sharing in governance of extractive industries
How times change. From the summer of 2002 to that of 2007, Anglo American PLC’s share price marched upwards, with only minor and short-lived reverses, from about £8.36 at the start of August 2002 to £32.22 by June 8th 2007, a rise of nearly 300% in less than five years. Earlier this month it gained the unwanted notoriety of become the worst performing stock of 2015 on London’s main bourse, the FTSE; currently (10th December 2015) the stock has an opening price of £3.20, that is 90% down from its £32.22 value shown above. In plumping these depths, Anglo American eclipsed fellow miner (and minerals trading house), Glencore, the share performance of which is nearly equally miserable.
Nor is it just the investors that will be hurt: Anglo American set itself a target of reducing its workforce from the current level of 135,000 to just 50,000; a deep cut by any reckoning. Whilst workers lose their jobs, mining companies themselves face an uncertain future. On the 10th December 2015, a Reuters article was provocatively titled: “Diamonds are forever; is Anglo American?”, an article coming just one month after Mining Journal led its November 2015 edition with a report on “Zombie” companies: “Don't mention mining's 'living dead'” of largely mothballed mining companies. Indeed, mining companies are disappearing off bourse exchanges at an alarming rate, with 25 de-listings from London’s Alternative Investment Market this year, and thirty from 30 from Canada’s TSX Ventures exchange.
Of course, it is the precipitous drop in minerals prices that is behind this carnage. On April 6th of 2007 (yes, that year again), Nickel broke the price barrier of $50,000 per tonne; as of December 2015 it is now trading at less than $9,000 per tonne, representing a drop of more than 80%. At the start of February 2011, so considerably more recently, the price of copper exceeded $10,000 per tonne; the current price is some 55% lower than that, a price reduction dwarfed by seabourne iron and metallurgical coal (65% and 70% down from 2011 prices, respectively). McKinsey, a consultancy, reports that industry-wide revenues down around 6% p.a. over the period 2011-2015, noting (quoted by the Mining Journal, p10, November 2015) that "historically, four years is a long time for average (base metals) prices to decline. In fact, since 1960, the greatest number of consecutive years that prices declined was five (aluminium and nickel for. 1989 -1993). But this is rare, and has never happened for copper, zinc and lead prices"; until now, that is.
Mining is a cyclical business: high prices attract investment and this carries the seed of a future glut in production; whereas low prices strangle new discovery and lead, long term, to future shortages. The source quoted above for Anglo American’s unwanted eclipse of Glencore as bottom FTSE performer year-to-date 2015 is the Daily Telegraph, and I turn to that same newspaper again for an article published in the heady days of April 2007, headlined “Nickel price 'loses touch with industrial reality'”
which reported that “China's top nickel producer, Jinchuan Group, warned that the price had lost touch with industrial reality, setting off a wave of "irrational investment" in new mines that would send prices crashing once the bubble burst. ‘The trend has gone like a raging fire into madness. We are in deep anxiety about at the potential ill consequences,’ it said.” Which is, of course, exactly what happened.
Anglo American’s intended 63% headcount reduction is consistent with the view of low mineral prices being the “new normal” for quite a time yet, particularly given the expense of making so many redundancies. This parallels the situation in the petroleum sector, where the 2014-5 price collapse was initially met with short-lived opportunism, now long gone, that prices would quickly recover, credence in which led to some oil companies holding (at great expense) crude oil tonnage at sea in (relatively) stationary oil tankers rather than bringing them into port.
Interesting times for Anglo American, and interesting times for the mining sector as a whole. Of course, in Chinese translation, "may you live in interesting times" is a curse. Anglo American and the sector overall needs to beat that curse and find a route through back to the good times, beyond this unwanted "new norma".
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