Only Five Risers Overall, And Most Of The Rest Lost A Lot: That Was The Year That Was ... In London
By Our London Correspondent
minesite.com
2008 was an extraordinary year in London’s stock market for a whole host of reasons, but possibly the overwhelming impression the year left us with was the speed and intensity with which the global economy went from boom to bust. Mining was particularly geared to the boom, with the “perfect storm” of seemingly unstoppable growth in demand for mined products combined with severe constraints in increasing supply leading to record commodity prices almost across the board. At the same time, massive problems with the developed world’s banking sector were emerging, but these were brushed aside by the belief in the extraordinary growth projections coming out of China – the Chinese economy was thought to be largely de-coupled from the developed world and its growth was said to have been invincible, driven by a billion people enjoying disposable wealth for the first time. Holding this view turned out to be unwise.
For the miners, the situation at the end of 2008 is that no-one wants any of their products, with the notable exception of gold. Commodity prices have collapsed to a point well below the marginal cost of production for all but the most robust mines and will stay collapsed until the stocks of already-mined material have been used. Stockpiles have risen to the point where those commodities which are sold directly to manufacturers – for instance ferrochrome and cobalt – have seen trading volumes collapse. As a result, the world’s ferrochrome and cobalt producers have simply shut down. Most other commodities are piling up at the mines and ports and in LME warehouses, with very little indeed moving further downstream. It now appears that many manufacturers had been accumulating stocks of raw materials in the expectation that prices would move higher still, and so are using these stocks first. At some point, demand for newly-mined material will return, but not yet. When it comes, it may signal the turning point. For now, reserves of cash and the maturity of debt are now the two most important indicators for analysing companies – as many recent announcements will testify.
Interestingly, the market anticipated the downturn by several months, though few realised quite what was happening at the time, and even fewer anticipated the extent of the collapse. In fact, almost all of the FTSE 100 miners reached their all-time highs on 19 May 2008, a day on which nothing special seems to have happened. However, it was the end of the mining boom and the fall gathered pace during the summer and autumn as it became apparent that demand was collapsing as discretional spending came to a halt all around the world.
By the end of 2008, London’s mining sector had lost around half of its value; indeed only five stocks ended the year higher than they started. All of the FTSE 100 miners lost out with falls ranging from BHP Billiton (LSE: BLT) which dropped a mere 15 per cent to Kazakhmys (LSE: KAZ) and Xstrata (LSE: XTA) which fell by 83 per cent and 82 per cent respectively. BHP Billiton’s relative strength was of course helped considerably by the jump in its stock following the end of its attempt to take over Rio Tinto (LSE: RIO). Rio Tinto fell sharply when the proposed deal was pulled and ended the year down 72 per cent - an extraordinary result. Rio Tinto’s shareholders have cause to be particularly unhappy, but the most distressed are probably holders of Xstrata given that Vale was very keen indeed to acquire the company but could not persuade Xstrata’s largest shareholder, Glencore, to settle on a price. Glencore’s decision to let greed triumph must rank as the worst single corporate decision of the year, though Lonmin’s assertion that it was worth much more than Xstrata was prepared to pay for it back in the summer runs it a close second – its shareholders are now holding stock worth less than a quarter of its value in May. Lonmin’s shareholders have more to be annoyed about: the dogged refusal of its board to use its highly profitable platinum mines as a starting point to build a diversified company is probably the sector’s largest lost opportunity.
Moving on, let’s look at the very few companies that actually added value for their shareholders in 2008. Here the key ingredient was gold, followed closely by positive cashflow from successful mine startups. The standout achiever was Minera IRL (AIM: MIRL) which more than doubled in value over the course of the year to end with a share price of 65.5p and a capitalisation of just over £40 million. Unsurprisingly, the company has a positive exposure to gold through its Corihuarmi mine in Peru which it brought into production on schedule in March 2008. Corihuarmi is a basic open pit heap leach operation and has already produced almost 40,000 ounces of gold, considerably more than planned, and recovered its cost of construction within seven months of startup. The mine has reserves sufficient for another 3½ years of operation and so the key for the company going forward is to use the cashflow to identify the next project. On a general note, quite a few companies have managed to get to this stage in the past few years, but have then lost sight of the corporate objective and wasted the money on poor projects or even on paying dividends and share buybacks – not what junior mining is about at all. Minera IRL is doing the right stuff by focussing on exploring for extensions to its current orebodies and for look-alikes in the immediate vicinity.
The second best achiever in terms of percentage gain, though by far the best in terms of actual value added was Randgold Resources (LSE: RRS). Randgold’s stock ended 2008 almost 61 per cent higher than it started, in the process adding £850 million to its value to give a current figure of slightly above £2.2 billion. Indeed, Randgold is now so large that it is about to join the FTSE 100 index, where it will be the first pure gold miner to be a component of the index for many years. This is a stand-out achievement by any standards and particularly so given the horrible markets of the last few months. Like Minera IRL, the company has stayed away from corporate distractions and has concentrated on getting on with the job in hand, namely the operation of its Loulo and Morila mines in Mali. Loulo is still building production, with an underground section commissioned during the year, whereas Morila is coming to the end of its operating life after an extremely successful run. Randgold has more growth coming through with the Tongon mine in Cote d’Ivoire under construction, and an active exploration and acquisition programme in hand. It’s also shown no compunction in walking away from joint venture exploration projects which it’s felt haven’t made the grade.
The third and fourth companies to deliver percentage gains for shareholders this year are by contrast to Randgold very small - Belmore Resources (PLUS: BEL) and Obtala Resources (AIM: OBT). Belmore rose 48 per cent during the year, though has barely traded in the last six months. The move would seem to have been driven by some success with its zinc exploration programme in Ireland – hardly the metal of choice in 2008. Obtala is actually the best performer of the few IPOs, having ended 15 per cent up on its April 2008 IPO price. However, it’s not at all clear what Obtala did to achieve the out-performance as it would seem to be a typical exploration company with licences in Tanzania and no near-term route to cashflow.
Fifth and last was Kalahari Minerals (AIM: KAH) which put on just over 11 per cent to end the year at 44p. Kalahari is focussed on exploring in Namibia, where it has a portfolio of exploration projects covering precious and base metals. However, its main claim to fame is its 39 per cent holding in ASX-listed Extract Resources Ltd (ASX: EXT) which owns the Rossing South uranium project close to Rio Tinto’s Rossing mine. Rossing South looks like being a major discovery and Kalahari is already being actively stalked by some major players including Rio Tinto and Stephen Dattels.
The rest of the mining sector lost value over the course of the year. For a few companies the fall was relatively modest, but for the great majority the fall was a devastating 80 per cent or more. For the record, the worst was Amur Minerals (AIM: AMC) which lost 99 per cent of its value in a slide from 19.75p at the start of the year to 0.2p at the end. The final fall came towards the end of the year when the company attempted to take itself private by delisting from Aim – this was unsurprisingly rejected by the shareholders but the company has run out of money and has no obvious way forward. Half of the board resigned on 29th December, which tells us all we need to know about the prospects. Amur may have been the worst performer but another 38 companies fell by more than 90 per cent, and it would be fair to assume that the market thinks that they are in trouble. A further 46 have lost more than 80 per cent, including two FTSE 100 companies, and it may be prudent also to include these on an “at risk” list. The key question for investors in the mining sector is survival – the London market could lose more than 50 miners and explorers in 2009. These will be difficult days for all of us involved with the sector. |
