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Globetrotting Chris Berry, founder of House Mountain Partners, finds most retail and institutional investors sitting on the sidelines waiting to see where the energy sector is headed before jumping back into the game. Game-changing disruptive technologies or sustainable end-user agreements are what companies need to succeed and he shares some likely names in the cobalt, lithium, nickel, graphite—even uranium—spaces in this interview with The Mining Report.
The Mining Report: Chris, on your travels, what are you seeing in Europe and Asia regarding supply and demand in the commodity markets?
Chris Berry: Sentiment varies depending on location. In Hong Kong the institutional community is generally optimistic and really favored gold, nickel, and aluminum heading into 2015, with a more bearish stance on coal and iron ore. While there are serious structural headwinds facing the global economy including the threat of deflation and a slowing China, the general consensus was that we're at the bottom of the cycle.
In Germany and Switzerland, the outlook is much more somber. In Germany, the call for higher gold prices based on market manipulation was in full force as it perpetually seems to be. The failure of gold to increase in price in the wake of the end of quantitative easing in the U.S. and the almost immediate continuation on the part of the Bank of Japan has many people scratching their heads. Clearly, the lack of inflationary pressure has stunted gains in gold or gold shares.
“Commerce Resources Corp. is both an REE play and a tantalum/niobium play; both are valuable and highly strategic assets.”
Switzerland was an interesting place to be, as I was there two weeks before the referendum voting on whether or not the Swiss National Bank would be required to hold 20% of its reserves in gold. Most people I asked had no opinion or didn't think the referendum would pass, but the fact that over 75% of voters voted against it was a real surprise. That the Swiss would rather have their national bank hold fiat currency in reserve rather than gold says a great deal about how gold is viewed in the financial markets these days.
My message to the institutional groups I spoke with was simple: If all you do is turn on the TV and listen to commentators rail about the falling price of gold and oil and you think that all commodities are faring the same, you're going to miss out on a host of opportunities. Not all commodities are in trouble. The outlook for lithium, cobalt or aluminum, for example, is positive, and this is where I see a number of opportunities going forward.
TMR: What is the collective opinion on the price of oil and what roles are Russia, OPEC and the U.S. playing in the era of fracking?
CB: With the price of a barrel of oil down close to 50% this year from its highs, I think everyone is in a collective state of shock. Fracking in the U.S. has led to a glut of oil on global markets. That and soft global aggregate demand are the primary forces responsible for the collapse in the oil market. The implications are positive or negative depending on which side of the investing coin you're on.
Consumers in the U.S. will presumably benefit as low oil prices give them a giant tax cut. What they choose to do with this—pay bills or spend on goods—is another story. I filled up my car yesterday for just $38. I cannot remember the last time I did that for less than $50.
Ultimately, low oil prices could end up hurting the mining industry in the near term as cheaper energy encourages increased production into many oversupplied markets. This remains to be seen, however.
TMR: What is your prediction for the price of oil going into 2015?
CB: It's not my area of expertise but it seems that the price of oil will continue to fall and may not bottom until mid-2015. In June 2014, West Texas Intermediate oil (WTI) was $108/barrel ($108/bbl). Today it's near $56/bbl. Wells that are currently producing oil can continue to do so until they run dry, as the costs are largely sunk. We're likely looking at another six months of oil prices in the current range.
“Namibia Rare Earths Inc. is a good example of a critical metals story that slowly continues to derisk itself and impress in the process.”
Longer term, my sense is that the equilibrium price for WTI crude oil will be $70–80/bbl. That level still hurts a number of OPEC members and Russia; they need a higher oil price to balance their budgets. It would appear that OPEC is backed into a corner and will continue to suffer regardless of the final new equilibrium for oil prices.
In the U.S., we're reading a lot about how the fracking industry is exposed to high-yield debt. The Saudi Arabians know this and it's one of the main reasons they won't allow OPEC to cut production to support the price of oil. The goal is to push the marginal players in the U.S. shale industry out of business.
TMR: With such low prices, are energy investors doubling down and investing in companies while they're at their historic lows or are they waiting to see what comes next?
CB: Almost universally, in both the institutional and retail sectors, energy investors are waiting and are pursuing higher returns elsewhere. This is a classic falling knife scenario where many commodities have fallen hard consistently and nobody wants to be the first person back in the market for fear of incurring additional losses. It seems that this is a market where you find out if you're a true contrarian or not.
Instances like this strengthen my belief that deflation, rather than inflation, is the more pressing economic issue to tackle.
TMR: Let's talk about some of those other commodities. You've written a lot about the impact of increasing battery demand on commodities. What's your outlook for lithium?
