Dryblower discovers his glass is half full and better times beckon

IT’S not easy being an optimist in the mining world when prices are low and gloom has a grip. But at a risk of falling out of step with his pessimistic friends, Dryblower is increasingly confident that the worst of the 2013 crash has passed.
Dryblower discovers his glass is half full and better times beckon Dryblower discovers his glass is half full and better times beckon Dryblower discovers his glass is half full and better times beckon Dryblower discovers his glass is half full and better times beckon Dryblower discovers his glass is half full and better times beckon


Tim Treadgold

Recovery, however, will not be consistent, starting as it always does at the top of the food chain – with the big miners benefiting while the small miners wait for the trickle-down effect, and explorers with no source of recurrent income waiting even longer.

Evidence to support this theory of revival, which cynics may find easy to dismiss because of ongoing doubt about growth in China and fear that Europe may spend another decade (or two) in recession, can be found in several places. These include the US stock market, metal prices over the past 30 days and the share prices of mining’s “big four”

BHP Billiton, Rio Tinto, Glencore Xstrata and Anglo American are the big four that Blower watches closely, because whether you love them or hate them, what they do sets the tone for the rest of the mining sector.

Three of the four have filed their latest quarterly reports over the past week and while each had a division (or two) that was travelling roughly, the overall trend was pleasing – a fact supported by the reaction of investors who have been quietly re-rating the industry leaders.

The trick in this exercise is to adopt a “glass half full” view of the world rather than a “glass half empty”, a view that tends to linger for months after a market has turned for the better – in precisely the same (but opposite) way hope of a revival lingers after a downturn has started.

In today’s market, the glass-half-empty brigade can still point to worrying aspects of the global economy, slack mineral demand and mixed results from individual operating divisions of the big four.

BHP Billiton and Rio Tinto, for example, appear to be excessively reliant on their iron ore units at a time when there are doubts about future iron ore demand in China.

Anglo American has a basket of troubles in its platinum operations, has a sputtering iron ore operation and is just coming to grips with big cost blowouts at a number of development projects.

Glencore Xstrata is heavily exposed to several of the worst-performing minerals, including nickel and coal, and remains a business that is hard for investors to decipher because of the way it mixes commodities such as copper, zinc and cobalt with rice, wheat and sugar.

Perhaps Glencore Xstrata as the new kid on the block is blazing a trail that others will follow, but there is really something odd in a quarterly report from a mining company that includes sections dealing with rice milling, oilseed crushing and pasta – yes, pasta.

Shuffling along from the grand “all-commodities” experiment that is Glencore Xstrata and sticking with the big picture and its rosy glow, it is interesting to focus on two sets of data, share prices and metal prices.

Since July 1, BHP Billiton, the biggest of the big four, has seen its share price climb 9.8%. The glass-half-empty believers will dismiss this as unimpressive, while the glass-half-full believers will say “wow” that means $9.6 billion has been added to the market value of the company in just 15 trading days.

Rio Tinto, interestingly, is up by almost the same percentage (9.7%) over the same time, and Anglo American and Glencore Xstrata are not far behind on the London Stock Exchange.

False dawns are a common sight at this stage of a commodity price cycle and a retreat back to the low point of a few weeks ago is possible.

It is also possible that the price of copper will slide back to its recent low point of close to $US3 a pound, and nickel will revert to $6/lb though the trend in both of those commodities has been quite interesting since the start of July.

But the fact that most impresses is the strength of the revival in the US economy, which is being reflected in share prices, job creation and the start of fresh industrial investment thanks to the continued priming of the economic pump by super-low interest rates and cheap energy.

Yes, there are doubters and yes there are many investors who worry about an outbreak of inflation, but alongside the record-high share prices there is the power of low energy prices, low wages and an increasing flow of US exports.

The next few months will prove (or disprove) the optimism of the glass-half-full advocates, but Blower is in that camp – with fingers crossed!