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Talking Mines and Money With Rick Rule and Frank Holmes

Jeff Nielson Jeff Nielson, Stockhouse
2 Comments| September 26, 2016


The UK-based Mines and Money show is now in its 13th year of operation. For the first time; the show is coming to North America, specifically Toronto. For a lot of Canadian mining companies, the timing couldn’t be better.
 
The event bills itself as the place “where mining deals get done.” With the mining sector coming back to life after five very tough years, there is a lot of pent-up energy among companies in this sector to move forward on projects and/or reorganize their balance sheets.
 
Among those expecting a spike in mergers and acquisitions is Frank Holmes, CEO of U.S. Global Investors. Holmes noted that the Mines and Money Show hosts the full spectrum of miners, from the large-caps at the top, down to the junior exploration companies. Bringing all these companies to a single event means it’s much easier for the large-caps to go “shopping”, while the juniors and mid-caps get a chance to show off their assets to interested buyers.
 
Rick Rule, CEO of Sprott US Holdings, had somewhat more nuanced thoughts on this subject. “You put in place in meetings at the show the foundation for (after negotiation) being able to conclude a deal.” First these companies have to line up their dance partners, and then the discussion begins about going to a dance.
 
Adding an additional dimension to the Show is that it is being paired up with the Advanced Battery Technologies & Metals event. As demand for hi-tech batteries continues to spiral upward, battery-making companies are drawing more and more investor attention, as revenue potential for these companies continues to climb.
 
In turn, batteries require metals. This was true with the old zinc dry-cell batteries. It is equally true with the lithium ion batteries of the 21st century. So, as interest and demand increases with respect to the battery-makers, this spawns a similar growth in interest in the miners exploring for or producing the metals required for these batteries: primarily lithium and cobalt, but also manganese and nickel.
 
With battery market growth showing no signs of leveling off, Holmes expects to see more events which merge this hi-tech niche with the miners who will be providing the raw materials to fuel this industry. Rule expects the meetings to be “useful” and “well-attended”, and then followed that up with a warning about “a perilous trap.”
 
With metals demand from the battery market based upon emerging technology, Rule noted that many investors and even the issuers themselves simply don’t have a full understanding of the technology, nor precisely how it would/will impact demand. “What you’re seeing in these markets is literally the blind leading the blind.”
 
The example he cited was the lithium market, and the soaring demand for lithium in the various lithium-ion batteries. “The sense that there is a long-term uptrend in the price of lithium is nonsense,” said Rule. He noted that lithium is a very abundant metal, with the larger producers having substantial capacity to increase supply to service this market.
 
The battery sector is one of the specialties of Peter Clausi, President and CEO of Green Swan Capital Corp. Clausi is known to some as “Captain Cobalt”, and the moniker is well-earned. Spend any time talking with this gentleman, and by the time you’re finished, you will feel a powerful urge to liquidate your other investment holdings, just so you can have your own stash of this rare-yet-vital metal.
 
He makes a powerful case, from both sides of the supply/demand picture. On the demand side, there is the relentless growth in the hi-tech battery sector. Clausi noted that in just one of Tesla’s new Model 3 electric cars, the battery requires 15 kg of cobalt. Start multiplying that by thousands, and then 100’s of thousands, and the cobalt required for just this one product starts to reach formidable numbers.
 
However, the view of Captain Cobalt is that the real story here is on the supply side. He pointed out that the cobalt market is extremely inelastic. It is not merely the fact that virtually all of the global supply of cobalt comes as a byproduct of other mining. It is that the cobalt production at these mines (primarily copper mines) constitutes only a tiny percentage of the metals extracted at such mines.
 
What this means is that there will be virtually zero supply response from a rising cobalt price, even (hypothetically) if the current price of roughly $12/lb should spike to some triple-digit number. Worsening the supply picture further, the copper market is relatively weak, meaning that there could be production cut-backs at some/many of the copper mines producing cobalt as a byproduct.
 
Rapidly rising demand. Flat, or even declining supply. Minimal global stockpiles. It is a formula for a market implosion, and this is even without considering other factors such as hedge-fund buying (on the demand side), and (on the supply side) the likelihood of reduced output coming from the Congo, currently one of the major sources of cobalt supply.
 
Of course the current level of buzz and enthusiasm in the mining sector won’t mean much if there is not the underlying strength in the economy to support continued growth in this sector. Holmes, for one, is cautiously optimistic. He notes that solid numbers in the forward-looking PMI index encourage companies to engage in growth-related planning, the impetus that is necessary to sustain current momentum.
 
Holmes also relies on his own “SWOT” approach to evaluating the current health in the economy. Each week, Global Investors assesses the strengths, weaknesses, opportunities and threats which present themselves in day-to-day economic activity. According to this metric, Holmes sees potential for a sustained rally in mining.
 
Rule sees the picture here as being somewhat more mixed. He is concerned about the lack of demand strength in the broader economy, noting that most of the strength he sees is more with respect to financial and equity markets. Consequently, with his resource focus, Rule is somewhat pessimistic about most of the base metals markets, with the exceptions here “proving the rule.”
 
Rule remains bullish on precious metals, but did not have the opportunity to attend the recently concluded Denver Gold Forum. Among those who did attend is Frank Holmes. What stood out to him at that conference was what he referred to as “the assault on GLD.” 
 
Holmes identified royalty-producing companies like Franco Nevada and Royal Gold as looking to take market share away from the SPDR Gold Trust. These financial mining companies not only provide investors with precious metals exposure, they offer something not available from the bullion-ETF’s: dividends. Holmes sees such companies being able to continue to attract investor dollars away from the bullion-ETF’s, and into dividend-producing stocks such as these.
 
Returning to Mines and Money; Holmes and Rule also shared some thoughts on what they were looking forward to, in terms of speakers and presentations. Both noted a couple of industry icons. Holmes identified Rob McEwen as someone whom he wanted to hear. Rule mentioned Robert Friedland, but then added “I like to surprise myself” so he will also be listening to some lesser-known speakers at the conference.
 
While these three industry experts had somewhat different perspectives on what the future holds, they all agree that – for the moment – markets and market sentiment are more favorable than they have been for several years. For the miners who will be exhibiting at the Show, that alone is welcome news.

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October 3, 2016
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MartinS1
"SPDR Gold Trust." I've been trying to do my due diligence into the SPDR Gold Trust (GLD). Anyone know why there is a clause in the GLD prospectus that states GLD has no right to audit subcustodial gold holdings? Why would the organizations behind GLD forfeit this right and create such a glaring audit loophole? I have not heard a single good reason for the existence of this loophole thus far. It also doesn't help that GLD claims to be fully backed by physical gold bullion...
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September 26, 2016
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