Mining Sector Stocks: Have They Performed As Predicted?

“Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.” - Warren Buffett

MiningFeeds announced that, because the global mining industry performed above expectations in 2016, it is well-positioned to repeat the same performance, if not improve its performance in 2017. According to a January report published by Citi, mining stocks will perform strongly in 2017. Their explanation for this prediction is that mining stocks "will be buoyed by the trends across the industry globally whereby there is an increased free cash flow; earnings are experiencing an upward momentum and the potential to return excess capital to shareholders."

Have mining sector stocks performed as expected?

We are now in July, six months later, and we need to look at two questions: Have mining stocks have lived up to global expectations, and secondly, are they able to continue this performance throughout the entire year?

Before we answer these two questions, it is worth noting that Stern Options financial market analysts were doubtful at the beginning of this year that the mining industry would outperform the 2016 results in the global capital markets. A senior analyst noted that “it is unlikely that the mining sector will experience the same growth levels as it did in 2016. This is primarily due to the uncertainty surrounding global geopolitics as a result of Brexit, the expected slowdown in China and the unknown international relations model that the US president Donald Trump will adopt.”

Based on this information, it looks as though the Sterns Options market analysts’ opinions are correct. Marketwatch's June and July headlines highlight a highly volatile gold price. It is up for one or two sessions, and then it drops again. Silver has also dropped to its lowest price in over a year.

This gold price volatility is due in large part to the continuing uncertainty around the global geopolitical climate as well as the associated socioeconomic conditions. Gold is traditionally known as a safe haven stock; therefore, the gold price is likely to drop (and did drop on July 3) as a result of gains in the US dollar as well as strengthening US equity stocks. Myra Saefong noted on July 3, that August gold fell 1.9%, the lowest it has dropped since May 10.

Conversely, when regional market investors feel threatened by the geopolitics, they tend to withdraw their money from the riskier investments and invest in gold or other safe-haven stocks to protect their investments.

On the other hand, the Canadian (British Columbia) mining industry is cautiously optimistic because the 2016 trend where their primary metal and resource commodities rose or stabilized continued in the first quarter of 2017.

PWC Canada published a report noting that the mining industry, although affected by the same global geopolitical and socioeconomic issues as the rest of the world, has managed to increase its gross revenue to $8.7 billion in 2016 from $7.7 billion in 2015. This increase in total revenue has been due in large part to the fact that the mining houses have managed to reign in their capital expenditure. Additionally, the prices of mining stocks such as coal and copper started picking up towards the end of 2016, and these prices held steady for the first quarter in 2017.

I do not believe there is an easy or simple answer to the question of whether mining sector stocks have performed as expected, and whether they will continue to outperform 2016 results. Overall, it seems as though mining sector stocks have held their own in spite of volatile and unstable market conditions.

As to whether mining industry stocks can hold their own throughout the rest of 2017, I don’t know. I am not sure whether anyone can really answer this question accurately. There have been lots of small ups and downs that can and will, have an adverse impact on the short-term trader. However, the long-term investor should be able to ride out these short-term market movements.

If the markets continue to see similar levels of volatility versus stability, then I suspect that current investors will continue to benefit from investing in mining stocks. However, if one of more of the world’s financial markets were to collapse, it would more than likely drag the remaining markets down with it. Ergo, investors would lose a major part of their overall capital.