Most of the companies whose shares are listed on global stock exchanges have recently reported their earnings results for the third quarter of 2018.

In this article we will discuss top commodity companies based on their current business results as well as take a further look into select commodity sectors, with the aim of finding out where in the cycle we currently are and what is the outlook for the future.

In the table below, we have prepared an overview of the fundamentally soundest companies which are in the business of mining key commodities i.e., gold, silver, copper and uranium.

Most of the companies from the above-mentioned list are currently included in our stock portfolio with the majority share being represented by gold and silver miners. *The market cap. data is in 000 USD.

miners 1Source: Proprietary analysis

SILVER MINERS

With commodity markets still in deep correction, some of the best silver miners like Fortuna Silver (FSM), Silvercorp Metals (SVM) and Hecla Mining (HL) are trading below their book value (P/B).

Given that these are the companies with the lowest mining costs and highest profit margins we could say that commodity markets are acting quite irrationally. (it is safe to say there are a few short-term market anomalies)

During the course of the current correction SVM, FSM and HL have lost around 64% of their value. At the same time these are the companies that will most likely post above average gains when the trend reversal in commodity markets happens, similar to the price increase between January and August 2016.

svmhlfsm

According to the data of First Majestic (AG) for every ounce of gold mined, the mining industry mines 9 ounces of silver, which is completely disproportionate with the current price ratio as it takes as much as 85 ounces of silver to buy one ounce of gold.

There has been an annual shortage of about 500 million ounces on the silver market for the last 10 years. This may in turn result in supply shortage and consequently lead to parabolic growth of silver in relatively short term.

Part of the reason why the gold, silver and copper miners are at such low valuation levels right now is due to extremely high degree of short positions on the futures market, where there are no limits with regards to the amount big institutions can short.

Due to the fact that commodity markets are in a downturn there is even more of irrational speculative short selling of gold, silver and copper as speculators see an opportunity for a quick profit, therefore driving commodity prices even lower.

This type of extreme speculative short selling always results in trend reversal but it could take a few months and even lower prices before the reversal happens.

COPPER MINERS

Copper miners deserve to be mentioned as well as they have lost about 40% of their value between January and October 2018.

We are currently trying to catch the bottom in copper market through our positions in Southern Copper (SCCO) and Freeport McMoran (FCX), with which we will try to catch the next big cyclical uptrend.

SCCO is a miner with the largest proven reserves of copper and the lowest mining costs in the world. On the other hand, FCX is production wise the biggest copper miner listed on a stock exchange.

scco

Judging by the data provided by research and mining companies such as Wood Mackenzie in Teck Resources (TECK) it is currently forecasted that the copper production peak will be reached in 2020, resulting in a shortage that could be as big as 5 million metric tons annually by 2025.

It is worth mentioning, that it can take as much as 15 years from the discovery of the ore deposit till the mine is actually operative and can start supplying copper.

baker deficit

URANIUM MINERS

The uranium market represents probably the most asymmetric opportunity on the financial markets for the long-term investors. After the Fukushima nuclear disaster market started falling and reached its bottom in January 2016. There has since been a price consolidation with the market testing strong support level at 11,80$ for a few times.

The biggest uranium miners, including Cameco and Kazakhstani Kazatoprom have ceased about 20% of world production which is an equivalent of Saudi Arabia suspending their oil supply on the oil market.

URA

Looking more in-depth at the uranium market, we have to point out a few factors that could play a role in the normalization of supply and demand on the market in the future:

  • Complete production stoppage of the two biggest uranium mines in the world McArthur River and Key Lake
  • Further reduction in uranium production by Kazakhstani state giant Kazatoprom
  • Launch of the new investment vehicle Yellow Cake, which recently bought for about 8 million pounds of uranium from Kazatoprom and has a 10 year contractual right for further purchases
  • Temporary uranium mine close Langer Heinrich owned by Paladin Energy
  • Closure of the Australian uranium mine Ranger till 2020
  • A ban on a Russian trade with the American nuclear power plants
  • Introduction of import tarifs on uranium by the US government
  • US government policy suspension of selling excess uranium
  • 57 new nuclear reactors under construction of which 19 in China
  • Gradual reopening of about 30 nuclear reactors in Japan after the Fukushima accident

We are currently maintaining a position of about 10% of our portfolio in the highest quality uranium miners and developers (CCJ, NXE, UUUU, URG, DNN in UEC).

proizvajalci urana portfelj

Commodity markets are currently on a relatively low price levels and if we assume that the new bull market started in January of 2016, we could conclude that there are 10 years of growth ahead of us. But with such growth there is always a possibility of price fluctuations of even 50% of individual commodity companies.

In the picture below we can see the cyclicality of commodities in relation to the US stock market index S&P 500 and it shows us that we are price wise still at the beginning of the bull market which started in January of 2016.

Commodities VS SP 500 eng

In the future, we will most likely regard the current correction of commodities as one of the best entry points for the exposure to the new commodity market bull run.

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