By Bron Suchecki, on May 16th, 2011
This post by Terry McFadgen on Australian housing prices is a good summary of the question of if/when prices will tank. One thing overseas readers should keep in mind is that Australian borrowers can’t walk away from their debt – the bank can foreclose on you and then go after you or bankrupt you for any remaining debt not paid by the sale of the house.
As you would expect this dampens the negative price spiral that can occur in countries where walk away is an option. However, consequence of this is that in the face of financial difficulties people will tend to restrict other spending and divert money to paying off the mortgage to avoid the stigma of bankruptcy (although this doesn’t seem to have bothered “former tennis ace” Mark Philippoussi) This contraction in discretionary spending acts like the “Paradox of Thrift” Terry mentions in his article.
I think Terry makes a good case that “house prices could simply slide down gently over a long period, with inflation doing most of the work of price adjustment” but he does identify four risks/shocks which could bust prices.
He notes that the RBA is between a rock and a very hard place in trying to de-bubble housing but having to increase interest rates too much to control inflation, or having to cut interests rates too much if housing tanks which will weaken the Aussie dollar and stocks as foreign investors pull out.
My view is that push come to shove RBA will cut rates and damn the exchange rate as an imploding housing market is not good for banks and the political pressure will be too intense. This will be an extend and pretend that will work for a few years as there is plenty of room to move with interest rates at the 6% level. A weak exchange rate is good for AUD precious metals prices, by the way, a sort of hedge against house price drop in a way.
I would also not discount politicians doing something stupid to “help” housing. With debt to GDP of 20% a populist call to “do something” could be made when other countries are at 100% ratios (”we have the capacity”). It will all be wasted of course but could drag the game on a bit longer.
However, as the US shows us, once you get to zero interest rates you’ve got nowhere to go and QE doesn’t help housing. Once we reach that point then we will really see a housing price crash as the boomer demographics, China slowdown and “income levels [don't] hold up relative to interest rates” factors all kick in together.
To sum up my view on house prices, “It Won’t Happen Overnight … But It Will Happen” (explanatory link for non-Aussies)
By The Gold Report, on May 16th, 2011
 What is good for the U.S. economy is good for gold. John Kaiser, editor of Kaiser Research Online, has proposed a graphic model that relates the value of all above-ground gold stock to global Gross Domestic Product (GDP), thereby explaining why higher real gold prices—even with a recovering American economy—will be the new reality. In this exclusive interview with The Gold Report, he shares his projections about where both gold prices and the U.S. economy could be going in the future.
The Gold Report: Intel Cofounder Andy Grove wrote an article in BusinessWeek bemoaning the fact that U.S. entrepreneurs in both the hightech and cleantech realm have become inefficient in the return of jobs created per investment dollar basis. He said companies hire fewer employees as more work is done by outside contractors, usually in Asia. He suggested this is a problem not only for low-grade production jobs but also robs the U.S. of its innovation edge, hurting the country’s overall economic prospects for the future. Your economic research illustrates this manufacturing decline and shows the value of gold stock values over the last four decades mirroring the U.S. GDP. Why is consolidating manufacturing and research important for U.S. and global growth and how is it linked to the price of gold?
John Kaiser: A lack of physical manufacturing stifles innovation because without access to support facilities, machine shops, test labs and other resources normally associated with a full-scale manufacturing operation, creative people don’t see problems, quickly test solutions and have the ability to bring products to scale in a controlled environment. Cut off from manufacturing operations, development stalls.
The American economy is still the largest in the world with a $14.7 trillion dollar GDP followed now by China at nearly $6 trillion. The problem is that the employment structure of the U.S. economy has, in the last 30 years, shifted very much to service jobs in the healthcare, retail, financial and professional sectors, away from making physical goods, that are increasingly imported. We also have a serious oil addiction, which contributes significantly to the trade deficit as we import oil to keep our cars moving. So what are we actually shipping abroad that allows us to offset all the stuff that we import? The jobs we see in the United States today produce less exportable output. That has not hurt economic growth, but it has been achieved through a drawdown of the wealth accumulated during the last century, a drawdown that accelerated during the last decade when a huge debt expansion party bubbled through the economy. But that party ended in 2008. We have now had two rounds of quantitative easing designed to keep the economy from collapsing. In order for the United States to deal with its long-term structural debts and deficits, it needs to demonstrate that there is something American workers can do that is of value to the rest of the world. The core has to be manufacturing.
TGR: Is your argument that we should ignore the lower cost structure we can achieve overseas, bring assembly jobs back to the U.S. and start manufacturing here? Wouldn’t the cost of goods go up and spur on inflation at a more rapid pace than we’re expecting just because of quantitative easing?
JK: There could be some interim higher costs from bringing manufacturing back to the United States. However, inflation with regard to imported goods due to increasing transportation costs, higher Chinese workspace and emission standards, generally higher wages and the rising value of the Chinese Renminbi is coming anyway. We can’t wait to react until we are stuck paying their higher prices with no domestic alternative because we have lost the manufacturing and R&D infrastructure at home. We need to anticipate this higher overseas cost structure and act now.
TGR: Won’t those jobs just go to another lower-cost Asian country like Vietnam or Thailand?
JK: Those countries have considerably smaller populations and without super-automation they don’t have the capacity to absorb a large-scale influx of manufacturing capacity. If the solution is super-automation, then you are reducing labor costs anyway so why not do it in the U.S. and avoid the political upheaval that could disrupt the production? Two outcomes of the 30-year decline in U.S. manufacturing are that the power of labor unions has diminished, and much of the legacy manufacturing infrastructure has disappeared. To a large degree American legacy production methods were simply shifted overseas where there was an abundance of cheap and willing labor. If manufacturing is to make a comeback in the U.S. it will be in a highly automated form with newly trained employees drawn from the younger generation, not the current boomer generation or their near-retirement parents. If boomers hope to receive their entitlements when they retire, it cannot be paid for by taxing young workers doing little more than fulfilling those entitlement expectations through service jobs.
TGR: Is supply chain and geopolitical security part of what’s driving this consolidation of research and the manufacturing?
JK: Yes. Long term, as China becomes stronger, it will flex its muscles. It’s just refurbished an old Soviet aircraft carrier so that it can park itself in the South China Sea and exert its military presence. If the United States ceases to produce anything, it will become irrelevant and lose influence anywhere in the world.
TGR: Are major companies bringing manufacturing back based on the reasons you just outlined?
JK: Yes, one example is Boeing, which is way over budget and delivery deadline on its new generation of composite materials-based 787 Dreamliner airplanes. Because the company had outsourced construction of every component, including design, the pieces didn’t fit during the assembly process in Seattle. It didn’t work. The company is now looking at changing its outsourcing strategy by developing a centralized industrial park in which its subcontractors will be required to have a physical presence. That way engineers can see first hand if a piece fits.
TGR: Does that mean consolidation of design and manufacturing domestically will be driven by private enterprise operating in their best long-term interest rather than the government mandating it though trade tariffs?
JK: Yes. Protectionism in the old style is not going to fly. Instead, individuals and companies will have to voluntarily adopt total cost accounting. Instead of just looking for a cheap price, consumers will have to consider all the costs associated, including safety standards, environmental factors and sustainability. By adding in the costs that have literally been dumped on somebody else, we do the responsible thing. We have to stop being parasites, hurting others for our own cheap goods. This total cost view will create jobs and make the country stronger in the long run.
From a corporate perspective, the opportunity cost posed by supply chain disruptions needs to be factored into the cost-benefit analysis before they happen, not just ignored and then suffered when natural disasters or political upheavals happen overseas such as recently happened in Japan. If we stop assuming eternally cheap transportation costs, building and operating factories close to destination markets starts to make sense. It’s also time to ditch the narrow-minded self-interest of the libertarian school and borrow a page from Henry Ford’s book of enlightened self-interest: if you want consumers to buy your product, they need to pay with money earned through productive jobs, not entitlement spending.
TGR: While we’re talking about consolidation and the global shift, please comment on the Barrick Gold Corp. (TSX:ABX; NYSE:ABX)/Equinox Minerals Ltd. (TSX:EQN; ASX:EQN) deal. You predicted gold in the thousands last year. Why do you think Barrick Gold purchased Equinox Minerals, a copper play in Chile, when gold is at an all-time high right now?
JK: First, gold is not at an all-time high in inflation-adjusted terms, which would be about $2,300 using the $850 peak in 1980 as a base. It is only two-thirds of the way to an all-time high. But if we use $400 where gold settled in 1980 as a base, the inflation-adjusted price is about $1,024. That means today’s gold price of $1,500 is about 50% higher than in 1980 in real price terms. But rather than look at the gold price, I look at the value of the above-ground gold stock. About 3.2 billion ounces (Boz.) existed in 1980; today that number is about 5.8 Boz. It is remarkable that during a 30-year period the mining industry nearly doubled a gold stock, which had taken several thousand years to build. This was possible because between 1970 and 1980 gold underwent a tenfold price increase. That equaled a 500% real increase for a mining industry locked in a $35/oz. mindset. Once gold was released from its monetary prison, it established a new relationship to the value of the global economy expressed in U.S. dollars, which I have graphed.
Models are based on each country’s GDP converted into U.S. dollars. While a 50% devaluation of the U.S. dollar should not change the nominal U.S. GDP, the U.S. dollar GDP of all other countries would rise, boosting global U.S. dollar GDP sharply to $110 trillion without any real growth. That would translate into a $2,100/oz. gold price if the gold stock stays valued at 10% of global GDP. Of course, the cost of everything would increase correspondingly and gold companies would be no better off than they are now at $1,500 gold. The model also accounts for the inflation of the gold stock through mine supply. A higher real price will boost gold production, which CPM Group projects as growing from 83 Moz. in 2011 to 103 Moz. by 2016.
I took the above-ground stock of gold that existed in each year and multiplied it by the average price of gold during that year to get the value of all the gold that existed in each year. Then I divided it by the nominal GDP of the world for each corresponding year. That produces an interesting chart. It shows gold going from about 3% of GDP in the 1970s to a peak of 20% during the 1980 bubble and then crashing all the way back down to 4% in 2002 at the bottom of the gold market. Now it is 10%, which is about halfway to what you might regard as a bubble peak. I think gold will stabilize at these levels and go up as GDP grows.
The International Monetary Fund is predicting that our $62 trillion GDP from last year will be almost $90 trillion globally by 2016. So, if you take 10% as the norm, gold should be stable within a $1,400/oz. to $1,700/oz. range over the next six years. That’s a sustainable price assuming the world is growing. Growth would also result in increased copper demand. Barrick is diversifying its revenue base and treating both gold and copper as commodities. Copper, because it is mined to serve as a means to an end rather than as an end in itself as is the case with gold, does not have the arbitrary price volatility of gold. If suddenly the world decided it didn’t need the gold anymore and wanted to convert it into some other form of asset, it would be worth a lot less. Because copper is useful for construction, there is a limit as to how low it can go. Barrick sent a signal that it thinks the global economy is going to grow, that we are not dealing with either a looming depression or hyperinflation. I welcome that because it means gold and copper will have a strong future for the next five years.
TGR: Do you foresee more mergers and acquisitions in precious metals? Is this the start of a trend?
JK: Yes. As companies focus on advancing projects, it will take large capital investment. It will be difficult for a stand-alone project to raise $500M+ without being absorbed by a bigger company that already has production in place and is generating cashflow. This is an opportunity for large, liquid companies to acquire these assets without paying a big premium, particularly if it uses its paper as currency. It is a one plus one equals three situation because as the acquiring company diversifies its revenue base, its catastrophe risk declines. As the market gets more comfortable with gold at current levels, we will see mergers and acquisitions step up and more money coming into the market.
TGR: So, you see economic growth as price drivers for both gold and copper?
JK: In the case of gold, yes. In the case of copper, the question is whether $4 copper is the new reality on which we can base mine development decisions, given a low inflation scenario. The key thing that has happened in the last decade is that China has become a significant economic force. It has now displaced Japan as the second-largest economy with a billion-plus population base and relatively low per-capita GDP. It could grow substantially and eventually become larger than the U.S. economy. But, China is still an unusual political entity; it is a hybrid communist-capitalist country. As they get stronger, we have no idea how they will behave on the global stage. Therefore, people are shifting capital into gold as part of their long-term security plans. As GDP grows, it will probably grow faster than the ability to bring new gold supply on stream. Therefore, gold will rise in price as it tracks the strength of the global economy.
TGR: If you’re expecting the price of gold to track nominal GDP, which is growing 2% to 4%, won’t you see money coming out of gold and going into equities that would probably represent a higher potential return?
JK: All the gold in the world is about 5.3 Boz., worth about $8 trillion. That’s really a fraction of the estimated net worth of all other assets, which is about $130 trillion. Most gold is held as a long-term asset. So even if the crazy gold bugs start selling to buy stocks, they are a small minority and won’t make a huge difference. I believe the value of gold stock as 10% of GDP is a reasonable level. Make it a lot higher and gold owners will look to convert it into other assets such as land, buildings, resources and dividend- or interest-yielding instruments capable of generating a cash flow as opposed to a capital gain. What would the new owner’s reason be for buying? The only return generated by gold is psychological stress relief. However, if gold prices surge to 20% of GDP as it did in 1980, it will be because of an unstable global situation. Under such conditions, gold ownership is not likely to offer much stress relief, especially if government confiscation or a breakdown of law and order become risks. At 20% of GDP, the value of the gold stock would imply a price of about $2,400 in real terms (as opposed to a price rise generated by excessive inflation or a major devaluation of the U.S. dollar against other currencies). In 1980, when gold was 20% of GDP, some thought the United States had reached the end of the line. But the United States survived that crisis and went on to win the Cold War, unleash globalization and accelerate time through the Internet communications revolution. Short of a calamitous collapse in China, I see the center of gravity for global economic and military power gradually shifting away from the United States during the coming decades. On the other hand, I do not see the value of the gold stock dropping back to 5% of GDP because this would require a major decrease in our uncertainty about the future global order.
TGR: What does this mean for silver? Both gold and silver had a setback recently.
JK: Silver has been the worst performing metal for decades. What it’s doing now is a bit of a catch up. Although most of the above-ground silver stock of 46 Boz. is fabricated into some useful form, unlike gold, silver is gaining popularity, especially in emerging economies. The above-ground silver stock value went from 1.5% of GDP in 1970 to a peak of 6% in 1980. But by 2002 the silver stock was worth only 0.5% of GDP. Right now it’s between 2% and 3%. I believe silver can parallel gold’s role as a hedge against the uncertainty associated with the long-term relative decline of the United States and the gradual disappearance of the U.S. dollar as the world’s reserve currency. If we assume the silver stock will establish a value as 3% of global GDP, the price will base out in the $30–$40 range this year, which will grow to $47–$57 by 2016. If it goes to $100/oz., that would indicate a bubble reflecting the inflation-adjusted equivalent of the $50 peak in 1980. Because the recent price growth looks exponential, the markets have fought back and a bear attack is pushing silver back down. But I believe $30–$50/oz. will be the new long-term reality, which opens up some good buying opportunities among silver companies in the next couple of months.
TGR: Since the pullback is happening right now and it has been pretty dramatic, wouldn’t the buying opportunity be now? What will be different in two months?
JK: I’m not a big fan of catching falling knives and anvils. I like to see them bounce around first so I know they’re not going to hurt me. Especially this time of year, it might be best to see where silver and gold stabilize.
TGR: What do all these new economic drivers mean for gold, copper and silver mining companies? And what companies could capitalize on these changes?
JK: Well, the pessimism embedded in the market right now about the U.S. economy and, ultimately, the global economy that still very much depends on the U.S. economy, has discouraged the market from taking current metal prices seriously. If you plug in $1,500/oz. gold and $4/oz. copper into the discounted cash-flow models for these development projects, you get some very sexy numbers compared to what the stocks are trading at. For example, take Geologix Explorations Inc. (TSX:GIX). It has the Tepal Project, a copper/gold play. It’s not super high grade or very large. But, right now the stock’s trading below $0.50. Conservative numbers like $2.75/lb. copper and $1,100/oz. gold result in a value of about $1.10 a share, which is not very exciting. But plug in current prices, $4/lb. copper and $1,500/oz. gold, and the target blossoms into the $3/lb.–$4/lb. range.
We see this across the board, an unwillingness to plug current metal prices into the valuations because of an assumption that we’re going to see copper back below $2/lb. or gold back to $1,000/oz. And, yes, if we end up in a global depression we will certainly see the metal prices go back down. But I see the global economy trending upward, causing gold and copper to stay strong, thereby leading to an inflection point when the market realizes this pessimistic attitude is all wrong. Then the market will take these prices seriously and put capital into mining projects to mobilize new metal supplies. The problem with mine development is it takes three to five years to realize. That is why we need to start going after these huge profit margins now instead of perpetually waiting for signs of an enduring recovery. The irony of the inflation we are seeing in raw material prices today, which threaten to destabilize emerging market economies, is that it is due to the reluctance of capital markets to take the IMF GDP growth projections seriously and deploy capital to mobilize new mine supply.
TGR: What companies are making those investments today?
JK: Sandspring Resources Ltd. (TSX.V:SSP) is an example. It started off as an alluvial gold operation in Guyana. The company ended up going public and raising capital to focus on the bedrock potential, thereby developing a large gold resource with a minor copper credit. Sandspring just completed a preliminary economic assessment using current pricing that suggests the project is worth about $900M. Yet the market valuation is about $300M. That gives you three to five times upside potential if there are no glitches in the pre-feasibility study and current metal prices get nailed to the wall.
Exeter Resource Corp. (TSX:XRC; NYSE.A:XRA; Fkft:EXB) is another example. The company discovered the Caspiche deposit in Chile. It has a large copper resource. It also has a low-grade gold-oxide resource on top. The copper resource is too big for Exeter to develop on its own and in view of the capital cost escalation being suffered by similar large deposits bought out before the 2008 crash and the skepticism that $3–$4 copper is the new reality, Exeter will have a hard time attracting a buyout by a major in the near term. So, to create value while it bides time, the company is now focusing on developing a gold-oxide leaching operation to take advantage of the 1.4 Moz. resource sitting on top of this system.
TGR: Any other companies that could take advantage of the new pricing reality either in the gold, the copper or the silver area?
JK: Grade is very important in the gold sector. Last year Osisko (TSX:OSK) took over Brett Resources Inc. (TSX.V:BBR) and its Hammond Reef Deposit in Ontario, which is just under 1 g/t and about 7 Moz., at about $4. Now that the market is getting more comfortable with the idea of gold north of $1,200/oz., other similar low-grade projects are looking attractive.
Northern Gold Mining Inc. (TSX.V:NGM) is an example. The company’s 700 Koz. Garrcon Project wasn’t very interesting when gold was below $1,000/oz. But, at current prices, the company has an incentive to do step out drilling and lower the cutoff grade in an effort to boost that resource to a 2 to 4 Moz. Open pit mineable. This $40M market cap company could undergo a fivefold increase if Northern Gold triples the resource and delivers a positive prefeasibility study.
TGR: Are you saying that whether we are in a depression as some believe or a recovery as you have outlined, we’ve already seen the floor of $1,200/oz. for gold and these companies are a low-risk return investment?
JK: Not exactly. In the scenario where gold rises because the American economy is in a death spiral, the solution is to pursue a hyperinflation strategy that results in costs rising in conjunction with the price of gold. So, that is of no benefit to the companies. If the alternative is to just curl up in a fetal position and suck one’s thumb and prepare for the end, that will result in gold prices going down. The best alternative for resource juniors is if the world avoids both a deflation-linked depression and hyperinflation scenarios, the American economy gets back on track with a revival of manufacturing on U.S. soil and the global economy continues to grow. That will be good for raw material demand and gold and silver prices.
TGR: Thanks, John. Enlightening as always.
John Kaiser, a mining analyst with over 25 years’ experience, is editor of Kaiser Research Online. He specializes in high-risk speculative Canadian securities and the resource sector is the primary focus for an investment approach he developed that combines his “bottom-fishing strategy” with his “rational speculation model.” Kaiser began work in January 1983 as a research assistant with Continental Carlisle Douglas, a Vancouver brokerage firm that specialized in Vancouver Stock Exchange listed securities. In 1989 he moved to Pacific International Securities Inc., where he was research director until April 1994 when he moved to the United States with his family. He launched the Kaiser Bottom-Fishing Report (now Kaiser Research Online) as an independent publication in October 1994 and developed it into an online commentary and information portal. He has written extensively about the junior resource sector, is frequently quoted by the media, and is a regular speaker at investment conferences. Since 2008 he has developed a focus on security of supply issues and how they relate to critical metals such as rare earths.
By B.P.T., on May 16th, 2011
At 8:30 AM EDT, the Empire State manufacturing index for May will be released. The consensus is that the index value will be 20.0 which would be 1.7 points lower than the value reported in April.
At 9:00 AM EDT, the Treasury International Capital report for March will be released, showing the flow of capital in and out of the United States economy.
At 10:00 AM EDT, the Housing Market Index for May will be announced. This index is created from a survey of home builders, so it shows the confidence that the sector has in the overall economy and their business.
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By Simon Grey, on May 13th, 2011
Putting aside, for the moment, the details of the Ryan plan, what many voters refuse to understand is the unpleasant choice they inevitably face. Either cost-control by the consumers or cost-control (aka rationing) by the State. The issue is stark.
Either consumers directly or indirectly will communicate to healthcare providers the need to economize or the State will put limits on what people can get. The thing is Americans don’t want to have to do the former nor allow the latter to happen. The “advantage” of State limits is that they feed fantasies Americans may still have about State magic. Stones into bread, and all that. We can all get the best care regardless of cost. (Keep in mind I want the best care regardless of cost too!)
The underlying problem with government-run health care programs is that they fail to solve the problem of scarcity. Politicians may promise unlimited resources and voters may believe those promises, but the simple fact of the matter is that there are not, in fact, unlimited resources available.
That resources are scarce implies that there MUST be some form of rationing. Democrats and their lapdogs in the mainstream media mocked Republican candidates for claiming that ObamaCare would lead to so-called “death panels.” And the Republicans are right: Government appropriation of health care doesn’t alleviate the need for rationing. Since health care costs are highest for the elderly, and the highest medical costs occur during the last year of one’s life, some sort of “death panel” rationing system is not entirely inconceivable.
Thus, the debate is erroneously framed as unlimited health care versus elitist limited health care. (This is, of course, a hyperbolic simplification. However, the general point remains.) The debate would be more accurately framed if it were described as state-based rationing versus market-based rationing of health care. This way, citizens would more inclined to compare the relative equitability of the competing methods of rationing, and would hopefully be more likely to make the better choice.
By Christopher Briem, on May 13th, 2011
Historically Pittsburgh has ranked very high in terms of public transit service and usage, but history is history unfortunately. Take a look at the Pittsburgh profile just out of Brookings looking at spatial mismatch issues here. We are actually just below average for the percentage of working age residents who live near a transit stop.
And I bet that was all compiled before the latest round of cuts, but that is speculation. It really is remarkable that we are below average given our history.
and the median wait time here? 40% higher than average. Share of all jobs reachable within 90 minutes. 23%. So even if you are willing to endure a 90 minute commute, you can’t get to 77% of jobs in the region. Think about that.
By The Energy Report, on May 13th, 2011
Advances in energy and agriculture are creating demand for previously ignored metals such as scandium, tellurium and indium. In this exclusive interview with The Energy Report, Mining Analyst John Kaiser, editor of Kaiser Research Online, explains the science that could exponentially increase the value of overlooked stocks.
Companies Mentioned: Cliffs Natural Resources Inc. EMC Metals Corp First Point Minerals Corp. Lithic Resources Ltd. Orbite VSPA Inc. PhosCan Chemical Corp. Teck Resources Ltd. Verde Potash
The Energy Report: Thank you John for agreeing to give us a peek at some of the revolutionary changes emerging in the energy markets today. You have written about the push for alternative forms of energy fueled by a growing middle class population in developing countries. In particular, your April 15th Kaiser Bottom-Fish Report focuses on Bloom Box, a solid oxide fuel cell that could jump-start the next generation of electricity with the help of scandia stabilized zirconia. What’s the status of this project?
John Kaiser: Solid oxide fuel cells have been around for a long time but they have had technical problems such as the decomposition of the electrolyte core due to the fuel cell’s high internal temperature. Bloom Energy tackled this problem by doping the zirconium core with scandium. The result is a robust box ready for production, with the caveat that it will take a decade to truly demonstrate that frequent replacement of the core is not necessary. The company has installed 140 of them already in California commercial buildings at a cost of $800,000 each and expects to have 200 of them in place by the end of 2011. The next step will be scaling down to residential capacity at a cost-effective price. If the company can actually make this work, the market would be extraordinary.
Like most clean energy technologies, the Bloom Box involves a high upfront capital cost; and because natural gas is not free like wind or sunshine, you may ask why a consumer is not better off just paying the price of electricity generated through traditional gas power plants on an as-needed basis. The answer lies in the near doubling of electricity generated by the same unit of fuel using a Bloom Box. Ironically, the more expensive natural gas becomes over time, the faster the payback. If we add a carbon price the payback is even quicker.
California is largely powered by natural gas combustion, which delivers efficiency of about 35% compared to the 60% of power harnessed in the non-combustion solid oxide chemical-electrical process. Gaseous fuels—hydrogen, methane, any biogas—can be input and the only residuals are electricity, carbon dioxide and water. The bottom line is a smaller carbon footprint.
TER: Based on developments like this, what is the outlook for scandium supply and demand in the future?
JK: No scandium mines exist in the world right now. Five tons or so come from scrap metal and stockpiles left over from former uranium mines in the Ukraine. The strategic metal is mainly used to make a light, strong aluminum alloy that can be welded. That makes it popular in the aerospace and defense industries. Scandium is one of these “Field of Dreams” stories. If you build a supply, all kinds of technology commercialization becomes feasible. More than 100 patents have been filed in the last 50 years for uses involving scandium. An accessible scandium supply would pave the way for all kinds of new technologies. The key here is efficiency. In the case of the Bloom Box, it provides functionality that allows this electrochemical process to be effective. But for most of these other applications it’s all about aluminum scandium alloys, making items more durable, more efficient and lighter. That leads to lower energy cost to move cars, planes or anything else engineers can imagine. And if things last longer there is also an energy savings.
Because of this latent demand, a few companies are addressing the supply problem. In Q112, EMC Metals Corp. (TSX:EMC) plans to deliver a feasibility study for the development of the Nyngan Gilgai Project in Australia. Nyngan has an unusually high scandium grade; what EMC hopes to bring to the table is an improved recovery process designed by its chief technology officer, Willem Duyvesteyn.
TER: So, EMC Metals’ strategic advantage is this better method of extracting scandium from the ore and then going and finding similar deposits which were previously not feasible using conventional recovery processes?
JK: That’s right. The days of discovering large high-grade deposits of any nature in readily-accessible regions are gone. The new game is to apply innovative extraction technologies to deposits regarded as too low grade or metallurgically challenged to be economical. EMC is looking for deposits with elevated scandium grades previously considered worthless. It just picked up some properties in Norway where pegmatite formations contain fairly large scandium crystals. The company will test its metallurgical bag of tricks to see if they can extract scandium from these complex minerals and provide a supply from that part of the world.
TER: Are there any other scandium projects in the works?
JK: While EMC is looking at primary scandium production plays, others are looking at scandium as a byproduct. Orbite VSPA Inc. (TSX.V:ORT) is developing an alumina clay deposit in Québec using a new proprietary process involving solvent extraction. The company hopes to sell metallurgical grade alumina to the dozen aluminum smelters across the St. Lawrence River where they have access to cheap hydroelectricity. Electricity is key to refining aluminum, so smelters are always built near an abundant supply of cheap electricity. Today, the smelters import alumina from tropical regions such as Jamaica and Brazil where it is derived from laterite deposits called bauxite which are double the grade of alumina clay deposits. Tomorrow, If Orbite can produce and sell its alumina at a competitive price, without the transportation cost risk, its deposit could replace the Quebec aluminum smelter industry’s dependency on imported alumina.
As a bonus, Orbite believes the company can extract low-grade scandium as well as gallium from the alumina clay. Gallium, used by the electronics industry and a key input for a new style of thin-film photovoltaic solar panels, is currently recovered as a byproduct of alumina production from bauxite using an expensive process. If Orbite can get scandium and gallium as a byproduct of their alumina clay process, and scale up the alumina production, they could provide a significant supply of scandium to world markets, a feat possibly more profitable than providing a secure local supply of alumina to smelters. The trick is to demonstrate that the scandium and gallium do not end up with the 3% portion of impurities in the alumina sold to the smelter, and that Orbite’s process enables it to selectively and cost-effectively extract the scandium and gallium remaining in the solution. Proving this will be a high impact milestone for Orbite.
TER: Are advances in other alternative energy technologies driving demand for metals?
JK: Definitely. A new tellurium-based solar panel is making a refinery byproduct metal suddenly valuable. Unfortunately, no one mines for tellurium. It is produced as a refinery byproduct of certain copper concentrates. The USGS estimates annual tellurium production at about 300,000 lbs., which at the current price of $200/lb. makes the tellurium market worth about $60 million per year, which is “peanuts” compared to the $100 billion-plus value of annual copper production.
Maybe the existing applications that require tellurium use so little that a price jump to $1,000/lb. would barely dent the profitability of the end-product. You would think that all you need is a higher commodity price to generate the supply needed to meet demand. The problem with critical metals recovered by refining base metal concentrates is that their production is linked to the global business cycle. No company is going to increase copper production because demand for tellurium is going through the roof. Those copper /tellurium byproduct mines are likely already mining copper ore at capacity. Furthermore, a dirty secret of the refining and smelting industry is that it does not pay anything to the producer for critical metals such as indium, tellurium and selenium that it recovers from the refinery slag. The entrepreneurial challenge for resource juniors is to find a base or precious metals deposit with an elevated grade for a critical metal such as tellurium and get a partner with sufficient clout to force the smelters and refiners to treat critical metals as payables.
Indium, typically recovered by zinc refineries, is another example of an obscure metal hijacked by technology innovation. Demand surged during the last decade when it turned out that indium was useful in display panels. The price is now $700/kg. compared to less than $100/kg. at the start of the past decade when cathode ray tube monitors still ruled. Thin-film copper-indium-gallium-selenium (CIGS) photovoltaic cells stand to generate new demand for indium and gallium as consumers hop onto the local solar energy bandwagon. Teck Resources Ltd. (NYSE:TCK; TSX:TCK.A, TSX:TCK.B) produces indium as a byproduct of its monster Red Dog zinc mine in Alaska. Because it smelts its own zinc concentrates, it profits from the indium byproduct. Red Dog’s production rate, however, is a function of global zinc demand and the permitted operating infrastructure; it is simply not responsive to indium demand and price, which presents a crisis in terms of simplistic free market capitalism.
The problem for solar panel manufacturers is that the mining industry is not geared to delivering a supply response to higher prices when they involve these critical byproduct metals. The mining industry is subject to the supply-demand cycles of the major metals such as copper, nickel, zinc, lead, iron and aluminum. However, the beauty of entrepreneurial capitalism is that thoughtful individuals can and will identify niche opportunities for which they can deploy specialized exploitation strategies.
For example, resource juniors are now searching for zinc deposits with elevated indium grades on the premise that in a world awash with a glut of zinc supply, future development priority will be given to zinc deposits with a conventional zinc grade but an exceptional indium grade. This is an opportunity for the juniors to investigate because the markets for these metals have generally been too small for the big mining companies who prefer to focus on large scale base metal mines which, examples like Red Dog or Neves Corvo in Portugal excepted, tend not to have a meaningful indium credit. China has been an indium source because the country is home to numerous zinc deposits exploited through small scale mining methods. However, the government has added indium to its restricted list with the result that the world may suffer indium supply shortages in much the same way it is suffering from China’s strategic decision to allocate rare earth production to domestic users.
TER: Other than in China, what companies are finding indium and where?
JK: One of the companies I have been following is Lithic Resources Ltd. (TSX-V: LTH). It has a zinc deposit in, of all places, Utah, home of monster world-class mines such as Bingham Canyon. The Crypto deposit, discovered decades ago and sidelined as an interesting but marginal skarn-style zinc deposit, has been demonstrated by Lithic to have an unusually high indium grade along with its zinc, copper, silver and gold, which will be the bread and butter of a future mine. The indium, however, has the potential to be the gravy.
America, despite its wide open spaces bathed in sunshine, lags Germany, Spain and Japan in the deployment of solar energy capacity. China, the world’s primary producer of indium and gallium, lags in tenth place but is pushing hard to become the dominant deployer and provider of solar energy technology. Lithic is now in the process of raising money to do step out drilling following an independent consultant’s recommendation that the resource be boosted at least 50% to make it feasible at base-case prices, which reflect the dismal reality of the past three years rather than considerably higher spot prices. In my view, unless you subscribe to the belief that raw material prices reflect “bubble” conditions, Crypto is feasible without the extra tonnage. But if the juniors can boost the tonnage with exploration drilling while the zinc mountain in the warehouses finally peaks, this “boring” zinc deposit with the indium icing will be able to withstand the more pessimistic scenarios bandied about by the “apocaholics.”
TER: Agriculture is another global resource problem looking for a mineral solution. In your December newsletter you said fertilizer plays are becoming hot again as the world contemplates the deadly combination of climate change-driven disruption of crop harvests and the growing appetite of developing nations. What about potash companies? Are you seeing those as part of the supply chain that is going to benefit from these factors?
JK: Yes, potash demand is going to go up because emerging middle classes in India and China are developing an appetite for meat, which takes 10 times as much grain to produce as grain for bread. The limited amount of fertile land available will increase the demand for fertilizer. This will increase demand for potash and probably increase potash prices.
Location is an important factor for fertilizer. Brazil is one of the few countries that actually has an enormous amount of arable land available for agriculture. But it has a 90% potash import dependency. Importing potash from the Ukraine or Canada consumes a large amount of energy. Those transportation costs are added to the potash price. One of the companies I have been following is Verde Potash (TSX.V:NPK), formerly known as Amazon Mining. The company owns about 15 billion tons of glauconite, a silicate-based potash existing at surface in Brazil’s agricultural heartland. At 9%–11% K2O (potassium oxide), glauconite is lower grade than the 20%–30% grade of sylvite, the salt-based potash also known as potassium chloride mined from deep evaporite beds or extracted from brines. Brazil’s glauconite deposits were first recognized during the eighties, but never developed because imported conventional potash was so much cheaper. But with $400/ton potash, this stuff suddenly becomes feasible to develop. The company plans to convert the glauconite into “ThermoPotash,” a whole rock product that can be blended into fertilizer blends. Brazil’s government is very supportive of Verde Potash, but the reality is that glauconite processed and marketed as ThermoPotash will never replace more than 15% of Brazil’s import dependency.
But, once again, entrepreneurial capitalism has come into play. Verde Potash commissioned a scientist at Cambridge University, Dr. Derek Fray, to investigate the possibility of a process for converting the silica-based glauconite into conventional salt-based potash products that can serve as a complete replacement for imported potassium chloride. A patent application for such a process was filed in December 2010 and Verde Potash is now setting up independent metallurgical studies to demonstrate that glauconite can be cost effectively converted into conventional potash fertilizers. If it works, Verde Potash’s process would allow its huge glauconite deposit to replace all of Brazil’s import dependency. Because similar low-grade silicate-based potash deposits exist elsewhere in the world, other agricultural economies armed with a technology license from Verde Potash could also turn their “worthless” glauconite deposits into a game-changing solution to fertilizer import dependency.
TER: Any other fertilizer companies you are following?
JK: PhosCan Chemical Corp. (TSX:FOS) has a phosphate deposit in Ontario that was stranded mid-development when the market fell apart in 2008. At the time, PhosCan had grandiose goals of becoming a vertically-integrated phosphate fertilizer producer based on skyrocketing fertilizer prices. Although fertilizer prices have rebounded from the 2008 crash, they are still well below peak 2008 prices. PhosCan has shelved its capital cost-intensive plan for a vertically-integrated plant in favor of investigating the feasibility of developing itself as a producer of phosphate rock to existing fertilizer giants such as Cargill with costs offset by byproduct credits from niobium and rare earths. With the help of a $60M war chest built up during 2008 and still largely intact, PhosCan hopes to turn the Martison deposit into a multi-stream mine that serves both the fertilizer and clean energy sectors.
TER: What other little nuggets do you have John?
JK: First Point Minerals Corp. (TSX-V:FPX) is an exciting, energy-related company. It has identified a type of low-grade nickel deposit where the majority of the nickel content occurs as a nickel-iron alloy technically known as awaruite and more commonly described as a natural stainless steel—the host rocks never look rusty. This type of deposit occurs within ophiolite belts—black oceanic rocks that have been shoved onto the continent. The ultramafic rocks normally contain about 0.25% nickel, but this nickel is locked up in the crystal lattice of a mineral called olivine. Extracting nickel from olivine is hopelessly expensive. Under the right metamorphic conditions Mother Nature squeezes the nickel out of the olivine so that it is able to combine with iron to create grains of nickel-iron alloy also known as awaruite. Cliffs Natural Resources Inc. (NYSE:CLF), a producer of key inputs for the steel-making industry, optioned the Decar Project in British Columbia in late 2009 and bought a 14% equity stake in First Point. The key here is that even though Decar is low grade, about two-thirds of the nickel grade occurs as nickel-iron alloy which Cliffs and First Point believe can be recovered through gravity and magnetic separation. In stark contrast to laterite and sulphide nickel ores, no chemicals and very low energy inputs are needed. Plus, the tailings are fairly benign in terms of acid-generating waste. We hope to learn by the end of the second quarter how much of Decar’s nickel grade is recoverable and at what cost.
Not only has First Point’s management thought outside the box in targeting a low-grade style of nickel deposit that could do for nickel what porphyry deposits did for copper during the 50s, but it has put its experience in geochemistry to use in developing an efficient geochemical method for establishing what percentage of a rock’s fire-assayed nickel grade is due to nickel-iron alloy. During 2010, an independent lab and metallurgist certified this method as valid. Armed with this low cost and quick turnaround tool for assessing the awaruite content of otherwise mediocre looking black rock, First Point is now scouring the world looking for similar deposits. Hopefully, in the next 6 to 12 months, the company will announce that it has acquired several billion ton deposits of this style of low-grade natural stainless steel (nickel-iron alloy) deposit. Such an achievement would make First Point of enormous value to countries such as China, which is looking for a source of nickel whose production is not tied to expensive, energy-intensive, environmentally-hazardous chemical processes. That is why this $0.77 stock could be worth an awful lot more.
TER: Thank you for your time. This has been great.
JK: You’re welcome.
John Kaiser, a mining analyst with over 25 years’ experience, is editor of Kaiser Research Online. He specializes in high-risk speculative Canadian securities and the resource sector is the primary focus for an investment approach he developed that combines his “bottom-fishing strategy” with his “rational speculation model.” Kaiser began work in January 1983 as a research assistant with Continental Carlisle Douglas, a Vancouver brokerage firm that specialized in Vancouver Stock Exchange listed securities. In 1989 he moved to Pacific International Securities Inc., where he was research director until April 1994 when he moved to the United States with his family. He launched the Kaiser Bottom-Fishing Report (now Kaiser Research Online) as an independent publication in October 1994 and developed it into an online commentary and information portal. He has written extensively about the junior resource sector, is frequently quoted by the media, and is a regular speaker at investment conferences. Since 2008 he has developed a focus on security of supply issues and how they relate to critical metals such as rare earths.
By B.P.T., on May 13th, 2011
At 8:30 AM EDT, the Consumer Price Index report for April will be released. The consensus is that CPI increased by 0.4% last month, with a 0.1% increase in CPI when food and energy are removed.
At 9:55 AM EDT, Consumer Sentiment for the first half of May will be announced. The consensus is that the index will be at 70.0, which would be an increase of 0.2 points from the level reported in the second half of last month.
By Simon Grey, on May 12th, 2011
In theory, all prices are determined by supply and demand. If there is a large supply of product x and little demand for product x, the price will be very low. If, on the other hand, there is a small supply of product x and high demand for it, the price will be rather high. This assertion is not new, but it can lead to a puzzling question.
Specifically, the question that can arise on occasion is: if prices are determined by supply and demand, why do economists talk about prices being impacted by taxes and regulations? Two reasons come to mind.
First, taxes reduce supply of a product. As has been discussed elsewhere, taxes are a way of redistributing resources. If a government directly taxes a product, it is essentially claiming some of the resources used to make the product for itself. If the government makes use of other taxes, it is still laying claim to some resources, and consumers then determine which resources are eventually consumed.
Second, regulations change the type of product. In the unfettered market, there might be times when, say, a car company would offer a two-ton car that gets twenty-five miles per gallon and produces 240 HP. Once the state begins to regulate the market, the car company might be forced to meet, say, a fuel efficiency target, and will thus seek to cut the car’s weight and decrease the car’s horsepower. As such, the product is no longer the same, and thus faces a different supply schedule and demand schedule.
Thus, it should be easy to see that the law of supply and demand is ironclad, and that there is no inherent contradiction between claiming that all prices are set by supply and demand and also claiming that taxes and regulations affect prices. Of course, it would be more accurate to claim that taxes and regulations directly impact supply and demand and indirectly impact prices. Still, the final assertion is correct, and there is no contradiction between the two claims.
By B.P.T., on May 12th, 2011
There are a lot of different sides to the NFL lockout, which is on again after an appeal from the NFL was granted to reinstate the lockout that was lifted by a judge, and most of the attention is going towards the owners, the players and the fans. But what about the cities in which these teams are being held? There are a lot of people that have nothing to do with football, or sports, who are going to feel the effect of a lockout for as long as it goes, and the longer it goes, the bigger the hit.
The players and owners are trying to figure out how to split up a staggering $9 billion in revenue between the two sides, and fans are stuck in the middle as they want to see their favorite teams and players, NFL betting players want to lay some wagers, and fantasy football owners would love to be able to schedule their annual draft. But no one is thinking about the local economies that are going to suffer greatly from this work stoppage; the people who work at the stadiums who may not care about the score of the game, but they care if they can put food on their tables. There have been estimations that the lockout is going to take $5.1 billion out of local economies across the country, and in cities like Detroit or Cleveland, that is a massive chunk that they can’t afford to lose.
That is what has happened in today’s age: it’s no longer about the sports. Sport is now a business and it affects many off the field, as much as it does off the field. There are a lot of parties invested in something that could be crippling to the game of football.
By The Gold Report, on May 12th, 2011
 Why has the price of gold punched through every barrier to a record high of $1,500/oz.? The market’s rigged, according to Peter Grandich, editor of The Grandich Letter. In this exclusive interview with The Gold Report, Grandich explores if it’s time to unload silver and transition out of gold and why it could be the perfect time to look more closely at junior explorers.
Companies Mentioned: Alderon Resource Corp. Altius Minerals Corporation Barrick Gold Corp. Consolidated Thompson Iron Mines Ltd. Crocodile Gold Corp. Equinox Minerals Ltd. Formation Metals Inc. Heatherdale Resources Ltd. Northern Dynasty Minerals Ltd. Oromin Explorations Ltd. Rathdowney Resources Ltd. Sunridge Gold Corp. Taseko Mines Ltd.
The Gold Report: Peter, in a recent interview you said, “I believe the game is rigged. Not only is the silver market being manipulated, the whole investment world has been rigged.” You suggested that Goldman Sachs and Morgan Stanley were tilting the game in their favor. Does that mean that those firms are responsible for driving up commodity prices across the board?
Peter Grandich: I was trying to emphasize that we are playing in a game that is heavily tilted against us. A classic example is that companies like Goldman, Morgan Stanley and others were selling mortgage-related products to clients while at the same time betting against those very products. Ironically, none of those people has gone to jail.
We are not on a level playing field. One of the main reasons I had been bullish on silver was the belief—a very small minority belief—that silver was manipulated for several years. At that point in time, it was actually helping the price. My call to sell silver was influenced by that manipulation because the price had gotten to such a high level.
TGR: You told investors to sell silver at just less than $50.
PG: Yes, $49.25 at the time. At that time, we did not note selling gold, but we did a week later.
TGR: Do you believe large banks are driving up other commodity prices?
PG: I see two types of manipulation. There is fraudulent manipulation like what happened in silver for a lot of years. I also believe the oil market has been manipulated, but not in a centrally controlled way. A group of people with a lot of money bid up the prices—even though there was no oil shortage.
Commodities in general have risen because they have an underlying strength. Increasing world population creates a need for more commodities that are, in some cases, scarce or declining in supply. Of course, the declining dollar has also driven commodity prices up.
TGR: Do you believe resources, or hard assets as they’re commonly being referred to now, are morphing into a generally accepted asset class like real estate investment trusts, or is the market there yet?
PG: It’s just getting to that point. The legitimization of the sector is deserved and it should have happened years ago. However, it took $1,500/oz. gold and record high silver prices to get investors, money managers and the like to appreciate them as a legitimate asset class.
However, resources may never become popular worldwide. Things like gold and silver are mortal enemies of stocks and bonds over the long term. I don’t expect the general investment community to embrace it as a true asset class. That said, investors are realizing that gold and silver aren’t just for crazy people who think the end of the world is coming. Commodities are not just cyclical or total speculation. Commodity-related stocks are just as good as other classes of stock.
TGR: What mining commodities have the most near- to medium-term potential for price appreciation?
PG: There’s no commodity at this point that could go sharply higher in the near term. But there are some that have washed out and their downside risk should be limited. The first one that comes to mind is uranium. Most of the damage that has come on the heels of Japan is already priced in the stock. There’s limited downside risk, but there may not be a lot of upside yet for a while. I just added several uranium stocks to my Tracking List.
The lithium market also fits that description. Lithium shares had a good wash out after a spectacular rare earth metals blowoff and that’s turning.
Iron ore is interesting because the price is still extremely strong, but the stocks have come back sharply in recent days.
There is also a metal that a lot of investors don’t talk about, but is very strategic: cobalt. In North America, the only pure cobalt mine that will be built this summer is by Formation Metals Inc. (TSX:FCO). Cobalt has become a strategic metal, but we don’t have a lot of access to it.
Copper is still quite attractive long term. I think the days of $0.90 or $1.20/oz. copper are gone. While we still see a 10% decline from here, there’s a lot of value in copper.
Barrick Gold Corp. (TSX:ABX; NYSE:ABX) recent acquisition of Equinox Minerals Ltd. (TSX:EQN; ASX:EQN) strongly suggests that it was having difficulty as a pure gold company. It’s hard to keep finding 5 to 10 million ounces of new gold each year. Copper, while a base metal and more cyclical, is a metal that’s going to be in demand for a long time.
TGR: You outlined three strategies in The Grandich Letter for playing gold and silver in the current market. One was a conservative strategy. One was somewhat speculative. The third was basically gambling.
PG: I’ve always struggled with cookie-cutter advice. Firms advise investors to allocate 30% to this and 20% to that and somehow 100,000 clients all fit into that model? I try to give more choices so individuals can decide where they fit. I gave three ways of approaching what I believed was going to take place for gold and silver.
The most conservative attitude was based on buying gold since it was a little more than $300 and silver was in the low single digits—that’s 400% to 500% gains. You don’t look a gift horse in the mouth. Take the profits.
The middle-of-the-road strategy recognizes that gold and silver have skyrocketed, but you still think gold’s going to $2,000-plus before it’s all over, which I still do. I suggested that investors should sell some silver, but hold on to a significant part of their gold using a scale-up or a scale-down selling program. In this particular case, I suggested that investors take profits in gold at certain levels and as it reached a higher level they should sell a little more and so on.
The final approach, which Wall Street likes to call speculative, but I call gambling, is for those who still think gold and silver can go higher to ride it out.
The last category is for investors who are in gold and silver because they have no trust in paper currencies. They can continue holding precious metals because they’d still be better off than owning the U.S. dollar over time.
TGR: Part of your argument for taking profits on silver and, to a lesser extent, gold, was that May to August is traditionally soft for precious metals. However, we’re seeing growing levels of inflation. Soon QE2 and the Fed buying U.S. treasuries will end. There is ongoing unrest in the Middle East. The U.S. likely rekindled enemy passions when President Obama sanctioned the killing of Osama bin Laden. Could this be the year when gold and silver don’t see an appreciable price decline during the summer months?
PG: Nothing is 100%, but we don’t forget that a significant part of gold demand comes from jewelers—about 65% to 70%. Jewelry fabricators tend to limit purchases of gold until after the summer months. All those things that you pointed out are still there. Investors have to decide if they believe they have already been included in the price. Last week, I advised my readers to totally liquidate silver at $49.25 and a portion of gold holdings at $1,575 to realize profits. This past week, I got back into silver at $35.75 and gold at $1,481 while it is a deal. The good news is that even if there is seasonal weakness, we’ve greatly cushioned ourselves from such a correction.
TGR: How do you think the death of bin Laden will affect gold?
PG: I have no doubt that there’s some person out there who thinks his death is going to lead to a tremendous increase in the amount of terrorism. But an equally compelling argument can be made for his elimination actually lessening those chances. It’s not a reason for buying or selling gold in my book.
TGR: Can you tell us about some of the more compelling gold and silver stories that you’re following?
PG: Investors should not lose sight that the price of metals is extremely high and there’s a lot of opportunity to make money in exploring, developing and mining them. Crocodile Gold Corp. (TSX:CRK; OTCQX:CROCF) has had some setbacks, but it also has some interesting assets. The company raised some money to meet its goals and it’s at a point where it has to prove to shareholders that it’s going to achieve them. The company’s assets have always been considered first class. We need to watch to see if there’s a true turnaround. If and when that takes place, the share price could be worth substantially more. It’s currently trading at $0.90. Over the long term, the stock could double.
TGR: Crocodile has gold operations in Australia, so it has some high cash costs because it’s trucking ore over a fair distance. What’s your timeframe for solving those problems?
PG: It has run out of time to solve them. Watch the next few quarters to see if the company is on its way to doing that.
TGR: What are some other gold or silver stories you like?
PG: Sunridge Gold Corp. (TSX.V:SGC) has a series of projects in Africa with drill results that are mindboggling—some of the best copper drill results I’ve ever seen in the world. Right now, the stock is ho-hum because of the projects’ location and because this has been a company that historically focused its attention on looking for and developing metals rather than shareholders. It has a wealth of early stage, prefeasibility and feasibility projects. The share price could be worth many times its current price in the next 12 to 24 months.
Another company in Africa that has been better at drilling for ore than investors is Oromin Explorations Ltd. (TSX:OLE; OTCBB:OLEPF). It has numerous deposits that keep getting better and better as they announce drill results. Two majors have bought significant stakes in the company. There’s a lot of good news flow out of Oromin.
TGR: Are there any management teams that you particularly like?
PG: Juniors are like burning matches. They’re always raising money. The more they can raise at higher prices with less share dilution, the better chance they have of being successful. Management is key. The leadership team can be as important as the project. The best in the world today at the junior to midsize level is the Hunter Dickinson Inc. mining group. Hunter Dickinson is so large that it has deep abilities to finance, as well as provide whatever support companies need.
It has two young companies that have been in its stable for a long time that are having really good results: Heatherdale Resources Ltd. (TSX.V:HTR) and Rathdowney Resources Ltd. (TSX.V:RTH). Hopefully, that will pay off in the share price down the road.
TGR: Hunter Dickinson has been one of the more successful outfits. It has a number of companies under that umbrella. The most successful in recent years is probably Northern Dynasty Minerals Ltd. (TSX:NDM; NYSE.A:NAK).
PG: Taseko Mines Ltd. (TSX:TKO, NYSE.A:TGB) has been a success story, too. Hunter Dickinson took Taseko from pennies when chief executive Russell Hallbauer showed up and made it a $7 stock with a large-scale copper mine.
Hunter Dickinson doesn’t do broker placements, so it doesn’t get a lot of the coverage from brokerage firms. But I don’t know of any company that’s bigger or better.
TGR: You’ve called an iron play on Quebec’s north shore, Alderon Resource Corp. (TSX.V:ADV; OTCQX:ALDFF), “the son of Consolidated Thompson.” You describe it as “a legitimate takeover target” and say, “I’m hard-pressed to find a reason it can’t make a new all-time high this quarter.” Why are you so bullish on Alderon?
PG: I’m involved with other companies headed by Alderon Chief Executive Mark Morabito. He could write a book on how to build and develop a junior resource company. The company was born out of his initiative. It’s a well run and respected player in the game. Altius Minerals Corp. (TSX.V:ALS) had a large iron ore project that wasn’t getting the valuation. Alderon was created to run with it. It’s had phenomenal drill results. The key here is that a large part of the management of Consolidated Thompson Iron Mines Ltd. (TSX:CLM), which is probably one of the better-known success stories in the business, left and became part of Alderon.
Once the NI 43-101 is updated, one of the bigger players or a major Asian mining company will be hard pressed to not to come in and take it out. It has the entire infrastructure. It’s the way that Consolidated Thompson became a takeover target, but Alderon will reach its peak faster than Consolidated Thompson. That’s why I think the stock is compelling.
TGR: It has almost 500 million tons (Mt.) at 30% iron. It has another 120 Mt. in the inferred category.
PG: It could have a billion pounds by the time the year is out.
TGR: There are a number of different companies in the vicinity that could be predators in this case.
PG: It could be one of those, one of the worldwide major mining companies, or it could be one of the end-users that decides the company is too good to pass up. It’s a legitimate takeover target.
TGR: You talk about having a defined exit strategy for the current commodity bull market. What are some of the key elements of a dependable and responsible exit strategy?
PG: One of the most common complaints you hear from investors is that experts always tell you when to buy, but they never tell you when to sell. Whether they tell you or not, there are a couple of things investors need to recognize. Investors shouldn’t be married to their investments. They should consider selling when they can no longer buy something. Investors shouldn’t be flying by the seat of their pants. They need a legitimate exit strategy. Investors need a formal plan with price targets.
TGR: What are your thoughts on the U.S. dollar?
PG: Long term, the U.S. dollar should continue to depreciate. I noted just the other day that we could see a fairly substantial bear market rally on the belief that when the Fed’s quantitative easing formally comes to an end, interest rates are going to tick up. Some might consider the dollar a player now, but it’s terminally ill. Eventually, the U.S. dollar index should break below 70.
This is one of those occurrences that investors need to plan for long term. They need to have some sort of strategy in place and not just go by how they feel emotionally on a particular day.
TGR: It’s been enlightening. Thanks for your time, Peter.
Though he never finished high school, Peter Grandich entered Wall Street in the mid-1980s and within three years was appointed vice president of investment strategy for a leading New York Stock Exchange member firm. He went on to hold positions as a market strategist and a portfolio manager for four hedge funds and a mutual fund that bore his name. Grandich is the founder of Grandich.com and Grandich Publications, and editor of The Grandich Letter, which was first published in 1984.
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