The Lion Clock ticks past eight and it ‘feels like 2001’, says Widdup

22nd February 2019
Resources Rising Stars

Top Melbourne fund manager Hedley Widdup from Lion Selection Group has likened current market conditions for junior miners to the early 2000’s, but has predicted a growing flow of money into the junior resource sector over the months and years ahead.

For investors that can remember that cycle, Widdup’s words are likely to strike a chord as the period between 2001-03 ended up being a prelude to one of the greatest mining and resources booms ever seen.

In an article published this week which echoed the themes first aired at the Resources Rising Stars Summer Series in Sydney and Melbourne last week, Widdup said the bigger end of the mining sector was again “match fit” after having to address a range of issues to ensure survival between 2011 and 2015. 

“Having met the top of the market with bloated balance sheets and unsustainable costs, austerity was rolled out,” Widdup said. “But unlike many mining initiatives there were no commemorative shirts or hats. 

“The collective attitude toward growth was put into reverse as dividends were cut, capital was raised and high cost or short life assets were sold or closed as the world’s miners were suffering severe indigestion – of expensive, top of the market acquisitions and funding themselves with too much debt. 

“Given time to digest, and develop a new wellness regime, the sector’s financial health has certainly improved dramatically since 2011. Debt levels have been reduced, dividends are back and even improving, and discipline around expenditure is a buzz phrase.”

Widdup cites two recent “mega-merger deals” in the gold sector as marking a step-change in the deal-making character for miners.

“Suddenly, in late 2018, a new character of deals re-emerged after a long while of absence,” he wrote.

“In September 2018, Barrick and Randgold announced a merger which saw Barrick acquire Randgold for US$6.5 billion in a nil premium paper deal. 

“Shortly after, in January 2019, Newmont announced a US$10 billion acquisition of Goldcorp – also a paper deal, this time with a modest premium (the premium shrinks for longer VWAP’s).  If this deal is consummated, it will have been the largest gold acquisition ever, to create the world’s largest gold company.

“One swallow may not make a summer, but one enormous gold deal followed by an even larger one certainly suggests more than one team have been thinking along very similar lines. 

“These two deals have reversed the trend of deals in the gold sector, and whilst that isn’t necessarily indicative of the rest of the industry, all of a sudden it certainly seems as if the big want to get bigger again – and the market approves.”

Widdup says big deals like this and the relative health of the big end of town show that there is hope for junior miners, which have languished on the ASX for the past 18 months or so.

“Very little of the enthusiasm that the market has shown to operating miners (especially for the large caps) has trickled down into the juniors yet,” Widdup said. 

“But there is hope – All mining cycles eventually feature a growing amount of money looking down the market capitalisation scale, so history assures us this will take place in time. 

“Reflecting on previous cycles, 8 o’clock was during 2001 and 9 o’clock during 2002.  Macarthur Coal and Sally Malay (now Panoramic) were listed in 2001; Independence, Avoca and Westonia (now Evolution) were listed in 2002. 

“Large miners were dealing: Rio Tinto successfully bid for North and Ashton, BHP took Billiton and Barrick took Homestake – the industry was certainly investing.  Then, much like now, fund raising and share price performance in the market for juniors was tough. 

“That cycle lasted another six years after the eight to nine o’clock phase.”

 

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