In the past paper, we talked about the vast performance disparity among metals, and offered our take on which metals to buy (Gold, Zinc) and which to avoid (Copper) going forward.

Not all metals are created equal - metals review:
http://new.goldmau.com/article.php?id=224

In this paper, we will provide the rationale behind mining equity investment, how to choose between metals futures or metals miners, and conclude with which mining sectors to buy and which to avoid.

Rationale behind mining equity investment:

The key to investing in mining equity is leverage. Suppose a copper miner's break-even point is 70 cents a pound. The company wouldn't have been worth much when copper was 70 cents as it couldn't turn a profit.

At a $1.00 copper price, however, the company will make 30 cents per pound of copper produced. And at $4.00 copper, its earnings will go up eleven times over to $3.30 cash earnings per pound.

Mining vs direct commodity investment

So the theory is that if copper prices go up 4-fold, copper mining stocks would go up 11-fold. In fact, this is pretty much what has happened since 2002. As copper went from 70 cents to $4.00, giant copper miners such as BHP went from $8 to $90.

BHP

If BHP's case were universal to miners, would all investors jump on the mining bandwagon to take advantage of booming commodity prices?

Only if the case is so clear cut; indeed, if we look at Oil and Gold mining equities, a different picture emerges.

Crude went from $22/barrel post-Iraq War to now over $130/barrel, yet Exxon Mobil has merely doubled from $40 to $80.

Exxon Mobil:

Gold went from $250/oz in 2001 to $970/oz today, yet Barrick, world's largest gold miner, has merely tripled from $15 to $45.

Barrick Gold:

So why have gold miners and oil companies underperformed relative to gold and oil respectively? We can only speculate: