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Basic Materials

Digging for Deep Value in the Global Mining Complex

By Roger S. Conrad, on Jul. 22, 2013

Welcome to the bear market for the once-booming global mining complex. With prices of copper, gold and other mined commodities sliding, the stock prices of the world’s largest mining companies have approached valuations not seen since the nadir of the 2008-09 bear market. Few analysts have forecast a rebound for the industry.

Mining companies face real headwinds in the second half of 2013 and beyond. China’s move to diversify its economy away from resource-consuming sectors such as construction has already slowed demand growth for basic materials such as copper and iron ore. With commodity prices sagging, the industry has reined in capital spending on new capacity.

At the same time, higher operating costs have squeezed earnings across the industry–a consequence of the past decade’s construction boom and the then-strength of the home currencies for major miners in Australia and Canada.

This litany of challenges has the market expecting another round of subpar quarterly earnings. Add in the potential for outages at individual mines–always a risk as operators target deeper reserves–and it’s easy to see why the industry has fallen out of favor.

In a July 11 address at Australia’s National Press Club, newly returned Prime Minister Paul Rudd declared, “The truth is in 2013–the China resources boom is over.” Australia’s economy has felt the bite from China’s reduced appetite for imported natural resources; unemployment Down Under has climbed to a multiyear high, and the Australian dollar has dropped to about US$0.90 from about US$1.05 in late April 2013.

The mounting challenges in the global mining complex and negative sentiment toward the group make the present a good time for patient investors to pick up shares of the industry’s highest-quality names at a discount. Although these stocks will likely endure their fair share of volatility in coming months and quarters, our favorites pay a reliable dividend to help compensate for the bumpy ride to an eventual recovery.

Game of Scale

The days when vital resources were cheap, plentiful and readily accessible are long gone. Today’s successful miners must manage increasingly complex operations that often depend on management’s political skills, as well as the company’s expertise in engineering, technology deployment, global logistics and finance.

Mining outfits that fail in any of these areas will come up short, even during periods of robust commodity prices. And when prices weaken, scale becomes more important than ever.

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