Ernst and Young's Michael Lynch-Bell says major mining companies want to make acquisitions and can afford to pick and choose between mid-tier mining companies as there is little competition for these, while many of them have great assets.
Lynch-Bell, E&Y's partner in charge of global mining and metals, said during an interview with Mineweb at the Mining Indaba in Cape Town that the big boys wanted to expand and acquire, but the big issue for them was outstanding debt and their real job was to convince banks to lend them money.
He said some of the majors would find other ways of doing these deals such as using their own cash or paper to conclude it. Majors could afford to take their time and pick and choose between mid-tier projects as there were few companies, such as Vale and BHP Billiton that had ample cash and little debt.
Further demonstrating this point he said when a potential investor asked him today whether it was the right time to invest in mining , he replied yes. This was because one could now take time to evaluate projects and complete due diligences as you had time on your side.
Lynch-Bell said there was reason to be optimistic about mining investment and resource prices and that he belonged to the camp that believed the economic slump was only temporary. He believed an economic recovery would start towards the end of this year.
The basis for his belief was that emerging countries such as China and India would continue their infrastructure spend and that China would announce additional infrastructure stimulus packages to help economic growth.
China would have to act as it can not stand by and watch unemployment, he said. This will boost demand for base metals such as copper and iron ore leading to a recovery in base metals prices.
Lynch-Bell said the world might also see the Chinese buying equity in the bigger mining companies as the top ten miners were cheap and had proven reserves. This would obviously be more beneficial than investing in exploration projects, though Chinese direct investment in bigger mining projects would continue.
Direct investment in equity that could give China metals offtake would firstly take place at the medium to big end, he said.
The mining expert is of the opinion that mining equity prices have hit their bottom as the market value of companies was now lower than the financial value of their assets. The PE ratio of the mining sector ranked almost at the bottom of all business sectors and this related to a general pessimism about the sector and economic recovery.
Lynch-Bell said the first signs that his optimism about commodity prices and economic recovery was warranted would be when coal, iron ore and copper prices recovered, China announced even more stimulus packages and banks make debt placements.
We need all this to come together to then feed through to equity prices.