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Australian Stock Market
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Cane Toad Offline
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Post: #48
RE: Australian Stock Market
(01-02-2018 12:02 AM)Tail Gunner Wrote:  If there is a substantial stock market correction, these sectors will likely become even more undervalued and become a distressed asset.

Ok, let's stay on topic.

You seem to be confusing the meaning of market, sector and asset valuation. Or maybe we are just using different terminology?

A "distressed asset" generally means an owner is being forced to sell. The reason for the forced sale can vary, but it usually is a result of debt.

In your mining example, a mine is treated as a long term asset and the mine valuation is based on a long term cyclical forecast of commodity prices. A share market correction may have a short term impact on the value of the mining company on the share market - however the long term value of the mine is unchanged. The asset, in this case the mine, is not considered "distressed" even though the market may have placed an irrationally low valuation on the company that owns the asset.

The key point is that a decision to invest during a market correction is a decision based on market timing, not vulturing distressed assets.

The next topic for discussion is sector valuation. This is where commodity price fluctuations are important - but not the only thing to consider. Using your mining example, it is true that increased demand from China did drive up commodity prices, particularly iron ore. In response to the increasing prices the major producers increased production. This appears to be basic economics, however the decision to increase production was being driven by more than price. A rational mining sector would have reduced production to strangle supply and keep the prices high. This is how the oil sector works. A closer look at the mining sector reveals a different strategy - they intentionally increase supply in an effort to force high cost producers out of the market ie; they want to force the price down to drive the smaller and higher cost producers broke.

The key point is that sector valuation is driven by more than supply and demand. Big miners are playing the long game. Last man standing strategy.

Which leads us to asset valuation. In the face of falling commodity prices, the smaller mine owners often just stop producing ie; the mine goes into care and maintenance mode. The share price of these companies go down (basic short term NPV analysis). The mine asset now has a lower value - bit it isn't considered distressed. The mine owners don't have to sell the asset - they just have to accept a lower return on capital until the mine becomes viable again - which in many cases does happen because the effect of shutting down production creates a supply problem and prices rise again.

The key point is that decisions about asset utilisation and the resulting effect on asset valuation is an investment decision made by the asset owners. A mine might be worth $1 on paper today, but it's not a distressed asset. It only becomes a distressed asset when the owners are forced to sell - and for $1 most owners will just sit on their assets until market conditions improve.

So anyway, hope that clears up my initial comments.
01-02-2018 05:48 PM
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Messages In This Thread
Australian Stock Market - Australia Sucks - 09-13-2016, 07:58 PM
RE: Australian Stock Market - Julio - 09-14-2016, 02:30 AM
RE: Australian Stock Market - TheFinalEpic - 09-14-2016, 06:13 PM
RE: Australian Stock Market - Kangaroo - 09-18-2016, 07:08 AM
RE: Australian Stock Market - BB1 - 06-06-2017, 05:23 PM
RE: Australian Stock Market - BB1 - 08-23-2017, 02:29 AM
RE: Australian Stock Market - BB1 - 12-22-2017, 12:38 PM
RE: Australian Stock Market - BB1 - 02-09-2019, 05:47 PM
RE: Australian Stock Market - BB1 - 07-15-2017, 12:43 AM
RE: Australian Stock Market - Tail Gunner - 01-01-2018, 10:47 PM
RE: Australian Stock Market - Justinian - 07-28-2017, 12:55 AM
RE: Australian Stock Market - Atticus - 01-01-2018, 07:07 AM
RE: Australian Stock Market - PK1098 - 01-01-2018, 05:11 AM
RE: Australian Stock Market - Tail Gunner - 01-01-2018, 10:21 PM
RE: Australian Stock Market - Cane Toad - 01-01-2018, 10:29 PM
RE: Australian Stock Market - Tail Gunner - 01-01-2018, 10:38 PM
RE: Australian Stock Market - Cane Toad - 01-01-2018, 11:00 PM
RE: Australian Stock Market - Tail Gunner - 01-02-2018, 12:02 AM
RE: Australian Stock Market - Cane Toad - 01-02-2018 05:48 PM
RE: Australian Stock Market - Tail Gunner - 01-02-2018, 06:13 PM
RE: Australian Stock Market - Tail Gunner - 01-03-2018, 03:39 PM
RE: Australian Stock Market - Cane Toad - 01-03-2018, 07:38 PM
RE: Australian Stock Market - Tail Gunner - 01-03-2018, 07:50 PM
RE: Australian Stock Market - Roardog - 01-10-2018, 09:40 AM
RE: Australian Stock Market - Tail Gunner - 01-10-2018, 11:07 AM
RE: Australian Stock Market - Roardog - 01-10-2018, 09:04 PM
RE: Australian Stock Market - Tail Gunner - 01-10-2018, 11:12 PM
RE: Australian Stock Market - Cane Toad - 01-12-2018, 06:26 AM
RE: Australian Stock Market - Tail Gunner - 01-12-2018, 11:25 AM
RE: Australian Stock Market - Tail Gunner - 01-12-2018, 11:38 AM
RE: Australian Stock Market - PK1098 - 01-01-2018, 03:22 PM
RE: Australian Stock Market - Cane Toad - 01-02-2018, 12:36 AM
RE: Australian Stock Market - Tail Gunner - 01-02-2018, 01:37 AM
RE: Australian Stock Market - Cane Toad - 01-02-2018, 02:45 AM
RE: Australian Stock Market - Tail Gunner - 01-02-2018, 12:45 PM
RE: Australian Stock Market - Mig Picante - 01-03-2018, 11:33 PM
RE: Australian Stock Market - Bucephalus - 12-10-2018, 06:47 AM
RE: Australian Stock Market - Blue Streak - 11-19-2018, 07:12 AM
RE: Australian Stock Market - Mig Picante - 12-10-2018, 08:19 AM
RE: Australian Stock Market - Mig Picante - 12-10-2018, 06:35 PM
RE: Australian Stock Market - Blue Streak - 01-15-2019, 06:15 AM
RE: Australian Stock Market - Mig Picante - 02-11-2019, 08:47 AM
RE: Australian Stock Market - Mig Picante - 02-19-2019, 08:54 AM
RE: Australian Stock Market - BigTedSven - 02-21-2019, 02:33 AM
RE: Australian Stock Market - Mig Picante - 04-14-2019, 06:30 AM
RE: Australian Stock Market - TDevil - 04-14-2019, 07:29 AM
RE: Australian Stock Market - Tail Gunner - 04-19-2019, 12:24 AM
RE: Australian Stock Market - Mig Picante - 04-20-2019, 03:11 AM
RE: Australian Stock Market - Mig Picante - 04-21-2019, 04:06 AM
RE: Australian Stock Market - BigTedSven - 05-21-2019, 09:47 PM
RE: Australian Stock Market - BigTedSven - 05-21-2019, 09:48 PM
RE: Australian Stock Market - Tail Gunner - 05-21-2019, 10:00 PM
RE: Australian Stock Market - Bogart - 05-22-2019, 10:54 PM
RE: Australian Stock Market - Mig Picante - 05-24-2019, 07:16 AM
RE: Australian Stock Market - BB1 - 05-25-2019, 02:31 AM
RE: Australian Stock Market - outback - 05-25-2019, 02:33 AM
RE: Australian Stock Market - Mig Picante - 05-25-2019, 03:51 AM
RE: Australian Stock Market - BB1 - 05-27-2019, 06:38 AM
RE: Australian Stock Market - BB1 - 06-10-2019, 06:54 AM
RE: Australian Stock Market - UnW - 05-27-2019, 07:16 AM
RE: Australian Stock Market - Mig Picante - 06-04-2019, 08:36 AM
RE: Australian Stock Market - BalanceLife - 09-08-2019, 06:18 AM
RE: Australian Stock Market - Mig Picante - 09-24-2019, 07:05 AM

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