We are in a world of uncertainty and volatility. I spend a fair amount of time each week talking to people who are very much researched and have excellent insight on what should happen going forward, but even these people are not wizards with the ability to exactly predict short-term movements in the markets.
What you can do is prepare for the worst and thrive. Within the precious metals sector, which has been in a depression for the last 4 years, many people have not had enough fortitude to withstand the bear market and stick it out for the bull market that will inevitably come.
I just interviewed Gwen Preston, from ResourceMaven.ca, who is becoming a force to be reckoned with in the resource space, and someone with a great amount of insight on how to thrive in this current environment while making short-term and long-term trades.
Gwen takes us through in an interview the supply and demand crunch that is coming, among a number of reasons, one of which being that the spot price for much of the production taking place at the moment is below the cost. In that same vein, we discuss what the impact on the mining industry has been, with oil getting slashed and having sustained itself under $50 per barrel for a long period of time.
When asked about her favorite commodity at the moment, she mentions uranium which has been under a tremendous amount of pressure lately with the dollar strengthening, as well as the Fukushima event that has made uranium almost a curse word in the investment world. What we know is that there is a major supply-demand crunch coming in regards to uranium, and Gwen shares her sentiments towards this commodity in our interview.
Transcript
(00:33) Kenneth: Hello, everyone, and welcome in to CrushtheStreet.com. I’m Kenneth Ameduri, and I’m joined today with Gwen Preston, which is the Resource Maven. She is the Resource Maven. She’s with ResourceMaven.ca, and has years of experience as a mining journalist, which has given her a deep base of knowledge and a wide network of contacts in metals and mining. She knows how to make money in mining, whether it’s in good markets, and in bad, through short-term trades and long-term buys. In the Maven Letter, she explains exploration and mining news, sifts through macroeconomics to find pertinent trends, and explains her portfolio moves. Gwen, thanks so much for taking the time to come on the show with me today.
(01:20) Gwen: Thanks very much for having me.
(01:23) Kenneth: Gwen, I wanted to start off with this, and just to get your thoughts… right now, a big question that people have is how long metals can stay below the cost of production without there being a supply issue. Let’s start off here, and get your insight on this.
(01:44) Gwen: Absolutely, and that’s a very good question. It’s interesting from a number of angles. One of them is that the mining sector has been in a downturn, in a bear market, for 5 years now, so it hasn’t been a lot of fun for those of us who work in mining. But until recently, I would say a lot of people in the sector, a lot of companies in the sector, continue to focus on precisely the question you just asked, which is “when’s it going to turn around?” And so, the idea was “let’s just get ready for when things turn around.” Of late, I think the change in 2015 has kind of been… we’ve all realized that there isn’t actually going to be a significant change anytime soon. We’re at the bottom, but this is a very broad, U-shaped bottom. There’s no near-term massive move up that anybody really expects. So with that realization, more and more people and companies are… instead of getting ready for the upturn, they’re figuring out “how can we make things today? How can we make the current climate work for investors, for shareholders, for projects?” And that’s really helped, because it’s created some interesting opportunities, it’s created some ingenious methods of financing, and whatnot in the sector. Now, the biggest setback: the other part of your question that’s interesting is simply “when are metals going to make any moves to the up-side?”
(03:10) Kenneth: The million-dollar question.
(03:11) Gwen: Absolutely, yeah. And there’s obviously… the answer to that is specific to each metal. My most bullish answer to that is on zinc, where zinc production has for years been dominated by several large mines, and quite a few of those mines have already closed, simply because they ran out of ore, or are about to close. And there really is a structural supply-demand crunch looming in zinc. There’s always been a question about Chinese zinc supply and how much that will fill the gap, but the general consensus is that in 2016, we should see up-side in zinc. So that’s a near-term one. Another one that’s near-term is uranium. Uranium is a complicated issue because of— after the Fukushima disaster, and in general, nuclear power sentiment. Nevertheless, we are also looking at a supply crunch on the uranium side. That supply crunch is still a few years out, but because nuclear utilities require, like need to cover their uranium requirements ahead of time… the worst thing that could happen to a nuclear reactor is that they run out of uranium. So they cover their requirements a few years out. The price needs to start moving fairly soon in order to pave the way for those supplies to be ready in a few years when the supply crunch is looming. When you come to the more mainstream metals, by which I sort of mean copper and gold, the arguments there aren’t as strong. Gold supply-demand to me is not a driver of gold… gold is more of an economic sentiment metal, and you can literally argue gold up or gold down until you’re blue in the face. I think and I’ve heard many do exactly that. I am somewhat like cautiously bullish on gold in 2016. I don’t expect massive up-side move, but I think it will strengthen somewhat through the year. Copper I’m not so certain about. The copper price decline has only recently started leading to production cutbacks, and that’s going to need to happen more before the price really responds in the absence of a massive driver, like the Chinese building boom that drove copper in the last round.
(05:31) Kenneth: Well, with that, how has oil affected these companies, specifically… obviously, oil being over $100 a barrel, and now it’s below $50. What has the significance of that been on the mining industry?
(05:46) Gwen: Well, within this bear market, where the price of the products keeps declining, the fact that the cost of this input is also declining has not really helped. So especially for the large, open-pit operations that just have to move a lot of rock, the fact that oil is a lot cheaper now than it was a year or two ago has really helped those companies. And that’s great, because the focus certainly, in mining over the last few years, has been “cut costs, cut costs, cut costs. How can we make our businesses more economic?” The lower oil cost has really helped in that. Another similar bit of help has come from foreign exchange, so the gold price is not doing particularly well in U.S. dollars, but that’s primarily because the U.S. dollar is doing so well. If you look at the price of gold in Canadian dollars or Australian dollars, we’re at $1,500, we’ve been at a high of $1,600 for sustained periods of time over the last year. So companies that are benefitting from low oil prices – that’s all of them – but who were then also having costs in weak Australian dollars or weak Canadian dollars, amongst others, but yet selling into the strong U.S. dollar… those companies have really benefitted as well. There’s quite a few examples of companies that are doing really, really well right now because of that combined boost from the lower oil costs and a weaker currency.
(07:18) Kenneth: Gwen, you mentioned from a fundamental perspective that why you like zinc, why you like some of these other metals, and why you’re not as optimistic in other metals, but I want to ask you from like a macroeconomic level, could a global recession be great news for, let’s say gold and silver, and then add further pressure to base metals, which are more closely tied to the economy? And even silver, for that matter, which is very much an industrial metal.
(07:51) Gwen: Yes, you’ve absolutely hit the nail on the head there. Certainly, a global recession would lift gold, and gold, I think, is independent from the other metals. And like you say, silver is somewhat tied to gold, but half of silver is controlled by industrial applications. So, yeah, I think that absolutely could happen. The big weight on the copper price right now is that combination of production was rising, because it takes so long for infrastructure investments to see through to rising correction levels. The production has been rising quite some time. And yet Chinese growth is slowing, and global growth is sluggish, and therefore there isn’t that just rampant demand. I mean, that being said, Chinese growth of whatever it actually is, let’s call it 5 or 6%, today, is as significant in terms of incremental copper demand as Chinese growth of 14% was a dozen years ago, because the base is so much bigger. We certainly are a world that needs an increasing amount of copper, and of zinc, and of base metals in general, every year. But, I mean, metals are driven by sentiment as well, and there isn’t that feeling of this big economic push that’s going to lift those prices. So absolutely, a recession would be tough for base metal miners, but would probably help this whole sector.
(09:24) Kenneth: Okay, we’re not far from a rate hike decision. What are your thoughts on this? Do you think the Fed will raise rates? And how do you believe this will impact the mining sector?
(09:36) Gwen: Yes, this is the topic of so much discussion. I mean, in a lot of industries, but certainly in mining of late. I think the Fed will raise rates In 10 days here, but I think they will do it with an abundance of language suggesting that there will not be another rate raise… to not expect another rate raise anytime soon thereafter. The impact, I think, there’s a lot of debate about what that will do to the dollar, the U.S. dollar. I see a short-term rally but I think the dollar is almost as high as it can get. A stronger dollar from this point would really start to hurt the U.S. economy. And also, historically, if you look at the first rate increase of a new cycle, the dollar actually falls over the up to three-month period most of the time. I actually expect the dollar to sort of rise and then fall off a bit. I expect gold may actually rise on the news, probably after, sort of in opposition to the dollar after a short-term fall. And that’s partly due to short covering, because the dollar might not do exactly what they expect. At the end of the day, though, there has been so much talk about this rate raise, I think it’s somewhat baked in. What is more important than the details of the Federal rate is the overall question of whether the U.S. economy is really doing that well, what the global economy’s doing, what new European central bank liquidity measures, the sluggish Japan. These sort of bigger questions are really, are fundamentally more important than the detail of the U.S. dollar rate raise, even though, of course, we like to focus on that detail. So there’s no guarantees, but I still see gold having its early-year seasonal rally that it has every year. So I see gold doing quite well in January, almost regardless of what happens at the Federal Reserve.
(11:48) Kenneth: Okay. Well, Gwen, you do short-term trades, and this actually caught my attention with mining companies. Could you elaborate on this strategy? I believe most people buy companies in general, especially like these exploration and mining companies… they’re waiting for the bull market, or, ultimately, a game-changer for an individual company. How do you go about short-term trading, and, if you want to talk about also your long-term plays as well, feel free as well.
(12:23) Gwen: Yeah, for sure. No, I mean, you’re correct that usually, the reason that investors are interested in the mining sector is for the bull market, right? A bull market can produce incredible returns in mining stocks. The fact is, though, we’re in a bear market, have been for many years, and like I said earlier, I don’t expect that to change overnight. So rather than sitting around and waiting for the bull market, which will come, and it will be great, but patience is wearing a bit thin. So rather than just waiting, there is opportunity to lock in some smaller gains with short-term perspective. So the things that I focus on there are seasonality, corporate news events, and sort of promotion pushes. So seasonality, looking at gold in particular, gold has some very, very reliable seasonal patterns. It always gains in January. It usually gains again to finish off the summer. Falls always during November. You can look back over dozens of years and see these patterns happen every time, and gold explorers, developers, and miners reflect those gold price movements. So if you play seasonality, you can lock in, call it 20%, maybe 30% by sort of buying at the end of tax loss selling season and then selling again maybe only a month later. But just relying on that gold seasonal rally. Another one is just straight-up corporate news. If you follow companies closely and you realize that news is coming, or you can respond quickly when news first comes out, even though the bear market is dragging everyone down and response is… share prices aren’t necessarily rocketing on good news, there are situations where share prices are certainly responding to good news. Pretium Resources is one example where earlier this year, they were waiting for the environmental go-ahead to build their mine, and confirmation that they’d raised enough money to build their mine. And they weren’t quiet about the fact that they were waiting for these things. That was the publicly-stated scenario. So if you followed the company and you were aware that these things were pending, and you were able to develop yourself enough confidence they were going to happen, you sort of could buy before the first announcement and sell after the second announcement because goals were successfully achieved, and you could lock in yourself a good 35% gain there. So there are shorter-term trades in this sector that are, for me, keeping me engaged and positive in the mining sector until the big bull market comes. The other side is I’m certainly also positioning for the bull market, so I’m finding the companies that I think will respond first and best when the bull market really establishes, but that’s still a while off.
(15:22) Kenneth: Well, I can’t argue with that, and the next thing that I had on my mind, actually, to ask you is… in this period where metals are severely depressed, is it worse, in a sense, to be a producing company, depleting their assets at such low valuations, or it may be a blessing for exploration companies, who are exploring during a time when these prices are really low, and potentially producing in a time where prices might be substantially higher?
(15:58) Gwen: It’s a very interesting question, and perhaps the answer might be that the grass is always greener on the other side. I think if you’re a producer, you need to be able… there’s no point being in production unless you can make money. So, like I said, a lot of producers — every producer — has focused over the last year on really cutting costs. But a lot of producers are still actually making money. Now, there’s a lot of overhang, yet, from debt servicing costs, or project write-downs, so they’re impacting quarterly or annual results, but a lot of mines are actually making money. There’s like… uranium is an interesting example of this exact question. There’s quite a few companies right now in the United States that are preparing a bunch of uranium projects for production. They’re getting the permits in line, they’re getting the engineering done, they’re getting completely ready to go into production once the price rises a bit. But they’re mostly of the opinion that there’s no point going into production until that happens, because as you said, you don’t want to, like, deplete your resources just moving rocks. Being on the other end of the spectrum, as an explorer, is really difficult as well, because there’s just no equity financing available to fund exploration right now. So it’s not… if you have a bunch of cash in the bank because you did a big raise back in 2013 when things weren’t so bad and you managed to hold on to it, and you can still be exploring, fantastic. Yes, this is a great time to be exploring because people are available, equipment is available, so that’s fantastic. But if you don’t have money, it’s very difficult to find any money. Perhaps the sweetest spot is to be that sort of advanced exploration project that’s almost ready to go into development, that has the ideal asset that is what everyone’s looking for right now, which is an asset that’s easy to build, in a good jurisdiction, that is going to be able to produce metal at a low cost. Those teams, and there’s only a few of them, have been able to raise money and continue moving their asset forward from when the bear market began, and they are truly positioned such that when the markets start to move, they, I think, will outperform everyone else. So, like I say, there’s kind of pros and cons to each situation.
(18:27) Kenneth: Yeah. No, I totally agree with that, and, I mean, thanks for shedding some light on that issue. Just… it’s just a philosophical thing that, ideally, which company is the best, but, of course, it always comes down to every company’s individual situation. Do they have the money, are they going to find a resource, is there management, so I understand that, too. Can you remind us what was your commodity that you’re most interested in for upside potential, and just your closing thoughts on what you suggest people to do regarding their investments in the resource sector.
(19:14) Gwen: Sure, yeah. So, the reason the sector is really full of opportunity right now, if you have a long-term time horizon, like if you’re willing to make investments right now that you don’t need returns on for, call it 5 years. It is an incredible time to be making buys, because 5 years from now, the companies will be worth multiples of what they’re trading for today. You have to pick right… some companies are just barely surviving, and they might die yet before the bull market arrives. So you really need to pick right. And to do that requires a lot of research, so here’s a little of a slide-in, a little promo here: if you happen to be in Vancouver on January 23rd, I’m putting on a conference alongside two other newsletter writers who I hold in great empathy. That’s Brent Cook, of Exploration Insights, and Eric Coffin, of HRA Analyst. They’ve both been writing mining newsletters for a long time, and we’re inviting our favorite companies and management to come and meet with our subscribers and have a day of corporate updates and shop talk. And that’s the kind of event where not only can you get advice from independents like myself, but you can meet management face to face, because like you just said, it really comes down to the particulars of each company, and I’ll argue that the most important particular is the people. You need to have people who have the experience, have the technical knowledge, know how to get through capital market challenges, know how to get through social-political challenges, and truly keep shareholder interest at heart, as their driving force. So really, getting to know management is really essential. So there’s opportunity in mining, short-term and long-term. It sort of depends how active you want to be as an investor, but if you’re looking for some long-term upside, there really is an incredible opportunity to position today.
(21:11) Kenneth: And what was your favorite commodity at the moment?
(21:15) Gwen: Right… I would say uranium. I think that we’re going to have some really good uranium up-side price movements in the next 24 months, for sure, and likely within the next 12.
(21:28) Kenneth: And Gwen, if people do want to reach out to you and find more information regarding your research, where would they go and what would they find?
(21:36) Gwen: Sure, so my website is ResourceMaven.ca, and there, every week, I publish a free article. You can get a feel for my writings and what I generally have to say. You can also sign up for a trial subscription to my newsletter, which comes out once a week. And that goes through… every week, I go through some interesting things that have happened in the sector, I dive into macroeconomics and talk about what matters in those macroeconomics when it comes to mining and metals. And then I make new investment recommendations and I track the companies that are in the Maven portfolio. And that portfolio is what I’m buying and what I’m selling. So it’s a letter that describes the market moves that I’m making, and if you’re interested, I would love to have you sign up for the free trial at ResourceMaven.ca.
(22:26) Kenneth: Gwen, thank you so much for coming on and sharing your insight with all of us. You’ve given us, really, a lot of excellent information, and I feel like we were able to just get to know the mining sector just that much more with you coming on the show, so thanks so much.
(22:45) Gwen: Well, I appreciate that. Thank you very much for having me.