Last week's Prospectors & Developers Association of Canada (PDAC) conference turned out to be a record-breaker. The swarm of company execs, geologists, engineers, equipment salespeople, brokers, bankers, and investors sent a strong side-current into the room where Casey Research held a PDAC "short course" – I'm not sure what the capacity of the room was, but we filled it.
My colleague Marin Katusa of the Casey energy division delivered a great talk on buying and selling techniques for our market sector, and I gave an introductory Speculation 101 talk, a Due Diligence in Depth presentation on what I actually look for in the 8 Ps, and shared some Notes from the Field on things I've seen and learned while out kicking rocks with world-class geologists. I appreciate the many subscribers who joined us and was very pleased to see so many new faces.
I was on stage, on camera, or in meetings pretty much back to back the whole time. I'm exhausted, but I feel good: I collected a lot of valuable information in short order.
And, of course, it's great that gold has rebounded, justifying – thus far – our calls to buy the dips. I was particularly pleased because the proximal causes for the recent correction, Bernanke's non-announcement of a QE3 and the trouble in Europe, were no reasons to be selling gold. Those who acted on a solid understanding of fundamentals and bought while others were selling were able to make some quick gains.
Key Take-Aways from PDAC
I met with some good companies with very interesting projects that I'm now putting through Doug Casey's famous "8 Ps" evaluation method. No comments until my due diligence is done. However, there was one take-away I think is important and worth pondering: liquidity appears to be tightening in our market sector. During the conference, I heard news of the plug being pulled on two corporate financings – and that's just among companies on my radar. Industry analysts I spoke with say the trend is widespread.
Now, given gold's fall from $1,900 and failure to regain or surpass that peak, this isn't too surprising. Even among industry insiders, there are those who think that gold has peaked for the cycle, that $1,700 gold is "high," and that gold will only lose altitude from here. Perhaps more numerous are those who don't actively think this, but fear it and are not about to take any chances. Both groups include company execs at mining companies already in production who are willing to take on hedges. It would certainly also include i-bankers, brokers, and fund managers who are nervous about zigging when the market is about to zag.
I, of course, disagree with this negative outlook at least for precious metals; the fundamentals remain very bullish. But whether they are right or wrong, a lot of players in our market do think this way, and I believe their pessimism is showing in the market's volatility and in the drying up of liquidity I'm drawing your attention to. As a general matter of market theory, this is a good thing; as buyers, we like nervous sellers, and we love panicky sellers. They are our best bets for "buying low" (in order to later "sell high").
There are two more specific and immediate consequences I'd like to draw your attention to now, however. First and most obvious, this is a bad time for companies to be without a lot of cash. I'd be especially cautious about buying stock in any company that doesn't have at the very least a year's worth of active, value-adding operations cash in the bank. But really, less than two years' cash would make me seriously hesitate to buy into a company. Unless, of course, I'm buying into a private placement on good terms. That's the good news; if this trend toward more limited finance liquidity in the mining sector continues, we may see some private placement opportunities offered on very generous terms.
The other consequence is a likely uptick in mergers and acquisitions. Those with the cash will take out those without it. Companies with quality assets and insufficient financial backing to advance them will become irresistible targets in such an environment, and not just to the major miners, but the mid-tiers and more profitable juniors. That's a trend worth watching for, as takeover offers usually come at a premium to market or – better yet for shareholders of the company being taken over – a bidding war between two (or more) purchasers can send shares soaring.
Jilted in Toronto
While I was in Toronto for PDAC, I was asked to appear on Canada's Business News Network, Tuesday, March 6 on Business Day with Kim Parlee – but they canceled at the last moment. Apparently the threat of a disorderly default in Greece was more important than my take on PDAC and the opportunities in metals and mining. And perhaps it was… but of the three stocks I had in mind to mention on the show, one closed the week 4.6% above the March 6 close (after rising as much as 10.7% in intraday trading), one was up 7.5% (after rising 14.9% in intraday trading), and one was even (after also rising 7.5% in intraday trading). Viewers could have made a quick buck on my recommendations if I'd gone on the air as scheduled – call me arrogant, but I somehow doubt the opinions of the talking heads they had on the European crisis offered as much opportunity to profit.
What were the stocks? Well, I was going to mention them on TV, so I guess it's okay for me to tell you, in the order mentioned above: Alexco Resource Corp. (AXU, T.AXR – disclosure: I own shares), Carpathian Gold (T.CPN), and Almaden Minerals (AAU, T.AMM). I still like all three going forward.
What about Europe? Well news of the "orderly default" that handed Greece's private creditors an approximately 74% loss seems to have reversed much of the harm done to precious metals prices by concerns about the euro (and hence an apparently "strong" dollar, which some still see as bearish for gold) the week before.
In short, as Jeff Clark pointed out last week – and Doug Casey has said all along – it makes no sense to fret over the daily fluctuations. A trend in the violence of those fluctuations is worth watching, but the fluctuations themselves are just noise – "chatter," as some traders call it.
Notes from the Field
That's about all I have to say about what I learned in Toronto. PDAC is really just a starting place for me; I collect a bunch of stories, and now I need to go out into the field to kick the tires – or rocks – on them. I will continue sending back Notes from the Field as I make these trips. Whether or not you subscribe to our paid services, I hope the facts and trends I uncover and report in this free service prove profitable to you.
Senior Metals Investment Strategist
|Rock & Stock Stats||Last||One Month Ago||One Year Ago|
|Gold Producers (GDX)||53.24||55.25||58.94|
|Gold Junior Stocks (GDXJ)||26.70||28.49||38.51|
|Silver Stocks (SIL)||24.06||24.65||27.65|
|TSX (Toronto Stock Exchange)||12,503.62||12,497.94||13,884.71|
Mining Sector Is on the Road Again (PricewaterhouseCoopers)
PricewaterhouseCoopers (PwC) presented its Global Mining Deals 2011 report, in which it shared its views on merger-and-acquisition (M&A) activity in 2011 and expectations for 2012.
The mining sector announced a whopping 2,605 M&A deals last year, making 2011 "the second busiest year of mining M&A activity in history." Average deal value rose to $105 million, up from $70 million the year before.
On both the buy and sell sides, the lion's share of the deals were located in US, Australia, and Canada. Five resources were targeted the most: gold, oil, copper, iron ore, and niobium, "representing 81% of aggregate target values." Gold M&A activity comprised 13% of all deals, down from 31% in 2010. Rising gold prices that made gold stocks look expensive may have accounted for the decline.
According to the report, growth in world gold demand will continue to drive M&A in 2012, with emerging nations remaining the key drivers.
Analysts at PwC anticipate other changes, too. One of the most significant ones is that Western miners may find themselves in competition with "non-miners" that step up to the M&A plate, such as sovereign wealth funds, pension funds, steelmakers, and players from other industries. According to PwC, Westerns buyers will be forced to adjust their business models to survive:
One of the key findings of our 2011 retrospective analysis was that western miners are lagging their growth market counterparts with regard to transacting in the higher risk emerging, developing, and frontier regions. This will need to change if Western mining titans want to remain dominant through the next decade. Roughly three quarters of known reserves are believed to lie in countries outside the developed market economy countries.
Another interesting expectation from PwC is that Africa will emerge as one of the most important M&A locations of 2012; the continent is rich in resources, and the investment climate is becoming more friendly in some countries.
"Under new rules announced on the mining ministry's [of Indonesia] website, Southeast Asia's largest economy will require foreign firms to sell down stakes in mines and increase domestic ownership to at least 51 percent by the 10th year of production. "
It is expected that this step will allow the government to "take more of the profits from its vast mineral resources." But a more likely consequence may be the decline in capital inflows to Indonesia.
In December 2011, the country recovered its investment-grade rating due to "strong and resilient economic growth, low and declining public debt ratios, strengthened external liquidity, and a prudent overall macro policy framework." But these unexpected changes in rules "underline continuing policy uncertainties that have long been a major risk for investors hoping to tap some of the world's richest deposits of coal, gold, and copper."
Indonesia is the world's top exporter of thermal coal and tin and also possesses rich deposits of gold and copper. Among the companies hit by the new regulations are Freeport, Newmont, and BHP Billiton. It's not clear yet how these rules would be implemented nor when the clock would start ticking, but this is clearly a turn for the worse in this once-pro-mining jurisdiction, and we'll have to take that into account in our portfolio decisions.
Innovations in Silver Usage (Silver Institute)
New and exciting industrial uses for silver continue to come to market: