Metals: Industrial dreams

The choices used to be pretty simple when brokers and analysts urged their clients to diversify their portfolios and invest in the metals-and-mining markets. Investors could buy a handful of well-known metals such as gold or copper, or they could purchase shares of the companies that mine those commodities. But investors who ignore the more exotic metals are in danger of missing out on one of the biggest boom markets the sector has seen in decades.

Prices for metals such as gold, copper, nickel and zinc have all increased substantially during the past several years, but they pale in comparison to the surging prices for more exotic metals like uranium and molybdenum. The price of uranium skyrocketed to a high of more than US$113 per pound in March, up from about US$10 five years ago, while molybdenum. a metal used in oil refining and as a way of increasing the strength of steel. jumped to roughly US$30 per pound from just US$3 over the same time period. It's pretty much the same story for other lesser-known industrial metals such as tungsten, cobalt and indium.

The bull market for both types of metals is not expected to end anytime soon. However, that doesn't mean that the share price of both gold companies and the growing number of companies looking to cash in on the booming industrial metals sector will have the same upside, says Kevin Bambrough, market strategist at Toronto-based Sprott Asset Management Inc. “Gold will most certainly outperform both uranium and molybdenum in the long run,” he says. “That said, gold equities need the price of gold to rise to justify their valuations. But if moly and uranium prices remain anywhere near current levels, there are many stocks in each sector that are cheap.”

The biggest difference between exotic metals and their more established counterparts is that the price isn't driven by global financial markets, but by the demand for them by industrial applications. That's why, until recently, there was little investor interest in exotic metals, says Otto Spork, president and CEO of Toronto-based Sextant Capital Management Inc., which launched a hedge fund last year that focuses on companies producing molybdenum, tungsten and other exotic metals. “When we launched the fund, it was pretty difficult to get investors interested,” he says. “It was clear that we were in a boom market for all the commodities, but most investors were more interested in oil, copper and the bigger commodities.” While Spork's fund concentrates on companies in the molybdenum sector, it invests smaller amounts in silver, tungsten, titanium and some gold. So far, that mix has paid off, with the fund posting a one-year return of more than 117%.

The initial reluctance to invest in exotic metals is not all that surprising. The last time most people heard about molybdenum, indium and tungsten was back in their high-school science classes. As a result, the markets for those metals are not well understood, not very transparent and often illiquid. Unlike copper, gold or nickel that trade on global commodity markets such as the New York Mercantile Exchange (NYMEX) or the London Metal Exchange (LME), there is no open market for most industrial metals. Prices are set through contracts hammered out directly by the mining companies and industrial users.

But in May, the NYMEX (which also trades commodities such as oil, gas, gold, copper and frozen concentrated orange juice) introduced a uranium futures trading contract, which may increase interest in the already hot uranium market and could drive prices for the yellow metal even higher, predicts Patricia Mohr, a vicepresident and economics and commodities specialist at Bank of Nova Scotia, in a recent research note. Spot uranium prices have already doubled since last October, making it the best-performing commodity tracked by the Scotiabank Commodity Price Index.

It's also getting easier to invest in the companies mining exotic metals as well. Investors who wanted exposure to the uranium market could either buy stock in a company such as Cameco (TSX: CCO) or Denison Mines (TSX: DML) that actually produce uranium, bet on one of the dozens of small junior mining companies looking for it or invest in Uranium Participation Corp. (TSX: U), a closed-end fund founded by Sprott Asset Management and managed by Canada's Denison Mines that invests in physical uranium. Shares of the fund have increased roughly 92% in the past year alone, and now trade at about $16 per share.

Sprott is now looking to do the same thing for molybdenum with the introduction of Sprott Molybdenum Participation Corp. (TSX: MLY). The fund's initial public offering in April raised $189 million. The moly market may also soon follow uranium into the global financial markets. The London Metal Exchange is pondering the introduction of a molybdenum contract to its roster of commodity markets.

Those initiatives should give molybdenum a higher profile with investors, who, until recently, would have had a hard time even finding a company that was producing just molybdenum, because it is primarily produced by copper companies. Now there are a growing number of pure molybdenum plays to attract investors. For example, with its October purchase of the Thomson Creek mine in Idaho, Toronto-based Blue Pearl Mining Ltd. (TSX: BLE) became the world's largest publicly traded pure molybdenum producer. Shares of the company have increased more than 375% over the past year and are expected to go even higher as the company brings online new production in the coming year. Another pure molybdenum producer, Adanac Molybdenum Corp. (TSX: AUA), based in White Rock, B.C., is on track to start production at its Ruby Creek deposit in northern B.C. by 2009.

As a general rule, investors looking for the next exotic-metals stock to cash in on should look for companies with low-cost deposits, and whose viability will not be jeopardized by volatile prices in the thinly traded metals markets, as well as solid management, says Spork. And avoid companies that have recently changed their stripes. say, a former gold exploration company suddenly into molybdenum or uranium.

Looking for a riskier play? Try cobalt and tungsten. The markets for both are small and difficult to invest in, but that might change if the global economy continues to boom, increasing demand for all exotic industrial metals. If that happens, investors may soon have even more metal in their pockets.