VANCOUVER (miningweekly.com) – With the commodity and equity markets in much better shape than a year ago, mining industry players are navigating the early days of a new bull run with renewed interest in exploration and mergers and acquisitions activity to secure future supplies.

While the commodity market is perhaps not ramping up quite as fast as might have been hoped for, signs of recovery permeate throughout the spectrum of participants, with significant investment flowing from the majors who are exploring brownfield opportunities, as well as investing in junior explorers at the grassroot level.

“It’s significant money. Just about every week there is a major putting between $2-million and $100-million into a junior exploration company, and that money matters so significantly,” Resource Maven newsletter writer Gwen Preston tells Mining Weekly Online in a recent interview.

It points to the underlying trend that the majors that are investing in exploration believe better market days are coming. “It’s a security of confidence in the underlying fundamentals,” the analyst states.

It physically means tens-and-tens-of-millions of dollars being put into the ground, something most in the mining industry neglected to do for years. Exploration budgets were among the first expenses to be axed, as finance executives hurriedly tried to bring greater equilibrium to debt-laden balance sheets when the recent historic commodity downturn intensified. Many are still repaying the debts weighing down their leverage ratios.

“The presence of the exploration cash and the vote of confidence in what the markets are doing, are making strategic investment arguably the most important factor in the market right now,” she stresses.

BACK TO BASICS
About a decade ago, for every ounce of gold mined, more than an ounce was discovered through exploration. Nowadays, the industry is down to discovering about a third of an ounce of gold for each mined ounce.

“Right now, discoveries are not sufficient to keep the machine going. And that’s true to a different extent for different metals, but, broadly speaking, it’s true across the metals sector,” the analyst assesses.

Mining clearly goes through cycles and the successful participants have gone through this before and know how to ramp up.

“When we talk about numbers like that it really comes down to averages, because there was a lot more gold discovered each year between 2006 and 2012, than there was between 1999 and 2005. We go through these cycles and the industry has that elastic ability to ramp up or step back. But the amounts of current investment in juniors and exploration programmes point to seniors trying to kickstart a serious resurgence in exploration and that’s what’s happening right now,” she observes.

Preston points out that zinc is probably the best example when it comes to the impact of pricing on supply. Zinc had a sharp price surge back in 2006 over about 18 months, after being cheap for decades.

She explains that it was literally too cheap for too long to incentivise exploration or mine development and so, without interest to build new mines, the market is now facing a “very real” supply crunch. “And that’s why zinc prices gained 80% last year, after correcting somewhat so far this year, which is normal.”

According to Preston, the sector is adept at responding to opportunities, despite dealing with difficult circumstances. Twelve months ago, there were only about five zinc equities to consider investing in, but that number has now grown to more than 30. Among those are some legitimate players, but there are also those bubble players that are now finding the assets that were last interesting some 35 years ago.

“Some of those deposits are really good, but they just haven’t been touched for so long,” Preston says. “The reality of how long prices have been weak, means that it’s going to be an exciting time for investors for a while."

Preston believes that peak production for gold is a thing of the past. In the context of the “really bad” bear market, production was cut back. Exaggerating the situation is the biggest failing of the last bull market that miners focused on growing their output at all cost.

“Rather than focusing on making money, as businesses are supposed to, they just focused on producing more ounces and this has impaired the production profiles to the contrast; they were pumping out new production assets every year and all that development led to higher costs and falling margins. That exacerbated gold production,” she argues.

Coupled with low exploration budgets in recent years, discovering new economic gold mines has indeed become much harder, since the "low-hanging fruit" is all long gone.

“I do think a big supply correction has happened. I do not think that supply/demand is a main driver of the gold market, I think it’s an interesting driver of strategic investment and how the majors operate in their view of how to find and secure new production. I don’t think it drives the gold price though, because gold is much more of a financial and political tool,” Preston states.

ECONOMIC UNCERTAINTY
The US economy will probably not grow at the pace President Donald Trump has hoped for. His plan right now calls for 3% gross domestic product growth over ten years, which is practically impossible coming off the level of about 1.3% last year.

As a metals investor, the strength of the US economy, in terms of what the stock market is going to do, matters to Preston. She notes that we find ourselves in a seven-year US bull market – and if that bull market turns down, it will be “incredibly bullish” for gold. We are also in “this crazy period” of financial policy experimentation, helping to retain strong investment demand for gold.

Preston expects real interest rates to remain low despite what happens to the US economy down the line. If growth takes off, it will push inflation higher; so even if interest rates rise, real rates (which are nominal rates minus inflation) will stay close to zero. If someone says the economy is due for a recession, it will also result in near-zero real rate movement, because neither inflation nor interest rate hikes will take place.

“Fundamentally, gold is set up to do well either way, no matter global geopolitical economic uncertainty. Timing and the degree to which it happens remains to be seen, but I think gold is set up for gains over the next several years,” Preston considers.

EXPLORATION SYNERGY
During past bull markets, majors across commodity sectors increasingly started working together on larger projects to mitigate costs, lower risk and take a “more sensible” approach to mine development.

“We’ve seen it happen in the copper mines of Chile, just because the cost of building those massive mines is just so much. It’s now happening again in other sectors of the mining industry, suggesting the majors are remembering the lessons learnt from the last bull run and thinking twice about ‘going it alone’ and making massive risky investments on their own,” Preston observes.

As the bull run gathers momentum, project developers will increasingly look beyond "safe" jurisdictions to lesser-known and riskier frontiers in Africa and some underinvested Latin American and even central Asian countries, but for now, safe jurisdictions are still leading the pack.

Because it is still so early in the bull market, all the opportunities in safe jurisdictions are not yet taken, so one does not yet need to go to the fringe areas. “Give it a year, and I think we’ll see a lot more interest in Western and Eastern Africa and perhaps the riskier Latin American areas,” she says, pointing out that some companies have more appetite for risk, and have become masters at adapting to it.

Preston has observed that there is renewed investor interest in mining stocks. A good example is the price movement of TSX-V-listed Camino Minerals when it more than tripled in April, after the company announced that a single drill hole hit 106 m grading 1.3% zinc at Los Chapitos, in Peru.

“The market is engaged once more, which is dramatically different from 18 months ago. That means that we’re going to keep seeing companies coming out of the woodwork – and that’s not said as a bad thing. Many companies with good assets simply had to go dormant in the absence of cash in the market, and wait it out.

“There are many companies doing marketing right now and [they] are perhaps a little impatient at the pace of market recovery, but it only points to how early we still are in this new bull market,” Preston says.