Investing Comment |
|
Your Money > Investing Comment Articles > Miners' strike
|
By Richard Hunter, Hargreaves Lansdown
The world is a different place from a year or even six months ago, and this applies more than anywhere to the mining sector. The recent announcement that BHP Billiton would be shelving its bid for Rio Tinto, which had at one time been valued in excess of £70 billion, was representative that the mining sector has had an extremely rough ride of late (see table, below) and that it did not wish to go along with some of the stipulations imposed by the regulator. And yet it had all been looking so good for the mining sector - there was a whole host of Merger & Acquisition activity, as companies sought economies of scale and expertise in specialist areas which they did not possess. By definition, the mining sector is a global one with natural resources being strewn around the planet and, as such, the pace of consolidation has very much had a global element. Last year, CVRD of Brazil acquired Inco of Canada in a deal worth £8.7 billion, whilst London listed Xstrata bought another Canadian company, Falconbridge, for around £10.4 billion. In October, Rio Tinto acquired Canadian aluminium company Alcan for £19 billion, whilst Brazilian giant Vale made an unsuccessful approach for Xstrata. One of the reasons for this M&A activity (and a reason why it could yet be set to continue, particularly along with the fall in share prices) was the high barriers to entry which a "new" miner would face. The expense and time lag in setting up a new mine can be huge and run to a number of years. The larger mining giants were therefore strategically deciding that it would be cheaper to buy (an existing company with its own infrastructure) rather than to build (one from scratch). It has even been suggested that the cash rich Sovereign Wealth Funds who have made their presence felt on world markets may be contemplating a move on the mining sector - notwithstanding the current concerns around a potential credit crunch. Mining shares apparently remain dependent upon economic cycles and the possibility of a global recession has brought with it concerns around demand for commodities. Even so, the largest miners remain cash generating giants and have over recent years chosen either to acquire or to embark on large share buyback programmes. The pressure for consolidation remains (pricing power is intensifying as the big get bigger) and, even for those companies which choose not to acquire, or be acquired, the future seems almost underwritten by the current glut of interest in the sector. There are few signs that this jockeying for position will be going away any time soon - the only potential blot on the landscape for the mega mergers would be the spectre of the Competition authorities and, in certain countries, a degree of protectionism to be overcome.
The bears of course made the observation that the current commodity cycle is showing every indication of being a bubble and this may now have played out - unless the long term demand story remains intact. They furthermore made the point that history has shown that a sector which becomes unwieldy in terms of the FTSE100 eventually ends acrimoniously, quoting the previous examples of the technology and telecoms sectors during the dot.com boom. Thus, the debate currently in place is whether that this is a sector whose share prices have now fallen to a realistic level or whether the recent highs were simply representative of a new "super cycle" of economic demand. In any event - and perhaps helped along by those share price declines - the general market view of the sector in consensus terms largely speaks for itself. Richard J Hunter is Head of UK Equities at Hargreaves Lansdown Stockbrokers Useful links: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||