Smallcappower: SmallCapPower’s Ask the Experts. SmallCapPower is as proud to be a Gold Plus sponsor at the recent PDAC Convention held in Toronto. We thought this would be the perfect opportunity to ask our roster of experts, “What’s currently holding back the resource sector?”
Vikas Ranjan: Global demand in particular, China especially. Resources had a good run because of China booming, China is going down, and that has put a dampener on resources demand, but we believe that as global demand picks up in 2015 and mostly in 2016, this will do better.
Adrian Day: Obviously when you talk about the slowdown in China, you have to put that in some kind of context, you know. Seven percent growth isn’t bad, but it’s down from 10 and 11. The slowdown in China is one thing, and I think with gold, the biggest thing has been holding it back . . . or two biggest things are the dollar’s strength, but also these ongoing concerns that the Federal Reserve is going to start raising interest rates at some point.
Jay Taylor: I think the global economy has really never recovered from the 2008, 2009 debacle that occurred after Lehman Brothers’ failure and the financial crisis. I think there’s been an aggressive response with monetary policy to try and rejuvenate the global economy, but quite frankly it isn’t working. If you look in the United States for example, the velocity of money is continuing to shrink, just as it did in the 1930s. We’re trying the same policy. We’re pushing on a string. They’re pushing huge amounts of money into the economy and indebting the economy even more. So if you look around the world, the global economy is really not doing well. China is shrinking. Maybe it’s not shrinking, but it’s not growing very rapidly anymore as it had been. Europe is a basket case right now, and even the United States which is supposed to be a beacon of hope is not performing very well. The unemployment, or let’s say the number of employed workers in the United States continues to shrink.
There’s so much evidence to suggest that we’ve never maybe even come out of the recession in 2008, 2009. If you use economic statistics from John Williams, an economist, who looks at inflation in a way that I think is much more realistic than what the government talks about. What does is cost to keep a family of 4 alive? Much more than 1 or 2%. Williams’ numbers are 8 or 9%. So if you take 8 or 9%, factor that into GDP, we’ve never had a positive GDP since 2008-2009.I think that’s more realistic, and I think that’s the reason that metals are having a difficulty. It’s because just the demands for the metals is not what it used to be, and a robust economy would be much stronger.
Brent Cook: Well probably in the big sense, it’s the lack of real profits out of the major mining companies, and all of the write downs and such. It’s been a rough past two years, and that’s what’s really keeping at least institutional investors for the most part out of it. For the junior retail investors, there’s really been a lack of discoveries, and there’s been very few that have actually been legitimate that have lasted through and proved to be actual discoveries, so that’s the other one. And it’s just been a tough market; I mean we’re down to 80 something percent in GDXJ over the past two years. That’s hard.
John Kaiser: Well the resource sector, the juniors are governed by four core narratives. One is the commodity cycle, which is where are the prices of the main materials, copper, iron, so on trending. The other is the gold bug narrative which is basically precious metals, gold and silver. Where are they trending? Are they trending higher? The third is security supply which is exotic materials such as tungsten and so on which have all kinds of complex factors determining whether their prices are going to rise. And the fourth important one is discovery exploration. Now on the commodity cycle of things, we are in a bit of a slump because global GDP growth is sluggish, expected to be sluggish for a year or two. There is big response by the mining companies to cut back on their development plans. That puts in place another supply demand imbalance in 2017-2018, which means that’s when that commodity cycle turns positive again. But meanwhile, there is not much appetite and interest for advanced base metal type projects, so the juniors are kind of stuck treading water, being treated as optionalities. In the case of gold, well there is no fiat currency debasement happening in the U.S. dollar. It’s rising. There is no hyperinflation. We’re in a deflation area environment. So the key talking points are basically on hold right now, and at $1,200 gold, most gold projects own by juniors do not work very well. But then again, their valuations are low, and they represent excellent optionalities on higher metal prices. And in the security supply stuff, we’re still suffering the legacy of the rare earth bubble. People are reluctant to get interested in this again. And the problem with discovery exploration, in this type of bear market is when junior should be drilling fantastic targets in that and coming up with that winning hole that suddenly switches the glass half full again and brings retail audiences back and set. It creates mystery and excitement, but the system is so capital starved right now. Those who have money are reluctant to spend it because they’re not sure that they can replace it except in the event of a barn-burner hole and barn-burner holes do not usually happen within the first couple holes drilled.
