We're not out of the woods quite yet

IT’S one thing to get to the bottom of the cycle, another to begin the climb back. The Outcrop by Robin Bromby.
We're not out of the woods quite yet We're not out of the woods quite yet We're not out of the woods quite yet We're not out of the woods quite yet We're not out of the woods quite yet


Staff Reporter

Gold is apparently suffering “Ukraine fatigue” and silver also seems to have caught the bug, with the metals down overnight to $US1259 per ounce and $19.03/oz respectively.

Mineral sands prices are becalmed with ample stockpiles around the world.

Base metals are so-so, iron ore is a bit of a worry and the uranium spot price now at $28.25 per pound is enough to make a grown man cry.

Yet on the other hand we are seeing some speculative fervour coming back into the junior sector.

Announcements of gold hits, graphite results and even improvement in fertiliser minerals have been prising open wallets.

This week, too, the European Commission reminded us that this industry has some important commodities to provide.

The EC updated its critical metals list and, of relevance to Australia, it now includes coking coal, phosphate rock, antimony, cobalt, graphite, niobium, platinum group metals and rare earths.

Yet how many of those stories have gone well and truly off the boil?

Rare earths is a prime example – anyone who got into any of those stocks to speculate is well and truly a long-term investor now if they haven’t managed to exit.

Yet we all thought 2013 was the bottom of the 10-year cycle in mining. Could we have been wrong?

As Canaccord Genuity chairman Warwick Grigor has shown (he charts well over 120 juniors on a daily basis), by 2013 the average fall in small mining stocks from previous highs was about 90%.

The final impetus was the crunching of the gold price.

“That was the point of complete abandonment,” he says in the latest client note.

“Since then we have seen more two-way traffic as money has flowed into and out of sub-sectors.”

It looked quite rosy for a while.

Gold stocks recovered, iron ore producers benefited from a commodity price that managed to hang up there longer than anyone predicted. But, continued Grigor, gravity was now taking hold.

It sure is a mixed bag.

Coal is in a sad place, copper is fighting back, graphite is finally being understood by enough investors.

Nickel has certainly produced some profits for speculators but that is not ruled by fundamentals: anyone remember what nickel prices looked like before the Indonesian export ban?

Grigor believes we are now seeing a double bottom.

The good news: a double bottom provides a firm base for recovery.

The bad news: we’ll probably have to wait until later in the year to see a head of steam start to build, largely because we are now moving towards summer in Europe and North America – hence the “sell in May and go away” adage.

August, particularly (and especially in Paris) is not a good time to interest someone in an investment prospect.

But fortune may favour the brave.

Grigor notes there are many junior companies with serious projects of merit, across many commodities, which are being ignored by the stock market.

There have been successful outcomes from the exploration phase, providing good trading profits for those investors who bought and sold but he says the decline in mining equities has now left these projects and companies stranded with no obvious path forward.

The problem for those companies is the “blue-sky” appeal no longer applies.

The next stage involves engineers working with an already established resource and needing to spend big money.

It is a phase that needs nerves of steel, a steady hand and high conviction.

“If there is a fatal flaw in the interpretation of the orebody, in the process circuit, in the engineering or the marketing, it comes home to roost,” Grigor continues.

He is not optimistic, believing that lack of market support and feeble confidence will likely result in many of these orebodies remaining in the ground indefinitely.

“Companies will try and promote their credibility on the basis of these projects but most will perform like unloved orphans for a long time,” he adds.

The positive thing is, with the passing of a few years, a new wave of investors and analysts will come along and some of these projects will be rediscovered, a process with which anyone who has been watching this scene since the 1987 crash will be all too familiar.

I can think of one Northern Territory gold mine, formerly worked by the old MIM, which has been put back on the development agenda by a succession of companies since the late 1990s.

I have to say that Grigor’s analysis sounds right.

It certainty jells with my own sense of the market conditions.

While, as noted above, there are encouraging signs of life with increasing numbers of good prices jumping on news, one doesn’t sense that we’re yet in take-off mode.

But also, there doesn’t appear to be any feeling we are going to drop further.

So, it’s fingers crossed for 2015.