After months of reading all the carefully worded analyst reports with their qualifications and tentative forecasting, it’s always refreshing when Roger Bade’s quarterly reviews turn up in the email box. Bade, who works for London-based investment bank and broker Whitman Howard, does not beat about the bush.
“Our prophecy that Australia would be more interested in their domestic market appears to be coming through post-election, particularly as the Australian dollar has remained weak,” he writes. And this: “A number of non-Australian exploration plays have moved to London and others are believed to be investigating the possibility of following, as interest from their domestic market diminishes”
Oh, dear. For more than decade during the dull 1990s, Australian investors remained so insular in their outlook. They just didn't want to know about all those jurisdictions with high political risk. The commodities boom beginning in 2005 changed that: the west Africa gold story was a stark illustration of that. If Bade is right, then we're back to square one in that regard.
Bade does not go into details of the trend he detects but there have been signs in recent months of renewed interest in London’s Alternative Investment Market. Western Areas announced a deal to vend its subsidiary, FinnAust Mining, into AIM-listed Centurion Resources. There were reports that Dart Energy was also looking at AIM while suspended Equator Resources, which holds Liberian gold assets, was at one stage talking to an AIM-listed outfit.
This is all rather a turnaround: for some time, there, Australians seemed to have soured on AIM but, if Bade is right, the tide is turning again. The exchange itself has seen something of a reversal in its fortunes. AIM’s total capitalisation rose by 20% (to £73.35 billion) in the six months to November, according to Deloitte. There were 45 floats on AIM during 2013 and Deloitte expected to see as many as 30 in just the current quarter.
But Bade’s main message is less than cheerful (unless you are the consumers of commodities rather than the producers).
“Our overall view of the world returning to the 1980s and 1990s, where growth was strong and supported by an abundance of commodities, remains intact,” he writes.
Investors are adjusting to this new reality. He adds: “It remains the case that rampant commodity prices aren’t going to bail out poor assets, or inferior managements”. Whitman Howard thinks the news flow will remain, in general, quite poor, with continued over-supply of commodities, poor prices, company cost-cutting, restructuring, write-downs and hence poor company financial results.
“We remain of the view that investors will remain tired of poor returns in the mining sector and will continue to concentrate on more consumer-oriented sectors in the stock market. A semi-repeat of 1987, with a very strong first half, followed by a correction on over-exuberance concerns, or rising interest rates, is not out of the question,” says Bade.
How’s that for gloom?
As for that last paragraph I have quoted, it may be a case of “up to a point”.
Yes, the view of this writer (who has been toiling in the junior sector fields since the post-87 crash) is that there is indeed every likelihood that investors will tire of poor returns in the mining sector. In fact, they already to have grown weary to judge by the performance of many shares. That disillusionment, of course, can be blamed partly on the mining sector itself: the performance on many companies has been disappointing; in fact, it is surprising that that so many punters have retained their hopes and dreams.
Bade is sticking by his yardstick that, for a profitable mining company, the minimum return on shareholder funds needs to be 25%. “We would also prefer to see a profitable producing company pay out a third of its earnings as dividends,” he adds.
Pause for wry laughter in regard to the Australian scene. Indeed, Whitman Howard is unyielding: of the 10 London-listed companies covered in its report, five come with “sell” recommendations, two with “hold”, and just three “buy” stickers.
A qualified “no“, however, to Bade’s second point. If there is going to be over-exuberance, then it won’t happen in the mining sector (barring the possibility of another Sirius-like story). Prices are simply not likely to jump in any degree such as suggest that the commodity boom is back on; gold is tricky, iron ore will go down rather than up, and the base metals are subdued. If there is a run on the market, it will be in a sector other than mining (or energy, given the subdued outlook for prices there).
There is every indication that 2014 is going to quite a grind for the miners. But, as in the 1990s, the industry will eventually come out the other end.
