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A worker shapes copper into art handicraft at a workshop in Karachi, Pakistan. (AKHTAR SOOMRO/AKHTAR SOOMRO/REUTERS)
A worker shapes copper into art handicraft at a workshop in Karachi, Pakistan. (AKHTAR SOOMRO/AKHTAR SOOMRO/REUTERS)

Schizas' Mailbag

QuadraFNX Mining losing altitude Add to ...

Hi Mr. Schizas,

I bought FNX on March 23 and the stock has dropped. Can you give me any advice.

Thank you,

May.







Hi May,



You bought the shares of FNX Mining Company on the day that it was announced that they would be merging with Quadra Mining Limited to form a new company called QuadraFNX . The combined company is now positioned as a mid tier copper producer with a mix of open pit and underground operations. However, what I think might have gotten missed in your analysis is the health of the underlying commodity. Let's get out the charts and see what might be lying ahead.

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The chart for copper gives us the tale of the tape on where a mid tier copper producer might be going. As a general rule, if I am buying a car company, I want to find some measure of the health of that market. If I am buying a pharmaceutical company, again I want to find a reasonable proxy to help determine if the road will take me where I want to go. With commodity-based investments, the resources itself provides all the information you might need.







The three year chart for copper shows a commodity that recovered from the lows but has now broken to the downside. A mid tier copper producer can not go up if copper is going down.



The three year chart for QUX is almost identical. The stock had a great run from a rock bottom and then flattened out and is currently giving up ground. The retreat has nothing to do with the merger. It has everything to do with price of copper which is the underlying asset.



The six month chart illustrates the sell off that started in late April as copper prices started to head lower. For resource-based investments, the price of the commodity is like the yoke of an aircraft. If the yoke is pushed forward the plane heads lower, if its pulled back the aircraft climbs.



Since late April it looks like the yoke had been pushed forward, taking the commodity and the stock lower. There is also a seasonal effect in play. According to seasonality expert Brooke Thackray, mining stocks enjoy a period of strength from mid November to early May.



It appears that there is some support at $11.50. But with a death cross starting to form and the sector not enjoying the summer and early fall on a seasonal basis, it might be wise to consider cutting your losses and preserving capital for a re-approach later in the year.



Happy Capitalism!

Have your own question for Lou? Send it in to lschizas@globeandmail.com.

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