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Jun 2015 - Bottomed Yet?

Have Resources Bottomed Yet?

Following the positive RIU/Vertical Events explorer's conference in Freo in late February 2015, and Stewart McDonald proclaiming that "the commodity bear market is over, the commodity boom has restarted again". The resource market slipped along with the weakening iron ore price into an even deeper funk, with many explorers focusing on devising methods to slow their dwindling cash reserves.

Doom and gloom appeared to have largely taken hold to June 2015, with a weak to flat/sideways stockmarket (unless you are in China - up ~40% to 50% by June) despite the bullish backdrop of a relatively strong A$ gold price of ~A$1550/oz (~US$1180/oz @ A$0.76) and falling labour costs. As many consultancy and stockbroker firms reduce their staff, the private equity funds state that it has been an extremely busy / boom time with everyone wanting their money, thus creating a "buyer's market" in which they can pick and choose which project/company to take a slab of.

Some  corporates have also done extremely well such as the Gold Road raising and the logical Independence / Sirius merger, both executed by ex-JBWere Ross King's Treadstone. The result has been a mixed bag amongst the four conferences that I attended during May 2015, all with reduced delegate numbers and all wanting to know "have resources bottomed yet ?".

At the SAA (Stockbrokers) conference in late May, delegates heard the opposition stating that re-training, re-qualifying and regular re-education was an essential requirement for the finance industry and new changes / requirements would be coming in mid-2015. Although, when the speaker was asked what qualifications a politician needs to have and what on-going re-education they take; the swift reply was that a politician never needs any educational standard and never should have to undergo any re-education - which says it all.

That opposition spokesman also stated that a means has to be found to reduce Australians claiming the pension, hence a means test, as the old formula under which the 65-year restriction had been imposed was no longer applicable. He elaborated that the 65-year pension start had originally been based on the then average life expectancy of men being 55 years and women 59 years (ie most should not have received it), but people were now living much longer than that.

At that SAA conference, Li Xinchuang (who from our observation appears to be one of China's main presenters on iron ore and steel), gave an outlook for the iron ore price and steel market to 2016, with his presentation giving a view to 2020. His expectation was that the average iron ore import price to China in 2015 would be US$60/t with the 2h2015 being US$60/t.

The iron ore price was expected to increase to US$65/t in 2016 as high cost miners close (in China, iron ore mining costs mostly range from ~US$60/t to US$100/t, within a range of ~US$35/t to ~US$180/t) resulting in better supply/demand conditions, and with further closures, and completion of expansion by the Big Four, the steel price was expected to rise in 2017, thus driving the iron ore price up to average ~US$75/t.

For 2018 to 2020, the iron ore price was expected to remain stable at about US$80 to US$90/t, initially due to the recovering world economy in 2018 driving up steel and hence iron ore demand, with supply & demand under control in 2019. While in 2020, costs would rise due to stricter environmental requirements while finance faced issues such as inflation and a depreciating US$. So according to China, the iron ore price appears to have bottomed.

Kerry Stevenson's Broken Hill Symposium Conference continued to be very different to most other resource conferences. The Symposium conference was opened by an 8-year old girl, Gloria Zhu, talking about Australia-China co-operation for a better future. The conference contained a number of panel discussions such as what acquisitive traits successful companies (NST, IGO, EVN, MLX, OZL etc) have (eg prior experience for material upside potential, management, quick return, and not overextension) and what company could be next into the group (possibly SAR).

Julian Malnic presented his successful companies that he has started like Nautilus (which expects to start mining with its ~$235m undersea miner in about 2 years' time) and DirectNi. Julian said that his key to selecting successful companies was to identify a future convergence point based on technical and economic vectors at which things could happen. Consequently one of his current focuses (apart from graphene and Nanocarbon) was DSI (Deep Space Industries) looking with NASA at mining asteroids (with a typical asteroid shown on top of a city for scale in the Figure).

Julian recounted a conversation he had with Buzz Aldrin who stated that "the first baby will be born on Mars in 2035, but no one is coming back. Those that go to Mars don't get to come back, after all no one asked for a return ticket on the Mayflower!". Julian's DSI also hopes to produce water in space due to the differential temperature between different sides (sun to shade) of an asteroid, because 1t of water at the space station costs ~$1m to $3m.

Hedley Widdup of Lion Selection showed that he thought we were at 4.30, approaching 5 on the "Lion Clock" shown inset in the Figure. The "Boom" period as far as he was concerned has started, with its "first swallow of summer".

Hedley thought that the key for 5 on the clock was private equity acquisition of companies. The move on Mungana was a possibility but there needed to be more. Hedley thought that private equity usually tries to buy near the bottom and then sell back to the market possibly ~3 years' later for a material profit.

However, according to the private equity companies they are extremely busy, although what they are doing may not be that obviously visible from an Australian viewpoint.

On the day after Kerry's Conference, there was a technical day by the NSW Government mostly on the Curnamona Craton followed by a field trip in the vicinity of Broken Hill which some people that attended said they thought was very good and hope that something like it continues. In a video link to Broken Hill, the NSW Minister of Mines stated that red tape was going to be halved, though some delegates were sceptical.

NSW does appear to be following South Australia by paying towards some drilling, although it has a long way to go as South Australia started its PACE program ~10 years' ago in 2004. South Australia commented that to start mining in its State now only needs about 2 key approvals and up to 10 sub-approvals. In contrast Roy Hill needed ~4,940  approvals from the WA Govt to start mining.

Apart from the ~$32m drill core library that it is constructing, South Australia is focusing on establishing a new minerals province in the western part of the State called "Uno", as part of its aim to triple its copper exports within 15 years, from 300ktpa to 1mtpa copper by 2030. If necessary, infrastructure development would occur in the Gawler Craton, possibly even a central processing plant for companies to use, and an almost $1bn upgrade was in progress for the Port Pirie smelter. Now that is what you call a State getting behind mining and processing and recognising its potential long-term growth benefits.

However, it has to be admitted that some NSW council areas have some of the most stringent environmental requirements in the world when it comes to drilling a hole. As in a knotted rope (specified thickness and knots at specified intervals) for the drillhole sump, so that a kangaroo or wallaby can haul itself out; that is after it has cleared with a clean jump over the fortified fence around the sump. A sump in this construction for each drillhole actually resembles a mini-box-cut, with a rope attached to a specified stake.

Although relatively less attended, Paydirt's Latin America down-under (LADU) conference in Sydney was upbeat as far as the South American countries were concerned. Yes they had slowed down, but in their opinion 2015 was experiencing a turnaround vs 2014, with expected GDP growth rates of 2.9% (up from 1.9%) in Chile, 4.7% vs 2.9% in Peru, ~2.1% increasing to 3.6% in Mexico, and 0.1% increasing to 0.5% in Brazil.

Paydirt's conference actually contained a surprise (for me) in that I usually think of Latin America as being Chile, Peru and then Brazil in terms of investment, whereas Mexico is in fact No.3. Mexico falls between the cracks due to its proximity with the southern border of the US and hence its ~50 international airports and ~47 border crossings that reputedly process ~1m people and ~300,000 vehicles per day. Mexico's GDP in 2014 was US$1.296trn (vs Australia's US$1.483trn) the second highest in Latin America, after Brazil.

At least one delegate commented that the advantage with Paydirt's LADU is the ability to meet the ministers of the country where your project / mine is located (a similar comment is made about Paydirt's ADU too). In addition, Paydirt managed to co-ordinate a panel of almost all the Australian ambassadors in Latin America, which was very informative.

The ambassadors gave introductory summaries of what was happening in the countries they are responsible for. Mexico appeared to be advancing the fastest in terms of GDP monetary growth with an expected target of ~ 6% to 8%pa by 2020 and there was speculation as to when Mexico was going to overtake Australia with the 2014 difference only ~US$187m. Mexico apparently has a population of ~180m of which ~120m are a young growing middle class. And Colombia may possibly be in 5th place, with Ecuador rapidly rising too.

China is conducting major infrastructure projects in Latin America, having started on the new ~$20bn canal (capable of take mega iron ore carriers) through Nicaragua as an alternative to the Panama Canal. China is reputedly financing a ~$50bn asset package to Brazil, besides its recent support of Vale, and undertaking a fast rail feasibility study between Brazil and Peru.

However Argentina with its rampant 30% to 50% inflation and collapsing currency was currently seen to probably be the worst investment area of Latin America. The new president (there has to be a new one because the current president has served 2 terms) is expected to be pro-mining (out of the 3 possible candidates) and should relax the forex controls. Unfortunately, mining limitations in the individual provinces are not expected to change because each province controls its environmental restrictions and that is dependent on political mayoral elections and what each mayor needs to do to get re-elected.

Brazil was also perceived to be facing problems due to its severe drought which was having a major impact on one of is mega cities - Sao Paulo. Whether, like South Africa, there will have to be water restrictions on mining operations and hence affecting production, was currently not known.

And so the last or first conference I attended in May, the Sydney RIU conference in which Stewart commented that sales at Joe's pie shop in Perth were picking up (inferring increased customers) and the bodies littering the streets of West Perth were beginning to twitch. While the closing speech was from Sean Russo, who thought it looked like it was time to "jump in" to the market, although it could still drift sideways for a bit longer.

Sean also commented that there has been a lot of debt and little hedging, apart from his few satisfied Noah's Rule clients. And although it is available, there had been very little hedging of iron ore, even though there had been many that called the iron ore price lower.

There has been a significant rebound in a number of gold stocks, but caution still appears to be the case, despite all 4 conferences that I attended in May 2015 seeming to be experiencing glimmering signs of recovery.

Possibly a recovering iron ore price as forecast by China could be the catalyst behind reviving sentiment, the advance of the Lion clock and the recovery of commodity prices, and hence Australia's mining industry.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is a Financial Services Representative with Taylor Collison Ltd.

Figure 1: Asteroid Mining and the Lion Clock

fig1 june 15 copy

  • Written by: Keith Goode
  • Monday, 01 June 2015