Market sentiment among metals investors is
extremely low. Investors are exiting the markets and even those investors who
were once bullish are right now skeptical that the bear market will turn around
any time soon. But that doesn’t mean investors shouldn’t be investing.
At the recent San Francisco Metals and
Minerals Conference, we spoke to Mickey Fulp, the “Mercenary Geologist” who
shared his always insightful viewpoints about the market and the opportunities
that exist.
During the conference, Mickey was a
panelist, spoke in a workshop, and presented a short course, but he was
generous enough to give us a few minutes for a one-on-one interview.
We first asked Mr. Fulp for his assessment
of the market: “We are arguably in the deepest bear market we have seen since
post Bre-X days, from 1998 to 2003,” he said frankly. As for the market we’re
in now, he said: “It can be argued that this bear market started in March 2011.
There were a couple of catalysts at that time that probably tamed the
irrational exuberance that had gone on before that.”
The first catalyst was the selling off of
private placements: “If you looked at the private placements that were done in
late 2010 and early 2011, there was a lot of smart money that poured in. With the
four month hold on private placements, that paper started coming out and
selling started coming in the early spring of 2011.”
The next catalysts included a typical
economic reality of the stock market, as well as some realities of the market
in 2011: “In the early second quarter of 2011, [the sell-off] was exacerbated
by ‘sell in May and go away’ and by another episode of the Greek crisis that
corrected commodities for a while.”
Mr. Fulp then described why things haven’t
gotten better since then. Readers might be surprised to discover that one
resource whose price remains high is actually contributing to the problem: “So
we are arguably at the 2 ½ year point of an increasingly bear market for the resource
sector. Part of that is driven by falling commodity prices. Gold is off its
2011 high by about 35%. Copper is off 20%. Uranium is in the toilet. The only
thing that has maintained its price is oil. High oil prices have made it worse
for energy-intensive industries like mining, which face high energy costs, depreciating
metals values, and shrinking margins.”
Next, we asked what it will take for the
market to turn around – to shift from bearish to bullish once again. What Mr.
Fulp describes won’t be pleasant for investors to read but will help to fix the
problem: “It will take the mining companies to get their houses in order by
writing off bad acquisitions and worthless assets,” said Mr. Fulp. “They have
to increase their cut-off grades and improve cash margins. They have to treat
the mining business for what it really is – a value industry not a growth
industry. The goal should be not quantity of ounces or pounds or tonnes produced
but the quality of those. Mine the high margin deposits. It’s an old rule of
thumb - your operating costs need to be 40% to 70% under the price for which
you sell the metal.”
“Until the mining companies start making
profits and returning value through stock price increases or real dividends, investors
aren’t going to come back into the market. With respect to the explorers, there
just aren’t that many good projects in the world that can support 1700
Toronto-listed juniors. We need half or more of these companies to go away and
never come back.”
In spite of his bearish assessment, Mr.
Fulp still sees some opportunities so he shared some with our readers: “I
particularly like two commodities at this juncture, copper and tungsten, and am
currently trying to put project deals together on them.”
About copper, Mr. Fulp said: “There are
80,000 more people in the world every day. 25 per cent of the world’s
population lives in the dark and can’t turn on a light switch at night. A
significant number of those people live in Eastern Asia. That’s where
infrastructure is coming; that’s where electrification is booming. So there is
an inherent demand for copper. Look at a copper chart of world production since
1900. For 113 years, it grows on average about 3.5% per year. The world demands
more copper because we have more people on the planet. Also if you look at a
chart of the average amount of copper consumed per person in kilograms per year,
over the last 20 years it has gone up from a little more than 2 kilograms to
almost 3 kilograms per person. Copper demand will continue to increase.”
About tungsten, Mr. Fulp said: “Tungsten is
a specialty metal that the free world needs and most production comes from
China. There are good deposits that can be developed in North America. There
are good tungsten deposits in Sweden and Scandinavia and Portugal. I own shares
in two companies that have tungsten assets in Portugal. I own shares in a
company that has tungsten assets in Sweden. And I’m working on a tungsten deal
in the United States.”
Mr. Fulp also shared with us how his
investing practices are changing in light of this bear market:
“In this bear market, I am acquiring the
cream of the crop – the best of the best juniors – and have developed a
longer-term outlook on how long I will hold those stocks before I expect a
return. I’m moving into assets in stable geopolitical jurisdictions like the
good old US of A.”
The United States, he said, offers a very
special protection that he thinks will attract more investors in the future: “Certainly
there is risk in the USA. There are long permitting timelines and NGO
opposition but there is one thing that won’t change: The concept of secure
mineral tenure is paramount in the United States. The takings clause of the
Constitution gives us a protection that does not exist in most parts of the
world. That’s not saying the US government couldn’t come in and put a royalty
on metal production from federal lands… but that hasn’t happened despite concerted
attempts for the past 30 years. Because of resource nationalism wreaking havoc
in many countries in the world, I see investors coming back to the US. There
are still good undeveloped deposits in the US and maybe it’s time to dust off
some of those projects and take another look at them.”
Investors might not like hearing that the
bear market could continue for some time. But that doesn’t mean Mr. Fulp is out
of the market. In fact, he is pursuing some specific opportunities in copper
and tungsten, and paying attention to opportunities in the US. Investors who
are wondering if there is any light at the end of the tunnel may want to take a
closer look at these same opportunities.
REFERENCES
Mickey Fulp’s website http://www.MercenaryGeologist.com
Metals and Minerals Conference: http://www.metalsandmineralsevents.com/sf/