This week in London I was at Mines and Money, one of the biggest mining conferences of the year. It's a chance for miners, bankers and investors to network, do deals, discuss the market outlook and generally gee themselves up for the future.
Mining attracts some of the most flamboyant and larger-than-life characters you will ever meet, from smooth salesmen with slicked back hair and gold rings to rock-obsessed geologists with pot-bellies and beards. But in the wake of what Bob Hoye of Institutional Advisors calls "the greatest train wreck in the history of credit markets", the event was swamped with gloomy sentiment.
One of the most interesting parts of the conference was a well-attended question and answer session with some of the leading lights of the natural resources investment sector. Here's what they had to say - though in fact, many of the more insightful comments came from members of the audience
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What will be the best performers in 2009?
Unsurprisingly, the experts on the Q&A panel (which included Graham Birch, manager of the BlackRock Merrill Lynch Gold & General Fund) were extremely bearish. They see this deflationary deleveraging process continuing to at least 2010 - in some cases 2012 - and found it hard to be positive about anything before then.
Now, I'm no blinkered optimist, but I thought this was a bit excessive. Sure, some sectors may well take that long to recover, but not all of them. So I asked them what they thought would be the best-performing commodity and the best-performing sector in 2009. Barry Dawes of Martin Place Securities voted for oil and possibly gold. Frank Holmes of US Global Investors, was bullish on palladium and silver and suggested that one of the minor metals such as bismuth, cadmium or graphite might shine, just as cobalt did last year.
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Then the question was turned over to the audience. So overwhelming was the bearish sentiment that many did not vote at all, while about 15% said gold, 10% oil, about 7% non-gold precious metals, and no more than 5% base metals. One person said uranium just one out of some 400! That has to be a bullish sign.
They're all interesting points. But not one person in the audience or on the panel, except Dawes, mentioned what I believe is going to be the stellar performer gold stocks. He seemed to agree with my view that gold stocks are making a bottom now and could be the sector that leads coming out of this. Indeed they are making higher lows each week (they did so again on Monday) and they are markedly out-performing the metal with each bounce. I expect them to be 50% higher by the spring I'll have more on the particular stocks I like in a future Money Morning. (If you're not already a subscriber to Money Morning, sign up for free here).
Why cost-cutting will bring the next commodity bull market closer
I am even starting to feel bullish about gold explorers, though Birch didn't share my enthusiasm. "The world does not need new discoveries right now," he said. "Majors such as BHP and Rio are cutting costs. Big projects that have already been discovered and that were going into production are now being shut down. Majors have the deposits and they are not using them. Why do they need to explore for new ones?" Frank Lucas of Loeb Aron added that costs needed to be cut, and businesses need to be streamlined.
But at this point a powerfully-voiced Scottish mining engineer in the audience burst out: "The average age of a mining engineer is close to 60. If mines start closing down now, these people are not coming back. They're retiring. Where are the new mining engineers, the new geologists coming from? It's all very well having colleges, but most of what you learn, you learn on the job. There's no substitute for real world experience. The older people need to be there to train the kids. There's no shortage of bankers and fund managers, but a mine can run without hedge fund managers. It's all very well talking about a shortage of good deposits the real shortage is of people capable of running operations."
This met with a round of applause and rightly so. At some time in the not-too-distant future, the impact of this generational loss of knowledge and skills will be felt and it will take a long time to claw back. And in the meantime, the lack of investment will make it harder to get resources out of the ground which means the next upturn in commodity prices could come all the sooner.
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