interesting article

From Minesite.com

I don't know a lot about Jeremy Grantham, but the content of this article is a great read.

cheers Mitch

Barrick Snatches Equinox As Jeremy Grantham Blows His Last Bubble
By Our Man In Oz


If in doubt that the global resources boom has years, perhaps decades to run two totally unrelated documents were released yesterday which will settle the debate. First came news that Canada?s gold leader, Barrick, was prepared to pay A$7.2 billion for the Australian-listed (but African and Arabian focussed) copper miner, Equinox Minerals. Then came an astonishing analysis of the outlook for global commodities from Jeremy Grantham, the British economist who has made the study of economic bubbles his forte. His latest quarterly newsletter from the company he co-founded, Grantham Mayo Van Ottterloo (GMO) is headed ?Time to wake up: Days of Abundant Resources and Falling Prices are Over Forever?.

Equinox first because Barrick?s A$7 billion is a remarkable A$1 billion more than a rival bid lodged three weeks earlier by the Chinese based Minmetals group. Quite simply, Barrick ?nuked? the game with a offer that was too big for Equinox to refuse and for Minmetals to counter. But, as the big goldminer with a suddenly revitalised interest in copper storms towards outright ownership some investors will be wondering what?s changed so suddenly. Why has Barrick dipped into its cash kitty to pay A$8 billion for a business which just 12-months ago was valued at A$3 billion?

The two-part answer is that Equinox had become available, first by launching a corporate raid of its own on Lundin Mining, and then by the attempted Minmetals raid. But the second reason is far more important. Barrick has been studying the same data as Jeremy Grantham about future global demand for commodities, declining ore grades and crop yields, the relentless rise of the world?s population, and rising commodity consumption levels in China.

In a document which his critics might see as a conversion to rival that of St Paul on the road to Damascus, or Germaine Greer who suddenly decided that men aren?t all bad, Grantham constructed his fascinating analysis which stopped short of giving price tips but did appear to attack his most famous field of study: bubbles. For decades, Grantham has been arguing (and making profits for clients on the strength of those arguments) that all asset classes eventually ?revert to their mean?, economist code for prices eventually returning from high levels to their long-term trend.

This time around Grantham has turned positively Malthusian, while also adopting one of those dreadful expressions from the tech-boom of the late 1990s ? ?paradigm shift?. What appears to have happened is that he has peered into his data sets and discovered that (a) the global population has surged from 800 million in 1800 to 7 billion today, (b) growth in crop yields per acre has plunged from 3.5 per cent a year in the 1960s to 1.2 per cent now, (c) that China is consuming staggering volumes of commodities, accounting on its own for 53.2 per cent of the world?s cement, 47.7 per cent of its iron ore, 40.6 per cent of its aluminium and 38.9 per cent of its copper, and (d) that the average grade of the world?s recoverable copper ore has fallen from around 0.75 per cent as recently as 1995 to less than 0.55 per cent today.

The key, for Minesite readers, are those copper numbers, rising Chinese consumption and falling grade, and if Grantham knows it so does Barrick, and so does every commodity consuming country in the world. That is why the one-time bubble champion of the economic world arrived at the conclusion that: ?The prices of all important commodities, except oil, declined for 100 years until 2002, by an average of 70 per cent. From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II. Statistically, most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has been reversed ? that there is in fact a paradigm shift ? perhaps the most important economic event since the industrial revolution?

Grantham?s recommendation is that countries start preparing for a global shortfall in commodities with ?price pressure and shortages of resources a permanent feature of our lives?. No reversion to mean there by the bubble king who is putting his money where his mouth his by directing a small position ?say one quarter of my eventual target in stuff in the ground and resource efficiency?.

Barrick is doing exactly the same thing by paying top dollar for Equinox to access a company with abundant copper reserves. It will not be alone. Grantham?s conversion on the road to his personal paradigm shift will reverberate around the world

? Footnote. At no stage in this story did Minesite?s Man in Oz use the words ?told you so? ? but it was bloody tempting!