Just when it seems that the precious metals markets are at a pivotal turning point, the mining industry isn’t coming along for the ride.
As stocks have crashed in the fist 6 weeks of 2016, gold and silver have been the beneficiaries of a huge wave of safe haven flight. Investors are losing faith not only in central banks but also in the global economy.
In such times of crisis, it’s typical for gold (and to a lesser extent, silver) to see rising demand as investors and managed money allocate more of their portfolios to a hard asset like precious metals. You would assume that the same is true for the companies that actually mine the gold—but not so much. Due to high debt levels and the damage done over the past several years that metals prices have remained low, miners are still attempting to dig themselves out of this hole.
It begs the question: Is the bottom in for the mining industry, or does it have further to fall?
Even Worse Than Oil
Another comparison with the mining sector is worth making. Everyone around the world by now has noticed that dramatic drop in the price of crude oil. Because of the commodity’s central place in powering the inner workings of the global economy, a slump in oil prices has a widespread impact on virtually every other industry in the world. The price of fuel is factored into all prices, whether energy is burned in the process of acquiring, refining, fabricating, or (especially) shipping something.
Although mining plays an important role in these kinds of global dynamics, it doesn’t occupy the same pervasive space as oil. For this reason, investor feelings regarding mining companies isn’t based as directly on the price of the resource they mine (i.e. gold or silver) as it is for oil producers. Instead, like other corporations, the company’s finances and other fundamentals are more important for evaluating their overall health. Moreover, oversupply and the slowdown in China are still dragging on miners everywhere.
When comparing the energy sector to the mining sector, it’s actually been worse for the miners, as difficult as that is to believe. $1.4 trillion in value has been wiped out from the mining sector as a whole since its highs a few years ago. In fact, since its peak in 2011, the mining industry has lost 73% compared to 49% losses for the oil industry.
No Bottom Quite Yet
It makes you wonder: When we will know that the bottom is in for the gold miners? Significantly higher metal prices definitely help, but the rally for the precious metals so far this year shows that this alone is not anathema for the industry as a whole.
Key executives in mining seem to agree. Tom Albanese, a seasoned industry insider who was previously CEO for Rio Tinto (NYSE, LON, ASX, SWX:RIO) and currently serves in the same position at Vedanta Resources (LON:VED), has resisted calling a bottom. Similarly, current Rio Tinto CEO Sam Walsh recently said that the year ahead will be a tough one. Companies have been cutting or eliminating their dividends to shareholders as a result.
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.