Copper, uranium and separating the wheat from the junior chaff - Fulp

Mercenary Geologist, Mickey Fulp discusses why he remains bullish on copper and uranium and how to pick out companies that are likely to survive the coming wash out.

GEOFF CANDY: Hello and welcome to this Mineweb.com Newsmaker podcast. Joining me live at the PADC 2013 is Mickey Fulp – he’s the Mercenary Geologist. Mickey it’s been an interesting show so far. The mood perhaps a little more buoyant than I was expecting it to be...

MICKEY FULP: It seems subdued compared to how it was last three years. We are in a pretty deep bear market. Yesterday, the first market day of PDAC the venture exchange closed at a four plus year low, so the question is, how low can it go? But that said, there's going to be a big washout of companies here, but that’s needed and the good companies will continue to prosper.

GEOFF CANDY: How does one filter the wheat from the chaff, the good from the bad in this kind of market because there's been a lot of talk we heard from the likes of John Kaiser that there's 600 companies on the Venture Exchange with not nearly enough cash to sustain themselves. What do you look for, what characteristics do you look for, for that good company?

MICKEY FULP: My criteria remain the same, so I’m always looking for a tight share structure, experienced people, preferably technical people at the top of their companies who have been successful in the business before. Someone that’s bankrupted three companies is no longer a venture capitalist or entrepreneur in my book, and then a flagship project that has a chance at some point to be a mine. So most of the time I tend to pick the advanced explorers because that’s where the real upside, that’s where the five and ten bagger potential lies. Also my criteria is, is it undervalued with respect to its peers, well everything is pretty much undervalued right now, or let me put it this way, good projects are generally undervalued. And the other thing you want now, the new criteria would be cash in hand because it’s hard to raise money right now and a lot of these bad companies are going to fail because of that.

GEOFF CANDY: Now there've been a lot of anecdotal conversations around the need for M&A to come into the system to basically kick-start it to some extent. That hasn’t happened yet and one of the reasons I’ve understood to be behind that is a reluctance on the sellers’ side of things to sell at these kinds of valuations. Is that something that you would go along with?

MICKEY FULP: Well I would think so. People don’t like to sell their project when it’s trading at a discount unless they're forced to. There has been some M&A activity in the uranium space, silver space, perhaps not to the degree that some people may have thought, but it’s not all quiet on the home front here. There have been takeout’s and I think those will continue to happen, perhaps at an accelerated pace because there are a lot of good projects out there held by companies that are not good, and so at some point those become even more available.

GEOFF CANDY: Now perhaps the important note to make is that we’re not necessarily in a bad market for commodities but the companies themselves are particularly poorly performing at the moment. Why is there that disjuncture?

MICKEY FULP: Well it’s probably led by the underperformance of the gold miners. This sector although it is many commodities that are very much as focused and always has been on gold. Gold is what moves the Toronto Venture Exchange, the disconnect also carried very drastically to the juniors and the reason for that I think is they have, as a group with exception of course, they have continually overpromised and under delivered and I think people have come into this market and played it and lost money because of that and they’ve pulled their money out. There's not just a lot of liquidity, not a lot of desire to own most of these junior stocks at this time.

GEOFF CANDY: One gets the sense, that particularly on the junior gold side of things over the last few years there was almost a legitimisation of gold as an asset class and more generalist investors came into the sector and said but where is the cash flow, where are the dividends, what's going on here and suddenly different questions were being asked. Do you think we have seen a change in the type of investor coming into this market over the last few years, and if so has that changed things fundamentally or is this part of the cycle?

MICKEY FULP: I’m not sure we’ve had a different type of investor come in, but what we have had in this boom really driven by gold starting in mid-2003 when it went above $300 and stayed and what came about during that period of time were the gold ETFs, particularly the big old ETF, and that created an alternative vehicle for people to invest in gold, or speculate in gold or to hold paper gold. And so before the advent of the gold ETF you either own physical gold, you owned stock in a gold miner you owned stock in a junior gold exploration company. Now here comes the gold ETF which gives people an alternative way to play the gold market. I think that’s significantly affected our market.

GEOFF CANDY: Moving from gold to copper, looking at copper – we were listening to Patricia Mohr during Roundup - she was saying that realistically speaking we’re likely to see $3/lb as a fairly long-term price for copper. How do you see that market unfolding?

MICKEY FULP: Well I’m probably somewhat bearish in the short-term and I mean the very short-term for copper because of increasing world inventories and drastic lowering of cancelled warrants. But from a fundamental point of view I’m very bullish on long-term secular demand for copper. The idea that copper has a base price of $3 I would very much subscribe to that idea because of cost of production worldwide is probably pushing total all-in costs is pushing $3/lb. so if it goes below $3/lb it’s not going to stay there very long. Commodities are very speculative, so they're subject to short-term spikes depending on what the market sentiment is. but if copper were to go below $3 and stay there for an extended period of time, a bunch or marginal producers shut down and we all know that the cure for low prices is low prices and vice versa. It’s simple supply- demand capitalistic economics.

GEOFF CANDY: Let's talk about the supply side because the key point is the changing nature of grades, particularly in the bigger projects. How do you see the grade profile changing over time?

MICKEY FULP: Well historically the grade profile for any commodity decreases as the easy surface deposits are found, then you have to go and dig deeper, and drill deeper and at this point, especially in the copper business, most outcropping copper ore bodies were discovered and mined a century ago. So increasingly we are looking for deeper and lower grade deposits. That’s the natural progression of any metal on the face of the planet. That said, we are not finding enough good copper deposits and that’s why I am this long-term secular bull on copper. We’ve got 25% of the world’s population still can’t turn on a light switch, they live in the dark and that’s going to change, and so the real demand for copper is for transmission of electricity, so I remain a long-term secular bull in copper for that reason. We have not been able to explore, develop and mine enough of good copper deposits. So I see demand continue to remain strong.

GEOFF CANDY: I want to get your views, in closing, on the exploration side of things in a second, but just from the demand side of things for copper there has been talk about the substitution effect and perhaps a lot of the market not necessarily understanding how much substitution is going into the copper market. Would you go along with that, what is your view of substitution is that something we should be concerned about...

MICKEY FULP: Well I’d say it’s not really an option for transmission of electricity. You can build a house and transmit electricity with aluminium wiring but you can’t carry big... if you're going to build a big electrical grid it takes a lot of copper, so I don’t really quite buy that and I’m very much a bull on the idea that the emerging market countries, the BRICS if you will, there's still a lot of demand out there for electricity especially in Asia and I think that’s going to drive the copper market for the foreseeable future.

GEOFF CANDY: Is that partly the reason why you also like uranium?

MICKEY FULP: It is and we’re ordering a significant supply deficit for mined uranium to consumed uranium every year. We need to find more good uranium mines and the current price does not encourage that fact. Big projects have been shelved because of the weakness in the spot uranium price. I probably don’t see a major movement in the uranium price in the short-term, but certainly the mid to long-term demand for uranium is compelling. It’s going to be, in my opinion, the electrical fuel for the next generation.

GEOFF CANDY: Has the fact in the impact of Fukushima – do you think that has now worked its way out of the system?

MICKEY FULP: Not completely yet. Japanese utilities are still selling inventories and that has affected the uranium spot price. So the Department of Energy (DoE) violated its agreement with the uranium producers in America last year and dumped 18% of US demand on the market versus 10%. That was a political situation where Obama needed to carry Ohio and 800 union jobs were boosted because of that, and the unions were behind Obama in Ohio and he carried it, now he’s the president.

GEOFF CANDY: Just in closing, there's been a lot of talk at this show and it is very much focused on exploration, that we’re seeing a lot of money being spent on exploration, but not necessarily discovering as much as we would like. How do you solve that problem?

MICKEY FULP: Well you wash out a bunch of juniors that exist here only, not to mine the ground, but to mine the stock market and there is a certain segment of this business and its probably less so than it used to be, that I would call lifestyle companies that they're basically mining the stock market and living North Vancouver style lifestyles and public company dole and this washout I think is going to be very good. I’m optimistic that once it’s over and it will be over just like bull markets don’t last – they have a cycle. Bear markets have a cycle. When this cycle is over, and I’m assuming we will still have strong commodity prices, we’re going to come out of this a much better and healthier industry, and hopefully we can attract investors again.

GEOFF CANDY: Just finally, is there any sense of timing as to where we are in the cycle at all?

MICKEY FULP: I have no sense of timing at all. If you look at historical cycles it seems to operate generally on a four to five year cycle. We are arguably... well the high on the Venture Exchange index was hit a day before the show in 2011, so whatever you want to call the bear market started, let's say six months later or the beginning of the summer in May when we had the Greek crisis again. So we’re arguably soon to approach two years in this down cycle. Perhaps we’ve got two or three years to go, who knows? The fact remains that the world needs metals. This is a metal-driven industry and I don’t see the demand for metals easing up with a lot of people, 40% of the world’s population live in emerging market countries...

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	About Geoff Candy With a particular focus on the macroeconomic linkages between the commodities sector and the broader economy, Geoff is the host of Mineweb's podcast series and the site's Director of Content and European Editor. Email: geoff@mineweb.com Follow @geoffcandy

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