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Industrial Metals: Focusing on Capital and Cost Management in 2014


Management Turnover

CHARL MALAN: We've had a number of changes in the management of mining companies over the last year and a half.  Nearly 65% of the top twenty mining companies have changed CEO, CFO, or operating officers.  It's brought about a change in that the focus is now on capital management and cost management. Where the previous management focused much more on growth at any cost, the new management has focused on capital and cost management.


What we have seen recently and what we will continue to see in 2014 is the aggressive approach by new management teams to focus on reducing costs. We still believe there's a very good probability that in 2014, two thirds of deliverable costs will be cut out of the system. We also believe that the already announced cap-ex reductions will come through in 2014 in a free cash-flow environment which most importantly will reduce supply in 2015. The next six months are critical to measure management's promises relative to deliverables and I'm looking forward to seeing the results.


M&A and Outlook

MALAN: What we've seen over the past couple of months and what we'll see in 2014 is cost-reduction, capital-reduction, and sales of non-core assets.  When I think about M&A activity, I do not think of one listed company buying another listed company like we had in the mid-2000s. I see a new method to capital management: the selling of assets.  Las Bambas, a large copper asset of Glencore Xstrata [represented 5.29% of Fund net assets as of 10/31/13], is getting sold for roughly $5-$6 billion. The people that are looking to buy these assets are a lot of Chinese parastatals. Private equity firms are also looking at companies that are smaller and have fewer assets.  I believe we're going to see more asset sales rather than companies merging with each other, which in turn will have a positive impact on cash coming into the balance sheets which hopefully will be returned to shareholders. [Click here for a complete list of holdings in the Van Eck Global Hard Assets Fund]

 

Cost Management

 

MALAN: Cost and delivery on cost management is one factor that will drive mining equities in 2014. Financial year 2013 will be the first time that we'll really start seeing how deliverable these cost-cutting and reductions are. The first quarter of 2014 is going to be very telling.  Some of the larger mining companies, such as Glencore [5.29% of Fund net assets as of 10/31/13], BHP [not in Fund as of 10/31/13], Rio Tinto [not in Fund as of 10/31/13], have already produced and delivered promising numbers.


The real area that we focus on is mining inflation.  Mining inflation has a 13% per annum impact on cost.  It's the second-largest area that impacts earning variance and we believe that that needs to be driven down.  13% mining inflation is an incredibly high number and if you unpack that 13%, the biggest portion of that are labor and contract laborers.  We anticipate these companies will lay off a whole range of people.  There will also be a restraint on discretionary spending, which includes exploration spending.  We are already starting to see some positive results on cost management.

 

Demand Outlook


MALAN: If I look at the metals world in relationship to Fed policy, the consensus is that gold will be the most positively impacted commodity by the stimulus. If you look at the base industrial metal space, the stimulus will drive metal prices.  I think what a lot of people have forgotten is that the U.S. is actually a very big consumer of base and industrial metals, specifically things such as copper and aluminum in the housing market.  Most importantly, demand in China will be a large driver in prices and right now China is expected to have its second-largest demand year for base and industrial metals.


 

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