Mining minnows: the new dotcoms?

By Euan Stuart Oct 31, 2005

Here’s something that is often forgotten about stockmarket bubbles: a lot of people make a lot of money in them. When we think about 1999 and 2000, we tend to do so in terms of the losers - the doomed online retailers such as Boo.com and Mangoclick, and the hapless investors who piled in too late and are still nursing losses. But there were thousands of investors who timed things rather well - investing in 1997 and bailing out in 1999, for example. The lesson? Simply because a new investment craze seems a little out of hand, that’s no reason to ignore it. Just don’t be the last one in. And don’t stay in too long.

That’s something to remember when you are looking at the mining minnows listed in London these days. Their dramatic rises seem remarkably reminiscent of dotcom madness, says Simon Watkins in The Mail on Sunday. Take oil prospecting company White Nile. When it floated on 10 February this year, its shares were trading at 32p each. Five days later, with the market gripped by “White Nile fever”, they had risen 430% and were suspended at 138p. The firm now claims that it has made a deal with the soon-to-be-formed government of South Sudan (formerly the Sudanese People’s Liberation Front) for exploration rights to a 26,000-square-mile block there, something the Sudanese government in Khartoum says is not possible. So far, so “nonsensical”. Indeed, says John Waples in The Sunday Times. White Nile may have prospects, but it isn’t worth £200m: “there is about as much chance of the company justifying this meteoric share rise as I have of winning the lottery”.

Still, White Nile is not alone in its meteoric rise: shares of a whole range of small oil and mining groups have been hitting record highs lately. And while White Nile may be a dud, many are rising for good reason. Oil prices have been high for some time, and this week hit the $50 mark again thanks to cold-weather related demand. And the price of copper (a key commodity of the electronic age) has soared to its highest since 1989. The results coming out from the mining sector have been pretty impressive as a result, says Lex in the FT. During the technology bubble, analysts would preface their questions on management-conference calls by exclaiming, “Great quarter, guys!” Similar “eulogies” are now features of mining-company results. BHP Billiton recently announced underlying operating profit up by 95% year-on-year, and like Rio Tinto signalled its optimism by raising its dividend. And there is probably much more good news to come: most short-term earnings forecasts use commodity prices well below those implied by current futures markets, suggesting further upgrades.

The only question left to ask, then, is how long this happy state of affairs can continue. The answer appears to be for some time to come. Surging demand from China and across-the-board supply constraints after years of underinvestment underpin the argument for sustained price increases. There are lags before new mining projects come on stream, so supply increases are unlikely to end the metals boom this year. More uncertain is whether demand growth will outstrip the supply response over a five-year period: the miners and oil firms (those that have some oil, at least) look good for now, but investors should keep an eye on the fundamentals. Don’t be the last one out.

Published in Tips & advice | More articles by Euan Stuart

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