Unlike almost every other kind of stock, a mining stock’s business is based on using up its assets. In simple words, a mining company makes a claim or files a permit, does all its investigation of any deposit (incl. feasibility study), digs up and sells it on the market. Needless to say, the more a company digs, the more it will profit. Efficiency of processes also plays an important role in mining that can substantially increase company’s profits. While these may be some of the intrinsic factors that helps an investor to monitor the health of the company, there are several extrinsic factors, such as demand of raw materials, economic conditions, etc that can prove both advantageous and disadvantageous to the company’s growth.
Mining stocks, over the last year or so, have shed away approximately 30% in their stock value. So it is not surprising that talks of bounce back this year, has predominately occupied the front stage on most news channel, newspapers, or other financial media. Many analysts suggest that no matter how hard the market slams a stock, there’s always the chance it will come bouncing right back. The extent of the bounce back may vary but certainly cannot be ruled out from the possible outcomes. Also, on grounds of technical analysis, the prices of stocks trading in this sector are extremely low and if a few fundament factors turn in favor, then a bounce back would be imminent.
However fundamentally analyzing these companies and the mining sector, presents quite a different story. With the Europe sovereign debt crisis looming over the markets, which perhaps has slowed down or nullified the growth story of U.S. and also across other regions in the world. Its effects would be directly felt on banking, foreign direct investment and manufacturing industries. Therefore, mining stocks will also be incontrovertibly affected in the process. It was recently learned that some of the biggest names in the industry are reassessing their capital expenditure plans amid escalating cost pressure and an uncertain growth. A recent development in Rio Tinto and BHP Billiton revealed that the companies are re-evaluating plans to spend tens of billions of dollars on vast development projects as growth rate around the world (incl. China) is slow and investors push for a greater emphasis on cost control and returning funds to shareholders. Analysts at Citigroup follow estimates for about forty such mining companies worldwide. In their latest study in April, they expect spending in the sector to rise only 13% this year, down from 34% forecasted a short while ago. Moreover, they now expect a fall in 2013. The study further states that half of the mining companies are considering lowering their budgets compared to less than a fifth three months ago. The cuts would also create a negative sentiment for suppliers to the industry, such as Caterpillar, Joy Global, etc, who would have gained as demand for trucks, equipment, excavators, belt systems and draglines was expected to pick up to feed China’s acquisitive appetite for raw materials. The slowdown in Europe does not help the cause. However, falling capital expenditure could help ease cost increases for labor, equipment and materials in the mining industry.
Considering all these factors, technical and fundamental, a dead cat bounce may be due. As to whether these stocks will really jump up depends largely on the health of major economies that could provide strong demand for mining. Mining is an expensive process and complexities severely affect its margins. Obviously, bigger companies are better equipped to brace against losses but if the mining rate is not met with sufficient demand in the market, the companies are only set to incur losses.