Good sale @ $37 Andy, well done. I also saw the resource downturn coming and avoided the entire sector up until starting to dip the toes in around 7-8 months ago and buying more shares over the last couple of months.
I agree that most resource companies either lose money, or don't make enough money to justify the capital investment and risk, or make just a little bit of money. Having said that, I think the exceptions are the lowest cost producers. The lowest cost producers will tend to make a little bit of money at the bottom of the cycle, very good margins mid cycle and rake it in at the top of the cycle. On average, resource companies with the lowest costs tend to make average return on equity (over the longer term) similar to the big banks, around the 12 - 18% mark. The big difference being the smoothness of the earnings. While Buffett generally avoids these companies, and they are indeed price takers, they have a competitive advantage that will see them survive any downturn, and be best positioned with higher market share in the inevitable upturn. At the bottom of the cycle they won't make a lot of money (usually still a little bit), but mid and top of cycle they make profits that most businesses would be extremely envious of. On average they make very good money, due to their cost advantage.
I agree the next 12 months will probably be quite tough. I'm not sure where (at what price) or when it will bottom, in my opinion though I'd be very surprised if a bottom of cycle is not reached over the next 12 months. Higher cost producers are starting to exit, this will accelerate. Some mines are also being depleted. Capex on new ventures has been slashed, setting the scene for a future supply shortage (although that will be quite a way off). In the oil scene, the US shale guys are starting to shut down at an increasing rate.
A reduction in demand from China is certainly possible and would cause more pain, and lower prices as you've suggested. But it would also accelerate the closure of high cost producers. If iron ore fell to US$30, I would suggest within a year that virtually all iron ore companies would have ceased production as they would be haemorraghing cash (only the lowest cost with the strongest balance sheets would remain). The four lowest cost producers make up about half of current supply, so the top half going out of business would quickly reduce supply to meet a new demand situation if that occurred. The lowest cost producers with strong balance sheets survive almost any scenario.
I'm not sure what the total impact of this burst dam will be, bit of an unknown. Shame I didn't hold out for another couple of weeks before dipping the toe in with bhp.
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