Ahead of his appearance at Mines and Money Australia at IMARC, Hedley Widdup from Lion Selection Group dropped us a line to discuss the key issues and opportunities in the mining investment space.
M&M: Where, globally do you see the next key investment opportunities in mining?
HW: Most of the global investment community has taken an ultra-conservative view on the risks involved in mining investment, so for that reason I see a trend toward investment in the growing mid-tier miners as the market slowly comes back to mining, and these companies are most active in the safer jurisdictions where they can pair funding with project acquisition – Australia, North America, etc. So the opportunity then is in the places which are now overlooked, but have not become unsafe just because capital has fled. There are many parts of Africa, Asia and South America which are investable and have attractive projects, they do require a high level of cultural sensitivity and persistence so not for everyone. However these places are where the key investment opportunities I think will emerge from.
“There are many parts of Africa, Asia and South America which are invest-able… These places are where the key investment opportunities will emerge from.”
M&M: Where do you think we are in the current mining cycle?
HW: In 2008 we had the Global Financial Crisis, a massive market crash which affected all sectors. It was rapid and harsh, recovery then in 2009/10 was also quick. Because of massive global economic stimulus there was a warped level of risk tolerance which should have been killed off by the crash, but it wasn’t. So it wasn’t until 2011 that risk aversion started to creep in, and brought on a slow burn of selling out of mining stocks. Because there was no clear catalyst – it was the risk aversion that should have happened in 2008 but was delayed – it was a long, slow death of 1000 cuts. A recovery cannot happen until all of the negative sentiment has washed out, and I think we saw the end of that in roughly mid-2014. There have been pockets of negativity since (iron ore) but broadly speaking investors since then have been open minded to mining investment ideas. They have not on mass returned to the market though, so I would say we can claim the bust is now off but it is yet a little early to say the next boom is on.
M&M: What advice would you give a mining company currently attempting to source and secure capital?
HW: Examine what your peers have done. We have seen some successful and sizeable raisings for aspiring mid-tier miners to purchase producing projects, especially in the gold market. At the same time there have been some notably tough raisings where there is an element of delivery risk on the use of funds or the purpose is balance sheet repair. Both kinds of raising cannot be priced the same – there is market appetite for growth where it is low risk (i.e acquiring scale), but otherwise the market is still very wary of trusting management to deliver on endeavours that are known to have volatile outcomes.
“We have seen some successful and sizeable raisings for aspiring mid-tier miners to purchase producing projects, especially in the gold market”
The other important paradigm shift from the first decade of this century is that management teams cannot depend on commodity price increases to provide margin expansion. This is well understood, however the requirement for companies to be aggressive on costs seems to still be sinking in. Unfortunately this means reducing salaries, not just taking a part bonus. The market is very keen to see boards and senior management incentivised through ownership, not stripping cash out of the business, especially where the company is seeking to raise funds.
M&M: What are the main problems facing the mining industry today?
HW: The mining industry as a whole has experienced declining exploration success over the past 2-3 decades, and the discovery rate has decreased. Long term this means there are fewer, and poorer quality deposits in the pipeline to replace dwindling production reserves. This highlights the finite nature of metal abundance, and it is not an issue which can be managed, it means that overtime commodity production will become more expensive per unit as deposits being mined become lower grade and harder to access.
“Across the board miners have been poor self-promoters outside of the sphere of mining friendly investors”
There are a range of perception issues the mining industry suffers from, some less fair than others, but across the board miners have been poor self-promoters outside of the sphere of mining friendly investors. As a result, miners are broadly regarded as being environmental vandals, poor social citizens and under taxed. Those in the energy space have additionally come under investor scrutiny for the part they play in climate change.
The sphere of mining friendly investors has shrunk, and those who remain have smaller pools of available funding and therefore much more selective. There are a variety of contributing factors to this, including the effects of the global financial crisis which unfolded in 2007. In a low interest rate environment many investors are targeting yielding investments, and given most miners struggled to return much at all to shareholders when commodity prices were high they are generally overlooked now as potential yield plays. There was a tendency to target capital growth during the boom, and many companies behave now like that is still their intention. Growth is wonderful, but tends to occur when there is excess capital competing for the investments. Given this is not presently the condition, and is unlikely to be for some time yet, hoping for impressive growth is akin to trying to shoot the lights out. Strongly suspect a strategy to generate and maintain sustainable returns to shareholders is more likely to win friends in the existing market.
Costs are still too high, and cost initiatives are being driven by boards and managers who seem unwilling to accept a reduction in their own remuneration.
M&M: Will resource companies continue to have a role to play in investment portfolios?
HW: Yes – undoubtedly. History tells us that mining is highly cyclic. Interest from investors comes and goes and responds to a range of stimuli. Having seen poor equity performance linked to commodity price softening over the last few years, most investors are on the sidelines at present. However, times will change, and most investors will redevelop a risk appetite and come back. The result of four years of falls in that miners are now cheap – this will catch on eventually.
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