With all the controversy about whether the metals and mining markets are in a bubble or not, have we perhaps forgotten what a real bubble looks like?
Back in 2000, we bought stocks at insane multiples based on predictions of a future we didn’t even begin to understand. Who could have predicted then how the internet would evolve and how we would use it to shop and search? And who knew how the whole mobile phone and wireless revolution would play out? No one. But that didn’t stop us paying high prices for shares in firms run by people who said they did. That was a bubble.
Then look at today’s Brazil, where anecdotal evidence suggests that the market is looking distinctly bubbly. CLSA chartist Chris Roberts was there last week and came back with a list of worrying signs – the man delivering morning coffee to a local fund management office “also arrives with the day’s stock tips”, and secretarial and back office staff are using multiple IDs to apply for shares in initial public offerings – daily… Worse was the disturbing story told by one CLSA client who noticed that during an examination the doctor kept looking over his shoulder. At a heart monitoring screen? No, “the doctor was monitoring his portfolio online”. That’s probably a bubble too.
But as we point out in sector of the week, the mining sector isn’t in a bubble. Its rise is entirely rational, based as it is on fantastically tight fundamentals, and it’s also far from overbought. How can firms growing earnings at double-digit rates, but still trading on p/es in the early teens (such as Xstrata and BHP Billiton), be considered expensive? sector of the week, you can buy to get in on the boom. But given the recent action in the platinum market (shares in Lonmin, the world’s third-largest platinum miner, soared 30% last Friday on rumours that it was being considered as a takeover target by pretty much every other miner in the market), it’s worth mentioning one smaller one too.
Aim-listed African Platinum (Afplats) has mining rights over an area right next door to the Lonmin platinum mines in South Africa. It has a market cap of £130m, but with an estimated resource base of a huge 100 million tonnes of platinum group metals, it surely looks like a pretty attractive takeover target to anyone wanting to get into the platinum business (which, with the price of the metal having recently hit a 25-year high of $1,013 a troy ounce, a great many people do). The shares jumped 36% as the Lonmin rumours kicked in, but if the bids start coming through, I think they’ll still look cheap at the price.