PDAC Convention 2005 Speech
Good afternoon ladies and gentlemen
There is a very upbeat mood in the mining industry now, especially
in the junior sector. You can feel it in the mood at the conference
here, especially with the record number of attendees.
Remember, exactly a year ago, it felt pretty much the same
And then we had that big letdown that continued for the balance
of last year.
A lot of people are wondering: Is this just another short
term rally? Or, is this the beginning of a long term bull
market in the mining industry?
The short answer is that things are fundamentally different
now. Fundamentally stronger.
There are a lot of reasons to believe that we are in a sustainable
bull market in the mining industry.
There will be volatility; the market will have ups and downs.
Individual companies will certainly go through some wild swings
I believe that we will see a good year overall, but the wealth
will not be evenly distributed. There are many companies that
will hit multiples of their current prices this year. Other
companies will continue to languish, at least for now. Later
in the cycle, everything will escalate.
I would like to point out some fundamental trends that suggest
that this upbeat mood will be here for some time yet.
One of the big differences from last year is the gold price.
Ironically, the gold price is almost exactly the same now
as it was at the last PDAC.
Last year at this time, gold was on a tear - it hit a five-year
high of $427 just two weeks after the PDAC - But then it quickly
dropped by more than $50. It took the balance of last year
for investors to regain confidence in the gold market.
This year, we have already experienced a drop in the gold
price - almost as large. Gold plummeted from a 16-year high
of $456 in December to a recent $411 before it turned back
up. This time, the equities market pretty much shrugged off
the drop in the gold price.
Investors are finally getting used to the fact that gold is
continuing its 3-year pattern of notching higher, with regular
gradually working its way upward.
A year ago, investors had a mind set that said you owned gold
companies because you expected the gold price would soon be
$1,000 an ounce
or higher. The merits of the companies
were secondary. The focus was primarily on the commodity price.
As a result, there was a lot of nervousness every time the
gold price corrected a bit. It was like investors would say
to themselves: "On no! Gold may not go straight to $1,000.
Quick dump the gold stocks."
Today, there is a much more sophisticated outlook - a recognition
that many gold companies will deliver big returns - regardless
of where the gold price goes.
Many investors are now taking an enlightened approach and
taking advantage of dips in the gold price to load up on gold
stocks in anticipation of the next up-leg. I have been urging
my readers to do that for years.
The driving force now for many investors is a recognition
that the majors need to replace reserves, and those investors
recognize that the most effective explorers are the juniors.
I'm sure everybody in this audience realizes that if a junior
company proves up a big gold deposit, shareholders will make
a lot of money, even if the gold price doesn't move a penny
from where it is today.
Having said that, I fully expect that the gold price will
continue to move higher. Fundamentally, I agree with the previous
speaker when he said that gold is destined to move higher
- in U.S. dollar terms - as the dollar continues to sink in
value. I would go further and say that I see gold increasing
in fundamental value, beyond the changes implied by declining
The big unknown is the timing. I don't agree that there will
be a catastrophic event. I see it more as an evolving adjustment,
a continuation of what we have been seeing for the past three
The best outlook that I know of for gold is to take a graph
of the gold price over the past 3 years and slide it to the
right and up.
With a generally bullish outlook for gold - and the possibility
of a 1980-style run in the gold price - it's worth owning
gold stocks. Many of you have heard me speak before about
the advantages of gaining leverage to the gold market by owning
companies with early stage gold deposits.
Articles on the Resource Opportunities website get into detail
about how an early stage deposit is valued around $10 per
ounce of gold in the ground. That value gives you exposure
to massive amounts of gold.
As that deposit moves toward a proven and probable reserve,
its value can escalate by a factor of ten, aside from any
movement in the gold price. In short, it's worth owning some
Many of the other metals are looking even more exciting than
Nearly all of the metal prices are at multi-year highs. The
mining industry simply can not deliver enough metal to meet
An important driving force in the metals markets is the enormous
growth in China, in India and right through Asia. The previous
speaker commented that China is simply replacing production
that would have occurred in other countries. This is a common
I have traveled extensively in China and have seen first hand
the fact that a massive amount of metal is being consumed
in China - both for infrastructure and for consumer goods.
The huge increase in overall demand for metals across the
board is confirmation that China is a huge net consumer of
metals. That situation is not going to change any time soon.
As demand for metals increased, the mining industry was simply
not able to increase production enough to satisfy demand.
The result is that nearly all the metals are up between two-times
and ten-times from their lows.
Part of the reason that the mining industry was not able to
increase production fast enough is that the industry almost
completely shut down exploration for several years when the
metal prices were down.
I don't expect the base metal prices to move a lot higher.
But I will say with confidence that the share prices of successful
exploration companies will escalate, in some cases to multiples
of the current levels.
The major base metal producers simply must develop new deposits
and many of those deposits will come from the junior exploration
The mining industry is well funded now - probably better than
at any other time in history. The majors are racking up record
profits and they have amassed a huge amount of cash.
In addition, more than $4 billion of new equity has come into
the exploration companies over the past year or so in the
form of private placements.
You can still see big private placements happening on a regular
basis. Northern Orion recently raised $150 million for a project
that doesn't even have a feasibility study yet. Any number
of private placements in the $10 to $25 million level have
been quickly over-subscribed.
With many of the good juniors now cashed up, they are turning
down offers of further funding. As a result, investors are
finally buying shares in the markets. We are now seeing big
trading volumes in select companies as funds accumulate shares
in the market.
There is a huge amount of money now looking for investments
in the mining industry.
Some funds have realized big gains from holding the major
mining companies. Also, a lot of money has been made from
investing in oil companies.
And of course, with resource funds generating big returns,
new money is flowing into those funds. The general investment
funds are also recognizing that the resource sector is the
place to be.
The junior companies are now becoming popular as the investment
dollars cascade down and money managers recognize that the
smaller companies offer better value.
Many fund managers have big bucks looking for resource investments
and they are under pressure to put that money to work. However,
they are also fully aware of the importance of having an exit
strategy. When you or I put $10,000 into a junior, it's not
too hard to find a buyer if we change our minds about the
company. With funds investing in $1 million chunks, it's important
for them to think of how they will eventually off-load those
One of the best exit strategies is a major company takeover.
Consequently, a lot of the money from the big funds is going
into companies with projects that are large enough to potentially
attract a major takeover.
I believe that the investment funds will continue to dominate
the resource market for some time yet. Even as a broader retail
interest develops, much of that money, at least initially,
will be directed through funds.
With the market driven by investments from big funds, the
smaller companies need to come together to create entities
with enough size to be noticed by the fund managers. Even
if a fund wanted to invest in a very small company, it's just
not possible on a practical level. I believe that we will
see more mergers like International Taurus and American Bonanza,
and that those mergers will generate value.
Another developing trend is that money is coming into the
juniors from the smelter companies and the metal trading companies.
The down-stream metal companies are clamoring for new sources
There's willingness for the big metal companies to invest
in near-term production situations where they can lock up
concentrate or the metal produced from a new mine.
We're going to see a number of mid-size mining projects funded
to production over the coming year, situations that might
not have attracted financing a year or two ago.
Right now, there is several billion dollars in the hands of
junior exploration and development companies - more than at
any other time. My sense is that the vast majority of that
money is being directed by capable explorationists.
In fact, some of the most capable exploration talent in the
mining business is now in the junior companies. It started
when the majors slashed their exploration teams a few years
back. Now, more and more top geologists recognize that they
stand to gain far better returns from their successes as owners
of junior companies than they would as employees of the majors.
There is a huge pool of money that is being directed to systematically
and methodically move projects through the exploration and
Exploration is going on everywhere in the world. I believe
that some of the best opportunities are available right in
our own back yards. Some of the old districts in northern
Ontario and Quebec are being revitalized.
British Columbia has come back to life after being out of
favor for 3 decades.
I don't know how many times I've heard the comment "We
need a big discovery to get the industry going." Good
heavens, we've had dozens of big discoveries. There have also
been some huge successes from juniors taking a fresh look
at projects that were previously explored by a major. NovaGold
has done that twice.
Just last Friday, another junior - Northern Dynasty - announced
a resource estimate that outlines one of the biggest metal
deposits ever found.
Investors got the wrong idea in 1996 when Barrick bid for
Arequipa after the junior had completed just 9 drill holes.
As far as I can determine, there has not been another big
takeover bid so early in an exploration program.
Typically, the majors need to see a feasibility study before
they put big bucks at risk in a takeover bid. Those deals
are worth hundreds of millions, or even billions of dollars.
If a major bids too low, they will be scooped by a competitor.
If they don't have their numbers right, they could pay too
There are tens of projects out there now that are moving toward
drill hole by drill hole by drill
hole. Before the end of this year, at least a few of those
exploration projects will be at a level where the majors will
begin to make bids.
The first big cash bid will blow the top off this market.
That's what happened in 1996.
First, a bid from a major will validate the exploration sector
and that will attract a broader level of investor interest.
Equally importantly, a few hundred million dollars of new
cash coming into the hands of resource investors will quickly
go looking for the next deal.
This is going to be an exciting year. And, the fun is going
to go on well beyond this year. Metal prices will at least
remain strong enough that the majors will continue to seek
out new deposits. That will go on until at least a few new
mines come into production. And that will take years.
In summary: This is an excellent time to be investing in the
junior resource sector. But, be cautious. Do your due diligence.
Be aware of the risks as well as the potential rewards.
For only $169 US for 1 Year,
or $249 US for 2 Years, you can be the first to read Lawrence
Roulston's comments on all the companies covered in Resource
HERE TO LEARN MORE ABOUT RESOURCE OPPORTUNITIES