komenalager: The "Reality" Of Metals Investing

I don?t know about you, but here in Pittsburgh, the weather has been crazy. Zero temps and subzero wind-chill early last week, with lots of snow. Then later on? Mild, springlike temps and thunderstorms. Now, though, it?s back to the deep freeze, with vicious winds.

Two words come to mind: San. Diego. Investmentwise, two more words come to mind: Precious. Metals?

Through the ups and downs I see basic support for precious metal prices ? gold, silver, platinum and palladium. They?ve found a floor. Prices are holding, with plenty of inflation built into the dollar supply (no matter what you hear in the mainstream), courtesy of the Federal Reserve and its $85 billion per month of bond buying. There?s just a lot of Keynesian thinking at work. Too much, some might say.

Platinum and palladium (PGMs), as I told you about last week, are a solid buy. I see limited downside with this one, because the supply deficit in the PGM metals is here and not going away. The demand side is primed to explode.

For those of you who want to accumulate a stash of something else, I suggest you skip the gun shows, where AR-style weaps are about triple the recent price. Instead, go for physical silver just now. Of course, don?t turn down the chance to buy physical gold, either, if you can get it without too much in the way of markup. If you do NOT hold any physical metal? Get some. Gold. Silver. (Don?t forget brass, if you know what I mean.)

On the merely valuable side ? but not quite as precious ? copper prices are firm too. The recent price for copper has been solid, within a dime or so of $3.70 per pound. There?s no apparent demand weakness, what with globally active construction and industrial activity.

This is not a ?China boom? time for copper, like five or six years back, but things are better than a lot of people think. I believe that a company like Freeport-McMoRan will have solid earnings this year and its share price will benefit.

Switching metals, let?s discuss uranium. The spot price of which ? at $42 per pound ? is ridiculously low and set to rebound. I had a long discussion with a couple of serious uranium scholars earlier this week. They?ve been doing uranium in both government and private industry since the 1970s. They?ve seen all the different rodeo acts.

These gents laid out a strong case for strengthening yellowcake prices this year ? 2013 ? and well into the future. ?Yellowcake,? said one, ?is comparable to where gold was 10 years ago. We?re looking at prices four-six times higher in the out years.?

That?s quite a claim ? $150-250 per pound ? and if it works out, it makes great news for uranium producers. You know, the guys that are already producing the stuff.

Begin with the eye-popping cost of acquiring ?new? uranium supplies. When you add up all the exploration and development costs, a new uranium mine scopes out in the range of $100-120 per pound. This is nearly triple the current spot price. And it?s before you factor in the vagaries of future tax changes and higher interest rates. After all, it pays to build a mine only if there?s a decent return on investment.

Expanding existing mines, on the other hand, is problematic. Everyone who?s trying to expand a mine confronts serious sticker shock. Look, for example, at how BHP Billiton deferred expansion at the gigantic site at Olympic Dam, Australia, as costs topped $20 billion.

A 10-figure level of capex approaches the limit of private enterprise in any respect. That?s big, even for the oil industry, let alone miners ? and I mean even the biggest of the big. We?re talking about a major defense program or space program level of capex, plus comparable difficulties in recruiting personnel, developing technology and scheduling the whole thing to work over a decade or more.

Look at it another way. Who can afford to make those kinds of energy investments? Governments, perhaps. Or more likely, government-industry partnerships. In the future, look for business forms in which the mining consortium becomes sort of a public utility, with all the legalistic bells and whistles something like that entails. But without government help? Big energy projects likely won?t happen. And then there goes the supply curve.

On the demand side, the China story is ?real and getting more real,? according to my sources. The Chinese need electric power, and they?re currently burning coal because they have it, not because they want to. Chinese air pollution is now a national problem ? as I discussed in the article noted above. Inside China, large future power projects all have to show an environmental angle to receive state approval. So says the Communist Party.

Across the sea from China, the stories you hear about Japan eliminating its nuclear power plants are ?fairy tales,? according my sources. After the Fukushima disaster, two years ago, initial sentiment in Japan was to move away from nuclear power. It was all emotion. ?And then came reality,? the man said.

Basically, Japan looked at the bill for importing liquefied natural gas (LNG), now in the $20 per mcf range. Plus, Japan is watching China build up its navy, which threatens Japan?s sea lines of commerce and communication, pertinent to oil and coal imports.

The bottom line is that rebuilding its nuclear power base gives Japan another reason to pour more concrete, which is as much a Japanese national pastime as baseball.

Unlocking Value in the Oil Biz

Let?s look at the oil side of things. There?s a trend within the industry, within shareholder groups, to demand more and better return from management. The movement is getting much stronger, and this may be a year to remember.

There?s a shareholder push at Hess Oil, for example, to move the company to deliver higher returns. Hess has already announced that it?ll close its aging, 70,000 barrel per day refinery at Port Reading, N.J. The facility is another casualty of weak refining profits on the East Coast in recent years.

Beyond closing money losers, however, there?s the possibility of Hess spinning off its entire exploration and production operation in the Bakken Formation of North Dakota as a separate entity. Hess shares have climbed on the news (as Dan Amoss wrote about on Friday.)

Elsewhere in the oil patch, similar shareholder activity is rattling the dishes. There are plenty of opportunities out there, as my paid-up readers know.

MENA Problems

Looking ahead, I see better days ? better years, actually ? for offshore players. Offshore is where there?s lots of oil. Also, offshore, there are far fewer Islamist terrorists.

The recent attack on the BP facility in Algeria marked a milestone. Up to now, the energy industry had an acceptable working presence across the Middle East and North Africa (MENA). Shiny, energy-producing technology existed side by side with the ancient caravan routes. Westerners did their work and kept a low profile. There wasn?t too much trouble ? occasional, but manageable.

That is, up to recently, people made deals and drilled wells. Oil and gas flowed to the coastlines, to refineries, tankers and transoceanic pipelines. Everybody got paid.

Now? With the BP attack in Algeria? The terrorists have determined that Westerners and energy interests are fair game. It?s part of the militant Islamist awakening across MENA.

It doesn?t really matter that the Algerian government sent in troops almost immediately, guns blazing, and wiped the terrorists out to the last man. The global energy industry ? Western players, but national oil companies, as well ? must deal with the new reality of development amidst a vast battle space of irregular warfare. It?ll make everything more difficult, time-consuming, costly, riskier.

What?s the answer? There?s no real ?answer.? You just have to deal with it. Welcome to the 21st century. You?ll have to invest around it. And on that note, thank you for reading.

Best wishes,

Byron W. King

Original article posted on Daily Resource Hunter?

Byron King

Byron King is the managing editor of Outstanding Investments and Energy & Scarcity Investor. He is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. He has conducted site visits to mineral deposits in 26 countries and deep-water oil fields in five oceans. This provides him with a unique perspective on the myriad of investment opportunities in energy and mineral exploration. He has been interviewed by dozens of major print and broadcast media outlets including The Financial Times, The Guardian, The Washington Post, MSN Money, MarketWatch, Fox Business News, and PBS Newshour.