Speaking with the Investing News Network at the recent International Metal Writers Conference, John Kaiser of Kaiser Research shared his thoughts on the junior resource sector, China’s economic slowdown and what companies he is following right now.
“I believe we are in the second year of a discovery/exploration cycle that has probably four to five years to run,” he said.
Kaiser talked about gold in 2017 and explained the impact that US President Donald Trump’s presidency is having on the market. He also shared his thoughts on the zinc market and discussed how environmental concerns in China could be the wildcard this year.
Watch the video above to hear why Kaiser thinks gold will reach $2,000 in the next three years and to hear some useful tips for investors who are brand new to the resource sector.
You can also click the following links to go directly to different parts of the interview or read the transcript below:
- 4:59 — zinc in 2017
- 8:10 — Kaiser’s top stock pick
INN: The resource sector has been recovering since last year. What commodities are you interested in right now?
John Kaiser: Well most metals have rebounded somewhat from their lows at the end of 2015. They have stalled, there are no real macroeconomic drivers justifying higher prices. I’m interested in commodities such as gold for which there is a deep market where you don’t have to worry about what the off-take agreements are going to be, if a company makes a new discovery or wants to develop a project. That’s the primary one right now.
I believe we’re in the second year of a discovery exploration cycle that’s probably got four to five years to run, and that’s very different from what we had in the last 15 years which was a feasibility demonstration cycle where it was the rising metal prices that caught everybody’s imagination. Existing deposits were dusted off and money was spent demonstrating that “hey, these deposits work at $1,000 gold, at $3 copper and so on”. We’ve been through that cycle. We don’t have that trade anymore. We now have to look at earlier stage projects for the substantial gains.
Zinc is the one base metal that I think is set to possibly hit a couple dollars, and that’s where we see a lot of like projects now being dusted off to see if we can expand them and perhaps even demonstrate that they work at $1.20 zinc and may be very well at $2 zinc.
INN: You mentioned gold, can you tell us what factors could impact the gold market this year?
JK: The election of Trump was a shock to everybody. His behavior since he became president, his propaganda message that America is no longer great which is implicit in the need to make America great again. Well, the rest of the world is listening to this and saying “yes this is true America has peaked. It’s in a state of decline. However, it’s the most powerful nation in the world, the biggest economy and so on and they have kind of like rule the roost.” So he has created a context where other countries can start thinking “well let’s push the envelope a little bit. Let’s see what happens.” We see this in North Korea with Kim Jong on testing all these missiles and threatening a nuclear attack if the United States does anything to contain it.
This is creating an atmosphere of potential geopolitical instability, and that fear trade can cause gold to rise in real price terms as opposed to what we’ve been hearing about for the last 15 years about currency debasement and hyperinflation due to the evil socialist Obama’s policies and all that, making capital available for poor people unlucky people and so on. We now have a three way Republican control of the United States. Their underlying goal is austerity. It has a sort of a tendency towards depression type of economy. Some of the ideas Donald Trump has are very negative. The Republicans are not going to let him do the infrastructure spending which would be good for the inflationary argument for gold. But the fear trade or geopolitical instability that desire to move capital out of U.S. dollars into gold to ride out this chaos, that could give us the move to $1,500 to $2,000 dollars over the next three years which is not huge. But for some of these optionality plays that are close to being in the money that’s very substantial. That’s because it’s not a company by inflation of the cost of producing the deposit or getting into production.
If we get a rising metal market in discovery exploration type of market people are becoming more and more familiar with economic geology and how to visualize the outcome of a potential project. And of course you’re supposed to use the spot price what you have right now and the goal is to deliver something that works with the prices that we have rather than what we wished we had down the road. But if we get rising metal prices then you get S-curve behavior and you could have crazy markets like in 1993 to 1996 where we had these great discoveries and some of the metals were trending up at the same time.
INN: You also mentioned zinc. What could impact the zinc market this year?
JK: The one everybody talks about is the fact that Western mines have been shutting down, and there is not an offsetting supply pipeline coming on stream or whatever it is that’s there and inventory has infrastructure problems that will take a long time to mobilize. The fear has always been China. China went from almost no zinc production in 1980 to being the dominant producer at 40-45 percent now and has relentlessly increased zinc supply.
The problem is Chinese zinc supply comes from many small operations. A lot of them are very polluting and China is undergoing its own environmental awakening. The Communist Party knows that the biggest threat to its longevity is middle class people getting upset because the food is contaminated, because the crops are irrigated with river water and which all these smelters and mines dump all their poisons and so on. They even set up water monitoring stations to shame the sources into cleaning up.
That’s the wild card that could not only cause Chinese zinc supply growth to stall but also to go in reverse. And if we do get macro-economic growth on a wide scale happening then where emerging markets kick in, then you get that demand growth on zinc too. So you have a potential triple whammy of greater demand depleting Western supply and also declining Chinese supply which could create $2 price for zinc.
INN: So now that you mention China, we also know that China is a big player in terms of demand for metals in general. Some analysts are saying that China’s economy might slow down this year. Do you believe that or what’s your opinion?
JK: China created the super cycle that hit a tipping point in 2003. There is no super cycle because the world has mobilized an awful lot of new supply to accommodate Chinese demand. So, the Chinese growth rate is declining and, while it’s still compounding, the supply infrastructure is there to take care of it. This is why I argue there’s no reason to expect substantially higher metal prices unless there is some sort of supply curtailing due to that geopolitical problem.
For example cobalt, if Congo goes up in flames 60 percent of the world’s Congo’s cobalt supply evaporates and then you have 50 to 100 dollar per pound cobalt type price. In some of the metals where there is concentrated supply from jurisdictions that become unstable we could see the metal prices go up. But China is not going to be a super cycle driver. India which theoretically could their growth rate is such that it will take at least till 2025 before they hit the tipping point in terms of share of global GDP.
INN: Can you tell us a bit about what companies you like right now?
JK: My favorite at the moment is Scandium International (TSX:SCY) and this is a metal that’s very different from all the others. It’s the perfect marriage partner for aluminum. Everybody knows what can be done with it but not much has been done with it because it does not concentrate well in nature. It’s very low grade. The Soviets mined it to make fighter jets during the Cold War when the Soviet Union collapsed the line in the Ukraine was shut down flooded because it’s too low grade to make it viable to make aluminum scandium alloy.
About 10 years ago deposits were discovered in New South Wales of Australia that are three to four times higher grade than existing sources, and Scandium International now has a mining lease for a plant to produce 40 tons per year. They are now waiting for a partner to decide whether to convert to equity or to pay their 20 percent share of the 100 million dollar cap. This is really a question of if you build it will they come. The market right now consumes 10 to 15 tons of scandium oxide simply because that’s all that is available from various byproduct sources that can’t be scaled up.
With these new deposits they can be scaled up they can go from 40 to 120 tons from that one deposit over the next 10 years. This is a metal that as the end-user start to realize it is a coming reality of reliable supply that’s scalable and at a stable price. This could go to 1000 tons per year in 10 years and be worth $2 billion just as what happened with niobium which also had the similar problem until Araxa was discovered in Brazil during the 60s much bigger and richer than any other niobium deposits in the world and that’s now a two-two and a half billion-dollar market. And it’s similar to scandium in that it makes steel special by giving it hardening and corrosion resistant abilities similar to aluminum. So it is a big theme of light weighting making everything lighter so it consumes less energy. That’s of interest whether you believe in climate change or not, because consuming less energy in moving your stuff around is a primary goal for everybody and scandium feeds into that.
INN: That’s great. Where should investors that are brand new to the sector start. How would you say they should allocate their portfolio for example?
JK: If they accept my thesis that we are in a discovery exploration market similar to the 90s. They should look for these juniors that have fairly early stage exploration projects with a well-thought out geological hypothesis evaluation that’s relatively low. They should take a statistical approach and they should own about 10 of them don’t go all in on any one of them because Mother Nature is extremely cruel. You can have the best model, all the supporting evidence but maybe the gold just didn’t concentrate enough to the degree that is needed to make a mine.
My website specializes in that kaiserresearch.com. We cover these 1500 companies that are in the resource sector. We’re even adding Australian listed companies to it so people can start looking at the action from Australian companies. Then it’s a subscription based system that costs about $250 for 90 days to get everything. But if you do that then you get an entire year of my formal Spec Value Hunter recommendations.
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Securities Disclosure: I, Priscila Barrera, 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 the interviews it conducts. 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.