Non-Precious Metals: A Straightforward Story of Supply and Demand

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Includes: MXI, PCP, VALE
by: David L. Wolf

I have a strong personal basis towards products that are in great demand and limited supply. Obviously the energy sector represents an example of this. Another of my favorite sectors happens to be the non-precious metals, particularly the ones that are tied to industrial growth or specialty growth.

My favorite company in this space at the present time is Titanium Metals Corp. (TIE), as I feel it is somewhat undervalued, has very strong insider ownership and is the largest titanium producer in North America. I hold a long position in this particular stock.

tie

The other metals that I am particularly interested in include copper, zinc and steel as they are all crucial for the building industry. Considering how much building is going forward in developing countries such as China, India, and Dubai, I would anticipate a continuing strong demand for these materials. In this particular area, I am long Companhia Vale do Rio Doce, (NYSE:RIO), which is a large Brazilian diversified mining company with a strong balance sheet and revenues that exceed $19 billion dollars a year. Rio’s net income has grown 150% from 2004 through 2006, and still sells for less than 10 times forward earnings.

rio

There are a number of ways to be involved in this sector including mining, steel producers, special metal fabricators, and a number of specialty plays. One can even use an ETF as there are several available that focus on the materials and the developing countries, for example, iShares S&P Global Materials, (NYSEARCA:MXI), and perhaps others that are primarily focused on global commodities.

While there are those who do very well by actively trading these commodities, as well as oil and gas, this takes a different mindset than I have. I personally prefer purchasing strong stocks, primarily for the long term. For some individuals with a lower risk tolerance, they may be better served by ETF’s or mutual funds which are focused on these particular commodities. While the returns might be slightly less, one has the additional diversification by holding a basket of different companies.