The mining stocks picture is picking up strongly

Big rises from mining stock price bottoms, a resurgence in M&A activity, and an indication that finance may be becoming available again may make the mining sector shake-out survivors much stronger than before.

LONDON -

There's no doubt that most mining stocks have risen well above the low levels experienced only a month or so ago - indeed for most somewhere around mid-to-late October may have defined the low points, despite commodities news not being particularly supportive. There are some exceptions of course - in particular relating to projects perceived to be of particularly high risk. Many of the DRC's array of mining projects fall into this high risk category as here the lack of finance available to the industry in general, coupled with what is seen as a particularly unstable political situation, has impacted heavily on project dynamics.

There are primarily two reasons for this sharp recovery in values. Firstly there is the realisation that in general that the sector has been substantially oversold as commodities stocks were liquidated in the general financial panic without any real thought being given to the underlying quality of many of them. Secondly the predators are moving in, with bigger cash rich companies prepared to bid for smaller cash-strapped outfits - and pay large premiums over the decimated stock prices to try and secure quick approvals and sale.

Those investors who had been doing their due diligence in the fallout have actually been able to make some spectacular profits in the past month or so with rises of more than 100 percent from their bottoms being recorded in a number of cases. My colleague Barry Sergeant records much of this in substantial detail in his tabulations of mining stock performance the latest being Mining equities led by gold stocks to best levels in three months which pointed out that gold stocks, which had been sold down almost pari passu with base metals stocks, despite a gold price level which had not suffered to the same extent as most other metals commodities prices, were leading mining stocks on an upwards path.

M&A activity can only prolong this trend so far though. Finance is still tight which means the cash have-nots are still in trouble, and stock prices are still way off their levels of only six months ago so we're not yet back where equity capital raising offers an ideal solution. But, there are indications that banks are beginning to lend again on mineral projects - as usual primarily to those who perhaps can demonstrate they don't really need the money at all but it would be helpful! But as prices rise then the M&A activity may begin to fall away again as the ‘bargains' begin to disappear.

The other trend though that is beneficial to many of the smaller project related stocks is that the sometimes over engineered project design plans have been radically restructured and that new mines, which might have been dependent on the kinds of high metals prices being seen only just over a year ago for their viability, are being re-assessed and plans reworked to make them potentially profitable at lower metals price levels. When the copper price fell drastically in the early 70s, for example, the major copper miners which the investment community had written off as being almost worthless, managed to restructure their operations to be able to mine profitably at the far lower price levels then being received. There is little doubt that today's mining industry can be equally adaptable and much of the fat which has been built up over the good times will be surgically excised.

Also, as has been noted here, construction, mining and labour costs which had been rising at an almost exponential rate, are beginning to come back drastically - helped substantially by the huge fall seen in the oil price.

Overall, the mining industry which emerges from the traumatic recent downturn will be leaner and meaner than the one which entered it and if one picks the right companies, the sector will again be an excellent one in which to invest.