We examine why the market appears to have missed the commodities boom - as indicated by the fact that on, the one hand, the mining sector has enjoyed boom times in terms of companies’ profit growth and excess returns achieved by mining investors, whilst on the other hand, the market valuations (PE ratios) have consistently lagged behind the wider market. We assess whether there is a bubble about to burst in the mining sector or whether the sector is still undervalued (as low PE ratios may indicate).
In a volatile market it is vital to understand the drivers of value. Without taking into consideration all of the factors influencing value, there is a risk of doing a deal at a price which is not optimal, or assigning a value to an asset for other purposes which cannot easily be supported. This is particularly important when doing deals in a market where commodity price trends and macro-economic factors represent key risks and uncertainties.
In this publication we compare market prices to fundamentals in order to get a better handle on value. We also discuss why, unlike technology investors, investors in mining companies do not seem to be willing to pay for future earnings growth potential and rather rely on current commodity spot prises and historic earnings.