As commodity prices plunge, miners are stretching their numbers

My July 8 post “Mine economics explained” explains why I think capitalization of stripping expenses is bullshit.  The current trend is for miners to make more aggressive assumptions in that department to boost their earnings.  This is contrary to reality.  Lower commodity prices means that mines will close earlier.  It would make sense to take impairments on previously capitalized expenses.  (Or better yet, accounting rules should be overhauled to reduce accounting shenanigans, investor transparency should be improved, and the accounting burden on public companies should be reduced.  Simpler rules would benefit investors.  The problem is that the system has been co-opted by public companies that want to play games with their accounting and rulemakers who enjoy lucrative consulting gigs helping companies game the complex rules that they created.)

The other disturbing trend in mining is that large cap companies like Suncor and Teck Resources are pursuing uneconomic oil sands projects.  The Syncrude project (partially owned by companies like Canadian Oil Sands and Suncor) is bleeding cash at current commodity prices.  I doubt that any of the new oil sands mining projects have economics that make any sense at all… yet Teck and Suncor haven’t mothballed their Fort Hills project.  Crazy.  Their institutional investors aren’t that smart because they have not gotten rid of management.  I’m a little annoyed because I think that Canadian Oil Sands is likely going bankrupt and I’m not shorting it because of the Suncor takeover.

Technically I shouldn’t be annoyed at the dumb money because dumb money will create short selling opportunities somewhere.  Still, I’d like to think that there is some karma in the world.  For example, look at what happened to the activists who kicked out Gary Halverson at Cliffs, thinking that “better” management would “unlock value”.  These activists invested in an overpriced company with good management and immediately installed a joke of a CEO.

I would hope that Teck and Suncor shareholders wake up and realize what management is doing because they may have the next CLF on their hands.  A lot of people’s retirement money and life savings are invested in these companies and it would be bad for society to see value needlessly destroyed.  I guess I’m annoyed because the mismanagement is bad for society and some ordinary people will be slightly hurt by it.  I’m not that annoyed at the management team at Canadian Oil Sands because those charlatans don’t run Syncrude and can’t do much to destroy value.

*Disclosure:  No positions in the stocks mentioned above.  I’m the idiot who owns Kumba Iron Ore, a company whose accounting practices make me a little uneasy.

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