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  Mining copper

BENJ GALLANDER and BEN STADELMANN

Friday, August 29, 2003

Last year at about this time, we wrote about our new foray into the copper sector, a little explorer by the name of Corriente Resources, purchased at 86 cents a share.

Our reasoning was that the situation for base metals had been so horrible for so long that maybe it was time to turn the corner, as gold had done several months earlier.

A cyclical commodity, copper's price shows a high correlation to the global economy. Many industrial sectors, from auto makers to housing construction, require copper wire. The weak economy of the past couple of years has kept copper prices at the lower end of its historical range.

In the past few weeks, copper has moved up smartly, which has affected Corriente nicely, triggering a surge to the $1.20 level. The other copper component in our portfolio, mid-tier producer Aur Resources, has also performed admirably, hovering near its 52-week high at $4.47, a lovely gain from our purchase price of $1.91 back in 1999.

However, those who would infer that copper's move indicates that the global slump is over might be moving a bit too fast. On a micro level, copper supply was tightened by a threatened strike at the Escondida mine in Chile. On the macro stage, copper's recovery probably has more to do with weakness in the American dollar than anything else.

Indeed, the U.S. Federal Reserve has signalled unequivocally that deflation is Public Enemy #1, and enough liquidity will be pumped into the system to avoid the "Japan Syndrome" at all costs. We disagree with the Fed on this one -- we doubt that American deflation is a trouble spot, but that's another story.

Which brings us to a fascinating interview with Jim Rogers we read recently. Mr. Rogers was George Soros's original partner in the wildly successful Quantum Fund, and he is widely considered to be one of the smartest investment minds on the planet -- not to mention an extraordinary traveller (our kind of guy).

Is he investing in financial institutions that have moved back into vogue? Far from it; in fact, he holds a large short position in mortgage lender Fannie Mae, as well as short bets against blue-chip ETFs.

Yet he is long basic commodities; he especially likes sugar, coffee and orange juice, or as he puts it: "Buy Breakfast." It's a strategy that has worked well so far for Mr. Rogers: the Rogers Raw Materials Index Fund has doubled since it's August 1998 inception.

Rogers could be correct, and commodities could run for a long time, but we'll leave the pit trading to him and stick with stocks.

Setting targets on cyclicals is always tricky; we have Aur at $6.45 and Corriente at $1.60. And beyond the basics of the copper price, Aur's prospects are dependent on other bread-and- butter issues such as reserves and "mine life," while Corriente has yet to nail down a partner to help develop its properties.

These are matters that will come to the fore if the copper rally peters out. However, if the upward trajectory is maintained, these two firms should have little problem hitching a ride.


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