The 'age of infrastructure' will gobble up physical commodities for years

A massive infrastructure build-out to support future growth of emerging markets, combined with a focus on infrastructure repair and replacement in G-7 nations, portends tremendous benefits to global mining.

Author: Dorothy Kosich
Posted: Thursday , 19 Jun 2008

SAN FRANCISCO -

A large, more urbanized population with an improved economic status in China, India and other developing nations is igniting the age of infrastructure-including massive long-term projects that may build or expand roads, airports, transportation, housing, water, utilities or even the information highway.

U.S. Global Investors asserts that "infrastructure has become a topic of choice for politicians around the world because they can generally count on the support of the electorate. In the case of emerging markets, it is very encouraging that many political leaders openly acknowledge that future economic growth in their countries depends directly on infrastructure improvements."

Infrastructure expansionist fever is even catching in the United States, Canada and other industrialized nations of the world with a mind-boggling global $41 trillion spending program between 2005 and 2030.

And, it all necessitates the unprecedented global consumption of record amounts iron ore, cement, copper, and other physical metals, no matter how bleak the U.S. economy.

In a keynote address to the Denver Gold Group Asian Pacific Forum in San Francisco Tuesday, U.S. Global Investors CEO and CIO Frank Holmes preached the gospel of global infrastructure expansion to a very attentive audience of fund managers, institutional managers, analysts, and mining executives all attuned to its benefits to international mining.

Holmes stressed the importance of broader cycles-- such as the influence of Kuznets Emerging Market Cycle, which drives commodity demands-in trying to analyze current business cycles. Kuznets, an economist who specialized in developing economies, in particular emphasized and tracked the lengthy cycles of infrastructure development.

Holmes suggested a global megatrend of globalization, urbanization and wealth creation is now generating "a global infrastructure boom on a massive, intractable scale." And, he added, "Megatrends increase the use of commodities, especially infrastructure, which creates sustainable jobs and massive use of commodities."

A general public, which previously could not have cared less about iron ore or copper, may suddenly relate to the need for iron ore mines to build bridges, or the need for iron ore and zinc to manufacture steel for building.

At the same time, Holmes hints that a political and economic power shift may be occurring from today's current G-7 industrialized nations to what he calls the" E-7", emerging nations-including the BRIC countries, along with Pakistan, Mexico and Indonesia. He also has noted a 70 to 90% correlation between the E-7 and copper and oil.

A U.S. economic slowdown will not harm the E-7 nations, whose growing domestic demand is capable of economically decoupling from or minimizing the U.S. economic woes. For instance, as the U.S. housing market endures the shock of a mortgage and housing crisis, Holmes emphasized that most E-7 nations have no mortgage market, no sub-prime debt, higher savings and more cash to spend. For instance, Asia is building five times the homes under construction in the U.S., and 80% of those Asian homes are being built in China.

Asian electricity generation demand is 32% ahead of the U.S. as billions of people also seek electricity to power the same technology available in nearly every household in industrialized nations. Mobile cell phone subscribers now exceed U.S. mobile subscribers by 4.2X, Holmes noted. Meanwhile China Internet subscribers surpass the total Internet subscribers in the U.S.

A new paradigm is emerging, Holmes asserted, as developing nations now enjoy stronger financial positions, along with improved debt rating.

MINING WILL BENEFIT FROM NEW ECONOMIC PARADIGM

Global mining will be a beneficiary of this new economic paradigm, Holmes advised. However, he explained that mining has scared away investors who tire of operating disappointments and delays, or excessive optimism about the ability of new discoveries and projects to actually consistently deliver mineral production.

Mining property ownership disputes, major exploration disappointments, forex issues, social and environmental concerns or delays; disappointing feasibility study results; and major project delays all are threats that cause investors to lose faith in a mining company, sell shares, and never return, he warned.

Holmes suggested that volatility drives away institutional investors. He advised mining CEOs to ask themselves if their mining stock is more volatile than the AMEX Gold Bugs Index. If the answer is in the affirmative, a mining company may in danger of driving away its shareholders.

U.S. Global Investors considers three key factors when picking a natural resources stock, Holmes said. They include reserve growth; production growth; and free cash flow growth.

Despite Holmes' popularity with gold bugs, he views gold as portfolio insurance, advising that gold be considered "because people will do dumb things" that will necessitate rebalancing portfolios. He suggested only 10% of a portfolio should be invested in some form of gold or gold equities.

Finally, Holmes advised his audience to pay more attention to the relationship between gold and oil-which has a five year correlation of more than 90%. "Oil is the largest single influence of the price of gold," he concluded.