Every passing week moves the world closer to recovery of the mining commodities market and towards the next up-cycle. It is comforting that over the first three months of 2016 most mined commodities, including precious metals, have seen substantive price gains. The harsh reality is, however, that price recovery is not yet adequate to guide longer-term market performance and potential investment decisions with confidence. The market can – and likely will – take longer to recover than one can remain solvent, paraphrasing John Keynes, the famous 20th-century British economist. Best-in-class major mining companies operating best-in-class assets can provide unparalleled insights to market recovery as they have front line experience and are sometimes even powerful enough to influence the market. Observations of Rio Tinto and BHP provide powerful insights. Re-diversification: CEO Andrew McKenzie recently hinted that BHP is considering acquiring additional copper assets, signaling its intention to continue to grow the copper business, and to strengthen it as one of BHP’s four core business pillars: iron ore, coal, copper and petroleum. The need for additional growth in BHP’s only base metal core business pillar, clearly demonstrates faith in a timely recovery of both copper price and demand, especially from China. They are similarly signaling a reduced reliance on bulk commodities such as iron ore. Rio Tinto and several other major miners appear to be adopting a similar growth stance for copper assets. The approach to copper assets is sensible, especially in the context of China. China is in transition from an investment-led economy (which drives demand for bulk commodities) to a consumer-driven one (which tends to favour consumption of copper and other base metals). BHP and other major miners are in tune with the world’s engine of growth – the economic development of China. Re-conversion: Rio Tinto recently announced, through a JV agreement with Sino-Steel of China, that it is extending its long-term Pilbara iron ore supply contract for five years, at up to 70 million tpa. During CEO Marius Klopper’s leadership, BHP was the evangelist for conversion of the global iron ore seaborne market from a long-term-contract model to a spot-market model. This maximizes producers’ pricing advantage in a sellers’ market. The conversion was a huge success; iron ore now has an active spot and futures market with massive liquidity. Rio Tinto’s recent long-term contract extension is a potential sign of a shift back to a long-term contracted supply and pricing model, driven by the expectation that the market will not be a sellers market again for several years. Rio Tinto appears likely to maintain its expectation of a more balanced iron ore market for the foreseeable future, and possibly continue seeking additional opportunities for contracted supply rather than relying essentially on the seaborne spot market. Reverting to a long-term contract model could produce a healthy market, as upstream iron ore suppliers and downstream steelmakers are both capital-intensive. Under this structure, miners and steelmakers can obtain capital more effectively and allocate it efficiently, relying on secure long-term contracts. 90-day payables Last week, Rio Tinto announced an extension of its supplier payables from 45 to 90 days, but the plan was later abandoned under pressure from both suppliers and governments. Last year, Rio changed its payables term from 30 to 45 days, while BHP also moved its payables to 60 days about 18 months ago. The post super-cycle saw lower earnings, write-downs, minimizing expenditures and modifying or eliminating dividends. Even first-tier mining companies such as BHP and Rio Tinto are squeezing working capital and maximizing cash liquidity by extending vendor payment terms. This ready source of cash for miners fosters liquidity, especially when commodity prices hit rock-bottom territory following the seemingly endless super cycle. However, it shifts enormous stress onto vendors, many of whom are also facing reduced demand for their products. Despite a shift towards growth of copper assets, iron ore remains a major source of income for BHP and Rio Tinto. Both companies are major suppliers of the commodity, which has surprisingly exceeded all price expectations in 2016 by selling in excess of $60 tonne FOB China at times. While the iron ore price has reached an unexpected high this year, going forward it is expected to be volatile for some time to come before we can reasonably expect any consistent and sustained recovery. （Written by: Sandy Chim, President and CEO, Century Global Commodities Corporation）