Despite the tight schedule of events at the Mines and Money conference, billionaire mining legend Robert Friedland found a moment to yell at a photographer during his presentation... While snapping photos from the floor, the photographer had parked himself in front of Friedland's teleprompter. And Friedland was on a roll...
Most mining companies are little more than a management team and a piece of land (which may or may not have minerals). They explore and assess their property... But they don't produce anything, so they don't have any earnings. These companies exist solely on their ability to raise capital. And they do so at conferences like this one. Given the importance of the process, you'd think they'd produce exciting presentations, heavy with visuals and laden with promises of huge returns.
Most don't... Most mining executives stand before the attendees and drone on in monotone using complicated industry jargon. They tend to fill their slideshows with barely legible numbers. Most don't even display their stock's ticker symbol where you can see it.
A Robert Friedland presentation, however, is a little bit different...
Friedland founded the mining company Ivanhoe Mines and made a fortune of more than $2 billion in the junior mining field... and he knows how to work a room. His presentation at this year's Mines and Money conference in Hong Kong was exciting and easy to follow (even for a mining industry novice like myself).
Friedland was pitching Ivanhoe's Oyu Tolgoi mine project in Mongolia. He dubbed it "the Canada of Asia," likening the Asian country's bounty of raw materials to Canada's renowned natural resources. Ivanhoe started the project 11 years ago. And it's just now coming to production. It's a testament to the huge capital commitments Friedland secured and long-term time frame of the mining industry.
The project currently employs 15,000 people, performing 130,000 man-hours per day of work. Merrill Lynch believes the project will eventually become the world's largest copper producer. It will also produce 650,000 troy ounces of gold and more than 3 million ounces of silver.
In addition to maps of the project, Friedland showed a six-minute video of the community his company built to house its workforce in the middle of the Mongolian desert. When they arrived 11 years ago, there was nothing but camels. Today, it's a functioning city... complete with bus stops, dining facilities, and electricity. It is fast-becoming one of the country's largest cities.
By February, Oyu Tolgoi was about 73% complete. Full production is slated to begin for next year. Company official projects it will produce 100,000 tons of ore a day. The high-end estimate is 160,000 tons of ore a day. Friedland, ever the salesman, told the audience that Ivanhoe engineers say the project could produce 200,000 tons of ore per day. (That's because the ore deeper in the ground is soft and won't require much work to extract, he said.)
The deposit could sustain production for between 60 and 100 years, according to Friedland. He showed a to-scale image of the deposits floating above Manhattan... They covered almost the entire island. (The second mineshaft at the project is one of the tallest structures on Mongolia. You could drop a Greyhound bus down it.)
Over the years, Rio Tinto, one of the world's largest mining companies, spent $4.5 billion to acquire 51% of Ivanhoe. It also gave Ivanhoe $1.8 billion in financing to develop Oyu Tolgoi. Rio Tinto needs the metals... Its production fell 15.7% in 2010 and 23.3% in 2011. Iron-ore revenue comprises 85% of Rio's total sales (almost none come from gold).
Friedland said Ivanhoe is undervalued today, but consider the source... You should always be skeptical of great marketers like Friedland. But the Oyu Tolgoi project looks like one of the world's great "trophy" resource assets. When you can buy trophies during major "fire sales," you can make extraordinary returns.
For example, after the 2008 credit crisis (which obliterated mining shares), Ivanhoe Mines traded for less than $3 per share. Two years later, it traded for $27 per share (a ninefold increase). It's currently trading for $17 per share. The stock is worth putting on your "wish list." Another crisis in mining stocks might knock shares down to around three bucks again.
Before rushing to buy junior mining stocks, consider what S&A resource expert Matt Badiali wrote in today's Growth Stock Wire...
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Today, junior mining stocks are close to breaking back below their 120-day moving average (DMA)... a sign that the sector is struggling. |
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As you can see in the chart above, Toronto's Venture Exchange Index peaked in late February... and has since fallen 100 points. The blue line is our 120-DMA. This simple technical indicator works by averaging, in this case, 120 days of closing prices. |
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By plotting this indicator, we filter out market volatility so we can gauge the general trend. When the market is trading above its 120-DMA, we consider it to be in a bull trend. When it trades below its 120-DMA, we consider it to be in a bear trend. Keep in mind: there's nothing "magic" about this indicator... it simply gives us a rough idea of which way the "trend wind" is blowing. |
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While I believe the Venture has found a bottom... and while I'm finding some good values in the sector... we can't be 100% certain what will happen here. If you own some small resource stocks, keep holding. But before we turn into raging bulls on the sector, we need to see this index turn away from its long-term moving average, away from its recent lows, and start working higher. |
The junior mining sector is one of the most volatile in the world. When the trend is up, these stocks can soar thousands of percent. When the trend is down, they can quickly fall in half, or worse.
2011 was a terrible year for the junior mining sector. I owned several junior mining stocks through the 2011 downturn. I still own them. When a stock you own falls by 60% or 70%, a 30% rally is cold comfort...
More bullish news for housing... Permits for homebuilding approached a 3.5-year high in February... New building permits increased 5.1% to a seasonally adjusted annual rate of 717,000 units last month – the highest rate since October 2008, according to the U.S. Commerce Department. Analysts were expecting a 690,000 unit pace... "The data provide further evidence of a rebound in housing activity. Housing is being nursed back to health, but getting out of rehab takes time," said Eric Green, chief economist at TD Securities in New York.
True Wealth editor Steve Sjuggerud has been espousing his bullish view on housing since the start of the year. He summarized the reasons he's bullish in the March 7 DailyWealth...
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Because you're buying a real asset with leverage (the mortgage), you now have a cheap, 30-year bet AGAINST the U.S. dollar. |
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You now have a bet on an asset that is the most affordable it's been in the history of America... |
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... that you paid-next-to-nothing thing for, relative to its value or its replacement cost. |
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Now you get to live in it for a few years (so you have no "rent"). |
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And then you can sell it with a (hopefully) good-sized TAX-FREE capital gain... as the real estate market simply goes from bad to less bad. |
The National Association of Realtors released a bit of bearish housing news today... The realtor trade association said existing home sales fell 0.9% to an annual rate of 4.59 million units last month. That's after January's sales pace was revised up to 4.63%.
Also, news service Reuters published this note... Investors bought 23% of the homes last month. First-time buyers only accounted for one-third of transactions.
Steve has said several times, the statistics – including price – for the housing market could continue to get worse. He's still bullish. Housing is cheap on an absolute basis. And the rental yields you can currently get (some of my friends are getting around 7% net of management fees) are higher than almost anything else in today's market.
We'll leave you today with words from billionaire founder of Oaktree Capital Management, Howard Marks. Marks is a great investor... His firm put $500 million to work one week in the aftermath of the 2008 crisis. Like most great investors, he's not afraid to stand alone on an investment.
In a recent letter to investors, Marks reiterated his distaste for consensus. He reminded us how quickly markets forget... and how wrong the consensus normally is...
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The tendency of investors to overlook or forget the past is noteworthy. So is their habit of succumbing to emotion and swallowing tall (but potentially lucrative) tales. In particular, people tend to forget the cyclical nature of things, extrapolate past trends to excess, and ignore the likelihood of regression to the mean. |
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The tech bubble may not recur anytime soon. No online grocer may ever again sell at 200 times revenues. There may never be another CDO-squared or SIV. Those aren't the things that matter. |
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But there's sure to be another cycle, another bubble and another crisis. There'll be another time when people overpay for exciting investment ideas because their future appears limitless, and then a time of disillusionment and price collapse. There'll be another period when leverage is embraced to excess, and then, consequently, a period when it gets people killed. And there'll certainly be another time when people can only imagine the possibility of gain, and then one when – after huge sums have been lost – they can think only of further declines. |
New 52-week highs (as of 3/20/12): V.F. Corp (VFC), Westport Innovations (WPRT), Abbott Labs (ABT), Cisco (CSCO), BLADEX (BLX), Clean Energy Fuels (CLNE), and Philip Morris International (PM).
One subscriber started compounding a World Dominator decades before Dan coined the term... How did he do? We'd love to hear about your greatest compounding successes. E-mail us at feedback@stansberryresearch.com.
"Not so long ago you put up a chart of FRO and talked about the cyclical nature of the shipping industry. I immediately looked as some charts did some research and sold 2 $5 puts for 0.15 a share. I was hoping to get put into the stock and did. At the time the stock was just under $5 a share and today it is up over $8 a share. I plan to sell calls on this stock Monday morning.
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Goldsmith comment: In case you're wondering how "LP" did on his ExxonMobil stock, check out the chart below. That's what buying and holding a World Dominator for 40 years will get you...
Regards,
Sean Goldsmith
Hong Kong
March 21, 2012
Bugger off!... Making a fortune in "the Canada of Asia"... The world's lowest-cost coal producer... Bullish news for housing... Lessons from Howard Marks... One lucky subscriber...