5 favorite metals stocks to mine

By Jim Jubak

The natural-resource stocks that powered the stock market in 2006 and 2007 have taken a rest so far in 2008, but there are no signs of an end to the long-term bullish cycle for producers of copper, iron, aluminum, nickel and other industrial materials.

Once worries about a U.S. recession and global slowdown have receded, the sector will be off to the races again.

But that doesn't mean you should put your money in the same old names that did so well over the past two years. The consolidation of the mining industry has turned many of the stars from that round into lumbering behemoths with huge debt loads. In the next round of the natural-resource bull, you need to own smaller -- and perhaps unfamiliar -- names that are likely to soar higher and faster when commodity prices climb.

I'll give you five favorites to study now and to buy when you think the coast is clear.

Fundamentals won't change

Economic growth in the United States slipped below 1% in the fourth quarter of 2007. The World Bank just cut its projected 2008 growth rate for China's economy by 1.2 percentage points to 9.6% -- still red hot, it's true, but almost 2 points lower than 2007's 11.4% growth.

No doubt about it: The U.S. and global economies are slowing. But not by enough to change the fundamentals that have driven prices for copper, iron, nickel, zinc and lead higher and higher in this bull-market cycle.

The basic problem is soaring demand. China, for example, imported about 1.4 million metric tons of copper in 2007 -- a huge 134% increase from the 600,000 tons it imported the year before. That'll drop to 1.2 million tons in 2008, predicts Desjardins Securities of Canada. But China isn't the only developing economy hungry for copper, and total global consumption is projected to climb to 18.95 million metric tons this year from 18.15 million in 2007.

That will leave demand in balance with supply, also estimated at 18.95 million metric tons in 2008, which won't leave anything to buffer any disruption in supply.And that will lead to a spike in copper prices every time miners go on strike, pushing copper above a base price near $3 a pound (roughly where it was in 2006) despite the slowdown in the U.S. and China.

Where the supply shortages are

If supply again slips into deficit in 2009, copper prices will take a big jump. In that year, Desjardins estimates, global demand will exceed global supply by 50,000 metric tons, which will come from stockpiles that are themselves shrinking because of persistent annual supply deficits. (In 2006, supply was also about 50,000 metric tons short of demand.)

So where will the biggest shortages be? And when?

• Copper: a shortage of 50,000 metric tons in 2009.

• Aluminum: a shortage of 140,000 tons in 2008 and 950,000 tons in 2009.

• Nickel: a shortage of 9,000 tons in 2008 and 13,000 tons in 2009.

• Zinc: surpluses in 2008 and 2009, and a gradual tightening through 2012.

• Iron ore: tight supply in 2008; supply and demand should level through 2011.

• Uranium: a growing surplus from 2008 through 2010.

But this is the supply-and-demand equation just for the well-known industrial metals. The profit picture is even brighter for some of the minor metals that don't usually cross investors' radar screens, such as molybdenum, cobalt and platinum. For those, supply is tightening because of two factors: Fast-growing developing economies are increasing demand, and fast-growing new technologies rely on these metals.

Technology creates demand

Molybdenum demand is climbing, for example, because the metal increases the corrosion resistance of stainless steel in industrial processes and because adding small amounts to steel keeps oil and natural-gas pipelines from fracturing in arctic temperatures.

Molybdenum also is used in catalysts that lower the sulfur levels of fuel. That's increasingly important because more and more of the world's oil supplies are heavy, high-sulfur oils. Australia's Macquarie Research projects molybdenum prices will climb about $2 a pound, or 6.5%, in 2008. Desjardins is looking for a $5 increase in 2008 and another $5 jump in 2009.

Continued: 5 favorites

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