Mining issues suffer during market debacle

In Toronto, the composite index lost 141.6 points to 3870.74 points before managing a partial recovery on Monday to 3927.29 points.

Whipsaw, volatile trading over the past week has left many retail investors shaken. “The retail sector has been a seller and the institutional a bit of both,” one Toronto trader told The Northern Miner.

Although copper, zinc, and nickel prices ignored the happenings on Wall Street, mining issues all sold off during the plunge on Friday only to quickly recover partially on Monday, Oct 16. “The market is discounting future weakness in metals prices,” an analyst who refused to be identified said. “People are looking into the future and saying there must be a recession.”

Many obviously didn’t believe that line of reasoning or felt that the sell-off was too steep. The bargain hunters stepped in Monday to swing the metals and minerals index to 3601 points — up 135 points during the day. On Oct 13, the metals group got whacked with a 187.19-point loss to 3465.75 points.

Eric Zaunscherb, mining analyst with Midland Doherty, was not surprised by the selling which affected the metals and minerals index. “There was a reason to highlight the base metals. If you see a general decline in the U.S. economy, that will reflect in a decline in metals demand.” That reasoning by some investors, he added, impacted on mining issues.

The major difference between 1987 and 1989, however, has been the reversal of attitudes between retail and institutional investors. In 1987, the first three days of the crash were followed by aggressive retail buying. This week, however, it was the institutional buyer who saw deals. “The retail investor could be out for along time,” Raymond Goldie, mining analyst with Richardson Greenshields told The Northern Miner.

One of the shortlived bargains on Monday was Aur Resources (TSE). The company has been a highflyer since June after a major copper-zinc discovery was announced in Louvicourt Twp., Que. Aur lost $2 to $10.25 on Friday and promptly lost another 75 cents to $9.50 on Monday morning. “At $9.50, we told our clients to get in (Aur),” Goldie says. The price was shortlived, as buying quickly moved the price back up to $11.50 at presstime.

New York’s sell-off is being attributed to a variety of reasons, the main being the reluctance of several banks to lend $6 billion to a consortium to buy United Airlines, a U.S. company. That deal was widely viewed as an example of excessive debt-driven bidding which suggested that if UAL could be financed at that price, then just about anything could. Combined with concerns in the high-yield (junk) bond market and several consecutive sessions of record-breaking performances in New York in October, the UAL financing problems triggered the flood of sell orders.

Gold issues have remained neutral during the past few days of turmoil. The gold and silver index immediately lost ground on Friday and managed a small recovery on Monday. Gold bullion, however, has displayed some strength adding $8 to $368(US) in London.

Takeover stocks were the biggest losers following news of the UAL financing difficulties. In Toronto, Inco Ltd., touted as a takeover candidate for the past year, was salvaged with a $5.62 loss to $35.62 on Friday before making a partial recovery to $37.50 at presstime.

“Inco’s takeover romance evaporated,” on the UAL news, Zaunscherb explained. “If you take junk away, then the takeover issues are just not as attractive.” High-yield or junk bonds have been the main tool in financing both hostile and friendly takeovers in North America. The reluctance of banks and institutions to continue providing funds for such ventures has forced investors to reduce the takeover premium which had been attached to takeover candidates.

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