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XMFSinchiruna (27.75)

My latest articles can guide Fools looking to enter commodities. It's not too late!!

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July 01, 2008 – Comments (16) | RELATED TICKERS: AEM , ACH , RIO

Coal has come a long way, to be sure, but drama like this signals the coal train has legs... really... no... REALLY!!!!

This mining strike in Peru is shutting in production at some key mines and threatening to do the same at others.  If you read all these articles, you'll see a clear pattern emerging:  global supply of raw materials to feed the robust demand from emerging markets is being threatened by a slew of factors.  The nationwide strike in Peru is example #1.

Example #2 of supply disruption:  Mining equipment makers have more business than they can handle.  Backlogs are enormous, and growing.  40 months to get a SAG mill delivered!  Slower mine development = supply shortfall = higher prices.

Example #3:  Aluminum production worldwide hampered by snowstorms in China, the earthquake soon after, thegas explosion in Western Australia, power shortages in South Africa and even Texas, etc. etc.  As I state in the article, I consider ACH a buy buy buy!!  These prices will not last long beyond their release of earnings.  Alcoa started getting into attractive territory today, but I think it will get cheaper still... perhaps to $30 as all this supply disruption news comes out.

The effects of that gas fire in Australia will linger until at least August, and these are some huge mining operations affected.

Consolidation activity is picking up nicely in the industry, and I believe it will increase to an unprecedented pace.  Meanwhile, mining costs are rising faster than prices, which in the long run is another early bullish indicator for prices.

Gold, which is not a commodity, but a currency, is surging yet again.  Silver, which has properties of both an industrial commodity AND a currency, is primed to rise even faster.  Gold will go much higher.  The USD, unfortunately, will go much lower. It is NOT too late to get into gold and silver. I have pronounced this one my favorite a couple of times (AEM). Fool Contributor Toby Shute's favorite gold stock, Yamana, is second on my list, but not by much.  And everyone who reads my stuff knows I love CEF as the best proxy for bullion available.

For silver, my number 1 is Silver Wheaton. Coeur d'Alene gets my vote for most undervalued.  I own a couple dozen junior silver miners, with my absolute favorite being Great Panther (GPRLF) despite some horrible performance to date.  As with most of the juniors, my pain is your gain.  I got in too early, not recognizing that the whole group was being held down by illegal shorting activity.  That shorting will cease when silver breaks back out, so today's levels for many, many juniors represent awesome deals.

For energy, natural gas is my present focus.  I think oil will be very volatile, while natural gas will tend to spend some time catching up with less volatility, IMO.  I own XTO energy, Chesapeake, etc.  For oil, I'm loving the looks of CNOOC here (CEO).

For coal, I own Massey Energy, Peabody Energy, and a little of the KOL ETF for kicks.  I missed out on the rest of the coal miners because I was writing about them (can't trade for a period before and after writing.  That's a sacrifice I'm happy to make if I can help out some Fools.

Brazil's Vale is on sale in recent days, despite having been successful with some impressive price increases recently.  Vale (RIO) is a buy IMHO.  A fascinating combined coal / iron ore play is Cleveland Cliffs (CLF). Again, the stock has doubled recently, but with good reason.

For copper, I like Souther Copper, but I wouldn't be buying it right now unless the strike ends very quickly.  Meanwhile, CAPS favorite Taseko Mines is looking sweet!

There is so much more to discuss, but this brief post has taken more time that one might guess.  I hope it's a helpful resource for some fools who may have waited a bit too long to enter the commodities space.  I'm here to suggest that it's not too late... that there are years left in this bull market for raw materials, energy, and metals.  I firmly believe that a combination of the companies listed above woven into any portfolio (up to your own comfort level allocation wise) will go a long way towards shoring up one's finances from these woes that are plaguing the markets.

Good luck, Fools!

16 Comments – Post Your Own

#1) On July 01, 2008 at 10:30 PM, Tastylunch (29.21) wrote:

Hey Sinchiruna thx for all the insight as usual. what's your take on Golden Star Resources post their pretty dissapointing announcement re: power costs?

http://seekingalpha.com/article/83119-golden-star-resources-ghana-power-increase-could-negatively-impact-production?source=yahoo

I'm concerned enough that I'm considering dumping my shares.

also do you know of other miner potentially facing similar power cost increase issues?

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#2) On July 01, 2008 at 10:34 PM, XMFSinchiruna (27.75) wrote:

I bought some on the 25% drop.  :)  I would REALLY not want to be selling GSS shares here... double down if anything.  It was one of these ridiculouslyundervalued juniors before the news, so for the price to fall that much on a 10%cost increase is more than crazy.

As to your second question... the answer is... all of them.  :)

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#3) On July 01, 2008 at 11:37 PM, colonelnelson (45.74) wrote:

Wow!  That's an impressive body of work you've done there.  Thanks for all of the recommendations, I've been looking to get into these sectors, having just recently found ACH, and this was a great tutorial.  I recommended almost every article I read.

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#4) On July 01, 2008 at 11:40 PM, Tastylunch (29.21) wrote:

Yeah Normally i'm inclined to buy more myself on selloffs like this, but I'm a little concerned they don't have enough cash to weather much of this.

well I think you may be right, I'll think about it and research it some more before doing anything rash.

thx for the answers  and the nice articles.

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#5) On July 02, 2008 at 12:01 AM, TDRH (99.66) wrote:

Appreciate all the work collecting and presenting your insight.  I believe with $4 per gallon gasoline, consumer behavior is being modified.   The economy will slow and worldwide demand will decline for oil.   With the fed feinting rate hikes the dollar will stabilize and we see a wave of profit taking in oil, which will lead to a dramatic decrease in the price of coal and alternative energy plays wind/solar.   Too much too fast and the high price of these commodities will be their undoing, like a virus that kills the host.

Gold and silver though are a different story, you are right they are not commodities but currency.  Financial collapse could lead to a flight to gold and to a lesser extent silver. 

All that said, I have been wrong before and you could be right.  That said I predict oil at 118 by mid August.   Of course I said that about mid June.

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#6) On July 02, 2008 at 12:17 AM, lquadland10 (< 20) wrote:

Who do we buy from? China and what happens if we stop buying?I buy gold it will go up again.

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#7) On July 02, 2008 at 12:41 AM, XMFSinchiruna (27.75) wrote:

Tastylunch

Just read that article you linked... The analysts are talking as if gold were going to stand still.  Miners around the world are experiencing huge cost increases, and many already have production costs in the $600s.  The comment I would pay least attention to in that article is the last one, about the guy being worried for GSS's survival as a company.  "He expects cash cost to rise above $600 per ounce, causing margins to become “dangerously slim.”"  He completely fails to recognize that gold will be back over $1,000 in short order, and quickly on its way to $1,200.  At $1,200 per ounce, I would hardly call costs in the $600s a 'dangerously slim margin'.

I haven't scrutinized the company's balance sheet in a long time.  Unless they were already on the verge of bankruptcy before this announcement... the company will survive just fine.

Maybe you just saw the wrong article:  http://biz.yahoo.com/minyanville/080627/20080627gssbright_id.html?.v=1

I shoud retract my advice about doubling down though... I don't want to suggest to anyone HOW to trade.... just what to trade and a smattering of when to trade... :)

 TDRH

Sorry, man.  I wish I could agree about a dollar rally.  The cat's out of the bag.  The whole world knows the Fed can't raise rates, and the huge rally in gold in the days immediately following the last Fed meeting were confirmation of this.

The days of cheap oil are forever gone.  The price of coal is not tied to oil... except to the extent that oil prices affact shipping costs for coal.  Aside from that, they are independent.  Solar / wind have momentum now... even $80 oil would not cause that momentum to falter... China is fully aware it will not be able to sustain growth without meaningful integration of solar power.

Stagflation, my man.   Weaker economies, but stil higher prices because of the trillions in fiat money circulating the globe.

colonelnelson

Thanks a lot!  Glad you found it helpful / interesting.  Because of the short format of online articles, I sometimes cover just one aspect of a story at a time.  To zoom out for the really big picture, I almost have to present a grouping of them like this.

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#8) On July 02, 2008 at 1:03 AM, XMFSinchiruna (27.75) wrote:

Tasty... for a purely technical analysis of GSS.  This comes from a professional commodities trader. 

"This stock will need to find a bottom soon or it risks headed all the way down to 2.30
While downside volume is declining from the record
peak made last Friday, it is still too high
."

Maybe I doubled down too soon?  That brings up a shole can of worms:  short vs. long-term focus.  Long term, I know my $2.80 purchase will look fine, though if it drops to $2.30, I will just have to be okay with having missed a better entry point.

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#9) On July 02, 2008 at 1:31 AM, AnomaLee (28.50) wrote:

I bought a small position in Double Gold last Friday, and I just tripled that position today. Chris, I think the gold rally is more than halfway through. I can't foresee another 6 year rally from here. However, I've been with you that gold will definitely outperform. I think the dollar is in for more decline, but I also think everyone is underestimating the United States economy 5+ years from now. If the trend between the U.S. Federal Reserve and the ECB continue the United States will be in far better shape than its european counterparts in that given timeframe. Eventually you will see these economies suffer to deflation. The United States has been down this road before, although the Federal Reserve has a nearly impossible mandate and shouldn't exist, the ECB has a failed mandate...

You can't simply target inflation. That's a losing game that will lead to severe recessions. That's a different subject...

As far as coal. I am very optimistic on Arch Coal and Peabody. Arch Coal doesn't suffer from unionization and they have major projects underway. I like Peabody(I sold, but i'll buy again) because they are highly hedged to rising input costs. I believe the figure is 94% hedged if I read the figures correct from their filing. I think the stocks are going to get a pullback so I'm just waiting to buy more lower.

Also, natural gas typically trades lower in July. People in Europe pay $20/million BTU and are switching to coal which is cheaper. What is interesting is that LNG tanker rates are rising higher than usual. I don't know what ot make of all this as of yet. If you can let me know... I'm guessing its due to China and others

Love the articles... Hope for more

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#10) On July 02, 2008 at 1:55 AM, Tastylunch (29.21) wrote:

Haha I know what you mean Sinchiruna, it's hard not try to think in the short term all the time especially when one play CAPS daily. That's one reason I only check on my long plays when they have big moves. Chart watching long term plays makes me go crazy. :-) I suppose you can kill two birds with one stone and "triple down" if it hits 2.30 ....

No worries re: trading advice. II make my own decisions on trading, I'll never do what someone tells me just because they do. I knew you meant it in a CAPS rating kinda way.

Yeah the volume of trades also looks not so good to me me too, which was part of my concern

I did see the minyaville article already, thanx for the link. Personally I always try to find the most negative sentiment I can on a stock which is why I linked the Seekingalpha article . I find the negative more useful in making decisions. If I think the negative has merit than I'll considering selling, if I don't think it does I consider buying more.  I usually can figure out the good stuff on my own. :-)

as for the price that Gold will hit, I agree the power issue for GSS is pretty moot at 1200 gold. I guess I was viewing it from a "what if Gold stays in the 900 range  or drops for a year" mindset. Again just trying to figure out the potential risk here.  It is very hard to imagine that the dollar isn't going to continue to tank though. Common sense says the dollar is being heavily devalued by the Fed's actions.

Thanks so much for the feedback, especially the bit from the pro commodities trader.

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#11) On July 02, 2008 at 6:45 AM, binv271828 (< 20) wrote:

This is why you are my favorite blogger :) There is so much good information and the timing is very good! Yes it is not too late. The dollar mini-rally is almost over. It has dropped, but today and tomorrow it may make one more attempt to rise. Past that though, it is probably ready for another big drop in search of a short-term support level.

It is intersesting to see how divided the opinion is getting regarding oil on Caps. I think there will be a correction. But I think it will be relatively short lived, much like this gold correction. I don't think the demand/supply equation is substantially changing. The US seems like it is starting to cut back, but will other countries start consuming more? I think the answer is yes.

But that said, I agree with your assessment. Between gold/silver and oil/nat gas, gold and oil get all the attention, but I think silver and nat gas continue to be better plays with more room to run. Of the gold/silver stocks I own, 2/3 are silver and 1/3 are gold. Of course, silver is a lot more volatile, so an iron stomach is required :)

Thanks again for all the blogs and articles, and most importantly thanks for all the advice! It really is obvious that you are trying to get all who read your stuff to think seriously about protecting their wealth.

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#12) On July 02, 2008 at 7:22 AM, TMFDeej (99.40) wrote:

Great article Sinch.  I need to look at a few of the miners that you mentioned.  I am absolutely swamped at work (worked a 15 hour day yesterday).  I'll bookmark this one for later.

Deej 

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#13) On July 02, 2008 at 10:49 AM, kdakota630 (29.52) wrote:

Excellent write-up.

I'm very much hoping that you're accurate because I own a number of the stock you are bullish on.

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#14) On July 02, 2008 at 2:08 PM, Sqwii (< 20) wrote:

Hi TMFSinchiruna

 

This was a great blog!

 

What do you think about ESV in the future (: ?

 

This is a oil drilling company.

 

Sqwii

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#15) On July 02, 2008 at 5:26 PM, BlueHorseShoeSez (< 20) wrote:

Great blog....how about this idea...a back door into commodities...make a stock buy on a submerged chapter 11/takeover target like FNLY going for 40 something cents a share with a jewelry precious metal meltdown inventory worth 11 or 12 bucks a share. Make any sense?

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#16) On July 02, 2008 at 6:38 PM, XMFSinchiruna (27.75) wrote:

Today's huge correction in coal and steel, the drop in Alcoa shares continuing, beginnings of weakness from companies exposed to the mining strike in Peru, like PCU (others to follow if it continues), and gold and silver equities dropping pretty much across the board despite a nice rise in gold and silver prices... all of this presents a gorgeous buying opportunity.  RIO (Vale) keeps looking sweeter.  I added 9 stocks to my CAPS profile today (you guessed it... coal and steel).

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