From the HRA Journal: Issue 211 originally published March 17, 2014
Its 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 its 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 its 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 its 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 its 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.
