Mining Finance and Investment
October 9th, 2008 | by mantrionline |The good, the bad and the ugly. Pick the right mining stocks.
Currently in Jo’burg as the excrement hits the fan. Here the optimistically described Rainbow Nation has something to be glad about. Exchange controls have cushioned much of the South African banking system against the flood of global toxic debt, virtually bankrupting financial establishments throughout much of the rest of the world.
And of course Johannesburg is Egoli - the City of Gold - to Africans across the subcontinent. Here is the real foundation of the worldwide gold sector and where yesterday’s equivalents of today’s Russian oligarchs made family fortunes which persist to this day and saw the foundation of such massive mining companies as Anglo American, Gold Fields and De Beers. And with gold being one of the few assets which has largely sustained its value as stocks and many other metal prices have crashed as big, highly leveraged, investors have had to liquidate virtually everything and anything to stay afloat, Johannesburg could well benefit from the current turmoil more than most other financial centres around the world - assuming domestic politics doesn’t get in the way.
That is not to say there aren’t pockets here which are suffering hugely. South Africa is home to around 80 percent of world platinum reserves and the Bushveld Complex, not that far away, has an inordinate number of new platinum mining projects on the drawing boards - or approaching production to mine a metal whose price has crashed by well over half in just a few short months. At the beginning of the year South African power supply problems, coupled with an anticipated deficit in world production, even without such local difficulties, saw prices rise to new records and platinum juniors were king of the roost. Now a good proportion of them are just struggling to stay afloat and the odds are against a number of them succeeding in doing so.
Gold miners too, despite the relatively steady performance of the gold price, have found the investment scene far from positive. Gold stocks have been sold off as any liquid assets are having to be sold, so we have the strange situation of the gold price holding value relatively well, but gold stocks tanking along with virtually every other stock market sector. Recently has been a time to be in physical metal and, perhaps, in ETFs rather than stocks. Small gold companies may well go to the wall through lack of finance to keep them going in these troubled times. Others will disappear into the maws of those who do have cash and longer term plans. Many predict the metal price will soar as the disastrous financial news seems nowhere near over yet and more flee to the comfort of the yellow metal. It may not be blood on the streets, but the whole situation is worryingly destabilising for many economies.
Those who had the foresight to pull out of the markets early and keep their assets in cash will have the opportunity of buying back in at a substantially lower cost, and if they can call the bottom of the market, will likely make fortunes as long as they are selective, because the good stocks have been brought down alongside the bad and the ugly. Financial meltdown can be no respecter of quality, but ultimately quality will pull through and these troubled times could be fortune-makers for those with strong nerves and cash in hand.
My colleague, Barry Sergeant, has already here pointed to the huge disparity between the performance of physical gold and gold mining and exploration stocks see Sell bullion, buy gold stocks. This has to create almost unparalleled investment opportunities for the investor who does his/her homework. But even in the cases where the metal prices and stocks have both fallen substantially, one needs to look for oversold situations too and platinum and uranium may both provide excellent examples of this. Bulk commodity stocks focused on products like iron ore, coal and potash, have also been decimated, while the companies concerned may actually be raking in record profits. This makes little sense in a normal market situation.
But then the market is not normal. Once panic sets in selling begets selling. Computer stop loss sales are initiated adding to the selling pressures and the market may be being driven down way beyond sensible levels, which is exactly what we are seeing today.
