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Discovery Investing: Who's Buying?

Michael Berry
0 Comments|October 30, 2006

Base metals stocks set to trade higher thanks to continuing bull run in industrial metals.

Base metals stocks set to trade higher thanks to continuing bull run in industrial metals.

Right now, just about everybody. That is why I am still bullish on the resource sector - in particular the metals and energy stocks. Take the industrial metals for example. In spite of a very strong pullback in the post May 11 commodity cycle break, industrial metals have maintained their momentum.

On October 10 I wrote, "Global metals demand is predicted to climb by 4% in 2007, compared with between 5.0 to 5.5% this year, Briggs said". Personally I believe these markets are telling us something. Are you listening?

Stockpiles meanwhile have fallen to critically low levels in 2006, as frequent strikes by workers at vital mines in Canada, Chile and New Caledonia have combined to create massive production deficits, whereby demand outstrips supply."

Monday, zinc and lead traded at all time highs. Now buyers are beginning to recognize this trend. Private equity investors, according to Canada's National Post, may be bidding for producing copper companies that have growing free cash flow. The Post claims that copper prices should strengthen in the fourth quarter of 2006. Futures markets predict copper at $2.65 by 2009 with support at $2.91 today.

Among the Canadian base-metal companies named in the article are Aur Resources Inc. (TSX: T.AUR, BullBoards), Inmet Mining Corp. (TSX: T.IMN, BullBoards), Hudbay Minerals Inc. (TSX: T.HBM, BullBoards). Aur executives report that the company has been informally approached by private equity firms. Aur will boast a cash balance of $622 million by year end 2006. That represents 30% of the company's market capitalization. You might consider options on these or establishing a small portfolio of each. At present Aur appears overbought so wait for a break if possible.

These stocks as well as Teck Cominco Ltd. (TSX: T.TCK.B, BullBoards), a stock I favor, have already have started to climb.

The Post says, "Traders are guessing that at least some of the funds from the recent takeover of Inco will flow back to other base-metal stocks." To these stocks I must add Candente (TSX: V.DNT, BullBoards) for its Cañariaco deposit in Peru as well as Quaterra Resources (TSX: T.QTA, BullBoards) for its potential copper position at Yerington, Nevada and of course our old friend and wealth creator par excellence, Quadra Mining (TSX:.T.QUA, BullBoards).

One final note: the Goldcorp (TSX: T.G, BullBoards) acquisition of Glamis (TSX: T.GLG, BullBoards) is beginning to look like it will come to fruition. Many people forget that there are presently (almost sure to increase) four billion pounds of zinc in resource at Glamis' Peñasquito property. There are also approximately two billion pounds of lead. The in-situ value of these metals today alone (not including the gold or silver) is approximately $8 billion. Further I believe that Goldcorp will also acquire the Glamis position in the San Nicholas massive sulphide (jointly held with Teck). There is significant value for Goldcorp in the Glamis purchase. It will be shown, before long, that the acquisition of Glamis will be accretive and not dilutive in the forthcoming leg of the industrial metals cycle.

Michael Berry has been a portfolio manager for both Heartland Advisors and Kemper Scudder, where he successfully managed small and mid-cap value portfolios. He was a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia and has also held the Wheat First Endowed Chair at James Madison University. Dr. Berry is now a proponent of what he calls "discovery investing."

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