Global giants get boost from platinum, diamonds

Until about five years ago, London’s mining giants could only watch in envy as investors paid hefty premiums for shares of much smaller companies listed on North American exchanges. London’s mining sector was perceived as staid and stagnant, at least relative to North American companies, which were then making plenty of noise about their new mines and development projects in almost every corner of the planet.

Today, North American mining companies are struggling to stay on the radar screens of investors, particularly the big funds that had supported them in the past. But low share prices and reduced market capitalizations have made this difficult in a “new economy” environment, which, until recently, favoured technology companies with giant growth potential. While the recent meltdown in technology stocks has modified that mind-set to some degree, investors still seem reluctant to return to North American mining markets, with the exception of a few top-tier companies. However, even London’s mining giants are receiving more attention from institutional investors, who, more than anyone, believe that “size matters.”

Mining analyst Jack Jones of CIBC World Markets has been watching London’s US$70-billion mining sector closely. His firm’s recommendations during 2000 tended to favour Anglo American (AAUK-Q), De Beers Consolidated Mines (DBRSY-Q) and London-listed Lonmin for their commodity mix and restructuring potential. “We see little reason to change this stance moving into 2001,” Jones notes in a report from London.

Overall, though, Jones says global mining stock “generally underperformed in 2000, unless boosted by platinum, diamonds or corporate activity.” London mining stocks ended the year with an unweighted average fall of 9% in U.S. dollars, in line with the broad U.S. market.

“Stocks that did relatively well in 2000 had platinum, diamonds and restructuring exposure — Lonmin, Anglo American and De Beers,” Jones explains. “Stocks that did badly were the base metals-biased groups, Rio Tinto and Billiton, both of which also suffered from market concerns over acquisitions.”

Jones rates Anglo American a “buy,” even though it fell 15% in 2000. “Developments regarding the De Beers cross-holding look possible in 2001, while recent stakes in Billiton and Gold Fields offer intriguing corporate potential,” he states, after pointing out that the company performed strongly in the second half of 2000, driven by platinum, diamonds and restructuring activity.

De Beers is also rated a buy. While shares fell 9% in 2000, they gained some of that back this year. “Diamond markets look set to remain tight in 2001,” says Jones, “even if the U.S. slows.”

Lonmin, which rose by 43% in 2000 because of booming platinum and palladium prices, is likewise rated a buy. Jones sees little sign of Russian export relief, and notes that, so far, 2001 prices are above forecast levels.

Jones rates London-based majors Rio Tinto (rtp-n) and Billiton as “holds” because of economic and acquisition worries. Rio Tinto fell by 27% last year, while London-listed Billiton slipped 35%. Jones cites problems associated with Rio Tinto’s North acquisition, “where Japanese minorities are threatening to reduce synergy benefits, and where there may also be a negative impact on current iron ore and coal price negotiations.” As for Billiton, which acquired Rio Algom last year, Jones notes that an analysts’ trip to South America at year-end provided reassurance on the quality of the Rio Algom assets. However, he notes that Billiton has the weakest balance sheet in the sector, “which gives the greatest gearing to changing economic sentiment.”

Looking ahead to the rest of 2001, the early cut in U.S. interest rates has improved the long-term outlook, which had suffered on the market bet of a slowdown. “We believe that 2001 U.S. GDP growth will be around 3% and that this scenario should be positive both for mining stocks and commodity prices in the longer term.” Concerns over near-term worries are reflected in the current stock recommendations.