Private Equity Moves on the Mining Sector, Gold & the 79 Times

"PRIVATE equity," Andrew Trounson writes in today's Australian, "finally moved on the mining sector yesterday, as global heavyweight and dumped BHP Billiton (ASX: BHP) boss Brian Gilbertson returned to Australia to lead a $625 million offer to take 60 per cent of Perth manganese, chromite and nickel miner Consolidated Minerals (ASX: CSM). Backed by Russian oligarch Viktor Vekselberg and US private coal giant AMCI, Mr. Gilbertson is offering to put his aggressive deal-making credentials and his backers' deep pockets behind a push to make Consmin into a multi-billion-dollar miner by pursuing acquisitions in Australia and globally."

There are a couple of noteworthy aspects to this story. The first is the hunt for nickel deposits. It has taken place against the backdrop of soaring nickel prices. Nickel is to 2007 what uranium was to 2006, as least so far. "Nickel rose more than 5 per cent on Friday, buoyed by low stocks and a tight supply outlook," reports Reuters. "Nickel closed at US$40,900, up $US2,000 from the previous day, before hitting a new peak of $US41,025 in late electronic trading."

Russian oligarchs and private equity funds seem like odd bedfellows at first sight. But then, if you have cash and you're chasing alpha, you have something in common with nearly everyone else in the world these days. So why not partner up and chase nickel projects in Australia? Even as the costs on mining projects blow out of control, the race for the actual resources in the grand is picking up speed.

Again being rational, you would think in an environment of rapidly rising mine development costs, developers would hesitate as the profit margins on projects fall. Only with metals prices rising faster than labour and energy costs with new mines, the margins must be doing okay (although Newmont and Barrick might beg to differ.)

With both precious and base metals it comes down to the same gamble these days really: if it's a rising bull market with many more years ahead of it, owning the assets in the ground is more important than putting a precise valuation on them today. Until new mine supply swamps demand, it's likely that base and precious metals prices will keep going up incrementally. Copper is up twenty per cent for the year, for example, but still nearly thirty per cent off its all time high.

 All of this is happening without even factoring inflation. That is, while not reformed, the U.S. dollar has at least shown some self-respect in recent months. You can't attribute rising metals prices to a falling dollar, yet. When you ad the prospect of a weaker U.S. dollar to a tight mine supply environment, and then, just for fun, throw in billions of dollars of private equity debt and cash, you get...you get what?

How about an inflationary boom in both metals futures and metals shares?

The whole thing reminds us of 1979 and Jimmy Carter and the taking of American hostages in Iran and the soaring of gold and oil prices and the blow-off top in hard assets. On the way to a 1979 redux, we estimate we are somewhere in the neighborhood of 1977. That was the year Hotel California, Dancing Queen, and Car Wash by Rose Royce all made it to the top of the music charts. Music was still vinyl and gold was still cheap and your editor was dressed in plaid, hip-hugging, nylon bell bottoms.

Just two years later, music was still vinyl but gold was not as cheap. Today, music is mostly digital and not as good. Fashion is about the same. But gold... well we think gold is right about where it should be, and right on the cusp of its famous run to over $800 in 1979 and 1980.

In May of 1979, gold fetched $284. In the next twelve months, it soared, eventually reaching over $850 in January of 1980. None of these figures are adjusted for inflation. Which is why in today's dollar terms, a gold price of $1,000 or more is just another stop down the line to a new, much higher high.

At least that's the way it looks from here at the Old Hat Factory. The gold price, we believe, represents a thermometer of sorts of the monetary psyche of the world, or the monetary wellness, if you will. When the gold price rises, confidence in paper currencies and the governments that issue them falls. Confidence in the entire monetary order is slowly eroded with inflation, the way syphilis eats at the brain. The gold price tells you these things, and indicates that a return to more fundamental, natural monetary order is in the making.

Of course the old order must die for the new one to emerge. Inflation kills the patient. It does not make him stronger. We have no idea what that order is, of course. But we reckon it won't involve nearly as much debt and speculation as you see on today's markets.

And while we track it, we've decided to follow gold on a daily basis through the headlines and stories about it at The 79 Times. Why the name, you may be wondering? Gold needs a biographer. And since it can't write for itself, we will write for it. 1979 was an important year in its history, and a historical reminder to investors of gold's crucial role in preserving your wealth in an inflationary bust.

But in one of those pleasant symmetries the universe sometimes offers up, gold's atomic number, our physics and chemistry students will note, is also 79. So our site will track the yellow metal's peculiar fortunes, as well as its parallels to its performance in 1979. And if you have a gold story you think other people might be interested in (coins, bullion, shares, mining, central bank reserves, or other) let us know at dr@dailyreckoning.com.au

By the way, what's the difference between Dick Cheney and Vladimir Putin? Cheney's airplane is funded by the U.S. taxpayers and had a mechanical breakdown after leaving Australia, forcing it to divert to Singapore. On Putin's plane, we read over at The 79 Times "The taps, the shower, washbasins, towel rail, table legs and even the seatbelt clasps are gold- plated."

The triumph of communism! Lenin, hoping to abolish the role of money in his communist utopia, once described a world in which the urinals of public toilets would be coated with gold. Gold, being chemically inert, would certainly have long-lasting value as a urinal coating. But we think its role as money will prove even more valuable.

Dan Denning
The Daily Reckoning Australia

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