Mining and Metals: Don't Panic

08/06/2013 8:00 am EST


Mining and metals stocks did not help our performance in the second quarter. Our advice, however, is "Do not panic and sell," as you may regret it later, suggests Russ Kaplan, editor of Heartland Advisor.

A major protection against unexpected events is to buy financially solid companies so they can ride out these events and not go bankrupt. Thus, the best thing to do is to figure out what is going on with these companies, and see if this is a permanent or temporary situation.

One thing not helping us is the fact that the price of gold and copper has been going down. Is this a permanent or temporary situation?

The price of these commodities has been volatile since, almost the beginning of the human race, and no doubt will continue to be volatile. However, I believe that, in the near future, they will go up again.

Meanwhile, investors should consider Black Swans; these are not the pretty birds, but harbingers of problems beyond a company's foreseen control. When we look at the mining stocks, we see that they have had more than their share of unexpected events.

One of these Black Swan events that recently happened was the Grasberg Mine incident in Indonesia, which is owned by Freeport-McMoran (FCX). Grasberg holds the world's largest gold mine and the third largest copper mine in the world.

Last May, there was a tragic event at Grasberg. A tunnel collapsed and killed 28 people. The government closed Grasberg pending a thorough investigation, which caused the loss of many tons of gold and copper.

Mine safety is paramount to Freeport-McMoran, and fortunately, this incident was temporary; the mine started back up on July 4, and production will soon be back on schedule.

While no sane person wants tragedies to happen, these events made Freeport-McMoran an even better buy now, than when we first bought it. There is also an above average dividend while you wait.

Just as Freeport-McMoran has had trouble with its Grasberg Mine, Barrick Gold (ABX) is having problems with its Pascula Lama mine in Chile.

This mine produced less gold than expected, causing Barrick Gold to take a $5.5 billion write-off. Again, I see this as a temporary problem and an opportunity to buy Barrick Gold at an even better price.

Further, just as Freeport McMoran and Barrick Gold are having their own problems, so are Southern Copper (SCCO) and Rio Tinto (RIO), offering a chance to average down or get in at new positions.

I believe that these stocks were undervalued when they were first recommended and are now even more undervalued. The above-mentioned companies are financially solid, which make them good buys.

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