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State of the Commodities and Resource Stock Markets….
One of the questions I get asked all the time is when will the market turn around?
With the recent pummeling that gold and other commodities have been getting, I’m getting asked this question even more and wanted to answer that in my presentation today.
So let’s get started.
People look at the price of mining stocks and just can’t believe they are so cheap. I agree they are ridiculously oversold. When I answer the question of when will the market turn around, I always get into why I’m extremely bullish on the price of many commodities and resource stocks.
There are key similarities of the market today compared to where it was back in 2001 when the greatest commodities bull market started. The TSX Venture market is trading at a level that it was back in 2000. Whether looking at small exploration companies or major mining companies, they are all in a bear market. Just like back in 2000!
But I don’t think that is something to be fearful of, it is something to get extremely bullish about.
Back in 2000 you could buy big and small resource companies for extremely cheap prices, and when the market took off in 2001 investors that did made a lot of money.
If you ask the average investor if they are a contrarian a lot of them would say absolutely. But the reality is much different, the market today is a contrarian’s dream, yet there are few investors getting greedy while there is blood all over the street.
Just buying things because they have gone down dramatically doesn’t make a good contrarian. What you really need is the ability to see the reasons to get greedy while most are fearful. The answer to why you should be greedy right now and not fearful, is found in the reasons that the great commodity bull market started in 2001.
I actually think we are on the cusp of the start of the next big bullish move in commodity prices. I don’t think that bull market has stopped it has just been taking a rest for the last 9 months or so, and while it’s been resting the resource stocks have gone into a bearish trend. Ultimately the bull market for commodity prices will get the resource stocks out of the doldrums.
Let’s take a look back at the year 2000; we had gone through a couple decades of under investment that severely weakened the supply chain of many commodities. The emerging economies lead by China and India were growing rapidly and as they were growing they were consuming more and more commodities.
If you looked at commodity prices back then, gold was trading at under $300, silver was around $5 an ounce, copper was around $0.60 per pound, and oil was around $20 per barrel. Back then quality resource stocks were very cheap, actually priced much like they are today. The TSX Venture market was trading at a level around where it is today.
Over 80% of the juniors back then were trading at under a dime, just like they are today. The major mining companies were not much better off; they were also trading at extremely low valuations.
But then the demand for commodities coming from the emerging economies started to overwhelm the supply chains and commodity prices took off, and the resource stocks went along for the ride.
After 2001 the commodities market went on a bullish run that, in my opinion, still continues to this day. Gold moved from under $300 per ounce to $1900, Silver moved from around $5 per ounce to as high as $50. Copper was around $0.60 and hit a high well over $4 per pound. Oil went from around $20 per barrel to nearly reach $150.
Since hitting the highs on a lot of commodities they have given back some of those gains over the last 9-12 months. Many talking heads on business TV are questioning if the long term commodity bull market is finished. While these questions are arising the resource stocks are just getting pummeled.
I do not usually put a lot of weight into the opinions of a lot of these so called experts. One, because they were not there getting bullish when the market took off. Secondly, I don’t really think they understand why the market took off and has been on a bullish run that has lasted for over a decade.
What got the bull market started was soft supply that was caused by nearly two decades of under investing in exploration and new development projects. And we are still seeing the ramifications of this issue today.
There aren’t nearly enough new discoveries and projects moving towards future production to replace what is being produced each year. Evidence of this problem is apparent in the commodities business, companies have to go deeper, for lower grades, are seeing their head grades in decline, and their reserves also in decline.
From around 2003 until 2008, there was a significant increase in exploration, but finding new mines is not an easy process. Just because there is more money spent over a few year period doesn’t mean that you can make up for what hadn’t been done in the previous two decades. It’s not that there weren’t new discoveries, and new development projects advanced, but what keeps the supply chain weakened is that they are not nearly enough to feed current or the rapidly growing future demand.
This really should enhance the valuation of resource stocks with high quality exploration and development companies. Simply because what they have is in short supply, not only for today but many years into the future. Yet the market is doing the exact opposite, it’s almost as if they are being punished for having valuable assets.
But the supply chain is only part of the reason that I am extremely bullish on commodity prices and resource stocks. Again looking back at 2000 the emerging economies lead by China and India had started to get to the size that they were able to overwhelm the supply of commodities with their demand. These countries are going from having little of the modern amenities that the developed countries enjoy, to having the same stuff.
As these emerging economies grow the rich are getting richer and more people are moving into the middle class. As this happens they are buying more cars, houses, fridges, stoves, washers & dryers, electronics and many other products.
To build and provide those products requires increasing amounts of commodities. With the populations of emerging economies in the billions, demand is going to keep growing, and the world will continue to need a lot more commodities than the resource companies will be able to provide due to the neglect of the supply chains of many commodities.
The combination of weak supply chains and strong demand is what started the bull market in 2001. The key reason that I disagree with the talking heads that say the bull market for commodities is over, is because the supply chain is still weakening and the demand from developed and emerging economies for commodities continues to grow.
Even after the 2008 economic calamity that slowed the global economy was over, commodity demand continues to grow. At the same time that the demand continues to grow, supply is weak and we are gearing up for the next rally in the long term bull market for commodities.
The bullish long term imbalance of supply and demand was clear back in 2000, even though most investors were ignoring it, just as it is today. They were fearful when they should have been greedy, does this sound familiar?
I’m seeing all the signs now, as I did back in 2000, that the prices of several commodities are primed to go a lot higher.
Commodities have been in a long term bull market that has sort of been in a pause mode for the past 9-12 months but the resource stocks are definitely in a bear market.
When I talk about resource stocks I don’t mean the vast majority, I am talking about a select group that have high quality projects. The criteria that I look at to put a company on my radar screen includes, mining friendly jurisdiction, well known geological regions, and most importantly good results with their drilling. Obviously top people are important in this equation, but in my experience the top people are looking in the same areas and have the skills to find something with their drilling.
I watch my radar screen on a daily basis and I have approximately 100 companies in it, what I look for is how their stocks are performing and news on developments. A couple key things I’ve noticed while the resource stock market is in a bearish trend is that most of the companies on my list are still very active with their exploration and development work, and that their stocks are tremendously undervalued.
Earlier this year I did an interview with well-known newsletter writer John Kaiser, one of the key things we talked about is how there are so many zombie type juniors that have little money and iffy projects. In my opinion the market would be much better off if these companies ceased to exist. All they do is clutter up the market, and make it harder for investors to find quality.
In my experience over the years I have seen periods where the valuation of quality in the sector got dramatically out of touch with reality. We are at one of those times, right now.
When I look at a resource companies results from a discovery, one of the things I am trying to determine is a ball park idea of how big it can be. As a project advances from discovery towards economic evaluation of the project I am trying to determine the likelihood of it turning into a producing property. The reason that I am trying to get an understanding of the size of a project, and its chances of going into production is because those are the hallmarks of what will turn a project into a takeover target, or help an exploration company become a producer.
Once I get an idea of how big a deposit is then I can start doing the math on what that potential value of the project is worth. Then I take several factors and try to assess what the market value of a company that owns that property should be worth. Looking at these factors and applying then them to the various companies on my radar screen, it has been over a decade since I have seen resource stocks with quality projects trading at such low levels relative to what they have in the ground.
I am going to give you a hypothetical example of what I am talking about. Let’s say you have a company that makes a gold discovery with the realistic potential of having a $1 billion deposit of gold. And it has all the right factors to become a future mine. Historically, a company with a project like this would realistically be worth $100 million in a takeover. So if this company has 10 million shares they should be trading at $10 per share. These days a company like this would have a market value closer to $20 million or 1/5th of its realistic value.
This situation is widespread across the resource stock market. You have to go back many years to find when quality companies have been valued this poorly. This is why I’m extremely bullish on high quality resource stocks.
It’s all about buying gold, silver, copper, oil and other commodities in the ground at the best price you can get, and it has been a long time since you could buy them for as cheap as now.
Next I will go into where I see things going in the future. I follow a key group of commodities which include, gold, silver, copper, oil, uranium, diamonds.
These various commodities all have similar supply and demand fundamentals they have gone through decades of under investment that has weakened their supply chains and looking forwards for at least the next decade their supply chains will continue to be weak.
On the other hand they have solid demand from the developed and emerging economies that are putting a lot of pressure on the supply chains. I can see all of these commodities trading at much higher values in the coming years.
Gold I could see trading at above $3000 per ounce in the next few years, silver at higher than $50 per ounce, copper at near $5 per pound, uranium at over $100 per pound, diamonds much higher in many categories, and oil well over $100 per barrel. I know that many commentators in the sector would question these prices, but I am confident based on what I see for supply and demand of these commodities, that we will see these prices in the next few years.
When it comes to resource stocks I think they are grossly oversold and are at a contrarians dream prices right now. It’s always challenging to pick the bottom when the market is in such a bearish trend, but I would argue strongly that the prices on quality resource stocks are at or near their bottoms and it is a great time for investors to be greedy not fearful.
It takes a lot for an investor to buy when there is blood all over the street, especially if some of that blood is your own.
When this market turns and I think we are on the cusp of that right now, it will turn very quickly because most of the sellers that have wanted to sell have done so, and when demand comes in, it will drive stocks up quickly because the sellers are exhausted.
Stocks are no different that commodities, they trade based on supply and demand, those that own them are the supply, and those that are buying represent demand. Currently there is little demand, but I would argue the supply is also weak, and when the demand kicks in, they won’t find a lot of eager sellers at these low prices, and that will drive resource stocks a lot higher.
We are at the point of maximum fear; I can hear it in the voices of people that ask me when will the market turn around?
I can’t give you a date of when I think the turn in the market will happen, but I am comfortable saying that when sentiment reaches its most bearish, which I think is exactly where we are today, the turnaround is near and has likely already arrived.
The trick to buying low and selling high is you first have to buy low and resource stocks with quality projects are at about as low as they can get.
By this time next year I will expect to be able to say that we went through the worst, the turn happened and quality resource stocks were grossly oversold and have made a remarkable comeback.
It is most important to get the big trends right, and we are still in the long term commodities bull market, we are having a short term correction, there are huge bargains out there in high quality resource stocks, and it is a buyers’ market and a contrarian’s dream.
At the end of the talk, I discussed the companies below as examples of the kinds of companies I think are dramatically oversold. They all have strong projects and very attractive growth prospects. Do your homework on them, and I think it will become clear why I like these companies, and have a bullish outlook on them.
Osisko (OSK)
Fission (FIS)
Premier Gold (PG)
Exeter (XRC) (Sponsor)
International Tower Hill Mines (ITH)
Stornoway (SWY) (Sponsor)
Evrim (EVM)
Rubicon (RMX)
Arctic Star Exploration (ADD) (Sponsor)
Bear Creek Mining (BCM)
Virginia Mines (VGQ)
Colossus Minerals (CSI)
Fortuna Silver Mines (FVI)
Allan Barry Laboucan
2013-04-24 16:01:17
Source: http://thestockvine.com/state-of-the-commodities-and-resource-stock-markets/
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