Gianni Kovacevic: Dr. Copper - Where are we now?
Published in July 3, 2012on
Dr. Copper - Where are we now?
From the late 1800's to about 1950, Spokane, Washington was a city of significance in the Western United States as one of the most important railroading connections in North America. Built up as a hub town of the West, Spokane's growth suddenly came to a halt as the largest "road to nowhere" project commenced. With the construction of the largest freeway system in the World that mega infrastructure project would connect countless cities and towns and was followed by a massive human migration. Three generations later Spokane has almost the same population and a local economy that has stagnated for decades. Is this what will happen in dozens, or even hundreds of examples, in China and elsewhere in the developing World?
In a recent article in the Financial Times, a writer pontificated how we should celebrate, what was his sole opinion, the end of the commodity super cycle. He further commented how for 200 years, real commodity prices have declined along a predictable path: one decade up and two decades down. Are we now entering a period of what will be declining or depressed underlying commodity prices and in turn natural resource stocks that deserve to have been punished as they have?
Elsewhere in Europe, not on the front page, is Poland, an exception of sustained growth all the while the other member states try to construct insurance for many of its participants after the financial accident that has already happened. To blend these three thoughts together Poland is the emerging market example in Europe. Poland’s 38 Million inhabitants live in a large country by European comparison and still lack a country wide freeway system and much needed large scale infrastructure. What the writer in the FT article fails to respect is the migration of 100's of Millions of people that has been underway, and will continue, the next decades. These new cities being built up in emerging markets should be considered Seattle's and Singapore's or Houston’s and Hong Kong’s and not Spokane. This has never happened and as such the old rule book of; one decade up and two decades down simply does not apply for an insatiable demand of all hard commodities that is unprecedented.
Big Mining Incorporated MUST replace depleting resources however they will chase only the choicest assets in areas they feel comfortable to operate in the decades to come. Japan is now restarting its nuclear power plants, Chile and the large scale copper miners continue to miss guidance and almost all of their allocated future cap-ex is to replace falling grade. Meanwhile gold miners produce less and less each year while gold itself finds more and more new long term customers as the biggest beneficiary of the inevitable currency dilution to come will be Au. In fact all hard assets are EVERY investors natural hedge to paper currency dilution for irrespective of how much dilution takes place that natual system of things, inflation, will re-price everything from cows to corn and copper to coffee. Why buy physical and store when one can buy billions of pounds of copper in the ground at 0.01 or 0.02 cents per pound in the ground (copper as of today is over $3.50 again) and the storage comes for free!
The Jr. resource market has become more mature irrespective on one’s thoughts or hopes otherwise. When the facts change we must change as investors as untold Billions of dollars has left this sector between the retail hoards and redemption out-flows, what will survive, as previously suggested, is a flight to quality. The cream always rises to the top thus the theme for investment continues to be the most prospective M and A targets for it is the Sr. Mining companies, literally swimming in free cash even though their share prices have crashed, that will bring liquidity and price action to the best assets and companies. As for the .05 and .10 puppy's in ones portfolio, support should ONLY be given to those that do not MUST have to spend big money on their properties to keep them. The highest quality penny stocks will find serious bids when investors make profits from what should be near term focus stocks like:
NEVADA COPPER (TSX - NCU) has fallen from ~$5.00 p/s to just under $2.00 in 3 months so what has changed? Other than the "risk totally off" across the entrire sector nothing. With only 72.8 Million shares out and as THE most advanced copper project of scale without a Sr. partner it remains in this investors opinion as the no-brainer in advanced stage Jr. Mining, what Sr. Mining will be interested in. Why? Located in the #1 mining jurisdiction in the World, Nevada, with a definitive feasibility study, and a 10 Billion lb copper resource (~45% in p & p) and with ~$60 Million cash raised at $5.40 p/s, it is now trading at far less then 1 penny p/lb of copper in the ground. To address the above concerns with Jr. Mining this project should have the interest of many Sr. companies as the annual copper yield moves the dial for all of them at 270 Million lbs/y AND an industry leading estimated cap-ex of $1.035 Billion and a 20 year mine life and overwhelming local support for the project. Those that own NCU from higher levels should seriously consider averaging down (I have @ ~$2.00 p/s!) and for those that do not have exposure this stock is almost like a 2008 throw away level. Volume proceeds price action and there has been lots of volume that past weeks/months considering ~60% of the stock is in tight hands.
LUMINA COPPER (TSX.v - LCC). Argentina has become a cuss word in the past months with the Repsol fiasco and currency controls and in this downdraft it has also affected miners and explorers. LCC has fallen from $17 p/s to ~$9 p/s due to this however the investment thesis/rational is still in tact. Their 100% owned Taca Taca project, at over 25 Billion eq. lbs of copper, has become one of the 3 or 4 biggest copper resources delineated in the past 10 year super cycle. Taca Taca is a 50-100 year mine and for this reason the biggest of the big integrated mining companies would want to own it as they know governments change however assets like this come around once in a cycle. Yes Taca Taca is that big and at $9 p/s and openly putting itself on the shopping block it could be an interesting Summer for LCC. Country risk for sure.... sigh... however certainly a stock to watch as it could have a major move one day to the next and in turn provide much needed liquidity to copper investors and the Jr. stock market alike.
The stock market is the only business that when it goes on sale it loses all of its customers. When the facts change so should investors however when the fundamentals, overwhelmingly, are in tact one need recognize that. One should remember that there is no army, government or spiritual force that can prevent Billions of people from basic progress thus the road to nowhere...if they build it the people do come, in fact they cannot stop them.
DISCLAIMER: Gianni Kovacevic has a conflict of interest as a shareholder of NCU and LCC thus stands to profit from share price appreciation. This introduction is for information purposes and all information contained within must be verified by the reader. It is strongly recommended that readers perform their own due diligence and contact management of NCU and LCC directly AND A QUALIFIED INVESTMENT ADVISOR if and when there would be any follow up questions with respect to he statements made above. The purpose of this information is to encourage the reader to initiate a proper due diligence process. This is NOT investment advice.