``A cynic is a man who knows the price of everything but the value of nothing.”-Oscar Wilde
WAY back in 2003, I turned bullish on gold and wrote a series called the “Rip Van Winkle in Gold”. (No blogging yet for me)
Not content with newsletters to our clients, I submitted my article entitled, “The Philippine Mining Index Lags the World” to two international websites (see link: safehaven.com and goldseek.com) who promptly published my outlook. Of course, I would like to thank safehaven’s Mr. Bruce Stratton and Goldseek’s Mr. Peter Spina for this.
My underlying message: Philippine mining industry, which should benefit from a secular global bullmarket in gold prices, will eventually become a dominant theme for the PSE. In addition, not only in terms of stock prices, but likewise from an increasing share of contributions to the domestic economy.
The last time I followed up my prediction for the Philippine Mining Industry to test the 9,000 level was in May 6, 2007 [see Philippine Mining Index: Reliving The March to 9,000!]
How time flies!
Anyway, the red arrow in 2003 shows that the Philippine Mining Index was at around 1,500 when I made the audaciously unorthodox call. The light orange arrow, where the Philippine Mining Index reached its high in 1987, served as my benchmark. The blue arrow marks today’s milestone breakout.
It’s isn’t easy to be a contrarian. Aside from being ostracized for espousing unpopular unconventional views, we occasionally get ridiculed or scoffed or mocked at. I never realized that publication can also be a humbling experience, aside from the self-effacing trait one has learned and gleaned from dealing with markets.
Speculative Stigma, Resource Curse
Anyway, the sharp downside volatility of 2008 meltdown likewise placed into a stern ordeal my beliefs. The mining index got bludgeoned the hardest. This goes to show local investors have yet to assimilate on the risk reward prospects of the industry aside from the realization of the diminishing risk premium relative to the reckless policies engaged by policymakers that enhances the value of mining products.
Moreover, the speculative stigma has yet to be eschewed by public. This has been quite evident even in the political context where populist politics have equated mining as anti-environment. This is where reason has been blinded by unthinking populism predicated on ipse dixitism and of the farcical nobility from the socialist mindset.
By prohibiting trade, supply is taken off the markets from which, in the face of limitless fiat currency issuance by global governments, would only provoke a supply shock that would send prices spiraling higher.
And a spillover of high prices to a wider basket of goods would only result to increased economic hardship in the name of environmental preservation. Moreover there are other opportunity costs from preventing commercial operations (such as increased employment and livelihood, technology transfers and other business opportunities).
Yet if mining has been generalized as totally environmentally destructive then it follows that we should expect economies as Australia, Canada, Chile, New Zealand and others to be vast wastelands. Conversely, considering that the domestic mining industry has largely been in the doldrums due to two decades of falling commodity prices, then the Philippines must have been an environmental model. Unfortunately, none of the two arguments are valid, demagoguery has been unsupported by facts. To add, environmentalism has been converted to religion-where reasoning is proscribed.
At the end of the day, high commodity prices would only compel for a “resource curse”. This means that eventually the political elite and their supporters or the economic rent seeking interests tied to them will use state power to engage in resource extraction. And by preventing trade and competition and by monopolizing commercial activities by the greasing of the public officials, these actions will effectively undermine social and political institutions which should impede growth-the recipe for the resource curse.
Examining The Mining Index
Going back to the mining index, compared to the previous boom, which had been premised on foreign investors buying into the local industry, today’s mining index breakout seems to have been based on several Godfathers’ (to borrow Joe Studwell moniker of domestic economic elite) interests on the publicly listed mines. Perhaps the dynamics mentioned above could be in play.
Principally the mining index boom has mainly been prompted for by the recent explosion of Philex Mining [PX] prices.
PX, a gold mining company, which price per share almost doubled from last month constitutes more than 60% of the Philippine Mining index weighting. In addition Philex’s market cap as a Phisix composite member has stormed to 4.19% as of Friday’s close.
Philex, which has surprisingly surpassed Metrobank [MBT], Globe Telecoms [GLO], Banco De Oro [BDO] and etc., is now among the top 10 or among the Phisix big leaguers.
Although as a caveat, the recent price action of Philex appears to have reached bubble like proportions. PX’s turnover this week constituted about 25% of the Philippine Stock Exchange’s total. The hefty turnover somehow replicates the Meralco saga [see Bubble Thoughts Over Meralco’s Bubble] which makes us leery of the attention PX has been getting.
But don’t get me wrong. Whether it is Meralco or PX they are all headed higher over the longer term. In a bullmarket-generally- all stocks go up to paraphrase Edwin Lefevre.
It is just that the unwarranted short term attention that could pose as a barrier for sustained new interim highs following a record breathtaking run.
It is true that size and heft matters, and this has been the reason for what we might call “survivorship bias” or the tendency to focus on winners at the expense of the mediocre.
The fact of the matter is Nihao Minerals Resources [NI], another mining outfit which could be classified as exploratory since the company has yet to make a buck from actual mine operations, has been a far stellar performer than PX.
NI’s chart has been parabolic or vertical (black candle), has returned almost 5x or 500% since the first quarter of this year and has breached to a new record high prices along with PX.
Moreover given the chart above of the other mining components as part of the local mining index, we can note that all the mines-Apex Mining (light orange) [APX], Lepanto Consolidated (dark green) [LC], Manila Mining (light green) [MA], Atlas Consolidated (blue) [AT] and Geograce Resources (gray) [GEO] have all made substantial moves, but unlike PX and NI are still far from the 2007 highs.
The chart excludes other mining index members particularly Omico Mining [OM] and oil companies Philodrill [OV] and Oriental Petroleum [OPM]
My Two Cents On The Domestic Mining Industry
So here are my thoughts on mining industry:
1. Given the recent explosion of NI and PX, corporate or mine product price fundamentals does not appear to be the key drivers but from alleged interests from new class of investors [including Godfathers] to partake of key stakes in the firm. Of course, loose monetary policies have been the unseen or unrecognized factor behind the reanimation of local equities in general.
2. Since the domestic mining industry remains broadly underinvested and where current crops of mining firms lack the capital to expand or operate, the major catalysts for prospective runs would be speculations on joint ventures and or prospective M&A developments from new investors (they could be foreign or local godfathers)
3. Actions among the mining components appear to be rotational- a classic symptom of bullmarket driven by inflation. This implies that the next major moves could likely come from those that have been in a reprieve.
4. A sustained bullmarket in commodities- arising from monetary “pass through” or from BRIC and emerging markets demand- is likely to underpin the secular case for investing in local mines.
5. Compared to other sectors mines are likely to generate ALPHA. As in the case of PX which traded at about .50 cents (dividend adjusted) per share in 2005, and closed 16.75 per share last Friday or a 3,300% for 4 years (285% p.a,) in spite of the volatility, should be very rewarding for long term investors.
That’s because using the “follow the money trail” analysis underinvestment in a world where money is given for free should translate to a gush into the industry which equally becomes rife for M&A rumors.
6. Market trends are social trends. As mentioned above, the speculative label on the mining industry is a symptom of the lack of social acceptance or persistent aversion emanating from over two decades of depression. Essentially such resistance is psychologically bullish. That’s because despite present levels, only a handful have been invested. In social terms, bandwagon effect occurs when trends are reinforced by confirmation of expectations. In other words, long term trends draws in more converts.
It’s when commodities or the mining industry is seen as “risk free” or deemed as blue chips or becomes the public’s favorite object of discussion- is where the red flag should be raised. As far as we are concerned, such social dynamic seems distant.
From this juncture, we believe that the mining index next goal would conservatively be at least 20,000.
Important disclosure: I am not fortunate to own any of today’s star performers. So it would seem like a pyrrhic victory-right in essence but less lucky in selection.
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