In
2007, she claimed the current commodities super-cycle would last another 20
years. But given the economic implosion since that time, could it still be
true? "Absolutely," says Carmel Daniele, founder, CEO and CIO of CD
Capital. "The crisis that occurred last year after Lehman's collapse
just interrupted the cycle," she explains, adding that it "is
actually going to seal the next stage of the super-cycle. . .it will make it
stronger and last even longer." In this exclusive interview with The
Gold Report, Carmel forecasts significant supply shortages resulting from
both the current lack of money flowing into exploration and planned
infrastructure spend by emerging countries'. She also shares which companies
she's investing in and why she believes long-term investors are "very
lucky" to experience this fantastic crisis.
The
Gold Report: Carmel, in 2006 you started your fund, the CD
Private Equity Natural Resources Fund, specifically to take advantage of the
commodity super-cycle. In 2007, you stated you thought this super-cycle could
last at least another 20 years. Since 2007, several key commodities are
trading at substantially higher levels—even with the market adjustment
of 2008. Have the market fluctuations since 2007 affirmed or challenged your
view that this commodity super-cycle has another two decades to run?
Carmel
Daniele:
Absolutely affirmed it! The crisis that occurred last year after Lehman's
collapse just interrupted the cycle, and I believe the cycle is still alive
and well. And I also believe that what's happening with this crisis is
actually going to seal the next stage of the super-cycle, and it will make it
stronger and last even longer. This financial crisis may have dampened
demand, but it has actually destroyed supply because a lot of mines have
shutdown and cut off supply. And you will see when demand picks up—and
it doesn't take very much for demand to pick up—there will be no supply
because you can't just flick a switch on and off to turn on supply. It will
take a lot of time to crank up the mines and get them supplying again to meet
that demand for raw materials.
It
takes on average about 7 to 10 years to get a mine into production after
there's been a discovery of a mineral, and when you look at the super-cycles
of the last eight years, I can't think of any major new supply or a new mine
coming on stream except maybe Fortescue Metals Group (FSUMF.PK), but that's exceptional. So, once
demand starts picking up, the supply and demand imbalance will be a lot
bigger and we will gear up again in the cycle.
Also
if you look at history, on average, the past cycles have lasted an average of
about 20 or 30 years. In the 1880s, the U.S. industrialization super-cycle
lasted 40 years, and that involved the industrialization and urbanization of
only 100 million people. In the 1960s, after World War II the Japanese
industrialization super-cycle lasted 20 years—and that involved 30
million people. And the one we have now with China and India, which is only
nine years in, involves the urbanization and industrialization of 3 billion
people. So, I wouldn't be surprised if it lasted longer than 20 years.
But
historically, these super-cycles have a lot of violent swings up and down,
but the trend is up. So, you have to be a long-term investor in order to be
able to survive the dips. They also provide a lot of opportunities when there
are dips.
TGR: In
the industrializations you pointed out in the U.S. and Japan, and now
China/India, are all commodities going to rise universally or will some rise
before others?
CD: No,
they don't always rise at the same time. It all depends on what is driving it
at the time; for example, it may be energy and coal demand for infrastructure
spending. It all depends on the demand and supply balance of the particular
commodity; and they go through different cycles. So, they won't all happen at
the same time. It just depends on which country is demanding what and where
the supply is coming from. Also I think what you will find over time is some
countries will build barriers around a strategic resource, and we're starting
to see that already, where some countries are starting to put duties on
exports so they can consume the raw materials themselves and secure their own
supply.
TGR:
There's been a lot of press related to China, not so much about barriers, but
the fact that they're starting to stockpile base metals and raw commodities.
What's your feeling in terms of China and the influence they will have with
potential barriers and duties on commodities, and what will that mean to the
commodity prices?
CD:
That's a very interesting question. Basically, they have a list of strategic
resources and it's actually illegal for foreigners to own certain metals.
You've got to actually watch and see what China is doing rather than
listening to what they're saying. What they've been doing is taking advantage
of the low copper prices and stockpiling. Iron ore is one that is really
interesting when it comes to China, because they actually import almost all
of the iron ore that they need. They don't have very high-grade iron ore in
China and they've been trying to control the price as the world's largest
importer at 60%.
The
government of China sees iron ore as a very much-needed resource for their
infrastructure that they're going to be building. I think they're going to be
spending over half a billion U.S. dollars on roads, railways and power.
They've been trying to take control of the pricing, through the China Iron
Ore and Steel Association, as they can't do that with 100 steel mills all
negotiating their own price. So, they've threatened to reduce the number of
import licenses of iron ore to under 10 so the government can get better
control over the pricing. All this has collapsed the annual negotiations over
iron ore pricing.
The
other one is rare earths; they have a monopoly on rare earths. China ranks
number one in total reserves, production and exports in the world. There's
another mine in Greenland, Greenland Minerals Ltd. ((ASX:GGG)),
for example, that's got the potential to be bigger than China's, which would
threaten the monopoly that China has over rare earth prices.
It
is interesting because when it comes to foreign ownership of China's metals,
it's very difficult; yet, they're trying very hard to control iron ore and
other metals around the world that they don't have internally. And India, I
believe, has threatened to further increase export taxes on the export of its
iron ore because it's very strategic to its own industrialization and
building of infrastructure.
So,
you see the world has got limited resources; you've got all these emerging
countries growing at a phenomenal rate. You've got this population explosion,
and they're all waking up to the fact that maybe they're not going to have
enough resource to continue building out their empires.
TGR: As
the demand from India, China, and other developing countries increases, what
investment opportunities do you see?
CD: There
are two drivers. First, the population explosion—the world's growing by
more than 17 million people per year. In 2008, the world population was 6.5
billion with 3 billion in cities; by 2030, there will be over 8 billion
people on the earth, and 5 billion will be in cities. So, there will be an
extra 2 billion people living in cities, needing things like housing, cars,
and of course to be fed. Because of that, I like potash and phosphate, which
goes into fertilizer, which is used for agriculture to feed the growing
population.
The
other big driver is all the emerging countries' infrastructure spending. In
the next five years, Asia, excluding Japan, will spend over $2.5 trillion in
infrastructure and that's going to need a phenomenal amount of iron ore and
coal.
TGR: You
mentioned copper, and copper is often held up as the precursor to any
economic boom.
CD: Yes,
I love copper; I'm a copper bull. Copper goes into infrastructure spending
and there are not many substitutes for copper. There haven't been very many
big discoveries of copper mines and it will take some time for supply of the
large mines to come on stream. A lot of the large ones are in politically
challenged jurisdictions like the DRC and Alaska, which has lots of
environmental hurdles.
TGR: Do
you see the possibility that the limitation of these natural resources will
limit the ability for these countries to expand?
CD: Yes,
that is why China is strategically building up its resources; it's very
shrewd. I think that China is positioning itself perfectly; it's the iron ore
and a few other minerals that they're actively looking for. Yes, I think it
could probably slow down if they don't have the metals they need. Or they
could start using substitutes.
TGR: But
in the situation like lithium or copper, there really aren't any substitutes;
so could that limit the expansion we're going to see here in the next five
years?
CD: Given
that there's no money flowing for the exploration for these metals, it has a
double whammy effect. Yes, I'd say in the next five years, probably, you'll
start seeing a chronic shortage of some of these metals, if there's no
substitute. But really, you can't go on a plane with a laptop and have fuel
in your computer so there are few viable substitutes for lithium. And lithium
is related to electric cars, as well. The people in China are going to start
buying more and more cars, because there are tax subsidies in China for
people to buy cars and apparently only 5 out of a 100 people in China own a
car today. Imagine when they get to the U.S. ratio of 70 out of 100 how much
metal those new cars will consume.
TGR: So,
with these shortages, how are you positioning your Fund to take advantage of
those investment opportunities?
CD: Well,
basically, what I'm trying to do is invest in anything that these emerging
countries need to continue their industrial revolution, and remember, they
are the ones with the deep pockets. So, what I look for is investing in
companies that have a world-class resource that is attractive to the emerging
markets either through an off-take or through actually buying it outright.
And
the interesting thing is this crisis is different than other crises we've
seen because the emerging markets are the ones with excess foreign exchange
reserves. China has $2 trillion U.S. dollars in foreign exchange reserves.
India's got a quarter of a trillion. Russia's got half a trillion. So,
they've got the deep pockets. And they're actively looking to convert their
U.S. dollars into hard assets. And it's not just these three emerging
countries that I've mentioned that have surplus cash; there's Korea and
Japan, as well.
TGR: What
are some of the investment plays that you're doing right now with the Fund?
CD: I
invest predominantly in private companies because I am trying to look for
tomorrow's stories today at low prices. One interesting private one is a
high-grade iron ore company with 4.5 billion tons in Brazil; it's the
third-largest in Brazil. It's the lowest quartile of producers, and it's the
best positioned to consolidate iron ore producers in Brazil. China is also
now increasing its imports of iron ore from Brazil and has reduced its
imports slightly from Australia. If you look at the shipping that's going
from Australia and Brazil to China with iron ore compared to previously, you
will see a big jump from Brazil, and I think it's because China's a little
bit disappointed that they missed out on the Rio Tinto (RTP)
acquisition.
Other
private companies are coal in Canada, and coal in Indonesia. As I mentioned,
India is hungry for thermal coal, especially from Indonesia because it lowers
transport costs and light sulfur coal suitable for their existing and new
coal-fired power stations. So, if you're bullish on iron ore, you've got to
be bullish on coal as well. And Canada's got lots of untapped resources and
high-grade met coal and a long market history in the Asian steel industry.
There's a lot of infrastructure already in place there to deliver to export
markets.
Another
one that I am looking at is potash in Brazil. It's amazing, but Brazil
imports 90% of its potash needs, and it's got a growing agricultural market. So
that's only just growing. I am just amazed that Brazil got itself into this
position.
TGR:
You're mentioning a lot of private companies. How can our readers who are
individual investors take advantage of some of these tomorrow stories today?
CD: The
best way to take advantage of these private companies is to invest in a Fund
like the CD Private Equity Natural Resources Fund that invests predominantly
in privates.
I'm
a big believer in people; I am a backer of jockeys, rather than horses, and
so I think the key is to look for a really good management team and you just
have to look at what the market will pay for top management. One example is
my ex-colleagues, Pierre Lassonde and David Harquail, at Franco Nevada Corp. (FNNVF.PK), who in their last fundraising managed
to raise money at a premium to the market price. That's a good one as they
have an excellent business model. It's a royalty company and they don't have
to lie awake at night worrying about day-to-day mining technical issues. They
just have to cash their royalty checks.
Colombia
Goldfields Ltd. ((TSX:GOL)) is
another one I like. It has recently been subject to a takeover by Medoro Resources Ltd. ((TSX.V:MRS)).
Colombia Goldfields is completely undervalued; it has five million ounces of
gold. What I like about the merger is that it is a perfect match of a great
asset with management that has a really good track record in the region.
There will probably be further consolidation in that region as the management
knows the region very well.
Another
one is Petaquilla Minerals Ltd. ((TSX:PTQ)). I
have in the past backed the management team there when they spun out
Petaquilla Copper. Now, they're doing another spin out. If you invested in
Petaquilla Minerals, which has gold in Panama, at some stage you'll get one
share in Petaquilla Infrastructure for every four shares you have in
Petaquilla Minerals. You will be able to benefit from each project.
Petaquilla Minerals will receive cheaper power, cheaper mining costs and less
dilution, while Petaquilla Infrastructure will benefit from guaranteed power
off-take with exposure to the growing power demands in Panama and surrounding
countries.
Another
one I like is Greenland Minerals and Energy (mentioned previously); it has a
very large rare earth deposit in Greenland. It's the largest outside of
China; potentially it could be the largest in the world because there is
still potential upside in their resource. The other thing—and not many
people know this—is that they have over 200 million pounds of uranium
as a by-product.
TGR: Wow!
CD: Yes,
and this company could be a threat to the monopoly that China holds over
supply, and this could help attract interest from Japanese and North Korean
groups to secure their own supply outside of China.
TGR: What's
your view on the precious metals market?
CD: I
think gold, for example, given the crisis, is something you have to have in
your portfolio. I mentioned Colombia Goldfields, which has 5 million ounces
of gold. Another one that I like is New Gold Inc. (NGD),
which Pierre Lassonde is behind; they did a three-way merger. They've
recently acquired Western Goldfields Inc. I mentioned Petaquilla Minerals as
well, which is another gold company with gold in Panama.
I
also like Norseman Gold PLC. ((ASX:NGX)),
listed in both London and Australia. It is producing and generating
significant surplus cash flows from the high Australian gold price. It also
has the working capital needed to fund the expansion of its underground mine
and increase production at its under-utilized plant.
Gold
is a psychological metal; it does well basically when everything else isn't
doing well. That's why you need to have some in your portfolio. I don't have
my whole portfolio in it; I just have a small interest in precious metals.
And we're also looking at some projects with platinum and palladium only
because they're used in motor vehicles and China's going to increase the
number of cars, so I am still very bullish on these as well.
TGR: Do
you have any specific companies you're looking at for platinum or palladium?
CD:
There's one that's called Nkwe Platinum Ltd. ((ASX:NKP)).
They have a portfolio of platinum deposits located in one of the largest and
richest platinum regions in the world. They expect upgrades to their
already-large resources, as well as the completion of the feasibility study
by late this year.
TGR: Are
you also following Colossus Minerals Inc. ((TSX:CSI)) ?
CD: Yes,
we are. We've invested in a private gold company, Latin American Gold, which
we think that will be the next Colossus Minerals.
TGR:
Carmel, any last thoughts you would like to give to our readers?
CD: I
think we are very lucky to be experiencing what's happening with the whole
commodities super-cycle. The stars are all aligned, and it's just very
exciting. It's going to last a very long time, and this is something you see
only once in every couple of generations. What we're witnessing now is
something that will be written up in history books some day, with the
emergence of China as a super-power and India close behind. And I think that
this crisis, though some people see it as a negative, is fantastic because
basically there are so many opportunities around that you could buy at
distressed prices, and you can throw valuations out the window. For a
long-term investor, if you buy now, you can make great fortunes when the
super-cycle comes back again, and it will come back, longer and stronger.
DISCLOSURE:
Carmel Danielle
I personally and/or
my family own the following companies mentioned in this interview: None
I personally and/or
my family am paid by the following companies mentioned in this interview:
None
Carmel
Daniele is the founder of CD Capital (see a chart of her Fund's Performance) and CIO
of the CD Private Equity Natural Resources Fund. The Fund's investment
objective is to achieve capital growth through pre-IPO and pre-trade sale
companies in the natural resources sector, targeting opportunities that
deliver substantial returns on exit.
Carmel
was previously focused on selecting and negotiating natural resource
investments for the Special Situations Fund at RAB Capital. Prior to this she
was a Group Executive in Corporate Advisory at Newmont Mining, negotiating
and structuring mergers and acquisitions around the world for the Newmont
Capital group which included the US$24 billion three-way merger between
Franco-Nevada, Newmont and Normandy to create the largest gold company in the
world.
CD
Capital was also the winner of the prestigious Fund Manager of the Year Award
by Mines & Money.
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