Commodities & Metals
Mining Stocks Undervalued According to BlackRock (BLK, BHP, RIO, VALE, FCX, SCCO)
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Iron ore purchases have seriously begun migrating to the spot market, which is particularly hard on small miners, though less of a problem for BHP, Rio Tinto and Vale. These giant miners can take a longer view of market conditions, and all are spending to expand production to meet growing demand. And demand remains strong to some extent because spot prices are, in many cases, lower than contract prices.
If customer demand continues to be strong, and the iron ore miners are unable to negotiate advantageous quarterly contracts as spot prices decline, then expanded production hardly seems the answer. That is especially the case if production costs continue to rise.
The situation in copper production is similar. China, which is the world’s largest consumer of copper, has been slowing down its copper refining industry and pulling materials from inventory rather than buying more. At some point, the refiners will have to restock, but that day could be some time off. Volatile copper prices are, so far at least, keeping Chinese buyers from making large purchases.
Copper prices have risen from near $3 per pound at the beginning of the month to around $3.40 per pound today, though still well below late July prices of around $4.40 per pound. But unlike the case with iron ore, demand is not as strong and a strike at Freeport’s Peruvian and Indonesian mines is lowering production goals. BHP has delayed some deliveries originally scheduled for the second half of 2011 to next year as it recovers from strike at its Chilean copper mine.
BlackRock’s claim that the big miners are undervalued appears to have merit based on the current state of the market and on expected demand from China. The real question might be one of timing. Iron ore and copper prices are currently low and may still be searching for a bottom. When that bottom is reached is anybody’s guess, but there is little reason to believe that it will happen very soon.
Demand for iron ore and copper remains strong in India and Brazil, while demand from developed countries is steady at best. Without a demand spike from China, though, India and Brazil together will not push prices significantly higher. Increased production and lower customer acceptance of quarterly contract pricing could continue to weaken, if not erode, prices further.
All these mining company stocks posted a new 52-week low earlier this month, although all have begun to climb back. For the past 12 months, BHP is down the least, at 6.5% and Southern Copper is down the most, at 31%. And today, when the DJIA is down about 1.2%, all these miners, except Southern, are down nearly twice as much. BlackRock has not made many converts today.
Paul Ausick
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