- We have just returned from our annual pilgrimage to PDAC
- The tone and tenor of the conference “felt” different this year – and not necessarily in a good way
There are several looming questions that the industry must grapple with and consider
Differentiation and diversification are key elements of the survival and prosperity strategy moving forward
Has the Bleeding Stopped? Or Has it Really Even Started?
Through last weekend and into this week, we attended the annual Prospectors and Developers Association of Canada (PDAC) Conference in freezing cold Toronto. With its reputation as the largest mining conference in the world, the PDAC attracts just about anyone involved in the mining industry in any capacity. More than anything, it represents a fantastic networking opportunity.
What has been most interesting to watch is how sentiment has changed in recent years given the fall in metals prices and resulting struggles faced by all mining companies, from major producers across the value chain to greenfields exploration plays.
I have to say, that despite the “buzz” which results from 20 or 30,000 people together, the tone of the conference this year was somewhat flat. That prevailing sense of optimism you feel at a conference of this magnitude just didn’t appear to be there this year.
And so the question is why? Why, after three years of generally down markets for mining companies, did this year’s PDAC in particular feel different from others? 2014 has started off on a positive note with the TSX up 4.96% and the TSXV up 10.35% year-to-date which has helped blur the memories of a challenging 2013 somewhat.
I think the uncertainty I mention above can be boiled down to several questions – many of which we have discussed and debated in past Morning Notes. Paradoxically, this uncertainty and feeling of capitulation is a good sign of a bottom.
Questions to be Answered
I have gone on record as recently as early this year stating that the commodity super cycle is not dead, but has changed its complexion. I still believe that and think that profits can be made in mining equities as long as selectivity and patience are the hallmarks of an investment strategy.
The mining boom in the first decade of the 21st Century added a great deal of capacity in the way of not just mining infrastructure, but also reserves and resources of a number of commodities. The fall in metals prices, from gold, to rare earths, to silver, to graphite has rendered much of this investment worthless at current prices, calling for massive write offs. Many commodity prices have settled at levels above their historic averages, but costs have increased just as much.
While there are a number of questions we in the industry must face, I see six to consider at this point in the cycle:
1. How quickly can excesses be worked off? – It is clear that the days of the “wind at the back” of the mining industry (with China’s increasing appetite for a host of commodities) is over, or at least paused. Companies across all market capitalizations have written down the value of assets, sold properties at a discount, and instituted strict cost discipline going forward. Can this newfound focus help the market “turn” in the way many of us are hoping for?
2. How quickly can China change its growth paradigm from investment and export-led growth to internal consumption? – I don’t believe China is headed for a hard landing, but give China’s leadership credit for at least acknowledging the necessity for a slower, more sustainable brand of growth. Can this change, which is really a change in the average citizen’s mindset, occur fast enough to breathe life into a junior mining sector desperate for signs of increasing demand?
3. How quickly can the rest of the Emerging Markets and Frontier Markets sop up this lack of demand from a slowing China? – China has size and scale, which is why so many of us focus on the country. Careful study of growth dynamics of countries such as Indonesia, Poland, or Colombia is a wise undertaking going forward as it is ostensibly countries such as these which will fill a demand void left by China.
4. If not fast enough, what does this mean for the junior sector? – I think this question answers itself.
5. Is Geopolitics set to play an increasingly important role in the typical mining portfolio? – The crises in Ukraine and Venezuela bring this question to the fore. Additionally, issues like slowing growth and inflationary pressures in emerging markets and resource nationalism appear set to provide investment opportunities, but also wipe out unsuspecting or careless resource investors.
6. What is a realistic investment strategy in the face of slow growth and excess capacity? – I explore this below.
The Good News
Despite the dour tone of this Note, I am still optimistic over the medium to long term vis-à-vis commodity demand. Population dynamics and the ubiquity of technology dictate that many more individuals in the future are poised to live more commodity-intensive lifestyles.
A key takeaway from PDAC this year was that all commodities are not created equal. Uranium is clearly the “belle of the ball” right now. Differentiation and diversification amongst metals and across the value chain are keys to success going forward if you’re investing at this stage of the cycle.
It is increasingly clear that large projects, either in terms of tonnage or capital expenditure, are being re-evaluated in favor of smaller sized projects better able to fit into current and future demand forecasts. This is a good development.
On an additional positive note, there does seem to be a flurry of significant financings taking place, with NexGen Energy (NXE:TSXV) announcing a $10MM bought deal most recently. This is good news, specifically for the sustainability of junior uranium companies. If more financings of this type can be completed across various commodities, I think many of the questions I listed out above will have been answered with a favorable outcome.
It was also abundantly clear that money is pooling and consolidating assets across a host of metals in the precious and base categories. Private equity money has moved into the mining sector and is intent on consolidating properties, recapitalizing companies, and potentially spinning them out. Again, this is a longer-term positive sign for the industry as a whole, but differs from one metal to the next.
The Takeaway
I wrote above that you can’t rely on Elon Musk or Vladimir Putin to boost metals prices sustainably. This may sound silly, but it’s true. With the recent announcement of Tesla’s (TSLA:NASDAQ) Gigafactory, share prices of US and Canada-based lithium exploration and development plays exploded through the roof. Similarly, Russian President Vladimir Putin’s movement of Russian troops into Ukraine sent gold and silver much higher. I’ll be writing a note shortly on the TSLA Gigafactory and its implications for the junior sector, but my point is that these isolated events tell us nothing about true supply and demand dynamics of commodities and everything about speculation and the fear and greed paradigm in financial markets.
Only organic growth, technological breakthroughs, and sound fiscal and monetary policies will provide the basis for increasing and sustainable demand. The travails in the mining markets today are setting the stage for the next move higher, but I continue to believe that a mixed global growth picture and excess capacity have delayed this move into the future. Patience and selectivity are still the most prudent way forward and can be rewarding in the interim as we’ve seen with select uranium plays.
Note on a portfolio sale: I will be taking profits in half of my position in URZ (5,000 shares) within 24 hours of receipt of this note. I still like the story and believe that near-term production plays in uranium are the most appealing, but want to lock in a portion of my gains.
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