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Should You Be Buying Mining Stocks?

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There's a hilarious play called A Tuna Christmas in which two actors together play more than a couple of dozen parts. But the speed of the costume changes the two accomplish pales beside the recent transitions in the mining and metal markets.

Indeed, it seems like just the other day that I was telling my Foolish friends about the world's big iron ore providers, Vale (NYSE: RIO  ) , BHP Billiton (NYSE: BHP  ) , and Rio Tinto (NYSE: RTP  ) , boosting by huge amounts the prices they charged Chinese steelmakers. In just the past few months, however, those prices have done such a 180 that Rio Tinto has cut its production of iron ore by 10% in an effort to affect prices, and BHP thinks that an expected December slowdown in purchases of the mineral by its Chinese customers could be steep enough to chop its full-year volumes by 5% or more.

However, it isn't just iron ore that's been hit by plummeting prices. Add copper, molybdenum, zinc, tin, nickel, and palladium to the list of metals that have retreated from their recent high-demand status. In fact, it wasn't long ago that thieves were making off with a host of copper-bearing entities, from telephone lines to air conditioners, just for the resale value of the red metal inside. No longer.

Since the biggest demand declines have occurred in China, my spouse ties it all to the Olympics, maintaining that the years-long buildup to the gala event led to a steady hike in the demand for all manner of resources. I think she's being a little simplistic, but the fact remains that China's economic growth has slowed by a quarter since last year, as the rest of the world has reduced its purchases of Chinese goods and the country has cut back on its own infrastructure spending.

The effects on the big metals and mining companies have been disastrous. Copper and molybdenum producer Freeport-McMoRan (NYSE: FCX  ) has seen is share price plunge by more than 80% from its 52-week high, while BHP is down 67%, Rio Tinto and Vale are both off 74%, aluminum giant Alcoa (NYSE: AA  ) has shed 78%, and U.S. Steel (NYSE: X  ) is 85% lower.

Have these companies become buying opportunities? My best analysis says not yet. Sure, they're cheap compared even to their early 2008 levels. But unless you can assure me that demand from China and the rest of the consuming world is returning, I'd urge you to give most of this sector a wide berth for now.

Freeport-McMoRan and BHP Billiton are the only Motley Fool CAPS five-star companies mentioned above. Have you rated the members of the group?

For related Foolishness:

Fool contributor David Lee Smith does own shares in U.S. Steel, but not in the other companies mentioned. He solicits your questions and comments. The Fool has a disclosure policy.

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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.

  • Report this Comment On December 04, 2008, at 7:24 PM, 2optomystic wrote:

    I may be too optimistic, but you cannot tell me that when you print billions of dollars purchase your own iou's that real hard assets whether they be copper, molybdomen, silver, titanium or gold will not be inversely inflated in price based on the devalued dollar. Yes, the world will reduce the pace of production, but only the US can justify the logistics to make a penny without copper.

    Even the meek TIE will have to skyrocket with the advent of the new administration subsidy of titanium dioxide based solar sheeting with the ten penny per watt output!

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