Anglo American and BHP Billiton

Anglo American's production from SA in the June quarter underlined foreign investors' fears about the risks to local miners.

It contrasted with a more upbeat report from BHP Billiton, even though some analysts expressed doubts about the wisdom of Billiton's increasing iron ore production into a weak market.

After plunging sharply in April, Billiton's share price has been recovering this month and gained another 800c on the JSE after its production report. At R280, the share is 22% higher than a year ago, despite generally weak conditions for commodities markets.

Anglo's share price, which has shed 21% over the past year to around R204, was flat after the production report. Andrew Keen, global head of metals & mining at HSBC, said in a report last week entitled "The supercycle ends - again" that at meetings with investors, HSBC had found Anglo was the stock that generated the least serious interest.

"For global and UK generalist investors, mining is a sector they don't feel that they need to own, and Anglo American, with its poor news flow stemming from political risk in SA, challenges in restructuring platinum and delivery of key projects such as Minas-Rio, is a problematic stock compared with its peers. The new CE, Mark Cutifani, has a challenge to reverse this negative momentum."

But Keen said the market was probably underestimating Anglo's ability to deal with its challenges and HSBC believed it would successfully negotiate a reasonable restructuring at Anglo Platinum and control cost increases.

Anglo reported a small dip in output from Kumba Iron Ore in the June quarter compared with the March quarter as Kumba recovers from a strike at Sishen late last year. Though platinum equivalent production from Anglo Platinum rose 2% to 594000oz, it would have been higher if it were not for illegal strikes.

The thermal coal operations in SA were mixed while diamond production from Venetia (about 80km west of Musina) fell 60%. Cailey Barker, analyst at Numis Securities in London, said Anglo's performance was "overall not a great set of results, especially when compared with the better results from the other majors.

"We expect the stock to remain less attractive with exposure to the weaker commodities and ongoing issues in SA, especially upcoming labour negotiations and Eskom power price hikes."

All Billiton's major commodities, with the exception of nickel, which was slightly down, increased output on both a quarterly and annual comparison, though its petroleum division was held back by maintenance and drilling delays in the Gulf of Mexico.

In particular, Billiton reported a strong rise in copper production in the June quarter and its iron ore mines, mainly its interest in Western Australian Iron Ore (WAIO), grew output 19% quarter on quarter to 47,7Mt. Billiton said WAIO's 2014 year sales would rise to 207Mt (100% basis).

Investec Securities' global natural resources team described Billiton's production report as "more positive than negative".

Billiton, Rio Tinto and Anglo American have all taken big bets on iron ore. For Anglo, its biggest expansion project is the Minas-Rio iron ore mine, pipeline and port in Brazil, which will cost about US$8,8bn to produce 26,5Mt/year in the first phase, starting production in the second half of next year. But it is widely speculated that Anglo will mitigate its exposure to the project - currently running over budget and behind schedule - by bringing in a partner.

Last week benchmark iron ore prices rose to a two-month high of $127/t, but Barker said in a note to clients that reports on iron ore were mixed. Some sources suggested restocking was taking place as steel mills were operating at low levels but others suggested bids for cargoes remained low, as steel mills were cautious about the higher prices.

HSBC's Keen said in the group's latest Metals Quarterly that widespread expectations of looming large surpluses in iron ore were unlikely. Iron ore production will adapt to demand and prices will be underpinned by the higher-cost Chinese producers.

Keen forecast prices to average $115/t in the fourth quarter of this year and $123/t for the full year. The bearish view held by some analysts of prices at $80/t-$90/t is unlikely to materialise, Keen said.