The yin-yang of mining in 2008

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31 Dec 2008

Resources shares slid quicker than a deckchair on the sinking Titanic in 2008 with former darling, Metorex, suffering most. The home-grown copper bet lost 91% on the JSE and was last hovering around 205c/share having touched R24.80 mid-year. It was a development that scarred the company's boardroom with CEO Charles Needham asked to surrender the company reins; already Simon Malone, Metorex founder, and other directors have been shown the door by irate shareholders.
"Overall, 2008 started well but ended in tears for commodities and share prices," said Des Kilalea, an analyst for RBC Capital Markets. Speaking at the Mines and Money conference in London in December, Kilalea said that from mid-year pricing power returned to buyers.
"Inventory building in upturns often reverse into destocking, in anticipation of a downturn, and pricing power returns to buyers of commodities as sellers are forced onto the backfoot," he said.
Before June, however, that wasn't how the year looked to be heading. And even when signs of over-bought mining equities and overly optimistic demand became apparent, analysts were choosing to believe in the prospect of correction, rather than crash.
Writing in Miningmx, Brenton Saunders, an analyst for Macquarie in Sydney, said the party was "for the time being" over.
"The beer has run out and the mid-cycle slow down manifested itself like a New Year's Day hangover... as painful as it is unavoidable," he said.
However, Saunders was hopeful China's enormous urbanisation programme would reassert itself in the commodities market.
"Take solace from the fact that the changes in the global commodity consumption drivers we have seen in the last seven years are here to stay, which will continue to make for good business in basic materials industries," he said.
That may well yet be the case but in the short term, investors in JSE-listed mining equities must be wondering what hit them.
Platinum, which raced to more than $2 000/oz in May, was more than 50% down by December clubbed by lower demand, particularly from automakers in the US which use platinum and palladium in the manufacture of autocatalysts.
Established platinum producer, Lonmin, was 70% weaker year-on-year. Again, management paid the price with CEO Brad Mills, long criticised for running the firm's SA-based mines from London, checking out amid a hostile buy-out proposal from Xstrata (later, wisely withdrawn).
And if the 900 000 oz/year Lonmin was paying dear, one can only imagine the distress of the platinum exploration firms which have little but high hopes and capital-hungry programmes to offer. Wesizwe Platinum, digging for metal near Sun City, was 78% lower.
Says Kilalea: "Cash-guzzling exploration is likely to be put on hold, with the focus being on near-term production."
Wesizwe Platinum, seeking R5bn to build its mine, has now resorted to a different strategy of constructing in easier-to-finance increments.
Sentula Mining and Merafe Resources, were the other worst performers on the JSE in 2008, down 77% and 67% respectively.
All in all, there were 75 closures of production facilities announced in 2008, according to a report by Fairfax, a UK mining-focused stock brokerage, representing 10% of all global seaborne iron ore, 4% of copper, 29% of ferrochrome and 10% of nickel and 10% of aluminium.
"Demand is down between 10% copper and 40% iron ore in the fourth quarter, but the decline is slowing," said Fairfax suggesting that there's hope yet that selected stocks that suffered the effects of the heaviest slowdown may bounce back the hardest.
Gold
Certainly, the much-abused South African gold stocks proved themselves more resilient in 2008 than many investors would have supposed.
Harmony Gold produced an almost uncanny 31% improvement in share price performance in 2008; uncanny because it was so out of kilter with the rest of the market.
Relative to the JSE's Resi 20, the stock was 63% stronger while DRDGOLD, a marginal miner now hoping to re-mine gold trapped in Johannesburg's remaining tailings, was only 2% weaker year-on-year and 30% better than the Resi.
Shareholders in Lonmin and Metorex waved goodbye to management this year, but painful departures had already been endured in 2007 after Harmony shareholder, African Rainbow Minerals, played an instrumental part in having Bernard Swanepoel ejected.
In his place, Graham Briggs has sounded a more methodical strategy, toning down Harmony's corporate ambitions in favour of hunkering down with the distressed assets it already has, and closing those beyond repair.
The market liked what it saw from Harmony this year, but there's still room to travel, according to Leon Esterhuizen, a precious metals analyst at RBC Capital Markets.
"Harmony's story remains a good one," he said in a recent note. "The key though, in RBC Capital Markets' view, will be the company's ability to get positive results from Elandsrand and Target," he said.
"Both these assets were supposed to have been delivering substantially better performances by now," Esterhuizen said.
Gold Fields, led by another newly appointed CEO, Nick Holland, was only 14% weaker year-on-year, and outperformed the Resi by 19% while another gold stock, AngloGold Ashanti was only 9% weaker.
The only non-gold stock among the JSE's top five best mining performers was BHP Billiton which - now famously - shelved its $66bn bid for London counterpart, Rio Tinto amid tightening credit markets and lower metal prices.
It was only 16% weaker year-on-year, a remarkable achievement and providing evidence chairman Don Argus was right in believing diversification and client relations will keep the mining houses in good stead through 2009.
Writing to the Australian Stock Exchange in a letter dated December 18, Argus painted a bleak picture for the 2009 commodity markets. "There is no doubt that these are challenging times for all of us," he said.
"However, we have excellent customer relationships and so far we have been able to substantially maintain our sales volumes through a combination of our normal long-term contract and spot business."

Source: Mining Weekly