Industrial minerals like copper and nickel are essential to global economic expansion. But everywhere you look, grades are getting lower, and costs are getting much, much higher. Is there a way out? Rick Mills says mining companies need to look to Greenland. In this interview with The Metals Report, the owner and host of Ahead of the Herd.com lauds the world's largest island for its vast resources, its one-stop regulatory system and its year-round access to ocean transportation.
The Metals Report: You never really believed that there was anything resembling an economic recovery in the United States, correct?
Rick Mills: I don't believe you can have an economic recovery with the type of jobs that have been created in the last few years. Wages have stagnated. The velocity of money, how many times it turns over in the economy, how many times it's spent, is at a record low,
TMR: So the decision by the Federal Reserve to hold off on tapering quantitative easing didn't surprise you?
RM: I've gone on record saying there would be no tapering this time around, but that doesn't mean it isn't coming—it certainly is. But it will likely be very gradual, and the Fed will start only when they feel the economic data support such a move. I firmly believe, however, that the Fed's zero interest rate policy is here to stay, and this is very important for gold investors.
RM: Because it will result in permanent gold backwardation. That's when the spot or cash price—gold sold for immediate delivery—is trading above the near active futures contract. Backwardation indicates a physical shortage, it's very rare for any commodity to go into backwardation, but especially gold. Backwardation tells us that gold is being valued higher right now than fiat currencies. It tells us that people are losing confidence in paper money and they'd prefer to hold gold rather then fiat currency.
With real interest rates (your rate of return minus the rate of inflation) in negative territory, the Fed has unintentionally created a lot of support for gold. Gold doesn't do well in a high interest rate environment because it's got no yield. If you could get 6% on your money, why would you buy gold, right? Historically, 2% interest has been the tipping point for gold.
TMR: Some people believe there's been a divorce between physical gold and exchange traded funds (ETFs). What do you think?
RM: I have never been an ETF fan; if you're buying gold for insurance against calamity, why would you want it held in Toronto or New York or somewhere else? I want my gold a lot closer than that. We see in the news that investors cannot get their gold back when they try to redeem some of their ETF holdings.
TMR: You've warned that with regard to nickel and copper the world is running out of low-hanging fruit. Will this lead to shortages, higher prices or both?
RM: Both. One billion people will enter the global consuming class by 2025. That's 83 million (83M) people per year. Demand is not going to go down. China will have to increase its average urban per-capita copper stock by seven or eight times just to achieve the same level of services we in the West enjoy.
While this is happening, copper mining has become an especially capital-intensive industry. In 2000, the average cost was between $4,000 and $5,000 to build the capacity to produce a tonne of copper. Today, this figure is north of $10,000 per tonne on average and has been reported as high as $18,000 for one particular project.
TMR: Why are costs escalating so rapidly?
RM: Two reasons. First, declining copper-ore grades mean much larger scales are required for mining and milling operations. Second, a growing proportion of mining projects are in remote areas of developing economies where there's little to no existing infrastructure.