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THOM CALANDRA'S STOCKWATCH
Metals melt-up mania coming
A peek at The Calandra Report
By Thom Calandra, CBS.MarketWatch.com
Last Update: 3:32 PM ET Oct. 27, 2003
Read my lips: Metals melt-up to reach mania levels
THE CALANDRA REPORT
Get profit-seeking strategies from Thom Calandra based on interviews with experts, research, analysis, and market-moving insight.
Hardened investors such as Paul Tudor Jones, Marc Rich and Lewis Moore Bacon, commodities-savvy institutions, like fund manager Capital Research Inc., and even aggressive metals and energy giants Abu Dhabi Investment Authority and China International Trust & Investment Corp. are all finding they don't have enough exposure to the melt-up in the prices of metals, grains, petroleum products. For more, see The Calandra Report.
Kneeling at the temple's main altar is China, voracious in its need for zinc, copper, nickel, surging platinum (near a quarter-century high mark), alumina, grains and oil. "There is no doubt China will be forming partnerships with large and small companies that can help supply raw materials," Hans H.C. So, vice chairman of China's CITIC Gold Group and CITIC Energy Group, told me in Beijing this past week.
It's a feverish feeling, as an individual investor, knowing the big names are all seeking avenues into the current price melt-up in metals, energy and other hard-good equities.
This once, I'm going to give you a peek into my search of the metals and energy melt-up, via subscription service The Calandra Report. The alert reprinted here in italics, first went to subscribers of The Calandra Report late last week. Is it still a good idea to pursue hard-asset equities, especially in metals and energy? Are there albino two-humped camels in Mongolia's Gobi Desert? (The answer to both is "Yes.")
There was a telling moment, at this week's Beijing banquet for China and Canada executives, when the top folks at PetroChina International Ltd., SinoChem and state-run giant CITIC (CITIC's Wang Jun, PetroChina's Chen Gong and SinoChem's Zeng Xingqui) were huddled with Sunwing Energy's Chairman Patrick Chua and other geologists, engineers and executives of the natural gas and oil exploration and production company.
Chua, along with majority owner Robert M. Friedland of Sunwing's parent, Ivanhoe Energy (IVAN: news, chart), were discussing ripening plans for further mapping and development of oil and natural gas properties across both the Sichuan Basin and China's lush Dagang oil fields.
At the banquet's lead table, China Premier Wen Jiabao, CITIC's Wang Jun and Canada Prime Minister Jean Chretien were expanding plans for exploiting what has become a thriving exchange of goods and services in the 25 years since Deng Xiaoping told the world, "Bring it on, baby." The mood at the dinner, which marked a quarter-century anniversary of robust relations between Canadian companies and the Chinese, was confident. See: The C-to-C connection.
China's demand for energy products, along with raw materials such as foodstuffs, metals and energy products, is bordering on mania levels. Ordinary Chinese, eager to invest their long-imprisoned capital, the yuan they have stuffed into their mattresses and in China's state-run banks, are lining up for miles to subscribe to IPOs in freshly minted, state-run gold mines and other resource plays. One fresh report notes that 98 percent of the worldwide growth in copper demand last year derived from China, pushing the price of fully processed copper cathode to premiums of 20 percent and more to the raw commodity.
Agricultural products, like maize, rice and wheat, are rising 25 percent and more year to year in price across China's wholesale markets. Even General Motors is saying China will soon top Japan to become the world's second largest market for automobiles.
On the energy front, China, like the United States, is seeing its net imports of oil and gas products rise dramatically. The nation's business and political leaders are taking aggressive steps to develop the trillions and trillions of cubic feet of natural gas, some of it stranded in remote locations, their country holds beneath its native soils and sea and to form partnerships with aggressive Canadian companies that are becoming expert at locating fresh sources of oil and gas in the Middle East and across Central Asia.
In between the prawns and the roast pork, a cell phone rings. It is a Singapore trader, a big one, asking me -- of all people -- just why shares of Ivanhoe Energy, the Canadian company (ticker IE in Canada) whose shares, in full disclosure, I am a large holder of, were weakening after weeks and weeks of heady gains. "Could it be the report you did about their shelf?" said the trader.
Digest this, please
Of course. Ivanhoe Energy investors, digesting 300 percent and more gains, saw my report a week ago about the company's $100 million shelf registration, and the arbitrageurs and short-term traders exited the stock like a flock of Boeing business jets headed to thoroughbred racing's Breeder Cup. A Bahamas-based money manager at my table, in touch with the owners or managers of tens of millions of Ivanhoe Energy shares, nodded his head sagely and whispered to me, "Let them sell -- they'll be buying back at far higher prices very soon."
Ivanhoe Energy's Sunwing story -- which includes the dramatic rise in cash flows the company will receive from projects in the Dagang oil fields, as well as those aggressive exploration efforts in the Sichuan Basin -- is largely ignored by western investors. But not for long. I expect Sunwing and parent Ivanhoe Energy to express in clear and direct language just how impressive the China connection is to this small but rapidly growing company. Indeed, as I outlined in May and June, investors just might wake up one day to see shares of Sunwing trading separately on Nasdaq from Ivanhoe, which is also pursuing efforts to develop oil and gas sources in Iraq, South America and elsewhere.
The next day, in London (yes, that's right), I was talking to Leon Daniel, Ivanhoe Energy's CEO and a longtime veteran of Occidental Petroleum, along with Ivanhoe Energy's chairman, David Martin. Leon has been having marked success in his talks with Iraqi oil and redevelopment officials, and I would expect Daniel at some point very soon to head to that war-torn nation, which hopes to improve oil production dramatically in coming months.
"Nothing much happens in this sort of thing until you get in-country," Daniel, who is mindful of security precautions, told me. Daniel, utilizing his southern Iraq blueprints from the Occidental days, when he came very close to engineering a development deal with the country just before the first Persian Gulf war, fully intends to be one of several companies that will help Iraq reach its goal of pumping almost 3 million barrels of oil a day by next March.
This morning (Friday), in a follow-up call, Ivanhoe Energy Chairman Martin told me he would prefer to downplay Iraq right now, but that fresh news on that front may come as soon as mid-November. If it does, one mega-sized asset manager in Abu Dhabi, and another one in Switzerland, will, I am told by professional commodity investors, be expecting Ivanhoe Energy's shares to triple from their current levels. They're currently adding to their stakes.
"Leon is having some preliminary success with the oil officials there, and I think we will have something to say sooner than most people might think," says Martin, who along with Daniel drove Occidental Petroleum's evolution into a multinational oil company over a 30-year span.
But back to the shelf registration and China. Martin explains that the company has zero plans to use any of the $100 million shelf at the stock's current price (now around $4 U.S. a share). "This is evergreen. We file it and put it away for another day. Robert (Friedland) doesn't want to see his stake in the company (about 33 percent) diluted, and neither do our other large shareholders," says Martin.
Friedland, between bites of grilled halibut at a London dinner honoring Mongolia Prime Minister Nambar Enkhbayar, tells me, "When Ivanhoe Energy hits $10, the company might think about issuing new shares in that amount, but only for the right assets in return." (In full disclosure, let me say, as I always have, that Robert Friedland's holding company, Ivanhoe Capital, paid for my transportation to the Oyu Tolgoi copper and gold mine in Mongolia earlier this year. I also received transportation on the Ivanhoe starship -- to Beijing and London -- for my current fact-finding mission.) See: Tien Shan minerals belt to become next Klondike.
But back to shelf registrations. As Newmont Mining has discovered in the past year or so, these filings for new shares can sit on the shelf for long, long periods. Companies that file them far in advance can take advantage of them in a smartly rising market -- when just the right deal comes along and the appreciating price of equity is far more attractive on a dilution basis. "Look," says Martin, "if we do any deals, it will be a total financing basis, or a small placement of a million or two shares with an individual shareholder."
China road
Enough on that front. Ivanhoe Energy, after all, is searching for a U.S. company that will help it expand what has become a rich source of oil across the oil fields in and around Bakersfield, Calif., and in parts of Texas. I expect developments on that American front - perhaps from the Rocky Mountain region -- soon.
As for China, this is where Ivanhoe's Martin, along with the team at Sunwing in Beijing, are cooking with gas. "People will see these numbers on natural gas that we put up in the next few days, trillions and trillions of cubic feet of it in these locations where we have exclusive rights in China, but they don't know what it means to us as a company, and I have to fix that. People are going to be pleasantly surprised on the impact all of this will have on our cash flow," he tells me.
"You know, if there was news of a 1 trillion cubic foot field of natural gas in the United States, it would make front-page headlines in the newspapers. And we're talking 5 trillion cubic feet or more," Martin says. One asset manager based in London, having contributed to the enormous explosion in trading activity of Ivanhoe Energy's shares in recent months, told me today, "I expect this to be a $5 billion company one day, I just can't tell you how long that will take." (Current market capitalization: less than $625 million.)
That's about it for now. I intend to stick with the Ivanhoe Energy story for some time. I fully expect strong price rises in the stock in coming days, weeks and months.
That doesn't mean I will be ignoring several other fronts in The Calandra Report. The metals equities' melt-up, as I have been forecasting for some time, will continue. (That's melt-UP in price, folks.)
Subscribers, for instance, should be thrilled with the performance of Nevsun Resources (CA:NSU: news, chart) , the gold and copper company whose Bisha project in Africa's Eritrea just might near that of Mongolia/China mining house Ivanhoe Mines (CA:IVN: news, chart) in terms of the size of the resource. "Copper," CIBC analyst Jack Jones told me over dinner in London, where I was rubbing elbows with the prime minister of Mongolia and a flock of high-powered asset managers, lords and ladies, "is the place to be for the next few years at least." See: Ivanhoe's tidal wave to sweep copper and gold markets.
Shifting continents, to the Africa front: I expect shares of Nevsun sister company Sunridge Gold (CA:SGC: news, chart) to continue their sharp gains as the company, commandeered by Ashanti Gold veteran John Clarke, begins to unveil fresh data on the extension of its Bisha complex, and the depths, widths and grades of copper and gold in that revived African nation. Nesvun's already robust shares sometime in the next three weeks will stage a considerable move higher, most likely a $3 Canadian gap-up in price, based on what almost surely will be lush mineralization at the Bisha project. Along for the ride: Sunridge, whose tiny market capitalization will swell as Canadian and American fund managers look for other Eritrea alternatives.
I am also doing intensive research on yet another Mongolia exploration and development company, Pacific Minerals (CA:PMZ: news, chart) . As those who have followed The Calandra Report know, the Tien Shan mineral belt across central Asia is likely the next Klondike, in my book, anyway. And until I am proven wrong, I will continue to do what I can to allow commodities believers to find the correct ways to capitalize on the region's proximity to China and the richness of vast stretches of mineralized land across the Gobi and into Inner Mongolia, China and the Indochina regions as well.
(Note: The following paragraph was added Monday, for this article.) Shares of Pacific Minerals, deeply linked to Friedland's Ivanhoe complex, already are surging in the wake of a reworking of its capital structure and a brisk fund-raising effort. Pacific Minerals, perhaps more than any micro-sized exploration outfit, is mapping out China, Mongolia and Inner Mongolia gold and copper projects that have instant rail and highway links to China's major manufacturing centers. The company's land holdings across Central Asia, along with partner Ivanhoe Mines, are the largest of any Canadian, Australian or South African exploration effort in the region.
Also on the commodities front: shares of agricultural producer Cresud SA from Argentina (CRESY: news, chart), my safest real-stuff equity for conservative investors who subscribe to The Calandra Report, has made a massive move, in part thanks to a recommendation, more seven months after The Calandra Report's endorsement, by highly regarded service The Oxford Club.
Finally, on the technology front, I expect new developments in terms of customers and contracts at electronic software manager Intraware (ITRA: news, chart), and I see the $2 shares (now $2.50) reaching $3.50 in short order. (Disclosure: I own shares of Intraware.)
That's it for now. I'll have the next full edition of The Calandra Report out to paying subscribers in a day or so, just before I head to New Orleans for the contrarian investing conference of the year, The New Orleans Investment Conference.
Thom Calandra's StockWatch is CBS MarketWatch's flagship column. The regular report is in its eighth year at CBS.MarketWatch.com. Thom Calandra is also author of subscription service The Calandra Report. He discloses his ownership positions in The Calandra Report at all times.