COLUMN-Major miners yet to be rewarded for prudence: Clyde Russell

Wed Mar 20, 2013 11:17pm EDT

By Clyde Russell

LAUNCESTON, Australia, March 21 (Reuters) - It seems the big miners are damned if they do and damned if they don't, as investors have yet to reward their new-found commitment to spending discipline as the commodity boom matures.

The share prices of the world's top two miners, BHP Billiton and Rio Tinto have barely outperformed or even lagged not only the commodities they produce but also broader stock indexes.

Equity investors have now had seven months to digest BHP Billiton's decision to curb capital expenditure, shelve or delay projects and focus more on shareholder returns.

BHP's share price has gained a mere 1.4 percent since Aug. 23 last year, the day after it announced plans to scrap its Olympic Dam copper and uranium mine expansion and wind back iron ore projects.

The S&P GSCI Index of commodities has lost 4.1 percent since BHP's game-changing announcement, but Asian spot iron ore is up 28 percent and London copper has edged 0.2 percent higher.

Rio Tinto has fared a little better, with its share price gaining 6.2 percent to A$57.48 at the close on March 20.

What this shows is that both these companies have failed to gain any traction from meeting investor demands to show more capital discipline, wind back expansion plans, cut operating costs and commit to increasing shareholder returns.

To put their underperformance in perspective, both Australian-listed miners have substantially lagged the benchmark ASX 200 Index, which has surged 13.5 percent since Aug. 23 last year.

Given that BHP has the biggest weighting in the index and Rio is ranked fourth, it's clear that investors have decided to put their money into other sectors and largely ignore resource stocks.

Commonwealth Bank of Australia, the number two stock in the index, has gained 25 percent since Aug. 23 last year, and this is despite a sluggish housing market and weak growth in credit extended to businesses.

So why are resource companies being shunned after they have seemingly bent over backwards to satisfy the demands of equity investors?

Is it that the message of the new generation of leadership simply isn't being believed?

Both BHP and Rio Tinto, as well as Anglo American Plc , have all recently replaced their chief executives with managers more focused on efficiencies than deal-making and building new mines.

Or is that commodity prices have also been disappointing and the outlook remains somewhat clouded by China's modest economic re-acceleration, and ongoing recession and debt woes in Europe?

Or is it that investors believe the good times for commodity producers are well and truly over, and a deluge of supply is going to hit the market in the next few years, thus destroying margins and profits?

It's probably a combination of all of the above, but that doesn't necessarily mean the prevailing market consensus is correct.

For companies like BHP and Rio the game is now all about being the lowest-cost producer, while maintaining market share.

One thing that became clear at this week's Mines and Money conference in Hong Kong is that junior miners are finding it extremely hard to get projects up and running.

Even those with top-class reserves located near infrastructure can't seem to attract equity or debt financing, and convincing private equity to take the risk is also a much harder sell than it was at the height of the commodity boom in 2007.

What this indicates to me is that much of the anticipated boost in supply over the medium to long term simply isn't going to arrive.

The major mining companies are in a new phase of caution and the juniors can't get support.

Ultimately this means there may be a supply crunch in some commodities in coming years, rather than the much-feared surplus.

With China still industrialising and urbanizing, with an estimated 130 million people expected to move to cities within the next decade, and India doing the same, albeit in a more haphazard manner, it's hard to see demand for commodities declining.

Yes, growth rates will slow, but as the base gets bigger and bigger, smaller percentage increases still result in large gains in actual volumes.

But until evidence of this is seen, and the big miners deliver on their promises to be more generous to shareholders, it's likely that they will continue to lag the wider market.

Disclosure: At the time of publication Clyde Russell owned shares in BHP Billiton and Rio Tinto as an investor in a fund.

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