High Metal Prices are the New Normal
TORONTO, Feb. 6 /CNW/ -
What: Contrary to the continued assertions of mining analysts, current
metal prices are actually a return to sustainable price levels
following an extended period of artificially depressed prices,
says a new report from Ernst & Young.
Most mining analysts - the report says - are off the mark in their
repeated predictions of a sharp decline in metal prices. While
analysts are wary of straying too far from the comfort zone of
historic averages, the mining companies - by their actions - are
taking a far more realistic view.
- Research shows that analysts' short-term metal price forecasts
since the beginning of 2005 have been significantly adrift of
where prices have actually settled, by anywhere between 20 per
cent and 200 per cent! The result? Most mines and mining
companies have been materially undervalued.
- More often than not, significant premiums have been paid over
market prices. Over US$100 billion have been spent on the
recent takeovers of Falconbridge, Inco, Phelps-Dodge and Alcan,
as the key players fight it out for control of low-cost
production across the globe.
- Research shows mining companies that have pursued growth
through acquisitions have consistently outperformed those that
have chosen to grow organically.
- The report's authors studied metal prices over more than a
century, highlighting a number of periods that have been
interpreted as cycles in the mining industry.
- The study shows that specific reasons were behind most of these
cycles, which are unlikely to be repeated in the near future.
For example, weak prices in the '90s resulted from a collapse
of the Soviet Union, triggering the release of 50 years of
accumulated stockpiles of minerals alongside a sharp reduction
in domestic demand in the CIS.
- Layered on top of traditionally recognized economic cycles are
major developments such as the industrial revolution, the rise
of the U.S. economy, the Cold War, the collapse of communism,
and, now, the industrialization of China and other emerging
Who: Ernst & Young's mining sector leaders can provide more insight on
the mining industry's current appetite for consolidation and the
role valuations play in the sector.
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