THE global mining industry had re-positioned itself over the past decade chopping capital expenditure and debt to increase free cash flow, but investors remained wary; in particular of South African mining companies.
That’s according to fund manager and Anglo American non-executive director, Jim Rutherford, who was addressing the Joburg Indaba mining investment conference being held in Johannesburg on Thursday.
Rutherford described the mining industry as being “… out of the intensive care ward and well into the rehabilitation process”, but he commented what the market was currently saying to the industry was ‘show me’.
He pointed out that mining equity valuations as of 2017 remained below their long-term averages with the mining industry 38% down as a percentage of world equities and 36% down on its price/book value relative to world equities.
As a result, specialist mining funds had under-performed badly over the past five years and one of the largest ones – Vanguard Precious Metals and Mining Fund – had restructured and broadened its mandate in an attempt to become a more diversified and predictable fund.
“Vanguard effectively threw in the towel. What Vanguard said was it was fed up with the mining industry; an industry with a poor track record in capital allocation and anything but predictable returns. This is a message that the mining industry ignores at its peril which is why I say it is almost engaged in a struggle for relevance”.
South African mining companies had fallen out of favour dramatically with only one of the top six specialist mining funds having an exposure to South Africa. That was the Fidelity Select Gold Fund which had an South African weighting of just 2%.
Rutherford said South Africa had not only underperformed against major mining destinations such as Australia and Canada, but it had also been outperformed on metrics such as mining output and employment by developing mining destinations such as Peru and Chile.
“International mining equity investors have largely given up direct exposure to South African mining. Their exposure instead is through Anglo American, Glencore and South32. What you constantly hear as the reasons are that they find the place too complicated; they don’t see an environment conducive to making returns and they see better opportunities elsewhere”.
