OREANDA-NEWS. September 30, 2011. On average, Russian steel stocks have shed over 50% of their value since 1 Aug, with the average of their 2011-12 forward P/Es falling from 9.0x to 5.0x. On a valuation basis they look cheap vs peers. However, we refer once more to our 21 Sep report (METALS AND MINING: Notes from the Edge of the Abyss) where we argue that market expectations may still be ignoring the pressures steelmakers currently face, and thereby overestimate their 2011-12 profits. As such, the current valuations may not be as cheap as they appear. When markets face a downturn, P/E ratios could be a poor indicator of the stocks' attractiveness, as they tend to be based on the assumption that company earnings will continue to rise; the current concern is that, as economic growth moderates, company profits may fall. For steelmakers slower economic growth may mean lower demand and steel prices which, in an environment in which cost pressure remains intense, could mean a sharp reduction in future profits. We have tested our models using flat forward steel price assumptions, which resulted in an approximately 15% reduction in the sector valuation. On these assumptions, Russian steels are currently trading at 6.4x average 2011-12 earnings, similar to the levels seen in the 2010 correction. This suggests to us that as earning expectations are tempered, steel stocks may face further weakness. Gold stocks, on the other hand, are valued using relatively conservative price assumptions. Using the current forward price for 2011-14 in our models (instead of a flat price curve), brings the gold company average P/E to 9.3x, again similar to where they traded during the 2010 correction. And that is despite the spot gold price still trading far above its 2010 peak of USD 1,425/oz. We believe this means that gold company shares may represent a more attractive investment opportunity in the current market environment than steels.