TORONTO (Kitco News) - Economics are making it possible for marginal metal deposits to come into production, and these lower-quality mines will likely suffer if commodity prices drop sharply, said one veteran geologist.

Record-high prices for many precious and base metals coupled with lower costs are spurring miners to expand output to take advantage of the boom times. Yet the time it takes to bring those regions into production can work against miners if prices slip significantly, said Mickey Fulp, geologist and writer of the newsletter “Mercenary Geologist.”

The increasing price of crude oil will cut into profits, too, adding pressure to less-efficient operations.

“We’re going to see more and more marginal deposits being promoted and undergoing feasibility studies. Marginal mines in production will have a strong chance of failure if the price of commodities comes off…. Companies can get hurt or become sub-economic if we have rapidly increasing operating costs compared to commodity prices,” Fulp said.

He spoke to Kitco News on the sidelines of the Prospectors and Developers Association of Canada’s conference in Toronto.

Many gold mines throughout the world are lowering their cut-off grades and mine grades because of the high margins, he said.  “The good mines will be able to go in and up their cut off grades and up their overall grade when margins aren’t so good. There are a lot of half-gram (per ton) gold mines. That was unheard of 10 years ago when a feasible mine was a gram per ton. Now people are making money at a half-gram per ton,” he said.

Part of that is because technology has lowered the cost structure and created efficiencies in the process, he said.

Like many participants at the conference, he said there is plenty of money being thrown at the mining sector, which is dramatically overvaluing some companies.

“Certainly there is a lot of money in the sector; a lot of it is going wily-nily in the sector. It’s bad money, it’s mal-investments. There are a lot of high flying juniors that shouldn’t be given the time of day,” Fulp said.

Fulp said there are some similarities between now and what happened during the last boom in metals in 2005-07, just before the financial collapse. He said while many poorly run and managed companies failed during the 2008 market crisis, the global recession didn’t last long enough to wash out some of these people from business permanently. Because of that he urged caution for investors.

“We were littered with failures but it didn’t last long enough to wash those people out. They financed at low cost and low prices…. I was hopeful the global economic crisis or our bear market would last longer to wash these people out but it didn’t. And now they’re back in funding the same bad projects again,” he said.

That doesn’t mean it’s impossible to find good companies. He said it’s easier now to look for viable investors than it was in late 2007. “I’ve gone in a lot of private placements – new start-up companies – that’s where the money is really made in this business – getting in with good companies with people and projects, buying low and getting in early is the key,” Fulp said.

His investment criteria is to look for a company with a tightly-held share structure, a flagship project that has a chance of meeting their goal, and people with strong backgrounds.

“You have to have the right people. People who have the right experience, that have technical background and have had success in previous endeavors – other companies.

They may have experience but if they bankrupted three companies they’re not venture capitalists or entrepreneurs, they’re people who are taking other people’s money and living off the public company dole, if you will,” he said.

Fulp said he’s “very bullish” on uranium, and said the rare earths “have a way to go.” Rare earth investing is a “very risky, speculative sector,” he added.

The gold market will continue higher, but it is getting top-heavy. “We’re way overbought; we’re due for a correction. It’s driven by safe haven buying (over the Middle East) and speculation, really,” he said.

 

By Debbie Carlson of Kitco News dcarlson@kitco.com

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