Mining for Profits:
Investing in Metals
Shohana Jannat
The Case for Metals
Current & Future Trends
Weakening U.S. Dollar
Rising Inflation Expectations
Global Economic Growth & Increasing
Demand
Supply Shortages & “Trade Wars”
Portfolio Diversification
Metals in Focus
Gold
Silver
Copper
Rare Earth
Rushing to Gold
“Gold is money. That’s it.” - J. P. Morgan
“You could hold dollar, you could hold yen, you could hold euro, you could hold
pound or you could hold gold.”
- David Einhorn
Bull-Run after 2008 Global Financial Crisis
Continued Uncertainty of World Economy
U.S. Deficit & Low Interest Rates Weak
Dollar
Global Demand Continuing to Rise
Does Gold Produce Value?
“You could take all the gold that’s ever been mined, and it would fill a
cube 67 feet in each direction.
For what that’s worth at current gold prices, you could buy all — not
some — all of the farmland in the United States. Plus, you could buy
10 Exxon Mobil’s, plus have $1 trillion of walking-around money.
Or you could have a big cube of metal.
Which would you take? Which is going to produce more value?”
- Warren Buffett, Oct 19 2010, Fortune
Is Gold Really a Glittering Investment?
• Few practical uses
• Price moves on
o Sentiment on world events
o Inflation & currencies
• No interest or dividend
payout
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Gold in 2011
• Low short-term interest rates
• Global gold mining production stagnant
– 2010 Global Mine Output = 2,652 tons (+1.2% from
2000)
– Lack of large deposit discoveries
• Greater volatility in world currencies
– Weak Dollar
• 2010 Performance: +30% ($1,421/oz)
• 2011 Estimates: +13% $1,600/oz
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How to Invest in Gold
• SPDR Gold Shares (GLD)
– $133.13 Equivalent of Gold @ $1,330.13
– Highly Liquid – Avg. Volume = 15.5M shares
– Closest to Investing in Bullion
– No Management Fees
• Midas Fund (MIDSX)
– Invests in mining & processing companies
– 2010 Performance: +47%
– Solid Management & Consistent Performance
– Top Holdings: Newcrest Mining Ltd. (8.4%) | Barrick Gold Corp. (5.77%)
– Expense Ratio: 2.29%
• T Rowe Price & Fidelity Mutual Funds
Silver
Store of Value
Global Manufacturing & Production
Increasing Greater Industrial Demand
Limited Supply – Not “Recycled”
“Poor Man’s Gold”
More Volatile than Gold
2010 Performance: +80%
Silver
• SI ($/oz) – 1YR Performance
How to Invest in Silver
• iShares Silver Trust (SLV)
– Last Trade: $29.85
– Volume: $5.36M shares
– Closest to investing in “real” silver
• 2011 Estimate: $50/oz
2011 Outlook
Copper
• Copper Inventories in London Metal Exchange 30%
• 435,000 metric ton Deficit in 2011 (International Copper
Study Group) Supply Shortage!!
• New Copper ETF Dec. 2010 More Pressure on Supply
• Global Growth & Recovery = Greater Demand!!
Copper
Downside Risks (1yr +)
More Chinese Tightening/Hard Landing
8-10% Decrease in Consumption
More Diversified Supply Base (Chile, Peru,
U.S.)
En Masse Sell-Off
Robust Demand Priced-In Limited
Upside
Copper
Usage
Building Construction
10% & Electronics
Transportation
13% Equipment
Consumer & General
Products
Industrial Machinery &
14% 63%
Equipment
• Current Price: $4.62/lb
• Bullish Outlook!
How to Invest in Copper
• Global Copper Miners ETF (NYSE: COPX)
– $20.229
• iPath Dow Jones Copper Index (NYSE: JJC)
– $61.56
• iShares MSCI Chile Index (NYSE: ECH)
– $72.51
2011 EOY Estimates: $5.00/lb
Rare Earth Metals
“The future of rare earth is great…it is pure simplistic capitalistic
economics now” – Jim Rogers
• China controls more than 97%
• Uses of Rare Earth:
<> Green energy <> Flat-screen monitors
<> High-Tech components <> Cell Phones
• Examples: Dysprosium, Molybdenum, Neodymium
Dysprosium 2003: $6.50/lb | 2010: $132/lb
(U.S. States Energy Department)
• Average 2010 Performance: +250%
Dysprosium
Highest Magnetic Strength of All Elements
Dysprosium 2003: $6.50/lb | 2010: $132/lb
(U.S. States Energy Department)
Uses
Clean-Energy Products
Nuclear Reactors
Enhance thermal, magnetic & optical properties in
technology applications
Rare Earth in 2011
• Diminishing Supply = Higher Prices
• “China to Tighten Rare Earth Production”
(Reuters, Feb. 14, 2011)
• Deposits subject to stricter gov. scrutiny
• 1/3 of world reserves
• 2010 – export quotas cut by 40%
• 2011 Performance Outlook: Bullish!
How to Invest in Rare Earth
• Difficult to invest in rare earth
• Most ETFs/Funds are traded on foreign exchanges
• Avalon Rare Metals Inc. (NYSE: AVL)
Canadian mineral exploration & development company
Focus on rare metals
100%-owned Nechalacho Deposit one of few sources outside of
China
Well Funded, No Debt, Strong Growth Perspectives
Current Price: $7.96
Market Cap: $743.00M
Negative Earnings
Investing in Metals
• Direct Ownership
• Mutual Funds
• Exchange-Traded Funds (ETFs)
• Futures Contracts
• Stock
Direct Ownership of Metals
• Buying minted coins/bars
• Ultimate “Pure Value”
• Jewelry
• Safe
Metals Exchange-Traded Funds (ETFs)
• Diversification of index fund
• Ability to Short Sell
• Lower/No Expense Ratios
Metals Mutual Funds
• Diversification across variety of investment
products for different metals
• Professional management of fund
• Fees
• Different Objectives:
– Long-term capital appreciation
– Hedge against inflation
– Aggressive short-term capital gains
Futures Contracts
Why Invest in Metals Futures Contract
Hedge against inflation
Speculative play
Alternative investment class
Advantages Disadvantages
• Centralized exchange • Substantial Risk
– Financial leverage
– Potential to lose
– Flexibility
more money then
• No counterparty risk originally invested
• Higher risk/Higher return
Gold & Silver Futures
Contract Specifications Example:
• U.S. Exchanges • Trader Long Gold @
– Comex
– eCBOT
$600/oz.
• Traded in dollars & cents per ounce – 100-troy ounce contract
• Position Limits – Contract Value = $60,000
($600 * 100 ounces)
Gold Futures Silver Futures Selling @ $610/oz will result
• 1 COMEX Gold • 1 COMEX Silver
Contract (GC) = 100 in $1,000
Contract (SI) =
Troy ounces (1 brick of 5,000 Troy ounces Selling @ $590/oz will result
gold) in -$1,000
• Min. tick size =
• Min. tick size =
$.005/ounce
$.10/ounce
• Req. Margin =
• Req. Margin = $6,751
$8,100
Stocks: Analyzing Mining Companies
• 3 Types of Mining Firms
– Exploration
– Development
– Production
• Key Ratios/Terms
– Mine Production Rates – ex. Gold Survey
– Futures Sales by Producers
• Global Supply & Supply Shocks
• Cost of Production – Operating Leverage
• Revenue Growth
• Debt Levels – Capital Expenditures
• Price/Earnings (P/E)
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Not everything that glitters…
• Mining Industry – Very Capital Intensive
• Prices determined by market forces
– Supply & Demand
– Inflation Expectations
– Return on Assets
– Central Bank Investments
• Volatility & Speculation
Outlook for Metals: 2011
Questions
