First Metro Asset Management Inc

Italy, Gold and Metals by Gus Cosio

7:35 pm Tuesday 12 July 2011

Having come back from such an enjoyable beach sortie, it is very hard to get work started, especially since the broad market looks to be taking a beating. It was all red today in the most actively traded stocks list. Of the top 30 stocks on value turnover, only LC/LCB, MWC, MA and PWR traded higher while BDO remained unchanged. This time, it is the negative foreign factors that drove people to sell. The situation in Greece has revealed the weakness in Italy’s fiscal position, hence threatening its ability to refinance existing government debt. The problem is that Italy is the third largest economy in Europe behind Germany and France. It’s total debt amounts to Eur 1.6 trillion which is more than two and a half times the combined debt of Greece, Portugal and Ireland.

What is scary here is the question on who can bail Italy out should they default. The European Economic Support Fund only has capacity of Eur 440 billion and after Greece, Portugal and Ireland, only Eur 320 billion is available. If Italy needs a bail-out, they will be seeding Eur 550 billion in the next two years. Things are really getting messy for the Europeans. Unfortunately, any meltdown in those markets will hurt smaller markets severely as investors sell down all types of asset classes even as emerging markets are in good fiscal shape generally.

The global situation only highlights the greater role that precious and base metals investments will play in global portfolio which will be seeking to maintain value. In other words, it is probably time to run to very hard assets. No wonder gold prices are so buoyant, and it comes as no surprise that commodity funds continue to grow.

Fortunately, the Philippines is a mineral rich country, and mining can possibly keep our economy afloat for many years. It is but practical for local equity investors to maintain their interest in the mining sector. Foreign funds have only nibbled at Philippine mining stocks so there is more to expect from price gains. Today, LC saved the day with huge value turnover of Php 483.53 million while LCB had Php 197.3 million. LC and LCB which combined comprises only 2.16% of the index contributed 10 positive points today which means that these stocks cushioned the large decline of the PSEi. Of course, the smaller MA and the even smaller ORE showed similar gains. While ORE was not in the top 30 like MA, it had value turnover of Php 32.6 million which is not bad at all. I understand that one foreign broker has released a research note on ORE which may start the serious coverage on the stock.

Here are some notes which I manged to pick up on a similarly interesting stock – BC. Next year, the company will be shipping 10k oz of gold and 600k tons of nickel ore based on higher daily tonnage of 225k in 2012 due to a mine capacity expansion. BC booked only Php 101m net income from its nickel unit in 2011 while its contract miner DMCI Mining, which effectively shares half company wide earnings earned Php 500m. The nickel unit recently declared Php 32 per share cash dividends or 80% of 2010 EPS – all accruing to parent Benguet Corp which owns 100% of the nickel mine project. Higher precious and base metal prices and a debt buyback have helped turn around net profits in 1Q2011. Management is seeking board approval to reclassify Php 2.7bn revaluation increment and capital surplus to cover a Php 2.1bn retained earnings deficit. This balance sheet clean up entails a debt buyback of Php 250m worth of principal on which Php1.2bn worth of one-off gains will be booked this year. Earnings guidance this year is Php1.2bn, Php200m of which comes from operations in two areas – the Acupan gold mine and the Benguet Nickel Mine. The nickel unit expects to earn Php 1bn. Some 2012 core net income forecast have been upgraded to Php 624m from the initial Php297m estimate. PE is 5x based on 2012 earnings.

So while we can expect some turbulence in the other sectors of the market, I believe that some enthusiasm can be seen in mining shares for some time to come. In the seventies, the Philippine market was all about mining. Perhaps in this decade mining will come to lead the market once more. The idea may not be far fetched as more credible mining operations come into production.

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