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George Osborne and other threats for commodity investors
The biggest risks facing investors in mining firms are posed by government actions and mining company management teams having too much cash, according to Evy Hambro, manager of BlackRock's World Mining Trust.
The biggest risks facing investors in mining firms are posed by government actions and mining company management teams having too much cash, according to Evy Hambro, manager of BlackRock's World Mining Trust .
Political risk is usually associated with countries like the Democratic Republic of the Congo or Zimbabwe, but Hambro pointed to UK chancellor George Osborne's North Sea oil and gas tax grab, announced in last week's Budget, as an example of government intervention becoming mainstream.
Investors in commodities are used to hearing good news about commodities and positive stories still dominated the agenda at a roundtable held by the Association of Investment Companies (AIC) in London on Tuesday. However investment trust managers Evy Hambro, Catherine Raw also of BlackRock, and Will Smith, who manages City Natural Resources and Geiger Counter , outlined some of the areas that investors that could pose a risk to commodity investor returns.
Hambro pointed to Osborne’s increase in the North Sea levy on oil and gas production from 50% to 62%, which analysts said had an immediate impact on the value of North Sea oil fields. The chancellor hopes the levy will raise £2 billion in taxes to fund a cut in petrol taxes.
Concerns about the impact of the tax increase have been growing since last week's announcement. The Norwegian state-controlled oil firm Statoil has stopped its North Sea operations in order to assess the tax implications. Osborne told MPs on the Treasury Select Committee that '[Statoil] just want to talk to us about their investment plans' and defended the tax as 'perfectly reasonable.'
However Hambro used it as an example of the political risks that investors in commodity firms now face as governments deal with rising commodity prices. He said that government action of varying degrees of severity been seen in countries as diverse as the UK, Australia and Zimbabwe.
Another key concern for investors was the ability of companies to handle the huge piles of cash they were accumulating on the back of high commodity prices.
Hambro said: 'Companies today are generating a lot of money and we want to make sure that the management teams of those companies are good guardians of that money.’ He said: ‘Companies are awash with cash and the temptation to do M&A is very strong and it's one of the risks we’ve highlighted.’
He was concerned that managers could make poor acquisitions, adding: ‘The risk is very much alive but it is reduced somewhat by the attractive valuations (of commodities companies) we’ve seen.’
However it was also pointed out that government intervention was the reason why some of the larger mergers and acquisitions had not gone ahead. Catherine Raw said that Citigroup research showed that last year had been a record-breaking year for M&A in medium and smaller mining firms, particularly in gold.
Smith said that in his view the danger came from the markets: ‘The biggest risk is another market meltdown like we had in 2008.’
Hambro also said that another risk to commodity investors was a slowdown in demand from China and other emerging markets.
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In this guide to investment trusts, produced in association with Aberdeen Asset Management, we spoke to many of the leading experts in the field to find out more.
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