Thursday, August 20, 2009

Commodities supercycle still with us and stronger than ever

Commodities supercycle still with us and stronger than ever

In 2007, she claimed the current commodities super-cycle would last another 20 years. But given the economic implosion since that time, could it still be true? "Absolutely," says Carmel Daniele, founder, CEO and CIO of CD Capital. Interview with The Gold Report.

Author: The Gold Report
Posted: Wednesday , 19 Aug 2009


"The crisis that occurred last year after Lehman's collapse just interrupted the cycle," explains Carmel Daniele, adding that it "is actually going to seal the next stage of the super-cycle. . .it will make it stronger and last even longer." Significant supply shortages resulting from both the current lack of money flowing into exploration and planned infrastructure spend by emerging countries will continue.

The Gold Report: Carmel, in 2006 you started your fund, the CD Private Equity Natural Resources Fund, specifically to take advantage of the commodity super-cycle. In 2007, you stated you thought this super-cycle could last at least another 20 years. Since 2007, several key commodities are trading at substantially higher levels-even with the market adjustment of 2008. Have the market fluctuations since 2007 affirmed or challenged your view that this commodity super-cycle has another two decades to run?

Carmel Daniele: Absolutely affirmed it! The crisis that occurred last year after Lehman's collapse just interrupted the cycle, and I believe the cycle is still alive and well. And I also believe that what's happening with this crisis is actually going to seal the next stage of the super-cycle, and it will make it stronger and last even longer. This financial crisis may have dampened demand, but it has actually destroyed supply because a lot of mines have shutdown and cut off supply. And you will see when demand picks up-and it doesn't take very much for demand to pick up-there will be no supply because you can't just flick a switch on and off to turn on supply. It will take a lot of time to crank up the mines and get them supplying again to meet that demand for raw materials.

It takes on average about 7 to 10 years to get a mine into production after there's been a discovery of a mineral, and when you look at the super-cycles of the last eight years, I can't think of any major new supply or a new mine coming on stream except maybe Fortescue Metals Group (ASX:FMG), but that's exceptional. So, once demand starts picking up, the supply and demand imbalance will be a lot bigger and we will gear up again in the cycle.

Also if you look at history, on average, the past cycles have lasted an average of about 20 or 30 years. In the 1880s, the U.S. industrialization super-cycle lasted 40 years, and that involved the industrialization and urbanization of only 100 million people. In the 1960s, after World War II the Japanese industrialization super-cycle lasted 20 years-and that involved 30 million people. And the one we have now with China and India, which is only nine years in, involves the urbanization and industrialization of 3 billion people. So, I wouldn't be surprised if it lasted longer than 20 years.

But historically, these super-cycles have a lot of violent swings up and down, but the trend is up. So, you have to be a long-term investor in order to be able to survive the dips. They also provide a lot of opportunities when there are dips.

TGR: In the industrializations you pointed out in the U.S. and Japan, and now China/India, are all commodities going to rise universally or will some rise before others?

CD: No, they don't always rise at the same time. It all depends on what is driving it at the time; for example, it may be energy and coal demand for infrastructure spending. It all depends on the demand and supply balance of the particular commodity; and they go through different cycles. So, they won't all happen at the same time. It just depends on which country is demanding what and where the supply is coming from. Also I think what you will find over time is some countries will build barriers around a strategic resource, and we're starting to see that already, where some countries are starting to put duties on exports so they can consume the raw materials themselves and secure their own supply.

TGR: There's been a lot of press related to China, not so much about barriers, but the fact that they're starting to stockpile base metals and raw commodities. What's your feeling in terms of China and the influence they will have with potential barriers and duties on commodities, and what will that mean to the commodity prices?

CD: That's a very interesting question. Basically, they have a list of strategic resources and it's actually illegal for foreigners to own certain metals. You've got to actually watch and see what China is doing rather than listening to what they're saying. What they've been doing is taking advantage of the low copper prices and stockpiling. Iron ore is one that is really interesting when it comes to China, because they actually import almost all of the iron ore that they need. They don't have very high-grade iron ore in China and they've been trying to control the price as the world's largest importer at 60%.

The government of China sees iron ore as a very much-needed resource for their infrastructure that they're going to be building. I think they're going to be spending over half a billion U.S. dollars on roads, railways and power. They've been trying to take control of the pricing, through the China Iron Ore and Steel Association, as they can't do that with 100 steel mills all negotiating their own price. So, they've threatened to reduce the number of import licenses of iron ore to under 10 so the government can get better control over the pricing. All this has collapsed the annual negotiations over iron ore pricing.

The other one is rare earths; they have a monopoly on rare earths. China ranks number one in total reserves, production and exports in the world. There's another mine in Greenland, Greenland Minerals Ltd. (ASX:GGG), for example, that's got the potential to be bigger than China's, which would threaten the monopoly that China has over rare earth prices.

It is interesting because when it comes to foreign ownership of China's metals, it's very difficult; yet, they're trying very hard to control iron ore and other metals around the world that they don't have internally. And India, I believe, has threatened to further increase export taxes on the export of its iron ore because it's very strategic to its own industrialization and building of infrastructure.

So, you see the world has got limited resources; you've got all these emerging countries growing at a phenomenal rate. You've got this population explosion, and they're all waking up to the fact that maybe they're not going to have enough resource to continue building out their empires.

TGR: As the demand from India, China, and other developing countries increases, what investment opportunities do you see?

CD: There are two drivers. First, the population explosion-the world's growing by more than 17 million people per year. In 2008, the world population was 6.5 billion with 3 billion in cities; by 2030, there will be over 8 billion people on the earth, and 5 billion will be in cities. So, there will be an extra 2 billion people living in cities, needing things like housing, cars, and of course to be fed. Because of that, I like potash and phosphate, which goes into fertilizer, which is used for agriculture to feed the growing population.

The other big driver is all the emerging countries' infrastructure spending. In the next five years, Asia, excluding Japan, will spend over $2.5 trillion in infrastructure and that's going to need a phenomenal amount of iron ore and coal.

TGR: You mentioned copper, and copper is often held up as the precursor to any economic boom.

CD: Yes, I love copper; I'm a copper bull. Copper goes into infrastructure spending and there are not many substitutes for copper. There haven't been very many big discoveries of copper mines and it will take some time for supply of the large mines to come on stream. A lot of the large ones are in politically challenged jurisdictions like the DRC and Alaska, which has lots of environmental hurdles.

TGR: Do you see the possibility that the limitation of these natural resources will limit the ability for these countries to expand?

CD: Yes, that is why China is strategically building up its resources; it's very shrewd. I think that China is positioning itself perfectly; it's the iron ore and a few other minerals that they're actively looking for. Yes, I think it could probably slow down if they don't have the metals they need. Or they could start using substitutes.

TGR: But in the situation like lithium or copper, there really aren't any substitutes; so could that limit the expansion we're going to see here in the next five years?

CD: Given that there's no money flowing for the exploration for these metals, it has a double whammy effect. Yes, I'd say in the next five years, probably, you'll start seeing a chronic shortage of some of these metals, if there's no substitute. But really, you can't go on a plane with a laptop and have fuel in your computer so there are few viable substitutes for lithium. And lithium is related to electric cars, as well. The people in China are going to start buying more and more cars, because there are tax subsidies in China for people to buy cars and apparently only 5 out of a 100 people in China own a car today. Imagine when they get to the U.S. ratio of 70 out of 100 how much metal those new cars will consume.

TGR: So, with these shortages, how are you positioning your Fund to take advantage of those investment opportunities?

CD: Well, basically, what I'm trying to do is invest in anything that these emerging countries need to continue their industrial revolution, and remember, they are the ones with the deep pockets. So, what I look for is investing in companies that have a world-class resource that is attractive to the emerging markets either through an off-take or through actually buying it outright.

And the interesting thing is this crisis is different than other crises we've seen because the emerging markets are the ones with excess foreign exchange reserves. China has $2 trillion U.S. dollars in foreign exchange reserves. India's got a quarter of a trillion. Russia's got half a trillion. So, they've got the deep pockets. And they're actively looking to convert their U.S. dollars into hard assets. And it's not just these three emerging countries that I've mentioned that have surplus cash; there's Korea and Japan, as well.

TGR: What are some of the investment plays that you're doing right now with the Fund?

CD: I invest predominantly in private companies because I am trying to look for tomorrow's stories today at low prices. One interesting private one is a high-grade iron ore company with 4.5 billion tons in Brazil; it's the third-largest in Brazil. It's the lowest quartile of producers, and it's the best positioned to consolidate iron ore producers in Brazil. China is also now increasing its imports of iron ore from Brazil and has reduced its imports slightly from Australia. If you look at the shipping that's going from Australia and Brazil to China with iron ore compared to previously, you will see a big jump from Brazil, and I think it's because China's a little bit disappointed that they missed out on the Rio Tinto (NYSE:RTP) acquisition.

Other private companies are coal in Canada, and coal in Indonesia. As I mentioned, India is hungry for thermal coal, especially from Indonesia because it lowers transport costs and light sulfur coal suitable for their existing and new coal-fired power stations. So, if you're bullish on iron ore, you've got to be bullish on coal as well. And Canada's got lots of untapped resources and high-grade met coal and a long market history in the Asian steel industry. There's a lot of infrastructure already in place there to deliver to export markets.

Another one that I am looking at is potash in Brazil. It's amazing, but Brazil imports 90% of its potash needs, and it's got a growing agricultural market. So that's only just growing. I am just amazed that Brazil got itself into this position.

TGR: You're mentioning a lot of private companies. How can our readers who are individual investors take advantage of some of these tomorrow stories today?

CD: The best way to take advantage of these private companies is to invest in a Fund like the CD Private Equity Natural Resources Fund that invests predominantly in privates.

I'm a big believer in people; I am a backer of jockeys, rather than horses, and so I think the key is to look for a really good management team and you just have to look at what the market will pay for top management. One example is my ex-colleagues, Pierre Lassonde and David Harquail, at Franco Nevada Corp. (FNV.TO), who in their last fundraising managed to raise money at a premium to the market price. That's a good one as they have an excellent business model. It's a royalty company and they don't have to lie awake at night worrying about day-to-day mining technical issues. They just have to cash their royalty checks.

Columbia Goldfields Ltd. (TSX:GOL) (OTCBB:CGDF) is another one I like. It has recently been subject to a takeover by Medoro Resources Ltd. (TSX.V:MRS). Colombia Goldfields is completely undervalued; it has five million ounces of gold. What I like about the merger is that it is a perfect match of a great asset with management that has a really good track record in the region. There will probably be further consolidation in that region as the management knows the region very well.

Another one is Petaquilla Minerals Ltd. (TSX:PTQ) (OTCBB:PTQMF) (FSE:P7Z). I have in the past backed the management team there when they spun out Petaquilla Copper. Now, they're doing another spin out. If you invested in Petaquilla Minerals, which has gold in Panama, at some stage you'll get one share in Petaquilla Infrastructure for every four shares you have in Petaquilla Minerals. You will be able to benefit from each project. Petaquilla Minerals will receive cheaper power, cheaper mining costs and less dilution, while Petaquilla Infrastructure will benefit from guaranteed power off-take with exposure to the growing power demands in Panama and surrounding countries.

Another one I like is Greenland Minerals and Energy (mentioned previously); it has a very large rare earth deposit in Greenland. It's the largest outside of China; potentially it could be the largest in the world because there is still potential upside in their resource. The other thing-and not many people know this-is that they have over 200 million pounds of uranium as a by-product.

TGR: Wow!

CD: Yes, and this company could be a threat to the monopoly that China holds over supply, and this could help attract interest from Japanese and North Korean groups to secure their own supply outside of China.

TGR: What's your view on the precious metals market?

CD: I think gold, for example, given the crisis, is something you have to have in your portfolio. I mentioned Colombia Goldfields, which has 5 million ounces of gold. Another one that I like is New Gold Inc. (TSX:NGD) (NYSE.A:NGD), which Pierre Lassonde is behind; they did a three-way merger. They've recently acquired Western Goldfields Inc. I mentioned Petaquilla Minerals as well, which is another gold company with gold in Panama.

I also like Norseman Gold PLC. (ASX:NGX) (LN:NGL), listed in both London and Australia. It is producing and generating significant surplus cash flows from the high Australian gold price. It also has the working capital needed to fund the expansion of its underground mine and increase production at its under-utilized plant.

Gold is a psychological metal; it does well basically when everything else isn't doing well. That's why you need to have some in your portfolio. I don't have my whole portfolio in it; I just have a small interest in precious metals. And we're also looking at some projects with platinum and palladium only because they're used in motor vehicles and China's going to increase the number of cars, so I am still very bullish on these as well.

TGR: Do you have any specific companies you're looking at for platinum or palladium?

CD: There's one that's called Nkwe Platinum Ltd. (ASX:NKP). They have a portfolio of platinum deposits located in one of the largest and richest platinum regions in the world. They expect upgrades to their already-large resources, as well as the completion of the feasibility study by late this year.

TGR: Are you also following Colossus Minerals Inc. (TSX:CSI) ?

CD: Yes, we are. We've invested in a private gold company, Latin American Gold, which we think that will be the next Colossus Minerals.

TGR: Carmel, any last thoughts you would like to give to our readers?

CD: I think we are very lucky to be experiencing what's happening with the whole commodities super-cycle. The stars are all aligned, and it's just very exciting. It's going to last a very long time, and this is something you see only once in every couple of generations. What we're witnessing now is something that will be written up in history books some day, with the emergence of China as a super-power and India close behind. And I think that this crisis, though some people see it as a negative, is fantastic because basically there are so many opportunities around that you could buy at distressed prices, and you can throw valuations out the window. For a long-term investor, if you buy now, you can make great fortunes when the super-cycle comes back again, and it will come back, longer and stronger.

Carmel Daniele is the founder of CD Capital and CIO of the CD Private Equity Natural Resources Fund. The Fund's investment objective is to achieve capital growth through pre-IPO and pre-trade sale companies in the natural resources sector, targeting opportunities that deliver substantial returns on exit.

Carmel was previously focused on selecting and negotiating natural resource investments for the Special Situations Fund at RAB Capital. Prior to this she was a Group Executive in Corporate Advisory at Newmont Mining, negotiating and structuring mergers and acquisitions around the world for the Newmont Capital group which included the US$24 billion three-way merger between Franco-Nevada, Newmont and Normandy to create the largest gold company in the world.

Published courtesy of The Gold Report -

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