Adrian Day is a Maryland asset manager whose INVESTING IN RESOURCES is just out. In the book, he covers gold, silver, platinum, nickel, copper, uranium, rare earths, energy, natural gas, water and geothermal.
Nice timing.
Mr. Day’s 341-page book (John Wiley & Sons) offers specific tips for profiting from the boom in metals and other resources. As his friends and colleagues will tell you, Adrian is patient, often sticking with his tried-and-trues for years, even decades. He has been, for example, a fan of Almaden Minerals (TSX: T.AMM, Stock Forum), Virginia Mines (TSX: T.VGQ, Stock Forum) and Altius Minerals (TSX: T.ALS, Stock Forum) for much of the 12 or so years I have known him.
British-born and educated, Mr. Day as an asset manager relies on a network of tried-and-trues: brokers, writers, operators, geologists, execs, coin dealers. These include Marc Faber, Rick Rule, Van Simmons, Doug Casey, Frank Holmes, Ben Johnson and Brent Cook.
He is not afraid to dig. Adrian cites banker Rick Rule’s Ram Power (TSX: T.RPG, Stock Forum), whose shares – like many geothermal developers – are near an all-time low. Geothermal developers almost always need capital to assemble their properties … but once they start producing power, get steaming as it were … they have the ability to become cash-flow geysers.
Mr. Day’s enthusiasm is rooted in demand and supply. “The central thesis is that we are on the brink of explosion in demand (primarily from China) yet we are not finding major new deposits sufficient to meet that demand,” he tells me. “We’ve all seen charts on China, the per-capita consumption of oil or cars per 1,000 population. Yet in researching the book, frankly, I was awed by the implications … social as well as financial. The opportunities are immense.”
I asked Adrian a few questions this week … my follow-up queries from the last time I saw him in Washington, D.C.
Have we already seen the best of this commodities cycle? “It seems to me that the sheer enormity of the potential is not quite grasped. Sometimes with enormous trends or developments, little human brains take a while to catch on and lag the importance (e-mail for example; who, 15 years ago, would have thought it?)”
China and resources – has not the China view been beaten to death? “The key is per-capita demand. Copper: China below 4 kg per person per year; Japan, Germany and other industrialized countries, 12-14. Oil: China, 2.7 bbl per person (last figure I saw); industrialized countries from Korea to Europe, around 15 bbl per person.”
What number shall we use? “Half the industrialized norm of 7 ½ bbl? Even at one-third the industrialized norm, that’s a doubling of China’s per capita demand. And remember, we are talking about per-capita consumption … there are an awful lot of capitas in China. This exercise can be repeated across most commodities.”
So I ask again, have we seen the best of the cycle? “Well, compare China’s demand trajectory with Korea’s, Japan’s and other industrializing nations. They follow the same pattern: a long (decade or more) and slow increase from a very low base (2 bbl per oil in Japan in 1950, around ¾ bbl in 1960 Korea, less than 1/2 bbl per person in China in 1990. That slow increase (reflecting development of the country and economic growth) starts to accelerate and then reaches a take-off point, normally when per capita income is between $2,500 and $4,000 per person. That’s where China is today. Then follow several years, 5-10 years for other post-war examples, of accelerated increase in demand before a plateau in demand as the economy matures. Again, mature developed economies have similar patterns of consumption (oil around 15 bbl per person, copper around 13 kg per capita and so on).”
So … enormous potential? “Perhaps China’s economic development will come to an end. Perhaps. If not, the demand for resources is going to increase, and at an accelerating pace. (And behind China, stands India at a much earlier stage, but in that slow increase period.) I am not here dismissing a slow-down in China’s economy; the U.S. saw significant slow-downs during its period of industrialization I am suggesting that, unless China’s development comes to a halt, the demand for resources will accelerate the next 5-10 years and there is nothing on the horizon now to suggest that that demand can be met without higher prices.”
Are investors missing something here – in general? “It’s more that they don’t quite grasp the enormity of the story. So rather than look for the weird and wonderful that hasn’t moved yet, I would suggest sticking with high-quality companies in gold, copper, other base metals, etc., that have solid balance sheets and either have the resources in the ground or have the possibility of discovering them.”
China and rare earth elements? Hype? “I am not closely involved in the rare earths story. China’s overwhelming dominance of source plus the difficulty of bringing some known deposits to economic production make it a little different from other basic resources. Also, the rise in the stock (equity) prices, anything with rare earths in its name, reminds me of the uranium mania of a few years ago.”
This is the book link on Amazon. INVESTING IN RESOURCES: How to Profit from the Outsized Potential & Avoid the Risks.
For more, please view Thom Calandra’s Stockhouse articles.
THE NOVEL: It’s complete and for your reading pleasure: PABLO BY NUMBERS. It’s about the world of natural resources.
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THOM CALANDRA of Ticker Trax helps his audience find value in a quagmire of investment choices. Thom was founding editor of CBS MarketWatch. He was the voice of Thom Calandra's StockWatch and The Calandra Report. Thom has been covering life-sciences and natural resources since 1988.
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