How to mine benefits from metal sector’s boom-to-bust

However, after a decade-long boom in the industry, the prices of metals and commodities in the past few years have plunged amid sluggish growth in the developed markets and weakening expansion in the emerging markets. 

The price of copper fell 27.2 per cent this year, while aluminium fell 20.3 per cent, the lowest prices in six years, according to Bloomberg. 

The negative outlook over the weakening macroeconomy and the uncertainty regarding growth in China will continue to weigh on the demand for metals and the health of the industry in the new year. The situation could be worse if there is still uncertainty in China, since it accounts for more than 40 per cent of global demand for key base metals, the World Bureau of Metal Statistics reported in May.

To cope with this harsh industrial environment, most metal and mining companies have reduced controllable costs such as capital expenditure and exploration expenses to boost liquidity, but such actions could pressure their credit profiles over the medium term if they need to finance future projects.

The trend in the metal and mining industry is quite clear, that participants have to keep focusing on cost cutting and debt restructuring amid these volatile economic times. Divestments are also being implemented to reshape balance sheets and improve returns on capital. 

Mergers and acquisitions (M&A) are planned in order to find partnerships with synergy, better economies of scale and a view to future growth. 

Global companies like Rio Tinto or BHP Billiton are more likely to survive with lower costs, good diversification, good liquidity and manageable debt profiles, but the smaller companies may fail to cut costs quickly enough.

The consolidation of the industry will continue until there is certainty over economic growth and a rebound in the prices of commodities. However, there is a silver lining to this environment. 

This bust will create opportunities and enable new participants to enter the market. More participants will engage in new enterprises, acquire assets, or form joint ventures, not because they see the market as bottoming out, but because the situation allows for attractive deals. 

Although the value of M&A deals has dropped in 2015, the trend remains on acquiring assets. 

Randgold Resources, a gold producer in Africa with a clean balance sheet and known for its lack of debt, has proposed a partnership with Anglogold Ashanti to reopen and ramp up production at Ghana’s Obuasi mine, one of the world’s largest gold mines. 

Warren Buffett’s Berkshire Hathaway agreed to buy Precision Castparts Corp, a maker of equipment for the aerospace and energy industries, in a deal valued at US$37.2 billion (Bt1.34 trillion), including debt. 

Carl Icahn, an activist investor, disclosed in September that he now controlled 8.5 per cent of Freeport-McMoRan, a well-known copper and cobalt producer, and aimed to turn the company around, according to Bloomberg. 

Norway’s Norsk Hydro has signed an agreement with Brazilian mining company Vale for the possible acquisition of Vale’s 40-per-cent interest in the world’s largest bauxite producer, Mineracao Rio do Norte, located in Brazil. 

The list could go on and on in the coming year as the market stabilises.

These situations could provide opportunities for investment once the consolidation period is over and these companies resume their synergy in production to capture the demand for capital resources. 

For those who are interested in long-term investment in metals and mining but have neither the direct access nor the time to monitor the market conditions, it is recommended that they take the opportunities offered by the boom-to-bust scenario by choosing professionally managed mutual funds that invest in this sector.

 

Contributed by Asset Plus Fund management. Investment entails risk. The investor should thoroughly study prospectuses, product features, return conditions and risk before investing.