By: The Mining Report and Paul Renken
Source: Brian Sylvester of The Mining Report
Paul Renken, senior geologist and analyst with VSA Capital, calls 2014 a soft year for gold and silver prices, but foresees stronger prices—and demand—for nickel, copper and tech metals as the year progresses. In this Mining Report interview, he lists the three commodities investors should feel good about and digs into the details of the Indonesian ban on exports of raw ore.
The Mining Report: Paul, what three predictions for 2014 does VSA Capital have for mining investors?
Paul Renken: We believe three commodities offer the best opportunities for capital or investment gains in 2014. First, several factors indicate that the uranium space will revert to the positive side. The end of Russia's Megatons to Megawatts program will take a significant amount of material out of the spot market. And while the Japanese reactors haven't yet come back on-line—and indeed Japan has been leaking some yellowcake, now surplus to requirements, into the market—we expect at least two reactors will be allowed to restart in 2014. Japan's balance-of-payments deficit is getting serious, due to the need to import liquid natural gas to make up its energy demand shortfall. All of this is favorable to uranium's spot price, which should rise to the $40/pound ($40/lb) level.
Second, we're bullish on the platinum group metals (PGMs). There is a significant amount of above-ground stocks, but labor issues remain volatile in South Africa. Last year, the country's Mines Minister had conversations with the Russian government about creating what they called a cooperative agreement, but which the commercial markets would call a cartel, to gain more control over the price and availability of PGMs. Another piece of news in the PGM space is the difficulties Colossus Minerals Inc. is having obtaining financing on its project in Brazil. That was to be a significant gold and PGM producer outside of South Africa. Today, that project no longer appears to be reasonable or even probable, due to financial difficulties. Given the improved auto-manufacturing outlook in Europe, China and elsewhere, we think PGM prices will continue to firm through the year.
Third, we think that gemstones, specifically the diamond space, is a good place to be this year. The luxury market continues to show buoyancy. Any company in position to produce gemstones—diamonds in particular—will do well this year.
TMR: Looking back on 2013, which predictions in the mining space did VSA get right?
PR: I have to start by admitting that many analysts, myself included, got many things wrong as far as equities were concerned, with the big downdraft in precious metals selling that began in April. But we did get a good many things right.
We correctly forecast the average of both thermal and metallurgical coal prices for 2013 in the relative range of $90-100/ton for thermal and in the $140/ton range for metallurgical coal.
We also were proved right in predicting that the copper equities, particularly the large copper producers, would underperform in relation to the copper price. The copper price came off from an average, but the copper equities sold off significantly more.
TMR: How would you describe the current state of the mining space?
PR: We do see significant pressures on gold and silver prices, with the selloff of exchange-traded fund products continuing into 2014. At the same time, there are concerns that the Federal Reserve's tapering will be whittled back. That will have the effect of improving the U.S. dollar. Overall, until we get some clear sense of direction, we think it's a mixed bag.
TMR: VSA Capital CEO Andrew Monk predicts that the FTSE will finish the year at 72.50. It's currently around 65.50. What will account for that 11%?
PR: The general investor sentiment among European and North American institutional managers is that U.K. equity valuations overall are somewhat of a bargain. In addition, going into 2014, the U.K. economy appears to be the strongest among the major economies.
Those two factors are causing institutional investors to buy into U.K. equity. Of course, the biggest names in U.K. equity are in the FTSE, so that's where we see the strength coming from.
TMR: In general, Western market strength leads to currency strength, which is typically a recipe for lower gold prices. What is VSA's forecast for gold and silver prices in 2014?
PR: We are in the modestly bearish camp at this point. Our market view sees the gold price spending much of the year between $1,100–1,200/oz ($1,180/oz average for the year), with some strengthening going into Q4/14, when we expect signs of inflation to start appearing.
Because of industrial demand for silver, we expect the silver:gold ratio to improve over where it was in 2013. We expect the silver price to remain below $21/oz for much of the year. Toward the end of 2014, it too should move up on inflationary expectations.
TMR: A recent VSA research report said that Indonesia will no longer ship raw ore. This has limited the supply of nickel laterite ore available to Chinese steel smelters. Does this mean nickel prices are heading higher?
PR: We're generally constructive on the nickel price, because of concerns raised by the Indonesian ban among nickel pig iron producers in China, who had steered their industry toward this high-grade laterite nickel ore from Indonesia. We think the nickel price will improve from here. By the same token, there is a lot of nickel metal in warehouse inventory and we would have to see those inventories come down before having sustained confidence in a higher price.
TMR: When is that likely to happen?
PR: There was evidence throughout 2013 of the Chinese stockpiling nickel laterite ore for use in the event of an Indonesian ban. We figure there's a good four to eight months worth of high-grade nickel laterite ore in stockpiles in China. This gives the Chinese mills time to seek alternative supplies.
TMR: Do you follow any nickel equities?
PR: We follow quite a number of them, because we are curious to see if they are able to produce what they say they will produce, according to the timeline they claim.
TMR: VSA has reported growing demand for niobium, tantalum, indium and lithium, all of which are used in products like tablets and smart phones. What are your theses for those metals?
PR: Niobium and tantalum are produced from minerals called colombite and tantalite—combined by the industry into the word "coltan." They are used in the battery packs of every portable communication device we have: cell phones, laptops, tablets. Granted, the amount used in each battery is small, but millions of these devices are being produced, making this a significant market.
Niobium and tantalum producers are in places like Australia, Brazil and Canada. The minerals have a high specific gravity, and thus can be easily concentrated with very nominal or artisanal mining methods. As a result, a lot of this material moves in the shadow world of individually traded barrels, often from countries that have had difficulties with social and civil strife. That's one of the specific reasons why the United States passed a conflict-free mineral law targeting the Democratic Republic of the Congo and neighboring states. The objective of the law is to get control of the trade or provenance of this coltan so consumers are not indirectly financing civil wars.
TMR: Do you want to talk about another of those metals you named?
PR: Indium is what makes touch screens work. There's a little coating of indium on the back of the quartz or a zircon screen you look at on your tablet or cell phone. The indium picks up a little signal of electricity when you touch the screen.
Lithium is all about the coming electrification of the transportation industry, specifically lithium-ion batteries.
TMR: Do you have any parting thoughts for us?
PR: Don't give up on the mining industry. A lot of people did tax-loss selling for 2013 because of the significant losses they had in equities. I agree with Rick Rule: If you've hung in there this long, then why not hang on long enough to participate when these materials rally in 2014 and 2015?
Timing is the particular issue. The rally will happen when we start seeing inflation numbers and rising interest rates around the world. We're not there yet.
TMR: Paul, thank you for your time and your insights.
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 U.K., he worked in the equity market media outlets of Digitallook and Hemscott before joining VSA as mining analyst in 2006.
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-- Posted Tuesday, February 25 2014 | Digg This Article |
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