When John Maynard Keynes suggested governments should bury vast sums of money at the bottom of old mine shafts, it was meant as a parable about the surprising benefits of fiscal stimulus. The world's miners seem to be trying it out for real.
Return on capital for companies in the Bloomberg World Mining Index has averaged minus 4.3 percent since turning negative at the end of September. That's the first time that's happened since the benchmark was created in 2003, barring a brief rounding-to-zero blip in 2013.
For a sense of how bad this is, compare miners to airlines. Aviation is a business so benighted that Warren Buffett once joked Orville Wright should have been shot down to save investors the heartache. The global aviation body recently celebrated the creation of industry-wide shareholder value for the first time in history. Right now, airlines are flying high versus miners:
The reasons for these doldrums are familiar. China has consumed between 40 percent and 50 percent of the world's mined commodities since the global financial crisis, but its appetite is faltering. Industrial output growth matched its weakest pace since 2008 in October, and the raw materials that fed all this activity are feeling the pinch. Iron ore has fallen 75 percent from its 2011 peak, Australian thermal coal is off 62 percent, copper has slipped 53 percent, and spot gold is down 43 percent. When the prices for a company's products tumble like that, what options does it have?
Given the circumstances, it's not surprising that when asked for reasons to be cheerful, mining executives increasingly point to factors over which they have no control.
Nev Power, chief executive officer of the world's fourth-largest iron ore miner, Fortescue, is counting on renewed economic stimulus out of Beijing to revive the steel mills that buy his rock. ``Watch the Chinese government and see what packages or actions or policy setting they put in place," he told reporters on the sidelines of a mining conference in Melbourne last week.
Shaun Usmar, chief financial officer of Barrick, the world's biggest gold miner, put favorable currency movements and lower fuel prices ahead of the company's own efforts when releasing its third-quarter earnings last month.
Such rhetoric is a giveaway that the industry is still stuck on the denial and bargaining stages of grief.
Take mining companies with more than $5 billion in annual sales, and subtract their estimated weighted average cost of capital from their return on invested capital. That should produce a measure of economic value added, the degree to which an investment in a business outstrips what you'd get from sticking your money in the bank. It's not a pretty picture:
The mining industry appears to have become a value destruction machine, sucking in equity and debt and spitting out at best meager profits in return. The only companies generating any economic value that doesn't round to zero are two coal miners controlled by the Indian and Chinese governments. Rio Tinto ekes out a 0.3 percent spread over its cost of capital. Newmont scrapes in with 0.1 percent. Don't forget, those figures will only get worse if interest rates rise and drive capital costs higher.
What's the way out of this mess? If they want to stop setting fire to shareholders' money, miners must either increase their profits, or reduce their capital. They're doing all they can on the former front by slashing away at costs, but remain hostage to further downturns in demand that could eat still deeper into revenues.
Cutting capital is harder, requiring the painful expedients of debt repayments, asset disposals and writedowns if it's to move the needle. There's much less evidence of that happening. Indeed, while the value of deals in the mining sector remains at subdued levels, the average takeover premium is rising, suggesting many companies still think it's a seller's market out there:
Until that starts to change and miners reach the acceptance stage, this grief is only going to continue.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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