Value in Resource Stocks

[YOUNG_TRADER]

Hi Peeps, well Gold got mashed last night down to $650, Silver is @ $12, Copper is @ $7,600t and Zinc is @ $3,200t

Now heres whats interesting, when I did my little valuation sheets for stocks like CBH and JML I was using a Zinc Price of $3,000t - $3,400t, a silver price of $12 an oz and a Copper Price of $6,000t, I forgot that we were at these levels about 1 month ago and these stocks were screaming buys )IMO and to most brokers who were using far more conservative metals prices Patersons, Hartleys, Bell Potter, Fat Prophets)

Have a look at CBH and JML see if you can find the valuation sheets I put up, point is using these metal prices the stocks were screaming buys, didn't really bother to adjust prices upwards as I thought they were running to hard,

People must take everything into consideration, most analysts are saying
U.S. copper futures have corrected more than 10 percent since record highs on May 11. But analysts say the fall is not too big, given the extent and the size of this year's rally.
Analysts said fundamentally the market remained supported by bullish supply/demand imbalances and the potential for further labor disruptions due to several labor contract renewals this year.


Take BMO, it is being sold down crazily, as gold drops its the high margin producers who are insulated the most, BMO will be a 70k oz p.a. producer with intial cash costs of $300 AUD an oz dropping to $250 AUD an oz for life of mine, so when gold is @ $750 AUD an oz there margins are still huge, unfortunately players such as RSG and other high cost producers margins begin to disappear,


Now CVRD and Rio have just secured a 19% price increase for Iron Ore, which Japanese and European Steel Mills were happy to pay, now if JMS (see thread) can pull of its JV with Sino steel, then regardless of how 'worrying' inflation is blah blah blah, its mkt cap has to rise from under $10m,

Uranium spots have kept increasing, again regardless of all this other mkt sentiment crap undervalued Uranium deposit developers should be insulated to this sell off,

Point is although this downturn was a correction e needed and does effect all stocks due to its effect on mkt sentiment etc, don't overeact and throw away your value stocks, I'm sure the people who were 'dumping' OXR @ close to $1 in Oct correction and PEM @ under $1 know what I'm saying,

Most anaylsts and economists I'm speaking to don't really care where the mkt heads in the next 2-3weeks, as they also believe in the 'stronger for longer' theory, XSTRATA is doing a $19BILLION US T/O I'm pretty sure they too believe in the stronger for longer theory.

One last thought, if inflation worries are causing this sell off why has gold continued to get smashed? I'LL LET YOU ANSWER THAT ONE


Anyway just my two bob, no doubt monday will be another shocker as most people over-react to the falls

 

[powerkoala]

Good thinking YT.
I have been doing the same thing on October last year.
Afraid of losing more, selling all my good stocks.
Result => afraid to enter when it crawls up
Now, all the stocks is twice my values....

So, just close my eyes for what happen this week. Don't even bother touching my shares. Coz, it will be back and i am sure it will be higher

 

[IGO4IT]

I agree with youngtrader that the Current market bad attitude towards resources is not coming from the actual decrease in metal prices because fund value of reserves & price estimations of prospect reserves were generally conservative when it was done & current dip shouldn't really make resources lose their weight much but more or less give resources stocks a hair cut!

The problem imo is the current fear from the DOW to keep declining (which I don't think anyone can really predict where it will stop its current dive!) & the more it declines the more time it will take to get up again to reach previous highs, therefore, more will tend step out & watch rather than get involved in a fight they have no connection to!

I'm not doubting that this is a temporary correction & it was due sooner or later but I'm scared of how long it should take before bulls trust putting their money back into resources without being worried of minerals pricing dropping again.

DOW is up already on close on Friday 0.14% after a very volatile trading & a lot are assuming that the buys at the close were to garnish the close & I think it was very possible.

I think ASX200 should act positively or at least stay stable on Monday as a response to the positive close of the DOW.

cheers,

 

[nizar]

the problem imo is the current fear from the DOW to keep declining (which I don't think anyone can really predict where it will stop its current dive!) & the more it declines the more time it will take to get up again to reach previous highs, therefore, more will tend step out & watch rather than get involved in a fight they have no connection to!

IGO4IT

IMO.. asx200 will get SMASHED on monday... resources especially..

No one cares about DOW when it comes to resources... its metals and Gold, BHP are not going to earn less money if DOW goes down, but they will if metals (keep) going down..

IMO this is only temporary, i would expect copper to hold above $2.80 (still a bit of down to go) and zinc im hoping stay above $1.20, as for gold maybe reach 600-620 before bouncing... everything got a bit 2 speculative and carried away... copper after getting dumped is still around $7,700tonne, last month it was $6,300tonne...

Agree with YT about over-reaction, everyday OXR are selling a few hundred tonnes of zinc and copper at SPOT prices, even copper at 2.80 and zinc 1.20 still VERY profitable...

More downside to come, but at the end of the year resources IMO will be much higher than they are today

 

[Kipp]

Is the emotional solution (for those who still hold resource stocks) to just not check the SP's for the next week if the carnage continues? Or is that akin to sticking your head in the sand?

But really whether the choices are no news or bad news... I'll take no news thanks.

Am I correct in saying that while the LME stocks are disappearing (Zinc and Nickel) that current supply can't match demand? Or is that a simplified view?

 

[Smurf1976]

IMO the underlying "problem" is that the markets are starting to wake up to the reality that recent interest rate rises haven't been anywhere near enough to halt inflation.

And so we come to a decision point:

1. The Fed keeps hiking rates to ward off inflation and protect the US Dollar's value. Not good for stocks or the economy in the short term though.

2. The Fed goes soft and the inflation rot is allowed to spread beneath the surface. Then at some point in the future we get far larger interest rate rises than option one. Good news economically short term leading to a trainwreck when the high rates finally arrive.

So basically a guessing game as to when the Fed addresses the inflation problem. Do it now or let it grow and fix it tomorrow? Either way, the required interest rate hikes ought to suppress economic activity and hence commodity demand globally.

All in my opinion etc. Do your own research before investing.

 

[specman]

I'm sure there are plenty of investors who believe in the China story sitting on the sideline smacking their lips just waiting to take advantage of this correction.

As for inflation and interest rates,they are still considered to be within acceptable levels at this stage.

 

[coyotte]

Since the Yanks have been hiking Rates --- the SP500 has been steadly climbing with them ---- So what happened now ? ---- is the real concern is that they will stop --- hence a drop in the $us --- leading to overseas investors pulling the plug on their US Equities ?


Just a thought
Coyotte

 

[nizar]

Since the Yanks have been hiking Rates --- the SP500 has been steadly climbing with them ---- So what happened now ? ---- is the real concern is that they will stop --- hence a drop in the $us --- leading to overseas investors pulling the plug on their US Equities ?

Agree
drop in us$.... U know what that means for gold
Hmmm... but what about gold stocks?
if DOW tanks and asx200 follow (?)... but gold is up will gold stocks suffer?

 

[michael_selway]

One last thought, if inflation worries are causing this sell off why has gold continued to get smashed? I'LL LET YOU ANSWER THAT ONE

Anyway just my two bob, no doubt monday will be another shocker as most people over-react to the falls

yeah i wonder why, but maybe they are thinking tha to fight inflation, they will raise interest rates, which shoudl lower inflation, tus gold falls in advance, like the DOW?

KZL - Earnings and Dividends Forecast (cents per share)
2005 2006 2007 2008
EPS 7.2 17.6 64.0 41.7
DPS -- 0.0 0.0 0.0

PEM - Earnings and Dividends Forecast (cents per share)
2005 2006 2007 2008
EPS -2.8 34.1 57.9 47.4
DPS -- 2.0 2.0 2.0

thx

MS

 

[specman]

I thought the drop in metal prices have been the hedge funds selling.Now they are shorting base metals and probably gold as well as declining prices has the been the trend of late.The hedge funds has really distorted the price of metals and it's anyones guess what the real supply and demand prices are.One report I read said 50% of what they were at their peaks but I don't know how they got that figure.

 

[YOUNG_TRADER]

Another thing that makes me laugh is how modern players or analysts view gold as an alternative investment to the US $ and protection against inflation only, they fail to recognise a new very powerful force,

About 2.5 Billion people from China and India combined with a few thousand years of belief that gold represents a family's wealth and status,

ie If you are Asian (Chinese/Indian etc) I'm sure you'll know what I'm talking about, but for those who are in the dark, most families from these countries view gold as a good place to store family wealth, don't ask me why but one of the first things a person does from India when their income levels begin to rise is buy gold jewellery, watches, bangles (type of bracelet), chains etc etc,

As the incomes of thse 2.5 Billion people rise slowly yet stedily we are going to see massive organic jewellery oriantated demand for the metal, so just like oil, analysts better re-write their books on prediciting gold prices,

$750 - $800 us/oz will be a good gold price to have going into the new year, anything higher is too high short term,

LT we will definately see $1000 us/oz probably in mid 2007



But for example, BMO is valued @ 60c (Hartleys) using a gold price of under $600 an oz and AUD/USD of 0.75, so once sentitment of stupid selling leaves, bargain hunters should be picking up the undervalued stocks.

 

[nizar]

IMO the underlying "problem" is that the markets are starting to wake up to the reality that recent interest rate rises haven't been anywhere near enough to halt inflation.

And so we come to a decision point:

1. The Fed keeps hiking rates to ward off inflation and protect the US Dollar's value. Not good for stocks or the economy in the short term though.

2. The Fed goes soft and the inflation rot is allowed to spread beneath the surface. Then at some point in the future we get far larger interest rate rises than option one. Good news economically short term leading to a trainwreck when the high rates finally arrive.

So basically a guessing game as to when the Fed addresses the inflation problem. Do it now or let it grow and fix it tomorrow? Either way, the required interest rate hikes ought to suppress economic activity and hence commodity demand globally.

All in my opinion etc. Do your own research before investing.

Smurf, some US economist in weekends AFR said that the FED has a habit of lifting interest rates until something " breaks" (so a great call by you) but he reckons the fact that housing has cooled may be that break, so 1 more rate rise in june and then it stops there...

Thoughts?
(sorry for off-topic guys)

 

[YOUNG_TRADER]

Well today was another smashing just like I thought it would be (see first post) and another over-reaction,

I am still 100% stronger for longer, this correction should last another week to 2 weeks (ie start june) so guys its gonna be a bit of an drain,

I was never that bullish on Copper, but Gold, Zinc Oil and Uranium yes please!

Zinc is my favourite, week on week we are seeing a decine in Zinc stocks, come Oct Zinc stocks will be @ or close to 0 so we'll see what a tech bubble really looks like then,

Oil, lol even with all this massive selling and slowdown etc etc Oil is @ $67 a bl, so near record highs, I hope it doesn't advance any higher. Some really undervalued Oilies out there

Uranium, the world needs a new power source full stop! ie interest rates, inflation, sentitment blah blah, the worlds demand for uranium has only started and will become insatiable over the next few years, lesson I have learnt, back players outside Aus, with strong technical and financial JV's

Gold, so many goldies have got hammered, can't believe how low BMO is going, one of the highest margin producers,


So for those who believe in the stronger for longer like me, try and ignore these next 2 weeks, look for bargains, top up on oversold stocks,

For those newbies out there, trust me when I say you'll look back on this and wonder why you stressed so much,

 

[Sean K]

Agree with your last 2 lines YT.

This will be a great opportunity to buy once the dust has settled.

Everyone should be hanging in there and happy that this correction has occurred. A chance to buy in at cheaper prices!

 

[YOUNG_TRADER]

To emphasize my point on over-reaction and sentiment devoid of fundamentals, look @ PDN's sell off from $5.60 to $3.60 almost 35-40% and Uranium spots just keep increasing!

p.s. once mkt turns I'm gonna CFD long OXR ZFX and PEM to the max!

 

[nizar]

To emphasize my point on over-reaction and sentiment devoid of fundamentals, look @ PDN's sell off from $5.60 to $3.60 almost 35-40% and Uranium spots just keep increasing!

p.s. once mkt turns I'm gonna CFD long OXR ZFX and PEM to the max!

YT dont forget KZL
The price is going down but those earnings keep on getting upgraded!!

 

[Warren Buffet II]

Hi,

This is one of the reasons why Warren Buffett does not invest in commodity stocks, it is simple, they do not follow fundamentals. He is very clear about that and I have always thought that now I can see why.

I am not saying that I do not own commodity stock but it amazing how they can swing from one day to another. They have become a hot topic and as such they will be in the ot seat for a long time.

IMO, I believe there is more downside than upside in commodity stocks now and the future has turned clowdy.

WBII

 

[YOUNG_TRADER]

Sit tight and don't lose your mettle
Robin Bromby
May 23, 2006
PREPARE for more bad news on the commodities front - possibly a lot more bad news - but don't panic and lose your nerve, say analysts and advisers.
And there was certainly disappointment yesterday after Friday's stomach-churning reverses in the precious and base metals prices in London and New York on Friday.

Gold, which had fallen 3.4 per cent at the end of the week, dropped another $US11.70/oz in Asian trading yesterday to bring the retreat to $US645.90/oz.

Copper, which gave up 6.5 per cent in New York to $US3.467 a pound, saw another 4 per cent sell-off in Shanghai yesterday.

And the mid-tier producers took another hammering as trading began for the week. Zinifex, which 10 days ago hit $13.50, shed a further $1.61 to end the day at $9.20. Consolidated Minerals, above $2.70 earlier this month, was down another 22c to $2.02. Copper producer Straits Resources - $4.63 on May 5 - took a 33c pummelling yesterday to close at $3.70.

Even Kagara Zinc, largely unhedged and riding both the zinc and copper bulls, is down from a month high of $4.64 to $3.03.

But this is where, in the view of Southern Cross Equities, investors risk making the biggest mistake of all.

In a letter to clients, SCE points out that, while copper is above $3.30 at present, the average broker forecast for the metal in fiscal 2007 is $US1.85/lb.

BHP Billiton produces 1 million tonnes of copper per year.

Wait for a week or two, let the correction run its course, and then buy BHP and Rio Tinto, advises SCE director Angus Aitken.

These resources giants have much better long-term earnings growth than industrials such as Coles Myer, Tabcorp or the banks.

"Who wants to be in a company with only 6 per cent growth?" Mr Aitken said.

He pointed to recent profit downgrades by industrials such as Housewares International and Repco as typical of the danger of switching away from resources stocks to industrials during a commodities boom.

And SCE's letter rammed the point home: "The current cycle is only in its infancy due to two decades of under-investment in new capacity and the unprecedented simultaneous industrialisation of two countries that together account for one-third of global population."

And there are signs local investors are watching and waiting rather than throwing in the towel.

Rohan Edmondson, client adviser at broker Montagu, said the phones had gone quiet yesterday after a busy time late last week.

"Investors here seem to be getting more informed about resources," he said.

Mr Edmondson is telling those clients who do call that he is not concerned with corrections and that the underlying fact is that there is not enough metal to meet demand with China booming and growth picking up in the developed countries.

There were just not enough new mines in the pipeline.

"Where is the supply coming from which is going to satiate demand?" he added.

Even though he believes metals have further to fall, Commonwealth Bank commodities strategist David Thurtell sees this correction as a reaction to the phenomenal speculation that has been sending prices skywards.

But he expects zinc, which closed at $US3280/tonne on Friday, to be back over $US4000 by the end of 2006 as London Metal Exchange stocks of just 247,000 tonnes should be run down before eight months were out.

And, while no gold bug, Mr Thurtell sees the yellow metal reaching $US800/oz also by year's end.

Far East Capital's Warwick Grigor's advice to investors is that they shouldn't try to beat the hedge funds that are driving the metals market.

"These barbarians of the market push prices up to the precipice and over the cliff because this is the way they make their money. And if there's panic they make even greater profits."

Mr Grigor said the market had peaked for probably as long as six months but that was good: at recent prices, buyers like China would have refused to take metal.

His best investments were iron ore and uranium, because neither was traded on the spot market and the price-setting through long-term contracts meant the hedge funds could not manipulate their prices.

Apart from that, investors should sit on their hands and wait for this to all play out, said Mr Grigor. Follow the old market adage - go away in May.

 

[powerkoala]

The market now is really overreacting toward this.
How come growth in 4 months, wipe out only in 4 days ???
Most of the companies is still making money, yet they dumped all.
Logically, if I still have more money, I will buy all and wait till my TAHITI arrives