The Mining Business Pauses to Catch Its Breath
By Steve Fiscor, editor-in-chief
The wheels began falling off the financial bandwagon in December. The signs were evident even before Bernard Madoff Investment Securities was exposed as a Ponzi scheme and $50 billion worth of investments disappeared. In India, Satyam Computer Services topped the news cycle for a while with $1 billion in alleged fraudulent accounting practices. All of this scandalous behavior could easily be summed with an often cited quote from Warren Buffet, chairman, Berkshire Hathaway, who said in 2001, “you find out who’s swimming naked when the tide goes out.”
Loyal E&MJ readers look forward to the combined January-February edition of E&MJ because it carries the Project Survey (see p. 24), which is assembled by the market analysts at Raw Materials Group (RMG) in Stockholm (www.rmg.se). Using the information gathered from more than 2,000 mining companies, they give a detailed analysis of the current mining project pipeline. RMG doesn’t hold back and opens the survey with, “the mining boom is over.” That’s tough news to take. According to the Project Survey the number of development projects peaked in 2006 and they are predicting a steep decline for 2009, but they don’t believe it will reach the trough levels of 2002.
As this edition of E&MJ was going to press, the equity side of the banking industry worldwide was under siege. Bankers were calling in their markers and refusing to lend. All industries have been feeling the ripple effect for months. A prime example in the mining sector is the Russian base metal miners (See News, p. 16). At the height of the commodity cycle, they were using their new found clout to build market share. They are seeking Kremlin bailout money less than one year later. The financial press often refers to UC Rusal’s owner Oleg Deripaska as one of the richest men in Russia. He was quoted recently as saying, they only count my assets and not my liabilities.
No one knows the situation better than junior mining companies. The Minerals Economic Group released its annual report on exploration spending (see Markets, p. 64). Had they not made their prediction for 2009, the report would have been tremendous news, record levels of spending in 2008, sixth consecutive year of growth since 2002, etc. The bulk of the explorers are junior mining companies and they depend heavily on equity financing. They are getting squeezed by a lack credit and investment. As they cut back on exploration projects to survive the current downturn in commodity prices, exploration activities will obviously decrease substantially.
The commodity markets are sending some signals. The only positive stories in the news this month are those from the gold sector. Gold loves misery. So, a lot of people must be unhappy. Prices for base metals have moved a little higher in the last month, indicating that the bleeding may have stopped. Oil futures remain low. The engines for economic recovery run on petroleum products and it doesn’t look like investors believe that world will see a recovery soon.
Two political moves could jump start the economic recovery. The newly elected Obama administration needs to solve the U.S. housing crisis. The election itself has restored confidence among many Americans, but confidence alone can’t keep families from walking away from mortgages. The $586 million Chinese stimulus package announced during November could launch an infrastructure spending program that would include the construction of new railways, roads and airports. When the Chinese and the Americans get their people back to work, the mining business could see another era of high demand.
The good news, and what readers need to remember, is that more than 10,000 mines are operating world wide and many mining companies have strong balance sheets. The mining business will fair much better than many other industries. Yes, some mining companies have announced layoffs. Many more will trim payroll through voluntary retirement and attrition. Projects in the pipeline are just that—development projects that have not been commissioned. Exploration can resume as quickly as it has been idled. The mining business will emerge from this downturn a much stronger industry. When the industry looks back from the next peak, hopefully 2009 will be viewed as the year the mining business paused to catch its breath during a long period of growth.