Chris And Michael Berry: What The Boomers Got Wrong - And Right - About Natural Resource Investing

TM editors' note: This article discusses a penny stock and/or microcap. Such stocks are easily manipulated; do your own careful due diligence.

What do Gen Xers not understand about value investing? What can Millennials learn from today's resource investors? In anticipation of Father's Day, The Gold Report, quizzed Chris and Dr. Michael Berry, authors of the Disruptive Discoveries Journal, on how investing has changed over the years in the gold, silver, niche metals and energy space, and what they are investing in today to make sure they survive to see the next cycle.

Natural Resources

The Gold Report: Mike, we often hear that the current generation doesn't realize how good they have it compared to when you had to walk uphill both ways through snow to make a trade. Is it easier to invest today with all the resources online and pundits around every corner or is it harder to cut through the noise and find the best opportunities?

Michael Berry: While the Internet makes it easier to do research and make a trade, that doesn't mean it is easier to make a good trade, or better still, a smart long-term investment. I think it's challenging today. It's easy to trade, but much more difficult to create real wealth. A P/E multiple used to have real meaning. Today, the pace of the market is so fast, there are so many flash traders, so many games being played and so many nickels being minted, that it is difficult to figure out what is real. There are debt and equity bubbles out there that have been being created for the past two decades. They can be difficult to take advantage of because investors have to go against the prevailing thinking.

Hedge funds can't make it today; only the private equity players seem to be successful and they have tremendous advantages. Almost all central bankers are in the investment game now. The Federal Reserve owns 25% of the Treasury bond market. What do they plan to do with their investment? There is US$9 trillion sloshing around the world today and a global exchange rate devaluation. These issues make central bankers powerful new players and make the market more challenging for individual investors.

TGR: Chris, did the boomers and the flash traders wreck it for the rest of us?

Chris Berry: Algorithmic trading has raised many issues while at the same time solving others. Regarding the boomers wrecking it for us, I don't necessarily think so. True, debt and deficits must ultimately be reckoned with and its through debt that we in the West have been able to live beyond our means, but the cost of technology is declining so quickly and the opportunities that it brings paint a reasonably optimistic view of the future, in my eyes. There are clear structural challenges and inefficiencies in the markets today, but I have faith in human nature to confront and solve these.

TGR: Chris, you just spoke at the Cambridge House Investment Conference in Vancouver (See our story on the Vancouver conference takeaways here). What was your message to current resource investors looking to take advantage of the opportunities you see all over the world?

CB: I discussed the idea of disruption in energy markets and I laid out the case for why segments of the energy markets are ripe for disruption and offered some areas where I think opportunities exist. According to the World Bank, the urbanization rates in China (53%) and India (32%) are still far below those in the West. Most economists would consider a country "urbanized" when the rate hits 75% (the US and Canada are at about 81%). The percentage differences equate to over a billion people who live at a fraction of our quality of life. Data like this shows that there are opportunities to employ new development models that disrupt the old patterns.

TGR: Are energy metals—lithium and cobalt in particular—part of that disruption solution?

CB: Yes, but it may unfold differently than we are currently forecasting. I define an energy metal as any metal or mineral used in the generation or storage of electricity. That includes lithium and cobalt, but also copper and silver, which have much larger markets with a lot more price transparency. The real growth, however, will be in niche energy metals, including lithium, cobalt and scandium, for example. The demand side is positive for all of these metals over the next 5 to 10 years.

Lithium demand is growing by 8–10% per year. As we sit here today, the potential for supply disruptions exists in lithium due to major producers having production issues and juniors facing difficulties accessing the major funding for production decisions. Cobalt demand is growing anywhere from 7–9% on a year-over-year basis.

TGR: What companies could move to fill that demand in the lithium, cobalt, copper and scandium space over that time?

CB: In the immediate term, the existing producers of these metals are going to handle the looming demand. Five years from now, we'll need additional supply and this is when the aspiring producers could benefit.

With cobalt, the large-caps are where I am focused. Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE), Glencore International Plc (GLEN:LSE) and First Quantum Minerals Ltd. (FM:TSX; FQM:LSE) are all examples. To be clear, cobalt is a very small part of their business—it's essentially a byproduct of copper and nickel mining. However, I think it's an important one, given the need for cobalt in battery growth. The cobalt value chain is not vertically integrated very well, with a majority of supply coming from one country (the Democratic Republic of Congo) and a majority of the refining taking place in another (China). Freeport-McMoRan is one of the largest refiners of cobalt outside of China, and so it's been a part of its business I pay close attention to. I have also begun looking at cobalt recycling. A company called Umicore Group (UMI:BRU) is a particular focus in that area.

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Disclosure:

1) JT Long conducted this interview for Streetwise Reports LLC, publisher of  more

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