This should be the year of the diversified mining conglomerates and, in particular, that select group of London-listed global resource giants known as the "London miners".
What the four London miners have in common are diverse portfolios of resource businesses, nearly all of which are booming at present, thanks in large part to the phenomenal strength of the expanding Chinese economy.
Two of them - Anglo American and BHP Billiton - are of intense interest to SA investors because they are also listed on the JSE Securities Exchange.
The other two, Xstrata and Rio Tinto, are of more academic interest, though Xstrata, in particular, owns extensive assets in SA. Whether it wants to or not, Xstrata will gain a public profile in SA through its joint venture with SA Chrome.
Xstrata is not listed in SA but it is the country's third-largest exporter of coal, through wholly owned subsidiary Duiker. The group's SA chrome mines and smelters make it the world's largest producer of ferrochrome.
Rio Tinto owns 50% of unlisted titanium producer Richards Bay Minerals and is the major shareholder in listed copper producer Palabora Mining (Palamin).
A growing belief among analysts and the resource groups themselves is that the surge in Chinese demand for commodities will last over the long term and constitutes a fundamental, positive change for the future of the mining industry.
Essentially, it is now believed that China is where Japan was in the late 1940s and early 1950s.
"China now accounts for about 20% of demand for global iron ore, copper and platinum," says Jack Jones, executive director for London-headquartered investment bank CIBC World Markets. "Current metals imports are well ahead of the historic growth rate of 20%/year. China imports about 50% of its iron ore requirements, 80% of its copper and 100% of its platinum."
Jones adds that China's own domestic metals supply is unlikely to increase in the foreseeable future. "This suggests China will remain a major importer of metals and a key driver of both metals prices and mining share valuations."
To get an idea of the implications, let's look at recent metal and resource group share prices compared with 2003 levels. The copper price reached US$1,37/lb in early March this year, which is 62% up on the average price of $0,81/lb reported by Anglo American for 2003. Nickel hit $6,53/lb in early March, 49% up on $4,37 for 2003.
The aluminium price reached $1 679/t in early March compared with an average of $1 474/t for the second half of 2003 and $1 332/t for the second half of 2002.
Coal prices have also gone through the roof, with thermal coal free on board from Richards Bay hitting $50/t in April from an average of $25,70/t last year. Hard coking coal exported from Australia has reached prices of up to $60/t compared with $44/t during 2003.
So it's not surprising that the share prices of the London miners have run hard. Anglo rose just over 80% to R178 in early March from a 12-month low of R98,20, while BHP Billiton did even better, rising 88% to a 12-month high of R66,25 from a 12-month low of R35,31 over the same period.
Both shares then pulled back fairly sharply in the middle of March as the market got the shakes. Yes, there are things that could upset the market and the main one is that China could cool off temporarily.
That's probably why both Anglo CEO Tony Trahar and BHP Billiton CEO Chip Goodyear, in their presentations this year, have stressed the ability of their groups to generate cash flow.
Trahar pointed out that, since 2000, Anglo's annual earnings before interest, tax, depreciation & amortisation (Ebitda) had remained between $4,65bn and $4,8bn, regardless of overall economic conditions. Goodyear said BHP Billiton's quarterly Ebitda earnings had averaged $1,3bn since the beginning of 2002.
What must be bugging both CEOs is the knowledge that their groups could be doing even better were it not for the strength of the rand against the US dollar.
That has hit Anglo in particular, because the group has greater exposure to SA. Trahar says fair value for the rand is around R8. (It was R6,60 in May this year.)
One mining group executive, Metorex CEO Simon Malone, argues that, because of what is in effect a strong rand policy, SA is losing out badly on an event that comes along perhaps once in a generation: a simultaneous surge in metal prices.
The last time it happened was in the early 1980s and SA boomed as a result. That's not happening now. "The SA mining industry right now is downsizing, retrenching and deferring capital," says Malone. "It should be spending, expanding and employing."
What that means is that the country will lose market share in various mining sectors. If our companies do not take advantage of the commodity boom to invest in new gold, platinum, coal and diamond mines, then competitors operating in other mining countries will.
Anglo and BHP Billiton offer investors different portfolios of resources. BHP Billiton has considerable exposure to oil and gas, while Anglo has a greater weighting towards precious metals through gold and platinum.
What both now have in common is iron ore, after Anglo's success in acquiring a 66% stake in iron ore group Kumba Resources.
The race is on to meet China's roaring demand for iron ore and BHP Billiton is way ahead of Anglo. BHP Billiton intends pushing its iron ore exports from 70 Mt/year in 2003 to 110 Mt/year from 2005 through expansions of its mines in Western Australia and by beefing up its privately owned rail and port infrastructure.
In March, BHP Billiton also announced a marketing breakthrough: a new joint venture with four of China's big steel mills, to which it will sell 12 Mt/year of iron ore.
Trahar says Kumba can push its iron ore production from 28,6 Mt in 2003 to around 75 Mt by 2009 "if all the proposed projects proceed".
The trouble is that Kumba's expansion projects are more doubtful than those being developed by BHP Billiton. Kumba's consist of a brownfields expansion of the existing Sishen mine in the Northern Cape, followed by development of a greenfields mine at Sishen South and then the opening up of the huge (25 Mt/year) Hope Downs project in Western Australia.
Kumba has far less control over making these projects happen than BHP Billiton has over its iron ore developments.
In SA, Kumba has to negotiate the provision of extra rail and port infrastructure with Spoornet. The state railway company is strapped for cash and is being widely criticised by the private sector for its inefficiency.
In Australia, Kumba still has to make up its mind about whether to build its own railroad or try to share BHP Billiton's.
Two other mining groups will be affected by what eventually happens with development of the iron ore resources of the Northern Cape. One is Associated Manganese (Assmang), which is controlled by Avmin, and the other is Associated Ore, which is the holding company for the Sacco family interests.
Kumba and Assmang, which own adjacent mines and mineral rights in the Northern Cape, have been trying for years to agree on a rationalisation of assets. The sticking point has always been the interests of Desmond Sacco, chairman of Assore, which jointly controls Assmang with Avmin.
Sacco has always fought against any merger, wanting to retain Assmang's independence in the iron ore business.
The two sides finally gave up last year, with Kumba declaring agreement could not be reached on the relative valuations of the assets.
SA Chrome had far more success with asset valuation through its merger with Xstrata, though the cynical view is that Xstrata's requirement to comply with the mining charter might have had a lot to do with it.
SA Chrome is controlled by the Royal Bafokeng Nation (RBN) and was in financial trouble at the end of 2003 because of start-up problems at its ferrochrome smelter near Rustenburg. As of end-September, SA Chrome had lost a total of R199m since operations began and had total liabilities of R527,3m. A proposed joint venture with Chinese stainless steel producer Jisco to double the capacity of the SA Chrome smelting plant fell through.
Then along came Xstrata. The merger gives SA Chrome joint management control of the combined operation, which is the biggest ferrochrome producer in the world, though it will have only a 17,5% equity stake. More importantly, the deal turns SA Chrome cash-positive with immediate effect because SA Chrome will accrue its share of the overall cash flow.
SA Chrome remains listed and will be used by the RBN as the vehicle for ventures outside the ferrochrome joint venture with Xstrata. These could include a diversification into manganese.
Trans Hex gave some of its shareholders a fright when its gung-ho CEO, Calvyn Gardner, abruptly resigned just before Christmas, though agreeing to continue as a consultant to the group. He is now based in Luanda, looking after Trans Hex's all-important Angolan mining ventures.
Trans Hex has staked much of its future on growing its Angolan business, which is why shareholders got another jolt in February when rumours started flying that the group had lost its Angolan mining and exploration rights.
The rumour was false, but the group had indeed fallen behind on the timetable to develop the second of four diamond projects in Angola. The controlling shareholder in all these ventures is the Angolan government and it seems the government had objected.
All was sorted out amicably and everything was back on track by mid-February, according to Trans Hex director Mark Willcox.
The surge in the copper price finally provided some good news for copper mine Palamin, which had been through a painful eight years developing a new underground mine. This replaced the opencast mining operations when they reached the end of their economic life.
Palamin's operations were cash-negative during 2003, when the group lost R83,2m before tax.
If the rand remains strong, Palamin will continue to battle financially, despite the good copper price.
The company's debt hit R1,8bn by end-December and management indicated that a "full recapitalisation" of the business was planned, which could mean a hefty rights issue.
