Friday, March 09, 2007
A very tight market just got even tighter
There's been a flood at another uranium mine. This one is in Australia and the damage appears to be extensive.
PDAC 2007 - Exchange Forum Speakers
Prospectors and Developers Association of Canada (PDAC) 2007
Notes from the Exchange Forum
Background: PDAC is the largest mining conference in the world, held annually in early March at Toronto’s convention center. The conference has two tracks, one with an admission price, for paid members of the PDAC and the other is free and open to the public. The former is oriented towards industry professionals and the latter is for investors. It is estimated that there were a record 17,000+ registered attendees in 2007, the 75th conference of the PDAC.
Context: The week prior to the conference, the general market had gone through a swift correction with gold getting knocked back sixty bucks. Many of the comments from the speakers were in regard to this event, interpreting its significance.
The first day of the investor track features a full day of speakers. Below are notes for these presenters:
Ian McAvity
John Kaiser
David Coffin
Lawrence Roulston
Paul van Eeden
Greg McCoach
Bob Bishop
Ian McAvity
Ian McAvity is a chartist and his presentation consisted of a series of charts which he presented with commentary. My impression from seeing him speak several times is that he is almost always pessimistic, so brace yourselves…
Last week we saw gold and silver down 5-12%
What if the S&P goes down 20-25%? What happens to gold? IM is very nervous right now.
There is too much money in speculative small-cap investments.
The metals market is vulnerable to a break in the stock market.
The $ is not going to break 80, it is not in Russia/China’s interest for the USD to collapse.
There is lots of money in small caps, the Russell 2000, they will not have liquidity. People buying base metal stocks don’t even know what the metals are used for.
The chart parttern last week (of the Dow?) shows an Outside Reversal. The market made a new all-time high on Monday morning but closed the week down 5%. IM thinks the Dow will go down 20-25%.
The bulk of the move for this cycle is probably over.
Consider HXD.TO, a fund that shorts the S&P TSX 60
Bad buying causes most losses in the juniors sector. Let the stocks come to you.
John Kaiser
JK thinks the third leg of this bull market started in October.
The action last week cooled down the juniors sector, which is a good thing.
We haven’t had anything resembling manic moves in the stocks yet.
The retail [investor] sector is not present in this market to any significant degree, but that will change. It will require massive participation to take the market to the mania phase, because of all of the paper that has been created along the way by sector companies.
Base metals – zinc warehouse levels have bottomed out, copper is building back up slowly.
Mainstream thinking continues along the lines that “the world is the tail wagged by the American dog”. The cyclical bears believe that China has no independent staying power if the US goes into a recession.
Base metal prices themselves have reflected market pessimism all the way up in this bull market as shown by backwardation of metals prices. Nobody thinks they can go much higher. [I got the sense Kaiser disagrees with that last bit.]
Yen carry trade – interruption of the Yen carry trade last May crushed the metals rally. When the Yen rises, hedge funds get hurt.
Wall of Worry includes housing. Housing will not collapse, even with the problems in the sub-prime market. They are not liquid like stocks (i.e. everyone can’t “go to cash”…you have to live somewhere).
Goldbugs Etymology
There are four types of goldbugs:
1. Apocalyptic – nobody wins, Ian Gordon is an example of this category.
2. Anti-USD – only gold ownership wins in this scenario, e.g. Paul van Eeden.
3. Conspiracy – Bill Murphy
4. Prosperity – John Kaiser. This is the scenario that recommends holding juniors and gold.
US dominance is declining with Asia’s rise. The USD will lose its role as the de facto global currency. Rising wealth in Asia will drive gold demand. More and more people want to own gold, to put some of their wealth into non-paper assets.
JK is scared by oil. If oil goes to the moon, base metal prices will come down but gold may not go up.
Uranium – a true bubble, but an almost invincible bubble. With decommissioning coming to an end, the supply demand situation looks like it is locked in. What could go wrong? Another Chernobyl. An atomic exchange between India and Pakistan. An al Qaeda dirty bomb. This the last one is the one that most concerns JK. This bubble will end by competition for other assets, for example, gold really taking off. JK commented that none of these juniors will be going into production any time soon.
David Coffin
The trigger for last week’s sell-off was Shanghai, but it was not the reason. We’ve had 4-5 years of strong markets, some things are now ending, like the Yen carry trade.
The strengthening of the Yen is the the signal for the second leg of this resource market. The Yuan is slowly strengthening vs. the USD, that will also continue. China wanted to see the Yen appreciate before letting the Yuan rise.
The debt in the US is going to continue to be a drag. The US slowing is a good thing.
Think about your timeframe and focus what you do along those lines. The next couple of weeks or months may be tough on your portfolios.
China will continue to boom, because of their high savings rate. As longs as China saves and re-invests, the boom will continue.
Last week we saw profit-taking, not panic selling. It is the unwinding of the Yen carry trade. There will be some more of that.
The Coffins are lining up buys. The buys are definitely out there.
Balance – stocks with big gains will come off some, but profits will be rotated into the undervalued stocks.
Copper – China is restocking, which started in mid-January. DC is now using $2 copper as a base price for long-term forecasting, up from $1.50. DC is looking for copper juniors that are near-term producers with projects that make sense.
Nickel – kind of cautious on this
Zinc – most unloved through the whole cycle, largely ignored. Hedge guys have not been in the zinc market like the copper market or the nickel market. Coffins are focusing fairly heavily on zinc, smaller ones, mid-tier takeover candidates.
Gold/Silver – gold should trade in the $700-$800 range to sustain current demand in the sector.
Uranium – Very real supply shortage. There is no spot price for uranium, really. Price is starting to have an impact on operating costs. Nobody knows where it will go. $200? Maybe. Some consolidation is coming.
Look for undervalued companies with strong bottom lines.
Buy carefully and watch the general market conditions.
The second leg of this bull market will run well into the next decade.
[…allow me to repeat that…]
The second leg of this bull market will run well into the next decade.
Oil is not going much higher.
Lawrence Roulston
Gold – the most important thing is the trend since 2001. There is no reason that should not continue. [Actually, he said “there is no reason that should continue”, but given everything else he said, I’m pretty sure the “not” was supposed to be in there].
Gold companies have sold for $230/oz for Proven and Probable reserves, but $20/ounce for inferred. So there is potentially huge upside between the two stages.
Focus on companies that have made the discovery and are adding ounces.
Silver – Lots of little companies are re-opening shut down silver mines and getting into production quickly and with relatively low capital outlays.
Platinum - $1200/ounce, strong supply/demand fundamentals.
Uranium - $85/lb, up from $7. Urge some caution with some of the juniors. There are now over 300 companies exploring for uranium. There are still some good values, but be selective.
Base Metals – the most misunderstood part of the resources sector. Is it a speculative bubble or a super-cycle that is just beginning? LR believes it is the latter.
Last week showed us that there is risk in all investment sectors. LR believes that there is strong fundamental support for the general market (earnings). There is lots of liquidity and the worst seems to be over.
In regard to the drop in the Chinese market, that market had been up 100% in the prior twelve months. The sell off was triggered by expectations that the government would act to rein in growth. They are still growing at 10% a year. They may pull back from that by one or two points, but remember that this is compounding.
The second wave of growth in China is underway and is about consumers. The first wave was in infrastructure. Now the growing Chinese middle class has just started to accumulate “toys”. There is no way that growth will drop off any time soon.
India is next door. Infrastructure development has lagged China but is getting better.
Between them, there are 3 billion people.
Nickel is the most dramatic lately. New all time high last week, closed over $20. Copper corrected last year, pulled back to a fundamental support level.
Commodities are strong fundamentally. If there was a speculative element in them, it would have been washed out by this nervousness.
Supply side response – Majors are increasing production, but there are fewer companies. In other words, growth is coming almost exclusively through acquisitions and not organic growth. Last year, the industry averaged less than 1% annual production growth. Not a lot of good deposits out there. The low hanging fruit is gone. There are some new mines but supply is basically flat and this will continue for several more years. New mines will not even offset current depletion rates.
Mixed Messages – Economists look at the long-term price trends and then project them forwards. Take the 1970’s and 1980’s prices and project them forward, but the measuring stick has changed in the meantime. You have to compensate for the decline in the US Dollar. The deposits that are getting developed are lower grade, deeper, more remote and more expensive to develop.
Six billion dollars have been spent in the last year and a half on acquisitions and one billion dollars more were made in minority investments and joint ventures.
The future – We are in the very early stages of a long-term cycle. There are many years to go. Prices are now very attractive.
List of companies to consider
Gold
Dynasty
Staccato
Mansfield
Exeter
Silver
Aurcana
Exmin
Fortuna
Platinum
Pacific Northwest
Base Metals
Acadian
Baja
Copper Fox
Geovic
Galway
Pacifica
Uranium
Hathor
Crosshair
Strathmore Minerals
Paul van Eeden
PvE commented that in his opinion, attendance seems down from last year. He thought there would be more people here.
It’s a waste of time worrying about what the market will do over the short-to-medium term.
China was cracking down on fraudulent activities in their markets. Tuesday was a total emotional reaction to that.
What are stocks? Fractional ownership in a real business. Why would you sell your shares based on what happened in China?
There are two things that are far more important than what is happening in China.
1. The US housing market – The US economy is 40% of the world’s economy. The US consumer’s spending is 30% of all economic activity in the entire world.
In the last couple of months, the US residential housing market has fallen into really bad shape. Home starts, home sales, sub-prime lender bankruptcies…there is a big shakeout going on. US consumers last source of financing is going away. If we get a 3% decline in worldwide economic activity, what will happen to base metal prices?
It’s game over for consumer spending.
The USD is declining due to a rising Yen.
2. Unwinding of the Yen carry trade – The Yen carry trade was underpinned by three Japanese policies: zero percent interest rate, stable exchange rate, quantitative easing. All three were eliminated over the last year and a half. Pillars of the Yen carry trade are gone. This is very, very significant and will cause downward pressure on the USD.
Last week gold and the USD fell together, because it was part of an emotional response.
PvE is buying gold here.
Greg McCoach
What happened last week? Greg is very concerned with the mortgage meltdown and thinks it will really hit home in the May-June timeframe. Several of the top 20 sub-prime mortgage lenders (20?) have gone under in the past few weeks. There is $2 trillion of mortgage debt that will reset in the next ten months. The average adjustable rate mortgage will go up between $300-$400 when they reset. This could get quite scary.
Last year the US government knew this was coming and that is why the Chapter 7 bankruptcy protections were removed (as of 10/17/05). Debt WILL get removed from the system. Real estate prices could drop by 50% or more.
On 3/15/06, the US Government stopped reporting M-3 figures. This is a red flag of desperation and one of which most investors are not aware.
There are major structural changes coming to America. Geopolitical risk has greatly increased over the last six months.
We need to have confidence in what we are investing in.
Precious metals are going much higher in the near future. There are 35 million new residences that have just been built in China, but 80% of the population is still rural. This equates to massive infrastructure demand. That said, Greg is still more bullish on PMs than BMs right now.
Bob Bishop
Note: Bob clarified the rumor that he is retiring by saying that he is leaving the newsletter business, but has no intention of retiring.
Last week was an opportunity. Gut check. Wake-up call.
Yen carry trade involves extreme leverage, take advantage of de-leveraging events.
If you can’t bring yourself to buy during a correction, then you need to review your exposure level (i.e. you are probably need to reduce your exposure).
What is going on now is the biggest growth story the world has ever seen. India is right behind China.
As an indication of where we are in this market, Bob presented the attendance numbers for some recent shows:
17,000+ PDAC
8,000+ Cambridge House Conference in Vancouver
6,000 Cordilleran Round-Up in Vancouver
Most Americans don’t even have a clue that there is a commodity bull market going on. We are still early in this market, gold for sure and probably other commodities too.
Bob recommended that people look at Martin Murenbeeld’s recent work. Mr. M. puts out gold price scenarios every year, best, worst and most likely. Best case for 2007 is an average price of $755. [Ed. – If memory serves, gold has exceeded even the best case scenario in recent years].
Investors should always spend some money when these things (big corrections) happen. Make it a habit to buy when there is panic in the markets.
Bob looks for price anomalies.
Uraniums are over-priced. Watch the market caps and look for valuation anomalies.
Bob gave a few investment ideas:
Kilgore Minerals (KAU.V) – Will be taken out this month in all likelihood.
Bitterroot (BTT.V) – Working on a Michigan uranium project with Cameco. Odds greatly favor success. Good value at 0.60.
Strongbow Exploration – Nickel play
[Jay Taylor spoke last, but I was unfortunately not able to stay to hear him]
Notes from the Exchange Forum
Background: PDAC is the largest mining conference in the world, held annually in early March at Toronto’s convention center. The conference has two tracks, one with an admission price, for paid members of the PDAC and the other is free and open to the public. The former is oriented towards industry professionals and the latter is for investors. It is estimated that there were a record 17,000+ registered attendees in 2007, the 75th conference of the PDAC.
Context: The week prior to the conference, the general market had gone through a swift correction with gold getting knocked back sixty bucks. Many of the comments from the speakers were in regard to this event, interpreting its significance.
The first day of the investor track features a full day of speakers. Below are notes for these presenters:
Ian McAvity
John Kaiser
David Coffin
Lawrence Roulston
Paul van Eeden
Greg McCoach
Bob Bishop
Ian McAvity
Ian McAvity is a chartist and his presentation consisted of a series of charts which he presented with commentary. My impression from seeing him speak several times is that he is almost always pessimistic, so brace yourselves…
Last week we saw gold and silver down 5-12%
What if the S&P goes down 20-25%? What happens to gold? IM is very nervous right now.
There is too much money in speculative small-cap investments.
The metals market is vulnerable to a break in the stock market.
The $ is not going to break 80, it is not in Russia/China’s interest for the USD to collapse.
There is lots of money in small caps, the Russell 2000, they will not have liquidity. People buying base metal stocks don’t even know what the metals are used for.
The chart parttern last week (of the Dow?) shows an Outside Reversal. The market made a new all-time high on Monday morning but closed the week down 5%. IM thinks the Dow will go down 20-25%.
The bulk of the move for this cycle is probably over.
Consider HXD.TO, a fund that shorts the S&P TSX 60
Bad buying causes most losses in the juniors sector. Let the stocks come to you.
John Kaiser
JK thinks the third leg of this bull market started in October.
The action last week cooled down the juniors sector, which is a good thing.
We haven’t had anything resembling manic moves in the stocks yet.
The retail [investor] sector is not present in this market to any significant degree, but that will change. It will require massive participation to take the market to the mania phase, because of all of the paper that has been created along the way by sector companies.
Base metals – zinc warehouse levels have bottomed out, copper is building back up slowly.
Mainstream thinking continues along the lines that “the world is the tail wagged by the American dog”. The cyclical bears believe that China has no independent staying power if the US goes into a recession.
Base metal prices themselves have reflected market pessimism all the way up in this bull market as shown by backwardation of metals prices. Nobody thinks they can go much higher. [I got the sense Kaiser disagrees with that last bit.]
Yen carry trade – interruption of the Yen carry trade last May crushed the metals rally. When the Yen rises, hedge funds get hurt.
Wall of Worry includes housing. Housing will not collapse, even with the problems in the sub-prime market. They are not liquid like stocks (i.e. everyone can’t “go to cash”…you have to live somewhere).
Goldbugs Etymology
There are four types of goldbugs:
1. Apocalyptic – nobody wins, Ian Gordon is an example of this category.
2. Anti-USD – only gold ownership wins in this scenario, e.g. Paul van Eeden.
3. Conspiracy – Bill Murphy
4. Prosperity – John Kaiser. This is the scenario that recommends holding juniors and gold.
US dominance is declining with Asia’s rise. The USD will lose its role as the de facto global currency. Rising wealth in Asia will drive gold demand. More and more people want to own gold, to put some of their wealth into non-paper assets.
JK is scared by oil. If oil goes to the moon, base metal prices will come down but gold may not go up.
Uranium – a true bubble, but an almost invincible bubble. With decommissioning coming to an end, the supply demand situation looks like it is locked in. What could go wrong? Another Chernobyl. An atomic exchange between India and Pakistan. An al Qaeda dirty bomb. This the last one is the one that most concerns JK. This bubble will end by competition for other assets, for example, gold really taking off. JK commented that none of these juniors will be going into production any time soon.
David Coffin
The trigger for last week’s sell-off was Shanghai, but it was not the reason. We’ve had 4-5 years of strong markets, some things are now ending, like the Yen carry trade.
The strengthening of the Yen is the the signal for the second leg of this resource market. The Yuan is slowly strengthening vs. the USD, that will also continue. China wanted to see the Yen appreciate before letting the Yuan rise.
The debt in the US is going to continue to be a drag. The US slowing is a good thing.
Think about your timeframe and focus what you do along those lines. The next couple of weeks or months may be tough on your portfolios.
China will continue to boom, because of their high savings rate. As longs as China saves and re-invests, the boom will continue.
Last week we saw profit-taking, not panic selling. It is the unwinding of the Yen carry trade. There will be some more of that.
The Coffins are lining up buys. The buys are definitely out there.
Balance – stocks with big gains will come off some, but profits will be rotated into the undervalued stocks.
Copper – China is restocking, which started in mid-January. DC is now using $2 copper as a base price for long-term forecasting, up from $1.50. DC is looking for copper juniors that are near-term producers with projects that make sense.
Nickel – kind of cautious on this
Zinc – most unloved through the whole cycle, largely ignored. Hedge guys have not been in the zinc market like the copper market or the nickel market. Coffins are focusing fairly heavily on zinc, smaller ones, mid-tier takeover candidates.
Gold/Silver – gold should trade in the $700-$800 range to sustain current demand in the sector.
Uranium – Very real supply shortage. There is no spot price for uranium, really. Price is starting to have an impact on operating costs. Nobody knows where it will go. $200? Maybe. Some consolidation is coming.
Look for undervalued companies with strong bottom lines.
Buy carefully and watch the general market conditions.
The second leg of this bull market will run well into the next decade.
[…allow me to repeat that…]
The second leg of this bull market will run well into the next decade.
Oil is not going much higher.
Lawrence Roulston
Gold – the most important thing is the trend since 2001. There is no reason that should not continue. [Actually, he said “there is no reason that should continue”, but given everything else he said, I’m pretty sure the “not” was supposed to be in there].
Gold companies have sold for $230/oz for Proven and Probable reserves, but $20/ounce for inferred. So there is potentially huge upside between the two stages.
Focus on companies that have made the discovery and are adding ounces.
Silver – Lots of little companies are re-opening shut down silver mines and getting into production quickly and with relatively low capital outlays.
Platinum - $1200/ounce, strong supply/demand fundamentals.
Uranium - $85/lb, up from $7. Urge some caution with some of the juniors. There are now over 300 companies exploring for uranium. There are still some good values, but be selective.
Base Metals – the most misunderstood part of the resources sector. Is it a speculative bubble or a super-cycle that is just beginning? LR believes it is the latter.
Last week showed us that there is risk in all investment sectors. LR believes that there is strong fundamental support for the general market (earnings). There is lots of liquidity and the worst seems to be over.
In regard to the drop in the Chinese market, that market had been up 100% in the prior twelve months. The sell off was triggered by expectations that the government would act to rein in growth. They are still growing at 10% a year. They may pull back from that by one or two points, but remember that this is compounding.
The second wave of growth in China is underway and is about consumers. The first wave was in infrastructure. Now the growing Chinese middle class has just started to accumulate “toys”. There is no way that growth will drop off any time soon.
India is next door. Infrastructure development has lagged China but is getting better.
Between them, there are 3 billion people.
Nickel is the most dramatic lately. New all time high last week, closed over $20. Copper corrected last year, pulled back to a fundamental support level.
Commodities are strong fundamentally. If there was a speculative element in them, it would have been washed out by this nervousness.
Supply side response – Majors are increasing production, but there are fewer companies. In other words, growth is coming almost exclusively through acquisitions and not organic growth. Last year, the industry averaged less than 1% annual production growth. Not a lot of good deposits out there. The low hanging fruit is gone. There are some new mines but supply is basically flat and this will continue for several more years. New mines will not even offset current depletion rates.
Mixed Messages – Economists look at the long-term price trends and then project them forwards. Take the 1970’s and 1980’s prices and project them forward, but the measuring stick has changed in the meantime. You have to compensate for the decline in the US Dollar. The deposits that are getting developed are lower grade, deeper, more remote and more expensive to develop.
Six billion dollars have been spent in the last year and a half on acquisitions and one billion dollars more were made in minority investments and joint ventures.
The future – We are in the very early stages of a long-term cycle. There are many years to go. Prices are now very attractive.
List of companies to consider
Gold
Dynasty
Staccato
Mansfield
Exeter
Silver
Aurcana
Exmin
Fortuna
Platinum
Pacific Northwest
Base Metals
Acadian
Baja
Copper Fox
Geovic
Galway
Pacifica
Uranium
Hathor
Crosshair
Strathmore Minerals
Paul van Eeden
PvE commented that in his opinion, attendance seems down from last year. He thought there would be more people here.
It’s a waste of time worrying about what the market will do over the short-to-medium term.
China was cracking down on fraudulent activities in their markets. Tuesday was a total emotional reaction to that.
What are stocks? Fractional ownership in a real business. Why would you sell your shares based on what happened in China?
There are two things that are far more important than what is happening in China.
1. The US housing market – The US economy is 40% of the world’s economy. The US consumer’s spending is 30% of all economic activity in the entire world.
In the last couple of months, the US residential housing market has fallen into really bad shape. Home starts, home sales, sub-prime lender bankruptcies…there is a big shakeout going on. US consumers last source of financing is going away. If we get a 3% decline in worldwide economic activity, what will happen to base metal prices?
It’s game over for consumer spending.
The USD is declining due to a rising Yen.
2. Unwinding of the Yen carry trade – The Yen carry trade was underpinned by three Japanese policies: zero percent interest rate, stable exchange rate, quantitative easing. All three were eliminated over the last year and a half. Pillars of the Yen carry trade are gone. This is very, very significant and will cause downward pressure on the USD.
Last week gold and the USD fell together, because it was part of an emotional response.
PvE is buying gold here.
Greg McCoach
What happened last week? Greg is very concerned with the mortgage meltdown and thinks it will really hit home in the May-June timeframe. Several of the top 20 sub-prime mortgage lenders (20?) have gone under in the past few weeks. There is $2 trillion of mortgage debt that will reset in the next ten months. The average adjustable rate mortgage will go up between $300-$400 when they reset. This could get quite scary.
Last year the US government knew this was coming and that is why the Chapter 7 bankruptcy protections were removed (as of 10/17/05). Debt WILL get removed from the system. Real estate prices could drop by 50% or more.
On 3/15/06, the US Government stopped reporting M-3 figures. This is a red flag of desperation and one of which most investors are not aware.
There are major structural changes coming to America. Geopolitical risk has greatly increased over the last six months.
We need to have confidence in what we are investing in.
Precious metals are going much higher in the near future. There are 35 million new residences that have just been built in China, but 80% of the population is still rural. This equates to massive infrastructure demand. That said, Greg is still more bullish on PMs than BMs right now.
Bob Bishop
Note: Bob clarified the rumor that he is retiring by saying that he is leaving the newsletter business, but has no intention of retiring.
Last week was an opportunity. Gut check. Wake-up call.
Yen carry trade involves extreme leverage, take advantage of de-leveraging events.
If you can’t bring yourself to buy during a correction, then you need to review your exposure level (i.e. you are probably need to reduce your exposure).
What is going on now is the biggest growth story the world has ever seen. India is right behind China.
As an indication of where we are in this market, Bob presented the attendance numbers for some recent shows:
17,000+ PDAC
8,000+ Cambridge House Conference in Vancouver
6,000 Cordilleran Round-Up in Vancouver
Most Americans don’t even have a clue that there is a commodity bull market going on. We are still early in this market, gold for sure and probably other commodities too.
Bob recommended that people look at Martin Murenbeeld’s recent work. Mr. M. puts out gold price scenarios every year, best, worst and most likely. Best case for 2007 is an average price of $755. [Ed. – If memory serves, gold has exceeded even the best case scenario in recent years].
Investors should always spend some money when these things (big corrections) happen. Make it a habit to buy when there is panic in the markets.
Bob looks for price anomalies.
Uraniums are over-priced. Watch the market caps and look for valuation anomalies.
Bob gave a few investment ideas:
Kilgore Minerals (KAU.V) – Will be taken out this month in all likelihood.
Bitterroot (BTT.V) – Working on a Michigan uranium project with Cameco. Odds greatly favor success. Good value at 0.60.
Strongbow Exploration – Nickel play
[Jay Taylor spoke last, but I was unfortunately not able to stay to hear him]
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