At the end of last year, it seemed as if the end was nigh for Glencore (LSE: GLEN), Lonmin (LSE: LMI) and Anglo American (LSE: AAL). Plunging commodity prices, weak balance sheets and general negative sentiment towards the mining industry sent the shares of these miners spiralling down to lows not seen for more than a decade.
However, since the middle of January investors have flocked back in a sudden reversal of fortunes. Indeed, since January 14 shares in Glencore have jumped by 115%, shares in Lonmin have risen 178% and Anglo’s shares have jumped 193%!
The question is, can these gains continue, or is the recovery built on a lot of hot air?
Improving sentiment
At the end of last year, it looked as if the market had completely given up on the mining sector in general. City analysts were forecasting low commodity prices for years to come and some were even going as far as saying the equity of some miners was worth below zero.
Three months on and not much has changed fundamentally. The market for most commodities is still oversupplied and the outlook for China’s economy remains uncertain. However, during the last three months Anglo American, Glencore, and Lonmin have all shown that they’are committed to repaying down debt, selling assets and improving efficiency while the outlook for the mining industry as a whole remains uncertain. In other words, these miners have regained the confidence of investors.
This newfound confidence seems to be the main driver behind the recent rally in Anglo, Glencore and Lonmin’s shares. But, a rally built on renewed optimism will only get you so far and pretty soon these miners will have to start producing results. Unfortunately, this could be a lot harder than expected.
You see, Lonmin, Anglo and Glencore are all price takers, which means they have to accept the market price for commodities produced. So cost-cutting and asset sales can only boost earnings by so much, ultimately higher profits require higher commodity prices. And as the markets for many commodities remain oversupplied, it could be a long time before supply/demand fundamentals fall back in line and prices start to move higher again.
So, can the shares of Lonmin, Anglo and Glencore double again before the end of the year? Well, the fundamentals imply that it will be difficult for these miners to replicate the gains seen over the past few months. Nonetheless, while the fundamentals aren’t supportive of further gains a lot depends on market sentiment. If traders and investors continue to view the sector in a favourable light, then it’s entirely possible that these miners could see their shares doubling by December. Now that would be a good Christmas present.