Northern Timber, Southern Gold 

02/16/2010 12:16 pm EST


Eoin Treacy

Global Strategist,

Canada's West Fraser Timber should benefit from rising lumber prices, while several smaller Australian gold producers have nicely weathered the correction in metals, writes Eoin Treacy of Fullermoney.

Lumber [recently] concluded a remarkable advance, having been limit-up at least once intraweek, and is attracting increased investor attention because of its performance compared to the wider commodity markets. It broke the five-year progression of lower rally highs in November, consolidated below $250 for two months, and broke emphatically upwards [the week before last], reasserting the medium-term up trend. It is somewhat overextended in the short term, but a sustained move back below $235 would be needed to question the consistency of the medium-term advance.

Given the considerable stress the lumber industry has been under over the last few years, it is perhaps not so surprising that the shares are lagging the commodity price. However, if lumber's recovery is to persist, it will need to be supported by increased investor activity, which should be reflected in higher related share prices. Provided lumber companies have not hedged their production at lower prices, the recovering price of the commodity should begin to be reflected in their earnings relatively soon. The general stock market pullback has also probably had an effect on the shares.

West Fraser Timber (Toronto: WFT) successfully completed its base with a sustained break above C$30 in November. A sustained move back below C$28 would be required to question potential for further [price advances]. [Shares closed at C$35.98 in Toronto Tuesday—Editor]

A subscriber [sent] an interesting report by Craig Sainsbury and colleagues for Citi covering the Australian junior gold mining sector. Here is a section:

We believe that another wave of gold [mergers & acquisitions] is likely to happen, especially if the gold price remains strong. Consolidation has started to occur at the micro end, with many of the junior explorers starting to come onto the radar screen. We believe that consolidation will continue, with producers looking to increase in size towards the 500K ounces-per-annum level through mergers. At [that] level, the companies start to look attractive for the major international companies. The Australian mid-tier sector also looks attractive on an earnings multiple basis to their North American and African peers. Therefore, deals done at today's near-record high gold prices are still likely to be earnings accretive if done on an all equity basis.

In Australian dollars, gold continues to range in the region of A$1,200 and a sustained move above A$1,300 would indicate a return to demand dominance.

OceanaGold (Sydney: OGC, OTC: OCANF) has one of the better chart patterns of the shares mentioned in this report. It remains in the most recent range and would need a sustained move below A$1.40 to question the consistency of the overall uptrend. [Shares closed at A$2.44 in Sydney Wednesday—Editor]
Medusa Mining (Sydney: MML) has lost its up trend consistency and hit a medium-term high near A$4.40 in November. It has since reverted to the mean, defined by the 200-day moving average but needs to sustain a move above A$3.50 to break the short-term progression of lower highs and suggest demand is regaining the upper hand. [Shares closed at A$3.46 in Sydney Wednesday—Editor]

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