Commodities boom seen lasting 4-5 years on demand


SEOUL, JULY 27: The boom in commodities will last another four or five years as supplies remain short due to underinvestment in mines and demand from emerging economies keeps rising, a senior fund manager in South Korea said on Thursday.

Inflation worries around the global economy will also cause commodity investments to shine among the dull returns from stocks and bonds, Kang Chungmo, senior manager at Woori Credit Suisse Asset Management, said. The commodities game will be much better than stocks and bonds for about four to five years, Kang said in an interview.

He manages an 80 billion won ($83.82 million) commodity fund, the largest one in Asia. The valuation for commodities, unlike stocks and bonds, is very difficult to do, so prices are completely decided by supply and demand. I believe there is a five-six year gap before commodity supply and demand will match.

Backed by the recent bullishness in commodities, Woori in March started sales of a fund that invests solely in commodities, the first of its kind in the country. The fund uses a basket of 19 commodities, tracking the Reuters/Jefferies CRB Index, which comprises futures from corn, gold, copper and crude oil.

We are basically following the weighting of the CRB, but personally I think gold and crude oil are the most favourable commodities, while copper only has 10-15% further to rise, Kang said. CRB index now weights 23% in crude oil and 6% each in gold, copper and corn.

Global prices of gold should hit $1,000 an ounce in three years, from $620 at present, Kang added. The Woori fund is up about 6.7% so far, after rising 12% in early May, and Kang is aiming for 10-12% in annual returns. In contrast, South Koreas KOSPI index has fallen 7% this year, after a 54% rise last year.

Woori is considering offering more commodity funds to attract a broader range of investors to the market. But investors are limited to individuals because regulations forbid big pension funds in South Korea from putting their money into commodities.

The health and welfare ministry, which regulates the pension funds, is considering allowing the funds to invest outside of stocks and bonds.

Commodity funds are drawing more attention, but it will take two years until big institutional investors are cashing in on the hot commodity market. Then the demand for commodity funds.

Reuters

Big Mining Is Big Value

By Alun Morris
July 28, 2006

I don't often buy large cap shares. I prefer to stay away from the thousand Watt arc lamps of multiple broker analysis and take my flashlight around the darker corners of the market.

However this month I bought a share in a sector that looks so cheap that I couldn't keep my grasping value hands off it any longer. I have been mulling a move on big mining since UK investing legend Jim Slater said in February that mining shares were cheap. In fact he thought the rating of this sector was one of the most serious mis-pricing of markets he had ever seen, showing high growth and low P/Es. Being fully invested I didn't buy. Besides, these huge companies have more analysts than Woody Allen, so where's my edge?



Why are big miners so cheap?

This sector is cheap for a reason. Metal prices have run up a hill that's got steeper and steeper and we don't know if there's a cliff at the end. Copper, nickel and zinc have doubled or trebled in the past year, largely due to rapid growth and construction spending in China and India. Many see it as yet another bubble with prices overshooting due to speculation. The futures market is predicting significant falls in prices next year. Demand would fall if the Chinese or Indian economies stumble..

The bull arguments are:

* The same was said about oil last year but the futures market is now predicting $70+ oil until 2011.

* New mines take six to seven years to enter production, so the recent rush to start new mines will not give a big supply boost until the end of the decade.

* Chinese growth seems to be underpinned by endless demand for ever cheaper consumer goods.

I believe that mining shares offer the same opportunity that the oil and gas sector did a year ago -- their prices considerably lag the rise in the commodities they produce.



So which is the cheapest?

An excellent Metals and Mining report from Deutsche Bank this month looked at seven UK listed shares. The table below has excitingly low ratios, especially cashflow, and uses Deutsche's estimates adjusted for Wednesday's prices:

                       2007 P/E
Anglo American      9.2
Antofagasta          7.1
BHP Billiton            8.2
Kazakhmys            6.5
Lonmin                11.4
Rio Tinto               8.4
Vedanta                7.2



see article and table in full here


Cash

Cash, cash, cash! Music to my ears. The sector has more cash than it knows how to spend, hence the very low P/CF and EV/EBITDA figures. I decided to buy Vedanta -- it has the lowest 2007 cashflow ratios and nearly the lowest P/E. These reflect forecast output growth of 48% over the next 3 years., far higher than the others at about 5% to 25%. Jim Slater likes it too -- in a talk in June his picks were BHP Billiton and Vedanta.

Be prepared for a bumpy ride. These shares will often move two or three times as much as the FTSE-100 in a day. If you can stomach this and the risk of a slump in copper prices (and the forecasts already assume some decline), Vedanta looks the cheapest of the bunch.

Am i blind or just plain dumb? ..... surely KAZ (and ANTO) is cheaper that VED, though KAZ from memory is a copper play while VED is fairly heavily into zinc ...... and surely it is a safer(?) bet to play the commodities straight rather than relying on the vagaries of companies who are at least one step removed

Workers vote for Escondida mine strike

Sat Jul 29, 2006 - By Pav Jordan


SANTIAGO, Chile (Reuters) - Workers at Chile's Escondida, the world's largest copper mine, voted overwhelmingly on Friday to strike to demand a new contract offer from the company that reflected soaring copper prices.

With global copper prices surging and markets nervous about supplies, 97 percent of 2,052 union workers at the mine had participated in the vote for a strike late on Friday.

"Some 97 percent of workers voted to strike," Union Secretary Pedro Marin told Reuters after votes were tallied.

He said the company will seek government mediation to hold off the strike, giving sides five more days to resolve their differences before workers walk off the job.

Marin said 1,994 workers voted, with the remaining 58 workers not participating because they were on holiday or otherwise not available.

"Only one vote was in favour of the company. One vote was blank," he said.

"On Monday we'll be talking with the company," Marin said.

With copper prices more than five times what they were when the union negotiated a 2003 contract that expires on August 2, workers are demanding a large raise from Escondida. The mine is majority-owned by global miner BHP Billiton.

Copper prices have soared amid strong demand from China's booming economy and solid global economic growth.

In New York, copper futures rose 2 percent on Friday amid jitters about the Escondida strike vote and a rockslide this week at the huge Chuquicamata copper mine, owned by top copper producer Codelco.

Workers were voting throughout the day on Friday, as shifts entered and exited the massive open-pit mine in northern Chile, and as union members on leave voted in surrounding towns.

Escondida expects 2006 copper output to be similar to last year's level of 1.27 million tonnes.

BHP Billiton, the world's largest miner, owns 57.5 percent of the open-pit mine, while number-two Rio Tinto has a 30 percent stake.

Billiton could not be reached for comment.

If government mediation fails, a strike likely would begin on August 7.

Three big miners issue interim results this week:

Wednesday:  Xstrata
Thursday:     Rio Tinto
Friday:         Anglo American


With vedanta issuing record busting results last week and the copper strike in Chile kicking off, all mining prices should get a boost this week.

Wednesday, July 26, 2006
Oligopoly Watch: - The latest maneuvers of the new oligopolies and what they mean.

Consolidation fever in the mining industry

Mining companies have been rolling up the industry over the past few years, and the consensus is that that trend will continue until there are no possible buy reagents left. That's the conclusion of a Financial Times article ("Miners roll up their sleeves to consolidate scarce resources", 7/25/06).

The most immediate sign of the buying frenzy is in the current duel between Phelps Dodge and Xstrata to buy Canada-based Falconbridge, a bidding war that has doubled the price of that company from around $10 billion to over $20 billion.

But that's not the only deal in the works.

* Australian iron ore miner Mount Gibson just made a bid for rival Aztec, hoping to boost the company to #3 status in Australia.
* Canada's GlobeStar Mining Corporation just bought out Dominican Republic nickel mines from Everton Resources Inc.
* Canada's Stornoway Diamond Corp. has bid to buy Canada's Ashton Mining and Contact Diamond Corporation, both diamond mining companies.
* New Zealand's Oceana Gold recently acquired Australia's Climax Mining, another gold miner.
* Canada's Barrick Gold has made an offer to buy Canadian rival NovaGold.

And these are just the deals happening in the last few months, all worth at least hundreds of millions of dollars.

Because metals prices are so high, the mining companies are loaded with cash. That means that even $20 billion acquisitions are doable. Some mid-size mining firms drawing strong interest are Alumina, Newcrest, Lonmin and Vedanta. There are twenty mining companies in the world with between five and 20 billion dollars in revenue, and all bets are that there will be significantly next within a few years. And the bidding, as for Falconbridge, is likely to be strongly contested.

And, as we've seen with big oil, acquiring established sources is far more desirable than spending money on exploration. The FT article quotes a Citigroup analyst as saying: "Acquisitions and buybacks deliver better returns than the expansion of production."

Older miners are wearing out faster than new mines are discovered. Also, the increasing environmental controls and Third-World nationalism make the cost of new mines grow ever higher.

Plus some very big companies are rumored, according to the article, to be targets. Aluminum company Alcoa is one of them, as is rival Alcan. Even gold and diamond giant Anglo-American may be tempting, now that is selling off both its steel and paper operations, making a pure mining play.

Companies like Rio Tinto and BHP Billiton are identified as possible predators. Both are set to generate many billions in cash this year, thanks to skyrocketing iron ore prices. Even smaller deals (purchases of single mines) are significant, as bigger companies keep rolling up smaller ones.

Harry (and others) ...... for all the truth in newspaper article etc, be wary of getting too greedy (yes, we've all done it) and don't chase any old mining company just because it just might be a t/o target ..... in conclusion, buy on fundamentals with any potential t/o as a bonus, and it would do no harm to put in place trailing stops.

Thanks C, and noted by many of us i should think.

the big Q is what to do tomorrow if anything .... lol!

Depends on peoples strategies as always.

Times Online July 31, 2006

Need to Know

Vedanta Resources, the miner, is to hold its annual meeting on Wednesday. Its first-quarter results, reported two weeks ago, showed revenue up 113 per cent to 1.3 billion.


Xstrata, the Swiss-based and London-listed mining group, is planning a rights issue of up to 2.75 billion to finance its acquisition of Falconbridge, the Canadian nickel and copper group. The way was cleared for Xstratas 10.8 billion bid to succeed when Inco, its Canadian rival, withdrew its offer on Friday. (The Sunday Telegraph)


Rio Tinto, the Anglo- Australian mining giant, which recently reported a 4 per cent rise in first-half iron ore production, is to report its first-half results on Thursday.

Copper Futures Rise as Prospect of Escondida Srtike Stokes Supply Concern

July 31 (Bloomberg) -- Copper prices rose amid concern Chile's Escondida mine, the world's biggest copper producer, will be shut by a strike next week, squeezing global supply.

Workers voted to stop work at the mine operated by BHP Billiton on Aug. 7, based on a tally of more than half of votes cast on July 28, Pedro Marin, a spokesman for the Escondida Workers' Union No. 1, said. Miners want wages to rise by 13 percentage points above the inflation rate, while management has offered 1.5 points above inflation.

``It looks like it's hard to avoid a strike as the difference between the union and management is too big,'' Cai Luoyi, a metal analyst at China International Futures (Shanghai) Co., said by phone.

Copper for three-month delivery rose as much as $133, or 1.7 percent, to $7,803 a metric ton on the London Metal Exchange. It traded at $7,790 at 8:24 a.m. London time, posting a 10.7 percent gain in the past six days.

Metal for delivery in October rose 2,530 yuan, or 3.9 percent, to settle at 67,640 yuan ($8,491) a ton on the Shanghai Futures Exchange when trading ended at 3:00 p.m. local time. It earlier rose by the daily allowable maximum gain of 4 percent.

Copper for cash delivery in Changjiang, Shanghai's biggest spot market, rose as much as 4.7 percent to 67,780 yuan a ton. Chinese users have to pay 17 percent value-added tax, 2 percent import tax, premiums and freight charges for imported copper.

Escondida accounted for 8.5 percent of copper mined worldwide last year. BHP Billiton owns 57.5 percent of the mine, Rio Tinto Group owns 30 percent and a group led by Mitsubishi Corp. owns 10 percent. The International Finance Corp. owns the rest.

Supply Shortfall

Demand will exceed production by about 200,000 tons this year, unchanged from last year, UBS AG, Europe's largest bank by assets, said in a July 27 report. There has been a shortfall since 2003, according to UBS. The price of copper, used to make pipes and wires, has more than doubled in the past year.

Inventories monitored by exchanges in London, Shanghai and New York fell 4.7 percent to a seven-month low of 155,350 tons this month, data compiled by Bloomberg News shows.

``A prolonged strike is likely to affect refined production, and aggravate the tight copper supply in China,'' Li Rong, a metal analyst at Great Wall Futures Corp., said by phone from Shanghai.

Stockpiles monitored by the Shanghai Futures Exchange fell to an eight-week low last week.

Source: Dow Jones - 31 July 2006

Supply jitters push LME copper to two-week high: LME


London Metal Exchange three-month copper benefited from supply-side jitters Monday, moving higher on the strength of the strike vote by Escondida copper mine workers late Friday.

Copper moved to a two-week high of $7,980 a metric ton towards the end of Monday's session, closing just shy of that level at $7,949/ton at late PM kerb in London.

"Even though a strike vote at Escondida had been broadly expected, the unanimous nature of the outcome with 97% in favor of strike actions prompted buying nevertheless," said Roy Carson, analyst at Triland Metals Ltd.

Apart from news of the strike vote, the base metals market was also digesting news that Mexican mining giant Grupo Mexico SA may be mulling a play for Phelps Dodge Corp., as reported by The Globe and Mail newspaper, Monday.

The article cited "sources" but didn't identify them, saying only Phelps aims to take over Canadian nickel miner Inco Ltd. after plans for a three-way combination with Falconbridge Ltd. fell through.

The remainder of the complex also moved higher on the strength of copper's gains with zinc recording the strongest intra-day gains, up 3.6% on Friday's PM kerb price at $3,415/ton.

Nickel also gained, rising $795 to $25,495/ton at PM kerb, buoyed by a continuation of the seasonal pattern of LME warehouse stock drawdowns and rising canceled warrants. LME warehouse stocks of nickel fell 4,128 tons Monday, while canceled warrants rose to 67%.

Aluminium prices breached nearby resistance at $2,550/ton during the afternoon session, moving higher still to close at $2,565/ton at late kerb, mainly on the strength of short-covering, according to Triland.

Well worth reading the long article in today's Telegraph re Xstrata ...... MD talks openly about the huge escalation of production costs and their effect on profitability, especially if there is a dip in commodity prices ..... That said he remains very bullish about nickel (see bid for Falconbridge!) and zinc.

Will now start thread for ENK which I think may well prove to be a profitable nickel mining investment.

Thanks for that C, on the point about zinc i think VED have plenty of that -);

yes they do ..... and from memory they also commented on the heavy adverse effect of escalating production costs

With VED having said that it means that the news is in the public domain, therefore by definition in the price. The only concern i have is, on what basis are they escalating? if it's wages+ conditions then i think that can be managed.

Refining/smelting or whatever is the correct term, assuredly uses HUGE volumes of "energy" .... and we all know what has happened with oil and gas prices

BBC - 3 Aug 2006

Largest copper mine facing strike


The world's largest privately-owned copper mine could see production halted next week, as workers threaten strike action after rejecting a pay offer.

Labour relations at the Escondida mine in Chile have deteriorated as staff hold out for a 13% salary rise and a 16m peso ($16,900; 8,900) bonus.

The mine operators' latest bid had been a pay increase of 3% and a bonus of 8.1m peso, double their previous offer.

Workers said a strike could still be averted at talks late on Thursday.

'Good will'

"If there is real good will to solve this, a strike may be averted," said workers' spokesman Pedro Marin.

Mr Marin said that the latest pay proposal was massively and absolutely rejected by the mine's 2,000 workers.

Should the talks fail on Thursday and Friday then the strike would start on Monday.

The Escondida copper mine is 57.5%-owned by BHP Billiton, while fellow miner Rio Tinto owns 30%. The remaining stock is held by a Japanese-led consortium, with a small stake in the hands of International Finance Corp.

The labour dispute comes as world commodity prices have surged, partly due to a surge in demand for metals and partly as supplies become squeezed.

Analysts said that any disruption to output at Escondida, which is expected to produce 1.4 million tonnes of copper this year, may lead to copper prices rising on the international market.

Aug. 4 (Bloomberg)

Copper Leads Gains in Metals on Looming Strike, Lower Dollar


Copper gained the most in four weeks, leading a metals rally on speculation that a looming strike at the world's biggest copper mine will reduce supply and after the dollar fell following a worse-than-expected U.S. jobs report.

Workers at the BHP Billiton mine in Chile, which produced 8.5 percent of the world's copper last year, said they will strike Aug. 7 unless they get a better pay offer. U.S. employers added fewer jobs than expected in July and the unemployment rate climbed, the government said, causing the dollar to fall to a one-month low, making it cheaper to buy dollar-priced metals.

``Any production that's taken offline will have an impact.'' said Jimmy Quinn, a trader at A.G. Edwards Inc. in New York, who also said U.S. jobs data ``plummeted the dollar,'' which caused metals prices to rise.

Copper for delivery in three months on the London Metal Exchange rose $380, or 5 percent, to $7,870 a metric ton as of 3:27 p.m. local time. The metal was up 2.6 percent for the week, heading for the fifth weekly gain in six weeks.

On the Comex division of the New York Mercantile Exchange, copper for delivery in September gained 12.6 cents, or 3.6 percent, to $3.615 a pound at 10:29 a.m. local time. In both London and New York, a close at these levels would mark the biggest one-day percentage gain since July 6.

Among other metals for delivery in three months on the LME, nickel gained $1,200 to $25,600 a ton, aluminum added $43 to $2,542, lead rose $18 to $1,135, tin was $150 higher at $8,350 and zinc advanced $142 to $3,462.

The U.S. dollar fell to a one-month low against the euro and dropped versus the yen after a report showing the U.S. added fewer jobs than expected. Employers added 113,000 jobs last month after an increase of 124,000 in June. That was less than the 144,000 projected by the average forecast in a Bloomberg News survey. The jobless rate rose to 4.8 percent.

Copper has risen 79 percent this year in London, and traded at a record $8,800 on May 11. The rally has been supported by labor disputes at mines in Mexico and Chile. Demand will beat output this year by about 200,000 tons, UBS AG forecast in July.



Inventory Gain

Consumers of the metal, such as makers of power cables and pipes for plumbing, may use stockpiled copper to fill the shortfall. Inventory monitored by the LME gained 1.2 percent to 102,825 tons today, the exchange said. The inventory is equal to less than three days of global consumption.

BHP, which is based in Melbourne, needs to close the gap with the labor union's wage demand for a raise that would be 13 percentage points above inflation, union spokesman Pedro Marin said. The company's last offer, made Aug. 2, was 3 percentage points over inflation. Marin said a new offer needs to be made by today at the latest to avoid a strike, because the union needs time to vote.

The planned strike is ``really supporting the market,'' said Neil Buxton, managing director of London-based GFMS Metals Consulting Ltd. ``In bull markets you get more strikes; it's always been the case.''

Copper yesterday fell 4.2 percent in London on speculation interest rate increases by the Bank of England and the European Central Bank will slow economic growth and curb metals demand.

The market was ``overreacting,'' and U.S. interest rates are of greater importance, Buxton said. Federal Reserve policy makers will meet Aug. 8 to decide on the benchmark overnight lending rate between banks.



Futures Forecast

Ten of 15 analysts, investors, traders and consumers surveyed Aug. 2 and yesterday by Bloomberg News said copper will rise next week. Four said it will drop and one forecast little change.

A strike ``will naturally drive the price of copper up to test the highs made in May,'' said Mark Lewon, vice president of operations for Utah Metal Works, a scrap-metal recycler and broker in Salt Lake City.

More wage negotiations are due at mines including Teck Cominco Ltd.'s Highland Valley in Canada. The management at Antamina, a Peruvian mine owned by BHP Billiton and Canada's Falconbridge Ltd., is talking with workers, said mine spokesman Gonzalo Quijandria. Chile's state-owned miner Codelco is due to negotiate with employees later this year.

``Even if there's no strike (at Escondida), and prices lose this source of support, there are the Highland Valley, Antamina, and Codelco labor-contract negotiations still to work through,'' said Andy Cole, a London-based analyst at Metal Bulletin Research. ``There's still plenty of support for prices out there.''