Louis James: Stuff is not really cheaper. There is deflation in some asset classes and some equities, but life for the average Joe is not cheaper and commodities in general are not cheaper. Gold is trading between $1,600 and $1,700/ounce (oz). Copper is at what looks like maybe reasonable long-term prices, but short term, they’re ridiculously high. I can’t believe the way copper has defied gravity in the face of all the economic turmoil the world is in. It says something about the supply destruction industry is seeing and the supply pinches coming.
It’s actually fantastic if you have high, driving prices in the commodities, find good companies with good management, money in the bank and the wherewithal to weather the storms, buy them cheap and profit from some of the volatility Rick is looking for.
But I agree with what he said. I also think we’ll see more volatility, and the chances of seeing much lower prices are pretty good. When a bear sentiment grabs the market, it takes everybody down, both the best and the worst players. If you have the courage to face it, that’s very good news. There’s a good chance we’ll see much more of that over this summer and I’m looking forward to it.
***************
After the sector bounced back from 2008,
I wrote that we should be so lucky as to have another one – Louis James
***************
TGR: Participants came to this conference for a Reality Check. Rick, you said a reconnoitering is inevitable. But how do you tell the difference between a correction or retrenchment in a supercycle and the start of a bear cycle?
RR: I don’t know how to know. Eric Sprott is a student of markets. I’m not. My response to a market is simply to try and figure out what I think a company’s worth and buy or sell based on that. I think the resource equities markets are headed lower this year. I also think we’re going to see increased merger and acquisition (M&A) activity simply as a consequence of the fact that the entry points are going lower. Although I think the overall market is going down, I’m writing more buy than sell tickets today. When the luster is off the sector, it’s off all parts of the sector, so in bad markets the best companies are cheap. When the best come cheap, you have to play.
I’m keeping powder dry, too, because I think we’re going to have the best private placement market in 2012 since 2002, when it was truly spectacular, when management thought they either had to raise money or forego their salaries. It made them reasonable about things like warrants.
MK: There are already more private placement opportunities on the buyers’ terms, with full warrants, three years minimum. We’ll also see management teams participating in the private placements. New terms will specify a certain amount that must go in the ground. A lot has unraveled and the mergers have started. Just on April 27, IAMGOLD Corp. (IMG:TSX; IAG:NYSE) bought Trelawney Mining and Exploration Inc. (TRR:TSX.V) with CA$585 cash.
A lot of the easy money has been blown up. Half the companies listed on the Venture Exchange have less than $5 million (M) in the till. They cannot do a serious exploration program. Drilling 4,000 meters in the Yukon costs a minimum of $2M. But the good companies will do very well, better than any bull market because there are more willing buyers for those few superb companies.
LJ: Because a rising tide lifts all ships, during part of a frothy bull cycle you have a reasonable chance of making money on the greater fool theory: buying something in the hopes somebody else will come along and pay more for it simply because the market goes up—not because any value has been added or the company has achieved any of its goals. But that’s a pretty risky proposition; the greater fool theory is exceptionally dangerous. You never know if the market will go up, or whether a dip is a bottom or an increase is a top. Nobody in his right mind tries to time the market.
A much better procedure is to buy value. A rising tide will raise all ships but it should raise those with real value higher. The people who know the quality players certainly know what they’re looking for, and they will buy the successful exploration companies.
TGR: Do you also anticipate increased M&A activity?
