Don’t Count The Miners Out Just Yet

Yes, labor and energy costs are going up.  Yes, geo-political risk is a problem.  Argentina is nationalizing…who’s next?  But there are also some good things happening for some of the miners, especially the ones with geographic diversification and a strong balance sheet.  I am seeing miners taking advantage of low interest rates to lock in 3-4% long-term financing.  Shaving off huge interest costs can do a lot to help defray the cost of higher energy and labor (which is still cheap no matter how you slice it).  And miners are seeing the costs of developing new projects escalating prohibitively, which makes miners who had the foresight to develop their plays in 2008-2010 all that more valuable.  Gold and silver miners are fortunate because even when inflation bites on the expense side of the equation, revenues more than make up for it.  I also think miners are wising up and holding back delivering inventory when the price is not to their liking.  Miners have gone from hedging the price of gold, to not hedging, to actually holding gold on their balance sheet as an investment.  What better endorsement of the commodity can you get!

Newmont (8.5 forward PE) announces earnings tomorrow and Barrick (6.5 forward PE) on May 2.  If I’m right saying that the analysts have been overly harsh on this sector, be prepared for a hot time in mining shares as we head into the coming debt ceiling debate and election fiasco season.

3 comments to Don’t Count The Miners Out Just Yet

  • Rojelio

    It’s not clear from this article what happens to your investment when the mines get nationalized.

  • Before replying let me give you a little credibility background. For the past 20 years I have been the personal CPA and financial adviser to Mack Rankin, one of the co-founders of Freeport McMoRan. (Just in case you are wondering whether I actually know what I’m talking about) During my tenure I have learned that investing in miners is not for the faint of heart, particularly during political transitions and upheavals. That said, my experiences have taught me two things: 1) talk of taxing or nationalizing mining companies is politically popular during elections and 2) when the rubber meets the road few governments are interested in visiting upon themselves the ramifications that come from killing the golden goose (metaphorically speaking) – namely 1) the headaches that come from trying to actually run a mine when you have no experience doing so (mining companies are smart, they rarely use indigenous people as anything other than low level workers) and 2) the alienation of foreign investors (no small thing as foreign investors bring massive infrastructure capital to the table as well as jobs prosperity). There are some countries that actually have massive partially state-owned mining companies like Brazil (Vale), but even these countries are smart enough not to alienate foreign investors. Countries such as South Africa, the Congo, Indonesia, and even Australia realize that it is best to strike a balance between public and private ownership. Talk of large tax increases like you saw in Australia and you are seeing in Indonesia during its present election cycle often amount to just that – talk. Much like labor negotiations, one thing the emerging world in particular has learned is to start high in a negotiation and leave plenty of room to get bargained down. I have also never seen a situation where a mining company was not operating under an international contract of work, thus the miner usually gets something in return for whatever is given up – most times a longer lease term.

    I hope this helps!

  • Fiat Facade

    ANY/ALL paper instruments are phony.

    When the market collapes (as it must), these stocks and companies (no matter what they do or sell) will drop precipitously.

    Caveat Emptor.

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