Best of the Week
Most Popular
1.Gold Price Trend Forecast, Where are the Gold Traders? - Bob_Loukas
2.Stocks Bear Market of 2017 Begins? Shorting the Dow At its Peak! - Nadeem_Walayat
3.Betting on President Trump Leaving Office Early, Presidency End Date - Betfair Market - Nadeem_Walayat
4.Why Stock Market Analysts Will be Wrong About 2017 - Clif_Droke
5.Is This The Best Way For Investors To Play The Electric Car Boom - OilPrice_Com
6.Silver Price 2017 Trend Forecast Update - Video - Nadeem_Walayat
7.Gold Price Set For Very Bullish 2017, Trend Forecast - Austin_Galt
8.10 Things I learned From Meetings With Trump’s Transition Team - - John_Mauldin
9.How Investors Can Profit From Trumps Military Ambitions - OilPrice_Com
10.Channel 4 War on 'Fake News', Forgets Own Alt Reality Propaganda Broadcasting - Nadeem_Walayat
Last 7 days
The Mother of All Financial Bubbles will be Unimaginably Destructive when it Bursts - 19th Feb 17
Gold’s Fundamentals Strengthen - 18th Feb 17
The Flynn Fiascom, the Trump Revolution Ends in a Whimper - 18th Feb 17
Not Nearly Enough Economic Growth To Keep Growing - 18th Feb 17
SPX Stocks Bull Market Continues to make New Highs - 18th Feb 17
China Disaster to Trigger Gold Run, Trump to Appoint 5 of 7 Fed Governors - 18th Feb 17
Gold Stock Volume Divergence - 17th Feb 17
Gold, Silver, US Dollar Cycles - 17th Feb 17
Inflation Spikes in 2017, Supporting Gold Prices Despite Increased Odds of March Rate Hike - 17th Feb 17
Roses Are Red... and So's Been EURUSD's Trend - 17th Feb 17
Gold Trade Note Sighted - 17th Feb 17
Gold Is Undervalued Say Leading Fund Managers - 17th Feb 17
NSA, CIA, FBI, Media Establishment 'Deep State' War Against Emerging 'Trump State' - 16th Feb 17
Silver, Gold Stocks and Remembering the Genius of Hunter S. Thompson - 16th Feb 17
Maps That Show The US’ Strategy In Asia-Pacific - 15th Feb 17
The Trump Stock Market Rally Is Just Getting Started! - 15th Feb 17
Tesco Crisis - Fake Prices, Brexit Inflation Tsunami to Send Food Prices Soaring 10% 2017 - 15th Feb 17
Stock Market Indexes Appear Ready to Roll Over - 15th Feb 17
Gold Bull Market? Or was 2016 Just a Gold Bug Mirage? - 15th Feb 17
Here’s How Germany Buys Time From China - 15th Feb 17
The Stock Trader’s Actionable Guide to Trump - 15th Feb 17
Trump A New Jacksonian Era? The Fourth Turning (2) - 14th Feb 17
Stock Market Yet Another Wall Street 'Witch's Brew' - 14th Feb 17
This Is Why You Don’t Own A Lot Of Stocks - 14th Feb 17
Proposed Tax Reforms Face Enormous Headwinds - 14th Feb 17
BBC Inside Out Tesco Rip off Offers - Determined to Lose Big Spend Customers! - 13th Feb 17
Is the UK An Economy Built on Debt? - 13th Feb 17
Stock Market VIX Cycles set to Explode in March/April 2017 – Part 2 - 13th Feb 17
Stocks At Record Highs - Will Uptrend Accelerate? - 13th Feb 17
US Dollar: 'Rumors of My Death are Greatly Exaggerated' - 13th Feb 17
Is This The Top Commodity Play For 2017? - 13th Feb 17
Trump a New Jacksonian Era? - 13th Feb 17
Stock Market at High Tide - 13th Feb 17
Channel 4 War on 'Fake News' Ends - The New News Age - 12th Feb 17

Market Oracle FREE Newsletter

State of Global Markets 2017 - Report

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

© 2005-2016 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

Catching a Falling Financial Knife