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A funny thing has happened to the bust that always follows the boom in metals and metal mining stocks: It's been delayed big time.
That's why, despite the huge run in commodity prices and the stocks of metal miners, I think this is still a good time to buy the shares of midcap mining stocks.
As I sketched out in the last of my two most recent columns on China, "Why China's train wreck will hit us, too," I think the global economic growth that ultimately feeds the commodity cycle will accelerate into 2008 before the danger of the train coming off the tracks peaks in 2009.
Boom-bust, interrupted
Here's what's supposed to happen. Mining companies, after underinvesting in exploration and production for years, get taken by surprise when demand for zinc, copper, nickel and tin suddenly surges as the cycle turns and a long, industry-wide slump comes to an end. Mining companies rake in the cash as demand soars and mining companies struggle to increase production.Finally, though, the boom proves to be its own undoing as mining companies finally figure out how to turn that river of cash into new production capacity. With every mining company adding capacity, the industry is set up for a bust as prices level off and then begin to fall, thanks to overproduction. Sometimes a drop in demand caused by a decline in global economic growth arrives just in time to put the final nail in the industry's coffin.
This time the commodities boom has sure delivered the cash flow. Citigroup (C, news, msgs) projects that the mining companies it covers will generate $253 billion in cash from 2006 through the end of 2008.
But it hasn't led to a rush to expand production. Companies are investing in new production, but they're spending just as much or more on increasing dividends and buying back shares. For example, BHP Billiton (BHP, news, msgs), a Jubak's Pick since April 2006, will see operating cash flow of $10.8 billion in the fiscal 2006 year that ended in June, projects Morgan Stanley. Projected capital spending in 2006, Morgan Stanley estimates, will come to about half of that, or $5.4 billion.
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Subtract another $2 billion for dividends and $1.7 billion to buy back stock, and BHP Billiton still shows a substantial increase in cash for the year. And that excess cash flow will just increase, given current trends, to $4 billion in fiscal 2007 and $10.4 billion in fiscal 2008. By the end of fiscal 2010, in June, the company will have accumulated $33.4 billion in cash, calculates Morgan Stanley.
BHP Billiton isn't alone, either. Citigroup projects that the mining companies it covers -- the ones set, by its estimate, to generate $253 billion in cash by 2008 -- will have an extra $108 billion in their coffers after paying for dividends and capital spending.
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