This presentation was delivered by Eric Coffin, co-editor of the Hard Rock Analyst, at the New York Hard Assets Investment Conference, held 12-13 May 2008 at the New York Marriott Marquis on Times Square. |
NEW YORK (Resource Investor Conferences) -- Morning, ladies and gentlemen. My name's Eric Coffin. My brother David and I publish a series of services newsletters, The Hard Rock Analyst publications. We're going to run through a couple of presentations here relatively quickly. I'm going to do mine, which is basically our rationale, our reasoning. It's not entirely dissimilar to some of the things you've heard from Lawrence [Roulston] about 10 minutes ago.
I mean, Lawrence and I are friends, and we agree on a number of things, including why the market's going to do what it's likely to do over the next little while, why it's done what it's done this decade. I'll go into that a bit. My brother will then follow with some talk about your grandfathers mining portfolio, and hell explain what that means and why we mean that. Its one of the other ways that this cycle is different from the last few, and how you can take advantage of the fact that its different from the last few.
This is where we start. This is basically the centerpiece, if you will, of whats gone on for the last 7 or 8 years, and what's likely to go on for the next 15 or 20. This is basically a short list that tells you where the growth is and where the growth isn't in the world economy. And we're talking about annual growth rates.
If you look at the West, and by West were really referring to the more developed countries, if you will. This years growth estimates and those are going to be revised a lot. I'm kind of hoping some of them will be revised in the right direction on the left-hand side, but the jurys definitely still out on that. But the U.S., you're looking at 1%, maybe, this year. Euro areas a little bit better, 1.7% to 2% is the last estimate I've got, but I suspect that's actually going to come down a little bit. Japan, I think, is going to come up a little bit. I think Canada will come up a little bit. But the bottom line here is all of those numbers are below 2% growth for this year.
This is obviously subtrend growth. If you look on the right-hand column, the picture�s decidedly different. China�s growth rate estimate this year is 9.8%. I think that one�s probably going to be revised up based on recent stuff I�ve seen. India�s just under 8%, southeast Asia�s 5% to 7%, Russia�s 7% - a lot of that�s oil, of course, but still, growth is growth. Brazil is 4.3%; that�s actually a very good number for Brazil. Brazil�s doing better now than they�ve actually done for a long time. And the Andes countries in South America are also doing significantly better in the last couple of years than they�ve done for a long time.
And the next slide here is - this is a graph that I pulled off of a Macquarie report, actually. It�s a very interesting graph because something I�ve heard again and again and again, especially coming out of commentators based in this city, is the whole decoupling thing is nonsense, it doesn�t work, there is no decoupling. Everybody else goes down the tubes with the States if we have a bad year. You know, we get the sniffles, everyone else gets pneumonia.
There�s two things you�ve got to keep in mind about that. Usually the people writing those commentaries, generally they�re people that focus on markets. And there isn�t much doubt that the epicenter of the world�s equity markets is in this city. And it does impact all other markets. But you�ve got to take a long-term perspective, and if you want to make money in markets, you�ve got to be looking at what�s going to happen going forward. And going forward, the important part of the story for us is if you take a look at these two graphs, basically what you�re looking at, the red line [hyphenated], the red graph, is U.S. growth. The green [dotted] is the rest of the world.
If you go back through the last 25 or 30 years, you�ll see that they pretty much hung together. There was a very strong correlation between the two of them. And in particular, there was a correlation, a positive correlation, in the sense that U.S. growth numbers tended to push world growth numbers. In other words, the old line - �When the U.S. gets the sniffles, the rest of us pneumonia� - was in fact true.
If you take a look at the graph for the last couple of years, it�s actually quite a bit different. The growth rate came out of 2000, got much higher in the rest of the world than in the U.S., and more to the point, if you look at the right side of that graph, although there was a bit of pull-down last year, by and large the rest of the world�s economy has not, in fact, slowed down as the U.S. did. And the projections right now are that it probably won�t. It will slow down some, but the slowdown�s going to be fairly minor in relation to what�s happening in the U.S. In other words, the rest of the world right now is the growth engine, not the U.S.
Something that we want to talk about when it comes to metals in general: the story�s slightly different from one metal to the next, but the overall story is much the same. This is something David and I have harped on for years and years, largely because we come out of the mining business. We came out of the mining side of it, not the market side of it, when we started doing these newsletters.
And one thing we understood was that the mining business went through 25 years that were very ugly. They were very, very nasty. It wasn�t a lot of fun. You saw short bull markets where companies would manage to make enough money to knock off some of the debt they�d accumulated in the 3 or 4 years before when prices were crappy. Guys were getting overloaded and building stuff that had low marginal return close to the top of these short cycles, just to get their head handed to them a year and a half later when things dipped again. And 25 years of that has an impact. And basically, what happened was the entire sector got gutted.
I mean, no one was going to university to take geology. No one was graduating as mining engineers. A lot of the assay labs went under. A lot of the companies that build equipment for mines went under. These are all specialized companies; they aren�t the kind of thing that gets off the ground in 6 months.
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So what we�ve been saying for a long time is, it�s the supply, stupid. It�s not just about demand. Don�t get me wrong. The Asian demand story is real, and it�s a very important part of the picture. But part of the reason why we�ve been bullish and felt that we�d see historically high metal prices for a very long time is that the supply side of the equation has been stressed very, very heavily by 20 years of bad markets for most of these metals.
And even now, when times are really good, companies are pushing really hard and having a very difficult time getting stuff done, getting equipment delivered, getting exploration finished, getting lab results. I mean, you can pick anything in the sector. That has an enormous impact on it because it�s stretched out delivery times for all of these mines enormously.
And that�s really part of the reason why you�re seeing prices hold up better than a lot of outside-of-the-sector analysts expected them to because there�s an expectation outside of the sector that someone�s going to wave a magic wand and 20 large-scale mines are going to appear on the horizon next month.
Well, I�m here to tell you, it ain�t gonna happen. This is a very - I love this chart. This is a very interesting chart. There�s a copy of a previous talk I did on our website that has this. And I�ll take this talk when I get back to the office and turn it into a PDF and put it up on the website in the free article area, if you guys want to pull the slides up that way and save yourselves some writing.
This is a very interesting graph that was put together by Xstrata a couple of years ago. And this is basically what it tells you. If you look at the curve over on the left, they start each year - they took the projections of mines to come on stream, basically anticipated supply. And what they did is they pulled a bunch of mining analysts. They pulled together industry reports on �This is what we think is going to come on stream in the copper market,� and then next year and the year after and the year after.
The left-hand curve is 2001. Every year as you go over, you see the revised expectations each year for what they thought would come on stream. The important thing to note is if you look at the 2001 graph, you take it right up to about 2007, they�re showing 7 million tonnes of copper is what they thought would come on stream by 2007. What actually came on stream by 2007 was about 20% of that, about 1,400 tonnes. And that�s basically the picture going forward. The simple truth is this stuff just isn�t coming as fast as people thought it would. But demand is still rising very quickly.
This is probably the most important base metal chart, in my opinion, that you can see. Because it�s the big picture. It�s not going to tell you what a stock price is going to do next month, but this is the big picture in terms of this decade, next decade, and perhaps the one after that.
This is what�s called an intensity-of-use chart, and again, this one�s for copper. But they�re similar basically for all base metals. They�re pretty much the same. What this chart tells you is it�s a timeline. Each one of those colored lines is a country going through a timeline, its per-capita use of a given metal. In that case, copper.
Basically, the story is fairly simple, and that�s as people move up the line in terms of per-capita GEP, people get wealthier. They move into - the average person in country X moves to lower middle class or middle class status. People want stuff. They buy stuff. They buy cars, they buy houses with wiring and plumbing, they buy air conditioners, they buy refrigerators. All of that stuff takes metals. And basically, countries that were big manufactures at the same time - maybe one of the steepest curves there is the orange one for Korea, and that�s because Korea, as well as going through a real upward shift in their wealth, also went through an upward shift in their industrialization.
China and India are at the early stages of that. The red squares that you see just in the lower left-hand corner, that�s where China is right now. The expectation is 2015 and purchasing power parity, they expect China to get to about $15,000 per capita, purchasing parity income.
In order to get from A to B, based on this graph, and it�s not - the projection most of us are using is not particularly steep in terms of what that curve is going to do. That�s going to take about another 7 or 8 million tonnes of copper in the next 10 years to pull that off. I don�t know where that�s coming from, quite frankly. It�s going to be very, very difficult to do that. And the story�s the same for most metals.
I mean, the short and sweet here is that we expect above-trend prices, far-above-trend prices, for a very long time to come. So there�s definitely room here for companies to make money. There�s room for investors to make money on those companies. This isn�t a story we think is going away any time soon.
People are concerned about how much speculation there is in the metal market. And there is some, there�s not a lot of doubt about it. I mean, as people have been buying in the futures market. They�ve been using base metals, for instance, as an inflation hedge, and when you see the dollar pop up, you can see some of those trades get closed out.
If you go back the last week, in fact, you�ll see a couple of days where copper got whacked because the dollar had a good bounce. I think the dollar�s got potential to go a little bit lower, but we�re not expecting a huge drop from here. And where it�s at, it�s had a pretty big run down so far.
It�s going to be difficult for the Fed to cut rates any more than they�ve cut them already, quite frankly. I mean, they�re down to 2% now. Everybody can see the inflation coming. It�s not a big secret that the government numbers on inflation are a bit of a joke, quite frankly.
The actual inflation rate�s probably more like 5% or 6%, and it�s not likely to stay there for long. So I mean, what you�ve got right now is a negative interest rate scenario. The best analogy to that, I suppose, or the nearest analogy to that is the �70s. Negative interest rate scenarios - and that�s usually a rising inflation scenario.
That�s when you get a long period of negative rates. They tend to be very supportive of commodity prices in general. If you go back to the �70s, that was the last really good period for commodities where it went on for a long time. This period�s very similar. Plus, you�ve got a big demand surge out of two or three areas in the world.
So you�ve got the right backdrop for it. There will be periods where you�ll see funds unloading and you�ll see some short, sharp knocks. But basically, we think the price is going to rebuild itself in most of these cases because, as I laid out in the previous slides, the scenario�s there for long-term high prices.
You should be sensible about it. You want to be buying the dips. You don�t want to be buying the runs. You should be trading stuff. We tell our subscribers constantly to take profits. I think every page on our website on the subscriber�s side has actually got that on the bottom of the Web page. Because that�s the way you have to trade these things. You try to get them when the market doesn�t really want them, and when you get a run on things or somebody gets some good results, you take some money off the table.
Gold and silver, it�s a slightly different story, but I mean, the story�s not that dissimilar. I mean, obviously, there�s been a lot of moves on gold and silver and other precious metals because of the dollar falling. That, like I said, we�re not expecting a lot of drop from here, but although there isn�t a lot of room for interest rate moves to the down side in the U.S., there is some potential for Europe to raise rates. The ECB seems a lot more serious - they�re a lot more worried about inflation; they�re much more inflation hawks than the Fed is. So you may actually see the interest rate spread widen again, and that�ll hurt the dollar.
And the other thing that�s helped precious metals a lot in the last year or two is there�s been a real rise in ETFs because it�s simply a much easier, simpler, cheaper way to play metals. Most people just don�t want to bother buying physical stuff. They don�t want to start opening futures accounts. It�s a pretty painless way to do it.
And that�s been pulling a lot of metal, a lot of physical metal, off of the market. So basically, the base is a lot better than it was a few years ago, thanks to the ETFs. And keep in mind, if something nasty happens, the gold market and the silver market are very small markets. It really doesn�t take a lot of mainstream guys deciding it�s not a bad idea to own a bit of this stuff to really move the prices because these markets are really very small in relation to the rest of the market.
So basically, before Dave goes up to talk about a couple of his things, just the basic points here: This isn�t just a marketplace; this is a fundamental shift in economic power. It�s a fundamental shift in economic circumstances. It�s not a short-term trading thing. The short-term trade�s in it, but this is a 20- or 30-year cycle.
If you go back and look at all these other countries that went through those growth patterns and went through those demand growth patterns, that�s basically, historically, been a 20-year cycle. The average secular commodity bull market is about 24 years, and we�re about 8 years into this one.
The BRIC countries aren�t in a situation like we saw in the �70s or the �80s. Everybody thinks back to the banking crisis. They look back at the Latin American bond crisis, long-term capital, and they go, well, you look at how fragile those markets are. But again, it�s different this time. It has changed because most of those countries are actually in a very strong fiscal position. Most of these developing countries are in far better shape fiscally right now than the U.S. is, quite frankly. They�re the ones lending the U.S. money, not the ones borrowing it.
And resource producers - to echo something that I heard Lawrence say a few minutes ago - some of these guys have done well. We�ve had a bunch of names on our list that have done pretty well, even recently, discovery stores have done well. But there are a lot of producers, smaller producers and development companies, that aren�t getting price to anything like today�s prices.
I mean, the basis of this argument is we expect these prices to stay historically high for quite a long time, and I think the market will come around to this when people get a little less paranoid about the markets in general, when they go looking for sectors where - where�s the real money? Where are the sectors that have actually made a lot of money, not guys that have talked about maybe being able to make a lot of money, but guys that have actually done it? Where there�s profits, where I can have some comfort? The mining companies are that sector.
There�s a lot of companies in the mining sector, especially on the base metal side, that are incredibly profitable companies. They�re hugely cashed up. M&As are going to be a big thing in this market going forward for a long time because this is one of the few sectors in the entire market where guys playing the M&A game aren�t doing it with other people�s money. They don�t need to do it with other people�s money. They can go out and write checks and take other companies over themselves. So there�s a good market for that. We�ve had a number of companies on our list taken over in the last 2 years, and we think there�ll be a few more.
This is basically the publications that we do. I won�t bore you with the details. We do have a table downstairs; I�ll have some handout material there. I do have a thing there you can sign up on if you want to get samples of all of these things. Just give us an e-mail address and we�ll send all of them out to you.
