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Investing Opportunity in Trump Times — Taking Advantage of Current Market Conditions

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US ELECTION:

Following a vindictive and somewhat toxic election with all its allegations, accusations, FBI involvement, posturing, media bias, and more, the result was never going to be acceptable for half the population – either way.

Overall it is not hard to understand why Trump won.

Aside from many other things, Bernie got rolled, and Trump addressing the ugly realties within America, he reached out to the forgotten voters that corporate America and the political parties have been ignoring for years. The reality is that America, despite still being an economic powerhouse, does have racial issues, major unemployment problems, and unbelievably over 42 million people classified as food-insecure and around 45 million on Food Stamps. Despite the well covered Trump ‘short-comings’, a massive population believe he is potentially the candidate that might keep his promises.

So, where to from here?

Regardless of all argument and/or dissention, Trump is the next President of the USA. If he does honor the key promise of his election – to make America great again - then, aside from all else, from an investment perspective there is a lot to look forward to.

I am sure that on good advice some of his representations will modify. The wall will change to a heightened border control reinforced by a wall in places where needed, some aspects, the better ones, of Obamacare will stay, others will go, and so on.

The critical change however will be the re-building within the Country, the creation of real jobs and opportunity, reducing corporate taxes to encourage corporate growth ‘in America’ and thereby jobs and opportunity, is going to be a monumental task, but a great building block. Tackling the state of roads, tunnels, rail, facilities and other infrastructure is an urgent need.

If we see this multi- trillion dollar re-building promise and transition being delivered, we will also see a massive investment opportunity. On this basis:

Now is the Time to Invest in Mined Commodities!

From time to time an industry sector is positioned for exponential growth. If investment entry can be timed at close to the low-point of a market sector, and close to its re-emergence as a value investment, then significant returns can be readily achieved in the immediate term.

I am convinced the mining sector is positioned for a demand-driven turnaround, and there is already evidence that this is in process. Should Trump lead a rebuilding of a very tired American infrastructure then the turnaround is going to be significant.

The following summarizes my post-election update of my analysis earlier this year and the logic for investment in mining sector opportunities.

INDUSTRY SITUATION:

We are currently living in extraordinary times through which, among other things, investment in the mining sector has fallen out of favor with the banks, institutions and equity investors. In fact the approximate US$1.5 trillion of investment value lost from a 2011 peak in mining activity and output to early 2016, matches the total USA sub-prime mortgage losses.

As commodity prices continued to collapse, miners struggling for financial survival dealing with debt levels, as well as operating margins of many of their current mining operations. We have seen and continue to see major employment cut-backs, portfolio rationalization through divestment, overall downsizing, as well as other dramatic emergency survival actions.

The market witnessed a dramatic collapse in the price of most base, industrial and precious metals. This current situation within the resources industry has been well covered through financial and market media.

OPPORTUNITY:

By 2014 and through 2015, we saw the end of the heady resources market as demand for mined commodities, especially by China, continued to drop off, resulting in continuing falls across the board in commodities prices.

Consequently, in the equities market, the share prices of most mining companies, including the world's largest and most well-regarded mining conglomerates went into a tail-spin with 50%, 60%, 70%, and more, resultant collapses of market capitalization.

During the course of this year we have seen the start of a share price recovery for many mining companies, and especially of resource diversified majors such as: BHP Billiton (BHP), Glencore (GLCNF), Anglo American (NGLOY), and Vale (VALE), or for more specific commodity focus such as on copper, Freeport McMoRan (FCX), or gold, Barrick (ABX).

THE DRIVER FOR MAJOR TURNAROUND:

Simply, and logically, it is demand for product.

Despite negativity in global mining markets, I am forecasting the start of a significant escalation in commodity prices driven by unprecedented demand growth that will revitalize the investment markets and their value products. This momentum, is already underway, driven by three major factors:

  • The world's 1.8 billion middle-class (2010 middle-income) consumers are forecast to balloon 77% to 3.2 billion by 2020 and to 4.9 billion by 2030.
  • Leading analysts advise that global middle-class annual spending will increase some 170% from US$21 trillion in 2010 to US$55.7 trillion in 2030.NOTE:We are already halfway there!
  • During the same time-frame, China's control of world production of the main industrial and base metals will move from today's approximate 60% to around 75% by 2022.

The level of forecast explosive global consumer growth AND spending that we will see in the next 10-15 years has never, in the history of the modern world, been experienced in any such concentrated timeframe, and will most certainly fuel a consumer-led demand for products.

Against this background, if we factor in the potential of commodities demand that is going to be required to re-build the American infrastructure, we will see the emergence of a perfect storm. This however is yet to be seen and is subject to Trump honoring his election promise.

Critically, what is relevant here is:

Where are the raw materials for this major production requirement going to be sourced from?

Within the 10 to 15-year timeframe of global growth and within the added time-frame impetus of Trump’s first four years in office?

Logically, just to meet the raw product demand required for the manufacture of the goods this global spending demand is creating, mine output over the next 10 to 15 years will need to double. Add to this the product that will be needed to provide for a multi-trillion building and development program across USA and we will be looking at a supply crisis in many commodities.

The wild card is the dominance that China already has in controlling future markets, pricing, and potentially commodity value-add and manufacturing industries. China, over the past twenty years, has secured mineral deposits and supply agreements internationally to satisfy its own growing economy and position itself as the single controlling supplier capable of meeting current and future global manufacturing demand.

China is already the world's majority producer and/or user of most metals. If China's current minerals and metals demand growth rate continues as forecast, then within the next five to eight years China's control will move from today's approximate 60% to around 75% of the total world production of many of the main industrial metals.

Although, somewhat late, as the Western economies have been asleep at the wheel while China built up its commodities control to secure its own economic growth, if America, through Trump sticks with the rebuilding commitment, there is potential for extraordinary economic growth.

Clearly, any increase in product demand, and any shortages will significantly increase the prices of most metal and mineral commodities. As commodity prices rise low-grade mines will be commissioned, which in turn will underpin higher pricing, as despite the increased price of production of these low-grade deposits the product will remain in demand - driven particularly by the economic need to support the existing market as well as the forecast growth and the needs of the rapidly growing middle-class consumers – and potentially, the rebuilding of the American infrastructure.

The ultimate outcome, a massive upside potential in the share price of most production focused mining companies, and similarly in the knock-on downstream and upstream related industries.

TIMING:

When to Buy and when to Sell? - Timing, this is very much a critical part of investing.

At this time I am putting forward the analytical and logic basis for getting invested in mining companies, or other investment situations, that offer exposure to base and/or industrial metals production.

I would suggest that positioning investment in major and mid-tier mining companies at any time this year makes sense. Next year, and especially in the later part of next year, I would see as possibly being at least 100% more costly than today's entry price opportunities.

SUMMARY:

Right now is a highly opportune time to consider accumulating interests in base and industrial metals producers through acquiring equities in a basket of companies operating in the sector. Twelve to eighteen months from now will be too late to acquire value strategic investment holdings, and almost certainly will be much more expensive, especially if we see America starting to re-build.

November 14, 2016

Peter Boonen

Analyst

SoLogic Advisors

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