Global mining companies are busily slashing the value of their assets, bolstering the view among many observers that the epic commodities supercycle is over. But for investors, that’s not such a bad thing.
Glencore Xstrata PLC is the latest in a long line of companies stepping up to the podium-of-shame to deliver bad news. It announced a $7.7-billion (U.S.) writedown on its Xstrata PLC acquisition, which closed in May and valued the coal, nickel, zinc and copper producer at more than $44-billion.
On Tuesday, the company explained that the writedown reflects “the broader negative mining industry environment and sentiment, which prevailed during the first half of 2013.”
Glencore is by no means alone in its embarrassing adjustments. In January, Rio Tinto Group took a $14-billion writedown on recent aluminum and coal-project acquisitions.
According to Bloomberg News, gold producers have written down the value of their mines by a combined $26-billion within the past two months alone, led by Barrick Gold Corp.’s $8.7-billion writedown in the second quarter.
The news certainly hasn’t helped share prices already reeling from lower commodity prices, rising production costs and slowing economic growth in China.
Glencore shares have fallen 44 per cent from their debut a little more than two years ago. Rio Tinto shares have fallen 35 per cent over the past two-and-a-half years. And Barrick shares have been mining 20-year lows.
For sure, the evidence is pointing to a shift in the commodities cycle, deemed a “supercycle” not long ago for its purported ability to sail through the usual ups and downs of the business cycle because of an explosion in demand from China.
But with euphoria now giving way to deep pessimism, the landscape for investors looks far more attractive today than it has at any time in recent years.
Global commodities producers marked the top of the commodities cycle – and arguably the worst entry point for investors – with a cluster of deals, signalling that enthusiasm for commodities was spinning out of control.
Glencore, once a closely held and secretive commodities trader based in Switzerland, chose 2011 – near the post-financial crisis high point for commodity prices themselves – to launch its $10-billion initial public offering. Soon after, it pounced on Viterra Inc., the Canadian-based grain handler, and took full control of Xstrata.
BHP Billiton Ltd. made a hostile $40-billion bid for Potash Corp. of Saskatchewan Inc. in 2010. And Barrick expanded into copper production with its $7.8-billion deal for Equinox Minerals Ltd. in 2011.
If this frenetic level of deal-making made commodity producers look drunk on bullishness, then the subsequent writedowns present them in a far more sober – if hungover – state.
The financial belly flops of the past few years and steep slide in share prices suggests that enthusiasm has been washed out of the sector. The S&P/TSX materials index has fallen 22 per cent in 2013 and recently flirted with five-year lows.
Quite possibly, mining stocks have hit bottom, and the slide in technology stocks a decade ago offers an intriguing template for what follows.
Consider that AOL Time Warner Inc. announced in January, 2003, a mind-blowing $45.5-billion charge related to the writedown of its America Online unit. That defined the bust of the dotcom bubble of the 1990s, but also arrived within three months of the low-point for the Nasdaq composite index, after it had fallen more than 70 per cent. The index has since rebounded more than 170 per cent.
No doubt, commodity producers and tech companies are very different. However, they both rode impressive waves of upbeat sentiment on the way up, suffered disastrous losses on the way down and offered opportunistic investors a chance to score big with a rebound.
Writedowns are ugly, but they also suggest that the worst is over.