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Urbanization
is a macro-trend, in 1800 two percent of the global population was urban, by
1950 it was 30%. Today half of all the people in the world live in cities.
This is an economic migration - historically poverty rates are 4 times higher
in rural than urban areas. The UN projects that by the year 2030 there will
be 1.5 billion more people living in cities.
Investing in copper might be the simplest way to profit from the ongoing
global urbanization.
China has one fifth of the world’s population and India has another 1.2
billion people. India's economy expanded at 8.9% in the quarter ended
September 30th while China's economy expanded at 9.8% in the quarter ended
December 31st.
China and India consume a lot of copper. Key drivers of increased copper consumption
in both countries is infrastructure build out - power, construction, energy
and transportation.
India's power production needs to rise by 15 to 20 percent annually which
means, according to the International Energy Agency (IEA), India needs to invest
$1.25 trillion by 2030 into its energy infrastructure. Because of this
investment into new infrastructure India's annual copper demand is expected
to more than double to nearly 1.5 million tonnes by 2012 - up from a current
600,000 tonnes. India usually exports between 100 and 150,000 tonnes a year,
Indian copper exports are likely to cease and indeed Indians might become
large copper buyers.
With less than 1/3 of the population India’s urban areas generate over
2/3 of the country’s GDP and account for 90% of government revenues. A
report done by the McKinsey Global Institute called India Urban Awakening
predicts that 590 million people or 40% of India’s population will live
in cities by 2030, up from 340 million today.
China's current urbanization rate of 46 percent is much lower than the
average level of 85 percent in developed countries and is lower than the
world average of 55 percent. China has set a goal of 65 percent of
urbanization rate in 2050. Over the coming 40 years that means 20 percentage
points of urban growth per year. This translates into 300 million rural
residents becoming urban residents over this time period - last year the
disposable income of the Chinese urban population stood at 17,175 yuan per
capita while the net income of the rural population was 5,153 yuan per
person.
The annual per capita consumption of copper in India is 0.47 kg,
China’s 5.4 kg and the world average is 2.7 kg. China’s
urbanization plans and forecast GDP is expected to drive Chinese copper
consumption from the current 5.4 kg/capita to an astounding 10 kg/capita by
the end of the decade.
Australian equity research firm Resource Capital Research (RCR) said it
expects the copper market to move from a small surplus in 2010 to a deficit
of around 400,000 tonnes by 2011. According to JPMorgan Securities Ltd, the
world refined copper market will have a 500,000-metric-ton deficit in 2011.
The International Copper Study Group said global demand for copper will rise
by 4.49% in 2011. Supply disruptions have cancelled out modest mine supply
growth.
A glance at the following two charts confirms the growing demand for copper
while inventory levels at the London Metal Exchange hint at the supply
deficit.
Follow
With
metal analysts calling for a 10-30% rise in the 2011 copper spot price, you
could probably make money buying shares of JJC-iPath – an index
composed of copper futures contracts traded on the New York Commodities
Exchange (JJC is up 50% in the last 6 months).
Or you could buy shares in one of the big multi-national copper miners.
Freeport McMoran (FCX-NYSE), BHP Billiton (BHP-ASX) or Xstrata (XTA-LSE) are
up a collective 58% in the last year.
But to make the big gains, you have to get in ahead of the money flow.
Potash has recently given us an excellent example on how to do that and what
signals investors should watch for as the process plays out.
Potash is the primary ingredient in fertilizer, it’s also a mined
resource with global demand being driven by a macro trend. What’s been
happening is a trickledown effect and is a three phase process:
PHASE#1: a barrage of bullish headlines in the mainstream
media: “Potash Profits Up” “Spike In Food Prices
Bullish For Potash” “Potash Export Prices Rising” etc.
PHASE#2: a flood of investment dollars into the senior potash
companies. Potash Corp (POT-NYSE), Agrium (AGU-NYSE) and MOSAIC (MOS-NYSE)
are all up about 120% in the last 12 months.
PHASE#3: Snowballing investor
interest in the “junior” (smaller cap) explorers. This third
phase is typically riskier and more profitable than phase #2. Nine months
after the potash majors began their climb, Amazon Mining (AMZ-TSX), Encanto
Potash (EPO-TSXV) and Western Potash (WPX-TSX) all caught fire –
catalyzed by news stories of food price inflation. In the last three months
all three aheadoftheherd.com sponsor companies have seen stock price
increases an average of plus 200%.
"You're
seeing a catch-up phase, there's capital flowing into the sector and it's
moving down into smaller-cap names." Robert Winslow, Wellington West
Capital Markets
Copper has just completed phase #1 (a barrage of bullish headlines), and
phase #2 (the majors have had their run).
Phase #3 is about to begin.
VMS Ventures, Copper Fox, Far West Mining, Hana Mining, Nevada Copper,
Redhawk Resources and Western Copper are all good companies seemingly well
positioned to benefit from this next phase.
Catalyst Copper
I am going to single out one company, Catalyst Copper TSX.V - CCY, that
appears to have everything going for it – including a
“tell” in the fundamentals that suggests it may be about to be
revalued.
Catalyst has the right to earn 60% of the La Verde Project. La Verde is a
Mexican copper porphyry project with NI 43-101 compliant resource of 2.1
billion pounds of Measured and Indicated copper and an Inferred Resource of
1.3 billion pounds of copper.
Catalyst Copper is currently earning into a 3.4 billion pound copper deposit
that remains open in all directions. Today their 60% share would equal 2
billion pounds of copper - 9.6 pounds per share - the current spot price of
copper is $4.46/lb. With Catalyst currently trading at .22 an investor would
be buying copper in the ground for .02 a pound.
Catalyst Copper, partnered with Teck Resources TCK-TSX, has commenced an
aggressive 20,000 meter drill program for 2011.
Catalyst CEO John Greenslade just raised $850 million for Baja Mining and he
is on record as stating that CCY is a “more straight forward project”.
But here’s the tell: for the last year CCY has traded about 500,000
shares a day. A lot of that trading is “seed stock” changing
hands. Since February 1, 2011 – the average daily volume has jumped to
about 1,840,000 – while the stock has risen to .22.
180,000 people a day move from the country to the city. Urban
infrastructure devours copper. Over the next 12 months that demand might
drive investment dollars into juniors with big resources like Catalyst
Copper.
Are there copper juniors on your radar screen?
If not, maybe there should be.
Richard Mills
Aheadoftheherd.com
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