A few comments on the advanced stage development PM deposits stocks.
One plausible theory out there is that the commodity super cycle driven by China and India will be more “differentiated” among raw materials depending on supply- demand balances. Citigroup’s Global Head of Commodities Research, Edward L. Morse, states the “super cycle” of commodity price gains has finished as China’s economy moves to slower growth and supplies increase. Morse thinks prices won’t climb “sharply” higher even though quantitative easing from global central banks lifts gold bullion demand. The Standard & Poor’s GSCI Spot Index of 24 raw materials, which has increased four fold since 2001, is up just shy of 1% this year evidenced by sluggish growth in global economies including China. When you look at the different commodities Morse was not exactly bearish on the outlook for most commodities. Its just that the mix is more favorable for mine developers. I am going a step further to say gold starts outperforming other input commodities.
What we have to consider is what happens if gold takes off because of monetary considerations (flight to real money) at the same time economies really weaken because of bad faux growth monetary policies. I think that’s what’s in store. This is also consistent with my “busted China and Japan thesis”. If one wanted to hedge the energy side of the Morse equation some, use uranium [Cameco (NYSE:CCJ) and Denison Mines (AMEX:DNN)] which is highly depressed. I would exclude food from Morse’s theory and use Potash Corp (NYSE:POT).
Material costs from fuel to tires, steel and metal alloys are a major component of mine construction. Just as raw materials prices have soared so have mine construction capex costs. If development projects can get into a new sweet spot of some price relief on costs combined with higher prices for gold, the leverage could be considerable, as right now new projects need to squeeze every dime out to get a decent return. Energy makes up about 25% of the cost of copper and gold production. That’s why you are seeing projects like Metates and Donlin Creek talking about bringing nat gas pipelines in.
In developing a little more background on porphyries, (which the market now thinks are unlikely to be developed), according to the United States Geological Survey database of worldwide porphyry deposits, the 2008 median grade of 422 porphyry deposits was 0.44% copper. Only 2/3 of these deposits contained gold and their average gold grade was 0.21 g/t Gold. For comparison, 0.44% Cu and 0.21 g Au are worth $45 currently and those would probably be top quartile (100 best in the world) deposits.
If you notice, the big porphyries that have gotten my attention have the following characteristics:
1. good jurisdictions
2. higher precious metal weighting versus base metals, with copper functioning as a credit to the main course.
3. extremely neglected valuations.
4. The negative: all large porphyry projects are expensive to construct, but if the cost side improves relative to the output product, Katie bar the doors.
Seabridge’s (NYSE:SA) massive KSMs reserves show a value of $49: 0.55 grams per tonne of gold, 0.21% copper and 2.74 grams per tonne of silver. So there is evidence, that KSM, in addition to being one of the largest porphyries ever found, has above average grades skewed towards gold.
The rest of this post and others on this topic throughout the week are available at my Actionables service.