A similar sentiment was expressed by Investec Asset Management, whose mining team is of the view that the current markets “reflect dynamics not seen since the aftermath of Japanese re-industrialisation in the 1980s”.
Writing in a sector review out in the middle of the week, the firm said it expects commodity prices to remain “at levels necessary to squeeze out a significant portion of current capacity while deterring new investment”. As a result, it expects prices to remain well into industry cost curves over its forecast period.
This disincentive price environment, as Investec refers to it, is appropriate it says for the “super bust” that has followed the “super cycle”.
As Investec points out, most mining companies have effectively cancelled any future expansionary capex and as a result will sweat existing assets even harder, and as a result, for margins to improve, even more cost cutting will need to take place. This is liable to put even further pressure on dividends, including for the majors.
“There is little reward for equity holders under this scenario. Debt remains the paramount concern for shareholders as equity values continue to fall. Bondholders are now priority, and promises by some companies to pay down debt are effectively made at shareholder expense,” Investec said, adding: “Reduced, or nil dividends, further dilution, selling assets that formerly offered growth – none of this is to the benefit of shareholders – apart from keeping the company alive. Asset impairments have already started and we observe that such write downs will re-set value benchmarks.”
There is no doubt that the mining sector faces all manner of challenges, but the lengths it is going to to protect itself will become much clearer as reporting season kicks into gear. And, with it a better idea of where the value might lie.
