Rudi's View | May 15 2007
By Rudi Filapek-Vandyck
According to Merrill Lynch resources specialist Vicky Binns’ observations, last year’s seemingly unlimited euphoria amongst executives in the mining industry and close followers of the sector has all but disappeared this year around.
This, however, doesn’t mean the tide has irrevocably reversed for the sector. Binns reported from Merrill Lynch’s annual Global Metals and Mining Conference in Dublin the case for further price rises has been replaced with merger and acquisition mania.
On Monday Binns concluded her conference report with: “Most Q&A sessions were dominated by discussions of M&A, ie the bid, the failed bid and the didn’t bid!”
Binns is not as bullish on base metals price prospects as some of her colleagues elsewhere. This might explain her second observation that nearly all executives presenting at the conference predicted that supply would continue to struggle to keep up with growing demand.
However, reports Binns, “most [executives] appeared quite confident of their own ability to deliver”.
A few weeks before the Dublin conference, another highly profiled gathering of industry experts took place in Golden, Colorado (USA). The annual Mineral Economics and Management Society (MEMS) Conference tends to attract many well-respected academics, thoroughly seasoned mining professionals and highly regarded industry consultants. Many of the attendants can look back on an active role inside or close to the resources industry since the 1980s or even the 1970s.
FNArena received a detailed report from the MEMS conference from one of the attendants who wishes to remain anonymous.
What stands out from the MEMS report is that Binns’ observations in Dublin equally apply to Colorado: the industry shares a general feeling that share prices, and thus resource companies, are undervalued amidst an overall buoyant trading environment. As a result of this, the M&A trend within the industry is expected to intensify and ultimately revalue assets to more appropriate price levels.
Attendants at the MEMS conference would not deny the basic principle that supply and demand will ultimately reach a balance and that this will push down product prices from today’s highly elevated price levels. They simply think achieving this balance is likely to require more time than securities analysts are willing to put into their models.
Interestingly, the overall view at the Colorado conference was that the same is true for the oil and gas industry.
As things turned out since late April, the MEMS attendants were spot on as far as M&A fever and revaluation of resources companies are concerned. In between both conferences Alcoa launched a hostile bid for Alcan and the board at Rio Tinto (RIO) has reportedly hired Morgan Stanley to fend off possible suitors.
As far as the sector-wide re-rating goes, for the first time ever one share of Rio Tinto costs more than $90 in Sydney, while shares of BHP Billiton (BHP) are again trading above $30.
No wonder all attendants at the Dublin conference could think about was: who will be next?
Given that the industry itself is ostensibly on the side of the market bulls, investors may want to draw another conclusion from all this as well.
Nickel, the stand out performer amongst base metals since May last year, seems ripe for a sizeable price correction. The spot price has risen 50% since January this year, taking the metal’s price beyond US$50,000/tonne – a figure deemed impossible as recent as only a few months ago.
While the number of market experts who’ve turned in favour of a much stronger for much longer scenario for nickel has gradually grown this year, even the most bullish among them have recently started to concede the current price level seems not sustainable. A price correction seems therefore the most logical outcome.
Given the pivotal role of nickel in the base metals industry this year, it is likely that a serious retreat in the spot nickel price will have an impact on the likes of copper, zinc and aluminium as well. While this tends to lead to weaker share prices for explorers and producers, the bulls in the market remain convinced that product prices will recover from any pull backs.
If this view is correct, the looming correction in base metals, which may already have begun this week, should provide investors with plenty of buying opportunities.
On Monday, respected resources analysts at UBS increased their long-term nickel price forecast from US$4.50/lb to US$7.00/lb based on growing marginal capacity and significant cost inflation in the industry. The analysts believe the latter to be largely secular in nature, supporting a higher price forecast.
Similar to other experts, UBS sees “near-term risks to spot nickel prices”. The analysts also note “long-term prospects appear well supported”.