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Thursday, July 27, 2006

Back to Basics

By William Trent, CFA of Stock Market Beat

Summary: Higher
Value Line says the following in their latest Metals & Mining Industry Survey:

Thanks to good recent price and earnings momentum, the Metals & Mining (Diversified) Industry continues to be ranked near the top of all the industries covered by Value Line in terms of Timeliness. Equities of companies here, however, have not been immune to the considerable volatility that the stock market has experienced thus far in 2006, arising partly from fears that record oil prices will spark a pickup in inflation and ultimately damage the economy. The Metals & Mining Industry, though, has tended to perform better than many other sectors, supported mainly by strong commodity prices. Another contributing factor has been heightened merger activity, as managements are hoping that the current industry up-cycle will last longer than previous ones, given the rise of China, India, and other developing nations. That said, several issues here are good selections for relative price action for the coming six to 12 months.

PPI data showed that pricing remains strong for most of the basic materials.

Organic chemicals bucked the trend:
But steel looks like it may be rising again (right).

Zinc shortfall was 120,000 t short of demand for the first five months of the year, because of higher consumption of the metal used to galvanize steel, the International Lead and Zinc Study Group said. Watch List Companies

Freeport-McMoRan Copper & Gold Inc. (FCX) reported second-quarter profit more than doubled, as higher prices helped offset a shortfall in copper production at its vast Grasberg mine in Indonesia. Net earnings jumped to $367.3 million, or $1.74 per share, from $175 million, or 91 cents, in the same quarter of 2005. In June, Freeport said copper production at Grasberg would be below estimates because of an unusual amount of clay in the section being mined. Glamis Gold Ltd. (GLG) finalized an agreement with the Guatemalan Government to begin payment of income tax effective July 1, 2006. The temporary exemption from the payment of income tax would have expired at the end of 2007. The earlier payment of the income tax will accelerate improvements to services and infrastructure in areas near the Marlin Mine and complement the employment and economic benefits currently being provided (2005 activity details can be found on the Glamis website under Properties-Marlin-Reports/Technical Items-2005 AMR). The funds will also be used for increased capacity building within government ministries with mining responsibilites. Assuming $600 gold and $10 silver prices the income tax will be approximately $4.8 million in 2006 and $10 million in 2007 based on current production guidance.

Sasol, Solidarity reach deal, three-day strike ends

Other News

Xstrata of Switzerland said it would increase its all-cash bid for the Canadian mining company Falconbridge a second time, by 7.2 percent, to 19.2 billion Canadian dollars ($16.9 billion).

World No. 2 gold miner Newmont’s output will be slightly down in 2006 and 2007 before it begins to rise in 2008, CEO Wayne Murdy said, adding that he expected gold prices to remain strong for years.

Palamin reports 8% rise in H1 copper production Falconbridge 2Q Copper Output Up 6% At 107,500 Tons BHP’s carbon-steel materials unit, which produces iron ore, coking coal and manganese, was the largest contributor to earnings in the six months ended December, earning $2.3 billion, or 34 percent of total pretax profit. Iron ore output has fallen for two straight quarters for BHP before this one, partly due to wet weather and as its expansion works limit production. Copper production rose 16 percent to 311,700 tons in the three months ended June 30, it said. Nickel output rose 31 percent to 41,600 tons. Its metals production rose as last year’s A$9.2 billion ($6.9 billion) acquisition of WMC Resources Ltd. made BHP the world’s third-largest nickel producer and one of the biggest copper producers.

Teck Cominco reports record net earnings of $613 million for the second quarter

Inco produced 140 million pounds of nickel during the quarter, which was 26% higher than a year-earlier production. Cash cost of sales for nickel unit, after by-product credits was well below at US$2.08 per pound, 26% lower from costs for prior-year quarter.

Global miner Rio Tinto Ltd has boosted its iron ore production to record levels, after fighting back from a cyclone-affected first quarter to take full advantage of a recent iron ore price hike. The miner produced 33.32 million tonnes of iron ore in the second quarter, up four per cent on the previous corresponding period.

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