Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Mining Becomes the Black Hole of Income

A good way to think of a mine is as a hole that one throws money down in hopes of making a profit in the future. Sadly enough, mining stocks are proving that old cliché is very true right now.

Bloomberg estimated that mining stocks have lost $1.4 trillion in value since 2011 because of over investment and the collapse in commodities prices. If that is true, the losses in mining could exceed the gains to the global economy from the growth of companies like Amazon, Apple Inc. and Alphabet.

It also means that the mining industry and many of the world’s resource-based economies are now in depression. More importantly, it explains why the so-called recovery has not happened: The gains in sectors such as technology are being erased by the losses in mining and other resource-based areas like oil.

How Much Money Can Mining Companies Lose?

Disturbingly, there seems to be no limit to the amount of money that mining companies can lose. Take Rio Tinto (NYSE: RIO); the iron producing goliath’s income fell by $3.486 billion between June 2014 and June 2015.

Rio reported a net income of $6.4178 billion in June 2014 and $2.9231 billion just a year later. Rio Tinto also saw its revenue fall by nearly $10 billion in the same period; Rio reported a TTM revenue of $51 billion in June 2014 and $41.31 billion a year later. That’s frightening because Rio is one of the healthier mining companies.

Abandoned mining equipment will become a common site all over the world real soon.
Abandoned mining equipment will become a common site all over the world real soon.

A more disturbing scenario is playing out at the metals producer Anglo American (OTC: AAUKF), where stock prices are approaching the junk pile. The company reported a TTM revenue of $24.41 billion June 30, 2015, yet its shares were trading at $3.32 million on January 8, 2016. Anglo reported a net income of -$6.99 billion on June 20, 2015. Just a year earlier Anglo reported a net income of $100 million.

These numbers show us that Anglo is probably in the death spiral rite now. Its revenue fell by $4.75 billion in a one-year period, dropping from $29.16 billion to $24.41 billion.

What’s even more disturbing is the collapse of Anglo’s market capitalization. On January 5, 2015, Anglo American had a market capitalization of $24.25 billion. By January 8, 2016, that number had fallen to $4.54 billion. This seems to indicate that the scrap or junk value of Anglo’s mining equipment might exceed the value of its stock.

The collapse of Anglo should tell investors to stay away from any natural resource-based company right now. Stock prices, revenue and income are in freefall, and there is no sign that it will stop any time soon. Mining has become a giant black hole sucking up cash and value rather than a profitable industry.

Carnage and Chaos in the Mining Sector

My prediction is that there is going to be major carnage and chaos in the mining sector as miners start reporting their financial numbers for December 2015. Even greater losses than those we’ve seen will be forthcoming, and the few mining investors left will run for the exits.

If giants like Rio Tinto are suffering such losses, one has to wonder how the smaller miners are going to survive. Although, my guess is that they’ll stay afloat by dumping precious metals on the market, much as the Saudis are dumping oil.


That will make the situation worse by driving down prices and revenues further, which will necessitate even more dumping. One has to wonder how long this situation can last.

My prediction is that mining stocks will not recover for at least 10 years. Stocks are so depressed and commodities are so low that it will take several years of depressed conditions just for a return to normalcy.

We will soon see a large number of mining companies collapse and a massive consolidation in this industry. The question we will need to ask is not if mining companies are making money but if they can simply survive. One has to ask how long before we will be asking the same thing about oil companies.