The mining newspaper for Alaska and Canada's North
The mining newspaper for Alaska and Canada's North
Investment strategist and mining executive forecast continued financial storm; advise miners to hold cash, 'right-size' projects
Though plummeting metals prices and fading investor confidence have hammered the mining sector this year, the Northwest Mining Association's 114th annual meeting in Reno, Nevada, Dec. 1 - 5 drew more than 2,000 attendees, a crowd the yearly gathering has not seen in more than a decade.
Miners and others attending the NWMA meeting said the economy and its impact on the mining industry is their primary concern. The meeting's two luncheon speakers echoed that concern in discussing the current global financial situation and what it means to the industry.
Frederick Sturm, executive vice president and chief investment strategist for Toronto-based Mackenzie Financial Corp., said the fourth quarter of 2008 and the first quarter of 2009 are "going to be nastier than most people are thinking."
The award-winning investor said he expects the markets will begin to recover by midyear, but advises miners to be careful with spending because raising capital could be difficult for a while.
"Do what you need to make sure you have the capital to win you time," Sturm advised.
David Harquail, president and CEO of Franco-Nevada Corp., had a similar message during his Dec. 2 presentation.
"If you don't have dollars, you have to anticipate you probably won't be able to raise dollars for the next 18 months," Harquail warned. "If that is the case, has your management team and your board gotten itself into survival mode to protect your most precious resource - and that's your cash?"
Ironically, when Sturm and Harquail were invited to speak at the meeting months ago, they both expected to be talking about how good life was.
"When we initially set this meeting up and the schedule was being put together, I thought this was going to be a love-in and a cheering fest. It is amazing that in a short three months conditions really have changed," Sturm said.
Bathtub or bungee?
Although the toilet is the first bathroom fixture that comes to mind when thinking about the current economic situation, Harquail used the bathtub to illustrate the likely scenario for market recovery.
"In the last six months we have been in a freefall. The recovery is either going to be a bungee recovery where we will have that immediate bounce-back or a bathtub recovery," Harquail said during a Dec. 2 luncheon at the NWMA Meeting.
The bathtub recovery, according to Harquail, represents a steep decline in stock prices that maintain the lows for a period of time before a recovery period that ascends the other side of the tub.
The Franco-Nevada CEO said the bathtub analogy also works well because Federal Reserve Chairman Ben Bernanke is pouring water, or liquidity, into the bathtub as fast as he can, but the drain is still open. Once the drain is plugged then liquidity will fill the tub.
Sturm said he believes the recovery will be a combination of the bungee and bathtub scenarios. He predicts that once the current unprecedented volatility has subsided, stocks will have overcorrected, resulting in a snap-back of the market before we are out of the recession.
"I think some of this is going to befall the mining industry. We have come down hard. You are responding quickly. We will have a snap-back, but then we will come down again," Sturm said. "On this snap-back, do what you need to get done quickly because we will not have come out of it just yet."
Mineral prices in the tub
Sturm, who is also manager of the Ivy Global Natural Resources Fund, foresees mineral prices on a similar trend to the stock market. He said mineral prices could snap-back and then settle again during the course of the next year.
The financial advisor advised the miners not to expect to see a return to the high metal prices of earlier this year in the near future. A survey of Morgan Stanley, UBS, Merrill Lynch and Mackenzie Financial shows long-term prices for zinc at 70 cents per pound, copper at $1.70 per lb., molybdenum at $10 per lb., and thermal coal at $70 per ton.
"I am not helping you if I say, just drive past it, it will all come snapping back and be fine. Because if I do that and you fail to 'right-size' your company, then you will find yourself looking for capital at the wrong time, and you will find yourself struggling in your businesses," Sturm explained.
"Right-size" supply
The natural resource fund manager advised the NWMA luncheon attendees to scale back operations to meet lower demand of market conditions. He said the amount of money being spent on consumer goods has lessened and to prevent a surplus of commodities on the market, the producers need to "right size" the supply.
Sturm reminded the audience that when the economy recovered from the downturn in the '80s and '90s, it took the mining industry an additional two to three years before it was able to take part because "we had to work down the copper mountain of inventory first."
"Focus on profit margin, not on quantity. The only way you can do it is to deny your customer one ton. If you try to get an extra ton out to the next guy's customer, the whole system breaks," Sturm warned.
The Toronto-based advisor applauded the mining industry for recognizing the need to scale back operations and being proactive in doing so.
Surviving the shipwreck
Harquail compared the financial crisis to a shipwreck.
"Some of us were lucky enough to get into lifeboats. The guys that have some cash are in lifeboats and are bobbing away in the waves right now, but we are surrounded by 100 drowning men. We can't pull them all into our boats, we can only save a few," Harquail said.
According to Harquail, Goldcorp CEO Kevin MacArthur said the companies with dollars have to be very selective in terms of which companies they are going to buy. They are going to choose companies with real projects.
"It is only those projects that the majors can say, 'That makes sense within our development pipeline' that are going to get bought. The other ones, we are going to have to wait until the next exploration cycle," Harquail said.
The Franco-Nevada CEO expects major companies to significantly cut back their exploration budgets and use that money to buy up projects that have already been proven.
"It is going to be really tough for the head of exploration of some these companies to justify another $100 million to $200 million budget for next year, when they look at how many ounces you can buy for those same dollars," Harquail observed.
Resources not optional
The theme of the annual NWMA meeting was "Mining for a Minerals Dependent World."
Sturm said the world's dependence on minerals is the ray of hope for the recovery of mining stocks and metals prices.
"Resources are not optional in a world that will ultimately go on," Sturm told the crowd. "Because these are indispensable industries, the question is 'when,' not 'if.' "
The world population, according to Sturm, is increasing annually by 700 million to 800 million people.
"Every five years we have to feed, clothe and house another North America," Sturm said. "If you have a decent mine and today it is not being accessed as valuable as it was yesterday, and you are wondering will it really be needed in the future, the answer is: 'It will.' "
In addition to a growing population, the financial advisor said the industrialization of China and other emerging economies will add to the demand for commodities.
It is projected that by 2025, there will be 221 cities in China with more than 1 million people, compared with only 35 such cities currently in Europe.
"There still is an awful long way to go, and what you do for the world is indispensable," Sturm told the mining industry representatives.
Resource stocks return to rightful hands
The natural resources fund manager not only foresees the long-term global need for minerals, but he also sees mining as an industry that has overcorrected.
This is why, despite the financial turmoil, he and other long-term investors are buying, or holding on to, mining stocks.
"In violent markets, stocks go back into their rightful hands," Sturm said. "The guys that are buying are the guys that have a longer- term vision. I am buying. The guys that are selling are the guys that just discovered resources a year and a half ago."
Over his more than 16 years of covering mining and mineral exploration, Shane has become renowned for his ability to report on the sector in a way that is technically sound enough to inform industry insiders while being easy to understand by a wider audience.
Reader Comments(0)