There's something of a schizophrenic nature to how the mining industry is handling its overloaded condition. While there have been steep cuts in workers, sales of assets, and a sharp curtailment in capital spending, it's not uniform or across the board. Instead of thinking of the "mining sector" as shrinking, investors may want to view it as one strategically realigning its priorities.
After a decade of expansion, it seemed the industry had heeded the need to retrench. It's not just gold miners like Barrick Gold (NYSE: ABX ) and Newmont Mining that were cutting jobs, but iron ore miner Cliffs Natural Resources and Uranium One were letting people go, too.
Similarly, projects not considered essential to core operations got the axe, with BHP Billiton (NYSE: BHP ) , Rio Tinto (NYSE: RIO ) , and Vale (NYSE: VALE ) all selling off operations, from potash projects to coal (and we don't even need to touch on the closures that industry's faced), and mining's capex plans were also shelved. Barrick said its Pascua-Lama gold mine would receive $1.5 billion to $1.8 billion less spending this year, while analysts at PricewaterhouseCoopers find the top 40 miners anticipating a 21% spending reduction in 2013, to $110 billion.
In general, it seemed like miners were hunkering down, and waiting for the storm to pass, but that might not be the case at all. Despite a call by Glencore Xstrata for a new "age of austerity for miners," as a Bank of America analyst put it, the industry's top miners seem determined to continue expanding production, at least in targeted instances.
Billiton is still weighing the potential of building out its Canadian potash mine despite the collapse of the fertilizer cartel that propped up prices. The estimated $14 billion cost of developing its Jansen mine in Saskatchewan has already had $1 billion worth of prepatory work done on it, and the miner's CEO says Billiton needs to look out tens of years into the future at potential demand to determine whether it will be moving forward, and that looks encouraging. It subsequently committed to spending another $2.6 billion over the next four years to install the essential infrastructure and utilities for the site.
For its part, after putting a "for sale" sign on just about everything, Rio Tinto continues to set the bar higher for its Australian iron ore output, noting earlier this year it had planned to invest an additional $5 billion into expansion of its Pilbara iron ore mine, even in the face of a likely supply glut that will last through 2018. Vale, while cutting back output slightly this year to 320 million tonnes, will be expanding capacity by nearly a third by building out its Carajas iron ore project in Brazil's Amazon, with capex spending to hit almost $20 billion by 2018.
Although there are conflicting reports about how much China's economy is slowing, the fact that it's still expanding well ahead of everyone else provides much of the impetus behind these moves. So we will see many areas of the industry continue to withdraw from the field of battle; but those that might best, or at least initially benefit, from Chinese economic growth will continue to grow their base.
Investors would be well advised, then, to look at the financial strength of miners, and strategically choose the ones most able of riding out the storm, even as they plan for their future exploits.