The mining industry is cyclical. Sir John Templeton famously said that the four most expensive words in the English language are: “this time it’s different”. Taking this into account, it’s worth having a look at the capital cycle in relation to the mining industry to get some pointers as to where we are in the cycle and what we could expect to see happening from here. With the benefit of hindsight, the low point in equity valuations at the beginning of 2016 is looking increasingly like the bottom of the previous cycle.
We need to examine whether the recent pullback in valuations reflects a fundamental change in direction or is just a ‘pause that refreshes’. Our Corporate Finance team has put together some quantitative and qualitative data on the mining industry and compared it with what was seen in previous capital cycles; the results are interesting. This information, much of which has been presented before, comes from various sources, but we think that it’s helpful to combine it together.
The presentation focuses on:
- Exploration & development expenditure by region and by commodity — This looks at its success (or otherwise) and what the pipeline can tell us.
- Financial performance — Including capex, debt and cash-generation cycles.
- Market-related data — Reviewing valuation metrics, capital raisings and IPOs and M&A activity.
The data was benchmarked against previous cycles and a theoretical capital cycle ‘clock’. Here, we looked at piecing together corroborating evidence to show where we are in this cycle and what we should expect over the rest of 2017 and beyond.
Happily, this all suggests that there are more exciting times ahead. If noon represents the ‘peak’ and six o’clock the ‘trough’ of a cycle, by our reckoning we’re at five. If that’s right, over 2017 and 2018 we would expect to see further M&A, cash takeovers, rising junior equity raises, more capex, increased exploration spending and further relative outperformance by the sector as a whole. Even bearing in mind Sir John Templeton’s wisdom, it’s time to have a look at mining.