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Where the smart money's been going in global mining

How and why the prices of 100 particular mining stocks have risen by an average of more than 500% (each) in the past seven months.

Author: Barry Sergeant
Posted: Tuesday , 02 Jun 2009

JOHANNESBURG -

Yesterday's news, and perhaps tomorrow's, is that the dollar is in a bit of a funk that may extend for months; the more useful news is that global stocks, in general, have risen now to seven month highs, as illustrated by the level of the benchmark MSCI world equities USD index. This broad measure, buoyed by the effect of strongly rising emerging market stocks, has outperformed the likes of the Dow Jones Industrial, S+P 500, and DJ Stoxx 600.

Within the global stock markets universe, listed mining stocks have staged the leading recovery, in percentage terms, from price troughs, generally seen during October and November 2008. This is a notable performance, given that banking stocks, especially in certain well know countries, were severely sold down; some disappeared or were swallowed up by bigger rivals. The world's biggest 100 mining companies, by market value, have now bounced by 141% on average, measured on a weighted average basis. Confidence in mining stocks has increased for fundamental reasons; among the latest, China's manufacturing has expanded for a third successive month, and the country has increased fuel prices.

Seen over the past 12 months, the best net price performance has been delivered by listed primary silver producers, led, in turn, by London-listed Mexican miner Fresnillo, followed by specialist miners of copper, zinc, gold, tin, nickel, uranium, iron ore, molybdenum, coal, potash, platinum, and, finally, oil sands.

There is only a limited degree of correlation between the order of these performances, and changes in underlying dollar commodity pricing. Thus while dollar gold bullion is currently within a hair of its 12-month, and all time record, high, gold stocks generally have been outperformed by primary silver miners. Dollar silver bullion is around 18% below its highs, but its bounce from the bottom of 88% has outperformed the comparative 45% number for gold bullion.

The comparison is starker when listed gold stocks are compared with copper peers, given that dollar copper prices are currently just over half the record levels seen in mid-2008; in other worlds, roughly 50% below highs. One possible explanation is that copper (and many other) stocks were oversold during the market panic in the latter part of 2008, while listed gold stocks, supported by a relatively stronger commodity, fell by less.

At the corporate level, there is no question that for months if not years, the price outperformance of dollar gold bullion has enabled established producing gold miners to maintain a superior status among global companies. Measured on absolute profit margins, however, there is little, if anything, to compete with the phenomenal margins still obtained by the seaborne iron ore businesses of Vale, Rio Tinto, and BHP Billiton. Seaborne iron ore constitutes one of the best franchises in the world, and goes a long, long way to explaining why the three senior members of the group are also the world's three biggest mining companies, measured by market value (capitalisation).

For investors with a good appetite for risk, there are two further themes that have gained strong momentum across the global mining scene. The first one is simply bottom feeding, seen either where a stock has been extremely oversold due to high debt levels, or where it has been particularly smashed up due to country circumstances. Russian miner and steelmaker Evraz encompasses both themes.

Debt-laden Evraz was extremely oversold due to hysterical market panic in its home jurisdiction, further weakened by the virtual absence of a retail investment market. Given the ongoing change in sentiment for stock markets in general and materials stocks apparently in particular, Evraz has been performing as a multiple theme recovery stock.

Evraz's dollar stock price has risen nearly 600% from its low points. Further on these themes, debt ridden global diversified resources stock Teck and Russian potash miner Uralkali have each bounced by more than 500% from price lows. Bumi Resources, a big Indonesian coal miner, has bounced by nearly 800%. JSC Polymetal has soared on several themes, including Russian jurisdiction, and production of silver and gold.

Mining companies have increasingly shown an ability to raise substantial capital outside the banking system. Thus Teck, in spite of a substantial debt load, recently raised USD 4.2bn by issuing term notes over five, seven and 10 years. In one of the biggest equity issues of the year, diversified miner Xstrata raised the equivalent of USD 6.8bn in an issue that was hugely dilutive; the fresh stock was sold for GBP 2.10 a share, way below current trading levels around GBP 7.30 a share. Alcoa, another debt challenged miner, raised USD 788m in a rights issue at USD 5.25 a share; the stock is now changing hands around USD 9.22 a share.

Listed gold stocks have been most commonly seen in equity issues this year; among the larger ones, Newmont raised USD 1.3bn by issuing 34.50m new shares, Kinross raised USD 361m by issuing 20.90m new shares, and Newcrest raised the equivalent of USD 610m by issuing 27.80m new shares. There are mining stocks that were literally sold down to a penny a share, but were soon rerated on one of more positive themes. London-listed Australian gold digger Norseman Gold has risen by more than 2,000% from the penny-a-share level, Century Mining, a Canadian and Peru gold digger, has risen by a similar amount after falling to a Canadian penny. Investors are increasingly prepared to award the meeting of delivery targets, as seen in the extreme cases of African and Australian gold digger La Mancha Resources, where a stock price increase of more than 2,000% has been noted.

Investors are equally prepared to bet on what may be considered to be extreme speculative situations; New Dawn has risen by more than 2,000%, not least on the promise that its Zimbabwean gold properties may now start doing something. Great potential discoveries - which need not be in gold - have been rewarded in a good number of cases, not least Azteca Gold; Extract Resources, in Namibian uranium, while great (gold) drill results may also do the job, as seen in the case of Sandfire Resources.

The possibly undervalued subsector of iron ore miners has attracted strong recent interest, being most extreme in established London-listed Ukrainian miner Ferrexpo, and London-listed African Minerals, which remains highly speculative on an apparently giant, but low grade, find in West Africa, with stock trading supported by apparently inexhaustible rumours of a takeover. The African Minerals stock price has risen by nearly 2,000% from its low points.

Investors are also taking bets on some of the members of the most heavily oversold subsectors; Australia-listed SA Metals, with interests in South African platinum group metals properties, has soared nearly 2,000%, somehow assisted by a recent name change, while Kopane Diamonds and Pangea Diamondfields have risen above their peers in terms of price performance, as has Opti Canada on its premium Canadian oil sands delivery.

Finally, an earlier, but persistent theme remains in place, as in potential takeover targets, exemplified by the likes of Greystar, Moto Goldmines, Athabasca Potash, and Osisko.