Today’s Notes:
. Double, Double, (T)oil and Trouble
. Riding Secular trends: Newmont Mining
1. Double, Double, (T)oil and Trouble
“Double, Double toil and trouble; Fire burn and cauldron bubble.”
Having grown up in Southwestern Ontario, I visited Stratford’s Shakespearean Festival every year. Shakespeare’s prophetic play Macbeth was one of my favorites.
This morning the witch’s prophecy to Macbeth seems apropos. Their prophecy, of course, led to Macbeth’s demise. This AM the 18th storm of the year, and second mega-storm, is bearing down on Texas and “refinery row.” If the surge from Rita equals Katrina’s 25 feet, the island of Galveston will be completely submerged. Its seawall, built in 1910, which has protected the city for 100 years, since the last disaster, is only 15 feet high.
It is now time for President Bush to lead the country in its preparedness and its response to the potential for this storm. The country wants to see the government, at all levels, work together for the welfare and safety of all. It will be a more crucial strategic test than you think.
As the “soft underbelly” of the US comes under attack form Mother Nature again, we must grapple with the following issues:
1) The “soft underbelly” of the Bush Administration will be judged, in the future, by its energy policy – or lack thereof. The “axis of evil” will be a distant memory.
2) For all future Administrations (State and local as well) the question of energy independence must assume a central role in policy. Can our various governments demonstrate a high degree of cooperation in this regard?
3) Man’s impotence in the face of God’s omnipotence is as evident today as it was 105 years ago. On September 8-9, 1900, Galveston was destroyed and 6,000 died in a predecessor monster storm. The world is truly “charged with the grandeur of God.”
4) There is a significant risk of supply disruption for gasoline, natural gas, heating oil and jet fuel. Petrochemical supply, crucial to the US manufacturing economy now must also be considered an “Achilles heel.” The pressure points in the US economy are beginning to mount. Perhaps the world is flat, as Freidman claims.
Is the President Bush’s legacy in jeopardy?
2. Riding secular trends: newmont Mining
Robert Bishop has recently (Sept 19, 2005) published his very excellent Gold Mining Stock Review (GMSR) newsletter. He interviewed Pierre Lassonde, president of Newmont Mining. I encourage you to read Bob’s interview with Pierre.
http://www.kitcocasey.com/displayArticle.php?id=294
Lassonde is a very savvy businessman. He suggests that higher oil prices are in store and that Matt Simmon’s hypothesis, that Saudi oil fields are peaking, is on target. Lassonde highlights one of the important catalysts inherent in Discovery Investing. He says
“it’ a bit like the mining business, it takes about 8 to 10 years to bring new production on line.”
It also takes 8 to 10 years to develop new transportation modalities, but develop they must. Intensive transportation discovery opportunities are in the wings.
Lassonde notes that Newmont burns 3 million barrels of oil per year. He believes that oil prices will stay above $60 for at least ten years. Thinking outside the box, in a discovery investing mode, Lassonde and his Newmont management team decided to hedge the company’s energy exposure. How? They took a significant position in the Canadian Oil Sands Trust – 7% to be exact. I recommended COS.UN last year at $54.
Here are the results:
1) The COS stock is now $125 per unit. Newmont’s $200 million investment is worth $635 million. Not a bad return, dear Discovery Reader, not bad, eh?
2) COS will pay $14 a share in dividends at $65 oil.
3) He says, “We expect the dividends on this investment will cover all of the increase in the of oil that we have seen providing us with a hedge for the next 50 years.”
4) Hard assets have had two major supercycles in the past 100 years. One was from 1924-1937. The next bull market in commodities, according to Lassonde, was from 1966 to 1980 – also 14 years.
If Lassonde is correct we have, on average, 10-years remaining in this commodity supercycle. He was “spot on” with his hedging of Newmont’s oil exposure. I think he is correct in his assessment of the current commodity megacycle.
Take copper, for example. It has roared back to $1.78 per pound. It is still 50% cheaper than it was in on a constant $ basis (after adjusting for inflation.) By the year 2007 copper will be in short supply again. We should realize significantly higher prices. Wait for your opportunities even though copper will also correct in the intermediate term. - I encourage you to deliberate on this very carefully. There is great wealth to be created in the next decade. China’s development may wax and wane. She may wobble like Rita. But, as in the case of Rita, her people are headed for a longer term landfall with a much higher quality of life
Yesterday the Chinese news agency Xinhua published an article on secular silver demand in China. Articles on silver by government sources – especially the Chinese - are so rare that it merits a comment in this Morning Note. China is higher in the QOL cycle and therefore China’s silver demand has not yet increased. The article suggests that China’s demand for silver will jump 80% by 2010. Think about it. In 4 years GFMS forecasts an 80% increase to approximately 3000 tonnes of silver per year. China’s stockpiles which have been used to feed the global silver deficit are now “a spent force.” China’s 1.3 billion consumers, according to the article, are likely to buy more jewelry “as they get richer.” “With silver costing about 63 times less than gold younger buyers could favor the precious metal.”
The silver cycle, unlike the energy cycle, is very much in front of us. You may ride this secular trend just as Newmont has ridden the energy trend to hedge its exposure. Newmont has hedged its energy exposure through the Canadian Oil Sands Trust – why not you? Don’t miss this next one, silver.
The material herein is for informational purposes only and is not intended to and does not constitute the rendering of investment advice or the solicitation of an offer to buy securities. The foregoing discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (The Act). In particular when used in the preceding discussion the words “plan,” confident that, believe, scheduled, expect, or intend to, and similar conditional expressions are intended to identify forward-looking statements subject to the safe harbor created by the ACT. Such statements are subject to certain risks and uncertainties and actual results could differ materially from those expressed in any of the forward looking statements. Such risks and uncertainties include, but are not limited to future events and financial performance of the company which are inherently uncertain and actual events and / or results may differ materially. In addition from time to time he may review investments that are not registered in the U.S. Michael Berry is a paid consultant to Immtech International, for which he receives a monthly cash payment. He is also a consultant to Senesco Technologies, for which he receives a monthly cash payment and has been awarded stock options. Michael Berry may own shares in the securities which have been discussed in this informational bulletin.