Customer Service 1 (888) 261-2693
Advanced Search

The Commodity Investor Q&A

With Matt Badiali, editor, S&A Resource Report
Wednesday, November 12, 2008

Q: Right now, quite a few land drillers are trading at a discount to book value. What are your thoughts on the drillers and their present "less than asset value" pricing? – M.H.
A: I think there are some real bargains in there. These companies lost 65% of their market value this year alone. The selloff coincided with the massive fall in oil, which is around 60%.
So where are they headed from here? Well, we can use the last big fall in oil prices to predict what could happen to the land drillers in the future.
We have to go back to 1998 – the year Monica Lewinsky brought down a president, Frank Sinatra died, Titanic became the largest grossing film of all time, and the price of oil fell to $10 and change in December.
Six out of the seven land drillers around back then bottomed in terms of price to book value (P/B) between December 1998 and February 1999. (The one exception was the newly public Pioneer Drilling, which bottomed in April.)
Drilling companies just couldn't make money with oil that low. So shares declined until they sold for less than the value of the iron rusting in their drill yards.
But let's say you bought those drillers in February 1999, just as they began to recover, and held them until oil hit $35 per barrel, just under two years later. You would have made 340% on average – about 6.4% compound growth every month.
Today, many of those same companies are trading close to the same price to book values as they were at the bottom in late 1998. Take a look...
Market Cap
1998 P/B
Today P/B
Nabors Industries
$4.6 billion
Pioneer Drilling
$366 million
$1.8 billion
Parker Drilling
$428 million
Unit Corp
$1.6 billion
Weatherford Int'l
$10.3 billion
Grey Wolf Drilling
$1.2 billion
These companies weathered the last bear market in the oil industry. Of course, that's no guarantee they'll do it again. But they are getting nearly as cheap as they were back then. Nabors and Pioneer are even cheaper.
If you can buy these companies at or below their 1998 P/B bottom, you'll probably double your money over the next two years or so.
Q: Matt... Nickel has given up all of the gains it made in the last three years. Is there any hope at all for base metals? – D.E.
A: From 2003 to late in 2005, the price of nickel traded between $5 and $8 per pound. It was gathering momentum... In early 2006, it turned straight up. Starting May that year, nickel gained an average $1.32 per pound every month for a year.
In the previous 23 years, it averaged a gain of about 3¢ per month.
Since peaking around $24, nickel is down 80%. But that doesn't mean it's cheap. Take a look at this 25-year chart (which resembles the charts of zinc, copper, and uranium, too)...
Nickel Prices Have Fallen Back into Range
Nickel went on a binge. It's like it took a booze-soaked vacation to Vegas. Now it's back to the boring job building cars... But it's leaving some broken hearts behind.
It's the "new economics" of higher metal prices. Now, that's all falling apart...
Take Lundin Mining, a mid-sized base metal producer, for example.
Lundin Mining owns a property that produced 14.6 million pounds of nickel last year. It cost about $7.23 per pound to get that nickel out of the ground. But today, nickel sells at $5.40. The economics are clear – Lundin Mining must either shut down that mine or operate at a loss until prices recover.
And the company is having similar problems at its other properties, where it mines copper, zinc, lead, and silver. In 2007, Lundin's revenues were $1.15 billion. I expect that to fall to $260 million this year. It'll be enough to pay for interest, taxes, and keeping the lights on... but little else.
Right now, the company's market value is around $550 million. That's just over twice my sales estimate – too expensive. I think we need to see another two or three quarters worth of poor results before the market throws in the towel on base metal miners.
Good investing,

Recent Articles
Market Notes
Cheap retailer 99 Cents Only hits a 52-week high.
Other retailers flounder... Abercrombie & Fitch, Saks, Nordstrom, Bed Bath & Beyond, Whole Foods, Books-A-Million, J. Crew, and Tiffany & Co trading at new lows.
Ad businesses struggle... News Corp, New York Times, and Google hit new lows.
Earnings today... Crox, Macy's, Penn West Energy.
Market Watch
Symbol Price
S&P 500 1221.53 +1.3% +10.1%
Oil 37.77 +1.5% -2.8%
Gold 135.20 -0.1% +13.4%
Silver 27.93 +0.4% +47.9%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 19.39 -9.2% -8.2%
Gold Stocks 564.53 +1.3% +10.6%
10-Year Yield 3.00 +1.4% -9.6%

World ETFs
Symbol Price
USA 122.56 +1.3% +10.2%
Canada 30.44 +1.3% +13.8%
Russia 21.63 +2.3% +16.7%
India 37.73 +1.9% +20.0%
Israel 16.47 +0.9% +9.7%
Japan 10.58 +1.0% +7.4%
Singapore 13.88 +1.0% +19.2%
Taiwan 14.72 +1.6% +17.8%
S. Korea 56.56 +1.7% +22.8%
S. Africa 70.85 +3.9% +22.9%
China 45.06 +1.4% +0.1%
Lat.America 52.82 +1.4% +6.7%

Sector ETFs
Symbol Price
Oil Service 136.18 +1.5% +14.8%
Big Pharma 64.13 +0.6% -3.3%
Internet 72.13 +0.7% +22.3%
Semis 16.03 +2.1% +28.9%
Utilities 31.21 +0.3% +1.6%
Defense 18.51 +1.3% +10.1%
Nanotech 9.99 +1.3% +0.0%
Alt. Energy 9.95 +1.4% -4.4%
Water 18.31 +1.1% +12.2%
Insurance 16.07 +1.2% +18.3%
Biotech 20.58 +1.1% +27.1%
Retail 19.65 +0.1% +28.4%
Software 24.59 +0.9% +24.1%
Big Tech 53.73 +1.0% +21.9%
Construction 12.99 +2.1% +13.3%
Media 13.57 +1.1% +25.0%
Consumer Svcs 67.26 +0.8% +23.3%
Financials 54.87 +2.4% +5.2%
Health Care 64.22 +0.7% +1.3%
Industrials 63.25 +1.6% +19.7%
Basic Mat 73.57 +1.6% +21.6%
Real Estate 55.24 +1.4% +23.8%
Transportation 91.17 +1.4% +25.6%
Telecom 22.48 +1.1% +17.1%