IN CASE you hadn’t noticed, the copper price quietly slipped over the $US4 a pound mark last week. It came back down by Friday, but that brief trip into record territory told Dryblower that the worst of the market correction is behind us.
Demand for copper, the bellwether metal which others follow, is the best indicator of widespread recovery in the mining market – but it’s not the only sign.
Professional investors, especially those in North America, are providing fresh capital for the small end of the mining sector. Excellent exploration results are flowing in from field work, and business and political leaders are finally admitting that the US is in recession.
Dryblower’s interpretation of the signs, even the US recession and the failure of few small Australian stockbroking firms, is that we have reached the bottom of the downturn and that the next move is up.
China, and its demand for raw materials, is the key to what is likely to be a fast rebound which will catch the pessimists on the back foot – just as the start of the boom caught the same people out in 2002.
The doubters will prefer to see more trouble ahead and point to indicators such as declining US industrial output, falling house prices, the unfinished business in global credit markets, and the uncertainties which always precede a US presidential election.
What they’re missing is the fact that most, if not all, of this bad news is already factored into share and metal prices, and the measurements of economic growth are lagging indicators – they tell us where we’ve been, not where we’re going.
That’s why recent events in the copper market are so interesting. They say that demand for copper, the metal which finds its way into every facet of industry, is outstripping supply – in same way that demand for iron ore is outstripping supply.
But layered on top of the upward move in the copper price, and tips that it could be heading for $US5/lb, is the refreshing optimism of some very smart people, such as Lloyd Blankfein, boss of the world’s most successful investment bank, Goldman Sachs.
Last week, just as the copper price was taking a look at future unchartered territory, Blankfein surprised the doomsters by saying that the credit crisis had peaked and that while he wouldn’t say when normality would return, conditions would not get any worse.
Right now, Blankfein is a bit of a lone voice in his home town of New York. But that will not be for long because the signs of recovery are everywhere to be seen.
Cheap money, in the form of ultra-low interest rates, is doing its work (as ever) in forming a layer of fresh confidence, and surging US exports, thanks to a cheap dollar, are also having an effect.
But what Dryblower likes best is the news from the copper market where demand is picking up, not falling as might have been expected if the world really was teetering on the edge of a global downturn.
What becomes really interesting with the copper price is what it means to the share price of copper producers, because some of them seem to be trading at a rather large discount if the research work by Blankfein’s firm Goldman Sachs is a guide.
According to Goldman the current share price of Oxiana, around $3.19, implies a copper price of $US2.90/lb.
No, you’re not going blind. Using a 10-times multiple Goldman reckons that Oxiana’s share price is a country mile short of where it should be with the copper price at close to $US4/lb.
Emerging copper producer Equinox Minerals, with a share price around $5, implies a copper price of $US2.15/lb.
This ‘reverse engineering’ of share and metal prices makes for seriously interesting analysis because what it’s saying is that a wide gap has opened between a shell-shocked financial market and the reality of supply and demand in the metals market.
Dryblower’s interpretation of the many signs that make a market is that the positive, for the first time in more than a year, comfortably outweighs the negative.
That does not mean we have seen the last of the troubles, such as more corporate failures of the Opes Prime variety. But it does mean that we are at the bottom and recovery is underway.
