HSBC Metals And Mining Analyst Has A Strong Buy Rating On Peabody Energy (BTU): Why?
February 9, 2010 - The Wall Street Transcript has just published Gold & Precious Metals, Base Metals and Non Metals Mining Report offering a timely review of the Precious Metals sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
Jordi Dominguez joined HSBC in 2007 as an Analyst covering the metals and mining sector for North and South America. He has covered this segment since 2005 as a buy-side analyst for long-only and long-short funds. He holds a bachelor's degree in telecommunications engineering from Universitat LaSalle, Spain, and a MBA from the University of Kansas.
TWST: Looking at all the different metals, where do you see the top opportunities in 2010?
Mr. Dominguez: As far as the metals, we updated our commodity forecasts last week. We believe that the opportunities are still more in the bulk commodities. Bulk commodities are the likes of iron ore and coal, thermal coal and metallurgical. Coking coal is the one that goes into steel making. Yes, we've heard the China story over and over - that China is consuming significant amounts of natural resources. But we believe that those two resources, iron ore and coal, are still the two commodities that seem to us there is the least supply available, or supply cannot be brought online quickly enough to cover demand from China. Also we don't see inventories available or growing inventories in the case of iron ore or coal. Speaking of copper, inventory of this commodity was up by 77% at the end of 2009 compared to the end of 2008. So the price was going up while inventories were also building, which is contrary to what you would expect.
TWST: Let's talk about Grupo Mexico. What risks are out there for them, and what positive developments do you see for them?
Mr. Dominguez: Grupo Mexico is a company that has a long history. It bought a company that was the old American Smelting and Refining Company (ASARCO), which goes back to the previous, the late 1800s. And Grupo Mexico bought ASARCO in a bidding war in the late 1990s. ASARCO ended up in bankruptcy proceedings because it had significant asbestos and environmental liabilities, which lasted until late last year. At the end of last year, those claims were finally settled and Grupo Mexico paid U.S.$2.6 billion to sponsor ASARCO out of bankruptcy. Why am I telling you all of this background story to talk about Grupo Mexico? Well, in the market, this history of Grupo Mexico being tied up in courts, and what is going to happen with the company and ASARCO has been in the minds of investors for years.
TWST: Shifting to the coal companies that you cover, what the names do you like the best right now and why?
Mr. Dominguez: Again, let me give you a bit of an idea of why I cover the coal the way I do and why they are important, because I will give you a bit of background on how I look at things. Let's imagine that somebody tells you to take a look and start covering the financial stocks in the U.S. You have to write about Citigroup and Bank of America, everybody has written about those companies, so how can you differentiate yourself? So looking at the U.S. coal sector, everybody has written about the U.S. coal sector, so why not take a look at what's going to happen over the future - if people should look at coal miners as an investment vehicle? Or you know what? We always knew of potential threats of regulation, which could make coal lose its appeal as an investment, and just let's not even worry about investing in coal stocks. And I also looked at these stocks from the point of view of what's going to happen with energy demand trends, and how can you look at these stocks from the environmental side?
That's why the report's title is "The Green Side of Black." I looked at whether they're green not only from the U.S. dollar side, making money, but also from the environmental side. And by doing that, I think also gives a different view for clients because I was looking at these stocks from a more long-term view versus Q1 earnings or Q2 earnings. So what do I like and why? I like more the coal miners in the PRB basin, that's the Powder River Basin in the Western half of the U.S. There are two main players there, Arch Coal and Peabody Energy; those are the ones that I have an overweight rating on, which is HSBC's equivalent of a buy. Why do I like it? The main difference between those assets and assets in the Eastern U.S. is that the operations in Wyoming are big, open cast operations, big tracts of land where you can use big equipment. By big equipment, I mean that you have shovels that can move 45 cubic feet of coal in one shovel - that's very big equipment.
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