Sprott Money

 October 7, 2015

 Five reasons to track mining stocks

TPP deal is just the latest, in a string of recent developments that suggests the sector, particularly precious metals players, may be worth a new look

 The Trans-Pacific Partnership (TPP) deal announced earlier this week, which will group 800 million consumers, from 12 countries, accounting for 40 percent of the global economy, has come at a great time for Canada’s mining industry. While precious metals prices have recovered somewhat, base metals have been clobbered by sluggish demand, particularly in emerging markets, as producers, struggle to shag off over-investment made during good times. 

 Announcement of the deal, which will enhance export opportunities for Canadian and US sector players, also comes at a great time for Sprott News, because it coincides nicely with the firm’s to increase its coverage of mining firms.

This, for five main reasons:

Low prices, attract value investors

Warren Buffet, loves to say that you should “be fearful when other people are greedy, and greedy when others are fearful. Likewise value investors, can’t have helped but notice, as Mishka vom Dorp, an investment executive at Sprott Global Resources notes, that the Market Vector Junior Gold Index (GDXJ), is off by nearly 90% during the past five years, in real terms. Declines of that sort inevitably signal that it is time to start looking for opportunities. 

 How much physical gold can you keep in your house?

Precious metals lovers, particularly lovers of the physical stuff, are a clever lot. However there are limits to how much even they want to keep in their houses or safety deposit boxes. That presents a challenge to followers of Marc Faber (publisher of the Gloom, Boom and Doom Report) and Jim Rickards, (author of the Death of Money) and other newsletter gurus, who have recommended holding between 5% and 25% of their assets in gold.[1] Mining stocks (along with sector funds, ETFs and physical trusts) enable such investors to get exposure to physical metals through these vehicles and thus to diversify their holdings within this asset class.

 

A window into underlying precious metals demand

Following mining industry developments provides precious metals investors with a good window into underlying demand for the metals, and the cost of producing them. For example when companies such as Barrick, Eldorado and Glencore or divest assets, discontinue projects and closing down production facilities (or when they do the opposite) precious metals investors ake note.

 You are already exposed to mining through your index funds

Many Canadians invest in the markets by buying index funds, or mutual funds that have so many stocks, that they track are almost “closet indexers,” themselves. Such investors are already heavily invested in commodities, which at end of August 2015, comprised 27.5% of market capitalization of S&P/TSX stocks.

 TPP: Ultimately fundamentals will decide

The good news about the Trans-Pacific Partnership is that it boosts the fundamentals of a the metals and minerals industry, which according to the Mining Association of Canada, averaged $158.6 billion a year from combined sector players between the years 2012 and 2014. Canada stands to be a big winner from the reduction in tariffs currently levied by countries such as Japan (7.9%), Vietnam (up to 40%0, Malaysia (up to 50%) and Australia (up to 10%). The TPP also eases many challenges that mining companies face in getting the people, products and services they need across borders on a daily basis, as they explore for, develop and operate ore bodies.

Of course one trade deal, an index tanking and major companies selling off assets are far from being guarantors that the mining sector is ready for a bounce back. However now is as good a time as any to start paying attention.

 Note: The writer’s views do not necessarily reflect those of Sprott News or Sprott Money.

peter@peterdiekmeyer.com

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[1] You can delete the portion in yellow, if you believe that this constitutes giving investment advice.