Cycle surfing miners lose their religion

If there is a religion in the mining industry, it is the unshakeable faith in the cyclical nature of commodity prices. But recent evidence suggests very few resources companies are willing to make the bold, countercyclical investments that the industry prides itself on.

Big companies like BHP, Whitehaven Coal, South32 and Alumina Limited have been challenged by investors over the past month as to whether their strategies and choices are appropriate for the prevailing market conditions.

What has emerged is a perception that the coronavirus pandemic is no ordinary cyclical downturn, thereby reducing management's confidence to seize on opportunities and take big spending decisions on acquisitions and construction projects.

Image

The holy grail in the resources sector is to act countercyclically; that means investing when prices for assets and commodities are low while avoiding buying and building when prices are high.

It might sound obvious, but it is particularly applicable in the volatile world of commodities, where sudden fluctuations in supply and demand (think cyclones or political decisions) can trigger extraordinary volatility in prices.

Faith that the cycle will turn is the nourishment that keeps companies and investors going through periods of low prices, and it is the nagging doubt that prevents the sector from ever celebrating boom time prices too extravagantly.

Nowhere has the cycle been more extreme over the past five years than in the coal sector, which was universally losing money in 2015, posting record profits in 2018 and is now back to a point where only a small number of Australian mines are profitable.

It has been clear through all of those five years that BHP was not going to be the long-term owner of the Mt Arthur thermal coal mine in NSW, but for various reasons, the company waited until coal prices were at four-year lows in August to formally announce a sale process.

Read the full article in the Australian Financial Review published 14th Sept 2020