FTSE 350: Mining

By Daniel O'Sullivan, 19 January 2009

Last year ended in what can only be termed humiliation for three of the four major diversified miners at the top of the FTSE 350. The commodity price collapse and regulatory pressure forced BHP Billiton to walk away from a bid for rival Rio Tinto that it spent $450m (£296m) preparing, despite the fact that there were serious concerns from day one that the deal could come unstuck. As the bid failed, Rio Tinto's share price dropped like a stone and it also became apparent that this company now has to sell off flagship assets right at the bottom of the cycle to help ease the massive debt burden it took on to buy aluminium arm Alcan in the good times.

Meanwhile, mining groupXstratabought a 29 per cent stake in platinum miner Lonmin just before the latter's own share price collapsed alongside the price of the white metal. Shares in Lonmin are trading at less than half the average price Xstrata paid for its holding. Xstrata too is now seen as dangerously leveraged, particularly as its own high operational gearing means its profits suffer more than other mining groups as commodity prices fall.

The big story for 2009 is which assets Rio now spins off, at what price and to whose benefit. With minimal gearing of its own and a large cash pile, expect BHP to be among those picking off the bargains - a development which may yet mitigate to some extent chief executive Marius Kloppers's misjudgement on the bid. However, none of the companies above really excite us in the coming year. Both Rio and BHP will suffer alike when Asian steel mills get their revenge this coming April for consecutive years of eye-watering iron ore price rises on the part of the duo. It will also be interesting to see if the Australian government finally prises open their joint grip on rail infrastructure in the core iron ore producing region of the Pilbara in western Australia, to the benefit of smaller players in the region. The long-term growth plans for their Pilbara ore operations, touted by both companies as core to their value stories, will be questioned if this does come to pass.

We have already nailed our colours to the mast in identifying both Chilean copper producer Antofagastaand Finnish nickel producer Talvivaaraas single commodity plays with extremely low production costs that should thrive in the current straitened metals markets. Among the larger diversifieds, Anglo American is undoubtedly affected by many of the same considerations that dog its peers. However, the group is relatively underexposed to the souring of the iron/steel story that taints not just BHP and Rio, but also smaller ferrous metal plays such as Ferrexpoand Eurasian Natural Resources. We see no significant near-term relief for platinum plays such as Lonmin and Aquarius Platinumand think gold and silver will slide through 2009, to the detriment of Randgold Resources, Fresnilloand Hochschild.

http://www.investorschronicle.co.uk/Companies/BySector/

Summary of sector:

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