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Resource Stock Roundup Tuesday, November 11, 2008

Doug Casey — Tue, 11 Nov 2008 20:50:54 +0000

It was a mixed start to the trading week with the big board issues taking on gains, while the junior explorers faced some profit taking during Monday’s session on the Canadian markets. For the tale of the tape, the TSX Exchange added a modest 0.96%, while the TSX Gold Index surged 6.1% and the TSX Venture Exchange, Canada’s largest junior exploration bourse, lost 0.85% with the declining issuers out pacing the advancers by a 462 to 277 margin on volume of 138 million shares traded.

After much debate, Rockgate Capital and Delta Exploration have come to terms that would see Rockgate take over Delta. Under the proposal, Delta shareholders will receive 0.50 of a Rockgate share for each Delta share held. Rockgate ended the day unchanged at C$0.37, while Delta closed down C$0.005 at C$0.115.

It was a good day for Silver Bear Resources after the company reported drill results from its Mangazeisky silver project in Russia. Highlights included 1,639 grams silver per tonne over 5.6 metres. Silver Bear ended the day up C$0.05 at C$0.43.

Tarsis Capital tagged some nice holes at its Goz Creek property in the Yukon but no one cared. Highlights included 27.91 metres grading 17.19 per cent zinc and 39.67 grams silver per tonne and 27.50 metres grading 12.83 per cent zinc and 10.91 grams silver per tonne. Tarsis ended the day flat at C$0.05.

Ecuadorean President Rafael Correa stated that the long awaited mining bill for that country will be tabled this week. If approved, the law will lift a government ban on mining activity that started in April. On this news key country players Corriente Resources dropped C$0.04 to close at C$2.90 and Iamgold added C$0.44 at C$4.61.

Despite news of a massive injection of capital into Chinese infrastructure projects, investors remain hesitant to pile back into the resource sector. We will see what Tuesday trading has in store.

Source: Resource Stock Roundup Tuesday, November 11, 2008

The Battle for $900 Gold

David Galland — Sun, 04 May 2008 15:20:06 +0000

The current “battle” in the gold market is around the $900 level, a fairly steep retrenchment from the recent highs of $1,011.

Some investors, their hopes dashed that $1,000 would be quickly and decisively overrun, are seeing disaster in this correction and dropping their gold as they run for cover.

So… do we at Casey Research think we’re now seeing a reversal in gold’s fortunes?

In a word, no.

I’m not going to go into meticulous detail here, but I do want to share some thoughts with you that may be of some use… if for nothing more than playing them back to me in sarcastic e-mails several months down the road if we’re proven wrong.

A few key things to ponder as the battle for $900 gold rages…

1. The current correction is not yet exceptional. Since the current bull market began in earnest in 2001, there have been nine corrections in excess of 8%.

During the three worst pullbacks, gold fell 15.98%, 18.27%, and 27.7%, respectively. And the average of all nine corrections is 13.6%, so the latest, which touched 15% at its worst (so far), is only fractionally worse than average.

Put another way, for the current pullback to match the sharpest correction to date, a drop of 27.7%, gold would have to fall to about $730. Could it happen, again? Sure, why not?

And if it does, rest assured that analysts will line up to say the back of the gold bull has been broken… just as they did when gold moved down by that percentage in May 2006, falling from $725 to $567. But if you had listened to the naysayers back then and bailed out at the bottom of that correction, you would have missed a rebound of close to 100%.

I mention this to stress that the fits and starts we are currently experiencing are nothing unusual. Quite the opposite, they’re the norm for any sustained bull market. In the sustained gold bull market of the 1970s, a similar pattern occurred.

The bottom line is that if you are going to invest in the resource sector, you need to take a long view. And I would stress once again, you have to be invested with money you can afford to lose a substantial portion of and not be overly concerned. Otherwise you’ll invariably become shell-shocked during periods of volatility and be prone to breaking ranks and selling at the worst possible time.

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2. The big gold companies are delivering. One of the largest mining companies in the world, Newmont Mining, just released its first-quarter 2008 financials, the first of the big gold producers to do so.

As we have been forecasting, the company had record sales of $1.94 billion, realized a record price of $933 per ounce sold, and saw its cash operating margin soar by 119% from the same period last year. Further, net income was up 444% from the first quarter last year. And the company’s cash operating margin rose to a record $537 million in the first quarter this year over the prior record $419 million earned in the previous quarter.

Over the next couple of weeks, we’ll see a string of similar results from the other major producers, offering a stark contrast to the billions upon billions in losses being suffered by the banks, investment houses, housing industry, airlines, etc.

So, what happened to Newmont’s shares on releasing its financials? They fell, albeit modestly, victim to this week’s softening gold price and a dumb remark by the minister of mines of Ghana – where Newmont has significant projects – about the need for mining reform in that country.

The key point is that the increase in the profitability of the gold miners, a prerequisite for the entire gold share complex to get moving, is now materializing.

3. Oil is stubbornly holding on over $100, and food prices are on the rise everywhere. This is simply the most visible evidence of the inflation now gripping the world.

We’ve said for years that there is a very tight correlation between rising oil prices and rising gold prices. While oil prices may moderate at some point – because, again, no market goes straight up or down – the trend is clearly for sustained high prices. This is additional support for gold in our view.

So… given gold’s correction, you might go right ahead and sell your gold. I’m hanging on to mine. And if I’m hanging on to my gold, I’m hanging on to my gold stocks, because that’s where the real juice will be.

When I look at the alternatives and the amount of risk I have to take to get even a 10% return right now, I am comfortable biding my time, continuing to buy gold and gold share bargains with the expectation that the 100%, 200%, and 500% gains down the road will catch me up in a hurry.

Good investing,

David Galland

Subcontracting the Subcontinent

Chris Mayer — Wed, 30 Apr 2008 15:50:24 +0000

The world has certainly given us a lot, and we keep asking for more. We have a need for many natural and precious resources that nature has to offer, but we must know where to look. The better we can find and extract these resources, the better we can use nature’s gifts to their full potential.

“ Nature is rich, she is generous, she refuses to no one who will ask his share of her treasure of which she has inexhaustible reserves in the trees, in the mountains, in the sea. But one must know how to climb the tall trees, how to go into the mountains… One must know how to catch fish, and how to dive to tear loose the shellfish so firmly attached to stones at the bottom of the sea. One must know, one must be able to do things.”

— Paul Gauguin, Noa Noa

Paul Gauguin, the famous painter, moved to the South Seas in 1891. There he painted and sketched and also recorded thoughts in his journal, since published as Noa Noa, which I recently read. Among his many observations was the one quoted above. Though he is far apart from us in both time and space, I have had this thought of his in my head of late, because it applies to the current commodity boom.

The price of commodities swept higher in late February. Only two months into the year and natural gas was up 26 percent, coal up 56 percent and platinum up 41 percent. This in two months! We know there are tons of this stuff in this big ball of a planet we call home. The trouble, as Gauguin would point out, is that you have to know how to find it, get to it and dig it out. Aye, there is the rub. As global demand explodes for nature’s riches, it takes time for the market to deliver the goods.

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So, too, copper and aluminum were within striking distance of all-time highs. Believe it or not, the consensus heading into 2008 was that the unfolding global slowdown would take these metal prices lower. That certainly didn’t happen.

Some of the price rise was due to supply problems in China and South Africa. Producing these metals requires a lot of energy. Yet persistent blackouts and power issues plague producers in these countries. In any event, aluminum topped $3,000 per ton for the first time since May 2006.

Copper hit $8,500 per ton, near all-time highs, as Chinese consumption remains high. Global copper inventory covers only about three days worth of global consumption. With a market running that tight, prices remain susceptible to big spikes. Credit Suisse says copper could spike to $12,000 per ton, partly on the rising cost of sulfuric acid, which about a quarter of copper producers use to process copper ore.

But the biggest driver behind metal prices such as copper and aluminum is the huge global demand for infrastructure. Morgan Stanley estimates that emerging markets will spend $21.7 trillion on infrastructure over the next 10 years. Power plants, roads, bridges, airports…

One sleeping giant in all of this is India. I see it in ABB Ltd. (ABB: NYSE), the world’s biggest maker of electrical grids — and the world’s third largest buyer of copper. India is the fifth largest market for new orders for ABB. In the last quarter, new orders were up 42 percent in India. ABB claims its orders in India will double by 2010!

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Certainly, when you compare India’s consumption of metal on a per capita basis with that of other countries, you see enormous room for growth. (See next chart.)

This is not idle wondering. This has real merit, like mixing vodka and tomato juice. Increased metal consumption is practically a given. India desperately needs more power. (See chart below.) And India’s government will spend billions of dollars adding around 600 gigawatts of electricity by 2030:

Rising Resource Prices Keeping Aussie Economy Afloat

Dan Denning — Thu, 03 Apr 2008 14:39:20 +0000

We have good news for Australia. Earnings are going up for some companies! Rising resource prices for tangibles like coal, iron ore, and gold should continue to generate earnings growth for Aussie exporters. It’s true that energy costs are rising for Aussie producers and the strong local dollar puts a dent in earnings.

When you get right down to it, though, the resource sector has a much better chance to grow earnings this year and next than the financial sector. The resource boom is, “generating an enormous amount of income for the Australian economy and it is not obvious that it is going away any time soon,” Reserve Bank governor Warwick Mckibbin told David Uren in today’s Australian.

Treasury economist David Gruen agrees. He points to the larger contributions to global growth from countries like China, India, Brazil, and Russia. “At this stage, there is every indication that this pattern of relative contributions to world growth will be repeated in 2008.”

The big drivers are agricultural exports (recovering from the drought) and mineral and energy exports, driven by Asian growth and high global energy prices. The charts below from ABARE show the total dollar value of select Aussie exports to various countries in 1996-1997 (the grey line) and 2006-2007 (the orange line).

Gold to India, iron ore to China, aluminium and thermal coal for power to Japan. What’s not to like about that earnings picture? Lucky country indeed.

Barring a total collapse in resource prices-something we addressed earlier this week-we agree with the basic thesis that these sectors and these mineral, energy, and farm exports will drive earnings growth in the resource sector. But what we’re after is what to do about it.

Deeds, not words!

We feel more optimistic about the smaller resource stocks in the market that we have at any time since we moved to Melbourne in 2005. The combination of bad news at Opes and the gloomy outlook from Bernanke makes for a lot of negative sentiment and frankly, despondence, hopelessness, despair and (if we’re really lucky) capitulation. That’s perfect.

Not that we are taking pleasure in other people’s misfortune. But this really is the time when you want to be a buyer: when other investors must sell. You have a relatively positive earnings outlook for select commodities (especially energy and energy alternatives). And you have an open playing field, where most investors have fled to cash and blue chips. You also have a lot of forced selling (see Opes note below).

The risk is obvious. Markets as a whole could go down. But as we’ve learned, even in down markets, companies that grow earnings tend to do well. Going against the earnings trend isn’t easy. But it does happen.

We’ve acquired a new research tool at the Old Hat Factory and have been putting it through its paces to prove the point to you. We asked Gabriel to run a simple report on the best performing ASX-listed shares over the last 52 weeks with a market capitalisation over A$100 million.

We excluded the micro-caps not because we don’t love them (they were, in fact, our first love in 1998 when we ran a Penny Stock Tip sheet in America), but because we wanted to prove that you can still make money in stocks even if you aren’t trading illiquid penny dreadfulls.

Top Performing ASX shares with a mcap of A$100m or better in the last 52-weeks

Forget Macquarie Bank. The real millionaire factory in Australia is resource prices, West Australia and all that gold, iron ore, and uranium!

“Minemakers is a little explorer, mostly a mine developer,” Diggers and Drillers editor Al Robinson said as we hunched over the desk, scanning the results for a little penny stock gold.” It’s also a phosphorous play. Phosophorous prices are way up with global fertilizer prices. Yeah… that’s a good little story. Lots of earnings potential.”

You’ll see a lot of other miners on the list. There’s one share tip from the Australian Small Cap Investigator on the list. We aren’t saying which one, out of respect for paid up subscribers.

We will tell you it has something to do with coal, which has lately been in the news owing to the fact that Australia gets 80% of its electric power from coal and that oil is still above US$100 and looking like it will stay there for quite some time.

You also have a few iron ore plays on the list. Mount Gibson jumps out because just this week Australia’s Takeovers panel quashed an attempted takeover of the company due to what the panel said were, “unacceptable circumstances.”

Chinese steel-maker Shougang loses out on the decision. But the panel is not trying to discourage Chinese companies from investing directly in Australian companies. In this particular case, Shougang already owned a sizable position in Mount Gibson due to its stake in Hong Kong-based APAC Resources Ltd. which owns 20.2% of Mount Gibson’s shares.

Under Australian law, a shareholder must make a formal takeover bid once it acquires more than 19.9% of a target’s shares. Shougang already had a 9.3% stake in Mount Gibson, courtesy of a January deal with Russia’s Gasmetal Holdings Ltd. Shougang’s association with APAC would have given it a back-door holding larger than 19.9% in Mount Gibson, triggering the necessity for a takeover bid.

So this bid didn’t go through. But don’t expect it to be the last. Sinosteel is still pursuing the first ever hostile Chinese bid for an Aussie company with its $1.2 billion offer for Midwest. And keep in mind that Mount Gibson produces a small amount of ore, just six million tons (compared to 120 million for Rio Tinto).

The desire by Chinese steel markers for Aussie ore is a long-lasting one. It should animate the juniors in the iron ore sector for the next few years. There are lots of good trades and investments to be made. And not just iron ore, but coal, bauxite (for alumina and aluminium), and other Aussie minerals. It will be a good time to own tangible assets, or the shares in takeover targets.

By the way, we’ll keep playing with our new research tool and let you know what we find as we find it.

Finally, we don’t have anything to ad to the Opes story that you can’t read in the other papers. It’s shocking, though, that’s for sure. Today’s Financial Review reports that the liquidation of the Opes’ $1.2 billion portfolio has affected almost one quarter of the stocks listed on the Australian Stock Exchange.

“Australia and New Zealand Group is already almost a third of the way through its sell-off of 677 different securities, including shares, options, and warrants in 579 companies ranging from blue chips to market minnows.”

The legal system is firing up, with Opes client’s seeking to block the sale of their share portfolios. These investors are challenging whether ANZ and Merrill Lynch actually own the shares. At least five companies went into trading halts yesterday as ambiguity over who owns big blocks of their shares set in.

What a mess. Word for the week: transparency. Earnings transparency this year will come from companies with real assets on the balance sheet and rising prices for those assets. Yes, it sounds so simple a fifth grader could figure it out. But right now, keeping it simple-in a world of complex financial instruments-is not a bad strategy.

Dan Denning
The Daily Reckoning Australia

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The Profitable Marriage of Two Soaring Resource Companies

Al Robinson — Thu, 03 Apr 2008 12:25:19 +0000

The huge run-up in commodity prices between January and mid-March has been a welcome boost for listed producers in the falling Aussie equities market. Oil, sugar, coal, gold, wheat… all these things have gained voraciously. Australian companies drilling, harvesting and mining them have weathered the storm of equity-selling better than other stocks.

Meanwhile, listed financials have gone from shaky to shaken.

That’s no coincidence. The fear surrounding banks sparked a stampede of financial capital. A lot of it has charged into the commodities sector. The tide of money flowing out of financials is gushing your way.

There are Always Good Resource Stocks…

But tangible assets…and resource companies…are a truly diverse bunch. They come in a variety of shapes, sizes, weights and uses. That diversity ensures there will always be something making gains. Commodity buyers always want more of something than there is available. That’s the beauty of resource investing. You have access to a constant stream of good investment ideas. It’s like a whole separate investment universe.

Unconvinced?

Well, the market was flat for all of February. But Alumina (ASX:AWC) was up 23% because Chinese aluminium demand sprouted wings. In the first half of March, the market was down 4.5%. But iron ore junior Midwest (ASX:MIS) had an explosive 20% gain thanks to a takeover offer.

Tangible assets are in a long-term bull market. Even when the whole share market is floundering… somebody, somewhere is making money in the resource sector. But in their haste for obvious profits, speculators can miss good opportunities.

There are two specific opportunities in particular we’re looking at. These come from two sectors of the Australian resource market that speculators haven’t blown up. Separately, they’re great companies. But together they combine two of the most profitable aspects of the resource boom, with synergies to boot.

We don’t expect this opportunity to stay at the price it is today, though. Money moves towards quality, and this pick is of a high standard. With that in mind, let’s quickly recap the exodus from financials to resources.

Funds Look for Inflation Safety in Commodities

Apart from the fact that resource stocks are in a historic bull-market, a lot of this buying motivation comes from inflation. Commodities tend to outperform other asset classes in an inflationary environment. Speculators are using the resource market as a shield against rising prices.

This is evident in Exchange Traded Funds (ETFs), which track the prices of the commodities they hold.

The Goldman Sachs Oil ETF has added around 22% since last year’s calendar came off the wall. The PowerShares DB Agricultural Fund is up 18%. StreetTRACKS gold ETF (NYSE:GLD) is up 16%.

Here’s an interesting one… the Powershares DB Base Metal Fund (AMEX:DBB). It’s up 13% over the last three months, despite most metals taking a breather.

These high commodity prices are pulling headline companies up with them. Global miner Xstrata (LON:XTA), for example, is up 7% for the year in London, despite the London market being down 13%.

Speculators have definitely moved into the hard asset market. But now that they’re here… what will they do next?

The Factors of Speculation

Different speculators hold different positions on the market’s direction. You could easily identify dozens of difference factors, all of which have the potential to drive the price of oil, wheat, or copper up and down. That leads to a lot of uncertainty, and a lot of people buying and selling.

But there are a few factors that matter more than the others. Here’s a short list of what the speculators are looking at, and what they mean for commodities in general.

Profit-taking from commodity gains

This one is unavoidable. Given that commodities are in an uptrend, every now and then speculators will choose to realise their gains. It will mean tangible assets occasionally take a break from the main uptrend.

Gloomy economic news from the US

A global recession would certainly cause demand for commodities to fall somewhat. It’s one reason traders have to sell commodities. We don’t agree that it will kill the boom. But there will be times when some commodity holders lose their nerve and sell.

Investors’ continuing need for an inflation shield

Given that the Federal Reserve slashed both headline rates by 75 points less than two weeks ago, there’s still plenty of reason to think people will buy commodities to protect themselves from inflating prices. Low interest rates mean cheaper credit. An easy money supply always leads to inflation in the long term. And you can bet that central banks will continue to heave money at falling financial markets to slow the rot. That’s inflationary.

Direction of the US dollar

The US dollar will probably head downwards in the long-term, but at the moment it could move either way. The dollar was so depressed before the Fed cut rates that it actually rebounded. This, we feel, is a temporary break against the norm. And when the dollar moves down, commodities quoted in dollars become more valuable nominally. Traders will buy commodities as a hedge against a falling dollar.

All types of market participants are willing to bet on the long-term commodity trend

Not just traders and investors, but consumers of commodities – like Chinese steel mills – will be keen to jump into the market and pile on inventories while piling is cheap. When commodity prices fall, there will be dip-buyers keen to make a thrifty purchase.

Looking at that list, it’s not hard to see why the price of grain futures or an oil ETF could fluctuate. Traders and hedge funds have a lot to think about. Those factors won’t all take precedence at the same time, of course. This adds to commodity volatility.

Predicting exactly when each will be most prominent is impossible. Don’t bother trying. Instead, read on. There are two corners of the resource market that have excellent potential for gains… and speculators haven’t taken advantage of them yet.