The latest report from ERNST & YOUNG says most mining analysts have missed the mark by repeatedly predicting a sharp decline in metal prices. Here’s a summary of what the authors observed:
Contrary to the continued assertions of mining analysts, current metal prices are actually a return to sustainable price levels following an extended period of artificially depressed prices. While analysts are wary of straying too far from the comfort zone of historic averages, the mining companies by their actions are taking a far more realistic view.
There are three underlying reasons for the analysts’ errors.
1) Research shows that analysts’ short-term metal price forecasts since the beginning of 2005 have been significantly adrift of where prices have actually settled, by anywhere between 20% and 200%. The result? Most mines and mining companies have been materially undervalued.
2) More often than not, significant premiums have been paid over market prices. Over US$100 billion have been spent on the recent takeovers of Falconbridge, Inco, Phelps-Dodge and Alcan, as the key players fight it out for control of low-cost production across the globe.
3) Research shows mining companies that have pursued growth through acquisitions have consistently outperformed those that have chosen to grow organically.
The Ernst & Young team studied metal prices over more than a century, highlighting a number of periods that have been interpreted as cycles in the mining industry. The study shows that specific reasons were behind most of these cycles, which are unlikely to be repeated in the near future. For example, weak prices in the 1990s resulted from a collapse of the Soviet Union, triggering the release of 50 years of accumulated stockpiles of minerals alongside a sharp reduction in domestic demand in the CIS. Layered on top of traditionally recognized economic cycles are major developments such as the industrial revolution, the rise of the U.S. economy, the Cold War, the collapse of communism, and, now, the industrialization of China and other emerging markets.
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