Sector Performance Analysis: Mining, March 2016

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Description: Figure 1 highlights the performance of the mining industry year-to-date (x-axis) and the performance of the 11 months prior to March 2015.

Shares of major diversified mining companies were up on average 16% since the beginning of the month. Since January, mining stocks have rallied as prices appear to be increasing, the number of financing and acquisition deals have been struck and, for the first time in years, the mood at the recent Prospectors & Developers Association of Canada (PDAC) convention in Toronto, Canada was buoyant. Typically, mining stocks enjoy a surge leading up to the PDAC convention and then drop off. That didn’t really happen this year, at least not to the extent that it usually does.

Gold prices are up 17% since mid-December, and copper prices, which hit a low of US$1.96 per pound on January 20, increased to US$2.25 – a 15% increase. Iron ore’s ride also continued with the steelmaking raw material jumping 19.5% in one day to above US$ 60 but the rally quickly evaporated. Iron ore is still up nearly 30% in 2016.Other industrial metals also gained led by zinc which rose 2% to US$1,812 a ton nearly matching a five-month high hit earlier in March. Nickel rose to US$ 8,765 a ton on the LME. Nickel was last year’s worst performing metal with a 40% drop and hit a 13-year low mid-February of $7,725. Some analysts point out that the bounce in mining equities is driven in part by a short squeeze.

Suffice it to say mining company stocks are having a good month and the renewed confidence has also resulted from several financing deals. One of those recent deals, announced March 4, is the $191 million acquisition of True Gold Mining Inc. (TSX-V:TGM) by Endeavour Mining Corp. (TSX:EDV). BHP Billiton CEO Andrew Mackenzie after years of selling unwanted assets and taking a multi-billion dollar write down on its US shale gas operations, has an appetite for acquisitions again. Mr. Mackenzie said BHP is sizing up deals for petroleum and copper assets that could offer an immediate boost to profit. A good target for BHP Billiton would be Freeport McMoRan. For starters both BHP Billiton and Freeport McMoRan have copper and oil & gas assets. For BHP, its obviously an attractive deal. Acqusition of Freeport McMoRan would make BHP Billiton the world’s largest copper ming, and propel it ahead of the current leader Codelco. BHP would easily double its output of copper, and end up with Escondida, Grasberg, and Morenci – all of the world’s biggest copper pits. On the other hand, Freeport’s oil and gas assets fit what BHP Billiton is looking for. Both companies have operations in the Gulf of Mexico’s Green Canyon region and the southern U.S.’s Haynesville shale. The one problem that is evident, however, is Freeport McMoRan’s ~US$ 20 billion in debt, which could be a hard pill to swallow for BHP Billiton.

Meanwhile, Rio Tinto’s CEO Sam Walsh will retire after three years leading the mining giant through one of the worst industry downturns in decades. Mr. Walsh, will step down from his role and the board on July 1. His replacement will be Jean-Sébastien Jacques, head of Rio’s copper and coal division, who will join the board immediately. The appointment of Mr. Jacques, after five years running Rio’s copper division, could signal a shift of focus towards the metal as demand for copper continues to remain strong while the demand for steel slows. Mr. Jacques, who was group strategy director at Tata Steel from 2007 to 2011 is known to be quite a deal maker and could lead Rio Tinto through a round of M&A as struggling miners have assets up for sale.

Freeport McMoRan:

Freeport McMoRan transparent logo

Share of of Freeport McMoRan were up 41% since the beginning of the month, compared to the market that is up only 4%. Freeport has received a boost from the recent recovery of commodities prices mainly copper and precious metals. For FCX, copper remains the main source of income as it accounts for over 60% of its revenue. Therefore, the recent bounce in the price of copper – prices rose from less than $1.9 per pound to close to $2.3 or over a 20% jump within a matter of weeks – contributed to the rally of FCX. Copper’s rally was based on two main developments: China’s high imports and the weaker dollar. Freeport McMoRan’s CEO, Richard Adkerson, has made some changes including selling its 13% share in Morenci unincorporated joint venture to Sumitomo Metal Mining for $1 billion in cash. This deal won’t add another company to this JV because Sumitomo Metal Mining already had a stake in this project, which, after the sale, will rise to 28% and leave FCX with 72% interest. FCX is finding ways of improving its balance sheet and increasing its available funds. The recent deal is a step in terms of valuation. And provides more liquidity that could be used to cut its debt. Moves like this helps assure investors especially after its debt ranking was reduced to junk status by S&P rating agency.

Disclosure: VCI has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

 

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