By Clyde Russell
LAUNCESTON, Australia, March 21 (Reuters) - It seems the big
miners are damned if they do and damned if they don't, as
investors have yet to reward their new-found commitment to
spending discipline as the commodity boom matures.
The share prices of the world's top two miners, BHP Billiton
and Rio Tinto have barely outperformed or even
lagged not only the commodities they produce but also broader
Equity investors have now had seven months to digest BHP
Billiton's decision to curb capital expenditure, shelve or delay
projects and focus more on shareholder returns.
BHP's share price has gained a mere 1.4 percent since Aug.
23 last year, the day after it announced plans to scrap its
Olympic Dam copper and uranium mine expansion and wind back iron
The S&P GSCI Index of commodities has lost 4.1
percent since BHP's game-changing announcement, but Asian spot
iron ore is up 28 percent and London copper
has edged 0.2 percent higher.
Rio Tinto has fared a little better, with its share price
gaining 6.2 percent to A$57.48 at the close on March 20.
What this shows is that both these companies have failed to
gain any traction from meeting investor demands to show more
capital discipline, wind back expansion plans, cut operating
costs and commit to increasing shareholder returns.
To put their underperformance in perspective, both
Australian-listed miners have substantially lagged the benchmark
ASX 200 Index, which has surged 13.5 percent since Aug.
23 last year.
Given that BHP has the biggest weighting in the index and
Rio is ranked fourth, it's clear that investors have decided to
put their money into other sectors and largely ignore resource
Commonwealth Bank of Australia, the number two
stock in the index, has gained 25 percent since Aug. 23 last
year, and this is despite a sluggish housing market and weak
growth in credit extended to businesses.
So why are resource companies being shunned after they have
seemingly bent over backwards to satisfy the demands of equity
Is it that the message of the new generation of leadership
simply isn't being believed?
Both BHP and Rio Tinto, as well as Anglo American Plc
, have all recently replaced their chief executives with
managers more focused on efficiencies than deal-making and
building new mines.
Or is that commodity prices have also been disappointing and
the outlook remains somewhat clouded by China's modest economic
re-acceleration, and ongoing recession and debt woes in Europe?
Or is it that investors believe the good times for commodity
producers are well and truly over, and a deluge of supply is
going to hit the market in the next few years, thus destroying
margins and profits?
It's probably a combination of all of the above, but that
doesn't necessarily mean the prevailing market consensus is
For companies like BHP and Rio the game is now all about
being the lowest-cost producer, while maintaining market share.
One thing that became clear at this week's Mines and Money
conference in Hong Kong is that junior miners are finding it
extremely hard to get projects up and running.
Even those with top-class reserves located near
infrastructure can't seem to attract equity or debt financing,
and convincing private equity to take the risk is also a much
harder sell than it was at the height of the commodity boom in
What this indicates to me is that much of the anticipated
boost in supply over the medium to long term simply isn't going
The major mining companies are in a new phase of caution and
the juniors can't get support.
Ultimately this means there may be a supply crunch in some
commodities in coming years, rather than the much-feared
With China still industrialising and urbanizing, with an
estimated 130 million people expected to move to cities within
the next decade, and India doing the same, albeit in a more
haphazard manner, it's hard to see demand for commodities
Yes, growth rates will slow, but as the base gets bigger and
bigger, smaller percentage increases still result in large gains
in actual volumes.
But until evidence of this is seen, and the big miners
deliver on their promises to be more generous to shareholders,
it's likely that they will continue to lag the wider market.
Disclosure: At the time of publication Clyde Russell owned
shares in BHP Billiton and Rio Tinto as an investor in a fund.