Living in the United States, I have what is likely a different perspective on the current state of the global economy than most Canadians. Living in California, in particular, gives me an even bleaker view than anyone in North America except perhaps those living in Detroit. The state is effectively bankrupt, millions in debt, and politically polarized and ineffective. People here are more frustrated and discouraged with the current state of the country's political leadership than at any time I can remember.
It's a grim situation. But since I'm not a doom-and-gloom person by nature, I naturally started thinking about how to benefit from this sad state of affairs from an investment point of view.
The good news is that Canadians (and Australians for that matter) are in good shape. There are several reasons for this. Canadians are used to higher taxes and have experience eliminating deficits under the tough love of then Finance Minister Paul Martin. During that period in the 1990s, Canadians proved they were willing to accept austerity to deal with a national financial crisis. Americans collectively have not shown that kind of resolve, at least not to this point.
Canada has always had a smaller manufacturing base than the U.S. and its economy has been far more dependent on commodities for growth. In years past, this was seen as a negative, placing Canada in the "hewers of wood and drawers of water" category. No more. Their rich resources put Canada and Australia in the catbird seat for the next decade.
It's no coincidence that the Canadian housing market never did deteriorate to nearly the same extent as it did in the U.S. And while the American housing market remains mired in the worst downturn since the Great Depression, the concern in Canada is that the market is so strong that government action may be needed to cool it down. Canada's housing "bubble" actually made the front page of The Wall Street Journal last week.
Canadian banks not only did not melt down during the credit crunch but are now being touted as a beacon for the world financial system. These are the same banks that for years were dismissed as stodgy, overly cautious, and unimaginative. Talk about irony.
Naturally, Canada has already been and will continue to be negatively affected by the decrease in demand from its major trading partner and with the decline in world trade generally but it will be among the first countries to benefit as demand picks up.
So with all that said, what stocks should you buy and in what countries should you buy them? Canada, certainly, and there are many excellent recommendations on the IWB buy list already. Other countries you should be taking a hard look at include Australia and Indonesia.
I have been taking advantage of the recent pullback in commodities by adding to my positions in two mining companies, one headquartered in Australia and the other with extensive operations in Indonesia. They are Freeport-McMoRan Copper (NYSE:FCX) & Gold Inc. and BHP Billiton Ltd. (NYSE:BHP). These are both huge, well financed mining companies that are well positioned geographically with diverse holdings around the world. I'll look at each in depth in my Top Picks for this month.
Freeport-McMoRan (F-M for short) bills itself as "the world's largest publicly-traded copper company." However, it also owns large deposits of gold and molybdenum. The latter is largely used in the steel industry but also has a number of other applications such as feedstock for the production of petroleum refineries as well as for lubricants and as an additive for water treatment.
The company is based in Phoenix, Arizona but has operations world-wide. Its Grasberg mining complex on the island of New Guinea in Indonesia is one of the world's largest single producers of both copper and gold and contains the largest known recoverable reserves of both minerals. F-M began open-pit mining of the Grasberg ore body in 1990 and that is expected to continue until mid-2015, at which time underground mining operations are scheduled to begin. Current reserves are listed as 35.6 billion pounds of copper and 38.5 million ounces of gold. F-M believes there are a lot more valuable minerals to be found in the Grasberg district and is actively conducting ongoing exploration there.
The company operates four copper mines in South America: three in Chile and one in Peru. Reserves there are shown as 32.2 billion pounds. In the U.S., there are five operating copper mines in the western part of the country plus one molybdenum mine in Colorado. The combined reserves of these mines are 28.3 billion pounds of copper and 2.1 billion pounds of molybdenum.
Currently, F-M is playing a lead role in the development of a large mine in the Congo, in partnership with a Canadian company, Lundin Mining (OTCPK:LUNMF), and the Congolese government. Current reserves are listed as 5.9 billion pounds of copper and 0.7 billion pounds of cobalt.
The company recently announced fourth-quarter and year-end results for fiscal 2009. Net income attributable to common stock for the quarter was $971 million ($2.15 per share, figures in U.S. dollars). That compared with a net loss of $13.9 billion ($36.78 per share) for the same period in 2008.
For the full year, net income attributable to common stock was $2.5 billion ($5.86 per share) compared with a net loss of $11.3 billion ($29.72 per share) for fiscal 2008.
Consolidated sales for 2009 totaled 4.1 billion pounds of copper, 2.6 million ounces of gold, and 58 million pounds of molybdenum. F-M said that the numbers for 2010 are expected to come in lower for copper and gold with sales of approximately 3.8 billion pounds of copper and 1.8 million ounces of gold. A slight increase, to 60 million pounds, was forecast for molybdenum sales. The expected year-over-year drop is attributed to several factors including lower grade ore from one of the South American mines, the impact of reduced 2009 mining activities on 2010 leaching operations at U.S. mines, and lower grade copper and gold ore in Indonesia.
This news hit the stock hard. At one point in mid-January, the shares traded over $90. After the results came out, they dropped to as low as $66.03 in intra-day trading. That's when I started buying and I intend to continue adding to my position until the price moves back to the $80 range. The shares closed on Friday at $73.68. The stock pays a small quarterly dividend of 15c a share.
Action now: Buy
BHP Billiton Ltd.
BHP Billiton Ltd. is an Australian-based mining giant that has diversified into other areas such as crude oil, natural gas, and, most recently, potash in Saskatchewan. Its mineral assets include aluminum, silver, uranium, nickel, iron, diamonds, lead, and more. The company operates in virtually every corner of the world, including Canada, and is perfectly positioned to take advantage of both emerging market growth and future inflationary pressures which will drive up the cost of commodities worldwide.
On Wednesday, the company reported financial results for the second quarter of fiscal 2010 (to Dec. 31). BHP said that for the six-month period, profit attributable to common shares, excluding exception items, was $5.7 billion ($1.025 per share, figures in U.S. dollars). That compared to $6.1 billion ($1.101 per share) in the same period of the previous year.
The company said it recorded record sales volumes in three key commodities: iron ore, metallurgical coal, and manganese. "However, lower commodity prices and a weak U.S. dollar adversely impacted earnings compared to the prior period," a statement said.
Looking ahead, the company expressed cautious optimism.
Physical demand for bulk commodities continues to be very strong in most regions following the aggressive destocking during the economic downturn. However, real end demand for metals still appears sporadic.
Commodity markets will continue to be largely dependent on Chinese and Indian demand. In the short term, it is critical to monitor the pace of monetary tightening and the rate of loan growth for commodity intensive sectors in China. We do not expect China to stop lending however reduced credit liquidity in key segments of the commodity market may have a flow-on impact on prices. Real commodity demand in the developed economies remains restrained and the impact of the gradual withdrawal of government stimulus will be a key driver.
In the long term we continue to expect strong growth in demand for our commodities. Any effects on commodity demand due to potential weakness in developed countries are likely to be offset over time by continuing growth as China and India urbanise and industrialise. However, with reduced capital investment in new mining capacity since 2007, supply may struggle to keep pace with demand in the medium and longer term.
BHP has the scale and the financing to ride out long periods of tepid demand and the muscle to negotiate strong pricing when demand is high. And, as mentioned, it's domiciled in Australia which came through the global downturn extraordinarily well and has already begun raising interest rates to cool down a burgeoning economy. This is one of my largest holdings and I consider it to be a strong buy at current levels. The latest quarterly dividend was 42c a share ($1.68 annualized). The stock closed in New York on Friday at $72.13. It trades on the NYSE as an American Depository Receipt (ADR).
Action now: Buy
Disclosure: Long BHP and FCX