Don Coxe: mining’s the best place to be

When Don Coxe looks at the new global economic order he sees opportunity — vast opportunity, especially for North American miners and explorers.

The strategy advisor for BMO Financial Group was speaking to a receptive crowd at the Prospectors and Developers Association of Canada (PDAC) convention in Toronto on March 10, winning them over with his whole-hearted endorsement of the industry as the place to be in the coming years.

“I can’t think of a better career in the next 25 years than geology,” he says. “To anyone coming in, what you will be tying yourself into is the hinge of history itself, where two billion people move from the outside to the inside and they can’t do it without you.”

The two billion people Coxe refers to are the inhabitants of China and India, or “Chindia” in the Coxe lexicon.

Coxe calls the return of the Indian and Chinese economies to prominence — yes, the return since they were the largest economies before industrialization occurred in the West — is coinciding with declining birth rates in advanced economies.

Such a scenario is creating a historic opportunity for companies that can supply the emerging powers’ needs.

And junior miners and explorers have the most to gain.

“There will be pressure between established mining companies and sovereign wealth funds, who in order to keep economic growth going must see that the resources they need are there and are going to be developed,” he says. “They can’t leave it up to senior companies themselves because they say it will take eleven years to develop a mine — that’s too far outside their time horizon.”

To better drive production, Coxe says Chinese and Indian firms will increasingly buy deposits — especially ones in politically secure regions.

Indeed, Coxe holds political risk as a key component that is too often overlooked. In his popular reports, Cox generously refers to literature and history to help illustrate his points and he carries this habit into his speech.

On the point of political risk, he cited a former chief executive of Exxon Mobil, Lee Raymond, who in 2002 said US$45 barrel oil wouldn’t happen.

Raymond, Coxe says, believed that if oil reached US$45, Exxon and other companies would ramp up production in Russia and Venezuela, which would drive prices back down to US$25 a barrel.

“At his final press conference when he stepped down from Exxon,” Coxe retells, “Raymond said they would commit no new capital to Russia and Venezuela. They wrote off billions there.”

Coxe uses the story both as a warning to miners and investors who become overly optimistic about the prospect of doing business in countries with “toxic” regimes, and as a reference point for supply forecasts. Not all the production that companies say will come on stream will come on stream.

As for another key driver of commodity prices — inflation — Coxe takes a bit more of an 8-mile high view than many other analysts.

While he says the global economy is certain to have “some sort of inflation,” it doesn’t guarantee an increase in prices for precious metals.

Instead, Coxe argues, future price gains for gold will come from the new buying power that is being generated in China and India.

“Chindia’s necessity is the mother of investing,” is Coxe’s latest mantra.

And in the case of gold, the slogan is tied into a belief system that has been held by many throughout the ages, but is about to be adopted by a whole new group.

“The basic story of gold is that it ties into an atavistic belief system,” he says. “With another billion people added to the buy side with a chance to exercise their belief system — and they picked gold long before our white man ancestors did — it is a reasonable prospect that there will be more demand.”

Coxe sees evidence of this driver in the gold price’s recent behaviour.

“When the two biggest known buyers of gold — the jewelry industry and Indian brides — had both gone on strike, and the price of gold stayed above US$1,000 an ounce, it meant something was happening out there,” he says. “That was the moment when I started to say maybe something was unfolding.”

Coxe, however, shies away from making price forecasts.

“While I can’t tell you how high it will go, I can say that with the creation of paper (on such a grand scale that you can expect the forestry industry to have some underlying basis of support), people want something tangible and real, and gold will have a lot of support.”

As for base metals, the story is slightly different, if the end result is the same.

While still bullish on base metals prices going forward, Coxe says the driver will have less to do with belief systems and more to do with good old-fashioned economic demand.

Evidence of the extent of that demand can be read in recent negotiations between the Chinese and big iron-ore producers.

“We were just told over and over that we went through the worse crash since the Great Depression, but BHP Billiton isn’t prepared to accept a 60% increase in iron ore prices because their executives said it’s not big enough,” Coxe says. “This is iron ore! The stuff used for steel which, supposedly we don’t need anymore!”

Coxe found some foundation for BHP Billiton’s (BHP-N) hard stance buried in the back business pages.

He noticed that the price of scrap metal was rising at the very same time that the U.S. was experiencing 10% unemployment and the government was taking over two of the Big Three automakers.

The answer was that the Chinese were buying up the scrap to meet domestic demand –a sign of how desperately they crave such materials.

More evidence of the over-arching trend, which sees China and India increasingly saying they will not wait for established mining firms to provide supply.

They will aggressively seek out to secure what they need to feed their historic growth. Coxe says prospectors and developers are being presented with a historic opportunity to capitalize.