Investors should not expect a recovery in mining stocks for about 20 years, according to Harry Nimmo, manager of the Standard Life Investments UK Smaller Companies fund and investment trust.
Over the past four years or so commodity mining stocks have been broadly plunging in price, proving a disaster for those searching for a bottom to the market, which has historically offered several periods of very strong growth and returns when it has been in a bull run.
Performance of index over four years
Source: FE Analytics
Nimmo, who heads the soft-closed Standard Life Investments UK Smaller Companies fund and the Standard Life Investments UK Smaller Companies trust, is staying well clear in the expectation that these stocks are a set for a generation-long bear market.
He suggests that historical data for commodities shows there is likely to be multi-decade downturn until the next massive rally.
“In the last 300 years in mining there has been four super cycles in metals prices. The first was associated with the British industrial revolutions around 1830, then the rise of America as an industrial power the late 19th century, then the reconstruction boom in the post-war era from 1945 to the mid-1960s and then the rise of China in the last 20 years,” he said.
“So, I think we can forgot about the mining industry for the next 20 years, particularly in smaller companies because they are invariably of the blue sky variety.”
The recent selling was sparked by concerns over the strength of Chinese growth, a key determinant for demand in the global market for natural resources, but there has seen a subsequent bounce back with many miners rallying hard.
Performance of indices since 29 September
Source: FE Analytics
David Madden, market analyst at IG, says the rally has hit a stumbling block this week due to the latest Chinese trade figures, which show imports have declined for 11 consecutive months.
“It paints a very clear picture that the second largest economy in the world isn’t as hungry for commodities as it once was. It is not just commodity companies that are feeling the effects of the dreadful Chinese data,” he said.
However, he says there are some indications in the market that bargain hunters have been scooping up miners.
One ‘bargain hunting’ manager who is mostly avoiding mining companies – he has just 1.5 per cent there – is FE Alpha Manager is Alex Wright, manager of the £2.7bn Fidelity Special Situations fund.
“Looking at the mining sector today, I see limited evidence of positive change, and I expect the environment to remain challenging for most large mining companies,” he said.
“The majority of capex in mining projects occurs before production actually starts. In key metals, such as iron ore, the incremental costs of producing are fairly low once the mine is operational. This means production remains profitable and thus continues even as demand and spot prices fall.”
“It can also take a number of years to bring a mine into production. This means supply increases today are the result of investment decisions made by mining companies many years ago, when spot prices were much higher.”
Wright, who seeks out companies that have been oversold or are in an industry hit by secular forces that are wearing off, says there is no evidence of a turnaround any time soon.
“Our in-house metals analyst models global supply based on his interactions with company management and other industry participants. According to this analysis, it is still likely to be several years before we see year-on-year falls in iron ore production.”
“Therefore, any improvement in spot prices requires an increase in demand beyond the extra production.”
However, he thinks there is an altered ethos emerging at mining firms, with a more disciplined approach to capital spending.
“The sector may look attractive at some stage, but for the time being, positive change is too far away to drive performance over the next year or two.”
Nimmo (pictured) is one of the best known names in the UK small-cap space.
According to FE Analytics, his Standard Life UK Smaller Companies Investment Trust has been the best performing portfolio in the IT UK Smaller Companies sector he took over in 2003 with returns of 719.64 per cent, beating the closest rival by almost 150 percentage points and more than doubling its Numis Smaller Companies ex IT benchmark.
Performance of fund versus sector and index since Sept 2003
Source: FE Analytics
The trust has an ongoing charges of 1.22 per cent, is currently on a 5.4 per cent discount and is 5 per cent geared.
His fund is more expensive at 1.69 per cent for its clean ongoing charges figure. It is soft-closed but is still available on some platforms.