Mining Companies have been crashing since 2011, why are they rallying now?
In 2011, mining companies hit their highest point in 20 years, and though this was a great time for their investors, it was short lived. Since then Metals and Mining companies have steadily declined in price; that is, until this year. For some reason these companies have been rallying for the entire year of 2016.
Metals prices haven’t been all that solid in recent years. Pun intended… And because of these unstable prices this whole industry has been plagued with volatility of double the overall market while making less overall.
Here I’ve plotted the prices of both gold and silver since 1995, and you can tell that the mining companies are correlated almost exactly to the price of commodities – not surprising. What is surprising is the fact that these companies are increasing their share price while they are losing money quarter after quarter and paying extremely high dividends.
Mining and Metal investors are cut from the same cloth as those who invest in oil – it’s all based on the price of commodities, and the primary thing these investors care about is their dividends. So, if a company is cutting its dividends it can be assumed that investors will pull out and put their money into another company. This forces companies to give dividends they cannot afford. This is such a common occurrence that roughly 85% of metal and mining companies are borrowing money in order to pay their dividends.
Though not great, only investing in companies that are capable of paying their dividends gets you closer to returning the same as the S&P over the past twenty years. If you are insistent on investing in a metal and mining company, I would suggest going for one of these companies as they are more stable than the rest of the industry, and thus less volatile – allowing you to sit back and collect your dividends without worrying.
It may just be me, but I don’t understand how a set of companies can increase in value while they are using debt in order to feign security to their investors. It would be one thing if it was one or two companies within the industry, but it isn’t. When virtually the entire industry is doing this, and has been doing this aggressively since the price of gold and silver crashed in 2011, you have to wonder how long they can keep the charade up before their credit lines begin drying up and their investors jump ship.