All manner of sins can be covered up by a bull market: exorbitant salaries, poor returns, bad projects, to name but a few.
But, as has been clearly shown over the last few years, we are definitely no longer in a bull market and, some of the sins of the past have come back to haunt mining companies.
Speaking to Mineweb in Cape Town recently, just following the 2014 edition of the Investing in African Mining Indaba, Jeremy Wrathall, head of Investec’s Global Natural Resources team, explains that while there has, indeed, been some optimism creeping into the market of late, there is no reason to be wildly optimistic that things are going to return to the halcyon days before 2007.
“China is still not performing the way we might like it to, and I think the trajectory for metal prices is certainly down from here,” he says.
Adding that, while even slow growth in China still implies massive growth in demand for metal, “the industry has reacted the way it always does and overbuilt, and hence we have seen a big hang over after the party and some of the big projects may not actually be required.”
The other result of the shift from bull to bear market is a significantly greater focus on costs and financial rigor, with many companies slashing costs everywhere from head office personnel to exploration.
“During the big part of the last few years it was very easy to let costs run away,” Wrathall explains saying the mantra for many was: “bigger is better, lets just keep growing into a massive gold business for example…we are now in a very different market.”
Proof of this, he says is the increased focus on executive remuneration. “The first thing we do when we are looking at a company now [and whether or not to fund it] is go into the annual report and look at how much the directors are being paid.Lots of companies say, ‘oh, please raise money for us,’ but if the directors are being paid a fortune they are actually putting the company into bankruptcy themselves.”
Asked if he sees salaries in the sector coming down, Wrathall says, there is no doubt about it.
“There is a lot of push from shareholders, because that is the first thing that they do now is to look at the annual report and say, Mr. X why are you being paid so much, especially if you have been underperforming. That is happening all over the place now, and shareholders are getting quite militant and also there are social pressures, it is obscene to be paid a ridiculous amount of money relative to the employees, especially when your company is underperforming. It was fine when it was a bull market, it is not fine now.”
Looking forward, Wrathall believes that, while the sector is unlikely to be a fun place to be this year, some companies have become good value as they were oversold, while others still have a lot to do before they become good value.
“When you see companies that are still burning their cash and their operations are not replenishing their cash, I don’t think that is a good stock to be in. when you have something that is clearly undervalued and has a good growth profile that doesn’t rely on the commodity price going up, that is a good stock.”
“I genuinely think it might pick up a bit because of sector rotation, fund managers putting money into a bombed out sector but I don’t necessarily think it’s going to be a great fun place to be.”