Taking aim at mining industry’s soft underbelly
Geoff MacDonald, vice-president at AIM Funds Management, recently said that mining is now “off the radar screen” of institutional investors. Speaking at the CIM’s Mineral Economics Society symposium in Toronto in late January, MacDonald explained that, to be noticed, stocks need either to be large or to be in a business with attractive business characteristics. Mining companies don’t fit the bill on either count.
The gold and base metal index weight today represents only 6.2% of the Toronto Stock Exchange (compared with 19.3% in 1998), and half of that small amount consists of two companies, Alcan Aluminium Ltd. and Barrick Gold Corp. McDonald added that mining companies are not financially attractive enough to deserve space in today’s portfolios.
In the span of 20 minutes, he had made mining shares look like a pretty poor investment, and this was a pro-mining audience!
Although MacDonald is young–he only got a BBA in 1992 and an MBA in 1994, when he entered the investment business–he knows whereof he speaks. He manages two major funds for AIM: the Trimark RSP Equity Fund (with assets of $1.5-billion) and the $38-million Trimark Canadian Resources Fund.
At the end of the talk, Bill James stood up and asked MacDonald the obvious question: What does a mining company have to do to regain favour with investors? This was THE Dr. Bill James, chairman of Inmet Mining Corp., ex-CEO of Denison Mines Ltd. and before that Falconbridge Ltd., and ex-vice-president of Noranda Inc., whose gravelly voice and persona is still enough to make me quake in my sensible shoes.
MacDonald’s answer was simple, but not easy: grow the revenue, cut the costs, make the hard decisions to close money-losing mines, and be disciplined in spending every dollar, asking “Would I put my own money in this project?”
James and others like him have been making such decisions and asking such questions for decades, and I think could teach many of the fund managers a lot about the human cost of attaining an acceptable bottom line.
The thing that confuses me is this: how can an economy work if the investors shift and flow to wherever the easy money is to be made, at this moment? Most of the fund managers are unfortunately tied to short-term results, as their performance is measured every quarter.
If the fund managers, who now hold such sway in the stock markets, abandon a sector, what then? Will it die, or is it doomed to follow the highly inefficient boom and bust cycle?
I don’t believe that mineral exploration and mining will die, because we need certain commodities to carry on a complex society. The best elements of today’s exploration, mining, processing and reclamation industries represent the safest and most efficient way of finding and providing new mineral commodities. In fact, processing plants will increasingly be the recyclers of the earth’s riches, where our industry will ultimately prove its sustainability.
Mining companies have to make a choice: either achieve steady Return On Investment figures that can compete with other industries, or learn to live without the support of institutional investors.