How have miners performed in Q1?

‘It’s kind of coincidental that a lot of [the] underperformance was attributable to rain in South Africa’: Peter Major of [Mergence] Corporate Solutions.

FIFI PETERS: Let’s check into the mining complex today, where we saw a big, big moves: Anglo American down nearly 7%, Kumba Iron Ore down over 12%, as well as Anglo Platinum losing lots of its shine, down over 6%. This followed the release of production updates coming from the Anglo American stable [as well as] BHP Billiton, which also came out with its production update and also saw a slight retreat in its share price.

Let’s get the take of Peter Major, the director of mining for [Mergence] Corporate Solutions, on the performance of these companies in the first quarter. Peter, I’m thinking the reason why the market sold down these shares quite heavily in today’s session is as a result of being surprised by their performance in the first quarter. Just your take on the updates that we saw from the mining companies today?

PETER MAJOR: Well, I think you’re a hundred percent spot-on, Fifi. Yeah, whenever we see a big move on a share price up or down, it’s directly related to surprise, positive or negative. These were negative to prices and they were across the board on the Anglo stable, other than De Beers – De Beers was way up, probably as it had been so down before – but across the board, you know, Kumba Iron Ore, Amplats, the coal side in Australia.

It’s kind of coincidental that a lot of that underperformance was attributable to rain in South Africa. Rain on the platinum mine section is a long way from rain where Kumba Iron Ore gets all of its rock in Sishen, and it’s a long way from Brazil. So that was kind of ironic that one of the reasons given was maybe excessive, above-normal rainfalls in those three areas. There were other ones as well, smaller ones. I sometimes think they downplay smaller ones because there are a lot of political sensitivities, like for railroad and like strike action and community.

Those were negative surprises because, yes, the first quarter is weak. People work hard during the year, they tend to take off around December, whether it’s in the northern hemisphere or the southern hemisphere. In SA these are our holiday seasons. So this is year on year. This is comparing it with the same month a year before. So, yeah, it was a blow. Maybe they’ve just been working so hard; we’ve had phenomenal results – production, earnings, fantastic metal prices.

FIFI PETERS: But the environment is still conducive for those phenomenal results to continue. If you just look at some of the dynamics happening in the markets with some countries busy fighting their political affairs [and] not being able to step up in terms of production. There’s a whole lot of opportunity for others who are not involved in such political matters to step up and plug the gap.

The environment, I feel, is so conducive, but when you have something like heavy rainfall being cited as a primary reason, isn’t this scary, particularly having seen the rains and what they did to KZN – isn’t it scary given that we know [about] weather patterns like this? It’s not over and they’re going to become more and more of a frequent occurrence as a result of climate change? How worried are you?

PETER MAJOR: [It’s] scary and it does happen. That’s one of the reasons Anglo American has been so successful for nearly 100 years, because they are diversified. They’re diversified in quantity, they’re diversified in geography – and not just geography in this country, geography all over the world. That’s why it was ironic, it’s true. It’s very ironic. Rainfalls in Brazil hit them just as hard as the rainfalls at Kolomela [mine in Postmasburg]. It’s just as heavy as the rainfalls way out in Sishen.

So it shows [that] even a very diversified company can have trouble and Anglo has done as good a job at diversifying as anyone. Hey, it’s a knock, but this can have a knock after you’ve appreciated in share price. Just look at Anglo since back in 2015/2016; it’s gone from $54/share to [inaudible] – that’s way more than a 10-bagger. And even in 2020 it fell down to $15/share, and now it’s up to $50/share, and there are huge production increases – not huge, but good steady production increases.

So, yes, it sounds [like] 6%, which is a bit of a build, but gosh, it’s the highest it’s been in years and years. Let’s see what they do on the next quarter. But it’s a diversified company, good management, good assets. I think it has more to go.

FIFI PETERS: One of our market commentators earlier, Andre Cilliers of TreasuryOne, was making a point as to yes, production is lower because Anglo American revised down production across most of its basket; they’re expecting to produce more. But they still have these elevated prices that they can get for selling what they do produce. The argument was to what degree the higher commodity prices would offset lower production.

Or are you worried about the line item that did come out of Anglo regarding its costs? Up nearly 10% as a result of a whole host of factors. To what degree will those costs also eat into some of the profit margins that the higher commodity prices could potentially bring?

PETER MAJOR: They are going to eat a lot into it. And yes, these are high prices we’re seeing now, they’re very high prices. I don’t think these prices are going to go higher, and a lot of other people don’t either. So, even if these prices stay high, they’re going to make a lot of money; but they’re not going to make as much money as the year before. They’re already pushing us towards accepting that earnings can be down 5%. If these commodity prices just stay where they are, earnings are going to fall for the exact reason you just mentioned, because costs are going up 9%, 10%.

We’re seeing it in every country. We’re seeing it in every division of economies – manufacturing, mining, services. So unless these prices keep going up and go up faster than inflation, earnings are going to come off. That’s what’s being forecast by everybody. These are very high metal prices – commodity prices across the board –  iron ore, copper. So it’s unlikely [that] these prices are going to go higher than they are now because they’re at such a huge level. It’s a great level, they’re going to make a lot of money, but the market can’t keep growing every year. The commodity companies can’t keep growing in production every year, they can’t keep growing metal prices every year.

FIFI PETERS: Sure. So if you had to give us some advice on [which] to pick, [which] to buy at a little lower levels after today’s moves, it sounds like you’re tilting towards Anglo American because they’re more diversified. But is there not merit in buying a more niche player, like Kumba Iron Ore or like Anglo Platinum?

PETER MAJOR: In my view, no, there’s not. If you’re an active trader, an active fund manager, maybe you can say, ‘Oh, buy one of the individual companies’. If you look Anglo trading on barely an eight PE [price-earnings ratio] and the big profit margins they’ve got and the healthy dividends they are paying and the small debt they’ve got, I’d sleep a lot better putting pension funds or people’s savings into Anglo American than I’d do Kumba Iron Ore. Hey, it can have an iron price fall, and I think it will. Iron ore at $150 is crazy; it’s the most common metal in the world.

What about more rains? What about more labour disruption? What about Transnet problems? There’s a lot less risk buying Anglo American than trying to take out one of these niche individual companies that it manages.

FIFI PETERS: A quick comment on Sibanye-Stillwater and the strike action happening at its gold operations? Now it’s the second month, around 43 days, and there’s a risk that it will ripple over to its platinum operations. Just your take on that situation? How worried are you?

PETER MAJOR: I’m really glad you brought this up, Fifi. This is a concern for the whole country. We have half the world’s known gold, and all we’ve been doing is closing gold mines continually now for 25 years. These are big-holed, deep mines, and need a lot more capex than is being spent. Nobody’s spending capex in this country in mining compared to how they used to decades ago, because they’re very worried about the future here.

This is the time for the unions to be negotiating ‘How can we keep working, [keep getting] decent wages, and extend the life of these mines?’

The gold mines will be closed, because nobody wants to invest in deep-level gold mines. Nobody wants gold mines in South Africa, period. If they want to start spreading trouble like this to the platinum mines, it’s just catastrophic for the country and it’s catastrophic for the workers. We used to have 550 000 men working on the gold mines, wealthy men, making good money, [with] long-term careers, good benefits. Now we don’t have 550 000 men on the gold [mines], we have maybe 80 000, 85 000. We’re going to have even fewer numbers going forward.

I don’t know who we need to bring these parties together, but going on strike is just hardening both attitudes, and the mines are going to start crumbling if they’re not being mined. When you’re that deep underground rocks start caving in, water starts levelling, [there’s] corrosion. We’ve seen too many gold mines close down to allow one more to – and it will. So it’s scary that these guys are still on strike and they can’t come to agreement here.

FIFI PETERS: You’re right. Someone definitely needs to step in. I know there have been calls for the president himself, President Cyril Ramaphosa, to see if he can mend it, but [there are] too many closures of gold mines. We can’t afford another one.

We’ll leave it there, Peter. Thanks so much for your time. Peter Major is director of mining at [Mergence] Corporate Solutions.



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