When I wrote Part I and sent it off for posting, I didn't realize that the Wall Street Journal's "Heard on the Street" column was going to help advance my proposition.
In this article titled, "Miner's Run Seems Over" (which is another way of saying "Mining Stocks are Dead") someone named Arindam Nag was adding to the pessimism and negativism about mining stocks (forgive the pun, but he or she was "Nagging").
The WSJ article had this kind of sour-grapes flavor to it:
Put away that shovel. Mining stocks are getting hurt as investors anticipate a profit squeeze between rising investment costs and falling commodities prices.
The DJ Basic Resources STOXX index, which includes some of the world's main metals companies, including BHP Billiton (NYSE:BHP) and Rio Tinto (RTP), is down 26% in the past three months.
That has left commodities companies trading at historically low multiples of expected earnings, suggesting either the shares are undervalued or investors believe miners' run of profit growth can't continue.
The latter looks most likely. Even if commodities prices don't fall further, rising costs could be enough to squeeze...
So, as if the Nag knew what investors were thinking and doing (many of them are on vacation I'm told), he/she announces to the world that "they", the investors, believe it's curtains for the mining companies' "run of profit growth."
They weren't the only one throwing cold water on the miners. Our friend Dan Ferris who pens the illuminating newsletter Extreme Value at Stansberry Research was opining about the shortage of both silver and gold coins, when he decided to weigh in on the Mining Stocks and their impending "funeral."
Dan writes, "We received this note yesterday from our own Matt Badiali:
Just got off the phone with Van Simmons (an executive with David Hall Rare Coins). He said there is a shortage of both Silver Eagle coins and 100-ounce bars. He can't get them. He said that, for the first time in his career, a supplier that guaranteed delivery simply couldn't make good on the promise. He also told me that platinum eagles are in serious short supply. I guess that means someone out there is buying up the physical metal in a big way.
The U.S. Mint has run out of one-ounce American Eagle gold coins. And it's been rationing Silver Eagles because of the high demand.
The U.S. mint sold 60,000 one-ounce gold coins this month, up from 47,000 in July and 13,000 in June. When gold fell from the $900s to the $700s, small buyers didn't sell, the way they usually do. They bought.
Abraham Lincoln may have been an even worse president than FDR, but he had one thing right: You can't fool all of the people all of the time. People know the government is destroying their currency, so they're turning it in for gold, which is exactly the right thing to do.
So if gold coins are dear, why are mining stocks so cheap? For one thing, cost pressures are hitting the miners. A Lehman Brothers analyst says inflation accounts for half the increase in the capital spending of mining giant Rio Tinto from 2003 to 2006.
Most people view mining stocks as inflation hedges. But at some point, it becomes illogical to view a highly capital-intensive business that way. Sure, at first, it seems like it's just too expensive to build a new mine or refinery. And that gives existing facilities an advantage.
But over time, given persistent inflation, running those existing facilities will cost more and more. The more it costs to run the existing ones, the more it seems to make sense to build new ones. And the cost increases aren't necessarily passed on. Mining companies don't have any pricing power over their goods. They sell products whose prices are set on the open market, minute by minute, at the whim of the herd.
The only real consistent inflation beater, aside from holding gold coins, is to buy companies like Procter & Gamble (NYSE:PG), Altria (NYSE:MO), Philip Morris International (NYSE:PM), Coca-Cola (NYSE:KO), and UPS (guess what their symbol is).
In good times and bad, these companies are acquired by knowledgeable corporate buyers at around 30 times earnings. As were Gillette, Wrigley, and Anheuser-Busch.
So my friends and fellow investors, what would you rather own: UPS (NYSE:UPS), Coca-Cola, or Goldcorp (NYSE:GG)? This conundrum is going to play itself out over the days and weeks ahead, and it might lead to some "capitulation selling" among mining stocks.
This is just the kind of negativity and hopelessness that can set up a market or a sector for a very nice reversal, surprising all but the most visionary and prudent investors.
You might just get that chance (and then again, you might not). If enough people begin to believe and spread the gossip that the "Miner's Run Seems Over" there could be a short but nasty selling spree among the most heralded names among them.
My suggestion is to begin to create a "shopping list" of the best-of-breed miners and producers that you want to own or add to your holdings, and be ready to pounce on them if this "fire sale" were to ensue...unless you're one who believes in "The Death of Gold & Silver Stocks" and the end of the gold and silver bull market.
If that's the case, Proctor & Gamble and the Marlboro Man at Phillip Morris International await your investment dollars.
Disclosure: Long GG, GLD, SSRI.