By Chris Berry
- With the commodity super cycle changing its complexion and looking for direction, we continue to believe that the metals markets don't have the "wind at their backs" anymore.
- It has been surprising to see many metals prices either bottom or shoot higher in the face of a slowing China and a sluggish global economy haunted by the specter of deflation.
- Can this upward bias in select metals prices continue given this backdrop?
- We continue to argue for SELECTIVITY amongst metals and companies as a crucial component of your investment selection until the next leg up of the cycle begins.
We're Still at a Bottom…But for How Long?
After enduring two terrible years in the metals markets, it has been a welcome respite to see several....
- Despite the Fed continuing to taper the pace of asset purchases, it appears that Emerging Markets (EMs) have rebounded from their initial sell off.
- Has the crisis “vanished” as Bloomberg recently claimed or is this a lull in a secular downtrend?
- There are a number of indicators we can look at, but none are more telling than the direction of currencies and interest rates – higher rates will hurt growth prospects.
- Regardless of the “crisis talk”, EMs will continue to lead global growth, albeit at a slower pace than many would like.
- Does this, coupled with slow and presumably steady growth in the West augur for higher interest rates going forward? This is anathema to Central Bankers.
Are We Out of the Woods Yet?
In May of 2013 when then-Chairman Ben Bernanke announced his intention to eventually start tapering asset purchases in the United States, Emerging Market equities and currencies were the first, unwitting victims.
The thinking goes as follows:
In accordance with the roll out of our new journal offering next week, and our goal of increasing your “value added,” we will begin publishing a quarterly review of the Discovery space. Specifically, today we will analyze the overall macroeconomic picture and how it has affected select Energy Metals. We'll highlight the key themes which have driven many of the companies involved in exploration, development, and production to double digit returns YTD.
As the West Sputters Along…..
In mid 2013, it appeared as if the US and Euro Zone economies were picking up steam based on accelerating PMI readings and falling unemployment.
There's no denying it - uranium companies are off to a solid start in 2014. An equally weighted basket of uranium names I am tracking is up over 22% YTD easily outpacing the TSX and TSXV indices which are up 4.82% and 9.36% respectively. Consolidation continues apace with the most recent example being the proposed Denison Mines (DNN:NYSE, DML:TSX) take out of International Enexco (IEC:TSXV, IEXCF:OTCBB) for its share of the Mann Lake Deposit in the Athabasca Basin. Exploration success is also evident with Fission Uranium's (FCU:TSXV, FCUUF:OTCBB) continued impressive off scale results at its Patterson Lake South property.
For all the positives, the spot price of U3O8 still hasn't "turned". In fact, the price seems relatively directionless. I have written before that the reasons for the stalled uranium renaissance include the delay of the Japanese reactor re-starts as well as other lesser-known factors like the U.S. Department of Energy slowly releasing its stockpile of uranium into the US domestic market, keeping a lid on prices.
This lack of a turn has only been reinforced when you consider that the recent spot price of U3O8 has now fallen to $34.63 per pound well below the price necessary to incentivize further exploration or project expansion.
Though many disinflationary forces still predominate around the globe, more and more is being said about food inflation. We still believe in the primacy of food security as forces as disparate as the weather and urbanization coalesce to push the price of food upwards.
Some recent headlines reinforce this assertion: