Hand-Me-Down Mining Tips

Waiting for the next boom in mining won't take a generation. Will it...?

 

LOOKING ahead to Father's Day, The Gold Report here quizzes Chris and Dr.Michael Berry, the son and father authors of the Disruptive Discoveries Journal, on how investing has changed between their generations in gold, silver, niche metals and energy – and what they are investing in today to make sure they survive to see the next cycle.

 

The Gold Report: Mike, we often hear that the current generation doesn't realize how good they have it compared to when you had to walk uphill both ways through snow to make a trade. Is it easier to invest today with all the resources online and pundits around every corner or is it harder to cut through the noise and find the best opportunities?

 

Michael Berry: While the internet makes it easier to do research and make a trade, that doesn't mean it is easier to make a good trade, or better still, a smart long-term investment. I think it's challenging today. It's easy to trade, but much more difficult to create real wealth.

 

A price/earning multiple used to have real meaning. Today, the pace of the market is so fast, there are so many flash traders, so many games being played and so many nickels being minted, that it is difficult to figure out what is real. There are debt and equity bubbles out there that have been being created for the past two decades. They can be difficult to take advantage of because investors have to go against the prevailing thinking.

 

Hedge funds can't make it today; only the private equity players seem to be successful and they have tremendous advantages. Almost all central bankers are in the investment game now. The Federal Reserve owns 25% of the Treasury bond market. What do they plan to do with their investment? There is US$9 trillion sloshing around the world today and a global exchange rate devaluation. These issues make central bankers powerful new players and make the market more challenging for individual investors.

 

TGR: Chris, did the boomers and the flash traders wreck it for the rest of us?

 

Chris Berry: Algorithmic trading has raised many issues while at the same time solving others. Regarding the boomers wrecking it for us, I don't necessarily think so. True, debt and deficits must ultimately be reckoned with and its through debt that we in the West have been able to live beyond our means, but the cost of technology is declining so quickly and the opportunities that it brings paint a reasonably optimistic view of the future, in my eyes. There are clear structural challenges and inefficiencies in the markets today, but I have faith in human nature to confront and solve these.

 

TGR: Chris, you just spoke at the Cambridge House Investment Conference in Vancouver. What was your message to current resource investors looking to take advantage of the opportunities you see all over the world?

 

Chris Berry: I discussed the idea of disruption in energy markets and I laid out the case for why segments of the energy markets are ripe for disruption and offered some areas where I think opportunities exist. According to the World Bank, the urbanization rates in China (53%) and India (32%) are still far below those in the West. Most economists would consider a country "urbanized" when the rate hits 75% (the US and Canada are at about 81%). The percentage differences equate to over a billion people who live at a fraction of our quality of life. Data like this shows that there are opportunities to employ new development models that disrupt the old patterns.

 

TGR: Are energy metals – lithium and cobalt in particular – part of that disruption solution?

 

Chris Berry: Yes, but it may unfold differently than we are currently forecasting. I define an energy metal as any metal or mineral used in the generation or storage of electricity. That includes lithium and cobalt, but also copper and silver, which have much larger markets with a lot more price transparency. The real growth, however, will be in niche energy metals, including lithium, cobalt and scandium, for example. The demand side is positive for all of these metals over the next 5 to 10 years.

 

Lithium demand is growing by 8-10% per year. As we sit here today, the potential for supply disruptions exists in lithium due to major producers having production issues and juniors facing difficulties accessing the major funding for production decisions. Cobalt demand is growing anywhere from 7-9% on a year-over-year basis.

 

TGR: Mike and Chris, you've both lived through a number of investing cycles. Where are we in terms of the rare earth (RE) cycle?

 

Chris Berry: We're close to the bottom. It's difficult to tell when the current down cycle will turn, as getting reliable data out of China is always challenging. It looks like China is serious about addressing its environmental challenges and demand for certain products that require REs continues to grow well above global GDP – two supportive factors for the market. Illegal mining has added excess supply to the marketplace and kept a lid on prices. Because of this, leveraging technology to ensure aspiring producers can compete with the "China price" is imperative.

 

I'm paying particularly close attention to advances in molecular recognition technology, ion exchange and solvent extraction, all of which are very promising. China is not going to give up its stranglehold on the market no matter what the World Trade Organization or anybody says. If you want market share in this space, you have to beat China on price. 

 

TGR: What is more important for a RE company, the resource, the processing chemistry or the agreements with the end users?

 

Chris Berry: If you don't have an offtake agreement, and I don't mean a letter of intent or a memorandum of understanding, I mean a binding offtake agreement, then nothing else matters. A binding offtake agreement is a vote of confidence that you can produce a product that an end user is certain it can integrate into its existing supply chain. Unfortunately for investors, the offtake is typically the last piece of the puzzle to fall into place. Usually, a mining company will need to establish positive economics for a project at a number of different pricing scenarios first. Unless the economics are robust, getting an offtake agreement is not likely, but without an offtake in place, the project is never going to move forward. So it's sort of a chicken-and-egg phenomenon. And it is not just with REs. It's the same thing with lithium, cobalt, graphite and some of these other niche metals.

 

TGR: Mike, are you seeing the producers stepping up and doing deals as they see explorers moving projects forward? Are you anticipating more mergers and acquisitions in the near future?

 

Michael Berry: Many explorers have stopped moving projects forward for a lack of capital infusion. Mergers are getting done. Unfortunately, because of the duration of this bear market, too many are being done for pennies on the Dollar. Even the big gold companies are trimming marginal projects that they otherwise would have developed and kept in inventory. They will wish they had kept them. This bleak setting sets the stage for a massive renaissance in the price of these metals in two to three years. And we'll benefit from that when it comes. Inflationary expectations, when they arise, will tell us when this renaissance is in front of us.

 

TGR: Are you focused more on macroeconomic trends like whether oil prices are going up, or on specific stories and whether they're taking advantage of new technology?

 

Michael Berry: We have shifted a little to playing the royalty side of the equation more. Investors have established a royalty package in the Texas oil fields. They don't drill; they simply buy the property and lease it back to the drillers. Last year, this investment yielded 9.5%. It's just a different way of thinking about how to play the commodity market in a market that doesn't have a yield where the interest rate is negative. So we hope to win no matter what happens, and we do not have working interest risks. So far, it's worked pretty well.

 

TGR: What about solar power? 

 

Chris Berry: I've spent a lot of time looking at the solar industry over the last three years. This is where the growth is, and both solar cell costs per watt and energy storage costs are falling precipitously. I think increased scale and distributed generation have the potential to remake our energy infrastructure in the coming decade. 

 

The solar panel business has really become commoditized and today you see a great deal of research and development going toward increasing panel efficiency, which is the percentage of sunlight that gets converted into electricity. The best I've seen today are in the low 20% range, but this is slowly increasing, which helps the overall economics.

 

TGR: Chris, you're a father. What will be the hot investing areas for your children?

 

Chris Berry: Everything is cyclical, particularly the commodity space, so I'm not sure if there's a specific area I'd tell them to focus on. I have begun to save money for my girls for college and I hope to be able to give them a choice: You can use the money for college, or you can use the money to start a business that can help address some of the societal issues we addressed earlier in the interview. Entrepreneurialism increases quality of life and creates wealth at the same time. That's a lesson I hope I can impart to my girls.

 

TGR: Mike, what advice do you have for investors just learning about the natural resource space?

 

Michael Berry: In a world with seven billion people seeking a higher quality of life, I think copper, gold and silver eventually will be more valuable than ever. Gold is constant. Gold is going to continue to be valuable because even now, China is buying as much gold as possible. It is rumored to have purchased the equivalent of the total mined gold production in 2014. The Chinese want their currency, the Yuan, to be part of the reserve currency standard, and it will be eventually. They are going to have to have enough gold to back it. Silver, in addition to its monetary character, is used in so many industrial and health care products.

 

I think oil will bounce above $100 per barrel again. Prices will go up and down, and you have to play it as it moves. But I think those liquid markets are easier to manage than smaller markets like graphite. But then again, I've been around for a while, so I could be wrong.