It could be 2017 before the commodity supercycle is evident again, but stormy weather in the mining space has a silver lining: It is encouraging miners to develop new, innovative approaches to their business. In this interview for the first edition of The Mining Report, John Kaiser of Kaiser Research Online outlines 10 strategies that are setting certain companies apart. Discover the companies that are redefining their business, as well as miners with the goods in the ground to continue come rain or shine.
The Mining Report: John, you have characterized the current resource market as a bear market unlikely to have higher metal prices in the next year, with the possible exception of zinc. Why are you drawing a different conclusion than other analysts who believe we are in a resource supercycle?
John Kaiser: I believe the general supercycle is still intact as nations with very large populations are embracing capitalist methods. Because they are starting with much lower standards of living, they have a long way to grow. However, I do think we are in a bit of a pause. We are still dealing with the fallout from the 2008 financial crisis, a dysfunctional political system in the United States and Europe's issues.
Also, China's growth rate is slowing and the country is shifting from a capital-intensive development of infrastructure and production capacity to more domestic consumption spending. On top of this, the mining industry generated a lot of supply in response to the higher real prices of the past decade. So there is a supply glut coming as demand cycles downward, and we're going to see weak prices for a while. Unfortunately, or perhaps fortunately depending on what hat you are wearing, we have also seen rising costs, the response to which may curtail the supply glut sooner than expected.
I would say by 2017, however, the supercycle will be evident again, because this bear market is creating the same supply/demand imbalance conditions that existed 10 years ago, when the big bull market started.
TMR: What indicators will tell us we might see the supercycle in 2017?
JK: What we have to watch is the world's gross domestic product growth. The International Monetary Fund scaled back expectations in its October World Economic Outlook. We also have to see how the U.S. deals with its debt ceiling problem, and the U.S. won't get any traction until there is a political change where nothing blocks spending the money to get the economy ramping up again.
We also want to see which mines in the pipeline actually come onstream. This applies more to the raw materials that are used in the real world as opposed to gold, which is treated largely as an insurance policy hedging various future outcomes.
A lot of projects are being shelved right now because of escalating costs. All this misery that we're witnessing will actually underpin a future bull market in the commodity sector.
TMR: What gold price is required to make mines economic these days?
JK: The average all-in cost for gold production is about $1,200/oz. Even though we're looking at a gold price that has increased three, four times since 1980's stabilized price, the costs have risen right along with it. We need something around $1,500/oz-plus to justify putting a lot of these deposits into production.
TMR: Are the costs for getting copper out of the ground also higher than the selling price?
JK: In the past five years, we have seen above-average cost escalation in the mining sector. Both capital costs and operating costs have been increasing about 10% annually. In the case of copper, if your all-in cost was $2.49 per pound ($2.49/lb) in 2007 and you apply 10% inflation each year, you're looking at a $4/lb copper price just to break even, and we're currently at $3.20–3.30/lb.
Now some of these costs are going to come down, but we're still looking at numbers that are at or higher than the current spot prices for gold and copper. It is not a wonderful situation for deposits where they have reduced the cutoff grade and started mining lower-grade deposits to meet the increase in demand. We're in a situation where we're going to have to just wait to see higher prices materialize to justify a fresh push of putting deposits into production.
TMR: If most of these commodities and the juniors that mine them are waiting for prices to go up, what does that mean for the juniors' common exit strategy—being taken over by a major?
JK: During the past seven to eight years, we've had a tremendous round of takeover bids, where 200-plus Canadian juniors were taken over at a value of over $128 billion ($128B). A lot of these deposits are waiting to be developed. The other companies out there own deposits that tend to be lower grade and have a more expensive cost structure. There is no appetite amongst the majors right now for that type of deposit, and the capital markets are not going to be interested in directly funding development because the profit margin just isn't there.
The one group that has not yet made a big move is Chinese sovereign wealth companies, which we know have been studying the landscape looking for opportunities. When these Chinese national companies start buying cheap gold assets, that will be a signal that the turnaround for gold is coming sooner rather than later.