LONDON – Investors in mining stocks could face years of weak returns as a rally in share and industrial metals prices eases pressure on companies to restructure and curb oversupply. The mining sector is known for over-investment in boom times and crashes when demand weakens as economies slow, but many companies say they have learnt lessons and are making efforts to reduce debt and control spending.
Mining stocks have more than doubled since multi-year lows touched in January, a rebound analysts link to cheap cash from Chinese financial stimulus rather than a fundamental increase in demand for industrial materials.
The rally has given companies with fragile balance sheets a reprieve from the bankruptcies and mergers analysts say are needed to adapt to lower demand. This could extend the stagnation as production at weaker firms limps along, adding to inventories.
“We see significant excess capacity in the (mining) industry which needs to be reduced before the fundamentals will improve, and this could easily take three years. We are therefore taking a cautious view toward the industry,” said Lewis Grant, a senior portfolio manager at Hermes Investment Management.
He said he was particularly wary of smaller firms and drawn toward miners with exposure to gold, such as Randgold Resources, as gold is seen as safe-haven investment.
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