Investor Capitulation in Metals and Mining Stocks Presents Great Buying Opportunity
Commodities / Metals & Mining Nov 12, 2008 - 01:29 PM GMTBy: Justice_Litle
This is because the use of copper is so widespread throughout our lives. Most of the appliances in your house use copper: the fridge, the dishwasher, the microwave, and the washing machine just to name a few.
By the time you add up the electrical wiring, pipes and so on, the average home uses 400 pounds of copper. And your car? Another 50 pounds.
We also know that, on average, 40% of annual copper consumption goes to building construction.
So copper prices have something to say about global construction trends.
Copper went on an extended bull run starting in 2003, topped out below $4.00 per pound, and then fell off a cliff.
The severity of the drop was registered almost all in one month - October 2008. That's an indicator as to what degree the entire global economy slammed on the brakes as a result of the credit crisis.
But now that copper has retreated back to 2005 levels - and other base metals back to 2003 levels - what does it mean?
I can think of two plausible explanations. Either the global infrastructure boom is well and truly dead, or the panic-driven sell-off as a result of the credit crisis was overdone.
China Picks Door #2
On Sunday, November 9th, China sent a clear message that infrastructure is not dead. We still need it, China said in so many words, and we're going to build like crazy.
In more official terms, Beijing approved a 4 trillion Yuan “stimulus plan,” with most of the funds slated for infrastructure spending between now and 2010. (In dollar terms, 4 trillion Yuan is roughly $586 billion.)
Not everyone was impressed by the news. While some called it a major development, others shrugged. China was going to spend this money on infrastructure anyway, the shruggers said. The announcement was meant more as a booster shot - a tonic for global sentiment.
My view, though, is that it doesn't really matter whether China's “mass stimulus plan” is truly a big shift or just new gloss on an old agenda.
The point is, that money - more than half a trillion dollars - will be spent on infrastructure. Beijing has confirmed it aggressively and openly: the global building boom is not dead.
We Still Need It
Everything the world needed before the credit crunch, it still needs now. Bridges, roads, ports, airports, refineries, you name it. And China, a country sitting on $2 trillion in reserves, has just pledged to open up the checkbook and spend like crazy.
It's true we don't need any more houses in the U.S. or Britain just now - but even in the aftermath of the housing bust, countries like China and India and Brazil are on a residential upswing.
And by the way, what we do need in the U.S., and need badly, are repairs and upgrades.
America's infrastructure - everything from sewer pipes to interstates - is on the verge of falling apart. We are looking at long-term repair and upkeep charges that run into the tens of trillions.
Basic Comforts
In sum, I like the base metals here. (I like precious metals too, but that's a different story.) If you're looking for good, safe places to put your money, I would consider some of the well-run base metal producers.
To recap:
• Base metals (also known as industrial metals) have been unduly crushed by the credit crisis.
• The market is acting as if the global infrastructure boom is dead and buried.
• China's 4 trillion Yuan (nearly $600 billion) “mass stimulus plan” says infrastructure spending is not dead. Maybe they were going to build like crazy anyway... but that's the point.
• It's the world , not just China, that has plenty of building left to do. In due time we will see a return to global growth, and a return to pre-crisis trend patterns.
• The U.S. might have a housing glut, but we are looking at huge outlays on the maintenance and upkeep side of things. The longer we put off these repairs, the more pressing they become.
A Quiet Oil Hedge
Oh, and one more thing. Another modest benefit of base metal producers is their negative correlation to oil prices.
In other words, if you're holding any long energy positions in your portfolio - and who wouldn't be with the bargains out there now - you have exposure to slumping oil prices right?
As heavy users of diesel fuel and electricity, the base metal miners can actually benefit from weak oil prices (which lower their production cost).
As I said, not a huge factor... but a modest diversification benefit for an energy-biased portfolio.
The “Lethargy” Strategy
When will base metals prices start to rise again? I don't know. But I'm not buying these producers for a trade, so I don't have to know. I can be patient.
In the past Warren Buffett has joked that “lethargy” (laziness) is a key component of his investment strategy. I'm taking a page from the Buffett book here.
In practice, that means I'm on the lookout for high quality base metals producers with strong balance sheets, plenty of cash in the bank, good cash flow, smart management, and low share prices to boot.
When you come across a company with the above characteristics, you can just buy a good chunk of shares, throw the position in a drawer, and sit back to wait for the inevitable double or triple.
A Great Buy... Right Now
I recently found a base metals producer with exactly the characteristics mentioned above, trading (as of this writing) for under $6 per share.
Better still, this company is a true “net-net” in value investing terms. Because investors irrationally hate the base metals so much right now, the company is selling for less than the value of its cash in the bank.
By Justice Litle
http://www.taipanpublishinggroup.com/
Copyright © 2008, Taipan Publishing Group
Justice Litle is editorial director for Taipan Publishing Group. He is also a regular contributor to Taipan Daily, a free investing and trading e-letter, and editor of Taipan's Safe Haven Investor, which helps guide readers to new global investment frontiers and safe harbors.
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