base metals article that may be of interest

The Good And Bad News About Base Metal Prices
And it’s exactly the opposite of what you might think….

By Resource Investor
04 Nov 2008


St. LOUIS (ResourceInvestor.com) -- Here’s the good news: Mine closures are happening around the world. Literally, every day a Google Alert spits out the name of a mine somewhere on this earth that is either closing completely, partially (reducing production), or thinking about it.

This is especially the case with base metals and specialty industrial metals like platinum and palladium. To wit:

Canadian nickel miner First Nickel (FNI) said it had suspended production at its Lockerby Mine in nickel-rich Sudbury, Ont., due to low nickel prices.

That followed Blue Note Mining's (BN) announcement that it will put its Caribou zinc and lead operation in New Brunswick on care and maintenance, as current prices have made it unprofitable.

Uranium One closed its flagship Dominion uranium mine in South Africa.

This list could take up the entire page.

A quick internet search of break even costs for metals suggests that the fall in metal prices has punctured the break-even price for zinc, nickel and several other metals.

For investors in metals and the mining sector, this is good news because it shows the industry is quickly responding to the sudden slowdown by closing mines, and reducing supply. Nickel and zinc mines are losing money, and the stocks of these producers have been killed. They could always go lower but with supply being curtailed, fundamentals will begin to improve. We are now on the (potentially long) road to higher prices.

Said another way, most of these stocks have only two ways to go from here – sideways or up.

Metal Industry Break-Even Price (Roughly) Current Price

Nickel $5.00 per pound $5.37

Zinc $0.90-$1.10 per pound $0.48

Copper $1.30 a pound* $1.85

Palladium $300.00 per ounce $195.00

Platinum $1,100.00 per ounce $818.00

The one caveat for investors is that many copper producers--especially the big ones--can still make a bit of money at the $2-per-pound price level. The little asterisk beside the break-even price for copper is there because there are some very large producers who now have operating cash costs of $0.35 – 0.70 per pound.

Most big name media pundits look at copper as the bellwether base metal. Because the price of copper has such a big impact on how investors see the entire base metal market, it could drag down valuations on ALL base metal stocks, even as inventories get lower and supply gets reduced in other markets.

It’s strange but true: good news – metal prices are so low only a select few large players are making money. The bad news – the big copper producers are still making money.

Copper is very close to rock bottom, however. Citi estimates industry costs at $1.30/lb, and industry consultant BrookHunt suggests that only 10% of the industry is making money with copper at $1.70/lb – and we’re within 10% of that now. This is where copper has settled during previous global recessions.

Now, speaking of bottoms – what happens at bottoms? Mergers and acquisitions will soon increase as companies scramble to survive in this time of tight finance.

The most dealmaking of any industry always happens at either the bottom or top of the cycle. So, mergers and acquisitions will certainly gather speed here as weaker companies get bought by stronger ones, for a premium.

The difference in this round of M&A is that it will be done for financial reasons. Up to now, mergers have been more strategic, to create synergies and lower costs. This upcoming round will be predatory.

Financing is hard to get, so the creative financiers and dealmakers actually make more money at the bottom. Which is why we like Endeavour Financial (EDV). They pay a dividend (which here at $3.60 equals 10 % - the highest of anybody in the resource sector we can find) and they have strong advisory fee (read: M&A, financings) revenue.

Endeavour also has exposure to the resource industry early-stage leaders in the junior sector, which they often help create. This means seed-level investment, and the means to participate from the ground floor.

The mining industry is responding to the break-even metal prices it is now experiencing by closing mines and curtailing production. This is highly supportive of metal prices here at the bottom of the price cycle trough. But it could take some time for a firm bottom to form on the stock charts of these companies, and meanwhile, the M&A teams are circling.