For mining stocks the future's bleak – or maybe the future's brilliant

“In the stock market no-one can hear you scream!” Consistent views: short term bloodbath, medium to longer term opportunities.

Author: Lawrence Williams
Posted: Friday , 03 Oct 2008

LONDON -

Speaking at this week's Global Capital conference in London - a reasonably well attended event which boasted some excellent and extremely interesting speakers - an unsurprisingly common theme was the effect the credit crunch is having on the fortunes of mining companies, both big and small, but particularly on the juniors.

Opening the event, Charles Kernot of Evolution Securities speaking on the ‘Future of the Mining Industry' (on the day that Xstrata announced that it was pulling out of its proposed bid for Lonmin over credit worries - but had still bought a substantial stake in the market), pointed out that the Eastern population growth patterns - notably in India and China, but also in many other countries - and the rapidly growing middle class, with typical middle class aspirations, would continue to support above average consumption growth. This, in turn, will filter down again into the minerals sector, notwithstanding the short term problems it is facing from the Western World's current sharp downturn. It was he who came up with the quote from Alien noted in this article's intro.

The toxic debt situation which has created the current severe downturn, in which many undercapitalised mining and exploration companies may well not survive will not go away quickly and there is likely further grief to be face in the investment sector, but, Kernot averred, "Growth will return". We will face short term price declines still, but industrial prices will improve. He picked gold as the safest investment choice pointing out that London's influential Financial Times which is not known for its support of the yellow metal, seems to have recently "grudgingly accepted" this position too.

Richard Chase of Ambrian Capital, talking about raising finance in the current market situation, feels that the difficulty for smaller companies to do this will see much consolidation as in part a defence against hostile takeovers from larger, or cash positive, companies picking up bargains among the minnows. Investors are becoming more risk averse, and are looking to companies which have production and cashflow - and for those which don't it is becoming increasingly important for cash to be conserved as much as possible to see the companies through the next couple of years. Investors are also seen to be seeking a more diversified risk profile.

With traditional capital raising through equity and debt finance becoming almost impossible for most companies, other means of raising, or conserving, capital may also become necessary. This can include the sale of noncore assets; farm-ins and far-outs; equipment leasing; hedging and forward sales; sale of equity to offtakers; Development Agency support; Royalty interest sales; export credits; debt swaps and conversions and, finally, companies should not forget private equity as an option.

George Rogers of Investec reckoned the sector may have already reached its bottom and that the best time to invest is when there is "blood on the streets" - metaphorically we hope! Equities are looking cheap and now may well be a very good time to invest, but one does need to be confident that those companies in which to invest are those with the financial strength to survive the bloodbath.

Also pointing to the continuation of China's growth, Bret Clayton, CEO of Rio Tinto's copper division reckons the base case is a 9 percent per annum growth rate which will continue to put pressure on supplies. He also noted that industry ‘experts' have continually underestimated the effects of disruptions on mine supply and as a result have often overestimated potential metal and mineral surpluses - or not predicted deficits which have subsequently occurred. Current disruption levels are around 4 percent, higher than they have been historically. Capital construction costs are rising fast, and EPCM companies are overstretched.

He also pointed out that going forward, production from underground mining operations is doubling and "not many companies are good at this" which suggests further supply predictions may not be met in a timely manner. He also, in line with the general theme taken by speakers, that it is a tough time for junior miners and explorers and offered great opportunities for companies like Rio Tinto with great financial strength. Majors like Rio will be looking for large long-life (+ 20 years) projects with the potential to produce metals and minerals in the lower cost quartiles. He was also confident on uranium longer term and sees the demand for copper doubling over the next 15 years (equivalent to another 12-15 Escondidas!).

One of the speakers, Mike Solomon of Wesizwe, was taken ill during his presentation and had to be taken to hospital. We are assured he is OK. However, before he left he did make a very interesting comment for platinum watchers, which is extremely relevant to the huge price falls we have seen in platinum group metals over the past few months. That is that the amount of metal offloaded during the current global financial turmoil from platinum ETFs has been in the region of 200,000 ounces - equivalent to several months global supply and this suggests current platinum pricing is not logical and does explain the huge price dip. He also pointed out that, up until the past few weeks, platinum price movements had been tracking gold which again he thought was unrealistic, as platinum should be treated as an industrial metal, not a precious one.

Overall the speakers at the conference provided some excellent insights into the state of the global mining sector in difficult times. There was too much to cover in this short report, but other excellent presentations were made by Robert Amsterdam on political risk (including some fascinating anecdotes on some scary events for those concerned), from Charles Swindon on Minor Metals - an extremely interesting market sector, Sacha Backes of the International Finance Corporation on the IFC's priorities in allocating finance and from George Adcock of the London Metal Exchange who pointed out how dominant the LME is in the global terminal markets sector as well as educating the audience on some of the mechanisms involved. There were some excellent presentations too from several junior miners and explorers with strong projects which they are still managing to bring forward in these difficult times