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6:05 pm  Tuesday  2 August 2011

Although the stock market closed down 9.3 points today, it does not tell a complete story.  My impression is that the market closed fairly mixed.  Some stocks started to tank early in the session, but they were the stocks that had been doing well over the past few days – stocks like MBT, BDO and ALI.  It is no surprise that people would be selling headline stocks after the big news on the U.S. debt ceiling deal yesterday.  In trading, it may always be wise to buy on rumor and sell on news.  In the case of the U.S. deal with congress, the passing by of the ceiling was the news people were waiting for.  Even in the U.S., now that the government debt issue has come to a temporary resolution, traders have started to look at other indicators.  Last night, it was the ISM index of national factory activity which fell to 50.9 from 55.3 the month before.  The reading was way below expectations of 54.9, according to a Reuters poll of economists.  A reading below 50 indicates contraction in the manufacturing sector, while a number above 50 means expansion.

Essentially, stocks on which the global and domestic economy would have a strong bearing would be quite sensitive to indicators coming from the U.S.  That is not to say that it will not be anticipating local economic data.  Unfortunately, the economic indicators which have been released so far has not been good.  The latest trade data showed that merchandise exports in May dropped 3.2% and the country’s volume of production index grew only by 0.9% for the same month.  In June 2011, Meralco sales declined by 2.2% – year on year – making it the 4th consecutive month  that it eased.  The significance of these early indicators is that it points to a slower GDP growth for 2Q-2011.  While there could be other considerations for the economy to do better, seeing that government has not done any pump-priming at all, I find it very difficult to be upbeat on economic growth.  That could be bad for blue chip stocks and stocks whose basic consideration is earnings growth.

Why then did some sectors in the market recovered and even closed strong?  If you examine closely, it was really the mining stocks led by MA/B, LC/B and ORE that gained sharply.  Of course, the stellar performer was ORE which skyrocketed after a cross-trade with a foreign broker usually associated with natural resource stocks.  Nowadays, there is particular attention being afforded resource stocks because of the perception that they are getting scarce.  I am not an expert on natural resources, but I can surely tell from commodity prices that demand for minerals are generally stable at higher levels.  I remain a believer in mining stocks up to this point.  After all, I had stuck to my guns with mining even when people got impatient with the likes of ORE.

Anyway, there have been questions on what I thought about ORE, and I would like to respond with some notes that an analyst friend sent me.  It seems that ORE is now on their 10th shipment.  So far, they have been shipping from the production of their Toronto mine.   This is the maiden shipment of their Pulot mine. The shipment will be a 1.5% Ni China grade with estimated selling price of around $30-$40/ wet metric tons.  The recent results of the exploration being conducted in the Pulot mine is hitting 3% ni grade at a depth of 6 to 12 meters.  Although this is still preliminary, it is very encouraging.  Putting things in perspective, the resource estimate of Toronto mine is much higher than Pulot mine – 44.5m dmt vs only 9.65m dmt  – despite the larger area of Pulot compared to Toronto – 1,408 ha for Pulot vs 768 ha for Toronto.  But because Pulot is relatively under-explored compared to Toronto,  there is high probability that Pulot mine might contain more resources than Toronto given that its area is twice the size of Toronto and geology/ mineralization of these areas are the same.

I think these notes tell us a lot of what is in the ground over there in Palawan.  Moreover, it tells us that there is a lot to be produced by ORE over the coming years.  No wonder the stock was very strong today.  These notes are not meant to recommend buying the stock.  These notes are merely meant to inform readers who know very little information about what is going on.  As in any mining story, there are risks all the time, meaning there is money to be made but also to be lost if you are not careful.  As Filipinos say it, walang sisihan.

As for Lepanto, I think the trend is still intact because there is still much to be anticipated.  Unfortunately, I do not have any notes on LC yet.

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