CITY investors think they are a clever lot who can spot a profit-making opportunity when they see it. Riding the crest of the wave that is propelling the mining sector has been a safe bet for investors for more than a year, with the FTSE mining index outperforming the FTSE all-share index. However, yesterday’s shenanigans are a reminder of the fickleness of investor sentiment.

The shares of all big mining companies, led by Anglo American, BHP Billiton, Xstrata and Rio Tinto, fell after confirmation from Lonmin, the platinum miner, that it had ended takeover talks with an unnamed party. The reaction of Lonmin shareholders — to mark the shares 8 per cent lower towards pre-bid speculation levels — was predictable and understandable. After all, the chances of that much hoped-for Lonmin takeover premium have evaporated, at least for now. Why the shares of Anglo American, for example, which was neither going to bid for Lonmin nor become a takeover target itself, also fell is down to herd mentality: if one mining stock goes down, all the others should follow.

In fairness, there are sufficient profits to be locked in at these levels, although not many people believe that the boom conditions for the mining industry are about to come to an end. These are heady days for the London-listed mining sector, with share prices at levels never before seen. The underlying fundamentals — a stuttering replenishment of mined resources to feed the unabated appetite for raw materials from the booming economies of China and India — remain strong. Investors may be tempted to take short-term profits — after all, Lonmin’s shares were trading at £10.15 a year ago, compared with their £23 close yesterday. Likewise, Rio Tinto has gained more than 50 per cent over the past 12 months and Xstrata is up more than 60 per cent.

The long-term outlook remains promising, and companies and investors have shown a willingness to throw caution to the wind by backing high-priced corporate plays.

BHP Billiton, the world’s biggest mining company, set the pace with its forecast-topping £3.8 billion bid for WMC Resources, the Australian miner, to scupper an initial approach from Xstrata by £430 million. Chip Goodyear, BHP Billiton’s chief executive, had argued at the time that the long-term fundamentals for the mining sector were so rosy that the price he was willing to pay for WMC was appropriate. BHP Billiton’s shareholders have, by and large, applauded the deal.

The fact that Lonmin, whose shares have more than doubled over the past year, nevertheless appears priced for a takeover is further demonstration of the belief that the market has entered a metals “super-cycle”, and that metal prices should remain high to underpin miners’ future earnings growth.

The iron ore miners, led by Rio Tinto, are engaged in price negotiations with the Japanese and Chinese steel mills amid investor hopes that the miners can force through a further price increase of up to 20 per cent, on top of last year’s 72 per cent rise. Coal, copper and nickel prices are also strong, and gold is trading at 25-year highs.

In Lonmin’s case it is the explosion in the demand for platinum — whose price is trading near record highs — that has been driving its share price and making it more attractive for potential suitors. Platinum is becoming increasingly popular because of its catalytic properties, and jewellery demand is also strong. Lonmin is the smallest of the three leading platinum miners, which are all based in South Africa and control the world platinum trade. Unlike Anglo, Platinum and Impala, Lonmin’s shares are listed in London, and it is a proxy for platinum’s price movements and an obvious investment target for anyone seeking direct exposure to the precious metal.

The fact that it was Gold Fields, the South African goldminer, that made the first approach to Lonmin came as a surprise, given that goldminers normally stick to their metal. However, it shows, again, that opportunism is the order of the day. Like Gold Fields’ assets, Lonmin’s platinum operations are facing the challenge of mining at increasingly deeper levels and at the same time struggling with soaring operating costs. Combining Gold Fields’s gold operations with Lonmin ’s platinum assets may make sense, although the talks between the two were over almost as soon as they started.

It remains to be seen if Gold Fields or, for that matter, Barrick Gold, Norilsk Nickel or Xstrata, other mooted suitors, can justify a cash offer that would value the target at almost 20 times next year’s prospective profits. The mining sector, by contrast, trades on about a 14 times multiple.

However, soaring metal prices mean that miners are loaded with surplus cash, more than they need to fund billions of pounds worth of new projects or to carry out buyback programmes or pay special dividends. The miners’ cash coffers are not filling as fast as those at BP and Royal Dutch Shell. But like their oil cousins, the miners have to catch up on years of underinvestment in metal projects. Some miners, such as Rio Tinto, have the organic pipeline to satisfy their immediate needs and provide future growth. Others, such as Xstrata, are acquisitive. BHP Billiton has been both. For investors in the mining sector the outlook remains bullish, and certainly worth retaining exposure to.

Explore Markets

• United States

• Europe

• Japan

• China

• Russia

• The Gulf

• India

• Africa

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive