‘AngloGold shareholders are some of the most patient on the JSE’ – Peter Major as commodity cycle turns

The go-to man when it comes to the resource counters, Peter Major shares his insights on the commodity downturn of recent weeks. Iron Ore and the precious metals basket have nosedived since highs in recent months, with many of South Africa’s mining giants feeling the pain. Major has been ringing the alarm bells on these unsustainably high commodity prices for months. Of concern for AngloGold shareholders specifically, Major lambasts management for inadequate cost controls, as the share has plummeted nearly 40% this year alone. – Justin Rowe-Roberts

Peter Major on the catalyst for the commodity downturn in the recent weeks:

I can’t say. I’ve read different reasons for it – worries about inflation, worries about the stock market having finally peaked, worries about excessive spending and inflation is going to come and that means interest rates are going to go up. What brought it about? I think it’s easier to say what brought it about. It was virtually the lockdown, when Covid first hit the world in March last year, the knee jerk reaction was to do what China did – lock everything down. We can see the implications of that in South Africa, you can see the implications of that when you come to America. America never has empty shelves. America never has a shortage of anything. But you go to places like Walmart, Costco, the big shopping malls – there’s big spaces with nothing. There’s a lot of shelf space that actually has half of what they’re supposed to. If you try and get equipment – the fact that construction materials two years – a two by four piece of wood went from a $1.50 to $5 to $10, it’s now back to $6. We knew lumber prices can’t go up six fold and stay there. But there is this choke in the system. I think it applied to metals as well. You only had to shut down the big ships or iron ore production only had to fall 20% or 30%. We know everything is finely balanced. If you just have a choke of 5%, it has implications. So it looks like it’s taking the world a year, year and a half to work through those shutdown implications in the system. There’s still a huge shortage of construction equipment here. We all know there’s not enough microchips. So the auto industry has to cut back production worldwide because there’s not enough microchips coming out of Taiwan and a few other chip factories. Is that now the reason that commodity prices are coming down, that this blockage in the system is working its way through – that the lockdown itself, per se – has pretty much ended in the majority of the world. It’s 90% plus in the States.

On whether the discipline of the management teams will provide these commodity counters enough of a war chest if spot prices continue to decline: 

Yes, I think it will. We got to split those costs into two categories, capital costs and ongoing working costs. The indications are they have not been able to manage the working costs. It’s actually easier to manage the capital costs, the expansion costs and the acquisition costs. That’s the switch you can pretty much throw. But the working costs are almost out of control. It’s almost back like in 07/08, and I guess it’s like you’ve got two addiction’s – candy and pastries. Those are my two addictions and I knew I couldn’t live with both, so I had to give up one. I gave up candy so I can eat all my pastries. I think the mining company said we can’t control these working costs. We’ve got a shortage of labour, we’ve got a shortage of material. We’ve got fantastic prices. It’s more important to keep production going at almost any cost to take advantage of those prices. And that’s what the mining companies did. The discipline part was that we’re not going to go out there and start expanding. We’re not going to spend any capital expenditure. We don’t think it’s absolutely necessary and they’re going to keep acquisitions to a minimum. They’ve done very well on that. I think you’re right. That’s giving them a decent war chest. That’s a war chest they haven’t had all these previous runs. So now they can attack the costs because now they have negotiating leverage with labour and they have negotiating leverage with their suppliers.

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