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Market conditions are also setting the scene for the next leg up of the commodity supercycle.

There are three things that are happening today that will guarantee higher prices for commodities in the future, once the current jitters have started to ease.

In a bull market people get away with some shocking things.

A few years ago I met a 21-year old geography student. He had been investing in the stock market for years. He had seen some success, so now his biggest ambition was to get rich. Very rich.

He wrote for a few publications and through this work got to meet some interesting City players. They told him that the biggest game in town was floating companies on Aim, talking them up. This would make him rich, he believed. So, he decided to join the game. He formed a uranium mining company, installed a geologist to give it some credibility and listed the company on Aim. His stake in the company was worth tens of thousands of pounds. He was laughing all the way to the bank, he thought.

Not bad for a 21-year old. But the problem was that the company was never going to work. It held licenses for some scraps of land that might or might not have contained uranium, but the nature of the market meant that this did not matter.

However, reality eventually hit home, the uranium price slid and the company’s valuation was dragged down as well. Eventually the company was wound up.

I saw this sort of thing happen a number of times. Nothing that went on was illegal; I just found it all very distasteful. Shareholders who had passed over their cash in good faith were the biggest losers.

Perhaps one positive thing to come from the credit crunch is that the number of spivvy miners on Aim will decrease and we will be left with some quality companies. My young geography student chum would have no success in this market. This is a good thing.

Market conditions are also setting the scene for the next leg up of the commodity supercycle. There are three things that are happening today that will guarantee higher prices for commodities in the future, once the current jitters have started to ease.

Firstly, prices of virtually all base metals have fallen below the cost of production. This means one thing: closed mines. This will hit the supply side hard.

According to Ambrian Capital all base metals prices except copper have fallen close to their cost of production. If prices fall any further mines will be closed, which will cause supply to tighten and prices will rise. Let’s have a look at some figures. The marginal cost of zinc production is around about $1,900 per tonne. The price of zinc is now $1149.75 per tonne.

The marginal cost of production for lead is around $1,800 per tonne. The lead price is now at $1,352.

The marginal cost of production for nickel is around $17,000 per tonne. The nickel price is now at $10,620

Then we have to consider gold. The gold price is also supported by its production costs, particularly for small, early-stage producers.

Take Uruguay Minerals (CVE:UME). Last week the company said that the cash cost for each ounce of gold production was $792. Today, the gold price is at $807. If the price was any lower, the company would have to close its operations.

The credit crunch has made access to capital to fund new mines difficult to come by. This will also tighten the supply side.

Then there’s the maths companies did on new projects last year. The calculations are now all wrong.

To develop new projects, miners had worked out the costs using higher commodity prices in these calculations. Many of these projects will now be uneconomic at lower prices. They will not get off the ground. Yet again this tightens the supply side.

So, the economics of commodity production means that prices cannot fall much further. If they do, new production will be crimped and scarcity will lead to price rises.

I also do not believe that China is going to stop developing. New developments in the cash-rich Middle East also continue to soak up materials. Despite concerns of a global slowdown, the world will continue to develop.

The commodities supercycle is far from over; we are now in the intermediate stage before the second leg.

This will be the best time to pick up commodity stocks in years. When the market settles, you should be ready to pounce on quality players. To find out more about Smart Commodities UK click here.

Source: Why The Commodity Supercycle Is Far From Over

For the tale of the tape, the TSX Exchange added 1.24%, while the TSX Gold Index surged 10% and the TSX Venture Exchange, Canada’s largest junior exploration bourse, rallied 2.8% with the advancing issuers actually outpacing the decliners by a 512 to 337 margin on volume of 125 million shares traded.

Uruguay Mineral Exploration (CVE:UME) cut 4.68 grams gold per tonne over 19.25 metres at the Arenal Deep target near the San Gregorio mine southern Uruguay. In the first quarter ended August 31, the company produced 16,439 ounces of gold by treating 335,832 tonnes grading 1.67 grams gold per tonne with recovery of 91.4%. The beaten down miner closed up C$0.05 at C$1.25.

It was a good session for shareholders of Energy Fuels (NASDAQ:CLNE) as the company reported that the U.S. Bureau of Land Management jointly issued a Record of Decision with a Finding of No Significant Impact for the company’s Whirlwind mine, which has surface facilities in Mesa county, Colorado, and additional mining claims in Grand county, Utah. Energy Fuels (TSE:EFR) ended the day up C$0.18 at C$0.61.

In the face of a market crumble, Potash Corp. of Saskatchewan (NYSE:POT) has increased its share repurchase program to 10%. The company ended the day up C$10.11 at C$172.11.

Shares of Odyssey Resources added C$0.08 to close at C$0.20 following news that Nassau Capital Management Partners acquired 5.2 million shares of Odyssey at a price of C$0.25 and now holds 5.2 million shares in the junior.

The junior board continues to trade at levels last seen in mid-2004 and this has many pundits calling it a major buying opportunity. We will see what Monday trading has in store.

Source: Resource Stock Roundup: Saturday, September 13th, 2008

For the tale of the tape, the TSX Exchange lost 0.68%, while the TSX Gold Index gave back 3.3% and the TSX Venture Exchange, Canada’s largest junior exploration bourse, added 0.10% with the declining issuers beating out the advancers by a 427 to 376 margin on pathetic volume of only 82 million shares traded.

In a clear sign of uncertain times, Uruguay Mineral Exploration (CVE:UME) has hedged 45,000 ounces of the 63,000 ounces of gold production expected for the nine-month period ending May 31, 2009. The price is $796.25 per ounce. Uruguay ended the day up C$0.04 at C$1.19.

A slumping zinc price has prompted HudBay Minerals (TSE:HBM) to close its Balmat mine in New York state. The mine re-opened in May 2006 and hit commercial production in January 2007. HudBay ended the day down C$0.29 at C$11.11.

Sprott Resource (TSE:SCP) signed a lock-up agreement with Severstal Resources, the mining division of OAO Severstal, to tender into a takeover bid to be made by Severstal for all the outstanding shares of PBS Coals. PBS is a private company in the midst of going public through a company called Penfold Capital Acquisition (CVE:PNA.P). The takeout offer is at C$8.30 per share, which would put another C$225.3 million into Sprott’s already full coffers. Sprott ended the day down C$0.02 at C$3.43 on over 10 million shares changing hands.

The Canadian markets are so heavily weighted on the resource side that it looks like the price of oil will dictate market direction over the medium term. We will see what Monday trading has in store.

Source: Resource Stock Roundup: Saturday, August 23rd, 2008