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-- Posted Monday, 6 October 2008 | Digg This Article | Source: GoldSeek.com
A veteran analyst, Kerry Smith of Haywood Securities covers a broad range of companies in the mining sector, from juniors to mid-tiers to majors, from explorers and developers to producers, from base to noble metals. In this exclusive interview with The Gold Report, he covers a lot of territory, discussing the outlook for gold, the next stage of sector consolidation and the rough political terrain in some of the world’s most resource-abundant geographies.
The Gold Report: How should investors play this market, and what's your outlook for commodities, gold in particular?
Kerry Smith: Big picture, I would expect the U.S. dollar to trend lower over time. That should be positive for gold and to a lesser extent the commodities. Short term, there’s so much uncertainty and scrambling to get liquidity and cash, with hedge funds blowing up, that it tends to confuse the picture. To me, the bigger picture hasn’t changed. I am neither a currency guy nor an economist, but that’s my view of the world, so I’d say commodities and gold are good places to be.
For commodities in general, the muted supply response from producers in the last five years adds a bit more credibility to this view. We haven’t seen much new production come on, whether it’s copper, nickel or zinc mines.
While demand has softened in Europe and the U.S., demand is still growing in emerging economies such as Brazil, India and China. Demand for metals generally is still growing, so metal prices should be relatively well-supported.
The bigger issue is what commodity demand will be on a go-forward basis. For the first time in six years, China recently cut Central Bank rates by a quarter point. I think China is less worried about inflation and more worried about growth, and cutting rates suggests that they don’t want their economy to slow too much. As you know, China is the biggest consumer of copper, nickel and all the rest of it, and I think will consume more and more metal every year. That should make up for any demand destruction in Europe or North America.
So I like the base metals. The demand side of the equation is good, despite these occasional hiccups during which people get fixated on slowdowns and financial crises in North America and Europe. If you talk to the companies, they don’t really see any slowdown on the demand side; they still see strong sales from their customers.
TGR: Any base metals in particular that you like?
KS: Among the base metals, I prefer copper because the market is still in a slight deficit. Zinc has a bit of a problem; surplus is likely to continue through 2009 and prices probably won’t rebound much. We’d need more mine closures to get the zinc market back to a more balanced position. On the other hand, the Brunswick mine—the world’s fourth largest zinc mine—will be mined out in 2010. The surplus isn’t likely to exceed the 200,000 tons of metal the Brunswick shutdown will take off the market, so if we continue to see reasonable growth in demand, maybe in 12 months’ time we will get to the point where zinc prices start to pick up.
In addition to copper, I’d prefer to be involved in iron ore, coal or some of the agricultural commodities. The market for coal looks good.
TGR: Do you have any preference regarding investing in explorers-versus-producers in this environment?
KS: In this market, the producers are quite cheap. With the producers’ cash building up on their balance sheets and their stock prices depressed, you may see some share buybacks. Another thing I think they will do in a market like this is use cash and cash flow to add projects into the mix in their pipelines.
Most of the easy acquisitions in the base metals and the golds probably have been done, particularly for the large caps. The next wave of consolidation probably will be the mid-caps. But at the same time, I think you will see the large caps with cash also buying assets. The CEOs of these companies don't worry about the metal price tomorrow or care what the copper price does next week, but they want to add to their pipelines because they’re planning for the next 30 to 40 years. What they care about is having a pipeline of projects to maintain their production profile and grow over time. In the current market I think most companies would rather acquire development-stage projects, given the reasonable prices today in the market, and then get those projects into production over the next five to 10 years.
Gold, of course, has potential to go a lot higher, given that people will gravitate to gold as a safe haven as the dollar keeps trending lower. Gold is a good hedge against currencies, and I don’t think Europe’s economy is in much better shape than North America’s. It’s China and the emerging countries that are now driving the global economy.
The big-cap gold producers look pretty cheap and are not trading at expensive multiples. The big caps and mid-tiers are cheap enough that I don’t think you have to go to the development-stage companies right now, but that is where you’ll make the most money as the cycle continues. Thus, I think you’d like to have a mixture of producing companies that are relatively cheap on a cash-flow or earnings-multiple basis.
I’d think you’d also want to own some of the development-stage companies because ultimately the bigger producers will acquire them. It is not easy for producers to go out and find a 5 million ounce deposit, but there are three or four development-stage companies with deposits of this size now and valuations are relatively modest, making them attractive potential acquisitions. If you are in a pretty stable first-world country, those companies are going to get picked off at some point because it becomes cheaper to buy ounces than explore. Any company looking to grow can find opportunities out there. What you need is a turn in sentiment in the market, because right now the market is only focused on liquidity through selling, irregardless of the fundamentals.
TGR: With prices so beaten down, is this the time for a long-term investor to be loading up?
KS: Yes, I would agree with that. If I had a longer-term horizon, more than a couple of years, I would want to own maybe a couple of the big-cap golds. . . . a couple of mid-tiers. . .and three or four of the emerging producers/development-stage companies. . . The big-cap golds cannot find enough ounces to replace their production. They’ve never done it historically, and I wouldn’t expect them to do it on a go-forward basis. Certainly a lot of these companies grow by acquisition. - The Gold Report. ***********************************************************************************************
Analyst Kerry Smith has consistently ranked among the top 15 for precious metals and diamonds research, and earned top analyst ranking for junior mining companies in the Brendan Wood International Survey in 1997. In 2001, he brought his 20-plus years of experience in the industry to Haywood Securities, joining the firm’s Toronto office as a senior mining analyst. Kerry focuses primarily on companies with production in the precious metals, base metals and diamond sectors. Kerry holds a bachelor's degree in mining engineering from the University of Alberta and a master's degree in business administration from the University of Western Ontario.
The GOLD Report is Copyright © 2008 by Streetwise Inc. All rights are reserved. Streetwise Inc. hereby grants an unrestricted license to use or disseminate this copyrighted material only in whole (and always including this disclaimer), but never in part. The GOLD Report does not render investment advice and does not endorse or recommend the business, products, services or securities of any company mentioned in this report. From time to time, Streetwise Inc. directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
-- Posted Monday, 6 October 2008 | Digg This Article | Source: GoldSeek.com
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