The debate last night was relatively boring and gave resource investors little to cheer about. Romney talked about commodities very little although he did mention coal, natural gas and oil and his commitment to those resources. It was not a knockout punch by either of the candidates, although we would say that President Obama won the debate. It will be interesting to see how this debate performance for the two candidates will affect the polls moving forward and into the close of the election period. We would say that a Romney win would be bullish for North America energy as he wants to create a continental union to work for energy independence between America, Canada and Mexico. Now that sounds like an idea which we need to focus on as it would keep our money close to home and help build up the economies of some of our largest trade partners and add further economic develop to our continent as a whole. A stronger and more developed Canada and Mexico would not only help their economies, but America's and the world's too. That was one of the ideas we really liked last night and wish that the candidates had spent more time discussing this topic over the course of the last few months.
Oil & Natural Gas
In yesterday's article we pointed out that Canada's action would not be good for investors in both the long-term and short-term as it would deflate some of the premium given to the E&P plays as it has become obvious that the government is against foreigners coming in and pillaging the Canadian resource sector. One of the losers yesterday was Nexen (NXY) as investors fretted whether the government will block the acquisition of the company when it comes up for review. Shares fell $1.26 (4.96%) to $24.14/share and volume surged to 41.8 million shares as investors reevaluated the risk/reward on this one and those who play the takeover game had to adjust their holdings based on the probability of the deal getting done. Sometimes it makes sense to get cute for a few cents per share when a takeover is a sure thing, but when that is called into question the risk is to great and spreads (between buyout price and current stock price) increase. We think that this deal will be an important one to watch, and if it is not approved then it shall indicate to the market that the Canadian market is closed for business as it pertains to the Asian state sponsored entities.
Freeport-McMoRan (FCX) reported earnings yesterday and they did come in a bit below the consensus. We were a bit surprised that the company's management was as optimistic as they were regarding Freeport's prospects short-term. Like most mining companies, Freeport is seeing higher mining costs take their toll and there was a shortfall on the gold production as changes were made in Indonesia. Based off of this report we suspect that shares will dip below $40/share in the near future and take a few steps back before it begins to take any forward.
We watched yesterday as Agrium (AGU) rose smartly to set a new 52-week high and continues to be the leader in the potash space. Shares traded higher all day, and hit a new high of $108.13/share before finishing the day at $107.94/share and rising $3.54 (3.39%). In all fairness to the company's peers, they are not riding the potash segment of the business higher, but rather are rising due to their diversified portfolio of businesses in the agricultural sector. There are still people thinking that hedge funds will swoop in and split the company, but we doubt this. Investors rarely rebel against management of a company whose stock has performed as well as Agrium's has, especially when that company has outperformed the sector to the extent they have. If you want agriculture exposure, you want Agrium exposure.
Peabody Energy (BTU) gave us the earnings report and comments we had been waiting for, and for those who questioned our comment of the company being a better buy at $29/share than $19/share, look at where we are and what we now know. Shares rose $3.06 (11.82%) to close at $28.95/share and volume spiked to 34.1 million shares as the company beat revenue expectations and reported solid bottom line results. The company seems bullish moving forward, and as they said last quarter this quarter was lower but it appears that management seems to be indicating that we may have very well bottomed as they commented that Europe is looking up, prices have stabilized in the US and they are even seeing utilities switch back to coal from gas and they expect China demand to increase as their latest infrastructure spending works its way through the economy.
We have watched with interest over the past week or two as Vale (VALE) has been stuck in a trading range and appears to be building a base to move higher. We think the move is higher anyways, and expect the stock to do as it has before and rise to the $19-20/share area and possibly as high as $21/share. It will take some bullish news to push the shares higher than that, and we would look to China to provide that spark. Looking at the market right now, it appears that iron ore prices may have already bottomed, which does not mean they are going to go higher right away but that we have seen the low and can tread water around these levels before moving higher as infrastructure spending in China and the rest of the world recovers as the world economy begins to grow once again.