21 Reasons to Invest in Natural Resources Companies - MiningMaven

21 Reasons to Investin Natural Resources CompaniesFebruary 2013“Thereis a tide in the affairs of men.which, taken at the flood, leads on to fortune;omitted, all the voyage of their lifeis bound in shallows and in miseries.on such a full sea are we now afloat,and we must take the current when it serves,or lose our ventures.Brutus: Julius Caesar Act 4, scene 3, 218–224

21 Reasonsto Invest in Natural Resource CompaniesAfter a rigorous and testing 2012 for naturalresources investors, now we are well into theNew Year, we thought it might be a good timeto remind ourselves why we participate in thissector. Are we just a little crazy, or maybeeven slightly masochistic by nature? Or isthere in fact a great deal of logic driving ourinvestment pursuits, and perhaps more sothan at any other time in recent history?As investors devoted to the natural resourcessector we’ve continued to be punished whilst thestock market in general has made some worthwhilegains. Unlike most stock market investors we don’thave the perceived luxury of a ‘balanced portfolio’and we can’t remember having ever received adividend. But the good news is we all came throughthe Mayan ‘end of the world’ scenario in one piece.Instead we can now refocus on the diverse globalfundamentals that support our chosen investmentstrategies. Strategies which well executed mightsoon blow the returns on a balanced portfolioand a few dividends, clean out of the water.12Increasing populations mean increaseddemand for resources. The United Nationsexpects the world population to grow by 47%from 2000 to 2050, to around 9 billion.Rising incomes and the growing middle class inBRIC and other nations creates an added layerof demand for consumer goods such as washingmachines, air conditioning and refrigerators.45TSXASXAIMBRAZIL RUSSIA INDIA CHINADespite future demand from a fast growingworld population, metals and minerals andoil and gas are finite resources, and only asmall percentage of these are economicallyrecoverable at current commodity pricesand with today’s technologies.Existing and near term supply constraintshave developed due to years of underinvestment in natural resources and a scarcityof capital to allow projects to be developed.Some of the 21 reasons to invest in natural resourcescompanies apply specifically to gold and silver stocks,but most apply to other commodities as well suchas oil and gas, copper, zinc and tin. China loomslarge amongst the logic, and for very good reason:3Eventually the resumption of growthin developed nations, this time almostcertainly including Japan, will add furtherto increasing demand for consumer goods.6As resources dwindle exploration activitiesare increasingly located in countries withless stable political environments andpoor or non-existent infrastructure, furthercomplicating future supply stability.

78910China is increasingly active in purchasinga broad range of quality mining assetswhere future production is destinedsolely for its own consumption. Thisdevelopment is increasingly promptingother nations such as Saudi Arabia, Koreaand Japan to seek security of supply.Rapid urbanisation is required due to thecontinuous migration of populations tocities in developing nations. The provisionof infrastructure such as accommodation,roads and bridges, and services such asschools and hospitals are large consumersof resources. Infrastructure spendingis currently surging across developingnations with Merrill Lynch forecasting an80% increase over the next three years.Ageing infrastructure in the United Statesis overdue for renewal and expansion.Policy makers have underinvested ininfrastructure for decades. A point freshin President Obama’s mind as he recentlyrecommended an extra US$50b for federalinfrastructure investment and the formationof a national infrastructure bank.Don Coxe of BMO NesbittBurns pointed out in2007 that if China and India both average 7%GDP growth per annum they could add 300mnew middle class inhabitants by 2015. That’saround 4 times the size of the middle classincrease in North America, Europe and Japanfrom 1948 to 1963, a period representingthe greatest mining boom in history.111213The gold mining industry needs to discover90 million ounces of gold every year justto replace mined ounces. In the three yearperiod to the end of 2011, total discoveriesamounted to only a third of one years’replacement requirement. The replacementrate has not been achieved in any year since1998 despite gold exploration spendingtrebling over the past 6 years to morethan US$8b. The Metals Economics Groupestimates only 56% of mined ounces havebeen replaced by discoveries since 1997.It is the junior resource companies whichown almost all of the world’s undevelopedgold and silver deposits, a fact seeminglylost on many but not the mid-tier and majorproducers who need these deposits to replacetheir own mined ounces. As Richard Millsfrom Ahead of the Herd points out “Investorsseeking leverage to precious metals shouldfocus on junior resource companies whoown the world’s undeveloped gold and silverdeposits, as they provide the best exposure toa rising precious metals price environment.”And right now junior resource companies withgold and silver deposits, are going for a song.The average grade for gold containingore globally dropped 23% from 2005to 2011 with grades expected to havefallen a further 4% in 2012 as highgrade deposits become even scarcer.Share thiswith your friends andcolleagues - they willthank you!14No one is going to keep exchanging somethingthat is rare, valuable and in short supply forsomething you just press a button and print,and in ever larger amounts. According to USeconomist and author Stephen Leeb, Chinaknows this better than anyone. China’s strategyis to accumulate gold to back the Yuan, andas a holder of huge quantities of US dollars,to diversify its exposure. China is getting outof paper and into gold as fast as it can.

1516Au 55%Physical goldover 3 years2%Gold stocksover 3 yearsOver the last three years physical gold hasrisen by 55% but amazingly gold stockshave fallen by 2%. Over five years, bullionhas doubled while gold stocks are only up10%. The same is true for silver where thenumbers are very similar. Gordon Papeone of Canada’s most respected authorsstated recently in Forbes magazine thatby any measure, precious metals stocksare currently selling at their biggestdiscount to physical metal for decades.An example of the finite nature of miningcommodities is copper. Many market analystsbelieve economically recoverable copper willrun out in around 60 years with prominent andrespected environmental analyst Lester Brownbelieving this number is closer to 25 years.1718In his latest book ‘Red Alert’ Stephen Leebargues that resource scarcity is the majorissue facing civilisation. Leeb sees China asagain being ahead of the West and believesits accumulation of vital resources may leavethe West in an untenable position, in aslittle as a decade. Michael Klare is professorof peace and world security at HampshireCollege, Massachusetts and a U.S. nationalsecurity advisor. In his latest book ‘The Racefor What’s Left: The Global Scramble for theWorld’s Last Resources’ Klare points outthat the struggle for the world’s resourceswill be one of the defining political andenvironmental realities of the 21st century.Jeremy Grantham is a British investor, cofounderand chief investment strategist ofGrantham Mayo Van Otterloo (GMO), one ofthe largest managers of such funds in theworld. Grantham sums up a sea change incommodity supply and demand balance asfollows. “Developing countries, especiallyChina, have caused an unprecedented shiftin the price structure of resources: after100 hundred years or more of demand fromprice declines, they are now rising, and inthe last 8 years have undone, remarkably,the effects of the last 100-year decline.”For more informationon natural resourceinvesting go to...www.miningmaven.com192021Considering the reliance the world aswe know it has on explorers doing theirjob, these companies have recently foundthemselves in the midst of one of theworst financing environments ever. Butnothing stays the same for long and asfear subsides some of the trillions ofdollars washing around the world will finda new home in junior resources stocks.Born into a peasant environment, DengXiaoping was a politician and reformist leaderof the Communist Party of China. In 1978the British Labour Party, facing an electionagainst Margaret Thatcher, invited Deng to tourBritain hoping he might be dismayed by thelot of the working class. But instead Deng wasimpressed by what he saw and the experienceacted as a catalyst for an event that wouldchange the world. On returning to China hechanged the slogan on Mao posters from “towork is glorious” to “to be rich is glorious”.Then he set about providing an environmentthat unleashed the entrepreneurial spirit of theChinese people. The rest is a matter of history.It is often said that to get rich in the futureyou need to sell to China what China needsto buy. No sector understands this betterthan mining, and now it’s the turn ofinvestors to wake up to a fast approachingturning point. We don’t know exactlywhen the market will finally turn, butwhen fear of losing is replaced by fear ofmissing out, previously unwanted juniorresources stocks can rise fast and furious.

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