Emerging Metal Miners Attractive to Value Investors

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We see the mining sector gaining in interest for value investors as they screen for companies selling at 52-week lows, below book value, and with potential to expand margins and earnings.

There appears to be an enhanced investment opportunity for long-term value investors in emerging producers selling near cost of investment or book value. We see the mining sector gaining in interest for value investors as they screen for companies selling at 52-week lows, below book value, and with potential to expand margins and earnings. Wholesale redemptions by investors, along with tax loss selling in both the U.S. and Canada, are creating opportunities for value investors looking to acquire companies with both real assets and the potential for increasing production.

Reduced global lending and investment, which caused a shortage of liquidity, has resulted in a deflationary environment unfavorable to commodities, including precious and base metal prices. Recent actions by governments and central banks are largely inflationary, which should lead to higher gold and silver prices as banks begin to lend and invest. A reduction in credit risk should spur a resumption of global growth, increasing demand for commodities and leading to higher base metal prices. While this cycle appears inevitable to long-term investors, this scenario may be delayed by credit markets or anti-growth policies including protectionism, higher taxes, and increased regulation.

It follows that deflation in the near term should be favorable for companies that have cash or the ability to operate profitably at current metal prices. Clearly, the inflationary environment in the mining industry in 2007 has reversed and costs of labor, materials and supplies are moderating or declining. Recent declines in the price of fuel lifts a burden on both operating profits and the barrier to resumption of economic growth. As this situation persists, should metal prices rebound, margins will also expand, leading to potentially significant appreciation for emerging producers above current levels...

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