INSIDE INVESTOR: What's held the big miners back?

For an investor, it’s been a funny old resources boom. Our economic growth has been strong, cash has flooded into the country, the volume of minerals being loaded onto ships continually breaks new records and the dollar has soared.

But investors in the big miners have been sorely disappointed. For the past two years, as the investment phase of the mining boom has peaked, our big miners have gone nowhere. Even as the stock market rallied all through last year, the big miners lagged the race. When it comes to resources, it has been the big energy stocks like Woodside and Santos that have rallied as energy prices rose.

What has held the big miners back has been their spending. Until late last year, they were committed to pouring the vast bulk of their earnings back into the business, to expanding their existing mines, buying new companies and looking for new deposits.

Our big financial stocks and major industrials instead looked at paying a greater proportion of earnings to shareholders. That has attracted investors and boosted share prices. Investors in those sectors have been greatly enriched, while those investing in resources have been left behind.

That picture gradually is changing. The big miners such as BHP Billiton and Rio Tinto both have launched themselves into a major cost-cutting regime. They’ve jettisoned many of their expansion programs and have underperforming businesses up for sale.

It is clear both have decided to deliver a greater share of earnings to shareholders. But don’t expect things to change in a hurry – running a mining group is a little like steering an aircraft carrier. It takes forever to shift course.

The other problem facing the big miners is that commodity prices are likely to fall. Most of the demand has been driven by China’s phenomenal growth in the past decade. While demand is likely to be maintained, China’s growth is moderating. That is happening just as supply is increasing. So in the medium to longer term, pressure is likely to be exerted on prices.

That means bigger, lower-cost producers will be the ones who will survive and prosper. If they can lower their costs and deliver a greater share of earnings to investors, the fruits of the boom may yet materialise.

But beware of high-cost operators or those with too much debt.  If metal prices do fall, these companies will struggle.