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Jim Letourneau's Blog

Investing, Technology, Travel, Geology, Music, Golf. I think that covers it.

Leverage

Our last post showed some obscure commodity price moves. You’ll have a tough time trading physical tungsten, molybdenum and uranium. However you can participate in these rising markets by buying the shares of companies that mine these commodities. The number one reason to own mining company shares is that they provide excellent leverage to rising commodity prices.





During the run-up in the uranium spot price (see my previous post) from under US$8 to over $33.00 the price of Cameco shares went from under US$4 to over $50. Cameco owns the richest uranium mines in the world and some of their operations remained profitable at very low prices. Those of you who are good at math will realize that a 4 fold increase in uranium price lead to a 12 times increase in the value of Cameco shares.





Even more leverage to rising commodity prices can be found in companies that have defined resources in the ground. The value of the metal in the ground increases at a rate even faster than the price of the commodity. The share prices of mining companies with defined resources in the ground behave like call options (that never expire) on the rising commodity price. Companies are often able to pick up past producing mines or discovered resources (not yet mined) very cheaply at the trough of the commodity cycle. In the uranium sector, Strathmore Minerals (STM.V) was making strategic acquisitions during the “dark ages” of the commodity cycle. Their trough to peak share price gain was almost 40 fold.   





Remember that leverage cuts both ways and the further down the resource stock pyramid you go, the greater your risk. The best gains in resource stock investing are in that fuzzy area between the industry leader and a heavily promoted chunk of “moose pasture”. If you do your homework you’ll be able to tell the difference.