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Is The Nuclear Winter In Base Metals Here?

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October 15, 2008 – Comments (8)

I always read what the bears had to say, even when I was highly bullish.  I first read Frank Veneroso's stuff almost two years ago, The Nuclear Winter in Base Metals.  At the time it did not seem realistic, but it cautioned me to keep my eyes open.  I met Mr Veneroso at an investment conference in January of 2007 and I was priviledge to listen to his views on different markets and to assess the data that he was presenting.

Within months it seemed that some of the signs he was suggesting were a problem were indeed a big problem.

Well, look at the prices of base metals today, copper in the range of half of its peak, nickel around 25% of its peak, zinc around 25% of its peak... I track prices on Kitco.

All down and an utter disaster for the earnings report of all of the entire mining industry.  Indeed, at these prices there will be mining developments cancelled and mines going out of business.

Any gold stock that reports "gold equivalents" is also going to be a disaster.  The degree of dependence on base metal revenues for some of these companies is enormous.   Some were barely paying costs with base metal cash credits and will not be losing money.  Goldcorp is one I like to pick on because it is so absurdly priced.  At one point 64% of its revenue was from copper.(Q2/06)  Well, the executives have long ago cashed out...

With these prices quarter 4 earnings will indeed be dire.

 

8 Comments – Post Your Own

#1) On October 15, 2008 at 7:19 PM, dwot (54.27) wrote:

Oh my, look at this little gem I just found.  Veneroso was saying that the hedge funds were highly responsible for the stellar rise in base metal prices.  Well, I just found a new story about Lehman having hedges to buy 20% of Imperial Metals Copper at $3.05/lb.  Just what do think Lehman was planning on building with 14.5 million pounds of copper?

So, now that hedge funds are imploding just how much physical metal that was being flipped is going to end up being owned by suits?  And where the heck are they going to store it all?

When I see that kind of evidence supporting Veneroso's claim, well, I think the nuclear winter for base metals just might be here...

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#2) On October 15, 2008 at 7:26 PM, dwot (54.27) wrote:

$600 trillion emergency derivative meeting.  I keep saying these things keep me cautious...

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#3) On October 15, 2008 at 8:28 PM, ryanman000 (83.37) wrote:

dwot-

How did you find that story with the Lehman copper hedges? Nice find by the way. Does that make you bearish on FCX? Or am I reading into it too much?

That would explain why I have been making so much coin on SMN lately.

-ryan 

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#4) On October 15, 2008 at 9:17 PM, Tastylunch (29.22) wrote:

Jus wanted to say thanks Dwot for convincing to get out of Goldcorp at a gain. I appreciate what I learned from GMX, Sinchruna but most especially your famous nalysis on them.

Your analysis saved me and my family probably 5-6k in profits . Thanks again.

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#5) On October 15, 2008 at 11:23 PM, dwot (54.27) wrote:

ryanman, I checkout stuff on stockhouse every once in a while.  Right about now I am completely bearish on base metals.  I have no idea how much the hedge funds have been keeping off the market, but it seems to me with the unwind this stuff is going to start showing up in the warehouse.  I've look back at 20 year charts on base metal warehouse levels and they can sky rocket to mount Everest size peaks in mere months.  You have a world economic slow down, hedge funds unwinding and an over hang of housing and industry that will take years to be absorbed into the economy.

I just looked at their last report, 

"Consolidated sales from mines are expected to approximate 4.1 billion pounds of copper, 1.4 million ounces of gold and 75 million pounds of molybdenum for the year 2008, including 1.0
billion pounds of copper, 315 thousand ounces of gold and 18 million pounds of molybdenum for third-quarter 2008. Second-half 2008 copper and gold sales are expected to approximate 2.2 billion pounds and 890 thousand ounces, approximately 400 million pounds and 350 thousand
ounces higher than the first half of 2008. "

A quick look for the price they got for copper... $3.85/lb in the second quarter.  Third quarter will be down, but I believe copper prices for the most part held up for 3rd quarter.  Copper now $2.15/lb.

Revenue for second quarter was about $5.4 billion. So, take $1.7 billion off revenue for 4th quarter compared to second quarter based on about a billion pounds of copper, giving revenue of 3.7 billion.

Well, out of the 5.4 billion they ended up with an operating income of only $2 billion.  If you can extrapolate this, the operating income just went down to 300 million.  I say if because some of the costs sometimes aren't linear and I have no interest in spending a couple hours trying to figure it out.

So, then out of the $2 billion you have $1.1 billion of it going to other costs, leaving around $900 million for profits.

Well, if you still have $1.1 billion in costs and only $300 million to take it from, well, you are in a heap of dung...

They have to cut costs big time now and I suspect more pain.  I wouldn't be a buyer right now.

Tastylunch, glad to hear it.  I suspect Goldcorp will do its ups and downs, but I couldn't find fundamental reasons to support its price.

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#6) On October 16, 2008 at 5:16 AM, gman444 (28.76) wrote:

Dwot,

Yet another set of great references provided to support your view; they are eye-opening--thanks.  This from a (long term)commodities bull, particularly in regard to base metals. 

Here are my first thoughts:  1)  You are well-versed enough to know that historically, commodities bull markets last much longer than the present one has.  However, the hedgies have thrown the relevance of many traditional trends into the trash can.  Is this the case here?   Perhaps.

2)  Why this type of activity with base metals rather than some other  asset?  The answer must lie in the area of long-term value.  Greed on this scale would only be practiced with something which will be extremely valuable in the future.

3) As in truly understanding any major world event the question of Who Benefits must be answered correctly.   I prefer to address this question in terms of govts., although there are many non-govt. entities which are increasing their power and influence, and which I think will be increasingly relevant to world events.

So, which country has exhibited very public behavior consistent with hoarding/acquiring access to base metals, as well as exerting very public pressure on individual companies to lower commodity prices?  The same country to which most people seem to think the 21st century will belong to, and which has the greatest, most voracious need for base metals: China.

Bottom line for me, at least for now, is that I remain a long-terms base metals bull, but am somewhat more muted in my enthusiasm, and with a somewhat longer time frame for an expected rise in future base metal prices.   

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#7) On October 16, 2008 at 9:10 AM, dwot (54.27) wrote:

gman, all booming economies have retraction periods.  I think China will have a few tough years as their economy shifts from supplying the world to consuming more of what they make for themselves.  But right now the rest of the world isn't buy quite the same and much of what they imported was being exported in finished goods.

For the past 18 months was telling people I knew that I thought entering the market was nuts and if you were in you need to really be on top of things and be super ready to hit the exit, and that it was a bad market to learn about investing.  I wouldn't be telling people that anymore.  If I had money in broker account right now I might be stepping in in a few places, but I think there will be lots of opportunity to step in at good place over the next couple years, and perhaps a better place.

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#8) On October 20, 2008 at 7:16 PM, MShekht (40.43) wrote:

speculation subsides, prices will reflect more normal supply/demand.

I'd like to see more regulation of hedge funds and their "play" in commodity market. The high prices were completely artificial. I'm not advocating socialism, but there has to be somerestoration of market normalcy.
I followed rice market, it's relatively tiny. So what happened - a bunch of hedge funds poured billions into it, it was very easy to inflate the price. the world has to eat - you reap the price and voila... crazy, eh?

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