Despite dire predictions, some in the investment and analysis industry still see life in the mining boom, at least according to BMO Capital Markets' Don Coxe in his August edition of Basic Points.
"The commodity story is essentially a scarcity story," said Coxe. As global living standards improve, the problem will be finding and producing enough metals and minerals to sustain economic progress.
Noting that gold was priced below $1,000 an ounce as recently as three years ago, Coxe observed that analysts "are agreed that nearly all gold companies now need at least $1,250 an ounce to make any money on current production when the costs of new capex are factored in."
"So, is it reasonable to value a gold producer's reserves at, say, $1,500 an ounce today? A rather minor correction in the gold price could wipe out the company's profits, right?
"Our answer to all of the above is that high-quality reserves in the ground in politically-secure regions of the world are becoming more-not less-valuable," Coxe declared.
As China seeks minerals reserves almost everywhere, "its companies are unconstrained by SEC rules on deals with dictators and dubious middlemen," he observed, adding the mining industry is now "faced with Chinese competition for mineral rights almost everywhere they look."
"The gold miners have challenges finding new orebodies in politically-secure regions, but they do not-at least for now-have to fear large-scale competition from China," Coxe advised. "That nation is the world's largest gold producer, and gold, unlike iron ore or copper, is not a necessary input for major Chinese industries."
In his analysis, Coxe observed that gold "has once again become a ‘risk-on' asset, which means it tends to fall when the stock market falls, and top raise when the market rises. This is paradoxical and illogical."
He believes, "Gold is a ‘Bad News Bull's' commodity."
"This schizophrenic period of gold and gold stock valuation is unsustainable," he declared. "We remain of the view that what might be the only way for the eurozone to assemble enough firepower to give credibility to the markets is for governments which have gold to use it to back very long-term convertible bonds."
In his investment recommendations, Coxe suggested, "The Commodity Super-Cycle will last for at least a decade or more."
Nonetheless, he advised, "Investors should be patient, and await an all-clear for the euro crisis before committing new money to a sector with a bright long-term investment future."
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