Monday, December 02, 2013

Summary of Metals and Minerals Investment Conference San Francisco 2013

The Metals and Minerals Investment Conference that took place last week in San Francisco is the latest name for the Hard Assets Conference (and before that, the Gold Conference) that I've been attending for many years.  This is the one annual event on my very busy calendar that I cannot ever miss.

Things started off right with a morning workshop from Benjamin Cox of Oreninc.  I was very impressed with this company's due diligence methods at a previous Hard Assets Conference and I was eager to hear their updates.  I like analysis that combines fundamentals with money flows because that's how you find bargains in any market.  Oreninc applies the wisdom of picking entry points in depressed markets, just like Warren Buffett used to do.  It was interesting to hear Benjamin's prediction that junior mining companies may survive this bear market only to fail in the recovery when creditors demand repayment.  His approach to investing in juniors also resembles one of the Buffett PIPE strategies that combines a private offer for equity with warrants.  His view on the market for lithium deflated my theory that lithium producers are underestimating demand from IoT devices, mainly because the lithium and graphite requirements for wearables are so small.

The keynote from US Global Investors is always interesting at these shows.  The firm is impressed with the "Chindia" market but I'm staying away from that region due to China's and India's huge internal problems and potential for conflict.  I do not agree with that firm's thesis that contrarian plays abound in today's markets.  Some sectors in the US and Europe may have declined but that does not mean they are undervalued.  I also disagree with the firm's thesis that high-speed rail stations in China will be retail anchors for US brand names.  More China analysts need to use the Keqiang Index instead of China's self-reported GDP figures.  The audience loved the photo slideshow of Thailand's Prime Minister Yingluck Shinawatra leading our President through a diplomatic event with a come-hither look, followed by a photo of our stern-looking First Lady subtitled "COMPLIANCE."  Every corporate presentation should be that hilarious.

Leading lights in mining company research held their panel on economic trends.  These conference panels have been saying for years that the world's bond markets will reject Treasuries and that US hyperinflation is imminent.  I agree but none of us can time this cataclysm precisely, so it continues to roll in slow motion.  Rick Rule opined that the low attendance at this conference was a contrarian indicator for the metals sector.  I'd like to see investor capitulation too at some point so I can get back in after selling most of my GDX holdings near the top.  The panelists were aware that HFT hedge funds are manipulating markets by paying for advance notice of quotes in split seconds.  I wish people would calm down about short-term swings from manipulation and use them to uncover mispriced securities.  The current market bubble is more than just the effects of HFT manipulation and tax incentives for using debt in share buybacks.  The Fed's easy liquidity has incentivized banks to extend easy prime brokerage credit to hedge funds and private equity firms.  This is not a fun game to play and a lot of people are going to be hurt when the music stops.

Adrian Day Asset Management weighed the relative attractiveness of bullion versus mining shares.  I note with chagrin Adrian's observation that mining costs have risen dramatically while large discoveries are declining in number.  That's why a lot of junior miners are going to fail before any bull market in the resource sector returns.  Adrian thinks raising capital is not accretive if companies use it to overpay for acquisitions.  I say juniors shouldn't be acquiring at all because their business is to develop good deposits.  Measuring purely on P/B value, as Adrian does, to show that gold stocks are cheap risks ignoring the quality of a company's earnings and deposits.  I was lucky to score a free copy of Adrian's book Investing in Resources at one of the exhibitor booths.  Perhaps that's a contrarian indicator that my lucky streak in the resource sector is about to begin again.

Rick Rule's keynote was about the fun of preparing a portfolio for recovery.  He offered more confirmation that the mining sector is priced cheaply.  Stories of executives squandering the capital they raised during the hard asset bull market from 2009-10 are common.  Rick thinks the mining sector bifurcated this past June and that about 70% of the sector is worthless.  That's a lot of small stocks headed for zero.  No wonder the exhibitor floor is so small this year.  Rick is one of the few investment professionals who recognizes the natural human tendency of confirmation bias that ignores information contradicting strongly held beliefs.  That's why most people make many poor investment decisions.

Dr. Ron Paul was the featured keynoter.  It's telling that he didn't use the permanent honorific "Congressman" which our nation's laws and political tradition entitle him to claim.  He'd rather be a doctor in retirement.  That shows humility.  My very first impressions from the original Gold Conference years ago included the huge following for Ron Paul among the gold bug crowd.  Their enthusiasm for his views has not dimmed and he was by far the most well-attended speaker.  I staked out a front row seat.

Dr. Paul talked at length about how his study of Austrian School economic philosophy led him to the discovery that bad monetary policy is a threat to personal liberty.  He was as critical as ever of the Federal Reserve, the dollar's reserve status, and the US's interventionist foreign policy.  The Fed's QE reminds him of the Founding Fathers' hatred of counterfeiting.  Dr. Paul's tour-de-force anecdotes through the Fed's modern history are worth repeating.  He liked Paul Volcker but thought Alan Greenspan should add disclaimers to his old Ayn Rand writings, and Arthur Burns admitted to him that the Fed isn't really independent of the President's policies.  He lauded the Occupy movement's diagnosis of America's social inequality but dislikes their preference for wealth redistribution to solve it.

I do not agree with Dr. Paul's stance on non-intervention in Iran's nuclear weapons program.  Tehran has clearly stated its intent to develop and use nuclear weapons against its neighbors and it is not at all a Western-style republic.  Dr. Paul is very intelligent but he is not a geopolitical analyst.  His naive non-interventionist writings in the 1970s and '80s lead me to believe he would have let Fascism take over Europe.  I also think he's delusional if he believes that young people want more freedom.  I did a Google search of "millennials trust government" and found plenty of polling results showing that young people want more government intervention and regulation even though they have little trust in government!  I used to sympathize with libertarian philosophies until I learned more about how real humans behave.  People never know what they want and will trust anyone with a slick sales pitch.  That's why Millennials and other generational cohorts are ready to be led around by their noses.  I've got some more bad news for Dr. Paul.  The Constitution's preamble says "promote the general welfare" and Article One's "Necessary and Proper Clause" gives the federal government a tremendous amount of leeway.  The government's promotion of canals, railways, land grant colleges, and westward expansion made this country prosperous and immune from foreign domination.

The audience questions for Dr. Paul ranged from intelligent to nutty.  I wish I could find active links to the US Gold Commission from the early 1980s because Ron Paul served on it and one of his fellow former commissioners showed up to ask whether Fort Knox's gold deposit has been audited.  Dr. Paul thinks there is actual gold in the US Bullion Depository but its ownership status may be in question, which is why it needs an audit.  Some other dude asked whether smart meters could feed data to the NSA.  Hello?  What planet is he on?  Smart meters read machine data and the NSA monitors human-generated data.  Get a clue.  Oh yeah, local gadfly "Starchild" showed up to advocate common cause between the Tea Party and the Occupy movement.  Good luck with that one.  Dr. Paul totally lost me when he said liberals and conservatives should both support personal liberty and oppose wars.  That is just not going to happen but people like "Starchild" will take it as gospel.  I've read enough Leo Strauss and Carroll Quigley to know that the Anglo-West's hereditary ruling elite simply won't allow such a confluence of political forces.  One final supplicant asked Dr. Paul whether a Cyprus-style bank solution could happen here.  He avoided a straight answer but I don't think he's aware of the joint US-UK plan titled "Resolving Globally Active, Systemically Important, Financial Institutions."  Yes, it really can and will happen here.  It's too bad Dr. Paul will be a footnote in our country's history, maybe a notch below other forgotten advocates like William Jennings Bryan.  I tried to meet him after his keynote but he was pretty much constantly mobbed as he made his way across the expo floor to the Korelin Economic Report booth for an interview.  Even James Dines' booth babes followed him around.  This guy had no idea that he was in the presence of greatness that day, namely Yours Truly from Alfidi Capital.

The next panel on precious metals brought forth more sector analysts.  The theory that big banks can manipulate gold prices or that central banks can hold them down morphs a lot in the imagination of many commentators.  I'll believe that when I see smoking gun evidence that no one can debunk.  One of the better explanations of gold's behavior came when a panelist said it can drop in value during inflation even if the early onset of inflation is a blowout stage for metals.  I don't listen to commentators who use the word "consolidation" because that is a technical term with no statistical validity, but people at these conferences like to throw it around.  We can always count on Indian retail demand for gold to stay strong because Indians buy it for religious reasons and bury it in temples.  We all saw gold rise after the 2008 financial crisis but US investors tend to have a herd mentality and sell gold when it drops in price.  The bombshell of this panel came from none other than Oreninc's Benjamin Cox.  Ben revealed that hedge funds hold a big chunk of US gold and a future crisis will force institutions to sell gold just to meet margin calls.  This will force the price of gold down.  Inflation will then force it back up, at least initially.  Ben also noted that the supply of metals cannot possibly keep up with population growth and therefore cannot substitute for a fiat currency in a modern economy.  He is one of the few people watching this sector who understands history.  Others who say "there's enough gold for everyone" are clueless.

Jay Taylor's workshop on deflationary forces inside an inflationary monetary regime closed out my first day at this show.  I share Jay's disdain for CNBC's cheerleading of Keynesian cultists while government agencies worldwide churn out false economic statistics.  He cited FRED data on rising excess bank reserves (series EXCSRESNS on Excess Reserves of Depository Institutions).  I won't spoil Jay's report by repeating his citations of stats on declining consumer confidence, a lower money multiplier, lower M2 monetary velocity, and other deflationary drivers.  Read his writings yourself and check out Mike Hodges' Grandfather Economic Report for more depressing data.

The conference's first day of knowledge deserves my own special reflection.  IMHO the last few months of FOMC minutes make it clear that some Fedsters doubt QE, but the Fed isn't truly independent of executive branch policy.  The Fed will likely go along with accommodative QE if a deflationary market crash leads to a government policy response that forces hyperinflation.  The time lag between the asset crash and the hyperinflationary effects of the combined Federal Reserve / executive branch policy response matter very much.  The Fed's treatment of bank reserves also matters.  If the Fed raises reserve requirements for banks, but then charges banks to hold reserves at the Fed, banks will be immediately forced to seek income.  Banks may then immediately charge fees to their own depositors (a deflationary lever) or immediately make riskier loans ( a hyperinflationary lever, forcing up the money multiplier).  I'd like to see historical evidence for hyperinflation in the economy of the world's reserve currency.  I suspect deflation is more likely in a world reserve currency's home economy, up until the point that currency loses its world reserve status when foreigners refuse en masse to hold it.  The status of that reserve currency may very well be the tipping point between deflation and hyperinflation in the home economy.  Many things could open a path to hyperinflation in the US once the dollar loses its reserve status.  Foremost in my mind is the end of petrodollar recycling but there are other possible triggers.

The second day started off with Rick Rule's boot camp on private placements.  These PPs are typically restricted to accredited investors.  Rick considers the company's amount of SGA expenditures versus its project expenditures, its stated purpose for a capital raise, and the deal's terms.  The warrants in a PP deal are key because a portfolio of private placements with warrants minimizes the expected failure of most of the companies, much like a venture capital portfolio.  Some frequent investors do "warrant stripping" if they have huge volumes of deal flow.  Rick thinks that's lucrative with the right expertise.  He likes full warrants better than fractions and longer durations (past two years) better than short ones.  I think his praise for debt PPs is more valid in riskier juniors because the debtholders will end up owning the company in bankruptcy.  He likes the rewards of bridge/mezzanine financing that include fees, regular coupons that beat booking of accruals, and upside participation.  That upside sweetener can be in the form of warrants, a royalty that the issuer can buy back, or a note convertible to equity.  Rick warned against companies that raise insufficient capital to complete their exploration program; that sets up failure and indicates a management team that isn't serious about a project.  I disagree with Rick's stated preference for political risk over technical risk because I'm not convinced that the best deposits lie in unstable countries.

The morning keynote from Casey Research described the next big investment bubbles.  The dude displayed a Photoshop merge of Janet Yellen with Ben Bernanke, just to illustrate that Calamity Jane at the Fed will be no different from Helicopter Ben.  I have a hard time believing the keynote's thesis that central banks are suppressing the gold price.  Some of the data on gold supply is selective and the claim that central bank gold leasing constitutes "missing supply" is difficult to discover through Mosaic theory analysis.  An argument for a supply shortage makes no sense to me if the price of gold has dropped significantly from its all-time highs.  Citing numbers from the depository warehouse for the SPDR Gold Shares ETF (GLD) means little if GLD also holds futures contracts on gold.  I cannot buy the argument that JPMorgan acts as the Fed's agent for suppressing the gold price because . . . JPM sold its gold warehouse!  It makes no sense for a SIFI bank to depart a scheme that holds forth guaranteed profits unless of course such a scheme never really existed.  I think a lot of gold analysts are misreading the "eligible" line on COMEX reports of gold deliveries.  I also think analysts are misreading the CFTC rules for trading organizations and the CFTC Bank Participation Reports.

I need to take a time out just to respond to the conspiracy mongers in the gold sector.  I just can't believe all this stuff about gold price manipulation.  Physical delivery satisfies real demand.  There is no point in risking a margin call on a big futures position just to manipulate the price of gold if you still have to make good on a physical delivery.  Where is the motive, means, and opportunity for SIFIs to suppress the gold price on behalf of central banks?  Why would they suddenly sell their trading warehouses and switch to long positions if central banks still have gold leases outstanding?!  The central banks would have to cover those outstanding leases at higher prices and book huge balance sheet losses.  One of the alleged motives for banks to suppress gold is to keep interest rates down so they can keep borrowing at zero and buy treasuries for the easy carry trade.  If that's so, why suddenly switch to long gold positions if that would place banks' bond holdings at risk of paper losses?  Is the Fed lined up to buy back their Treasuries?  Come on, people.  Conspiracy theories are less compelling than supply/demand fundamentals.

Everbank gave their traditional rundown of the global markets and the implications for currencies.  The PIIGS are obviously still sovereign debt risks and the poorer countries of southern Europe want to continue to borrow at Germany's preferential interest rates indefinitely.  That's my take, anyway.  It boggles my mind that homebuyers and college students are the only real loan demand sources in the US economy right now and the suckers are still lining up.  I've blogged before about how marginal increases in debt no longer drive comparable GDP growth and Everbank has noticed the same trend.  I will lay out Everbank's stated currency valuation factors:  GDP growth, high current account balance, low government budget as % of GDP, low debt as % of GDP, high real interest rates.  Gee, it looks like the US dollar fails on all counts.  Everbank likes the Swedish krona, Chinese renminbi, Brazilian real, and Mexican peso.  I don't like any of those currencies.  I have no need to keep money at Everbank.

The panel on exploration trends featured two speakers I recognized from my first ever stint as a panelist two years ago.  The TSX Venture Exchange is the best proxy for the exploration sector.  One panelist opined that year-end tax loss selling and fund redemptions will further depress shares in the exploration sector.  Hmmm, that means I'll wait until January to buy anything I'm watching now.  The panel's conventional wisdom is that prospect generator models are candidates for longevity but I've always viewed them as black holes for invested capital.  I'd like someone to name one great producing project that came out of a generator and made it to either stand-alone viability or acquisition by a major producer.  The panel thinks survivors have lots of working capital and royalty interests.  Well, I've looked at lots of balance sheets and NI 43-101 reports this year and those two things rarely go together.  They noted that resource nationalism is rising.  That's why I like the US, Canada, Australia, and New Zealand for their Anglo-Saxon common law traditions.  My worst picks for resource nationalism risk are Venezuela and Argentina for their collectivist responses to stagflation.  I'll also throw in North Korea as the worst place to invest because they kidnap and kill investors there.  The DPRK has untapped high-grade deposits of tungsten and rare earths, if drill samples from Chinese companies have credibility.  The panel did reveal some good red flags to watch in a troubled company.  The biggest warning is flow-through funding that progressively dilutes shareholders in subsequent rounds, which indicates rising risk of the company's projects.  They also noted red flags in environmental issues and fatal accidents.

A bunch of exploration company CEOs held a panel on making the grade in an investment strategy.  They claimed that owning large districts increases the chance of a big discovery but IMHO competent geologists can reduce exploration to a focused area.  They did reveal that different jurisdictions require different cutoff grades to be economically worthwhile.  They liked Visual Capitalist and I think its infographics follow the trend in Big Data towards convenient representations.

CPM Group gave its gold market outlook.  I was grateful for this data-driven analysis as an antidote to conspiracy theories about gold.  I did learn that the premia on US Mint coins is a proxy for investor demand for gold.  The COMEX Gold Futures and Options weekly data on net fund positions indicate changes in demand for gold, as do changes in gold ETF holdings.  Many things affect gold supply.  Look at annual production and new gold mine capacity for indications of changes.  This sharp guy noted that gold and inflation are unlikely to surge while the US and other developed economies have high unemployment and excess manufacturing capacity.  I take that to mean that gold's best days are ahead, maybe, at some point.  Any Fed tapering that raises real interest rates would cause the gold price to drop.

I'll say one thing about something I heard from another self-styled gold expert at this show.  I'm tired of hearing stories about how some stock that trades for less than the cash on its balance sheet is some kind of screaming buy.  I consider that cash to be a depleting asset that is supposed to be used in a productive exploration program.  It will go to zero if it funds a drill program that doesn't work.

I liked Dudley Baker's talk on his Common Stock Warrants platform.  The site looks good and Dudley advised us to perform leverage calculations on warrants to determine their likely ROI.  He also thinks warrants are useful in combination with traditional stock options.  I'd like to see someone run a platform that makes contingent value rights (CVRs) just as transparent and easy to use in combination with other instruments.

The conference concluded with the traditional bulls and bears debate among Rick Rule, Jim Dines, Adrian Day, Al Korelin, and Jay Taylor.  The lineup changes a little each year but it's always lively.  They couldn't reach a consensus on whether the junior resource sector has bottomed but Jim sure likes the 3D printing sector.  The question of whether there's really gold at Fort Knox was in keeping with the "audit the Fed, audit Fort Knox" meme that's symbolic of a general distrust in government.  Jim thinks the gold has been audited but that Americans just don't care.  I would really like to know whether foreign intelligence services are feeding this auditing debate by seeding "information operations" elements among the libertarian fringe.  Rick asked his panelists about their most important lesson from the junior mining sector's downturn.  Well, now it gets interesting.  Jim told a bizarre story about the Clintons that made no sense.  Al wants us to stay diversified, just as I recall him saying many times over the years of this conference.  Want my most important lesson?  Here it is.  I learned that there's more to hard assets than gold bullion and gold stocks!  A basket of hard assets includes precious metals, base metals, energy, timber, REITs, and sectors like pipelines and railroads that service them all.  Jim also snapped out of his daydream about the Clintons to remark that the low attendance at this conference indicates a low for the sector's valuation.  Rick had a special zinger question just for Jim about what was interesting in the many conversations at his booth.  Jim said he noticed fear among his attendees, another market bottom anecdote.  He wandered off into his geopolitical theories but I was left reminded of Warren Buffett's advice to be greedy when others are fearful.

I noticed the low attendance too.  I've been at this conference series through all of its name changes since 2005.  The decline in attendance and exhibitors has been noticeable.  This was the first time since then that all of the exhibitors and workshops fit on the same floor of the SF Marriott Marquis and the expo floor only took up about half of the available concourse space.  Several paid exhibitors didn't even show up at their booths, namely, Mining Leaders, and the Financial Survival Network.  I know darn well how expensive those booths are because I manned one myself in 2006.  The depressed junior mining sector isn't the only thing hurting attendance.  Investor relations promoters are now able to hold webinars and virtual roadshows over social media broadcast tools.  Traveling to a trade show is hard for people who can get the same content over the Web.  I like this particular show and I will attend for as long as it exists, regardless of how many times they change their name.  I'm all about booth babes, free knowledge, and hard assets.