Mining Business Risks Summit

Last month the Cambridge House Resource Investment Conference identified risk as a critical element for the mining industry. The second annual Mining Business Risks Summit jointly organized by The Fraser Institute and CRU Group held in Toronto, October 25-26 was well attended and focused on a broad understanding of how risks are developing in both emerging and traditional mining jurisdictions; analyzing and identifying the impacts of mining business risks from practical examples; and developing proactive solutions for environmental infrastructure, fiscal, social and political risks. Professionals from across the spectrum of mining, finance, law, regulation, government and consultancy agencies shared expertise in conjunction with an equally diversified delegation of participants on multiple aspects of managing risk.

Thematic risk

While some of the presentations highlighted cumulative risk theory and the need for calibrating various elements of risk across a matrix of functional areas, Don Coxe, a well-known Strategy Advisor for BMO Financial Group decided to first examine broader secular themes. Mr. Coxe discussed the prominent concept of demographic shift as it could be applied in the commodity and mining industries. Speaking about the global financial concerns and macroeconomic risks, Mr. Coxe offered some commentary, “this crisis is rooted in what is going to be a key part of my forecast in commodity prices which is the disastrous demographic changes that are occurring across the world. Disastrous for global growth, they started off in the advanced countries and that is the reason that the advanced countries are now struggling with social programs that they can’t pay for in low growth economies.”

According to some estimations, including a recent report by the United Nations Population Fund the global population will eclipse the seven billion mark at the end of this month. Although the present global demographic profile demonstrates a relatively youthful world where the generational cohort under 25 comprises 43 percent of the population, it is the older segment that is widely expected to expand the fastest. The growth of the number of people over 60 is forecasted to increase by a multiple of three by 2050, from 893 million to 2.4 billion, when the global population is estimated to total 9.3 billion.

Industrial metal demand constraints

In looking at a long term catalyst for underlying base metal price volatility, food inflation appears to be a primary risk. Mr. Coxe explained, “China has been drawing in the reins on its runaway economy not just because of some abstract economic principle that they shouldn’t be growing at more than 11 percent a year, but simply because of food inflation.” The impacts of this become magnified, “Food inflation in its own way works as being a downward pressure on the price of metals. Obviously, if you slow down growth in China, India and Indonesia because of food inflation, you are going to slow down at the margin what has been the biggest driver of metal price increases.” For a long term forecast, the price of copper might average $3.50 per pound, with further constraints from the risk of Chinese population growth slowing and increased sources of supply from recycling activities.

No scrap oil

Energy costs should continue to appreciate according to Mr. Coxe, because, “85 million barrels of oil get burned up a day. At the margin, the prices have to go up because we have run out of all the low cost sources of supply. Peak oil doesn’t mean we are running out of oil, it means we are running out of oil at $50 bucks a barrel.” As a forecast, “oil prices are likely to stay at about $70 bucks [per barrel of oil] in real terms.” He also believes the spread between the West Texas Intermediate and the Brent will be eliminated within the near future, “the United States and to a lesser degree Canada will not have an automatic competitive economic advantage in competing with Europeans as a result of the distortion of energy prices.”

Precious metals

A gold standard may surface in the mid term, which would suggest a strong potential positive risk for investors. The mechanism for this might be the destruction of fiat currencies as suggested by Mr. Coxe, “the financial crises reveals the fact that the economic underpinnings are eroding. Demography is so powerful, so potent and so sustained. I think we will get something like a gold standard within the next 8 to 10 years, because the Euro will disappear within the next 3 or 4 years. The [economic] crisis is terminal and precious metals will continue to be the best long term bet for the mining industry because you aren’t going to have to worry about all of those other factors that might be a constraint on demand.”

Securities Disclosure: I, Dave Brown, hold no direct investment interest in any company mentioned in this article.