Analysts Advise Investors, “Stay away from the metals mining sector”
$GLCNF, $TCK, $GG, $RIO, $BHP, $LNMIY
Investors in smaller mining companies are likely to suffer further losses as the recent plunge in commodities prices to multi-year lows pushes some firms to the brink of extinction.
Without the heft of a Glencore (OTCMKT:GLCNF), which has suspended dividends, issued new shares and plans asset sales to cut debt after its share price plunged 60% in 3 months, smaller players may struggle to raise new money.
Analysts are advising investors to stay away from the metals mining sector, even though they say a re-balancing of demand and supply could underpin metals prices and improve the prospects of basic resources companies in the longer term.
“The market has to adjust so demand and supply come back into balance. Current developments in commodity prices suggest that it is going to happen faster than people had expected,” said one mining analyst.
“Smaller miners tend to get lower quality assets and lower margins and are more focused on exploration than mining. That is not something people are interested in funding at the moment.”
Shares in small-cap company Lonmin (OTCMKT:LNMIY), once a FTSE 100 constituent, have sunk nearly 90% this year, while First Quantum Minerals has lost about 67% of its share price as investors worry about their earnings and margins.
In contrast, global diversified mining giants like Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP) are down around 20%. They have outperformed Glencore, whose shares fell to an all-time low last Friday despite its more diversified earnings stream from mining and trading.
As falling commodity prices hit profit margins, smaller players’ reliance mainly on single commodities and heavy dependence on lending are making life harder for them, analysts said.
According to Thomson Reuters Datastream, profit margins of European miners have been hanging near record lows, having fallen to about 11% from 17% at the start of the year and from a high of 45% in Y 2011.
It is not a good time to get back into the metals mining sector.
As long as commodity prices stay weak and economic concerns remain there, I do not think participants should include miners in their portfolios. As it is too risky in here to add holdings in the sector as earnings will take a lot of time to recover, but large-cap players are better suited to weather the problems of supply destruction.
Some mining companies are going to be bankrupt.
Some early-stage mining companies hit particularly hard by the fall in metals prices, Copper is at a 6-year low, are shifting away from exploration and starting new ventures like medical marijuana growing.
The small firms usually find the deposits that larger miners acquire and develop into mines. Their search for alternative ventures has given rise to concerns that when prices eventually rebound, there will be fewer junior miners and a reduced pool of new mine prospects. It is not a case of pulling back. It is either full steam ahead or not.
Earlier this month, Goldcorp (NYSE:GG) cut its Y 2015 production forecast for its newest mine, the Eleonore gold mine in Quebec, while in July, Canadian miner Teck Resources (NYSE:TCK) said it needed to cut another 10-M tonnes of production.
Have a terrific week.
HeffX-LTN
Paul Ebeling
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