An Important Update On Commodities

Brad Briggs's picture

Thursday, May 19, 2016 - 10:30am

by Brad Briggs

We got some major news in the metals space last recently. Mining giant Rio Tinto (NYSE: RIO) just gave the OK for one of the first large-scale mining investments in years: a $5.3 billion development project on its existing Oyu Tolgoi mine in Mongolia.

According to The Wall Street Journal, Rio's project will take current open-pit operations at the mine (which primarily produces copper) underground. This should more than double production to 500,000 metric tons a year by 2027.

      Oyu Tolgoi's underground ore offers a good grade. And the mine's costs are already phenomenally low: Turquoise Hill reported first-quarter costs of 2 cents per pound of copper, helped by the gold produced as a byproduct at the mine. Including maintenance investment, the all-in costs were $0.62 per pound, compared with a spot price of about $2.20.

This is significant. After taking it on the chin after the commodity "super cycle" ended, many major mining firms ceased investing in big new projects. Now that prices for everything from copper to iron ore are picking up, it could be a sign that miners feel confident the rally will hold.

The Gold Market Is At A Turning Point
If you remember back in April, I interviewed Dave Forest, our resident commodities expert. Dave highlighted signs of strength in the space, which had been suffering for the past couple of years. Here's what he recently told his readers about action in the gold market:

      Things are reaching a critical point in the gold market.

The trading action the past few weeks has been some of the most frenzied we've seen since this market jolted back to life in January, with many gold stocks setting new, multiyear highs.

He continued:

      Much of what happens next will depend on the price of gold. In order to support the rising valuations for gold stocks, I think a new high in the gold price is going to be required. A good target is $1,300 per ounce -- if bullion can break that mark, it will justify the recent appreciation in gold stocks, and likely set the stage for another run.

As Dave pointed out to readers, the gold market appears to be at a crucial point. The S&P/TSX Global Gold Index is trading at the highest levels seen in the past three years. The last three times the index reached near its recent level around 220, it corrected, losing over 25% in a few months in mid-2013, and 40% during the second half of 2014.

 

According to Dave, that means right now is a critical moment for gold. If the index can push above this psychological barrier, a quick and large move upward could happen. But if the index stalls, we could see a short-term pullback.

So far, Dave's Scarcity & Real Wealth portfolio is up 31% year to date, with notable winners such as gold miner Mandalay Resources (OTC: MNDJF) up 33% in just two weeks.

For investors looking for an entry point into one of the world's largest, most diversified miners, this may be it. RIO shares advanced nearly 20% in April, and if commodity prices continue firming, shares could continue climbing. But caution is warranted: Large miners are still suffering from the effects of overinvestment during the super cycle. And while RIO's shares carry an enticing trailing yield of about 7%, this is still a somewhat risky play.

I plan to watch the resource markets closely over the coming months and keep you abreast of any important developments. In the meantime, if you'd like to get access to Dave's most current analysis on commodities -- as well as receive two free reports -- you can visit this link.

Brad Briggs does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.