The Rant
Thank you Toronto, and other observations
Your neighbours to the south will be eternally grateful for your crackpot mayor providing considerably better entertainment value than your mining markets of late. The comic relief is greatly appreciated-- keep it coming.
The relentless hammering of the junior mining markets and gold price continues despite the obvious signals from future Fed Chairwoman Janet Yellen that the risks of early Quantitative Easing withdrawal outweigh the risks of continuing with the Fed purchase program. Although “tapering” seems to be the Fed’s preferred policy into next year it is unlikely to begin until Yellen is in charge, and then only reluctantly it appears. Regardless of which way the taper/QE decision goes, the notion aggressively touted by numerous gold gurus that QE would prove to be a boon for the gold price has not come to pass. Gold is off 28% this year.
The US markets, on the other hand, are on a tear--nearing all time inflation adjusted highs-- which demonstrates to me that global markets are little more than freewheeling virtual casinos in which most participants are playing (trading) with other people’s money, moving from one hot table to the next while the losers buy the drinks. The Fed has pumped nearly a trillion dollars into the economy this year alone, with very little to show by way of real GDP growth (or jobs, for that matter). Stock markets and financial firms are, once again, on the receiving end of the rotating bankers that chair the Fed. If this bull market (bubble) is to continue, it will take more and more funding from the Fed, not less.
Epitomizing the current bull market is the noteworthy story of the two founders of Snapchat, pictured below, who declined a $3 billion offer from Facebook (an $87B company) for their app. The app sends photo and video messages that disappear after viewing--that’s it: sort of a virtual auto-delete button. The company has no sales, and the founders are not clear on their business model, yet. They are thinking maybe users would pony up for stickers or coupons that they could send to each other—huh?
(Permanent snapshot of Snapshot founders at the office. The app allows users to send video and photo images that disappear after viewing—does the NSA know about this?)
As a point of reference for the young bulls in the audience, today $3 billion would buy Ivanhoe Mines (IVN.T) plus cover phase one capital to build the Kamoa Copper deposit (indicated 739Mt @ 2.67% Cu). With the purchase, the owner of IVN also gets the Platreef deposit (75 mil oz PGE’s, 3.6 bil lbs Ni, and 2.3 mil lbs Cu), and Kapishi deposit (largest and richest undeveloped zinc deposit in the world). Alternatively, the potential purchaser of IVN could up the offer for Snapchat while the company is still searching for a business plan for the vanishing videos. Maybe Evan and Bobby would accept bitcoins in lieu of cash?
Getting back to our version of reality. . .
Although we in the junior mining and exploration sector are certainly closer to a bottom than at this time last year, it is difficult to see what will save us in the year ahead.
Were global markets to collapse, Chinese banks begin to default, or any black swans just over the horizon fly into town, history shows that investors will flock to the perceived safety of the US dollar. My expectations are that a rush into the US dollar would, at least initially, be destructive to the gold price, and even more so to the miners. Likewise it seems that, barring any catastrophic events, with a marginally improving global economy the fear trade in gold is also a no-go.
Between now and whatever happens next, the miners will continue slashing exploration, curtailing development, and high grading their viable deposits in response to low metal prices and high production costs. These cosmetic changes add nothing to the companies’ future growth and leave investors wondering, “Why bother at all when bitcoin is up 5,000%?”
Does this sound like professional capitulation? Quinton and I are close but not yet there, meaning: there is probably more pain to come in the junior sector. On a more optimistic note, Stan Bharti (big time successful Toronto mining promoter) has teamed up with Carlos Slim and Paul Anka in a mobile social network company, Mobli, which will focus on picture and video sharing. Presumably these don’t vanish immediately—how 2012 is that? If this isn’t a sign of an approaching bottom in miners (or top in tech) I don’t know what is.
Regardless of what it all means, I come back to the one thing we know for sure from the preceding rant—we are closer to the bottom in miners today than we were last year. We also know, as covered many times in past letters, that economic discoveries are not keeping up with current metal production, and producers are painting themselves into a corner. This will ultimately lead to a severe shortage of new economic deposits, valid exploration projects, competent junior explorers and, eventually, a rush back into the sector when the boys in the casino discover our penny tables at the back of the room.
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Rick Rule
Chairman, Sprott USA
