Seeking Alpha

Tim Wood's  Instablog

Tim Wood
Send Message
Tim is a media entrepreneur focusing on natural resources investing, especially for precious and base metal mining stocks.
My blog:
MineFund
View Tim Wood's Instablogs on:
  • $8,000 Gold by 2013-2015 May be Too Cheap
    Speaking at the Mining Indaba conference in Cape Town, James Turk forecast that gold could reach $8,000 per ounce by 2013-2015. He added that that may be too conservative.

    Turk, the founder of digital gold currency GoldMoney, said individuals should own bullion not as an investment, but as a wealth preserver.

    “Gold is not a commodity. It is not volatile. It is not an investment. Gold is money,” Turk told an audience of nearly 1,000 delegates.

    He illustrated gold’s ability to retain its purchasing power by comparing the price of oil in British pounds, US dollars, German marks, euros and gold. Only gold had maintained its purchasing power since 1950, with massive losses for the currencies, especially the pound.

    “Gold is a form of money that holds its value over time,” said Turk, adding, “capital is a precious resource that is best preserved with gold.”

    He explained gold’s fundamentally different character as a tangible asset that was accumulated, or saved, rather than consumed. It’s value derives from its utility as a medium of exchange for things like food, shelter and communication.

    “Gold as money is a mental tool that enables economic calculation unchanged through human history,” Turk told the audience of mining and investment professionals.

    Turk bases his forecast on a long-range view of boom-bust cycles. He believes we are currently moving through a bust of epic proportions as individuals, companies and governments are forced to restore balance to their balance sheets.

    “The bust has not yet peaked and you should own gold to preserve wealth until it has.”

    He projected the cycle via a ratio of the Dow Jones Industrial Average to gold. He assets that the ratio will again revert to one, and that’s where his $8,000/oz prediction lands.

    Turk said that a collapse of the dollar was inevitable because the United States, among other countries, was in a structural crisis that could not be avoided via interest rate increases.

    “The US is not suffering from a cyclical deficit, but a structural one. It is a path to hyper-inflation.

    “Japan’s credit rating has just been cut. It is probably the first slow fuse to be lit.”

    Turk laid his thesis against the strong correlation of the Federal Reserve’s monetization of US debt with the S&P 500. Since the launch of quantitative easing, the correlation has been almost perfect.

    Meanwhile, he pointed out that the US appears to have entered a “debt compounding” phase. As a result, the country is now extremely vulnerable to even moderate increases in interest rates which have begun to move up.

    “We cannot replicate the previous [1980s] high interest rate cure for mismanagement of the economy and dollar,” Turk concluded. He believes the US currency will inevitably collapse as a consequence.



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Feb 09 10:02 AM | Link | 1 Comment
  • America Expects Someone Else to Solve its Rare Earth Element Vulnerability
     

    wpid-MineFund_DragonFood-2011-01-20-10-20.pngEARLY next month thousands of delegates will converge on Cape Town to participate in one of the world’s most important mining capital formation and distribution processes - Investing in African Mining Indaba. The event is ground-zero for the money flowing to and from the world’s last great frontier in mineral exploration and development, Africa. Yet the United States will, as usual, have no formal representation even as officials from China, Australia, India, Japan and Canada jockey to land mining assets for their national companies and national interest.

    It is unfathomable that the American government continues to leave mining investment events like Mining Indaba to everyone else. Sometimes the United States Embassy in Pretoria assigns low ranking officials to noodle along, but even then it’s not without pleading for discounted access.

    Here we have the world’s largest economy on the brink of a national commodity crisis, epitomized by the complete dependence on the importation of rare earth elements (NYSEMKT:REE) and related fabricated products, but it can’t afford to spend $1,500 on a delegate.

    Perhaps the CIA sends along a desk officer or two, but the event is utterly worthless as a clandestine exercise given what really takes place. The US Geological Survey makes a reliable showing each year, but its focus is narrowly academic rather than policy driven.

    None of the consular officials, USGS staff or CIA officers is capable of representing the U.S. in the policy war that takes place each February in Cape Town, where national cabinet level ministers and their entourages engage in elaborate but hard-knuckle trade diplomacy. They have also committed millions of dollars to back up their efforts to own tens of billions of dollars of natural resource wealth.

    The U.S. gazes at its navel, although its diplomats can write fine cables observing what others are doing. It’s one reason why the private sector has taken matters into its own hands.

    It is another component in the massive and ongoing failure in U.S. strategic policy on commodities and mining, which has left the country vulnerable on several fronts. It also raises the risk for resource based conflicts around the world.

    Contrast Washington’s placid indifference (incompetence?) with China.

    China deliberately, patiently and methodically undermined America’s leadership in rare earth oxide extraction, processing and product development. 25 years after initiating its policy to monopolize rare earth elements, China has successfully shut down its competitors and shipped their assets home.

    Today the U.S. has no local source for rare earth oxides (REOs), and its manufacturing capacity for heavy rare earth products or alloying is non-existent. More worrying is the evidence that many American originated REE related patents have also been evacuated to China along with the skills, equipment and knowledge.

    The problem is not confined to REOs and minor metals more broadly. There is a much larger commodity sourcing and pricing problem related to the combination of America’s capital markets and its regulatory burden. Both have conspired to offshore American mining capital. That is thanks to costs-of-capital that no longer provide a competitive edge, and nanny state regulations that make it entirely unattractive to run a mine either in or from the U.S..

    Consequently, very few U.S. mining companies remain competitive internationally, and the same pattern is repeating in hydrocarbons. When measured by mineral reserves under management, units of production, and free cash flow, America has surrendered to Australia, Canada, and the UK. Now it is being knocked further down the totem pole by China, Brazil, and Russia. India is trying hard to catch up, but remains its own worst enemy.

    The United States seems to think that owning stock in mining companies is sufficient. It is not. From a strategic perspective you then limit yourself to capital gains and dividend flows. Meanwhile you have financed your rivals who control the assets and cash flow, very little of which may ever accrue to you.

    Returning to Cape Town, let’s unpack what goes on at Mining Indaba. In it’s simplest form, the conference is a bid - offer spread on Africa’s mineral resources.

    Bidders showing up next month include (no particular order):

    • China (ministerial and consular level).
    • Japan (ministerial level and technical bureaucracy).
    • India (ministerial & ambassadorial level).
    • Australia (ambassadorial level with high level trade development program).
    • Canada (high level trade development program).
    • Sweden (technical bureaucracy).
    • United Kingdom (technical bureaucracy).
    • Czech Republic (technical bureaucracy).
    • France (technical bureaucracy).

    Sellers include (no particular order):

    • Burundi (Vice President, ministerial level and technical bureaucracy).
    • South Africa (ministerial level and technical bureaucracy).
    • Ghana (ministerial level and technical bureaucracy).
    • Botswana (ministerial level and technical bureaucracy).
    • Zambia (ministerial level and technical bureaucracy).
    • Ethiopia (ministerial level and technical bureaucracy).
    • Guinea (ministerial level and technical bureaucracy).
    • D.R. Congo (ministerial level and technical bureaucracy).
    • Nigeria (ministerial level and technical bureaucracy).
    • Niger (ministerial level and technical bureaucracy).
    • Algeria (ministerial level and technical bureaucracy).
    • Malawi (ministerial level and technical bureaucracy).
    • Zimbabwe (ministerial level and technical bureaucracy).
    • Afghanistan (ministerial level and technical bureaucracy).
    • Angola (ministerial level).
    • Tanzania (ministerial level).
    • Burundi (ministerial level).
    • South Sudan (ministerial level).
    • Congo Brazaville (ministerial level).
    • Cameroon (ministerial level).
    • Gabon (ministerial level).
    • Burkina Faso (ministerial level).
    • Mali (ministerial level).
    • Liberia (ministerial level).
    • Sierra Leone (ministerial level).
    • Namibia (technical bureaucracy).
    • Morocco (technical bureaucracy).
    • Mauritania (technical bureaucracy).
    • Senegal (technical bureaucracy).
    • Kenya (technical bureaucracy).
    • Uganda (technical bureaucracy).
    • Egypt (technical bureaucracy).

    This is a highly liquid market with willing buyers and sellers, and fantastic assets to trade. But look who failed to show up - the nation that’s retired to its mortgaged enviro-haven and expects someone else to bring it cobalt, thorium, tungsten, titanium, lanthanides, vanadium and everything else it needs to sustain its innovative industrial-commercial complex.

    Not only is the U.S. walking away from a chance to bid for minerals, or sway the outcome in favor of allies, but it has also gifted foreign banks first rights on the Cape Town generated deal-flow.

    Banks report doing more business during the week of Mining Indaba than they can drum up in the rest of the year for their mining investment divisions. Although American banks are active, there has been a decline in their representation, and the deal structuring and execution has increasingly moved away from New York.

    That also amplifies the risk that America will sooner lose the benefits of having commodities denominated in U.S. dollars since trading volumes gravitate closer to the largest sources of demand. Iron ore priced in yuan, anyone?

    Deal flow domicile has a domino effect on related mining service and equipment deal flow because bankers exert a strong influence over purchasing and servicing decisions. So there has been a parallel swelling of business going to non-American insurers, manufacturers, consultants and lawyers to name some key elements in the mining value chain.

    Reflecting this is the low number of mining related IPOs in the US, especially if they operate abroad. Related, there is also evidence that foreign markets are becoming sufficiently deep and broad to make an automatic parallel US listing (usually via depository certificates) unnecessary.

    Indeed, it is notable that no American securities exchange is showing up to pitch for business in Cape Town. By contrast, the London Stock Exchange, Australian Securities Exchange, Toronto Stock Exchange, and Johannesburg Securities Exchange having invested considerably in attracting clients to their markets.

    Analyzing Mining Indaba’s ~$1.5 trillion market value for sponsors reveals that very few American based mining companies are represented, and it has been steadily declining for 17 years. Indeed, a smaller proportion of American delegates make the trip south each year. And why should they? There’s no work for them thanks to American industrial and strategic policy.

    Perhaps someone could wake up the grandees in Washington to do more than write about securing materials for “green energy technologies”. That alone tells you all you need to know about the deplorable prioritization in American policy. The first requirement would be to place a national initiative in the hands of someone, anyone, other than the U.S. Department of Energy. How about the State Department getting someone into Africa to do more than dish out condoms and abortions?



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jan 20 4:02 PM | Link | 1 Comment
  • HudBay and Norsemont Strike a Good Deal

    The New Year is barely cold, but the merchant bankers are already plying their trade in the commodities sector.

    The most notable deal is that for HudBay Minerals (CA:HBM) for Norsemont Mining (CA:NOM).

    HudBay is buying Norsemont for around $400 million in a scrip and cash deal (click to see evaluation table) in order to add reserves and production from the latter’s Constancia project in Peru. Constancia is expected to produce 172 million pounds of copper per year and 2 million pounds of molybdenum in concentrate over a 15-year mine life. That would more than double HudBay’s annual copper production.

     

    Norsemont shareholders have been offered a ratio of 0.2617 HudBay units and 0.1 Canadian cents for each share (up to a maximum of C$130 million). The offer was only 2.7% higher than Norsemont’s Friday closing price of C$4.27.

    The first reason to notice the deal is suspicion that insiders have been making hay ahead of the announcement. Norsemont’s stock has been running very strongly since December 20. That was also 10 days ahead of a feasibility study optimization announcement. Volumes have not been notably higher, but can’t be considered that regular either.

    It’s also worth noting that Norsemont has been running hot since October without any obvious, or at least public, news catalyst.

    That aside, the transaction is one we like for being an example of sensible deal-making in the sector, in contrast to the problems we’ve highlighted in the precious metals sector.

    Key wins for shareholders:

    • HudBay is issuing a modest number of new shares with just a 10% increase and, thereby, gives up very little to Norsement whilst protecting its shareholders.
    • Norsement shareholders enjoy a massive decrease in risk which was reflected in the relative discount Norsemont has traded at despite its substantial reserve base.
    • Copper reserves per share increase markedly for HudBay, and it’s a minor trade off for Norsemont.
    • Presuming Constancia gets built on time and on budget, and cash costs hold at the projected level, we believe HudBay has an outstanding chance of not only recovering its investment, but of making a large profit.
      • By our calculations, HudBay is paying an effective all-in price of $3,127 per reserve tonne of copper. That is well cushioned give then current copper price of $9,331/t.
      • Norsemont shareholders may grouse about the value they are giving up, but it’s worthwhile to transfer the development and marketing risk to a company with an appropriate capital structure.
    • HudBay is now becoming well positioned as an emerging diversified mining company that offers an alternative to the giants, and which could boost its takeover premium.

    RBC Capital Markets is HudBay’s advisor, whilst Norsemont has engaged small player Cutfield Freeman & Co Ltd.
     

    Tags: HMB, NOMFF, Copper, Mining, Peru, M A
    Jan 10 5:06 PM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

  • Diversified miners a fountain of cash dividends that may hit significant records in 2011 http://bit.ly/fyUvXc/
    Feb 2, 2011
  • Zimbabwe takes a blunt instrument to its mining sector. Nationalization without any stealth. http://bit.ly/hoplz4
    Feb 2, 2011
  • Last Days 2 Enter Forecasting Competition 2 win 1oz of Gold, 100oz of Silver, iPads & Kindles. http://bit.ly/eUU8NE GLD CEF SLV IAU
    Jan 28, 2011
More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.