The London Stock Exchange recently unveiled a glossy new guide to best practice in corporate governance for companies quoted on its platforms. This must be regarded as a timely exercise, given the increasing domination of the FTSE100 by natural resources groups with operations in the most exotic corners of the world.
In its desire to be the world’s IPO capital, the City through the ages has offered a haven to overseas miners. There has been a tendency, however, to overlook their governance, environmental and social failings. In general, mining firms based in the great Anglo-Saxon democracies of the United States, Canada and Australia offer their workers a decent wage and reasonable housing, and adhere to environmental and safety standards. But in the developing world the same rules are rarely observed.
This disparity has taken some of the shine off mining and natural resources stocks. No one doubts that over the long haul, demand for commodities by the wealth-creating economies of Asia will be extraordinarily strong despite swings in the trade cycle. But the richer the miners become and the more ascendant they are in the investment indices, the more focus there is on their behaviour.
The resulting potential for investment losses has been exposed in the platinum miner Lonmin. Strife over pay and conditions at its Marikana mine in South Africa left 47 people dead and brought production to a halt for more than six weeks, cruelly revealing the social deficit. A board that included former trade union leader Cyril Ramaphosa was slow to respond to strikers’ demands, stood by while security forces did their worst, and was exposed for housing workers in unsanitary conditions.
Moreover, when Lonmin eventually offered its workers a significant wage rise, contagion was triggered across the sector. Most affected was Anglo-American, which holds 77 per cent of another platinum miner, Amplats, where miners demanded similar awards. The Lonmin and Anglo-American strikes offer a gift to NGO activists who aim to bring a laser focus on conditions in Southern Africa mines that look little changed from the apartheid era.
Another miner, the Indonesian coal producer Bumi, brought to the London market in a deal masterminded by Nat Rothschild, has seen its share price badly holed by accounting irregularities. Governance has also played a key role in the Glencore-Xstrata merger saga, in which terms have now been agreed by the two boards. A plan to unite Xstrata with its 34 per cent shareholder and Swiss-based neighbour Glencore was among the reasons why Glencore listed in London in 2011: Glencore chief Ivan Glasenberg aimed to strengthen the quality of his company’s earnings by adding mining to its existing commodity-trading portfolio — and argues that Xstrata boss Mick Davis could never have built his business without Glencore’s supportive stake.
The strength of both these companies has been to exploit resources in parts of the world where more traditional mining giants such as Rio Tinto and BHP Billiton prefer not to tread. Glencore’s copper operations in the Democratic Republic of Congo, for example, have attracted negative attention from NGOs. In the boardroom, Glencore had trouble recruiting a trusted non-executive chairman and made do with gaffe-prone Simon Murray from Hong Kong. Xstrata’s name has been tainted by huge proposed retention payments for key executives, including Davis, while its chairman Sir John Bond has also put in a stumbling performance.
Nevertheless, ‘Glenstrata’ looks as if it will be a global leader in its sector, with interests ranging from wheat to oil and coal. Its big involvement in bulk commodities makes it an attractive investment proposition despite governance shortcomings and the overhang of the large share stakes still held by Glasenberg and his partners. And the expected departure of Davis within six months eliminates the prospect of an extended power struggle.
The mercurial Glencore chief has also signalled that he is not enthusiastic about retaining Xstrata’s 24 per cent stake in the troubled Lonmin. Glasenberg has been careful to give his own miners ‘buy-in’ to operations in South Africa by rewarding them with shares.
The difficulty of operating in exotic locations has been seen at the African-Kazakh mining giant ENRC, whose shares have plunged 46 per cent in response to a Serious Fraud Office investigation into its Kazakh operations. The backdrop to this particular story has been the setback to bulk commodity prices in 2012 as Chinese demand has faded and the world economy has slowed. If there is such a thing as a commodity super-cycle, it has not proved quite strong enough to withstand the gyrations of global growth. While copper has managed a 7 per cent rise, zinc 12 per cent and gold (largely for the reasons Tim Price describes on page 40) 13 per cent, the prices of iron ore, coking coal and thermal coal have dropped 21, 30 and 23 per cent respectively. As a result, several big miners are postponing new projects and have seen disappointing cash flows from existing ones. Among those suffering are BHP’s coking coal operations.
In this mixed picture, Glenstrata looks in relatively good shape, with interests in copper, zinc and thermal coal. BHP Billiton may have cash to redistribute to investors with the cancellation of $40 billion of capital expenditure. A revival in Chinese demand for iron ore will be the key to Rio Tinto’s progress as an investment. These three giants will naturally be core holdings in most portfolios, in the same way as they feature strongly in many index funds. Finding attractive and safe investments among the smaller mining groups is more difficult.
My own preference is to steer clear of direct investment and concentrate on exchange-traded funds that are more liquid and, I hope, less volatile. There are a variety of ETFs focused on gold, copper, zinc and uranium; personally, I would avoid gold and go for ETFs in metals in industrial demand such as ETF Securities’ Physical Copper and Zinc. A more speculative answer might be to look at rare metals and minerals: Galileo Resources is a South African producer often mentioned by analysts.
But wherever you look, governance issues will continue to haunt the sector.