Where the Money Is Right Now:
Deals Flowing in Mining Sector

By Wednesday, April 6, 2011

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.


About the Author | Browse Mitchell Clark's Articles

Mitchell Clark is a senior editor at Lombardi Financial, specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, including Micro-Cap Reporter, Income for Life, Biotech Breakthrough Stock Report, and 100% Letter. Mitchell has been with Lombardi Financial for 17 years. He won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was a stockbroker for a large investment bank. In the... Read Full Bio »

Sep. 2, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter) $1014.15
Trailing 12-month Price/earnings multiple (Most Recent Quarter)

17.44

Dow Jones Industrial Average Dividend Yield 2.71%
10-year U.S. Treasury Yield 2.14%

Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.

Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.

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