Domestic mining issues have been one of the recent ‘darlings’ of the Philippine Stock Exchange for the second week.
The Rising Commodity Tide
And these have been happening on the backdrop of record metal prices mostly led by precious metals.
Sizzling hot silver (+51% year to date) has skyrocketed reportedly from a massive short squeeze[1] and so with also gold (+5.91%).
Meanwhile copper also drifts near its record price highs even if its year-to-date performance has been lacklustre (marginally down .63%).
Importantly, prices of commodity products lead mining issues, and this phenomenon seems to take place around the world as global mining issues (S&P/TSX), Emerging Market Mining Titans (EMT), Gold Bugs (HUI) and Industrial Metals ($DJAIN) can be seen in an ascending trend (red line).
Philippine Mining Index Surfs The Tide
Domestic Mining issues have likewise been markedly moving higher too.
Since mid-2010, major mining component issues as Philex (black candle), Semirara (blue), Lepanto (green), Atlas (violet) and Manila Mining (orange) have lifted the Philippine Mining Index (red line). These companies constitute about 89% of the Philippine Mining index and whose pecking order shown above are based on market capitalization.
Some may suggest that the current price actions have been prompted by corporate deals. For instance, the yet to be formalized joint venture agreement of Philex with Manila Mining [MA] for the combined development of Philex’s Boyongan with Manila Mining’s Kalayaan properties[2].
While this may be partly true, one should understand the function of the market is to discount the flow of information that are perpetually being disseminated through the ticker tape. I call this the diminishing returns[3] or the marginal value of information as market prices incorporate future expectations rather than the present or the past.
In other words, there are bigger forces than just mergers and acquisitions (M&A) or joint ventures that drive equity share prices. Although, M&A and JVs characterize the climate of the underlying bull market trend.
Looking at the bigger picture, chart actions reveal of the same narrative: Mining issues has been on an uptrend since 2009, but the actions differ in terms of degree and in timing.
As I earlier described in 2009[4], (bold emphasis original)
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)
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.
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.
Compared to other sectors mines are likely to generate ALPHA.
IT has not always been a boom, nonetheless nearly all of what we have described above been fulfilled.
And the rotation has not been limited to companies within the mining index but signifies largely a phenomenon of the general market, as different sectors flow in a single direction but gets differentiated by timing and by the degree of price motions.
Yet there will always wall of worries to climb.
Anti-Mining Politics, It’s Economics Stupid!
The recent landslide in Compostela Valley that has resulted to 3 fatalities, has largely been blamed on the mining activities.
In the understanding of the public’s anti-mining bias which has been buttressed by the Church, and the attendant environmental hysteria that has been promoted by mainstream media, accidents like this could lead to a political backlash that could risk political outcomes. Though I would say that this is likely to be attention-span based which means public’s attention is usually short term, fickle and limited and would shift to new controversies as they emerge.
Yet the anti-mining political hysteria fails to distinguish that the environmental hazards emanate NOT from market based mining activities but from underground based activities as consequences of the feckless prohibition laws.
As the Inquirer reports[5],
Many of these operations are illegal and unregulated, and there are frequent accidents, Reuters said in a report.
The point is: One CANNOT legislate away demand and supply. Politics can only shift them.
If resources, as mineral commodities, are there for the picking, and considering that these products has been generating higher values (ergo MORE profits), then either the markets or political means will resolve its extraction.
The essence is, since these politicized commodities have imputed economic values, then prohibition laws won’t stop the economics of mining.
It’s downright dimwittedness for anyone to suggest they can.
And if politics is the chosen option, then mining will become either an activity rewarded as concessions to the politically favoured—who would seek to please the political benefactors as their priority than of the environment—or an activity that will be implemented in a guerrilla warfare fashion. Of course, the latter would most likely operate under the inferred blessings of venal local officials.
In addition, in guerrilla type of mining operations, since illegal miners operate under temporary implicit licenses or are reckoned as completely underground, this implies that operators won’t care about the environment since they are illegal anyway.
Besides, illegal operators are most likely to be amateurs from within the locality or from the surrounding areas, instead of professional miners. Thus by rendering illegitimate the industry, this would lead to more frequency of accidents and of damages in larger scales.
Yet unknown to most, because economics is what drives the mining business, prohibition laws would only breed and nurture corruption. High profits and reduced competition would allow illegal operators to payoff politicians and the police.
Again it is all about economics.
So the more the prohibition, the more we can expect accidents from underground activities to take place.
Conclusion
Rising commodities prices have been filtering into global mining issues.
We see the same phenomenon impact the local market.
Momentum appears to favor a continued rise.
Political risks from recent catastrophe may affect mining sentiment on the short run but this should be muted.
In terms of politics, prohibition laws won’t ever succeed to stop the forces of demand and supply. It’s just the distribution that changes.
Yet the above dynamics has once again been validating my predictions since 2003, as published in safehaven.com[6] (there are two more articles I published thereafter[7])
The prospects of a continuing rise in commodity prices due to the tightening of supplies and possibly in combination with mounting demand from the rapidly expanding China and India, or from the steep fall of the US dollar, should highlight the potentials of mining and resource based companies in our region too.
No trend moves in a straight line. Yet, mining issues will function as the main beneficiary of inflationism and the emerging market consumption story.
So I’d stick by them. So should you. (My other favourite industry would be technology)
[1] See Hi Ho Silver! April 23, 2011
[2] Philstar.com Manila Mining says deal with Philex on Kalayaan 'done', April 20, 2011
[3] See “I Told You So!” Moment: Being Right In Gold and Disproving False Causations, March 6, 2011
[4] See Prediction Fulfilled: Philippine Mining Index Tops 9,000 (Now 11,300!) November 15, 2009
[5] Inquirer.net 15 buried miners saved, April 24 2011
[6] Safehaven.com The Philippine Mining Index Lags the World, September 26, 2003
[7] Safehaven.com Author Benson Te
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