We’ve had it so good, for so long, with small cap miners. But what’s this…?
Since hitting a peak at the turn of the year, London’s mining index has lost 12% of its value. Last week alone the index lost 10%.
Investors have seen the share price of some of the favorite junior miners – including Nyota Minerals (NYO), Goldstone Resources (GRL), African Eagle (AFE) – slip as much as 30% from their highs. Is this just a blip or should investors be worried?
That’s what I’m looking at today. And I start with an interesting parallel from history.
Andronico Luksic, the late owner of the Chile’s massive Antofagasta mine, started his immensely successful business career by selling copper for the post-war reconstruction of Japan. As his successors view the present day destruction of Japan, they must be wondering whether just such an opportunity has arisen once more.
The earthquake that struck Japan has sent tremors through the mining world, adding to the jitters that have been building in recent weeks. Yet clearly the Japanese quake cannot be held responsible for any of the retreat that happened before last week.
So what has caused this pull-back?
Why mining stocks are falling
There are a number of factors behind the falling share prices of mining stocks:
Retreating metal prices
Prices of most metals, both industrial and precious, have retreated from their highs. Copper is down from $10,200/ton to $9,040/ton, and nickel from over $29,000 to $25,670. Other industrial metals show a similar pattern. Gold is off from $1445/oz to $1424/oz, while at $35.8/oz silver is below its recent $36.6/oz high.
Capital raising
Mining projects need regular dollops of cash. Executives know that they must hold out the begging bowl when investors are feeling in a generous mood. In the first two months of the year AIM-listed mining companies raised £344m. In recent days Stellar Diamonds (STEL), Sirius Minerals (SXX) and Hambledon Mining (HMB) have all raised new money from investors.
But neither of these factors should worry investors unduly. Metal prices enjoyed a strong run up in the second half of 2010. The reversal of metal prices hardly constitutes anything more serious than profit-taking. Crucially it has very little impact on the very positive economics of mining projects.
As for the recent instances of capital raising, there is little sign of any acceleration of last year’s pace, when £1.6bn was raised for AIM-listed miners. And while miners at the development stage are raising cash, producers are handing it back by the shovel-full. Antofagasta (ANTO) itself announced last week that it would hand a massive $1.1bn back to its shareholders in June. To the extent that its shareholders are mining funds or other dedicated mining investors, I would expect much of that money to be reinvested back into the sector.
No, the real cause of the jitters is neither of these things, but something entirely more worrying. It’s the creeping political antagonism towards the international mining industry that I discussed last month in this column.
World governments start seizing mining assets
Last month I reported that the main talking point from the Indaba Mining Conference in Cape Town was the increasingly strident calls for mine nationalization by opposition politicians. These have been strenuously denied by the South Africa government.
The debate has highlighted the uncomfortable truth that while foreign owned mining companies the world over are enjoying spectacular profits, the countries in which they operate feel that they are not benefiting to the same extent. Tensions are evident around the world.
In some countries this is all too predictable. Zimbabwe, for instance, is to establish a sovereign wealth fund to own up to 51% of all mining companies operating in the country, effectively nationalizing its key resources.
In the Ivory Coast where fighting has erupted since defeated President Laurent Gbagbo refused to step down, Cluff Gold (CFG) has been unable to secure critical supplies, notably fuel and explosives, for its Angovia mine and has been forced to put it on care and maintenance. Guinea is revising its mining law amidst speculation that the government wants to grab a 33% stake in mines.
But the problems are not confined to Africa. Oxus Gold (OXS) is resorting to international arbitration after its interest in the Amantaytau gold field was seized by parties backed by the Uzbekistan government. And in Indonesia Churchill Mining (CHL) has lost a legal battle to prevent regional authorities from cancelling its licenses to the world class East Kutai coal project.
As metal prices rise, host nations inevitably (and not without some justification) feel that they are being exploited. Political risk is rising and many junior miners are at the mercy of undemocratic governments and corrupt officialdom. The more enlightened nations know that heavy handed treatment of foreign miners will deter investment and hold back their own economic development.
But that won’t necessarily stop them. Investors ignore political risk at their peril. I’m watching developments very carefully and will be advising Red Hot Penny Shares readers exactly what to do with the mining shares in our portfolio and which ones I think they should be buying.
If you’re thinking about buying penny shares in the mining sector, tread carefully. And you’re more than welcome to come along and share the intelligence I’ve already gathered for Red Hot subscribers.