The health of the mining sector has come into sharper focus in recent weeks, with deadly disturbances in South Africa and ongoing concerns about commodity prices denting the sector and the cloud hanging over the sector is unlikely to blow away quickly.
“We now have more resource nationalism in countries that own the assets. That’s changed the view on how much money is left over for mining companies,” Neil Dwane, chief investment officer, Europe at Allianz Global Investors, told CNBC Europe’s “Squawk Box” Tuesday.
“We’re now in the zone where African countries are thinking we’ve got to make sure we get money out for our economy on the way through.”
The price of some of those assets, such as copper and iron ore has dropped recently amid concerns about falling demand as economic growth slowsfrom Beijing to Brooklyn.
“We don’t believe the commodity boom is over,” Rupert Nathan, head of fund management at Fat Prophets, told CNBC. “This is merely a cyclical retrenchment within a long-term super-cycle. Draw a line in the sand. If you’re positive you would look over the horizon and buy the assets.”
One of the biggest focal points for the sector is commodities trader Glencore’s 30 billion pound ($47 billion) all-share takeover bid for Xstrata.
Ivan Glasenberg, chief executive of Glencore , told reporters after the trader reported a 25 percent drop in first-half earnings, that the deal was not a “must-do” for the company at the moment, and it could return to the offer in the future. The current offer is for 2.8-times earnings and Qatar Holdings, Xstrata’s second-largest shareholder after Glencore, wants 3.25-times earnings.
“Glencore are incredibly good poker players, so they’re not going to show their hands,” Rupert Nathan, head of fund management at Fat Prophets, told CNBC. He added that the Glencore bid would not be successful at its current level and argued that Glencore should offer about 3.4 times earnings to secure the deal.
“We feel that this is pivotal to any future strategy, and based on that premise this is a must-do deal for Glencore,” he said.
In contrast, analysts at Macquarie said in a recent note that Glencore shouldn’t pay more than 2.9- to 3-times earnings.
Xstrata’s management have faced criticism over the deal — particularly the bumper pay package lined up for the company’s Chief Executive Mick Davis if it goes through.
“For me to get back in (to Xstrata), I’d need to see wholesale changes to the board and management,” Dwane said.
Xstrata is also likely to face pressure after Lonmin, in which it owns a 25 percent stake, has seen a steep drop in its value after a dispute with workers at one of its South African platinum mines ended tragically last week. Forty-four people killed and dozens more injured in clashes between police and protestors.
“We are convinced that this is an escalation of a deeply embedded problem with the South African mining sector. We are unlikely to see any lower risk going forward, despite government efforts,” Robert Besseling, senior Africa forecaster at Exclusive Analysis, told CNBC’s “Worldwide Exchange” Tuesday.
The relatively new Association of Mineworkers and Construction Union (AMCU) has spearheaded the strikes by rock drillers which led to the violence. One key demand of the strikers is a tripling of their pay – currently around $500 a month.
“We have warned our clients of contagion risks to other platinum mines such as those of Aquarius and Impala Platinum where the AMCU union is recruiting, and there’s the risk of further violence.”
The AMCU could accelerate its recruitment to other sectors, according to Besseling. Both the AMCU and its larger rival the National Union of Mineworkers have “lost control” of the situation, he added.
Lonmin is in danger of breaching its loan covenants as early as September if the halt to production continues, according to Christopher Nicholson, analyst at Morgan Stanley.
This will add credence to reports that management are considering fundraising of up to $1 billion to keep the company going through the dispute.
“We believe that management will take action well before this risk becomes pressing as they have previously highlighted a number of potential financing options in the near term,” Nicholson, who has an equal-weight rating on the stock, wrote in a research note Tuesday.
He said that Lonmin’s net debt is likely to exceed 4-times earnings if 3 to 4 weeks of production is lost as a result of the strike. This makes it increasingly important for the company to resolve the dispute as this is the covenant placed on its $700 million syndicated loan facility, which is due to be tested on September 30.