“Usually, at the end of a bear market, things that sell for millions and billions can be bought for pennies and dollars. We still have assets priced on the hope they can be developed during this current cycle and usually those projects have to be cast aside for five or ten years and then they come back.”

Diversified Investments

The last bull market in commodities lasted around ten years and, given that markets are cyclical, the downturn could last a similar period. For that reason, Jim stresses the importance of diversification, which means having a whole range of investments and not simply putting money into different commodities.

Jim’s role as an early stage investor means he speaks to many companies but he hasn’t heard much recently to make him really excited about an investment opportunity. In his experience prices continue to fall for even the most apparently exciting companies and so he recommends caution: “Be patient and don’t get sold something but really check things out. If someone tells you a specific company is good and you’re convinced they’re onto something, really do your due diligence.

“Don’t use all or nothing thinking. But if you really think it’s good, buy a small amount and see what happens. I think we’re going to see attrition and it’s going to be a slow and painful attrition as companies with projects that probably don’t deserve funding in the first place will eventually go away. As the commodity bull market kicked off, we got more and more resource juniors and they’re not all above average. There are some that don’t deserve to be around.”

One reason behind the fall in the commodities markets, in Canada at least, has been the US becoming close to being self-sufficient in energy due to the availability of shale oil and shale gas. That’s removed Canada’s traditional main market and, with energy exports being a huge part of the economy, left it looking for other outlets. Although there are willing markets in China and Europe for natural gas, the lack of infrastructure to export it means Canada may be left behind as shale gas and oil technology spreads throughput the world.

Mining Challenges

Jim, however, doesn’t see that being all negative. “I can see a downward pressure on a lot of commodities,” he comments. “The only positive is for active miners because in Canada we have lower energy costs. Costs are a big part of mining challenges so low energy costs are bullish for miners and the Canadian Dollar has devalued quite a bit against the US Dollar over the last six months. That’s a positive for miners because they’re getting paid in US Dollars but their costs are in Canadian Dollars so there’s a bit of a spread there.”

Due to the current state of the markets, he recommends mining companies that are actually producing and generating positive cash flow as well as energy technology companies. A particular favorite is Wavefront Technology Solutions, which has an enhanced oil recovery business in international markets and a stimulation business that’s growing extremely fast.

“Their secret to longevity is they have $10 million in cash because they raised money when they didn’t really need it and that’s kept them alive during hard times,” recounts Jim. “Companies with cash are always worth a look and, if they can deploy that cash into something that generates revenue, even better. In mining, that’s hard to find since the whole industry is contracting. There’s less drilling, less exploration, fewer discoveries and it’s going to take a while for that to switch. It’s tough out there right now.”

High Quality Assets

With the price of gold and other metals going down, high quality assets are more important than quantity of resource. That’s because production costs aren’t going to change significantly unless there’s a technology shift in mining, as seen in oil and gas where fracking and horizontal drilling have really changed the game. Jim says: “I haven’t seen a magic shift in technology for mining to help some of these giant low grade deposits.

“Grades still matter a lot in mining because we’re faced with challenges of larger resources with lower grade deposits and how do we extract those economically. We need either higher metal prices or new technology. I keep looking for the magic bullet, a big game changing thing and I haven’t seen it yet. Some producers with high costs are going to have a lot of challenges and lower energy costs are one of the big things that will help them.”

Diversification, in Jim’s view, means looking outside resources and into other sectors such as technology, manufacturing and biotech where there’s currently a bull market. However, he stresses that resources shouldn’t be ignored because they’re a critical part of the economy. “We have short memories but we have to temper that with the reality that commodities aren’t the best sector to be in right now,” he recounts. “That could change and I’ll be one of the first people to jump on the bandwagon when it does but right now we’re in a bear market.

“There’s nothing I feel compelled to own right now so I’ll wait and see. Go for the indexes, the GDXJ, look at the gold price and right now there’s pretty established downtrends. You want to see those trends broken with volume, some excitement and switching over to an uptrend. Until that happens, it’s really expensive to try and pick the bottom.”

Open Mind

Jim stresses the need to keep an open mind although he admits he’s currently biased to the negative side regarding resources. He says: “Check the market, look for new highs, look for evidence that more than one or two little companies made a discovery or something nice happened to them. You want the wind at your back and right now it isn’t.”

If you want more information on Jim’s views, check his blog at www.jimletourneau.com. For investment opportunities, access www.bigpicturespeculator.com where Jim puts forward a range of energy, metals, biotech and technology companies.