Atomic Number 29: “How to Cash in on China’s Massive Appetite for Copper…”

By Travis Johnson, Stock Gumshoe, November 30, 2010

Today’s tease has been forwarded by a handful (or a few hands full, I suppose) of curious readers — our teaser is Mitchell Clark for his Penny Stock Reporter, and in exchange for his special recommendation of a Chinese copper stock he’d like you to sign up for a subscription to his newsletter … at the “special test market rate” of only $89, naturally (has anyone ever paid the list price for a newsletter?)

But, equally naturally, some of us are simply curious about just which stock Clark is touting … and would prefer to find the answer at a price that’s a bit more, well, free-ish. That’s why you’re here, I imagine — or perhaps it’s just my friendly smile. The Lombardi folks (that’s his publisher) tend to be a bit light on the kind of precise clues that your friendly neighborhood Stock Gumshoe likes best, but that’s no reason not to take a crack at it, eh?

The ad says that this unnamed stock is “an amazing undiscovered and undervalued company that’s already found the solution to China’s copper shortage.” So that can hardly be a bad thing.

But there’s more … he goes on to make the “big picture” case, but I won’t bother you with all those details — it’s all the stuff you probably know already, about how China is voracious in its demand for copper (which, yes, does have atomic number 29 — so I’ll offer a grudging “thanks” to Clark’s copywriters for making this the third time I’ve had to look at a periodic table in 20 years … the first two reunions with this high school chemistry nemesis were in the service of teasers about rare earth elements and lithium).

And we sure use a lot, lot, lot more copper than we do lithium — though that’s no surprise. The teaser tells us that the average US household includes about 90 pounds of copper in appliances and wiring, and that the average Chinese consumer uses only 9 pounds of copper wiring — which is not a particularly direct comparison, but we get the idea: China is rapidly urbanizing and building an electricity-hungry middle class and what’s likely to be a massive fleet of personal automobiles, which means they’re going to suck up a lot of copper unless someone comes up with a better metal to use for all that wire.

So that’s the backdrop, the tease says that the Chinese are building the “American dream on steroids” and that their copper consumption will continue to climb. So which company is our secret play on this trend? Here’s a bit of a tidbit, in Clark’s words:

“… someone—or some company—has to pull this stuff out of the ground, right? And then turn it into wire with a high enough quality to work in high-tech gizmos. And, if this company existed, wouldn’t it be in a perfect spot for exponential growth?

“Let’s face it, 10-fold growth is almost guaranteed based on the facts of China’s mega-shift from agriculture living to urban living.

“And one of the micro-cap stocks I’m most excited about just happens to be THE leading manufacturer of copper wiring and copper alternatives in China.

“Listen, I’m really excited to tell you about this opportunity…

“Because, the thing is, this company is already building factories to meet China’s huge demand for copper and copper wiring, and is perfectly positioned to profit from this mega-trend.

“In other words: the solution to China’s copper shortage is already in this company’s hands! It’s figured out a way to source China’s copper wiring needs, all at a fantastic profit.”

So that’s pretty much all we get by way of clues about the business — then we get a few more clues about the stock in this spiel:

“… even though it’s based in Mainland China, this company trades on the NASDAQ exchange, which means it’s easy for you to buy in just minutes.

“Plus, did I mention, IT COULD BE HUGE—Jackpot huge!

“But here’s the most important part…

“Unlike many other risky stocks from China, this company has cash in the bank, is debt-free, and is completely accessible. Anybody can check its books quarterly and listen to its earnings conference calls.

“Oh yeah, one more thing…

“As I write this report, this stock is trading under $15.

“When you consider the opportunity, it’s CHEAP, and massively undervalued in market capitalization.

“You might be wondering why, if it’s such a great investment, you haven’t heard about it. The same reason you hadn’t heard about Microsoft, Intel and Wal-Mart before they were Wall Street superstars…

“Because it doesn’t have analysts touting it to institutional investors and, because of that, you won’t hear it shouted at you on CNBC…yet.”

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OK … so, on the Nasdaq, under $15, something to do with Chinese demand for copper? Toss all that into the mighty Thinkolator and we find that this stock is probably …

Lihua International (LIWA)

LIWA is not a miner, but is essentially a refiner and manufacturer — they are largely a copper wire company but appear to create alternatives to pure magnetic copper, including what is effectively recycled copper wire and wire that’s stretched or improved with the addition of other metals. I had never heard of them before today, but they are another of the Chinese companies that’s raised money in the US and gone public on the Nasdaq by way of the circuitous reverse merger route.

The stock has been climbing nicely over the last month or two, after they reaffirmed guidance of about $1.35 in earnings this year according to this note, but at just under $12 the stock still looks pretty cheap on the surface — analysts expect better than 30% earnings growth next year as their new capacity comes online and demand continues to be strong (I assume), which gives them an estimated forward PE of about 6.

And yes, they have almost no debt and net cash of about $90 million (on a market cap of $340 million), so that’s a big chunk of cash that can, I suppose, go into further expansion. They’re profitable, but not outlandishly so with a profit margin a bit over 10%.

For more info on Lihua, you’ll have to start up your own research engine — the price of copper is obviously a big factor for them, but I assume that when copper rises (as it has done in our latest commodity boomlet this year), their input costs must also rise as they bring in more copper scrap. Whether they can make up for that with increased prices for their wire products is one question — and, of course, whether copper prices are currently being driven by real demand in China or by speculators there and elsewhere who expect real demand increases is another question. And, of course, LIWA may have innovative products or manufacturing capabilities (if you ask them, at least), but copper wire is effectively a commodity business so supply and demand are determined on a far, far larger scale. They have a pretty good English website that includes their recent filings and a number of presentations that they’ve made at investment and analyst conferences, so that’s a reasonable place to start your research.

For what it’s worth, there has also been at least a little concern voiced about LIWA’s accounting — I haven’t looked into the filings myself, but one contributor to Seeking Alpha raised some red flags about the differences between their SEC filings and their domestic Chinese filings, which is something that concerned a lot of investors in some other reverse merger US-listed China stocks earlier this year, particularly after that group got some negative attention from Barron’s during the Summer. As with most small Chinese public companies, there is heavy insider ownership and control, and a discount built into the stock price for the fact that most investors seem have a bit of fear about the transparency and/or accounting of these operations.

That, limited as it is, is what I know about LIWA — if you’ve got an opinion on these guys or any other players in the global copper business, feel free to share with a comment below. We do not yet have any reviews on file for Penny Stock Reporter, which I think is quite new, so if you’re a subscriber I’m sure folks would like to hear what you think — just click here to review it for your fellow investors. Thanks!


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