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PDAC Underscores Corporate Survival Strategies

By James West
MidasLetter.com
Thursday, March 5, 2009

The PDAC, the global granddaddy of mining conventions, is a remarkable event on many levels.

The most persistent irony involves the migration of two thirds of Vancouver’s mining executives to the concentrated mall of the Investor’s Exchange, where individuals who reside in the same city but seldom interact either professionally or socially are suddenly immersed in a four day shmoozefest where families are seconded to networking. We are incited to an intensity of deal making and synergistic connectivity by the intense effort required to move an office and its staff to downtown Toronto for four days, along with all the maps, charts, diagrams, posters and apparatus that comprise the standard display booth.

The intensity of the professional networking environment is only exceeded by a social exuberance that borders on, and often penetrates deeply, the realm of insanity. The younger soldiers of IR who retain the high level of organ functionality required to party til three in the morning and then rise by 7 to get breakfast by 8 and be in the booth by 9 to spend the next 10 hours pitching is a right of passage for anybody on their way to the rarified air of resource finance royalty, or mining management rock stardom.

This year’s social event highlight was easily the performance at the Phoenix Concert Lounge on Sherbourne street by the Blues Brothers, now fronted by Dan Akroyd and Jim Belushi, who put on a hilarious spectacle of blues music and clowning that had the audience simultaneously laughing and shaking their derrieres. The event was sponsored by Balkan Resources, of which Jim Belushi is honorary chairman.

Another highlight was the Mega Uranium bash thrown annually by Pinetree Capital. Held this year at the Turf Lounge, an Adelaide street betting parlour and bar, this event was characterized by jam-packed manouevering through a crowded sea to the bar to acquire drinks. The competence of the staff their made that a relatively simple proposition in spite of the shoulder-to-shoulder density of the crowd.

But the heart of the PDAC remains the meetings and unexpected alliances that emerge through the process of wandering around and meeting new associates through existing friends, and forging new deals and agreements and relationships that add to an individual’s career inventory of contacts, to be tapped again and again over future years.

The cavernous South Building of the Metro Convention Centre is accessed by a 2 kilometre (or so it seems) hike through tunnels and skywalks and hallways and escalators down the equivalent of 10 stories to the lowest floors. Getting to the convention is complicated by perennial sub-zero biting cold that Italian suit-clad Vancouverites are not sufficiently dressed to evade. Fortunately, the underground tunnel network can be utilized to get around the financial district warmly and pretty much entirely, once you figure out the confusing interchange of concourses.

Vancouver is not the only city from which convention delegates originate obviously, but being based there one is acutely aware of the fact that Vancouver is probably the biggest geographical contributor to the convention’s population. During the bull market of the last 7 years, it became common to see a vastly more cosmopolitan attendance, but hard times have evidently reduced the number of attendees from distant nations. Not that you still don’t hear every language and accent under the sun. It was present this year but on a highly diminished scale.

Its another informally observed phenomenon that markets seem to tumble whenever the PDAC is on, and with a couple of exceptions, gold tends to head downward in price as if it too is riding 6 escalators into the PDAC bowels. This year, the mood at the event was palpably glum as the S&P TSX Index upchucked 504 points on Monday, closing 4% lower on the day. The Dow followed with a 300 point trop, and gold lost its shine by $48 over two sessions. It seems we are poised indeed to fall the rest of the way off of the proverbial financial cliff we (they) built for us with the myriad financial instruments of mass destruction now living up to their names. Which brings us to one of the primary reasons people and companies attend the PDAC: to raise money.

Perception is reality in many components of the resource industry, and nowhere is that more material than in the raising of capital. The perception is that nobody is interested in base metals, and therefore attempting to raise cash for those kinds of deals remains a failing proposition. The perception at large is that the only thing that’s going to get financed easily is near-term producing or already producing gold assets.

Companies who have earlier stage exploration plays for gold are not going to participate in the immediate future as the only appetite universally expressed is for producing gold assets, or ones that can be moved to production soon. Also receiving positive investor attention are companies whose gold deposits are so advanced and rich that a sale to a major is a highly potential exit for the deals investors.

Companies who last year were focused on base metals exploration are seen to be scrambling to shift into a gold focus, and that has JV discussions happening prolifically, yet not many deals were seen to get done because a joint venture is one thing but the earning-in partners are reluctant to commit too much precious capital to exploration, rendering deal consummation arduous. Its unfortunate really, because the market at large is unable to distinguish value from risk in this environment, which means everything is painted with the same brush.

I visited with one company trading at 15% below cash whose project is viable, has been re-scaled to reflect the reduced demand afforded by market conditions, and yet they wallow in share price near their all time low. Irrationality is the cornerstone of markets presently, and mining companies are bearing the brunt.

But maybe its not entirely irrational. What is emerging as increasingly clear is that what has been destroyed in far greater degree than capital or wealth or risk appetite is confidence. Our collective refusal to part ways with what little money we have left has reduced monetary velocity (which is the frequency with which money transacts) to the point where economic stagnation gains dominance, further eroding confidence in a vicious self-fulfilling prophecy of doom.

The great expectation of demand for products that might reverse this trend based on the international economic stimulus club is held in check by a greater skepticism. Flooding the system with the currencies that are increasingly worthless enforces its own feedback loops, and the result is more paralyzing doom and gloom.

Preposterous platitudes by the likes of Bernanke and Geithner only reinforce the decaying confidence in our financial stewardship and redouble the absence of trust in the system at large. Despite Obama’s assertion that he will cut the deficit in half, reality has a habit of inflicting itself in non-partisan brutality, and the market instinctively perceives that.

The sad fact is that many of the companies floundering for financing at this year’s PDAC will simply cease to exist by next year’s. As an investor, you should ask the companies you own what it is they are doing to preserve cash and remain viable. Any company that hasn’t reduced salaries to four digits will be punished by the markets, unless of course they are a producer or have otherwise created value for their shareholders that make them exceptions to the current rule of steep losses.

Going forward, gold will continue to dominate investor favor, especially when the anticipated reversal of fortune for USD materializes. When exactly that will happen is difficult to pinpoint, but sooner rather than later is my bet.

SOURCE: http://www.ft.com/cms/s/0/22722c4e-0...