The slogan of the Manitoba Prospectors and Developers Association Inc. is “If it Can't Be Grown It Has To Be Mined” That is a very short sentence but one of significant importance. Think about it, most of what we use has been derived from minerals that had to be mined, processed and manufactured into goods. Minerals and Mining are a fundamental part of life. Mining next to Agriculture is the oldest of industries and it follows the flow of civilization.
I recently read a very interesting Article by Doug Hadfield the Chief Editor of the Resourcex Investor newsletter. In his Article “ An Introduction to Mining and Mining Investment” he points out that It’s increasingly difficult to supply enough gold, uranium, nickel, copper, fuel to millions added each year to the middle class. I have reprinted the article below with permission under ArticlesBase guidelines.
Resourcex Reports: an Introduction to Mining and Mining Investment
Author: Doug Hadfield
By Doug Hadfield, Senior Editor, ResourcexInvestor.com
An astute investor once said, “If it’s not grown, it has to be mined.” It’s a phrase of gigantic proportions and far-reaching consequences, when you think about it. From the knob on your television to the zipper in your trousers, most of what we possess was first explored for, extracted from the earth, smelted and finally manufactured. As such, mining is, next to agriculture, the oldest of mankind’s industries.
The first mining occurred some 450,000 years ago during the Stone Age. At this time, humans barely scratched the surface of the earth for minerals to forge implements such as flints for hunting and countless other purposes.
Interestingly, the history of mining to some extent parallels the history of civilization. Many epochs are identified by the minerals associated with them. For example, the Bronze Age, from 4000 to 5000 BC; the Iron Age, from 1500 to 1780 AD; and the Steel Age, from 1780 to 1945.
We now live in the Nuclear Age (1945 – present), which recent events prove is only just beginning. Though few are aware of it, there are 435 nuclear reactors in 30 countries, which in 2006 provided 16% of the world’s electricity. According to Australia’s Uranium Information Center (www.uic.com.au), at least 10 countries are building or are planning to build nuclear reactors, with more than 60 in the planning stages, and 150 proposed. Greenhouse gas emissions and global warming, along with the likelihood of peak oil putting upward pressure on established energy prices and eventually knocking out supply – these have conspired to put nuclear back on the global agenda, regardless of what environmentalists have to say about it.
In this sense, all of mining is an imperative. While it is true that mining investment is essentially a series of “supercycles” (marked by 10 years or more of bull market conditions), we are currently in the midst of the most significant bull market in the history of modern economies. Never before have global supply and demand fundamentals exerted such pressure on the price and availability (or lack thereof) of mineral commodities.
To put it simply, we are entering an era of scarcity. It’s increasingly difficult to supply enough gold, uranium, nickel, copper, fuel and so on to the millions that are added to the world’s (read: Chinese and Indian) middle class each year. During the period 1980 to 2000, China’s GDP quadrupled, resulting in an incredible boom in its middle class that still goes on today. And what do middle class people do? They watch TV, drive cars, and wear jewelry. In short, they consume, and, as I stated earlier, everything that is not grown must be mined.
Mining today is seeing incredible land staking, particularly in the newly burgeoning uranium exploration industry. I spend about an hour every day scanning the TSX Venture exchange press releases. As such, I can tell you at any point in the year what companies are reporting about. And today – these days – the vast majority of uranium exploration companies are reporting land acquisitions, optioning properties and very early stage exploration.
The reason that exploration companies are presently buying up land in a frenzy, with uranium and nickel showing lots of early stage reporting, while gold has numerous late stage assays, etc., is central to understanding investing in the industry. Mining is cyclical. Demand rises, the price goes up. New production comes on-stream, the price goes down.
What caused the present supercycle – and there have only been three in history – was a combination of events: extended increase in demand (fueled by sustained population and economic growth) and a slowdown in supply during the previous crash in commodities prices, exacerbated by the depletion of most of the world’s “easy” reserves. Add to this mix the volatile variable known as speculation, and you just never know when this bull will stop for a breather.
Evidence of the present supercycle permeates both the mining world and our global economy. For example, the price of gold is riding high at approximately $685 per ounce, but not as high as it was in January 1980, when gold reached a high of $850/oz. Yet the British metals consulting firm GFMS recently said that the highest average gold price for any year ever – $614.50 per ounce in 1980 – will be beaten this year. Sustained elevated prices sound the supercycle siren.
Further evidence of the supercycle comes in the form of a publication from Deutsche Bank entitled “China’s Commodity Hunger”, which forecasted an increase in Chinese import demand at least until 2020. The report projects that import demand growth rates for commodities such as oil, coal, iron ore, copper and manganese will continue to grow by double digits for more than a decade.
So what does all this mean to investors? Two things: First, the next ten years or so will see unprecedented sums of money made (and lost) by those who invest in mining companies. Second, if the previous point interests you, now is the time to learn about mining, because the better you understand the industry, the better armed you will be when making important investment decisions.
Most analysts will tell you that the sagacious independent investor invests the bulk of his or her savings in established mining companies with large scale production activities. This is true: junior exploration companies do not enjoy the same insulation from market fluctuations as companies with established reserves. Exploration companies like the ones Resourcex Investor researches rely on the acumen of their management team, the ability to raise substantial capital to fund exploration activities and, believe it or not, a great deal of luck.
Yet, along with the inherent risk associated with exploration companies, there is also no question that exploration companies enjoy the greatest potential for reward. The top ten venture stocks in Resourcex.com’s 2007 newsletters to date have enjoyed an average ROI of 226% in about six months.
Perhaps the one constant in all the epochs that have passed since the dawn of organized mining is the sequence of activities that comprise the life of a mine. Understanding the five stages of a mine is essential to anyone considering investing in mining companies: Prospecting, exploration, development, exploitation and reclamation.
One pitfall that novice investors frequently experience is excess optimism about investments that they haven’t done proper “due diligence” on and/or don’t understand. If you were to put all the names of the world’s mineral exploration companies in a hat, you could pick 1000 before pulling out a winner. By doing due diligence on each prospective investment, by understanding the stage each is at, who the company employs and what they are looking for, there is much profit to be made.
About the Author:
Doug Hadfield is the Chief Editor of the Resourcex Investor, an internationally distributed newsletter specializing in identifying as-yet-undiscovered resource companies representing the best in their class. For more information, visit the website www.resourcexinvestor.com