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One of the worrying features of many local portfolios I see is that they hold gold and platinum mining stocks.
This trend is often more pronounced in newer and smaller portfolios.
But truthfully, I see these beaten down mining stocks in far too many portfolios, and in every case the stocks are loss-making.
Sometimes that loss is modest, but it can be massive due to a concentration of these single-commodity mining stocks.
There are a few reasons for these holdings, with the biggest being home bias and price bias.
Home bias, in this case, is that because our local economy was largely built on the back of mining and miners, many still feel an attraction to the dizzy heights the shares once reached.
This is despite the fact that the industry has long had its day. Local mining has been in decline for decades and as a percentage of our economy it has been falling for even longer.
But the industry still gets outsized attention from media and investors, in part because of its history and in part because of our own bias towards its previous status in our economy.
Price bias comes from those previous highs that have a magnetic charm; as we gaze at the chart of a stock that is down 90%, we dream of the day it will again reach those highs.
Here the reality is that an all-time high is totally meaningless, especially if the industry is in structural decline.
This structural decline is an important point. Mining itself is a tough industry for many reasons, but being a price taker is perhaps the biggest.
A mine sells whatever it’s mining at the prevailing market price. It has zero pricing power, and if the price being traded happens to be loss-making for the mine… that’s just too bad, you’re now operating at a loss.
Commodities are a supply-and-demand game and as technology has improved, and we’ve dug around in more parts of the world, we keep finding more ore deposits.
This means we keep finding more supply without a commiserate increase in demand.
In the case of platinum, global demand is a little under 8m ounces, according to statista.com, whereas gold sits at about 110m ounces.
The issue here is that a modest increase in platinum production tilts the supply curve dangerously, and that’s what we’re seeing right now with platinum around $860.
Gold is less sensitive to new supply or demand pressure as it has a much higher annual number every year, needing a significant change in either the supply or demand to tilt the price.
The time to own single-commodity stocks is when the commodity price is booming. At any other time you’ll lose money.
It is very important to wait for the boom to start – do not jump in ahead of the expected boom, because if it does not arrive, rising costs will kill the miners’ profits.
Be patient. Or even better: just ignore the single-commodity miners.
I have been investing for decades and I have never owned a single-commodity miner, and my portfolio has done just fine without them.
A last important distinction is the global diversified miners such as Anglo American and BHP*.
These companies have structured themselves to ensure they’re producing commodities that are in demand and in locations that are at the lower end of the cost curve.
The demand point is important as they can exit commodities they feel will no longer be profitable for them, and lower costs always win at the end of the day.
A single-commodity miner is stuck in that one commodity that may be in permanent decline and, as such, stuck with permanent loss-making.
*The writer owns shares in BHP
This article originally appeared in the 19 July edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.
