The U.S. mining sector's continued freefall has raised a lot of debate among investors. Not only is the sector performing poorly but it happens to be one of the few sectors dipping amid an all out improvement in most sectors in the United States. When compared with the equity markets, the glaring contrast in valuation and performance tells a story of a sector in shambles.
Over the past half year, the Dow Jones U.S. Mining Index shed 21 percent. This decline was in flagrant contrast to the Dow Jones Industrial Average which edged up 6.8 percent during the same period. Although analysts and experts have identified different reasons for the dissatisfactory performance in the mining sphere, none of the reasons are more predominant than falling ore prices. In addition to straining profit margins, these falling ore prices have compelled mining companies to tighten up on capital spending. This has in turn affected the companies' ability to expand in the long run explaining the industry-wide downtrend. Amid this profound bearishness, investors are holding on to their cash in fear of earnings losses. However something interesting is emerging.
The current market conditions present a good entry point for risk disposed investors. Share prices are low and there is a lot of upside potential in the industry at large.
Looking at the share prices of key players in the sector, it becomes clearly evident that most mining stocks have been pushed below their book value.
As of this writing, Cliff Natural Resources (NYSE: CLF) is trading at $19.01; this is more than $10 off its book value of $32.50. Another badly hit mining company is Thompson Creek Metals (NYSE: TC). The company, which primarily mines molybdenum, is as of this writing trading at $3.00. This share price is way below its book value of $8.30. Could this suggest that the downside is limited?
Overall, most mining companies witnessed operational improvements over the past six months. The industry wide downswing therefore suggests that uncontainable price declines offset operational improvements within the sector. Thompson Creek Metals in particular has greatly improved its operational structure. Nonetheless, the throw away prices that characterize the market forced the company to involuntarily hoard molybdenum. This situation has culminated into a glut in the company's inventory.
Molybdenum, which contributes close to 80 percent of Thompson Creek's U.S. revenue, has a wide range of industrial applications. Given Molybdenum's varying industrial applications, it comes as a surprise that Thompson Creek's sales figures reduced over the past six months despite the uptrend in industrial valuations. This was an effect of the inventory glut that was earlier mentioned.
Although this snapshot tells a story of reduced prospects and low growth moving forward, it equally shows that the sector's underperformance was attributable to forces of demand and supply. Considering that most stocks are currently trading below their book value, the effect of falling ore prices will do little to push the sector any lower. This suggests an imminent upside. This could in turn translate into huge returns for investors who buy into the sector right now.