Too Much of a Good Thing for Miners?

Breezes are better than hurricanes, and showers are preferable to downpours. Too much of a good thing can really be a downer.

It's a similar thing with the recent enormous rally among shares of virtually all metal miners, from BHP Billiton (NYSE: BHP  ) to Yamana Gold (NYSE: AUY  ) -- too much, too soon. Although I expect a broad recovery for commodity stocks to become a theme for 2009, I think we still have a mammoth near-term obstacle to overcome: fourth-quarter earnings.

Although markets are forward-looking, earnings are the spectacles they must peer through. Third-quarter results from the industry were painful enough, but metal prices deteriorated further through the Q4. Gold managed a nice recovery to end the year, but silver, copper, nickel, molybdenum, and zinc all continued to flounder. The abrupt declines sent miners such as Freeport-McMoRan (NYSE: FCX  ) and Rio Tinto (NYSE: RTP  ) scrambling to rein in production and placed this Fool on alert for a most challenging fourth-quarter earnings season.

I have chronicled how the zinc effect had an impact on mining costs even for gold miners, including my top stock pick for 2009: Agnico-Eagle Mines (NYSE: AEM  ) . Weak copper prices helped transform Teck Cominco (NYSE: TCK  ) from a titan to the Titanic. The pitfalls for the upcoming earnings season, however, don't stop at low metal prices. Curtailed production volumes will reduce revenue streams, increased borrowing costs will eat into net profits, and stalled mine-development projects by the likes of Anglo American (Nasdaq: AAUK  ) will force restatements of forward guidance. Meanwhile, I believe the sheer complexity of issues facing the metal miners right now makes estimating earnings a tricky game, so we can only hope that analysts came through with sufficiently pessimistic earnings estimates.

Too much of a bad thing is clearly a downer, too, so what's the bright side to all of this? Even if the market reclaims some of the recent gains as earnings hit the wires this time around, I believe that a long and sustained rally remains in the cards for the best-positioned miners. Hiccups within a rally are part of the process, and I welcome some near-term declines to set the stage for the next phase of recovery for the miners of metals.

Further Foolishness:

If you believe that China will be a keystone to recovery for countless companies with exposure there, then consider taking the Motley Fool Global Gains newsletter service for a 30-day spin. The Global Gains team watches China carefully as part of its search for exciting and Foolish investment opportunities around the globe.

Fool contributor Christopher Barker is the commodore of copper and the Colonel Klink of zinc. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna.  He owns shares of Anglo American, Agnico-Eagle Mines, BHP Billiton, Freeport-McMoRan, Teck Cominco, and Yamana Gold. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 806089, ~/Articles/ArticleHandler.aspx, 9/2/2014 5:20:41 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement