TALK TO AN EXPERT: Bart Melek Makes The Case For Base Metals
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Bart Melek
In our latest conversation with BMO
Senior Commodities Analyst Bart Melek,
we discussed the direction of commodi-
ties and markets for 2010. Mr. Melek is
no pessimist this year. He sees plenty
of opportunity for upside remaining,
particularly in copper, iron ore, platinum
and zinc. On the other hand, he worries
that sovereign debt in some European
countries could derail the recovery to
date. Should that happen, he says, gold
will be a popular investment choice.
R
esource Intelligence: Your division of BMO
researches and writes reports throughout
the year on all sorts of commodities, from
coal to copper. You must notice a lot of trends.
So from an economic and investing point of
view, what sort of trends defined 2009?
Bart Melek: Well, 2009 was initially characterized
by a very dismal macroeconomic environment.
We saw the worst growth since the 1930s, which
then precipitated an extremely sharp correction
in commodity prices, ranging from base metals,
to oil, to iron ore. During this cycle we’ve ac-
tually seen a 60% decline in as little as 10 months
and normally those declines don’t happen that
quickly and certainly not that sharply, but the
macro environment was quite poor at that time.
After the government of China and the govern-
ment of the US and central banks around the
world started adding massive amounts of money
in a co-ordinated effort globally, about $2.2 tril-
lion in aggregate and lowered interest rates to
record levels, we started to slowly see an increase
in the latter part of the year. Certainly the opti-
mism about commodity markets and the future
of commodities rebounding helped a great deal.
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In 2009, Canadian metals stocks surged 440%, while energy
equities and the broad market jumped about 60% from the bottom.
In fact, if you take zero to be the start of the
recession, after a 60% fall we recovered back to
the -20% mark, so we recovered much of what
was lost in a very, very quick time and we’ve not
seen anything like that before. The take away
from this is the following: Demand in China was
pretty decent because of the massive stimulus
they implemented there, equal to about 14% of
their economy in terms of direct physical spend-
ing and infrastructure and such. The implication
there is that the supply lines weren’t particularly
overdone, in essence. For many commodities,
like copper for example and commodities like
zinc to some extent, the supply or inventory rela-
tive to demand weren’t all that high by historical
standards. Keep in mind that this was the worst
time in the demand environment, certainly in
my lifetime. So all in all it wasn’t too bad and
to some extent, for those reasons, this is why we
have seen such a sharp recovery.
RI: If we have come out of this relatively un-
scathed, what do you think will define the com-
ing year?
BM: Well, you know, I would say this year is not
going to be a year where we see these sharp ac-
celerations anymore. I think we will see some
upside later in the year as per this correction that
is unfolding currently. Again the key reason here
is, we are going to see restocking globally. We are
going to see significantly better growth in the de-
veloping world and I think China will continue
to do fairly well down the road.
RI: What commodities then are you focused on?
BM: We have an order in the criteria from which
we pick commodities. First of all, in order to be
See page 96 for Disclosure, Disclaimers & Info on Mineral Resource and Reserves
Toronto
Mining Index
BMO Base
Metals Ind
TSX Composite
S&P 500
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Source: BMO
top ranked as far as we are concerned, demand
prospects have to be decent in the short run and
long run and supply shouldn’t be expanding at a
greater pace than demand. The other criteria that
I use is China shouldn’t have any, which means
they can’t distort the market, produce below cost
and subsidize. And what fits that cagegory? Cop-
per for example. Demand looks good because
of infrastructure, building and industrialization
within China. I think over time, India and the
current build up of power supply, build up of
transmission lines, roads, infrastructure of all
sorts, from logistics to telecom, copper is going
to be used. Demand looks robust there.
There is a mass migration from the rural to the
urban settings in countries like China. I think
that is going to start increasingly accelerating in
India and other parts of the developing world.
That, by definition, means massive building of
infrastructure and capital spending. Since 2000,
we’ve seen some 150 million people in China
move to the urban centre. You add India to that
and who knows, ten years down the road, in the
next decade you might have 300 million people
moving in to cities, and that is equivalent to one
United States of America being built up. So there
are potentially massive upsides to demand for
commodities and something like copper, with
not too many mining projects out there, and
something like zinc, not too many projects out
there long term, so there is a very good chance
of a very tight market down the road. Iron ore
is another one, what is it used for? Steel, which
is the commodity for infrastructure and develop-
ment—when you are thinking of building out
roads and factories, you have to think steel.
 ...The Case For Base Metals
RI: Ok that’s iron, copper, and you mentioned
zinc a little bit
BM: Platinum is another one which we think, cer-
tainly for the immediate future. Certainly not in
the recent corrections, not withstanding. Again,
we had a massive decline in demand last year.
We see some of that coming back. Inventories
are lean, supply side is tight, certainly in South
Africa, so there could be some significant upside
pressure as this recovery takes hold.
RI: Copper has in the past made repeated stabs
at $4.00/lb. Now that global growth is back on
track, to some degree, could we see that again?
BM: Look, we are actually forecasting a copper
supply deficit in 2011. That means a potential
price increases, and as the year unfolds the pros-
pects of an environment where the economy does
well given the supply chain of mined copper and
secondary supplies out there, we could very easily
see it test historic highs.
RI: And yet China is developing a huge copper
deposit in Afghanistan. It’s fairly early stages I
believe, the Aynak deposit in Afghanistan, which
has some 11 million tonnes of copper. Has China
become more aggressive in acquiring metals pro-
jects, or is that just perception?
BM: Certainly I think the evidence is there with
some of the iron ore deals and some of the deals
in Latin America. Certainly with energy broadly
they have become more aggressive. There is a very
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United China Japan Russi
aE
States
$Blns US
The chart above shows stimulus spending by some of the world’s major economies. Of the massive US$787 billion allocated
for the American stimulus program, only 20-25% had been spent by early 2010.
Free Revolutionary Online Investment Calculators and all 43-101 data with sources and project values www.resourceintelligence.net
good reason why. They have well over $2 trillion
in reserves, they are worried about the US dollar
preserving its value and frankly they know they
need the material to fuel their growth.
RI: So do we need to be more aggressive?
BM: I think aggression of this kind is only a pre-
requisite if you’re actually growing. At this point,
I don’t think we have been focused on that, but
who knows, if prices and supply becomes an issue
then that could very well develop.
RI: Let’s talk about peak metals. Everybody knows
the peak oil argument, which states that we’ve
reached the maximum possible production of
oil based on existing reserves. Do you think the
concept of peak metals is nonsense, or is there
real concern?
BM: Well, I’m not much for buying into the idea
of peak oil or peak metals. There is plenty of oil
out there. The question is, at what price? There are
plenty of copper resources out there. Africa—the
African continent in particular— has very high-
grade supplies of copper. Unfortunately there is
a lot of geo-political risk there and its infrastruc-
ture is an issue but, again it’s a matter of price.
There exists a price at which a lot of things get
developed. Low-grade, high tonnage operations
that weren’t viable previously, become viable at
different price points. So I wouldn’t say there is a
peak, at least not for the foreseeable future. The
question is, at what price? Certain resources are
not considered a resource because they are not
U Canada Brazi
l India
of GDP%
Source: BMO
economic, but at a certain price they become a
real resource. You can turn a gravel pit into a real
mine if the price is right. If the economics are
there we don’t really have a shortage. What we
have is a shortage of cheap, easily accessible ma-
terial in geopolitically stable parts of the world.
RI: So what role do junior explorers play in that?
BM: I think junior explorers have a great function
to play in the sector ultimately and I think a great
many majors rely on them to be their sniffer dog,
so to speak. With a positive demand environ-
ment and a high price environment in particular,
I think the juniors will do well, because you will
need them to find the next economic mineral
deposits.
RI: Ok, let’s talk about Nickel. Nickel also has
been through incredible highs and very profitable
periods. Back in 2007, the price of nickel rock-
eted such that a single drill hole from a junior
could set their stock on fire. Will we get back to
this kind of growth?
BM: Certainly not for a while. We have an awful
lot of Nickel out there and there have been large
mine supply cuts in Nickel, so really I don’t ex-
pect a lot of upside for a while. It has large in-
ventories right now and demand has not really
started turning. We had considerable mine shut
downs in 2009 because of low price environment
and much of that stuff will start coming back, so
I think the supply side is much better. For the
very long term, I think that most metals have
supply issues, but in the next few
20% years that is probably not the case
for nickel.
RI: It seems that in spite of the fears
of liquidity in 2009, there was really
no shortage of funds available for
15% miners and some explorers as well,
with good projects. For example
Salman Partners raised $7.7 billion
dollars, mostly for resource com-
panies in 2009. Are they going to
10% continue to see those kinds of funds
being available in 2010?
BM: I don’t know if we are going to
see those kinds of funds, but to re-
iterate, certainly earlier in 2009 and
5% late 2008 we weren’t quite sure if we
could do anything. So the environ-
ment has certainly changed with
the recovery. I think that down the
road, a good project will find cap-
0% ital. I think for the most part, if it’s
economic and it’s the right project,
I think investors will be more than
happy to provide the funding.
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