The Metals Investor Forum will take place in Vancouver at the Rosewood Hotel on Friday May 26 and Saturday May 27. Participation is free to the public but one must register online ahead of time. My session is on Saturday in the afternoon at 1:50 pm. My topic will be "Two Global Crises: what they mean for resource juniors". I will play on the theme Yellow, Red and White Gold reflecting the three metals I believe will be most important for the junior resource sector over the next couple years. I will also refer to Iridescent Gold as a catchall for metals whose supply will be disrupted if the geopolitical conflict between China and the United States turns hot.
Yellow gold, of course, is the regular gold whose price trend seems to have a permanent grip on the mood of the audience for resource juniors. Gold this past month has been struggling to establish $2,000 as its new base rather than a ceiling which it stopped short of in 2011, and briefly broke through in 2020 during the covid pandemic and again in 2022 when Russia invaded Ukraine. This year, despite interest rates having been jacked to the highest level since 2007, gold has clawed its way above $2,000. The current reason seems to be anxiety about what will happen if the US debt ceiling is not lifted and the United States defaults on its obligation to pay its debts. When the Republican Party first launched a debt ceiling extortion attack in 2011 the capitulation by the Obama administration was followed by an 8 year bear market for gold that did not turn around until 2020 when the world was blindsided by the covid pandemic which prompted extraordinary measures that cranked up the US debt and bestowed on Trump the honor of seeing the national debt increase during his term by a greater amount than accomplished by any predecessor. Biden is on track to becoming the new debt increase champion by the end of 2024 and this is supposedly what the Republican Party is upset about now.
What is different today from a decade ago is the geopolitical context. A decade ago China was still a fast growing economy with quite a ways to go before catching up with the United States. Although America's financial sector engineered the global financial crisis, the United States was still resting on its laurels as the leader of a globalized economy. But a lot has changed in the past decade, starting with the emergence of Xi Jinping as China's new leader. At the time the hope of the "liberal" world order was that growing prosperity would cause China's hybrid communist-capitalist system to become westernized and the country to become a huge market for western corporations. Xi, however, decided to re-establish China as a Communist autocracy with ever tighter control over corporate activity with a bias toward domestic entities. At the same time he used technology to impose hyper-surveillance on the Chinese people so that Beijing could make sure nothing could be heard or spoken that was at odds with Beijing's desired messaging. He also launched the Belt and Road Initiative as a way to reach into emerging countries that could supply China with the raw materials it cannot produce domestically.
Along the way Vladimir Putin, whose Russia was a fading economic power relative to the United States and China because he allowed crony capitalism parasitic on Russia's resource base to be the basis of its economy, decided it was time to re-establish the Soviet Union, starting with Ukraine, first with Crimea in 2014 and then with a full-blown invasion of Ukraine in 2022. China decided to align itself with Russia because it had a similar goal of annexing Taiwan whose existence is a democratic rebuke of China's autocracy. This accelerated the geopolitical power conflict between China and the United States which has been brewing for the past decade.
The Biden administration has packaged the conflict as one between autocracy and democracy, but it is not as simple as the Cold War conflict between Communism and capitalism. Alexander Stubb, former prime minister of Finland, recently provided a much better description of the conflict in a Financial Times opinion piece on May 10. (The west must learn from its mistakes if it wants to shape the new world order. He describes the conflict as a triangle involving the global west, which includes the United States, Europe and their allies, the global east which includes China, Russia, Iran and about 20 other outright autocracies, and the global south, which includes the non-autocratic members of the so-called BRICS nations, India, Brazil, and South Africa, plus most countries in Latin America, Africa and Asia.
This group of 125 countries that make up the global south has refused to condemn Russia's invasion of Ukraine in a UN resolution, and has been reluctant to participate in the sanctions imposed by the United States on Russia. The global south consists of countries which Freedom House would classify as "partly free" based on its civil liberties and political rights scoring system, whereas the global east would be "not free" while the global west is "free". The global south's primary goal is a better economic future. It is on the sidelines watching the struggle between the competing systems of the United States and China play out.
Unlike the Cold War where the Soviet Union had the goal of establishing global Communism run by Russians, China has no such agenda for the countries it wants as part of its trading network. Countries in the global south can shift to left or right wing autocracies, China would not care so long as it can secure some degree of economic leverage over the prevailing regime. During the Cold War the United States aligned itself with right wing autocracies whose leadership was happy for support against left wing opposition. Now that Russia is a right wing autocracy there is no distinction between left or right wing autocracy within the global east. It is really a struggle between China and the United States for domination of the global economy, and the global south's primary question is, how will we benefit?
Since the US dollar is the primary exchange medium for global trade and also provides price discovery, the underlying desire within the global west and global south nations is to keep using the US dollar for trade, both to price the exchange of goods and services and to park the proceeds of a consummated transaction. The very fact that the losers of a democratic election can use a meaningless concept like a debt ceiling to threaten a US default unless the winners to the bidding of the losers has already harmed the credibility of the United States. Should a default actually happen, it will stigmitize the United States as an unreliable foundation of the global dollar system. Because no other currency is as ubiquitous as the dollar, none is an ideal immediate replacement. A debt ceiling default would push the global south into a closer economic embrace with China. And even if a deal is struck, it only punts the extortion problem down the road. Gold as a fungible asset class stands to benefit as a bridge when the dollar dominated global transaction system begins to fragment. My presentation will outline how the various paths of this geopolitical conflict can allow $2,000 to become the new base for gold from which it can launch real price gains as this new world order sorts itself out. Such a development underpinned by a general understanding of the irreversible drive of a real price uptrend will create a bull market for gold exploration and development juniors. The most likely path, namely a world partitioned into separate economic zones defined by the global west and global east, with members of the global south choosing whatever zone serves their interests best, will also create a bull market for juniors chasing Iridescent Gold, namely metals such as rare earths whose supply is concentrated in the countries of the global east.
The other part of my talk will be mostly about red gold (copper) and white gold (lithium), both of which are key metals for energy transition goals. Global warming and the resulting climate change is the other global crisis for which a solution is desired by most nations except Russia whose vast land mass overlapping the Arctic stands to benefit from global warming caused by greenhouse gas emissions. It is entirely possible for the global economy to split into two isolated zones headed by China and the United States with limited trade between them while all nations remain committed to achieving the energy transition. Copper demand is projected to increase 50% by 2030 to facilitate net zero emission related goals, while the IEA projects a 500%-600% demand increase for lithium. The latter can only be accomplished if lithium carbonate establishes a floor price around $10/lb. This means that by 2030 yellow, red and white gold will have annual supply markets worth $100-$300 billion. There is insufficient copper in the development pipeline to meet this 2030 NZE goal so for it to happen the real price of copper will need to rise so that lower grade deposits are dragged into the money. The supply of copper is globally diversified, so the higher real price will promote exploration and development around the world, though many of these regions will be off limits to resource juniors because many of their countries already are global east autocracies and many of the global south are drifting into autocracy, left wing style in Latin American and right wing style in Africa and parts of Asia beyond China's influence. Members of the global west, especially if they remain interested in ESG criteria, will look for new copper supply from secure jurisdictions such as Canada and Australia where open-pittable grade tends to be lower than in other parts of the world.
Lithium, which just over two decades ago in 2005 was a tiny $200 million annual market, was worth $20-$40 billion in 2022 depending on what one uses as an average lithium price. A five-fold supply expansion by 2030 would make lithium a $100-$200 billion market, putting it in a league with yellow and red gold beyond nickel and zinc. Half of that future supply will come from Australian pegmatites and brines in China and the Lithium Triangle of South America. The other half will come from Archean cratons in Canada, Brazil, Africa and Europe. There is a vast abundance of outcropping pegmatites documented as a by-product of precious and base metals exploration. The obvious ones visible from Google Earth were grabbed a long time ago; the smaller outcrops whose sub-surface extent and lithium content is unknown are the target of Lithium Mania 2.0. Lithium enriched pegmatite exploration will unfold as the greatest exploration boom ever and it will be dominated by resource juniors.
My past two MIF presentations in Vancouver and Toronto focused on the importance of lithium for the energy transition and why Lithium Mania 2.0, the hunt for pegmatite deposits beyond Australia in secure jurisdictions like Canada, will dominate resource junior speculation over the next couple years. I have only two companies in my May MIF session. The first is West Vault Mining Inc which is a gold optionality play I adopted as a Good Spec Value rated KRO Favorite in Tracker April 13, 2023 based on its Hasbrouck project in Nevada. The second is Beyond Lithium Inc which has acquired an extensive portfolio of known pegmatite showings in Ontario from a prospector group which in early 2022 assembled the claims groups using an archival research approach resembling that deployed by Brunswick Exploration Ltd last year. I did invite a copper junior to which I recently assigned a Bottom-Fish Spec Value rating but the company decided not to be part of my session, so red gold is not represented in my session. |
