PDAC 2010: The Bull Market is Back

By Dave Brown

Call it investing through the looking glass or sympathetic fallacy, the temperature and mood at PDAC 2010 could not have been more different than last year’s convention.  An increase in the number of attendants, the weather outside and the mood of the market combined to create a great sense of optimism among this year’s participants.

During the past 78 years, the PDAC convention has become the world’s leading exploration and mining industry conference.  This year attendants numbered around 21,600, almost 20% more than in 2009; and with such a bullish market context, the optimism and positive sentiments demonstrated in the faces and body language are certainly excused.  Attendants comprised a diversified sample of individuals including prospectors, developers, mining executives, geoscientists, consultants, students, as well as individuals occupied in drilling, financial, legal, investment, media and supporting fields.

The Past

At last year’s conference, the mining industry was depressed. Commodity prices had collapsed, financing for projects was deficient, and even largely capitalized producers like Teck Resources Ltd. [TSX: TCK.A] were struggling.  The general mood of the convention was a range of sentiments bordering on cautious optimism to a slight sense of apprehension and trepidation.  Analysts had conflicting outlooks about the magnitude and forecasts for the current economic crisis, with a few predicting a relatively fast recovery and others predicting a prolonged recession.  A common theme of the conference was that the ongoing financial crisis was making investors extremely cautious of risk.  As a result, most of the venture capital was flowing to senior profitable gold producers, leaving many junior gold companies competing for increasingly scarce investment capital.

The Present

This year the convention has continued to attract and build international representation from countries around the world looking to monetize their mineral potential.  Commodity prices have been going in the right direction and financings are starting to prime the exploration pump.

Andrew Keen of HSBC Securities provided some bullish guidance on metal fundamentals particularly in the medium-term. Over the last twelve months, prices in metals have generally doubled, aside from gold. The head of metals and mining equity research for Europe, the Middle East and Africa thinks that the West is about half way through the metal recovery cycle.

The doubling of metal prices has been largely driven by the demand from China. China has stimulated their economy with developments in transportation, infrastructure and housing projects, which required copper, steel and aluminum. At approximately 8 per cent GDP growth, China has experienced a growth rate that is lower than in previous years, but it is still healthy. Chinese inventories of copper, zinc, nickel and aluminum have increased by more than 7 per cent since last year, an interesting fact considering that metal demand contracted by the same amount during the crisis.

The Future

While the bull market is back, it is still fragile. Interest rates will have to go up eventually, and that is never a good thing for metal markets. Inventories are a risk, and demand from the Western World is still poor. Looking to the future is fraught with difficulties and risks.  Last year, nobody expected prices to double; today, nobody expects prices to drop by half. The best way to make forecasts is to use fundamentals and to analyze the past with the objective of identifying future potential. We need to think about commodities that could double but not drop by half, like contract iron ore, coking coal and platinum. We should also think of prices that could drop by half, but not double, like copper.

In his concluding remarks, Keen noted that: the risks of decelerating growth in China are overestimated; in the medium- to long-term the outlook is good; the positive outlook is mostly a function of demand not shortage of supply. The world is not running out of minerals; the recovery is happening in some commodity and equity prices; and finally, there is considerable cash available after balance sheets have been repaired and excess costs have been reduced.

Don Coxe’s closing remarks for the conference addressed these optimistic sentiments.  His speech was titled, “Two Bets for Mining Growth: The Base Metal Bet on Asia, and the Precious Metal Bet on Obama.” Mr. Coxe also strengthened the case that the commodity bull market has a long way to run.

It will be interesting next year to look back and recalibrate our thoughts and portfolios. Hopefully, with the proverbial “wind in our sails” the exercise will not require such a different outlook from the previous twelve months.