Leaner and meaner: How miners are ready to deliver – by Stuart Theobald, Orin Thambo and Phibion Makuwerere (Mineweb.com/Moneyweb Investor – April 11, 2016)

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An analysis of Anglo American, Kumba and Lonmin.

Are the good times back? The JSE’s mining index gained nearly 60% in the first 10 weeks of the year. Some shares – Anglo and the platinum producers among them – have nearly doubled investors’ money. That’s only a partial recovery – the index is still half what it reached in the pre-2008 financial crisis-driven crash. But it’s the first glimmer of light long-suffering shareholders have seen in their mining stocks since then.

The share price action has had thin real underlying drivers. There has been an uptick in commodity prices and the weak rand has helped. There does not seem to be any good reason to think the commodity bear market is over – there is still far too much supply around to meet demand – but the bottom of the cycle may be in sight.

It is a good time to look at the measures taken by some of the bigger mining houses to cope with the hard times they’ve been experiencing since China stopped hoovering up industrial resources from around the globe in mid-2014, causing the collapse in prices.

With leaner, meaner, operations, a modest commodity price recovery can leverage a much bigger bounce back in profitability. That is the scenario investors should be on the lookout for. We went digging into the economics of a handful of key commodity companies to figure out which are looking best set for further strength.

We found companies in the midst of dramatic restructurings that will leave them much tougher and potentially able to deliver serious value for shareholders.

Anglo American

The most dramatic transformation has been made at Anglo American. In order to effect a step change in its financial fortunes, Anglo’s management announced a plan in December 2015 which seeks to aggressively streamline the company. Through asset sales and restructuring, the group intends ending up with only those assets that meet their criteria: large, scalable and low-cost assets with the ability to generate cash and returns through the cycle.

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