In a recent interview
with Phase 1
editor Frank Curzio on his S&A Investor Radio podcast, natural resource expert Rick Rule explained a simple philosophy for investing in commodities...
Rick said you look for commodities where the price is less than the cost of production. As long as the world needs that commodity to live, the price will have to go up eventually. The catch is... you can't know exactly when the price will increase...
Right now, Rick says water is one of the most undervalued commodities in the market. From the interview:
[T]he most mispriced commodity of all is water. We're seeing this played out with the current drought. People have the ability to buy holders of water... Public or private agricultural companies with in-place water rights are an example. And as a homeowner, you need to invest in water-conservation measures because your water bill will go up and your water allocation will go down. This is something that's going to happen. It's a "when" question, not an "if" question.
And remember... water is used for more than just agriculture and taking showers...
The mining industry uses a huge amount of water to retrieve minerals from the ground...
Two years ago, Freeport-McMoRan Copper & Gold
, Stock Forum
), one of the world's largest copper miners, bought 280 acres of ranchland in the Arizona desert for $1.3 million... All Freeport wanted was the water rights.
As the mining companies move into more remote and arid land, their need for water increases.
Moody's estimates mining companies spent $12 billion on water management – which includes pipelines and treatment facilities – in 2013. That's three times what they spent in 2009.
Just in the U.S., mining companies consume around 4 billion gallons of water a day – about the same as households. That compares with 18.2 billion gallons for industrial uses and 128 billion gallons for agriculture, according to the U.S. Geological Survey.
From the Wall Street Journal
Around half the world's copper comes from a belt running from Utah to Chile under mountainous, dry areas, and costs for water are expanding. The Chilean parliament is considering forcing mining companies to build desalinization plants, which remove salt from ocean water, rather than use fresh ground and surface water for their operations. BHP Billiton Ltd... (NYSE: BHP, Stock Forum) and its partners agreed to build a $3.43 billion desalinization plant for its massive copper mine in Chile's Atacama desert. Freeport[-McMoRan] in Chile recently completed a $315 million desalinization plant and pipeline. And in Peru, it is building a $340 million sewage treatment plant.
"Water is a critical issue in places like Northern Chile and Southern Peru, and here in New Mexico and Arizona," Freeport-McMoRan Chief Executive Officer Richard Adkerson told the Journal
Also, as the big miners stretch for more production, the quality of the ore is lower... meaning it takes more water to unearth the same amount of minerals.
"If you extract 100,000 tons of raw copper with 0.2% instead of 2% grade copper, you need 10 times as much rock and 10 times as much water," Paul Gait, an analyst at the financial research firm Sanford C. Bernstein & Co., told the Journal
. "Water is one of the biggest things mining companies have to worry about, and it's going to get worse."