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Strategies for Success in a Flat Commodity Price Market



-- Posted Tuesday, 22 October 2013 | | Disqus

Source: JT Long of The Mining Report 

 

It could be 2017 before the commodity supercycle is evident again, but stormy weather in the mining space has a silver lining: It is encouraging miners to develop new, innovative approaches to their business. In this interview for the first edition of The Mining Report, John Kaiser of Kaiser Research Online outlines strategies that are setting certain companies apart.

 

The Mining Report: John, you have characterized the current resource market as a bear market unlikely to have higher metal prices in the next year, with the possible exception of zinc. Why are you drawing a different conclusion than other analysts who believe we are in a resource supercycle?

 

John Kaiser: I believe the general supercycle is still intact as nations with very large populations are embracing capitalist methods. Because they are starting with much lower standards of living, they have a long way to grow. However, I do think we are in a bit of a pause. We are still dealing with the fallout from the 2008 financial crisis, a dysfunctional political system in the United States and Europe's issues.

 

Also, China's growth rate is slowing and the country is shifting from a capital-intensive development of infrastructure and production capacity to more domestic consumption spending. On top of this, the mining industry generated a lot of supply in response to the higher real prices of the past decade. So there is a supply glut coming as demand cycles downward, and we're going to see weak prices for a while. Unfortunately, or perhaps fortunately depending on what hat you are wearing, we have also seen rising costs, the response to which may curtail the supply glut sooner than expected.

 

I would say by 2017, however, the supercycle will be evident again, because this bear market is creating the same supply/demand imbalance conditions that existed 10 years ago, when the big bull market started.

 

TMR: What indicators will tell us we might see the supercycle in 2017?

 

JK: What we have to watch is the world's gross domestic product growth. The International Monetary Fund scaled back expectations in its October World Economic Outlook. We also have to see how the U.S. deals with its debt ceiling problem, and the U.S. won't get any traction until there is a political change where nothing blocks spending the money to get the economy ramping up again.

 

We also want to see which mines in the pipeline actually come onstream. This applies more to the raw materials that are used in the real world as opposed to gold, which is treated largely as an insurance policy hedging various future outcomes.

 

A lot of projects are being shelved right now because of escalating costs. All this misery that we're witnessing will actually underpin a future bull market in the commodity sector.

 

TMR: What gold price is required to make mines economic these days?

 

JK: The average all-in cost for gold production is about $1,200/oz. Even though we're looking at a gold price that has increased three, four times since 1980's stabilized price, the costs have risen right along with it. We need something around $1,500/oz-plus to justify putting a lot of these deposits into production.

 

TMR: Are the costs for getting copper out of the ground also higher than the selling price?

 

JK: In the past five years, we have seen above-average cost escalation in the mining sector. Both capital costs and operating costs have been increasing about 10% annually. In the case of copper, if your all-in cost was $2.49 per pound ($2.49/lb) in 2007 and you apply 10% inflation each year, you're looking at a $4/lb copper price just to break even, and we're currently at $3.20–3.30/lb.

 

Now some of these costs are going to come down, but we're still looking at numbers that are at or higher than the current spot prices for gold and copper. It is not a wonderful situation for deposits where they have reduced the cutoff grade and started mining lower-grade deposits to meet the increase in demand. We're in a situation where we're going to have to just wait to see higher prices materialize to justify a fresh push of putting deposits into production.

 

TMR: If most of these commodities and the juniors that mine them are waiting for prices to go up, what does that mean for the juniors' common exit strategy—being taken over by a major?

 

JK: During the past seven to eight years, we've had a tremendous round of takeover bids, where 200-plus Canadian juniors were taken over at a value of over $128 billion ($128B). A lot of these deposits are waiting to be developed. The other companies out there own deposits that tend to be lower grade and have a more expensive cost structure. There is no appetite amongst the majors right now for that type of deposit, and the capital markets are not going to be interested in directly funding development because the profit margin just isn't there.

 

The one group that has not yet made a big move is Chinese sovereign wealth companies, which we know have been studying the landscape looking for opportunities. When these Chinese national companies start buying cheap gold assets, that will be a signal that the turnaround for gold is coming sooner rather than later.

 

TMR: While we're waiting for that to happen, what strategies should investors know about when looking for companies that will be successful?

 

JK: Look for a company that has a high enough deposit grade so that even at the current metal price there is still a decent profit margin. These companies are available at bargain prices.

 

TMR: So look for a company with a higher-grade deposit. What's another strategy?

 

JK: I like the strategy of a discovery within a discovery that could completely eclipse the original low-grade resource. Looking for higher grade zones within the system is a way a gold junior can revitalize an existing deposit that doesn't work at current low metal prices.

 

TMR: So look for a discovery within a discovery. Can you give us another approach?

 

JK: Look for companies that have an innovative target-generation strategy. All the easy gold that's at surface has been found and harvested. You now have to look deeper.

 

TMR: Sounds like an interesting target-generating approach. Any other strategies you think could work between now and 2017?

 

TMR: Any thoughts on rare earths?

 

JK: Let's talk about nickel, an unpopular metal, currently around $6.25/lb. Used in stainless steel, it was selling for $25/lb in 2007. A seemingly unlimited supply of nickel pig iron is haunting the market right now. Nickel pig iron is made in Chinese blast furnaces from low-quality laterite ore direct shipped from Indonesia and the Philippines, which have in recent years emerged as the world's biggest nickel suppliers. Experts are pretty negative about the supply/demand surplus deficit in the next four years, but by 2018 they expect this to reverse.

 

By then we will start seeing that the Philippines' supply of laterite for nickel pig iron production is not infinite and that perhaps Indonesia has put a stop to exporting raw ore. Then once again we're caught off balance because the big guys during the interim have had to scale back their development plans because of this current glut of supply that's depressing the metal prices. It's a bit of a longer-term speculation, but it's based on a different processing style targeting a different type of mineral.

 

TMR: Can you give us one more idea that's completely different?

 

JK: OK, how about diamonds?  We know that as long as the world doesn't go into a depression, demand for quality diamonds will continue to grow. Explorers have not found any giant diamond mines in a very long time, and no big new diamond mines are coming onstream.

 

TMR: Interesting. Can you leave us with advice for investors who are trying to survive 2013, or as Rick Rule says, thrive, because fortunes are made in bear markets rather than bull markets?

 

JK: Fortunes are made in resource sector bear markets by those with great patience, especially when you target juniors with deposits that are near worthless at prevailing metal prices. However, if higher real metal prices take a long time to arrive, such juniors run the risk of diluting away their upside to stay alive, or getting swallowed cheaply by predators with deep pockets and even greater patience. Most investors do not have Rick Rule's capacity to influence the destinies of the companies in which they make investments. The resource sector juniors that I generally target in the current bear market climate are ones with innovative stories that can flourish and create shareholder value whether or not higher metal prices materialize. If we do get into a stronger overall market, it's companies like these, which have well-articulated stories, that will accelerate out of the bottom faster than other companies with deposits that require a substantially higher metal price to be back in the money.

 

TMR: Thanks for giving us that wrapup. We appreciate your time.

 

JK: You're welcome.

 

John Kaiser, a mining analyst with 25+ years of experience, produces Kaiser Research Online. After graduating from the University of British Columbia in 1982, he joined Continental Carlisle Douglas as a research assistant. Six years later, he moved to Pacific International Securities as research director, and also became a registered investment adviser. He moved to the U.S. with his family in 1994.

 

DISCLOSURE: 
1) JT Long conducted this interview for The Mining Report and provides services to The Mining Report as an employee.
2) Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) John Kaiser: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent. 
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews 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.

 

Streetwise - The Gold Report is Copyright © 2013 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

 

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

 

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

 

Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

 


-- Posted Tuesday, 22 October 2013 | Digg This Article | Source: GoldSeek.com

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