Missing the big story in Asian resource investments...
WESTERN JOURNALISTS learn from day one to find the bad news in everything they report, says the Gold Report.
Lawrence Roulston, a trained geologist and engineer with more than 20 years of hands-on experience as an analyst and manager in the resource industry, says this means the mainstream media is now missing good news – and major opportunities for investors – across Asia.
Lawrence Roulston founded Resource Opportunities – which provides objective commentary on the resource industry and emerging resource companies – in 1998. Having established an impressive track record, with a particular knack for picking emerging companies that delivered 10-fold or better returns, he launched GreenTech Opportunities in February 2009.
But as historian, political writer and Guardian columnist Timothy Garton Ash observed, "Many Chinese City Dwellers Moderately Content with Rising Standard of Living" isn't a headline that would sell a lot of papers. Roulston's advice is to "Take a broader, longer-term view of the world," as he explains in this Gold Report interview...
The Gold Report: You wrote about a very interesting concept in your May Resource Opportunities newsletter. The media attention in Europe and North America has kept us focusing on the sovereign debt debacle, but the big concern on the other side of the world is finding enough raw materials to supply the economic engine of Asia. Will North American and European investors realize lower returns compared to their Asian counterparts because of this media bias driving us toward safe-haven investments, while Asians are driven to growth?
Lawrence Roulston: The short answer is yes, absolutely. The media has a huge bias toward the negative side of any story. The possibility that Greece would default and the Euro collapse was a huge story in the Western media. It was never more than a remote possibility that Greece wouldn't get bailed out, but it dominated the headlines and scared the hell out of a lot of investors. Many people chose to stay in safe havens. Of all things, the Dollar gained a lot of strength during this period as there was a bit of a flight to the Dollar, too.
Meanwhile, the Asian economies are booming, and investments there are focused on growth companies. They're going all over the world buying up commodities. We have been so focused on the possibility of a disaster that people are missing out on a phenomenal opportunity.
TGR: Why isn't the Western media looking at the opportunities in Asia?
Lawrence Roulston: I don't have a good answer for that. I was in Hong Kong at the beginning of April. I'm astounded every time I go there, seeing firsthand and reading media accounts of what's going on. It's an entirely different world. I come back here and people just don't get it. They don't see it. They don't understand it; I don't know why. A lot of people here apparently don't think what's happening in Asia is real. Maybe more of them just need to get on planes, go there and see with their own eyes to understand what's really happening in that part of the world.
TGR: Most of the Asian discussions center on China. Is China the driving-growth engine in Asia, or are all the Asian countries experiencing growth?
Lawrence Roulston: China is absolutely the main engine of growth. It's now the second-largest economy in the world, the largest exporter and the second-largest importer. Still, it's not the only part of the story. With a billion people, India is growing at about 7% a year. It's years behind China in terms of infrastructure development and everything else; but, nevertheless, growing at 7% a year. Indonesia has roughly 250 million people and also is growing. The whole region is growing at a very fast pace, creating incredible investment opportunities that are being completely ignored by most people here.
TGR: Your May newsletter also covered base metals in the context of that growth. Specifically, you focused in on some statistics related to automobiles. As you look at the growth in China and also with an eye to the safe-haven investments, are you bullish on all metals, or do you expect some to outperform others?
Lawrence Roulston: I have to come back to my mantra. I'm not really looking at metals as a commodity play. I'm looking at them from the perspective that metals being consumed, and the pace of that consumption, is increasing year by year. Mines have a finite life; even with no growth at all, mines have to be replaced on an ongoing basis. But because there is growth, there's a real pressing need to develop new mines and replace those that are being depleted. Therefore, I'm looking at companies that are part of the supply side of the commodity story rather than betting on what might happen on the price side. As far as one metal versus another goes, I see opportunities in all the metals for companies that have deposits of suitable quality that will eventually be developed into mines.
TGR: Any thoughts on what might happen on the price side?
Lawrence Roulston: Deep down I believe the prices are going higher, but higher prices for commodities are not part of my investment approach. It's entirely on the supply side.
TGR: In essence, you're looking at supply/demand gap, and then identifying companies that are close to the front to provide supply. In that context, do some metals currently have a bigger gap than others? And are there companies that are closer to coming online with supply? Or is it the same situation for all metals?
Lawrence Roulston: No, it's not the same in all metals; and you'll find a range of opportunities at the company level. I'm focused on companies with good prospects that encompass a wide range of metals. Of course, gold is by far the most popular. Most investor attention in the space is devoted to the gold industry. For that reason, many of the small players in the gold sector have values that reflect a reasonable outlook on the Gold Price.
When you look at the base metals space, though, the juniors are completely under the radar. There are outstanding values in a lot of the small base metal companies. As for specialty metals, lithium had its day in the sun as well as rare earth metals and vanadium. Various specialty metals get some media attention and, therefore, investors tend to lock into that space and it becomes a bit of a mania.
I think investors have to be very, very cautious about that sort of thing. Looking at rare metals for a moment, they're not as rare as the name implies. However, there is a need for new sources of supply of these metals. Demand will increase at a fairly substantial pace. There are also a lot of known deposits of the metals, but only a few companies will succeed in advancing projects to production. So it's extremely important to be selective. The opportunities across all the commodities range from pie-in-the-sky dreams to companies that are closing in on near-term production.
TGR: Various rare metal pundits talk about, as you mentioned earlier, rapidly increasing demand. I've heard that the first two or three companies to come online with production will capture pretty much most of that demand. Do you agree with that, or will all of the rare metal deposits that come to fruition find some demand?
Lawrence Roulston: Far more rare metal deposits are potentially headed toward production than are needed to fulfill the supply, so only a very small number of companies will be successful in that space. Most likely, they will be the ones that come onstream first. I'll qualify that by saying some high-cost producers might catch a short-term spike in the price if they are early; but later, some larger lower-cost producers could change the market completely.
TGR: You've suggested that the "sell in May, go away" investment strategy is outdated, at least insofar as mining stocks are concerned. You point out that mining companies now not only have deposits all around the world, but they're mining and producing results year round – including the traditional slow summer months. Do investors who sell in May and go away miss the upside of some of these mining opportunities?
Lawrence Roulston: They certainly do. In one of my recent talks, I gave a number of examples of companies that had spectacular success over the summer months – not just up or down by a few percent but, in some cases, doubles and triples. On average, prices probably will come down between May and August or September, but specific companies could generate huge returns. So again, it's extremely important to be selective.
If the companies you own as an investor don't generate results, chances are their share price will suffer a decline. Those companies that deliver results, however, will get a reaction in the marketplace and their gains could be enormous. One final point there, a lot of the exploration activity especially in North America takes place during the summer. So there is a lot of news flow coming in the summer that could generate big gains in the share prices.
TGR: Because it's May and most of our readers are in North America, are you suggesting that they check their portfolios and look at those companies generating news? Or should they just hold on to good opportunities because, even if things slow down in the summer, they will pick back up and recoup share value in the fall?
Lawrence Roulston: There's a lot more talk of sell in May and go away than there is actual price action. We've done a little research on that and found a bit of a dip – in the 10%–20% range on average. But the upside potential on successful companies is much, much greater than 10% or 20%. The last stages of the Greek debt crisis last week brought share prices down across the board. I think the decline that some expected in May has pretty much been factored into share prices by now.
Again, it's very dependent on the specific company. Some companies may suffer further drops; but, on the other hand, a lot of good companies have already been knocked back because of the general decline in the markets. I would think they are very attractively priced at this stage given the potential news flow.
TGR: We'd love to hear your views on the market over the past month. We saw an incredible dip and recovery with the blame pointed in any number of directions – fat fingers or the Greece bailout or quantitative easement or green shoots. What's your take on all of that?
Lawrence Roulston: In this age of the internet, we have instantaneous reaction to whatever news happens to be on the screen at that moment. I think investors need to stop reacting to headlines and take a longer-term outlook on their investments. Europe and North America are going to continue to endure a period of slow growth. As we discussed, the growth is happening in Asia. It's booming right now. For that reason, people should be investing with some knowledge of the companies that are, in some way, involved with what's happening in Asia – and not companies that are dependent on recovery in Europe or North America. Of course, a lot of companies based in North America and Europe are benefiting from the growth in Asia. A lot of export-oriented companies are doing very well in terms of earnings.
Another way to play the Asian boom is to be involved in the commodities world, because that Asian growth is consuming a lot of commodities.
TGR: What's your take on the recent developments in Australian mining?
Lawrence Roulston: Well, for a very long time Australia was considered one of the best places in the world to invest in the mining industry; but then it shocked the mining industry with news that it was going to implement a new tax. So there's no sure thing in this business.
TGR: Given the US' current economics – specifically its debt – do you envision the potential for it to do something similar and raise taxes on mining companies all of a sudden?
Lawrence Roulston: I would be very surprised if the United States did something like Australia. Mining is pretty inconsequential in the US, for one thing; and something like that would tend to drive away jobs. It's far more important for the American government to focus on job creation, so I can't see them doing that. Places that are most dependent on mining, such as Nevada, would obviously be very, very opposed to any move like that.
TGR: Very good. Any last thoughts for the day?
Lawrence Roulston: I'd just like to reiterate the importance of not getting too hung up in headlines or focused on the crisis of the moment. Take a broader, longer-term view of the world. See the growth in Asia and look to companies that will benefit from the fast-paced growth there.
TGR: Wonderful. I think that's a great look that we haven't heard too much about. Thank you for providing that.
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