Miners agree: Worst still to come

An estimated $1.4 trillion has been wiped off the shareholder value in the mining industry since a peak in 2011, and the 73% fall in the sector far outweighs the oil industry’s 49% loss over the same time, according to Bloomberg.

The result is that the world now has monster stockpiles of metals, coal and iron ore, and no one has any idea of how long it will take for the world to consume.

Around 6,000 executives, bankers, brokers, analysts, miners and journalists have gathered for the mining industry’s biggest event in Cape Town, South Africa to discuss many issues – including the one above. According to Bloomberg, here’s what they have concluded.

It might be bad, but the worst is yet to come

An indication of how bad it has gotten, was a comment from Anglo American’s Australian CEO Mark Cutifani. Since he took on the CEO role 33 months ago, Anglo’s revenues have fallen by US$350 million a month.

BHP Billiton Limited (ASX: BHP) saw is 2015 financial year revenues drop by more than US$12 billion, or US$1 billion a month. Rio Tinto Limited (ASX: RIO), which is heavily leveraged to iron ore, saw its revenues plunge in 2015 by US$12.8 billion and underlying earnings fall 51% and sensibly, has dropped its progressive dividend policy.

Distress or Impress

The industry is splitting into two classes – those under distress and those who will ride out the cycle and come out the other end in a strong position (if only because much of their competition has dried up). Ex-Rio boss Tom Albanese and now CEO of London-listed Vedanta Resources told Bloomberg that his company is ‘hunkering down and concentrating on paying down debt’.

The larger the company, the lower its costs of production and the lower its debt level, the better the chances of the company coming out the other end.

Sticky Supply

The big cost of closing a mine and the environmental cleanup afterwards means many miners are keeping their mines open. That is prolonging the downturn in commodities prices. Then you have company’s like Brazil’s Vale that is pushing ahead with a massive expansion of its production – partly to lower its overall costs.

Gold is the shining light

When investors lose confidence and global markets tumble, gold demand soars, the spot gold price has jumped to within sight of US$1,200 an ounce, and hitting an eight-month high according to some reports.

On the ASX, some of the best performing shares are from gold companies, benefitting, from not only the higher gold price, but also the Australian dollar buying around 70 US cents.

A flood of shares

Blackrock’s Evy Hambro quipped that the most abundant commodity would be new shares in mining companies. Mr Hambro told Bloomberg that he expects the ‘floodgates to open’, as miners attempt to shore up their balance sheets.

Foolish takeaway

Investors jumping into the sector now could have a long wait to see a return on their investment, with some forecasts suggesting low commodities prices could stay until at least 2020.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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