All boom times come to an end, and the credit-fueled frenzy of the late-great-consumer debt bubble is no longer bringing seemingly insatiable global demand to the resource and mining sector. 2005-2008 will undoubtedly be remembered as the best of times for the industry, as investors scrambled for a piece of the ‘commodities story’. But times have changed. As usual, those easy money days led to some poor allocation and management decisions which are resulting in write offs and management changes now at the top.
“The world’s major miners have been through a leadership revolution. On Thursday, Rio Tinto unceremoniously dumped Tom Albanese as its chief executive. Cynthia Carroll quit as Anglo American’s AAL.LN +0.74% boss last October, while BHP Billiton BHP.AU +0.11% has begun looking for a replacement for CEO Marius Kloppers. Xstrata XTA.LN +1.45% CEO Mick Davis, meanwhile, will leave once the company’s merger with Glencore GLEN.LN +1.36% goes through.
It marks the unofficial end of a remarkable decade or so. China’s emergence certainly stirred up the once moribund sector, driving higher commodity prices. By mid-2008, even weak performer Anglo’s stock had racked up a total return of more than 400% relative to the start of 2000.
[image]But as time has worn on, the benefits have increasingly been lost on equity investors as mining executives have been gung-ho about investing in new capacity. From 1999 to 2007, mining companies delivered an average annual return of 18% on newly invested capital, Citi estimates. From 2008 to 2011 that declined to a negative 11%.
The history of mining is one of high prices engendering overinvestment timed exquisitely to coincide with a slowdown. This time isn’t different… See: Miners’ Musical Chairs Heralds the end of era
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I’m anti-miner – not for the reasons Danielle is, but because I see little actual price discovery left in the Marketplace and the miners are a testament to that. I wrote this about 6 -months ago:
With all the fraud, manipulation and corruption in the Financial Markets – and this includes support by the Exchange Stabilization Fund, The President’s Working Group on Financial Markets, The London Interbank Offered Rate collusion, the looting of clients supposedly segregated funds of Sentinel Management Group, MF Global, Peregrine Financial and ‘yet-to-be-announced’ countless others – there is no longer a ‘free market’. Tiny Ann Barnhardt doesn’t mince words and belts out “If you’re still in these markets you’re either stupid or on drugs!”
But what is becoming almost comical is hearing analysis and experts prognosticating on directions since it is essentially moving based on debt crisis fear, falsified government reporting data or Federal reserve, Global Central banks, LTRO etc. intervention by fabricating currency and/or supporting Bond purchases and bailing out banks. “Risk On” / “Risk Off”… Total BS.
It’s actually worse than that though. If we can accept a couple of general concepts:
1) that a total lack of viable price-discovery has absolutely removed any formula of stock-analysis. NOTHING consistently rises or falls with valid day-to-day, or often longer, expectation. Charting, except in the case of a extremely long-term historical context, has become totally meaningless.
2) we can mathematically conclude that every major investment bank (include governments) are debt-laden beyond any recoverable state if balance sheets were ever marked-to-market. The implementation of Derivatives was simply a mask to cloak a lack of financial buoyancy.
3) With Interest rates – essentially the cost of money – suppressed, the market bottom-line pricing is distorted with no hope of recovery.
Solvency and its pretense requires liquidity to maintain mere existence.
With short term control of the markets through high-speed trading, massive shorting or a number of other positional slight-of-hand ministrations – none the privy of the average investor, by the way – Investment banks reap profit. Corruption? Really? In the Financial world? JP Morgan, as one prominent example, shows 60 consecutive successful trading days sparking Reggie Middleton to state that it is as “honestly as conceivable as leaping off the Empire State Building and landing safely in San Francisco”. Whose money are they taking, anyway? Yours! – IF you have anything in the markets and are incapable of trading more than 100 times a second or predicting and initiating large irrational shifts. Simply put you are at the whim of the casino and the longer your dollars stay ‘invested’ (a misnomer at this point) the greater the chance of individuals being fully separated from their wealth. Sounds like fiery Ann is spot-on.
Governments won’t lose till after they have exhausted their ability to sustain their control which includes taxation and its most covert form; unbridled printing of currency. Your currency. The former can have limits (prior to ousting political power from TweddleDum to TweedleDee or, at the extreme, risking social unrest) but the latter, now in practice by all relevant countries, robs your purchasing power without your direct consent. It is giving you an unauthorized cut in pay, snatching grapes out of your grocery cart, confiscation of your hard-earned savings account, watering down your morning O.J. .
So you can’t hide in the Stock Market with any assurance, If you keep your money in cash and you walk around the block it’s worth less than when you took the first step. Every major ‘G’ country now offers a negative yield.
Gold, and its bargain-basement sister Silver, stand alone as a no-brainer for those who don’t have ability to keep large drums of Petroleum on their back porch.
But here stands the problem. Even those cognoscente of the ever-so precious metals trust that the mining stocks will reflect Au + Ag’s inevitable rise substantially surpassing their spot gains. So far it has been incorrect, but it’s not the most advanced form of naiveté. Remember the 70s? Yes, a handful of the 1000s of mining stocks went ballistic and made some individuals richer than astronauts. Ditto for the Great Depression. Bravo. But, of course, the greatest predictor of future behavior is… past behavior. Or in this case – recent past behavior. How have the mining shares performed compared to their physical counterpart so far? Shouldn’t they be joined at the hip? They have severely underperformed through no fault of their production, their proven reserves, their estimated, their strong management. They have underperformed because they are manipulated by the Goldman Sachs-types of this world! Allowing them to rise and crushing them back down makes significant scratch for the desperate bankers. If you don’t believe that you are as delusional as a Mongolia-wine-swilling Fleckenstein. But they are producing Gold! and Gold is worth $XXXXX? They will have other problems, energy costs, strikes, fires, floods, nationalizations – real or insinuated issues – they will be restrained. And the what may be the biggest one – your profits are denominated in increasingly failing paper. The price of Gold will be somewhat irrelevant… until it isn’t. But by then the miners will have other problems – taxation by broke governments, enticing nationalization attractiveness, takeovers that leave shareholders SOL… Okay, some will sky-rocket (not the ones you own – the ones Goldman Sachs owns) and do you think that the ridiculously broke government – who makes all the rules – is going to let you get rich on your dart-board picked (may as well be) miner? Okay, that is naive. When the ‘windfall’ tax on mining share profits is enacted no one will protest because the rest of society will be hurting – and you, the greedy gold -hoarders, will be blamed for much of the financial ills. You don’t have lobbyists, you don’t have a loud voice – you are less than %1 of the population as Eric Sprott keeps reminding you.
Wouldn’t having to deal with slower growth affect most other sectors as well?
“The history of mining is one of high prices engendering overinvestment timed exquisitely to coincide with a slowdown.”
The same can be said for the stock market.
Also, wasn’t it Samuel Clemens who said that a mine is a hole in the ground with a liar standing next to it?
20 years in the mining sector, Andy Hoffman is now totally out of ‘paper’ and 100% in physical…
http://youtu.be/TyK3epLcFKs
Cheers,
Gary
Yes
Hey, Danielle:
Thanks for two, very worthwhile talks at the VRIC this weekend! I am totally on board with your thinking that we are going into recession and to expect a market correction, but I was wondering if the current actions by Abe in Japan could affect the timing of the market correction as all the big money invested in Yen needs to find a new home that isn’t crashing. If that came flooding into the S & P, gold, etc. what then? Thanks.
Yes, but not all sectors are impacted in a negative way. The necessary and unfortunately, necessarily forgotten sector sacrificed at the altar of greed, our environmental sector will benefit from the respite. Perhaps the brief interlude will be sufficient to allow voices lost in the madding crowd to be heard. World population is exploding as arable land, clean water and breathable air is disappearing. Do the math.
The mining sector has benefited from a number of trends in the past, say 20 years.
1. Keyword: China
2. About 700 to 800 million consumers (North America, Europe, Australia) approaching and reaching their “Peak Spending” years. See Harry S. Dent Jr.
Now with the chinese and japanese economy slowing down and 750 million people past their “Peak Spending” years demand for commodities only have one way to go; Down !!!
In other words: I am NOT surprised.
However with all the money being printed around the world will this not put a floor under commodity prices if not send them higher. A case of too many dollars chasing too few metals and commodities. ?
The economic “miracle” has a price…..got coal!
http://www.theverge.com/2013/1/16/3881898/nasa-photos-of-beijing-smog-air-pollution-from-space
Don’t hold your breath about ‘going down’. And BTW, good old Harry Dent(ed) folded his DENT fund about six months ago, threw in the towel. He got beat, fair and square. With all this financial repression, Zero interest rates and QE to infinities….he didn’t have a chance. GROWTH! Thats where we are all headed. ALL ABOARD!
Population exploding? I heard it was beginning to fall again…am I misinformed?
How long do you still believe the “Financial Repression” Myth ? It’s NOT the FED (or the ECB, BoJ, BoC, etc.) that determines interest rates but “Mr. Market” that determines rates !!!!