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Energy / Resources

  • Do I invest in commodities or individual commodity stocks?

    rogermontgomeryinsights
    December 3, 2009

    Yesterday an investor who likes his commodities, James, posted the following comment to the blog:

    Hi Roger,

    Following you on the TV shows is really helpful to my investment decisions, so thanks very very much.

    I’d also like to have your view on current commodity bull trend. I understand that you like to value companies based on ROE, RR, etc, but do you ever try to reasonably predict the metal / commodity / gold price for next year? While you may say that is speculation, but a reasonable prediction based on supply / demand would also help in determining the company value?

    James

    Following is my response:

    I am interested in commodity companies.

    There’s something in the fact that billionaire Jim Rogers has been saying expect new highs in virtually all commodities over the next decade. There’s also something ominous in Warren Buffett’s purchase of a railroad company. Both men believe that oil prices will rise substantially.

    I think its impossible to predict prices of anything in the short term, however I do believe that over longer periods there are supply/demand considerations that are easier to discern.

    With regards to taking advantage of this, I have so far been biased to investing in the commodity itself rather than stocks. Companies that mine, plant or otherwise produce a commodity have risks associated with them that are unrelated to the commodity’s price itself.  For example for an exploration company, there are funding risks and execution risks, not to mention management risk and stock market risk.

    It is quite possible that you believe that the gold price is going up, but the gold explorer whose shares you have just bought doesn’t find any gold! You may believe that the oil price will rise and yet the particular company you have bought shares in has an environmentally  catastrophic spill.  The wheat or corn price may be going to go up, but the farm you just bought had its crop wiped out by a flood resulting in no revenue and a higher future capital expense. There are simply risks that aren’t related to the commodity price.

    For these reasons, where I have had a view about a commodity, I have thus far taken interests in the commodities directly rather than through stocks.

    Posted by Roger Montgomery, 3 December 2009

    by rogermontgomeryinsights Posted in Energy / Resources, Insightful Insights.

  • Can I value Fortescue (FMG)?

    rogermontgomeryinsights
    November 4, 2009

    On Richard Goncalve’s Market Moves show on the Sky Business Channel last week I mentioned I would estimate a value for Fortescue Metals Group (ASX:FMG). Let me be the first to say that, like IT businesses, companies in the resources sector are notoriously difficult to value. This is not because they are in a fast changing industry whose long term economics are difficult to predict, but because the economics are based on commodity prices that change daily and whose prediction is almost impossible.

    Having said that I should offer a caveat; Buffett’s announcement that he is buying the railroad operator Burlington/Santa Fe in a $44 billion deal – his biggest ever – suggests he truly believes that fuel prices are going up a lot. Indeed while higher diesel prices will raise the costs of running trains, it will raise the cost of operating trucks over trains by a factor of four.

    But I digress, FMG – based entirely on 2010 consensus analyst forecasts – is worth $1.90 to $2.00. Another caveat – consensus analysts predictions could be wrong.

    By Roger Montgomery, 4 November 2009

    by rogermontgomeryinsights Posted in Companies, Energy / Resources.