The aftermath of last weeks catastrophic dam collapse in Brazil continues to be felt among the junior mining stocks as investors weigh the contrasting forces of lower iron ore production and a potential environmental and legislative backlash.
With hundreds of people still missing and presumed dead, there is understandable anger in Brazil at Vale SA, the company whose Feijao iron ore mine was behind the tragedy. The company suspended some of its operations and ratings agency, Moody’s, placed its debt on review, saying that clean-up costs, potential liabilities and sanctions against Vale and its executives “will strain the company's liquidity and its ability to meet its financial requirement". This for a company with $6bn cash on its books.
On the other hand, shares in other iron ore miners have surged as Vale’s actions look to trim around 40 million tonnes of annual supply from the global market. While no one wants to be seen as profiting from a tragedy, higher ore prices are being priced in as a consequence to the supply constraint.
Those who are tempted to profit, however, should first listen to financial analyst, Jayant Bhandari, who addressed both commodities speculation and environmental issues in a wide ranging interview from the Vancouver Resource Investment Conference, but released this week. He said investors were using uranium’s supposed green credentials as a ‘camouflage’ for their greed, and that the market would better determine the cheapest - and therefore least resource hungry - ways for economies to develop. Already, solar and wind are often the cheapest forms of electricity generation and, as a result, Bhandari saw no value in uranium or its mining.
Indeed, he warned that investors lost heavily speculating on a number of fashionable commodities last year, such as cobalt, lithium and uranium.
“Unless you’re actually a manufacturer or user, you should not try to speculate in these commodities,” he warned. “Particularly when you get into physical storage, the spread is so large and [because] you have to pay for warehousing and insurance, you can lose a lot of money.”
Instead, Bhandari recommends seeking value in mining projects. This has the advantage of making bear markets more appealing because stakes in good companies can be acquired for a lower cost.
Brian Leni of Junior Stock Review is more comfortable with pure commodities investing but he also spoke about the difference between metals and miners in a video released this week.
“A distinction needs to be made between the metal and the resource company. If you are bullish on the metal, buy the metal. Junior resource companies are a speculation on the people and their ability to push a company forward regardless of the underlying metal price. However, if you can align the two [metal price and resource company] the results can be spectacular,” said the former engineer, who turned investment writer after his own portfolio tripled in value.
Leni is bullish on nickel, saying that falling inventories, growing demand from the stainless steel sector and a burgeoning electric vehicle market support his case for the metal.
The week also brought news that one rather wealthy buyer group in particular has taken a shine to metal: figures from the World Gold Council show that demand from central banks jumped in the final quarter of 2018.
In a boost for gold stocks, central banks' demand for gold soared to 651 tonnes last year, up 74% on 2017 and the highest level since the dissolution of Bretton Woods 50 years ago, when the US eliminated the gold standard.