The Year For Metals

2006 was a great year for metals though very few things (except uranium) went straight up. Most commodities had larger price swings than the year on year numbers (impressive though they are) indicate. We don’t expect a repeat of that scenario for most metals in 2007. Price movements should be more muted than last year, and more individual, based on how balanced each metal’s supply-demand picture is.

As the previous editorials make clear, we think the days of world markets being driven purely by US stats are over. We think that is true in fact, but we still have to see if it will be true in perception, which drives the markets as often as cold hard logic.

One encouraging note we will add is that the world’s biggest exporter in 2006 was—wait for it—Germany! That statistic shocks a lot of people who view Europe as a brake on the world economy. The fact is, Brussels Eurocrat stupidities aside, much of “Old Europe” is making the sort of painful but necessary labour adjustments that North America went through after the “Japan Inc” scare 25 years ago. The effects are now being felt and its one more reason for bullishness in a year when the US itself looks shaky.

The rebound in metals during the last two months of 2006 is evidence that the market is, in fact, coming to terms with the new realities. The jury is still out on the US economy, however and base metal traders clearly have the jitters.

December’s US numbers were better than feared which helped the major stock indices close the year on a strong note. The housing slowdown is not over though. The pick up in sales volumes is encouraging but housing prices have father to fall. The full impact of the slowdown won’t be felt until currently permitted units get completed and we see how large the industry layoffs really are. Permits have dropped much more dramatically than sales. This is good—medium term– as it speeds up the process of the market coming back in to balance but it means construction layoffs down the road.

The hero of the story in the US is, as always, the fearless consumer. Nothing seems to faze them. The housing slowdown might. The growing segment of the population that has used home equity to make ends meet is in for a tough year. You can’t bump up a zero or negative equity loan when the house’s value is dropping. That will continue to be a drag.

The good news in the US is the labour market. Even with slower growth, unemployment rates are holding at decades low levels. That is one statistic that is worth keeping track of on a regular basis. If the US muddles through it will be because the economy manages to maintain full employment. Watch weekly unemployment data. If the US economy really puts the brakes on it may appear there first.

Since we talk about metals on a regular basis we won’t bore you with too many details in this piece. We do like to run though the list at the start of the year however and lay out where we think the strength will be going forward.

Like other metals, gold moved quicker than expected early in the year and then struggled. We expected it to top $600; it actually moved to $730 before weakening. The downtrend was broken convincingly in November and it looks ready for another run. Accumulation by ETF’s continues as a positive theme for both gold and silver, as do the noises from a number of central banks that say they want to continue diversification out of the US Dollar. The 150% gain in prices gold has seen this bull market has had little or no impact on output levels. This highlights the fact that finding and starting new mines is much tougher than Wall St “experts” think. It also helps explain the frantic pace of sector consolidation. We expect mergers to continue and private equity buyouts to be an increasing force.

Gold has held well in the face of a minor Dollar rally. It’s getting its own buying and we expect it to see levels near or above last year’s highs of $730, especially if the Dollar plumbs new lows, which we think is likely.

Silver lived up to its reputation as gold’s more volatile cousin, though it had a few twists and turns of its own. As we predicted, the long anticipated start of silver ETF’s turned out to be an intermediate top, not a launch pad, but silver regained its poise as the year drew to a close. As the table on the previous page shows, silver put in a strong performance overall, holding above $10 once it cleared that psychological hurdle. Although we can see supply coming for this more industrial metal it won’t arrive in bulk for 2-3 years. We expect silver to stage another strong run this year. If it tops resistance at $14 it could keep running for a while.

Platinum saw record prices in 2006, though its percentage gains through the year were weaker than palladium, gold or silver. Both metals are heavily influenced by auto sales due to their use in catalytic converters. We are not expecting a banner year for auto sales except in places like China where environmental restrictions are lighter. This, plus a number of larger mines being developed in the Bushveld make it hard to be too bullish. Platinum might see another high this year before these mines come on stream but, with a couple of notable exceptions, the market hasn’t warmed to Bushveld deals that dominate the sector. We don’t plan to focus on these metals.

Professor Copper seems to be giving the world economy the thumbs down, but we think the issues are more commodity specific. We’ve noted in the past that copper, as one of the most liquid metal markets, tends to draw a lot of spec and hedge money. That came and went fast in the spring and left prices at levels that generated inevitable substitution and recycling. That, plus some new production, reversed five years of warehouse inventory declines. That led to selling, which accelerated as we passed year end and funds locked in last year’s gains. Traders are fixated on warehouse inventories. It will to tough to reverse the slide until those levels drop. A bottom in US housing or acceleration in Chinese buying could do it.

The first isn’t likely to happen for a few months. China remains a mystery. Copper usage doesn’t match growth statistics which implies big drawdown of local inventory but this cannot be confirmed. China is cracking down hard on new smelter capacity and metal exports starting January 1, 2007. These changes could also help halt the slide but we think the most likely scenario is prices reverting to early 2006 levels of $2-2.25/lb this year. This will cool copper equities and we may call for profit taking on many soon. We do note however that most of the producers and near producers on the HRA list are not expensive even using a $2 base price.

We said going into 2006 that we expected zinc to be the star performer and it’s lived up to its billing. Zinc powered all the way past $2.00 before puling back recently in sympathy with copper. Zinc warehouse inventories dived through the year, again as expected, before leveling off in December. Zinc is heavily used in autos and construction. The US might slow things a bit but zinc doesn’t have a lot of large scale production in the pipeline. Its expected to come into balance in 2008 but this is based on things going right at a large number of small operations. Analyst estimates of supply growth have been consistently over-optimistic. We expect zinc prices to hold at or near these levels which will generate huge bottom lines for the zinc producers on HRA’s list and will continue to support spec buying in new discoveries that look like they have size potential.

Nickel was the star performer this year, generating and holding a huge price gain. We expect nickel to stay strong because, like zinc, there is little new production on the horizon near term. There are a number of large laterite (oxide) projects on the drawing board but these continue to be plagued with cost overruns and production delays. This will make for another good year and we continue to watch a number of explorers. With M&A clearing out the ranks of senior nickel plays a strong new producer would be welcomed by the market with open arms.

Based on uranium stock trading you would think U was the top gainer -though it was close. As we’ve pointed out in recent comments, the problems at Cigar Lake mean there is no obvious way to close the supply gap in the next couple of years. Uranium prices are therefore very strong and likely to stay that way. They will stall occasionally due to lack of trades to set the price but we continue to expect $100 plus prices in 2007. As long as the supply crunch holds U stocks will be very strong. They bear watching however and it’s never a bad idea to lock profits in along the way. Ω

David Coffin and Eric Coffin are the editors of the HRA Journal, HRA Dispatch and HRA Special Delivery publications focused on metals exploration, development and production stocks. They were among the first to draw attention to the current commodities super cycle and have generated one of the best track records in the business thanks to decades of experience and contacts throughout the industry that help them get the story to their readers first. Please visit their website at www.hraadvisory.com for more information.

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The HRA – Journal, HRA-Dispatch and HRA- Special Delivery are independent publications produced and distributed by Stockwork Consulting Ltd, which is committed to providing timely and factual analysis of junior mining, resource, and other venture capital companies. Companies are chosen on the basis of a speculative potential for significant upside gains resulting from asset-base expansion. These are generally high-risk securities, and opinions contained herein are time and market sensitive. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer, solicitation or recommendation to buy or sell any securities mentioned. While we believe all sources of information to be factual and reliable we in no way represent or guarantee the accuracy thereof, nor of the statements made herein. We do not receive, request or accept compensation in any form in order to feature companies in these publications. We may, or may not, own securities and/or options to acquire securities of the companies mentioned herein. This document is protected by the copyright laws of Canada and the U.S. and may not be reproduced in any form for other than for personal use without the prior written consent of the publisher. This document may be quoted, in context, provided proper credit is given, including reference to the website http://www.hraadvisory.com.


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