Where the Money Is Right Now:
Deals Flowing in Mining Sector
The best action for stock market speculators continues to be in the mining sector. There have been lots of good momentum trades lately in a diverse number of industries, but, for consistency, mining stocks have been some of the best performers due to high prices for precious metals. These stocks also remain the most shunned by individual investors, as compared to other sectors. It’s always been that way and will likely remain so.
One trend I’ve noticed in the marketplace is that junior oil stocks haven’t performed nearly as well as junior gold stocks, even though the spot price of oil is well over $100.00 a barrel. The opposite is also true in regards to large-cap stocks. Large, integrated oil and gas stocks have been doing tremendously well this year, while large-cap gold stocks have waned. The explanation lies in economies of scale, where the oil business has a lot of it and the mining business does not. This is why we’re now getting all kinds of mergers and acquisitions in the mining sector. It’s a great time to be a player in the mining business. The whole sector is awash in cash.
The latest big name in the mining sector to be the subject of a takeover offer is Equinox Minerals Limited (TSX/EQN), a copper producer in Zambia. The company owns one of few new copper mines to be started up on a large scale. I picked this stock almost a year ago between $3.00 and $4.00 a share and now a Chinese firm wants to purchase the whole company at a premium, in order to secure much-needed copper production for their economy. China’s been doing a lot of this lately. A number of its state-owned firms have been gobbling up resource companies all over the world. I suppose when you have such a big appetite, it’s a natural thing for a country to do. It’s also a reason to have exposure to this sector—there are well-heeled buyers out there.
Investing in gold is what junior gold miners are doing now, outside of their existing operations. Merger and acquisitions are taking off because they have a lot of cash in the bank and their share prices are lofty enough to represent real currency. Just recently, New Gold Inc. (AMEX/NGD) announced an all-share deal to acquire Richfield Ventures Corp. (TSXV/RVC) in order to get that company’s reserves. With a super strong stock price, a company like New Gold can easily afford to make these kinds of acquisitions. And, with the spot price of gold over $1,400 an ounce, the business model for fully priced deals is still very profitable, especially if gold keeps going up.
The stock market is churning now, waiting for first-quarter earnings. If the numbers don’t impress, then we’re going to get a serious pullback in the broader market. In any case, the number one sector for equity speculators remains that of mining stocks in my view. It’s a sector with the most attractive fundamentals for growth.