CITY FOCUS: How miners dug their way to dominance of the Footsie
This is the Year of the Miner on the London stock market. If the first two-thirds of the last decade was overshadowed by the rise of financial services – and the final third by its near-apocalyptic fall – this decade will be dominated by what we can pump, drill and dig out of the ground.
Consider this. Four years ago, banks such as RBS and Lloyds TSB dominated the FTSE 100, accounting for just over 20 oer cent of the index’s weighting. By contrast mining stocks, led by hoary old bellwethers like Rio Tinto and BHP Billiton, made up just 8.74 per cent.
Fast-forward to today and those roles have been reversed. Banking stocks have fallen to a lowly third, making up just 15 per cent of the index’s weighting, while mining has shot past into second.
And if mining and oil and gas are pasted together into one industrial supergroup, natural resources now make up more than a third of the entire FTSE 100.
It’s a staggering reversal of fortunes in four years. This shift in power raises some important and distinctly uncomfortable questions.
Allowing African, Russian and Kazakh miners to sell shares in London benefits the City’s army of financiers. And the profit generated by these listed vehicles is shared out in dividends to millions of pension savers.
With oil and metals prices on the rise there is little sign of mining stocks and flotations losing their lustre. Commodities trader Glencore, set to complete its £7billion listing in April or May, is merely the biggest of the lot. Hard on its heels comes Russian miner Nord Gold, likely to revive its listing plans later this year.
London isn’t playing hard-to-get with the mining industry. The merger of the London Stock Exchange with TMX of Canada is designed to create the world’s leading platform for mining shares.
Yet this focus on (and some might say obsession with) energy and minerals raises genuine concerns.
First and perhaps most important is the issue of how well any given foreign mining firm is really run. Kazakh mining group ENRC is often touted as a prime example of a company with poor corporate governance, a reputation it has tried and failed to shake.
The more London rebrands itself as a mining-heavy stock exchange, the greater the chance that resource companies-with questionable governance will slip through the net.
‘There are poor examples of governance in the mining sector,’ says Mark Goyder, founder director of business think tank Tomorrow’s Company. ‘ Certainly there are some very well observed examples where firms are struggling to raise governance to the sort of levels that London demands.’
Then there is cyclicality. Mining and resources are undergoing a boom, supported by rising demand in places like China and India. But commodity prices can plunge as fast as they spike.
‘While metal prices are high, it’s not a situation that will necessarily be sustained,’ says Charles Kernot, a mining analyst at Evolution Securities. ‘ London should be wary of putting too many eggs in one basket.’
Last but not least, the wider reputational risk. Mining and energy firms increasingly operate in areas of the world deemed unreliable at best.
Many of these places – Zimbabwe, say – are run by unsavoury and capricious leaders with a tendency to seize assets and natural resources arbitrarily.
That process also works in reverse. When a company finds its path to a key resource closed off for environmental or human rights reasons, as Vedanta Resources discovered when it tried to mine bauxite in India’s Orissa region, it hurts the reputation of both the company and its listing host.
But for all the potential pitfalls, the City might be right to cosy up to the mining industry. Better-run resource companies – as London will force them to become – lead to better environmental standards, while efficiency diverts more cash into British pension funds.
The outcry would be greater if London was missing out.
‘If we were actually dropping our governance and listing standards I would be worried,’ says Goyder. ‘Besides, I’d be much more worried if we were moaning that global mining companies were listing elsewhere. That wouldn’t be good at all.’
Image: freedigitalphotos.net by wandee007