Tony Daltorio: It was a disappointing summer for mining stocks, with some measures falling more than 25% for the year at one point.
While the indexes are up from their lows of the August swoon, the S&P Metals & Mining Spider ETF (NYSE:XME), which holds only U.S.-traded stocks, is down 23% from its high for the year, and the EGShares Emerging Markets Metals/Mining ETF (NYSE:EMT) is down 22%.
Earnings have largely been great, such as the 86% jump for BHP Billiton (NYSE:BHP), with forecasts pointing to above-average growth through 2013.
Some investors are having second thoughts about the sustainability of high metals prices, in the face of growing evidence of a global slowdown in economic growth. For example, Germany’s GDP grew just 0.1% in the second quarter, while governments in China and India are working to slow their economies to control inflation.
Other investors are concerned that investments to increase output from the mines are about to come to fruition, which will increase supplies at a time of declining demand.
This view has both strong proponents and opponents. Most of those with an opposing view actually come from the mining industry, rather than Wall Street. They understand the length of time and the difficulties encountered in bringing a major mining project online.
For example, Brazilian mining giant Vale (NYSE:VALE) recently argued that the price of iron ore would remain elevated, at least $150 a ton, for at least five years. Their reason? Delays in iron ore projects around the globe.
Gayle Berry, metals analyst at Barclays Capital, is taking the Vale side in the argument and doesn’t see lower metals prices anytime soon, mostly because of difficulties in bringing new mines into production.
Andrew Keen of HSBC, however, thinks the worst case scenario for mining companies has already been baked into the prices of their stocks. “Mining stocks are wrongly discounting a return to long-run operating profit margins as early as 2012,” he wrote.
Mining companies certainly face rising costs for labor, equipment and materials.
Rio Tinto (NYSE:RIO) is spending $2.4 billion more than previously expected to fund its iron ore expansion project in Australia.
Overall, the mining companies’ balance sheets and rising profit margins show that they are generating more than enough cash to offset these rising costs. Which means some companies may be worth a second look.
Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.