Low iron ore prices and the recent Ebola outbreak are causing big problems for West African companies focused on the metal. Is there any way for investors to escape unscathed?
Despite efforts to contain the current outbreak of Ebola, which began in Guinea last year and has since spread not only to various other West African countries, but also to Spain and the United States, the disease remains a problem.
In its latest report on the situation, released on October 10, the World Health Organization states that since October 8 there have been 8,399 “confirmed, probable, and suspected cases” of Ebola and 4,033 deaths. The cases have been reported in seven countries, with Guinea, Liberia and Sierra Leone described as having “widespread and intense transmission” and Nigeria, Senegal, Spain and the US said to have experienced “an initial case or cases, or with localized transmission.”
While of course the disease’s most serious impact is the fact that it’s taken so many lives, it’s unfortunately had a number of other negative consequences. For investors, the key thing to note is that Ebola has created significant issues for mining companies operating in and around the affected areas — for instance, copper and cobalt producers have faced difficulties, while more recently diamond miners have encountered problems.
Currently, however, the sector whose hardships are in the spotlight is iron ore. The metal’s price has been on a downward spiral this year due to increased sales from companies like BHP Billiton (ASX:BHP,NYSE:BHP,LSE:BLT) and Rio Tinto (ASX:RIO,NYSE:RIO,LSE:RIO), and the Ebola outbreak has further hurt smaller companies by prompting investor anxiety about their stability.
For instance, Bloomberg reported on Monday that African Minerals (LSE:AMI) and London Mining (LSE:LOND), both of which operate in Sierra Leone, are down 92 and 96 percent this year, respectively. While the former continues to operate, the latter was “suspended from trading on Oct. 10 after it said the only investors it was still engaged in talks with were those not seeking to keep the company operating.”
Meanwhile, the news outlet states, Sable Mining Africa (LSE:SBLM), which is developing an iron ore mine in Guinea, is down 85 percent so far this year, while Bellzone Mining (LSE:BZM), which is also focused on Guinea, has had its shares suspended.
While those poor figures have resulted in buying opportunities for companies like Glencore (LSE:GLEN), which is rumored to be interested in taking over Rio Tinto, for the most part they do not seem to have brought similar benefits for investors. As The Wall Street Journal notes, while London Mining is certainly a takeover target for major miners, the company has stated that “[u]nder the structures currently proposed, the board believes that there will be little or no value remaining in the equity of the company and the other listed securities of the group.” Not good news for investors.
As a result, many market participants, particularly those involved in the iron ore space, are now wondering about the best way to handle investing in Africa, with some raising the question of whether it’s possible to create an “Ebola-proof” portfolio.
That would certainly be helpful, but as Louis James, chief metals & mining investment strategist at Casey Research, points out in a recent note, it’s easier said than done. ”Unfortunately,” he quips, “with the disease already present in the US and EU, the only sure [way to do so] is to sell everything and go 100% to cash.”
That’s an “extreme” measure, he admits, and also one that it’s too early to take, but it does help highlight the fact that now is not the time for investors to sit idly by. James recommends selling “all stock in companies that rely upon or have close connections to Liberia, Guinea, and Sierra Leone — if not the rest of the countries on the outbreak list, except for the US and Spain,” pointing out that “West Africa’s gold fields are a major source of global mine supply, and if the disease does spread farther across the continent, especially east and south, there could be serious supply issues with copper, uranium, and other metals.”
At the same time, James states, investors need to keep the situation in perspective and not be alarmed by fearmongering. “Think of it as an orderly retreat, made only when necessary in the face of a clear and present danger, such as Mali or Côte d’Ivoire looking like the next Ebola dominoes to fall,” he suggests, concluding that he is “not ready to sell everything in Africa yet.” Investors should certainly be taking a good look at what they believe.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.