Joy sneaks back into the picture

Booming commodities markets look durable

A year ago in this space we observed just how hard it had been to kill the mineral industry, no matter how hard the economic cycle tried. Perhaps, as the Prospectors & Developers Association of Canada begins its 73rd annual convention, we should acknowledge that the economic cycle sometimes jolts the industry back to life, too.

That has certainly been the case since the global economy turned back up a couple of years ago. An industry that had been neglected by the capital markets for too long is vibrant again.

There’s no room to complain about commodity prices. Much as gold prices drove the industry’s recovery in recent years, base metal prices are pulling it along this year. The best commodity market in years should naturally be good for the mineral industry.

There are factors driving the metal market on both demand and supply sides. The appetite for basic materials is good, certainly. But the shortage of good, large projects now seems to have spread across the whole base metal market.

Hence, the skyrocketing copper price. Long a commodity seen as having too many big producers, copper is now looking at medium-term shortages. Nickel, which looked frothy at US$6, has driven through that level, again largely on the strength of tight supply.

Fundamentals for the major base metals look good. We have also started to see the quirky price spikes that affect the lower-profile metals: molybdenum, vanadium, cadmium, mercury, and tungsten are all at prices that haven’t been seen in years.

Strong fundamentals on the demand side can go south quickly, so we can’t count on them. But the strong fundamentals on the supply side for so many commodities don’t go away as easily. They could underpin strong prices for a long time.

And while gold faces the double-whammy of a large above-ground supply and a stock of marginal projects ready to start up if good prices stay good, weakness in the U.S. dollar is proving to be gold’s most loyal friend.

Equity prices are up, as well. The Toronto Stock Exchange’s two mining indices, the Diversified Metals & Mining Index and the Gold Index, both started in early 2001. The golds have about doubled since then, and the base metals have more than doubled. In the same span of time, the Venture Exchange’s Composite Index, heavily weighted to the junior mining sector, has doubled as well.

That suggests investors have been rewarded fairly well for stepping into mining and mineral exploration, a nice-enough change in itself, but also a sign that wallets may be opened again for the right kind of opportunity. We’ve argued before on this page that getting returns into investors’ pockets was the best way of bringing investor interest back into the industry. (What still hasn’t materialized, and would help even more, is a big discovery, the kind that people talk about on the street.)

A subtler observation about the course of the mining stock market in the last four years is that much of that doubling came in late 2003 and early 2004. That coincided with a flood of financings in both the producing and the exploring sides of the industry, a time when the tap opened wide for mining stories.

That created what the best of the newsletter writers, John Kaiser, called “the wall of paper,” which shaded the junior exploration market through most of 2004. Yet during that time prices of the base metals have risen steadily; gold prices, though they backed off from highs time after time, are higher than at any time since 1988.

So, even with the steady increase in stock prices, mining shares are becoming a call on higher commodity prices again, just as they were in 2003. Let’s hope it leads to another good year.