Sunday 20th September 2020

Resource Clips

This downturn is different

Investors should realize the recovery will differ too, says Lawrence Roulston

by Greg Klein

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This downturn is different

Lawrence Roulston

No sugar-coating here—this market’s “probably the worst I’ve ever seen and I’ve seen a lot of cycles in my three-plus decades in this industry,” said Lawrence Roulston. “But this one is different from previous cycles.” Speaking on May 26 at Vancouver’s World Resource Investment Conference 2013, the editor of Resource Opportunities emphasized that “it’s really important to understand why this is different in order to understand what to do moving forward.”

By long-term standards, metal prices remain strong. With “irrational” stock prices, Roulston maintained, investors face the challenge of distinguishing the “grossly undervalued” companies from their “grossly overvalued” peers. Even so, opportunity awaits buyers who are more discerning than sellers.

To offer some perspective, Roulston went over some history. In 2008 “everything around the world was hit at the same time,” he said. “The Venture index lost 75% of its value in a matter of weeks. But that sell-off was driven by external factors.” Recovery started “almost immediately,” in early 2009. “Over the next few years the Venture index tripled.”

Looking back to the years between 1999 and 2001, “the nuclear winter of the resource industry,” Roulston said “mines were built whenever metal prices were high, new supply came onstream at the top of the market, there was an oversupply, the prices collapsed and the market went into a down cycle. These cycles had been going on for decades and decades in the mining industry and a lot of people still see the mining industry in that sense.”

This downturn is different

But, he insisted, “we’re no longer in that era. It’s very different this time around.”

In 2001 copper went for about 60 cents a pound, “which is in real terms the lowest price copper has ever traded at.” Gold was $252, “the lowest price in over two decades.” In the midst of that despair “nobody dreamed that China, India, the rest of the developing world were about to take off. They were still just looking at the Western world.”

Over the next decade that nuclear winter transformed into “the biggest bull market in the mining industry ever.”

If anything, today’s malady could be worse than that of 1999 to 2001. Yet demand for metals “is still strong.” Although short-term prices have dropped, “all the metal prices are well above their long-term average prices. And the mining companies are generating big operating profits at the current prices. The industry has prospered, at least on the operating level. You don’t have to be a visionary at this time to understand that there’s outstanding value in these junior companies. Most of the valuations on these companies were done at prices well below the current metal prices. And they still look like attractive valuations, even if those valuations aren’t reflected in the current share prices.”

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