Metals Retain their Glitter

11/03/2008 12:01 am EST

Focus: GLOBAL

Lawrence Roulston

Editor and Publisher, Resource Opportunities

Lawrence Roulston, editor of Resource Opportunities, thinks metals will emerge "shining" from the current financial crisis.

There are some bright spots [for commodities] in the current crisis. China has been and continues to be the most important driver in the metals markets, although its pace of growth has slowed from more than 11% a year to just over 10%. (Third quarter growth was just reported at 9%—Editor.)

India is still growing strongly (also at a slower pace), as is much of Asia, but is still at a pace that developed countries can only dream of. Metal prices are still well above long-term trends. Iron ore prices are still rising sharply and definitely not driven by speculators. The prices are set by producers dealing directly with users.

Emerging markets are far more intensive users of metals than the developed world. New sources of supply are needed to match that growing demand and to replace older mines as they are depleted. Much of the mining industry’s investment in this cycle has been directed to buying existing production.

The major producing mining companies are being valued on the [premise] that metal prices will fall hard based on a US recession impacting the rest of the world. That hasn’t happened, so the mining companies are being valued at exceptionally low levels in relation to actual and projected earnings. Teck Cominco (NYSE: TCK) represents exceptional value.

The larger miners have lots of cash, including Canadian companies Barrick (NYSE: ABX) with nearly $2 billion, and Teck, Goldcorp (NYSE: GG), and Inmet (OTC: IEMMF.PK) all sitting on more than a billion dollars of cash.

The majors have suffered, but the smaller companies have been beaten down to absurdly low levels. We are already seeing takeovers as the larger companies go bargain hunting. The smaller and mid-tier companies are beginning to merge. Those deals will be accretive to shareholder value as they will create larger and stronger companies.

Junior mining companies that need to raise money in the near term will continue to face real challenges. But the many small companies with defined metal deposits, strong management, and cash will come back early in the recovery.

At present, major gold companies are valued on the basis of just under $200 per ounce of total gold resources. Juniors, on average, are valued at a mere $29 per ounce. At prices like that, the juniors must look extremely enticing to the larger companies. Obviously, there would be takeover premiums that would generate returns from the current price levels.

Panic selling at this stage is definitely the wrong thing to do. Taking advantage of the panic selling of others could net you some good companies at attractive prices. Be selective. Be patient. The market will come back.

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