While mining companies have often proved unreliable investments for those clients focused on income, there is considerable evidence it could be different this time, according to Evy Hambro, who runs the BlackRock World Mining investment trust.
He said: “Mining goes in cycles, and the high and low prices are created by the same thing. In bad times there is under investment in new projects, until demand exceeds supply, and in good times there is a tendency for some company managements to become over emboldened with the idea of their own skill, and invest too much in new projects or in M&A activity. This means in good times, not enough cash gets back to shareholders, and in bad times there may not be enough cash.”
But he said that in the 12 years since the cycle last peaked, “company managements have changed. Assets that were purchased for too much money have been dealt with, either disposed of or made more productive. There has been lots of management change, and over the past five years, when commodity prices have been rising steadily, companies have been using surplus capital to pay down debt, rather than over pay for assets.”
He said with the global economy expanding and debt levels lower, there should be more cash available to return to shareholders, meaning a more reliable income stream.
He added: “Of course we cannot be certain about the change in behaviour, but how much more data do we need? We have had twelve years' worth. ”
Hambro said commodity prices are likely to be boosted by the transition to net zero, as such a switch will require increased use of commodities such as copper.
david.thorpe@ft.com
