Thursday, 6 June 2024

By James Cooper Editor, Mining: Phase One and Diggers and Drillers

Twitter (X): @JCooperGeo

[6 min read]

Dear Reader,

If we break down commodity markets to their simplest form, we have supply and demand… You could liken this to the Yin and Yang of the commodity world.

Equal measures of each result in a balanced market. Displace one, and the market loses harmony. Volatility rises, and prices rise or fall. 

Neither is more important than the other; supply and demand play a vital role in a balanced commodity market.

But the key point is this… Most investors focus exclusively on DEMAND.

Demand controls the narrative in the commodity world—the yang, if you like. 

However, supply is equally important yet often overlooked.

In mining, supply is primarily dictated by geology, engineering, investment and politics. Each component can affect the overall output for a particular commodity.

Regarding the latter, imagine a commodity concentrated in a geopolitical hotspot; political instability can destabilise a market by causing mine closures.

Regarding geology or engineering, declining grades or poor mine planning can impact an operation’s output. This is worsened by a lack of investment in finding new reserves to replace depleting assets.

Recognising the important role SUPPLY plays in a balanced market can put you ahead of most investors.

Last year, I wrote extensively about the potential supply squeeze forming in the copper market based on all the factors above. 

A prolonged period of declining output at the world’s largest copper mines, lack of exploration to drive new development and geopolitical instability.

All these factors offered the perfect melt-up for higher copper prices. 

The copper squeeze

In late 2023, the copper squeeze had begun. The world’s largest copper refiners began to cut fees to compete for the limited supply of concentrate in the market.

A sign that the market was falling into deficit due to years of underinvestment in exploration, mine development, and geopolitical tensions.

So, what was the consequence?

Copper prices surged from around US$3.70 per pound late last year to over US$5.00 late last month.

Yet, as you’ve probably noticed over the last several weeks, the copper SUPPLY story has become rather mainstream.

How far could this market go?

Who knows. Given it takes upward of 15 years to put new mines into operation, the supply problem is a long-term challenge.

Don’t expect copper’s supply problem to be fixed with a brief spike above US$5 per pound… Miners will need sustained higher prices to warrant investment in new developments.  

That’s why the current copper correction should not be viewed as a major concern for longer-term investors. Resolving these supply problems will take years to correct. 

But what’s the lesson from copper’s moves in 2024?

As an investor, you should pay attention to potential supply squeezes, not just copper but any commodity.

So, which commodity could be the next big winner from a potential supply squeeze?

One that hasn’t been picked up by mainstream outlets?

The answer… OIL.

Supply problems emerge from the failure
to find new reserves

Over time, near-surface deposits deplete. That pushes geologists further into the Earth’s crust to find new deposits. 

Exploration and extraction are both becoming more difficult and expensive as mines become deeper.

It’s similar to oil and gas… As onshore and nearshore basins deplete, explorers must seek new reserves in deeper unexplored basins.

Again, this drives up exploration and development costs.

Yet, like mineral exploration over the last several years, investment has declined in oil and gas exploration. 

As you can see below, average cumulative spending has fallen from US$10 billion to just US$7 billion over the last eight years. 

So, what’s the consequence of this?

According to IHS Markit, reported oil and gas finds had recently sunk to their lowest level in over 75 years. In other words, discovery rates in the early 2020s were on par with the mid-1940s.

Just to put that in perspective…

Back in the mid-1940s, the global population was around 2.5 billion. Today, it’s 220% higher, with around 8 billion people.

With about 5.5 billion more mouths to feed, plus many more homes to heat and goods to transport, energy needs have grown exponentially.

As the graph below shows, in 1946, energy demand stood at 20,000 TWh (terawatt-hours).

By 2021, this has escalated to a staggering 160,000 TWh.

In short, the industry’s discovery rate is similar to 75 years ago, yet energy demand is around eight times higher!

That puts incredible pressure on current reserves and sits at the heart of the looming energy problem.

Rapidly declining oil fields without replacement reserves in sight.

So, why not ramp up exploration now and address the supply squeeze before current reserves deplete?

Well, even if the global economy recognised that we still live in an oil-fuelled economy, thus need to continue finding more oil… these new reserves won’t come fast enough.

It takes at least 7-10 years to bring a new oil field discovery into production.

That’s why the world’s largest oil producer is sounding the alarm on energy security… According to Saudi Aramco’s chief, global spare capacity for oil and gas supplies is now extremely tight, at around 2%.

Suffice it to say, the oil market could be precariously out of balance.

Your ticket to history’s last oil boom

Given the world remains committed to ending fossil fuel reliance, we could be at the cusp of history’s LAST oil and gas boom.

Yet, that doesn’t mean this boom will be any smaller than those from the past.

Oils’ (eventual) demise seems inevitable… But don’t expect oil to leave the global stage quietly. 

Despite efforts to transition toward renewables, we remain in an oil-fuelled economy.

Given this major global oversight and the lack of attention to developing new oil fields or exploring for new basins, crude offers a highly favourable SUPPLY dynamic.

If you missed copper’s breakout in 2024, ensure you don’t miss the potential surge in oil prices.

To make it as easy as possible, I’ve just finished putting together a new report, outlining the full opportunity.

You can access it for free here. 

Enjoy!

Regards,

James Cooper,
Editor, Mining: Phase One and Diggers and Drillers

James Cooper has been a working geologist in mines across Australia, Canada, and Africa since the early 2000s. He’s led the operations of tiny explorers through to huge producer outfits. He’s seen booms and busts firsthand and he also understands the cyclical nature of individual commodities. For example, James was right there when Barrick Gold launched an enormous $7.5 billion takeover bid for Equinox. That was the peak of the last cycle.

With his background as a geo and finance professional, he brings a unique insight and experience to Fat Tail Investment Research. He writes the broader resource-focused investing letter Diggers and Drillers and the ultra-speculative explorer-focused trading service Mining: Phase One.

By Bill Bonner Editor, Fat Tail Daily

[3 min read]

In our first visit, almost 30 years ago, Dublin was still a grim city on the Liffey. And it took three hours to drive... on little, winding roads... to get down to our office in Waterford. Eating out was not an easy matter back then; there were few good restaurants. And bars were still of the “old Ireland” vintage. 

In one, we recall standing on a bed of sawdust and talking to an Irishman, both of us holding big tankards of Guinness. In the course of the conversation, our companion got drunker and drunker. And then, he fell down... not once, but three times. 

Remarkably — and perhaps as proof of his Old Ireland pedigree — he didn’t spill a drop of his beer. 

But that charm has all been swept away by wealth and progress. Today, a modern highway system spreads out from Dublin. In just an hour and a half, you can zip along to Waterford. And the old pubs? Some are still there. Many have been turned into Italian... or Thai... or French restaurants. 

Even the Irish themselves have changed.  

‘We think of ourselves as European’, explains a neighbour.  

Like Europe, Ireland has become risk averse and law abiding. No more drinking at the pub until late at night. Now, dads share childcare... and put on helmets before riding a bicycle.  

Still, we ran into a little of the Old Ireland at home in Youghal over the weekend. 

The old Ireland

Colm is a man in his 40s. The weather was cool and breezy, but he was dressed only in jeans and a T-shirt, shod in a heavy pair of rubber boots. He came over with two chainsaws and offered to cut down some trees in exchange for the firewood. He had a youngish face, a bit like Michael J. Fox... with straight dark hair, grey on the edges, that bristled out like a toilet brush.  

After a few words of introduction, Colm lit a cigarette and bent to put gasoline in his chainsaws. Your editor stepped back. But Colm knew what he was doing. 

After cutting for a while, he came over to talk. 

‘I was down on the river yesterday’, he said, the cigarette still between his teeth. ‘When I’m not milking cows or cutting trees, I like to fish. I use the weir right down there.’ 

Colm pointed down to a salmon weir on the river. It is a simple thing... a stockade made of ash sticks driven into the mud. The salmon, swimming upriver, get trapped in it. 

‘I thought you weren’t allowed to fish in the river. The Duke of Devonshire has the fishing rights... hasn’t he had them since the 17th century... something like that?’ 

The 12th Duke of Devonshire owns the castle at nearby Lismore — where we went on Saturday night. It was the Blackwater Opera Festival, the highlight of the social season in the area. You dress up. You explore the extensive gardens, a glass of champagne in hand. Then you sit for a meal under a big tent and say hello to your friends. 

Finally, a bell clangs to tell you it’s time for the opera to begin.  

Julius Caesar, by Handel, was on stage. And it was dreadful. Painfully boring. The arias were unbelievably repetitive. The music was uninspired, even dull. And the characters dressed and acted in ways that made little sense. Caesar was played by a woman. What message were they trying to convey? It wasn’t clear. Tolomeo Cleopatra’s scheming brother (who had Pompey killed and sent the head as a gift to Caesar) was portrayed as a foolish, fat, gay man with a taste for gaudy outfits. Only Cleopatra was plausible.  

Our mind wandered. How many people have died watching this opera, we wondered? It’s been around for hundreds of years. Yet, the show is so tedious, it must result in a substantial death toll. And for each one whose heart stopped, there must have been hundreds of others whose will to live was stretched to the breaking point. 

As a point of American interest, Kathleen Kennedy, sister of JFK, once figured in the history of the castle. Despite the objections of her mother, Rose, she married a protestant, William Cavendish, (aka Billy Hartington) who was in line to become the 10th Duke of Devonshire. Unfortunately, he was killed in WWII only four months after their marriage. The title, and the fishing rights in the Blackwater River, went to his brother. 

After a few years of widowhood, Kathleen, known as “Kick Kennedy,” took up with another British aristocrat, the 8th Earl Fitzwilliam. This time her mother threatened to disown her; her new squeeze was divorced. Kick flew to France, in 1948, to plead her case with her father and died in a plane crash.  

‘Aren’t you afraid of getting caught?’ we asked Colm. 

‘The Duke doesn’t have to know I’m out there. And I don’t take many fish; he won’t miss them. 

‘And I did get caught. Once. I got home and there were two gardai (policemen) waiting for me. 

‘But they didn’t know anything about the fishing rights. I told them I have a special license that gave me the right to fish out in the ocean or in the river. It was not exactly true... but who really wants to look out for the Duke of Devonshire’s fish? 

‘I invited them in. We had a drink. Then, they left. That’s how you settle problems in Ireland. 

(The Hutchs and the Kinahans should have thought of that.) 

‘But now, with your new neighbor [billionaire James Dyson bought the property next door], everything has changed. He has a security team. They drive around and keep everybody out. I can still come up the river, but I can’t come the way I used to... from the river bank. 

‘And over there (Colm pointed to the old abbey that has been in ruins since the ninth century), he even tried to prevent people from going to look at it. But that is sacred here in Ireland. No Englishman is going to come in here now and keep us from going there. Even if it is on his land. 

‘They had closed the gates and told everyone they couldn’t come in. But then the security team got a visit from some old IRA guys. I guess they made it clear that if Dyson didn’t want his new house burned down, he would open up the gates. They were opened the next day.’ 

Stay tuned. 

Regards,

Bill Bonner,
For Fat Tail Daily