... it's all about cash flow and cash reserves. This is a thought piece designed to codify my thinking and is not intended as any kind of investment advice.
Commodity prices have fallen like rocks lately. Oil is below $40 a barrel and copper is way down as well. Mining stocks are cheap right now as are the oil companies. I prefer the oil companies.
Everywhere you look, people are still driving cars. However, it's hard to find construction jobs going on and auto makers are closing plants, even if temporarily. That means that there is still a market for oil, but almost none for metals like copper. Exxon (XOM) has a reduced cash flow, but I would bet that Freeport-McMoRan Copper & Gold (FCX) has seen theirs fall much more.
What happens when you start to run out of cash? First, you cut expenses. You close down projects that were predicated on higher prices for your products and you might lay people off. When you lay people off, you start to lose your corporate knowledge base. Depending on whether or not your (former) employees find another line of work, you may not be able to get them back. When business picks up, you may have to train a lot of new staff.
I'm not saying this is happening at FCX, but as I watch what's going on and think about how I would run the company and the decisions I would have to make, I'd much rather be in XOM's shoes where there's a constant demand for their product than FCX's where there might not be much of one at all.
3 comments:
Actually the oil industry does exactly the same thing you are describing for the mining industry. Oil exploration workers expect to be dropped the moment the price drops. For the most part the production folks keep their jobs, but the research folks are let go. So both industries have a problem loosing their experienced workers.
Although I agree with your opinion that in the short term oil is a better investment than mining. I think in the longer term they both will do well.
Kelly, I'm sure that's true, but a company like Exxon can keep a lot more not-currently-profitable staff on hand than Freeport can. Exxon has a huge mountain of cash to draw down.
Argh. Don't remind me. I develop new technologies for the mining and metals industries for a living. When times are flush (like they were last year), everybody is working like crazy and want results NOW NOW NOW!, and anybody with anything vaguely resembling expertise is in hot demand, and I can't possibly keep up with all the people who want my help. But then when the prices inevitably crash, they immediately cut development, halt all their external contracts, stop returning your calls, and frequently "forget" to pay their outstanding bills. I expect it, of course, and have ways to ride out the bottom of the cycle, but it is still aggravating. If there was some way to switch to making a living just taking pictures of bugs, I'd do it.
And mining is significantly different from oil, in that the profit margins are thinner, the lead times for new development are longer, and the price swings are more drastic. Back in the early 1980s, the oil industry was really flush with cash and thought that they would move into mining, because hey, "oil and mining are a lot alike, right?" So they bought every mining company they could get. And then promptly lost their shirts when the next downswing hit, and it was a lot harder to ride out than they thought it would be. That's actually the major thing that destroyed a lot of the domestic mining industry in the 80s.
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