At the time, I was also following two copper stocks: Northern Orion Resources (NTO:AMEX) and Taseko Mines (TGB:AMEX).These two copper stocks have hit a few bumps in the road recently. Northern Orion and Taseko Mines are down 20% and 21%, respectively, since I mentioned them in the August issue of Small-Cap Strategy Report.

As I said when I first mentioned these companies, they are extremely risky. In fact, I said they were a 10 on the risk scale (1 being risk free and 10 being the most risky). Both NTO and TGB rise and fall with the underlying price of copper. And since I first published my issue on copper, the reddish base metal is down 10 cents (or 3%):

Despite the general weakness in copper (and, really, in all commodities) over the last couple of months, I wouldn’t panic. Let’s consider the facts…

First of all, both Northern Orion and Taseko have major catalysts that could unlock explosive profits for patient shareholders. NTO is sitting on 21.8 billion pounds of copper that is not reflected in NTO’s current stock price. And TGB’s Prosperity Mine has 2.3 billion pounds of copper that is not reflected in its stock price. The reason these large amounts of copper are not being factored into these companies’ respective stock prices is simple: Neither NTO’s Agua Rica or TGB’s Prosperity mines are in production yet. Thus, Wall Street doesn’t have any fixed numbers or stats to go off of to properly value these companies. So they ignore this potential upside altogether.

That is ridiculous.

If we just assume that NTO’s Agua Rica and TGB’s Prosperity mines have only HALF as much copper as has been proven (based on preliminary tests), then NTO is still sitting on 10 billion pounds of copper and TGB is sitting on 1 billion. Now let’s assume copper prices fall to $2 a pound. And to be ultra-conservative, let’s assume it costs each company $1.50 to mine each pound of copper (though NTO’s current cost per pound is about 10 cents!). With these assumptions, TGB is worth an additional $500 million and NTO is worth an additional $5 billion.

Given this, TGB is currently undervalued by at LEAST 100% (its current market cap is only $261 million) and NTO is undervalued by about 800%!

When I wrote to you in August, I mentioned that there has not been a significant new copper mine discovery in nearly 100 years. And according to the Metals Economics Group, “Worldwide, significant copper discoveries between 1998-2004 have fallen well short of what is needed to replace the copper produced — a total of just 39.9 million metric tons of copper in reserves and resources has been discovered, while production totaled just about 93.6 metric tons — although the resources in these deposits have potential for further increases over time.”

As you know, due to significant demand worldwide, this base metal outpaced all of its higher-profile precious peers by a significant margin over the last five years. When I last wrote to you about copper, in August, spot copper prices were up 393% from their lows in 2001. Meanwhile, gold was up only 151%, silver was up 188%, platinum was up 202% and palladium was up 122%.

Also, thanks in part to rapid growth in India and China, worldwide copper demand is at an all-time high. Below is a table that shows the total amount of copper produced every year since 1998 compared with total consumption:

For the last three years, copper consumption has been greater than the total amount of copper produced. As a result, copper supplies and stockpiles have shrunk to five-year lows and copper prices have skyrocketed from 75 cents a pound to as high as almost $4.

At the end of the day, copper prices are super volatile. So if you own these stocks, you MUST be willing to endure the ups and downs. It’s as simple as that. You must also be willing to lose your money should copper prices plunge.

The flip side is that if either mining company is able to put Agua Rica or Prosperity into production, you are looking at almost certain triple-digit gains.

The risk is yours to take or not. But I like both stocks at current levels.

Good investing,

James Boric
October 5, 2006

P.S.: When I’m not following the bigger trends affecting the small-cap market, I’m tracking the smart money. One of the best (and most misunderstood) ways of making money in the stock market is by following the insiders. As one famous fund manager said: “Insiders might sell their shares for any number of reasons, but they buy them for only one: They think the price will rise.”

Investing in Copper was originally featured in the Penny Sleuth.