MINING MARKET & INVESTMENT NEWS — INVESTMENT COMMENTARY — Tough markets keep analysts trained on fundamentals

Are resource stocks yesterday’s news, devoid of upside and not worth bothering about? Or are they simply bargain-priced frogs waiting for the kiss of better metal prices to turn them into wealthy princes?

Investors pondering these questions are still debating whether to steer clear of equity markets, or to begin bottom-fishing in order to exercise the old adage, “buy low”. Professional guidance is helpful, but analysts are not finding it easy to make gains in a bear market when stocks keep hitting new lows. Nor are they finding it it easy to make predictions when shock after shock keeps rocking the global economy.

But buying opportunities are being found, even by conservative brokerage firms, though their recommendations are typically confined to undervalued companies with solid assets and staying power. This disciplined approach has been a boon for the senior South African mining houses, which are getting plenty of attention from North American and European investors because of their low trading multiples (relative to North American producers).

In addition to scouring the globe for undervalued producers, analysts are watching for companies they believe will be major players in the mergers-and-acquisitions game (M&A for short). Senior companies traditionally look at bear markets as the best and cheapest time to find growth opportunities.

Analysts and investors are also paying more attention to the ratings given by various credit agencies (Standard & Poors, and Dunn and Bradstreet, for example) to base-metal, gold and diversified mining companies. This, in turn, provides hints as to which companies have the financial muscle to go on the acquisition trail and which are vulnerable to takeovers themselves.

Today only one mining company, Rio Tinto (RTP-N), has an AAA top rating. Already, the diversified producer has positioned itself as a major shareholder of Freeport-McMoRan Copper & Gold (FCX-N), which, in turn, operates one of the largest gold-copper mines in the world.

Rio Tinto, meanwhile, is increasing its own low-cost production — particularly in copper — at Escondida in Chile and Bingham Canyon in Utah, both of which produce the red metal at less than US40 cents per lb.

Broken Hill Proprietary (BHP-N), another diversified producer, was recently down-rated for the relatively poor performance of its investment decisions, which have led to substantial writedowns. Some analysts predict that the company will be extremely cautious about new investments in the years ahead and, instead, will focus on boosting its bottom line.

In the gold sector, Barrick Gold (ABX-T) has maintained its A rating, after writing down its high-cost mines. While the company is expected to be an important player in M&A, its current emphasis on low-cost operations means that it, too, will exercise a cautious and highly disciplined approach to acquisitions.

Freeport-McMoRan Copper & Gold was downgraded, owing to the current unrest in Indonesia, where its Grasberg mining complex is situated. The company is not expected to be a major player in acquisitions, as it has spent (and is still spending) huge sums to explore, develop and expand the vast Grasberg mine complex in Irian Jaya.

Placer Dome (PDG-T) also was nudged downward from its A- rating because of low gold prices. However, like Barrick, the company is focusing on cutting costs and developing only low-cost mines. While Placer will be keeping an eye out for new opportunities, it still has several undeveloped mines on its plate, such as Las Cristinas in Venezuela.

Several analysts predict that South Africa’s major gold producers will be aggressive players in M&A in the coming year, and that they will take a particular interest in companies holding quality assets in Africa.

On the base metal front, Inco (n-t) has held on to its BBB rating so far this year, despite growing apprehension that the company’s Voisey’s Bay project in Labrador may take considerably longer than originally anticipated to reach production. But Inco was downgraded a few years ago, right after its $4.3-billion deal to acquire Voisey’s Bay was announced.

Analysts have long speculated that Inco is a takeover target, though, as yet, nothing has materialized, perhaps because of the impasse at Voisey’s Bay. Negotiating with Newfoundland Premier Brian Tobin appears to be a prospect few mining executives relish.