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Vale operations at Voisey's Bay, Labrador
Vale operations at Voisey's Bay, Labrador

The Rock: As solid as commodities Add to ...

If things go really well for Newfoundland and Labrador's economy in the coming years, maybe someone will launch an exchange-traded fund that tracks companies leveraged to the province, just as many currently available ETFs track particular countries. Here's a suggested ticker symbol: ROK.

In the meantime, the best way to play a resurgent Newfoundland is with an investment in a commodities producer that has extensive operations there.

Clearly, Newfoundland's fate is tied directly to commodities, particularly oil and base metals. For the province's jobless rate to decline (it rose to a mind-boggling 17.1 per cent in July) and housing prices to strengthen (still among the cheapest in the country), commodity prices are going to have to kick in to high gear.

Can they? The Reuters/Jefferies CRB index of 19 commodities has risen an impressive 32 per cent since March. However, the index is still 44 per cent below its high last year, suggesting that there is plenty of room for more improvement.

In particular, nickel prices have doubled in recent months but are still well below their highs, and rebounding crude oil is selling for about half the price it sold for last summer.

Goldman Sachs, for one, believes that commodities have a long way to go. Sure, they lost some credibility last summer when analysts predicted that oil would rise to $200 (U.S.) a barrel, only to fall as low as $34 a barrel earlier this year.

Still, its bullish stand on commodities is relatively solid: They believe that supply shortages are the biggest impetus for price increases, beginning next year, because companies haven't been investing enough in future production. That in turn is the result of the recent double-whammy of lower commodity prices and tight credit conditions, which sidelined many projects.

When demand rises with an improving global economy, this weak supply will send commodity prices shooting higher. Sounds reasonable enough. And if the future unfolds according to plan, Newfoundland - and the commodity producers that operate there - will indeed find themselves in a sweet spot.

Vale SA , the Brazilian-based metals producer, is a good company to keep an eye on. Although its Canadian holdings account for a relatively small slice of its global operations, they are growing fast with the extensive nickel, copper and cobalt deposits in Voisey's Bay.

The stock, which trades as an American depositary receipt in New York, looks a lot like the commodities it produces: Although it has already doubled from its low in November, it is still more than 50 per cent below its high in 2008, leaving plenty of upside potential.

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  • Vale SA
  • Updated August 21 4:00 PM EDT. Delayed by at least 15 minutes.

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