What Does China's Stock Market Meltdown Mean For Mining Companies?

Chinese stock markets continued their free-fall on Monday despite support measures enacted by China’s government. The Shanghai Composite index fell as much as 8 percent on Wednesday before closing down 5.9 percent, while the Shenzhen Composite fell 2.5 percent.
The Hong Kong stock exchange also fell 5.8 percent. About 1,476 stocks, or over half of all companies listed on China’s two main exchanges, have halted trading in an attempt to stop shares from falling further, the Financial Times reports.
China’s securities regulator banned listed company shareholders with stakes of 5 percent from buying or selling shares for 6 months. When that failed to stop stocks from falling, the People’s Bank of China stepped in to help the China Securities Finance Corporation (CSF) buy shares directly in order to provide further support to the market. The People’s Bank is also lending about $41.8 billion to brokerages to help them buy shares, while the China Securities Regulatory Commission (CSRC) has said that the CSF would keep buying blue chip stocks, and would also buy smaller companies to help relieve strained liquidity, according to the Financial Times.
“There is a mood of panic in the market and a large increase in the irrational dumping of shares, causing a strain of liquidity,” the regulator said in a statement.
Analysts and market watchers have predicted that efforts by the government won’t have a positive effect anytime soon. “Investor confidence is likely to take some time to recover. The stock prices still look elevated albeit are being supported by flush liquidity and strong policy guidance,” Wei Lin, economist at Commonwealth Bank of Australia told the Wall Street Journal.
Similarly, Bloomberg cited a poll by the Survey and Research Center for China Household Finance at Southwestern University of Finance and Economics which stated that Chinese investors are “relatively optimistic” about the future, but that many still want to reduce their stakes in the market.
Elsewhere, prices for commodities that depend on Chinese growth – such as copper – have fallen in recent weeks along with the markets. The Toronto Stock Exchange lost over 200 points during Wednesday trading hours, while the NASDAQ lost 80 points and the TSXV was down about 12 points.
A separate article from the Journal stated that the Chinese stock market fall could potentially drag down global growth and hurt earnings for US companies linked to growth in China.
“What’s concerning is that when we look forward, the deterioration in financial markets over the last three weeks [in China] may ultimately feed through to a much slower outlook for earnings growth over the next couple of quarters,” Gina Martin Adams, equity strategist at Wells Fargo Securities, told the publication. “It’s too early to say, and companies aren’t going to have a strong handle on that risk either.”
More pressure on miners
Certainly, the situation in China hasn’t helped the ongoing bear market for metals. Frik Els at mining.com provided a good overview of the damage, noting that:

• Copper has dropped to 2009 levels on Tuesday;
• Gold and silver also fell (though they rebounded slightly on Wednesday);
• Prices for nickel, tin, zinc, lead, aluminum, crude oil, and iron saw losses too;
• Shares of BHP Billiton (NYSE:BHP) lost 8 percent in New York on Tuesday (they fell another 3.65 percent on Wednesday before trading was halted on the NYSE due to a technical issue);
• A number of other larger miners fell, including Freeport-McMoRan (NYSE:FCX), Glencore (LSE:GLEN) and Vale (NYSE:VALE)

Combined with issues being faced by the Greek economy, things are certainly looking a bit dire out there. Chris Berry of House Mountain Partners and the Disruptive Discoveries Journal noted that $3.2 trillion has evaporated from China’s equity markets in the past three weeks.
Meanwhile, M&A
Berry stated in a note put out Tuesday that “we may be at the beginning of a correction in the equity markets that will further depress metals prices as the twin headwinds of excess supply and slack demand begin to dominate.” In other words, Berry doesn’t think that the bottom is quite there yet.
That said, Berry said that he does see some mining companies making use of M&A as an effective survival strategy. Included on a list of examples were recent mergers by Denison Mines (TSX:DML) and Fission Uranium as well as (TSX:FCU) Western Lithium (TSX:WLC) and Lithium Americas (TSX:LAC). “I won’t speculate on potential returns, but would argue each of these companies is better positioned now versus before the respective mergers were announced,” Berry said.
He also suggested that “one trick pony” developers are dead and that in the current market, traditional lifelines such as equity, debt, funding, or joint ventures “do not offer the opportunity for optimal long-term returns based on the potential dilution.”
“The current M&A wave we observe today paradoxically should be welcomed by investors as it sows the seeds for a leaner and more resilient mining development space going forward,” he said.
Certainly, that view provides a bit of a silver lining for the current market. Investors will no doubt be keeping a close eye on China in the coming days and weeks.
 
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.