SBM Prescient call 3 – Mining Sector Bull case update

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Over the last few months, we have been resolutely bullish on the mining sector, alerting our readers to the material undervaluation amongst many mining stocks, particularly the likes of Bumi, Lonmin and ENRC – all of which have led the tables of the biggest risers amongst the large caps in 2013 (see table below). Here’s a link to the special Mining edition of our magazine too –

We re-iterated our stance for the disbelievers on November 23 ( in which we rebuilt the bullish case for the sector just as many investors were heading for the exits. Again, our favoured stocks were the “story specific” ones – ENRC, Vedanta, Lonmin and Bumi. As you can see in the Mining sector returns table below, we hit the hat-trick catching all 3 of the top performers (unlike out friends at Soc Gen!!)

We can see that the mining sector as a whole has outperformed the FTSE 350 by 4.7% since the start of the year. With the key economies of China and India showing renewed vigour, and the US also posting decent economic figures in recent months which has been flowing through to rising commodity prices, it is not surprising that the sector is up markedly since the start of the year. Married with the very attractive valuations, all the ingredients were on the table to build a successful and enjoyable financial meal! Unlike the wider market however, which has fully now fully recovered from the financial crisis, the mining sector is still 34% below its highs observed in May 2008. Question is after the cracking recent run, is it time to start taking money off the table?

The mining sector in fact hit a high of 30,746 on May 19, 2008 but was severely hit by the financial crisis as global demand for commodities sank brutally. The sector has now recovered to 20,404 but it is still sitting at a discount of around 34% to its previous peak. There is no doubt in my mind that at the peak, the mining sector was in a bubble, and I personally doubt that the index will take out its peak for many years. This is why we have been focused on the stock specific plays and believe it is right to continue so. We still see material value in Lonmin and Bumi – in the latters case, particularly if the unwind of the Bakrie shareholding issue takes place over the next few months. £4+ should be eminently achievable. Ditto with Lonmin.

We can see in the chart below that the gap between FTSE 350 and the mining sector indices increased as the great financial crisis intensified through 2008-09. It then narrowed materially until mid 2012 at which point it opened again considerably, principally due to Chinese slow down issues aswell as certain geo-political problems in countries like South Africa.

In the summer of 2012, as you may remember, talks over the US debt ceiling and the loss of the AAA US credit rating led to huge volatility and investors demand for safe assets increased with mining stocks dropping heavily – it pays to sift for the “baby amongst the bath water” sometimes! The gap still persists today and we believe that this will narrow once more through 2013 as the sector outperforms the wider market. That is not to say however that they both will rise in tandem. We wouldn’t be surprised to see the FTSE 305 flatline during the balance of the year/be modestly up but the mining sector add another 10-15%.

To conclude, with our picks still trading towards the lower end of their historic valuation range and, with the exception of ENRC, all 4 stocks having healthy balance sheets, there is no reason to jump off this train as yet although we are a believer in booking profits steadily and so any extension of gains over the next few weeks should, in our opinion, be taken as an opportunity to reduce exposure. Out of the 4 stocks, the one to trim with more urgency, we believe, is Vedanta.

If you’re looking to make expose yourself to the Mining sector and would like to do it with all the benefits of a spread betting account but with professional fund management principles from a proven team, then email TITAN MINING to

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