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The following is the underlining thesis of the portfolio of The Apprentice Millionaire Plan
Donald Coxe, the strategist for the Harris Bank has for several years advised clients to invest in all things that the Chinese and Indian economy needed to satisfy millions of newly minted middle class consumers.
He correctly forecast that “this time it's different" meaning the commodity boom was not going to be followed by a bust. Oil, copper, lead, nickel and uranium haven't collapsed but moved ever higher.
Jim Rogers has cited the economies of China and India as the reason for a commodity “super cycle ". a term you can see being picked in in the media.
Coxe has told investors to buy the resource stock companies and hold on for the takeovers that the new cycle would produce. We have seen International Nickel and Falconbridge vanish but more money will be made in other producers.
Canadian oil sand owners may receive takeover offers from the big U.S. and international oil companies seeking to replace their declining reserves. The major U.S. producers have not believed oil prices would remain as high as they are and did not spend enough to keep their reserves expanding. As a result of that underinvestment they will be looking to buy up Canadian oil sands projects as a way to quickly book extra reserves.
What is the difference “this time"
A summary of reasons can be easily set out, it is Economics 101
1) Lack of Supply
Underinvestment in new supply (new mines) for years when commodity prices were low.
This means that new mines ,taking years to build , won't lower commodity prices many time soon because there aren't enough new supplies coming on stream.
You can see this in the price of uranium which has gone from $10 to $85 in less than five years. There are a hundred junior miners looking for uranium now (and two hundred changing there name to add Uranium into their letterhead). Permitting for new uranium mines takes years - after the viable uranium site has been found. As at 2007 there are few producers are few miners with near term potential to reach production.
Australia, home to significant deposits does not permit uranium mining in several key areas and this has led to underinvestment. If the restrictions are listed it may be years before new supply is on the market.
Cameco had a huge mine site at Cigar Lake ready to begin production but flooding at
Cigar Lake has postponed that production for up to seven years. This is tremendously important because it holds Cameco's earnings down and keeps supply tight. Cameco is tied to contracts- for a much as half of its production - signed years ago at prices far below the market,
The current high commodity price has helped junior producers like SXR - Uranium One and Denison secure high returns at prices that are set by the market. Cameco may have to buy productioin to replace Cigar Lake but SXR.Paladin,Denison and larger players like BHP Bilton and Rio Tinto are also looking at the same time and at the same targets. This has driven up the share prices of companies with reserves that have production potential.
2) Expansion of Demand
China has expanded its economy at 9-10% for more than five years. India has now approached that growth rate. Both nations are building their economies by huge amounts of money spent on infrastructure - roads, energy production and telecommunications. This expansion and the export based economies have resulted in millions of jobs and thus millions of new middle class consumers.
China is scouring the world and India is competing with it, to acquire oil to feed the demand
for oil supplies. The same demand from China and India is responsible for the continuing demand for metals.
To see where this demand may lead you have to consider that current usage in China is one thirteenth of the that of the U.S. emerging markets are still only at the first stages of expansion. Their demand has yet to be calculated and is likely to result in continuing high commodity prices.
Electricity demand will be met ,in large part by China's own coal supplies. It is estimated that China opens a new coal fired plant every day - and most without pollution controls. Electrical transmission requires huge amounts of copper cable as well as steel transmission towers etc, etc, etc.
China opens a billion dollars of highways every month - and those roads are being filled with new automobiles and trucks that consume oil and gas. The cars and trucks require copper, steel, nickel etc ,etc, etc.
Nuclear Power
France is the only European country not in fear of Russian demands and control over gas and oil used to produce electricity because it has a majority of its needs met by nuclear power plants. Germany is now reconsidering its plans to close nuclear plants.
China will open two new nuclear plants a year for the next ten years.
There are 30 nuclear power plants being constructed in the world and more being considered as a consequence of the concern over greenhouse gases being produced by gas fired power plants.
Profits in Uranium - now and more to come
Lack of investment in uranium mines has resulted in the surge of demand for uranium but no additional supply. The laws of supply and demand have resulted in price increase every year since 2002. The current price of $85 a pound brings great profits for the few producers who are selling at market price - Denison, and SXR will become the "go to" stocks for investors. Near term there are other mining companies like Energy Metals that will capture high prices and investor attention.
Profits in Base Metals
Imagine the "wants" of millions of consumers in the developing countries. Coxe has said that millions are now seeking what every North American enjoys - and each consumer item from cars to washing machines requires base metals. Phelps Dodge . BHP Bilton, Rio Tinto and CVRD are majors now profiting and likely to continue, Smaller producers like FNX, Fronterra Copper and Breakwater Resources offer more leverage to the pricing in today’s market.
Peak Oil ???
The doomsayers have predicted that the oil was running out and oil would be at 100 dollars a barrel. Prices went to $78 and then retreated. Matt Simons book “Twilight in the Desert" details his review of engineering reports about the massive middle east oil pools. He concluded that production is or has peaked and prices will be bid up as China competes for a scarce resource. China has been expanding trade relations in Africa and exchanging its economic help and foreign aid for all manner of commodity supplies.
OPEC members counter that supplies are plentiful. The current price of $60 a barrel has a certain terror and political uncertainty premium but how much that is- is uncertain. The U.S. is unhappy with Venezuela and Iran - but continues to buy millions of barrels from each country, each day. They have no choice and the world has to pay the price the market sets.
Majors like Exxon, Chevron and Petro-Canada will do well but more aggressive smaller companies like Talisman and Devon Oil are likely to have the new discoveries that will have more impact on their share price.
Natural Gas may exceed oil potential
In the fall of 2006 and winter of 2007 the weather will determine if the AMP plan of a pool of small producers will result in outsize profits. . We are anticipating a surge in natural gas prices that will benefit companies that are leveraged to natural gas. Companies like Chesapeake are "in waiting” for this turn. Canadian juniors like Vero, Crew and Cork may have sharp increase as investors return to this sector.
At the present time however, low prices resulted in natural gas producers lowering their exploration budgets. Overtime this will lead to less production and thus a shortage of supply. We may see much higher commodity prices within the next nine months - and profits follow those prices. Stock prices anticipate moves in profits - build your watch list now.
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