Despite the collapse in broad commodity prices, numerous specialty metal prices have held or even gone up in the last few years: companies with the potential to produce these metals couldn't attract capital, and the tightness today is now likely to become shortages tomorrow, says Richard Karn, managing editor of The Emerging Trends Report.
When institutional capital eventually comes back to the sector, money will flow first to companies in or nearing production now. In this interview with The Gold Report, Karn highlights three such companies in Australia producing graphite, tungsten, rare earth elements, hafnium and other specialty metals.
The Gold Report: Junior mining companies are facing what John Kaiser has called the mother of all bear markets and have had a tough time raising money at reasonable valuations. What are your thoughts on that? Is there a light at the end of the tunnel?
Richard Karn: No. We continue to see more junior mining companies failing from here and have been waiting for a final wash out of the junior mining sector for some time.
At the end of the day, capital is the most vital of all resources in producing commodities, and too much capital has been misallocated in the last few years for there to be a sudden resurgence in lending, especially to the junior mining sector.
And as we all know, global commodity prices as measured by P GSCI index are down 34 percent over the last year due to overcapacity and overly rosy projections about future pricing power and consumption and emerging market growth and endless expansion, etc.
Less discussed, however, is the way this misallocation of capital is likely an unintended consequence of years of unprecedented capital injections by central banks globally, which is more than mildly ironic because the Federal Reserve blamed the global financial crisis on the "surfeit of savings globally."
As with the housing bubble in the run-up to the global financial crisis, there was such a thorough relaxing of lending standards, not to mention the push to "get deals done," that projects and expansions that should not have been funded were, and now the world is awash in not only oil and iron and cotton and labor but also capital itself.