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  • Volatility Continues as a New World Order Rallies
Articles:

Volatility Continues as a New World Order Rallies

09 August 2019

Insights from Sprott Natural Resource Symposium

Recently in Vancouver, the Sprott Group hosted its annual Natural Resource Symposium, a multi-day event featuring numerous speakers mainly focused on the mining sector. I’ve attended this show for many years and often find themes among the speakers that are interesting and quite insightful.  While it’s not possible to hear every speaker, I attended the ones with topics that I found most compelling.

 

Green is the new gold

Consistent with many of the speakers at PDAC earlier this year, there continues to be significant speculation on what minerals and metals will see increases in demand as technologies evolve in the coming years. I’ve observed growing acceptance of the prediction that global demand for oil and gas will experience a rapid decline over the coming decade, largely due to growing dominance of electric vehicles.  Most major car manufacturers are investing heavily in electric car development and many governments have committed to converting their transit fleets to electric or hydrogen fuel cell vehicles. Such a shift will contribute to a rapid drop in global oil and gas demand while simultaneously helping to increase demand for copper and other electric vehicle materials.

It’s interesting to note that China is fully committed to converting its entire vehicle fleet to electric in an effort to fight pollution. In contrast, the U.S. is less committed to converting fleets to electric mainly because their pollution is not as severe as China and it has abundant and cheap oil and gas reserves.  Further, the energy grid in the U.S. is aging, with parts of it over 100 years old and unable to support mass charging of electric vehicles. Rebuilding the U.S. power grid will be an expensive and time-consuming process, putting them at a disadvantage when compared to China and other developing nations.

All of this points to an increase in demand for materials used to produce electric vehicles, most notably copper. Current copper production falls significantly short of anticipated demand and it’s predicted that the price of copper would need to double in order to motivate mining companies to initiate the necessary copper exploration and development.

 

Limited capital for exploration

It’s no secret that the juniors continue to starve for the risk capital they need to hunt for new discoveries. Investors are looking for safe investments in companies with projects that have been de-risked to a significant degree. The majors seldom directly engage in exploration, relying on the juniors for new discoveries, and they rarely support those juniors in these activities. This dynamic has resulted in very few new discoveries occurring, with only 3-5 occurring annually by the roughly 1,200 juniors based in Canada and Australia. 

During the last cycle, a number of the majors overpaid for assets, suffered for it and, as a result, a bunch of CEOs lost their jobs. While the majors do need to put their support behind some projects to feed the pipeline, they’re being very careful about what they put their money into these days, looking for high quality assets in safe jurisdictions. This will continue to put strain on the supply side of the equation if demand predictions play out as expected.

On the bright side, the continued mining down cycle (at least outside Australia) means that those few companies that can bring a new project into production may be able to do it cost effectively, with used equipment and labour currently being available at low prices. 

 

Shifting volatility

The trade war between China and the U.S. continues with no end in sight and this is causing those economies to scramble to secure materials. China has used this strategy for years with their belt and road initiative being at the core. They’ve done a very good job of securing assets in developing nations, such as in the African continent, as well as through investments with major mining companies.

The U.S., on the other hand, has not applied this same strategy and is currently struggling to get its house in order. This struggle is amplified by the distraction of the threat of a presidential impeachment coupled with the uncertainty of an upcoming election, both casting a shadow on their economic future. In addition, geopolitical issues affecting the U.S. and other Western nations, such as Brexit, further aggravate their domestic problems.

This doesn’t bode well for the U.S. economy and they very well may come out as the losers in this trade war with China. The road will be rocky, resulting in increased volatility in commodities and share prices, making resource project development in the West very challenging for the foreseeable future.

 

Changing resource security?

Oil security has proven to be a highly disruptive and expensive issue for many decades, particularly for the U.S. As oil dependency decreases over the coming decade, oil security, mainly in the Middle East, will become less of an issue. But that raises an interesting question: will security of other materials, such as copper for electric vehicles and rare earth elements for defense-related technologies, result in increased conflict in nations that hold significant reserves of such materials?

Given that China has been quietly securing natural resources in developing nations and may need to defend those materials, it should be no surprise that they’re increasing their military spending with the objective of being the dominant military force by 2050. We may find China to be the new ‘world police’ sooner than we think.

For more information - contact Bryndon Kydd, Leader, Global Mining, BDO