Our Outlook for Basic Materials Equities

As long as metals prices remain high and borrowing costs stay low, we're likely to see more marginal mining projects getting the green light and fewer projects ending up on the cutting room floor

Elizabeth Collins, CFA 4 January, 2011 | 11:44AM

We expect 2011 to be the year of big spending plans from the mining companies. Metals prices are soaring, borrowing costs are quite favourable, and most major miners will likely shy away from huge acquisitions after having been burned by highly leveraged transactions prior to the downturn in 2008.

Most miners are placing a huge bet on continued strong economic growth and demand for metals in China, India, and other emerging markets. Their views are supported by low per-capita consumption rates in these countries and the strong forces of industrialisation and urbanisation. On the supply side, ore grades are decreasing and world class deposits are increasingly hard to find, and labour disputes are disrupting production in the short term.

Oddly, each major miner claims that it should be able to grow its production of key metals such as copper or iron ore significantly over the next several years. Apparently, each mining company is the exception to the rule that it will be hard to grow production. Instead, we'd argue that only one of the following can be true: Either growth in global output of metals will remain constrained and prices will remain elevated while large miners will face declining production absent major acquisitions; or, mine supply will expand significantly, pushing commodity prices lower towards the marginal cost of supply.

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About Author

Elizabeth Collins, CFA  is an associate director of equity research with Morningstar.

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