Paul Robinson: There are Few Poor Juniors - But There are Poor Investors

This year’s Prospectors & Developers Association of Canada (PDAC) conference wrapped up last week, and it’s no secret that attendees were much more optimistic than they have been for the past few years.
But is that optimism warranted? According to Paul Robinson, director of CRU Group, the answer is yes. “As a whole, there’s cautious optimism for the commodities sector this year,” he said at the sidelines of the show. “We’ve got slow, firm growth across most commodities, with the exception of iron ore and met coal, where it’s a little bit slower.”
CRU Group believes cobalt, copper and zinc have the brightest outlooks this year, but Robinson acknowledged that there are factors that could throw those metals off their positive trajectories. For cobalt, whose price has increased significantly in the last six months or so, he said that artisanal mining in the Democratic Republic of Congo (DRC) could be an issue.
“We expect to see a response from the DRC, the artisanal miners, who will increase their cobalt production in 2017 because of the very strong price signal,” said Robinson. While that’s built into CRU Group’s cobalt forecast, he thinks it’s something not all market participants will be expecting.
Robinson also cautioned investors to continue to do their due diligence, even when investing in a company focused on one of this year’s hot commodities. “There are too many investors that get caught up in the commodity story, and maybe don’t realize that … they’re engaging with a management team that has never brought assets to market, or a technology that’s never been used before,” he said.
Listen to the interview above to hear more of Robinson’s thoughts on the commodities space this year. You can also click the links below to skip directly to specific parts of the interview:

• 0:28 (the Chinese economy) — “[Look] at two things — look at those environmental considerations, and look for stability in the economy, at least over 2017.”

• 1:51 (possible headwinds for cobalt, copper and zinc) — “Over a two- to three-year horizon we think that they are positive commodities … but there are things that can throw them off over the short term.”

• 3:50 (other metals that may perform well) — Robinson mentions manganese and lead.

• 4:57 (2017 commodities outlook) — “As a whole there’s cautious optimism for the commodities sector this year. We’ve got slow, firm growth across most commodities.”

• 6:03 (tips for investors) — “There are actually very few poor junior miners, but there are poor investors.”

The transcript for this interview can be viewed below.

INN: I want to start out by talking about today’s global political environment. In your presentation you mentioned there’s a lack of clarity over US and Chinese policies. I think investors are pretty familiar with US factors like interest rates and Trump, but I wonder about China and what market watchers need to be aware of over there.

PR: I think there are two important considerations regarding the Chinese economy in 2017. The most important is we’re going through a change of leadership at the end of 2017, and therefore there is a desire from the Chinese government to maintain stability throughout 2017. That’s actually good for commodities because it means that we’ve got a stable outlook.

The other important issue that China is battling with now, and over the medium term, is the balance between economic growth, economic stability and the environment. And so what we’re seeing in China is some quite short-term reactions such as we saw in met coal last year, where they’re closing down capacity to deal with the environmental considerations.

Now, as much as that can be good for commodity prices in the short term, and bad for some producers, it’s actually a positive sign that the Chinese economy is performing well because China doesn’t tend to try to fix its environmental issues unless it believes it’s got the economic stability.

So looking at two things — look at those environmental considerations, and look for stability in the economy, at least over 2017, because of those political changes.

INN: Got it. Another big part of your talk was which commodities are going to do well this year and which aren’t. Ones you mentioned that are hot are cobalt, copper and zinc, which I’ve heard a lot about. I’m wondering if there’s anything that could throw those metals off their positive trajectories.

PR: Over a two- to three-year horizon — we think that they are positive commodities over that horizon. But there are things that can throw them off over the short term, particularly in 2017.

If I go through them in order, I think for zinc, the worst thing that could happen would be a bad communication of the restart of Glencore (LSE:GLEN) production facilities. So if that wasn’t telegraphed well, and that came as a shock to the market, that would bring more production online than investors expected. We don’t expect those Glencore assets to restart until 2018 — if they came earlier, that would be negative.

For copper, I think the challenge is we all know that there are large reductions in copper concentrate now because of the strikes in South America. It’s really important to understand how long that will take to flow through to the copper balances. And so it’s important to make that distinction. It won’t impact metal balances straight away.

I think on cobalt we expect to see a response from the DRC, the artisanal miners, who will increase their cobalt production in 2017 because of the very strong price signal. That’s built into our forecast, but we suspect that some people out there will be surprised when they see an uplift in production in 2017 from that particular sector.

INN: That must be very difficult to track, I would think, those artisanal miners.

PR: It is difficult to track. We’re lucky that we have … 30 of our team in Beijing. We’re able to track the imports going into China, and we also have got history on our side. We know the sort of response we got from that sector back in 2005, and I think 2008 as well.

INN: So difficult but certainly possible.

PR: Doable, yes.

INN: Some of the other possible hot commodities you mentioned were more surprising for me, like manganese and lead. Could you talk a little bit about those metals and why we should be optimistic about them?

PR: I think in the case of manganese, there is still general strength in the steel sector. It’s still a commodity that is relatively underinvested, and therefore it’s just a simple question of supply, demand and looking like we’ve got much tighter markets than we’ve had in recent years.

Lead is a little bit duller, I’m afraid. Apologies to your lead followers out there. Lead will just continue to give us steady growth and steady demand … we’ve got good performance partly on the back of the rest of the LME complex. But also it is really the “steady Eddie” as we call it in England — it’s just got that steady consumption growth that gives us good economics.

INN: And for lead, is there a reduction in supply because more zinc is coming off the market?

PR: We don’t see anything in particular on the lead supply. I think there’s some issues with the smelting in China, but nothing significant on that side.

INN: Obviously there’s more to the picture than top-performing commodities. As a whole, what is your outlook for the commodities sector this year?

PR: As a whole, there is cautious optimism for the commodities sector this year. We’ve got slow, firm growth across most commodities with the exception of iron ore and met coal, where it’s a little bit slower.

We’ve got good signals from the Chinese economy as I said earlier, so we’ve got firmness in the Chinese economy. And we think there may be a little bit of upside in the North American economy as well. That firm growth means that we’ve got a nice underlying demand side. And generally, though not in all cases, supply and new supply growth is now under control. We’re starting to see market balance and we’re starting to see that sentiment come back to the market as well.

INN: That sounds like a nice change from the past couple of years. Finally, I really liked in your presentation your overview of what makes a good junior. I wondered if you could flip that on its head and tell me what factors would make you think a company is just not good; a red flag?

PR: I think maybe I’ll answer it in a different way. I think there are actually very few poor junior miners, but there are poor investors. As an investor, I think particularly in the junior mining cycle, this part of the cycle, you’ve got to really understand what you’re investing in.

I think there are three risks that you typically take on with a junior miner. You take on management risk — can they bring it to the market or sell the asset? You bring on technology risk, so are they using a new technology or are they using existing, proven technology? And you’re taking on commodity risk. Now, if you choose to take all three on, just understand that you are taking three risks. 

It’s a risky venture that may well make more money. I think there are too many investors that get caught up in the commodity story and don’t realize that maybe they’re engaging with a management team that has never brought assets to market, or a technology that has never been used before. So it’s not so much a bad investment as a bad investor not understanding the risks that they really are taking when they make that move. Good due diligence, and then you can make the right investment.

INN: So maybe just don’t buy every cobalt company?

PR: Maybe not every cobalt company, unless you want to take that sort of risk. 

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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in contributed article. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
Related reading: 
PDAC 2017, Day 1: Notes from the Floor
PDAC 2017, Day 2: Notes from the Floor
PDAC 2017, Day 3: Notes from the Floor