-- Posted Tuesday, 11 August 2009 | | Source: GoldSeek.com
Even if emerging economies' demands for copper were to falter, Jennings Capital Inc. Mining Research Analyst Peter Campbell sees plenty of polish on copper ahead. One big reason: Even a gradual climb out of recession will prompt North American and European manufacturers to replenish inventories as they begin restoring production to pre-crash levels. As for the copper companies themselves, he tells The Gold Report that some of the best bets lie with emerging producers that are prepared to augment diminishing supplies with new finds. Peter has his sights set on iron ore, nickel, aluminum and other base metals, too, but he calls copper "the best and clearest way by far" of participating in the evolving economic story.
The Gold Report: There are mixed views on what's happening in the world economy today. We hear the recession's over, we hear it's going to be a long recovery. We even hear people say we may still go into a depression. What's your perspective?
Peter Campbell: I think all indications seem to be that if we're not at the bottom, we're definitely approaching a bottom within very short order. Fundamental demand for all commodities, base metals in particular, has been very, very good. This is the kind of activity that you see at the bottom of an economic cycle. So if we aren't there yet, there's every indication to believe we're very close.
TGR: Are we going to see a V-shaped bottom?
PC: It's really hard to say. Manufacturing has taken a very large hit, primarily in North America and Europe. A V-shaped recovery when manufacturing has been so hard hit would be very difficult to envision. I would be in the camp that expects a more gradual recovery.
TGR: If we have a gradual recovery, what will be the impact on commodities?
PC: A gradual increase in demand for base metals in particular, but also for all commodities, would be part and parcel of a gradual recovery. So I think we can see strengthening demand for copper, aluminum and nickel for example. Because of the collapse of commodity prices in the last year or so, a lot of supply has been taken offline, so I anticipate a shortfall between current production capacity and the demand I see that will be gradually increasing as this economic recovery begins to take hold.
TGR: In essence, you're saying some of the pricing increase you expect will be due to a shortfall in supply, but the recovery is going to be very gradual. What would cause these mines to come back online before there's a real recovery in the commodity prices?
PC: Because of a growing gap between demand and available supply, we will see steadily increasing commodity prices. We've seen this most definitely in terms of copper, which has recently gone from a low of $1.28 a pound at the beginning of the year to the $2.70 to $2.80 range these days. It's not that this trend will continue indefinitely, but I think the fact that there isn't a lot of new supply to meet any new demand is going to be very supportive of base metal prices going forward.
TGR: You hear a lot about the BRIC countries, particularly China, being the economies that will pull the rest of the world out of recession, especially with their infrastructure demands. To what extent will that drive base metal commodity prices, as opposed to what's happening in North America and Europe?
PC: The recent strength in commodity prices is indeed being driven by demand from China. What's different about this recent demand is that it appears to be a demand for raw materials which are being consumed domestically within China. In the past when there's been a demand for raw materials, they've been used in manufacturing for export to perhaps the European and North American markets. So, with internal consumption for raw materials in China, we can probably extrapolate that into greater internal consumption in some of the other BRIC countries.
In the near term, what I think will be supportive of base metal commodities is a restocking cycle in Europe and North America where many of the consumers of base metals have run down their inventories. As we start to see this gradual return to economic growth, these consumers of base metals and other raw materials will start restocking their own supplies. So even if demand from China slows down a bit, it will be more than offset by restocking demand from North American and European consumers.
TGR: From the investors' perspective, what would a gradual increase in demand mean for mining companies? Would you think a buy and hold, looking for appreciation over the long term?
PC: As I mentioned, one of the things that is very supportive of the commodity prices going forward is there's not a whole lot of new supply that's ready to come on stream to meet this gradually increasing demand. Therefore, I think in order to find good investment opportunities, new emerging producers are the way to play this next cycle.
TGR: If an investor is just getting into base metals, which would you suggest they consider?
PC: The clear winner in this case is copper. Copper has been known colloquially as the base metal with the PhD in economics. If you believe that we are going to have a sustained, albeit gradual, economic recovery, the best way to participate is with copper. I think that's the best bet for the entire commodity space going forward. It's also a very liquid, transparent and well-understood market with a large number of players.
Another metal you could potentially play, which I personally like a lot, is iron ore. But iron ore is controlled by three very large producers and sometimes it can be hard to find smaller stories that can really win at the iron ore game. They tend to get overwhelmed by these three large producers and are frequently overlooked. The iron ore market is also not nearly as transparent as the copper market.
TGR: Last March, a CEO of a mining company told investors at a conference to buy as much copper as they could. He basically said buy it, hold it, and you'll be able to retire on the appreciation of copper. How high can copper go?
PC: That's anybody's guess, of course. There was a time when $2 copper was unthinkable. Even $1 copper was a bit of a stretch back in the days when copper was 60, 70, 80, 90 cents. So we have to think much longer term here and understand that copper is an essential commodity for any developing economy. It's very supportive in many sectors, including home building, industrial production, automobiles, manufacturing, power generation and distribution. Economic activity is dependent upon copper, so it's an essential element of economic growth. Therefore, I'd have to agree that copper is the best way to play long-term economic growth too.
How much higher could it go? I think we've established in this last six or eight months that a new floor price for copper is more or less in the $2 range. I can pretty much tell you that it won't go too much below that. On the upside, copper briefly traded at $4 a pound in the last up-cycle. It would not be unreasonable to get there again.
If my inclination is right regarding the copper supplies versus copper demand, we could very easily have new peaks in copper pricing, just based on the simple fact that there's not enough new copper supply which could create a price shock to the upside.
TGR: Any closing comments for our readers?
PC: Only that those who are so inclined could look at other commodities, such as iron ore and potentially nickel and aluminum. However, I think copper is the primary way —the best and clearest way by far—of playing the evolving economic recovery story.
A professional mining engineer who joined Jennings Capital Inc. as Mining Research Analyst in February 2008, Peter Campbell has 27 years' experience in the mining and geology business – with an in-depth global mining background, strong technical expertise and proven project management experience. He previously spent 17 years with Falconbridge Limited (now Xstrata), where as an exploration manager he worked on various aspects of worldwide projects involving nickel, copper and copper-zinc deposits. Peter's experience encompasses the spectrum of project stages, from grassroots and advanced exploration through to feasibility studies and mine production. He has a strong interest in financial modeling, portfolio risk management, project valuation and capital investment decisions. A graduate of Queens University in Kingston, Ontario, he is a member of the Professional Engineers of Ontario (PEO), the Canadian Institute of Mining and Metallurgy (CIM), the Prospector's and Developers Association of Canada (PDAC), Society of Economic Geologists (SEG) and Mineral Resource Analyst Group (MRAG).
