Last week I attended the Denver Gold Forum along with three other U.S. Global Investors representatives, including our resident precious metals expert Ralph Aldis. I was happy to see sentiment for gold way up compared to last year’s convention, as was turnout. I was also pleased to see Franco-Nevada, Silver Wheaton and Royal Gold in attendance, all of which I’ve written extensively about.

One of the most interesting presentations was held by Northern Star Resources—the third biggest listed gold producer in Australia, a dividend payer and a longtime holding of USGI. I’ve always appreciated Northern Star’s insistence on being a business first, a mining company second. This shareholder-friendly mantra is reflected in its stellar performance.

Compared to other companies in the NYSE ARCA Gold Miners Index (GDM), Northern Star is a sector leader in a number of factors, including five-year cash flow return on invested capital. Whereas the sector average is negative 1.6 percent over this period, Northern Star’s is a whopping 27 percent, the most of any other mining company in the GDM.

This has helped it return an amazing 800 percent over the last five years as of September 23. Compare that to the GDM, which returned negative 56 percent over the same period.

Australian gold miners as a whole trade at an impressive discount to North American producers, 5.7 times earnings versus 8.3 times earnings, according to Perth-based Doray Minerals.

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Screening for high cash flow returns on invested capital, as you can see, helps give us a competitive advantage and uncovers hidden gems such as Northern Star and others.

Resource Equities Offer Attractive Diversification Benefits

A recent whitepaper published by investment strategist firm GMO makes a very convincing case for natural resource equities. I urge you to check out the entire piece when you have the time, but there are a few salient points I want to share with you here.

In the opinion of Lucas White and Jeremy Grantham, the paper’s authors, “prices of many commodities will rise in the decades to come due to growing demand and the finite supply of cheap resources,” presenting an attractive investment opportunity. Over the long-term, resource stocks have traded at a discount and outperformed their underlining metals and energy by a wide margin.

According to White and Grantham, a portfolio composed of 50 percent energy and metals, 50 percent all other equities, had a standard deviation that’s 35 percent lower than the S&P 500 Index. What’s more, the returns of such a portfolio outperformed those of the S&P 500, resulting in a risk-adjusted return that’s 50 percent higher than that of the broader market.

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Resource equities have also historically shown a low to negative correlation to the broader market, which might appeal to bears. The reason? When metals and energy have risen in price, it’s been a drag on the economy. The reverse has also been true: Low prices have been a boon to the economy.

The thing is, general equities currently do not give investors enough exposure to natural resources. The weight of energy and metals in the S&P 500 has been halved in the last few years as oil and other materials have declined. Considering the diversification benefits, investors should consider a greater allocation to the sector.

Timing Is Key

There’s mounting evidence that now might be an opportune time to get back into resource stocks. Following the sharpest decline in crude oil prices in at least a century, as well as a six-year bear market in metals, the global environment could be ripe for a commodity rebound. From its January trough, the Bloomberg Commodity Index has rallied 17 percent, suggesting commodities might be seeking a path to a bull market.

During the down-cycle, many companies managed to bring costs lower, upgrade their asset portfolios and repair their balance sheets. As a result, many of them are now free cash flow positive and are in a much better positon to deliver on the bottom line when commodity prices increase.

I’ve often written about the imbalance between monetary and fiscal policies. My expectation is that unprecedented, expansionary global monetary policy will be followed by fiscal expansion. Consider this: Total assets of major central banks—including those in the U.S., European Union, Japan and China—have skyrocketed to $17.6 trillion dollars as of August 2016, up from $6.3 trillion in 2008.

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This expansion is expected to result in significant inflation gains over the next decade, an environment in which natural resource stocks have historically outperformed the broader market.

Infrastructure Spending About to Increase?

China largely drove the global infrastructure build out over the past decade as rapid economic growth and rising incomes increased the demand for “advanced” and “quality of life” infrastructure. This resulted in a breathtaking commodities bull market.

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Now, other advanced countries, the U.S. especially, are readying to sustain the next cycle to repair its aging and uncompetitive infrastructure.

As you can see, most major economies dramatically cut infrastructure spending after the financial crisis, indicating it might be time to put some of that $17.6 trillion to good use.

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According to the Center on Budget and Policy Priorities (CBPP), the U.S. is presently facing a funding gap of $1.7 trillion on roads, bridges and transit alone—to say nothing of electricity, schools, airports and other needs. Meanwhile, state and local infrastructure spending is at a 30-year low.

If this financing can’t be raised, says the American Society of Civil Engineers (ASCE), each American household could lose an estimated $3,400 per year. Inefficient roadways and congested airports lead to longer travel times, and goods become more expensive to produce and transport.

Let’s look just at national bridges. After an assessment of bridges last year, the American Road & Transportation Builders Association (ARTBA) found that 58,495, or 10 percent of all bridges in the U.S., are “structurally deficient.” To bring all bridges up to satisfactory levels, the U.S. would currently need to spend more than $106 billion, which is six times what was spent nationwide on such projects in 2010.

Fortunately, both U.S. presidential candidates have pledged to boost infrastructure spending—one of the few things they share with one another. Hillary Clinton says she will spend $275 billion over a five-year period, while Donald Trump says he’ll spend “double” that.

Trump’s central campaign promise, as you know, is to build a “big, beautiful, powerful wall” along the U.S.-Mexico border, which analysts at investment firm Bernstein estimate could cost anywhere between $15 billion and $25 billion, requiring 7 million cubic metres of concrete and 2.4 million tonnes of cement, among other materials.

As I like to say, government policy is a precursor to change. I’ll be listening closely for further details on Trump and Clinton’s infrastructure plans this coming Monday during the candidates’ first debate. I hope you’ll watch it too! Media experts are already predicting Super Bowl-sized audiences.

Don’t Count China Out

In the past year, a lot of ink has been devoted to China’s slowdown after its phenomenal spending boom over the last decade, but there are signs that spending is perking up—a tailwind for resources. According to the Wall Street Journal, Chinese economic activity rebounded in August, driven by government spending on infrastructure and rising property taxes.

“In the first seven months of 2016,” the WSJ writes, “China invested 962.8 billion yuan ($144.1 billion) in roads and waterways, an 8.2 percent increase from the previous year.”

The Asian giant still accounts for a large percentage of global trade in important resources such as iron ore, aluminum, copper and coal. This is why we closely monitor the country’s purchasing manager’s index (PMI), which, according to our own research, has been a reliable indicator of commodity price performance three and six months out.

The energy complex are trading higher after the EIA released its latest weekly oil inventory report. The data showed Total Crude & Product stocks decreased by 6.034/mmbls to 1390.917/mmbls for week ending Sept. 16. Looking at the year-on-year for Total Crude & Product stocks we see we are now 93.2/mmbls above last year’s level for this time of the year and above the five-year average by 242.9/mmbls.

….read more HERE

…related:

Energy Curiosities: September 2016 Update

An Ongoing Photo Essay

Lately, Canada’s energy markets have become even more curious.

The West Coast pipeline is protested because it would increase oil tanker traffic on the pristine Pacific Ocean.

The pipeline to the East Coast is protested, despite that it would reduce the number of oil tankers on the pristine Atlantic Ocean.

“TransCanada Corp launches US $15 billion lawsuit against U.S. government for rejecting Keystone XL”

– Financial Post, January 6, 2016.

During Obama’s term the U.S. constructed some 10,000 miles of pipeline.

Wind Turbines 1980’s: Admired

Oil Wells 1930’s, California: No Longer Admired

Wind Turbines Recent: Greatly Admired

U.S. solar developers are luring cash at record rates from investors ranging from Warren Buffett to Google Inc. (GOOG) and KKR & Co. by offering returns on projects four times those available for Treasury securities.

Buffett’s Berkshire Hathaway Inc. (BRK/A) together with the biggest Internet search company, the private equity company and insurers MetLife Inc. (MET) and John Hancock Life Insurance Co. poured more than $500 million into renewable energy in the last year. That’s the most ever for companies outside the club of banks and specialist lenders that traditionally back solar energy, according to Bloomberg New Energy Finance data.

Wind Turbine Bird Kills:

In 2011 the Los Angeles Times reported such bird kills amounted to 440,000 annually.

Not Widely Published

Oil-Coated Birds:
Widely Published

Lenin Finally Topples

Pipeline Right Of Way, Pennsylvania:
Very unpopular

Permitted Way of Transporting Crude Oil

Train Wreck Alabama

Train Wreck February 2015: New, Stronger Oil Tanker Cars

“Crude oil hauled by rail needs to be shipped in stronger tanker cars and on safer routes, transportation investigators in the U.S. and Canada said following a series of accidents in North America.”

– Bloomberg, January 23, 2014.

Pipelines
2,500,000 Miles Can’t All Be Wrong

By way of perspective, the length of proposed Keystone pipeline amounts to 1,179 miles.

That works out to an increase in total mileage of 0.0047 percent.

BOB HOYE, INSTITUTIONAL ADVISORS

WEBSITE: www.institutionaladvisors.com

….also, speaking of energy:

Fundamentals for Uranium Look Great; Is the Uranium Market Ready to Soar?

TRIPOLI—Only a day after the head of the Libyan National Army (LNA) took over Libya’s key oil ports to the dismay of Western powers trying to gain support for a Government of National Accord (GNA), the recently reunified National Oil Corporation (NOC) of Libya has announced that it will start exporting 600,000 barrels of oil per day in just four weeks.

Late last night, the NOC also announced that it will ramp up production and exports to 950,000 barrels per day before the end of the year. That’s up from the approximately 250,000 bpd the country is exporting right now.

.…continue reading HERE

…related:

The Next Sector To Recover From The Oil Price Crash

Oilfield services, shipbuilders and other industries that rose with the pre-2014 oil price boom have had it hard. Since barrel rates fell, their previous patrons have become uninterested in doling out major purchase orders, leaving oil and gas equipment manufacturers without revenues.

A recent report by Arkansas Online says the energy industry’s support sector could feel the effects of low oil prices for up to two years after the current bear market recovers.

“When oil gets good again we will be the last to get back to work” because half the fleet available is not currently in use, Vance Breaux Jr., a boat manufacturer from Louisiana, said.

Louisiana’s rig count has shrunk to 35 active sites as of last week – down 40 from the same time last year, according to Baker Hughes latest report on the matter.

Currently, Breaux and his industry compatriots lack diversification in their client profile. Production sites with easy-to-reach oil and gas deposits are running out in Louisiana, but the weak investment climate prevents energy firms from starting new projects, making it difficult for equipment manufacturers to generate revenues.

In other parts of the country, bargain hunters are snagging expensive oil and gas equipment at auctions for a fraction of their original cost.

“Everyone says we’re crazy, but we’re hoping to capitalize on the downstroke,” Shawn Kluver, a buyer in the market for a hydro excavator truck, told USA Today last year.

Kluver flew to Colorado from North Dakota to compete with more than 3,000 bidders for a rock-bottom price on backhoes, bulldozers, trucks and other heavy equipment.

As hundreds of oil and gas rigs shut down across the United States, falling bottom lines force oil and gas majors to abandon future exploration projects and reduce the scope of ongoing ventures, causing thousands of drilling workers to lose their jobs and the equipment they once used to sit idle.

If a company begins liquidating its assets, some of the idle equipment may find itself in the hands of industry resellers, such as the Vancouver-based Ritchie Bros, which claims to be the world’s largest auctioneer of heavy equipment.

The company says it has seen a peak interest in its events this year, driven in large part by contractors looking to repurpose drilling equipment for construction projects.

Oil and gas firms have been hemorrhaging workers and physical assets essential to drilling operations, which means bringing oil and gas companies back into peak production will not happen overnight when prices do recover.

In June, The Wall Street Journal, used data from HIS Energy to estimate that roughly 70 percent of the fracking equipment across the shale industry had been idled due to financial constraints. Also, about 60 percent of U.S. field workers needed to frack shale wells have been handed pink slips since the pricing crisis began two years ago. Many of those workers have moved on to jobs in other industries over the past two years, clearing the job market of experienced hires.

“It’s scary to think what a drag and what a headwind finding experienced labor is going to be this time around,” Roe Patterson, CEO of Basic Energy Services, a Texas-based well completion company, told the WSJ.

Patterson also emphasized that the state of equipment deteriorates due to wear and tear over time, even when its not in use.

“Pop the hood on your car and let it sit for a year,” he suggested. “I guarantee the car won’t be in the same condition.”

As Hordes of heavy drilling equipment exit the energy industry to be repurposed, the woes of oil and gas equipment manufacturers will continue as the industry finds its footing in a recovered market. Once profits from existing drilling projects begin to show in oil and gas companies’ books, new sites will be brought into production, spurring further equipment purchases.

Though the energy equipment industry may see a delayed boom as idled equipment stored in warehouses slowly returns to duty, firms will have to turn to their old sources to replace their now-sold assets. Better late than never.

By Zainab Calcuttawala for Oilprice.com