Commodities market research, consulting, asset management, and investment banking are all in high demand. And what all these have in common is that to be successful in each requires a person with a specific skillset. To consult some of the wealthiest people and institutions in the world on commodities and investing requires a profound understanding of economics, politics, world issues and perhaps most importantly, people. Our next guest is an expert in each of these arenas. Catherine Virga is a senior analyst at CPM Group and is involved in client consulting services for major mining companies, a full range of institutional investors, and commodities consuming companies.
Resource Intelligence: In 2009, there were enormous jumps in the prices of working metals. Lead was up 135%, copper 134%, and so on. Are we going to continue to see this trend?
Catherine Virga: We are forecasting that we are going to continue to see strength in industrial metals in 2010. In 2009, there was a rather linear approach to the recovery and that should be expected, given base metals historic trends during an economic downturn.
For 2010 I think it’s going to be a more interesting year for your savvy investor, because there are going to be periods of profit taking that are going to lead to buying opportunities for other investors. It won’t be as attractive for your long-only investor in the sense that you’re not going to have this continued upward trend, but there will be a kind of choppy upward fashion to the continued recovery in base metal prices for many of the metals.
RI: Are there any specific base metals that you feel are under priced?
CV: Industrial metals have good demand fundamentals, but more important are tight supply fundamentals. There are several metals that fall under this category such as copper, zinc, molybdenum and on the precious side, platinum and palladium could be interesting this year.
RI: Putting on your investment management hat for a moment, where should the investor be going right now if they want to play in the base metals area?
CV: The commodities that were most positive in the base metals would be copper and molybdenum in the nearer term. Zinc I think would be much more positive going into 2011. I do think that there are some interesting primary plays for molybdenum where investors can gain exposure and also with copper. While there are a lot of diversified companies there, you do have some smaller projects that you can take part in.
RI: Given the economic landscape we’re seeing, do you think 2010 and into the coming decade may been seen as spawning ground for mergers and acquisitions as opposed to developing new projects?
CV: Absolutely. The one thing that we saw in 2009 was a dramatic slash in exploration budgets. This is a great time period to move forward with expansion plans and growth plans by acquiring some of the juniors that already have very decent projects. There has been some appreciation with these juniors over 2009 if they had a good project. But they are still vastly undervalued from what we saw in 2007 or 2008. There is still a lot of good opportunity for growth through mergers and acquisitions along those lines. I think that 2010 is going to see a definite uptake in that.
RI: What are the underlying macroeconomic drivers behind the surge in moly?
CV: It particularly has to do with the end uses of molybdenum. Molybdenum is an industrial metal and about 70% of it is used in the steel market. We’ve already seen a tremendous jump back into manufacturing in China followed by expansion and manufacturing in Japan, the US, and Europe. So there already has been a fairly significant recovery there, but for the steel market it has really been China that has shown the most recovery so far. China’s fiscal and monetary stimulus have really boosted Chinese steel production. This year alone we saw new loans in China increase two and a half fold. This year we’re looking to see restocking pick up in the developed markets, which will continue to boost molybdenum demand.
The other big end market for molybdenum is its use in the energy industry as a steel catalyst in super alloys. There is a range of end uses for moly that are used in the energy industry, so as we see oil prices tick up we will continue to see the increased demand for infrastructure that typically contains molybdenum bearing material.
RI: What about the use of molybdenum in nuclear waste repositories?
CV: This is something that is going to continue to present growth opportunities for molybdenum. Molybdenum can be used in the steels that are used in the waste facilities. 316 stainless steel contains molybdenum and that is one of the most common steels out there. Other specialty steels will potentially contain molybdenum and that would be of course, very bullish for molybdenum demand prospects.
RI: You’ve said that the price of moly is event driven. Could you elaborate on that?
CV: Well, molybdenum is actually a very small market. Compared with nickel, which is also primarily used in the steel market, moly is roughly 1/6 the size, with only 422 million pounds mined last year. As a result, particular events on the supply and demand side can have a significant impact. We have seen from the industrialization and build out of emerging markets, particularly in China, a real boost in molybdenum prices and that is because these markets command such a significant share of the molybdenum market. In the past we have seen particular changes in Chinese policy that have been market drivers for molybdenum prices. Last year China produced about 38% of the world’s molybdenum supply, so when China makes changes to the supply and demand of molybdenum it’s going to have a significant impact on prices.
RI: So you’re really calling for moly to continue going north?
CV: We are forecasting continued strength in molybdenum prices. We have the market moving into a tighter surplus this year and then a multiple year deficit starting in 2011. It could be quite interesting for the molybdenum market.
RI: Would you be buying shares in juniors or producers?
CV: For molybdenum historically about 60% of the production is from byproduct producers. That is primarily copper producers that produce molybdenum as a byproduct and the remaining 40% is primary producers. The latter are companies like Thompson Creek and Freeport-McMoRan. So there are opportunities to play on the equity side and primary producers have full exposure to the molybdenum prices.
We are seeing a shift in the market fundamentals in the sense that we’re going to have 50% of the market produced from byproduct and 50% produced from primary molybdenum players. So increased market share for primary producers as we become more dependent on their supply, but you have the opportunity for full exposure to the commodity prices when you do invest in these primary operations.
Copper is a little bit different. There are such diversified players. There are juniors that primarily rely on copper fundamentals and prices, but that is a market that you are able to have some physical exposure through futures or ETFs. These are not as popular for base metals as they are for precious metals, but they do afford some opportunity to have retail exposure into base metals.
RI: Are you witnessing new mines coming into production?
CV: We’ve already seen investment flowing into precious metal projects and that should eventually be the case for base metals, as well, but new project financing for base metal companies is still fairly limited. There are a couple of projects that will be trickling out, but a lot of this has been pushed out several years.
Now that we’ve had this rise in base metals prices, we are seeing there is potentially more financing out there for base metal companies. However, base metals projects tend to have much higher expenditure cost projects, so it’s primarily the lower cost projects that are going to make it on line.
We’re also seeing some mine expansion plans going forward, which could be companies that already have existing cash flows.
RI: Will there be any significant new mines coming on, or mothball mines coming into the market that are going to all of a sudden take the air out of prices?
CV: There have been projects that were not attractive 20 years ago that are more positive today. So, there are opportunities for some larger scale projects to come on and satiate some of the demand needs. Again, this could be two to three years out from where we are right now. Industrial metals and base metal projects are very capital intensive. We can have projects that exceed $1 billion and require a significant amount of work to even receive the project financing to move forward on these projects. So again, it’s these smaller expansions that are expected in the next two to three years. The larger projects might start to trickle in by 2014 or 2013 possibly.
RI: Dr. Copper had a huge gain in 2009. Some people are saying $4 per pound for the coming year. Do you agree?
CV: We are bullish on the copper market because there are strong fundamentals, particularly with supply. We are expected to be approaching a very narrow balance between supply and demand. We see a very small surplus in 2010, but I do know some analysts are forecasting a deficit already occurring. We are starting to see that demand is picking up in developed economies, but supply can’t respond quite the same. There is really a lag in the supply response. So in that case we are going to see inventory drawdowns and some pressure on supplies in both scrap and primary supply. We are looking to have a firmer price in 2010, not quite $4, but we do think that prices could get up to about $3.30 for the year on the annual average.
Disclosure: No Positions