House Mountain Partners

GDP

The Key To The Way Forward In The Mining Sector

Chris Berry1 Comment

By Chris Berry (@cberry1)

 

For a PDF version of this note, please click here.  

 

·       The mining sector remains challenged by multiple headwinds including a lack of investment, currency headwinds, slower productivity, excess capacity, and deficient global demand.

·       Debt overhangs and slowing emerging markets – specifically China – appear to be the culprits behind slack demand. These forces must be reckoned with.

·       Longer-term, however, innovation, sustainability, and urbanization are legitimate drivers of growth and help promulgate “good” deflation which enhances productivity and can drive returns.

·       This note examines these phenomena and which sector(s) of the mining industry may benefit.

 

Groundhog Day

After three-plus years of a dismal mining investment environment and the potential for it to continue for some time, a number of questions arise from the soul searching many of us have done to try and make sense of this. According to Bloomberg, the value of the TSXV has fallen from its peak by almost 72%. This market environment necessitates a different method of thinking and evaluation about publicly traded mining companies. The good news is that it appears that many metals prices have bottomed, though this doesn’t mean that the cycle has definitively turned. The bad news is that the global economy still appears to be struggling with excess capacity AND muted demand. China, the seemingly endless engine of metals demand is unquestionably altering its paradigm for economic growth from one of infrastructure build out and exports to one more focused on internal consumption. With China’s debt to GDP ratio of 282% according to McKinsey, this move to a new growth model is absolutely necessary to maintain a sustainable growth rate, but there is no overnight fix to achieve this type of change. The success of this transition won’t be known for years, though the effects are already being felt.

The Difference Between The Signal and The Noise in Commodities

Chris Berry1 Comment

By Chris Berry (@cberry1)

 

For a PDF of this note, please click here.

 

In 2012, Nate Silver, a well known statistician and writer, penned the book “The Signal and The Noise” which discusses using statistics and probabilities to determine real-world outcomes. With volatility in the financial markets on the rise led by a collapsing oil price and plunging emerging market currencies, determining and differentiating the signals from the noise has profound implications for navigating the metals and mining markets as we forge ahead into 2015.

With the price of a barrel of oil (WTI) currently at US $56.05 and widely believed to be headed lower and other commodities including iron ore, silver, copper, and corn under similar relentless pressure, these trends are clear signals and the “noise” they generate is the damage done to investor portfolios. 

The Only Question That Matters In Mining Investment Today

Chris BerryComment

By Chris Berry (@cberry1)

For a PDF version of this note, please click here. 

 

This note will be shorter than usual as my travel schedule seems to have gotten the best of me. I recently returned from Costa Rica and am off to Europe tomorrow with Zimtu Capital to join them in Frankfurt (Nov 6th), Munich (Nov 8th), Zurich (Nov 10th), and Geneva (Nov 12th) as a keynote speaker on their annual bus tour. If you’d like to attend any of the presentations (numerous TSXV and CSX companies will be presenting as well) please let me know and I can get your name on the invite list.

 

The recent swoon in the metals markets likely has all of us questioning our faith and resolve. Personally, I see no reason why gold and silver, in particular, can’t go much lower and stay there indefinitely. Ultimately, supply and demand always equilibrate, but it can be painful waiting for this to happen. The perception of increasing economic strength in the US with a recent 3.5% GDP growth print plus continued US Dollar strength are outweighing the continued reports of gold and silver consumption in the Emerging World. 

2014 Q2 Economic and Energy Metals Review & Second Half Outlook – Part I

Chris Berry

By Chris Berry
 

  • During the second quarter of 2014, many share prices of energy metals companies struggled for direction after the dust settled from the Tesla (TSLA: NYSE) Gigafactory announcement.                                                     

  • Our theme of viewing the supply and demand dynamics of each energy metal individually continues to be the best course of action as the trajectories of each metal may differ. For example, lithium carbonate prices remained healthy while uranium prices fell by 8% in Q2 and are down 21% YTD.                                   

  • The recent precious metals price spike did not transfer over into the industrial or base metals sector.

  • Though economic data continues to improve selectively, there are still too many economic headwinds in place. Therefore only those resource investments that demonstrate the ability to produce at lowest-cost quartile costs or those that have a disruptive competitive advantage should be considered at this time.          

  • Despite nascent inflationary pressures, we are still inclined to believe that deflation (or disinflation) is the predominant threat to growth. The recent US Q1 GDP print of a 2.9% decline has many concerned that this was due to more than “the weather”.                   

  • We think that the second half of 2014 will be just as challenging as the first half for reasons we outline below.

 

Different Quarter, Different Catalysts

When Elon Musk announced plans to build a Gigafactory in the Western US (and has since discussed building multiple facilities), this sent select energy metals share prices into the stratosphere. Many believed this was the “turn.” The dust has since settled.....