Why Metal and Mining Stocks Are a Buy

Today metal and mining stocks are seeing some weakness with XME down about 3%. This perhaps is primarily driven in part by market view about economic recovery and in part by Chinese rambling about Rio Tinto (RTP). RTP shares are in particularly down about 5.8%. But I personally think that any weakness in metal and mining stocks is a buying opportunity. Adding them to the portfolio by utilizing any weakness will provide a great boost to portfolio. The reason is that these companies are the only ones which are actually sitting on the most tangible and valuable resources (because of sheer limited supply of them) in the world.

Any recovery, however small and limited it might be, will have to buoy the demand for these scarce resources. So both RTP, FCX and BHP are definitely a buy for our portfolios, especially RTP with today's weakness. There is some nervousness in investors about RTP due to comment from a Chinese official. But the swift denial from other Chinese officials about the authority of the comments I think clearly reflects intentions of China to pressurize Rio Tinto into coming to the discussion table. This is a lot of politics but investors should note that these events started after RTP denied China government's majority owned Chinalco (ACH) to offer a stake in the company. But China clearly realizes that importing iron ore from Australia is much cheaper for it than any other major producers like Brazil simply due to its geographical location and transportation costs. So I don't think China will have any other viable alternative to import iron ore in the near future. And in any case we have to remember that China represents only a fractional part of iron ore business operations for Rio Tinto. The other good thing is that its ADR is not available to retail investors for shorting and thus avoids any false panic situation to be created. So I am putting a buy on RTP, especially given that its stock is down about 25% from recent highs. This is a great stock with 2 year target for ADRs of $240 (in weak economic recovery scenario) and $285 (in strong economic recovery scenario).

Other focus for the future investment is on gold stocks including Goldcorp (GG) and Freeport (FCX). I believe that inflation or no inflation, we are sitting in a global economic environment where focus will soon be turning from fiat (paper money) economy to currency values being determined by precious metals. A total conversion may not happen in the near future but some sort of alignment is definitely in the order as soon as the global economy stabilizes and governments can spend more time in analyzing the root cause of current credit problems emanating from United States. So instead of buying gold directly and worrying about its storage, I would rather suggest to invest in gold stocks like GG and FCX.
These stocks are perhaps the best assets for forward looking portfolios. I would still stay away from paper money driven bank stocks like Bank of America (BAC), Wells Fargo (WFC) and Morgan Stanley (MS) specially given that bank stocks have rallied almost 30% in the past month alone.

Disclosure: No position in stocks discussed in the article at the time of writing. I'll add RTP and FCX to my portfolio soon at a good entry point.

Comments

[ScroogeMcduck:]

(AUY) Reports Q2 earnings of $0.13 per share, $0.04 better than the First Call consensus of $0.09; reports revs of $269.8 mln vs the $299 mln consensus.

By product cash costs of $213 per GEO and $318 per GEO, Average co-product cash costs (excluding non-core mines under sale) of $352 per GEO and $351 per GEO

Our core mines achieved record quarterly production and are expected to continue to perform in the second half of 2009. During the second quarter, we continued to show strong operating margins and cash flow due to our industry low cash costs," said Yamana's chairman and chief executive officer, Peter Marrone.

Aug 10 06:11 PM

[Hyperinflation:]

I like Yamana a lot but was not impressed by the numbers and guidance at Gualcalmayo ( Definitely spelled that wrong ), what are your thoughts? The quarter tha impressed me the most was Jaguar (JAG) followed by a solid execution by Agnico (AEM) and then Yamana. As for the PM miners, I wouldn't look at this years numbers, rather next years where this industry is set to shine.

Aug 11 08:26 AM

[Gravity404:]

I own both FCX and ACH. I am long in FCX and think it’s the best investment opportunity. I have been trading ACH for many years and it too is a good investment however I run in and out of it because unpredictability of the government. BHP is a behemoth and most likely will grow slower than the other best of breeds in the industry. And let's not leave out PCU.

I wouldn’t touch RTP with Madoff’s money. RPT has $40 Billion in debt. that's a "B".

Aug 11 12:46 PM

[buybigtires:]

I am probably not as familiar with Rio's balance sheet as I should be, but isn't much of that debt from acquisitions that promise to pay out? They've been gobbling up smaller mines during this recession, and the assets they've acquired should more than exceed their debt in the mid-to-long term.

Sep 03 09:13 AM