|
|
Sector Rotation Performance
Spreadsheet excerpt
-
Relative positioning of most mining sector groups out of
222 possible sector groups and their 1 year weighted average
performance in percentage (for the week ending Nov
14, 2008).
Mining stocks have dropped in
ranking as funds/investors have liquidated positions based
on price and not valuation. Mining gold, silver, and
non-ferrous sector groups are at the bottom of sector
performance relative ranking and are thus now positioned for
above average performance going forward.
For brevity/display purposes only the top
1 sector is
displayed then the
bulk of the sectors have been annexed up to the bottom 35
where our subject sector sub groups dwell. For full list
click
here. |
|
Commodity Super-Cycle
|
Click here to enlarge 10 Yr
weekly chart of Reuters CRB Index |
Recent commodity weakness
could be explained merely as a huge sell-off within a longer-term bull
market in basic materials, which has years to run. And while
inflationary conditions are generally the most favourable for
commodities, scholars note that this asset class did perform fairly well
during the extreme deflationary era of the 1930s (analysis
of that era found here). The Reuters CRB Futures Index is a
bellwether physical commodities indicator, the 10 year weekly
chart (seen to the left) shows the long uptrend from 2002 - 2008 and
ferocious break down within the last few months. Due to the inordinate
amount of monetary inflation experienced in the last eight years it is
unlikely that the current downturn will retrace all, or even most, of
the preceding gains.
Mining Sector Rotation
November 14, 2008 Sector Rotation
Chart Demonstrates Opportunity That Exists Now
Commodities and material stocks over the last several weeks have
experienced one of the steepest sell-offs ever seen as talk of
China growth worries and the reality of global economic
recession spreads. Markets are about dynamic equilibrium, and
are in a constant state of flux as they attempt to maintain it. Sector Rotation is always happening, both between and within
sectors. There are many forces at play - both micro & macro. A
well balanced portfolio will have exposure to all sectors - the
key is the weighting and timing. The stock market is a
discounting mechanism; industry groups are priced now according
to investor’s perception of future company earnings and fortunes
within the various groups. Capital flows in and out of the
markets according to anticipated fortunes and momentum. The
flight from commodity based stocks has been breathtaking as fund
manager liquidated positions and appears to have created
opportunity. Sometimes things just get overdone; don’t
misinterpret commodity stocks downward movement to be
proportional with lack of demand for the commodity -- now would
be the time to dive in as the foundation for the next boom in
commodity prices is being sown and the related commodity stocks
will react in time. You need to be invested in the sector in
order to participate and a patient investor can now buy stocks
and/or options at attractive prices. The relative ranking of the mining sector has
steadily fallen from week to week and now sits at a low relative
to almost every sector tracked (as illustrated in adjacent
Sector Rotation Performance Spreadsheet excerpt to the right).
Demand Side – China and the
World. The demand for key elements will remain high for
years to come. Contacts of this writer that are currently in
China, post-Beijing Olympics, are able to confirm a dynamic and
growing working class that have just started to get a taste of
the good life and the trappings it entails. Obviously China is
not immune economically; China’s economic growth slowed to 9% in
Q3 from 11.3% a year ago and export growth that topped 20% year
over year is expected to slow to zero. However just this week
(Nov. 10, 2008) China too joined a host of countries to unveil a
stimulus plan ($586 billion) to fight effects of global
meltdown. It seems China realizes it can’t afford to be
complacent, it needs to create jobs for millions of new workers
who enter the economy every year and to satisfy a public that
has come to expect steadily rising incomes. China's statement
said the Cabinet, at a meeting chaired by Premier Wen Jiabao,
had "decided to adopt active fiscal policy and moderately easy
monetary policies." The statement said the spending would focus
on ten areas, including picking up the pace of spending on
low-cost housing (an urgent need in many parts of the country,
as well as increased spending on rural infrastructure). Money
will also be funnelled into new roads, railways and airports.
Spending on health and education will be increased, as well as
on technology and environmental protection. Already committed
spending on rebuilding disaster areas, such as Sichuan province
where 70,000 people were killed and millions left homeless by a
massive earthquake in May, will also be accelerated. The
statement also said rural and urban incomes would be increased,
credit limits for commercial banks will also be removed to
channel more lending to priority projects and rural development,
and reform of the value-added tax system will cut taxes by $17.5
billion for enterprises.
This weekend, November 15, 2008,
leaders from the G-20 group of major wealthy and developing
nations convene in Washington to discuss a strategy for
strengthening the global economy. Chinese President Hu Jintao is
expected to attend. With the growth of China and the potential
elsewhere, even here in the USA - to quote Obama “First, I will
make strategic, long-term investments into American
infrastructure”, the planet is going to need natural resources.
Break-even for miners –
mines closing
Numerous miners have reacted to
lower prices by closing and curtailing supply. Prices could
still edge lower, but basic supply side economics dictate that
fundamentals will stabilize in the face of reduced supply. The
road to recovery of metals prices and related stocks starts
here. A review of generally accepted industry approximated
break-even prices for miners show zinc ($0.90/lb break-even,
current Price $0.52) and nickel ($5/lb break-even, current price
$4.90) producers are loosing money and are better off closed in
abeyance of more favourable prices. Others like palladium and
platinum are under break-even too. Bright notes are gold and
copper. Gold is driven more so by investor demand rather than
industrial demand. Copper has roughly $1.30/lb break-even for
many producers, current $1.66).
|
Click to enlarge
5 yr copper price chart |
Copper Insight. Relative to
where copper was a few years ago, copper at $1.70/lb is still in
an uptrend. As a key element in our consumer driven society the
demand for copper is not going to go away – it may not continue
on the fervorent pace that it had over its recent history but it
is going to be consistent. The economies of scale for a few
select larger copper producers are such that they are still able
to reap (with cash costs as low as $0.40 - $0.70/lb break-even,
much better than the norm) large margins from production at
current commodity price levels. However,
industry specialists Brook Hunt, a firm that provides
industry cost studies, suggests that only 10% of the industry is
making money with copper at $1.70/lb -- This 10% figure is where
copper firmed up during previous global recessions, so it stands
to reason copper will find roots here. Additionally, there will
be a change in the supply cycle to copper in the next few years
as a number of copper mines will be closing in the next few
years; a number of copper deposits had extended their life
because of the run in copper -- at $3 copper they eked out
additional life to stay open but over the next few years these
will be closed.
Case Study:
Yale Resources Ltd.
(TSX-V: YLL) - Exceptional
valuation with large copper-gold-silver mine potential at La
Verde
Yale Resources Ltd. is a
development and exploration mining company listed on the TSX
Venture Exchange (ticker symbol YLL). Yale appears to offer
an exceptional risk-reward scenario for investors with its
growing portfolio of highly prospective projects in Mexico
and as it focuses on the near term production potential at
its La Verde Grande copper-gold-silver mine project. YLL now
possesses well over 300 square kilometres of land in Mexico,
including their multiple historic mines with current
production within 10 km of each of these properties.
Defining a deposit
that supports a production decision --
Open-pit copper-gold-silver mine potential exists at Yale's
100% owned La Verde Grande Mine
|
Click to enlarge
lower lever of La Verde Grande Mine |
Yale's 100% owned La Verde
Project is host to six known historical deposits of copper,
silver, zinc and gold that have seen limited production. The
largest is Yale’s La Verde Grande Mine site where YLL.V's
2008 geological mapping and sampling program has shown the
deposit to be larger than historic data indicated.
Conceivably the large historical (non NI43-101) copper
resource deposits may be brought current, expanded on, and
conceivably be brought to near term open-pit production
status. Yale has averaged 1.54% copper, 57.9 g/t silver,
1.32% zinc and .12 g/t Au from 181 samples taken over 500
meters of workings; YLL has duplicated old assay results
with great success in various areas of La Verde, currently
has geologists in the field conducting ongoing geological
mapping and sampling, and believes the potential exists for
a multi-million tonne Ag-Au-Cu-Zn open-pit mine. A stream of
affirming results are emerging from the on-going work
program at La Verde designed to define the potential for
significant tonnage; see the latest development Oct 31, 2008 release "Yale
Samples 14.2M Grading 2.14 % Cu, 151.8 G/T Ag And 0.96 % Zn Above La
Verde Grande Mine" & Sept 11, 2008 release "Yale
Samples 70 Metres Averaging 1.70 % Cu, 133.9 g/t Ag and 2.32 % Zn
Within La Verde Grande Mine, Sonora, Mexico".
Focused on taking La
Verde to a production decision
New 3D model of Yale's La
Verde Grande Mine, Senora Mexico. Yale is focused on
bringing the La Verde Grande Copper-Gold-Silver-Zinc mine to
a point where a production decision may be made.
Logistically such a decision point may not be too far off;
for Yale to move this deposit to the next level this will
include metallurgy and drilling of which Yale will be doing
with luck in the New Year.
Verde
Grande Deposit has now been traced on surface for over 200
metres of its strike length -- double what was previously
known
Yale Resources has
methodically advanced their La Verde Grande project to the
point where the inherent value of La Verde as a possible
future revenue source is growing and the Company is
approaching an inflection point.
Madison Avenue Research
contacted Yale Resources' president, Ian Foreman, P.Geo.,
for insight into the significance of the latest press
release on October 31, 2008 ("Yale
Samples 14.2M Grading 2.14 % Cu, 151.8 G/T Ag And 0.96 % Zn Above La
Verde Grande Mine") and he stated the following; “We
have doubled the length to which the deposit comes to
surface. The fact that it comes to surface for now 80% of
its known length is really significant in that it increases
the size of the deposit, it confirms our geological theories
with regards to the size and dimensions of the deposit are
correct, and that if we move down the path to production
then this dramatically reduces things such as strip ratio …
when you’ve got 40m swaths of mineralization on surface when
you start – in early days of the deposit [strip ratio] may be zero.”
The large near-term
open-pit copper-gold-silver mine potential for Yale Resources at La
Verde is undeniable and would bode well for shareholders if
the plan clicks together; Mexico is the land of small scale
production where a 200 – 400 TPD mill might be assembled (by
Yale or through a partner) cost effectively and cash flow
future exploration without further dilution.
Building for the future - The addition of new highly
prospective targets surrounding La Verde:
Yale has secured control &
stewardship of the entire La Verde project; maximizing
future upside of highly prospective Copper-Gold-Silver-Zinc
mine potential. Yale now controls several historic deposits
that have great values, all together - all in one contiguous
area, never before achieved and making what was once a
handful of separate excellent historic deposits held by
three separate companies now all under the control and
stewardship of Yale. Additionally, Yale’s President Ian
Foreman is highly skilled at identifying prime situations
that don’t have claims on them in very favourable land; he
is able to source highly prospective properties at very low
cost (exploration work). Yale evaluates new prospects
cheaply and quickly, if the new prospects meet certain
criterion then Yale prioritizes the property for future use
or possible optioning-out (for others to take the risk); the
staking of Dos Naciones (announced October 29, 2008) cost
was only CDN$6000.
Upside Valuation/Summary:
An exceptional risk-reward scenario exists in Yale Resources
Ltd. (YLL.V) as this young Mexico focused venture's story is
more widely understood. Yale is focused on highly
mineralized Copper-Gold-Silver-Zinc projects, including
multiple historic mines with current production within 10 km
of each of their properties. With less than 44M shares
outstanding (~61M fully diluted) and currently trading at
under CDN$0.15, the current market cap of YLL.V relative to
its portfolio of highly prospective rapidly advancing
projects seems disproportionate.
----- ----- ----- -----
Additional Projects of significance in Yale's portfolio
Gold-Silver at Urique
North: Yale has recently completed a 1,700m drill
program and the results have shown the potential for a
significant silver/gold grades; See June 26 News Release "Yale
Drills 9.2 m of 0.51 g/t Au and 96.5 g/t Ag at Cerro Colorado".
Results also show that mineralization occurs over
significant widths and that the system has the potential to
host a bulk tonnage silver/gold target.
High silver values "8 kilos silver per tonne" at Urique
South: Phase II field work results have just been
released at Yale's El Rosario target area, an area at which
sampling yielded significant values as much 10.6 g/t gold
and an astounding 8,290 g/t silver from a 10-40 cm wide
veins. (see May 9/08 release). Yale's has recently released
(see Aug 14 release "441 G/T Silver Over 2.35 Metre") high
grade assay results, one approaching 1 per cent silver, from
the El Rosario location at their Urique project; highlights
include 1,640 g/t silver over 1.05 m, 441 g/t silver over
2.35 m, 8.8 g/t gold over 0.85 m, and 257 g/t silver and
0.78 g/t gold over five metres (within the host rocks).
----- ----- ----- -----
|
