Do You Hear That Sound? It's The Sound Gold, Silver And Copper Make When They Are Going Much Higher
Even many metals bulls don't get it, if they did the prices of metals stocks wouldn't be so cheap based on historical metrics.
As crucial as exploration is for gold, silver and copper mining, it is equally as misunderstood about how badly it is needed. That includes grassroots and new discoveries exploration, plus advanced staged exploration of known discoveries.
Without success in the earliest stages of the mining supply chain, there won’t be enough new mines in development. And by extension the miners will struggle to increase production and replace what they mine.
To make a discovery, it requires surface sampling, geophysics and regional geological work to get a prospect to the drill ready stage. Once a discovery is made then it needs plenty more work to advance it to move into development. These steps have been underfunded for many years, and the evidence can be seen in the dearth of projects in development.
This is all a strong argument for why I’m so bullish on gold, silver and copper, as their supply chains are broken from grassroots exploration through to mining. Demand for all of these metals is growing and the supply chains will struggle for many years which could last for at least a couple decades.
Exploration takes a lot of hard work, time and money. Which makes it ill suited for a world full of people that want instant gratification. Regardless, the mining industry needs success in exploration in order to keep the supply chains healthy.
It’s hard to fix the problem for a couple key reasons. One of them is the cost to keep a publicly traded junior compliant to meet all the regulatory demands. To cover the costs of having an office, while employing key people needed to run it, then covering accounting costs and legal fees runs around C$1 million a year these days.
That is before sending folks out into the field to do geological work, geophysics and drill baby drill. Once that gets started, the costs ramp up dramatically. But in the grand scheme of things, it is a pittance compared to the dollar amount of trading in insane valuations of tech stocks. You could fund all exploration companies worldwide for a year with the amount of money trading hands in an afternoon in a handful of tech stocks.
An even bigger problem that doesn’t get talked about much is that when you underfund exploration, less people want to do the fieldwork and drilling, and enrollment at universities for geosciences decline. Which all results in not enough people in the exploration side of the mining business.
When I got into the mining sector in the early 1990s, there had been around a decade of this people problem in development. The 1990s weren’t much better. Which is why this period is called the Lost Generation in mining.
It improved during the 2001 to 2011 metals bull market and then it kicked in for another decade or so afterward. Which means that for 30 of the past 40 years, the problem of not enough people in mining has festered.
Making this an even bigger issue is that the people that were in the business prior to 1990, didn’t have enough people to pass their knowledge down to and some brilliant experts have sadly passed away or retired. That knowledge base is lost forever.
I was blessed to come into the mining business when I did, as I was fortunate to have an amazing group of mentors in geophysics, geochemistry and geology. I’ve had a front row seat to watch how the business has changed over the past 30 years that I have worked in the mining business.
Exploration is not easy, if it was, everybody would have a mine. But, time marches on and as it does, people leave the business, yet the world crucially needs mining. Without exploration, the supply chain from top to bottom gets broken.
Geology is challenging, it takes a lot of effort to make a discovery and then understand the geological system. If all that goes well, then it needs to move into development to establish a resource and reserves, then derisk a development project through economic evaluation. If it passes those stages, then it needs to be permitted and funded to build it into a mine.
From grassroots exploration, through to building a mine can take a couple of decades these days, or more. Along the way, in addition to all the issues I’ve described above, companies have to deal with the swings in metals prices and the vagaries of the stock market.
Mining companies know how hard exploration is, which is why they pretty much abandoned it decades ago. Instead they wait for juniors to make discoveries and buy them out. This sounds good on paper, but it is not sustainable.
To understand why it is unsustainable one need not look further than the major gold miners. While gold is at record prices, most of them are challenged to increase production and replace their old mines with new mines.
A perfect example of what can happen to gold production when there is long-term under investment in the supply chain from grassroots mining to gold miners is South Africa. For many years they were the dominant gold mining country in the world by far. Their peak production happened in 1970 when they produced a record high 1,000 tonnes of gold.
After decades of neglecting the supply chain they are now producing around 1/10th of that amount. The same thing that happened to South Africa can happen to major miners throughout the world. It is highly likely that global gold production has recently peaked and will start going into long-term decline.
The peak in production happened for Newmont and Barrick years ago. Their issues with increasing production while controlling costs and replacing what they mine is an industry wide problem.
Very few companies are like Agnico Eagle and Alamos Gold that are increasing production, while producing gold for all in sustaining costs around $200 per ounce less than the average for gold miners worldwide.
They are exceptionally talented mine operators and are free cash flow machines that make them best in breed. It is pretty astonishing that in addition to their wonderful performance on the key metrics, they are both making moves to reduce costs and increase production.
Agnico Eagle and Alamos Gold are exceptions to the rule, most gold miners are suffering from similar issues as Newmont and Barrick. Peak gold production worldwide is happening as America and other G7 countries are in Death Spirals of Debt which are causing the world to go back on the Gold Standard.
The Death Spirals of Debt can’t be stopped, and they are getting worse as politicians keep spending more and the interest on the debt is going to become the leading expense to come out of revenue from taxes. The return to the Gold Standard is on autopilot.
I started as a market commentator in 2005, and until this year, would keep my speculation on where gold prices were heading confined to a year, or two at the most. I had never made a call beyond that timeframe until this year when I made a call for gold to reach $20k within ten years.
The reason I had enough confidence to make that long-term projection is because I see the problems in the supply chain. It is broken from grassroots exploration to the major miners which is why we are seeing peak gold production while gold hits record highs. I also clearly see that the Death Spiral of Debt in America and other big economies are going to cause a return to the Gold Standard.
Silver is in a similar situation, in fact it is even more bullish. The supply chain for physical silver is much lower than physical demand. This deficit will only grow because the physical supply has peaked, yet demand is growing rapidly from silver as a monetary metal and its demand from the solar industry.
Silver was reluctant to join the gold bull market. Gold is at record highs and silver needs to go up $20 per ounce just to reach its record highs. I think we will see silver go over its record high of around $50 per ounce within the next six months. Then head toward triple digits within a year or so afterward.
Copper is the most critical mineral and it has a tremendously compelling supply and demand story. Much like gold and silver, it has suffered from chronic underinvestment in its supply chain for many years. Copper discoveries have been in decline for the past two decades. The result is that there aren’t enough copper development projects for the miners to replace their old mines with new mines.
Every major mining company, including gold miners, are in a race to add copper to their portfolios of mines. They see the writing on the wall that demand is growing rapidly while the supply chain is not prepared for the demand.
This poorly prepared copper supply chain has been happening for many years. It is a worldwide problem due to the growth in demand from developed economies that have been relying on ancient power grids for much too long. The developing economies also need a lot of copper to build their power grids and to come into the modern electrified world.
The weakness in the copper supply chain is about to get acute as the electrical vehicle market grows. Out of left field, in the past year, Artificial Intelligence (AI) burst onto the scene and is a power hungry hog that will make demand for energy from traditional technology pale in comparison. Everybody hears about the hype of AI, but what few realize is how much energy and copper is needed to make the AI dreams reality.
The tech companies focused on AI are already giving people hints as they are trying to revive mothballed nuclear reactors to meet the demands to build data centers. This is happening for really the first iteration of AI. So far it is primarily a glorified search engine and it uses 10 times the energy as a Google search. The more robust the answers to the queries become, the more energy and copper will be needed.
AI has people believing that before too long we will be overrun with robots that are smarter than humans. For that to happen, they better start building nuclear reactors like they are going out of style. While they are at it, every copper mine in development needs to be built into a mine within the next five years and that still won’t be enough.
To meet all the demands for copper, it will require the price to be around triple its current price to make every copper development project a new mine. The copper supply chain was already headed toward a serious problem before electric vehicles and AI. Even tripling the price of copper will probably fall short of fixing the broken copper supply chain.
If Tesla and other electric car makers, plus technology companies want widespread AI, they better start getting very friendly with copper miners. They can’t stop there, they will have to start helping to build new copper mines and fund exploration.
The supply and demand stories for gold, silver and copper are so compelling that they will drive the prices of metals much higher than even most metals bulls comprehend. If they did, then valuations of the stocks wouldn’t be so low.
What is even less appreciated is what those higher prices will do for the valuations of explorers with important discoveries, developers with new mines in the pipeline and miners. The stocks in these kinds of companies aren’t even close to pricing in the current prices of gold, silver and copper. They certainly aren’t looking out a year and beyond when the prices of these metals will be much higher.
Generalist investors are fixated on driving up the value of Bitcoin, and high valuation tech stocks to insane prices. It won’t be long before they start figuring out the metals stocks. When they do, the jumps in stock prices will be explosive.
Are you ready for the renaissance in metals? Most metals stocks bulls aren’t, and the smart money generalist investors are only starting to dip their toe in.
There is a perfect storm for gold, silver, copper and the stocks involved in mining those metals, building new mines and exploring for buried treasures.
Let the metal’s games begin.
All the best,
Allan Barry Laboucan
