Thursday, 21 March 2024

By James Cooper Editor, Mining: Phase One and Diggers and Drillers

Twitter (X): @JCooperGeo

[6 min read]

Dear Reader,

Earlier this year, I wrote to my Diggers & Drillers members suggesting gold, copper, and silver could be the key metals to watch in 2024.

While it’s still very early days, these metals are setting up nicely for potential gains in the future.

One of our copper picks has jumped more than 50% since we recommended it last November. For reference, copper has risen around 9% over that time.

This is an example of how a stock delivers outsized gains relative to the underlying metal.

And a reason astute investors target specific stocks rather than broad commodity ETFs. Though it comes with added risks.

But the key here is to find quality companies. Believe me, that’s easier said than done.

You’ll always find yourself holding some duds. But the key is letting these laggards go while retaining your rare gems.

If you keep a strict criteria, eventually, you’ll have a list of strong stocks.

So, how do you find the rare gems in the commodity market?

Some investors look for quality management.

Others focus on attributes like a clean balance sheet, low operating costs or stocks with a strong track record of meeting production guidance.

But the thing is,all these factors tend to come together when the geology is favourable.

Call me biased, but I tend to gravitate to any stock holding a high-quality deposit.

The rest takes care of itself.

You see, having worked as a geologist and an investor has shown me that rocks in the ground matter most when picking quality companies in the resource sector.

And it doesn’t matter whether it’s a small-scale explorer or large-cap producer, success is ultimately driven by the underlying asset, the geology.

Consider a management team successfully delivering back-to-back production guidance on a high-grade open-cut mine.

Well, it’s far easier to build a track record of success on a project like this versus a deep underground deposit with complex engineering and inconsistent mineralisation.

In fact, you could argue true skill comes from delivering on marginal projects.

Yet, it doesn’t work that way in this industry.

The title of success falls into the hands of those delivering the fattest profits.

Focusing on management as a key stock-picking criterion can lead to biased investment choices.  

On the other hand, geology never lies. It only surprises!

That’s why focussing on the rocks should be your number one factor when picking a stock in the resource sector.

Sticking with the rocks will put you far ahead in sidestepping the duds and picking gems.

But there’s more to a resource company than its geology.

As a resource investor, you do need to consider the bigger picture.

Understanding supply and demand nuances

Commodity markets are a complex beast and riddled with risk.

Even if you invest in the best copper or nickel discovery, this STILL won’t guarantee success.

Resource equities are heavily influenced by external factors driving demand and supply.

This could be a consequence of geopolitical outcomes squeezing supply in the market.

It could be from production downgrades (or upgrades) at major mines.

Or it could be a technological innovation that unlocks new supply.

The factors influencing supply and demand are diverse and can substantially impact the share price.   

Take nickel for example.

This important industrial metal has fallen over 25% in the last 12 months. That’s a big move for a commodity.

Surging output from Indonesia’s nickel laterite mines has flooded the market with new supply.

According to some analysts, supply gluts could last years.

From Australia to northern Europe and all the way across the Pacific to Canada, nickel operators are shutting up shop.

Andrew Forrest’s Wyloo Metals closed the door on its nickel acquisition in Kambalda, Western Australia. A project formerly owned by Mincor Resources.

Meanwhile, BHP’s Nickel West operations have been put on notice.

The global response to oversupply has been predictable and unanimous. Operations are shifting into care and maintenance in the nickel market.

But Copper sits on the other end of the
supply spectrum

Global copper operations have endured decades of declining ore grades.

That’s been borne from a lack of investment in new mines and inadequate commitment to exploration.

This problem has lingered for well over a decade.

It’s something I’ve been warning readers about for months. The consequences are now starting to catch up with the market.

You see, smelting firms in China are in crisis mode. That’s because they can’t find adequate metal to sustain operations.

It’s a key reason copper hit a 12-month high last week while major North American producers broke into new all-time highs.

Falling treatment charges at Chinese smelting firms has fuelled this surge.

This nuanced feature of the copper market tends to point toward higher prices, so bear with me...

Treatment charges are what mining operators pay smelters to have their semi-processed ore, or concentrate, turned into finished metal.

So, why does that matter?

Well, smelting firms will reduce the smelting fees they charge copper miners as they compete for declining supply.

Therefore, contracts between miners and smelters are a handy LEADING indicator for investors.

It offers an early insight into where prices might be heading in the coming months.

I highlighted this to my D&D readers back in November 2023.

Back then, Chilean copper miner Antofagasta pencilled in one of the first major deals for 2024 with China’s Jinchuan Group.

Jinchuan is one of the country’s largest mineral processing companies. But a sharp drop in refining charges back then took the market by surprise.

A sharp lift in copper prices followed. 

Yet, in recent weeks, more refiners have cut fees in response to tightening supply.

Ultimately, falling grades, mine closures and lack of investment in discovery all contributed to today’s supply shortage.

Time will tell, but the latest contracts clearly point to a long-term supply deficit for the copper market.

How that looks when demand begins to pick up is anyone’s guess!

But a perfect storm is brewing for this commodity.

If we see a meaningful lift in demand amid a major supply problem, the consequences could be huge!

The reaction last week demonstrates that the market is starting to price in these concerns.

But as I pointed out, the real surge will come alongside rising demand.

That’s why now is a great time to look at copper stocks for your portfolio.

If you’re interested in finding out the names of our prime copper picks in the D&D portfolio, you can do so here.

Until next time,

Regards,

James Cooper,
Editor, Mining: Phase One and Diggers and Drillers

James Cooper has been a working geologist in mines across Australia, Canada, and Africa since the early 2000s. He’s led the operations of tiny explorers through to huge producer outfits. He’s seen booms and busts firsthand and he also understands the cyclical nature of individual commodities. For example, James was right there when Barrick Gold launched an enormous $7.5 billion takeover bid for Equinox. That was the peak of the last cycle.

With his background as a geo and finance professional, he brings a unique insight and experience to Fat Tail Investment Research. He writes the broader resource-focused investing letter Diggers and Drillers and the ultra-speculative explorer-focused trading service Mining: Phase One.

By Bill Bonner Editor, Fat Tail Daily

[4 min read]

‘The government in Spain, short of revenue for its expensive imperial projects, increased the fiscal burden and manipulated the coinage, triggering inflation and further damaging the Spanish economy. ’

Christopher Storrs

Inflation and war…war and inflation. Evil and stupid. Fool and knave.  

They follow patterns too.

You send a beautiful armada to deal with the English. It is so impressive, its huge oak ships rising out of the water… as much as 150 ft. long and 50 ft wide, with as many as 60 cannon poking out of its portals. Flags flying. Three tall masts and billowing grand sails. They were the magnificent aircraft carriers of their day; each one took 2 years and 2,000 stout trees to build.  

Named after saints…carrying a priest onboard for daily services…and adorned with a golden lion wearing a crown (for the royal vessels) – could there be any doubt who ruled the sea?

You hold a sacred mass…the Pope himself blessed the fleet. Surely it is an Invincible Armada!

And then, whaddya know…it sinks.      

Spain – part of the Habsburg Empire – was the first empire on which the sun never set. It had the Philippines in the East… Central and South America in the West…and in Europe, it was the hegemon…the indispensable nation of its time.  

So, when English terrorists began attacking Spanish ships, Philip II decided to take forceful, resolute action. His was the leading empire of the time…with the largest military budget in the world…and the 16th century equivalent of a reserve currency.  That is, Spain was getting boatloads of gold and silver from the New World, thereby stimulating the Old World economy with newly minted money.

Does any of this sound familiar? Alert readers will notice two important themes.

The Money

First, inflation. Or, more broadly, the Dutch Disease…commonly understood as the paradox that happens when good luck – finding billions in gold and silver that could be easily stolen – turns your economy into a sh*thole.

We usually think of gold as a protection against inflation. In this instance it was the cause of it. Typically, gold protects against inflation because it is so hard to get. You have to find it, and mine it…so it is very difficult to add to your money supply. And since gold is priced on the open market – like everything else – the quantity of it available as money tends to increase in line with everything else…at a rate more or less even with GDP growth. If supplies fall short, the price of the gold rises and miners are inspired to work harder. If there is ‘too much’ gold, on the other hand, the price of it tends to fall…and miners become unprofitable.

It was just a quirk of larceny and stroke of luck that the Spanish found so much above-ground gold and silver in the hands of the Aztec and Inca and were able to seize it and send it back to Spain. The adventurer, Pizarro, captured the Inca chief, Atahualpa, for example. The conquistador demanded a room full of gold for his release. The Inca dutifully filled the room…but Pizarro killed him anyway.

This increase in the Spanish money supply had one immediate effect – it made Spain rich – and one secondary effect…it caused inflation that made Spain poor. 

Spain was still rich in July 1588, when the big fleet assembled and sailed north towards the English Channel. With 137 ships…including the great galleons and Atlantic-class caravels…it was intended to escort barges full of soldiers, horses, food and weapons from Flanders across the Channel for an invasion of England.  

This was more or less the same naval force that had won the battle of Lepanto in 1571, a crucial battle of Christian Europe against the infidels of the Muslim world.  And it was fought in the old-fashioned way…with sword, knife, musket and pistol.  This was the battle the Armada of Philip II was prepared to fight again.

Which brings us to our second theme: the surprising, and largely unwelcome, twists of war.  

The Guns

The surprise to the Invincible Armada was that the English didn’t fight like the Ottomans. Or the Romans or Greeks before them. The Battle of Gravelines was not just another infantry battle, based on floating platforms moved by galley slaves.  

Unnoticed by most of the rest of the world, the English had made technical progress. Their ships were smaller, swifter, but with less firepower. They had already proven effective in the hands of English privateers – terrorists! – such as Sir Francis Drake. They came at the enemy from windward. This left their prey heeled over with their underbellies (below the waterline) and rudders exposed.  

Rather than come alongside, throw over grappling hooks and try to board the ship, the English just tried to sink it (or, better yet…knock down its masts and destroy its rudder so it was helpless). In this, they were successful. First, they broke up the Spanish formation off Calais by sending fireships in among the moored vessels. The Spanish panicked, cut anchors and dispersed the fleet.  

Then, at the Battle of Gravelines, the following day, the two fleets faced off. The Spanish executed the manoeuvre that they had used with such success at Lepanto. They fired their cannon once…and prepared to board the enemy ships. They could only fire once because their cannons were not set up to be reloaded – not in the heat of battle. The English, meanwhile, kept their distance…and continued to blast away. By the time they had run out of ammunition, they had  damaged and/or sunk so many of the Armada vessels that the battle was effectively won.

The End

The Armada was vincible, after all. The wind, then, blew from the south, and gave the Spaniards an escape route…to the north. The surviving vessels, many in rough shape, tried to sail around Scotland and Ireland so as to rejoin the Iberian peninsula without encountering English warships. Alas, many ran aground in Ireland, where their ships were stripped and sailors were killed mercilessly. Others died from cold, hunger and disease. (They were not prepared for a long ocean voyage.) Few made it back to Spain.

And while war did its damage, the new money did even more. It set off a now-familiar pattern of actions and reactions. The conquistadores grabbed huge new quantities of gold and silver. This increase in the basic money supply caused prices in Spain and Portugal to rise 500% over the next 150 years. Rising prices – along with higher interest rates – forced the Spanish emperor to borrow more and more money just to keep his expensive empire in business. It also provided a substitute for real output on the Iberian peninsula. The Spanish and Portuguese had money. They could buy things; they didn’t need to make them. ‘Let others sweat’, they may have said to each other. ‘We conquer.’

But by neglecting their own commerce and manufactures, the Spanish and Portuguese set themselves up for a Big Loss. By the time the Invincible Armada set sail, the flow of new money from the colonies was already on the decline. After the battle of Gravelines, Spanish power sank too…and never recovered. Then, the Spaniards could neither conquer nor sweat. War and inflation had condemned them to four centuries of marginal, sh*thole status.

Regards,

Bill Bonner,
For Fat Tail Daily