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Analyst Ray Goldie Makes the Case for Uranium and Resources

Salman Partners Analyst Puzzled by Decoupling of Copper Prices and Inventories

Our next guest wrote the definitive account of the birth of the Voisey’s Bay mine. A best seller called Inco Comes to Labrador. He was also a part of the team of prospectors that spearheaded exploration for copper and nickel in Labrador in the 1970s. Today, Ray Goldie is a senior analyst and Vice President with Salman Partners and regularly speaks to the investors and the media on subjects ranging from uranium investing to the Goldie Principle.

Resource Intelligence: Is there anything about the current state of the market that troubles you?

Raymond Goldie: The main thing that doesn’t trouble me as much as puzzles me, is the rule of thumb in pricing “Dr. Copper”. Dr. Copper is good at forecasting the future and it used to be that if you knew what the price of copper was, then you had a good idea about what the world’s inventories of copper were, what the demand was and what the supply was. That doesn’t work anymore in copper and that’s got me puzzled.

RI: Doctor copper had a nice rebound last year—134%. Are we going to have a further rebound?

RG: If you had asked me that question back in January 2009, I would have said that we were going to have a rebound. That was probably the general consensus expectation, but there was a lot of argument in those days whether it was going to be a V-shaped or U-shaped or L-shaped or square root shape, or even no recovery at all. Our view was that it was going to be U-shaped, but instead of having the 4% growth in the western world and 8% growth in the BRIC countries, there was going to be half of that. 2% In the western world and 4% in the brick countries and maybe there would even be a hint of a W there. So a U with a hint of a W was our answer and in fact if you look at what’s happened to the world’s demand for base metals, to the world’s industrial production in that year, it’s been pretty much that. What that means is, with demand less important in this cycle or less strong in this cycle than it was in the previous one. To differentiate good commodities from so-so commodities, the supply side has become a lot more important.

RI: Do you believe there are going to be some significant shortages in the major commodities in the coming year?

RG: I certainly believe there are going to be shortages of major commodities and some of those shortages, rather than shortages, would actually be market in balance and they’d be in balance because of discipline on the part of suppliers.

Back in 1987, the marketing fellow for what became the Potash Corporation of Saskatchewan, said “This is a debt ridden, money losing corporation and I want to turn it into a lean, mean, profitable private company, and to do that you have to recognize in the commodities business that market share doesn’t matter. What matters is price. I would rather sell one tonne of potash and make $1,000 than sell five million tonnes of potash and lose $50 million. So if the world wants 100 tonnes of potash I’m going to give it 99.9 tonnes of potash. That way we can maintain prices that are both reasonable from a producer’s point of view, to give a reasonable rate of return and be stable.

We have seen one of the most notable adherents in recent years of the “Potash Corp. School of Supply Side Management”, in Mr. Vladimir Putin. With instructions from the Russian government, we have seen in the last year the Russians production of potash has been greatly limited, because they want to match supply with demand. Russia’s nickel giant, Norilsk, shut down almost all of its offshore nickel production and instead of expanding production last year the way they had planned, they kept it flat. As a result, we’ve seen on the supply side in commodities like potash and nickel, support from the supply side, because the supply side is being managed by the producers.

RI: Uranium has been quite a story. A lot of investors may have been burned, having bought at over $100. It’s dropped down now. What is your position now on uranium?

RG: Uranium is one of the commodities that appears to be easier to forecast, because the key elements in forecasting a price of a commodity are supply, demand and inventories. On the supply side, half a dozen mines provide more than 80% of the world’s uranium and a dozen companies provide more than 95% of the worlds uranium. The supply side is actually fairly easy to forecast.

The demand side is only 440 consumers of uranium, the nuclear reactors of the world. In the recent financial crisis, we’ve seen no destruction in demand for uranium. I think it’s the only commodity that has had no destruction in demand.

Supply and demand are both pretty easy to forecast; the real issue though is that third missing part of the puzzle—what are the inventories? We don’t know that very well, but it looks as if we could be running out of the stuff before the end of next year. I think we could see a repeat of 2007, with prices running up well above $100 for a year or so around the end of next year, but beyond that looking out to 2016/17 we are going to have a long term surplus of uranium, because there are a lot of projects that are coming on stream. Most of them are not coming on stream as fast as management expects, but they will eventually return us back to the $40 to $45 per pound price that we have today.

RI: Is uranium purely a large player market?

RG: I think it is definitely a small players market, because the small players seem to be the good explorers. Look at Sudbury for example. We have Vale, Inco and Xstrata that have been exploring there for over 100 years, a small company FNX comes in and they have found deposits that no one else has and they make money finding and mining those deposits. You can do that in other commodities as well. A small company with excellent exploration people can find, develop and bring on stream uranium mines.
RI: The juniors in the uranium sector have really been slammed. Do you think this is a good time to start buying?

RG: I do and one of the examples of that would be a company like Palladin where it was a junior company, but it had the expertise that their large competitors lack. If companies’ shares have been slammed, that actually creates an opportunity for someone like Cameco. Cameco is very much a value-oriented investor. They won’t buy an asset because it is the flavor of they day. They will buy it because it adds to their shareholder value and they would buy it because they think there is something really behind that company. If you have a company like Palladin, whose shares have been slammed, that could well be an opportunity for Cameco to come in and buy out the company.

RI: Financing has been a significant issue, certainly for juniors as well as larger miners. Do you see that as an ongoing problem in 2010 and possibly for the balance of the decade?

RG: I do think it’s a significant problem. One of the reasons that copper prices are close to a record all time high is that there is a perceived shortage. If you look around at the world’s copper mines, there is not really a shortage of copper deposits. There are lots of copper deposits. The question is, are they all going to get financed? It’s probably the ones that the Chinese choose to finance that will come on stream before the ones that have to go to western banks to obtain financing. Banks in 2008 started to say maybe the long term price of copper is going to be over $2 and we’ll earn money on that basis. They got very nervous about the long-term price of copper and scaled it back to maybe $1 at the end of 2008. They are starting to get more enthusiastic again, but probably not as much as Chinese financial institutions are and maybe the Chinese can lend money on a copper project where western banks can’t.

RI: What do you see as a floor price going forward in copper?

RG: A floor price would be the price where, if the price of copper were to fall to that level enough to make people start shutting down. That price is about $1.65 a lb. Almost every mine in the world can make money above $1.65. So as long as the price stays above that everyone mining copper is making lots of money, but below that level we could see some shutdowns.

RI: On the demand side do you think we are going to be looking at $4?

RG: On the demand side I do think we are going to be looking at $4.

RI: Do you anticipate very many mergers, acquisitions and so on in 2010 and going further primarily because of financing?

RG: Primarily because of financing yes, because if you are a small company and need your project financed, sometimes the only way to do that is to merge with a big company with deep pockets but also because those big companies want to keep on growing and we’re not finding the kind of deposits by going out there and hammering rocks the way I used to as a field geologist. Often the only way to find a new ore body is to go out and find it in the stock market among resource stocks. Also, another reason for mergers is that in the Canadian market in particular, the biggest measure of risk in the past has not been what we hear from financial theorists, that the true measure of risk is standard deviation of returns or some other very obscure quantitative technique. The real measure of risk in Canada has been liquidity. A company that is very liquid trades at a premium.

RI: Do you go to the PDAC?

RG: I have been going to the PDAC every year since the early 1970s.

RI: What are some questions that you think an investor should ask an exhibitor?

RG: Why should I invest in your company rather than that fellow across the hall? Secondly, if your company proposes to produce a commodity that is an unfamiliar one, for example lithium or rare earths rather than copper or gold, ask if there is any interest by potential consumers of that commodity. Ask about the track records of the exploration people who are involved in finding ore deposits.

RI: What opportunities do you think an investor should be looking at during this year’s PDAC?

RG: I think uranium is a sector that has cooled off a lot and is going to become hot again. I would rather buy uranium as a cold play right now, because I think it’s about to become a hot play in the next year. Similarly zinc, it’s warmed up a bit, but as we recognize that we are running out of zinc mines, it’s going to get hotter too.