Nuclear Winter? Not Yet!

Louis James, Chief Metals & Mining Investment Strategist

Dear Reader,

Last week, The Beard announced that the Fed may think about considering possibly easing back a tiny bit on the cash infusion life support it's been administering to the economy – just as David Galland predicted in our Daily Dispatch ten days ago – precipitating a global selloff.

Some analysts seemed to see the over $60 drop in our favorite metal as confirmation of their predictions that gold was slated to go lower. It seems a bit myopic to me to attach a great deal of meaning to gold's retreat when everything was in full-flight panic mode. This wasn't about gold, but about the global economy itself.

It's really quite striking that investors of almost every stripe around the world reacted so violently to the Fed's timid suggestion that it might be time to start thinking of easing back on the money printing. The message was loud and clear: an economic "recovery" that can't stand even the suggestion of reduced subsidy is not a recovery at all.

It's as though the world's heart had stopped, and while everyone thought government was administering shock paddles to get it going again, it actually put the patient on total bypass. The world's economic heart was neither fixed nor replaced, but set aside as government switched over to pumping cash blood directly through the arteries of the economy. And now they can't stop.

The violent reaction to the mere suggestion of tapering that artificial blood flow is an unmistakable and undeniable admission that the emperor has no clothes.

But of course, in the real world, if a plucky little boy did declare that the emperor had no clothes, few people would see the truth that had been before them all along. Instead, the boy would be tackled by a number of large, gun-toting thugs and dragged off, never to be seen again. Everyone within earshot would suddenly find themselves subject to government "help" from guys with white suits, rubber trucks, and no sense of humor. The parade would go on, or try to go on, just as it is in our world today.

Meanwhile, the junior resource sector has been so beaten up, people are starting to compare the current market to the "nuclear winter" of the late 1990s. But as Andrey Dashkov shows below, we are still far from the complete market capitulation of those days. And that means that buyers must still beware, sticking to the best of the best – with plenty of cash in the bank to weather the storm.

Sincerely,

Louis James
Senior Metals Investment Strategist
Casey Research

Rock & Stock Stats
Last
One Month Ago
One Year Ago
Gold 1,298.60 1,377.60 1,565.50
Silver 20.12 22.46 26.84
Copper 3.09 3.34 3.30
Oil 95.01 96.18 78.20
Gold Producers (GDX) 24.90 27.32 44.82
Gold Junior Stocks (GDXJ) 9.50 10.84 19.33
Silver Stocks (SIL) 11.73 13.29 18.68
TSX (Toronto Stock Exchange) 11,995.66 12,742.43 11, 408.32
TSX Venture 895.74 939.41 1,217.35

 

Nuclear Winter? Not Yet!

Andrey Dashkov, Senior Analyst

The late 1990s for the resource sector was so challenging that it is now often referred to as the "nuclear winter" of the industry. Some analysts are comparing our current circumstances to that period, while others purport we haven't hit bottom yet.

In its Business Risks in Mining and Metals 2013-2014 report, Ernst and Young states  that capital allocation and access is now the number-one challenge the resource sector is facing. While production-stage companies are rationing capital expenditures to meet long-term goals, the juniors don't have this luxury; they need to raise money just to keep the lights on.

The report says the current situation is the worst market in ten years. Since International Speculator deals mostly with the early-stage companies, we set out to see exactly how bad it is.

To do that, we pulled data on 10,521 private placements (PPs) closed by TSX-V-listed metals and mining companies since January 1, 1999 and compared the financing market now to the infamous "nuclear winter." Here's what we found.

The data show that metals and mining companies closed only 36 private placements in Q2 2003, raising C$17.6 million. By comparison, so far in the second quarter of 2013, metals and mining companies closed 150 financings for a total of C$192.6 million. This clearly shows that the current market, while definitely under pressure, is not as bad as it was ten years ago.

The market is also stronger now than in 1999-2001, when little financing activity took place. That period indeed was a desert for a metals and mining company.

For a clearer picture, let's zoom in on that period.

Before things picked up at the end of 2002, the junior metals and mining sector was in a miserable state for at least two years, as the chart shows. Further, a few large deals skewed the data; for example, Mazarin Inc. and Regency Gold Corp. raised about C$10 million each in Q4 2000. These financings were huge compared to their peers, but wouldn't be considered that big today.

Conclusion

While the current state of the junior market couldn't be described as strong, these data show we haven't reached a nuclear-winter phase, at least not yet. Juniors still can finance, though clearly investors are much less generous now.

Keep that 1999-2001 period in mind the next time someone tries to convince you the bull market is over. That is what a nuclear winter looks like.

Our situation is much better than ten years ago. The best companies are still able to raise funds to explore and develop. This is where investment dollars should be focused, because when the market does turn around, it is the better-managed and better-capitalized companies that will be the first to deliver the tremendous returns this volatile sector is known for.

Despite the spectacular fall in gold prices in recent weeks, sales of the physical metal are going through the roof. Is the gold market dying, or is it getting ready to rebound with a vengeance?

To answer these questions, Casey Research has partnered with TheStreet to produce an exclusive video event to help investors sort out the complex world of the gold market – Gold: Dead Cat or Raging Bull? This must-see webinar premiers tomorrow at 2 p.m. EDT and features investment guru Jim Cramer, our own Doug Casey, Sprott Inc. founder and chairman Eric Sprott, and a number of other renowned precious-metals experts. Click here to learn more and to register.

 


Gold and Silver HEADLINES

Ghana Arrests 124 Chinese Citizens for Illegal Gold Mining (BullionStreet)

Ghanaian authorities have arrested 124 Chinese citizens for illegal gold mining in the resource-rich West African country, highlighting the challenges of the ever-growing Chinese presence on the continent. Many of them will likely be deported.

In Ghana, the continent's second-largest gold producer, foreigners have been prohibited from working its small-scale mines since the 1980s. Just last month, President Mahama began cracking down on illegal mining.

Is Deep Sea Mining Worth the Risk? (911 Metallurgist)

Proposals to mine the ocean floor for valuable resources are not new and still considered highly controversial. Some fear that mining operations could pollute the ocean floor and destroy the ecosystems inhabiting the deep sea; others are not convinced of the economic viability of such projects.

The potential benefits, however, seem to be huge; it's been estimated that there are nearly nine poungs (4 kg) of gold buried in the seabed for every person on the planet. This infographic takes a closer look at the processes and implications of mining on the ocean floor.

Silver Found to Be Key Weapon in Fight Against Antibiotics Resistance (Mining.com)

A team of researchers led by biomedical engineer James Collins at Boston University says that adding silver to antibiotics can make them up to 1,000 times more effective, especially when it comes to combating Gram-negative bacteria – which are harder pathogens to kill.

Biomedical uses of silver continue to grow and will push on supply for decades.


This Week in International Speculator and BIG GOLD – Key Updates for Subscribers

International Speculator

  • This exploration company with a monster-sized, bonanza-grade gold project is making excellent progress drilling from underground to define and sample its world-class deposit. We like both the project and the company.
  • One of our favorite exploration teams arranges financing to incur expenses at its Canadian properties. The company looked good before the deal, and the new cash infusion will strengthen it further. Read our analysis.

BIG GOLD

  • One of our smaller silver producers announced a significant increase in milling capacity at one of its mines – here's our comments.
Jun 24, 2013
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