Base Metal Commentary
Precious metal analyst Ken Gerbino has some bullish comments on base metals in this recent commentary at 321 Gold.-
P.S. to previous post: Stockhous might have erased my previous attempt to post this, since it appeared in triplicate in my prior attempt to post it.
https://www.321gold.com/editorials/gerbino/gerbino032006.html
“We are in an era where India and China need 5-6 times more raw materials than Europe and the U.S. did during the 30 years of booming economic expansion after WWII. However, the inventories of metals in the world's major warehouses (Comex, London Metal Exchange and Shanghai) are down by more than 80% in the last three years and all the easy mineral deposits found near surface over the last century have been mostly consumed. Minerals and metals are becoming more scarce.
“Consequently an acute supply squeeze will surely occur in the coming years. This means historic valuations of mining stocks based on global economic cyclicality is no longer valid. Growth from Asia and India changes the entire landscape of raw materials from a cyclical business to a growth business - and there is precedent for this; the 1950's and 60's, where old names such as Kennecott Copper, Reynolds Metals, St. Joseph Minerals and International Nickel experienced two decades of strong non-cyclical growth.
“The above makes this investment thesis a unique opportunity and the mining sector could, again, become the long term darling of Wall Street.
Mining companies should now enter an era of sustained growth. Growth stocks sell for 20-30 times earnings. Base metal mining stocks in the last three decades usually sold for only 3-7 times earnings because of the constant ups and downs of the world's economy (cyclicality). This is all changing right now. Although we own plenty of gold and silver companies for our clients we are also invested in producers of copper, nickel, platinum, zinc and lead deposits and I recommend the same for you. These companies will experience higher valuation multiples of cash flow by Wall Street because they are enjoying very strong profit margins and sustained growth.
“Even slow growth from India and China make these stocks big time growth companies that have huge asset values already in the ground and because no one can ramp up any supply in the short or medium term to meet demand, pricing power will be strong. Also these mineral deposits like everything else in the world become more valuable as inflation continues to move forward year after year.
“The mining sector, up until 2002, had 20 years of lower prices, layoffs, and abnormally low investments in new mines and exploration. Consequently the mining companies were totally unprepared for the huge increase in global demand for basic metals in the last three years. They are now 5-7 years away from catching up. Shortages are here and now and they could get worse. ….
“There are three phenomena converging right now that offer you a unique opportunity. 1) Prices are going up for gold, silver, copper, nickel, zinc, lead, uranium, and the platinum group. 2) Supply will be constrained for 5-7 years. 3) Warehouses are almost empty. The combination of higher prices and a growth aspect means that many properly evaluated mining stocks could have enormous moves to the upside. …
“There is no better sector on Wall Street than the mining companies in my opinion. Take advantage of the above data and being in the right place at the right time. Most likely we have a 5-10 year major bull market coming in the metals. There will be some nasty corrections... but no one ever said it would be easy.”