Posts Categorized: David Duval

Posted by & filed under David Duval, General Editorial.

Dear Friends,

Jim has agreed to impart some of his vast knowledge on the gold market to jsmineset readers and other interested participants in Canada and the United States. The exact choice of locations will depend upon demand.

We will also consider offering these presentations in European and Asian cities – again based upon demand.

In addition, Jim’s colleague, personal friend and long time advisor, David Duval, will be available to discuss some of the more practical aspects of the gold mining industry, using Jim’s own public mining corporation as an example.

In order to gauge your interest, we invite you to respond to the following email address.  As a means of eliminating SPAM, please cut and paste the following  address into your email: goldmarketpresentations@gmail.com

In the subject line, please include the city that is most accessible to you for the presentation (i.e. Toronto/New York/San Francisco/Los Angeles/Chicago…….)

In the text body, please provide us with your preferred date and time.

Lastly, please provide your affiliation (i.e. private investor/fund manager/media…)

Thank you,

David K Duval
Co-founder
JSMineset.com


Posted by & filed under David Duval.

Jim,

The CME/MF Global fiasco is really a game changing event in my opinion. It will certainly support gold as a safe haven investment.

CME’s oversight of its members is just as bad as the U.S. government’s oversight of its banking system.

Safe investment options are narrowing and we all know who the last man standing will be – gold.

David D

Posted by & filed under David Duval.

Dear CIGAs,

BHP Billiton’s attempted takeover of Potash Corporation of Saskatchewan presents an interesting dilemma for Canada’s free enterprise government and its provincial counterpart in Saskatchewan.

While politically supporting the concept of open markets, the Harper administration caved in to a backlash from the Premiers of the Western provinces – and from other Canadians for that matter – who felt the country’s natural resources are being plundered by large multi-nationals.

Any objective observer could probably find some justification for concluding that the takeover activity relating to several large Canadian corporations in recent years has also been happening on a not-so-level playing field – a sentiment that is hardly new in Canada or anywhere else for that matter.

Other countries with bountiful natural resources have found themselves in a similar ideological dilemma – most notably Australia which has vast quantities of strategic mineral resources. The United States has also been somewhat guarded with respect to foreign investment in its economy, especially from the Middle East.

Whatever ideological camp you find yourself in you have to admire BHP for its moxie. Offering a paltry 16% premium to the market price for a world class asset like PotashCorp takes a lot of it. No doubt BHP recognized it was the only company in the world with the capacity to fund a $40 billion acquisition in the minerals sector – a virtually unassailable position for any company. That realization alone probably figured in the premium it offered above market.

Criticism concerning the Canadian government’s rejection of the takeover bid has been relatively mute and understandably so. For one thing, the takeover attempt is hardly an anomaly in the North American market which is becoming increasingly sensitive to merger and acquisitions activity in critical market segments.

Several years ago, the American government prevented Dubai Ports from purchasing port management businesses in six major U.S. seaports under the premise that it represented a national security risk. The government’s reasoning seemed somewhat contradictory at the time given the fact port security would have remained a Federal government responsibility. In addition, Dubai is a key middle-east ally in the War on Terror and the U.S. has military access to its land, ports and airspace for operations in Iraq and Afghanistan.

An attempt the previous year by Chinese oil company, CNOOC to acquire Unocal Corp. was vetoed by the U.S. government for national security reasons. CNOOC subsequently withdrew its $18.4 billion bid for Unocal, ending a politically charged takeover battle that brought to the forefront U.S. concern over China’s growing economic clout. Chevron Corp., the second-largest U.S. oil company, subsequently completed the acquisition of Unocal even though its cash-and-stock offer was about $700 million less.

Canada’s Sudbury nickel camp and the rich Voisey’s Bay nickel deposit in Labrador fell under foreign control in 2005 and 2006 when Brazilian iron ore producer, Vale, acquired Inco Limited and Xstrata acquired Falconbridge, the number two nickel producer in the Sudbury camp. Critics of the Inco takeover noted, perhaps justifiably, that the Brazilian government would never allow the takeover of Vale by a foreign entity, meaning the international playing field for takeovers was hardly level.

In Africa, the situation is notably different in several respects, especially in emerging economies. Few of these countries have home grown corporations that are attractive takeover targets. However, many African countries are seeking a greater share of the wealth produced by foreign companies which is fair game as long as their fiscal regimes remain competitive with foreign jurisdictions. Nonetheless, some radical elements within African nations (most notably South Africa) want their governments to expropriate assets from companies and run them for the benefit of the state. Anyone who’s taken the time to read George Orwell’s “Animal Farm” knows what type of society (and economy) that would create.

It’s difficult to envision the government’s decision on PotashCorp having a major impact on foreign investment in the Canadian minerals industry. In fact, the government did not intervene when Sinopec – China’s largest refiner –offered $US4.65 billion to acquire the 9% stake owned by ConocoPhillips in the Syncrude oil sands.  Under the Syncrude partnership agreement, all the owners have the right to market their share of production for their own account.  However, the Globe & Mail reported recently that the Federal government will use its regulatory power to stop Sinopec from exporting raw oil sands bitumen and refining it abroad to take advantage of looser environmental rules.

Clearly, every county has a vested interest in protecting industries that are vital to its national economy- especially in the case where control passes to a foreign power. On the other hand, smaller bites might be more palatable to most governments.

PotashCorp was unique because it would have seen control of the world’s largest fertilizer enterprise fall into the hands of a huge multi-national conglomerate. This probably guarantees that you won’t see takeover interest in Canadian companies with dominant positions in critical metal markets anytime soon – world class uranium producer Cameco Corporation being one of the better examples.

More…

Posted by & filed under David Duval, General Editorial.

Dear CIGAs,

The contemporary wisdom that “bigger is better” has taken a well-deserved beating since the credit crisis unfolded and destroyed some of the world’s largest financial institutions in its wake.

With large-scale project financing options limited or non-existent because of the credit crisis, many of the smaller players in the global mining industry have been forced to review their growth strategies, a trend that could see historic mine development practices making a comeback and less mainstream business models adopted.

Perhaps not since the turn of the 19th century has the appeal of “small” become so attractive. Indeed, today’s examples encompass a broad range of industries including power generation (wind turbines, small hydro, solar etc.) and small mining operations that provide feedstock to portable or centrally located process plants and refineries, a practice that is relatively common in Asia and Africa.

Not being major enterprises with large industrial footprints, long permitting periods, and high capital costs, these businesses can be developed incrementally from ongoing cash flows, substantially reducing the risk to investors. In the “good old days” this scale of development was the rule rather than the exception and most of the world’s major gold camps were discovered and developed on this basis over a century ago.

In his book titled, "History of Dakota Territory" George W. Kingsbury describes the development of the Homestake Mine in these words:

“When the claim was purchased by the Homestake Mining Company the exploration consisted of small surface pits only and some mining men considered its value as doubtful although there were a number of favorable surface indications. The company immediately began the further exploitation of the property and two shafts equipped with hoisting engines were sunk and various drifts were soon under way.

By July, 1878, or the year after the purchase of the claim, the first mill of eighty stamps was constructed and in commission. With the first dropping of stamps it was proved that the mine was a producer and from that small beginning the mine has steadily expanded, breaking all records and setting a new pace in the world of gold mining. Although it is a very low ore, illimitable tonnage is at the disposal of the company and large mills, the most improved mining machinery and great mechanical power enable the mine to pay large dividends.”

It’s worth noting that Homestake was listed on the New York Stock Exchange in 1876 and its now dormant South Dakota mine produced approximately 40 million ounces of gold over a 120 year period before the mine’s economic reserves were exhausted in late 2001.

Mimicking the discovery of other major gold finds at the time, Homestake began as a surface showing with gold values occurring in vein material that was easily distinguishable from adjoining wall rock. Pick and shovel mining provided a bulk sample for metallurgical test work and grade estimation.

First off, however, the miners recovered gold from alluvial gravels that were eroded from the hard rock vein material. Exploration shafts were then sunk to evaluate the vein material at depth, producing gold in the process to offset exploration costs.

In many parts of the world (including Africa and Latin America) artisanal miners have already gained access to sub-surface vein material by hand sinking small shafts and mining along the vein structures. In fact, you would be hard pressed to find a major mine in Africa that didn’t have such workings within its property boundaries. These old workings facilitate target selection and the development of a resource base for production purposes.

Because of its high specific gravity (gold’s relative weight to that of water) gold concentrates in stream beds within alluvial gravels and it can be extracted by mechanical methods that take advantage of the fact it is 19.3 times as heavy as water.

Gold occurs in many different geologic settings but two basic types of occurrences or deposits are recognized: primary and secondary. Both rely on similar chemical and physical processes to produce economic concentrations of gold ore.

The Homestake discovery didn’t have the advantage of present day drilling technology to confirm the existence of an orebody whose life would extend for more than 100 years. Instead, the economic viability of the mine was established by mining and processing the easily extractable surface material with equipment that used gold’s specific gravity to produce a saleable concentrate. In the late 1890s, cyanide was employed to recover fine gold from rocks and is still used under carefully controlled conditions.

Even today, gravity separation is the best proven and accepted technique of concentrating minerals due to its high efficiency and low cost. In addition to gold, gravity separation remains a primary means of concentrating iron, tungsten, tin and coal ores.

Process plants (mills) for gold need not be large and in fact they are often manufactured and assembled in large industrial centers where skilled trades people are readily available. By employing modular construction techniques, equipment can be brought into a mine site by truck, air transport and in the case of tidewater locations, by sea barge. The various modular sections are simply joined together like a kid’s Lego set on the mine site. As the operation expands, new modules can be shipped to the site and added to the existing plant facility.

In order to reduce capital requirements, companies often employ contractors to mine their mineral deposits at a fixed price, locking in costs for the term of the contract. With contract mining, a company need not acquire in-house mining expertise or equipment that would only be utilized on a seasonal basis in any event. For smaller operations, contractors can provide services for a sufficient length of time to develop a stockpile for year round milling operations.

What’s surprising about today is the reluctance of many companies to consider the small scale, staged development of mineral deposits which is much less risky from both a financial and technical standpoint. In gold’s case, some of that reluctance no doubt relates to the belief by analysts that any company producing less than 100,000 ounces won’t get adequate market recognition. But as we’ve seen during the global financial crisis, analysts sometimes make a habit of being just plain wrong.

Nonetheless, in an escalating commodity price environment, the appeal of these modest-sized operations is certain to increase, especially where possibilities exist for multi-sourced production that will boost consolidated output to even more attractive levels. This has been a feature of China’s mining industry for generations and is certain to catch on in the West before too long.

Physical gold output – even on a small scale basis – provides price leverage to companies in the marketplace, especially for situations where the exploration potential leaves room for future production growth.

The Royalty Model

Less mainstream perhaps but even more attractive to the market are royalty companies who either purchase royalty interests (and gold production) in producing mines or seek to acquire royalty production through exploration successes.

Companies bringing new mines into production are sometimes willing to sell Net Smelter Royalty (NSR) interests in their operations to offset some of the capital costs. But these royalties are prohibitively expensive for junior companies with limited access to such capital.

This is not an issue for royalty companies that employ an exploration model, however. In these situations, companies with strategic land positions in established gold belts deal off their holdings to third parties in exchange for a royalty interest should the property achieve commercial production. In the interim period, the royalty partner agrees to make staged exploration expenditures and property rental payments (usually escalating) until commercial production is achieved.

The premise behind this royalty strategy is that companies can discover gold at a much lower cost by utilizing their exploration expertise and core assets as opposed to purchasing production on the open market. Clearly, it’s a strategy whose time has come!

Posted by & filed under David Duval.

Dear CIGAs,

Evaluating the merits and future prospects for a junior exploration company is a highly subjective process. Intangibles such as political risk, financial risk, market risk, commodity risk, technical risk and a host of other variables confront companies across the entire minerals industry spectrum. Nonetheless, no matter what the relative size of the company or the commodities segment it’s actively involved in, the best place to start your evaluation is with management.

This is especially true for junior gold explorers, the segment of the minerals industry that accounts for the largest proportion of global exploration expenditures and, predictably, the vast majority of new gold discoveries.

In reality, these are the “feeder companies” for the major gold producers whose primary focus is usually weighted to production (i.e. bread and butter issues) rather than exploration. In order to maintain the annual production rates that underpin their share price valuations, these majors need new sources of gold production and junior explorers are usually the ones that feed their insatiable appetites. Not surprisingly, when push comes to shove they are generally willing to pay a king’s ransom for undeveloped, economically viable gold resources in the ground.

Let’s have a broad look at several important criteria one should examine before determining a suitable investment in this often complex but infinitely exciting investment sector.

Management: Do the Litmus Test

It shouldn’t come as any surprise that good management can spell the difference between success and failure. So how does one determine if management is good or bad?

First and foremost past success is arguably among the best litmus tests for gauging management, although it’s certainly no guarantee. In this Internet age, regulatory filings and Google searches can often reveal a library of information on specific individuals and corporate entities.

A good CEO with a track record that includes at least one notable success generally has the ability to attract risk capital because people like to bet on a jockey that’s won a race already. In addition to having market recognition from past successes, they often tend to be magnets for high quality exploration projects.

Most investors in this market sector have observed seemingly well qualified management ruin good exploration companies because of bad technical judgements and even poorer market decisions. In the latter case, non-market oriented executives often forget that markets and exploration-related activities are closely aligned – if not joined at the hip. Those who manage one without paying attention to the other do so at their peril.

These days it’s quite uncommon for industry executives to have a personal investment in the companies whose future they control. Instead, they elect to take large salaries and award themselves cheap stock options which are typically re-priced lower when the company’s stock price reflects their lack of success.

Executives who are willing to risk their own money with ordinary shareholders have an added incentive to be successful. In old fashioned terms, it’s called “putting your money where your mouth is” – a lesson that unfortunately is largely ignored by most contemporary mining executives. Their shareholding need not necessarily be large but it should at least be meaningful.

It’s also wise to look for management with a broad knowledge of the minerals industry and capital markets, both of which are integral to running a successful company. These attributes need not be exclusive to the CEO but they should feature prominently within the corporate management team including the board of directors.

Senior executives don’t necessarily have to be geologists or engineers but they should at least have the ability to attract, manage and motivate a multi-disciplined group of industry professionals who share the corporation’s philosophy and objectives. Who can forget Paul Penna who brokered penny stocks in Toronto before he became the guiding force and chief executive behind one of the most successful mining companies in the world, Agnico-Eagle?

Personal integrity and the ability to communicate the company’s message to shareholders and the marketplace round out the critical attributes that one should look for in public company management.

Summary:

In the minerals business, past performance is often a good indicator but not a guarantee of future success. Pick management with strong track records and preferably at least one notable success (i.e. mineral discovery). The ability of management to raise capital to fund the company’s activities on an ongoing basis is also critical as the price of any exploration company’s stock is results driven – and getting those results costs money.

Management integrity can be determined by examining the way a company conducts its business, especially in foreign jurisdictions. In the case of developing economies, this would include a strong commitment to the principles of sustainable development.

Also, one should keep in mind that a company can be a success in the marketplace without taking a project to commercial production. In fact, the majority of mineral explorers never achieve such a distinction, selling out instead to an operating company with production expertise, perhaps retaining a royalty in future production.

Project Selection: The Best Place to Find a Mine is Where There is One

There are many aspects to selecting a good minerals project. But smart companies attempt to reduce some of the geological risk by exploring areas with known mineral potential as well as active mining operations.

Most of the world’s gold production comes from greenstone belts, ancient volcanic and sedimentary rocks that feature prominently in the mining industries of Canada, Australia and South Africa. These belts typically host a broad range of metals including gold, silver, platinum, nickel, copper, lead, zinc and even diamonds.

When you examine the evolution of these belts from a precious metals standpoint, new discoveries are being made well over one hundred years after the initial discoveries. Emerging greenstone belts, including the Lake Victoria Greenstone Belt in Tanzania, are relatively early in their development and will likely account for increasing amounts of gold and base metals production in the years ahead. In these regions, the larger the land position you have the better!

Companies exploring such areas are generally good exploration bets because the infrastructure in these regions tends to be better and the local population generally has a cultural affinity towards mining.

Summary:

Pick companies with large strategic landholdings and exploration projects in areas with proven geological potential, active mining operations (= good infrastructure), and a recent history of discovery and new mine development.

Project Development: Establishing the Big Picture

Exploration methodology has changed little in decades with the exception of data processing which today is understandably highly computerized. “Boots on the ground” remains the most effective method of discovering mineral deposits and that’s not likely to change any time soon – if ever.

Evaluating an exploration project is most meaningful at the drilling stage and this is when investors usually step into the marketplace. Market activity during this period is generally based on the timely release of exploration results. Understandably, diamond drilling or rotary drilling results are considered the “Gold Standard” during this phase of exploration because these results comprise most of the input data for resource calculations.

In Canada, geologists must adhere to the 43-101 standard when reporting resources for any commodity. This standard is a codified set of rules and guidelines for reporting and displaying information related to mineral properties; and it applies to any company listed on a Canadian exchange which is where the majority of the world’s junior explorers are trading.

Resource estimates are by far the most misunderstood feature of the 43-101 reporting standard. Investors like to apply values to resources that have not been proven economically viable which is a long, costly process. This is particularly true for “Inferred Resources” which have a great amount of uncertainty as to their existence, along with their economic viability. It cannot be assumed that all or any part of any Inferred Mineral Resource will ever be upgraded to a higher category.

For large exploration projects, most companies focus on developing the property-wide potential with widely-spaced drill holes. The reason for this is actually quite simple and practical. Drilling is expensive so rather than expend money tightening up drill hole spacing to produce a resource with no economic legitimacy, companies prefer to assess the global potential to ensure they end up testing the most attractive targets.

Summary

When assessing the potential of a mineral property, make sure your analysis falls within a big picture context. One thing to look for is a broad distribution of gold values on the property. You can find comprehensive information on exploration companies from publicly disseminated news releases and regulatory filings. The technical information in these filings has to be 43-101 compliant, providing a high measure of security to investors. Be careful not to apply economic viability to any resource category, especially inferred resources. Even resources that are included in a full fledged feasibility study are subject to various assumptions including future commodity prices.

Exploration Agreements: The Devil is in the Details

Minerals exploration is often conducted under joint venture agreements. In these situations a corporate entity has the right to earn a specific interest in an exploration project for a set expenditure over a specific period of time. In most cases, the expenditure commitment would include money for exploration and staged option payments to the property owner. Look closely at the JV agreement to determine what interest the optionee can earn (the larger the better) and the cost associated with earning that interest.

Junior partners involved in exploration joint ventures with major companies are at a distinct disadvantage. Make sure they have the internal ability or have sought professional help to ensure their joint venture agreements do not subject them to any derivative-related exposure or accounting related issues at production that will prevent them from achieving a timely return on their investment.

Summary

Exploration agreements are important and can make or break a company. Make sure you know exactly what interest the company will end up with after the earn-in period. Also, beware of excessive financial commitments (including non-exploration related option payments) that can put the company at risk during periods of market weakness. In the event commercial viability is established, ensure the production agreement with the major allows for a timely return on the junior partner’s investment.

Royalty Agreements: Low Risk, Premium Market Valuation

Some companies opt for Net Smelter Royalty agreements (NSR) which limits the financial risk associated with funding exploration work themselves. The royalty model allows for industry partners to earn up to a 100% working interest in an exploration project for a firm exploration commitment and rental (option) payments over a specific time period. In this particular case the property vendor would receive a sliding scale royalty (based on the gold price) should the property achieve commercial production. Because achieving commercial production is the responsibility of the project operator, the royalty partner does not suffer any dilution of shareholder’s equity or development capital risk.

A net smelter royalty (NSR) is the amount actually paid to the mine or mill owner from the sale of ore, minerals and other materials or concentrates mined and removed from mineral properties. This type of royalty provides cash flow that is free of any operating or capital costs and environmental liabilities. A percentage of an NSR royalty on an ore body can effectively equate to a larger percentage of the economic value of the ore body.

Royalty companies have low overhead, are relatively easy to evaluate, and generally command a premium in the marketplace.

Summary

The royalty model is virtually risk free but realizing royalty income from an exploration property is dependent upon the project operator achieving commercial production. For exploration companies, holding a strategic land position in a developing gold camp is an essential requirement to attract royalty partners. Royalty exploration companies operate under the principle that you can find gold cheaper through exploration than you could by purchasing production through royalty agreements on the open market. Royalty companies are attractive because they typically command a premium in the marketplace.

Posted by & filed under David Duval, Trader Dan Norcini.

Dear CIGAs,

Talk about a roller coaster ride in the gold market – up strongly overnight, down during the early New York session and then back up again after noon in New York before settling slightly lower on the day. Gold was caught in a crossfire between safe haven buying and a huge, and I do mean HUGE, dumping of commodities across the board. The only commodity that I could see that was up was natural gas and that was mainly due to the cold weather snap currently hitting the Northeast – everything else was smacked and smacked hard as funds unloaded everything as the US equity markets imploded.

The gold shares as indicated by the HUI and the XAU were down 20 points and 10 points respectively at one point early in the session before both indices cut their losses in half by late in the morning. They are currently weaker but well off their early lows as I write this.

Bonds once again received the usual lemming like response to plunging stocks after going through a brief period last week in which they were moving lower alongside of equities. It seems as if old habits die hard. Those buying bonds are going to be taught a painful lesson as the upcoming massive supply surge will continue to weigh on Treasuries, particularly the long end.  For today however, the bond bulls are in charge as they squeeze out all the shorts and produce a sharp, short-covering rally.

The equities are now trading at 12 year lows after violating key support levels in the overnight trading in the futures pit. That brought in more selling during the course of normal trading hours which utterly mauled them.  Investors are reacting to the news surrounding AIG and the inept manner in which the feds are handling this entire financial debacle. I have said it before and will say it again – the market has lost all confidence in the new administration as the policies they are following are a recipe for economic disaster. Soaring , out of control, indeed, wild-eyed spending, talk of elimination of home mortgage interest deductions, daily bashing of producers and achievers, tax hikes, confusing statements from various policy makers and officials, all have led to an attitude that looks to be approaching total despair. I know of several small business owners who have told me categorically that there is no way in hell that they are going to hire anyone new because they do not trust what the feds are going to do next. You are talking about the chief  source of new job creation in this nation and those folks have had enough already of this new administration after not even being in power for two months! Hold onto your hats – it is just going to get worse if the past month is any indication of what we can expect.

Remember, markets attempt to put emotions aside when evaluating policy and act accordingly and they have voted with their feet.  As such, I can easily see a breach of major support in the S&P of 700 and a fast plunge in the Dow to near 6,000 at the current rate of selling. What has to wonder exactly what news might arise that can stem the loss of confidence and arrest the growing attitude of despair. I should also note one thing – shares of a certain handgun manufacturer are trading strongly higher. Looks to me like many Americans are “getting it”.

Back to gold since it has been affected by the movement in the equity markets and will continue to be for the foreseeable future. The selling originated from fund sources whose computer selling programs indiscriminately dumped a wide basket of commodities across the board. That selling is quite large as can be seen by the extent of the price moves in other commodity markets. Sugar was slammed alongside of crude oil which then hit corn which spread to the bean pit. Wheat was crushed by the rally in the dollar which looks to be embarking on a bull run if it can push through very strong resistance that lies up near the 92 level on the USDX. The Dollar rally will not last but for now, it is wining the safe haven flow race merely by default because it is so bad everywhere else. I find it ironic that the source of this economic contagion, most notably the US, is not somehow perceived to be the best place to shelter one’s wealth. Scary isn’t it?

While not exactly anything to get excited about, I view gold’s ability to withstand the commodity-wide selling onslaught as impressive. It is hard to understate the extent of the selling that hit these markets today. To see buyers be able to absorb all that selling and push the market high enough to actually get it into positive territory is a notable achievement even if the bulls failed to secure a positive pit session close. Buyers of physical gold take note – if you want to acquire the physical metal do it when prices are down.

I am watching the price of corn and am wondering what farmers are going to do this season after watching the market push prices down so low. Imagine having to make a decision that affects your family’s income when you wonder if you can put a crop in the ground and actually make enough off of that crop, assuming you can bring one to maturity, to recoup your costs and even recompense you somewhat for all the labor involved. Folks are used to eating but had better not take the American farmer for granted.

One last thing – platinum has so far been able to maintain its footing above the $1,000 mark –again, fairly impressive given the severity of the economic news and its industrial metal role. It is evident that a goodly portion of the platinum buying is coming from safe haven flows.

Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini

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Posted by & filed under David Duval.

Dear CIGAs,

Market corrections are never painless but this particular one seems more like a flesh-eating disease, consuming a little bit of the patient (and impatient) every day.

My sense of things is that if we haven’t found a bottom in metal markets yet, we are very close. Supply-demand fundamentals are bound to work their way back into the marketplace and prices for key industrial commodities will begin to reflect that fact. Most of the carnage inflicted on commodities in my view has come from an appreciating dollar; and when demand for U.S. treasuries starts to wane, the dollar will weaken and commodities will begin to rise. (We saw the early signs of this in the last trading days of October).

In the past week, I’ve read about several metal producers shutting down operations while others have put new projects on the back burner. In the former camp is Brazil’s Vale do Rio Doce (RIO), the world’s largest iron ore producer. RIO recently confirmed it would substantially cut iron ore production as demand for steel slumps because of the global economic downturn. Steel companies across the globe have cut production by 20-40% and until demand stabilizes and begins to recover, iron ore companies will continue to feel the pinch.

Investors in commodities associated with steel production (metallurgical coal, nickel, zinc, molybdenum and chromium) face significant investment risk in such an environment unless companies are selling under long term contracts. Once the panic selling of commodities abates, it will be much easier to determine which commodities present the best investment opportunities. My bet is that it will happen soon. What people tend to forget is the fact that fiscal and monetary reflation on a global scale never seen before is only just beginning. With all this money being pumped into the global financial system, commodities will get their fair share.

More… (in PDF format)

Posted by & filed under David Duval.

Dear CIGAs,

Here’s a thought provoking article about an M.I.T.trained economist, Krishnamurthy Narayanan,  whose GI Global Opportunities Fund has returned 57% in the past year and 19 per cent (compounded) over the past five years.

For those of you who remain convinced of the long term invincibility of the U.S. dollar, he sounds a note of caution if not down right alarm.

He also has some positive things to say about the Canadian dollar, gold, oil and uranium – hardly mainstream views these days. But his views were hardly mainstream a year ago when he warned about the financial crisis that is currently spreading like wildfire around the globe.

Heed the advice of The Smartest Man
October 25, 2008 at 6:00 AM EDT

Crackpot. Crank. Scaremonger. Alarmist.

The Smartest Man We Know has heard the slurs. When you make your living on Wall Street, yet hold the opinion that Wall Street is populated by incompetent fools, you’re not going to win a lot of friends at dinner parties, are you?

And when you bet millions that the American financial system is going to fall apart, that its economy will be seized with fear – and when you were doing this and saying this before there was any hint of real trouble – well, you couldn’t really expect other people to welcome the message, could you?

The Smartest Man, when delivering his prophesies, did not sugar-coat them. “This could potentially make Long-Term Capital [the financial crisis of 1998] look like some kind of walk in the park,” he predicted. “The reckoning has started.” No soft landing this time: It could even be “like the Great Depression of this century.” He said these things not last week, not last month, but on July 26, 2007. That day, the Dow Jones industrial average closed at 13,473.

But The Smartest Man was just getting warmed up. Checking in with him again this January, he was every bit as gloomy. By that point, credit fires were burning all over the place; the Dow was at 12,500; the world’s biggest banks had been forced to turn, cap in hand, to Singapore, China, the Middle East and elsewhere for billions of dollars. It won’t be enough, he said. “There’s a whole bunch of companies that just have to hit the wall. They can’t survive.”

What kind of companies? U.S. financial institutions, mostly. Wachovia looks bad. The major investment banks are shaky. It’s about to get a lot uglier, warned The Smartest Man. “The implications of what’s going on for the U.S. economy, credit, for lending over all, are not that pleasant to think of.” Two months and two days later, Bear Stearns was gone.

More…