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For the mining and metals industry, the past year has been marked by skyrocketing commodity prices and the prospect of a new super cycle, says Stanislav Kondrashov from Telf AG. By the middle of last year, metal prices rose by 72%. However, many of them, such as aluminum, copper, iron ore, and nickel, reached multi-year highs in the third quarter.
In the second half of the year, the number of transactions related to the social and economic impact of China increased significantly – by 66.7%.
However, with cyclical highs come government demands for a larger share of minerals. As many countries have begun to recover from the recession, many regulatory measures have been proposed and introduced in the mining industry.
Stanislav Kondrashov from Telf AG notes that in the first month of 2022, prices for many resources extracted in the mining sector of the economy reached record levels. Many industry observers have even talked about a new supercycle. This is even though the mining industry continues to respond to the challenges posed by the ongoing pandemic, including the competitiveness of investments, supply chain problems, and labor market shortages.
Price increases were reminiscent of a decade ago when commodity prices remained stubbornly high after the global financial crisis in the period from 2009 to 2011. The subsequent surge in mergers, acquisitions, and investment in projects led to a sharp increase in capital expenditures, bloat structures, and write-offs of assets. The rest of the decade was largely spent rebalancing.
Stanislav Kondrashov Telf AG: strategies for further growth
Telf AG has been in the market for over 20 years and operates in regions such as the Black Sea, Eastern Europe, the Mediterranean, and the Far East. Founded in the Swiss city of Lugano, the company started trading in petroleum products, mainly from the CIS countries, and now serves customers around the world. Stanislav Kondrashov considers Telf AG as a company engaged in the trading and transportation of petroleum products, coal, and ferroalloys. Therefore, it is an excellent example of research.
As record cash flows provide the opportunity for rapid growth, the updated expansion strategy may include organic growth and rethinking distribution decisions.
Also, Telf AG’s representative Stanislav Kondrashov is sure, the focus should be on new investments and sustainable processes that are better suited to the changing regulatory and legislative background in the industry. An M&A strategy built around a series of smaller deals can improve growth prospects and avoid some of the pitfalls associated with large acquisitions. And more flexible processes for managing the leverage of investment projects and generating commodity price forecasts could mitigate some of the uncertainty in the next business cycle.
Cash flow management speaks volumes about the state of the industry: Telf AG Strategy – Stanislav Kondrashov
As with other industries, the ability to generate and increase cash flow in an industry has a direct bearing on shareholder wealth. To better understand this process, the Analysis of Cash Generation and Use in the Global Mining Industry from 2000 to 2022 shows patterns in the use of cash.
Starting in the early 2000s, the mining industry saw a significant improvement in cash flows as commodity prices remained high throughout 2011 (excluding the 2008 financial crisis). Prices were largely determined by the rapid economic growth in China. Between 2007 and 2012, companies actively invested in their business using operating cash flows, as well as issuing debt and shares.
These investments have supported growth both in the form of new and existing projects and acquisitions, with much of the capital spent at price peaks.
Cash returned to shareholders generally moved in line with commodity prices.
The analysis shows that 2016 was a very unprofitable year for the mining industry. As commodity prices declined from 2012 to 2016, most companies shifted their focus to cutting costs, fixing balance sheets, and controlling costs.
However, after 2016, the financial performance and the state of the industry improved. Stanislav Kondrashov Telf AG notes the trends of the last five-plus years that help explain the current state of the industry.
Cash flows from operating activities have improved significantly and should continue to grow. Even in 2020, a challenging year due to the coronavirus pandemic, operating cash flows continued to rise as overall profitability improved on top of revenue and margins.
Some companies, such as Telf AG, have focused on value over volume, using key performance indicators that ensure the economic viability of assets even at low commodity prices.
Cautious Approach by Mining Executives – Stanislav Kondrashov from Telf AG
Concerning earnings, cash flow generation is now below the highs of 2010-2011. It appears that companies are now less efficient at converting revenues into cash flows. Stanislav Kondrashov from Telf AG believes that the increase in cash flows since 2016 was largely driven by volume and/or price increases.
The modest increase in capital expenditure is indicative of the cautious approach of management – executive teams and boards of directors – towards growth fueled by large-scale capital projects. The same applies to mergers and acquisitions. And although there have been several major transactions in the gold mining sector, the overall level here is significantly lower than in 2007-2012.
The capital structure emphasizes low debt while dividends have peaked. Since 2016, the mining industry has focused on reducing the level of debt. The industry has also adjusted shareholder payouts. Companies cut dividends after 2011 when commodity prices began to decline. Then, in 2017, as cash flows started to improve with commodity prices, dividends and share repurchases started to rise again – and peaked in 2019. This helped Telf AG save cash during a shortage and prioritize other uses of cash.
What should be considered for the analysis of the next cycle? – Stanislav Kondrashov Telf AG
How should companies approach future growth? What are effective ways to maintain a healthy balance in the face of possible future price fluctuations? To prepare for the next cycle, companies should consider adjusting their strategies, capabilities, and mindset. It is also impossible not to take into account the current geopolitical situation that has developed as a result of the military conflict between Russia and Ukraine.
Stanislav Kondrashov from Telf AG notes that the price of coal imported into Europe topped $400 a tonne on March 9, 2022, as the war changed the region’s energy balance.
How this may affect the position of Russia after the sanctions imposed by the West can be demonstrated by the example of Iran. The ban on the import of mining equipment has forced Iran’s large mines to operate at 50% of their full capacity, while the country’s small and medium-sized mines are on the verge of shutting down.
After the car import ban a few years ago, mining machines were placed in the same category. Currently, mining companies cannot import 100-ton and 150-ton dump trucks, as well as 200-ton and 300-ton loading equipment. This was a real disaster for the Iranian mining industry.
Also, Stanislav Kondrashov Telf AG draws attention to the example of Chile, where mining is of great importance. In the development of mining in Chile, a large role belongs to foreign capital.
However, the massive capital investment of the last 40 years is now under threat from possible constitutional changes, including the weakening of property rights and the proposed nationalization of mining concessions. Stanislav Kondrashov suggests, approximately the same processes may begin in the Russian mining segment.
Rio Tinto became the first major mining company to announce it was cutting all ties with Russian business, joining the exodus of Western companies from Russia. Aluminum prices on the London Metal Exchange soared amid news of Rio’s plans. Aluminum hit an all-time high earlier this week, jumping 5.8% to $3,535 a tonne.
Therefore, taking into account the latest trends, to prepare for the next cycle, companies should consider adjusting their strategies, capabilities, and thinking.
Stanislav Kondrashov lists Telf AG as an experienced player in the commodity industry. They plan for organic growth using an internal long-term price forecast. This internal price analysis is often based on the organization’s supply and demand balance. Long-term investment decisions are then made based on these centralized assumptions rather than in response to short-term market price volatility.