Base Metals 2013 Updated Outlook
CHARL MALAN: I was optimistic for base and industrial metals earlier in the year. I think the one thing that's changed significantly is a significant reversal of people looking for a strong dollar as well as people's perceived negative approach towards emerging market growth, and those two combined aspects has put some pressure on base industrial metals, both commodities and equities.
However, going forward I continue to remain very positive. I think there's three key catalysts that will unlock value over the next 12 months; the first one being a reduction of capital spending or CAPEX. We are seeing a significant reduction of that taking place and in turn it will mean that companies will have a higher free cash flow yield at the end of the day.
Secondly is a significant reduction in cost of production, mainly driven by lower input costs such as equipment and other re-agents and, thirdly, I think we will see significant sale of assets of uneconomic properties.
And a combination of lower CAPEX, lower costs and higher income from asset sales will mean higher free cash flow, will mean high dividends, potentially shape IBEX and ultimately a higher re-rating in these stocks.
MALAN: China's growth is slowing. It's only natural that China's growth has to slow in percentage terms but I think if we look at the overall economic growth within China the slow-down is not really being reflected. I think if I look at things that consumes copper for example and I look at electrical cables the demand for electrical cables continues to increase significantly on a year by year basis.
The demand for steel continues to increase significantly on a year by year basis, so although in percentage terms China is slowing down on an underlying demand trained for base metals and industrial metals China still looks very positive. If we want to talk about percentage terms as long as we maintain somewhere around 7 percent or north of 7 percent I feel very comfortable with my current assumptions within the base industrial metal equities and commodities.
MALAN: The South African mining industry continues to be in free fall, mainly driven by the fact that there is a turf war between the two main unions and I think this is gonna continue over the months to come as we're moving into wage negotiations. I do think gold equities within South Africa as well as the platform equities within South Africa is very poorly-positioned to manage another protracted strike. I do anticipate we will through significant strikes as the various union members are promising salary increases of north of 20 percent.
The industry cannot afford a salary increase of 20 percent, somewhere closer to eight percent or nine percent is marginally affordable for these companies, so we are at lock head where companies are gonna be offering a much lower number than what unions are promising its members and I think that rift is going to continue to grow over the months to come and I foresee that we can go through a protracted strike.
What I find interesting about this space this time around is talking to management. They are all very prepared to go into a protracted strike, unlike last year where they eventually gave into the demands of the unions. Clearly this year they've all said 2013 is going to have to be a watershed year where we will not give in to the demands of the unions.
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