We were once very intense commodity bulls at MoneyWeek. Back in 2001 or so, around when we started trying to persuade you all to buy gold, we also got into the idea of the commodity supercycle. Then, prices of almost all commodities – from sugar to silver – were languishing at ludicrously low levels. Yet exploration had collapsed. There was very little new supply coming online, despite huge (and obvious) demand down the road from fast-developing emerging countries. Prices had to go up. And so they did.
We got nervous on all this a few years ago, and have been avoiding the industrial miners in particular for a while. This week, however, our cover story suggests you might like to buy back in. We still think China will see a hard landing, and we still think the global economy is in a bit of a pickle growth-wise. No change there. But it is worth remembering a few things.
First, even a slowing or rebalancing China will still need a good supply of commodities to keep going. Second, commodities aren’t all about China – even as recently as 2004, Japan was the world’s biggest importer of iron ore. And third, investing isn’t about growth, it is about price.
If you buy something for a price that already reflects every possible element of a happy future, you are highly unlikely to make money. But if you buy something at a price that reflects expectations of untold misery, it takes only one nice surprise to turbocharge your returns. Right now, many of the big (and the very small) resources companies we look at are very cheap indeed. Look at the Baker Steel Resources Trust in this week’s cover story. Not only has its share price fallen 50% over the last year, but you can now pick up its shares at a huge discount to its net asset value. Which is nice.
Still not convinced? I have – among the millions – a note from Aviate Global on my desk. Their analysts point out that the price of shares in Rio Tinto usually tracks that of iron ore reasonably well. At the moment, however, the two are diverging: iron ore has risen to over $120 a tonne (well above analyst estimates for the year), but Rio shares have been gently falling for months. To Aviate, that doesn’t make sense.
If you look at the iron-ore price and then add in “renewed cost control”, the effects of a weak Australian dollar, and some growth of production, they say, it seems that we could easily be seeing a trough in Rio earnings. Assume this is so, says Aviate, and buyers will find they are able to pick up the shares at almost half the price-to-earnings ratio they paid at the bottom of the last trough in 2009.
All misery can be overdone. We aren’t suggesting you pull your money out of everywhere else and pile it all into mining stocks, small or large. This is risky stuff. But for anyone with a contrarian streak, this seems as good a time as any to start buying.