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The Globe and Mail

Commodity supercycle? Don't believe hype, HudBay says

A worker taps into the copper stream at BHP Billiton's Olympic Dam smelter.

David Garofalo, the man now at the head of HudBay Minerals, is no fan of two of the big themes in resource space -- the wave of consolidation that's rolling now and the idea that there's a long term bull market in commodities that supercedes the traditional cycle.

The Globe and Mail's mining reporter, Brenda Bouw, is listening in to the conversation and passing along Mr. Garofalo's comments.

They stand in pretty striking contrast to the view of many commodity investors and miners that this time is different, that we are in the midst of a very long term bull market in commodities driven by urbanization and demographic shifts.

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Mr. Garofalo, who took over as head of HudBay in mid-2010, is having none of that.

"With some of the auspicious events that have occurred over the last day or two on the consolidation side, there is a wave of excitement on the consolidation side in the sector; base metal, gold," Mr. Garofalo said. "I am here to tell you we don't subscribe to that type of growth. We don't want to take short cuts. We think that scale for the sake of scale generally tends to be very value destructive."

"We are not in a super cycle, this is a cycle and when the central banks find religion on inflation again, the cycle will be over. When that will be, I don't know, interest rates are very low and that's really what is assimilating demand industrially for our commodities. But at some point the central banks will have to raise interest rates. That will curtail demand. There will be demand destruction, the cycle will be over. And if you aren't building a sustainable business, not building it with an eye to allocating capital on a disciplined basis you won't sustain the down part of the cycle."

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