Mining companies are no strangers to being knocked around by economic and political conditions, and this year is shaping up to be yet another rocky road for the world's miners. But experts say there are still opportunities to be had if the keen investor knows what to look out for.
Battered metal prices, a significant shift in demand from China and choked-off access to capital made 2013 a rough year for the industry in all parts of the globe. Precious metals such as gold and silver cooled and demand for commodities such as iron ore and coal still threaten to fall into oversupply.
Data compiled by Barclays showed total global commodity asset values fell by a record $88-billion, to end at $332-billion (U.S.) in the first 11 months of last year, with the value of precious metals falling by $78-billion (compared to 2012) to a total of $119-billion. Investors pulled more than $36-billion out of the sector last year.
Surprisingly, that shouldn't have mining investors fleeing the market just yet as analysts see opportunity in changes they say are coming. But investors will need to have a long-term view, and put in some research and time along with their money.
The 2014 industry forecast doesn't show any relief as production costs remain persistently high and a third of the mining work force is set to retire in the next decade, according to Deloitte's 2014 Tracking the Trends report released last December.
As part of the report's 10 recommendations, it asked companies to take drastic steps to change the way they do business, from rethinking how they allocate capital to adopting new technologies. According to the report, "it's not a pendulum swing, it's a seismic shift" – signalling that these need to be significant structural changes.
"We actually think that there is only so much you can do with these incremental changes," says Glenn Ives, Americas mining leader and chair at Deloitte, "and the cost pressure that companies are under is actually going to force them to maybe take the leap to do things quite differently."
Innovation is the way for mining companies to stay viable and relevant, according to the report, but this is not a sector that is known for its overall dexterity, which could prove challenging, Mr. Ives says. "As a general rule, it's a conservative industry and it doesn't bring in new technology perhaps quite as quickly as other industries."
Admittedly these considerable alterations could send fear into the hearts and wallets of some investors, but experts such as Rick Rule, chairman of Sprott Global Resources Ltd. and an expert in natural resource securities investing, says it's all part of the "capitalist and cyclical" mining industry. Mr. Rule warns that anyone looking at investing their money in this business needs to understand that downturns – such as the one miners are up against – are "natural and normal" and can actually lead to better long-term investment opportunities.
In a sector that could take years, even decades, to bring a mine into production, perseverance and time is something investors should have in abundance.
"Investors who go in with any time frame shorter than 18 months are deluding themselves," says Mr. Rule. He advises that "aligning investor expectation with the realities of the business results in happier outcomes."
After the dust settled from the white-hot market of 2010, raising capital was one of the biggest challenges miners faced and resulted in the traditional investors fleeing the market. But it's made room for newer – and in Mr. Rule's opinion, more long-term-oriented – investors to emerge.
"The capital providers, which were so generous in the 2003 to 2010 up-cycle, were often generalist mutual funds or momentum-oriented hedge funds. Those funders are, by and large, gone from the industry," he says. "But they have been replaced by things like sovereign wealth funds, [and] by large private equity funds, and I think that's a very positive step. They're being replaced by long-term committed capital, capital that won't go away like a public mutual fund holder."
The previous bull market set up unrealistic expectations, and the bubble eventually burst, forcing mining companies of all sizes to halt projects, delay expansion and watch their stock prices fall. Now investors have to scrutinize their investment more heavily, says Joe Fazzini, mining analyst at Dundee Capital Markets Inc.
"With metal prices definitely coming under pressure, I think the focus going forward for a lot of investors has really been looking for quality," he says.
In the search for more high-value investments, his advice is to know who is at the helm of these companies and their projects.
"When we think about the mining space, it's all about the quality of the management team, the quality of the operation, and management's ability to execute operationally and financially," Mr. Fazzini says.
Junior mining companies are often the ones to feel the brunt of brutal economic environments, and many fail before they even get to production. According to PricewaterhouseCoopers LLP, the market cap for the top 100 junior miners on the TSX Venture Exchange fell 44 per cent in 2013, to $6.49-billion.
"I would say that the junior mining sector will never die," says Mr. Fazzini, adding that these companies are the pipeline for future mines and many of the majors.
"So, at the end of the day, I think there will always be a junior mining sector, but what you tend to see is that, like commodity prices, the junior miners are going to fluctuate in their cycles."