Boards and investors have let the mining sector dig itself into a hole – by Ian McVeigh (The Telegraph – August 27, 2015)

Ian McVeigh is head of governance at Jupiter Asset Management

Senior management continued to behave as if the boom times would last forever by engaging in expensive takeover deals that seemed to make no financial sense

“Where has all the money gone, long time passing…” What a sorry state of affairs for long-term investors in the mining sector, the ones who put their money into household names like Rio Tinto or Anglo American during the great commodity boom from 2003 to 2015. Over this period, the FTSE All Share Mining Index actually managed to underperform the broader market by a massive 39pc in spite of a powerful tailwind for much of the period.

Two factors have been behind this dismal outcome for investors: first, the hubris that marked many of the mergers made at the peak of the boom; second, the excessive nature of much of the capital investment that went to increase output as financial discipline went out of the window.

It also raises questions about the quality of the corporate governance operating at these mining firms.

To put the underperformance of the mining sector into context, it is important to remember that the price of oil trebled during the boom years, copper surged from 75c/lb to 400c/lb, while the prices of iron ore, thermal coal, nickel and aluminium also surged on the back of huge demand from China.

The boom only started to run out of steam towards the end of 2011 as the first signs of China’s economic slowdown appeared.

For us, the warning bells on China rang loud and clear, especially after Steve Davies, with whom I co-managed one of Jupiter’s UK equities funds until earlier this year, visited the country in 2011. We decided to sell out of the large mining firms we owned.

For senior management at most of the mining firms, the same warning bells seemed to fall on deaf ears. They continued to behave as if the boom times would last forever by engaging in expensive takeover deals that seemed to make no financial sense, or investing heavily in new production that would become surplus to requirements.

Simon Toyne at Redburn Partners, one of the City’s most respected mining analysts, compiled what we would call a list of “Top Stinkers” – the deals in the mining sector we believe should never have happened. The list is a very long one but topping it is Rio Tinto’s infamous purchase of Alcan.

Rio paid $40bn for the Canadian aluminium producer and so far $20bn has been written off; BHP Billiton’s purchase of the shale assets at Fayetteville and Petrohawk cost $20bn, of which $6bn has been written down; Anglo American paid $7bn for the Minas Rios iron ore assets, spent $9bn upgrading them and has now written off $13bn. Xstrata’s purchase of Lonmin shares deserves a mention; the shares are currently 97pc off their peak.

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