An interesting look at diversification in the metals & mining industry from The Economist. In short, diversification is all well and good, as long as that diversification is into good quality assets…

…whereas Rio Tinto has doubled down on iron ore, BHP also invested in oil and gas—in which it has nothing like the same heft—at the height of the shale boom. Their differing strategies are a good test of the merits of diversification.

Paul Gait of Sanford C. Bernstein, a research firm, says that because of BHP’s weak position in oil, it is suffering from the same cost pressures that it is inflicting on its competitors in iron ore. He calls it “nemesis to their hubris. They are in oil what they are attempting to destroy in iron ore.”

Whatever they do, mining companies will now be required to demonstrate that the assets they have are high quality and capable of generating cash even in hard times. The trouble is that as they attempt to focus, as Anglo American is doing, there is no guarantee they will be able to sell their non-core assets for a high price. Acquirers, as one analyst puts it, only want the family silver, not the dross.

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