News

June 23, 2008

Good Times For Iron Ore Miners, But Where Is All The Zinc Going?

By Rob Davies

Talk to some analysts and they point to the halving in price of nickel, lead, and zinc as evidence that the bull market has had its time in the sun. Other equally knowledgeable observers cite the near doubling of iron ore prices, and a whole host of supply problems that combine to restrict output of almost all metals, as evidence that this rally has further to go. Look at the stock market valuation of the mining sector, a yield of 1.4 per cent and a price to book ratio of 4.5, and it is clearly priced for further growth. Contrast that with the bank sector on its yield of eight per cent and a price to (a questionable) book value of one. On those valuations a long term investor would surely sell mining shares now and reinvest the proceeds in the beaten up bank stocks, on the basis that miners have priced all that growth in already.

There is of course no rule to say that expensive shares can’t get more expensive and stocks can stay mispriced for a long time. But are mining shares wrongly priced? An historic price earnings ratio of 16 might be on the high side, but a forecast rating of 11 is hardly demanding. Besides, how meaningful is a price to book ratio for a mining company when its largest asset, its reserves, is not included in the accounts. A PE of 11 looks low for mines with a life of 15 years or more. Perhaps it...