Mine’s a London listing
The imminent 3rd quarter review of the FTSE 100 will bring into sharp focus the imbalances within the UK’s flagship index. Many of the FTSE’s constituents generate their revenue outside the UK and notable amongst these foreign businesses are the miners: there are now 15 mining companies listed on the main London index, and a further tranche populates the FTSE250 and AIM markets. A steady stream has fed the Footsie over the past decade or so, beginning with Anglo American and BHP Biliton at the turn of the millennium and continuing through a raft of firms from emerging markets in the middle of the decade such as Kazakhmys and Fresnillo. A London listing has become the prize from the pit.
This march of the miners has undoubtedly benefited the City, generating millions in advisory fees; Glencore’s ailing bid for Xstrata augurs a much needed fillip for the M&A market should the Swiss commodities house overcome opposition from Qatari and Norwegian Sovereign Wealth Funds. The miners also enjoy the benefits of the respectability, visibility and often lighter regulatory touch (than is applied in Hong Kong, say) that is a corollary of membership of the FTSE 100.
However, there are several issues that trouble investors, regulators and environmentalists: silver, gold, bauxite and iron ore weigh heavily beyond the profit and loss account. Aside from concerns over the environmental impact of mining activity, and disputes over workers’ rights, the lilt of the FTSE towards mineral extraction provides challenges for fund managers.
Soaring demand for raw materials from emerging economies, in particular China, has seen earnings, revenues and share price at mining companies grow significantly in recent years, translating to significant gains for many investors. However, as growth stalls and the voracious appetite for iron ore, bauxite and other metals abates, the overweight sector becomes problematic, often dragging the market down. The commodities super-cycle is ailing. BHP Billiton has halted the expansion of its $20bn copper and uranium project in Australia and Vedanta’s share price has tumbled 30% following a shareholder revolt over remuneration and vocal environmentalist protests at its AGM. This is, of course, a matter of timing, but in the past 12 months the miners have depressed the FTSE 100: the sector is down by 15% while the index itself is up nearly 13%. This issue is particularly pertinent for passive index tracker funds which follow the market (being composed of all the Blue Chips) and are thus exposed without option to the high BETA of mining stocks. Many are seeing the gains from the sector’s previously strong performance pared back; the popularity of the FTSE amongst institutional investors’ means many pension funds will face further challenges in seeking to match their liabilities.
Such concerns over the bursting of the commodities bubble by a demand-side needle are exacerbated by worries about liquidity, accounting standards and corporate governance, as the reaction of Vedanta shareholders shows. Investors are increasingly aware that a London listing and a rent-a-grandee board does not create a high quality company overnight, and the original owners often maintain a controlling stake in the company – see, for example, the mere 18% of shares in free float at ENRC, and a scarcely higher 23% at Fresnillo. Whilst many institutional investors demand exacting performance benchmarks, and firms with lower free floats are less heavily weighted in the index (thus requiring lower investment from the trackers mentioned above), scepticism remains that some miners on the conveyor towards a FTSE listing will continue to exercise investors and regulators.