Is the slump in ASX stocks Iluka Resources (ASX: ILU) and Mirabela Nickel (ASX: MBN) the canary in the coal mine?
The AFR says "…the resources boom is ending."
James Montier of global hedge fund GMO, agrees, saying in the AFR…
"Resources are hard to value because you cannot assess them independently of the commodity price. And they're only set by what someone is prepared to pay for them — by marginal demand."
We're staying away from the sector too. The long list of companies recently hitting 52-week lows includes Alumina (ASX: AWC), Altas Iron (ASX: AGO), Dart Energy (ASX: DTE), Gryphon Minerals (ASX: GRY), Uranex (ASX: UNX) and Kingrose Mining (ASX: KRM).
As if to emphasise the point, this week alone we've seen the shares of market darling Iluka Resources slump after reporting it was reducing production of zircon because the global outlook remains unclear.
Worse, Mirabela Nickel dropped 30% before entering a trading halt as it considers its capital raising alternatives. Market speculation is that Mirabela could follow fellow miner Kagara (ASX: KZL) into administration.
Many smaller resources stocks have been sold down below levels seen at the depths of the GFC.
But where normally we see opportunity in seemingly irrational sell-offs, we're continuing to steer clear of the hundreds of highly-speculative loss-making mining company, most of which will never, ever, make a profit.
Greater fools? Not us
Investing in such stocks relies on the greater fool theory — a theory that states it is possible to make money by buying shares, whether overvalued or not, and later selling them at a profit because there will always be someone (a bigger or greater fool) who is willing to pay the higher price.
The theory can work really well, until it doesn't, like now.
As Warren Buffett says, you only find out who is swimming naked when the tide goes out…and for many small mining companies, the tide is receding fast — almost as fast as their dwindling cash balances.
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The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. Bruce Jackson doesn't own shares in any companies mentioned in this article. This article contains general investment advice only (under AFSL 400691).
