02-05-18

More documents

Recommendations

Info

30 BUSINESS A.M. FEBRUARY, MONDAY 05 - SUNDAY 11, 2018 MARKETS DATA
BUSINESS A.M. FEBRUARY, MONDAY 05 - SUNDAY 11, 2018 COMMODITIES & AGRICULTURE 31 Miners, investors bet, fret over latest commodities cycle A combination of accelerating global growth and supply constraints has driven raw materials — as measured by the Bloomberg Commodity Index — to their highest level in more than three years, boosting the profitability and cash positions of the world’s biggest mining houses. As a result, the sector is enjoying its best run since 2010 as investors look forward to bumper payouts. Morgan Stanley estimates the industry generated $23 billion of excess cash last year and will generate a further $21 billion in 2018, if current commodity prices hold. That should give delegates plenty to celebrate at the meetings, private dinners and cocktail receptions that are an integral part of Investing in African Mining Indaba. But after two consecutive years of gains — the FTSE 350 mining index, which counts Anglo American, BHP Billiton, Glencore and Rio Tinto as constituents has surged 186 per cent since 2016 — the question those at Indaba will be asking is, can the party continue? For many the answer is yes, as long as the industry maintains shareholder friendly policies that place profits and dividends above megamergers or building expensive new mines, and demand in China — the world’s biggest consumer of commodities — holds up. “Valuations are low, balance sheets are strong, and fundamentals are positive. This is the sweet spot of the cycle, and mining shares should outperform again in 2018,” says Christopher LaFemina, analyst at Jefferies. But for others, wary of the industry’s history of violent boom and bust cycles, there will be a temptation to lock in profits. During the commodities boom of the 2000s, the mining industry invested more than $900 billion of shareholder money on new projects and deals to feed China’s seemingly insatiable appetite for raw materials. However, much of this new supply hit the market just as growth in China started to slow, sending prices — and with them the profits of the biggest miners — into a tailspin during 2014 and 2015. Chastened by the experience, the mining industry spent the next couple of years cutting costs, paying down debt and refusing to sign off on new projects. But with commodity prices rising as global growth accelerates, investors are worried the industry could fall back into the old habits of overspending and chasing market share. “Miners need to convince investors that returns are sustainable and avoid splurging on excessive capital expenditure,” says Tal Lomnitzer, deputy head of global resources at First State Investments. “They need to find the right balance between growth and returns to shareholders.” To that end, the sector’s reporting season, which gets under way this week with annual results from Rio Tinto on Wednesday, will have a material bearing on the performance of the sector this year. Valuations are low, balance sheets are strong, and fundamentals are positive. This is the sweet spot of the cycle, and mining shares should outperform again in 2018 Aided by higher commodity prices, the Anglo-Australian miner is tipped to announce the biggest dividend payment in its history and top up its share buyback programme. But equally as important will be the message Jean- Sébastien Jacques, its chief executive, delivers to shareholders. Since he took the helm 18 months ago, Rio has focused on generating cash and delivering as much of it as possible to investors through dividends and share buybacks. In the past year alone, it has announced $8.2bn of cash returns, putting the company ahead of many of its peers. “We will allocate cash with discipline,” Jacques told analysts and investors in December. “As you know it’s a balanced allocation between the strength of the balance sheet, long-term growth — because we need to grow at some point in time — and returns for the shareholders.” Cementing in investors’ minds the idea that miners can deliver consistent returns while at the same time growing responsibly will be key to driving a re-rating of the sector, says Lomnitzer. In spite of recent strong run, miners still trade at a big discount. According to RBC Capital Markets, the enterprise value of the FTSE 350 mining index is 6.5 times prospective earnings before interest, tax, depreciation and amortisation. The wider MSCI World Index by contrast trades on 10. Another reason the sector could outperform is the outlook for commodity prices. Even though they have risen sharply over the past year — copper has gained 20 per cent, zinc 25 per cent and thermal coal 27 per cent — there will not be a quick supply response with miners suddenly able to ramp up production. This is because the industry’s project pipeline has been depleted by several years of costcutting and austerity. [Miners] need to find the right balance between growth and returns to shareholders. Ivan Glasenberg, chief executive of Glencore, has stated he will not invest in new ‘greenfield’ mining projects, while BHP Billiton, the world’s biggest mining company, has slashed its capital and exploration spending from more than $20 billion in 2013 to just $5.2bn last year. Across the industry capex has fallen from a peak of $160 billion six years ago to about $50 billion in 2017, according to Jefferies. As higher commodity prices are reflected by analysts in their profit estimates, this should help push share prices higher, says Neil Gregson, portfolio manager at JPMorgan Asset Management. “It’s probably going to be a year when the sell side [analysts] are continually upgrading earnings forecasts,” he says. George Cheveley, portfolio manager at Investec Asset Management, agrees. “If you look at consensus forecasts and compare them with current commodity prices you actually have to factor in some pretty major falls not to have earnings upgrades for a lot of the miners,” he says. The big risk to this optimistic outlook is the ever-present fear of slowing growth in China. However, analysts believe Beijing’s supply-side reforms and war on pollution will help put a floor under prices even if demand weakens. In an effort to clean up its skies and improve the profitability of bloated state-controlled companies, Beijing has imposed supply constraints on steel and aluminium production and restrictions on copper scrap imports. The environmental crackdown has also hit domestic mine output. Collectively, these actions have helped support the price of aluminium, steelmaking ingredient iron ore, as well as zinc and copper. “The single most important question for commodities is the new environmental religion that Chinese policymakers appear to have caught and whether it is structural or not,” says Nick Stansbury, fund manager at Legal & General. “If it is, the implications are massive and we are nowhere near to pricing them in. They are so much more far-reaching than anyone realises,” he said. Aside from China, perhaps the other risk to further outperformance will come from the urge to bank profits, especially if costs start to pick up because of higher oil prices and the weakness of the US dollar. But even here there are reasons to think investors will stay the course. “For those who have been in from the bottom, psychologically it’s difficult to believe share prices are going to do more,” says Cheveley. “But I think you have to look past the gains in 2016 because it was just a recovery from irrational falls in the second half of 2015 and focus on the stronger balance sheets and free cash flow that appear sustainable through 2018.” Shares in Anglo American, which has a significant footprint in South Africa, have risen 20 per cent since Cyril Ramaphosa’s victory, outperforming the wider market and its peers. Ramaphosa, deputy president, has already promised to review a controversial industry charter published by Zuma’s government last year, which required at least 30 per cent of the sector to be owned by black investors under measures to redress sharp economic inequality. “If the mining charter is holding us back, we must deal with that,” Ramaphosa told this year’s Davos gathering — addressing concerns that the charter could freeze investment by threatening dilution for existing mining shareholders in order to add new black investors. Under the new charter, previous black economic empowerment deals are not given credit. Ramaphosa added that he did not want South Africa to miss a commodities boom. Even during the last one, South African miners struggled to benefit because of high labour costs and the difficulty of overhauling ageing and deep underground mines. But while Ramaphosa is wellknown to the industry — he formed the country’s biggest mineworkers’ union as an antiapartheid activist, and later grew wealthy on mining deals after the ANC won power — much depends on how quickly he could remove allies of Zuma from control of mining policy. The architect of the charter, Mosebenzi Zwane, Zuma’s mining minister, will still be delivering the welcoming address at the Investing in African Mining Indaba, and is unlikely to back down from calls for it to be rewritten. However, Zwane is implicated in an investigation into the alleged influence of the Gupta business family, who are accused of using a friendship with Zuma to control government appointments and contracts.
Page 1 and 2: Nigeria’s Financial & Business Ne
Page 3 and 4: BUSINESS A.M. FEBRUARY, MONDAY 05 -
Page 9 and 10: EXECUTIVE KNOWLEDGE SERIES BUSINESS
Page 17 and 18: Q&A BUSINESS A.M. FEBRUARY, MONDAY
Page 23 and 24: Zinox set to reposition e-commerce
Page 29: BUSINESS A.M. FEBRUARY, MONDAY 05 -

02-05-18

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?