Monday, December 14, 2015

In the midst of gloom and doom a bottom in resource stocks?

Two recent items I have read lead me to believe we are near a low in resource markets:


Asset sales and layoffs, the legacy of too many high-cost projects dating back to the pre-crisis boom, will shrink the company’s staff by a third over the longer term.

Global mining giant Anglo American Plc said Friday it will shed tens of thousands of jobs in the next couple of years and might put up more assets for sale as it battles an accelerating slump in metals prices that has dragged its shares down to a 13-year low.


Anglo, the world’s fifth-biggest diversified global mining group by market capitalization, said it would cut about 6,000 of its almost 13,000 office-based and other non-production roles globally, 2,000 of which will be transferred through the sale of some assets. In the longer term, Anglo, which employs 151,000 staff worldwide, aims to reduce its workforce by about a third, it said.

When one of the largest mining companies in the world announces it is basically going into survival mode one can be assured that future supply of metals will be constricted. Other large mining companies have also announced production and project cutbacks.

The suspension of dividends is also a clue we could be near a bottom.

Last week, Anglo American (LON: AAL) and Freeport-McMoRan (FCX) decided that (for the health of their companies' futures) they will stop paying dividends, cut their workforces, and try to survive.

 Next to fraud, this is about the last thing a company wants to admit. Dividends are considered sacrosanct – especially in this market environment where it's hard to get yield anywhere else. So they must really be desperate.

 That sounds like a bad thing, and perhaps it will be this time. But that's not what history suggests...

 It's not the first rodeo for either of these firms. They've both suspended their dividends at least once in the past 20 years. Freeport did so on December 9, 1998 and December 3, 2008. And Anglo did it on February 20, 2009.

These dates roughly coincided with bottoms in metals and mining stocks

Now it is no guarantee that we are near a bottom but this is still compelling evidence. One must remember that what makes these types of stocks so lucrative is their volatility. The volatility is based on the constant swings in long term supply and demand. All mines and wells are depleting assets. Therefore as the resources deplete constant replacement must occur. In the context of a lower price environment like we are experiencing today companies do not invest in replacement reserves which inevitably leads to the next bull market in prices. I am going to print out a copy of the linked article and see if in fact history does in fact repeat. 

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