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TORONTO (GlobeinvestorGOLD) — It appears that demand for industrial type commodities will likely continue to push commodity prices higher and the underlying beneficiaries will be mining companies.
A comparative study of the Dow Jones industrial average and Teck Cominco Inc., Canada’s fourth largest diversified mining company, uncovered a significant divergence between the Dow industrials and industrial-based commodity stocks that began in 1997. Then followed the divergence between the Dow industrials and transports in 1999, further signifying a non-confirmation of the Dow bull market. However in the second quarter of 2003, all three started to rally together again and on December 26, 2004 the Dow transportation index registered an all-time high, suggesting that continued new high ground might be sought by the markets. Since transport stocks are much more dependent on the economic environment than the average stock, they foreshadow economic growth and further strengthen the bullish view of commodity prices.
According to Dow theory, the averages must confirm one another for a primary trend “buy” or “sell” signal to be valid, meaning in this case, that the new high for the transportation index needs to be confirmed by the Dow industrials. Though it appears that the industrials are on course to doing so, they will have to advance to a close of 11,723.
The 1997 Asian currency crisis lay at the root of the seemingly paradoxical divergence where economic growth, as represented by the U.S. stock market, was not confirmed by a corresponding demand nor price increases in industrial commodity prices or underlying commodity-based stocks.
The crisis began on July 2, 1997 with the precipitous fall of the Thai currency, which spread to Indonesia, Malaysia, the Philippines, South Korea, Singapore and Japan, a country already in the grip of economic difficulties. According to London’s Financial Times in August 1998, “Following the outbreak of the crisis, $100-billion (U.S.) of foreign capital fled Asia as the currencies of the ’tiger’ economies tumbled, stock markets crashed, and major banks came face to face with insolvency. A total of $126.2-billion flowed into equity funds in the first six months of 1998 in the U.S. and European stock markets thus explaining the incredible market rise.”
However, that was then and now both the U.S. and Asian economies are expected to grow over the next few years with China emerging as the probable frontrunner.
Co-founder of the Quantum Fund and U.S. investment guru Jim Rogers believes that China is “the next great country of the world” and commodities are the next big thing.
Technical analysis supports the underlying premise that investors should focus attention on resource stocks. Analysis of the S&P/TSX metals and mining sub-index and stocks within the index reveal that they have traced out bullish patterns over the past six to eight years and have recently broken out to the upside.
Teck Cominco’s share price could be a direct recipient of the predicted boom as the company is the largest zinc producer in the world, it is a partner with the second-largest metallurgical coal producer in the world, the Elk Valley Coal Partnership, and it is a significant producer of copper, one of the oldest metals recognized as a major industrial metal.
Another little known player and newcomer to the copper and zinc arena is HudBay Minerals Inc. It is a base metal producer with four operating copper and zinc mines, two concentrators, a copper smelter and zinc plant all located in Manitoba and Saskatchewan. HudBay recently acquired Hudson Bay Mining and Smelting from Anglo American plc for $312 million.
On a fundamental basis, HudBay is extremely leveraged to copper and zinc prices but is negatively impacted by a rise in the Canadian dollar. The company’s net asset value based on current commodity prices is calculated to be $4.50 according to one analyst. The stock should be classified as suitable for risk tolerant, aggressive investors.
Yola Edwards is a contributing writer and technical analyst for Bell Globemedia Interactive, providing options and technical analysis research on a variety of North American equities.