From yesterday: Reinvesting to rebuild longer life operations
- Rockwell has conducted a strategic review and as a result will close its operations on Saxendrift in Feb-16 and has entered into two royalty mining contracts. Rockwell is also focusing on the start-up of Wouterspan where development is now underway for a 200,000m3 operation at an estimated capital cost of C$4.4m. Production is targeted for mid-2016.
- As part of the restructuring, Rockwell’s Johannesburg office will be closed with key executives transferred to the Middle Orange River. The corporate structure will also be simplified. Cost savings are estimated to be C$0.8m per annum.
Rockwell will also restructure the workforce Company-wide.
NORTHLAND CAPITAL PARTNERS VIEW: Low diamond recoveries, grades and processed volumes have made it challenging for Rockwell Diamonds to achieve financial viability leading the Company to take this decisive action in order to improve its future. Management is confident with these actions that it will benefit all stakeholders.
Mining sector review 2015
2015 more painful for mining investors than 2014 and 2013
2016 to be a stock pickers’ year
NORTHLAND CAPITAL PARTNERS VIEW: 2015 was slightly worse than 2014 and 2013 with 83% of miners seeing negative or unchanged share price movement during the year (2014 and 2013 saw 80%). This performance is reflected in the substantial shrinkage of the total market capitalisation of the AIM mining sector over the past four years - down a total of 84% to £2.7bn in Dec-15 from a high of £17.4bn in Jan-11 (Chart 1). This represents the lowest total since Oct-03, when the sector was in its infancy on AIM.
The number of AIM quoted mining companies is now at its lowest level since Jun-05 (Chart 2) and interestingly the average market capitalisation per AIM quoted mining company of £21.4m (as of Dec-15) is at its lowest level since Nov-02 (Chart 2).
New issues and the amount raised from new issues in the sector during the year were also at its lowest levels since AIM was established, and secondary placings were vastly down from a high of £1,709m in 2007 to £399m for 2015.
What does this mean for the mining sector on AIM in 2016 and are we at the bottom of the cycle?
One could assume that with the average market capitalisation for the mining sector on AIM at its lowest level since 2002 that this is a prime buying opportunity. However, this ignores an important point that with 125 mining companies listed on AIM the sector remains relatively over supplied in terms of number of companies.
The start of the last Bull Market for the sector in Mar-09 was associated with a 13% reduction in the number of quoted companies within the sector compared to the end of the previous Bull Market in May-08. To date, we have only seen a 3% reduction in the number of quoted companies in the sector from the end of the last Bull Market (Feb-11). This is despite the number of companies being at its lowest level for over ten years as the number of quoted miners never fully recovered to the 2007 highs of up to 181 companies during the subsequent Bull Market (Mar-09 to Feb-11) due to the high volume of M&A activity during this period.
The large amount of lower quality companies within the sector on AIM means that capital deployment remains highly inefficient with many companies that do not warrant further investment continuing to receive funds, while many quality businesses are capital starved. As a result, in general investors are continuing to realise poor returns in the sector. This trend will not continue indefinitely and we expect this year to be a stock pickers’ year as a substantial portion of the lower quality businesses leave the market providing mainstream investors with a greater chance of picking the better quality businesses that should lead to a self-propagating improvement in sentiment towards the sector.
A continued collapse in commodity prices during 2016 would likely hasten the decline in the number of listed mining companies on AIM and other markets, driving investors away from debt laden and marginal operations and towards companies with strong balance sheets and low operational costs who can survive and grow even in low commodity price environments.
We believe investors should be focus their attention during 2016 on:
- producers with strong balance sheets and high margin operations,
- developers with low capital requirements and all-in sustaining costs at the lower end of the cost curve,
- explorers that have made high-grade and near surface discoveries or have enough cash on the balance sheet to make material acquisitions of more advanced projects.
In terms of commodities we envisage a volatile year for gold with events such as increased tension in the Middle East, South China Sea, countries along the Russian border and the potential Brexit from Europe along with other European instability, all potential sources for spikes in the gold price that will be set against an ultimate downward trend as US rates increase, and the dollar continues to strengthen.
Platinum could well be one of the better performers with the continued closure of loss making South African based operations and the potential for increased levels of industrial actions in those mines that continue to operate all acting to squeeze supply.
Zinc is likely to see a steady improvement in pricing with the closure of both Lisheen and Century combined with Glencore’s scale back all reducing supply, while Chinese demand is expected to continue to grow.
Copper on the other hand is likely to continue its downward trajectory with weaker demand from the Chinese combined with increased production levels from a number of large developments and expansions.