The ‘new world order’ of mining isn’t pretty – by John Shmuel (National Post – August 3, 2013)

The National Post is Canada’s second largest national paper.

If there was a stock market discount bin, it would be overflowing right now with mining stocks of all shapes and market caps.

The TSX materials sector is down more than 30% so far this year, with gold miners being particularly clobbered, having lost 38% of their value since January. It’s been the worst year for global mining stocks since the financial crisis.

The last bastion of safety for mining investors — potash stocks — collapsed this week to join their digging and drilling brethren in the basement. The break-up of a Belarusian-Russian cartel that was responsible for 43% of global potash exports is to blame. Its demise led to a potash price collapse, resulting in a sharp pullback for fertilizer stocks such as Potash Corp. of Saskatchewan Inc., Mosaic Co. and Agrium Inc.

The bad news didn’t stop there. A day later, Barrick Gold Corp. revealed the second-worst loss in Canadian corporate history. The miner announced it lost US$8.56-billion in the second quarter, after a massive US$9.3-billion writedown at its Pascua-Lama development in Chile.

All of that ensures Canadian mining stocks are well on their way to posting a third-straight annual decline. It’s no wonder many fund managers, despite seeing a lot of value in the sector, are proceeding cautiously.

“We’re staying away,” said Barry Schwartz, vice-president and portfolio manager at Baskin Financial Services Inc. in Toronto. “We’re done with our flirtations with commodity stocks, because we’ve been burned one too many times. That’s been the case for a lot of portfolio managers. One would have thought that with the world economy growing and with China growing, commodity stocks would have outperformed, but they haven’t. It’s mind boggling.”

Keep in mind mining stocks are cyclical, meaning their prices tend to move depending on whether the global economy or a specific domestic one is steadily growing. In the case of mining, one of the most important economies is China, the world’s largest commodity consumer and until recently on a torrid growth pace. But China’s economic growth has been slowing in the past few years and the slackening demand has hurt commodity prices.

Many miners are also suffering from rising cost inflation, as new projects, often being built in increasingly more remote locations, require more equipment and longer development time frames. Since the world’s most easily exploited resources have already been discovered, what’s left is simply harder and more expensive to get out of the ground.

“Until I see more of a rebound in risk appetite, I don’t think commodity prices will take off,” said Sadiq Adatia, chief investment officer at Sun Life Global Investments (Canada) Inc. in Toronto. He remains bearish on mining stocks, and says he’s staying away for now.

Another issue souring investors on mining stocks is the growing political risk that comes with companies mining in more remote locations. Barrick is one of the biggest poster children for how dangerous the politics of mining can be. At its annual general meeting in April, Barrick founder Peter Munk spent a great deal of time talking about the growing hostility to foreign miners in developing countries.

Mr. Munk said governments a decade ago were flocking to Barrick to try to get the company to sink money into the ground and create mines and jobs in their countries. Today, he said, “governments are more likely to ask questions like, ‘Who are these foreigners? Why would they take our gold away from us?’”

Many developing country governments are now demanding higher royalties from miners, with some even threatening to nationalize mines owned by foreign companies.

For the rest of this article, click here: http://business.financialpost.com/2013/08/02/the-new-world-order-of-mining-isnt-pretty/

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