The shuttering of huge copper and iron ore projects gives the Street the blues, but the resulting squeeze in supply can lead to explosive price hikes. Meanwhile, Mark Lackey, executive vice president of CHF Investor Relations, is eyeing infrastructure buildouts in China, Korea, Brazil and India that point to a swelling of demand. In this interview with The Mining Report, find out how Australian partnerships, the deepening of the Panama Canal and the South Korean-Canada trade agreement could result in major returns on investment, and why 2014 looks like a bounce-back year for potash.
The Mining Report: Mark, the price of copper recently dipped to its lowest level since 2010. Are we going to end the year below $3/pound [$3/lb]?
ML: We don't think so. We believe that the price of copper will actually recover as we progress through the year. In fact, we actually are still calling for the price of copper to trade in the $3.60-3.70/lb range by year-end. We really haven't changed our view because if we look at supply and demand conditions, we think there's definitely been an overreaction to some of the recent Chinese economic data. Investors are losing sight of the fact that there are reasons for demand to pick up later in the year, and that the postponed production projects will impact the supply side.
TMR: Are weaker Chinese economic data the only reason behind this shortsightedness?
ML: It's certainly a major factor. It's seems that the export data in particular got the market concerned, because if you look at retail sales and industrial production, they've been only a little bit weaker than analysts had expected. We're really talking about just two months of trade data here, so this is not necessarily a long-term trend. We would also point out that the Russian situation with Crimea has caused some concerns about European growth.
TMR: In other words, prices will remain weak in the short term, but investors should be long copper.
ML: That's right. If you look at the new infrastructure programs planned in China, South Korea, India and Brazil, they all are scheduled to kick off this year, so we should start to see more spending later this year. That's one positive for copper.
Don't forget that China is by far the biggest consumer of copper in the world, and half the copper goes into the wire and cable business, which is growing at about 15-20%/year. We see China ending up with one of the biggest and best electrical grids in the world, but this growth should go on for the next five or six years. So there is a fairly significant built-in amount of copper consumption that's already in place. Whether the country grows at 8%, 7.5% or maybe 7% isn't nearly as relevant as some people think.
TMR: Most of the copper heavy miners have been sold off. What's happening with the juniors?
ML: Across the board, I'd say most junior companies have lower share prices than they had three or four months ago, although some have gone sideways. You'd be hard pressed to find a copper company, other than Augusta Resource Corp. (NYSEMKT:AZC), which is in takeovers, that's actually up.
TMR: What are some of the juniors you're following reasonably closely?
ML: We like NovaCopper Inc. (NYSEMKT:NCQ). It has a significant play in Alaska. It was once part of a very well-known gold company that spun out its copper assets, which made sense because the market wasn't giving it really much value for the Upper Kobuk Mineral projects, which are some of the best copper projects in North America. What we like about NovaCopper, first of all, is that management knows the jurisdiction-the Ambler district in northwest Alaska-which is a very good jurisdiction. What's also appealing is that the Bornite deposit found in this area is a significant, high-grade project that also hosts some zinc, lead, gold and silver credits. We like the management team since it has a proven track record in Alaska. We think it's a good way to play copper when the copper price recovers.
TMR: Does it have enough capital?
ML: Yes, they have millions of dollars.
TMR: It has an updated NI 43-101, right?
ML: That's right. On March 18, the company released an updated NI-43-101-compliant resource estimate for the Bornite deposit. The new result contains 5.7 billion oz copper [5.7 Boz copper] Inferred and 334 million pounds copper [334 Mlbs copper] Indicated. In just under three years, the company has increased the scale of the Bornite deposit six fold.
TMR: Moving on to iron ore, some market experts believe the steep drop in the price for iron ore in early March was based on poor economic data from China, while others believe it was largely caused by a speculative play gone wrong, likely at a Chinese brokerage. What's your perspective?
ML: First of all, some of the economic data in China in the past two months clearly affected the iron ore price. But there was also a slight buildup in inventories before the trade numbers came out, so there had already been a little bit of weakness in the market.
China also announced that it wants to shut down some small marginal steel plants that are not particularly positive for the environment, and that announcement got some analysts concerned about potentially less demand for iron ore. I think that concern is overblown. I expect bigger steel producers in China to make up for this modest drop in steel production. So we don't see a loss in demand for iron ore as a result of the consolidation that is taking place.
As far as a speculative play gone wrong, there have been a few rumors of that out there. It's hard to know if that's true. We would suggest that if it is true, it's one of those factors that is not going to have any significant impact on the medium or long-term iron ore market.
TMR: What's your forecast range for iron prices over the course of 2014? Is it above $120/ton?
ML: We expect prices to get back above $120/ton, closer to the $125-130/ton range by the end of this year. Again, like copper, we do see this increase in infrastructure spending in China, South Korea, India and Brazil as a bullish signal for steel demand. We also expect China to produce over 20 million [20M] vehicles this year, so we see steel demand rising out of the consumer sector. Meanwhile, China is also trying to increase the quality of its steel. This generally means that there will be increased demand for iron ore. Finally, supply, which increased significantly last year, should level off this year since Australia is producing at close to full capacity given the infrastructure constraints currently being experienced in the country.
TMR: Big iron miners, like Rio Tinto Plc (NYSE:RIO), produce iron at $30/ton or even $20/ton at some operations, but smaller miners generally have much higher production costs. Midtier producer, Cliffs Natural Resources Inc. (NYSE:CLF), is already experiencing a shareholder revolt over poor share price performance. What does all this mean for investors in this space?
ML: It's true that Rio Tinto does have some production in that cost range. If you looked around the world, the cost production for the majority of iron ore mines is considerably higher. Some Chinese production has costs of around $100/ton. So the question becomes, will companies produce at a small profit, or will they take some of that iron ore out of the market? Our expectation is that the Chinese will take some of those smaller inefficient mines out of operation.
TMR: Let's move from metals to minerals and potash. Like most mined commodities, potash had a turbulent 2013. What do investors need to know about what's happening in the potash space in 2014?
ML: The basic underlying supply-demand scenario has not changed. In fact, we continue to see less arable land in the world per capita every year. As a consequence, there is a need for higher crop yields, and thus a continually growing market and demand for potash, particularly the muriate of potash [MOP], which is 90% of the potash market. We believe that potash prices actually will start to recover this year. There is also some other positive news on the demand side. It looks like this will be the best soybean-planting season in Brazil in history, and it looks like a strong year in the Midwestern U.S. Plus there's been less potash used in the last few years in India, and you cannot go more than a couple of years if you want to continue to have enough nutrients in your fields. So we see this as a bounce-back year for potash and the MOP market as we go through the year.
TMR: One of the interesting names in the potash space right now is GreenStar Agricultural Corp. (OTC:GRLH) [GRE:TSX.V] .
ML: GreenStar is not actually a potash play, but is in the agricultural sector. The company is currently trading around $1/share and it pays a 6% dividend. The company has a low price/earnings ratio, which is quite unique among small cap resource based companies. GreenStar produces various canned products-oranges, peaches and its biggest product, tomato paste. This is a growing market. The company had record agricultural shipments in 2013 and in the last five years has seen revenue and EBITDA both raise four fold.
With its recent takeover of Beichen Tomato Products Co., GreenStar will produce about four times as much tomato paste in the next year as it does now. Given the drought in California and the fact that tomatoes are fairly water-intensive to grow, it looks like there's going to be some rationing of water in the agricultural system in California this year. This means that some farmers are not going to produce the same amount of tomatoes that they produced in 2013. We see GreenStar attaining a very large increase in revenue and earnings over the next few years.
TMR: Can you share one more agricultural name with us?
ML: Karnalyte Resources Inc. (OTC:KRLTF) [KRN:TSX] is developing a major project in Saskatchewan that initially could produce 625,000 tonnes of potash per year and increase this to 2.125 million tonnes per year. We like the management; as they have considerable experience in the potash industry. Karnalyte is also a possible takeover candidate because it's one of the few midcap companies in the space, which will make it attractive to some of these bigger potash players, like Potash Corp. (NYSE:POT), Agrium Inc. (NYSE:AGU) and The Mosaic Co. (NYSE:MOS). We also think it's very interesting that Karnalyte has a magnesium byproduct, which is actually in short supply in the world these days-95% of it is produced in China. This is an interesting company because it has a fairly low-capital expenditure project with low operating costs and a byproduct that could have a fairly significant impact on its bottom line.
TMR: What are your parting thoughts for us?
ML: Don't overreact to every data point that comes out of China such that your medium- or long-term view of the world changes. Clearly, one has to recognize that there are going to be ups and downs in the commodity markets. I would suggest we're still in a long-run bull market for commodities because at least 4 billion people in the world are trying to become middle class, whereas in the 1970s, it only took about 400M people to create enough demand to give us a very strong commodity cycle. Finally, in many commodities like copper and iron ore, we're seeing more and more deferred projects. So over the next five years, there is not going to be the supply that some people may anticipate. If you have no exposure to equities in the commodity markets, then you could very well miss an excellent opportunity over the next couple of years to enhance your portfolio return.
TMR: Thanks for joining us today.
ML: Happy to be here.
This interview was conducted by Brian Sylvester of The Mining Report.
Mark Lackey, executive vice president of CHF Investor Relations [Cavalcanti Hume Funfer Inc.], has 30 years of experience in energy, mining, banking and investment research sectors. At CHF, Lackey involves himself with business development, client positioning, staff team coaching and education, market analysis and special projects to benefit client companies. He has worked as chief investment strategist at Pope & Company Ltd. and at the Bank of Canada, where he was responsible for U.S. economic forecasting. He was a senior manager of commodities at the Bank of Montreal. He also spent 10 years in the oil industry with Gulf Canada, Chevron Canada and Petro Canada.
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