Title: Outlook 2010
Subtitle: Q&A with Don Coxe, chairman Coxe Advisors LLC.
Don Coxe has tracked the mining industry for most of his 35-year investing and money management career. During 2008 he launched the Coxe Commodity Strategy Fund, which gives him a coveted perch to track global events in the sector. During two recent interviews Coxe gave CIM Magazine his take on trends to look out for during the coming year and beyond. Following is an edited transcript of those conversations.
You say that your investment approach is based more on “page 16” stories as opposed to those on page one. What do you mean by that?
Investors need to pay more attention to long-term fundamentals rather than to topics of the day. Any investment that will not be written about by historians two centuries from now, is probably not worth following up on. A company’s latest earnings announcement is a page one story, but news of an emerging technology that could make its products obsolete is often buried on page 16, or it only appears in some obscure scientific journal.
What “page 16” stories are you following that could have an impact next year?
Rising gold prices have made a lot of headlines. But the bigger move has been the changing attitude of the world’s central banks towards the ore. Many have reversed their policies of selling “excess,” reserves and have started to rebuild holdings. The Chinese central bank has been buying up a lot of that country’s local production. India’s central bank also recently announced a major reserve purchase.
The other big story is that China, India and many sovereign wealth funds have been increasingly looking at global resource assets. Historian Niall Ferguson recently predicted that next year China will stop its massive U.S. dollar purchases and move to hard assets instead. True, China has failed at several attempts to buy controlling stakes in major resource companies including Unocal and Rio Tinto. But the country learns fast and it will be back.
What does that all mean for gold prices?
These actions have significantly helped to ramp up gold demand, a trend that will likely continue next year. Despite the reports of people selling off all their old gold jewelry, prices continue to rise. Much of this is due to the fact that gold production has not kept pace with demand. Global output has been slowing for almost a decade now. Despite the fact that exploration budgets have shot up, new bodies are not coming on-stream at the pace they once did. New mines that come into production are simply not of the same quality that they once were. Ore grades have fallen from about 12 grams per ton several decades ago to closer to three grams per ton.
What about other precious metals?
Interest has been rising in the category. About two thirds of all drilling in the world is for precious metals. However gold remains the big story. The only problem is that many of the most promising deposits are in high risk areas such as Russia and the Congo. Silver and platinum will also continue to well. We look for companies that have un-hedged reserves in the ground in politically secure areas.
What are some of the major factors currently influencing commodities demand? And what changes due you expect during 2010?
The longer term demographics are simple: the big drivers of world economic growth are India, China and other emerging economies. Right now it looks like several of these countries will weather the global recession better than the United States. Like all economies in early stages of development they will require enormous amounts of commodities.
What does this mean for base metals?
Once again a lot depends on how the global economy will do. For example copper will not stay at the $3.00 a pound level if the economy goes bad. The coal story is more nuanced. Metallurgical coal (which is used to make steel) should continue to do quite well. However a lot of what happens to steam coal (for heating) demand depends on what happens at the United Nations Climate Change Conference in Copenhagen. Although the Chinese continue to build many steam coal plants, other countries may feel that the environmental cost is too high. Uranium too presents a mixed picture. More nuclear plants are being built globally, but the U.S. has not put a new one into operation since 1976. The political climate needs to change before we see a real upsurge in demand.
Jeff Rubin recently released a book that broadly predicts that rising energy prices will have a significant effect on global trade. Would there be any fallout on resources companies?
I respect Jeff a lot, but I do not think that oil prices will rise quite as high he thinks. That said, there is no question that energy demand will increase. Canada should be a good position on the energy front for the coming years. Already we are the largest source of U.S. oil imports and sales there will continue to rise. As a result I am upset with the negative way that Canada’s oil sands development has been characterized. We really have to tone down the excess rhetoric surrounding the sector, particularly on the environmental front. Natural gas is a different story. Demand is strong and will continue to grow, but supply, due in part to the emergence of shale gas, is growing even faster. Exxon recently announced a major discovery and there is a lot more coming on-stream.
How do you assess the state of the Canadian mining industry?
Canada continues to be a great place to do mining, but many of the best and easiest to extract ore bodies have been discovered or put into production. On the other hand the country has few very large domestically owned mining companies relative to the scale of its resources, so there are fewer goon investment opportunities than there should be. The country really should be doing a lot more to maintain some domestic control. For example while the federal government generally wants to keep a more hands off approach to foreign acquisitions, the provinces have several tools at their disposal to delay or even halt deals that are not in Canada’s interest.
What is the current global climate like now for Canadian mining sector companies?
Terrific, the Canadian brand name is the best that it has been in decades. Canada has a great tradition of training people for the mining industry and companies recognize both their talent and their work ethic. Canadian miners are known for not shying away from assignments in remote areas, where they work 12 hour days. One businessman recently told me that the biggest constraint for his industry is not resources, but that his company cannot find enough Canadian staffers. In fact if I had a son who was uncertain of his career path, I’d tell him to become a geologist or a mining engineer. Canadian professionals will continue to be welcomed around the world.
Peter Diekmeyer is CIM Magazine’s Quebec Correspondent.
|© 2009 Peter Diekmeyer Communications Inc.|