PICK On Price Weakness: Leave Room To Add On Further Declines

It has been a long time since I wrote about the iShares MSCI Global Metals & Mining Producers ETF (BATS:PICK) on Seeking Alpha. In March 2022, PICK was at the $48.04 per share level after reaching a $52.39 high in May 2021, when copper prices reached a high. Copper, the leading base metal barometer, reached a higher high in March 2022, pushing PICK to a marginally higher $53 peak in April 2022.

Since the March and April 2022 highs, copper and PICK corrected. Rising interest rates, increasing the cost of carrying inventories, and Chinese economic weakness have weighed on the base metals sector. In the March 2022 Seeking Alpha piece, I wrote:

Copper and base metals prices are at sky-high levels, and the prospects for a continuation of the rallies remain high. The companies in the PICK ETF will see profits increase with metals prices. The all-time high was in 2012 at $56 per share. I expect the PICK ETF will eclipse that level over the coming weeks and months as inflation and the geopolitical landscape remain highly bullish for the metals that are infrastructure building blocks and critical for green energy initiatives.

While PICK made a slightly higher high in April 2022, it did not eclipse the 2012 peak. Over the past year, base metals prices and PICK have declined. At below the $40 per share level in mid-October 2023, PICK could offer significant value for patience investors.

Base metals prices have declined

The nonferrous metals on the LME have declined since the 2022 highs. Nearby copper futures on the CME's COMEX division have dropped 28.5% from $5.01 in March 2022 to $3.5800 per pound on October 16, 2023.

The London Metals Exchange is the worldwide hub of international physical base metals trading. Prices of LME three-month forward contracts have moved significantly lower over the past year. As of October 13:

China is the world's leading base metals consumer. Economic weakness in the world's second-leading economy has weighed on the demand and prices. Simultaneously, rising U.S. interest rates have added insult to injury, pushing base metals prices lower since the March and April 2022 highs.

Base metals producing companies follow the prices lower

Shares of the leading base metals producers have suffered declines alongside the metals since the 2022 highs:

• BHP shares fell 28.9% from $79.66 in April 2022 to $56.60 on October 13.
• RIO shares fell 26.3% from $84.69 in March 2022 to $62.38 on October 13.
• VALE shares fell 38.5% from $21.29 in April 2022 to $13.09 on October 13.
• GLCNY shares fell 23% from $14.41 in January 2023 to $11.09 on October 13.
• FCX shares fell 31.8% from $51.99 in March 2022 to $35.45 on October 13.
• SCCO shares fell 17.6% from $87.59 in July 2023 to $72.14 on October 13.

The metals producers face rising production costs as nagging inflationary pressures continue. Higher output expenses and falling metals prices have weighed on earnings and share prices.

The reasons for buying the dip - Inflation and rising production costs, green energy initiatives, eventual Chinese demand, and the prospects for U.S. interest rates

The following factors favor buying the shares of metal-producing companies after the corrections. While the bearish trend continues and prices could continue to slip, base metals prices could be approaching significant bottoms because:

• Inflation and rising production costs - the increasing output cost puts upward pressure on prices. Production will decline if prices do not rise, putting pressure on the already tight supply-demand fundamentals in many base metals markets.
• Green energy initiatives- addressing climate change increases the demand side of base metals equations. Copper and aluminum are critical for electric vehicles and other green energy initiatives. Other base metals are crucial for batteries.
• Chinese demand - While Chinese demand has been weak, any improvement in China's economy could spur sudden purchases, putting additional pressure on already tight fundamentals.
• U.S. interest rates - The trajectory of U.S. interest rate increases is slowing in late 2023. War in the Middle East may pressure the Fed's monetary policy path to avoid the growing odds of a severe recession.
• The U.S. dollar - If U.S. interest rates stabilize or decline, the dollar will likely decline, putting upward pressure on metals prices, creating bottoms and trend reversals.

Bearish trends can push prices to illogical, unreasonable, and irrational levels that defy fundamentals. However, any downward price spikes from the current levels could create buying opportunities.

PICK is a diversified ETF that holds shares of the leading base metal-producing companies

The top holdings of the MSCI Global Metals and Mining Producers ETF product include:

PICK owns shares in multinational companies that produce base metals. At $39.12 per share on October 16, PICK had $1.28 billion in assets under management. PICK trades an average of over 246,000 shares daily and charges a 0.39% management fee.

The dividend yield of the S&P 500 (SP500) is around the 1.57% level. At $1.85, PICK's blended dividend yield was 4.73%, over three times the S&P 500's yield.

A decline from the 2022 high - Consolidation in October 2023- Leave room to add to long positions

PICK has followed base metal and base metals producer share prices lower.

As the chart highlights, PICK reached a $53.00 high in April 2022. At the $39.12 level on October 16, the ETF that holds the base metals producers was 26.2% lower.

PICK is a proxy for base metals prices as the shares of its constituent holdings will rise and fall with the industrial metals. While lower prices are possible, the tight fundamentals and other factors make the current price level a compelling investment opportunity. However, picking bottoms in any market is virtually impossible, and volatile base metals are no exception. Leave plenty of room to add on further declines.

I remain bullish on the prospects for base metals and the companies that extract ores from the earth's crust and process them into refined metals. PICK's dividend yield is attractive, paying investors while they wait for capital appreciation.

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