When gold and silver took a plunge, institutional investors went bargain shopping right away, says Paul Renken, mining analyst with VSA Capital. Now it's time for retail investors to ride upside momentum in copper, zinc, tungsten and phosphate. In this interview with The Metals Report, Renken shares his outlook for base and minor metals, as well as the companies that could outperform on the back of climbing commodity prices.
The Metals Report: Paul, you're based in London and introduce European investors to small-cap resource equities, many of which are listed and domiciled in Canada. Do you think European investors have a stronger appetite for mining equities?
Paul Renken: I don't think European investors have a stronger appetite than, say, the marketplace in Canada. However, European investors do have some interest in mining equities, particularly for those stories that are more advanced.
TMR: It's been a relatively good August for gold, silver and some of the base metals. Are you noticing an uptick in interest in resource equities from institutional and retail investors?
PR: Our activity actually picked up within weeks after the gold and silver prices fell in April. Particularly in the private equity space, firms were sniffing around for good bargains, good projects with relatively good grades that no longer had decent outlets to get funded. This would include early-stage projects that aren't to the point where they can take a feasibility study to the bank for conventional financing. Some investors were interested in picking up a bargain in this space, investing in companies with extremely low valuations.
TMR: One aspect of junior resource equities is that you pay particular attention to a company's narrative. What are the key aspects of a saleable narrative?
PR: We see an awful lot of stories come through our doors, both on listed and unlisted corporate situations. What we find is most saleable, in terms of being able to find the equity financing that they're looking for, are high-grade deposits. That is what investors are looking for. They're also looking for a corporate story or business model that is quite simple. They're not looking for companies with many different types of commodity assets across a whole host of countries. Investors want simple, focused stories where it's easy to develop to the cash flow stage. Low development cost is another selling point. Investors have been looking for companies that aren't cash constrained at the moment-they don't want companies that are desperate for any kind of a deal at any kind of a price in order to get some cash. Finally, to a lesser extent, investors are looking for situations with minimal equity dilution and few if any warrants outstanding.
TMR: What commodities is VSA interested in right now?
PR: Anybody that is in mining equities of course is interested in gold and silver because the commodities are highly liquid once they're produced. We like gold and silver companies, but we're also interested in lead-zinc mineralization and nickel. Also, we're kind of specialists in tungsten and minor metals.
TMR: Where are we at with base metals?
PR: Base metals carry a mixed bag of possibilities. Copper, lead and zinc are looking very good, but nickel is not so strong at this point. That has a lot to do with where the demand lies in Asia, specifically in China, and whether there is a lot of inventory in warehouses at the moment. Nickel warehouse inventories are at five-year highs and are still climbing. Meanwhile, copper warehouse inventories are coming down, which means that copper is being delivered to the smelters and mills in order to be fabricated.
TMR: What are some copper plays you're following?
PR: We didn't think the major producers, the top-tier names, would do that well simply because we didn't quite see the strength in the marketplace for copper. At the same time, we saw the development of these new copper exchange-traded product instruments. We thought some of that copper was going to get taken up into inventory, and expected copper itself to perform better than the top-tier names. We thought second-tier producers might perform better in this situation, producing companies that aren't the first names that come to mind but that are either expanding their capacity or located in safe jurisdictions. We're talking about names there like First Quantum Minerals Ltd. (OTCPK:FQVLF) [FM:TSX; FQM:LSE] or Taseko Mines Ltd. (TGB).
TMR: What about zinc?
PR: Zinc we're pretty positive on actually, particularly for 2014-2015, for three particular reasons. First of all, we feel underinvestment in zinc is going to cause some supply constraints in 2014, particularly because some of the really large deposits are reaching the end of their life throughout the world, such as the Century deposit in Australia. The New Brunswick smelter is now being closed, so the availability is going to become more constrained as we head into 2014. Another constructive thing for zinc we feel is the Glencore International Plc (OTCPK:GLNCY) [GLEN:LSE] / Xstrata Plc (OTC:XSRAF) [XTA:LSE] merger, which essentially further constrains the alternative to supply out there, particularly seaborne supply. Just as the iron ore space is dominated by a few major seaborne players, we think that there will be just a few players in seaborne zinc concentrate in 2014-2015.
TMR: How can investors get zinc exposure?
PR: We like some of the junior players here, especially preproduction stories with very sizable deposits the majors will be interested in.
A larger company that has been around for a little while is Silvercorp Metals Inc. (SVM) within the Ying mining district in China, which certainly has been very profitable and consistent.
TMR: Are you following any nickel plays despite your pessimism toward the commodity itself?
PR: We actually follow quite a number of companies because we have some clientele in the space and we are interested in the direction of the metal itself. There are some junior nickel plays in the London market that have attracted interest over the years, particularly from retail investors.
TMR: You brought up tungsten earlier. That is a very niche product, but it's increasingly in demand due to its ability to resist heat and its incredible hardness. Tell us about the market for tungsten.
PR: The marketplace for tungsten was really hammered during the late 1980s and early 1990s because the Chinese low-production-cost scheelite mines have forced non-Asian players more or less out of the market. But now China has depleted its higher-grade deposits, and its manufacturing capacity is such that it wants to maintain what supply it has in-country from the mining aspect for its own use. This means that the rest of the world, which hasn't made any tungsten investment of any size in the recent 10-15 years, is looking for alternative supplies. There are some deposits out there, both relatively small, higher-grade shear zone and vein-hosted deposits that have reasonable possibility for being profitable, as well as larger deposits of the skarn or porphyry type that have more or less languished for some period of time. Now those projects are definitely getting a second look.
One of the larger deposits is the Sisson project in New Brunswick. The Sisson project has been around for more than 20 years, waiting to be developed. It's a skarn tungsten deposit with some byproduct of molybdenum as well. All the indications are that it should be developed now simply because of its size of contained tungsten. It would indicate that it has a 20- or 30-year mine life, so any potential partners who want a sustained source of reliable supply outside of China would be considering financing that deposit.
Another deposit is one we have right here in the U.K. called Hemerdon, which used to be in fact a clay property. For a couple of decades now, it has been known to have underneath the weathered clay material tin and tungsten. Now, a company out of Australia is putting that deposit into production.
TMR: What about vanadium? Would you say you're bullish on vanadium in general?
PR: We're generally constructive on vanadium. Ferrovanadium makes up 90% of the market for vanadium, which means that it ends up competing against other materials of steel-blended products. It competes against moly-steel, nickel-steel or chrome-steel in various applications, depending upon specifications. A lot of press has been targeting vanadium, however, on the basis of its battery potential. Vanadium redox batteries are a small segment of overall vanadium usage, but if they prove to be a longer-term means of electricity storage for wind and solar energy, then it changes the whole demand picture for vanadium.
TMR: Let's get to rare earth elements [REEs]. What equities are you following in that space?
PR: Roughly a couple of hundred names came into the REE space since 2010, whereas now only several dozen names have demonstrated viable projects.
One name in the commercial space that people have been following in recent years is Molycorp Inc. (MCP). This company now is either in production or about to be in production. Molycorp had cost overruns in trying to get its deposits up and running. So it's definitely a challenging space for investors to make money in.
TMR: Do you have any parting thoughts for the investors reading this article?
PR: Institutions and private equity have already been jumping into bargain hunting, but now it's the retail market's turn as we go into the autumn. The marketplace overall has been oversold this summer and there is some significant upside in some corporate stories, even if the metals prices overall are not in a boom period. The stocks have a little bit of catch-up to do, so there's some good profits to be made.
TMR: Thank you, Paul.
This interview was conducted by Brian Sylvester of The Metals Report.
Paul Renken has a broad range of experience in various aspects of the mining and minerals business. He began his career as a geologist for Canadian junior resource companies in the Western United States. Owning a stake in a private consulting firm as vice president of exploration, Renken searched for various base metals, precious metals and industrial minerals. In the UK, he worked in the equity market media outlets of Digitallook and Hemscott before joining VSA as mining analyst in 2006.
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