In 2007, she claimed the current commodities super-cycle would last another 20 years. But given the economic implosion since that time, could it still be true? Absolutely, says Carmel Daniele, founder, CEO and CIO of CD Capital. The crisis that occurred last year after Lehman's collapse just interrupted the cycle, she explains, adding that it is actually going to seal the next stage of the super-cycle. . .it will make it stronger and last even longer. In this exclusive interview with The Energy Report, Carmel forecasts significant supply shortages resulting from both the current lack of money flowing into exploration and planned infrastructure spend by emerging countries'. She also shares which companies she's investing in and why she believes long-term investors are very lucky to experience this fantastic crisis.
The Energy Report: Carmel, in 2006 you started your fund, the CD Private Equity Natural Resources Fund, specifically to take advantage of the commodity super-cycle. In 2007, you stated you thought this super-cycle could last at least another 20 years. Since 2007, several key commodities are trading at substantially higher levels - even with the market adjustment of 2008. Have the market fluctuations since 2007 affirmed or challenged your view that this commodity super-cycle has another two decades to run?
Carmel Daniele: Absolutely affirmed it! The crisis that occurred last year after Lehman's collapse just interrupted the cycle, and I believe the cycle is still alive and well. And I also believe that what's happening with this crisis is actually going to seal the next stage of the super-cycle, and it will make it stronger and last even longer.
If you look at history, on average, the past cycles have lasted an average of about 20 or 30 years. In the 1880s, the U.S. industrialization super-cycle lasted 40 years, and that involved the industrialization and urbanization of only 100 million people. In the 1960s, after World War II the Japanese industrialization super-cycle lasted 20 years - and that involved 30 million people. And the one we have now with China and India, which is only nine years in, involves the urbanization and industrialization of 3 billion people. So, I wouldn't be surprised if it lasted longer than 20 years.
But historically, these super-cycles have a lot of violent swings up and down, but the trend is up. So, you have to be a long-term investor in order to be able to survive the dips. They also provide a lot of opportunities when there are dips.
TER: In the industrializations you pointed out in the U.S. and Japan, and now China/India, are all commodities going to rise universally or will some rise before others?
CD: No, they don't always rise at the same time. It all depends on what is driving it at the time; for example, it may be energy and coal demand for infrastructure spending. It all depends on the demand and supply balance of the particular commodity; and they go through different cycles. So, they won't all happen at the same time. It just depends on which country is demanding what and where the supply is coming from. Also I think what you will find over time is some countries will build barriers around a strategic resource, and we're starting to see that already, where some countries are starting to put duties on exports so they can consume the raw materials themselves and secure their own supply.
TER: There's been a lot of press related to China, not so much about barriers, but the fact that they're starting to stockpile base metals and raw commodities. What's your feeling in terms of China and the influence they will have with potential barriers and duties on commodities, and what will that mean to the commodity prices?
CD: That's a very interesting question. Basically, they have a list of strategic resources and it's actually illegal for foreigners to own certain metals. You've got to actually watch and see what China is doing rather than listening to what they're saying. What they've been doing is taking advantage of the low copper prices and stockpiling. Iron ore is one that is really interesting when it comes to China, because they actually import almost all of the iron ore that they need. They don't have very high-grade iron ore in China and they've been trying to control the price as the world's largest importer at 60%.
The government of China sees iron ore as a very much-needed resource for their infrastructure that they're going to be building. I think they're going to be spending over half a billion U.S. dollars on roads, railways and power. They've been trying to take control of the pricing, through the China Iron Ore and Steel Association, as they can't do that with 100 steel mills all negotiating their own price. So, they've threatened to reduce the number of import licenses of iron ore to under 10 so the government can get better control over the pricing. All this has collapsed the annual negotiations over iron ore pricing.
The world has got limited resources; you've got all these emerging countries growing at a phenomenal rate. You've got this population explosion, and they're all waking up to the fact that maybe they're not going to have enough resources to continue building out their empires.
TER: As the demand from India, China, and other developing countries increases, what investment opportunities do you see?
CD: There are two drivers. First, the population explosion - the world's growing by more than 17 million people per year. In 2008, the world population was 6.5 billion with 3 billion in cities; by 2030, there will be over 8 billion people on the earth, and 5 billion will be in cities. So, there will be an extra 2 billion people living in cities, needing things like housing, cars, and of course to be fed. Because of that, I like potash and phosphate, which goes into fertilizer, which is used for agriculture to feed the growing population.
The other big driver is all the emerging countries' infrastructure spending. In the next five years, Asia, excluding Japan, will spend over $2.5 trillion in infrastructure and that's going to need a phenomenal amount of iron ore and coal.
TER: Do you see the possibility that the limitation of these natural resources will limit the ability for these countries to expand?
CD: Yes, that is why China is strategically building up its resources; it's very shrewd. I think that China is positioning itself perfectly; it's the iron ore and a few other minerals that they're actively looking for. Yes, I think it could probably slow down if they don't have the metals they need. Or they could start using substitutes.
TER: But in the situation like lithium or copper, there really aren't any substitutes; so could that limit the expansion we're going to see here in the next five years?
CD: Given that there's no money flowing for the exploration for these metals, it has a double whammy effect. Yes, I'd say in the next five years, probably, you'll start seeing a chronic shortage of some of these metals, if there's no substitute. But really, you can't go on a plane with a laptop and have fuel in your computer so there are few viable substitutes for lithium. And lithium is related to electric cars, as well. The people in China are going to start buying more and more cars, because there are tax subsidies in China for people to buy cars and apparently only 5 out of 100 people in China own a car today. Imagine when they get to the U.S. ratio of 70 out of 100 how much metal those new cars will consume.
TER: So, with these shortages, how are you positioning your Fund to take advantage of those investment opportunities?
CD: Well, basically, what I'm trying to do is invest in anything that these emerging countries need to continue their industrial revolution, and remember, they are the ones with the deep pockets. So, what I look for is investing in companies that have a world-class resource that is attractive to the emerging markets either through an off-take or through actually buying it outright.
And the interesting thing is this crisis is different than other crises we've seen because the emerging markets are the ones with excess foreign exchange reserves. China has $2 trillion U.S. dollars in foreign exchange reserves. India's got a quarter of a trillion. Russia's got half a trillion. So, they've got the deep pockets. And they're actively looking to convert their U.S. dollars into hard assets. And it's not just these three emerging countries that I've mentioned that have surplus cash; there's Korea and Japan, as well.
TER: What are some of the investment plays that you're doing right now with the Fund?
CD: I invest predominantly in private companies because I am trying to look for tomorrow's stories today at low prices. One interesting private one is a high-grade iron ore company with 4.5 billion tons in Brazil; it's the third largest in Brazil. It's the lowest quartile of producers, and it's the best positioned to consolidate iron ore producers in Brazil. China is also now increasing its imports of iron ore from Brazil and has reduced its imports slightly from Australia.
Other private companies are coal in Canada, and coal in Indonesia. As I mentioned, India is hungry for thermal coal, especially from Indonesia because it lowers transport costs and light sulfur coal suitable for their existing and new coal-fired power stations. So, if you're bullish on iron ore, you've got to be bullish on coal as well. And Canada's got lots of untapped resources and high-grade met coal and a long market history in the Asian steel industry. There's a lot of infrastructure already in place there to deliver to export markets.
Another one that I am looking at is potash in Brazil. It's amazing, but Brazil imports 90% of its potash needs, and it's got a growing agricultural market. So that's only just growing. I am just amazed that Brazil got itself into this position.
TER: You're mentioning a lot of private companies. How can our readers who are individual investors take advantage of some of these tomorrow stories today?
CD: The best way to take advantage of these private companies is to invest in a Fund like the CD Private Equity Natural Resources Fund that invests predominantly in privates.
However, a public company that I quite like is Americas Petrogas Inc. (TSX.V:BOE). It's got oil and gas in Argentina but not many people know that it's got a hidden gem, a potash deposit in Peru. Research Capital has valued their potash deposit at over $2 Canadian per share, but the price of both the potash and the oil and gas in Argentina is roughly 28 cents a share and they're looking at spinning out the potash in Peru out at some stage.
Another one I like is Greenland Minerals Ltd. (ASX:GGG); it has a very large rare earth deposit in Greenland. It's the largest outside of China; potentially it could be the largest in the world because there is still potential upside in their resource. The other thing - and not many people know this - is that they have over 200 million pounds of uranium as a by-product.
CD: Yes, and this company could be a threat to the monopoly that China holds over supply, and this could help attract interest from Japanese and North Korean groups to secure their own supply outside of China.
TER: Another thing you mentioned earlier, when you were talking about base metals, is lithium and the need for lithium ion batteries. Are you looking at any lithium companies?
CD: Yes, we're watching Western Lithium Corp. (TSX.V:WLC) and looking at Latin American Minerals Inc. (TSX.V:LAT), which is going to be spinning out a Latin American lithium project called Lithium Americas on the TSX-V.
TER: Are there any other companies that you can share with us at this time?
CD: Yes, there's Bannerman Resources Ltd. (TSX:BAN) (ASX:BMN), with uranium properties in Namibia. The reason I like it is because it's really close to Extract Resources Ltd. (TSX:EXT) (ASX:EXT), and when you compare the valuations of those two, you realize how undervalued Bannerman is. And the reason that Extract is valued a lot more than Bannerman is because Rio Tinto is interested in it.
TER: Yes. Is there a possibility that Rio Tinto would also be interested in Bannerman?
CD: I wouldn't be surprised. Yes, if they want to consolidate the region, but to date nothing's been announced.
TER: And is Bannerman currently producing or exploring?
CD: Not producing yet but it's the next significant large-scale uranium project due on line. It is targeting annual production of around 5 to 7 million pounds of uranium by 2011. And it's in a country where they're used to uranium mining; it's got low-cost production.
But if you want something that's producing, I like Continental Coal Ltd. (ASX:CCC) with coal operations in South Africa. They just recently raised capital to acquire and commence production by next quarter on two of its projects. The company is targeting production of around 100,000 tons per month from the redevelopment of these brownfield open-cast coal mines in South Africa. They recently bought another 100-million ton project. They've got the ability to ramp up production from 1.5Mtpa to 3Mtpa; and effectively double production in two years.
TER: Do you have any specific companies you're looking at for platinum or palladium?
CD: There's one that's called Nkwe Platinum Ltd. (ASX:NKP). They have a portfolio of platinum deposits located in one of the largest and richest platinum regions in the world. They expect upgrades to their already-large resources, as well as the completion of the feasibility study by late this year.
TER: Carmel, any last thoughts you would like to give to our readers?
CD: I think we are very lucky to be experiencing what's happening with the whole commodities super-cycle. The stars are all aligned, and it's just very exciting. It's going to last a very long time, and this is something you see only once in every couple of generations. What we're witnessing now is something that will be written up in history books some day, with the emergence of China as a super-power and India close behind. And I think that this crisis, though some people see it as a negative, is fantastic because basically there are so many opportunities around that you could buy at distressed prices, and you can throw valuations out the window. For a long-term investor, if you buy now, you can make great fortunes when the super-cycle comes back again, and it will come back, longer and stronger.
DISCLOSURE: Carmel Daniele
I personally and/or my family own the following companies mentioned in this interview: None
I personally and/or my family am paid by the following companies mentioned in this interview: None
Carmel Daniele is the founder of CD Capital (see a chart of her Fund's Performance) and CIO of the CD Private Equity Natural Resources Fund. The Fund's investment objective is to achieve capital growth through pre-IPO and pre-trade sale companies in the natural resources sector, targeting opportunities that deliver substantial returns on exit.
Carmel was previously focused on selecting and negotiating natural resource investments for the Special Situations Fund at RAB Capital. Prior to this she was a Group Executive in Corporate Advisory at Newmont Mining, negotiating and structuring mergers and acquisitions around the world for the Newmont Capital group which included the US$24 billion three-way merger between Franco-Nevada, Newmont and Normandy to create the largest gold company in the world.
CD Capital was also the winner of the prestigious Fund Manager of the Year Award by Mines & Money.
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