Commodities Analyst Mohr Urges Patience

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In a trying week for resource investors that saw most commodities fall, including gold, which suffered its worst one-day drop in 30 years, commodities analyst Patricia Mohr said investors willing to go long on commodities should see improvement in the next couple of years. Shorter term, Mohr is bullish on potash, zinc and uranium. INN Senior Editor Andrew Topf sat down with Mohr, vice president and commodity market specialist at Scotiabank, last Friday at her office in downtown Toronto.

Andrew Topf: At the PDAC conference in March, you said that the mining bull run is likely to return at the end of the decade. Why do you think so?

Patricia Mohr: We continue to think that demand growth coming out of China and the rest of emerging Asia will be good. The pace of that consumption growth for particular base metals and for iron ore may very well be slower than what it’s been in the last 10 years, but will nonetheless still be quite high and will be coming off a much higher base of demand. Once we get through the next few years, where there probably will be more brownfield capability put in place, particularly in copper, and of course a number of major nickel mines, I think in the second half of the decade, the supply-demand balance around the world will tighten up again with less mine supply relative to demand — and with that, I do think the bull run for many commodities is going to return. Copper prices, although they’re probably going to edge a little lower from 2013 to 2014, I’d expect to actually rebound quite substantially later in the decade.

AT: You also said in March that more mergers and acquisitions (M&A) could take place in the next few years in the mining sector as companies sell nonperforming assets. Could you explain the connection between asset sales and M&A? 

PM: I think we’re at a point in the business cycle in the mining industry where we still have a lot of economic uncertainty in the world, although we do think that global economic activity will perform somewhat better next year. But it appears that there’s going to be a bit more mine supply in the next few years for the key base metals. In particular, copper and nickel and a little more mine supply relative to demand for iron ore. In recent years as well, companies have been faced with rapidly escalating capital and operating costs, so I think we’re probably entering a period of several years where the mining industry will be much more cautious when it comes to new capital commitments and much more disciplined with its capital spending. In that environment, we tend to think that companies will want to sell assets that are not core to their holdings, so because of that, we do expect M&A to pick up in the next few years.

AT: I’d like to turn attention to the copper market. The copper price has held up around $3.50 a pound, which is still quite lucrative for copper miners. Yet there is more supply coming onstream from places like the Democratic Republic of the Congo (DRC), South America and Panama. Is this new supply going to push the price down?

PM: Yes, I think it probably will. There’s a lot of skepticism by many in the industry about some of these new developments. Through 2012, the actual pace of new mine development and expansion has proceeded very slowly. Even last year, actual mine production was only up maybe 4.5 percent, a little higher than some anticipated, but still fairly modest. I think in the second half of this year and going into 2014 to 2015, some of the brownfield expansions will come onstream in all sorts of countries: Peru, China, the DRC, Zambia, the United States, so probably the supply-demand balance will loosen and we’ll probably move into a modest surplus and the price will go down. I’m forecasting $3.20 a pound for 2014, and it may move down further from there and then snap back in the second part of the decade.

AT: What are your reasons for thinking that it will snap back?

PM: While we do think there will be new mine supply, like Cobre Panama and Oyu Tolgoi in Mongolia, it is fairly limited, and by the second half of the decade things are going to tighten up again.

AT: Turning to potash, there’s been some news that could impact potash supply. For example, we saw Vale (NYSE:VALE) cancel its Rio Colorado project in Argentina. Prices have been down lately, so that can’t be encouraging for producers. When do you see the potash price picking up?

PM: I think you’ll see some stabilization in potash prices in the next few months. The spring planting season in North America is being delayed by quite cold weather and heavy snow cover in many areas, so it’s going to be a very late spring planting, but once it does get underway, I think potash application will be fairly good; in places like Brazil and Southeast Asia, we’d expect fairly good application. Late last year, there was a lot of deferral of orders for potash, with buyers waiting for prices to move lower because of very poor business confidence across the world, and also because the market was anticipating that contract prices in China probably would be lowered. I think that the China price was the bottom of the market; it’s not moving up rapidly, but I do think that in the second half of the year prices will edge up. I think a lot of the producers this year are going to put more emphasis on getting the shipments rolling again, so I think 2013 will be a year characterized by higher shipments than last year.

AT: There have been a lot of rumors recently about quantitative easing ending in the United States, and that has caused great fluctuations in the price of gold. Where do you stand on QE and what do you think the gold price is going to do for the remainder of the year?

PM: The anticipation of stepped up quantitative easing was one of the reasons behind the rapid advance of gold prices over the last few years. But I think gold probably peaked at $1,921 per ounce in early September 2011 and the price has recently been consolidating (editor’s note: this interview took place on the morning of Friday, April 13, before the gold price took a precipitous drop). The gold market was a little unnerved in January, when the Federal Open Market Committee minutes came out, because there were some meeting participants who were talking about when the Fed was going to withdraw some of its asset-purchase program. We at Scotiabank do not think the Fed will withdraw that bond-purchase program for some time. They’re not satisfied with where unemployment rates are — they’re still at 7.7 percent and a normal level is 6.5 percent or less. So the Fed is not going to withdraw its program until they see real progress in the unemployment rate and that isn’t going to move to normal for quite some time, perhaps 18 months from now. I don’t see them withdrawing it, but I don’t see them increasing it either, and that’s been a bit of a worry for gold. In recent days, there’s been news that Cyprus may sell some or all of its gold holdings as part of its bailout package, and that has really unnerved the market and sent it lower. I’m not sure where the market is going to level out from here, I’m still in the $1,500 to 1,600 camp, but there are large risks around these numbers, so I wouldn’t want to put a spot forecast on it at the moment.

AT: We’ve also seen a lot of volatility with silver. When I talked to David Morgan in January, he was optimistic about industrial demand for silver picking up, yet that doesn’t seem to be happening yet. In fact, we’re hearing the market is oversupplied and that we’re entering into a bear market for silver. Would you agree with that?

PM: I think the industrial demand for silver is probably fairly strong, and likely to move higher in the next few years. You use silver in a lot of electronic devices, all mobile phones, flat-screen TVs, so I see the electronic demand for silver doing quite well. And so I’d say that while there’s a lot of uncertainty over gold prices, I think silver relative to gold will tend to hold up better.

AT: Our publication covers mostly junior mining companies, and as you know, this sector has been hit hard, with the TSX Venture at its lowest level since 2009. If investors take the long view on commodities — as you’re suggesting the bull run will return at the end of the decade — is there still hope for junior mining?

PM: I certainly hope so. The one positive is we do expect economic activity around the world next year to be better than this year, and certainly much better than in 2012. We see global GDP expanding perhaps 3.8 percent. It’s not a really stronger number next year, but it is better than the 3.1 percent of 2012 to 2013, so that will be a positive and could lead to some rejuvenation of equity interest for the junior mining companies. I do think mid-decade that zinc will outperform and there are a lot of little zinc junior miners that will maybe perform better because of that. I’m also hopeful that uranium prices towards the end of this year are going to look a little stronger, and that will help the junior mining sector as well. I do think it’s going to be a challenging time in the next couple of years, and then a much brighter future in the second half of the decade. By the time we get out to about 2016, it should start looking better again.

AT: Okay, let’s leave it on a bright note. Thanks very much for speaking with me.

PM: Thank you.

 

Securities Disclosure: I, Andrew Topf, hold no direct investment interest in any company mentioned in this article. 

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