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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.