News that Moves Markets: Further Evidence of Government Manipulated Credit Markets & Continued Evidence of the Phase II Precious Metals Bull Market

Reducing the Noise: A look at the stories that really matter

Evidence of a Government Manipulated Credit Market: ZeroHedge writes:

“…over the past 30 years, the 1 Year inflation expectations has tracked the moves in the 2 Year bond very closely. Until today: the 1 year inflation expectations jumped from 3.4% to 4.6%, a 1.2% jump in one month, this is the single highest monthly jump in a decade since the 1.4% jump in December 2001, following the deflationary knee jerk reaction from the September 11 attacks. But what is most interesting… the spread between the 1 Year inflation expectation and the 2 year bond yield is now at a record wide. This means that either consumers and bonds are at record odds over how they view the inflationary environment in the future, or that there is no real bond market in the short end (all the way up to the 2 Year bond), which is dictated purely by the Fed, and its monetization activity.”

We have contended for some time now that the 2nd phase of the Precious Metals bull market will coincide with explosive earnings growth of the mining companies. This EPS growth will naturally attract capital flows from Wall St. , which is well versed in the dynamics of price relative to earnings. The story below suggests the drilling companies will be primary examples of ebullient earnings growth….

Reuters Summit-Tight mine labor, equipment to slow future plans

NEW YORK, March 25 (Reuters) – Top North American miners of gold, copper and iron ore all said this week that a sudden ramp-up of mining projects has begun to squeeze labor and equipment and before long will slow or delay projects.

Executives talking to Reuters at this year’s Mining and Steel Summit said, skilled labor, especially geologists and mining engineers, were hard to come by and lead times on heavy equipment has been stretched out for weeks or months.

While none said their current plans were being stalled by shortages–the largest miners have lengthy planning processes and lucrative compensation packages to keep top talent–but, the day was not long off when projects would feel the crunch.

“If you add up all of the projects people want to bring online, there are not enough qualified workers to make it happen,” said Laurie Brlas, chief financial officer for iron ore miner Cliffs Natural Resources , adding, “You are seeing that everywhere. We are definitely seeing it.”Metal prices have advanced to either record or long-term highs since the start of the year, impelling miners to restart idled mines, expand current projects or develop new ones.

At the Prospectors and Developers Conference in early March in Toronto, junior miners and developers also said tight labor was rapidly worsening, and likely to accelerate costs, squeeze margins, and threaten some projects.

Cliffs got a taste of the crunch when it began to develop a new body of chrome ore.

“We asked five engineering houses to bid on our project. Three of them said, We have no resources. We can’t,” she said.

Major Drilling , a mine driller specializing in difficult locations, was surprised by the rapid ramp-up of demand for its services so far this year, comparing it with the swift slowdown of late 2008. Though Barrick Gold Chief Executive Aaron Regent did not think the recent pick up in mining projects was en par with the breakneck pace of 2008’s boom, he said, “It’s obvious that things are heading up.”

Nevertheless, to keep skilled labor in places like Tanzania and South America the world’s largest gold miner was having to pay wage increases of 70 percent to reflect local inflation rates. Western Australia’s multitude of projects also commanded sizable pay hikes, though wage rates in the United States and Canada were fairly benign, he said. While Major Drilling has plenty of drill rigs, it does not have enough crews to operate them. With many miners ramping up at the same time, it has had to curry favor to keep talent. “Some guy wants a special truck. It costs $5,000 more and he doesn’t need it, but he wants it. So, he gets it. You are in a skills intensive industry,” said CEO Francis McGuire.

Goldcorp CEO Chuck Jeannes said his company was not seeing slowdowns, but for some equipment, he might have to wait 50 weeks instead of 35 or 40 weeks a year ago. “It means you place those orders earlier,” he said. As a supplier, Major Drilling must decide which assignments to take. Miners that understand the exigencies of the shortages and are willing to pay will likely win the service. On the other hand, he described one company that stuck to its rules requiring outside bidders for part of a project. “We’re saying, ‘What do you mean you have to go to bid? There are no drills out there. We’re here. We can start today. In that case, our price is going to go way up,” said McGuire. “Companies that do that are going to have a heck of a problem getting their projects done,” he added. Furthermore, he said, a number of critical supplies have been showing up later and later and quality has declined. For example, machines are working 24 hours and equipment gets  stressed, so engines regularly blow. “Something as simple as an engine for a pick-up truck. In September, you could buy that anywhere in the world, any time. Now, it’s a four-month wait no matter where you are,” he said. When Major Drilling found a country with eight of the engines, it bought them and shipped them around the world.

“That is symptomatic of the extremely rapid ramp-up. It’s a very difficult 3 to 6 months as the ramp-up goes forward.”

Disclosure: We own shares of Major Drilling (MDI)

About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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