Global Infrastructure, Alternative Energy and the Cost of Commodities

by: Marc Courtenay
We have long held that the infrastructure needs of nations such as the USA, China, the European Union, Russia and India would put massive demands on specific material providers and open the door for mega-contracts for companies that provide infrastructure services and products.
Frankly, I had no idea that we were entering "The Age of Infrastructure" as one renowned money manager recently entitled it. That "Age" has begun with a vengeance and the investment possibilities are making a lot of us see green in a big way.
Dorothy Kosich, writing on behalf of, reported about a speech given recently that underscores this investment theme and focuses light on which sectors will be the main beneficiaries.

A large, more urbanized population with an improved economic status in China, India and other developing nations is igniting the age of infrastructure-including massive long-term projects that may build or expand roads, airports, transportation, housing, water, utilities or even the information highway.

U.S. Global Investors asserts that "infrastructure has become a topic of choice for politicians around the world because they can generally count on the support of the electorate. In the case of emerging markets, it is very encouraging that many political leaders openly acknowledge that future economic growth in their countries depends directly on infrastructure improvements.

Infrastructure expansionist fever is even catching on in the United States, Canada and other industrialized nations of the world with a mind-boggling global $41 trillion spending program between 2005 and 2030.

And, it all necessitates the unprecedented global consumption of record amounts iron ore, cement, copper, and other physical metals, no matter how bleak the U.S. economy.

In a keynote address to the Denver Gold Group Asian Pacific Forum in San Francisco Tuesday, U.S. Global Investors CEO and CIO Frank Holmes preached the gospel of global infrastructure expansion to a very attentive audience of fund managers, institutional investors, analysts, and mining executives, all attuned to its benefits to international mining.

Holmes stressed the importance of broader cycles, such as the influence of Kuznets Emerging Market Cycle, which drives commodity demands-in trying to analyze current business cycles. Kuznets, an economist who specialized in developing economies, in particular emphasized and tracked the lengthy cycles of infrastructure development.

Holmes suggested a global megatrend of globalization, urbanization and wealth creation is now generating "a global infrastructure boom on a massive, intractable scale." And, he added, "Megatrends increase the use of commodities, especially infrastructure, which creates sustainable jobs and massive use of commodities."

A general public, which previously could not have cared less about iron ore or copper, may suddenly relate to the need for iron ore mines to build bridges, or the need for iron ore and zinc to manufacture steel for buildings.

At the same time, Holmes hints that a political and economic power shift may be occurring from today's current G-7 industrialized nations to what he calls the" E-7", emerging nations-including the BRIC countries, along with Pakistan, Mexico and Indonesia. He also has noted a 70 to 90% correlation between the E-7 and copper and oil.

A U.S. economic slowdown will not harm the E-7 nations, whose growing domestic demand is capable of economically decoupling from or minimizing the U.S. economic woes.

For instance, as the U.S. housing market endures the shock of a mortgage and housing crisis, Holmes emphasized that most E-7 nations have no mortgage market, no sub-prime debt, save more and have more cash to spend. For instance, Asia has five times the homes under construction in the U.S., and 80% of those Asian homes are being built in China.

Asian electricity generation demand is 32% ahead of the U.S. as billions of people also seek electricity to power the same technology available in nearly every household in industrialized nations.

Chinese mobile cell phone subscribers now exceed U.S. mobile subscribers by 4.2X, Holmes noted. Meanwhile China Internet subscribers surpass the total Internet subscribers in the U.S.

A new paradigm is emerging, Holmes asserted, as developing nations now enjoy stronger financial positions, along with improved debt rating."

Who Will Benefit and "See Green" as Infrastructure Expands?

According to Mr. Holmes, global mining will be a beneficiary of this new economic paradigm, Holmes advised. However, he explained that mining has scared away investors who tire of operating disappointments and delays, or excessive optimism about the ability of new discoveries and projects to actually consistently deliver mineral production.

Mining property ownership disputes; major exploration disappointments; forex issues; social and environmental concerns or delays; disappointing feasibility study results; and major project delays, all are threats that cause investors to lose faith in a mining company, sell shares, and never return, he warned.

Holmes reportedly suggested that volatility drives away institutional investors. According to Ms. Kosich, he advised mining CEOs to ask themselves if their mining stock is more volatile than the AMEX Gold Bugs Index.

If the answer is in the affirmative, a mining company may be in danger of driving away its shareholders. The AMEX Gold Bugs Index is the structure behind the Market Vectors Gold Miners ETF (NYSEARCA:GDX).

U.S. Global Investors considers three key factors when picking a natural resources stock, Holmes said. They include reserve growth; production growth; and free cash flow growth.

Despite Holmes' popularity with gold bugs, he views gold as portfolio insurance, advising that gold be considered "because people will do dumb things" that will necessitate rebalancing portfolios. He suggested only 10% of a portfolio should be invested in some form of gold or gold equities.

Finally, Holmes advised his audience to pay more attention to the relationship between gold and oil which has a five year correlation of more than 90%. "Oil is the largest single influence of the price of gold," he concluded.

You wouldn't have known that on Monday, June 23, 2008, when the price of gold plummeted over $17-an-ounce to around $883 while oil went up above the $136 mark.

However, it was a good day for both oil and gold stocks, especially the big players. ConoccoPhillips (NYSE:COP) went up 3% to $95.54, which inspired us to take profits on a old position we were sitting on.

Bellwether gold stocks such as Barrick Gold (NYSE:ABX), Goldcorp (NYSE:GG), Agnico-Eagle Mines (NYSE:AEM) and Yamana Gold (NYSE:AUY) all had an "up" day, with GG leading the way up over 2% in one session.

Someone Special Just Returned to Gold

My colleagues at Casey Research were happy to see one of the most respected analysts return to the gold-fold after being absent for awhile. Here's how they reported it Friday:

It was less than two months ago that, with much flourish, Dennis "the Guru" Gartman loudly announced he was selling all his gold due to something he had read in the entrails of his technical analysis. That, and because he had viewed a TV commercial encouraging people to sell their old gold jewelry. Together, as he explained it at the time, these inputs led him to a dramatic change of heart about the yellow metal.

Well, this week, he has reversed course yet again. In his own words…

Turning then to gold and the precious metals, we have been out of the gold market for a couple of weeks, having idiotically tried to sell gold short on our last entry. That trade proved to be a complete and utter mistake, making us look more than merely unwise; it made us look foolish.

That was not the first time we've made a foolish, rule-breaking trading decision, and in all likelihood it shall not be our last, for we are but human; we are not machines; we are not Spock. At this point, however, it seems rather clear to us that the trend of the dollar is down; that the trend of the commodity market is up, and that the proper course of action is to once again be long of gold... and so we shall be. It's good to be home again."

While his candor and self-effacement is commendable, I can't help but note that the rationale he provides for changing his mind again contains not even one hard data point in support. (That is the sort of thing that normally drives our own Bud Conrad up the wall.)

Even so, while Gartman's star may be somewhat tarnished by his unusual flip flop, I suspect he remains influential in certain circles and so his quick change in recommendation is certain to get noticed. It certainly did by us."

Frankly I'd rather listen to Ian McAvity who writes "Deliberations on World Markets". He recently wrote to us, "I've been looking for a lower test [of gold], sub-$800, but with [the technical] pattern formed in the last month, I would suggest that a move above the initial rebound from the low, $935, could suggest another try at the March highs at $1034".
Ian wasn't suggesting that this would happen right away, but like several other "old-timers" he suspects it will happen before the end of the year. Like myself, he is concerned that a "down and dirty" stock market correction (which might be the second leg down of this smelly bear market we are in) might drag mining stocks and precious metals producers down with all the ships in the harbor.
Thus he cautions, and so do we, that you not be overexposed, especially to the high-flyers like GG and AEM. Frankly, from a fundamental and "valuation" basis, I'm much more comfortable in AUY or ABX right now.
Speaking of Infrastructure, some of the "Green-style Companies" like Veiola Environnment (VE) and Suntech Power Holdings (NYSE:STP) stand to benefit greatly from this amazing age and movement. So do steel-recycling companies like Nucor (NYSE:NUE).
By the way and holy guacamole, did you see what First Solar's stock did on Monday! It was up over 7% in one session after analyst Vishal Shah of Lehman Brothers raised his price target to $335 from $280, implying an expected return of 25 percent over Friday's close of $268.22.
Shah said greater output from Malaysia could add roughly $30 million to the company's second-quarter revenue. The company should benefit from a more favorable exchange rate and a resolution of solar incentives in Spain.

He also predicted a possible announcement of a U.S. contract ahead of the company's "strong" second-quarter results, scheduled for release in July. I recently interviewed a sales representative from Suntech and hope to have much more to say about that promising solar energy company in the weeks and months ahead.

These are the most exciting times ever for both infrastructure and alternative energy, and frankly friends, the fun has just begun.

If you want income from the infrastructure boom, you will want to check out the Macquarie Power and Infrastructure Income Trust (OTCPK:MCQPF) which sports close to a 12% annual payout, paid on a monthly basis.

A subtly more conservative infrastructure income play with close to a 9% yield is the Macquarie Infrastructure Co. Trust (NYSE:MIC) which mainly invests in infrastructure projects in the U.S.

Disclosure: Long