Citi: Beware the mining rally

Some very solid analysis from Citi today:

The miners have experienced a nice rise in 2015 so far and it is now time to figure out if this is just some positive ‘noise’ within a sector which may continue to disappoint in the next few months. Our fundamental view is that valuations in the mining sector are attractive based both on longer term valuations such as P/NPV and on shorter term metrics such as near-term dividend yields.

…That all seems positive in terms of the medium term but the one nagging issue is more near term and relates to the fact that the market seems to be inputting nothing like current spot prices into its models.

…In our MM product, we always like to ask “What are the charts saying”, as a counter to our fundamental view. Figure 12 shows the recent rally in the UK mining index. A chartist would describe it as exactly that: ‘a rally’.

…Success breeds success and the chart below indicating commodity assets under management shows that we are not breeding success at the moment. Miners are following global equity indices upwards but commodities are not. Something’s gotta give!

That first chart is what a less civilised person might coin the “idiocy spread”. A few points to add:

• no mention of China which is not sending anything other than a stabilisation signal at best so there is little chance of the kinds of price rises needed to justify equity prices, indeed I expect further falls;
• NPV and book values only as good as the data inputs. The old “garbage-in, garbage-out” problem. As the super-cycle comes apart mine values over the long run will come under increasing pressure, hammering balance assumptions lower as well;
• three words for ya in conclusion: bear market rally.