Saturday, April 22, 2006

Whats a Penny Worth? Northern Orion Resources (NTO)
Copper, Thinking outside the Box

The accelerating price of copper had your Cheap Stocks Editor deep in thought earlier this week. (We like to think outside the box here at Cheap Stocks, and that includes our philosophy of incorporating non-traditional asset classes into our portfolio.) With the realization that prior to 1982, pennies were 97.5% copper, I decided to do a few calculations. Based upon weight, 155 pre 1982 pennies make up a pound of pure copper. With copper trading at more than $3.00 a pound, that seemed like a natural business opportunity. I'd trade $1.55 for $3.00 anytime.

Armed with this information, I explained it all to my very skeptical (and highly intelligent) brother in-law. I told him, if we bought $10000 in pennies, and sorted out all the pre-1982 pennies, we could make some money. With a 50 percent hit rate, I explained, that is having half of the one million pennies being copper, we could
make a nice return, even at $2.00 per pound. The leftovers, or newer, primarily zinc pennies could be returned to the banks for cash, thus there is no downside to the strategy. If the strategy was successful, our 500000 copper pennies could be worth as much as $10,000...not a bad return.

My brother in law made some excellent points, including the time and effort needed to sort $10000 in pennies, as well as the sheer bulk and size of such a payload. He did seem intrigued, though.

The Experiment
So I pledged to do an experiment. I would go to a bank, obtain $10 worth of pennies, and get to work. Well, with help from my children, we completed that exercise this morning, sorting through the $10 in minutes. The results were disappointing. In that $10 in pennies, we found about 10 pre 1982 copper pennies. Thats a 1 percent hit rate. So back to the bank we go with our $9.90 in copper coated zinc, but don't be surprised if we try again.

Northern Orion Resources

Here's the other way we've been playing copper here at Cheap Stocks. Last year, we purchased shares in Northern Orion Resources, a Canadian based company (ticker NTO:AMEX)which owns or has interest in some low cost Argentinian copper mines. With a current market cap of $750 million, the company has $136 million in cash, no debt, and a forward P/E of less than 20.

Initiating a position in a copper company was a huge acknowledgement by your Cheap Stocks editor that a portfolio needs exposure to non-traditional asset classes. (Maybe one day he'll even buy a growth stock!!!) So far it has paid off nicely. We got in around $2.80, and are pleased with the results. We are not fooled though, this company goes as the price of copper goes. But we are believers in commodities exposure. We doubt their validity for pure investment purposes, but believe that their low correlations to other asset classes can help lower risk, and enhance returns.

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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