Disruptive Discoveries Journal

mining

Emerging Markets at Stall Speed and the Silver Lining in Metals

Chris BerryComment

By Chris Berry (@cberry1)

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As China’s equity markets continue to sink, calling into question the ability of Chinese officials to prop up the market (and maybe the economy), it appears that collateral damage has already begun.

Both Kazakhstan and Viet Nam have devalued their currencies by 4.4% and 1% respectively in a bid to remain competitive with their Asian neighbors. The MSCI Emerging Markets Index has entered a bear market and a gauge tracking 20 currencies is in its longest slump since 2000, according to Bloomberg. Emerging markets as a whole are dealing with a major slowdown in global trade and collapsing commodity prices and must confront the cheaper Chinese Renminbi as a threat to their balance of payments in the absence of structural reform. The performance various currencies from last week is shown below: 

The Collapse in Commodities: Miners at a Financial Crossroads

Chris BerryComment

By Chris Berry (@cberry1)

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

 

The implosions of the Greek economy and China’s stock market have brought the mining sector to the crossroads that it desperately needs to face. We’ve discussed the need for this reckoning often over the past three years and believe we may be at the beginning of a correction in the equity markets that will further depress metals prices as the twin headwinds of excess supply and slack demand begin to dominate. The need for global debt deleveraging also looms on the horizon much to the chagrin of politicians everywhere – not only in Greece.

The precipitous decline in China’s equity markets with $3.2 trillion in value evaporating in three weeks has quite simply demolished the metals with gold, copper, iron ore, and oil serving as the unwitting poster children for what happens when things don’t go “as planned” in a centrally planned economy.  

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 Fallacy in Mining Valuation

Chris Berry2 Comments

By Chris Berry (@cberry1)

 

For a PDF of this note, please click here

 

A great deal of attention has been placed recently on the resurgence in rare earth prices and the concomitant increase in share prices. Given the general bloodbath in the mining sector since 2011, this is extraordinarily welcome news. Nevertheless, it leaves one question unanswered: Is this enough? Specifically, is a double digit increase in underlying commodity prices enough to make specific projects “economic” and justify the start of a new cycle? 

I think the answer in most cases is no, but this then raises a second question. The tailwind of select higher commodity prices (should they last) will undoubtedly help project economics, so how do you accurately value a company with no revenues, no cash flows, no operating history, and management with limited (or no) operational experience?

Company Updates - Arianne Phosphate and Terraco Gold

Chris Berry

By Chris Berry

 

Arianne Phosphate (DAN:TSXV, DRRSF:OTCBB)

Good news out of Arianne Phosphate (DAN, TSXV, DRRSF:OTCBB) this week with the announcement of a mineral resource estimate on the Nicole Zone of the Lac à Paul phosphate project.

As a refresher, the Lac à Paul project hosts several distinct zones and the addition of the inferred resource on the Nicole Zone should be beneficial to the company as it can positively affect the already promising project economics.