The Commodity Investor Q&A
With Matt Badiali
September 16, 2009
Q: Why have prospect generators lagged in share price during the recent precious metals rally? They're not at new highs like the gold producers are. – A.M.
A: The short answer is: because they're not gold producers.
The companies that actually produce gold and silver are soaring because their profit margins are rising with the metals' prices. Here's what I wrote a few weeks back:
Let's say a gold miner spends $400 per ounce of gold to get it out of the ground. So when the price of gold is $500 per ounce, it makes $100 per ounce in profit. If our company produces 100,000 ounces per year, it earns $10 million.
Now, let's imagine gold goes to $600 per ounce. Our company will make $200 per ounce, or $20 million in profit. Gold is up 20%, but our company's profit has doubled... and its share price will follow.
But prospect generators are explorers. They are out in the field sampling rocks and trying to find the next big mine. Generally, they don't have any producing properties. So they don't respond to the rising gold price like the giant miners Barrick or Newmont do.
On the other hand, when one of those microcaps makes a discovery, the share price explodes. The higher the gold price, the higher it soars.
Take a look at this chart of prospect generator Mirasol Resources.
The tiny $10 million company finally has a big discovery. In November 2008, it announced a potentially huge silver deposit in Argentina. And the share price did exactly what it was supposed to do: Since November, shares are up fourfold. I'd wager that none of the big producers performed that well, new highs or not.
You buy big gold producers for leverage to the price of gold. As gold goes up, these stocks should go up more.
You buy prospect generators for the possibility of a big score. Buy a basket, take a lot of small losses on the way, and wait for that 1,000% winner.
Q: Is there any way I can play a potential shortage in rare earth minerals? – B.C.
A: According to the U.S. Geological Survey, there are 15 naturally occurring rare earth elements (REEs). These elements range from merely important to irreplaceable for manufacturers of high-tech gadgets.
For example, the red color in your flat screen TV comes from europium. There is no substitute. Erbium, another REE, acts as a laser enhancer. It must be incorporated into fiber-optic cable.
These are important and expensive minerals, but it's tough to invest in them. China's state owned mining companies now control over 90% of the world's production of rare earth elements.
Q&A Update: Many of you didn't like my recent discussion of wind power's problems. We received many e-mails like this one from B.L.:
Getting more mpg or more power from wind or solar is where it is, Hoss! Ever heard of the end-goal of less reliance on foreign oil?
What B.L. is essentially saying is, "I want to cut down on my electric bill, so I'm going to ride my bike more."
Oil is a transportation fuel – it runs cars, trucks, ships, trains, and airplanes. So you can't cut oil consumption with a windmill.
But B.L. and other readers are also illustrating the fundamental problem with discussing alternative energy these days. The population is passionately uninformed. Passion is OK, as long as you have the facts to back it up.
I'm not against new power sources. But I am against paying 40 times the price for inefficient, politically motivated, scientifically flawed "solutions"... Hoss.
Good investing,
Matt Badiali
P.S. Are you buying the big gold producers... or speculating on the junior explorers? Let me know here: editorialfeedback@growthstockwire.com. |
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Regional U.S. banks heading down... First Commonwealth, First Merchants, and First Financial make fresh lows. |
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Big Tech surge underway... Apple, Motorola, Seagate reach new highs. |
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Climb continues in Brazil... country fund EWZ makes new highs as retail sales suggest domestic recovery. |
|
Last |
Change |
52-Wk |
| S&P 500 |
1049.34 |
+2.34% |
-16.17% |
| Oil (USO) |
35.71 |
-0.31% |
-56.18% |
| Gold (GLD) |
97.96 |
-0.83% |
+29.66% |
| Silver (SLV) |
16.31 |
-1.15% |
+51.72% |
| U.S. Dollar |
76.85 |
-0.62% |
-2.68% |
| Euro |
1.46 |
+0.90% |
+2.45% |
| VIX |
23.86 |
-6.87% |
-7.01% |
| HUI |
419.57 |
-1.53% |
+44.46% |
| 10-Year Yield |
3.41% |
0.07 |
-0.30 |
|
|
| Company |
Sym |
Industry |
| DreamWorks |
DWA |
movie studio |
| Ashland |
ASH |
chemicals |
| Dendreon |
DNDN |
biotech |
| Community Health |
CYH |
hospitals |
| Comp Brasileira |
CBD |
grocery stores |
| Melco Crown |
MPEL |
casinos |
| Equinix |
EQIX |
telecom |
| Crown Holdings |
CCK |
packaging |
| Hospira |
HSP |
pharma |
| Qiagen |
QGEN |
electronics |
| CareFusion |
CFN |
medical devices |
| Manpower |
MAN |
staffing |
| Lam Research |
LRCX |
semiconductors |
| Ivanhoe Mines |
IVN |
mineral mining |
| Cerner |
CERN |
health IT |
| IAMGOLD |
IAG |
gold mining |
| Ultrapar Holdings |
UGP |
gas distribution |
| Ross Stores |
ROST |
clothing stores |
| Owens Illinois |
OI |
packaging |
| Rockwell Auto |
ROK |
eletrical equip |
| AmerisourceBergen |
ABC |
pharma |
| FMC Technologies |
FTI |
oil & gas drilling |
| Int'l Game Tech |
IGT |
casino games |
| Priceline.Com |
PCLN |
online travel |
| BMC Software |
BMC |
software |
| Google |
GOOG |
online search |
| Seagate |
STX |
data storage |
| Concho Resources |
CXO |
oil & gas drilling |
| Network Appliance |
NTAP |
data storage |
| Life Technologies |
LIFE |
biotech |
| Annaly |
NLY |
virtual bank |
| NVIDIA |
NVDA |
semiconductors |
| Foster's Group |
FBRWF |
beer |
| AES |
AES |
utilities |
| ConAgra |
CAG |
packaged foods |
| Coach |
COH |
accessories |
| Western Digital |
WDC |
data storage |
| Vmware |
VMW |
software |
| Komatsu |
KMTUF |
heavy equipment |
| Talisman Energy |
TLM |
oil & gas |
| ICICI Bank |
IBN |
bank |
| Motorola |
MOT |
telecom equip |
| Swisscom |
SCMWY |
telecom |
| eBay |
EBAY |
online auctions |
| Telecom Italia |
TI |
telecom |
| 3M |
MMM |
conglomerates |
| Suncor Energy |
SU |
oil & gas |
| Baidu |
BIDU |
online search |
| Visa |
V |
credit cards |
| Itau Unibanco |
ITUB |
bank |
| Goldman Sachs |
GS |
investment bank |
| Virgin Media |
VMED |
TV programming |
| Telefonica |
TEF |
telecom |
| Apple |
AAPL |
computers |
|
|
| Company |
Sym |
Industry |
| First Merchants |
FRME |
bank |
| Verona Pharma |
VNAPF |
pharma |
| First Commonwealth |
FCF |
bank |
| First Financial |
FFNW |
bank |
|
|
|
