MINING FINANCE AND INVESTMENT

ANALYSTS PREDICTIONS LAG REALITY

Mining companies significantly undervalued
Analysts’ underpredictiaons of metals prices in the short term leading to material undervaluation of mining companies and thus helping fuel acquisitions by cash rich predators.Posted: Monday , 26 Nov 2007

LONDON -
Speaking at the Mines & Money conference last week, Michael Lynch-Bell, head of mining & metals at Ernst & Young, said that recent predictions of metal prices have consistently lagged the actual spot prices by significant margins. His comments were based on a new report by Ernst & Young - EYeSight on consolidation: back-pedalling on the cycle - pre-launched at the event, which reviewed the metal price forecasts made by analysts over the last three years. The rAesearch showed that analysts' short term metal price forecasts since the beginning of 2005 have been significantly adrift of where prices have actually settled, invariably on the pessimistic side. The result, according to Lynch-Bell, is that during this period most mines and mining companies have been materially undervalued. He comments, "Metals prices have mostly risen sharply over the past three years. This is particularly true of the key industrial metals: copper, nickel, steel and aluminium.

It is clear from our research that the metals analysts did not foresee these price rises, or that the price rises would endure as long as they have. Only after prices have risen have the forecasts of the near future prices followed. This has had the effect of both deferring investment in new capacity, and undervaluing existing and potential producers." All of this, according to Lynch-Bell, means that acquirers have been able to buy strategic assets at a good price over the last 3 years and now have the cash flow to make further strategic purchases while the stock market plays catch-up - the mining consolidation era has only just begun.