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Jim Letourneau's Blog

Investing, Technology, Travel, Geology, Music, Golf. I think that covers it.

Credit crunch crimping commodity supply

A "normal" Wall Street crash often doesn't have much of an impact on Main Street. While people's portfolios are bruised, most people go about their day to day business and eventually things work out.

It is a different kind of beast when the global financial system is reeling. Numerous commodity-related "bankable" transactions are now being scrutinized intensely... and then refused. This is hard to imagine, given our recent period of free-flowing credit and buoyant commodity prices, but banks will say no to even the most attractive sounding projects when the fiscal landscape is uncertain.

Commentary on the 7 Year chart of the TSX Venture Composite Index

While companies with solid projects were being swarmed by bankers a year ago, things are different now. Keep in mind that before a bank will even be interested in talking to a resource company that they will have spent numerous millions and many years proving that they have something of value. The geological, environmental, and political risks have been vetted. Here are a couple of Canadian examples.

Canadian Royalties' (TSX:CZZ) Nunavik Nickel Project is being delayed by a lack of bank financing. This half billion project was slated to produce up to 27 million pounds of nickel and 50 million pounds of copper annually.

On the oil and gas side, Oilexco (TSX:OIL) announced last week that their proposed increase in credit facilities from $700 million to $1 billion were being delayed. This will delay activities that would have ramped up their oil production. Their lead financier, Royal Bank of Scotland Group PLC plunged 39% yesterday.

The absence of a functioning global banking system is rippling through the economy. This will lead to a tightening supply of formerly "hot commodities". If demand for these commodities doesn't completely dry up, we'll be seeing some renewed interest in these companies. While it may be too early to buy, it is not too early to start researching interesting companies. Keep in mind that once everyone is in cash and stability to the financial system returns, the search for higher returns in the market will begin anew.