SFX 5.77% 55.0¢ sheffield resources limited

I wonder to corp01, it is the conundrum of our time. A conundrum...

  1. 2ic
    1,718 Posts.
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    I wonder to corp01, it is the conundrum of our time. A conundrum all the more quizzical because interest rates and yields around the world march ever lower while excess capital sloshes around looking for any kind of return. Exacerbated by QE, unfettered credit growth and exponential asset values, some US $14 trillion of excess savings hides in guvvie bonds yet highly profitable resource projects can't attract and bid let alone funding?

    Ultimately the short answer is resource juniors are unloved in the market. Too risky for those that do not understand them, and speculators are focussed elsewhere on the quick buck from never-make-a-profit tech stocks, cannabis stocks, cryptos, biotech gambles etc. Without the animal spirits of a bull market in resource stocks, juniors in particular, low share prices and thus market caps of juniors simply make funding new mines numerically pointless if not impossible for existing shareholders. Larger companies will make the odd takeover, but usually only on very safe (read cheap) terms. Risk aversion is strong after they all lost M&A money leading into the 2016 commodity price crash.

    Downstream market participants like commodity traders, smelters, or material end users simply do not understand or contemplate actually investing in mines. They don;t mind paying up front for off-take rights, or even lending money to a wannabe new miner, but actually owning a mine seems anathema. Maybe it has something to do with cultural history? Asians represent the vast majority of end-user companies commodities are sold to yet mining is dominated by Anglophiles (OZ, Cananda, Sth Africa, US and UK through deep financing history). Maybe too many Asians got burned like Citic buying dog projects off the likes of Clive Palmer but for what ever reason they just don;t want to play.

    My old fashioned Economic 101 book says the wheel will turn eventually. It was thus in 2000 during the dotcom boom. I was working exploration for Charters Towers on a VMS mine in 1998 and the MD came for a visit and I went out to dinner with him and some of the board. All he could talk about was his new float Surfboard.com and the money it was making. Commodity prices were much lower of course but the 'smoke stack economy' in which I worked was a thing of the past apparently. China changed that situation around soon enough. Unless the world hits a recession and commodity prices tumble a number of commodity projects look like fantastic and relatively low risk investments. There always seems to be too much risk aversion for mining juniors and not enough for bubble stocks with no DFS and little profitable prospects.

    What will really turn things around for commodity stocks? Obviously, strongly rising prices are always a good tonic. In the long term we're all dead, but if your young enough you should see the mother of all commodity booms imo. Recent history and economic doctrine says that money is a controlled and unlimited variable with which to keep activity and growth humming along at it's maximum potential. Debt can be QE'd away, interest rates artificially lowered into the realm of the negative (my old Econ's book didn't consider this) and MMT provides a living wage for everybody to spend. All people/countries want to work, produce, consume and if governments supply the fiat, credit and stimulus then all this is quite possible and even sensible to a large degree. I'm a MMT fan. However, the only limiting factor is availability and price of commodities. Labour is almost unlimited and with machines/robots taking over everything from manufacturing and and agriculture to self-driving and personal assistants, labour is almost a mute point for inflation. Energy is unlimited with ever cheaper renewables, technology keeps improving productivity and blueprints for the newest factory can be sent around the world in a millisecond for anyone to get in on the game. Print currency, print demand, even print the goods but you just cannot print the commodity inputs. Boring old commodities will come back into fashion when prices start rising strongly.

    It starts with gold as people realise where this is heading and that interest rates all below inflation makes holding gold more sense than a negative yielding bond. Then once gold has galvanised peoples attention, punters money they say "why not something else 'real' that benefits from rising inflation, exponential growth but zero interest rates", then it's copper and nickel. Pretty soon, as everyone is stimulating away and consuming more commodities while trashing their fiat, supply deficits become obvious to everybody and then an almighty rush is on during a price spikes to build enough new mines. That is when I plan to sell out if I'm still alive, then wait for the whole thing to collapse under it's own inflationary weight as the unstoppable force of inflation collides with the immovable object of zero interest rates.

    I hope for all who play in this space that commodities become the new black shortly. Dark as it looks now, my base case is the world exits the trade war before year end into an overstimulated boom driven by panicked governments and CB's all too worried about impacts of a trade war and any sort of slow down. Some clear economic air, supply deficits emerging across a number of commodities, a relief rally in junior stocks and it could be game on!

    Good luck



 
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