Title: Outlook 2011
Sub-title: Q&A with Ian Campbell, president of StockWatch.com
Ian Campbell is the founder of StockResearchPortal.com, a Web-site focused on resource stocks listed in the Toronto Stock Exchange and the Toronto Venture Stock Exchange. Campbell’s role at the portal, which was founded in 2008 and has 14,000 subscribers, provides him with a unique platform to follow industry developments. He recently agreed to share his insights with CIM Magazine. Following is an edited version of his comments.
What are your views on the resources sector as a place to trade and invest?
I decided that resources was the place to be in the fall of 2005, and nothing has happened since then to make me change my mind. Naturally investors need to continuously monitor the macro-economic picture to make sure that that does not change. For example the geo-political outlook right now is filled with uncertainty. If for example some extraordinary event or conflict were to occur that could change everything. As far as investments go, I believe that those who take responsibility for making their own decisions going forward are going to out perform others. To do that, individual investors need well-filtered, accurate, easy-to-understand data. This is one of the main reasons that I founded StockReserchPortal.
What is your outlook for raw materials demand during the coming months?
Raw materials demand is generally a function of economic growth. On that score the picture is mixed. I do not see the US economy, the traditional motor of global economic growth, recovering any time soon. The recent mid-term elections (which returned the House of Representatives to Republican control) will only increase gridlock in Washington and make it harder for politicians there to get anything done. The UK for its part appears to be suffering from the same economic malaise, as are many western economies in one form another. As a result, the world is increasingly dependent on emerging markets to fuel growth. That said, over the longer term, the raw materials demand outlook is quite bullish. The world population, which was just 1.1 billion people in 1910 is now at 7.5 billion and is expected to grow to 10 billion by 2020. In addition, many people in the emerging markets are moving into the middle class and are adopting Western style high-consumption lifestyles. The hard goods that they will be buying will have large material inputs.
We keep reading that Chinese demand is driving the industry — what is the strength of this trend going forward and what will this mean for the Canadian minerals industry?
China is a force to be reckoned with. It has an inexpensive workforce and a strong government that can make and implement its decisions quickly. Not surprisingly, its economy has been growing rapidly for an extended period of time. To fuel that growth the country has an enormous need for raw materials. But China affects the sector in other ways too. The country is also sitting on close to $2 trillion dollars in foreign currency reserves and is actively looking for places to invest that money, notably in the raw materials and extraction sector.
What other trends are affecting the industry?
Mining companies as always continue to be vulnerable on the revenue side because they have very little control over the prices, which are for the most part set on the world markets. However mining and metals players also have significant vulnerabilities on the cost side. These come from a wide variety of areas. For one, price inflation, which has not showed up in statistics on the consumption front, has hit raw material producers hard. Many companies are recording double digit rises in production costs due to factors such as increasing energy prices. Intense publicity surrounding the Chilean mine disaster will no doubt heighten pressure on mines to devote far more attention to safety issues. This too will have an effect on the cost side. Beyond that, resource nationalism is also rearing its head in many countries, for a variety of reasons. Here in Canada, government intervention to slow BHP Billiton’s recent attempts to buy Potash Corporation in Saskatchewan, is emerging as an example of what I call “resource protectionism,” through which countries are increasingly seeking to keep control of what they feel are strategic assets.
What are some of the hot and not-so-hot commodities?
The hottest topic right now is gold prices which as we are talking (mid-November) appear to be hitting new highs every week. These new highs are in large part a function of the weakening US dollar and economy, as well as gold’s traditional role as a hedge during times of uncertainty, such as those we have been seeing lately. I believe that these trends will continue, which in turn augurs well for gold.
What about other metals?
The outlook for base metals also appears to be quite bullish. Copper in particular is doing well and will likely continue to do so. Like all other base metals, such as aluminum, nickel and zinc, an increasing share of the demand for copper comes from emerging markets. These markets in turn are growing faster than the global economy as a whole. Silver too is profiting from this trend. In part because silver is a conductive metal, the lion’s share of silver production right now is used in industrial applications such as circuit boards and so on. That means as goes the economy, so goes silver demand. But silver also has additional value as a store of wealth and has traditionally benefited from flight-to-safety periods, in part, because it has tended to track gold prices. That said, lately the paths of these two metals have diverged, and silver is now trading at more than one fiftieth the price of gold. People who regard silver as a monetary asset would say that the asset is under-priced.
Do you see outsized opportunities in any particular mining stocks?
I don’t provide advice on specific companies. However one trend that I am looking at right now is the disconnect between the price of gold and the equity markets in general. As we speak, stocks are doing quite well. This would imply that the markets are bullish going forward. However gold prices too, which many investors regard as a safe haven during volatile times, are also strong. Those are contradictory messages. If the economy does hit a rough patch of sub-potential growth next year, the balance of probabilities is that stocks will have a hard time too. This will of course affect explorers and producers, because when stocks do poorly, their ability to raise capital is often constrained.
Will acquisitions and partnerships continue to play as large a role going forward as they have in the past?
Yes. Acquisitions activity will be high because of the increasing scarcity of resources such as oil, gold, copper nickel and many others. As a result, as I mentioned earlier, both countries and companies are increasingly looking to secure longer term supplies for strategic reasons. China in particular, will no doubt devote a significant potion of its foreign currency holdings to make large acquisitions.
Peter Diekmeyer (firstname.lastname@example.org) is CIM Magazine’s Quebec correspondent.
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