Ten years ago, at the start of 2009, there were 11 mining companies in the FTSE/JSE Top 40. Together, they constituted more than 41% of the index.
This was slightly above the average of the last few years, but it was by no means an extraordinary state of affairs on a bourse that was founded and built on mining stocks. Commodity producers had always been a mainstay of the JSE.
Today, however, that picture is substantially different. There are currently only three mining counters in the Top 40, and the combined weights of BHP Group, Anglo American and AngloGold Ashanti come to only around 18% of the index.
What is equally noteworthy is that these three companies primarily operate outside of South Africa. BHP Group has no local assets since the unbundling of South32; only 13% of AngloGold Ashanti’s production comes from South African mines; and while Anglo American still has South African interests through Kumba Iron Ore and Anglo American Platinum, it recently sold its local coal operations and is not looking to expand in this country.
“The large miners have steadily decreased their South African exposure, either by investing in more attractive options in their portfolios outside the country, or divesting altogether,” says Sean Munsie, an analyst at Allan Gray. “Heightened country-specific risks have also contributed.”
One could also add Glencore to this picture. Although it is not part of the Top 40 because its local free float is too small, it is nevertheless a significant industry player, with a larger market capitalisation than Anglo American.
Like its peers, however, it has limited South African operations. Its physical commodity business in the country covers only coal and ferroalloys.
Investors in the resource sector on the JSE are therefore getting mostly international exposure. This is clearly apparent by the make-up of the Resources 10 Index, which does include Glencore. There, Exxaro and Anglo American Platinum are the only two companies in that basket with predominantly local operations, and their combined weighting is not even 6% of the index.
This disconnect between the resources sector on the JSE and the local mining industry has created some interesting dynamics. In particular, during a time when South African mining has been in an extremely unsettled space, investing in locally-listed commodity stocks has actually been highly productive.
For the 12 months to the end of January, resources returned 16.8% on the JSE. Over the same period, the Top 40 Index was down 6%.
Mining stocks have therefore actually given investors protection against local risks. George Cheveley, a portfolio manager within Investec Asset Management’s natural resources team in the UK, says that this is not dissimilar to recent trends on the London market.
“If you look at the London Stock Exchange, the big miners there have almost the same function as those on the JSE, as both of them take you away from domestic risk,” Cheveley points out. “Miners in London have been quite attractive for investors who want to get away from Brexit, and for different reasons they have been attractive to investors in South Africa who don’t want exposure to the local economy.”
Over the course of 2018, local mining stocks also stood out among rand hedge counters. Even though the rand lost over 14% against the dollar last year, most of the big international shares that one would expect to offer protection against the currency underperformed.
“If you look at all the other rand hedges, they had a terrible year,” says Unathi Loos, portfolio manager at Investec Asset Management. “Naspers was down due to negative revisions on Tencent, British American [Tobacco] had big issues on regulation, and Richemont fell because the consumer in China seems to be in trouble. So there was nowhere to hide, from a rand hedge perspective, except for the miners.”
Will the story hold?
The question for investors is whether this will continue to hold true. What should one expect from resource counters going forward?
For the first month of 2019, resources performed in line with the wider market. Both were up 2.8%.
Analysts are wary of being too bullish, as so much depends on commodity prices, but Cheveley believes that the global, diversified miners are still attractive as defensive plays.
“You have to make the distinction between the big companies with strong cash flows, stability and diversity,” he says. “They still have great value and, even in a bad market, great defensive qualities. I don’t need to look at smaller, more geared plays. Last year that’s what worked. The big miners outperformed the sector and I still feel that’s the case. You don’t need to start looking for small or mid-cap companies in this environment.”
Munsie is less enthusiastic about these stocks as a group, although Allan Gray does retain exposure to BHP. He does, however, favour Glencore because of the value they believe it offers.
“On aggregate, we are underweight the large, diversified miners, but we do hold a position in Glencore on behalf of our clients,” says Munsie. “At the current discount to intrinsic value we believe the share offers an appropriate margin of safety for regulatory risk. Its portfolio of assets are well capitalised, with a growing production profile, and should generate decent cash flow through the cycle, a lot of which is being returned to shareholders.”