Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Mining Stocks: How Long Will the Downturn Last?

Commodities / Metals & Mining May 22, 2012 - 06:49 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticleMartin Hutchinson writes: Over the last twelve months mining stocks have substantially underperformed the market.

In fact, the Standard and Poor's Metals and Mining select industry index (INDEXSP: SPSIMM) is off 35% in the past year, while the overall market is up 2.5%.


Admittedly commodities prices are down, but only by 14% in the last year. Meanwhile, the cost of some commodities -- notably gold prices -- are much higher than they were.

Given the buoyancy of global monetary policy, this is surprising. For investors, the big question is: will the downturn in mining stocks last?

It truth, though, when you look more closely at operating numbers, the weakness in commodity shares is easier to explain.

Mining Stocks: Breaking Down Barrick Gold
For example, Barrick Gold (NYSE:ABX), a gold and copper miner that is generally well regarded, posted first quarter earnings which were up just 3% from the previous year. That was a surprisingly weak performance given that its gold sales price was up 22% -- even though its copper price realized was down 11%.

However, gold cash mining costs were up 25% and copper cash mining costs were up a startling 66%. So even though copper production and sales were also up sharply, margins on those sales were down 43%.

In other words, even though Barrick enjoyed a favorable operating quarter with good prices, mining costs for both gold and copper were up so sharply that Barrick enjoyed little benefit from this success.

The same picture is clearly seen around the mining sector, and indeed in the related energy sector.

Strong sales prices over the last few years have had two effects.

They have led producers to extend operations to higher-cost mines that were not previously viable. Further, they have increased wages in the mining sector.

Additionally, energy prices -- which represent around 25% of the operating costs of the average gold mine -- are also higher, putting more pressure on margins.

Naturally, with commodities prices somewhat weak and costs increasing much faster than general inflation, mining profitability has been hit.

A further problem is that, for mining companies engaged in major expansion projects, which many of them are, escalating construction costs have caused them to run seriously short of cash.

That has forced them to raise equity at prices that are currently unfavorable.

The molybdenum producer Thompson Creek Metals (NYSE:TC) is a good example of this. In the middle of a $1.5 billion gold mine project at Mount Milligan, Thompson Creek sold equity shares at 50% of book value.

Even so, many mining stocks are trading at low single-digit price-earnings ratios-- far below the value of their operations.

For these companies, the best solution would be to cut back capital expansion plans as far as possible and sharply increase dividends to maximize the benefit to shareholders.

If that were the case, their stocks would then trade up because of their dividend yields, and shareholders would benefit from both the dividends and the higher share price.

After all, a large surplus cash flow with a mining company is a recipe for trouble in the form of foolish acquisitions or ill-thought-out exploration.

The Fundamental Case for Mining Stocks
Going forward, the outlook for gold and silver prices, at least, remains bright.

It seems inconceivable that the Eurozone crisis can be resolved without the European Central Bank pumping more money into the system, while Federal Reserve Chairman Ben Bernanke needs only modest encouragement to engage in another bout of inflationary "quantitative easing."

Inflation itself has not disappeared as many predicted. It may in fact accelerate quite rapidly if conditions are right, as unemployment has declined and the labor market has tightened.

Further, the deflationary boost we all gained from easier global sourcing and the entry of India and China into the world economy seems to have ended, with both India and China experiencing substantial inflation. For energy and other commodities, the future depends on global growth.

Of course, if China really is entering a downturn, with losses in the banking system causing a recession, then the bull case for commodities such as iron ore and coal is much weakened. With overall inflation continuing, producers of those commodities may continue to suffer earnings stress, and therefore remain somewhat undervalued compared to the market as a whole.

For gold and silver miners, however, the outlook is bright.

Their output prices should increase, while their inputs of energy and mining engineer talent will become cheaper as supply increases and energy prices remain at around current levels.

That should bring them both increasing margins and profits. As gold and silver prices increase, it should also raise their valuations relative to those profits.

In short, if you own gold and silver mining stocks, hold tight. You shouldn't regret it.

Source :http://moneymorning.com/2012/05/22/mining-stocks-will-the-downturn-last/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in