[miningmx.com] – PERHAPS too much has been made of Mick Davis’
fall-out with Port Elizabeth school chum, Ivan Glasenberg. What’s really interesting
about Davis’ decision to leave Glencore Xstrata before the interim period was up is
what it tells us about the mining industry and the cycle.
It was just over ten years ago that Davis bought for $2.5bn the unloved coal assets of
Glencore, a transaction that formed the basis of Xstrata. Back in 2002, the notion of a
supercycle was still relatively new; back then, the accepted wisdom is that this
heightened demand for commodities would still operate like a cycle, only in greater
degree of oscillations.
Picking through investment reports and news articles, reading the quotes attributed to
mining leaders, it would seem that perspective has been lost. Perhaps Davis thinks
that as per the view of 2002 while we’re in the throes of the downcycle, the return of
metal demand will be quicker than that to which we’re accustomed.
As for the creation of a fund, that sounds like a lifestyle choice. At about 55 years of
age, it’s likely Davis prefers to manage the investment rather than the company itself
leaving questions of appropriate capital allocations between companies, and the like,
to the actual managers.
So what will the investments be? According to an interesting note from John Meyer, at
SP Angel, a UK-based brokerage, which asked whether a regulated fund might be the
best platform for Davis to repeat history, as it were. “We feel the environment is
good for Davis to hoover up unloved and discounted assets within the market at a
time when many funds are keen to reduce their mining holdings,’ SP Angel said.
The next question is the kind of asset for which Davis will plump. According to SP
Angel, he may consider ferrochrome, a mineral which formed the base investment
case for Xstrata, specifically IFM. This, however, may see Davis returning to South
Africa and from many past comments, Davis is bearish on the southern African
country, especially with its power restrictions.
Ditto suggestions he may he look at the platinum market. Apart from the South
African exposure, platinum has not been a happy hunting ground for Davis having
burned his fingers at both Lonmin and Eland Platinum – although Lonmin could come
to represent unfinished work for Davis if the notion was to merge it with Xstrata’s
chrome assets as he had previously suggested.
SP Angel also believes zinc and nickel are possible investment targets, especially the
latter where there are lots of cheap nickel laterite projects to consolidate.
Perhaps the most obvious opportunity is Las Bambas, the copper assets Davis
developed and that Glencore Xstrata is now required to release for the Chinese
authorities to appove the $30bn combination.
Last of all, however, there’s coal. Highly pressured at the moment, the coal market
remains most closely knit to GDP growth, especially in emerging markets. And with
certain economies ambiguous about nuclear energy, with renewable energy remaining
highly expensive, it’s quite possible Davis could return to where he started.
