Monday 31 October 2016 10:25 am

Optimism is a precious commodity

It’s been a tough few years for the mining industry but the future is promising, says Jeffrey Couch.

London is currently hosting much of the world’s metals community at LME Week, the industry’s most important gathering. This year’s event comes against a backdrop of significant change, whether at a global economic and geopolitical level or a little closer to home.

There will be much to discuss. But looking ahead, I am cautiously optimistic. Last year’s headlines were dominated by the fall in commodity prices, particularly in the case of industrial metals like copper, zinc and nickel, as well as oil.

This was largely due to concerns about China’s economy, as credit availability in the country tightened and big infrastructure projects stalled.

Slowing growth in the world’s second largest economy was always going to impact demand for commodities. This put pressure on margins for the mining companies and share prices duly followed.

This year has seen the picture improve somewhat. China has shown signs of stabilising, growth is accelerating in the world’s emerging economies – particularly India and Southeast Asia – and the US looks to be on a stronger footing.

Moreover, the last 12 months have seen the price of many commodities rally, notably iron ore, metallurgical coal and zinc, although much of this has come as supply was reduced.

Mining companies responded to last year’s downturn swiftly and comprehensively, cutting spending, costs and debt.

This process is yet to fully play out, but most corporates are now in a much healthier state than they were 12 or 18 months ago, with stronger balance sheets and a more positive outlook for commodity prices.

So what of the future?

While there are probably as many different opinions on the macro outlook as there are people voicing them, I can make some assertions from how our world looks right now.

There is much debate about the health of China’s economy, with high corporate debt levels concentrated within a few industries.

The country is undergoing a significant transition from investment-driven to consumption-led growth, but we believe the fundamental motivation for policymakers remains to be stability.

We are certainly seeing a continued appetite for Chinese M&A in the mining sector. Volumes may be softer than in the past, but Chinese companies are viewing data rooms and taking part in M&A globally.

While there have been a number of high profile instances of the west rebuffing advances from China, we have not seen the same trends playing out in our industry. Opinions on the US vary. Some take a bullish stance on the basis of pent up demand from planned infrastructure projects, while others are pessimistic.

Given the US remains such an important driver of global demand, both fiscal and monetary policy expectations matter.

I expect the precious metals markets to remain strong. Gold and silver prices are supported at times of uncertainty and there is no question the environment will remain uncertain for some time yet, even if the underlying picture seems to be stabilising.

And what of the mining companies themselves? With the improvement in corporate health and a stabilisation in the wider operating environment comes a renewed focus on growth and a heightened appetite for corporate activity, in particular for M&A and equity fundraising.

Moreover, the buy-side is showing an increasing willingness to provide capital to support growth. For the right assets – and the right management teams – the market is open.

For those unwilling to tap the equity or debt markets for capital, the royalty and streaming sector (whereby mining companies agree to sell a portion of future metals production at an agreed price in return for an upfront payment) remains an attractive source of funding for miners.

From our own standpoint, we continue to lend to clients in both the mining and oil and gas industries, and raise equity capital. The industry would do well to go into this year’s LME Week in a state of cautious optimism.