Geology or geography?
Miners should spread their risks across countries as well as minerals
THE past half-dozen years have been kind to miners.
China is gobbling up minerals as fast as they can dig them up.
Commodity prices have surged, dipping only temporarily after the financial crisis of 2008. The doldrums of the 1990s are a distant memory.
Well, almost. The share prices of big mining firms have wobbled in recent weeks, as jitters about the global economy have intensified.
But profits are ballooning. On August 24th BHP Billiton, the world's largest miner, unveiled record annual profits of $23.6 billion.
Not long ago Rio Tinto, another Anglo-Australian giant, reported record profits for the first half of the year.
The other big global miners—Vale, Xstrata and Anglo American—are raking in mammoth sums too.
Vale， Xstrata 和Anglo American，这三大全球采矿业巨头也捞到了大笔利润。
Investors should be celebrating.
But Rio missed analysts'forecasts and investors were quick to question the company's strategy.
Their main concern is that Rio earned nearly 80% of its profits from a single commodity: iron ore.
That makes it vulnerable to price swings, and it is not alone.
Vale, a Brazilian miner, gets a hefty 60% of its revenues from iron ore.
And last year it sold most of its aluminium business, thus putting all its eggs in an iron basket.
There are two theories as to how miners should spread their risks.
One is that they should diversify by geology.
That is, they should dig up lots of different minerals, just in case the price of one of them collapses.
That was the thinking behind the mega-merger that created BHP Billiton in 2001.
It also explains why Xstrata and Anglo American operate so many different kinds of mines.
A rival theory holds that miners should worry more about geographical diversity than the geological sort.
Some analysts believe that because China's appetite for minerals is growing so fast—it already consumes around two-fifths of the world's output of industrial metals—prices can only go up.
They talk of a “supercycle” of 20-25 years of high demand.
The big threat now is not that prices will fall but that governments will seek to grab a greater share of miners'profits, predicts Grant Thornton, a consultancy.
So miners should spread their political risk by digging in multiple countries.
BHP is doing well by following the first theory. It wants to become a large supplier of potash, a base for fertilisers, and recently spent $12.1 billion on Petrohawk, an American shale-gas firm, to add to an energy business that already accounts for a fifth of its profits.
But the second theory is gaining followers.
Several cash-strapped African governments are looking hungrily at miners'bulging moneybags.
Tanzanian politicians are mulling a supertax on miners.
Namibia and Zimbabwe have plans for the “indigenisation” of mining assets—ie, forcing miners to sell or hand them over to locals.
Peru's new government pledged to levy a windfall tax, but has since agreed merely to negotiate a better deal for its treasury.
Trouble can arise in unexpected places: in 2010 Australia's government tried to impose a mining supertax.
A campaign by big miners forced a climbdown and cost the prime minister his job, but Australia will now slap a tax on iron ore and coal mining.
Anglo American illustrates the dangers of geographical concentration.
The firm was originally South African, but moved its headquarters to London in 1999.
It still relies on South African assets for 40% of its profits, however. Whenever a South African politician talks about nationalisation, its shares react as if whacked with a shovel.
One ruling-party firebrand talks of seizure without compensation.
His views will probably not prevail, but Anglo is investing heavily in Latin America and elsewhere, just in case.
Miners have so much cash that they are sure to splurge on further acquisitions.
To guard against future adversity, they would be wise to seek both kinds of diversity.
For political winds are as unpredictable as swings in commodity prices.