By Brent Cook
Today we begin where our last rant left off (link).
But then metal prices began to decline, economies slow, and profits slip away.
What went wrong this time Dad? Will mining boom again?
Don't hold your breath kid. It’s bleak out there and we have a 10-year super commodity bull to work off this time.
I think what ultimately killed the recent boom was the slow realization by investors that most mining companies really couldn't make money. Those savvy investors got the commodity boom and gold price right, and bought into the thesis that mining companies’ profits would soar with the rising metal prices. The share prices did soar, for a while, but...
(Share prices Teck [black], Rio Tinto [blue] and Goldcorp [gold], 1999 to July 2015)
Instead of profits they got production costs rising in tandem with metal prices; capex blowouts; companies issuing equity and taking on debt whenever they could to cover the multitude of stupid acquisitions (supported by dubious, but 43-101 sanctioned, technical reports and financial projections) all piled on top of an eat-what-you-kill banking/brokerage community fronted by inexperienced or compromised analysts faced with the tall task of feeding the global frenzy of very short-term hedge fund gamblers with no skin in the game, trading stocks based on microsecond blips up until the shine wore off and, well, here we are today—busted again.
Of course on the junior side, they always soar higher and crash harder—the junior gold index (GDXJ) is down about 86% from its high in early 2011. Ouch.
The allure of a pot of gold at the end of the rainbow, and the sense of greed that instant riches inflame is very powerful and primal. It’s easy to overlook the fact that the overall odds of finding an economic mineral deposit are extremely low, as I’ve said many times before. That one-in-a-thousand shot at an easy score led investors (large and small) into overfunding more than 3,000 exploration companies to the tune of billions of dollars, chasing that pot of gold. As in all booms, expectations and blind faith overshot an otherwise obvious reality—gold doesn't sell for $1,200 an ounce because it’s easy to find.
We know that legitimate large discoveries (meaning ones that are probably economic) have declined significantly over the past 10 years-- still, there have been successes. Problem is, when you spread those limited successes over the 3,000-odd companies exploring tens of thousands of prospects through the 10-year bull market, one’s optimism fades.
And fade it has.
Volume (liquidity) in junior mining stocks has collapsed: the action is elsewhere for gamblers chasing a ten bagger. Proof comes via a recent screen of ten baggers over the past five years on the US and Canadian exchanges, which turned up 120 companies. On that list were only three mining related equities: Reservoir Minerals (RMC.V), Abitibi Royalties (RZZ.V), and Dynacor (DYN.V). No wonder the miners’ gambling hall is empty, kid.
I think the reality has finally set in that around 90% of the juniors will never find anything of value. Further, that even when successful maybe half the deposits are sidelined by 1) metallurgical problems, 2) geotechnical issues, 3) capital costs, 4) jurisdictional/political realities, or 5) metal prices. We can’t seem to win even if we win.
But hasn’t this always been the case?
Not so much. At the start of the 2002 boom and throughout the previous ones, most of these issues didn't surface so early in a discovery’s history. Today we are unfortunately much better informed. We have instant access via Google and 43-101 technical reports to a project’s past failures and a promoter’s questionable history, plus unregulated bloggers and virtual chat rooms that allow anyone (informed or not) to expound and rant at will. The classic quote, generally attributed to Mark Twain, that a mine is a “hole in the ground with a liar standing on top of it” is so much easier to prove nowadays that brokers, promoters, and liars are all at a serious disadvantage compared to their mentors.
Add to those promotional problems the very real fact that it is flat-out getting harder and harder to find new mineral deposits. The recent booms coincided with an era in which much of the world was just opening up to modern exploration techniques. Satellite imagery and a search through historical records allowed geologists to walk on to outcropping mineralization or alteration that had never before been drilled.
Those days of an easy pump or outcropping orebody are, for the most part, gone.
Today we are usually looking under cover through barren rock for deposits that will be more expensive to drill test, develop, and mine. Additionally, it seems that whenever a discovery is made NGOs, politicians, and excitable locals turn up to either throttle or steal a project. (Ecuador, Venezuela, Argentina, El Salvador, Mongolia, China, Russia, Pakistan, Alaska, Zambia, South Africa, and Thailand come to mind.)
The discovery success rate will certainly continue to decline; and we are currently faced with slowing economies across the world, which translates to slower metal consumption, which translates into lower metal prices, which translates into less money coming into the sector. We are now experiencing another bust phase of the commodity cycle.
Is this worse than usual Dad? This is, like, getting really depressing.
Hard to say.
As we discussed ealier, the 1997 bust was absolutely horrible. The 1987 crash came fast and furious; I spent the resultant bust taking hydrology classes and soil samples—not fun. The late ‘70s boom was killed when Volker took the Fed’s target rate to 20%: the gold price collapsed, recession ensued, and, except for uranium, mining was dead yet again. Then the uranium price crashed too, just as it had done in the early 1960s after the US government stopped supporting the price.
But boy, that 1950’s uranium boom was spectacular. Charlie Steen kicked it off when he found the Mi Vida mine near Moab, Utah in 1950. Your grandpa was out there roaming the desert with a case of beer, a box of dynamite, and a Geiger counter stuffed into the back of a Cadillac. At the height of the uranium boom, the Salt Lake City penny stock exchange traded more shares in a day than the NYSE. It was a promoter’s dream, and millions were made and lost on rumors and tips from a small-time radio show host and some guy in a dirty Cadillac.
The early 1960’s base metal mining boom was built on the back of the Kidd Creek discovery in Ontario, and broken by Viola MacMillian and the Windfall scam, which took the share price from $0.56 to $5.60 and back again. In Australia, the 60’s mining boom (link) followed a short but severe recession, and came about due to a number of major discoveries (Kambalda, Mount Newman). This boom came crashing down in 1970 when Poseidon’s nickel discovery, which had taken the share price from $0.80 to $280, turned out to be of minor value. In both cases, confidence in the mining and exploration markets went to zero, as did most of the previously highflying penny stocks. No one wanted any part of a liar standing over a hole in the ground anymore.
The cycles of boom and bust in the commodity markets goes back to at least the Bronze Age collapse (now that was a bust), and probably to the salt trade in 6000 BC. It’s just the nature of things. Rising demand causes rising prices, which cause increased exploration, which results in more discoveries that go into production, causing oversupply and therefore declining metal prices, which are usually correlated with economic recessions, then decreased supply, which eventually results in rising prices (again).
The same holds true for mining shares. Greed follows fear and vice versa. When everyone wants in there is no shortage of new paper and new stories, when everyone wants out, stocks go no bid.
Despite how bad it feels out there today, it could get worse. Metal prices are still at historically high levels and production cuts have been minimal--so far. Most mining companies have been chopping their sustaining costs and have managed to remain cash flow positive, at least at the operational level. The rapid drop in energy prices and near-global currency devaluations may have saved us from the final leg down-- or just put the inevitable off for a year or two. As for gold, it still faces a possible pounding as (if) the Fed begins increasing interest rates-- and it’s hard to see what could take it higher that hasn't already happened.
So yes, it could easily get worse and drag on for some time. There are still hundreds of zombie juniors that have to fade away, and a number of resource funds still in liquidation mode. There are no catalysts on the horizon to take the mining sector higher; and nearly everything I see says mining is dead. It is hard to imagine how things could look much worse, which is another way of saying this is how the bottom looks every time, before it eventually and slowly gets better.
I don't know when; I don’t think anyone really does. It’s the events that come out of left field--the black swans-- that usually seem to kick the resource sector into gear, and out. In my opinion, it will be the fact that we are not finding enough metal to replace what we are mining that puts the sector back in front of investors—but who knows.
So all you’re really saying Dad is that this happens all the time and it’s simply supply and demand that moves metal prices, and fear and greed the stock prices?
Yeah, I suppose that’s about it, from 30,000’. It looks pretty dismal and scary out there in Mining Land, just like it did in 2000 and at the bottom of every previous bust. And like then, the hardest thing to do today is to put on your dust goggles and head into the abyss to buy another doomed junior mining company.
So don your googles, we’re going in--fortune favors the bold...
That’s the way I see it.
Author and Economic Geologist
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