Interactive Investor

Mining remains a viable long-term play

1st April 2015 08:53

Lee Wild from interactive investor

The global mining sector has had a tough few years. Hit hard by a plunge in commodity prices, driven largely by a decline in demand from China, companies have had to think twice about which projects they run and those to mothball, or sell. Lower prices make things difficult for both large and small operators, but there are still plenty of well-funded miners on AIM with the potential to weather the storm, discovery new assets, or getting potentially valuable mines into production.

And there is clearly a commodities cycle at play here. A sharp correction during the financial crisis in 2008-09 was followed by a spectacular China-driven rally, which sent many metal prices to record highs. But as Chinese growth slowed and with only modest global economic growth and over-supply, prices have spent the past three years in decline.

"We're convinced that the long-term fundamentals for metals remain strong," says John Gravelle, Global Mining Leader at PwC. "Now that companies have restructured and refocused, we see reasons for cautious optimism. In the past we've described the industry downturn as a 'confidence crisis.' It will be up to the industry to work on regaining investor confidence to ensure its long-term sustainability."

"It's our belief that demand for metals will continue, but it won't be the steady upward climb that we saw between the end of 2009 and early 2011, or in the years leading up to the 2008 commodities crash."

Whether or not this is the end of the so-called mining "super cycle" remains the subject of hot debate. Consensus is that it's not.

And while sector-wide cost cutting remains an ongoing theme, it should, at least, better prepare miners for future price volatility. Lower metal prices also make this a good time to buy assets on the cheap.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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    Commodities