Despite a bounce-back in commodity prices (some, not all), investors remain reluctant to put large sums of cash on the table when all risks are considered.
This article can be found on page 72 and 73 of the January 2018 edition of Mining Review Africa.
Shareholders need to be assured that mining companies have learnt from past mistakes to avoid operating at high risk and potentially bleeding their businesses of cash in the future.
This was the key message delivered by Evy Hambro, MD and chief investment officer for the Natural Resources equity team at investment management company BlackRock, at the Mines & Money conference in London in December 2017.
The commodities investment expert further outlined what his company would consider a lucrative investment in the current market.
“When people look back from around the second half of 2015, they will probably see the period as a much-needed catalyst for change within the industry where the pain of mistakes from the past cycle came home to roost,” Hambro started.
The plus side is that there has been a noticeable wide-scale adoption of capital discipline discussions amongst management teams.
The quality of risk profiles also appears to be much, much higher.
“Without some of the balance sheet leverage we’ve had in the past, the underlying volatility or the risk that investors have put into these equities has dropped.
“This has however created some confusion in terms of multiples – we’ve seen a multiple compression for a lot of companies despite lower risk.”
Moving forward however, Hambro anticipates an expansion of multiples over the next year or so which will be a reflection that businesses are delivering on their promises.
“This is in the hands of management who need to deliver on their commitments and deliver on the capital returns that investors have been waiting for.
“It is up to them to put their companies in a position to hand some of the money back and [furthermore] be sensible with the capital allocations.
“That is what we’re looking for from the next stage of the cycle over the next 12 months. This will re-establish trust and bring people back into the sector.
“We are already seeing share buy-backs and increased dividends and I think there is room for a lot more of that. This will help heal the relationship between investors and companies.”
Hambro does however note that investors (in general) want to see greater openness and transparency – in terms of investor expectations.
“We want to see and need to be sure that we will see growth in the value per share of our investments. The industry track record has been so successful in destroying value over many years – if we can avoid that mistake then returns will improve for investors.”
What Blackrock considers a worthy investment
When asked to share his opinion on the gold sector – the large-scale number of mature assets in particular – and what this could mean from an investment perspective, Hambro emphasised that gold producers must not be afraid to produce less.
“If you can be more profitable by producing less then the industry will resolve itself because the deposits that need to be developed to create production for the future will be developed economically under a higher price scenario.”
Discussion his company’s general investment preferences, Hambro says that BlackRock shows favor for mining businesses that replenish their reserves and resources thanks to a strong exploration culture and a successful track record with property optionality.
He believes that in many instances this is a more lucrative model than building portfolios through mergers and acquisitions (M&A).
“M&As can be successful if you buy the right assets at the right point in the cycle. But most assets are acquired at the wrong point in the cycle and often get written off.”
In addition to avoiding companies that are at a standstill and maintaining flat production levels, BlackRock also favours companies with “innovative cultures – who know how to manage their assets to get the best returns.”
More recently, BlackRock has been adding what it terms “high growth juniors” to its investment portfolio, meaning it is not all bad news for this large sector of the market who claim to struggle most when seeking financial investment.
Meeting certain criteria however is important.
“We want juniors who have the ability to provide assets that others might want in the future. Alternatively, they should have control over districts or regionally hot exploration areas which provides potential for companies to become significantly larger over time. But – for our investment, they must have proven they have something tangible.”
Lastly, it is no secret that investors show preference for commodities with strong underlying growth potential.
This ranks battery metals (lithium, cobalt, nickel, graphite) at the top of the list. Battery metals are required to feed the electric vehicles (EV) market, so much so that eco systems are emerging to support this new market, as well as legislation.
“This is a real trend at present and something we at BlackRock have been aware of the last three years when we started building this component of our portfolio. We do however recognize and are conscious of the fact that some cycles come and go.
“We have consequently chosen to support companies that have robust economics and will be profitable – even if prices are considerably lower in the future than they are now. We also prefer operations that in this field are either already in production or will be in production very soon.”
Feature image credit: Blackrock