Things don’t seem to have gotten any better for the mining sector after shares of the major miners recently bounced from their lows. This reprieve hasn’t significantly shifted the near-term outlook for the mining industry, as the slump for commodities does not appear to be abating anytime soon.
This macroeconomic development, among other things, it continuing to weigh on the miners.
BHP Billiton Damage Control
BHP Billiton Ltd. (NYSE, ASX:BHP) is one of the industry’s biggest players across a number of different resources (by some measures, the biggest) with a market cap of nearly $74 billion. The company took a hit that anybody in mining desperately did not need when a dam broke at one of its Brazilian mines two weeks ago, releasing a torrent of toxic mine trailings (i.e. waste) into the Minas Gerais province. (Minas Gerais translates to “General Mines.”) There were at least 9 deaths as a result of the accident.
Many local groups across South America have protested against and voiced frustration with the big mining firms. These multinational’s presence in their homeland is seen as both a form of global imperialism and an environmental threat to native communities. Brazilian prosecutors plan to seek $260 million in damages from BHP and its partners in the project.
Glencore On the Ropes
Glencore Plc. (LON:GLEN), another mining giant, has been struggling with an ambitious debt-reduction plan as tumbling commodity prices leave the company with a staggering $45-billion drop in market cap. (Glencore currently has a market capitalization around $13.5 billion.) Even though the firm has succeeded in meeting its immediate milestones in cutting debt, leaving most of its debt obligations 20 and 30 years into the future, the economic environment is as unfavorable as ever.
GLEN has been the worst performer on London’s FTSE 100 stock index, losing close to 70% year-to-date. While the free fall has been astounding, it’s difficult to reverse amid multi-year lows for a range of commodity prices. As China’s commodity boom slows, some wonder if the company will ever recover.
Putting It in Perspective
A recent article by Bloomberg columnist Barry Ritholtz on Mineweb explains an important concept: Owning shares of gold miners is a trade, not an investment. Why is this distinction worth noting? Because even though holding stock in mining companies is a way to get exposure to the gold market or to other commodities in general, it’s subject to far larger swings-and-misses.
Ritholtz says, “I am tempted to conclude that the miners are a trading vehicle, not an investment. They have great years and terrible years, but not all that many in-between years.” Moreover, much of the appeal of the miners has been replaced by ETFs that are backed by gold (rather than miners with proven gold reserves, yet unmined). Ritholtz closes by repeating, “The key point is that if you want to take ownership of gold miners, you better understand what you are doing. You are making a trade, not a long-term investment.”
Luckily, when you own physical precious metals, you don’t need to worry about being “nimble” (as Ritholtz puts it) in order to get the most out of your asset. You can just stack for the future and sleep easy!
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.