March 27 (Bloomberg) — Evy Hambro, Portfolio Manager at BlackRock World Mining Trust, discusses the outlook for the world’s biggest mining and steel companies. He speaks on Bloomberg Television’s “The Pulse.” (Source: Bloomberg)
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This this industry has seen a galactic amount of shareholder value destruction over the last 12 months are we through it how should we view an industry that has that has done this and does that change our investment view of it yeah i think it’s a it’s a great point to start on i
Mean we’ve been putting the as much pressure as possible on on management teams to rein in some of the over-enthusiastic investing of the cash flows they’ve been making in the last few years and to increase the amount that they share back with the owners of the business the shareholders
We’re having some success from that point of view but i don’t think we’re at the end yet in terms of these write-downs obviously the big one that could be still to come is the combination of extraterre and glencore now when that combination takes place i’m sure that the accountants and the management teams
At glencore will be running a very fine tooth comb over some of the asset values inside the combined group to make sure that any of the things that have been that the other companies have been writing down in the past that strata might have to do the same gets dealt
With as soon as possible rather than as a hangover into 2014 so i think there’s still one big big one out there there’ll probably be some other smaller ones but i think you’ve seen most of the news outside of that but do you think that this will be dealt with very shortly
Will it be dealt with in the next couple of quarters for sure yeah well it depends on the on that when mufcom gives the approval for the before merger so as soon as that takes place um then i think you’ll obviously have a combination of the two companies and then you’ll the
The carrying values will be addressed are the new management teams the new le are the new leaders in place for this industry going to be significantly more conservative than their predecessors uh well all of the rhetoric that we’ve had today out of the management the new managers in charge of the large
Companies has been incredibly conservative they’ve talked about no m a they’re talking about cutting operating costs huge numbers coming in costs and also capital expense coming down absolutely some of the people that have come into these roles are some of the more conservative individuals so you
Look at sam walsh at rio tinto he’s got a great track record he’s going to be very hard on costs so i do think we are starting to see this come through mark kudafani he’s a technical background he did a great job at turning around some of the operational performance at anglo goal
I’m sure he’s going to be addressing a few of those things inside anglo-american and maybe even helping to undo some of the things that have happened over the last few years which have caused the changes in the ceo there ivan glastenberg just last month was saying we’ve always been wanting to keep
Building and keep putting the cash we generate into new assets he says we really hope this is a new paradigm in the mining industry and so what we have to stop doing as a mining industry is is basically you know break from the past and learn about demand and supply
Is this kind of rhetoric what you welcome yeah i think um i think we always understand that mining companies run depleting assets so there’s a balance between reinvestment and returns to shareholders and that that balance has to take place for the last 10 years that balance has been out
Of sync we’ve had far too much reinvestment and far too much m a yields collapsed so the shares were no longer competitive with other high yielding equity investments in a yield hungry market so i think what we’re now starting to see is that capital investment being reigned back in the
Balance being restored yields are starting to rise and i think that that will attract shareholders back to the same but the moment the breakdown and trust between investors and management is very very significant and new management coming in for a few months doesn’t repair that at fake time just
Just to come back to the issue of m a is glencore done glencoe was set up the whole idea of taking this company into the private sector was to provide it with capital a currency for m a we’ve seen one big deal and some smaller ones is glasenberg really done or do you
Think that this industry still may seem more m a particularly from his direction yeah i think what we will see in the industry is we will see m a which is the reverse of what we’ve seen for the last few years so rather than the big consolidations taking place what we will
See is the jettisoning of non-core assets by the major companies now that element of m a could lead those assets into mid cap companies and be transformational deals or transactions for those groups i think some of the larger scale of m a has probably kind of
Been put out to pasture for the near term the financing isn’t there for the companies to be able to do this the appetite from the shareholders isn’t there they want to see more stable rates of return coming from these companies and they want to see management actually
Doing what they say they’re going to do our shareholders too greedy with their demands for dividends for mining companies um i think michelle the companies owe us some catch up which is where where we’re coming from i think as a group and so this over investment into assets at very
High rates of capital intensity um that has now stopped so the as the cash flow starts to come through and the capex isn’t spent then and the balance sheets are all pretty strong by and large for the sector then the only place for that cash to go is actually to come back to
The company so you look across the space now all the majors are on roughly four percent dividend yields and that’s not a vodafone dividend yield or anything else so we’re not in that five plus percent attractiveness area for the market as a whole but it’s getting very close you
Know we we’re at less than two percent a couple years ago once you start to get to those divi yields do you see a pop in share prices as you sort of break through into when the income funds are going to start buying these things or buying them more aggressively
I think it’s the main change we’ll see with demand for shares in this sector is when trust starts to be reestablished right and i think that that will take time so we need to see management actually delivering on what the new promises that they’ve been making and
That will take you know six months a year a year and a half before people start to say actually these guys are doing a great job and delivering what they say they’re going to do you know they’re they’re delivering a head of expectations those kind of things and
Then you’ll start to get that momentum shift and that was obviously outside of a macro event like another cyprus or china or us can i ask you about the iron ore market we had a goldman sachs analyst talking about 264 billion dollars in planned projects on iron ore
Is there a concern do would you ask some of the major producers to actually pull back on some of these projects because otherwise you risk the the price collapsing yeah it’s a really interesting subject that um there’s so many different views around that with regards to the arnold market
Obviously we’re great pricing right now so you’ve got to put everything into context if you’re producing iron ore for 30 or 40 dollars a ton and the price is 130 or 150 or 100 it’s a phenomenal price you’re making huge margins and if you’re a rio tinto or bhp and you’re
Producing hundreds of millions of tons that’s a gigantic amount of cash flow so i do think that we are seeing new supply coming through we haven’t had the weather interruptions and the strikes affecting the market we have had restocking in china so we’ve had this bump in prices second half of this year
We’ll probably have slightly lower prices but the average this year is way ahead of most people’s forecasts