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Afghan Riches: Not So Fast
June 16, 2010
The New York Times recently ran a story claiming that $1 trillion worth of mineral wealth lay under the soils of Afghanistan, and this war-ravaged country could become “one of the most important mining centers in the world.”
It’s an interesting thought, but let’s slow down a bit.
We often refer to “delays and disappointments” when discussing new discoveries of gold, copper, oil, etc. It’s easy to announce a big new discovery, but incredibly hard to turn it into actual production.
After discovery comes a lengthy period of additional exploration and other geological work to determine the size of the prospect. Then there’s engineering, a sequence of feasibility studies, budgeting, permitting, capital expenditure on roads, power and other infrastructure, and much more.
For this reason, most discoveries never even get close to reaching the development stage. And this is in countries with stable political systems, solid property rights, an experienced work force and no bullets flying. Imagine the additional complications in a war zone like Afghanistan.
Afghanistan could defy the odds, and its subsurface riches could put it on a successful social and economic path similar to that of Chile. Or it could devolve into a warlord-driven situation akin to the Democratic Republic of the Congo.
Much work still has to be done before anyone starts throwing around 13-digit numbers.
Louis James from Casey Research wrote a very good commentary that goes into more detail on the challenges ahead. Louis spends a lot of time out kicking rocks in the field, so his perspective is a knowledgeable one. Click here to read his thoughts on the discovery.
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Chart of the Week – SWFs and Oil Prices
June 02, 2010
Over the past few decades, Sovereign wealth funds (SWFs) have become the preferred way for oil-rich nations to diversify their economies away from oil.
SWFs are “special investment funds created or owned by governments to hold foreign assets for long-term purposes,” according to the International Monetary Fund (IMF). They can also be used for stabilization and short-term liquidity.
This chart shows how the rise of oil prices and the creation of SWFs have gone hand-in-hand. The timing of SWFs' establishment generally coincides with spikes in oil prices because SWFs are financed by surplus revenues that governments set aside for future development.
Oil and other natural resource reserves are finite and nations are planning for the “day after” their reserves are depleted. Countries like Indonesia have already turned from oil exporters to net importers of crude oil.
While their role as a cushion at the bottom of economic cycles is clearly defined, SWFs' investment success in global markets has been mixed.
Before the credit crisis unfolded, SWFs collectively managed more than $5 trillion in assets but many of them saw 30-40 percent drops in 2008. The world’s largest SWF, the Abu Dhabi Investment Authority, lost 40 percent of its value during the crisis but still has $875 billion in assets as of last reporting.
Still, their long-term investment focus can be an important stabilizing factor for these developing economies.
Cars Driving Oil Demand
June 01, 2010
The federal government expects global energy use to rise by nearly 50 percent in the next quarter-century, with the bulk of that increase due to strong GDP growth and rising household incomes in the developing world.
The Energy Information Administration (EIA) says energy consumption in non-developed countries will be 84 percent higher by 2035. Over the same period, energy use in the developed world will grow by 14 percent.
The EIA says oil will remain the world’s largest energy source, with transportation being the key driver of oil demand. The red line on the chart reflects that auto ownership in the developing world – China is the world’s largest car market – is expected to continue on a steady upward trend.
Energy use for transportation in the developing world is expected to rise 2.6 percent a year through 2035, while in the developed world the growth line is essentially flat (blue line).
This demand increase from the emerging economies may end up having a profound impact on price. The EIA estimates oil prices will average $79 a barrel in 2010, but jump to $108 by 2020 and then $133 in 2035.
Discussing the State of Mining
May 21, 2010
I was in London this week speaking at the World Mining Congress. Following my address to the general session, I was able to take a few moments to share my outlook on the mining sector and the global economy with Jane Grieve from Reuters TV.
Jane and I discussed what new mining laws in Australia may mean for commodity prices, our investment process and a slowdown in China.
“The Chinese have been big buyers of copper and other industrial metals but they’re going through a quiet period right now and that’s been the biggest drama in the global scene. How will a housing slowdown in China impact the world? What are the ramifications or the domino effects if that’s true? However, [historically] it’s normal for China to try and slowdown housing [before it gets overheated], they can pick it back up again.”
[Note: The audio on the video does not begin until the 1 minute mark so you can fast forward to there]
Holdings in the Global Resources Fund as a percentage of net assets as of March 31, 2010: Pacific Rubiales Energy Corp 4.52%, Chevron Corp 3.89%, Freeport-MacMoRan 3.28%, Occidental Petroleum 3.21%, Canadian Natural Resources 3.20%. The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver.
Chart of the Week: Strong as Steel
April 20, 2010
Economic growth in Asia is the key driver for the big upswing in steel prices around the world, along with capacity utilization exceeding 85 percent.
The rollercoaster-shaped chart below from Macquarie Research shows the steel price trend since 2007 in the U.S. China, Europe and the world overall.
Starting in late 2007, there was a near-vertical climb to a peak in mid-2008, followed by (as the global financial crisis and deep recession took shape) a near-vertical plummet through early 2009. The broadening economic recovery has been accompanied by a bounce-back in steel to price levels not seen in more than a year – up nearly $200 per metric ton in the U.S. since the bottom.
In the past month fabricated steel prices have been matching or even exceeding the prices for iron ore and nickel (for stainless steel) after lagging these raw materials for the past year.
Macquarie believes that steel prices will continue to increase at least through the second quarter of 2010, with a strengthening of economic recovery in the world outside China being a driver, before growth slows in the second half of the year.
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Net Asset Value
as of 09/08/2010
- Global Resources Fund
PSPFX $8.78 +0.05 - Gold and Precious Metals Fund
USERX $17.44 +0.03 - World Precious Minerals Fund
UNWPX $20.18 -0.01 - China Region Fund
USCOX $8.61 -0.02 - Eastern European Fund
EUROX $9.11 +0.13 - Global Emerging Markets Fund
GEMFX $8.17 +0.08 - Global MegaTrends Fund
MEGAX $7.71 +0.04 - All American Equity Fund
GBTFX $20.02 +0.09 - Holmes Growth Fund
ACBGX $16.04 +0.15 - Tax Free Fund
USUTX $12.58 -0.01 - Near-Term Tax Free Fund
NEARX $2.26 -0.01 - U.S. Government Securities Savings Fund
UGSXX $1.00 No Change - U.S. Treasury Securities Cash Fund
USTXX $1.00 No Change