mining investment

Mining Investment: Back to Reality or Generational Opportunity?

By: Erik Ronald, PG

Mining Geology HQ

16 February 2016


Mining, and more specifically mining investment in metals & mining, can be a dirty game, both literally and figuratively.  Historically, fortunes have been made by the select few and fortunes have been lost by many. The one commonality is that it is certainly a wild ride!  Being a geologist by training, I learned early in my career the bi-polar nature of working in a cyclical industry.  Whether it was offshore Oil & Gas exploration in the early 2000’s or riding the Australian mining boom the past few years. A big-picture perspective and perhaps some humility have been important in weathering the cycles both physically and mentally. A short history lesson of the boom and bust nature of commodities should remind those in the industry that the day will come when you’ll look back at 2016 and think – what an opportunity!

There’s little doubt the recent global commodities boom was a direct result of China’s unprecedented appetite and growth over the past decade or so.  A simple graph comparing Chinese commodity imports with the share price of BHP-B tells you everything you need to know. The real question on everyone’s mind is, what happens next? Chinese growth is now the slowest in 25 years (WSJ, 19-Jan-16) and their central government is aiming to transition from a raw material consumer with large building and infrastructure projects to a more sustained domestic consumer-based economy. Additionally, the EU is still sluggish, South America is worse and the 2016 Q1 share market sell-off isn’t giving anyone the warm & fuzzies. So will the next decade simply resemble a more tempered and sustainable consumption model or are we back to the days when people would say “the way to make a small fortune in mining…is to start with a big fortune”.

China’s population and consumption certainly aren’t going anywhere soon and any modernizing country of 1.35 billion people will obviously require raw materials but not likely at the rates experienced recently. Most commodities will continue to be in oversupply in 2016 creating a continued state of depressed prices. This is not dissimilar to previous mining booms where global demand strengthens, supply lags, then quickly catches and surpasses demand to the point of price collapse and the resulting turmoil and fear. Production then falls, demand slowly grows, prices rise again…wash, rinse and repeat!  What we’ve experienced in the past 12 months is essentially best described as: market volatility scares people – scared people flee – fleeing drops prices – dropped prices creates bargains – bargains create opportunities.

I’ve always enjoyed the quote “The way to make money is to buy when blood is running in the streets – even if the blood is your own”. The important takeaway here is simply that contrarian investors, with the right scrutiny and research, can find once in a generation opportunities when the sky appears to be falling. When investors and financiers understand the commodity cycle and think long-term, the bottom of the cycle is when opportunities are created through acquiring distressed assets, forming new joint ventures, or gaining equity stakes in world-class ore bodies.

These opportunities will likely start with the restructuring of insolvent assets, project acquisitions as producers focus on repairing their balance sheets after the boom, and private equity companies gaining minority stakes in operating gold mines.  For those few companies who have made it this far with strong cash flow and low gearing, they are well placed to take advantage and possibly become like the diversified miners of old – actually diversified! Personally, I anticipate commodities like uranium and potash to do well in the next 18 months with the slow recovery of base metals and iron ore to follow. We won’t likely see oil & gas move significantly until at least mid-2017. As for gold, I foresee the price in the triple digits soon but it won’t likely be long before we’re back at US$1,500 per ounce again.

In summary, if you’re a private investor or a producer with a decent balance sheet, do your homework and research but don’t let the opportunity to gain equity in world-class non-renewable resources at depressed prices pass you by. Just think if you had that same faith in the share markets in January 2009 and invested! The world will continue to spin, populations will continue to grow, countries will continue to develop and industrialized nations need copper, iron ore, oil & gas, aluminium, and the rest.

Thank you for taking the time to read this article. I encourage your feedback, comments and thoughts.

 


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