Doom, gloom, and the silver lining in mining stocks

As I recall, back in December I spoke about the chance of the Dow Jones hitting 11,000. It was roughly the same time that I mentioned my targets for the price of oil (initially 110 and then upped to 125). So far one has exceeded my expectations the other is probably forthcoming to a similar degree. So what else can investors expect?

Well I think the mining sector has issues that are both positive and negative. So far there is still a huge run-up in commodity prices that is keeping many companies in the black that otherwise wouldn’t. Anglo Platinum out of South Africa is one such example though there are others. But this run up won’t last too much longer.

One of the main factors helping many mining companies has been the fact that supply has been cut. Energy shortages, most notably in South Africa but also in North America and Chile, forced supply down artificially helping to boost prices. But that is a problem that has been in the works of being fixed since the 1st quarter. Once it is done supply will rise to meet the growing demand and be a signal for profit taking.

Another factor to consider it the American economy. Mining companies eked out a mere .2 percent profit so far this year, though only one other group in the S&P 500 also held a profit. As costs for fuel continue to rise that profit margin is evaporating. Add in a decrease in demand due to cut-backs, and then an increase in supply and you have strong sell signals.

Of course there are still companies in the group that have room for these problems like Marathon Oil and Newmont Mining Corp. Marathon is only trading around 7.5x earnings and Newmont was the 9th best stock on the Philadelphia Stock Exchange Gold & Silver Index. Some analysts like Brian Barish of Cambiar feel they have not caught up to the surging resource prices and thus are worth owning.

So what is the net result? It’s no easy answer but since I expect a run up in heating oil and crude oil prices as the 3rd and 4th quarters hit, plus a continued bear market in the U.S. driving Gold and precious metals, my belief is that mining stocks will outperform most markets into the 2nd quarter of 2009.

Now that doesn’t mean profit, nor does it mean that other factors like who wins the U.S. Presidential race won’t affect the final results. But I think the odds are likely to favor all the mining stocks even if their books aren’t perfect. Its food for thought, take it as you will.