Lawrence Roulston, the Editor of the Resource Opportunities newsletter, recently attended the PDAC 2012 conference and spoke to attendees about the future of the global markets and the junior sector in particular.
Roulston started by acknowledging that investors are struggling with uncertainty in the global markets, he said, “I know there is a lot of uncertainty out in the world. We need to focus on the items where there is some certainty. If we focus our investing on certainty, we can be more profitable. There has been a lot of flight from risk, which has hurt the junior sector.”
Roulston's advice starts with gaining some perspective. He said, “It is important to take a step back. People are so focused on the short-term that they aren't remembering the long term. People want to know where the gold price is going to be tomorrow morning, or next week or next month, or any of the other commodities. I think it is important to invest according to the long term picture.” The long term picture has shown a great deal of growth. Said Roulston, “The copper price over 10 years is up the same six fold ratio as gold. The gold price is not an anomaly in the commodities market. Metals are global commodities. It is critical to look at the global picture when you are trying to evaluate the commodity market. It is critical to go to these places and to work a global perspective of the economic picture. There is a lot of doom and gloom in the US, but it is a totally different environment in the rest of the world.”
While many parts of the world are struggling economically, there are others that aren't. Said Roulston, “Whether the European economy grows or shrinks a couple of percentages is inconsequential to metals. China's economy is bigger than the whole European economy. In China they are building stuff. They are using half of the world’s iron ore and much of the other metals. All of the countries that we think of as inconsequential are coming up. All of the developing areas are using more metals each year. Growth is strong in Latin America and there are a billion people in Africa that are just starting to find the need for commodities. The growth in metals is strong and is going to stay strong.”
According to Roulston, the challenge will be on the supply side of the equation, making sure that mining companies are getting enough goods to market to meet the demand. Said Roulston, “A typical mine lasts about 20 years. That means that every mine has to be replaced to meet demand. Over the last decade the price of gold has increased six fold but the production hasn’t. It is not that the mining industry doesn't want to increase production, they just can't.” Challenges with permitting have caused huge slowdowns in mine development. Mines that are coming online are seeing profits, though. Said Roulston, “The high prices for gold, silver and copper are generating enormous profits. A decade ago most investment analysts dismissed mining as a subset of investing. Things have turned around dramatically. The mining industry is now worth $1 trillion dollars. More importantly, globally the mining industry is sitting on $100 billion in cash and they want to build their businesses.”
Given these statistics, there should be more production. Roulston said, “Why aren't we seeing more production? The new mines that are being built are barely able to keep up with the mines that have been depleted. It is getting harder and harder to build new mines. If we start with a mine that already has a feasibility study, it can still take a decade to get to production. It is also getting harder to find big new deposits.” While large, high-grade deposits used to be the norm, it is no longer the case. Said Roulston, “The big high-grade deposits that were sticking up out of the ground are now gone. The new deposits are technically challenging. I'm not suggesting that we are going to run out of gold or copper or anything else. We are going for deeper, lower grade deposits.”
With the change in the quality of deposits, there needs to be a change in the size of deposit that companies are willing to develop. Said Roulston, “We have a mindset that we need 1 gram per ounce. Companies are making money on smaller deposits than that.”
These changes do not mean that there are not profits to be made. Said Roulston, “Lower grade, more remote, all these other changes we are seeing are now the norm. How do we get this huge return on a deposit that has already been discovered? The early stage will show about $10-$20 per ounce of inferred. As they achieve milestones, the value increases. By the time they get to production, one ounce can be worth $500 an ounce. You have to look for companies that are going up the development curve. We have been very successful with this.”
Roulston believes that there will be growing interest in the junior sector. He said, “The TSX venture index is down about 30% to 40%. We have this flight away from risk around the world. Investors are buying gold bullion, Treasury bills and American blue chip companies. But people are starting to come back – they are starting to be interested again.” While there is additional attention going to juniors, Roulston said to be cautious of juniors who have to continue to come to the market for funding because of concerns over stock dilution.
Finally, Roulston addressed the notion that stocks tend to drop after PDAC. He said, “Individual companies that continue to deliver results during the summer season, companies who deliver results will get benefits. We have not had a run up as in past years. Focus on building positions in high quality companies.”