Mining Markets


Danielle Park takes the market’s temperature

Danielle Park has been addressing resource investors at conferences since 2007, but her message has never taken on the bullish tone that's often saturated such events.

Danielle Park has been addressing resource investors at conferences since 2007, but her message has never taken on the bullish tone that’s often saturated such events.


Even in those halcyon days before the Great Recession, the portfolio manager and president of Venable Park Investment Counsel and author of the book Juggling Dynamite, was warning about the risks of investing in junior mining stocks.


Park, who manages the money of high net worth clients, says that mining investors need to be aware of the larger cycles in the market to get a feel for the overall investing landscape.


“I always say if it’s Canada in the winter and it’s February, if you know that, you’ll know how to dress when you go outside,” Park says. “But if you think it’s July, you’re going to be taken unawares and you’ll probably he hurt by that.”


The current investing climate consists of a commodities supercycle that’s taking place within a secular bear market for equities.


The secular bear in equities has been in place since the tech bubble burst in 2000, sending capital away from paper assets and towards commodities or hard assets.


After the frenzy, Park says everyone suddenly realized that commodities, a sector of “nuts and bolts” and the “building blocks of society” had been underinvested in since the last bull market in commodities from 1966-1982.


With China’s recent slowdown, and economic troubles continuing globally, Park says investors have to revise their expectations.


“Global demand that had peaked at GDP growth of about 5% in 2008 turned to – it might be 2% or 3% over the next couple of years. So that’s a hell of a downturn.”


Given that slowdown in demand, Park suggests that the commodities sector is no longer underinvested in and that a lot of new supply has come onstream.


“Now that demand is not robust, it will take some time to work that down and that’s why I believe that the cycle peaked out.”

While other commodity market watchers believe that the current difficult markets reflect a pause the commodities supercyle, Park believes that it’s over and that supply is higher than demand for some commodities.


“I’m not saying that there’s no demand for commodities and I’m not saying that it won’t come again where we get to a low stockpile, when things are drawn down, but I think it’s going to take several years before that happens.”


That means investors should only be holding companies that are well capitalized and have properties that can work at lower commodity prices, she notes.


Whereas the previous commodities bull of ’66-’82 had been fed by inflation and the view of commodities as hard assets or a store of value, the current boom has been fed by credit, Park says.


Asset prices have been inflated because of rock-bottom interest rates, and capital that came flooding into the commodities sector (until last year at least) has attracted solid operators and poorly managed companies alike. Those latter companies will fail, and Park foresees a lot more consolidation in the sector.


“Probably something like 70-80% of the companies that were in the hyper growth phase that came onstream, will no longer be there within the next couple of years,” Park predicts. “That means that the mature players, the ones that are well funded, the ones that have built up their coffers and know how to get through a down cycle will still survive, will inherit infrastructure from other failing companies at cheap prices and then they’ll be well positioned for the next boom phase.”


Secular bears tend to last 15-20 years, Park notes, so we are more than halfway through the current cycle.


It is possible, however, that endless quantitative easing by the U.S. federal reserve bank and other central banks could extend the cycle.


One of the signs of the end of the current bear market will be when price-to-earnings ratios dip to 10 or lower. The Shiller P/E is currently at around 21, Park says.


Valuations could be in for a decline imminently – Park believes we’ve already tipped into another global recession and that confirmation will come in the next few months that the U.S. is in recession.


That could mean a 20-30% drop for equities, and a buying opportunity for investors.


“I think the upside story here is that for people who can anticipate these cycles, they can become an incredibly valuable tool,” Park says.


“So for the players that are present today in the space, those that are thinly capitalized or who have business models that require a breakeven price at these levels or higher, should be avoided in my view.”



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