Freidrich Hayek and the Austrian school of economic policy argue for a laissez faire approach to the economy – emphasizing individual actions and criticizing government intervention. John Maynard Keynes acknowledged that economies could, over time, correct themselves, but argued that government had a responsibility to intervene and stimulate demand when the economy is in a slump. This video is a sequel to Fear the Boom and Bust, also produced by Econstories.tv
For my students, see how many of today’s economic issues you can find in this video and compare them to our look at the Great Depression.
Worldwide hysteria and the fear factor notwithstanding, Casey Research Chairman Doug Casey still considers nuclear power “by far the safest, cheapest and cleanest form of mass power generation.” Sharing his views in this Energy Report exclusive on the eve of a sold-out Casey Research Summit in Boca Raton, Florida, Doug says power generated from wind, sun, the tides and other alternative sources are “very nice special applications but don’t work economically unless they’re subsidized.”
The Energy Report: You have traveled the world extensively, studying the geopolitical forces that shape the economy on a day-to-day basis. In the past, you’ve been quite enthusiastic about uranium because of the need for nuclear power. Has the situation in Japan altered your view?
Doug Casey: No. What’s happened in Japan is most unfortunate, but it hasn’t altered my view at all. People are referring to it as a Class 7 Chernobyl disaster. Perhaps 20,000 people, or more, have died because of the earthquake and subsequent tsunami in Japan. Not one death, so far, has been attributed to that nuclear power plant.
What happened at that plant was not anticipated, and the reactor shouldn’t have melted down. Still, I have long said that nuclear power is by far the safest, cheapest and cleanest form of mass power generation. That is absolutely as true now as it was before the Fukushima disaster.
Around the world, coal is the source of the vast majority of power, and it kills directly, through air pollution and fly ash, thousands of people per year and many thousands more per year through coal mine disasters. Most of the mining deaths in the world—many thousands each year—occur in coal mines. No one ever talks about that. Nor do people seem to recall that when a large hydroelectric dam gives way it kills thousands of people. The debate on nuclear is intellectually dishonest.
TER: But mass psychology includes a nuclear fear factor.
DC: That’s true, because the average person is absolutely ignorant of science. Ask a kid in the city where milk comes from, and he says it comes from a carton out of Safeway. He doesn’t know it comes from cows and what’s involved in raising cattle. It’s the same with power. They think it’s like magic. But if you want to turn the lights on, if you want your refrigerators to run, you’ve got to generate the power, and you’re not going to do it from wind and solar. Those are very nice applications, but they don’t work economically unless they’re subsidized.
I have high hopes that these things will get better in the future, along with tidal and geothermal power. But now, and for the next generation, only coal and nuclear make any sense for mass power generation. Of course, if the government hadn’t been involved in nuclear for all these many years, we might be using thorium—which appears to have many advantages—instead of uranium. We’d certainly be far more advanced with uranium reactors using different technologies. The Fukushima plant design was almost 50 years old and the plant itself was 40 years old; that’s the equivalent of driving a 1957 Chevy today for your primary transportation. This is what happens when you have heavy regulation that makes capital costs so high that you can’t put in new technologies. Is nuclear power potentially dangerous? Of course. Everything is. But it’s a question of alternatives. I’m afraid hysteria has overwhelmed reason here.
TER: But how can we get over that? Can uranium really increase in value if the entire world is reassessing nuclear facilities?
DC: Reassessing in favor of what? Sure, they’re going to build more coal plants because India and China and the whole world needs more power. But aside from coal, what are they going to do?
TER: How about liquefied natural gas (LNG)? Some suggest that LNG will be a viable alternative in Japan, at least temporarily.
DC: LNG is fine except that it suffers from the NIMBY (not in my back yard) syndrome too. First, you have to get the gas; there’s plenty of gas, but nobody wants it recovered using current fracking techniques. Then you have to compress it and deliver it in a highly compressed form. Nobody wants an LNG tanker around, because if it explodes, it’ll literally blow up a city. That happened in Cleveland in the 1940s. Hundreds of people died and it took out half a square mile of Cleveland. So it’s not without risk.
A new hysteria is developing since we found shale gas, with absolutely vast quantities available using new technologies of horizontal drilling and fracking. But there are dangers of damaging the water table, so everybody will say, “You can’t go for shale gas here because it can potentially ruin our water”—and maybe they’re right, at least in some instances. Everybody wants power but nobody wants to do what it takes to generate the power. I don’t know how all of this is going to end, but probably badly because the world is so politicized.
TER: Shifting focus a bit, Doug, earlier this month, in a piece entitled “Keeping Capital in a Depression,” you wrote about agriculture as a viable option, and your summit agenda includes an “Investing in Agriculture” presentation by Steve Yuzpe, CFO at Sprott Resource Corp. Could you tell us a bit about your views on agriculture going forward?
DC: The prices of most grains, especially wheat, corn and soybeans, have doubled in the last year. You can make a good case that agriculture is a good place to be for the long term. I’m quite involved in the cattle business in Argentina and I think cattle actually will go much higher for a lot of fundamental reasons. Agricultural land all over the world has gone up hugely in the last few years. But that’s the problem, because if you want to make money, you have to buy cheap. Almost no assets are actually cheap anymore because so many trillions of dollars are floating around. I try to look at all the markets, everywhere. There are very few bargains.
TER: A recent article you wrote suggested that you’re not crazy about commodity foods such as wheat, soy or corn because they’re so subject to political interference and—as you put it—”they’re not as important as foods for wealthy people, which is the profitable sector in the market.” What do you mean by subject to political interference? And what are foods for wealthy people?
DC: Two different questions and they’re both good. As for political interference, Argentina is an excellent example because Americans are only a few years behind the Argentineans in learning how to destroy an economy. In agriculture, a government can use export controls—subsidizing some things and taxing others—to manipulate the market. Wheat, soy, corn and other grains are common targets. These are commodities for feeding masses of people, grown by the millions of tons. I find boutique areas of the market much more interesting—and less regulated.
TER: For example?
DC: Apples, peaches, blueberries, or, for that matter, cattle. The rich people in the world are getting richer, mostly because of politically-caused distortions. But the middle classes are growing by tens of millions of people per year in China. They don’t want to just eat bread and cheap soybean-based foods. Rich people like to eat meat, so it makes sense to me that it’s a better place to be. Plus, ranchers haven’t made money raising cattle for decades—most do it just because they’re ranchers, and can’t break a bad habit. Cattle herds worldwide have been in liquidation for a long time. I believe that’s going to change, and cattle prices are going way up.
Another problem mass commodity producers face is that every year farmers can plant huge new crops, adding volatility to the market. But cattle take years to mature. So the supply is more predictable, and constrained.
TER: In the world of the Greater Depression that you foresee, to what extent is the production of foods for wealthy people—the fruits and the meat—sustainable? Wouldn’t these markets also crash?
DC: In a depression the standard of living goes down. That’s the definition of a depression. But it will go down less for rich people than for poor people. So in relative terms, I think rich people’s foods will be higher-priced. I don’t think they’re going to go down as much and they’re likely to go up more. Think about caviar. The number of sturgeon will go down and the number of people who want to eat fish eggs will go up. In fact, if I could buy long-term contracts on caviar and good eating fish, I’d do it.
Regardless of what happens in the U.S. and Europe, both of which are in a lot of trouble, the Indians and the Chinese are coming up rapidly in the world. Scores of millions of people a year in both of those countries are joining the middle class. After they have money, nobody wants to eat high-fructose-based corn products. They want to eat rich people’s food too.
TER: In terms of the mass commodities, you pointed out that at any point farmers can simply plant more grain. But aren’t there issues in terms of the amount of arable land available, appropriate water sources and machinery and so forth that inhibit or limit that ability to just plant more? If we have this ability to just plant everywhere, why are potash and fertilizers going up so much? Doesn’t that indicate we’re trying to get more out of the same places?
DC: That’s absolutely true. There are counterarguments to everything I’ve said and I’m well aware of them. For instance, when it comes to these grains, they’re all gigantic monocultures. Whenever you have a gigantic monoculture that goes for many, many miles in every direction, like in the grain-growing areas of the world, you’re looking at a potential disaster because a bug—whether it be a microbe or an insect—could devastate all of it at once. When plantings were much more variegated, you couldn’t have a wholesale disaster wipe out the whole crop.
Another thing to consider is that while the fertilizers increase yields on the one hand, on the other hand, fertilizers as well as the various biocides are very destructive of soils. They kill good microbes and earthworms and things like that. And, of course, in many growing areas they pump water up from the water table. That’s generally a non-renewable resource because it takes thousands of years to recharge those water tables. That’s another potential disaster.
At some point you could find the grains going through the roof for those various reasons. But in the meantime, as people plant grains, for instance, here in Argentina cattle are being kicked off good land because it’s being planted with grains. The cattle have to go on junkier and junkier lands that are less productive. All of these things are pushing against each other in the markets. So, having said all that, I prefer the ends of the market that are generally looked upon as being rich people’s foods.
TER: Aside from holding precious metals and finding agricultural niches such as you’ve described, how does someone with any wealth preserve it during this tumultuous period you anticipate?
DC: You must be geographically and politically diversified. That’s critical. It’s hard to find a politically stable place, but at least you can find a politically isolated place that’s unlikely to be overrun in a war, or become a police state. The average person lives his whole life in the country where he was born, and whatever happens in that country happens to him. He’s planted there and stays there, acting like a vegetable, which isn’t a very intelligent approach to survival. So I recommend, first of all, political and geographical diversification.
TER: When it comes to geographically allocating your capital, you’ve founded a development in Argentina called La Estancia de Cafayate, a remote “lifestyle community” near the Andes—apparently now home to more than 150 people from a couple of dozen countries. But you know a lot of other places, too. How do you view Argentina now in comparison to other countries that are thriving? Thailand’s economy is healthy, expanding more than 7.5% last year. And of course everybody talks about China’s economic growth. Do you consider those politically stable places? Or would you focus more on South America?
DC: I’m a huge fan of the Orient. I’ve lived in Thailand, and thought seriously about going back for the years to come. But as much as I love it, it’s the antithesis of Argentina—not just geographically, but culturally it’s exactly opposite as well. If you’re of Caucasian background, it’s fine to live in the Orient, which I’ve done for years, but you’re never going to really be part of society there, and you probably won’t learn the language either. Tonal languages are tough. All things considered, I’d say South America is the best place to be. It’s experiencing a boom right now because of agricultural prices.
There are a lot of places you can go in South America—15 countries. Argentina is just the one that culturally suits me. Of course, the government has been idiotic almost all the time since Perón, but it bothers you less than most governments in the world do. As far as Estancia is concerned, it’s without question the best community in the world to live in, at any price—even 10 times the price. It has far more in the way of amenities and facilities and climate. And most important, the people buying there are the kind of people I want to hang around. So it’s a good place to be.
TER: Another good place to be, this weekend at any rate, is your summit in Boca Raton. Participants can look forward to hearing from some remarkable people, with something on the order of 35 of them on your agenda. What do you expect to be the major takeaway from this summit?
DC: What we’re facing now is something of absolutely historic importance, the biggest thing that’s gone on in the world since the industrial revolution. Many things will be completely overturned in the years to come. What’s happening now in the Arab world with all of these corrupt kleptocracies being challenged and overthrown is just beginning. We haven’t heard the end of this in any of these countries—Egypt, Tunisia, Syria, Algeria. Saudi Arabia will be the big one, of course. Everything’s going to be overturned. And all these stooges that the U.S. government has been supporting for years could very well lose their heads.
So this is a very big deal that we’re facing here in the next 10 years. It’s going to be the most tumultuous decade for hundreds of years, bigger than what happened in the 1930s and 1940s. Hold on to your hats. You’re in for a wild ride.
Doug Casey, chairman of Casey Research, LLC, is the international investor personified. He’s spent substantial time in over 175 different countries so far in his lifetime, residing in 12 of them. And Doug’s the one who literally wrote the book on crisis investing. In fact, he’s done it twice. After The International Man: The Complete Guidebook to the World’s Last Frontiers in 1976, he came out with Crisis Investing: Opportunities and Profits in the Coming Great Depression in 1979. His sequel to this groundbreaking book, which anticipated the collapse of the savings-and-loan industry and rewarded readers who followed his recommendations with spectacular returns, came in 1993, with Crisis Investing for the Rest of the Nineties. In between, his Strategic Investing: How to Profit from the Coming Inflationary Depression broke records for the largest advance ever paid for a financial book. Doug has appeared on NBC News, CNN and National Public Radio. He’s been a guest of David Letterman, Larry King, Merv Griffin, Charlie Rose, Phil Donahue, Regis Philbin and Maury Povich. He’s been the topic of numerous features in periodicals such as Time, Forbes, People, US, Barron’s and the Washington Post—not to mention countless articles he’s written for his own various websites, publications and subscribers.
See the USAToday with the most ill-conceived thesis ever in this article today: Indians, Tigers, Pirates and Reds fighting population loss in the Rust Belt.
Does anyone in the world really think Pirates’ attendance problems (worst in the NL according to the article) have anything at all to do with population loss in the City of Pittsburgh proper which is the only factoid they reference for us in that article.
I do have a question though; what is the top attendance at AAA games around the country?
Speaking of population though.. this factoid may be more important as symbol, but something I put up over here is some recent census data released on the population in group quarters as of 2010. For Allegheny County the population in nursing homes is down significantly, while the population in college dorms is up a large amount over the decade. Check it out.
Inflation measurement is a critical component of macroeconomic policy. In a recent paper, Patnaik et. al. have argued that while the CPI-IW has many problems, these difficulties are not first order, and that the CPI-IW can yield a reasonable measure of inflation today.
On 18 February 2011, CSO released a new CPI with base year 2010 (Jan-Dec =100). This new CPI has five important new features:
- It is disaggregated at the rural and urban levels. The new overall all India CPI is a weighted average of the two. This is in contrast with the earlier CPIs which represented subsets of the population (industrial workers, agricultural labourers, rural
- The new series has better geographical as well as commodity coverage. The basket of consumer goods has risen from 25 to 250. The weights have been derived from the 61st round of the NSS consumer expenditure survey (2004-05).
- Data for the urban CPI will be collected from 310 towns (compared to 78 in the current CPI-IW, for all India). The rural CPI will use data from 1181 villages. Field officers of the NSSO and the Department of Post will be the price collection agents for urban and rural centers respectively.
- Since the two series are not comparable, year-on-year inflation numbers based on the new CPI will be available only from February 2012.
|| New CPI
|Food, beverages and tobacco
|Fuel and Light
|Clothing, bedding and footwear
The share of food in the new CPI series has seen a small dip in comparison to the CPI-IW while the share of services has risen. The
share of housing has also seen a sharp rise. In CPI-IW, the price of housing services was imputed from the house rent allowance given to civil servants. For the new CPI series, housing prices will be collected through surveys of a sample of rented dwellings in 310
The weights in the new CPI are taken from a household survey by NSSO. This is, however, already quite dated given that it was
conducted in 2004-05. It is hence interesting to compare these weights with those seen in the CMIE Consumer Pyramids dataset, which goes upto the quarter ending Dec 2010. This is a panel dataset where 140,000 households are measured every quarter.
The household basket as shown by CMIE gives a weight to rent based on households that report rent. The CPI uses an imputed rent. An imputed rent calculation for the CMIE data is not feasible based on the information presently given out by CMIE. In order to render the two comparable, we purge both consumption baskets of rent.
||New CPI, rural
|| CMIE: Oct-Dec 2010, rural
|Food, beverages and tobacco
|Fuel and Light
|Clothing, bedding and footwear
In rural India, the weights of food and miscellaneous in the new CPI match that seen in the CMIE consumer pyramids even though the CMIE dataset is much more timely. In comparison to the Consumer Pyramids weights, fuel and light is under-weighted while the clothing category is over-weighted in the new CPI. The fact that these differences are small gives us increased confidence in the NSSO and in the new CPI.
||New CPI, urban
|| CMIE: Oct-Dec 2010, urban
|Food, beverages and tobacco
|Fuel and Light
|Clothing, bedding and footwear
A similar comparison in urban India shows noticeable differences in all categories. The weights for the food group is lower in the CMIE data. Both the clothing and the miscellaneous categories exhibit similar patterns. The fuel group has a significantly higher weight in Consumer Pyramids. Over time, the role of fuel has risen.
||New CPI, all India
|| CMIE: Oct-Dec 2010, all India
|Food, beverages and tobacco
|Fuel and Light
|Clothing, bedding and footwear
All India weights reveal similar patterns as urban India weights. This is not surprising because all India figures are weighted
averages of rural and urban weights.
Assuming NSSO did a good job of measurement in 2004-05, this suggests that over a short period of time, the expenditure pattern
of Indian households has been changing at a fast pace.
Despite the issue of weights, the new CPI series is a welcome step. Improvements in inflation measurement will be an important
component of the Indian process of refashioning monetary policy to deliver low and stable inflation.
At 8:30 AM EDT, the monthly Personal Income and Outlays report for March will be released. The consensus for Personal Income is an increase of 0.3% over the previous month and the consensus Consumer Spending index change is an increase of 0.5%.
Also at 8:30 AM EDT, the Employment Cost Index for the first quarter of 2011 will be announced.
At 9:45 AM EDT, the Chicago PMI Index for April will be announced. The consensus index value is 68, which is 2.6 points lower than last month, but is still well above the break-even level at 50.
At 9:55 AM EDT, Consumer Sentiment for the second half of April will be announced. The consensus is that the index will be at 69.6, which is the same as the value reported in the first half of the month.
At 12:30 PM EDT, Federal Reserve Chairman Ben Bernanke will give a speech to the San Francisco Federal Reserve Bank Community Affairs Research Conference.
At 3:00 PM EDT, the Farm Prices report for March will be released, giving investors and economists an indication of the direction of food prices in the coming months.
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Here is a trivia question. What has been the average unemployment rate for the Pittsburgh region’s labor market over the last 40 years?
That certainly includes some bad times averaged in there, but it also averages in some pretty good times as well. The question was prompted by the quote in the paper today describing the regional unemployment rate drop down to 6.8% as being “still a long way to go to return to normal employment“.
So not even any light there at the end of the tunnel as yet? Like waiting for Godot for a positive sign in the local economy.
Again, I like to keep track of the relative unemployment rate for a lot of reasons, but mostly because it is a decent predictor of net migration rates for metropolitan regions. Here is what that looks like which when you combine the length (54 months since the national unemployment rate was higher than Pittsburgh’s) and depth (2 full percentage points below the US rate) clearly now represents some unprecedented times for the region in terms of how the region is performing compared to the nation.
So still not an absolute record in just how far below the US we are. There was one month in April of 1975 when we were 2.1 percentage points below the national unemployment rate. Darn rounding error is messing up my factoid. And just for one other little sidebar to this all The City of Pittsburgh unemployment rate is coming in for March at 7.3%. The City of Detroit for example, seems stuck above 20%.
Lots more to parse of course. Some confusion over what is happening in the labor force which has not grown much in recent months. While the relative unemployment rate chart would indicate there is still net migration into the region, the fact that the post-recession labor markets are beginning to recover nationally means that the pressure to move out of many other regions is nowhere near as dire as it was a year or two ago. So I would not be surprised if say the flow of folks from places like Detroit (which is now down to 11% unemployment) for example to Pittsburgh has come down. There is also the issue of the folks who wound up remaining in the labor force a bit unwillingly because their retirement portfolios took such a hit in 2008. That was the story with a lot of elderly deferring retirement. Well… you may have noticed the stock market has done quite well the last couple years and at least at the margin, a lot of folks who were continuing to work may now feel empowered to finally retire. Probably a part of what is happening to the unemployment rate as those openings filter down.
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Reading this opening line from a Seeking Alpha article “Ben Bernanke continues to be one of the only economic voices of reason in the United States”
my first thought was the article was humorous. Not so, he is actually serious! It continues:
Gold is economically irrelevant for the following reasons:
1. The pricing mechanism of gold is too easily manipulated by extremists. Gold is the investment vehicle of fear.
2. Gold is no longer a currency. Gold has no fundamentals.
3. Gold prices are transitory. This is a fad.
4. Bond prices, gold stocks, and core inflation suggest there is no imminent threat to the economy.
This is the mainstream view, unfortunately. We are a long way off a bubble.
How long until the window on rising iron-ore prices closes? Global demand is driving prices higher and shipping costs are at historic lows. But only companies poised to get into production quickly will be able to capitalize. In this exclusive interview with The Gold Report, Geordie Mark, an analyst with Haywood Securities in Vancouver, picks the companies that are ready to profit and those that are likely to get picked off by competitors.
The Gold Report: BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF), one of the world’s largest suppliers of iron ore, recently submitted an environmental review for a proposed $48 billion expansion of the Port Headland Harbor in Western Australia to accommodate the doubling of iron ore production from its Pilbara operation. When a company’s willing to spend $48 billion at one operation, what does that tell us about the long-term fundamentals about the iron ore business and, ultimately, the steel business?
Geordie Mark: The thesis there is one of global growth in steel demand resulting from continued industrialization from advancing economies, particularly China. At the moment, China produces somewhere near 45% of the world’s steel.
On the back of that, India is continuing to grow its internal steel production at greater than world average rates. So, 37% of the world’s population, which includes only China and India, has significant growth in its underlying steel consumption and demand.
If you take a step back, these countries are both in the juvenile stages of their steel use. They still have a long way to go in ramping up their countrywide infrastructure requirements. This trend is expected to continue for a number of years, if not decades.
TGR: Investors commonly think of China and India as the primary drivers behind steel demand. However, I have a November 2010 report from UBS, which estimates that steel consumption this year will rise by 4.5% in Europe, 4.5% in Russia and 5% in Brazil—a little bit more than India and China. The growth forecast gets even more bullish in 2012. Are Haywood’s numbers similarly robust in countries outside of China and India?
GM: I would have to agree. China is obviously the main source of growth due to its size. For example, China’s steel consumption is roughly eight times that of the U.S. But we are seeing significant growth from other countries, too. There are significant growth projections coming out of Europe, Russia and Brazil. The World Steel Association estimates global growth this year at 5.9% and 6% for 2012.
TGR: All that competition for iron ore is driving up the cost. China’s imports of iron ore in the first quarter rose almost 15% to about 177 million tons (Mt). Meanwhile, the average import price was $156.50/ton in the first quarter, about 60% higher than in the year-early period. What are some ways to play this remarkable growth?
GM: To play the growth, investors could look to companies that are either entering into production or can enter production in this period of high prices, which we believe will be about five years. In the short term that could include companies entering into production this year in order to get near-term cash flow and strong margins. An example is Labrador Iron Mines (TSX:LIM). We expect Labrador to start production within about a month’s time from a direct-shipping style operation.
Investors could also find growth in development-stage companies that could go into production within the window of high prices. For example, Northland Resources S.A. (TSX:NAU) has a project it anticipates it will start mining in late 2012 for high-quality iron ore concentrate product.
TGR: What’s your prediction for prices a year out from now?
GM: This year we are forecasting an average price of around $139.50/tonne for 62% Fe iron ore FOB Brazil. Next year, we forecast about $124/tonne.
TGR: Why are the prices going down?
GM: We have taken a conservative approach to building our forward commodity price curve given known supply growth, as well as uncertainty surrounding seaborne transport rates. Furthermore, concordantly, the commodity has witnessed elevated pricing volatility whereby about a year ago, the industry came off an annual benchmark approach where the Big Three, that’s Vale S.A. (NYSE:VALE), Rio Tinto (NYSE:RIO; ASX:RIO) and BHP, negotiated with steel producers on an annual basis to fix prices. The rotation of the mechanics of commodity pricing within this industry was a result of the underlying demand-driven environment, which now places the iron ore producers with a lot more say in negotiations.
World iron ore pricing rotated out of an annual benchmark into quarterly indexing and a greater reliance on the spot price markets. In the last first quarter and second quarter price negotiations, we have increases in prices for the Big Three, but as stated earlier we will also see greater volatility in the spot market relating to seasonal events and any fundamental policy changes out of China and other growth steel producers. Since we do see greater potential for volatility in the market going forward, we’re resting on the conservative side for pricing.
TGR: The value of companies with iron ore assets or projects increased by an average of 400% between October 2005 and October 2010, whereas the value of metallurgical coal companies increased 34% during that same time, according to the UBS report. Steel companies were up 12% during that period. Part of that value creation is because steel companies have gone upstream and bought iron ore juniors to control the cost of supply. Do you expect that trend to continue?
GM: I would say the valuation metrics driving steel companies and companies with iron ore assets differ appreciably given that the steel companies work on operating margins and output growth, whereas companies with iron ore assets and projects have moved up because they’re increasing the underlying resource base, lowering apparent risk by moving through development or entering production in a market with elevated commodity prices.
We do see vertical integration being a very significant component going forward for the steel producers. Steel producers want to hedge away from the Big Three. These companies want to be independent and integrate their cost management into locking up some of their iron ore at cost. Such integration enables steel companies to be more competitive when selling steel. We believe that there is likely to be continued vertical integration in the sector as steel producers lockup supply and protect the underlying cost base.
TGR: One example of that was when Cliffs Natural Resources Inc. (NYSE:CLF) bought Consolidated Thompson Iron Mines Ltd. (TSX:CLM)
GM: That’s exactly right. Cliffs and Consolidated Thompson have a lot of operational synergies in the Labrador Trough. Cliffs was able to pay a good price for Consolidated Thompson. The Canadian operations had operational synergies, so that arrangement worked for Cliffs.
Another example of vertical integration would be Tata Steel Ltd. (LSE:TTST; Grey Market:TATLY) forming a joint venture with New New Millennium Capital Corp. (TSX.V:NML) on a direct-shipping ore project in the Schefferville-Labrador Trough, as well as participating in a bankable feasibility study on New Millennium’s large taconite deposits near Schefferville.
There is good vertical integration potential in the sector, particularly within areas that have existing infrastructure or reasonable assurance in terms of asset ownership. Canada is a very good home for such activity.
TGR: You recently revised your price target on Alderon Resource Corp. (TSX.V:ADV; OTCQX:ALDFF) from $3.90 to $5.80 after it published a resource estimate on its Kami iron ore project in Labrador. Was it the size of the estimate that made you revise your target?
GM: We were pleasantly surprised by the resource estimate. Alderon reported an Indicated iron ore resource of 490 (Mt), plus an inferred resource of 118 Mt. Just today, the company brought out some drill-hole results on North Rose, which is outside the defined resources, and looks as though it has potential to add resources. Alderon did surprise on the upside and we give it some more credit on that basis.
TGR: What were your thoughts after visiting the property and meeting management?
GM: My take is that the management is made up of very strong group, and this is married with a very strong board. A significant component of the current board is that many were also on the board of Consolidated Thompson during its pre-production stages.
In terms of the property, it’s all location, location, location for infrastructure. The Kami property is within 15 miles of four operating mines with four options to get to a public rail system. Those components work well together for this project.
TGR: Would those factors make it a takeover target?
GM: It has potential. The main other component is that it is independently owned. There are no steel producers involved in the company at the moment. Its largest shareholder is Altius Minerals Corporation (TSX.V:ALS) because it originally held the property. I definitely think Alderon could be a potential takeout candidate in the long term.
TGR: Are there some other promising juniors that you follow?
GM: Another independent iron ore company in that same mining area is Champion Minerals Inc. (TSX:CHM). It has a portfolio of projects with around 1.5 billion tons of NI 43-101 compliant resources. Its flagship project, Fire Lake North, is not too far away from ArcelorMittal (NYSE:MT) existing Fire Lake Mine. Champion potentially still needs a little more infrastructure to come into play, but it has a very good portfolio of assets going forward. We have a target of $4.20 for Champion stock. Recently, it was trading at about C$2.38.
TGR: Any other juniors in the Labrador Trough there?
GM: I mentioned Labrador Iron Mines, which is entering production this year. It probably will produce just less than 1.5 Mt. of 62% direct shipping iron ore style product.
TGR: Who are the major shareholders in that play?
GM: The main shareholder is Anglesey Mining Plc. (LYSE:AYM). The second major shareholder is Passport Capital.
There is also New Millennium Capital Corp., which has a joint-venture project with Tata Steel, its largest shareholder.
TGR: Given Tata’s large stake in New Millennium, it’s probably not a takeover target. But are Champion and Labrador?
GM: Alderon, Champion and Labrador all have the potential to be taken out.
We are also looking at Northland Resources being one of the next producers, although it isn’t in the Labrador Trough.
TGR: Where is that project located?
GM: It has two projects. Its flagship is the Kaunisvaara project in Sweden, which is fully permitted for production, and is in development at the moment.
Sweden has a long history of iron ore mining. This project would export out of Norway, and would probably be predominately selling to a European market. The project is expected to output a very high-quality product at around 69% Fe, and we think the company could fetch a good premium for the product.
TGR: What can investors expect in the iron ore market in the near term?
GM: Growth should continue to emanate out of China and India, and bolstered recovery is taking hold in Europe, particularly Eastern Europe, and North America. Another feature to look at is the cost of seaborne freight. There have been continuous lows in the market for seaborne freight because of surplus capacity that should continue for a number of years. Demand growth and lower transportation rates provide fantastic opportunities for pricing protection to moderate operating margins for projects entering production or at the development stage.
TGR: Thanks for your time, Geordie.
Dr. Geordie Mark, a research analyst with Haywood Securities, focuses on uranium companies involved in exploration, development and production. He joined Haywood from the junior exploration sector, where he was vice president of exploration for Cash Minerals, which concentrated on uranium and iron oxide-copper-gold targets across Canada. Prior to joining the exploration industry, Mark lectured in economic geology at Monash University, Australia, and served as an industry consultant. He completed his Ph.D. in geology in 1998 at James Cook University’s Economic Geology Research Unit in Australia, specializing in aqueous geochemistry and igneous petrology applied to ore-forming systems.
At 8:30 AM EDT, the advance GDP report for the first quarter of 2011 will be announced. The consensus is an increase of 2.0% in real GDP and an increase of 2.2% in the GDP price index. The real GDP estimate is 1.1% lower than the final value for the fourth quarter of 2010, and the GDP price index is 1.8% higher.
Also at 8:30 AM EDT, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 390,000 new jobless claims last week, which would would be 13,000 less than the number released last week.
At 10:00 AM EDT, the value of the pending home sales index for March will be announced.
At 10:30 AM EDT, the weekly Energy Information Administration Natural Gas Report will be released, giving an update on natural gas inventories in the United States.
At 4:30 PM EDT, the Federal Reserve will release its Money Supply report, showing the amount of liquidity available in the U.S. economy.
Also at 4:30 PM EDT, the Federal Reserve will release its Balance Sheet report, showing the amount of liquidity the Fed has injected into the economy by adding or removing reserves.
Speaking of pensions ever again. The last post on the vast ambiguity in the value of the City of Pittsburgh pension fund was mostly a reflection of the lack of hard numbers in this story from February. It all sounds like accounting by Ouija Board.
I was going to follow up with yet another rant on the lack of useful information made available by the City’s pension fund. For the longest time the only interesting information there was a newsletter from 2007. Yet, low and behold, there is all of a sudden real and recent news including the detailed performance of the pension plan for the 4th quarter of 2010. It is indeed a brave new world.
Would be quite a step forward, except for what that report says. Be careful what you ask for may be the lesson learned. Ignorance in indeed bliss. The report has a comparative metric of how the city’s pension fund did in the quarter compared to a large benchmark of other investment funds. The answer is that the city’s pension plan came in at the 96th percentile.
So I would really love to know what were the 4% of funds out there that did worse. Give those folks bonuses.
The reason for such a pitiful performance, as clearly noted by the investment managers, was that the pension board’s decision to remove virtually all equity risk from the fund earlier in the year. Take away the risk, you also take away the reward and it turns out the 4th quarter of 2010 was a pretty good period for investment return… if you had exposure that is.
To remove all equity risk at a single point in time would be what is called a massive bet based on market timing. Go ask your own financial advisor if they would ever recommend such a course of action.
So how much did that decision cost is the real interesting question? A million or two? Again according to the same report, the median return as 6% over the quarter, while the city came in at 0.3%. Given an assumption that the average asset value was around $300 million, the counterfactual loss of 6% is nearly $18 million.
That decision could become quite a massive irony if the actuarial calculation of where the pension fund is with the notionally dedicated parking revenue comes in short by an amount less than $18 million. Hold that thought for a future blog post I guess.
There are some real questions I would love to be in a position to get answers for. The primary one is whether they are still lacking equity exposure. At the end of 2010 it says they were 57% cash (I’d put that into that annoying html flashing tag if it was not just so annoying). That’s what it says, really… I didn’t make it up. 57% cash and 29% fixed income. You wonder how much in fees it took to get a few hundred million in equities liquidated to cash.. and how much it will cost to get back into the market assuming they did so. Those fees could easily push up that notional $18 million ‘loss’ even further as a result of the decision last fall.
I really do wonder if they have remained out of equity markets. Given that the Mercer contract is winding down, you could see the logic in holding the cash to turn over to the new fund manager to invest… but I have no idea. If the new paradigm of data disclosure continues next quarter, then maybe we will see if and when they rebuilt an equity portfolio. One would hope they did buy back into equity markets because the 1st quarter of 2011 had a pretty good return. If they stayed in cash, that notional loss might be a fair bit larger still.