The image of the grizzled miner is a familiar one. Hope, desperation, and elation take their turns as his fortunes rise and fall in dramatic fashion. Although he may have little in common with miners at the other end of the scale, giant companies like Alcoa (AA) or Peabody Coal (BTU), the dramatic rises and declines in stock prices typical of mining companies cause shareholders to experience the same emotions. Fortunately, in contrast to the serendipity that's determines the old miner's fortunes, many mining giants have a specific, persistent pattern that shareholders can use to their benefit.
Part of this pattern is related to the well-known commodity super-cycle and its attendant sub-cycles. These are decades-long periods of rising and then declining prices for a commodity based on underlying dynamics of supply, demand, competition, and technological innovation. Will Van't Feld has an excellent summary here. Super-cycles are important to mining companies because nothing is more relevant to profits than rising commodity prices. After production costs, each dollar increase in the product's price goes right to the bottom line. The chart below, using World Bank data, is an excellent example of the super-cycle in aluminum with peaks in 1988 and 2004.
Mining company shares often show a characteristic pattern as well, sometimes correlated with the super-cycle, sometimes related to other conditions. The Alcoa chart below shows this pattern clearly (all stock price data from Yahoo Finance). The share price drops suddenly by more than 50%, as if every stockholder decided to get out at once. Another peak is reached in 4 to 10 years, with one or more intermediate increases of at least 100% from the low. This pattern has repeated 5 ½ times since 1972, and is still intact.
Although it appears as if the pattern has been broken since 2008, a closer look shows it's still operating. The magnified chart below shows Alcoa achieved the predicted 100% rise and more, going from 5.22 in late 2008 to 17.92 in 2011.
This very persistent cycle, durable through many economic conditions over at least 40 years, says the next leg for Alcoa will be up. The last peak was in 2008, and the next may be several years away. Based on the recent intermediate high the next peak should be at least 20, but could be 30 or more.
The same cycle can be found in other mining companies to varying degrees. The charts below show Peabody Coal and Southern Copper (SCCO) are in a stage similar to Alcoa, indicating that the next leg is up for them as well. Note that SCCO has already had a 100% intermediate rise from its low in 2008. The time period shown is less than for Alcoa to show greater detail.
Mining company shareholders have taken a beating in recent years. The last couple of years have been particularly frustrating as miners have gone in the opposite direction of booming stock markets. But there is hope in the miners' persistent and intact price cycle, which says the next leg for Alcoa, Peabody, Southern Copper and other beleaguered companies will be up big.