Little fear of price retreat for Anglo, BHP

[miningmx.com] — IT may seem ironic that while much of South Africa’s mining industry is being hamstrung by power limitations, the shares of the two biggest mining stocks – Anglo American and BHP Billiton – have been so firm.

But analysts say it’s perfectly logical. Anglo American has risen just over 60% from its market low of R338 set on 22 January. BHP Billiton hasn’t been such a stellar performer, but with a still handsome gain of 37% from a low of around R175 – but then it hadn’t fallen so far from last year’s peak of just under R260. Unlike Anglo, which topped out at R546,55 earlier this month, BHP Billiton is now at an all-time high.

There are several inter-related reasons for that strength – corporate, domestic and international. In the first place, though we like to think of both companies as South African, neither is based here any more.

And however loudly and sincerely executives such as Anglo CEO Cynthia Carroll proclaim their continuing commitment to this country, fact is South Africa is becoming a progressively smaller component of both their global footprints.

Anglo’s most recent sale was the bulk of its stake in AngloGold Ashanti. Even if it reinvests the proceeds in South Africa, its biggest new projects are in South America and Australia.

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While BHP Billiton hasn’t been so overt a seller of South Africa assets, and continues to invest here, the bulk of its capital pipeline lies elsewhere – a process that may have accelerated since the ousting of South Africa-born Brian Gilbertson as its CEO.

It will be interesting to see whether the replacement of Gilbertson’s successor, the American Chip Goodyear, by South Africa-born but long-time Australian resident Marius Kloppers will bring any change of emphasis.

But currently, as Absa Asset Management resources analyst Stephen Arthur puts it: “South Africa contributes “negligible’ earnings to BHP Billiton worldwide.’ As for Anglo, its second-biggest contributor product-wise is platinum, and that market’s been booming.

Indeed, across the board, Arthur generalises, commodity prices have risen by 30% to 40% since the electricity cuts crisis erupted, while production volumes will be cut by little more than 10%. That’s an extremely positive gearing and, in the case of platinum, Arthur adds that production shouldn’t be lost anyway.

Both Anglo and BHP Billiton have extensive coal operations in South Africa, which will benefit from Eskom’s belated major capital programme as well as from the strong world coal market.

Though Arthur hypothesises that supply problems in South Africa may even have contributed to the continuing worldwide bull market in commodities, there’s more to it than that.

Ron Klipin, of SA Stockbrokers, argues that the world has changed. “We’re in a different era now,’ he says. A decades-long low inflation environment, with growth largely led by consumer spending in the developed economies, has ended.

As I wrote last year after interviewing in London the likes of Gilbertson and Xstrata CEO, the South Africa-born Mick Davies, 40 years of low and (in real terms) falling commodity prices have been replaced by a bull cycle driven by China and India.

Commodity markets may not be entirely immune to the aftermath of the sub-prime mortgage crisis.

Both China and India have to export some finished products to the West, but their economies are largely driven by internal growth and urbanisation. They’ll continue to suck in commodities even if the US does go into recession.

Klipin refers also to high oil and food prices and sees a “huge wodge’ of investment money moving away from the US dollar and the high-inflation endemic to the developed world into superior investment prospects – among which commodity producers rank highly.

And that’s not to be dismissed as just trendy cyclical rotation – to use a favourite term of sharedealers – but is a fundamental structural change. If the above factors apply to most global commodity shares, there are also specific forces relating to Anglo and BHP Billiton.

In the case of Anglo, new CEO Carroll has gone out of her way to rebuild political fences broken under her predecessor, Tony Trahar. As this website’s Brendan Ryan wrote, her address to the Mining Indaba in Cape Town earlier this year was so conciliatory it verged on self-abasement.

Less humiliatingly, the message was driven home by a public endorsement from three top officials at the recent profit briefing, even if that was somewhat opportunistic, as they had to be in London for a post-Budget briefing at South Africa House in Trafalgar Square anyway.

Finally, we mustn’t forget the rand. You could debate the extent to which rand weakness has been caused by South Africa’s power crisis but that’s irrelevant to the current issue. Simply, three months ago the rand was at around US$1/R6,60. At the time of writing it’s US$1/R7,895. That’s a depreciation of almost 16%.

Other things being equal, the rand share prices of companies whose profits almost entirely depend on commodity prices set in US dollars should logically rise by an equivalent offsetting amount.

Add all those points together and not only is the strength of the likes of Anglo and BHP Billiton understandable, there’s also little reason to fear any reversal of the trend in the foreseeable future.