Remember, Escondida Was Once A High Risk Project: Markets Are More Efficient Than Many Commentators Realise
By Rob Davies
minesite.com
It is amusing that newspaper columnists are convinced that market prices are wrong. This week several pundits have taken the view that mining shares are too expensive and are due for a fall. And of course they all think the gold price is too high.
But for anyone who thinks metal prices are too high the simple riposte is to invite them to go out and find some more metals for themselves, and then to arrange finance and get permission to build a mine and then to actually dig the stuff up, refine and sell it. It’s not something that can be done overnight, even in a developed country - or maybe especially in a developed country.
Then again it is not particularly easy in undeveloped countries either, as the stalemate this week over Tenke Fungurume in the Democratic Republic of Congo (DRC) shows. Tenke Fugurume is one of the world’s largest undeveloped copper deposits. If it was fully in production today its output would transform the supply and demand balance for copper. However, it is located in the DRC where the rule of law is still getting re-established after the kleptocracy of Mobutu.
The current government thinking there is that owners Freeport McMoran and Lundin were given the licence on terms that were too easy, although given that the spend on the project has already run into the billions, and that the political risk on the project is just as intense as ever, the word “easy” may stick in the craws of some Freeport investors,
In Mongolia, though, there is a different big project story. Rio Tinto and Ivanhoe Mines have reached agreement with the government to develop the Oyu Tolgoi deposit, one of the world’s other large known but unexploited copper deposits. Obviously the Western partners in this project are comfortable with the level of return they expect to get for the risks involved. It is unlikely, though, that the project would have got the green light when copper was trading at less than US$1.00 a pound, a price which is still in the not-too-distant past.
What many observers outside the industry totally fail to comprehend is the level of risk, complexity, time and sheer expense in finding a new large metal deposit and bringing it to production. That commitment can only be made if the rewards are high enough and that means metal prices will rise until they are.
Of course demand is needed to pull metal prices up. Implicit in many of the negative comments about metal prices and the valuations of mining shares is the expectation that demand is about to collapse. That seems an odd view as the Western world struggles with it worst recession for half a century. Can car making or construction get any more depressed?
It is the strength of Chinese demand, though, that worries these doomsters. And, to be fair, there are some grounds for concern, especially on the issue of the stockpiles the Chinese have amassed. If these were used to satisfy internal demand then the impact on world metal prices would be severe, but only for a while. Once normal consumption had depleted the inventories fresh material would be needed.
So the doomsters might be right. Maybe metal prices have risen too far too fast, but anchoring valuations to where they were at the beginning of the year is missing the point. For a real perspective, what’s needed is a look back ten or twenty years to when today’s mines were commissioned. It was low metal prices then that prevented more being built. Remember, Escondida was once a high risk project. |
