Best of the Week
Most Popular
1.China Crash, Greece Collapse, Harbingers of Stock Market Apocalypse Forecast 2015? - Nadeem_Walayat
2.Gold Price Awaiting Outcome of Greece Crisis - Clive_Maund
3.Gold Price Peculiar 6 Month Cycles - Rambus_Chartology
4.Gold Price Just a Little Bit More - Bob_Loukas
5.8 Unprecedented Extremes Indicate a Stock Market Bubble in Trouble - EWI
6.Gold And Silver – Without Either, You Will Be Greeced - Michael_Noonan
7.Lies, Damned Lies and Statistics - James_Quinn
8.China Crash, Greece Crisis Harbingers of Stocks Bear Market? Video - Nadeem_Walayat
9.Gold and Silver Record Shorting - Zeal_LLC
10.Markets Big Deflationary Downwave Quick Reference Guide... - Clive_Maund
Last 5 days
Stock Market SPX Triggers Sell Signal - 3rd Aug 15
The Gold Investment Demand Juggernaut - 3rd Aug 15
Stock Market Pullback at Hand, Gold About to Rally? - 3rd Aug 15
Gold – The More Hate, The More Bullish We Become - 3rd Aug 15
Stock Market Critical Week Ahead - 3rd Aug 15
Gold Price Near Intermediate Bottom - 3rd Aug 15
Stock Market Reluctant Primary Wave IV? - 2nd Aug 15
Power and Compassion - 2nd Aug 15
Preparing for The Stock Market Crash - Inverse ETFs and Puts Timing... - 2nd Aug 15
Commodity Prices Slump Signals Slow Economic Growth Outlook - 2nd Aug 15
BSE Sensex Stocks Bear Market Underway - 2nd Aug 15
What Microsoft’s Dismal Earnings Report Really Tells You - 2nd Aug 15
Gold And Silver Charts Are The Compelling Story. Fundamentals Do Not Apply - 2nd Aug 15
The Fed Can't Stop the Commodity Bear Market - 1st Aug 15
Meet the Leader Who Turned Google Into a “Buy” - 1st Aug 15
The Greek Coup: Liquidity as a Weapon of Coercion - 1st Aug 15
Gold’s Amazing Resiliency - 31st July 15
Silver – A Century of Prices - 31st July 15
Demand for Gold Bullion Surges – Perth Mint, and U.S. Mint Cannot Meet Demand - 31st July 15
Reasons Why the Greek Crisis Will Only Get Worse - 30th July 15
The War On Cash: Why Now? - 30th July 15
Greece - The IMF Experts Flunk, Again - 30th July 15
Threat Of Cyber Warfare the “Other Reason To Own Physical Gold” Warns Rickards - 30th July 15
The 5 Biggest Myths and Lies about the Middle East - 30th July 15
Greece, Diversion, and the New World Order - 30th July 15
Ibuprofen Warning - The Pain Killer that can Kill You! - 29th July 15
More Ritholtz on Gold, and Another Response - 29th July 15
Crude Oil Price Is Lower – and You’re Richer - 29th July 15
U.S. Home Sales Market Is Dead – This Chart Proves It - 29th July 15
Greece- What Happens When Economists Talk Politics - 29th July 15
The Gold - U.S. House Prices Ratio As A Valuation Indicator - 29th July 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stock Market Bubble in Trouble

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

© 2005-2015 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

Biggest Debt Bomb in History