Commodity Stocks Rising: Are You Taking Advantage? - Fat Tail Daily

By James Cooper, Thursday, 24 October 2024

I’ve hammered this point several times over the last few months…

The deeply pessimistic period from mid-2024 was an excellent time to buy commodity stocks.

As companies like Fortescue [ASX:FMG] fell almost 50%, investors should’ve been snapping them up!

That’s the message I tried to get out back then.

And the key reason for that was our long-term conviction in the commodity cycle.

It’s a theme I revisit regularly with my paid readership group.

One key aspect driving the cycle toward a more bullish phase is the lack of investment in new supply.

A condition that has been in place for well over a decade now… This is the foundation from which the market can build strength.

But that can only happen once demand picks up.

That’s why 2025 could become a breakout year for commodities.

Let me explain…

Understanding the commodity cycle is crucial to making money in resource stocks.

It gives you the confidence to buy when most are fearful – when the risk-reward is most in your favour.

Here’s what I wrote to my premium readers at Mining Phase One on September 10, just as resource stocks were sinking to major lows:

‘Today, I have two new recommendations for you.

‘But before we discuss those, it’s important that you understand my rationale for entering these trades today.

‘As you probably know, sentiment in the resource sector is now perhaps at its lowest level in years…

‘Falling iron ore prices, a poor outlook for Chinese growth, and heavy falls among Australia’s largest mining firms have put the resource sector on edge.

‘Yet, against this bleak outlook, copper futures are holding firm.

‘The commodity looks to be posting another “higher-low”, consolidating above US$4/pound, as you can see below:

Source: Trading View

‘While the outlook for industrial commodities appears dim, “Dr Copper” suggests that this negativity could be close to bottoming.

‘Remember, copper futures moved well ahead of this negative news flow from China that began in August.

‘Futures began to fall in June and have now pulled back around 20% since the May top.

‘Copper is now consolidating above its recent lows and perhaps preparing for a move higher toward the end of 2024.

‘We’ll look to capitalise on lower prices while the mood remains bearish for most resource investors.

‘We’ll do that by selecting two moderately discounted copper plays…

‘Stocks that have sat on my watch list for a long time, awaiting a prime opportunity to enter, I believe we could have that now.’

One of the recommendations sent to my Mining: Phase One readers was Aldebaran Resources [TSX-V:ALDE].

I’ve linked a recent recording with the company’s CEO, John Black (above) if you’d like to add this copper play to your watchlist.

Since that recommendation was issued, copper futures have steadily strengthened, up around 7%.

Aldebaran, on the other hand, is up 48%.

But the key point here is not to cherry-pick our strong performers. Instead, it shows you why you shouldn’t follow conventional thinking as an investor.

Be different and always find ways to think differently!

There are opportunities for the taking, but only if you don’t take your lead from the mainstream.

That’s the core message I’ve also tried to pass on to you in 2024.

Recall back in August, a piece I wrote in Fat Tail Daily titled, ‘Iron Ore Stumbles…China Bears Return! ’

I wrote that to counter the negative news about China’s economy and convince you of the opportunities I saw in the market at the time.

I hope you took that message onboard!

As I pointed out, one key reason for my doggedly bullish stance was an understanding of the commodity cycle.

However, it was also backed up by China’s strong iron ore imports.

Despite weak GDP growth, the country continued to import record volumes of the bulk commodity.

That could only mean one thing… stimulus!

The volume of iron ore imports was the key metric to watch as markets fretted over a looming economic collapse in China.

But no one was paying attention!

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Here’s what I wrote in that August article:

‘Nothing happens in China by chance, which extends to its access to raw materials… That’s why you should be observing iron ore imports carefully.

‘Strong numbers (in the face of falling steel production) will add weight to the theory that China is perhaps cutting steel production in a bid to drive down iron ore prices.

‘Paradoxically, that could be good for the iron ore miners over the long term. Who knows where future demand will come from… Stimulus? Perhaps.

‘But iron ore import figures will be the most useful guide in understanding the future trajectory of China’s economy.

‘Far more than some stats on new housing starts or steel demand.

‘Again, that seems like a paradox given all the negative sentiment today.’

As I outlined back then, imports were not falling.

They were steadily rising! A fact that most bearish commentators were ignoring.

And now, as investors fret over a pause on China’s stimulus plans, they’re again missing this key data point:

According to the commodity analysts at Kpler, vessel movements into China suggest iron ore imports are on track to hit their highest levels ever!

Just to make that point again:

October is on track to be the LARGEST import month on record for iron ore… 120.5 million tonnes.

That should be viewed as very bullish, but most ignore it.

The last time iron ore imports broke a monthly import record was back in July 2020.

What followed was a doubling in the iron ore price, from around US$110 to US$220 per tonne, in just 12 months.

I’m not saying that will happen again, but it paints a relatively bullish outlook…

Why would China be importing record volumes of iron ore?

Is it trying to aid the stock price of FMG and BHP?

Of course not!

China knows it needs more iron ore… And that can only come from its intentions for further stimulus.

2024 was all about steering my paid readership group away from the deep negativity in the market and capitalising on steep discounts.

Now, our focus is on optimising our portfolio with the aim to take advantage of a more bullish market in 2025.

2024 was a year of deep value.

2025 should be a year of riding bullish momentum.

Both offer opportunities.

But as I showed you, resource stocks move quickly when conditions turn favourable.

If that strikes your interest, you can gain full access to our Diggers and Drillers membership here.

As of writing, we have six active buy recommendations in the portfolio, including a new one issued on Tuesday.

The service focuses on mid to large-cap mining stocks.

But if you prefer to invest in juniors, you could consider joining my premium service, Mining: Phase One.

Here, we focus on mining stocks with a market cap below $500 million, like the Aldebaran example I showed you earlier.

These are the types of stocks that could benefit the most as the cycle transitions toward a more bullish phase.

Until next time.

Regards,

James Cooper, Editor, Mining: Phase One and Diggers and Drillers

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All advice is general advice and has not taken into account your personal circumstances.

Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

James Cooper has been a working geologist in mines across Australia, Canada, and Africa since the early 2000s. He’s led the operations of tiny explorers through to huge producer outfits. He’s seen booms and busts firsthand and he also understands the cyclical nature of individual commodities. For example, James was right there when Barrick Gold launched an enormous $7.5 billion takeover bid for Equinox. That was the peak of the last cycle.

With his background as a geo and finance professional, he brings a unique insight and experience to Fat Tail Investment Research. He writes the broader resource-focused investing letter Diggers and Drillers and the ultra-speculative explorer-focused trading service Mining: Phase One.