Follow the Money: How to Profit from Copper's Next Wave

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"To make the big gains, you have to get in ahead of the money flow."

As a general rule, the most successful man in life is the man who has the best information

Urbanization is a macro-trend. In 1800, 2% of the global population was urban; by 1950, it was 30%. Today, half of all people on the planet live in cities. This is an economic migration; historically, poverty rates are 4x higher in rural than urban areas. The UN forecasts there will be 1.5 billion more people living in cities by the year 2030.

Investing in copper might be the simplest way to profit from the ongoing global urbanization.

China has one-fifth of the world's population and India has another 1.2 billion people. India's economy expanded at 8.9% in the quarter ended September 30, while China's economy expanded at 9.8% in the quarter ended December 31.

China and India consume a lot of copper. The key driver of increased copper consumption in both countries is infrastructure buildout—power, construction, energy and transportation.

India's power production needs to rise by 15%–20% annually, which means, according to the International Energy Agency (IEA), India needs to invest $1.25 trillion by 2030 into its energy infrastructure. Because of this investment into new infrastructure India's annual copper demand is expected to more than double to nearly 1.5 million tons (Mt.) by 2012—up from a current 600,000 tons (Kt.). India usually exports 100–150 Kt./year, but its copper exports are likely to cease and indeed Indians might become large copper buyers.

With less than one-third of the population, India's urban areas generate over two-thirds of the country's GDP and account for 90% of government revenues. A McKinsey Global Institute report called India Urban Awakening predicts that 590 million people, or 40% of India's population, will live in cities by 2030, up from 340 million today.

China's current urbanization rate of 46% is much lower than the average level of 85% in developed countries and is lower than the world average of 55%. China has set a goal of a 65% urbanization rate in 2050. Over the coming 40 years, that means 20 percentage points of urban growth per year. This translates into 300 million rural residents becoming urban residents over this time period. Last year, the disposable income of the Chinese urban population stood at 17,175 yuan per capita while the net income of the rural population was 5,153 yuan per person.

The annual per-capita consumption of copper in India is 0.47 kg., China's is 5.4 kg. and the world average is 2.7 kg. China's urbanization plans and forecast GDP are expected to drive Chinese copper consumption from the current 5.4 kg./capita to an astounding 10 kg./capita by the end of the decade.

Australian equity research firm Resource Capital Research (RCR) said it expects the copper market to move from a small surplus in 2010 to a deficit of around 400 Kt. by 2011. According to JPMorgan, the world refined copper market will have a 500 Kt. deficit in 2011. The International Copper Study Group said global copper demand will rise by 4.49% in 2011. Supply disruptions have cancelled out modest mine supply growth.

A glance at the following two charts confirms the growing demand for copper while inventory levels at the London Metal Exchange hint at the supply deficit.

Copper prices surge

Copper inventories falling

With metal analysts calling for a 10%–30% rise in the 2011 copper spot price, you could probably make money buying shares of JJC-iPath—an index composed of copper futures contracts traded on the New York Commodities Exchange (JJC is up 50% in the last six months). Or you could buy shares in one of the big multinational copper miners. Freeport McMoran (FCX-NYSE), BHP Billiton (BHP-ASX) or Xstrata (XTA-LSE) are up a collective 58% in the last year.

But to make the big gains, you have to get in ahead of the money flow. Potash has recently given us an excellent example on how to do that and what signals investors should watch for as the process plays out.

Potash is the primary ingredient in fertilizer; it's also a mined resource with global demand being driven by a macro trend. What's been happening is a trickledown effect and is a three phase process:

PHASE #1: A barrage of bullish headlines in the mainstream media: "Potash Profits Up" "Spike in Food Prices Bullish for Potash" "Potash Export Prices Rising," etc.

PHASE #2: A flood of investment dollars into the senior potash companies. Potash Corp (POT-NYSE), Agrium (AGU-NYSE) and MOSAIC (MOS-NYSE) are all up about 120% in the last 12 months.

Potash majors

PHASE #3: Snowballing investor interest in the "junior" (smaller-cap) explorers. This third phase is typically riskier and more profitable than phase #2.

Nine months after the potash majors began their climb, Amazon Mining (TSX.V:AMZ), Encanto Potash (EPO-TSX.V) and Western Potash (WPX-TSX.V) all caught fire—catalyzed by news stories of food price inflation. In the last three months all three aheadoftheherd.com sponsor companies have seen stock price increases an average of plus 200%.

Juniors catch fire

"You're seeing a catch-up phase, there's capital flowing into the sector and it's moving down into smaller-cap names." Robert Winslow, Wellington West Capital Markets
Copper has just completed phase #1 (a barrage of bullish headlines), and phase #2 (the majors have had their run).

Phase #3 is about to begin. VMS Ventures, Copper Fox, Far West Mining, Hana Mining, Nevada Copper, Redhawk Resources and Western Copper are all good companies seemingly well positioned to benefit from this next phase.

Catalyst Copper

I am going to single out one company, Catalyst Copper TSX.V - CCY, which appears to have everything going for it—including a "tell" in the fundamentals that suggests it may be about to be revalued.

Catalyst has the right to earn 60% of the La Verde Project. La Verde is a Mexican copper porphyry project with NI 43-101-compliant resource of 2.1 billion pounds (Blb.) of Measured and Indicated (M&I) copper and an Inferred Resource of 1.3 Blb. copper.

Catalyst Copper is currently earning into a 3.4 Blb. copper deposit that's open in all directions. Today its 60% share would equal 2 Blb. copper—9.6 lb./share—the current spot price of copper is $4.46/lb. With Catalyst currently trading at $0.22, investors would be buying copper in the ground for $0.02/lb.

Catalyst Copper, with partner Teck Resources, commenced an aggressive 20,000m drill program for 2011. CEO John Greenslade just raised $850 million for Baja Mining and he is on record as stating that CCY is a "more straightforward project."

But here's the tell: for the last year, CCY has traded about 500,000 shares a day. A lot of that trading is "seed stock" changing hands. Since February 1, 2011—the average daily volume has jumped to about 1,840,000—while the stock has risen to .22.

180,000 people a day move from the country to the city. Urban infrastructure devours copper. Over the next 12 months that demand might drive investment dollars into juniors with big resources like Catalyst Copper.

Are there copper juniors on your radar screen?

If not, maybe there should be.

Richard (Rick) Mills
[email protected]
www.aheadoftheherd.com

If you're interested in learning more about the junior resource market, please come and visit us at www.aheadoftheherd.com.

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Richard is host of Ahead of the Herd and invests in the junior resource sector. His articles have been published on over 200 websites, including: The Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell.com, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor and Financial Sense.

Legal Notice / Disclaimer
This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

Richard Mills owns shares of Encanto Potash. Catalyst Copper, Amazon Mining, Encanto Potash (EPO-TSX.V) and Western Potash (WPX-TSX.V) are advertisers on Richards's website aheadoftheherd.com.

CCY on AOTH

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