1. The US is in the grips of recession.
2. The greenback is in freefall.
3. Consumer confidence in Japan is an oxymoron.
4. Eurozone countries are battening down the hatches.
5. The allords is in tatters.
6. Precious metals are at cyclical record highs.
7. Hard and soft commodities remain in a bull trend.
8. Emerging economies are not bleeding.
The obvious disconnect is between received commodity prices and equities that produce them.
BHP’s price collapse during the week was a classic disconnection. Its 10% price fall was met with little or no change to the prices it receives for its products.
Oxiana is a little easier to work out because it has a more limited product mix; base metals and gold. True, gold prices came off the boil. But its principal product, copper, rose during the week: And copper fundamentals remain at the best in many months. Oxiania’s Golden Grove is predominantly a zinc mine, and while there might be a perception that zinc is poorly priced (relatively speaking), the reality is that when OXR was trading around $4 the price of zinc was about the same as it is today.
Yet the kicker for OXR is that Golden Grove’s zinc costs are expressed against by-product credits – namely copper, gold, silver and lead – all of which remain strongly priced in today’s terms and look like holding up reasonably well in the short term at least.
Against this backdrop is USD weakness, and the fact that commodities are priced in USD terms. Although this diminishes the profitability of our producers, another reality is that our dollar rallied strongly well before the allords went into freefall, suggesting our producers remain likely to report very good results for the December quarter, while still traveling well in the early stages of this quarter.
I am not suggesting you go out and buy our cashed up, low cost commodity producers next week, or even next month. I think it is silly to think the present market carnage is near an end when it has really just begun. So I expect bargains will “appear” every week, for some time. Liken these bargains (for now) to buying a laptop computer: Great value and great price, but you could have got it cheaper had you held off a little longer.
My strategy is to wait for price/earnings multiples to go through the floor, then eke a little into the stronger commodities equities. I don’t anticipate I will be buying at the lowest point of the market, but I also don’t expect our market will be in the doldrums for as long as many might think. So long as I get back on board relatively cheaply, I will be satisfied.