Saturday, September 6, 2008
Mining Stocks and Profits
"Weaker commodity prices and higher costs are starting to take a toll on the global mining industry as the billions of dollars being spent on new projects could take years to recoup. ... But with nickel prices down 60% from mid-2007 highs and mining costs spiraling higher, some analysts wonder if Ravensthorpe will ever make much money at all. ... The turnaround highlights an important change in the world's mining industry. A few years ago, demand was so tight, that almost any new project seemed attractive. Since then, costs have surged and demand has started to wane. As a result, analysts say, some of the newer and higher-cost mines coming online are likely to struggle to deliver returns--even if demand for commodities continues to boom. ... Still, the economics of mining have shifted drastically in recent years. The cost of energy to run mining trucks and other equipment has skyrocketed, while steel and other building materials also are more expensive", Patrick Barta at the WSJ, 25 August 2008.
"Put away that shovel. Mining stocks are getting hurt as investors anticipate a profit squeeze between rising investment costs and falling commodity prices. ... That has left commodities companies trading at historically low multiples of expected earnings, suggesting either the shares are undervalued or investors belive miners' run of profit growth can't continue", Arnidam Nag at the WSJ, 26 August 2008.
The mining industry doesn't need a Fed to tell it how much of any type of ore to produce. High prices cause high costs, not vice versa.
This industry looks cheap to me. Unlike say, banks.