Metals and Mining Outlook
1970’s Repeat?
Victor Lazarovici
Feb. 4, 2009
Presented to NY Section SME
Victor Lazarovici
1970’s vs. 2000’s
(But Which 70’s?)
Why is this Important?
Metals and Mining Stocks Outperformed Broader markets in the 70’s
Similarities:
Industrializing Major Economy - Japan / China
Supply Shortages
Oil Shocks – 1973 & 1979 - $147/BBL
Real Increases in Metal Prices
Stagflation – 1970’s / ????
Differences:
Rising Interest Rates / Falling Interest Rates (For Now)
Geopolitical - Restricted Access to Producing Areas / Globalization
Large Inventories vs. JIT
Victor Lazarovici
1970’s vs. 2000’s
Problems in the Comparison:
Lack of Data or Comparability of Data:
Opaque Metal Price Discovery :
No consistent LME Market Data – Trading of Al and Ni started in
1979
Producer Pricing Dominates the 70’s in all but copper
Industry Restructuring / Consolidation = Apples to Oranges
Change in Index Components
Electronic reporting of Market Data started in the 80’s
Gold Peg
Victor Lazarovici
The Perils of Forecasting!
Notable
Long Term Forecasts:
Notable Long Term Forecasts:
"The truth is more important than the facts."
- Frank Lloyd Wright (1868-1959)
"I think there is a world market for maybe five computers."
- Thomas Watson (1874-1956), Chairman of IBM, 1943
"There is no reason anyone would want a computer in their home."
- Ken Olson, president, chairman and founder of Digital Equipment Corp., 1977
"The concept is interesting and well-formed, but in order to earn better than a 'C', the idea
must be feasible."
- A Yale University management professor in response to student Fred Smith's paper
proposing reliable overnight delivery service (Smith went on to found Federal Express
Corp.)
Victor Lazarovici
The Perils of Forecasting!
Notable
Long
Term
Forecasts:
Notable
Recent
Forecasts:
"A very powerful and durable rally is in the works. But it may need another couple of days
to lift off. Hold the fort and keep the faith!" — Richard Band, editor, Profitable Investing
Letter, Mar. 27, 2008
At the time of the prediction, the Dow Jones industrial average was at 12,300. By late
December it was at 8500.
AIG (AIG) "could have huge gains in the second quarter." — Bijan Moazami, analyst,
Friedman, Billings, Ramsey (FBR), May 9, 2008
AIG wound up losing $5 billion in that quarter and $25 billion in the next. It was taken over
in September by the U.S. government, which will spend or lend $150 billion to keep it afloat.
"I think Bob Steel's the one guy I trust to turn this bank around, which is why I've told you
on weakness to buy Wachovia (WB)." — Jim Cramer, CNBC commentator, Sept. 15, 2008
Two weeks later, Wachovia nearly failed as depositors fled. CEO Steel eventually agreed to
a takeover by Wells Fargo (WFC). Wachovia shares lost half their value from Sept. 15 to
Dec. 29.
Source: Businessweek, Jan. 12, 2008
Victor Lazarovici
The Perils of Forecasting!
Notable
LongForecasts
Term (Continued):
Forecasts:
Notable Recent
"Existing-Home Sales to Trend Up in 2008" — Headline of a National Association of
Realtors press release, Dec. 9, 2007
On Dec. 23, 2008, the group said November sales were down 11% from a year earlier in the
worst housing slump since the Great Depression.
"I think you'll see $150 a barrel [of oil] by the end of the year." — T. Boone Pickens, June
20, 2008
Oil was then around $135 a barrel. By late December it was around $40.
"I expect there will be some failures.... I don't anticipate any serious problems of that sort
among the large internationally active banks." — Ben Bernanke, Federal Reserve
Chairman, Feb. 28, 2008
"In today's regulatory environment, it's virtually impossible to violate rules." — Bernard
Madoff, money manager, Oct. 20, 2007
On Dec. 11, Madoff was arrested for allegedly running a Ponzi scheme that may have cost
investors $50 Billion
Source: Businessweek, Jan. 12, 2008
Victor Lazarovici
5/11/2008
5/11/2006
5/11/2004
5/11/2002
5/11/2000
5/11/1998
5/11/1996
5/11/1994
5/11/1992
5/11/1990
5/11/1988
5/11/1986
5/11/1984
5/11/1982
5/11/1980
5/11/1978
5/11/1976
5/11/1974
5/11/1972
5/11/1970
5/11/1968
5/11/1966
5/11/1964
5/11/1962
Broader Market Context
End of the Liquidity Bubble?
DJIA vs. 10 Yr. Treasury Rates – 5/62 to 12/08
DJIA vs. 10 Yr. Treasury Rates
16,000
DJIA
10 Yr Treas
16
14,000
14
12,000
12
10,000
10
8,000
6,000
8
4,000
6
2,000
4
0
2
Victor Lazarovici
Notable Bubbles?
Nasdaq
Nikkei
1930’s Dow
2000’s Commodities
Victor Lazarovici
2/5/2007
2/5/2005
2/5/2003
2/5/2001
2/5/1999
2/5/1997
2/5/1995
2/5/1993
2/5/1991
2/5/1989
2/5/1987
2/5/1985
2/5/1983
2/5/1981
2/5/1979
2/5/1977
2/5/1975
2/5/1973
2/5/1971
Nasdaq Composite
2/71 to 1/09
6000
5000
4000
3000
2000
1000
0
Victor Lazarovici
1/4/2009
1/4/2008
1/4/2007
1/4/2006
1/4/2005
1/4/2004
1/4/2003
1/4/2002
1/4/2001
1/4/2000
1/4/1999
1/4/1998
1/4/1997
1/4/1996
1/4/1995
1/4/1994
1/4/1993
1/4/1992
1/4/1991
1/4/1990
1/4/1989
1/4/1988
1/4/1987
1/4/1986
1/4/1985
1/4/1984
NIKKEI 225
1/84 to 1/09
40000
35000
30000
25000
20000
15000
10000
5000
0
Victor Lazarovici
10/1/1954
10/1/1952
10/1/1950
10/1/1948
10/1/1946
10/1/1944
10/1/1942
10/1/1940
10/1/1938
10/1/1936
10/1/1934
10/1/1932
10/1/1930
10/1/1928
The Great Depression
25 Years to Recover
DJIA Close
1928-1954
450
400
350
300
250
200
150
100
50
0
Victor Lazarovici
Metals Outlook
Historical Perspective:
It’s All About Industrialization
Victor Lazarovici
Global GDP Growth
LT Economic Growth Puts Pressure on Supply
Average GDP growth
1900 – 1960
1.3%
1960 – 1980
3.5%
1980 – 2005
5.7%
2006 – 2015E
6.0%
Source: IMF, Angus Maddison, The world economy: historical statistics, OECD and CVRD.
Victor Lazarovici
WW Copper & Aluminum
Apparent Consumption Growth Rate
1956 to 2010E
30.0%
AL
CU
20.0%
10.0%
0.0%
-10.0%
-20.0%
-30.0%
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
Victor Lazarovici
Long Term Consumption Trends
WW Consumption in 00’s constrained by Supply/Chinese growth
WW Consumption - Net EB Imports/Exports
10.00%
Ave. An % Change
8.00%
6.00%
AL
CU
PB
ZN
4.00%
NI
2.00%
0.00%
50'S
60'S
70'S
80'S
90'S
00'S - To
2007
00'S Est'd
-2.00%
Victor Lazarovici
Long-Term Production Growth
Steel Example
Crude Steel Production CAGR
World
1959-1974
1974-1999
1999-2004
3.4%
1.8%
6.0%
Japan
13.0%
-
China
11.4%
Note: Japanese Steel Production Growth Slowed Sharply in 2nd. Half
of 70’s
Source: CVRD (IISI, Japan’s Ministry of Economy, and CEIC)
Victor Lazarovici
Will a Strong Recovery Follow the Global Recession?
Western World Recession / Recovery Demand Patterns- Last 6 Cycles
Recession/Recovery Pattern
Average Base Metals Demand
25.0%
22.2%
20.0%
15.5%
15.0%
12.0%
8.5%
10.0%
10.0%
4.6%
5.0%
2.7%
2.4%
-1.6%
0.0%
0.0%
0.0%
-1.6%
0.1%
-4.1%
-5.0%
-5.6%
-10.0%
-15.0%
-15.5%
-20.0%
57/5859/60
67
68
74/7576/77
82/8383/84
92/9394/95
2001 2002 2003 2004 2005 2006
Victor Lazarovici
Base Metals Recovery Cycles
Base Metal Cycles - 1971 to Present
Base Month in Cycle = 1.00
6.00
Feb71-Apr74
Dec75-Feb80
Dec82-Feb89
Sept93-Jan07
5.00
Index
4.00
3.00
2.00
1.00
LME Cash Price: Unweighted Average of Al, Cu, Ni, Zn, Pb
1
10
19
28
37
46
55 64 73 82 91 100 109 118 127 136 145 154
Months from Cyclical Low
Victor Lazarovici
Producers Lost Control of Production Costs
Near Term Focus will be on:
• Cost Reduction
• Reducing Excess Production
• Repairing Balance Sheets Stressed by “Top of the Market”
Acquisitions
Early Curtailments Reduce Inventory Overhangs:
Reductions to Estimated 2009 Production:
Coking coal Copper Nickel Zinc
13%
9%
21%
9%
Source: Brook Hunt, Xstrata
Victor Lazarovici
Producers Lost Control of Production Costs
Copper Cash Cost Curves
Source: Brook Hunt
Victor Lazarovici
Aluminum Recession/Recovery Cycle
LME Price vs. LME Inventory – June 89-June 2007
Aluminum Recovery Cycle
Inventory -Tonnes
LME Price - $/lb
1.40
3,000,000
Price
1.30
Inventory
2,500,000
1.20
1.10
2,000,000
1.00
0.90
1,500,000
0.80
1,000,000
0.70
0.60
500,000
0.50
Ju
n07
Ju
n06
Ju
n05
Ju
n04
Ju
n03
Ju
n02
Ju
n01
Ju
n00
Ju
n99
Ju
n98
Ju
n97
Ju
n96
Ju
n95
Ju
n94
Ju
n93
Ju
n92
Ju
n91
0
Ju
n90
Ju
n89
0.40
Victor Lazarovici
Copper Recession/Recovery Cycle
LME Price vs. LME Inventory – June 91-June 2007
Copper Recovery Cycle
LME Price - $/lb
Inventory -Tonnes
3.90
1,000,000
Inventory
900,000
Price
3.40
800,000
2.90
700,000
600,000
2.40
500,000
1.90
400,000
300,000
1.40
200,000
0.90
100,000
Ju
n07
Ju
n06
Ju
n05
Ju
n04
Ju
n03
Ju
n02
Ju
n01
Ju
n00
Ju
n99
Ju
n98
Ju
n97
Ju
n96
Ju
n95
Ju
n94
Ju
n93
0
Ju
n92
Ju
n91
0.40
Victor Lazarovici
Nickel Recession/Recovery Cycle
LME Price vs. LME Inventory – July 84-June 2007
Nickel Recovery Cycle
Inventory -Tonnes
LME Price - $/lb
26.00
160,000
Inventory
Price
140,000
21.00
120,000
100,000
16.00
80,000
11.00
60,000
40,000
6.00
20,000
0
Ju
n84
Ju
n85
Ju
n86
Ju
n87
Ju
n88
Ju
n89
Ju
n90
Ju
n91
Ju
n92
Ju
n93
Ju
n94
Ju
n95
Ju
n96
Ju
n97
Ju
n98
Ju
n99
Ju
n00
Ju
n01
Ju
n02
Ju
n03
Ju
n04
Ju
n05
Ju
n06
Ju
n07
1.00
Victor Lazarovici
“The Big Picture”
Global Population Trends
Billions
Urbal
10
Rural
9
8
7
4.6
6
6.4
3.3
5
4
1.5
3
3.4
2
3.4
2.8
2.6
1
0
1975
2007
2025
2050
Source: UN Population Division, World Urbanisation Prospects: The 2007 Revision
Victor Lazarovici
Global Population Trends
Urbanization's Second Wave: A Difference of Scale
First wave
Europe and North America in the early 18th century
Occurred over two centuries (1750-1950)
Produced the new urban industrial societies that now dominate the world
Involved a few hundred million people.
Increase from 10 to 52 per cent urban and from 15 to 423 million
Second Wave
In the past half-century, the less developed regions have begun the same transition.
Achieving in one or two decades what developed countries accomplished in one or two centuries
Urbanites will go from 309 million in 1950 to 3.9 billion in 2030; from 18 per cent to 56 per cent
Between 2000 and 2030, Asia’s (alone) urban population will increase from 1.36 billion to 2.64 =
Approximately 42.7 Million/year = Build 3 NYC/Yr. for 30 Years!
Source: UN Population Division, World Urbanisation Prospects: The 2007 Revision
Victor Lazarovici
Global Population Trends
Infrastructure Growth Must Continue!
“very few developing-country cities generate enough jobs to meet the demands of
their growing populations
the shortage of urban jobs, are responsible for conditions that can outmatch the
Dickensian squalor of the Industrial Revolution “
Source: UN Population Division, World Urbanisation Prospects: The 2007 Revision
Victor Lazarovici
If Chinese-Driven Growth Resumes,
Where Will the Supply Come From?
Constraints to Supply:
•
•
•
•
•
Near Term Profitability Pressure and producer Responses
Lack of Financing/Stressed B/S Severely Reduces Project Pipelines
Resurgence of Nationalism = Increased Risk
Companies/Investors Less Risk Tolerant
Availability of Equipment & People will still be an issue
Victor Lazarovici
US Earth Sciences Graduates
11,000
PhD
Master's
10,000
Bachelor's
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
19
77
19
75
19
73
19
71
1,000
Source: U.S. Department of Education, National Center for Education Statistics
Victor Lazarovici
Metals Outlook
Conclusions
Near Term:
•
•
•
•
•
Recession / Demand Uncertainty Continues
Commodity Prices Could Decline Further
Demand/Price Cycle Bottoms
Early Curtailments Should Result in Quick Rebound
Renewed Demand Growth Absorbs Inventory and Idled Capacity
Longer Term:
• Sustained Demand Growth
• Depleted Project Pipeline
• Availability of Risk Capital Could be an Issue
• Shortage of Technical Personnel and Supplier/Equipment Capacity
Victor Lazarovici
1970’s vs. 2000’s
Conclusion
On Balance – More Similarities Than Differences
•
•
•
•
•
•
Stagflation Likely
Commodity Supply/Demand Tightness
Strong Demand for Industry Professionals, Equipment & Supplies
Prices Above LT Historical Levels
Superior Industry Profitability
But Slower Growth
Victor Lazarovici
1970’s vs. 2000’s
Conclusion
“If something can’t go on forever, it will end.”
Anon
Victor Lazarovici
Additional Slides
Victor Lazarovici
Victor Lazarovici
Brief Biography
Victor Lazarovici has over 35 years of experience in a broad range of management, financial and
analytical roles. Most recently, he worked as a highly ranked and successful global metals and mining
analyst for the past twenty years. Prior to entering the financial sector as an analyst, he spent over 14
years in the corporate sector in engineering, financial management and corporate development roles.
He currently serves as a director of Abacus Mining and Exploration and Minera Andes Ltd. Most
recently Mr. Lazarovici was the Managing Director and Senior Base Metals and Minerals Analyst for
BMO Capital Markets in New York. There, he led a team of analysts covering the base metals sector
that was consistently ranked amongst the top tier in all of the major Canadian polls of institutional
investors. Mr. Lazarovici has also served as a Managing Director and Senior Metals and Mining
Analyst for Smith Barney, where he was consistently ranked in the top tier of Wall Street mining and
metals analysts in all of the major US polls of institutional investors. He is the only analyst to receive
the top honour in both the Canadian and US Greenwich Associates surveys. He also worked at UBS,
HSBC, and Scotia Capital. As an analyst, Mr. Lazarovici expertise includes extensive first hand
knowledge and coverage of the global base and precious metal producers' operations, having toured
most major mineral camps and mines around the world. He also has an in-depth understanding of the
macro-economic factors as they impact the industry and has extensive experience in short and long
term forecasting of metal prices. He maintains an excellent relationship with his peers and is a past
President of the Metals Analyst Group of New York, and is highly regarded for his knowledge of the
North American and Latin marketplace. Mr Lazarovici holds an MBA from York University in
Downsview, Ontario and a B.Eng. from Sir George Williams in Montreal, Quebec.
Victor Lazarovici
The Perils of Forecasting!
Notable Recent Forecasts:
“Peter writes: ‘Should I be worried about Bear Stearns in terms of liquidity and get my
money out of there?’ No! No! No! Bear Stearns is fine! Do not take your money out. … Bear
Stearns is not in trouble. I mean, if anything they’re more likely to be taken over. Don’t
move your money from Bear! That’s just being silly! Don’t be silly!” —Jim Cramer,
responding to a viewer’s e-mail on CNBC’s Mad Money, March 11, 2008
“The possibility of $150-$200 per barrel seems increasingly likely over the next six-24
months.” —Arjun Murti, Goldman Sachs oil analyst, in a May 5, 2008, report
Murti was dubbed the “oracle of oil” in by the New York Times. Oil prices peaked in July
at about $147 a barrel before beginning a long decline. Thanks to a decrease in demand
because of the global recession, prices are now nearing the $40 mark, and some experts even
see $25 as a possibility next year.
Victor Lazarovici
Equity Markets Trends
Victor Lazarovici (212)702-1226Victor Lazarovici
Equity Markets Trends
$Billion
Percentage of Total
40%
Agressive Growth
Total
$250
35%
$200
30%
$150
25%
20%
$100
15%
$50
10%
$0
5%
0%
1984
1986
1988
1990
1992
1994
1996
-$50
1998
Victor Lazarovici
LT Trend in Copper Costs & Grades
Source: Phelps Dodge
Victor Lazarovici
Copper Outlook - Fundamentals
U.S. COPPER CONSUMPTION - AUTO & HOUSING
lbs./car
lbs./sq.
0.210ft.
70
Average lbs. per New Automobile
Ave. lbs/ sq. ft.
65
0.205
60
55
0.200
50
45
0.195
40
35
0.190
30
25
0.185
20
1970's
1980's
1990's
Source: Copper Development Institute.
Victor Lazarovici
Copper - LME Inventory vs Price
Monthly Averages Jan 1986 to Nov 2005
$2.00
Nov 05
$1.80
$1.60
Jan 05
Price - $/lb
$1.40
$1.20
Jan 04
$1.00
$0.80
Jan 03
$0.60
$0.40
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
Inventory - (Tonnes)
Victor Lazarovici
Nickel - LME Inventory vs Price
Victor Lazarovici