-
Markets, across the board are getting hammered at the moment. The thing to watch for resource investors are the reports coming out of China. I just read another write-up on the commodties boom in china in the Press today. The mayor of the city, which the story was about (forgot the name), had said that his city would continue to expand at the current hectic pace for at least another 10 yrs. The journalist, who had obviously been there, decribed the place as one huge construction zone.
There are no indications of a slowdown in China whatsoever which means there is no need to panic for those people invested in resources. The bull market in commodities is still in force.
Bull markets never go staight up. Bull markets take two steps forward then one step back. What's happenning at the moment is a healthy correction in a long term bull market.
Mick
-
Good comments Mick
The way to go , I believe , is with quality resource / commodoties / mining stocks that are producing or at the point of producing , keeping away from those that are not past the exploration stage as they are too risky and too far away from creating real value even if successful in their exploration activities
-
Exactly WH, One of my "rules of thumb" is not to invest in companies unless they have completed a BFS (Bankable feasibility study) If the banks are not prepared to put their money into a project then I'm not putting my money into that company. When the BFS is completed the decision whether to proceed with developement is made.
I must admit that I have broken my own rule this year (got a bit greedy) and bought two companies (SMM , CMR) which have not completed BFS. I'v already lightened up on one of those two companies today and will be watching them very closely.
The rest of my miners are either producing or at different stages of developement and will be coming into production in either 05 or 06.
Mick
-
Mick
Our investment criteria is obviously very similar
Resource sector
Key component = BFS
Proven management
Financial backing from top banks / financiers
Producing or close to production
Location ( country and proximity to road / rail / shipping )
Financially sound
Low to medium cost of production
Reasonable mine life
Probability of further exploration / finds
These are the things that I look for --- the more of these that a company has the better
I am now looking to weed out my weaker stocks and replace them with those of better quality
This will mean less trading activity but a reduced exposure to volatility ( especially downward ) I believe
As a matter of interest I have been looking at gold , silver and base metal prices this evening
Gold and silver are not too flash at present but base metals are generally pretty strong , not much off their recent highs
I am a little unsure about gold although there is still room for a good profit to be made so long as production costs are in the low to medium range
Because silver is in supply deficit , has such a multitude of uses and such low worldwide stocks I believe that it will have a very rosy future
The demand for base metals must surely remain strong ( China , India etc ) and this will keep prices at a reasonable level at least , even if below the current levels
Efficient producers were able to turn a profit at prices around 50 % of what they are now so I see no cause for panic
Based on the above I will be sticking with top quality mining / resource / commodity stocks
-
Investment criteria - Resources
Yes WH, my criteria are very similar to yours however I had never got round to writing them down (formallising the criteria) which I have now done - made a copy of your list
I would include "country risk" on it's own rather than bundling it in with infastructure.
Cheers
Mick
-
By Kenneth J. Gerbino
March 29, 2005
I believe the base metal stocks are going to extend their bull market for a long time and well beyond the consensus "group think". There will be corrections along the way but I believe these stocks are going to surprise everyone over the next few years. My reasoning follows below.
I believe precious metal mining stocks should be in everyone's portfolio but I also think it is a good idea to have some exposure to base and other metals (copper, zinc, nickel, lead, chromium, aluminum).
In order to understand a major change that could take place in an investment sector one can gain insights from a major change that took place in another sector.
I remember twenty years ago when Intel was producing computer chips, which at the time had become like a commodity item. From 1985-1995, Intel sold for only 7-12 times earnings because of the then "commodity" aspect of chips and the fact the computer industry was at that time a cyclical industry. By 2000, Intel was selling for 60 times earnings because of the Internet, laptop and cell phone usage explosion (mega-trends creating a new electronic marketplace with a more sustained demand for chips). Even today, after the tech stock wipeout, Intel is still selling for 20 times earnings.
A similar usage explosion has now started in base metals. The corresponding new mega-trend is Asian and Indian base metal demand. Base metal stocks are now selling at only 5-8 times cash flow. Old time base metal investors are locked into the past thinking of the cyclical nature of the industry. Three billion Asian and Indian people say "no way". Any structural or sustained demand for these metals could increase cash flow multiples to 12-16 times or more. This has significant implications. It means that even if the prices of these base metals go down by 25-35%, because of the multiple expansions, the base metal stocks will still be buys.
Even with just 2-3% growth in Asia and India (current growth rates are 8-9%) a steady demand for resources will create a more sustained and structural market for these metals. A steady demand would change the "cyclical" aspect of base metal demand and this would be reflected in higher cash flow multiples and higher stock prices. Tight supplies also will help stock values.
The latest data from China shows that 82% of their capital spending is on housing and infrastructure (roads, power plants, railroads, sewers etc.). Even with only 2-3% growth, China's capital spending should be a long-term positive non-cyclical factor to metal demand, as these infrastructure projects will last for decades as huge rural populations enter their new economic world. In the more established economies, capital spending is more cyclical because people are buying cars and TV sets and washing machines based on the economy, which can go up and down. But newly industrializing countries do not stop building roads and power plants when their economies slow down.
Infrastructure projects are usually not cyclical since they have State backing and many times are not curtailed despite poor economic conditions. In the current age of debt financing and printing money by world governments, it would be hard to imagine politicians considering canceling a power dam or major highway because of a slowdown in the economy. It will not happen in China or in India. The projects in the U.S during the great depression and many projects in Asia during the Asian meltdown are good examples of large state projects that continued despite all. Therefore one can expect a robust demand for base metals for a very long time even with substantial slowdowns in India and Asia.
China will attempt to talk down their economic growth and try and get the hedge funds and speculators out of the metal markets so they can buy cheaper on world markets. But with 82% of their capital spending on housing and huge infrastructure projects any economic slowdown will still require a sustained demand for these metals.
Because of this change from a
-
A number of interesting articles, with references to China, on Joes Diner - FSO
http://www.financialsense.com/fsu/po...ncy/diner.html
,
-
China to boost refining capacity by a third to handle booming energy demand
Tue Mar 29, 5:43 AM ET Business - AFP
BEIJING (AFP) - China, whose booming economy is expected to see record demand for oil this year, plans to expand its refining capacity by more than a third within the next five years, state media said.
By 2010, the country aims to add 100 million tonnes to its refining capacity, on top of its current nearly 300 million tonnes, the Xinhua news agency said, citing the China Petroleum and Chemical Industry Association.
"Fast-growing domestic demand for finished oil products has given full play to the surplus refining capacity that had lain idle for a dozen years," said Tan Zhuzhou, president of the association.
"It has been top of the agenda for the country's oil giants to develop and expand oil refining capacity," Tan said.
China processed a record 273 million tonnes of crude oil last year, up 13.7 percent from the year before, marking the fastest growth rate in three decades.
Boosting domestic refining capacity is a key element in China's plans for coping with its enormous appetite for energy and fits into a larger strategy to rely more on the country's own resources to the greatest possible extent.
"China has the potential to ease its reliance on foreign energy as it has vast oil and gas reserves," Tan said according to the Xinhua report.
Tan's remarks echoed a statement made by Foreign Minister Li Zhaoxing earlier this month saying China would rely mainly on domestic oil resources to fuel its economic growth.
Intensified exploration efforts helped the two biggest oil companies to locate nearly 850 million tonnes of oil reserves in the course of 2004, state media reported recently.
Consumption of crude oil in China, already the second-largest user after the United States, will jump to 320 million tonnes this year, an 11 percent rise over the 288 million tonnes used last year, according to earlier predictions.
A net importer of petroleum products since 1993 and of crude oil since 1996, China is reliant on overseas producers for one third of its supplies, a share that may rise as Asia's second-largest economy continues to expand.
-
Very good thought centring articles Mick!
So Mick you are a buyer in oil producers or soon to be oil producers?
I am, and more than just NOG!
I like NOG for the oil&gas and coking coal....make sense to me and the NOG bull run is set to continue. Name another small player with three commodity boomers with exploration upside?
Gregor.
-
The fact that you have got oil interests other than NOG is good to hear Gregor.
I suspect many of the NOGers have all their eggs in one basket - NOG, which I don't think is a good idea no matter how good NOG's prospects look. NOG has performed well for me over the past two yrs and I am confident that this strong performance will continue for another 2-3 yrs.
NOG is not my best oiler and not my worst - it's somewhere in the middle of the pack.
I'm very bullish on resources, particuarly oil as well as gas (in the US)
The thing I'm concerned about at the moment with oil is that there would be a sharp spike in oil prices which would reduce demand and bring the whole thing crashing down. Ideally I would like to see prices rise gradually (20-30% per yr) so that the economies can adjust slowly and demand for oil will remain high.
Mick