Major miners are shutting down…
If you’ve been reading the Dispatch, you know commodity prices have crashed. Iron ore, the key ingredient in steel, has plunged 64% over the past two years. Copper, which goes into everything from plumbing parts to electrical wiring, has dropped 36%. Lumber has dropped 29%.
The Bloomberg Commodity Index, which tracks 22 different commodities, has plunged 42% over the past two years. It hit an all-time low last month.
• China’s stalling economy has slammed commodity prices…
China is the world’s second-biggest economy and the largest commodity consumer. It uses half of the world’s aluminum, nickel, copper, steel, and coal.
Last year, China’s economy grew at the slowest pace since 1990. Its manufacturing sector has shrunk 11 months in a row. And last month, Chinese exports dropped 11.2%.
This means China is using far less steel, cement, copper, lumber, and other commodities to build its infrastructure.
• The companies that produce these materials have crashed…
Mining stocks have been a train wreck over the past year. The world’s five largest miners—Anglo American (AAL.L), BHP Billiton (BHP), Rio Tinto (RIO.L), Vale S.A. (VALE), and Glencore (GLEN.L)—have plunged 54% on average.
Vale and BHP are trading at their lowest levels in over a decade. Anglo American and Glencore are near record lows.
• The mining giants are cutting costs to survive…
Anglo intends to lay off half its employees. Combined, the five companies have laid off more than 100,000 workers. They’ve slashed spending by billions…and they’ve cut their dividends.
Glencore and Anglo terminated their dividends last year. Vale cut its dividend in June. And Rio Tinto cut its dividend last week. BHP is expected to terminate its dividend when quarterly results come out next week.
These drastic spending cuts show that the mining sector is in “survival mode”. As we explain often, a high level of despair is a sign that a sector is close to bottoming. Yesterday, we got another sign that miners might be close to bottoming….
• Anglo American is shutting down more than half of its mines…
The Wall Street Journal reported yesterday.
Anglo said it plans to reduce its total number of mining operations it runs to 16 from 45, a steeper decline than the target 25 operations announced in December. The company plans to completely exit the coal-mining industry and to sharply pare down its iron-ore operations.
Anglo’s decision to shrink its iron ore business is significant. The company earns a big chunk of its revenues from iron ore. Anglo hopes selling its mines will raise $4 billion.
The company made this drastic move after reporting a 26% decline in sales last year. It also lost $5.6 billion—double the loss it recorded in 2014.
Anglo’s stock jumped 18% on the news. But it’s still down 65% over the past year.
• Anglo American has lost money four years in a row…
Low commodity prices have made it almost impossible for the giant miner to turn a profit. Now, the company is struggling to pay off debt it racked up during the “boom” times…
In 2007, the company’s debt-to-equity ratio was 37%. Today, it’s 108%. This means the company relies heavily on debt to keep the lights on.
• Moody’s and Fitch both downgraded the company’s debt to junk this week…
Credit agencies lower a company’s credit rating when its financial health is getting worse. A company having a junk credit rating is like a person having a bad credit score. It makes it harder and more expensive to borrow money.
Anglo American is the first of the five major miners to get a junk rating.
• Like most miners, Anglo expanded too much during the last commodity boom…
It built too many mines, hired too many workers, and took on too much debt.
This is what happens in the commodity market. Prices rise. The industry expands. Supplies grow beyond what’s needed. Prices collapse. The global economy works off the excess. Then, the cycle repeats.
At some point, commodities will boom again. After all, the world can’t function without lumber, copper, steel, and other “building blocks.” Today’s beaten-down miners should deliver incredible gains during the next bull market.
But for now, the industry is still in a major bust. We expect to see more drastic spending cuts before it’s over.
• Louis James, editor of Casey Resource Investor, has a “watch list” of his favorite resource stocks…
Louis is our resource guru. He’s seen commodities bust and boom many times during his career. He’s mastered the skill of identifying when a market is near a bottom.
Today, Louis sees huge opportunities shaping up in the resource space. Two companies on his watch list are copper miner Freeport-McMoRan (FCX) and uranium producer Cameco (CCJ).
Both stocks are trading at their lowest price in years. Louis hasn’t issued a “buy” recommendation on these stocks yet. He believes they can fall a bit more, giving us the chance to pick them up at “stupid-cheap prices.”
If you’d like to invest with us when Louis gives the “buy” signal, try a risk-free trial to Casey Resource Investor. It’s our advisory dedicated to making money in agriculture, water, energy, and mining stocks. As we mentioned, commodity stocks are highly cyclical, and they’re coming off their worst bust in decades. The boom that comes next should be huge. Click here to learn more.
• E.B. Tucker, editor of The Casey Report, has also prepared a “shopping list”…
E.B. is our “big picture” guru. He invests in any industry or country where there’s money to be made. He looks for opportunities to buy “Empire Assets” for cheap. That’s our nickname for high-quality companies that we can hold for the long-term to build lasting wealth.
In September, E.B. warned that the bull market in U.S. stocks was over. So far, his call has been spot-on. All three of the major U.S. indices are down this year. The S&P 500 recently hit its lowest level since April 2014.
E.B. says U.S. stocks will fall even more.
I'm always looking for the market to make a mistake. Stocks get too expensive during a bull market frenzy…and too cheap in a vicious bear market.
I think stocks will rebound before the end of this quarter. They've been down, down, down all year. That's not normal. It's more common to see a pause and even some relief. But make no mistake, they'll resume the decline soon after.
E.B. says the next leg down in stocks should lead to great buying opportunities.
People usually sell whatever they can in a bear market.
This means great companies get very cheap. It only happens once a decade…twice if you're lucky.
He’s watching one industry in particular.
I'm waiting for once-in-a-decade prices on food stocks.
When people can't afford to eat out, they go to the grocery store more. I want to own the companies that stock the shelves…companies like cereal maker Post Holdings (POST) and B&G Foods (BGS), which sells the iconic Green Giant frozen vegetables.
These aren't fly-by-night companies; they're consistent, solid, and trusted…but they could soon trade at fly-by-night prices. That’s when I’ll step in and buy them.
E.B. will let you know when it’s time to buy these world-class food companies. To get in on these investments and more, sign up for a risk-free trial of The Casey Report.
Chart of the Day
Mining stocks are rallying…
Today’s chart shows the performance of the S&P/TSX Global Mining Index. This index tracks the companies that mine materials like aluminum, coal, gold, and silver.
The index has gained 7% this year. And several companies within the index have surged much more. Glencore, the world’s third-biggest miner, has soared 41%. Anglo American, the fifth-biggest, has spiked 62%. For comparison, the S&P 500 has fallen 6% in 2016.
Some folks might see these huge moves in mining stocks as the start of the commodity bull market. But before you jump in, take a step back to look at the big picture…
Global mining stocks have been in a downtrend since 2008. The S&P/TSX Global Mining Index has plunged 74% since 2011. We want to see the index “carve a bottom” before buying.
Dispatch readers know an index carves a bottom when it stops falling, forms a bottom for a period of time, and starts moving higher. A carved-out bottom often signals that an index is ready to climb higher.
For now, there’s not enough evidence to call a bottom in mining stocks. We’d like to see this index hold above its recent low until at least the spring. That would suggest miners have carved a bottom. We’ll keep you up to speed on miners in the Dispatch.
Delray Beach, Florida
February 18, 2016
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