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A Firm Foundation for the Next Boom
10/22/2008 12:00 pm EST
Jim Jubak, contributor to MSN Money, thinks commodities like molybdenum will get way oversold, and he finds a stock to play their rebound.
We're building the foundation for the next boom in commodity prices—and commodity stocks.
Right now, commodity stocks are factoring in huge declines in demand and tumbling commodity prices over the long term that just aren't going to occur. A patient investor who can put up with the pain of the next six, nine, or 12 months can now buy a very reasonably priced option on the shares of the strongest commodity producers for the next leg up in commodity prices. I peg the beginning of the next boom at late 2009 or early 2010.
The economies of the developed world are indeed slowing, and the high prices of commodities, especially of oil, have indeed reduced demand. But [demand] is still soaring in the developing world.
Thanks to the current crisis, the world is looking at an even bigger demand-supply gap in the near term once the economies of the US, Japan, and Europe emerge from recession in 2009 or 2010.
The prices of all the base metals, except for copper, have fallen to a level that's below the costs of production for all but the most cost-efficient producers.
Before the crash in commodity prices, Wall Street was calling for molybdenum prices of $32 a pound in 2008 and $30 in 2009. Nobody's using that price estimate for molybdenum now. Deutsche Bank, for example, has cut its price estimate for molybdenum to $26 a pound in 2009 and $20 in 2010.
I know we're headed into a recession—probably a severe one—but molybdenum miner Thompson Creek Metals (NYSE: TC) closed [below $7 Tuesday, barely above] the company's book value of $6.49 a share and [below] the company's net asset value, as calculated by RBC Capital Markets, of $8.96 a share.
Deutsche Bank has also cut the price-to-earnings multiple it uses to calculate a target price for the stock to nine times from ten times. And still that results in a target price of $24 a share—a full $17 a share, or nearly 300%, above the current market price.
If I radically cut my projected 2009 price for molybdenum to $24 a pound and assume a very modest price-to-earnings ratio of eight times, I calculate a $17-a-share target price for December 2009.
The company is now essentially debt-free and has $63 million in cash on hand. (Full disclosure: I own shares of Thompson Creek in my personal portfolio.)
A deep-value investor tries to buy a business for less than it is worth. I think you can do that for Thompson Creek right now.
That, plus the fact that production costs for molybdenum at many of the company's competitors are climbing due to the increasing scarcity of high-grade molybdenum ores, makes this a stock I'd be willing to buy now—or to hold while adding to my position. At this price, I'm willing to wait for the next stage in the commodity boom.
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