Why short-term slowdowns are great

As an investor, operator, and merchant banker, I am happy to see all the short-term pain in the industry. We are going through a thinning process that will, in the near-term, hurt everyone and everything, but in the long-term, put the industry on better footing. Here’s why:

No commodity demand destruction: Let’s start with a core concept that people seem to be missing — this industry reset is not a demand-driven reset, it is a capital market-driven reset. The fact is that commodity demand is still high, people are using stuff and most of the world is coming out of the recession, and it has a pent-up demand. Even China is still growing.

Let’s face some facts, China is not falling off of a cliff and demand is going to stay up there, and it will probably continue to grow. No one is going back to the Stone Age, and Americans are still going to expect new cars.

India, and every second- or third-world country, is also coming into the modern world; we are not going to see a halt in global development.

Capital redirection: 2004-2012 was a period where a lot of capital chased stupid projects. Everyone did it, from the majors on down, and now they are being forced to go through and decide what to fund and what to cut off/kill on the vine. Just because $100m was spent does not mean the project should get another $20m. If it is not economic, it is never going to be economic, and if it sits under a large sacred lake it should probably be ditched.

Majors are doing the best job of killing projects, but the public market is also doing a good job of it; however, the public market seems to fund some things for years that will never become a mine…

Majors are not stupid: Just because the price of iron ore is down and the majors are taking a year to shake out the market, it does not mean that the price will stay there for a long time. In markets that are managed, a year of bad earnings that shores up market share and wipes out the weak companies is GREAT. Prices will bounce back, but second-rate Chinese domestic production will not.

Pipeline interruptions: Everyone, including majors, has been forced by the capital markets to put projects on hold. This period of market correction has put 10-50 good projects on care/maintenance and will slow down the increase of supply in commodities like zinc and copper, where supply should be growing. This slowdown is going to seriously impact supply in 2016-2020 and lead to the next bubble.

What juniors should do?: Either partner project in markets that matter to majors, or focus on markets that are going to be independent of major involvement — like zinc or mineral sands. But in either case, figure out how to operate with less capital.

If you are management, what is your business plan? Running a pipeline company that is generating projects for majors, or running a development company that is focusing on niche projects/markets that do not matter to majors, but can still make money? Don’t do both.

What should investors do?: Find cheap options and buy them. Buy quality companies that are going to weather the storm. Buy BHP or VALE, or find beaten down juniors who have material projects to majors, but do not chase grassroots exploration plays at this point.

– Benjamin Cox

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