All boom times come to an end, and the credit-fueled frenzy of the late-great-consumer debt bubble is no longer bringing seemingly insatiable global demand to the resource and mining sector. 2005-2008 will undoubtedly be remembered as the best of times for the industry, as investors scrambled for a piece of the ‘commodities story’. But times have changed. As usual, those easy money days led to some poor allocation and management decisions which are resulting in write offs and management changes now at the top.
“The world’s major miners have been through a leadership revolution. On Thursday, Rio Tinto unceremoniously dumped Tom Albanese as its chief executive. Cynthia Carroll quit as Anglo American’s AAL.LN +0.74% boss last October, while BHP Billiton BHP.AU +0.11% has begun looking for a replacement for CEO Marius Kloppers. Xstrata XTA.LN +1.45% CEO Mick Davis, meanwhile, will leave once the company’s merger with Glencore GLEN.LN +1.36% goes through.
It marks the unofficial end of a remarkable decade or so. China’s emergence certainly stirred up the once moribund sector, driving higher commodity prices. By mid-2008, even weak performer Anglo’s stock had racked up a total return of more than 400% relative to the start of 2000.
But as time has worn on, the benefits have increasingly been lost on equity investors as mining executives have been gung-ho about investing in new capacity. From 1999 to 2007, mining companies delivered an average annual return of 18% on newly invested capital, Citi estimates. From 2008 to 2011 that declined to a negative 11%.
The history of mining is one of high prices engendering overinvestment timed exquisitely to coincide with a slowdown. This time isn’t different… See: Miners’ Musical Chairs Heralds the end of era