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Enumerate
25-04-2008, 06:27 AM
Here is a copy of post I made on an Australian investment forum. The new generation of model for metal resources has some extremely interesting twists .. see for yourself:



Here is a very interesting link describing a new generation of price forecast models from Bloomsbury Minerals Economics:

http://www.mineweb.com/mineweb/view/mineweb/en/page36?oid=43894&sn=Detail

The long and the short of it:

- the Macquarie "return to mean" PoZ/PoPb forecast is "first order". More detailed models predict a much high long term price based

- this higher long term price is based on evidence of a new "regime" of stock to price correlation

Further, BME describe base metal prices being driven by 5 basic factors. Significantly, the old view of "Industrial Production" as a driver of price is, in fact, relatively insignificant. The emergence of stock going into exchange traded funds is the single key factor driving elevated base metals prices.

For INL investors this is very good news.

- We can expect Zn to maintain value above 90cents (feasibility study price)

- We can expect Pb to increase in price (and become the dominant "growth" value in Hellyer concentrate)

- We can expect these prices over the full economic life of Hellyer concentrate

- We can expect the residues project to complement Hellyer concentrate production and extend the "life of mine" into the long term

The Macquarie model put 15cents per share on the Hellyer concentrate project based on 1 year profitability falling to break even in subsequent years leading to unprofitable in the medium term. Advanced modelling indicates that this could be quite wrong.

If the value of HZCP is 15cents year 1 and 10cents years 2 to 8 with HZRP coming in years 3 to long term at 10cents, say ... with Zeehan slags and BSM ore coming in at another 10 cents per share years 5 to long term.

Consider that we have to put in 20cents a share, this year, to finance the HZRP ...

Using a 17% discount rate, as a return capital ... I calculate that the "value" of these income streams should make INL.ASX worth about 88cents per share - right now!

This is simply the application of the current generation base metals forecast and the correction of the Macquarie forecast methodology!!

FarmerGeorge
25-04-2008, 07:24 AM
Thanks E that's a very interesting article. I think that understanding the extent to which mutual, long only, exchange traded and other funds are altering the price of commodities will be a key to making serious money out of this cycle. The data I've seen show a very, very small movement, like from 1% to 2-3% towards commodities, driven by their historic low correlation to equities, but this has had a very real effect on the market. Imagine what would happen if, say 7% hard assets (don't laugh, look at the big Uni endowments as a lead indicator for the behaviour of the general investment population) became the norm.
I'm trying to understand the extent to which this could become a bubble, at least with equities you are buying the rights to a stream of cashflows, with commodities you rely 100% on the capital appreciation and that negative correlation, neither of which can be relied on once they become a more mainstream part of capital markets. I'm not saying we're anywhere near bubble territory, nor that these commodities are overvalued. Just that it's worth keeping in the back of our collective investing mind over the next few years.

Steve
25-04-2008, 08:30 AM
Here is a copy of post I made on an Australian investment forum. The new generation of model for metal resources has some extremely interesting twists .. see for yourself:

Great link! :)

Enumerate
25-04-2008, 08:55 AM
I'm trying to understand the extent to which this could become a bubble ... with commodities you rely 100% on the capital appreciation and that negative correlation, neither of which can be relied on once they become a more mainstream part of capital markets. I'm not saying we're anywhere near bubble territory, nor that these commodities are overvalued. Just that it's worth keeping in the back of our collective investing mind over the next few years.

I think there is plenty of scope for micro-bubbles to appear and to have different commodities driven by differing phases of micro-boom, micro-bust.

Most people are at the stage of thinking that Industrial Production drives commodity prices and that the historical relationship that Price is proportional to 1/(Stock Levels). Even more surprising is the notion that we will eventually return to pre-2005 price levels once stock levels rise!

I believe some of these notions are driving mining company investment decisions. If this is true - we will see vast variance in commodity stock levels, fueling even more price booms/busts.

The next decade will be very interesting.