FTSE 350 industrial metals & mining: Mining giants' cautious plans

The alarm bells over China started ringing in July when Brazil mining giant Vale reported its worst quarterly earnings for two years. And there was a further sharp intake of breath in August, when BHP Billiton (BLT) announced that it was indefinitely shelving the $20bn (£12.3bn) expansion of the Olympic Dam copper/uranium site. The move stoked fears over a slowdown in China's economy, while sparking ructions in Australian political circles, with the opposition Liberal Party linking the decision to the introduction of a carbon tax on the mining industry.

Though rising labour costs and the resilience of the Australian dollar had rendered the 'lucky country' an expensive operating base, BHP had also been coming under pressure from institutional investors to pare back new projects in favour of returning cash to shareholders. The Anglo-Australian resources giant duly obliged via an 11 per cent hike in the full-year dividend, achieved despite the fact that charges linked to the postponements fed through into a 35 per cent fall in annual net profits. In total, BHP said that it was mothballing capital projects worth around $50bn, including the development of its Port Hedland iron-ore export facilities in Western Australia. Sector peers such as Anglo American (AAL), Xstrata (XTA) and Rio Tinto (RIO) all followed suit to varying degrees.

However, after slumping to a three-year low of $90 a tonne in September – a 54 per cent decline from the previous year's all-time high – iron ore prices recovered strongly during the last quarter of 2012, and are now 35-45 per cent in advance of median projections over the next three years. This appears unsustainable given that Rio and BHP should add around 250m tonnes in aggregate production capacity to their Pilbara operations by 2016. Nevertheless, worries over excess capacity and China's slowdown have probably been overdone, as the development of adequate housing and infrastructure to meet rapid urbanisation within the People's Republic is still at a relatively early phase when paralleled with the 20th century experiences of Japan and South Korea, both of which underwent similar transitions.

Last year also reminded investors of the deleterious effect of labour disputes on valuations, as mine workers caused substantial disruption to several large-scale operations in Latin America and South Africa. Standard & Poor's decided to lower its outlook on Anglo American from "stable" to "negative" because of persistent industrial strife, which was also cited as a contributory factor in the subsequent resignation of Anglo's chief executive, Cynthia Carroll.

Mining companies can also pay the price for discord within the boardroom – investors were left nursing heavy losses after the value of Indonesian coal miner Bumi (BUMI) fell 69 per cent in 2012, reflecting a public spat between significant shareholders Nathaniel Rothschild, scion of the banking dynasty, and the controversial Bakrie Group. Bakrie wants to sever its links with Bumi in return for the Indonesian assets it originally bought on board, but the terms don't appeal to Nat Rothschild, who wants to clear out most of Bumi's current directors, and there's no end in sight to the dispute.