Not-So-Minor Miners

The past four years have been a “dream come true” for commodities bulls, and this could be only the tip of a commodities iceberg. Oil and non-oil commodities have been on a tear across the boards, along with other precious metals.

Commodity-related stock indices have gained dramatically over the past year. The Dow Jones U.S. gold mining index, for instance, rose 50 percent in the year to mid-2006, as did the general mining index and the aluminum index since last October. The non-ferrous metals index, driven by surging copper prices, more than doubled from its 2005 trough in the second quarter to its May peak.

Copper prices have been going from one record high to the next, creating prosperity for such producers as Chile and Peru, and benefiting smaller copper exporters such as Zambia. After hovering below 80 cents per pound on the London Metals Exchange through end-2002, copper prices more than doubled by the end of last year, and reached $3.75 per pound in May 2006, before easing toward mid-year. Copper prices have jumped fivefold since 2002.

Other metals have also performed well. Nickel has more than tripled in price over the same time period, and aluminum prices increased by more than 80 percent, peak to trough.

As commodity prices increase, gold is likely to be bid up. Gold has always been a proxy for other commodities, but, equally important, inflationary pressures have started to rise — and gold is also seen as a hedge against inflation.

The First Inning

Spectacular though the run-up in metal prices has been, Kevin Ernst, Managing Director and Head of Business Development for Canada at the American Stock Exchange, believes that the limit has not been reached yet. He cites rapid economic development in China and India, which are building production capacities and infrastructure literally from scratch. Economists believe that demand from China is the principal factor driving copper prices to record levels.

Although commodity prices dipped in May and June, it may be merely a pause that refreshes. A similar decline was seen in the first half of 2005, when the Beijing government engineered a slowdown in the Chinese economy. Metal prices not only rebounded in the second half of last year but set new peaks in 2006. And by early July of this year, oil prices were above $75 per barrel, and other commodities were on a rebound as well.

Ernst sees an add-on effect from rapid growth in China and India in other economies and markets. For example, the rising standard of living in those two countries, which together have a population of over 2.2 billion, has spurred demand for gold and gold jewelry.

“We are still in the first inning as far as the commodities boom is concerned,” says Ernst.

A Neglected Sector

However, mining companies still account for only a small share of broad U.S. stock market indices, and their weighing is a fraction of what has been accorded to oil companies. Similarly, despite acute interest in commodity producers on the part of institutional and retail investors, major brokerage firms have only a handful of analysts in the sector — ironic in light of the coverage lavished on various “new economy” sectors, many of which have gone nowhere in the past two years.

Being a premier U.S. market for small and medium-cap companies, Amex began to focus on metal companies several years ago, when commodity prices were still in the doldrums. It typically lists companies below $1.5 billion in market capitalization, with the sweet spot for mining companies being in the $100 million to $600 million range. This is an ideal range for companies engaged in exploration, mining property development or early stages of production, and trading on their potential rather than actual output and profits.

Although Amex has a representative list of U.S.-based gold, silver and base-metals companies, such junior exploration operations have been especially plentiful in Canada, the hub of international mining industry. They have their primary listing on the Toronto Stock Exchange; but over the past several years, more than 60 Canada-based mining companies obtained a second listing on Amex. More are coming every year, with the total number of listings increasing by nearly 15 percent during 2005 and a healthy pipeline expected for the future.