It's basically Cookie's old "intro to the Moss Isley Exchange", just updated for this year. Still, if you haven't been following him for the past few years, it's worth a read.
In fact, since Cookie's article sets out an investment thesis that I'm having a hard time poking holes in, and which Wall Street still seems to have no clue about, I'm going to reprint that whole section here:
As we all know, for most speculators and investors the past few years in the mining and exploration sector have been disastrous. However, there are a number of fundamental trends that have been set in motion over the past few years that follow upon the previous decade long bull market that point to an improving investment climate for the junior miners. We will deal with that below and lay out some useful rules of thumb for interested investors; but first, let’s briefly consider where we are today.
With inflation expectations low and metal prices apparently contained, I don’t see a pending catalyst to pop metal prices or entice the crowd into our antiquated sector. Further, given the mining sector’s very poor returns to investors who bought into the commodity boom and currency debasement story, it is difficult to see them stepping back in again. Where the next big slug of new money for mining and exploration will come from is not apparent.
You don't think of Cookie as a market supply/demand analyst, but he's the guy who predicted the top in the miners simply by looking at supply & demand for their paper, so I find the underlined to be an important point.
Certainly I don't see anyone with an image to maintain ever touching these juniors again. I bet even Ritholtz wouldn't buy a junior miner, and he'd buy anything that was a good buy.
Still, if you like the "Nasdaq 2000 equals GDX 2012" analogy, the best stocks should come back up quickly. It's just that it might take 10 years for the index to come back up, because the index was made up of utter garbage.
Barring a significant rise in metal prices, the larger mining companies will continue to cut wherever they can. This means: people, projects, exploration, and development. Most will also be forced to lower production costs via high grading—a process that ultimately guts a deposit, rendering rock previously classified as ore, as waste.
It also means we are unlikely to see a buying binge by the miners because they are in the unenviable position of proving that mining their current deposits is a viable business. Good luck on that one!
Um... one problem I have with this is that cash-flowing companies will still need somewhere to invest their cash. Buying binge? No, but there will still be a lot of buying. It might just be that they decide they're in no rush because the targets they want to buy have been kneecapped by low share prices, and so their stocks aren't going to go anywhere.
But I'd still have to think The Clive will use B2Gold's massive cash flows to grow his company accretively. Til someone puts a stop to it.
Money will remain tight for development projects, extremely limited for exploration, and virtually non-existent for conceptual ideas. Mediocre junior miners, and explorers without sufficient funds to survive the year, will be decimated. Therefore, I expect 2014 will also be another tough year for most explorers.
By "money", does Cookie mean investment capital? I wonder if banks will continue to avoid this sector, or at least make renting their capital prohibitively expensive because of the past few years' demonstrated downside. After all, who wants to lend to the next Colossus?
Cookie's been through a down cycle before so I guess he knows what he's talking about.
However (and I need to point out that this is the most positive I have been for some time) 2014 should be a good year for investors to begin positioning themselves in the better metal deposits, mining companies, and the most competent explorers. The reason is quite simple: the industry is not finding enough economicdeposits to replace mine production.
The drastic cost saving measures being implemented by most miners, combined with the increasing difficulty and cost of exploring, plus the length of time to permit these activities, is compounding the already low odds of discovery success. Throw in the pervading political, social, environmental, and financial uncertainties of exploration and mining, and we are virtually guaranteed the industry will be devoting less time and money to finding the fewer and fewer deposits that might be viable. This dearth of exploration comes despite strong global metal consumption and the fact that a deposit found today would take between 4 and 20 years to begin producing. We are not replacing the 2013 global gold production of ~86 million ounces, ~7.4 million ounces of platinum, or ~18 million tonnes of copper, etc.
There is a pinch point coming sometime in the future that will coincide with the “investing” crowd waking up to the fact that mined Bitcoins actually don’t go into refrigerators or cars, nor factor into a central banker’s view of the world. We have covered this topic many times in past EI issues—this very simple idea is the one “macro-view” that seems most likely to be proven right, eventually. Quality metal deposits and the people capable of finding them will become increasingly valuable the longer this bear market lasts.
He knows there are caveats, of course. Any new innovation that turns waste back into ore (like leaching did) will bring in tons of new supply. Financial modernization of Indian society could kill a lot of future demand (for gold, anyway). A secular EM collapse would also kill demand, while paradoxically creating new supply (if the collapsed EMs decide to subsidize their mining industries to stabilize employment).
Gold's only worth what people will pay for it. Though okay, that price has remained pretty steady for the past 5000 years.
Anyway, go read the whole article.