BMO Nesbitt Burns Basic Points Feb 2010

Basic Points
Hard Rocks and Hard Shocks
February 19, 2009
Published by Coxe Advisors LLP
Distributed by BMO Capital Markets

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BMO Capital Markets Disclosures

Company Name Stock Ticker Disclosures Company Name Stock Ticker Disclosures
Barrick Gold ABX 1, 3, 4 Goldcorp GG 1, 3, 4
BHP Billiton BHP Goldman Sachs GS
BP BP International Business Machines IBM
Caterpillar CAT JPMorgan Chase JPM 1
Citigroup C 3, 4 Kinross Gold KGC 1, 3, 4
Companhia Vale do Rio Doce RIO Nasdaq NDAQ 2
ConocoPhillips COP Newmont Mining NEM 3, 4
Exxon XOM Potash POT 1, 3, 4
Fannie Mae FNM 1 Rio Tinto RTP 3, 4
Freddie Mac FRE 1 SPDR KBW Regional Banking KRE
Freeport McMoRan FCX Xstrata XTA
(1) BMO Capital Markets or its affiliates owns 1% or more of any class of common equity securities of the company
(2) BMO Capital Markets makes a market in the security
(3) BMO Capital Markets or its affiliates managed or co-managed a public offering of securities of the company in the past twelve months
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Don Coxe
THE COXE STRATEGY JOURNAL
February 19, 2009
published by
Coxe Advisors LLP
Chicago, IL
February 19, 2009
Author: Don Coxe 312-461-5365

DC@CoxeAdvisors.com
Editor: Angela Trudeau 604-929-8791

AT@CoxeAdvisors.com
Coxe Advisors LLP. www.CoxeAdvisors.com

190 South LaSalle Street, 4th Floor
Chicago, Illinois USA 60603
OVERVIEW
This is the month for the BMO Nesbitt Burns Resources Conference, a major
event for global mining companies, and for institutional investors in mining
stocks. It is our tradition to prepare an issue of our journal that will be of
particular interest to the attendees at that great gathering.
This meeting will also be the eighth anniversary of our keynote speech to the
2002 meeting (sparsely attended compared to this year, which should be a
record). Back then, we audaciously proclaimed “The Birth of the Greatest-
Ever Commodity Boom.”
As we began thinking about our keynote address for this year’s meeting,
we have been reviewing what we said at earlier meetings, and are struck by
how much the outlook has changed for the hard and soft rock industries,
because of the two great dramas of recent years: first, the emergence of China
and India as the driving forces of the global economy, and secondly, the
international financial crisis and recession.
We remain bullish on the longer-term outlook for commodities and the

shares of the commodity-oriented companies. But the fragile financial state
of many major governments and banks means that we must consider the
implications for investment assets at a time when investors—and such basket
cases as Fannie Mae and Freddie Mac—are beginning to look forward with
trepidation to the time when the flows of what we call “financial heroin” will
slow down before drying up.
We are leaving our cautious Recommended Asset Mix unchanged. The

powerful equity bull markets have, since last March, driven many valuations to
levels that make scant allowance for further systemic shocks. Most commodity
stock prices are held back by the mixed messages of recovery in Europe and
the US, while China has switched from expansionary to restrained liquidity
policies. Within the US, there are some hopeful recovery signs—notably the
recent strong performance of the US regional banks in the KRE Index (despite
reports of rising problems with commercial real estate loans)—but volatility,
as measured by the VIX, is rising anew.
February 1
2 February THE COXE STRATEGY JOURNAL
I The Base Metal Miners

When we spoke in 2002, the Canadians—and most of the Americans—in
the audience were focused primarily on the outlook for copper and nickel,
because Inco and Falconbridge were the core base metal investments in
Commodities: The asset
Canadian—and Canadian-oriented—portfolios.
class of the Seventies,
Naturally, our enthusiasm was greeted with skepticism and, (we have since ending in January 1980,
learned) some outright scorn—particularly from the mining analysts and followed by two
from mining executives. decades of decline,
disappointment,
We explained the importance of Triple Waterfalls for macro-financial analysis
and despair.
by listing the three within our experience: in each case, a decade of bullishness
ended in mania, followed by two decades of collapse:
Commodities: The asset class of the Seventies, ending in January 1980,

followed by two decades of decline, disappointment, and despair.
Japan: The real estate and stock market stars of the Eighties, ending on the
last trading day of 1989; we predicted that Japan’s plunge still had many
years to run.
Technology: The asset class of the Nineties, ending March 2000. We

predicted that most technology stocks would be underachievers until late
in the following decade. (Note: Google wasn’t public at Nasdaq’s peak.)
Copper
January 1, 1986 to February 18, 2010
450
400
350
300
320.25
250
200
150
100
50
Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10
February 3
My entry into portfolio management in 1972 came just in time for the
horrendous stock market crash of 1973-75. Commodities then became an
inflation hedge class, driven initially by gold, silver and oil, but later by base
metals when the big oil companies began redeploying into mines some of the
...“the largest-scale billions of dollars of their proceeds from the nationalization of their major
efflorescence of human Mideast oil fields. One of the historic Dow Thirty of that era—Anaconda—was
economic liberty in the bought by a member of the club still known as Big Oil. Its purchaser explained
history of mankind.” that its skills in extracting wealth from the ground were equally applicable
to metals. That was a sign of mania driven by desperation. (The investment
was later written off.)
The peak came in 1980. Commodities entered their Triple Waterfall collapse,
and 20 years of despond and despair ensued, as the capex born of the mania
was slowly and painfully absorbed or sold for scrap.
By 2002, with the mining industry shrunken and disbelieving, the stage
was now set for a boom—which would be driven by demand from Asian
industrialization.
China and, to a lesser extent, India, had embarked on what would become “the
largest-scale efflorescence of human economic liberty in the history of mankind.”
Buy what China needs to grow, we had been telling investors since 1999.
By 2002, most investors seem to have forgotten their enthusiasm for the
new millennium, which had arrived with two shocks: the Technology Crash,
which spread into an overall equity bear market, followed by 9/11, which
meant we were collectively at risk from attackers based in some of the most
primitive regions of the world.
Yet, we were telling them their biggest investment opportunity was coming
from nations that had not long ago been considered so economically
backward as to be mere footnotes to any global investment strategy.

A chance meeting in Australia months previously had confirmed our
suspicion that good times would soon be returning for the ravaged base
metals companies:
After touring the famous desert massif sacred to the Aborigines as Uluru,
Invest in an industry
our group was supplied a desert dinner. I asked the gentleman next to
where “Those who know
me what he did, and he replied that until a few weeks ago he had been a
it best, love it least,
mining executive. Since I had long been a follower of that industry I asked
because they’ve been
which one. “I ran Rio Tinto’s operations in Australia.”
disappointed most.”
I explained that I was an investment strategist and had been negative on
mining companies for years. Was the outlook changing?
He explained that, for twenty years, the industry was driven by men who
sought to prove their virility by opening bigger new mines than their
competitors’. That strategy may have been good for their testosterone,
(he allowed), but it was terrible for shareholders. Stock prices were so
beaten-up that managements finally learned their lesson: from here on,
they wouldn’t be betting big on big new mines. (Reflecting on that, I later
coined a maxim: Invest in an industry where “Those who know it best, love it
least, because they’ve been disappointed most.”)
We asked, “What could create the shortages that would get them to reopen
closed mines and open new ones?”
“China,” he said. “They’re going to need a lot of metal to meet their growth
promises to their people, and they will soon have trouble getting it. Metal
prices will have to go up eventually.”
That, I figured at the time, was the single most prophetic speech I was
likely to hear for years.
I knew from having studied economic history that large-scale industrialization

created huge demand for metals, whereas mature economies’ modest annual
growth in consumption could be met—in considerable measure—from
scrap.
By 2002, I was convinced the Prime Mover for the global economy in coming
decades would be Asia—not Europe and North America.
February 5
The Boom Begins, and Has Its First Pause

BHP Billiton (BHP) BHP Billiton relative to S&P 500
January 1, 2002 – February 17, 2010 January 1, 2002 – February 17, 2010
100 900
90 800
80 700 739.68
70 74.25
600
60
500
50
400
40
30 300
20 200
10 100
0 0
Jan-02 May-03 Sep-04 Jan-06 May-07 Sep-08 Jan-10 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Vale (RIO) Vale relative to S&P 500

March 23, 2002 to February 17, 2010 March 23, 2002 to February 17, 2010
50 1,800
45 1,600
40 1,400
1,336.96
35 1,200
30
27.78 1,000
25
800
20
600
15
10 400
5 200
0 0
Mar-02 Jan-03 Nov-03 Sep-04 Jul-05 May-06 Mar-07 Jan-08 Nov-08 Sep-09 Mar-02 Jan-03 Nov-03 Sep-04 Jul-05 May-06 Mar-07 Jan-08 Nov-08 Sep-09
Rio Tinto (RTP) Rio Tinto relative to S&P 500

January 1, 2002 – February 17, 2010 January 1, 2002 – February 17, 2010
600
550 550
500
450
450
400
350
350
250 300
284.23
215.25 250
150 200
150
50
100
Xstrata (XTA) (London) Xstrata (XTA) (London) relative to S&P 500

March 23, 2002 to February 17, 2010 (currency adjusted)
March 23, 2002 to February 17, 2010
3,000 900
800
2,500
700
2,000 600
500
1,500
400
362.91
1,000 1,062.50 300
200
500
100
0 0
Mar-02 Jan-03 Nov-03 Sep-04 Jul-05 May-06 Mar-07 Jan-08 Nov-08 Sep-09 Mar-02 Jan-03 Nov-03 Sep-04 Jul-05 May-06 Mar-07 Jan-08 Nov-08 Sep-09

These are the diversified base metal giants that operate around the world,
and their collective performance is driven by demand and pricing for copper,
aluminum, iron ore, coal, nickel and zinc. (BHP has substantial oil and gas
production, and others have precious metal exposures in varying degrees,
but they trade on investors’ outlook for the key base metals and coal.) These are the diversified
base metal giants...
Copper—“King Copper” serves a wide range of industrial markets, as
they trade on investors’
does aluminum. The others are tied directly into global iron and steel
outlook for the key base
production.
metals and coal.
Copper
450
400
350
300 320.30
250
200
150
100
50
0
Aluminum
1.60
1.40
1.20
1.00
0.80 0.83
0.60
0.40
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
February 7
Nickel
60,000
50,000
We had, in effect the 40,000
Anorexic Index—
30,000
a few analysts too
scarred by years of 20,000
20,066
grim news to issue 10,000
enthusiastic Buy
0
stories.
Zinc
5,000
4,500
4,000
3,500
3,000
2,500
2,000 2,276.75
1,500
1,000
500
In 2002, and each speech thereafter, we outlined the key financial and
political principles for successful commodity stock investing:
First: invest in an industry that has completed its Triple Waterfall Crash,
whose companies are led by battle-scarred executives and whose shares
are followed mostly by analysts who, like those executives, “know it best,
and love it least, because they’ve been disappointed most”.
Secondly, invest in companies whose strength is “unhedged reserves in the

ground in politically-secure areas of the world”.
As time went on and the stocks began to move, we added another maxim:
“The Obesity Index.” Avoid investing in stocks where the weight of analysts
on the Street is heavy in relation to that group’s weight in the stock market,”
In 1980, there were more oil analysts than tech analysts on Wall Street:
you should have sold oil and bought technology. Now the reverse was
true, even after the first stage of technology’s Triple Waterfall collapse. We
had, in effect the Anorexic Index—a few analysts too scarred by years of
grim news to issue enthusiastic Buy stories.

By the late 1990s, most of the big base metal miners had virtually shut down
their exploration departments, firing their geologists, and hunkering down.
Why explore for new mines when you’re losing money on the ones you’re
operating—which are probably higher grade than what you might find in
some bush, jungle or mountain top—and face strenuous opposition from Why explore for new
local residents and global greens? mines ....which are
probably higher grade
University geology departments had been shrinking or closing for more than
than what you might
a decade, and many geologists had taken up careers outside their industry.
find in some bush, jungle
(A friend who was Chairman of Geology at a major university once told me
or mountain top...
that one big reason they were able to keep the department going during the
bad times for exploration was demand from students who had no intention
of working for mining companies. They wanted to learn about the industry
so they could get jobs with Greenpeace, environmental NGOs, and law
firms that sue to prevent mines from operating. Some of these enthusiastic
demonologists doubtless got gloriously satisfying work on Avatar.)
Such exploration as was being undertaken was mostly by the smaller

companies, who took advantage of the lack of competition from the biggies
to stake claims around the world. That meant that the contract drillers which
had somehow survived the Triple Waterfall Crash were getting more demand
for their services than they could fill.
Once the China story took hold with risk-oriented investors, smaller mining
and exploration companies were able to raise funds through equity offerings,
and they filled the gap left by the bruised biggies. Result: one of the great
winners from the mining boom has been contract drillers:
Major Drilling Group

70
60
50
40
30
23.47
20
10
0
February 9
In keeping with “Those who know it best love it least,” big mining and oil
companies, having slashed exploration and capex to the bone, did not
boost their exploration budgets in line with rising revenues as metal
demand climbed. A study in 2005 reported that global mining exploration
In 2006, with copper expenditures were roughly equal to what the industry had spent a decade
prices soaring to $3.00, earlier.
the honchos of the
The managements of those companies and the few surviving analysts who
Arizona desert found
covered them looked at each uptick in prices of their production as selling
themselves under water...
opportunities.
It took a while for copper prices to respond to the rapidly-rising demands

from China (and, to a lesser extent, South Korea). One big reason was the
determination of the management of Phelps Dodge, one of the world’s four
biggest producers, to lock in higher copper prices by selling huge amounts
of production forward in what was (falsely) called hedging. At the 2005
Conference, I was asked during Q&A, “How high can metal prices go?” I
had heard Phelps’ management’s presentation that morning, in which they
insisted that analysts should use 85 cents per pound for their long-term
earnings estimates. I replied, “Why not use $2.00 for copper and $9.50 for
nickel?” The Phelps team got up, and noisily marched out. In contrast, Inco’s
CEO was quite complimentary about the speech, and grinned, “I loved your
$9.50 nickel.”
Phelps had locked in 85-95 cent copper on huge long-term contracts. They
doubled up with more sales in the $1.25 range. Insiders exercised stock
options and sold heavily with copper prices trading not far from $1. Result?
In 2006, with copper prices soaring to $3.00, the honchos of the Arizona
desert found themselves under water and were bought out—at a bargain
price for their superb assets—by Freeport McMoRan.
The management of BHP, led by the shrewd “Chip” Goodyear, had a different
view. The giant continued to expand production, eschewed hedging, and
shocked the industry by buying Olympic Dam, which had the largest known
undeveloped reserves of copper. At the Society of Economic Geologists
Convention in 2006, Rio Tinto people were smiling about “the very large
sum” BHP had paid for Olympic. In his speech the next morning Mr.
Goodyear noted, “Yes, we paid ‘a very large sum’ for those copper reserves.
But we also got the world’s largest known uranium reserves for free. That is
the optionality that builds great mining companies.” He further explained
“optionality” with reference to Freeport’s giant Grasberg mine—the world’s
biggest gold deposit and one of the three biggest known copper deposits.

When the mine was being readied for production in 1988, its reserve life was
estimated at 20 years, but the geology in the region was extremely favorable.
He said that its current estimated reserve life was many decades.
That approach to “optionality” should, we felt, be used by investors in mining

That approach to
stocks. Look for companies owning properties with great, unhedged, proven
“optionality” should...
reserves, and with indicated geologic potential for massive additions to those
be used by investors in
reserves, including—in some cases—the likelihood of proving economic
mining stocks.
quantities of other minerals.
The Crash: Was That The End of the Greatest-Ever Commodity Boom?
As the stock charts show, the big miners took bigger hits during the Crash
than most other big non-financial companies.
Naysayers who had dismissed the commodity boom as another 1990s bubble
were gleeful. “So much for the China story! How will China continue to buy
copper and coal when its exports collapse and it falls into recession? Those
big mine expansions in Australia and Asia will probably go bust.”
However, as those charts also show, the mining stocks came roaring back.
Their cash flows are once again robust, and the only one of the majors
with a modestly worrisome balance sheet is Rio Tinto, which leapt late
into the acquisition game, buying Alcan right at the top. But RTP’s earnings
are powerful, and it is having no difficulty in raising money. Meanwhile,
Freeport, which borrowed to expand Grasberg and buy Phelps Dodge, could
be debt-free by next year, if copper and gold prices stay near current levels.
BHP announced its earnings for the first half of fiscal 2010 last week—$6.1
billion, up from recession trough $2.6 billion. Of perhaps more importance
were its announced capex plans—up 17% in this year, not including $5.8
billion for its joint iron ore venture with Rio Tinto that still awaits final
government approval. The company had earlier advised the it was now
seeing “strong price recovery driven by demand in China and restocking in
the developed world.” This optimism was confirmed in a Wall Street Journal
report last week which asserted, “The prices of ingredients to make steel—
iron ore and coal—are rising sharply.”
February 11
Contrast that powerful recovery in prices of minerals and stocks from

recession depths with the anemic GDP outlook for the US and Europe.
On the evidence, “The Greatest-Ever Commodity Boom” remains intact.

What the Crash and subsequent events have demonstrated is that these
“The Greatest-Ever
companies have far less endogenous risk than most macro-analysts realize.
Commodity Boom”
Many “deep cyclical” US stocks that rely on US economic activity have barely
remains intact.
recovered from the Crash, and their futures depend on the success of the
Obama-Bernanke-Geithner programs. The miners are true global companies,
and the strong recoveries across Asia more than offset sparse demand from
American and European customers.
China’s “Second Long March” Goes Global

As metal prices—particularly iron ore—continued to climb to record levels,
“The China Story” took a new turn. Stung by the iron ore cartel—BHP, Rio
Tinto and Vale—China began sending its minions across the world looking
for metal reserves. When BHP tried to buy Rio Tinto, (which had recently
bought Alcan), the Chinese were alarmed that the merged company would
have the properties, production, and cash flow to have a lock on Australia’s
production of iron ore. Chinalco leapt in, buying sufficient RTP shares within
24 hours to put a hold on the merger, which was already in trouble because
of anti-trust claims by Australia and the European Economic Community.
This year, China made its next move to lock in control of major Australian
properties that produce what China’s steel mills need: the Export-Import
Bank of China is putting up $5.6 billion of the estimated $8 billion cost of
developing Clive Palmer’s huge Resourcehouse coal project in Queensland,
which will be built by Metallurgical Corp. of China.
China is investing almost everywhere—including in Quebec, where Wuhan

Iron and Steel has taken a $240 million stake in Consolidated Thompson
Iron Mines. Stung by governmental intrusions into attempts to buy major
commodity companies such as Rio Tinto and Unocal, what is happening
is that Chinese state-owned or controlled companies are buying minority
and controlling stakes in companies with mineral properties across the
world—and opening mines in hellhole countries backed by their own
security personnel.

Although the Crash was devastating to the miners’ stockholders, it may
have accelerated the emerging competition for ownership of resources from
government-owned mining companies and Sovereign Wealth Funds. These
cash-flow-rich organizations tried buying up mining and oil companies,
but found that Western governments were unhappy about losing “national Those outcomes are
treasures.” The situation was asymmetric: it was difficult—or impossible—for dubious tributes to the
resource companies to buy control of Chinese, Brazilian or Indian companies, glories of capitalism
but the government-controlled companies were able to hymn the virtues of and free markets.
free markets as they made major acquisitions abroad. Vale bought Inco, and,
(as we bitterly complained at the time), the Canadian government sat by
as the EEC bureaucrats took geologic time to consider the implications for
European steel mills of Inco’s planned merger with Falconbridge. That merger
would have prevented a takeover of Inco, and would have blended the giant
Sudbury operations of the companies. As a result of Brussels’ stalling, Xstrata
was able to pick up Falconbridge, while Inco was left virtually defenseless
against Vale’s big bid, at a time hedge funds were huge holders of Inco
shares.
We believe that the government-controlled companies and Sovereign Wealth

Funds will eventually dominate the world’s base metal industry unless
investors collectively revise their appraisals of mining’s risks and rewards,
and governments in the countries where the miners are incorporated change
their purist views about takeover rights by government-controlled companies.
Five years ago, for example, Falconbridge and Inco were jewels in Canadian
portfolios and RSPs. After the dust had settled, a Brazilian-government-
controlled company owned Inco, and a company of shadowy origins that
was partially spun-off from the Marc Rich group owned Falconbridge. Those
outcomes are dubious tributes to the glories of capitalism and free markets.
February 13
The Next Eight Years
What now?
...resource companies The mining industry has long been loathed by environmentalists. It is relatively
still suffer from friendless among G-7 governments as a polluter and a big contributor to
what could be called global warming.
G-Sevencentric- Nobody wants a big smelter upwind.
Evaluations.
Nobody wants any runoff of toxic chemicals into local rivers and bays. The
industry, fortunately, has devoted billions to research and construction to
make it a clean air, clean water producer of what the world needs now—and
in the future.
Global warming is a different kind of challenge (as will be discussed in

the Investment Environment). Cleaning up air and water pollution from
sulphuric and other acids and metal dust is something that is being done
at costs the industry can bear. But its smelters are CO2 producers, which the
warmists have been opposing with all their connections and might.
One reason why so many investors consider the mining stocks to be high-risk is
that resource companies still suffer from what could be called G-Sevencentric-
Evaluations. For the early years of the boom, skeptics regularly dismissed
these stocks as terrible investments: “They’ve been that way for twenty years,
and, apart from the inflation boom, they’ve been deep cyclicals that can’t
deliver good long-term returns. They don’t fit the stable grower model made
famous by Warren Buffett, and they have, in most cases, no control over the
prices of their output. They finally get around to opening big new mines late
in one cycle, and then a recession arrives, prices collapse, and they have to
keep pumping stuff out for whatever they can get. They are their own worst
enemies.”
Dare we say it? It’s different this time.
Despite the worst Crash and recession since the Depression, prices of key
industrial commodities, such as copper and crude oil, are trading at highly
profitable levels for efficient producers. The S&P is up by one-third in eight
years but copper is up 192% and crude is up 130%.

One reason is that known economic reserves in politically-secure areas
have not increased, despite heavy capex in recent years. Costs of finding,
developing and producing are up sharply, which means the small and mid-cap
entrepreneurial companies that in earlier booms supplied substantial new
production (either by themselves or through being taken out by majors) Robert Friedland,
have not been able to fill those roles to the same extent this time. a respected giant among
mining promoters,
Why?
is a modern Gulliver,
Mostly because of politics. beset by Lilliputians.
Robert Friedland, a respected giant among mining promoters, is a modern

Gulliver, beset by Lilliputians. His superb Ivanhoe copper mine in Mongolia,
which could increase that poor nation’s GDP by one-third, is finally going
forward after years of politically-driven delays. Just when it looked as if
he was on the verge of getting full financing, the Mongolian government
announced punitive new resource taxes. It has taken three years for him,
and his new partner, Rio Tinto, to get the government to repeal those mine-
killing levies, but investors are naturally wary that once many billions have
been invested and the ore flows, the cash-strapped government will enact big
tax increases. His vision, guts and smarts have outlined potentially gigantic
reserves in the Congo. They once looked secure because he had negotiated
rights with a government backed by the UN. Alas, as of now, his guts haven’t
brought glory. The Congo has reverted to its pre-Belgian pattern of bloody
tribal warfare.
Where is it safe to bring on new mines?
If there aren’t major environmental challenges, and if local native tribes

don’t claim veto powers while they sort out among themselves who has the
historic rights, then most provinces in Canada—and particularly Quebec—
remain safe for miners. (Mining exploration in remote regions, as we have
been told by one of the leading contract drillers, is in Quebecois’ genes dating
back to Les Coureurs de Bois who lived, hunted and trapped in the wilds. Their
descendants are, he said, among the world’s best and most reliable workers
in the bush or jungle.)
Perhaps the best place for mining in North America is Nevada, because
the local governments are friendly and Congress has been unable—despite
decades of effort—to come up with a royalty scheme for federal lands. Result:
companies only pay regular corporate taxes. The miners have strong support
in Washington with Harry Reid as Senate Majority Leader, and he gets help
from Senators in other states with substantial federal lands.
February 15
Conclusion
The base metals and coal are the purest “Chindia” plays among the four
commodity asset classes (base metals and coal, precious metals, energy, and
agriculture). Among those metals that trade on the exchanges, the China
China is the price-setter.
influence is powerful; for those steelmaking ingredients that trade by overseas
contract—iron ore and metallurgical coal—China is the price-setter.
We underweight these stocks within our recommended commodity stock

portfolio because they have the highest economic risk of the four classes,
and have the most to lose if the global economic recovery falters when the
“financial heroin” supply dwindles. China’s inventory policies are opaque,
and base metal contangos in the metal futures—most notably in aluminum—
stimulate speculative activity that makes valuations vulnerable to major sell-
offs.
However, the base metals may well have the best upside potential of any
group when—or if—overall global economic growth resumes and investors
no longer have reason to worry about metal price bubbles.
We expect to boost our recommended exposure to the base metals sharply

this year, as our concerns about a double-dip US economy fade.

II The Latest Chapters in the Financial Crisis
The best moment for us, in our continuous coverage of the debate about the
financial crisis was Obama’s response to the Massachusetts “Tea Party” shock,
in which an obscure, centrist-conservative state senator named Scott Brown
After Shelby announced
won the Senate seat that had been under Kennedy family control since 1952.
his opposition, other
Within hours, Obama announced that he was endorsing Paul Volcker’s banking
Republicans rushed,
reform proposals (which we endorsed enthusiastically in our last issue). Then
Gadarene-Swinishly,
we heard that Barney Frank and Chris Dodd would be proposing the reforms
to join him...
in their respective committees. The surprise at being on the same page at the
same time with Obama, Frank and Dodd recalled for us the time we absent-
mindedly wandered into the wrong restroom at O’Hare.
The worst moment for us was to come two days later. Mr. Volcker appeared
before the Senate Banking Committee, whose members are the objects of
Wall Street’s tenderest attentions and most generous gifts. The Democrats
were, in the words of Wodehouse “not exactly disgruntled, but they weren’t
gruntled either.”
The Republicans were more openly hostile. Republican Senator Richard

Shelby of Alabama became the Brutus in this latest Capitol drama. As The
Wall Street Journal described it, “He questioned Mr. Volcker in a fashion that
suggested the utmost respect for a great hero of economic crises past and the
patronizing condescension one would give an 82-year-old suspected of being
out-of-touch with the modern financial world and, perhaps, a bit senile…..
Mr. Shelby has taken $2 million from financial interests, more than double
the contributions from the next leading industry….But that’s how it is in
Washington these days. Unlike the Congress of the 1930s this body is more
beholden to politics than to reforming a broken system that has put the
American economy in a hole so deep the competitiveness of every American
industry is now in question.”
After Shelby announced his opposition, other Republicans rushed, Gadarene-

Swinishly, to join him, and the Democrats quietly withdrew from the scene,
unwilling to mount a fight that their biggest donors opposed.
Shelby may well be remembered as the Capitol killer who destroyed the
rescue program offered by the man who could reasonably be regarded as a
short-list candidate for “the noblest American of them all.” Prior to shafting
Volcker, he was best-known for holding up 70 federal appointments of all
kinds because he demands approval of a big tanker deal for his state.
February 17
Other Developments
The Big, Bad Bonused Bailout Banks (aka the B5) are having a remarkably
easy time in Washington these days. They have even managed to convince the
Republican Right that defending them against what Obama calls “Reform”
The stock price of
is standing up for Free Enterprise and The American Way of Life. These were
what had recently been
the financial organizations that brought, with more than a little help from
the biggest bank in
Fannie, Freddie and their overlevered counterparts abroad, the Crash and
the world with
Recession and added more than $2 trillion to the National Debt.
“a prudency culture” was
on its way to 99 cents... Investors are learning more about the B5 as hefty books are published about
the tense days of 2008. We recently read Andrew Ross Sorkin’s impressive Too
Big to Fail. There are very few laughs in the book, but to our taste, there is a
deliciously hilarious quote from Vikram Pandit, the ex-hedge fund manager
within Citigroup who was paid more than $120 million to become CEO of
that multi-strategy hedge fund that wants to be viewed as a bank when it’s
seeking deposits from the public:
At the point in the crisis when it looked as if even Goldman could fail,
the overstressed Hank Paulson and Tim Geithner briefly tried to convince
Citigroup to merge with Goldman.
Pandit’s explanation to Geithner of why he turned down their plea could

be one of the two great quotes of our time, along with Homeland Defense
Czar Janet Napolitano’s assurance after Mutallab’s crotch bomb failed to
explode over Detroit, “The system worked well.”
“This is a bank,” Pandit announced. “And a bank takes deposits and a

bank has a prudency culture.”
As he spoke, Citi was still trying to unwind hundreds of billions of dollars’

book value in off-balance sheet SIVs, and, from its grotesquely overlevered
balance sheet, even a small part of its humungous collection of perfumed
CDOs. The stock price of what had recently been the biggest bank in the
world with “a prudency culture” was on its way to 99 cents from its fifty-ish
level 15 months earlier.
But Pandit and his Wall Street allies had enough money left over from the
bailouts to shower donations on Shelby and the other key Congresspersons
who blocked Volcker’s reforms.

Another of the central figures in the book, JP Morgan’s Jamie Dimon, who is
one of the most vociferous and powerful of the Wall Street barons, was upset
with Volcker’s proposals. He defended the Street, saying that a crisis comes
every five to seven years.
Wall Street’s words
Really?
of repentance and
Will that go into history as the Morgan equivalent of Chuck Prince’s its acceptance of
memorable, “As long as the music is playing, you’ve got to get up and meaningful reform
dance?” are as impressive
and reliable as the
The Crash wasn’t some Seven-Year Hitch. And even after nearly two years
investment quality
of multi-trillion spending, 8.5 million Americans are unemployed, and the
of the average
stock market is where it was twelve years ago.
sub-prime CDO...
Nor was all this misery necessary. Had the B5 and their bankerly brethren
not pigged out on their fancy, impenetrable CDOs and CDSes, that Buffett
and Volcker had routinely derided as socially useless and outright dangerous,
there would have been no Crash, and no recession.
In general, Wall Street’s words of repentance and its acceptance of meaningful

reform are as impressive and reliable as the investment quality of the average
sub-prime CDO that they’d love you to buy.
That doesn’t bode well for the financial recovery on which the nation
depends.
On the other hand, the KRE is looking better in recent weeks. If its relative
strength continues through a stock market correction, we would be looking
for the time to give the “All Clear” signal to investors.
KBW US Regional Banking ETF (KRE) relative to S&P 500

110
100
90
80
70 69.25
60
50
Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10
February 19
III Turning of the Tide?

When the financial markets and economies imploded, Leftist publicists and
politicians could barely conceal their satisfaction: at last the era of greed that
began with Reagan and Thatcher and spread across the world so obscenely
The record of European,
after the collapse of Bolshevism was over. Voters everywhere would now,
Asian and Latin
finally, demand socialist-oriented policies. Leftist parties would transform
American countries
the political landscapes of the world. Greed is dead! Government is no longer
is enough to make a
the problem, it is the solution!
moralist weep and
a sovereign bond Except that it hasn’t been turning out that way. Consider Europe: Apart from
investor consider Greece and Spain, two of the Mediterranean’s members in the Eurozone’s
hemlock as an family of PIIGS (Portugal, Ireland, Italy, Greece and Spain), elections have
alternative acquisition. been going for center-right or conservative parties. Admittedly, in Latin
America, the tide toward the dictatorial Left in Venezuela, Ecuador, and
Argentina, which began even as most of that region was turning to the Right,
is continuing. But even in those dens of political stench, the caudillos are now
having trouble holding down political discontent.
The most important confirmation of this trend toward normalcy came in

last year’s election in India, in which the center-right Congress party of
Manmohan Singh was returned with a larger majority.
We have commented on these reassuring trends previously. Now we must take

note of something that could be even more momentous: the tide in bond
risk appraisals away from sovereign credits toward high-quality corporate
bonds. As voters seem to be moving away from reliance on Big Government
and looking to the business community to revive their economies, bond
investors have begun to migrate from the debt of hideously over-indebted
governments to the debt of well-managed companies that will be part of the
economic progress of future years.
If, as we expect, this trend continues, it would be one of history’s greatest sea
changes in bond investing.
Harvard’s Kenneth Rogoff may have helped set off this swing among bond
investors with the publication of a remarkable history of debt defaults over
six centuries. He shows that the list of countries which have never defaulted
on their own debt is a handful. (Canada, by the way, is a member of that
virtuous group.) The record of European, Asian and Latin American countries
is enough to make a moralist weep and a sovereign bond investor consider
hemlock as an alternative acquisition. Rogoff asks why sovereign credits are,

according to banking system rules, always ranked higher than any corporate
credits. He shows that many of the biggest corporations have never defaulted.
He is, in effect, challenging the Basel rules which provide that a bank holding
Greek bonds does not need to allocate capital for that investment, whereas
if it holds Exxon Mobil bonds, it does. As Mr. Bumble would say: “The law Greece’s democratic
is a ass.” performance since
then suggests that the
The new doubts about sovereign credits are based on the rapidly-unfolding
genes of Pericles and
evidence that governments’ unionized employees’ salaries, pensions and
Solon are extinct.
health care have created a huge new class of winners—and few governments
can afford what previous governments promised to the privileged. Watching
the striking unionized government employees screaming threats in Athens,
we realized that those people—who retire as early as 58 or no later than 63
with great pensions—may have more to argue about with most of their fellow
citizens than the Greeks had with the Trojans. (Our favorite rioter quote,
“We gave the world democracy: now it’s time to pay us back.”) Athenian
democracy disappeared 23 centuries ago, and only returned when Truman
intervened after World War II to prevent the USSR from taking over. Greece’s
democratic performance since then suggests that the genes of Pericles and
Solon are extinct.
In other words, many—if not most—governments are struggling under the

piled weight of all the sweetheart pension and union promises of the past,
while the economies on whose taxes they rely are forced to compete in the
present—and face a future of increasingly formidable competition from
economies that were deemed irrelevant when those costly promises were
made. To add injury to destiny, they have to bail out bad banks and insurers.
Why buy the paper of sovereign issuers that keep going deeper into debt and
have no realistic programs for doing better? (Although the dollar currently
benefits from the Greek-driven rush out of the euro, the IMF’s calculation
of current deficit to GDP ratios puts the US in Greece’s league. Only the
US’s reserve status allows Washington to keep boosting wages and benefits
to government employees while the private sector languishes. According to
one study, the number of Federal employees earning more than $150,000
per year has doubled in the past 18 months.)
If people are collectively beginning to mistrust Big Government and Zero

Interest Rates, then it should be no surprise that investment-grade nonfinancial
corporate credits gain on governments almost every week.
February 21
Until recent months, the United States seemed to be an exception to this

rule that governments were moving from the Left toward the center-right.
Mr. Obama ran as a centrist against the record of a faux conservative who
had added a huge new entitlement (Prescription Drugs) and a major federal
The White House Budget intrusion into school systems (No Child Left Behind), and drove the US into
office minions kept a war based on botched intelligence about WMDs. Result: a big rise in fiscal
grinding out reassuring deficits and the national debt. Bush also failed dismally by kowtowing to
figures about global the Fannie Mae and Freddie Mac backers in Congress who kept legislating
demand for Treasurys. reductions in down payments and credit ratings for mortgagors. Despite
Those geeks should strong support from Congressional Republicans and Allan Greenspan, he
thank the Greeks. caved in to the Congressional Democrats who kept insisting that Fan and
Fred posed no risk whatever to the financial system.
Inheriting “this mess” and a full-blown financial crisis, Obama proceeded

to surprise many of his supporters by introducing massive, costly new
federal programs in health care and global warming. The result: deficits—in
both the short and long-term—far above earlier estimates and the kind of
rising political discontent that opens the doors to populists. As early as the
Midterm elections, if current polls hold, the US will have rejected dreamy
progressivism, and will, at least superficially, more closely resemble the
political trends abroad. (Whether the new winners in November will prove
to be sensible centrists and moderate conservatives remains to be seen, and
the auguries at this point are hardly encouraging.)
Obama has had one big stroke of luck recently. The Euro-turmoil about
Greece and the other PIIGS has forced China and other central banks to
reconsider their reduction in Treasury buying in favor of buying Eurozone
bonds. Major investors had been warning of a coming crisis—with sharply
rising interest—as projections for US deficits kept climbing. The White House
Budget office minions kept grinding out reassuring figures about global
demand for Treasurys. Those geeks should thank the Greeks.
Conclusion
If the big bosses of the Big Government trend are losing public confidence,
then, at some point, private investors and pension funds will decide to build
some longer-term protection into their funds against worsening economies
and the rapidly-deteriorating quality of federal and state bonds.
There’s a four-letter word for the clear alternative to all these machinations
and program and deficits and bad bank paper: gold.

IV The Precious Metals
Gold
1,400
1,200
1,120.10
1,000
800
600
400
200
Silver
2,500
2,000
1,500 1,609.80
1,000
500
0
Platinum
2,500
2,000
1,500 1,537.10
1,000
500
0
February 23
This is the commodity stock group that, as of now, seems to offer the best
risk/reward opportunities for equity investors. (We remain ardent advocates
of agriculture stocks on a longer-term basis, but with the dollar and euro
both facing major near-term challenges, gold’s haven status makes its appeal
All other commodities’ impressive even to investors who are instinctively averse to commodities.)
prices are constrained
It is also the group that offers greedy dreamers the best prospects for price
by the willingness of
increases arising from accumulation by central banks and foreign exchange
current users to pay
funds. All other commodities’ prices are constrained by the willingness of
any price increases.
current users to pay any price increases. Not so with bullion. Gold went to
new highs after jewelers and Indian ladies—for long the major buyers—had
gone on strike. Contrast that behavior with what would happen to prices for
iron ore and metallurgical coal if half the Chinese steel industry were to shut
down. Although there are numerous experts on gold prices who issue well-
reasoned forecasts, nobody really knows what it’s going to be worth in six
months—let alone six years.
Gold has one unique characteristic: since the beginning of time, it has always
been one of the accepted alternative asset classes to consider in wealth
conservation and building. A Giacometti statue of a skinny walker can be the
current rage among nouveaux-riches, and set an alltime auction price record,
but its weight in gold could well be worth more than the statue fifty years
from now when the fashionable love of the lean has soured.
Barrick Gold (NYSE: ABX)

55
50
45
40
35 37.86
30
25
20
15
10

Goldcorp (NYSE: GG)
60
50
40
38.65
30
20
10
0
Newmont (NYSE: NEM)

70
60
50
47.24
40
30
20
10
0
Kinross (NYSE:K)
30
25
20
18.50
15
10
0
February 25
Among the biggest metal stories since the last Resources Conference have
been the dramatic run-up in gold prices, and the announcement of Barrick’s
unwinding of its hedges.
Barrick’s hedging program was the right big thing during the years of gold’s
Gold finally broke
Triple Waterfall collapse—and the wrong big thing once gold had entered a
through that magic
new long-term bull market. The Barrick volte-face helped drive gold prices to
barrier last September,
new heights.
and has remained in
The Promised Land For decades, many gold companies’ executives and promoters spoke longingly
since then... of the coming Golden Age when gold would trade at $1,000 an ounce. Gold
finally broke through that magic barrier last September, and has remained in
The Promised Land since then, but gold mining stocks (as measured by the
XAU) peaked out weeks ago.
As we wrote in December (Financial Heroin), when gold broke into Four

Digitland, it suddenly began to look less like a store of value and more like
a speculator’s plaything. Why was gold running wild? We cheekily suggested,
as historians, that this moment in metal history could be driven by dates of
the past. According to this dubious hypothesis, gold’s first target should be
1066 (The Battle of Hastings), the next 1215 (Magna Carta), with a near-
term peak of 1258 (The Provisions of Oxford) and a one-year target of 1345
(Onset of The Black Death, which began to fade away by 1350). Bullion
bounced all the way to Magna Carta before the mini-bubble burst and gold
plunged briefly back, bottoming out—at 1066.
What converted so many skeptics into chrysophiles was (1) Barrick’s

capitulation to market forces, and (2) word that the Government of India
was buying 2,000 tonnes of gold from the IMF for its foreign exchange
reserves. Analysts also noted that the list of European central banks who
were not taking advantage of their gold selling rights under the Washington
Agreement seemed to be gaining new members.
The new elixir for gold investors and gold bugs alike: what happens if (1) all
the central banks in the Washington Agreement stop selling and start buying
and (2) China and other heavyweights decide to put a meaningful percentage
of gold into their forex reserves? As gold broke through $1,000, that kind of
buzz began to spread, and, after thirty years in which gold bugs talked of
“Gold at a thousand,” suddenly the new target was $2,000. The wise Pope
(Alexander, that is), would understand:
Hope springs eternal in the human breast.

Man never was, but always to be blest.

Aaron Regent, Barrick’s market-savvy new CEO, comes from a base metals
background at Falconbridge. He helped fuel the flames of desire (after he
had shrewdly convinced Barrick to pull in its huge hedges) by touching and
stroking a hitherto-undiscovered erogenous zone in gold bugs: peak gold—
which could be the latest Big Thing since peak oil. ...a hitherto-undiscovered
erogenous zone in gold
He noted that new-mined production of gold has been declining for a
bugs: peak gold...
decade, and suggested this could prove to be the equivalent of what has been
happening to major oil fields (such as the North Sea, Cantarell, and Alberta’s
sedimentary basin).
During that decade, gold’s price trebled, yet the feared and revered “Iron
Law of Commodities” did not re-appear to spoil the fun. (“The cure for
high commodity prices is high commodity prices. When prices climb,
new production appears and prices fall back: always has happened; always
will.”)
Another “law” was cited in some quarters during the later stages of gold’s
long run-up: the Stupid Central Banker Rule: “As for gold, do the opposite to
what central bankers are doing: they’re nearly always wrong.”
These self-styled sophisticates noted that central bank buying helped drive
gold to $800 an ounce thirty years ago, and their selling helped drive it to
$250 at the end of the past decade. Since then, they’ve continued to sell into
a rising market.
This is one of those “rules” that makes its proponents look smart, but has a
hidden problem: since central bankers have apparently stopped selling and
are now buying, shouldn’t we be rushing to the exits and buying something
more secure—like Treasurys or Citigroup debt?
The longest-established “Golden Rule” is that “He who has the gold makes
the rules.” It was cited with relish month-in, month-out, from 1974 through
1982. It stopped working in January 1980, but its hordes of true believers
kept relying on it for years thereafter.
Much of the recent commentary on gold (and, to a lesser extent, the

other precious metals) is that Obama’s deficits, coupled with Bernanke’s
money-printing, could produce either a Depression or runaway inflation.
To us, this is an argument investors really should take seriously.
February 27
We have advised those who, terrified by soaring global fiscal deficits and
global liquidity, talk of a rush to cash by selling most or all their equities that
gold could be the optimal investment under both extreme outcomes.
Since we regard cash as an unattractive asset for investors who fear Depression
If gold were back at
most (they should own long-duration high-quality bonds instead), we argue
$250, total mineable
that a holding of gold and gold stocks offers excellent protection under both
gold reserves might
extremes, and attractive potential under a regime of moderate inflation and
be barely adequate
modest recovery.
to meet the collective
bling demands of all Gold was the best investment during the Rooseveltian 1930s and the
Grammy winners. Carteresque 1970s. Mr. Obama seems at times to be a blend of those two
Democratic Presidents. The first was a confident, charismatic interventionist,
whose economy was actually rescued by World War II; the second was a well-
meaning, yet inept, President who seriously weakened America at home and
abroad. Nothing became him in his Presidency as the leaving of it—first, by
giving the world the gift of Paul Volcker, and then by losing to the reformist
Ronald Reagan. While on vacation, we spent some time watching Obama on
TV. We found him even more impressive than we had thought previously.
What he’s peddling may well be the wrong answers to our problems, but his
charm and energy are infectious.
Such bad news as there has been about gold recently has been confined
to disappointing news from some of the major gold mining stocks that
unleashed big selloffs.
We have held some of these recently-wounded companies in our Fund (The

Coxe Commodity Strategy Fund) because of our belief that long-duration
unhedged reserves in politically-secure ground meant they were better than
bullion in a bull market for gold.
Why? Because all mining (and oil) companies report reserves on the basic
of economically-recoverable minerals. If gold were back at $250, total
mineable gold reserves might be barely adequate to meet the collective bling
demands of all Grammy winners. Conversely, were it $2,000, new-mined
gold production would surge past current levels—but it wouldn’t double:
There ain’t enough gold in them thar hills.
Miners report three kinds of mineral reserves: proven and probable reserves,
and resources. The latter category is generally lower-grade, has not been
drilled out in detail, and may have been estimated primarily by geophysical
and geochemical techniques.

One reason a big boost in bullion prices has not meant a big jump in gold
production—but was actually accompanied by declining output—is that
the kinds of mining companies in which you should invest are those who
recognize that each ton of ore taken out of the ground brings the mine closer
to closure. A mine’s closing is painful for stockholders and management, but ...that valuation
is usually a disaster for a community. Therefore, responsible mining means technique makes as
mining some lower-grade ore during periods of high metal prices to expand much sense as giving
mine lives. This not only serves the community, it protects the value of the the Academy Award
company’s biggest asset—the mine. This was illustrated a while back when to the actress whose
Freeport McMoRan announced a slight reduction in its copper and gold facial expressions are
output, which meant earnings came in modestly below the estimates of some the most predictable.
Street analysts. Some of these responded with criticisms of management’s
“failure to execute,” and argued that shareholders should reconsider their
approach to the stock.
These criticisms bespoke not sophistication, but ignorance.
When copper and gold prices soared, that gave Freeport the chance to mine
some lower-grade sections of its Grasberg mine, thereby extending its life
and smoothing its earnings growth.
The idea of steady, uninterrupted, and predicted growth in per-share

earnings is a construct of modern portfolio theories about what makes good
investments. It doesn’t work with commodity companies, because the prices
of their products are subject to wide swings over time. As applied to mines,
that valuation technique makes as much sense as giving the Academy Award
to the actress whose facial expressions are the most predictable.
That’s one reason why we do not recommend giving the highest recognition
to mining analysts who make the most accurate short-term earnings forecasts.
We rely most on those analysts who have real understanding of the nature
and challenges of each of the mines a company is operating or is planning to
open (or re-open), and the management’s longer-term strategies.
Nevertheless, rising metal prices will almost always mean increased ore
reserves—and in some cases, the results can be dramatic. There are huge
ore-bodies in politically-secure areas of the world that are virtually worthless
at $1.25 copper and $600 gold but can be bonanzas at $3.00 copper and
$1100 gold.
February 29
We have argued that investors should overweight the gold mines and
underweight the bullion if they are bullish on the metal, and reverse the
strategy if they turn bearish on the metal. Quite simply, higher gold prices
not only mean more profits from existing reserves, but likely mean major
...investors should additions to published reserves. You win—or lose—two ways on a significant
overweight the move in metal prices.
gold mines and
There is one other alternative form of precious metal investing that we have
underweight the
employed in the Coxe Commodity Strategy Fund: the royalty and streaming
bullion if they are
companies. The pioneer in this field was the original Franco-Nevada, which
bullish on the metal,
was merged away, but has since been reincarnated. It has acquired some
and reverse the
imitators and competitors, but the field doesn’t yet look so overcrowded
strategy if they turn
that investors’ returns will shrink. These companies don’t operate mines:
bearish on the metal.
they buy percentage shares of the output, either on an overall basis, or one
component part of the production—usually a precious metal. A relatively
recent entrant to this entrepreneurial sector—Silver Wheaton—illustrates the
most impressive feature of the concept: According to The Northern Miner, the
company has the highest market capitalization per employee on the New
York Stock Exchange—23 employees for a $6 billion company.

Conclusion
The latest published estimates for global fiscal deficits this year and last are
$14 trillion. Dennis Gartman quotes a friend who explains a trillion by saying
that a pile of US $100 bills totaling a trillion dollar would be 800 miles high.
What has long been
Conversely, all the gold on earth could be held within a few bank vaults.
the popular metaphor
It is less than a century since all major currencies became non-exchangeable for a sure-fire
into gold (or, the case of US, silver). That is, in human experience terms, money-making idea
a brief interval. During that time there have been two World Wars, many of almost any kind?
lesser wars, one Great Depression, many recessions, and many localized
“It’s a gold mine.”
depressions. The purchasing power of the greenback—the global store of
value—declines year in, year out. Exactly.
Since the invention of paper money and the development of foreign exchange
markets, there has never been a time when the central bank of almost every
industrial nation in the world that matters is pumping out money at near-
zero nominal rates—and government deficits continue to explode, while
demographies in the G-7 countries continue to erode. Long before the fifty-
year bonds of some European countries mature, the workforces of their
issuing countries relative to retirees will have plummeted to levels that are
insupportable under almost any economic theory.
When the sum of existing debts, present deficits, and future projected deficits
is so far beyond human experience, investors should go back to the Old
Reliable: There may never have been a time where Gold had a better claim to
inclusion in all portfolios dedicated to wealth conservation.
What has long been the popular metaphor for a sure-fire money-making idea
of almost any kind?
“It’s a gold mine.”
Exactly.
February 31
V Is a Fertilizer Producer a Mining Stock or an Agricultural Stock?

Or Does It Matter?
For months there had been growing speculation that the big mining
companies were going to add fertilizer to their product mix.
...it’s positively poetic:
Yara bought Terra. Then, within weeks, Vale bought Bunge’s Brazilian fertilizer operations, and
BHP bought a small Saskatchewan fertilizer wannabe, Athabasca Potash.
BHP has long held rights to potash permit land around the main producing
properties of the giant Potash Corporation, and is developing a potash mine
(Jansen) that adjoins Athabasca’s leases.
(Not that the miners are the only buyers: the world’s biggest fertilizer
company, controlled by the Norwegian government, bought a US nitrogen
producer this week. It’s not only a big deal, it’s positively poetic: Yara bought
Terra.)
Several brokers have been flatly predicting that BHP will buy Potash, a
company whose stock has recently languished in response to disappointing
earnings:
Potash (NYSE:POT)
250
200
150
115.20
100
50
0
The CEO of Potash, the messianic Bill Doyle, who is almost never ruffled,
recently complained that “BHP is trying to buy fertilizer companies on the
cheap.”
Why did BHP move into agriculture? Answer: it’s so big it has to think big.
Since BHP was frustrated in its attempt to buy Rio Tinto, it has what most
companies would consider a lovely challenge: how to reinvest its powerful
cash flow.

How? Buying a basket of little mining companies would probably be little
more than a managerial nuisance; however, buying big mining companies
producing what BHP also produces can unleash a sea of antitrust troubles
—from the multitudinous tiers of Brussels Snouts, and the US Justice
Department, recently aroused from somnolence with the kiss from Prince ...the US Justice
Obama. Department,
recently aroused
Potash and phosphorus are mined, although the techniques have little in
from somnolence
common with hard-rock metal mining. The big mining companies’ experience
with the kiss from
with farmers has tended to be of the unpleasant, pitchfork variety, because
Prince Obama.
of alleged or actual injury to the farmers’ air, land, water and livestock.
Diversifying into agriculture therefore is not, at first blush, the basis of a
sound business model. It arouses memories of what happened to Big Oil
when it bought base metals.
However, BHP naturally covets POT’s reserves in the ground in politically-

secure Saskatchewan—possibly the longest-duration reserves of any mineral
asset on Planet Earth. (Potash Corp. people enthuse about their “thousand
years of reserves,” but even if they’re out by 25%, that means they’ll be
pumping out potash for more than a half-millennium after the last drop of
bitumen has been drawn from the Alberta oil sands.)
As clients are aware, we have always included the fertilizer stocks within the
Agriculture component of our Recommended Asset Mix (and within our
Fund, where they have nearly a one-third weighting in Agriculture and a 9%
overall weighting).
If BHP is as serious about taking a run at Potash as Wall Street believes, we

suggest the managements of both companies consider the arguments about
mega-mining takeovers we adduced after the Falco-Inco-Fiasco. (Basic Points,
May 2007).
In brief, we believe that takeovers of companies with large mineral operations

in a Canadian province are not, primarily, a question for Ottawa but for the
legislature of that province—under Section 91 of the British North America
Act, which became Canada’s constitution. Provinces have jurisdiction over
mineral resources within their territory, except for pipelines and other forms
of interprovincial trade. We are virtually certain that Quebec would take that
position if there were a foreign takeover attempt at Agnico-Eagle’s mines in
that province. In the case of Potash, the Saskatchewan government’s veto
power may be stronger, because the company operated for many years as a
provincial Crown Corporation, until Bill Doyle and friends arranged that
historic privatization.
February 33
Canada’s federal Cabinet was only slightly more involved in the Falco-Inco
takeover battles than were the Commissioner of the National Hockey League
and the artistic director of the National Arts Centre. So Ottawa should not
be considered the premier player if Potash is the prey. The Saskatchewan
Canada’s federal Cabinet government, one of Canada’s most quietly competent, should, in our view,
was only slightly more set up an informal committee within the Department of Agriculture or the
involved in the Falco-Inco Department of Finance to prepare a position paper on the province’s response
takeover battles than to any future takeover bid.
were the Commissioner
We greatly admire the management and ethics of BHP, but we feel that the
of the National Hockey
people of Saskatchewan should be heard if Potash Corp—a true national
League and the artistic
treasure (even though its top management resides near Chicago)—control is
director of the National
at stake. A thousand years is a long time for remorse.
Arts Centre.

INVESTMENT ENVIRONMENT
For investors worried about anemic growth in the G-7, industrial commodities
and commodity stocks may look highly risky, after their dramatic snapbacks
from the Depression fears of a year ago.
...equities are still
We talk from time-to-time with pension funds about the attractions of in a long-term bear
commodities, and frequently find great willingness to consider new or market, whereas
increased allocations to this sector despite all the worries about deficits and commodities are
unemployment in the developed world. still in a long-term
bull market.
In the US, many pension fund managers and consultants cite a paper
recommending commodity investing published four years ago by two Yale
professors—Gary Gorton and Geert Rouwenhorst. The Financial Times last
week interviewed them about how their forecasts had worked out, given
that “prices in the years following the report’s publication moved in tandem
with other asset classes…As stock markets plummeted worldwide in 2008,
commodities fared just as badly.” The academics seemed unruffled, still
maintaining that “Over a long period, commodity futures returns match
equities but with a negative correlation.”
Their work tends to confirm our friend David Rosenberg’s cogent analysis that
commodities and equities move in different long waves—and that equities
are still in a long-term bear market, whereas commodities are still in a long-
term bull market.
What does that imply for commodity stocks? Can they be in a long-term bull
market while the major equity indices are still in bear markets?
We believe that well-managed commodity companies offer investors the

opportunity to position themselves in the industries that are performing
more strongly than the global economy, while under-exposing themselves
to shares in companies whose market caps reflect the way the advanced
economies used to be when the industrial world was still industrializing
rapidly—as was its supply of citizens under age 25.
That was before the combined impact of negative demographies, disastrously

engineered financial behemoths, and overburdened governments brought
the developed world’s global economic leadership to an end.
Car drivers drive by watching the road ahead, with frequent checks to the rear-
view mirror. Northrop Frye, one of Canada’s most renowned intellectuals,
argued that the best way to travel across Canada by train was to ride seated
backward—watching where you have been.
February 35
The major equity indices offer that vista—you know the companies, you
know their competitive positions, and you know which products and services
have been their growth engines. This is ordinarily comforting, compared to
the neck strain from trying to peer into the landscape ahead.
These economies are
Commodity stocks are the asset class that should be priced mostly by appraisals
the Global Olympians—
of the future of the global economy. They are the pre-eminent global asset class
young, competitive
because the materials the companies produce are priced internationally, and
and optimistic.
are tied to rising demand in the fastest-rising economies. These economies
are the Global Olympians—young, competitive and optimistic. The advanced
industrial economies are rapidly becoming the equivalents of the high-end
golf and country clubs where the successful people who’ve already made
their wealth come to retire, play and drink with their own kind—and where
they don’t have to compete with aggressive young upstarts.
Governments’ debts are the accumulated buildup of cumulative spending

growth above GDP growth—the underpayments made by earlier generations
for the rewards their politicians showered on them. They are an ever-present
reminder of past budget fantasies.
Investors have begun the momentous process of re-evaluating the endogenous

risk in the pre-eminent backward-looking asset class—OECD government
bonds—compared with high-grade corporate debt, which is priced the
way drivers drive cars—looking forward most of the time, with occasional
shoulder checks.
But, you ask, don’t government bond prices reflect perceptions of future
deficits? Yes, governments, economists and investment firms routinely
publish projections of future public debt situations.
However, apart from basket cases like Greece, those longer-term guesstimates
seem to have little or no effect on bond prices today. Else why would 30-year
Treasurys offer a nominal yield of just 4.6%, when the range of future US
national debt estimates is from the deeply worrisome to the utterly terrifying?
Obama’s own forecasts are for endless deficits, even though they predict
strong economic growth forever, no real increase in inflation, and only a one
percent rise in long Treasury yields. The nation’s debt/GDP ratio is widely
predicted to be heading –within a very few years—into the Mediterranean
Eurozone—the Twilight Zone for risk-conscious investors.

In contrast, blue-chip corporate debt sells based on the current balance sheet
and on assumptions about managements’ commitments to restrain future
bond issues in line with—or less than—actual earnings growth. Were IBM to
announce it expected to lose money for the next decade, but by then it would
dominate the computer service business, the yield on its outstanding bonds Peddling stock with
would skyrocket, and it would be effectively priced out of the bond market. a forecast of future
sustained gloom rarely
So, what about the evaluations of commodity stocks?
works—except for
The good mining companies should be priced three ways: the past, the selling box seats for
present, and the future: Wrigley Field.
The past is there in the form of the existing mines and reserves;
The present is there in the form of earnings and new discoveries.
The future is there in the form of expectations about the growth of “Chindia”
and other emerged and emerging economies, and the companies’ abilities
to position themselves for even greater future profitability as hundreds of
millions of new consumers vie for the products that will come from the
manufacture and use of commodities.
We place the greatest emphasis on the future, whereas the Street tends to
downgrade it, posting long-term base metal price forecasts that plunge to
levels last seen in 2005 or thereabouts. We disagree strongly with those future
earnings projections and question why any smart investor would want to pay
up for mining stocks that supposedly face grim years later in this decade
and beyond. Peddling stock with a forecast of future sustained gloom rarely
works—except for selling box seats for Wrigley Field.
The endogenous risk for the well-managed mining companies compared to

the broad stock market is much less than most backward-looking conventional
strategists assert, and the future profitability is greater than most analysts
dare to predict.
February 37
The Global Warmists’ Crisis

Global warming began to emerge as the new challenge to the economies
of the industrial world after the Fall of the Berlin Wall and the subsequent
implosion of Bolshevism. The devastated global Left found a new cause
...the IPCC’s headline
that, by attracting support from across the political spectrum, could give
claim that the great
Big Governments even greater power than they exercised before Reagan and
Himalayan glaciers
Thatcher made capitalism fashionable.
would disappear
within 35 years Crucial to warmism’s rapid rise to power was its insistence that the science
was as scientifically of global warming was settled. Dissenters within the scientific community
based as reports of found themselves marginalized and ridiculed, and their access to publications
conversations with a restricted.
Yeti...
The Nobel Peace Prize awarded to the UN’s Intergovermental Panel on
Climate Control (IPCC) and Al Gore sanctified the cause. The Copenhagen
Conference was to be the occasion at which the industrial world would not
only pledge itself to imposing strict controls on its practices, but would
pledge up to $100 billion in payments to the Third World in reparation for
the damages to emerging economies from Western industrialization, and to
assist its members in achieving climate-sensitive economic growth.
Then the settled consensus began to become unsettled:
First came “Climategate”—the thousands of hacked emails that showed

the extent to which the scientific dogmatists went to cover up embarrassing
data and discredit their opponents.
Second was Copenhagen. TV viewers across the world saw rioters in the
streets and socialists like Hugo Chavez getting standing ovations when
they demanded the end of capitalism. No deal was reached.
Third was the revelation that the IPCC’s headline claim that the great
Himalayan glaciers would disappear within 35 years was as scientifically
based as reports of conversations with a Yeti (The Himalayan Bigfoot).
The one scientific paper used for that scary claim had actually talked of
the possibility they would disappear by 2350, but the basis of the IPCC
assertion was anecdotal reports from a few enthusiasts at the World Wildlife
Foundation (WWF), which had long ago morphed from saving pandas to
fighting warming.
Fourth came the report from Swiss glaciologists that the Davos Glacier, the
most influential ice sheet on world opinion, had not shrunk because of
global warming but because of eight years of far-above-average sunlight.

Fifth came “Amazongate.” The IPCC had leapt into the cause to save the rain
forest by claiming that a huge percentage of forestland faced destruction
from warming. Now it was revealed that the only basis for that scientific
alarmism was an article written by a pair of youthful global warmists with
scanty scientific credentials—one of whom worked for the WWF. What matters most
is the week-to-week
Sixth came the saving of Holland. The IPCC had reported that, because of
accumulation of
rising oceans, 55% of the Netherlands was below sea level. Dutch scientists
evidence that the
showed that the part of its landmass protected by dikes was a small fraction
“science of warming”
of the nation—and it hadn’t shrunk recently.
has to go back to the
Seventh came the confessions of Phil Jones, the former head of the East drawing boards.
Anglia climate institute whose emails had been hacked. He had been put
on leave after the scandal broke. He admitted that their studies showed
“no statistical evidence” that the world had been warming since 1995, and
that the historical records showed the world was warmer 1,000 years ago
than now. He said that what was needed in coming years was a return to
peer-reviewed research.
More and more confessions and revelations come out each week.
This week, the big business alliance that had been backing Obama’s Cap and
Trade bill began to unravel, as BP, Caterpillar and Conoco Phillips pulled out.
Its biggest remaining member is General Electric, which has built its business
model on building alternative energy devices. The legislation is stuck in the
Senate, and it now looks as if that will be its tomb.
The record snowfalls across the Southern and Eastern US cheered the
opponents of global warming, but the warmists point to the problems for
the Vancouver Olympics to argue that, as they said all along, warming meant
wild weather swings, so a snowbound Washington is actually proof of their
claims. On balance, those snowfalls were further bad news politically for
warmists—because of their impact on ordinary people’s perceptions—but
they certainly weren’t decisive. What matters most is the week-to-week
accumulation of evidence that the “science of warming” has to go back to
the drawing boards. There is no chance now that voters in the developed
world will support governments that impose heavy burdens on their own
economies, while sending billions in reparations to the newly industrializing
nations that have become such formidable competitors—and formidable
polluters.
February 39
The investment implications are immense:
• Coal is coming back, and Warren Buffett’s bet on BNSF will pay off.
• The Canadian oil sands will probably never get support from the
The business model environmental elites, but the odds that the US will ban imports of
of Blood & Gore may Canadian heavy oil now range between slim and none. Moreover, the
have to undergo supposed global consensus demanding the shutdown of the oilsands
some revisions. soon will be history. Suncor and the other producers can start breathing
more easily—and investors who dumped their shares to prove their green
virtues may begin to reassess their decisions.
• The US Environmental Protection Administration’s carte blanche to involve

itself in business decisions across the economy will probably not outlive
the US Midterm elections. That is good news for the US economy—and
particularly for transportation and industrial companies.
• The business model of Blood & Gore may have to undergo some
revisions.
No one has proved that man-made global warming does not exist.
But, week by week, more and more people across the world will come to
believe that no one has proved beyond reasonable doubt that it does.
The game has changed.
Is Bernanke Running Out of Heroin?

As we were going to press, Bernanke announced a boost in the Discount
Rate—the fee for short-term emergency loans to banks. He also announced
there would be no change to the fed funds rate. Commodities—particularly
gold—were hit hard. We see this as central banker’s cosmetology---not
surgery. He doubtless would love to abort the commodity recovery, which
was confirmed by a big surge in the Crude Goods component of the PPI.
As an economic historian, he knows that indicator was the one that, in the
1970s, first flashed powerful evidence of the stagflation to come. The only
capital punishment open to him is closing down bad banks. He can’t shoot
the inflation messenger.

RECOMMENDED ASSET ALLOCATION
Recommended Asset Allocation

(for U.S. Pension Funds)
Allocations Change
US Equities 17 unch
Foreign Equities
European Equities 5 unch
Japanese and Korean Equities 2 unch
Canadian and Australian Equities 11 unch
Emerging Markets 14 unch
Bonds
US Bonds 12 unch
Canadian Bonds 8 unch
International Bonds 11 unch
Long-Term Inflation Hedged Bonds 10 unch
Cash 10 unch
Bond Durations
Years Change
US 5.25 unch
Canada 5.00 unch
International 4.50 unch
Global Exposure to Commodity Stocks
Change
Precious Metals 33% unch
Agriculture 30% –3
Energy 22% unch
Base Metals & Steel 15% +3
We recommend these sector weightings to all clients

for commodity exposure—whether in pure commodity
stock portfolios or as the commodity component of
equity and balanced funds.
February 41
INVESTMENT RECOMMENDATIONS
1. This is assuredly an inopportune time to increase equity exposure—and

an opportune time for profit-taking.
Major stock indices are breaking down. For the S&P, it would take only
an 8% retrenchment from its current level to break the 200-Day Moving
Average, and take the index to late summer levels.
2. Maintain a strong overweighting in commodity stocks within equity

portfolios.
3. Maintain high exposure to gold bullion and the gold miners whose
production comes from politically-secure areas.
The core belief system for gold is that governments can’t be trusted. Investing in
miners dependent on the sustained honesty and wisdom of conspicuously dubious
governments may work out for a time, but the principle behind that strategy is
oxymoronic.
4. Investors should overweight base metal miners within the cyclical

component of their equity portfolios.
The base metal miners’ earnings have come back faster than all but the
most optimistic would have predicted when the world’s crisis managers
were engaged in panic-driven ad hoc strategies to avert a Depression. Few
investors grasped the significance of the fact that the new players on the
global block—China and India—weren’t even in recession. Result: metal
inventories never mounted to levels that would have imperiled major
miners.
5. Here is a strategy for corporate clients to consider: borrow—don’t

buy—debt denominated in euros.
The Eurozone, justly renowned for its liberal dispensations of pork, barely
emerged from the Crash before being faced with a big PIIGS (Portugal,
Ireland, Italy, Greece and Spain) problem. Germany has a veto on any
form of bailout for the big spenders, and German voters were never given
a chance to vote on whether they really wanted to swap their beloved
Deutschemarks for euros. Canada recently demonstrated its smarts by
borrowing heavily in euros.

6. The Saudi Oil Minister has said that $70-$80 is the “perfect” price for
oil. In an imperfect world, this looks like a reasonable price for valuing
oil producing companies—and the contango in the futures curve is a
reasonable basis for valuing the companies’ Reserve Life Indices.
7. Underweight natural gas-related stocks within energy portfolios.

Overweight the oil sands companies, whose managements should be
among the loudest of laughers at the warmists’ implosion.
Despite El Niño, it has been a challenging winter for most of the USA. But
it hasn’t been enough to get natural gas prices up to interesting levels.
8. We remain bullish on the leading agricultural stocks.
Food price inflation is hitting consumers in many emerged and emerging

economies. The reasons vary, but the Beijing bosses and their counterparts
in other important economies have to be concerned that prices could be
so strong, even though prices of corn, wheat, soybeans and rice are not.
9. Canadian bonds and stocks should be heavily overweighted in global

portfolios.
As you watch the Vancouver Olympics, don’t focus too much on the
Canadian committee’s high-risk decision to schedule many downhill
events on the coast in what turned out, unfortunately, to be the year of a
giant El Niño. Look at the beautiful city and countryside, and look at how
Canada’s economy is performing compared with its Southern neighbor.
10. Overweight investment grade corporates in bond portfolios.
Would you rather hold long-term debt from a government that cannot
manage its finances or from a great company that manages its money very
well? Remember that those smart people who rate leading governments’
bonds AAA also gave that rating to trillions of face value in complex
“bonds” that are heavily weighted in the worst of residential mortgages.
If the US stock market rolls over and falls sharply, the impact on the US
economy is likely to be profound. Such improvements in consumer and
business outlooks as the pollsters find are heavily based on the strong
equity markets. Those ebullient markets helped corporations rebuild
their finances through debt and equity issues. A bear that emerges from
hibernation could be dangerous to more than equity investors.
February 43
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Basic Points

Hard Rocks and Hard Shocks

February 19, 2009

Published by Coxe Advisors LLP

Distributed by BMO Capital Markets

BMO Capital Markets Disclosures

Hard Rocks and Hard Shocks

February 19, 2009

February 19, 2009

Author: Don Coxe 312-461-5365

Editor: Angela Trudeau 604-929-8791

Coxe Advisors LLP. www.CoxeAdvisors.com

We remain bullish on the longer-term outlook for commodities and the

We are leaving our cautious Recommended Asset Mix unchanged. The

I The Base Metal Miners

Commodities: The asset class of the Seventies, ending in January 1980,

Technology: The asset class of the Nineties, ending March 2000. We

4 February THE COXE STRATEGY JOURNAL

I knew from having studied economic history that large-scale industrialization

The Boom Begins, and Has Its First Pause

Vale (RIO) Vale relative to S&P 500

Rio Tinto (RTP) Rio Tinto relative to S&P 500

Xstrata (XTA) (London) Xstrata (XTA) (London) relative to S&P 500

6 February THE COXE STRATEGY JOURNAL

Secondly, invest in companies whose strength is “unhedged reserves in the

8 February THE COXE STRATEGY JOURNAL

Such exploration as was being undertaken was mostly by the smaller

Major Drilling Group

It took a while for copper prices to respond to the rapidly-rising demands

10 February THE COXE STRATEGY JOURNAL

That approach to “optionality” should, we felt, be used by investors in mining

Contrast that powerful recovery in prices of minerals and stocks from

On the evidence, “The Greatest-Ever Commodity Boom” remains intact.

China’s “Second Long March” Goes Global

China is investing almost everywhere—including in Quebec, where Wuhan

12 February THE COXE STRATEGY JOURNAL

We believe that the government-controlled companies and Sovereign Wealth

The Next Eight Years

Global warming is a different kind of challenge (as will be discussed in

Dare we say it? It’s different this time.

14 February THE COXE STRATEGY JOURNAL

Robert Friedland, a respected giant among mining promoters, is a modern

Where is it safe to bring on new mines?

If there aren’t major environmental challenges, and if local native tribes

We underweight these stocks within our recommended commodity stock

We expect to boost our recommended exposure to the base metals sharply

16 February THE COXE STRATEGY JOURNAL

The Republicans were more openly hostile. Republican Senator Richard

After Shelby announced his opposition, other Republicans rushed, Gadarene-

Pandit’s explanation to Geithner of why he turned down their plea could

“This is a bank,” Pandit announced. “And a bank takes deposits and a

As he spoke, Citi was still trying to unwind hundreds of billions of dollars’

18 February THE COXE STRATEGY JOURNAL

In general, Wall Street’s words of repentance and its acceptance of meaningful

KBW US Regional Banking ETF (KRE) relative to S&P 500

III Turning of the Tide?

The most important confirmation of this trend toward normalcy came in

We have commented on these reassuring trends previously. Now we must take

20 February THE COXE STRATEGY JOURNAL

In other words, many—if not most—governments are struggling under the

If people are collectively beginning to mistrust Big Government and Zero

Until recent months, the United States seemed to be an exception to this

Inheriting “this mess” and a full-blown financial crisis, Obama proceeded