Deleveraged Profits in Base Metals
Reuters has a story on China's top aluminum producer's profit falling 92%.
I could see that base metals were going to have some problems and I tried to show the craziness of some valuing their mining companies based on current metal prices. That looked like a great argument to me when I first started looking at miners, but very quickly I had looked at prices and historical prices so I knew that you had to be ultra conservative about valuing minerals in the ground. I did this post, The Abundance of Minerals, about a year ago trying to show how crazy it was to value a company based on its reserves. Reserves come into valuing a company, but to value them at bubbled prices is milkmaid economics.
Aluminum was the least bubbled metal out of all metals, probably because it is one of the most common metals in the earth's crust in comparison to all the other metals, so finding a place to mine isn't that hard. Having said that, it went up about 3-fold over the low.
If you see a 92% plunge in profits for the least bubbled metal, just what kind of drop in profits do you think the rest of the base metal companies are going to have? What do you think is going to happen to nickel, which is back into the historical low range after it had quarters where prices were five times higher?
Do you think the dividends are going to survive here? I don't.