- Scientific rationality aside
It may not be a first order recovery for mining project financing, but there are more than a few reasons to be cheerful in the mining space, Hallgarten's Christopher Ecclestone suggests.
Posted: Tuesday , 01 May 2012
Metals analyst Christopher Ecclestone has made what he admits is "the rather unscientific pronouncement that we suspect a turn is about to occur" in metals prices, despite the current malaise.
In an analysis published by Hallgarten & Company Monday, Ecclestone observed, "The metals space seems to have gotten itself into a bind where even the metals prices don't matter and the vast heaving mass are demanding from the market more money in financing and long term holders than is out there."
"If the mining market is hooked on QE-type drip-feeds then there is a moment of truth coming up rapidly if Central Banks do not oblige them," he advised. "There are too many producers that are hoarding cash instead of sending it back to investors for reallocation to other up and coming stories."
Meanwhile, Ecclestone noted, "In M&A there are too many targets and too few acquirers that any one deal does not do anything to clear the market or lift any of the other targets, In another less crowded market space a deal like last week's acquisition of Trelawney by IAMGold would have caused some knock-on effects but instead the effect is more like a tree falling in a very large forest."
"However, having said all that we would make the rather unscientific pronouncement that we suspect a turn is about to occur," he said.
"It will be the cumulative effect of metals prices failing to weaken, a build-up in cash positions, rising equities away from mining (in the US particularly), new funds being launched in the mining space (for the first time since the 2008 debacle) and the severe undervaluation that has opened up between producers and the underlying metals that could produce a rerating in the space," Ecclestone predicted.
"This does not mean a first order recovery in financing activity though, however the race is not on for fixed income business in mining (something the Canadian market has been poor in providing) and a burgeoning of the offtake avenue with trading houses/ end-users driving base metals deals and a widening group of VPP players who fancy themselves as the next Silver Wheaton in the previous metals space. This gives us more than a few reasons to be cheerful, or less gloomy, at this point," he said.
In his analysis, Ecclestone suggested, "Call us crazy but there is something about uranium these days that gives us a feeling that a turn is imminent."
"Uranium would appear to us to be ready for an upswing as the Japanese nuclear industry comes back on stream and the over-riding dynamic of potential shortages comes back into focus," he advised.
However, Ecclestone was far less bullish about mining's latest apparent flavor of the month, graphite.
"At the risk of appearing to rain on anyone's parade, we cannot help but marvel at the sheer cheek of the mining entrepreneurs currently piling onto the graphite bandwagon," he wrote. "Irrational exuberance is part of the human condition if one can believe Alan Greenspan."
"However to be as serially shameless and become ranting fans of a mineral that two years ago, promoters could not even turn a head with requires chutzpah in the strongest doses.
Never let it be said though that the Canadian mining promoter does not seize an opportunity with anything less than full commitment.."
"Thus with 200 rare earth companies not even cold in the ground, the promotion machine has latched onto a very strange cause indeed. Graphite is basically being promoted as a lithium on steroids," Ecclestone observed. "Now for the rain...graphite is not rare."
""Unlike gold, where potentially all players could get into production and not queer the pitch, these specialty metals/minerals can easily go from shortage to excess in 60 seconds of acceleration. Fasten your seatbelts, it's going to be a bumpy ride," he concluded.