We have already covered the sea change that is washing over the mining industry. Where past practice has been to invest heavily in new assets with the strategy that growth was assured, massive mining companies like Barrick Gold Corp. (NYSE: ABX), Kinross Gold Corp. (NYSE: KGC), Rio Tinto PLC (NYSE: RIO), BHP Billiton Ltd. (NYSE: BHP), Anglo American and Newmont Mining Corp. (NYSE: NEM) got caught with huge investments, the value of which collapsed as the global economy slowed down.
Ivan Glasenberg, CEO of London-traded Glencore International, just paid $34 billion to acquire the piece of Xstrata that Glencore did not already own, and his take on the situation, it appears, is that Xstrata will contribute to shareholder returns, not just bigger mining companies. Bloomberg reports Glasenberg’s remarks at an analysts’ conference:
We’ve [the mining industry] always been wanting to keep building and keep putting the cash which we generate into new assets. That’s what we’ve got to stop doing as a mining industry. We’ve got to learn about demand and supply. … Now we have a new generation of CEOs; I hope CEOs have learnt their lesson. They built, they didn’t get the returns for their shareholders. It’s time to stop building.
Falling prices for commodity gold, silver, copper, iron ore and other metals have not helped. The SPDR Gold Shares ETF (NYSEMKT: GLD) is off about 11% in the past year, and the iShares Silver Trust (NYSEMKT: SLV) is down about 19%. The gold miners’ shares are down even more: Barrick is down about 37%, Kinross is off more than 30% and Newmont is down about 34%. Silver miners Coeur d’Alene Mines Corp. (NYSE: CDE) and Pan American Silver Corp. (NASDAQ: PAAS) are both down about 34%.
Cutting investments in new properties and delaying new properties works to control capital spending and to lower production, which in turn should help raise prices. As Glasenberg puts it:
We will get better returns on our investments, we will be able to kick out more cash to our shareholders. We will be late to invest. So, who cares? We’ll be late and we’ll have to invest in five years’ time. It’ll take us three years to build the mine but we could hopefully have an eight-year run.
Even if the new austerity in expansion and development does take over the industry, there is no guarantee that the global economy will pick up enough to “kick out more cash” for investors. Then three to five years down the road, where will they be? It is a delicate balance and mining is many things, but delicate is rarely one of those things.