11 Next-Generation Commodity Names

10/07/2011 7:00 am EST


A number of commodity and agriculture stocks, along with new companies developing biofuels, are on Jason Burack’s radar right now. He’s encouraged by technical developments among biofuels makers, and by demand projections for the fertilizer companies.

Kate Stalter: Today, I am speaking with Jason Burack. He is one of the founders of Wall Street for Main Street. Jason, I know that you tend to take a macro approach, and from there, you take a closer look then at some of the commodities. So, given all that, I wanted to ask for your perspective on the market right now.

Jason Burack: In general, the market is not really valuing anything more than six months out from now, so some of these companies just continue to get more undervalued pretty much every day.

I think the market is extremely, extremely worried about the sovereign debt crisis—the possibility of European bank contagion here—and spreading to the US and elsewhere. Because of that, people are just in demand for the most liquid of instruments, just for the short term.

People are not really thinking about even two or three years out from now, which is just funny, because for some of the companies I follow, the fundamentals have actually improved in the last six to eight months. More good news has come out.

More positive things have come out with some of these resource companies, and they have expanded the resources greatly, and the stock price has gone down.

Kate Stalter: Give me some examples of that.

Jason Burack: Well, Silvercorp (SVM) for one. I really like the gold and the silver companies right now. It really depends on people’s risk tolerance, though: What percentage they should have in their portfolio of gold companies or silver companies?

If they are more aggressive, and they’re younger, like me, and they can afford more risk, they should have more allocated to silver, I think, than to gold. But the volatility in silver has been even greater than in gold.

So, a company like Silvercorp—they have all this stuff about the short squeeze, and people thought they were one of these fraudulent Chinese stocks. They pay a dividend.

The management has a stock buyback; the CEO and Chairman of the company went and bought 100,000 shares on the open market in the not-too-distant past. And a lot of the stuff has come out about the company. They publish their bank statements online, and their grades and stuff like that.

So, Silvercorp is a really good bargain here. They are already producing a good amount of silver, so there’s no bankruptcy risk or anything like that.

In terms of some of the other companies, I really like AuRico Gold (AUQ). They are what we call a gold-silver hybrid company, so they produce basically just gold and silver…you don’t have any base-metal exposure. I think something that people need to be careful about is the base metals.

Some of the commodities we really don’t like right now, especially in the near term. The base metals got way ahead of themselves. So, people who are buying these gold and silver companies need to be careful about some of the base-metal exposure, because the base metals—like copper, iron ore, lead, zinc—a lot of the prices on the base metals have just fallen off a cliff, even more on a percentage basis, than the gold and silver have.

Kate Stalter: Now, talk a little bit about the rare earths. That’s something else you follow, isn’t it?

Jason Burack: Yes. I cover the rare earths extensively. I really like the rare-earths story, because the industrial demand can grow pretty easily, in my opinion—at least 9%, but pretty easily double digits for a long time.

There is a lot of innovation upside in the rare earths. They are coming out with some amazing possibilities there in the lab to continue to grow the pie as a whole.

I am just seeing some of the innovations that are coming down the pipeline. Some of your investors are already familiar with some of the innovations in rare earths, like the new windmill technology and flat-screen TVs and the possibility of solar panels down the line.

We already have the iPads and the smartphones, and really those technologies wouldn’t exist without rare earths. The only thing that makes those technologies smaller, thinner, and lighter is the rare-earth element.

China has a monopoly on this. This is not a free market, so some of these other companies coming in there, there’s a lot of profits to be made if the company understands what it’s doing and not just on the mining side. I am talking about innovating with it and processing the rare earths and making value-added products.


Kate Stalter: I was just going to ask you if there are any particular stocks that investors or traders should take a look at.

Jason Burack: Oh, for sure. The top three stocks people should look at are Molycorp (MCP), Great Western Minerals (Toronto: GWG), and Neo Material Technologies (Toronto: NEM).

The reason these are the top three, in my opinion—that this is the top tier of the rare earths—is because all of these companies are already generating very substantial revenues for profit.

In the case of Molycorp and Great Western Minerals, you have vertically integrated companies. Great Western Minerals does not have a deposit yet, so they have been buying raw supply from China, but they will have the Steenkampskraal mine up and producing in the next 18 months out of South Africa, and then they will have other mines in their portfolio developing, coming online, after that.

The profit margins, higher up the value chain for Molycorp or Great Western Materials and Neo Material Technologies are very, very sound. The stock prices have taken a very big hit in the last five or six months, but their profit margins are expanding very, very rapidly on their value-added component for processing the rare earths.

Great Western Minerals’ gross profit margins have expanded 81% just in the last year, and the profit margin for Molycorp has expanded 54%. So, I think this is really good sign for both companies long term.

Kate Stalter: Let me just ask you about the time horizon on this, Jason, given that these stocks have been punished so severely recently. Is this something you would suggest as a watch-list group of candidates, or something that perhaps traders might want to look at making a buy sooner than that, while the stocks are still low?

Jason Burack: Well, it really depends, like you said, on their time horizon, because Molycorp is bringing the Mountain Pass deposit, they’re starting phase one. Halfway through next year, they should have about 20,000 tons of production up and running at Mountain Pass, and then they’re scaling up to 40,000 tons a year of production in 2013.

JPMorgan did downgrade the stock a couple of weeks ago, but even their analysts admitted that they’re still projecting $11 per share earnings in 2013, based on the production increases. The earnings are going to be there even if the rare earths’ prices are low.

Molycorp is just going to have very, very low production costs. Their production costs are actually going to be even lower than China’s, because they have new technology implemented, and they have advantages of skill.

For people who have like a two- or three-year time frame, if they are willing to average into positions here, maybe start accumulating a position here, maybe buy 10% to 30% of a position, and then if there’s a little bit more of a dip, you add more.

It just depends on the person, and if they are willing to value invest, and they are willing to continue to average down, which is something I do.

Kate Stalter: Jason, let’s talk a little bit about some of the fertilizer stocks. I know that’s another area that you cover.

Jason Burack: Yeah, the fertilizer, the food—wheat, corn.

I can’t tell you which one is going to outperform the other, because if one price goes up, the farmers tend to overplant it, and the price corrects very quickly. So, I don’t think that, unless you’re a good futures player, that is a good thing for investors to be investing in.

I think the best way is with the fertilizer companies, because it doesn’t matter, then—corn, rice, wheat—they pretty much have to plant fertilizer regardless. That boosts the input costs.

I tend to focus more on the juniors, because I like going for home runs, so one of the top juniors that I like is Allana Potash (Toronto: AAA). That is out of Ethiopia right there.

On a relative valuation basis, the stock was only like at 30 cents with a 200 million-ton potash source about 18 months ago. Now, on a relative valuation basis, it’s over 600 million tons, and the stock went up a lot, and then it basically went back down, and the resource is three times the size.

So, I think there is even more value in the Allana Potash, and it’s only two years away from raising all the money. They are doing the prefeasibility now, and then their feasibility and they just hired BNP Paribas to finish up all the raising of the money and start constructing a mine there.

The potash companies, for people who are more aggressive, there are some of the juniors. If not, they could go and buy like a Potash Corp. of Saskatchewan (POT), and I think we’re close to a bottom here, because there are 7 billion people on this planet, from a supply-demand fundamental perspective, and the population is growing. People want better food, so I think the potash and fertilizer stocks are a really good way to play this long-term fundamental trend.


Kate Stalter: I also want to follow up on kind of related area in the Ag sector, which would be some of these biofuels. Can you say a little bit about some of those?

Jason Burack: Yeah. Since 2011 started, the advanced biofuels have actually had very successful IPOs, more successful than the other technology IPOs.

Basically, there have been a lot of technological breakthroughs in the advanced biofuels companies in the last few years from biotech.
What this has allowed them to do is make cheap simple sugars from cellulose.

It used to be impossible economically to break down the inedible part of a plant, like a used corncob and other parts of a plant, into cheap, usable sugars to get ethanol at an economic price. But, now that oil prices moved higher, they found designer bacteria in the lab with biotech.

This occurs naturally. But they’ve been able to make them even cheaper out of the biotech lab, and they could get this to turn into cellulose, ethanol, algae biofuels it helps with, and also bioplastics.

Some of them that people should add to their watch list—and I’m not advocating, you know, people go out and buy these immediately—some of them are Amyris (AMRS), Ceres (Toronto: CRP), Sapphire Energy, Solazyme (SZYM), OriginOil (OOIL)—these types of companies have very big investors stocking them.

You have Warren Buffett investing in quite a few of them, and you have Bill Gates. Vinod Khosla, who is a renowned financier and venture capitalist in the tech sector. Over a decade ago, he made a lot of money with Sun Microsystems, and he’s invested very heavily in the advanced biofuels sector.

These are not corn ethanol. These are not the bad stuff. This is the next generation of really good technologies.

Algae are just something that’s very important. Most people don’t realize this, but all petroleum really is—the majority of petroleum—is fossilized algae.

What they can do in the lab now, on top of the cellulose ethanol and the designer bacteria, is they can really grow algae. They can grow algae and have it mature in only a few days, and they can turn it into oil and turn it into bioplastics without fossilizing it.

So basically now, they just have to prove this on a large scale, but they can do this on a small scale. What took Mother Nature millions of years, they can do in the lab in a few days.

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