The BarkerLetter

January 18, 2008

Greetings investors.

There’s a wall of worry building south of the 49th parallel.

Nor is it without foundation. There really are tangible signs that the U.S. is running out of fingers to stick into the dyke.  Bush’s tax relief package could be the last pinky left.

Here’s the good news: I think that metals, energy and resource shares can and will weather a bear market in the U.S. due to brisk demand overseas.  In fact, just last week while I was lamenting the lack of rosy 2008 market forecasts by the major mining companies (like we had late in ‘06), I saw a report by Rio Tinto stating that metals demand will keep percolating along right through ‘08.

Credit Suisse quickly jumped on the bandwagon, citing its own numbers to prove the year will end with a severe shortfall of iron ore. (Note:  Have a look at near term iron ore producer Northland Resources trading as NAU.TSX-V).  So that bodes well for steel. 

Though I’m obviously not a doomsdayist, I don’t think we’ll see runaway stock prices for miners this year except - and this point cannot be understated - those that are currently undervalued and have really good projects in their portfolios.

By really good, I mean really high reserves or near reserves and really low projected operating costs!  

That means research is the key word going into ‘08. Be stingier with your investment dollars, more selective, more discerning, more patient, and more willing to do research.  (Subliminal message: continue to read this daily message and subscribe to The BarkerLetter).

In the meantime, hang onto your energy and precious metals shares.

Kb

November 27, 2007

Greetings investors!

Uh uh …

First there was this proposed BHP Billiton/Rio Tinto Ltd. merger to create the world’s largest integrated mining company. Now the world’s second largest zinc producer is warning of lower earnings.

Am I the only one who thinks we’ve been too long at the trough?

Zinifex Ltd. of Australia has warned investors that rising costs, the strong Australian dollar and lower zinc prices could hold back earnings this year.  Net profit is still ontrack to exceed last year’s record result, but I think this is a harbinger of leaner times ahead.

I don’t like to be the skeleton at the feast, but higher costs and inflated currency values have created an artificially expensive operating climate for mineral explorers and producers.  A downtick or (heaven forbid) prolonged dip in metals prices could be disasterous.

Look, it’s the reverse scenario of a few years ago. After a prolonged bear market for copper, nickel, and precious metals (closer to a nuclear winter in fact), producers had wrenched down operatings costs so far that any upward moving in pricing sent profits and share valuations sky high.

In this reverse scenario, we’ll see it all go the other way.

Personally, I think BHP and Rio are both looking to their future survival, rather than a way to expand profits over the short term. They’re already planning into the next bear market. 

The only way to stay in business when aluminum and steel return to ’90s prices is to be the world’s largest volume producer with the thinnest margin.

But it’s always profitable to buy the right penny explorers, if you can get them cheap. Nobody ever went broke finding minerals, merely from producing metals at costs that were too high to sustain profitability in a dwindling commodities market.

Be real careful out there.

Kb

November 22, 2007

Greetings investors!

Personally, I hate to see it when the world’s largest mining companies start making takeover bids for each other.

It’s not a bad thing necessarily, but it shows a ripening bull market, a peak if you will.

Last week I said I wasn’t keen on new or emerging base metals and precious metals producers, because of the economics of that stage in a company’s lifecycle. The biggest gains are made in the early stages of discovery, and during the latter stages of optimizing the company’s presumed operations. It’s when the company begins to get profitable, and enters a period of exponential growth.

In a similar vein, I’m not keen on the big producers such as BHP Billiton Ltd. or Rio Tinto plc, which have had several consecutive quarters of untrammelled growth. I think they’re fully valued.

BHP Billiton wants to acquire London-based Rio for $150 billion. Wow! The bid was nixed earlier this month, but I think the Australian mining giant will keep trying and eventually succeed. 

Apparently the takeover would achieve efficiencies by reducing overlapping investments in mines and other assets. It is also said to be a good thing for steel makers.

Not so, according to the steel industry federations in Japan and China, who fear the creation of a mega monopoly on iron ore that would be unfair to the producers. 

The two companies control 60 per cent of Japan’s raw materials imports, according to the federation.

Like, whatever. The point is this: Iron ore and steel making are good businesses right now, and going forward!  It’s why I’m in favour of iron ore start ups like Northland Resources (NAU.TSX-V) which has an impressive suite of projects in Scandinavia.

One of those is  the 100% owned Hannukainen iron-copper-gold project in Finland, where Northland plans to collect a bulk sample for the purpose of metallurgical testing. Metallurgy is one of the final stages of feasibility, and suggests the project is well advanced.

Check them out. The stock is just over $3 Cdn per share!

Kb