MINING FINANCE / INVESTMENT

Top 100 Mining Companies: What a difference a year makes

Nothing succeeds like success: unlocking investor value through dominance and diversity.

JOHANNESBURG - - 

New readers of this article should be aware that it was published in January 2010 - it seems to have been gaining much readership recently as it must have been picked up by another site which is directing readers to the original.  This is not to detract from the article's quality and relevance but it is important that readers are aware of when it was written. However the interactive table at the foot of the article is updated with the latest data.

SEE ALSO: Top 10 Miners - A tough year, for CEOs and for stock prices
Published 06 Dec 2012

A good number of recent headlines have dwelt on just how well prices for listed mining companies performed during 2009, but, at the same time, ignore the possibility that Rome wasn't built in a day. There are two keys to this big investor door, as illustrated by bellwether BHP Billiton, the world's biggest diversified resources stock.

BHP Billiton's [BLT:LSE] London price is currently near £21.00 a share, very close to its all time record seen in May 2008. But between then and now, the stock price traded below £8.00 a share, during the months in the aftermath of the collapse of Wall Street's Lehman Bros., as famously recorded on 15 September 2008. Since then, mainly during 2009, BHP Billiton's stock price has more than doubled, and may be on the way to a triple, once it has matched its previous all time record.

A good number of lesser mining stocks were all but left for dead during the closing months of 2008, and have staged almighty recoveries. During the past 12 months alone, Teck's [TCK:NYSE] stock price has increased by more than 1,500%, putting its market value at nearly US$24bn, ranking it as the world's 20th biggest mining stock, by value.

The other key can be most usefully associated with longer term stock price performance, allied most closely, in turn, with the materially different cash generating ability of various mining subsectors. BHP Billiton's market value is currently around US$209bn, followed by Vale [VALE:LSE][VALE:NYSE] (US$166bn), and Rio Tinto [RIO:LSE] (US$136bn). The total, at US$510bn, comprises no less than 26% of the aggregate US$2 trillion market value of the world's biggest 100 mining companies, measured by value.

The factor most common to the three super groups is iron ore; the three account for about two-thirds of the world's lucrative seaborne iron ore market. Vale used to be the biggest, but in early June 2009, Rio Tinto and BHP Billiton announced an iron ore joint venture for the two companies' Pilbara, Australia iron ore operations. The value of the full joint venture, now formalised, is no less than US$116bn.

BHP Billiton also operates powerful franchises encompassing two of iron ore's closest bedfellows, coking coal, and manganese. The group's significant base metals operations have come to play more of a "swing" role, where many other producers have acted, in effect, to place more metal at the margin, rendering profits and cash flow more vulnerable to price volatility, especially on the downside.

BHP Billiton's base metals division (which excludes nickel, and aluminium, accounted for separately) posted underlying profits of US$8bn during the financial year to 30 June 2008, before crashing down to US$1.3bn for financial 2009. Underlying profits from nickel crashed from US$3.7bn in 2007 to a loss of more than US$800m in 2009. Aluminium profits fell from US$1.9bn in 2007 to just US$192m in 2009, further reflecting the severe status downgrading of base metals over the past few years.

Measured on associated profits and cash flow generated over time, copper has proven to be the most robust of base metals.  Freeport-McMoRan [FCX:NYSE], the world's second biggest copper miner, and also a producer of gold, molybdenum and cobalt, has moved into position No 9 among global miners, with a market value close to that of Barrick [ABX:NYSE], the world's No 1 gold miner, by value and also by output.

The so-called commodities supercycle, which ran from early 2002 to peak out between mid-2007 and mid-2008, has largely resuscitated itself over the past year. Over this period, among metals, gold bullion, which fell the least in 2008, has risen the least, at 44%. Palladium, copper, lead and zinc have each risen by more than 100% in dollar terms, assisting in at least the stabilization of cash flows at many mining companies that were left crippled by events during the second half of 2008.

Developments in primary aluminium, the world's biggest base metal market, appear to fortify arguments that diversified miners are likely better longer term investment bets. US-based Alcoa [AA:NYSE], the integrated aluminium-alumina-bauxite giant, ranked as the world's No 1 miner, by market value, early in 2001, a year ahead of the start of the so-called commodities supercycle. Today Alcoa ranks down at No 26, with a relatively modest market value of US$17bn.

Developments in the global aluminium sector also appear to have been of little significance to Rio Tinto, which in 2007 acquired Alcan for US$38bn in cash. This created the world's most indebted mining company that would be forced into crisis during 2008. After announcing a series of potentially insane transactions, Rio Tinto announced in June 2009 a general rights issue to raise the equivalent of US$15.2bn, and agreement of the monster US$116bn joint venture with BHP Billiton over the two companies' West Australian iron ore assets.

Cash, by any name, especially cash generation, remains king. During its latest three financial years (to 30 June), BHP Billiton produced free cash flows totalling US$25bn. Over the past three (calendar) years, Alcoa has produced aggregated negative free cash flow of minus US$3bn. Alcoa has effectively been funding itself via a combination of fresh debt raisings, asset sales, and a rights issue. In a strange association with nickel, but for many different reasons, the aluminium market has permanently changed in the past few years.

Going forward, it seems that the masters of the mining universe will remain heavily determined not only by size, but also by size in specific markets. Command performances are most likely to continue coming from those groups which hold sizeable chunks of subsectors characterised by relatively few producers, as seen in seaborne iron ore, coking coal, magnesium, and potash. Established, dominant, players in smaller specialist niches are worth watching, including the likes of Anglo Platinum [AMS:JSE][AMS:LSE], and Sociedad Química (potassium, lithium and iodine).

World's Top 100 Mining Stocks

Ranked here on market value

* 12-month

Source: market data; table compiled by Barry Sergeant