Investment opportunities and ideas for 2011

At the beginning of this week we drew attention to three sectors which could contribute outstanding performances next year and they were iron ore, uranium and silver. We have already been beaten to the punch in iron ore with Atlas Iron bidding a hefty price for neighbouring Giralia Resources. In fact our Man in Oz wrote a piece earlier this month questioning why the share price of Giralia had not moved after it announced a serious increase to the tonnage at its McPhee Creek iron ore project in Western Australia. Now we know why. The company was intent on not allowing its shares to fly ahead of the bid.

Iron ore was key to Australia escaping the impact of the global financial crisis through its exports of millions of tonnes to China. Spot prices for iron ore fines are approaching 2010 highs reached back in April and this has led to a 7.7 per cent increase for the quarterly price index for iron ore in the first quarter of 2011 reaching US$137/tonne compared to US$127/tonne in the last quarter of 2010. It is now expected to stay steady or fall very slightly towards the end of next year as new productive capacity is expected to come on stream in 2012.

China has increased iron ore production in the past 12 months as it tried to reduce its massive imports and to an extent it has been successful as these imports are forecast to have only increased by 2.7 per cent. But this does not mean that iron ore contract prices will fall. In fact they should increase in the first quarter of 2011, triggered by the recent increase in spot market prices. Overall, therefore, the iron ore market should remain stable, after a volatile period extending from the global financial crisis to the collapse of the annual benchmark pricing system and the introduction of quarterly iron ore contracts in the second quarter of 2010.

Bids remain a probability for iron ore throughout the world and it is a lot simpler and cheaper to acquire an existing project than to develop it from square one. Rob Davies, our commodities expert explained why earlier this week. “Copper at $9,049 a tone, “he wrote,” might look very expensive in historical terms. Fine, if that’s what you think go and find your own. First, you need to devote about ten years to finding an economic deposit. And it’s not much good finding one in a country that that doesn’t give you secure legal tenure. Once you have done that you need to spend capital equivalent to several thousand dollars a tonne to build a mine and the associated infrastructure. Assuming of course you can find a banks that will lend you the money on terms that will allow you to keep your right arm. Then you have to spend another few thousand dollars a tonne to actually mine the deposit. Finally, if you are lucky, you might make a few bucks in profit.”

These same comments also apply to uranium and silver. Uranium is a sector coming back into favour at last after a few dismal years when the spot price refused to budge. Now it is around US$65/lb which is 25 per cent up on the US$48/lb achieved in September and nearly 50 per cent ahead of the US$40.75/lb in June. The recent price surge has been driven by Chinese buying as Alan Eggers or Manhattan Resources forecast at the annual Australian Uranium Conference last July in Fremantle. He reckoned that China was starting to stock pile uranium well ahead of its requirement to fuel 24 new reactors under construction and his view was supported by the World Nuclear Association and Thomas Neff, a physicist at the Massachusetts Institute of Technology.

Market confidence has increased in the growth outlook for Chinese reactor build following recent Memoranda of Understanding and long term sales agreements announced by the Chinese with Kazatomprom, Areva, Cameco and Paladin. Nor are the Chinese alone as there are no less than 479 new nuclear reactors planned or proposed by countries around the world as of now and it is when they commence operations that the demand for uranium is highest. The search by existing producers for others with advanced projects in politically stable areas is therefore now well under way.

Silver may prove to be the wild card in mining this year and the FT continually draws attention to it by quoting its price in US cents/lb when the rest of the world has it in US$/lb. Still the FT has been notoriously weak on metals for some time and those who took notice of the Lex comments on gold from 2004 onwards must be kicking themselves. We are deliberately not discussing gold in this note because enough has already been said about it over the past year. The same cannot be said of silver and a couple of weeks ago Martin Vander Weyer wrote a very cogent piece about this metal in the Spectator which adopted an ambivalent view to the rumours about JP Morgan amassing a huge short position in the metal.

Sooner or later the squeeze will start, as the Hunt Brothers found to their cost when they cornered the market in 1980, and those who are long of silver will have a very happy time. What Martin pointed out is that silver, which is subject to dual demand from industry and jewellers, has lagged behind gold in a big way over the last 30 years. In 1980 gold was 17 times more expensive than silver: now it is 48 times more expensive. A market squeeze allied to a number of new industrial uses for silver could put it into orbit next year. Demand has now overtaken supply and when this happens a premium attaches to any potential bid target be it a company in production, development or at the advanced exploration stage. Silver is often a by-product of a lead and zinc mine so it will be interesting to see how values are assigned. Guess right and you could be in the money.

At the beginning of this week we drew attention to three sectors which could contribute outstanding performances next year and they were iron ore, uranium and silver. We have already been beaten to the punch in iron ore with Atlas Iron bidding a hefty price for neighbouring Giralia Resources. In fact our Man in Oz wrote a piece earlier this month questioning why the share price of Giralia had not moved after it announced a serious increase to the tonnage at its McPhee Creek iron ore project in Western Australia. Now we know why. The company was intent on not allowing its shares to fly ahead of the bid.

Iron ore was key to Australia escaping the impact of the global financial crisis through its exports of millions of tonnes to China. Spot prices for iron ore fines are approaching 2010 highs reached back in April and this has led to a 7.7 per cent increase for the quarterly price index for iron ore in the first quarter of 2011 reaching US$137/tonne compared to US$127/tonne in the last quarter of 2010. It is now expected to stay steady or fall very slightly towards the end of next year as new productive capacity is expected to come on stream in 2012.

China has increased iron ore production in the past 12 months as it tried to reduce its massive imports and to an extent it has been successful as these imports are forecast to have only increased by 2.7 per cent. But this does not mean that iron ore contract prices will fall. In fact they should increase in the first quarter of 2011, triggered by the recent increase in spot market prices. Overall, therefore, the iron ore market should remain stable, after a volatile period extending from the global financial crisis to the collapse of the annual benchmark pricing system and the introduction of quarterly iron ore contracts in the second quarter of 2010.

Bids remain a probability for iron ore throughout the world and it is a lot simpler and cheaper to acquire an existing project than to develop it from square one. Rob Davies, our commodities expert explained why earlier this week. “Copper at $9,049 a tone, “he wrote,” might look very expensive in historical terms. Fine, if that’s what you think go and find your own. First, you need to devote about ten years to finding an economic deposit. And it’s not much good finding one in a country that that doesn’t give you secure legal tenure. Once you have done that you need to spend capital equivalent to several thousand dollars a tonne to build a mine and the associated infrastructure. Assuming of course you can find a banks that will lend you the money on terms that will allow you to keep your right arm. Then you have to spend another few thousand dollars a tonne to actually mine the deposit. Finally, if you are lucky, you might make a few bucks in profit.”

These same comments also apply to uranium and silver. Uranium is a sector coming back into favour at last after a few dismal years when the spot price refused to budge. Now it is around US$65/lb which is 25 per cent up on the US$48/lb achieved in September and nearly 50 per cent ahead of the US$40.75/lb in June. The recent price surge has been driven by Chinese buying as Alan Eggers or Manhattan Resources forecast at the annual Australian Uranium Conference last July in Fremantle. He reckoned that China was starting to stock pile uranium well ahead of its requirement to fuel 24 new reactors under construction and his view was supported by the World Nuclear Association and Thomas Neff, a physicist at the Massachusetts Institute of Technology.

Market confidence has increased in the growth outlook for Chinese reactor build following recent Memoranda of Understanding and long term sales agreements announced by the Chinese with Kazatomprom, Areva, Cameco and Paladin. Nor are the Chinese alone as there are no less than 479 new nuclear reactors planned or proposed by countries around the world as of now and it is when they commence operations that the demand for uranium is highest. The search by existing producers for others with advanced projects in politically stable areas is therefore now well under way.

Silver may prove to be the wild card in mining this year and the FT continually draws attention to it by quoting its price in US cents/lb when the rest of the world has it in US$/lb. Still the FT has been notoriously weak on metals for some time and those who took notice of the Lex comments on gold from 2004 onwards must be kicking themselves. We are deliberately not discussing gold in this note because enough has already been said about it over the past year. The same cannot be said of silver and a couple of weeks ago Martin Vander Weyer wrote a very cogent piece about this metal in the Spectator which adopted an ambivalent view to the rumours about JP Morgan amassing a huge short position in the metal.

Sooner or later the squeeze will start, as the Hunt Brothers found to their cost when they cornered the market in 1980, and those who are long of silver will have a very happy time. What Martin pointed out is that silver, which is subject to dual demand from industry and jewellers, has lagged behind gold in a big way over the last 30 years. In 1980 gold was 17 times more expensive than silver: now it is 48 times more expensive. A market squeeze allied to a number of new industrial uses for silver could put it into orbit next year. Demand has now overtaken supply and when this happens a premium attaches to any potential bid target be it a company in production, development or at the advanced exploration stage. Silver is often a by-product of a lead and zinc mine so it will be interesting to see how values are assigned. Guess right and you could be in the money.

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