JOHANNESBURG (miningweekly.com) – Global miners will increasingly shift away from a diversification strategy as low mineral prices will drive them to concentrate on increasing competitiveness in specific commodities to improve earnings, predicts research firm BMI.
According to a report published last week by the firm titled ‘Global Mining – Diversification Era Over, Focus on Core Assets and Mergers and Acquisitions’, BMI forecast that while miners’ divestments would continue, this would only be a temporary measure to improve the companies’ cost structures and increase operational margins in the short term.
In the long run, miners would increasingly acquire assets within their field of operations to improve synergies and strengthen their cost structures.
The report indicated that consolidation would be supported by mining companies’ drive to divest high-cost assets and readjust their focus to include competitiveness and improve operating margins on existing higher-margin assets.
Low mineral prices had resulted in significant earnings deterioration for the global mining sector, leading to weak financial performance, falling share prices, rising borrowing costs and spiking bond yields, which had boosted global diversified miners’ drive to consolidate operations, thereby improving companies' performance.
Small and midtier miners had faced an even greater challenge, exacerbated by the the increasing potential for an emerging market corporate debt crisis in 2016, given the parlous state of high-yield bonds in the US, rising dollar interest rates, slow growth and elevated emerging market private sector leverage.
While the negative impact on mineral supply of this consolidation trend would be positive for commodity prices, BMI expected that it would take longer for resource equities to come back into favour.
Over the first two months of 2016, market sentiment improved and mining shares had rallied, which resulted in bond yields falling from elevated levels and reduced borrowing costs.
This rally would not last as commodity prices would remain low over the coming quarters on the back of a persistently oversupplied market, the report said.
BMI predicted that the global large-cap mining sector would consolidate, as global diversified miners would increasingly shift away from a diversification strategy and focus on reducing operating costs and increasing competiveness through a concentrated mining portfolio.
Further, while the firm forecast that mineral prices would bottom in 2016, it expected to see miners increasingly surrender to a 'lower for longer' price outlook, which would result in further significant divestment of assets, output cuts and bankruptcies.