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Investing in copper might be the simplest way to profit from the ongoing global urbanization.
China has one fifth of the world’s population andIndia has another 1.2 billion people. India's economy expanded at 8.9%in the quarter ended Sept. 30 while China's economy expanded at 9.8% inthe quarter ended Dec. 31.
China and India consume a lot of copper. Keydrivers of increased copper consumption in both countries isinfrastructure build out – power, construction, energy andtransportation.
India'spower production needs to rise by 15% to 20% annually which means,according to the International Energy Agency (IEA), India needs toinvest $1.25 trillion by 2030 into its energy infrastructure. Because ofthis investment into new infrastructure India's annual copper demand isexpected to more than double to nearly 1.5 million tonnes by 2012 – upfrom a current 600,000 tonnes. India usually exports between 100 and150,000 tonnes a year, Indian copper exports are likely to cease andindeed Indians might become large copper buyers.
With less than 1/3 of the population India’s urbanareas generate over 2/3 of the country’s GDP and account for 90% ofgovernment revenues. A report done by the McKinsey Global Institute called India Urban Awakening predicts that 590 million people or 40% of India’s population will live in cities by 2030, up from 340 million today.
China's current urbanization rate of 46% is muchlower than the average level of 85% in developed countries and is lowerthan the world average of 55%. China has set a goal of 65% ofurbanization rate in 2050. Over the coming 40 years that means 20% urbangrowth per year. This translates into 300 million rural residentsbecoming urban residents over this time period – last year thedisposable income of the Chinese urban population stood at 17,175 yuanper capita while the net income of the rural population was 5,153 yuanper person.
The annual per capita consumption of copper inIndia is 0.47 kg, China’s 5.4 kg and the world average is 2.7 kg.China’s urbanization plans and forecast GDP is expected to drive Chinesecopper consumption from the current 5.4 kg/capita to an astounding 10kg/capita by the end of the decade.
Australian equity research firm Resource CapitalResearch (RCR) said it expects the copper market to move from a smallsurplus in 2010 to a deficit of around 400,000 tonnes by 2011. According to JPMorgan Securities Ltd, the world refined copper market will have a 500,000-metric-ton deficit in 2011. The International Copper Study Group said global demand for copper will rise by 4.49% in 2011. Supply disruptions have cancelled out modest mine supply growth.
A glance at the following two charts confirms thegrowing demand for copper while inventory levels at the London MetalExchange hint at the supply deficit.
With metal analysts calling for a 10%-30% rise inthe 2011 copper spot price, you could probably make money buying sharesof JJC-iPath – an index composed of copper futures contracts traded onthe New York Commodities Exchange (JJC is up 50% in the last 6 months).
Or you could buy shares in one of the bigmulti-national copper miners. Freeport McMoran (FCX-NYSE), BHP Billiton(BHP-ASX) or Xstrata (XTA-LSE) are up a collective 58% in the last year.
But to make the big gains, you have to get inahead of the money flow. Potash has recently given us an excellentexample on how to do that and what signals investors should watch for asthe process plays out.
Potash is the primary ingredient in fertilizer,it’s also a mined resource with global demand being driven by a macrotrend. What’s been happening is a trickledown effect and is a threephase process:
Phase #1:a barrage of bullish headlines in the mainstream media:“Potash Profits Up,” “Spike In Food Prices Bullish For Potash,” “Potash Export Prices Rising,” etc.
Phase #2: a flood of investment dollars into thesenior potash companies. Potash Corp (POT-NYSE), Agrium (AGU-NYSE) andMosaic (MOS-NYSE) are all up about 120% in the last 12 months.
Phase #3:Snowballinginvestor interest in the “junior” (smaller cap) explorers. This thirdphase is typically riskier and more profitable than phase #2.
Nine months after the potash majors began their climb, Amazon Mining (AMZ-TSX.V),Encanto Potash (EPO-TSX.V)and Western Potash (WPX-TSX.V)allcaught fire – catalyzed by news stories of food price inflation. In thelast three months all three aheadoftheherd.com sponsor companies haveseen stock price increases an average of plus 200%.
"You're seeing a catch-up phase, there's capital flowing into the sector and it's moving down into smaller-cap names." Robert Winslow, Wellington West Capital Markets
Copper has just completed phase #1 (a barrage of bullish headlines), and phase #2 (the majors have had their run).
Phase #3 is about to begin.
VMS Ventures, Copper Fox, Far West Mining, HanaMining, Nevada Copper, Redhawk Resources and Western Copper are all goodcompanies seemingly well positioned to benefit from this next phase.
Catalyst Copper
I am going to single out one company, Catalyst Copper TSX.V - CCY, that appears to have everything going for it – including a “tell” in the fundamentals that suggests it may be about to be re-valued.
Catalyst has the right to earn 60% of the La VerdeProject. La Verde is a Mexican copper porphyry project with NI 43-101compliant resource of 2.1 billion pounds of Measured and Indicatedcopper and an Inferred Resource of 1.3 billion pounds of copper.
Catalyst Copper is currently earning into a 3.4billion pound copper deposit that remains open in all directions. Todaytheir 60% share would equal 2 billion pounds of copper – 9.6 pounds pershare.The current spot price of copper is $4.46/lb. WithCatalyst currently trading at 22 cents an investor would be buyingcopper in the ground for 2 cents a pound.
Catalyst Copper, partnered with Teck Resources TCK-TSX, has commenced an aggressive 20,000 meter drill program for 2011.
Catalyst CEO John Greenslade just raised $850 million for Baja Mining and he is on record as stating that CCY is a “more straight forward project”.
But here’s the tell: for the last year CCY hastraded about 500,000 shares a day. A lot of that trading is “seed stock”changing hands. Since Feb. 1 the average daily volume has jumped toabout 1,840,000 while the stock has risen to 22 cents.
Currently 180,000 people a day move from the country to the city. Urban infrastructure devours copper. Over the next 12 months that demand might drive investment dollars into juniors with big resources like Catalyst Copper.
Are there copper juniors on your radar screen?
If not, maybe there should be.
Richard (Rick) Mills is president of Northern Venture Gorup and host of aheadoftheherd.com. He can be e-mailed at rick@aheadoftheherd.com
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Legal Notice / Disclaimer
This document is not and should notbe construed as an offer to sell or the solicitation of an offer topurchase or subscribe for any investment. Richard Mills has based thisdocument on information obtained from sources he believes to be reliablebut which has not been independently verified; Richard Mills makes noguarantee, representation or warranty and accepts no responsibility orliability as to its accuracy or completeness. Expressions of opinion arethose of Richard Mills only and are subject to change without notice.Richard Mills assumes no warranty, liability or guarantee for thecurrent relevance, correctness or completeness of any informationprovided within this Report and will not be held liable for theconsequence of reliance upon any opinion or statement contained hereinor any omission. Furthermore, I, Richard Mills, assume no liability forany direct or indirect loss or damage or, in particular, for lostprofit, which you may incur as a result of the use and existence of theinformation provided within this Report.
Richard Mills owns shares of Encanto Potash.
Catalyst Copper (CCY - TSX.V), AmazonMining (AMZ-TSX.V), Encanto Potash (EPO-TSX.V) and Western Potash(WPX-TSX.V) are advertisers on Richards website aheadoftheherd.com.
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