The Direst Prediction Of All, Pt. 2 – Mining Armageddon

In hindsight, my first article of the year, “the direst prediction of all,” was one of the most important I have ever written. David Stockman’s “great deformation” theme – of how decades of unfettered money printing have caused the greatest degree of financial and economic mal-investment ever – was not only the premise of that article, but my long-term thesis that commodity prices could take years, if not decades, to cleanse the unprecedented oversupply caused by unnaturally cheap financing, destructive financial engineering, and the unsustainable “pull forward” of demand caused by historically loose monetary policy; all of which, must eventually be unwound. Quite obviously, with the CRB commodity index within 5% of its 2009 crisis low, and 10% of 40-year lows; whilst global economic activity down to its lowest level in generations, amidst the most onerous debt burden ever, the unwinding of economic oversupply has clearly begun.

Conversely, Central Bank/PPT supported stock and bond markets remain near record levels, attesting to just how far they have to fall when control is inevitably lost – certainly in real terms, and perhaps nominally as well. To that end, if the carnage we are currently witnessing in the Chinese stock market – notwithstanding this week’s unprecedented, draconian government interventions; and the “tectonic market shifts” in Western bond markets – of rising yields despite economic weakness; are any indication, said “end game” is clearly in sight. I mean, in China’s case alone, we’re looking at the worst economic “growth” in 35 years; the highest equity valuations; and by far, the most margin debt in history!

Of course, the “fake stuff” that are government rigged “securities” markets will be the “last to go” – as will essentially all manipulatable “markets”; like, for instance, paper Precious Metals, which continue to be driven down – at this point, further below the cost of production, and long-term industry sustainability, than at any time in history – despite surging physical demand and vanishing inventories.

In silver’s case, the U.S. Mint again ran out of product last week – which is probably why premiums are surging (junk silver, for instance, has risen from spot plus $2.00-$2.50 last week to spot plus $6.00-$7.00 today), and delivery times expanding. And just wait until the average person starts to understand PMs’ timeless monetary value – as opposed to these idiots, who believe a Hershey Bar is more valuable than ten ounces of silver; or these morons, who wouldn’t buy a $1,500 gold coin for $25. And when I say idiots and morons, I don’t mean because they are not aware of gold and silver prices. But instead, because they are too stupid to even ask what they’re worth – particularly as in both cases, the interviewer is standing right in front of a coin ship, telling people they can go inside and find out!

No, at this point, the unprecedented financial bubbles fostered by direct and indirect government and Central bank intervention, are mere diversions – compared to the main event that is the all-out collapse of global economic activity; which sadly, is in the theoretical “first inning” of an extra-inning game. And thanks to the massive, unprecedented, across-the-board explosion in global debt levels – again, care of historically easy monetary and fiscal policy; financial engineering; and the resulting moral hazard; when “the Big One” inevitably hits – likely, much sooner than most can imagine – the resulting carnage will change “life as we have known it” indefinitely, per the soon-to-be-immortal words of Michael Snyder.

“The debt-fueled prosperity so many take for granted is about to come to a screeching halt, as we are about to enter the hardest times any of us have known.

To that end, our favorite monetary villainess takes center stage tomorrow morning, for her semi-annual “Humphrey-Hawkins” economic testimony. And if you think February’s H-H testimony was “unequivocally dovish,” just wait until tomorrow’s comments; as not only does she have to deal with long-term “deflationary” forces like today’s Iranian nuclear deal (more on that later); but a Greek crisis which, far from over (I’d put the odds of yesterday’s “deal” being ratified by tomorrow’s deadline at 50/50), could implode before the next FOMC meeting. By the way, here’s what the IMF – i.e., one of the Troika members behind said deal (which comically, does NOT include debt relief) – said in private documents “conveniently” uncovered last night. In other words, they know as well as anyone that Greece is headed for catastrophe; and frankly, aside from propagandists and market manipulators, it’s nothing short of comical to believe adding another €86 billion of debt – a third of which will be out the door on day one – will somehow “improve” Greece’s economic outlook.

“The dramatic deterioration in Greek debt sustainability points to the need for debt relief on a scale well beyond what has been under consideration. European countries would have to give Greece a 30-year grace period on servicing its debt – including new loans, and a very dramatic maturity extension; or else, make explicit annual fiscal transfers to the Greek budget, or accept deep upfront haircuts.”

And, oh yeah, a U.S. economy unequivocally collapsing as we speak – per this morning’s horrific economic data; which, equally comically, arrived just in time for the 10-year Treasury yield to be “rescued” from breaching the key round number of 2.5%. In other words, the Fed’s “3.0% line in the sand” from 18 months ago has been, despite the so-called “recovery,” lowered to 2.5%.

Not to mention, Puerto Rico; i.e., the new “poster child” of municipal bond default; who, in admitting it can never pay its $72 billion – and rising – debt, opened a “Pandora’s Box” of similarly insolvent municipalities and sovereign nations, whom will subsequently race to the “bailout” (and “bail in”) lines faster than the “final currency war” can debauch currencies. And what’s this? It appears I had this one pegged 17 months ago, per the below comments.

“Don’t be surprised if the soon-to-collapse Puerto Rican economy yields a massive debt default; subsequently, creating the equivalent of a Greece-like bailout event.  Perhaps Puerto Rico will be the ‘black swan’ that catalyzes the ‘Big One’ – and perhaps Greece, for that matter.  Even if not, we assure you many others are waiting in line behind them.”

But that’s not the half of it, as said “deformations” have been so dramatic – and global - that the catastrophic impact will be seen not just in the “short-term,” but for years to come. I mean, despite having relentlessly commented on General Motors’ insane policies of inventory over expansion; channel stuffing; government “transfer” sales; and subprime vendor financing; even I am blown away by how rapidly the global automotive market is collapsing. To wit, yesterday’s news that Chinese auto inventories have exploded from a multi-year average of 30 days to a mind-blowing 143 days; again, care of the massive “deformations” of Chinese government and Central bank fostered “expansion” programs, with no end user demand in sight – per these horrifying photos of Chinese “ghost parking lots.”

And heck, I haven’t even mentioned last night’s “historic” Iranian peace deal; which frankly, doesn’t make the world one iota “safer”; but conversely, dramatically increases the odds of geopolitical conflagration, care of the near-guaranteed economic collapse and social unrest caused by collapsing oil prices. Which, as it turns out, we warned of in October’s “crashing oil prices portend unspeakable horrors” – when WTI crude was $81/bbl, compared to $52/bbl today. Not that I have a problem with Iran selling oil – as frankly, America has no right to decide who “deserves” of nuclear weapons. However, in Obama’s blind ambition to produce “peace” with Iran before the 2016 elections – ironically, by extorting them at gun point – he has inadvertently unleashed a veritable tsunami of oil supply; set to flood the world this winter, and potentially take WTI crude into the $30s, or lower.

Which brings me to today’s all-important topic of the pending – if not already occurring – collapse of the global mining industry. Said deformations are, once again, the principal reason behind this horrific predicament – for entirely different reasons across the expanse of metal products. In the case of base metals, the industry is imploding due to massive oversupply and overcapacity – as depicted by the horrifying, nearly three-year plunge in Caterpillar’s equipment sales. Conversely, the opposite is true in in Precious Metals – where, due to 15 years of price suppression, capital investment long ago collapsed, leaving a rapidly depleting reserve base – whose implosion is being accelerated by rising costs; and a cost of both production, and long-term industry sustainability, well above current prices. Moreover, in silver’s case, a supply “double whammy” exists – in that two-thirds of silver production is the byproduct of (primarily copper, lead, and zinc) mines. In other words, as discussed in October’s “Miles Franklin All-Star Silver Panel Webinar,” the peak supply that is all but assured in gold could be dramatically more significant in silver.

That said, the catalyst for today’s topic is this must read article; whose title, “miners buried in billions of debt after colossal misjudgment of demand,” encompasses every major concept we have focused on. That is, financial deformation; economic collapse; unprecedented oversupply; and catastrophic debt accumulation; per the below commentary.

“As forecasts predicting endless growth in China’s appetite for raw materials became a matter of industry faith, mining companies borrowed extensively to build networks of pits, railway lines, and port terminals. Megadeals abounded as a merger-and-acquisition frenzy took hold – with cheap borrowing costs, thanks to low global interest rates, fueling the splurge. To wit, the world’s largest mining companies – by market value – accumulated nearly $200 billion in net debt by 2014, six times higher than a decade ago; whilst their earnings only increased two-and-a-half times, and nearly 90% of their acquisitions since 2007 were written off.”

To that end, it’s remarkable how short people’s memories are; of, for instance, how the world’s second largest miner, Rio Tinto, nearly went bankrupt in 2009. Or, for that matter, “market darling” Silver Wheaton, when the “silver streams” from the mines it held rights to were mothballed by plunging base metal prices. And yet, those were the “good times” compared to today; when, with base metal prices plunging anew, the cost of mining has dramatically risen, whilst miners’ balance sheets have dramatically deteriorated.

To that end, I have long written of the demise of the junior mining industry; which, for all intents and purposes, was dead and buried when I left its employment nearly four years ago to join Miles Franklin. Back then, in mid-2011 – ironically, when dollar-priced gold and silver prices peaked – junior miners had already been capital starved since the TSX-Venture’s 2007 peak; and today, the junior mining industry is all but non-existent; with no major discoveries in the past 15 years, nor capital to explore for, or develop, the piddling ones they’ve made. As for the “majors,” I don’t think I could be clearer that many – if not most - of the HUI’s components are in, or within a hair’s breadth of, severe financial distress. Which is why, without question, if prices end 2015 anywhere near the current levels, several of the world’s largest miners will be forced to consider bankruptcy filing – once their comically overvalued, arbitrarily measured “reserves” and “resources” are dramatically written down. I mean, it doesn’t take rocket science to guess who’s going first. Just take a look at the stocks of, for instance, Anglogold (the world’s third largest gold miner), Kinross (#5), Goldfields (#8), Harmony, Coeur D’Alene, Hecla, Iamgold, Eldorado, and Yamana, among others. Not to mention, the world’s largest gold miner, Barrick Gold – i.e. “evil personified” – which today, fell below $10/share, to its lowest level since 1991. Long-time readers need not be reminded that Barrick’s production is expected to plunge by an incredible 45% from its 2013 peak in the coming years; or that, amidst what will clearly be a miserably failed attempt to shed a meaningful portion of its mammoth $13 billion of debt, is essentially guaranteed to pursue a merger with the second largest gold miner, Newmont Mining – yielding further, ultra-draconian capital expenditure, employment, and production cuts.

In other words, the global mining industry’s fundamentals are dramatically worse than in 2008; with global economic activity dramatically weaker; and its ability to financially withstand such conditions – let alone, the coming “Mining Armageddon,” severely compromised. But don’t worry, gold and silver are decidedly NOT “commodities,” no matter how hard the Cartel attempts to portray them as such.

Again, we cannot be more vehement of how desperate the global economic situation has become; in essence, a fuse awaiting a match. And when it lights – be it tomorrow, next week, or next year – if you haven’t already protected yourself, it will likely be too late.Similar Posts:

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