The end of the world is priced into this market

POSTED ON November 30, 2015 BY Benjamin Cox
CATEGORY Commodities,

Is the financial world coming to an end? I don’t think so, but if you looked at the major metals & mining and steelmaking industries, you would think it was.

I remember in 2002 when high-tech was dead and in 2009 when the U.S. real estate market was “never” coming back. 2015 could be that kind of year for mining; the year that everyone gives up faith that there will ever be growth again in the world.

Clearly China is never going to grow again, India is going to stay frozen for the next three to four decades, and no one else is going to achieve a better lifestyle or any serious growth (I hope you can sense my sarcasm).

Of course, this could also be the year that we all talk about the stuff we could have bought if we had some guts.

U.S. Steel’s (NYSE:X) equity is trading for less than it was worth in 1901, VALE’s (NYSE:VALE) equity is trading for less than $50 per tonne of iron ore capacity once Serra Sul starts up, Anglo American plc (LON:AAL) is trading for less than the auction value price of their copper division ... and let's not get started on the juniors or the rest of the majors.

Let’s face it: everyone has given up. But that is when things really begin to change. At some point bargain shoppers will start to show up, and it does not take much capital to move these market caps.

5% of VALE is less than $800 million. That is a deal that will look stupidly cheap in 20 years. VALE is core to the world’s industrial output, and if it disappeared, Europe would go into depression for a long time. Any funds flowing into cheap assets will drive share prices.

I don’t like U.S. Steel, but I think there is value at 5% of U.S. Steel for $60 million. Clearly, it has less value than VALE, but it is a real asset. It has leverage problems, legacy assets, and a lot of other issues, but it is still a real company with real assets.

Anglo has to be looking over its shoulder. It is so damn cheap I am shocked that the Chinese or some other group does not make a bid to take it private or strip it of its best assets in a strategic deal.

At some point, the Cyber Monday sale on metals is going to end, and when it does, prices will go back up. At $70 per tonne for iron ore, a price I expect to see within two to three years, VALE is going to be minting money with their new mine. At $6,000 per tonne for copper, Anglo’s copper assets are worth more than the whole rest of the company at current prices.

I am not going to get into juniors or higher-risk plays, but when the market gets to the point where the end of the world is priced into it, the investor has to make a decision: is it the end of the world or not? If not, then at some point the funds are going to “back up the truck” to take positions. The tide will rise, and it will do so far before a recovery in commodity prices.

I don’t expect this rising tide to fix everything: There likely won’t be a recovery in freight, and it won’t make Canadian iron ore juniors competitive in the next 20 years, or make a 0.3% copper porphyry economic.

But even a slight change will result in a serious return on capital coming back to the majors, and that will help the quality juniors.

Benjamin Cox

Prior to founding Oreninc, Mr. Cox served as a senior analyst at the D.E. Shaw Group and as a consultant with the GLG Group, where he worked directly with 15 Wall Street teams in the mining deal space. Mr. Cox is the Chief Executive Officer and a Director of Aston Bay Holdings Ltd. (TSX-V:BAY), a copper and zinc company with properties in Nunavut, Canada. Mr. Cox has researched and developed business, financial, and shipping models for every major global iron ore project. He is also an expert on mining industry market dynamics and metals, with a focus on raw materials including base metals, iron ore, platinum group metals, and industrial materials such as potash and lithium. Mr. Cox holds a B.S. from Brandeis University and an M.B.A. in Finance from Portland State University. More →

bjc@oreninc.com

Benjamin Cox

bjc@oreninc.com

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