Mining companies face challenges from investors as returns crumble

23 March 2017 Consultancy.uk

Mining companies investors have had a rough five years, as their investment saw median total investor returns of -17%. Many mining companies continue to face poor prospects as structural market changes, and a cyclic commodity downturn, bite. For well positioned companies, improved strategic business integration with investor outcomes may be required, while for companies with ailing balance sheets and high debt levels, transformation to more streamline operations is nigh.

The mining industry has seen ups and downs over the past decade, as demand for commodities rose and fell on the back of changing economic conditions across the globe. Recent years have been particularly harsh for the mining industry as the price of commodities hit new lows due to China’s transformation, and increased global demand for more sustainable forms of energy production.

In a new report from The Boston Consulting Group (BCG), titled ‘Restoring Investor Confidence’, the consultancy firm considers the effect of the sector’s current challenges on the investment community that provides funds to the industry. The report is based on data from 55 of the world’s biggest mining companies, from between 2005 and 2015.

TSR Performance varied radically from 2005 through 2015

The research shows that the recent downturn in commodity prices has hit the total shareholder return hard, almost across the board. The TSR between 2010 and 2015 stood at median -17%, with almost all companies operating close to the median. This is in stark contrast to the five years previous, when almost all companies operated at above zero, and median TSR was +30%. The median for the full ten-year period came in at +5%. The results are considerably lower than a diversified investment in the S&P500, which would have netted 25% more on an investment made in 2005.

The research found that companies across the globe have been affect, with large US corporates seeking bankruptcy protection, while in South Africa gold miners were hit hard by declining demand. The consequence of increasing pressure has been increased focus on transformation to cut costs and up productivity; however, the moves made by many companies have done little to alleviate investor concerns – some of which may be more structural than merely a reflection of poor cyclic performance. Gustavo Nieponice, a Partner and Managing Director at BCG and a co-author of the report, points out, “Generalist investors are still concerned, and have reallocated billions in capital from natural resources since 2012, particularly growth-oriented investors.”

Generalist funds are retreating from natural resources

To better understand the current investors’ mindset, the firm leveraged the Preqin Investor Outlook, to get a better idea about generalist investors’ market perceptions, including natural resources. The study found that 62% of respondents had a negative perception of natural resources as an investment opportunity at the end of 2016, with just 2% seeing the sector in a positive light. Private equity was found to be the segment with the largest interest, seen positively by 65% of respondents. Real estate and infrastructure came second, garnering positive perceptions from 52% and 57% of respondents respectively.

In terms of their investment plans, natural resources drew the largest negative sentiment, with 17% planning to divest, and the lowest number of respondents planned to invest. Private equity and private debt were the biggest draw cards, at 30% and 32% of respondents respectively. The key concerns for investment across the board related to ongoing volatility in the global markets (61%), and performance (43%). Regulation and the exit environment were found to be the areas of least concern for investors, at 10% and 8% respectively.

Miners strained balance sheets have investors calling for capital discipline

To better position themselves for investor interest, the report considers where three different types of companies are in their current journeys – from those that have streamlined operations, the right quality of capital and access to high value seams, to those that are heavily in debt, made poor investment decisions during the boom and are relatively unproductive with their capital.

For those with relatively strong balance sheets and room to manoeuvre, focus on the development of a holistic value creation strategy is cited as key by the authors. The report suggests that a holistic approach to integrating business strategy, financial strategy and investor strategy may create a more compelling story for investors – as well as more long term tangible results.

For companies with poor balance sheet performance however, with the market falling 51% since 2010 while debit in the industry has risen steeply over the past five years, considerable focus on transformation towards even more streamlined operations may be required – particularly as activist investors become interested in the segment.

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