Billionaire investors return to top miners armed with questions

Melbourne/Sydney: The world’s mining giants better get used to the attention. Their recovery from a price collapse that sent the industry spiraling into crisis is delivering a fresh challenge—renewed scrutiny from major investors eager to magnify returns.

Billionaires Paul Singer, Alisher Usmanov and Anil Agarwal are among those to add holdings this year after a rebound in profits from the lows of 2015 and 2016. Mining companies’ management will have to adapt to a more critical eye and greater public notice as their businesses become more compelling to investors, according to Brenton Saunders, a Sydney-based investment analyst and portfolio manager at BT Investment Management Ltd.

“Everybody is being questioned,” Saunders said by phone. “Investors have grown up a little in the post-supercycle period, in terms of the way they evaluate strategy.” BT Investment manages about A$87 billion ($65 billion) of assets and holds shares in BHP Billiton Ltd, which is fending off a three-pronged proposal from Singer’s Elliott Management Corp. that the hedge fund believes will deliver a 50% lift to shareholder returns.

Restive investors including Elliott are pushing mining companies to reappraise strategy, by focusing on issues that existing holders may have become weary of raising, said Saunders. “Even though the questions can often be quite obvious and clumsy, it does make everybody sit up and think,” he said.

Proposals rejected

While Anglo American Plc’s new investor Agarwal says he’s no activist and is backing management, his ultimate intentions after unveiling a complex transaction to become its second-biggest shareholder last month remain unclear. Analysts have speculated that he might be planning to force a break up of the company or engineer a merger.

BHP, the world’s top miner, and New York-based jet- and auto-parts maker Arconic Inc. on Monday rejected separate proposals from Singer’s Elliott to overhaul their operations. Melbourne-based BHP said the benefits of the hedge fund’s ideas, including the demerger of US oil assets that Elliott estimates are worth $22 billion, would be outweighed by their costs and aren’t worth the risk. BHP is working with Goldman Sachs Group Inc. on its defence, according to people with knowledge of the matter.

Elliott’s attempts to oust Klaus Kleinfeld as chief executive officer of Arconic, the Alcoa Corp. spin-off, risk jeopardizing ties to customers, according to the company, which said its current strategy has the backing of companies including Airbus Group SE and Boeing Co.

The price-to-book ratio of the Bloomberg World Mining Index of almost 130 producers has jumped since tumbling to the lowest on record last year, touching a near four-year high in February, as investors ascribe a greater value to the companies’ assets. Since raw materials prices bottomed in early 2016, the index has surged more than 80%.

Mining companies have reaped the benefit of stimulus in China, the world’s biggest consumer, amid government policies to curb pollution and over-capacity that trimmed its domestic production. Surging prices of iron ore to coking coal have delivered a profit bonanza after dividends were slashed and assets sold to bolster balance sheets. The sector has survived a “near-death experience,” Franco-Nevada Corp. chief executive officer David Harquail said last month.

The clamour for change and higher returns from some activist investors comes after they under-invested during the sector’s downturn, according to Craig Evans, a Sydney-based portfolio manager for Tribeca Investment Partners Pty, which has assets of about A$2.5 billion under management, including BHP and other miners’ shares.

“We still feel there are a lot of people who are underweight this space at an institutional level,” Evans said. “In the short-term, we’re pretty bullish as buyers in this space. We think more will come back over the short to medium term.”

Others remain cautious. Prices of commodities including iron ore and coking coal are likely to fall as much as 40% over the next three years as demand peaks, according to Dion Hershan, managing director and head of Australian equities at Melbourne-based Yarra Capital Management. Yarra Capital, which has about A$7.5 billion of funds under management, is retaining an underweight position on the mining sector, Hershan said this week in a letter to investors following a visit to China. Bloomberg