Mining stocks still look bright for the stock market in 2008
Written by Michael Vass
There is nothing that feels as good as being vindicated on an idea. As a former stockbroker I especially like to hear that I got it right. But I realize that my vanity is only a personal joy and mining stocks are the real winners.
I have said in August and September, as well as in other points in this year, that mining stocks were one of the best values in the stock market. While the focus has been on financials the market has run to gold. And with the latest drop in the stock market, some 20% down in a week and 42% for the year at that point, there were few that believed anything was still a buy. And then the market gained nearly 1000 points in a day.
And then the Motley Fool readers jumped on the ride. The MSN Money list of institutional buying and the Motley Fool CAPS both picked as their top 2 leading buy choices:
- Compania de Minas Buenaventura
- Agnico-Eagle Mines
Is anyone surprised?
On Monday Barron’s wrote about Van Eck portfolio manager Joe Foster and his call for the gold market - International Investors Gold Fund.
So it seems that all these sources are looking towards the mining stocks. That means that you can be sure that this is the time for a pause in gains for a bit. I still regard this sector as one of the best purchases in the market. Volitilaty is not gone, but then again the markets in general are going to experience that.
The 4th Quarter is going to be abysmal. As sales miss projections and earning look to become negative, the need for metal will become attractive again. As the financials continue to seesaw, causing turmoil in other markets, and the Presidential election places a firm vision of the next 4 years precious metals will experience a run similar to that at the end of 2007.
I may be wrong, just as at various points this year I already have been. But the overall outlook has been correct, and I think it will be in the future as well. But only time will tell.
When China Goes - Mining Stocks Go
If the recent trends continue, mining stocks may turn out to be one of the worst performing sectors of 2008 when the first 6 months looked oh so promising. A slowdown in China’s economy is having a devastating effect on commodity markets as demand for construction materials and materials used in exports slows down among the world’s reeling financial markets.
As the Sub-Prime Syndrome has taken its toll on the financial markets, the financial crisis is threatening to sink the global economy into recession.
China has a glut of commodities supplies at the moment and even 5-7% GDP expansion could have a negative impact on commodity prices , especially oil ,coal, copper and iron ore. Growing fears that China will scrap plans for new power plants will place a strain on copper prices.
When China’s customs office releases preliminary data showing September metals trade next week, that should give a clearer picture of commodity prices for thr rest of 2008. Hopfully, China is still a player.
Are mining stocks the safe haven from the bailout crisis?
Written by Michael Vass
There is no deal on the bailout of the U.S. financial markets as of this moment. Treasury Secretary Paulson is in the White House as I type trying to create a new plan. The Congress is busy trying to make their own plans as well.
That is the situation that the world markets will be facing tomorrow. And in the wake of this revelation I expect that the Dow Jones Index and other markets will retreat in the face of an unsure weekend. Which means that this is a great market for mining stocks.
I have already mentioned that I feel that coal mining is a great area for the future, based on the need of alternative sources of energy to crude oil. But when the markets are in turmoil, and with direct talk from the likes of Warren Buffett stating that the potential of failing to get a bailout deal done is akin to a financial Pearl Harbor, well there is just 2 place you can bet people will go – gold and oil.
Gold is the traditional hedge in worrisome times. And crude oil has gained in popularity as a hedge as demand has increased in China and other developing nations. Both of these items are limited commodities, and require mining to bring them from the earth that surrounds them.
In the immediate short-term gold will have to fluctuate to handle the demand for safety. Which means that the gold supply will diminish and mines work harder to make up the difference. In the short and long-term oil is both required for energy needs and depleting the finite supply.
And I have to say that mining stocks look great because of all these factors. Why?
There was an old saying from when I was a stockbroker
“You may or may not get rich looking for the gold vein, but if you own the picks and axes you’ll never go poor.”
Companies with proven assets in coal, gold, and oil are the picks and axes of this market and on into the future. The world needs these commodities for safety and energy. No matter the financial outcome, and perhaps because of it, these valuable commodities have to come up to the surface. And mining companies are the means to do so.
With the decreased liquidity in the capital markets, competition is reduced and weaker companies will be forced to merge with bigger and stronger companies. Thus supply will be centralized into fewer hands. With demand up, profits will increase.
Now some would say that this is a temporary blip. And were this the spring I would agree. But with winter and cold weather approaching, and the fact that a slow 4th quarter is all but guaranteed in the U.S. this small blip should last for 6 months from this point.
Plus the fact that a Democratic President has usually been met with a lower market day one. In this case, Senator Obama has yet to declare that the current bailout of $1 trillion (including AIG and Fannie Mae and Freddie Mac) will disallow his initiatives on healthcare and other social programs. So the damage, unless he changes his stance, will even be worse.
When you consider all this, I come to the conclusion that mining stocks are one of the few safe havens in this tumultuous market. If you disagree, please do let me know why.
Mining stocks in the 2nd half of 2008
Written by Michael Vass
Oil is in the middle of the summer breather, gold has backed off the stellar highs reached in the 1st quarter. Inflation is in the background, and the mortgage housing crisis continues to hinder the financial markets. Well back on July 2nd I mentioned that
It seems I was right. So what might an investor do and look forward to?
Mining stocks continue to hold one of the better risk reward scenarios for a long term outlook, I think. While many sectors of the markets are slowing there is huge potential in the mining sector for reasons most are not discussing now.
Because of the huge run on gold and precious metal prices early in the year, many of the mining companies took the opportunity to horde cash and survey the landscape. Several of these companies are taking the current indecision in the markets to use that cash to acquire some of the competition. Lonmin was recently offered a takeover valued at roughly $2.5 billion. Vale of Brazil is looking for a potential match with $12 billion in its coffers, while BHP Billiton and Rio Tinto are doing merger dances.
But a merger is only one reason why the current lull in metal demands is a buying opportunity in mining stocks. China and India are far from peak of their demand for metals. Both of their economies are in growth phases and require more raw resources.
China is not only using more metal, they require much more energy. Already China has grabbed the excess crude oil that has become available from the slowdown in the United States. Soon they will have increased their need enough to be driving up crude oil prices even if America lessens its demand via domestic drilling or increases alternative fuel sources.
And of course there is the aspect of fuel sources outside of crude oil. The world is looking for options and needs energy until a renewable alternative becomes viable. That means an increase in mining and processing of oil shale, coal, and uranium. While nuclear has its detractors it provides too much energy to be ignored, and is relatively clean. A new process for coal is in talks in America, making its use cleaner and a readily available domestic stopgap for crude oil. And oil shale has a potential that still remains unknown on the large scale.
Each and every one of the reasons above is likely to show their influence before the end of the year. With the political situation in America poised to change energy consumption trends after the Presidential election, mergers creating more efficient (and profitable) mining companies, demand pressure from China and India even a slight increase in crude oil prices (as winter approaches) or a rush to gold and other precious metals as a hedge for inflation and/or weak markets means that mining stocks are well poised to outperform virtually all other sectors by the end of 2008.
Commodities: Anxiety and Performance
Oil, precious metals and farm products are causing anxiety for consumers at the gas station and the supermarket and we anticipate continued escalation in the gas and food prices. The unique market dynamics to this almost recession have created a situation in which commodity mutual funds may be your best hedge against rising gas and food prices.
According to Lipper, commodity mutual funds were up almost 20% for the second quarter and were up almost 30% for the year. It’s remarkable considering the fact that 70 of the 78 mutual fund groups followed by Lipper were down YTD through last week.
Here’s some funds that performed extremely well YTD and may continue to perform well through the end of the year.
Fund Return
Vanguard Precious Metals and Mining (VGPMX) 17.8
PowerShares DB Energy (DBE) 53.8
One mutual fund manager told Mining Stocks Blog, “Commodity mutual funds allow investors to invest in these real assets when these asset classes are rising. It’s a good way to hedge your life in a very scary time.”
Doom, gloom, and the silver lining in mining stocks
Written by Michael Vass>
As I recall, back in December I spoke about the chance of the Dow Jones hitting 11,000. It was roughly the same time that I mentioned my targets for the price of oil (initially 110 and then upped to 125). So far one has exceeded my expectations the other is probably forthcoming to a similar degree. So what else can investors expect?
Well I think the mining sector has issues that are both positive and negative. So far there is still a huge run-up in commodity prices that is keeping many companies in the black that otherwise wouldn’t. Anglo Platinum out of South Africa is one such example though there are others. But this run up won’t last too much longer.
One of the main factors helping many mining companies has been the fact that supply has been cut. Energy shortages, most notably in South Africa but also in North America and Chile, forced supply down artificially helping to boost prices. But that is a problem that has been in the works of being fixed since the 1st quarter. Once it is done supply will rise to meet the growing demand and be a signal for profit taking.
Another factor to consider it the American economy. Mining companies eked out a mere .2 percent profit so far this year, though only one other group in the S&P 500 also held a profit. As costs for fuel continue to rise that profit margin is evaporating. Add in a decrease in demand due to cut-backs, and then an increase in supply and you have strong sell signals.
Of course there are still companies in the group that have room for these problems like Marathon Oil and Newmont Mining Corp. Marathon is only trading around 7.5x earnings and Newmont was the 9th best stock on the Philadelphia Stock Exchange Gold & Silver Index. Some analysts like Brian Barish of Cambiar feel they have not caught up to the surging resource prices and thus are worth owning.
So what is the net result? It’s no easy answer but since I expect a run up in heating oil and crude oil prices as the 3rd and 4th quarters hit, plus a continued bear market in the U.S. driving Gold and precious metals, my belief is that mining stocks will outperform most markets into the 2nd quarter of 2009.
Now that doesn’t mean profit, nor does it mean that other factors like who wins the U.S. Presidential race won’t affect the final results. But I think the odds are likely to favor all the mining stocks even if their books aren’t perfect. Its food for thought, take it as you will.
A Bullish Case for Silver
Since 1990, silver demand has exceeded supply each and every year reducing stockpiles.
If that’s not bullish enough for you, this interview with Bob Quartermain, CEO of Silver Standard Resources Inc., is an extremely bullish article for silver stocks.
Oil shale: questions and opportunity
Written by Michael Vass
As I write this President Bush is expected to discuss offshore oil drilling in America, and the opportunity of Oil Shale mining. In recent years I have heard a lot about oil shale and its mining, but I really didn’t know anything about it. Like most I expect the thought of oil shale made me think of a rock that is filled or comprised of oil. That is not the case.
Oil shale is a fine grain rack filled with kerogen. In heating the oil shale a gas from the kerogen is released which can be used in heating homes and creating power, or the gas can be cooled to create a synthetic petroleum-like oil. The use of that oil is similar to the uses for crude oil, but they are not the same thing.
How much oil shale is there, and is anyone using it? Those are the next questions I had. The answer may well surprise you as it surprised me. There is estimated to be 3 trillion barrels of oil equivalent of oil shale in the world. The United States is one of the major sources of deposits in the world with 1.8 trillion barrels equivalent under Colorado, Wyoming, and Utah. This is in comparison to the 267 billion barrels of oil estimated in Saudi Arabia (as of 2006). And currently first world and emerging nations including Germany, Russia, China, Israel, Brazil, and Estonia all have varying degrees of oil shale industries producing energy and fuel. Who knew.
Now consider this, mining companies - such as BHP Billiton, Anglo American, Kazakhmys, Vedanta Resources, Xstrata – and oil companies have been having a strong year as energy is on the forefront of political and investment minds. With the rise in speculation of crude oil prices, rising gasoline and home heating oil prices, and calls for alternative energy sources oil shale stands to be more actively in the public domain than ever before.
Now since there is no oil shale market (yet) and given that mining shale is a very different process from drilling for oil, I would imagine that several oil companies will be looking for acquisitions and joint-venture deals with mining companies that have the ability and experience in this field. Schlumberger, Shell, EnCana, Chattanooga Corp, Fushun Mining Group, Tosco Corporation, Petrobras, Viru Keemia Gripp are just a few involved in some aspect or projects with oil shale. I doubt that the number of companies will decrease in the coming years.
Opportunity abounds for the investor and individual that seeks it. How you take advantage of this potential is up to you. But I would expect that oil shale will become a greater factor in at least American energy future plans than ever before.
Calling NASA about mining stocks
Written by Michael Vass
On the best day, in the best markets, investing is difficult and stressful. But the current market environment is far from the best of anything. Even so there are a few things we can definitely say about this current cycle. Most notable is that this may well be the year of raw resources, commodities, and the mining and energy companies that find them.
As many of the stockbrokers I have worked with are wont to say,
“You don’t need to be a rocket scientist to figure this out.”
[Something I stopped saying after having said that to a rocket scientist who still disagreed with my analysis of a stock position.]
Energy is a critical issue in every world market right now. Whether it comes from oil, ethanol, coal, geothermal or any other source. Considering the constant demand in the U.S., the increasing demand in China and India, and the growing desire to have cleaner energy (for whatever reason) this is not a short-term issue. Yet oil and energy companies are under political attack. And thus there is an opportunity. If you know where to look.
There are far too many speculating in the commodities markets, particularly oil, right now. The rise in oil is attributed by many to be directly tied to that speculation. Given the current political environment and election I would not be surprised to see legislation enacted to raise the margin requirements in commodity trading up to 50%. Even if it is not raised (or to that level) the mere action of talks occurring in D.C. will hit that market hard. So I suggest another old broker ideal, look where the market isn’t hottest.
Coal. It’s one area that isn’t getting a lot of conversation on cable news channels at this time. It’s a fuel that is available, abundant in the U.S., and with current and future technology cleaner than ever before. It’s also easier to improve technology to make it even more clean, and last I checked no environmentalists were seeking to block its mining to save any owls.
Gold. When economies are shaky, or perceived to be, everyone wants their hands on at least some of this yellow metal. With Lehman Brothers reporting a $6 billion bailout similar to other financials earlier this year, the economy is in question still. While gold has retreated in recent months from its run at the start of the year its way off the lows. And it would take little to spark another run, like maybe a weak dollar. Sound familiar?
The other precious metals. If gold is good, platinum is sweet. And silver is their poor cousin.
Uranium. If we aren’t using oil, and coal hasn’t been looked at, the only immediate answer left is nuclear. Short term it solves many questions, and it’s very clean. As pressure builds for politicians to investigate all energy alternatives nuclear will hit the table again. Add just one or 2 new power plants and there will be a spike in this mined resource on expectation of a growth spurt in the industry not seen since the 70’s.
Now there are other reasons to be in mining stocks for the near, mid and long term. I don’t think most need more though. No one knows which of these mined materials will be the first to run. The political environment hinges on the person elected President. The economic forecast is in shadows currently.
But probability says at least one if not all of these will have their value increase. And the best hedge may be owning the mining stocks as opposed to the particular individual material. Yet another old saying is
“don’t mine the gold, sell the picks and axes”.
The turmoil in the stock market is hardly over. The price of oil may even out. At least till winter hits. But I will guarantee that talk about energy, and therefore mined materials will not end before the Presidential election at it’s soonest. Any rocket scientists want to speak up?
Flying Conservative in the Mining Stocks
It sure sounds like a paradox of words but if there’s anything conservative about the mining sector, there are some funds out there which will allow you play the mining sector while still sleeping at night.
Vanguard Precious Metals and Mining, USAA Precious Metals and Minerals, Oppenheimer Gold and Special Minerals, Fidelity Select Gold, and U.S. Global Investors Gold and Precious Metals are some well run funds which allow you to play the miners and/or the metals.
None of these funds have returned less than 35% over the past 3 years.
The state of mining stocks so far
Written by Michael Vass
The question in recent days has become, will another fall. Will another major investment bank in America become so unstable due to exposure to sub-prime loans that it will either fold or, if big enough, be bought at a fire-sale price.
Of course this instability has been wonderful for crude oil and gold. Gold in particular has had a huge increase in it’s spot price throughout the year since the first trading day of 2008. The run up is a reaction to the questions of recession, losses, and speculation. But the bigger questions for those involved in mining stocks is will this rush to commodities help and be a sustained process.
There is no one answer, especially as we are just in the wake of Bear Stearns. Lehman and Goldman Sachs have announced earnings, that pleased analysts while still taking massive losses versus year before figures. So you would have to ask, are they positive and are they signaling the end of the crisis.
One outlook can be taken like this, mining stocks must go higher. That is not because of the sub-prime scenario but because of the less prominent factors of the world.
While everyone is focused on America and it’s slowdown in this recession, most are not looking at the fundamentals in the world. Demand for all mined metals, precious or not, have increased because of the growth in India and China. That demand, which could wane to an extent from the record pace in the recent past, will not be going away. Those economies will not stop their growth, as some fear, just because America will slow it’s growth.
Add to that the conditions found in South Africa. Massive power outages have reduced supply, and there is no expectation that in this year stable power supplies will be guaranteed. Thus lowered levels of production should mean higher prices, and likely profit, though not to the biggest names (who may lose due to volume).
With higher prices of the underlying commodity, increased demand, and reduced supply in an arena of economic instability the most probable result is increases for the mining stocks. And while the U.S. may recover by 2009, the fundamentals only get stronger with that result.
So I would think, regardless of rate cuts (that will spur inflation), economic slowdowns (that will not significantly prevent growth in emerging markets), reduced supply, political unrest, and unknown factors the mining stocks will continue to show strength throughout 2008. Investors should not be emotional, nor should they be traders. Taking that thought in mind, potentials exist, and this blog will discuss them in more detail as we go forward.