Sylvain Brunet is the number one analyst in the metals and mining sector and fifth overall in the Thomson Extel Survey’s pan-European ranking.

Until 2004, resource specialists were the only fund managers interested in metals and mining stocks.

Then commodity prices started to rally, resource stocks started to outperform strongly and generalists were attracted, exaggerating the trend.

Brunet says he had to adapt his research approach: “We had to detail most of our assumptions and discuss the sensitivities of earnings and valuations to volatility in commodity markets, to enable non-specialists to gauge risk-rewards more easily.”

Some of the non-specialists are now specialists with as much as ten per cent of their assets invested in commodities.

Disclosure
Metals and mining companies have had to become more transparent in the past three years.

Brunet says there has been a great improvement in the level of disclosure on costs by mining companies, “as cost pressures were shaving some of the profits from surging commodity prices”.

He is also finding that steel companies are becoming more confident in expressing their market views.

“What we are still missing sometimes is more disclosure on detailed divisional reporting, all the more so after some mergers or acquisitions have taken place,” he says.

There is only one company in Spain that is “still missing the point” when it comes to market communication.

“It doesn’t hold conference calls after results, nor does it host capital market days,” says Brunet. “Instead, it disseminates information to locals, clearly breaching market rules on equal and even communication.”

Management meetings
Although Brunet meets top management on roadshows or at conferences, one-on-one meetings are pretty rare.

“It is crucial to me to understand the psychology of people in charge, more so than any concrete piece of data that would help our modelling work,” he says.

Brunet is keen to hear more from chief executives on medium- and long-term market trends.

“Long-term metal price assumptions and long-term returns on capital employed have the main influence on company valuations in our space,” he says. In times of short-term volatility, “transparent disclosure on costs and prices would help in restoring confidence”, he says.

Similarly, he says, when prices reach unjustifiable levels – such as nickel hitting $50,000 (€37,000) a tonne earlier in 2007 – “it would be reassuring for investors to hear IR teams on what a justifiable price would be, instead of the usual ‘we don’t comment on prices’.”

Brunet would also like CEOs to be more forthright in stating their companies’ main sources of competitive advantage and even commenting on their competitors.

The latter, he says, would help analysts to set the best companies apart. Companies with effective risk management systems might also get a fairer valuation in periods of increased volatility if they improved disclosure about risk.

Arcelor Mittal
The merger of Arcelor and the former Mittal Steel, and consecutive deals, such as Tata Steel and Corus, triggered market discipline and shed a new light on the sector, says Brunet.

Valuations in the sector have moved from four to five times EV/Ebitda in 2004 to six or more today. “We continue to feel that the sustainability of free cash flow generation at Arcelor Mittal is under-appreciated by the capital markets,” he says.