Base metals stocks, like gold stocks, nowadays offer some enormous investment opportunities. They fell so low, along with most base metals prices that, particularly with the improved economic recovery in the U.S. and in some other nations, and with China showing some positive growth indications again, there is relatively little downside remaining. Indeed base metals stocks have been some of the best performers so far this year as they have risen off their nadirs. And in the junior sector in particular, selective stock picking—i.e., those with good projects, the finances to survive any continuing price malaise and successful management teams—should, like similarly placed gold juniors, ultimately pay off in spades. It may yet take time, but picking the absolute bottom in stock prices is more a matter of luck than judgment. The best most investors can hope for is picking stocks near their bottoms and when there looks to be little downside risk as at present, this has to provide some great opportunities.
But it is not only the juniors which will benefit from an upturn in metal prices. The base metal mining majors, and the big diversified miners, will also benefit strongly from a global economic pick-up, with far less investment risk involved—and also offer the additional benefit of regular dividend payments which does not apply to most juniors. The leverage involved in any pick up for the big companies is obviously far less than from a potential high flying junior, but the latter remains more of a gamble—although again the better juniors could also provide more immediate, but perhaps smaller, gains if they are swallowed up by a bigger company. We have already seen some interesting M&A activity and there will undoubtedly be more as companies with financial strength look to improve their medium to long term growth potential through acquisition.
The other factor in favor of the bigger mining companies—mirrored also in the precious metals sector—is that, often under new leadership, they have been looking much more closely at rationalizing operations with a particular emphasis on controlling capital, operating and administrative costs. The good times did lead to the ball being dropped in some aspects of cost control and this returned to bite them with the falls in metals prices.
As an indicator of how far the base metals miner stock prices fell the particularly hard-hit Canadian S&P/TSX Capped Diversified Metals and Mining index fell to a four-year low last year, having dropped by almost 60% from its early 2011 peak leading to the mining companies ditching CEOs and some top executives, postponing expansions and new project developments - and in some cases dropping them altogether and generally attempting to cut costs across the board. In the latter they were helped by contracted organizations—engineers and project management companies having to cut their charges as the move from glut to scarcity had a similar impact on them too. Manufactures also needed to make concessions as waiting lists for major equipment items disappeared.
But there has been something of a pick-up since, despite continuing low prices for copper and aluminum—the two biggest elements in the base metals sector, both of which plunged to low points at the beginning of the current year, but have picked up a little since. Looming shortages have seen zinc prices, in particular, rise and nickel and lead have also seen some good counter-trend strength too as prices have been stronger although still well below historic highs.
While the perceived U.S. "recovery," however dubious the government statistics, will have had an impact, it is still China and its growth pattern which remains the key. Even a weak growth year sees a 7% plus rise and there is a growing realization that the Asian dragon economy seems unlikely to collapse in tatters as it has to maintain growth to assuage the expectations of its massive population for growing wealth and advancement.
What we are seeing now is a typical cyclical pattern of base metals price rises and falls, and which looks to be on the up again. The pattern develops thus. Demand rises, prices accelerate, the mine developers bring on massive new projects and expansions to meet perceived demand growth. Demand falters, leading to a glut of supplies and price collapses. Major mining companies are pressured to cut back on expansions and new projects and close unprofitable operations. Then demand picks up again but the project cutbacks and mine closures mean there isn't sufficient supply to meet it. Prices rise and the whole cycle begins again.
The China fuelled growth of the past decade or so led to the coining of the term supercycle and there is huge argument amongst economists and market followers as to whether this "supercycle" is over or not. But one suspects that in reality the supercycle in some form or another is here to stay failing some enormous global environmental disaster or conflict decimating world population. Global population growth is accelerating as are the expectations of people for better living standards. China is the prime example of this, but it is also happening elsewhere. Rising living standards demand more 'stuff' and this can only be provided by producing more resources with which to make it. Thus the supercycle remains alive and well, although perhaps not quite as strong as it was pre the 2007/8 global financial crisis, and the recent downturns almost certainly just represent a blip in continuing global growth.
So, on the base metals investment sector which is purely supply-demand driven, certainly the medium to longer term outlook has to remain highly positive. Canada's Globe & Mail quotes Terry Shaunessy, President and portfolio manager at Shaunessy Investment Counsel thus:"This is an industry that was absolutely savaged. It's not unlike what happened with American banks. The downside risk was almost zero, because expectations, there weren't any. All you're really waiting for is the cycle to get going."
So, long term investors should see the recent base metals malaise as providing a distinct investment opportunity. If one does one's due diligence in stock picking carefully there could be some huge gains ahead. Avoid the dogs and almost any solid base metals miner, developer and better explorer should generate some substantial rewards in the pipeline in the medium to long term. Pick carefully, buy, and hold should perhaps be the mantra here and wait for the next down cycle to reappear before divesting. Easier said than done but such a policy could serve you well.
Lawrence Williams
Mineweb
