Molten metal being poured at an Alcoa smelter in Baie-Comeau, QuebecHO
What a year it's been for mining stocks and metals. Shares such as Teck Resources, First Quantum and Quadra Mining have quadrupled since the start of 2009. Copper prices have almost doubled, and the S&P/TSX Materials Index is up 25 per cent.
Many investors are wondering whether this is just the start of the rally that accompanies economic recovery -- or whether it will all end in tears. What's the best way to play the sector? Which stocks are still not worth touching? Where do you put your money?
You can bounce your questions off David Whetham, who runs the Scotia Resource fund and the Scotia Canadian Small Cap fund. He'll be taking our readers' questions in an online discussion at noon on Friday, August 28th, but you can get a jump on the queue by submitting your question here.
Mr. Whetham began his investment career in 1990 as an equity analyst with Confederation Life, where he developed a background in fundamental company analysis as well as a disciplined approach to equity valuation. He continued his career managing Canadian equities at several money management firms before joining Scotia Cassels in 2000 as a member of the Canadian equity team. He has managed the Scotia Resource fund since 2000, and the Scotia Canadian Small Cap fund since 2004.
He has a Bachelor of Business Administration degree from Wilfrid Laurier University as well as an MBA from the University of Toronto. He also holds the Chartered Financial Analyst designation and is a member of the Toronto CFA Society.
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Sonali Verma, Globe Investor: Hello, everyone, thanks for joining us! And what better way to wrap up the week than by talking mining with David Whetham... Thanks for giving us so much of your time, David. Let's get to our readers' questions.
Ken Yurchuk writes: Mr. Whetham, It seems to me the current rally in mining stocks is just a little frothy. It has been highly dependent of the health of the Chinese economy, which, while continuing to grow, has slowed to mid single digit growth. Do you feel that the Materials rally is a little premature? I think the US economy has to turn around more substantively before this kind of growth will be supported.
David Whetham: I agree. Much of the demand we have seen for many commodities has come from China, and I question how sustainable it is in the short term. Chinese demand has included inventory restocking, some speculative demand, and some demand from the government stimulus spending. All three of those factors are not sustainable, so there is potential for short term weakness until the western economies (specifically the U.S.) show stronger demand.
Don McAlpine writes from Elliot Lake, ON: Teck Resources, First Quantum and Quadra Mining all appear to be primarily involved in foreign activities. They are also relying upon the commodity market for their revenues.
Given that China, a major consumer of resources and appears to be intent upon avoiding the commodities market through acquisition and loans to resource based corporations thus securing supply directly. What is the long-term stability of the commodities market?
David Whetham: Even though China may try to control the supply of some commodities by making investments in different companies, the price will ultimately be set by the laws of supply and demand on a global basis. Chinese ownership of foreign assets doesn't change the amount of worldwide supply, so in the long run I don't think it will affect the price. In the long term commodity markets will continue to be volatile based on short term changes in supply and demand, but in the long term the resource markets look attractive because supply growth is limited.
John Lupson writes: Where do you see the stock price of Western Canadian Coal being in one year ---and in 5 years from now.
What is your take on the company as a whole now that it has merged and taken over the parent company's holdings?
David Whetham: I don't have a target price for the company. In the short term, I am cautious on met coal companies, because demand from China has been extremely strong, and I think there is a risk that demand will weaken over the next few months as the Chinese find it difficult to maintain current levels of consumption. Over a five-year period I would expect the met coal companies to perform well, because the expected long term growth in the steel market will keep prices at historically high prices.
Jack Carloss writes: What is your opinion of the lithium mining business? I see Canadian Lithium has been rising quickly as has First Lithium Resources. Any one better than the other and is it a long term play worth investing a few loonies?
David Whetham: In general we don't invest in early stage companies like the two you mentioned. The risks are very high, and mines take a long time and a lot of capital to bring into production. We prefer to own producing companies, or companies that are close to production, because of their profitability.
The lithium market is still being developed, and it is unclear how large the market will be, so we prefer to wait until the market is more developed before getting involved.
Philippe Taussac writes from France: What do you think about the "Zambia Consolidated Copper Mines - Investments Holdings" that have shares with First Quantum (20% of the Kansanshi Copper Mine, the biggest asset of First Quantum), shares in Equinox Minerals (which exploit the biggest copper mine of Africa Lumwana), shares (20%) in Konkola Copper Mines KCM which is one of the bigger mine of Vedanta? Thank you for your answer .
David Whetham: Zambia Consolidated Copper Mines is a private company, so we don't follow it too closely because we can invest in it directly. However, all of the assets you mentioned are quite attractive, and will be very profitable with current copper prices.
Jim Hunt writes: What's happening with Hudbay? Almost a billion cash, Lalour lake, metal prices up and share prices going nowhere.
David Whetham: The big issue with HudBay is what they plan to do with the cash they have accumulated. They have indicated they want to make acquisitions, and investors are currently waiting to see what they buy before getting more positive on the company. The cash balance allows them to make a significant acquisition that would change the profile of the company, so investors want to see what they are going to do.
At the same time, commodity prices are going up, which will allow the company to remain profitable and accumulate even more cash, which should eventually be reflected in a higher share price.
Butch Karch writes: What are you short term and long term thoughts on these two companies -- GCE and WTN? Thank you.
David Whetham: As I mentioned in the earlier question about WTN, the short term outlook for met coal is cautious, since there is some risk that Chinese demand will fall from recent levels. In the long term the market is positive because of continued strong steel demand growth.
We have not focused on these two companies because they have been extremely volatile as they have found it difficult to meet operating target in the past. At current coal prices they should both be profitable, but they are higher risk investments if coal prices decline.
Darren McDonald writes from Vancouver: With the run up in copper and correspondingly Freeport McMoran shares, should I be selling FCX?
David Whetham: It depends on your time horizon. In the short term there may be some risk to the copper price because demand from China may weaken from current high levels, and a lower copper price will likely cause Freeport's shares to weaken.
However, in the long run Freeport is well positioned. Over the next few years there is limited new supply of copper, and if demand rebounds the copper price will remain very strong. Freeport is a low cost producer with world class assets, and has attractive growth opportunities, so in the long run, it should be a strong performer.
Sherrie Jones writes: What are your thoughts on the molybdenum markets? Reliant on the steel markets of China/US ?
David Whetham: Moly prices have been strong in 2009 due to strong demand from the Chinese steel mills. However, at current prices, domestic Chinese mines are becoming economical again, and we would expect to see some of these mines restart in the short term, which would put some pressure on the price. As with most metals, there is the potential for a short term correction, until demand picks up in other economies outside of China. However, in the long run the moly market remains attractive.
Matt S writes: What is your outlook on platinum/palladium and specifically eastern platinum and north american palladium?
Both commodities are used extensively in the automotive markets, which continue to be weak (despite the impact of the cash for clunkers program). Platinum is also used in jewellery, which continues to be weak as well. Inventory levels appear to be relatively high. As a result the outlook isn't robust, and will need a strong auto market to show strong growth.
David Whetham: Both commodities are used extensively in the automotive markets, which continue to be weak (despite the impact of the cash for clunkers program). Platinum is also used in jewellery, which continues to be weak as well. Inventory levels appear to be relatively high. As a result the outlook isn't robust, and will need a strong auto market to show strong growth.
North American Palladium has closed their palladium mine (although it has the potential to go underground if prices recover), and is moving into the gold business, so it is now longer a pure palladium play. Eastern Platinum appears to be relatively inexpensive, but has had difficulty achieving its planned production rates in the past, so it needs to show it can meet its targets before the share price recovers.
Sonali Verma, Globe Investor: David, sincere thanks for making the time and sharing your expertise with us. We really appreciate it. And thanks to everyone who joined us.
David Whetham: It was my pleasure.