Equities

It was in 2009 that the first of “The Hangover” movies hit the silver screen. Other than setting the scene of just how long ago 2009 was, the movie contains interesting parallels to the experiences of the mining industry in the last decade. Anyone wanting to know what a hangover looks like in a market sense need look no further than the performance of miners from 2011 to 2015 – the longest and deepest mining bust in living memory, against a broader market that posted a decade of almost uninterrupted gains. This certainly suggests there had been a long and wild party in the mining dorm at the start of the period. Whilst the analogy is far from highbrow, it seems strangely appropriate. Ultimately, the main characters of The Hangover look back to try to piece together what has happened to them. This may well be a worthwhile reflection for mining, but spanning a full decade, to piece together how miners fell so significantly from grace and then recovered the market’s favour again.

The last decade contains the longest and deepest mining bust in living memory, and therefore the major changes of investor sentiment toward miners that bookended the bust. Less obviously, but extremely significantly for what it means for the future, has been a change in the pecking order of the industry brought about by the emergence of a new breed of mid-tier miners in Australia.  

The Five Most Significant Events in the Last Decade of Mining

(In order of importance, not chronology)

1. Initial Public Offering and listing of Glencore onto the London Stock Exchange (US$11B, May 2011)

Really large IPO’s are only possible at the peak of the mining market, because that is the only time the necessary liquidity exists. But large IPO’s also have a high capacity to disrupt sentiment, especially if their promotional push, liquidity drain, and comparative pricing help the penny drop on the actual state of the sector.

2. Revision of dividend policies of major miners BHP Billiton and Rio Tinto (January & February 2016)

There is only one way to make the front pages of major newspapers and its not via tremendous success. In 2015 BHP Billiton and Rio Tinto received plenty of front-page news, most over their progressive dividend policies, rigid adherence to which was seen as high folly on the tail end of roughly five years of commodity price weakening, reinforcing the belief that miners were financially reckless and irresponsible.

3. Commencement of large scale (US$1B+) M&A (circa September 2018)

M&A trends provide a strong indication of the growth appetite of the mining industry, and also what temperament their owners have toward company growth. If shareholders are worried about cash flows and expenditures, an acquisition of just about any kind will probably be a hard sell. There has been a steady increase in the tempo of deal making over the last 18 months which corresponds with increasing average deal size.

4. Emergence of new Australian Mid-tier Miners (2014-2015)

Many of today’s Australian mid-tier have grown via plucky acquisitions made when the bust loosened assets at great prices from stressed sellers, followed by apparent asset transformation brought about by asset appropriate investment and operation.

5. ASX gold miners achieving a premium valuation over TSX gold miners

For as long as most people in the gold market can remember, North American domiciled gold companies had richer premiums than their Australian domiciled contemporaries. But since 2016, Australian listed gold companies have eaten into and overtaken their North American peers and now have the strongest premiums.

Read the full article "LionAnalyst 15 - The Five Most Significant Events in a Decade of Mining" via the Lion Selection Group website: http://www.lionselection.com.au/wp-content/uploads/2020/01/LionAnalyst_Jan2020.pdf



Michael Whelan

Hedley - Great to see a mining and resources-related write-up in LW. A trend I have picked up the past 2 years that have been accelerating are farm-in and farm-out agreements; and small-mid tiers taking shareholdings in smaller explorers / pre-developers perhaps with an eye to eventual M&A activity.