Mining stocks: Is this a bubble?

[osmosis]

I'm only a novice, but I have noticed some huge gains in some of the mining stocks over the past 2 or 3 months on no earnings really, just expectations of future results. Take FLX or QGC. Are these exponentially increasing share prices justified or is this a bubble similar to the late 90's tech. bubble? What do you think?

 

[Garpal Gumnut]

I'm only a novice, but I have noticed some huge gains in some of the mining stocks over the past 2 or 3 months on no earnings really, just expectations of future results. Take FLX or QGC. Are these exponentially increasing share prices justified or is this a bubble similar to the late 90's tech. bubble? What do you think?

osmosis, A good way to look at whether a bubble is occurring is to look at a chart when the price gaps or goes through a larger than normal range.

If you look at flx on 4th April it has a large range but closed below the half way move up the bar. Thus it was being sold down after an initial flurry, thats a blue bear beside it, the price fell. Then if you come to April 21st there is a gap up in price after a trading range from the 4th April on reasonable volume and the bulls took it on up to last friday.

Today there was a big gap, called an exhaustion gap and it closed below its open after going quite high during the day. This was on minuscle volume.

Unless there is a very good fairy out there with a takeover bid nobody knows about , it will fall again to fill that gap.

Technical analysis is useful for seeing bubbles and such. Excuse the little bear, it looks like a cow, blame metastock software.

gg

 

[michael_selway]

I'm only a novice, but I have noticed some huge gains in some of the mining stocks over the past 2 or 3 months on no earnings really, just expectations of future results. Take FLX or QGC. Are these exponentially increasing share prices justified or is this a bubble similar to the late 90's tech. bubble? What do you think?

Hm both of these companies are producers (as opposed to explorers), one in coal and one in coal seam gas...plus both appear to have growth in EPS forecasted in the next few years at least

FLX - Earnings and Dividends Forecast (cents per share)
2007 2008 2009 2010
EPS 7.8 56.9 135.9 155.7
DPS 6.0 9.7 18.0 17.3

QGC - Earnings and Dividends Forecast (cents per share)
2007 2008 2009 2010
EPS -2.2 4.0 5.5 8.4
DPS 0.0 0.0 0.0 0.0

Also it depends on whether you look at these as short term or long term plays etc. But coal, an energy source has been doing well this year, because of world shortages

thx

MS

Felixs strategy is to become a significant coal producer with a reduced risk profile in the medium term. Growth is achieved through development and diversification of products, mine locations and delivery channels. As at October 2007, Felix had a portfolio of coal projects, ranging from the steady state Yarrabee mine to the Moolarben development project with 348Mt open cut reserve. The Company is progressing with its plans to add capacity and increase shareholder returns so that by 2010 it will be operating 6 mines, supplying 13Mtpa of coal to the worlds metallurgical and thermal coal markets. Acquisition of White Mining Limited in FY05 has doubled annual coal capacity of Felix and gave it a pipeline of near and medium-term development projects. At operating Yarrabee, Ashton open-cut and Minerva projects Felix is concentrated on consolidating and lifting operating performance. As with the development projects, Ashton underground and Moolarben are the priority. Scheduled to begin production in 2007 and 2008 respectively, these projects have the potential to triple Felixs annual coal capacity from current 6.5Mtpa to 15Mtpa.

QGC operates primarily to explore, appraise and develop Coal Bed Methane Gas (CBM) resources in the Surat Basin, Queensland. The company holds interests in 8,500sqkm of permits in the region, which are located close to the Roma to Brisbane gas pipeline. QGC is focused on increasing gas reserves and securing new supply contracts. Gas is currently being produced at a rate of 20PJ per annum at the Berwyndale South Gasfield. QGC will continue securing long term gas supply contracts to ensure revenue from gas production. FY08 target is 40PJ, increasing to 90PJ in FY09. In October 2006, it increased its gas sales agreement (GSA) with Braemar Power Station (owned by CS Energy) by 25% to 10PJ pa. First gas sales commenced in May 2006, with production exceeding 9PJ pa a year. As at June 2007, QGCs share of 2P reserves across its tenements were 932PJ. After receiving takeover offers from Santos (STO) and TCW Group, QGC signed a partial takeover agreement with AGL Energy (AGK). Under the terms of the partnership, AGK would take a 27.5% stake in QGC, sign a 540PJ gas sales agreement for over 20 years and allow QGC access to AGLs excess pipeline capacity.

 

[Pommiegranite]

I'm only a novice, but I have noticed some huge gains in some of the mining stocks over the past 2 or 3 months on no earnings really, just expectations of future results. Take FLX or QGC. Are these exponentially increasing share prices justified or is this a bubble similar to the late 90's tech. bubble? What do you think?

What I do think (from reading a lot of posts on various forums) is that many investors are assuming that there will be an unsatiable demand for whatever resource their invested company will produce in X number of years into the future.

This assumption is made without any consideration of what the effect on demand will be of every single explorer producing.

There is also a major risk factor that in X years, that resource will even be in that much demand.

Either all of this, or everyone is aware and just subscribing to the bigger fool theory which in itself is leading to a bubble.

 

[noirua]

From what I remember of the dotcom boom, most companies had no earnings and the comment often said was "it's different this time". Warren Buffett wouldn't touch them.

Comments now seem to always point to the Chinese expansion boom, and they say, "it's different this time".

Answer: "it's never different", it's always the same.

I suppose you must look and see if the stock you're buying or holding is making profits and paying dividends. Many mining stocks are priced on forward PE's that rely on high commodity prices.

If you hold a lot of explorer stocks, making no profits and spending the cash on drilling and surveying, then you have to accept they are "XYZ Mining Exploration.com Ltd".

The bubble is really your own personal bubble. If only 10% of your money is in mining.com companies, so to speak, then your bubble is small. 50% or more, then your bubble is really enormous, and there could be a very nasty end. However, you could make your fortune, afterall, as you say "IT'S DIFFERENT THIS TIME!".

 

[Bushman]

Once again it will be longer term demographic trends vs short term demand and supply spikes.

For me, over the longer term, base and soft commodities will rise as we now have 2 or 3 billion consumers fighting for increasingly scarce resources to live a 21st century modern lifestyle. Aspirational politics is now the dominant paradigm for lefties as well as the traditional base on the right. So if you can dig it up or grow it and it is scarce, it will appreciate in price.

In the shorter term, demand and supply will fluctuate as new mines come on, mines have production issues (weather, politics etc) or manipulators accumulate/dump stock to manipulate prices (eg gold). Then there is profit taking and the herd to content with. The bigger the bubble, the more nervous the investor, the greater the stampede.

For me, it is -
1. agriculture - rice, wheat, fertilizer
2. energy - gas, uranium, green energy and coal
3. construction (steel - coking coal, iron ore, alloys etc).
4. investment banking (they who survive will be financing the modernisation even though the source of the finance might be petrodollars or yuan rather then the good old US of A).

I like gold too but it is so manipulated that I baulk at taking a position when the price is up towards $1000 per oz.

Anyway my view for what it is worth. I just keep thinking that the one constant in all this is population growth and human aspiration for a better life. We (as in Australian invetors) are as well placed as any to take advantage of this.

 

[nioka]

For mining stocks I work on the assumption that it is a boom for the producers and those nearing production but a bubble for the wannabees. Even the wannabees will probably have their bubble get bigger before it bursts and they wont all burst at the same time.(if at all, but a lot will).

That's my opinion but then I'm often wrong although I hope to beat 50/50 with an educated guess.

 

[finnsk]

Interesting article

http://www.news.com.au/business/story/0,23636,23727906-462,00.html

Here is part of the article from news.com.au

THE commodity boom may be turning into a bubble that could burst around the end of the year, according to a special report from Lehman Brothers in New York.

A collapse of the commodity bull run would have a disastrous impact on the Australian stock market and the country's economic growth.

 

[MRC & Co]

Have you seen recent price negotiations? Not just speculation, but for actual delivery..........

A bubble? No. This is a bullmarket in the mining sector and thoroughly justified.

WA isn't growing through speculation, nor are the wages!

 

[AnDy62]

^ Good call. The crucial aspect of a bubble is reality and perception become decoupled, at the moment there is not much to suggest this. Maybe a softening will occur but I don't see a giant dump of the resources sector on the cards.

 

[MRC & Co]

^ Good call. The crucial aspect of a bubble is reality and perception become decoupled

Exactly my friend!

There will always be retracements and corrections within bullmarkets, but the overall trend is up!

One thing to always remember, is 10% growth in China today, is larger than 10% growth yesterday. The power of compounding does not only apply to your trading account! If you know what I mean! That is a LOT of resources!

Overpopulation and excessive consumption is a dangerous phenomenon! This does not negate the financial sector!