Why the mining sector is booming, not bubbling – MoneyWeek

Investors,saysMontier,are“inlovewiththe‘Chinacangrowtothesky’/supercyclestory”andtheyshouldn’tbe。

Why?

Becausetheyareindangerofconfusing“simplestories”withseriousinvestmentprocessandsobuyingintoa“craze”,regardlessof“thepricetheyenduppaying”。

Montieriswellknownforhisworkonbehaviouralfinanceanditistruethatmanyabubbleisthoughtofasaboomuntiliteventuallycrashes,whensuddenlyeveryonereferstoitasabubble。

Butthereisawaytotellthedifferencebetweenthetwo。

Somethingisabubblewhenstockpriceshavemovedfarbeyondanythingthatcanbejustifiedbythefundamentals(thiswasthecaseinthetechboom,whennooneunderstoodthefundamentalsanyway)anditisaboomwhenpricesarerisingfast,butgiventheunderlyingconditions,thosepricerisesmakesense。

Tous,thecurrentsituationlooksmorelikethelatterthantheformer。

DavidFuller,writingonFullermoney。

com,agrees。

Youhavetoseerisingminerpricesinthecontextofthe“secularuptrend”incommoditiestheworldisexperiencing,saysFuller。

Chinaisstillgrowingataround9%,IndiaatnotmuchlessandtherestofAsiaaround5%,sothedemandforresourceswillincreaseeveryyear,fora“verylongtime”。

Still,thatdoesn’tmeanthatinvestorsshouldbuyindiscriminatelyinthesector。

AstheFTpointsout,theAim-listedexplorationandproductionfirmsdeservealittlemorescrutinythantheyhavebeengettingaftertheir“phenomenal”three-yearrun。

Notethatmanyoftheexplorersinparticularwillneverhaveassetsamountingtomuchmorethanmuddyholesintheground;thatfundmanagersarealreadybecomingmorediscerningaboutwhichonestoback;andthatmanyofthesmallercompaniesthatraisedcashearlyintheboomarerunningoutofmoneyandfeeling“increasinglynervous”aboutwheretheymightgetmorefrom。

Anotherconcernisthatcosts(forlabour,energyandequipment)aregoing“throughtheroof”formanycommodityproducers,saysDailyreckoning。

co。

uk,andcuttingintoprofits–somuchsothat,accordingtoconsensusforecasts,profitsatbasicmaterialscompaniesintheSP500willactuallycomein8%lowerinthefirstquarterof2006thaninthepreviousquarter。

Someofthismaysuggestthatwemaybeseeingamedium-termpeakforsomeminingshares,butit’sworthnotingthatthesesamerisingcostspreventnewprojectsbeingdeveloped,somethingthatwillkeepsupplytightandpricesupoverthelongterm。

Finally,ontheissueofwhetherthemetalsmarketisinabubbleornot,we’daskyoutolookatthep/eratingsofthevariousdiversifiedminerslistedintheUK。

Mostarebarelyindoublefigures–andthat’swithearningsestimatesbasedonassumedcommoditypricesthatarewellbelowtoday’slevels。

Thiswasn’t,andisn’t,abubble,saysMoneyWeekeditorMerrynSomersetWebbinTheSundayTimes。

“Instead,sofar,it’sbarelythebeginningofarealboom。

Mostbullmarketsincommoditieslast15-20years。

Thisonehasbeengoingforamerefive。



Thebestminersinthesector

OnefirmmakinghaywhilemetalspricesboomisBHPBilliton(BLT,1,009p),theworld’slargestminingcompany。

Thefirmrecentlyreporteda45%increaseinfirst-halfpre-taxprofitsto$6bn,saysTheFleetStreetLetter,andnowintendstoreturn£1。

15bntoshareholdersthroughasharebuybackprogrammeoverthenext18months。

Withitssharestradingonaforwardp/eofonly12times,BHPisthe“bestvehicle”tocashinonthecommodityboom。

Buybelow£10ifyoucan,saysthenewsletter。

AnotherfinefirminthesectorisgeneralminerXstrata(XTA,1,739p),saysTheMailonSunday。

Inadditiontobenefitingfromrecordmetalsprices,thegroupisdoingwelloutofthe“strongrebound”incoalprices–totheextentthataboutaquarterofthisyear’soperatingprofitsshouldendupbeingderivedfromcoal。

Thesharestradeonap/eofonly12。

9times。

Finally,forthoselookingfordiversifiedexposuretothesmallercompaniesinthesector,itmightbeworthlookingagainattheAim-listedRABSpecialSituations(RSS,126。

5p),up25%sincewelasttippeditinJune2005。

ThecompanyrunstheRABSpecialSituationsfund,whichinvestslargelyinoilandminingfirms,suchasFalklandsOilGas,andOxusGold。

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