Higher for longer: it’s all upside for mining stocks if restraint is shown – by Robert Guy (The Australian – February 14, 2017)


American writer Mark Twain may have dismissed mines as a hole in the ground with a liar at the top, but the surge in the share prices of some of the world’s largest dirt diggers shows that many investors are buying into the hopes of sustained strength in commodity prices.

The reversal in fortunes has been stunning: BHP Billiton and Rio Tinto rallied 83 per cent and 75 per cent, respectively, over the past year. But those returns look a little meagre compared to the 190 per cent gain recorded by South32 and the massive 300 per cent gain notched up by Fort­escue Metals as prices for iron ore, coal and copper have marched higher on hopes for a stabilisation in Chinese growth and a Donald Trump-inspired US infrastructure boom.

Iron ore, which sold for $US38 a tonne in December 2015, now fetches about $US87.

The latest batch of quarterly production reports from Australian miners underscored just how much low prices have helped to concentrate the minds of executives on what’s important: lower cost production, sweating assets harder and cash flow generation to fund higher dividends and buybacks after a few lean years for beleaguered shareholders.

But here’s the thing: miners didn’t fully profit from the strength in commodity prices. Realised pricing, or what miners actually get, fell short of spot prices due to the lagging nature of some contracts.

It’s that lag between prices that investors will need to keep in mind as miners report their results over coming weeks.

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