Commodities and the ‘silent’ boom

Thursday, 8 December 2022 — Albert Park

[7 min read]

Dear Reader,

No doubt there’s been some major interruptions to global growth over the last three years.

There was the COVID-19 outbreaks and global shutdowns, followed closely by the war in Ukraine.

Then in 2022, there was the potentially much more damaging global bank interest rate hiking regime led by the US Federal Reserve.

These events have been unprecedented for sure, but so far, virtually every economist has been wrong about the global impact on markets.

The problem…despite their conviction to think otherwise, each one of these experts is unable to look past the sentiment of the day.

In 2022, sentiment was driven by fear.

Fortunes were on the table for those that were able to look ahead and ignore mainstream opinion.

As I’ll show you below, some large-cap miners are now trading well above the peak of the early 2000s commodity boom.

As I told readers several months back, once global markets found confidence, mining stocks were set to explode…and that’s exactly what they did.

Now you might say, sure, but as a commodities editor, wouldn’t I always take a default bullish outlook on the mining sector?

Fair enough, except to say this: at the peak of market bearishness in 2022, I was DEMONSTRATING to readers how mining stocks were showing strong relative strength.

If you read my Daily Reckoning Australia articles through the second half of this year, you’ll understand what I mean.

It was stocks and sectors holding important support levels (while the market broke lower), which identified them as key stocks for your portfolio.

I demonstrated to readers that market downturns offer enormous opportunities for investors.

Understanding how to read a chart is a key element of this and something I’m teaching my subscribers over at Diggers and Drillers.

If you acted on the advice back then and accumulated quality mining stocks, while markets panicked, then your portfolio will be showing strong gains indeed.

Mining has performed well in November
but it’s a far cry from the last boom

This brings me to my next point and the opportunity that awaits…you see, mining is still not part of the psyche for regular investors, even mining executives remain tempered with their growth ambitions.

Unlike the boom of the early 2000s, mining stocks are far from making front page headlines.

There’s no talk of the exorbitant salaries on offer in Australia’s mining capital, Perth. That’s because it’s not happening yet.

Neither is there any market commentary covering windfalls being made for property investors in mining towns across the Pilbara.

That’s because it’s not taking place anywhere to the extent that it did during the last boom era.

It’s widely accepted that the enormous growth in Perth property prices, exceeding 300% in some areas, was driven by rising wages and an influx of workers from the east coast and overseas to fill job vacancies in the mining sector.

In this ABC article from 2013, it describes Perth as the most expensive city in the Southern Hemisphere.

That’s right, at one point during the last mining boom, Perth median values exceeded those in Sydney!

This was ALL thanks to that once-in-a-generation mining boom that drove demand for labour to unprecedented levels.

But 10 years on, Perth has gone from the most expensive…to the most affordable capital city in Australia.

According to this piece from Domain:

‘For the first time in 28 years, Perth has just emerged as the most affordable city in the country to buy a house.’

This is grossly at odds with what we are seeing in the value of Australia’s two largest mining companies, BHP Group [ASX:BHP] and Fortescue Metals Group [ASX:FMG].

There’s a significant mismatch in the industry between investor sentiment and the prices for major mining stocks and commodities.

In 2021 and 2022, commodities quietly crept past their euphoric highs made during the early 2000s boom. Copper, iron ore, nickel, coal, and lithium have all reached (or exceeded) the historic highs from 15 years ago.

But the national (and global) psyche for mining remains muted.

The ‘quiet’ boom set to make noise

The early 2000s was described as unprecedented, a boom that could never be repeated.

Yet, for some major mining companies they’ve already surpassed that historic peak, virtually unnoticed.

Just take BHP.

It made a double top during the last boom era, the first in 2007, just prior to the Global Financial Crisis, then a second in 2011, as mining stocks surged ahead against the global financial turmoil of the time.

Yet, in early 2021, the world’s largest mining company silently trickled past these ecstatic highs.

Most mainstream investors would be surprised to hear that the BHP share price is trading at the highest level in its history…even fewer would understand why.

The world’s largest miner currently trades 20% above the extreme peak of the last boom. Take a look for yourself below:

The quiet achievement of the darling from the last boom is perhaps even more astounding…

At one point in 2021, Fortescue Metals Group’sshare price was trading more than 100% higher than the peak of the last boom…Fortescue shares are still more than 60% above the early 2000s top:

Why isn’t there more investor interest in the sector?

The downturn years from 2014–19 certainly punched the wind out of mining investors and sentiment for the industry.

From what I can gather, many economists are hanging onto the effects of this period to downplay any bullish feelings toward the future prospects of mining, even as commodity prices move beyond the early 2000s peak.

According to JPMorgan, this boom will be ‘less fun the second time around’.

That’s the general mood among mainstream commentators. But at least they’ve accepted we’re heading toward a new boom in mining.

Economists blame the lack of capital expenditure by the big miners as a key reason for boom conditions not being felt (outside of high stock prices for the majors).

But something they haven’t recognised is that this will need to change, fast.

Right now, the world’s biggest miners are sitting in a sweet spot, old mines discovered, and developed from the last mining boom providing windfall gains for very little capital outlay.

The big miners are growing fat from the work that was undertaken 10–15 years ago.

Right now, they’re reaping the benefits but spending very little on future investment.

It gives them enormous cash flow as commodity prices break previous highs.

It’s why you’re seeing gigantic 10% plus dividends coming through from the big miners.

To quote BHP Chief Andrew Mackenzie:

‘Our focus is clear and that’s to maximise cash flow, maintain capital discipline and increase value and returns.’

But this attitude cannot last…a mine is a depleting asset.

The major miners have grown lazy, risk adverse, and abhorrent toward spending money on project development.

Ultimately this will lead to their gradual decline.

Failure to make meaningful steps toward replacing existing reserves through exploration will result in a slow painful death for those established miners who have sat idle, growing fat on the hard work undertaken in past cycles.

This is why you need to look at the next generation of miners for investment opportunities.

The ones that ARE actively exploring and bringing new projects into production.

Some of the companies I’ve identified for Diggers and Drillers subscribers are fast-tracking projects that have 40 or more years of production ahead.

What’s more, they’re not focusing on the commodities that fuelled the last mining boom (iron ore, coal, and gas) but on critical metals.

The metals that will play a central role in this NEXT boom.

Unlike our established iron ore miners, these companies aren’t just digging up ore and sending it overseas for processing; the new generation of mid-cap miners are looking to extract maximum value from their assets by refining ore onsite.

These companies will be in an enviable position to sell critical metals directly to the world’s largest manufacturers.

In my mind, the blue-chip miners have grown lazy…right now, they’re reaping the benefits from hard work achieved 10 or more years ago…but this WILL NOT last.

Enormous opportunities await in this sector, but the rules have most definitely changed.

Careful stock selection is critical for maximising the future gains on offer.

Have a great week!

Regards,

James Cooper,
Editor, The Daily Reckoning Australia

Dear Reader,

Stocks sold off again yesterday. From CNBC:

‘The S&P 500 and Nasdaq Composite closed lower for a third straight session Tuesday as traders struggled to recover from sharp losses suffered in the previous session and looked ahead to more economic tea leaves coming later in the week.

‘The Nasdaq Composite shed 0.59% to close at 10,983.78. The S&P 500 lost 0.16%, ending the day at 3,957.63. The Dow Jones Industrial Average notched a marginal gain, closing 3.07 points, or 0.01%, higher at 33,852.53.

‘Investors are watching for data coming later this week, including JOLTS job openings on Wednesday and November payrolls Friday, for insight into how the economy is performing. They are also waiting for Federal Reserve Chair Jerome Powell’s scheduled speech at the Hutchins Center on Fiscal and Monetary Policy at Brookings on Wednesday for clues into whether the central bank will slow or stop interest rate hikes.’

We can’t be 100% sure that the rally is over…but it looks like it. And if that is so, we should expect the stock market to take out October’s low, bringing the Dow back down below 29,000 points. As for the final bottom, our guess is that it won’t come anytime soon.

Not your grandad’s market

This is not that steady, comfortable path of the last four decades, in which stocks would sell-off…but soon come bouncing back and then go on to new highs. This is a longer route. Slower. More difficult. This is the path that has been abandoned for the last 40 years. It’s a much more treacherous trail…with traps that catch-up unsuspecting investors.

By our reckoning, we left the well-trod ‘buy-the-dip’ trail in two steps. First, in July of 2020, the Primary Trend in bonds finally came to an end. Then, the 10-year T-Bond yielded less than six-tenths of 1%. That was it for the bond market. More than 38 years’ of falling yields and rising bond prices had finally reversed. A new, long bear market in bonds had begun.

And it’s unlikely that yields will get anywhere close to those 2020 lows again — not in our lifetimes. Currently, the yield on the 10-year is six times as high — at 3.6%

In the stock market, the bubble top was finally reached 18 months later in December 2021. Then, the Primary Trend — a bull market in stocks that had begun in August 1982 — came to an end. It had taken the Dow from 900 to more than 36,000 in a 39-year period.

Since then, the averages have fallen, bounced, and fallen again. The big losses, naturally enough, came in the ‘tech’ sector. In 2021, no price for Apple, Google, Facebook, or Microsoft seemed too high. But as 2022 developed, trillions of dollars’ worth of capital in these leading stocks just disappeared. Prices fell…far more than the Dow itself.

Leading losers

Facebook (now Meta) was trading at US$334 at the end of last year. Now it is only US$122.

Amazon, similarly, has been cut in half. Nvidia, ditto.

Even the mighty Tesla began the year around US$400 a share. Today’s price? US$179.

Meanwhile, over in the even fluffier crypto world, it’s hard to imagine that Bitcoin [BTC] was at more than US$50,000 a year ago. Now, it’s around US$17,000. But that loss is benign compared to the rest of the crypto scape. Many coins have vanished. Billion-dollar fortunes have gone ‘poof’ overnight. The second largest exchange — FTX — has gone bankrupt. And even coins thought to be ‘stable’, by virtue of their links to other assets, have turned out to be worthless.

Taken as a whole, the crypto universe has lost about 75% of its value. That may seem like a lot. But what amazes us is not that so much has been lost, but that there is anything left. Everybody now knows that most cryptos had no value at all. And everybody now knows that some of the leading crypto celebrities — such as Sam Bankman-Fried — were either total frauds or total incompetents, maybe both. And nobody knows for sure where the next debacle will appear.

Under those conditions, why is anyone still holding cryptos? The whole idea of cryptos as a ‘store of value’ has been discredited. It turned out, there was no value to store. Earning ‘interest’ from your cryptos also turned out to be bogus. If you were lucky, you might participate in some of the speculative gains. But slow, sure, steady interest earnings? From cryptos? They never existed.

But the whole hullabaloo was fun while it lasted. Meme stocks…NFTs…buybacks…stimmy cheques…SPACs…business loans you didn’t have to repay — whee!

Try to recall these things, dear reader. We’re unlikely to ever see them again.

The Bubble World is gone.

We’re going to miss it.

Regards,

Bill Bonner,
For The Daily Reckoning Australia