Sunday, May 27, 2007

The Commodity Bubble?

If you've been watching commodities at all you probably saw some doom and gloom news, Metals Bubble Poised to Burst on commodities, and it certainly sent commodity prices tumbling despite a continuing trend to lower LME warehouse levels, as the charts below show.

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Zinc warehouse supplies are at their lowest levels in over 5 years, so just what is this commodity bubble?

There is no question that some company's share price has gotten way, way ahead of itself, like Goldcorp, and its valuation could be described as a bubble valuation.

Another company that has gotten ahead of itself is Blue Pearl, now known as Thompson Creek Metals, TCM-TSX. They have a share price of $16.63 and made 45c/eps their last quarter. Their molybdenum production is 21 million pounds per year, increasing to 27 million pounds, so earning should go up, right?

Wrong, for this quarter where they report 45c eps commodity prices were so strong, in their opinion, so they reduced their inventory levels and they sold 10.5 million pounds for the quarter, twice their level of guidance. They do not have the inventory levels to repeat this feat, so productions sales for Q2 should be about half of Q1 and production will not increase until they've built another mine.

Add to that that with the US dollar declining their Canadian costs will go up, about 10% over last quarter just based on recent strengthening of the Canadian dollar. Molybdenum prices are up for this quarter so it will offset some of the increased costs due to currency losses, but trying to make up for doubling their sales for a quarter simply isn't going to be covered by the increase in molybdenum price.

The other thing is that they earned $47.7 million dollars, and that is over 105,395,000 shares diluted, or so they report to get 45c/share. Currently they have 111,749,000 shares, 24,644,000 warrants and 6,943,000 options for fully diluted share capital of 143,336,000 shares, or about 36% more shares then reported. Average the earnings over the full dilution and you get 33c/eps.

Blue Pearl, aka Thompson Creek metals, is highly unlikely to come close to its Q1 earnings, but with 2007 earning potential to be in the range of $140-150 million and a fully diluted market cap of $2.4 billion, it just isn't the kind of return investors in base metals are looking for.

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