Mining shares capitulate on day of heavy selling

[miningmx.com] – DIVERSIFIED mining shares took a clobbering on world markets, including the Johannesburg Stock Exchange (JSE), as more blood-letting in the beat-up gold sector spread to other metal industries, including copper.

The price of gold fell today for the tenth successive day – its longest losing streak since 1996 – and was last trading at around $1,094.43 per ounce.

Liquidations in other metals may also have been linked to a Goldman Sachs report, published on July 20, which acknowledged management of mining firms were doing the right things, but metal prices outweighed their efforts.

“We don’t expect the bounce in mining shares that has accompanied the past few results seasons as the impact from self-help is slowing after four years,” said the bank’s authors ahead of the July to August reporting season for global mining bellwethers such as BHP Billiton, Glencore, Rio Tinto, and Anglo American.

“The size of the capex cuts and cost reductions is moderating and the chance of an upside surprise is limited, in our view,” they said.

“These actions [cost cutting and productivity improvements] have not been enough to stop declines in earnings and see miners continuing to underperform – being the worst-performing sector in 2011 through to and including 2015 year-to-date,” it said.

Five days earlier, David Butler, an analyst for Barclays Capital, said in a report that following the bank’s quarterly mark-to-market exercise on commodity prices, the outlook was towards “… material downgrades to earnings forecasts for the sector… ” for the next three years. “It leaves the sector trading on full valuations,” he said.

The outcome was a near 4% decline for the Resource top 10 on the JSE with BHP Billiton suffering the most, taking a 4.5% hit. It was followed by Anglo American (4.18%), Glencore (3.73%) while other mining shares such as Exxaro Resources, African Rainbow Minerals and South32 were down just under 4% each.

South32 published its fourth quarter production report today which was recognised as a generally solid result. “Output was solid, with most projects delivering results within 5% of our forecasts,” said Macquarie Research. “Beats on metallurgical coal, zinc and manganese alloy were offset by misses on nickel and lead,” it said.

Two analysts asked for comment on market developments described the sell-off as “a capitulation. “Probably overdone today and we’ll see a bounce tomorrow (July 23),” said Kieran Daly, an analyst for Macquarie Research. “It’s that kind of market,” he said.

According to Bloomberg News, the weakness in mining shares today was a further indication of an industrial recession.

“We’re probably not too far off a global industrial recession,” Colin Hamilton, head of commodities research at Macquarie Group told Bloomberg Television. “The only thing that can turn it around are strong capacity cuts,” he said.

Surpluses in copper, aluminum and tin were expected this year, said Bloomberg News which cited Societe Generale SA. Norsk Hydro ASA said on Tuesday that China’s exports were compounding a global aluminum glut and damaging the industry.

Barclays Capital added in its note, however, that the second half of the year would show improved economic activity in China and Europe.

“We also continue to believe that Chinese economic data and commodity consumption will improve in the second half (noting stronger new loans and money growth data in June) accompanied by ongoing economic recovery in Europe,” the bank said.