Is now the right time to invest in mining? A research analyst weighs in
Timing is everything. It’s a saying that can apply to a lot of situations, and finance is certainly one of them—whether you’re looking at buying and trading stocks or acquiring a property or business, the right timing is crucial. Even the smallest price fluctuation can have major consequences, and the most successful businesses are those who know exactly when to strike.
With commodity prices falling, many in the mining sector have been wondering if now is the right time to buy. To tackle that question, CNBC recently interviewed Paul Gait, senior research analyst for metals and mining at investment research firm Sanford Berstein.
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When asked if the sector has a “buy” rating at current commodity levels, Gait gave a confident yes. “We’ve maintained a buy throughout this kind of weakness,” he said, acknowledging current prices as a flaw in the industry—especially in the iron ore market—that must eventually be righted in order to avoid serious consequences down the line. “If we look at the kind of levels of cash that the mining industry typically generates, and needs to generate in order to maintain the supply of commodities that are just absolutely essential to the world’s economy, pushing prices down much further than this really starts to compromise that ability.”
In the interview CNBC also asked whether there are many potential buyers on the market looking to make acquisitions. Gait also confirmed this, pointing to acquisitions in the past couple of years including Glencore’s purchase of Rio Tinto’s Clermont Mine in 2013 and Barrick’s recent sale of 50 percent stake of its Zaldívar copper mine to Antofagasta Plc.
“I don’t think it’s a sense that there aren’t buyers for assets,” said Gait. “I think the issue is valuation, not necessarily whether or not there’s an appetite to acquire. [...] I think what there is, is that there’s a mismatch between what buyers want to pay and what sellers want to receive. So the buyers want to pay on-the-spot commodity prices, and sellers want to receive on what they think is a longer term equilibrium fair value. It’s that discrepancy that’s causing the slowdown in M&A activity generally in the sector.”
For a more detailed analysis, check out the whole interview here at CNBC.
Copper, iron ore surge as Chinese investors unleash demand
The reopening of major industrial economies is sparking a surge across commodities markets from corn to lumber, with tin climbing above $30,000 a tonne for the first time since 2011 on Thursday.
In the wake of mounting evidence of inflation fuelled by higher raw materials prices, investors are also increasingly focused on when the U.S. Federal Reserve might start throttling back its emergency support.
Many banks say the rally has further to run, particularly for copper, which will benefit from rising investment in new energy sectors. Copper is at the highest in a decade, fueling bets it will rally further to take out the record set in February 2011. Steel demand is surging as economies chart a path back to growth just as the world’s biggest miners have been hampered by operational issues, tightening ore supply.
“The long-term prospects for metals prices are ‘too good’ and point to higher prices in the next few years,” said Commerzbank AG analyst Daniel Briesemann. “The decarbonization trends in many countries, which include switching to electric vehicles and expanding wind and solar power, are likely to generate additional demand for metals.”
Trading house Trafigura Group and several major Wall Street banks including Goldman Sachs Group Inc. and Bank of America Corp. expect copper to extend gains.
Copper rose as much as 1.6% to $10,108.50 a ton on the London Metal Exchange before trading at $10,080 as of 4:07 p.m. in London.
Benchmark spot iron ore prices rose to a record, while futures in Singapore and China climbed.
The boom comes as China’s steelmakers keep output rates above 1 billion tons a year, despite a swath of production curbs aimed at reducing carbon emissions and reining in supply. Instead, those measures have boosted steel prices and profitability at mills, allowing them to better accommodate higher iron ore costs.
Spot iron ore with 62% content hit $201.15 a ton on Thursday, according to Mysteel. Futures in Singapore jumped as much as 5.1% to $196.40 a ton, the highest since contracts were launched in 2013. In Dalian, prices closed 8.8% higher.
Erik Hedborg, Principal Analyst, Steel at CRU Group commented: “Recent production cuts in Tangshan have boosted demand for higher-quality ore and prompted mills to build iron ore inventories as their margins are on the rise. Iron ore producers are enjoying exceptionally high margins as well, around two thirds of seaborne supply only require prices of $50 /dmt to break even.”
Still, some analysts including Commerzbank’s Briesemann expect a short-term correction as metals become detached from fundamentals. There’s also a risk that China could engage in policies that may cool demand for iron ore and copper.
The metals rally has boosted concerns about short-term Chinese demand. Some manufacturers and end-users have been slowing production or pushing back delivery times after costs surged, while weaker-than-expected domestic consumption has opened the arbitrage window for exports.
Tin climbed as much as 2% to $30,280 a ton on the LME, boosted by rising orders for the soldering metal. Tin is at the highest since May 2011, with a 48% gain this year making it the best performing metal on the LME.