It is too early to start digging back into the mining sector – by Tom Stevenson (The Telegraph – October 26, 2013)

If you want to know what is going on at a company, it is sometimes better to ask its suppliers rather than its management. They have less interest in telling you everything is just fine.

So it was revealing this week to hear BHP Billiton’s bullish assessment of the outlook for commodities alongside news of slumping demand for the picks and shovels provided by the likes of Caterpillar and Sandvik, two of the world’s leading suppliers of mining machinery and tools.

BHP’s chairman, Jac Nasser, told the mining giant’s annual meeting that demand for some commodities could rise by 75pc over the next 15 years as he expressed confidence that the Chinese government retains the firepower to keep its economy growing strongly.

But Sweden’s Sandvik reported a 17pc decline in orders for its mining business, while US-based Caterpillar once again cut its full-year revenue outlook and predicted another downturn in mining-related sales next year. The mining sector is going through a painful transition after a decade, to 2010, in which China-fuelled growth seemed endless and the sector outperformed the wider stock market by a factor of 20.

It was pretty much impossible not to make money from mining and, as ever when things are this good, making money went hand in hand with wasting it. Misallocation of capital in the boom’s latter stages was on a truly industrial scale and the resultant write-offs — $50bn in five years from the big four (Rio Tinto, BHP, Xstrata and Anglo American) — ensured the leading companies are now under new management.

The squandering of shareholders’ money also resulted in some nasty share price falls. Anglo American has halved in the past two years, Rio is off by a third and BHP by a quarter.

Mining is a very cyclical business with long project lead times. This means that, like commercial property developers, it tends to bring projects on stream just as the demand for them is evaporating.

Transitions like this can provide great opportunities and I have heard some compelling cases made recently for investors to dip their toes back in.

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