The mining industry, as noted before, has tried for more than a year to improve its ways. The best companies have made real progress to effectively control production output and costs while being more disciplined with capital and increasing payouts to shareholders.
These efforts will continue. Management teams that choose to ignore the new paradigm will drive themselves and the companies they lead to oblivion.
For some time, mining companies thought diversifying their portfolios was the best way to improve cash flow stability and protect themselves from natural resources cycles and increased volatility. That hasn’t worked, at least not as expected.
The most important change in the industry during the past ten years we’ve covered it has been the move from annual to spot pricing contracts in iron ore, metallurgical coal and thermal coal. This significantly increased volatility, because the annual contracts of yesteryear locked in some stability and allowed for better projections (e.g., capex growth, dividends). Consequently, industry beta now is close to 2, up from around 1 in the late 1990s.
Management teams that can handle this kind of volatility, something that happens only through discipline, will see their companies outperform both operationally and in the stock market.
Mining companies have no choice but to continue with these changes if their shares are to become a competitive alternative for long-term investors. For the past 20 years, they have underperformed global markets because of cyclicality issues and misguided managerial policies.