Wall Street Daily

Investing in the Next Growth Stage for Mining

It’s what I call the Age of Austerity in the global mining industry. Tight-fisted managements are slashing capital spending on projects and selling assets. The evidence is everywhere…

Rio Tinto PLC ADR (RIO) slashed costs by $2.3 billion in 2013, with promises to halve capital spending to $8 billion by 2015.

Newmont Mining (NEM) cut about a quarter of its workforce and made about $1 billion in cost reductions in 2013.

Mining equipment provider Caterpillar (CAT) said sales of its large mining trucks were down 80% in the first quarter of 2014.

But the most amount of evidence is in the world’s largest mining company, BHP Billiton (BHP). New management is seriously considering tearing up the merger that created the current company in 2001.

Management says that most of the Billiton’s assets are now underperforming, now considering them non-core assets as it attempts to improve performance for disgruntled shareholders.

So what caused this Age of Austerity?

Poor management investing in too many lousy projects.

Between 2005 and 2012, mining companies spent $348 billion on projects that generated only $126 billion in net cash returns.

That led to a decline of 46% in the HSBC Global Mining stock index between 2011 and 2013. No wonder shareholders are grumbling!

So what does the new Age of Austerity mean for investors?

Consequence #1: More M&A Activity

It means that the mining sector is at the end of an investment phase. In other words, global miners like BHP are looking to unload assets.

This is good news for the companies able to pick up assets on the cheap.

Consequence #2: The Seeds of the Next Bull Market Are Planted

Investors should also be looking for early signs of the next bull market in the sector.

After all, we’ve seen this movie before.

Vast underinvestment in new projects in the 1990s led to shortages of many metals. This led to soaring prices for some metals, including gold. Also, miners that had prepared themselves for the end of a bear market reaped the benefits.

Mick Davis, former head of mining giant Xstrata, summed up the current situation nicely. “A combination of the complexity of investment, the retrenchment of growth capital, and declining grades mean that we’re probably entering a period of constrained supply. For me, it’s just a very simple equation that translates into a period of sustained rising prices.”

In other words, the current Age of Austerity has already planted the seeds of the next bull market with short supplies and rising prices for metals.

That means investors should look for companies that continue to invest during this current Age of Austerity. Or even companies planning to invest soon.

One such company may surprisingly be Rio Tinto. Its cost-cutting CEO, Sam Walsh, said recently that the company would prepare new investment proposals to present to the board of directors next year.

If RIO proceeds, that may be a good sign for it going forward.

I’ll keep my eyes open for those companies that are ready to pounce on the next bull market, and I’ll let you know about them in future articles.

And “the chase” continues,

Tim Maverick