Juniors stand to benefit from higher metal demand Conventional wisdom

Back in the days when computers provided their wisdom on green-lined fanfold paper, a simple cartoon used to circulate. A small slope-shouldered man, punctured by a large flat-headed screw, looked out mournfully at the reader. Beneath his image were the words, “Work diligently and receive your reward.”

It often feels like that in the mining business, given the level of public approval the industry gets. It seems as if no new mining project makes it to the development stage without bringing the wrath of several dozen activist groups down on it. Even banging a few rocks is enough to set some people off about the threat mining poses to wilderness areas. And let’s not even get started on the way mining operations, in sinister league with the International Monetary Fund, the Freemasons and the Dallas Cowboys Cheerleaders Oldtimers Squad, destroy indigenous societies in the Third World.

This mining-bashing (we are in debt to Mr. Justice Lamer for that coinage) might all be fine if there were a big payoff, but on the other side the financial industry kept moaning about the low returns in the mining sector. Their displeasure is a little bit selective, considering the returns offered by some of the Next Big Things they fell for over the past few years, and considering how well we’ve all done with our bank stocks recently. But they’ve got a point: current returns are not high in commodity businesses, and for better or worse, mining will always be a commodity business.

This of course flies in the face of conventional wisdom, which is stuck on the image of the rapacious capitalist exploiter busily counting his stacks of money while his mines despoil the landscape. Not that mining’s more vocal critics would be likely to show up and look, but search high and low at the annual convention of the Prospectors & Developers Association of Canada and you’re unlikely to find a single stereotype.

What you are likely to find are some not-very-rich people whose fortunes have taken a modest turn for the better in the past year after about five very lean ones.

What’s been going on? Certainly the collapse of the “new economy” equity market, and the generally lousy returns from all financial assets, have brought some investor interest back to commodity businesses in general and mining in particular. But that doesn’t tell all, or even most, of the story; the dot-coms peaked almost three years ago now and, depending on how you count, there have been anywhere from five to eight real crashes in “new-economy” equities since.

The terrorist attacks of September 2001, and the resulting global tension, have been blamed for rising oil and gold prices, but also for spreading economic pessimism. It’s hard to explain the modest turnaround in base metal prices using the terror-and-tension model.

So what we may be seeing is something different, and potentially more enduring, than either a bear-market retreat to harder assets or a tension-fuelled rush to commodities. It just might be that the world wants more metal than the industry is ready to supply.

If so, that is good news for metal producers, but very much better news for metal explorers. We have droned on about the shrinking base of good projects previously in this space, but the little signals like smelting charges and exploration budgets — the ones that tell you more than just the motions of prices — suggest that large metal producers have recognized their own need to bring new projects into the fold. That means — more than ever, given the way the large companies have pulled back on exploration over the past two decades — the juniors will have to dominate in mine-finding.

Thus, a suitable theme for the junior exploration industry, as it holds one of its biggest get-togethers: the supply pipeline starts here. Make opening it worth our while.