Every investor talks about how commodities are cyclical. But few take advantage of this fact.
It's certainly true that throughout history most commodities have swung from boom to bust. Which means that buying busts has been a reliable strategy for profits.
And judging from news last week, we're certainly in a bust for one metal: uranium.
Reports emerged of another high-profile mine shutdown in the sector. With junior producer Paladin Energy announcing it will suspend output from its Kayelekera mine in Malawi.
The firm noted that the rationale for the closure is simple. The mine simply wasn't making any profit at today's low uranium prices. Even after a slew of cost-cutting measures were implemented over the past several months.
The overall loss of output from Kayelekera is small. At around 0.5 to 0.7 million pounds of U3O8 yearly. But the closure is yet another sign of how badly the uranium business is hurting at current prices.
This follows on a string of other announced project delays and shutdowns in the sector. With even top-producing nation Kazakhstan saying it will delay any new mining projects, because the financial returns simply aren't there in today's environment.
It's simple logic that when these sorts of closures start to happen--as prices languish at multi-year lows--it's a good sign that an industry is correcting itself. With production losses beginning to cure low prices, and set the stage for a rebound.
It won't happen overnight. But these sorts of events are glaring indicators that the market probably isn't going much lower from here. Making this a lower-risk time to buy good companies and projects, in preparation for the recovery.
Years out, we'll look back on this time and say, "It was obvious things had to get better." We'll see who actually puts that insight into action, and turns a profit on this down market.
Here's to buying the bust,
By Dave Forest