RESOURCE INSIGHT – DECEMBER 2015
Gerry Brockelsby, CFA, Chief Investment Officer.
Mining Sector Valuation is Rock Bottom
As noted in the chart below, Canadian mining stocks are trading at valuation levels only seen in 1982, 2001 and 2009, all periods of extreme stress on the industry caused by depressed demand due to recessionary economic conditions. In the current period, demand has been slowing but has not declined to levels experienced in the previous three periods. The issue today is an abundance of supply caused by the over investment in the 2005 to 2011 period. Note the capex spending on the bottom section of the chart below. As in these past periods, the fundamentals eventually improve and the mining industry recovers as the economic cycle advances. Capex spending has already declined significantly which will in time reduce the supply of metal commodities. At current valuation levels, we believe that the challenges facing the mining industry have been fully discounted in the market place. As the market sentiment improves, we expect that a modest improvement in commodity prices could have a very positive impact on the price of select mining stocks due to the attractive valuations presently.