“A New Resource Bull” by Eric Coffin, HRA Advisories

It’s game on in the
resource space at long last. There are plenty of market players that are still
cautious but that is how it should be early in a bull market. Technically, we
need to be 20% off the bottom for a Bull to be official but it seems very
unlikely we won’t get there now.

As this issue was
finished the Crimea announced the voting result everyone expected. It hasn’t
generated a negative impact but it’s too early to sound the all clear on that.  It will be a few days before all the
political players have read their lines so things could still go wrong. I don’t
expect too many surprises which means I don’t expect higher gold prices because
of Ukraine but the chance of more serious repercussions is real enough. 

The elevated rate of
financings continues. Most of it is still going to producers or companies
drilling existing exploration successes. More important will be fund raising
for new ideas but we are not quite there yet. 

I did add a new company
this issue and I plan to add a few more between now and autumn.  Traders are starting to bid up the stronger
exploration stories and that is the time to be adding names to the list. It
looks like we finally have a bull market to work with after three years of
market pain. Better late than never and it did feel like never for a while
there.

Another PDAC has come
and gone. I spent several days in Toronto attending the PDAC and, of course,
the Toronto Subscriber Investment Summit the day before the PDAC began.   

I want to thank my
subscribers who made the effort to attend. Attendance was good again this year
and everyone seemed pleased with the companies that presented. I also want to
be sure I thank Nichola Vermiere and Katy Severs. As always with the SIS, they
did the heavy lifting required to make sure the event went smoothly and was a
big success. Keith, Lawrence and I show up and get the kudos but it’s Nichola
and Katy that get it done. 

The attendance was a bit
lighter at the PDAC this year with an official attendance figure just over
25,000 against 30,000+ figures in 2012 and 2013. I don’t read as much into PDAC
attendance as many others do. It’s important to remember that the largest
contingent there is a fairly static one. Very large mining houses and countries
send large contingents and there are always a few thousand attendees from the
supplier side as well.  

It looked like several
countries tried a charm offensive to increase mining related FDI. Peru seemed
to have a particularly large contingent. Guys with red Peru scarves were
everywhere. I take it as positive that several favored exploration destinations
decided they had to sell themselves hard. If that marketing is backed up with
better access to good geology it could be a win-win. 

Booths in the Investor
Exchange portion of the show looked as full as last year. Some might read this
as a sign the sector needs more pain but the list of attending companies did
change quite a bit. This is significant. For years the PDAC had a long waiting
list of companies wanting booths and those that had them rarely gave them up.
Booths at the PDAC are cheaper than those at any investor conference. If you
run a company based in the GTA attending is a bit of a no-brainer.   

The high booth turnover
is unusual and speaks to some long overdue attrition of weaker names. A lot of
the companies replacing them were plenty weak themselves though. Quite a few of
the companies I looked at have no hope of doing any real exploration until a
major financing is completed.   

A large number of the
exhibiting companies were really there trying to find a JV partner.  Many major companies send representatives to
PDAC to look for new projects. Some deals will come out of it but most
companies left in as poor shape as when they arrived. 

While there were quite a
few companies that were new exhibitors there were not many that I hadn’t seen
before. I’m still waiting for the turnover of stories and new projects that
mark the start of many cycles. I did make the decision to add a new name to the
HRA list based on discussions there but this was a company I’ve been tracking
for a while. The decision was based as much as anything on the fact that other
people have started to notice it. 

The good thing about
light news flow ahead of the conference is the reduced danger of a “PDAC Curse”
this year. Yes, the junior space has had a pretty nice bounce so far but that
is thanks to higher gold prices and seller exhaustion. There were only a
handful of news releases that seemed to have market impact prior to the big
confab.  Not enough one-off spikes to
generate a succeeding letdown.   

If the Venture pulls
back meaningfully in the next few weeks it will be due to falling gold prices
or major markets reacting to some black swan event like things going really
wrong in the Ukraine. The chart above still looks fairly strong to me. The past
few sessions have featured rising gold prices and weaker major markets. That
combination meant Venture Index traded better than most of its larger cousins. A
fall could still happen of course but I’m impressed with the way it’s holding
up so far. Similar conditions six months or two years ago would have surely led
to a pullback.

There was a lot of
evidence of money looking for a way back into the sector both at the PDAC and
at the Subscriber Summit. There were a number of private equity and European
fund representatives at both events. 
 

I’ve been cynical on the
subject of private money. It’s real enough and I’ve had approaches from a
couple of groups looking for ideas. Initially these groups were very much
vultures looking cheap carcasses to pick over. I haven’t seen a lot of deals
announced. There seems to be a shift to stronger deals starting now and talk
about taking control blocks in deals that remain public. I’m not sold yet on
private equity being a savior but it should be a bigger force at least. 

On the more traditional
brokerage side activity has continued with a number of companies announcing
financings in the $10 million plus range, most of them bought deals. That
indicates new institutional interest though it’s still focused on the top of
the food chain.  Trading has begun to
improve for companies with discoveries but no resources yet and others with
good targets and money to spend. This has helped the junior sector keep rising
as the small producers flattened out and awaited another leg up in metals
prices. 

The charts below show a
contradictory picture. While NY markets are hovering near all-time highs there
hasn’t been a lot of strength in either bond yields or the $US. Both are much
weaker than expected, especially the latter. Bond traders might be more
skeptical about weak economic readings being all weather related and the
situation in the Ukraine undoubtedly has some traders buying safety nets.  

Dollar weakness is more
a function of its trade against the Euro than anything else from what I can
see. While the US was generating negative surprises the EU was chalking up
positive ones. Growth is a bit stronger than expected and more traders are
deciding the EU crisis is “over”. The ECB has been taking a more hawkish tone
lately as well.  I think it’s too early
for that but it’s put a bid under the Euro. 

Most of the move off the
bottom by gold was physical market demand but current trading is dominated by
the situation in the Ukraine. As I noted in a recent SD I hate geopolitical
gold price moves. They are unpredictable and can reverse themselves several
times as events unfold. Nonetheless the market is what it is so they can’t be
ignored. 

I think the Ukraine
situation is likely to go Russia’s way. Possession is nine tenths of the law
and pretty much the entire Crimean peninsula is a Russian military base. That
has been the case for a couple of hundred years. The only reason it’s officially
part of Ukraine is that Khrushchev thought it made administrative sense to join
it up 60 years ago. 

Back then no one was
seriously contemplating the breakup of the Soviet Union.

I’m not commenting on
the equity or ethics of the situation, just the geopolitical realities. I don’t
see the US and its allies starting a war with Russia over the Crimean peninsula
and I am highly skeptical that the EU will enforce sanctions with any real
teeth against the country that supplies the bulk of its natural gas. Perhaps
I’m being too cynical but that is the way I see it. 

We’ll have to see how
Ukrainians react to Russia effectively annexing the Crimea even if it’s done
“democratically”. Obviously, they wouldn’t stand a chance against Russia in a
real shooting war. Even so, there could be enough partisans calling for western
help as they blow up bridges and rail yards to keep a bid under the gold price.
Not a great scenario but not one to hurt the gold market. 

No one who hasn’t lived
under a rock since Putin became the leader of Russia is surprised how the vote
in the Crimea went. We’ll see how the arm waving and sabre rattling unfolds
after that vote but I wouldn’t be short gold with all this going on. 

The picture is rather
different on the base metal side, particularly in copper, iron ore and coal.
What those markets have in common is the dominance of China as a buyer. China’s
growth has been slowing and traders are getting increasingly concerned about
the shadow banking sector. That’s weighing heavily on base metal markets.
Charts for iron ore, copper and the Reuters CRB commodity index appear on the
previous page. Interestingly, the CRB looks like it’s broken a 3 year
downtrend. That significant but the big gainers are energy (natgas) all “softs”
– coffee and sugar—all weather related price moves. 

I’ve noted before that
while LME warehouse inventories have dropped rapidly I’m not comfortable I know
where it’s all going. Some is being consumed but I’m concerned a good portion
of the drawdown is going to non LME bonded warehouses. The buyers might be
planning to consume or resell it but it’s not out of the market yet. 

In the past couple of
sessions iron ore and copper in particular have gotten slapped down hard. Some
of this selling followed on the first major corporate bond default in China on
March 6th. Traders are worried the “there’s never just one cockroach” theory
will apply to corporate China. I agree. There will definitely be more
bankruptcies. There should be if the system is functioning properly.

The question is how
traders react to events. There wasn’t much panic as the default was well
telegraphed. Very weak stats on China’s February trade balance looked scarier.
It’s hard to tell because the Lunar New Year skews things so much. Also
important is that there was fake overbilling by exporters last year and perhaps
fake under-billing this year.   

This isn’t done to fake
the trade figures. Companies were overbilling so that inflated invoices could
be “paid”, allowing money to flow into China and avoid currency controls. On
top of the trade numbers there were indications that the Bank of China is
starting to succeed in squeezing credit demand. I suspect some copper and iron
ore are being used as loan collateral in leveraged trades. When the loan gets called
the metal must be sold. We have to wait to see how this plays out but until the
market calms assume there is more downside in copper and iron ore and hold off
accumulating in those subsectors. You may get better deals later. 

On the gold side I think
we’ve got the “all clear”. Pick weak days but if you have been waiting to
accumulate producers and those with viable resources and good exploration
targets I wouldn’t wait longer. As long as Ukraine doesn’t blow up I see the
rally continuing through spring.