Column

BURIED TREASURES

Mining stocks outperformed all others in the third quarter

DONALD COXE October 27 2003
Column

BURIED TREASURES

Mining stocks outperformed all others in the third quarter

DONALD COXE October 27 2003

BURIED TREASURES

Column

Mining stocks outperformed all others in the third quarter

DONALD COXE

YES, AS your e-mails often note, this column consistently promotes the wisdom of investing in commodity-oriented stocks. Companies producing metals, oil and gas are praised, while those producing the gizmos of the so-called “New Economy” are panned. Yet, this year, Nasdaq has been on a tear, leaping 40 per cent. So why this fixation on those who extract stuff buried for millions of years, compared with those who produce stuff invented yesterday?

’Twould seem I just don’t get it. Am I just trying to justify what I wrote in my book about the Triple Waterfall crash of technology stocks? I plead guilty to belief in the basic principle ofEcon. 101: markets are all about supply and demand. Tech gear is in oversupply and there are few barriers to entry to the business. The profitable lifespan of the latest new product to dazzle the world is closer to the lifespan of the mayfly than the monarch butterfly. Whatever you pay for a gizmo today, you’ll be able to buy a better and cheaper version within a year. Microsoft Windows is the exception, but even that monopoly is feeling the heat of Linux.

Meanwhile, products that had their own Triple Waterfall crashes in the 1980s and 1990s are coming back. Big time. Oil and gas prices rose first, driving stocks skyward. Then gold. Now it’s base metals—copper, nickel, aluminum, lead and zinc.

When the Wall Street Journal published its full-scale review of stock market performance in the third quarter, it exulted in the fabulous returns from tech stocks. Way back in the section was a small chart that recorded the actual performance of all sectors in the U.S. market. The top-performing group, up a mere 43.4 per cent, was mining stocks. They collectively rose more in the quarter than Nasdaq had managed for the year to date. But that splendid score drew no commentary from the Journal’s tub-thumpers amid their gushing over the glamour stocks. (No surprise: the Journal dissed my book.)

What has quietly been happening is that, after two decades in which metal supplies routinely exceeded demand, supply and demand came into balance. Nickel is now in extremely short supply, in part because of the shrewdness of the United Steelworkers of America union. Having learned the lessons of supply and demand, it shut down Inco’s Sudbury operations for the summer fishing and camping season and came back to skyrocketing nickel prices. (High prices should continue as Inco predicts that nickel demand, fuelled by China, will outstrip supply for the next few years.)

The Journal remains the most authoritative financial paper in the world, the one indispensable read for serious investors. That even this august publication failed to note the change in fundamentals for the beaten-down mining industry is part of the continuing disbelief that two decades of mining misery have ended.

mining misery The wondrous decade for the metal miners was the 1950s. Along with the boom in babies came the booms in home-building and automobiles as the people who had survived the poverty of Depression and the Second World War bought the consumer durables they had never been able to afford. By the mid-1960s, the huge new middle class in North America and Europe had the metal products it needed. Thereafter, growth in demand slowed, and the economic growth of subsequent decades was no longer heavily focused on heavy metal, but on leisure, consumer electronics, services, health care, education and travel.

WHAT lies ahead is two decades of fast-growing metal demand from the gigantic new middle class currently emerging in southern and eastern Asia

Meanwhile, mining companies kept exploring and kept opening new mines across the world. The more successful they were at their basic business—creating supply—the more they drove down prices of their products for their customers who built cars, machines and heavy equipment. Today, there are more cars than drivers in the U.S. Metal demand won’t leap even if U.S. GDP grows at the high rates the most enthusiastic economists project.

So what is changing for the better? What lies ahead is two decades of fast-growing metal demand from the gigantic new middle class emerging in southern and eastern Asia. By some estimates, there are already 350 million people in these regions who have family incomes approximating those of their counterparts in Portugal and southern Italy—two of the poorer regions of the European Union. By the end of this decade, that number should exceed 500 million, and their average incomes will be heading inexorably toward those of Continental Europe. An oil company executive recently told me that within a decade, when residents of the coastal cities in China have the same number of cars per capita as South Koreans, their oil consumption will require two new Saudi Arabias. Long before then, they will have generated metal demand that will, Midas-like, turn base metal mines into gold.

Some shrewd investors notice. Last week’s Barron’s (a sister investment publication to the Wall Street Journal) has an article detailing how leading pension funds are investing directly in commodities. Among those profiting handsomely, it says, is the Ontario Teachers’ Pension Plan Board (a conspicuously well-managed fund).

From the mineshafts deep in the earth, things are looking up. IH

Donald Coxe is chairman of Harris Investment Management in Chicago and of Toronto-based Jones Heward Investments, dcoxe@macleans.ca