I have never seen a greater disconnect between resource equity prices versus the underlying fundamentals. Metal prices, although down from their highs, are still well above long term trends. The producers remain profitable, aside from the write-offs of their disastrous investments. Vale, for example, reported third quarter income of $3.7 billion, a near record. In spite of that strong performance, the Vale share price is barely above the multi-year low.
The across-the-board selling that hit the resource industry has driven down the values of every company in the industry, the good along with the bad. There is growing evidence of a change in investor sentiment. The resource indices have stabilized and are no longer dropping. The mood among investors, as noted at two recent investment conferences (San Francisco and New Orleans) has shifted to more of a forward-looking stance: At least a few people are beginning to build positions at these low prices. Some investors are beginning to see the wisdom of rotating out of record-high main-stream equities into resources, where one can find attractive valuations.
The resource industry has always been cyclical. This down cycle has been worst than most, and has come in spite of strong underlying fundamentals. At some time, the market will once more turn positive.
We continue to look for companies offering exceptional values, with a few new companies introduced in our latest issue.
It is hard to know what to do with many of the companies that we currently cover. They have good projects and experienced, capable management teams, but it may be some time yet before some of those companies begin to catch investor attention. I recently compiled an updated summary table ranking all the companies we follow, taking into account the prospects for near-term recovery. A portfolio of carefully selected, high quality companies accumulated at the current over-sold share prices will turn out to be an exceptional investment.