Investing in big new mining projects in a cyclical price downturn is how the world’s mega miners got where they are today.
LONDON (MINEWEB) – Mining companies are beset with major investors who browbeat the CEOs and the boards into making major capital cutbacks when metal prices move against them.
They just don’t seem to understand that the time to build major capital projects – and make what may seem like expensive and counter-intuitive investment decisions and acquisitions – is actually at times when metal prices are low. This will enable them to reap the rewards when the mining cycle picks up again as it inevitably will. That is the way the world’s mega miners built their real wealth.
I am probably being unfair in the title here – there are probably plenty of mining CEOs who understand this but they more often than not don’t have the clout to carry their boards and major institutional investors with them. The latter, in particular, tend to look only at the bottom line and the prevailing stock price with their ultra short-term investment outlook, thereby missing the huge upside potential that lies ahead.
As the Elliott Wave followers will point out, all economies move in quite pronounced cycles – there are boom and bust scenarios which repeat over and over again through time – and the mining cycle is more pronounced than most.
Major investment decisions are made as the cycle picks up and tend to peak at or near the cyclic top thus bringing big increases in supply on line at around the same time, leading to big surpluses and thus contributing strongly to the succeeding downturn with too much production chasing too little demand.
The smart company that looks to the long term, though, will make its big capital project decisions on the cycle downturns and low points (downturns are good given the length of time it can take to bring a new project on stream nowadays). That’s how the Rio Tinto’s and BHP Billiton’s of the world became the world’s mega miners.
All credit therefore to Rio Tinto’s CEO, Sam Walsh, for slamming the company’s critics who pontificate that it is mad for it to implement major increases in its iron ore and copper production at a time prices have been slipping dramatically given the apparent downturn in Chinese and global demand.
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