By The Energy Report, on September 23rd, 2011
 The Western world’s skittishness, skepticism and staunch opposition when in comes to nuclear energy won’t stand in the way of its production elsewhere in the world. It will be full steam ahead in China, India and other developing nations, says Casey Research Chairman Doug Casey, and the Western world is tiny in comparison. In fact, “I’d say uranium is a great place to be for at least the next generation,” he tells us in this Energy Report exclusive. With ever-advancing technology enabling economic recovery in places where it previously wasn’t possible, he’s also optimistic about natural gas and oil.
The Energy Report: Next month, at the sold-out Casey Research/Sprott Inc. “When Money Dies” summit in Phoenix, you’re on tap for a presentation entitled “The Greater Depression Is Now.” Your colleague, Marin Katusa, is on the roster too, talking about “Making Money in Energy.” Marin recently told us there’s a buying opportunity for uranium companies. Given Fukushima’s repercussions in terms of the nuclear energy industry, are you bullish on uranium?
Doug Casey: Absolutely. It’s unquestionably the safest, cheapest and cleanest form of mass power generation. That’s not to say that there aren’t problems, as the Fukushima incident made clear. As much of a disaster as that was—a combination of earthquake, tsunami and radiation leakage—so far it’s just been a big industrial disaster. I daresay that if government hadn’t been so involved in nuclear power these last 50 or 60 years, the technology would have been much further along. Nuclear power would be much safer, cheaper and cleaner than it is today. We might, for instance, be using thorium, which appears to be better than uranium in many ways. We would almost certainly have much smaller, cheaper, and robust reactors.
So, yes, I’m a huge uranium bull. If you want mass power, you need nuclear power. And today that means uranium. I’d say uranium is a great place to be for at least the next generation.
TER: But considering the fact that governments remain involved and people are even more squeamish about nuclear power post-Fukushima, won’t we see a stall in nuclear power and development?
DC: That’s possible. But, the hysteria is mainly going to affect the Western world. China and India recognize they have no alternative to nuclear power. As you know, the growth is in China, India and other emerging economies; it’s where the most of the world’s people live. The Western world is small by comparison, and getting smaller. These other places will continue full steam ahead with nuclear.
TER: Porter Stansberry, whom you know well, recently told us to expect the U.S. to become a net exporter of natural gas in the not-too-distant future. Do you see that as well?
DC: Quite likely. Let’s talk about peak oil first, though. I think that the Hubbert peak theory is accurate, and for good geological reasons—but understand that peak oil doesn’t mean we’re running out of oil. Rather, it means that we’re running out of easily available, cheap light sweet oil. And we are.
However, technology is always improving, enabling economic recovery of oil and natural gas in places where it previously wasn’t possible. Horizontal drilling and the fracking process have opened up gigantic reserves of gas, scores of trillion of cubic feet in some basins in the U.S. So, yes the U.S. could become a huge exporter of natural gas. It’s entirely possible. It could happen in other regions of the world as well, but probably not with gas at its current prices.
The gas is available, but because it’s very underpriced relative to other forms of energy, it probably won’t be produced until the price doubles or even triples from where it is now. That would bring it more into historical alignment with oil prices, which I expect will themselves go higher as well.
TER: How is it that the oil prices have remained relatively high and gas is still so low? Given the differential of the two price points, why aren’t we seeing a conversion from oil-dependent cars, for instance, to natural gas?
DC: Oil has much a greater density of energy than natural gas, and a much more convenient energy-based fuel, so of course we’ve all gravitated toward it. It’s not really feasible for aircraft, for instance, to be able to run on natural gas, so they’ll continue to use oil-based derivatives. In addition, gas is much harder to transport than oil. So it’s tended to be a local market, whereas oil is international.
But since most all the easy, cheap oil’s been found—mostly in the 60s and 70s—and those old oilfields are going into decline, gas is probably the next thing. Gas has some advantages as well. For one thing, it burns cleaner. Remember that these fuels, these petrochemicals, basically contain just hydrogen, oxygen and carbon. As technology advances, we should be able to manipulate these very simple and well-understood molecules and put them into a form we want. We’ll be able to do it ourselves in various ways as nanotechnology, for instance, develops further in the future. Then maybe we won’t have to rely on nature doing it for us over billions of years.
TER: Despite criticism of the effects of government involvement—stifling nuclear energy advancement over the years, as you mentioned earlier, or printing money to paper over enormous amounts of debt, as you’ve pointed out in other interviews—you’ve indicated that improving technology is a countervailing trend that actually will increase the standard of living.
DC: Exactly. There are more scientists and engineers alive today than have lived in all previous history put together; that’s a huge cause for optimism. Technology is very likely to solve many, many problems—as long as the scientists and the free market are allowed to develop these things, and as long as there’s capital available to manufacture the tools they need to do so.
TER: What are you hoping attendees come away with from next month’s summit?
DC: People come to these conferences is to get ideas about intelligent places to put their capital. Today those places are harder to find than has ever been the case before in my lifetime. With the dollar’s imminent demise, staying in cash is also very dangerous. There are very few bargains to be found in the world of investment today. Stocks today are quite overpriced by almost any parameter. Bonds will implode; that’s especially serious because they’re a much bigger market than shares. Property prices are still headed down. So people are looking for answers, and I think we have some.
Beyond answers along those lines, we also host these summits to discuss some investment principles so that our attendees don’t have to rely on us for answers. They’ll be equipped to deal with these things on their own.
TER: What are some things that investors can do to protect themselves?
DC: It’s very hard to be an investor in today’s world, because an investor is someone who allocates capital in a way to create new wealth. Inflation, taxation and regulation make investing very problematic—and all three are becoming much more severe. That said, it’s late in the day but not too late to buy gold, silver and some other commodities. Productive assets of several types are good to own. Of course, the easiest way to buy most productive assets is through the shares of publicly traded companies, but since the stock market is overvalued in my opinion, that’s not the best option right now.
In addition to trying to build personal holdings of gold, and to a lesser degree silver, I think people should learn to be speculators. That’s not to be confused with gamblers, who rely on random chance. Speculators position themselves to take advantage of politically caused distortions in the marketplace, and we’ll be seeing lots of those. In a true free market society, you’d see very few speculators because there’d be very few such distortions. But compounding regulations, taxes and currency inflations are likely to keep markets very volatile. Good speculators will position themselves to both capitalize on inflating bubbles, and identify bubbles that already have been blown to their maximum and are about to pop.
Increasing government involvement in the economy is going to literally force people to become speculators.
TER: What bubbles might speculators look to exploit?
DC: As I mentioned earlier, most forms of real estate in the U.S. are problematic because the U.S. bubble hasn’t completely deflated yet, and real estate bubbles are just starting to deflate in places such as Australia and Canada. Probably the world’s biggest real estate bubble is in China. It’s relatively hard to short real estate, of course. But shorting banks there might work well. . .
Bonds are another story. I’d say bonds are the short sale of the century. They’re going to be destroyed. Bonds pose a triple threat to capital:
- Interest rates are artificially low, and as interest rates rise—which they must—bonds will fall.
- The currencies that bonds are denominated in, let’s say dollars, will depreciate radically.
- The credit risk presented by many issuers—certainly including governments—very high.
On the long side, mining stocks are very cheap relative to the price of gold right now. There’s an excellent chance of a bubble being ignited in gold mining stocks, especially the small ones; in fact, I’d put my finger on that as likely being the easiest way to make a killing—although there’s plenty of risk.
TER: How about technology? Do you see a bubble forming there?
DC: You have a point, but I’m not sure you can talk about technology stocks as a whole; technology is too variegated, too vast a field. I must say, however, that I’ve always been a huge fan of nanotech—that is an area that will change the nature of life itself. The market will see that, and so it’s a definite candidate for a mania. With gold stocks, however, you can jump into a discrete universe.
TER: Any others?
DC: Just talking about the things that seem most obvious to me, like gold. . .well, oil isn’t cheap, but a lot of oil stocks are. Natural gas, as we said, impresses me as being cheap relative to other commodities. A favorite of mine is cattle—the downside is de minimus and the upside is huge.
TER: Well, Doug, thank you so much for your time and this preview of your October event. I imagine you look forward to it for many reasons, including the fact that it’s sometimes nice to be with other intelligent people who want to broaden their horizons.
DC: It is. It’s nice to spend time with others who see things the way you do, and with whom you have some philosophical principles in common. The people who come to our conferences share what I believe to be a sound view of the world. They’re not statists; they’re not collectivists; they’re not misguided, ignorant or wrong-headed. They’re an enjoyable company.
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 featured 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.
By Christopher Briem, on September 23rd, 2011
So here is something I should have noticed. I actually will sometimes look at what the state’s revenue reports look like.
The story today on the state of the city’s budget has a real bonus in there. The city received $10 million more than anticipated in aide from the state for municipal pensions. The line in the Post-Gazette story is that “Officials weren’t sure why the city and other municipalities were getting extra money this year”.
There is no mystery here at all. Pennsylvania distributes pension aide to local municipalities from a single dedicated source, the Foreign Fire Insurance Tax. So the more comes in from that tax, the more goes to the municipalities. You might have thought the recession would put a damper on that type of tax, but I guess we are becoming a risk averse (i.e. insurance loving) society.. That or insurance premia are way up? I’d like to know which it is actually.
From the June revenue report you get the fiscal year to date data for the 2010-2011 fiscal year in Harrisburg. Below is the trend for the revenue stream dedicated to local municipal pension. You will see a big big jump in the fiscal year that just ended. There is a related story here. It was not any goodwill toward Pittsburgh in particular that gave us a boost. That boost in state aide went to most every municipality receiving pension aide from the state. Should be a lot of happy local officials out there with some ‘free’ money hitting their books.
Anyway… if we looked at that June report that came out last month, it should have been obvious a big(or at least bigger) check was coming our way.
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By Simon Grey, on September 23rd, 2011
“Of jobs created in Texas since 2007, 81 percent were taken by newly arrived immigrant workers (legal and illegal),” says the report from the Center for Immigration Studies, a group that advocates reduced levels of both legal and illegal immigration. The report estimates that about 40 percent of the new jobs were taken by illegal immigrants, while 40 percent were taken by legal immigrants. The vast majority of both groups, legal and illegal, were not American citizens. (Hat tip: Vox Day.)
Native-born Americans filled just 20 percent of the new jobs in Texas, the report says, even though “the native born accounted for 69 percent of the growth in Texas’ working-age population.” “Thus, even though natives made up most of the growth in potential workers, most of the job growth went to immigrants,” the report concludes.
If you want to fix the unemployment mess America currently faces, do four things:
One, round up all illegal immigrants and guest workers and deport them. I am unable to comprehend how a government that claims to represent the interests of its people even tolerates any foreign workers when the unemployment rate is hovering around 16%. Why is this allowed when citizens are jobless and looking for work? Citizens should be given preference when it comes to domestic policy, and labor is no exception.
Two, deregulate labor. Get rid of the minimum wage, the minimum age, and mandatory overtime pay laws. Price floors always, without fail, create a surplus. Again, labor is no exception.
Three, get rid of government-sponsored welfare, unemployment compensation, and all other forms of paying people to not work. This will give the currently unemployed a very powerful incentive to find and/or create a job. Note, however, that one should not end the dole without first having eliminated minimum wage.
Four, get rid of payroll taxes. Milton Friedman’s monstrously stupid idea to have taxes withheld from one’s paycheck places compliance costs on businesses that they do not face when hiring illegal workers.This, in turn, makes it more difficult for legal workers to compete with illegal workers. As such, ending payroll taxes will reduce the costs of employment, and make it easier for citizens to compete for jobs.
By Ajay Shah, on September 23rd, 2011
The INR/USD rate is now nudging Rs.50 to the dollar. This is a big move over a short period: a depreciation of 12.1 per cent over the 84 days from 1 July till 23 September.
What fluctuations of the INR/USD can we reasonably expect?
After the rupee became a float, so far, it has had average volatility of roughly 9 per cent annualised. Roughly speaking, this means that over a one year horizon, the movement over a year would range between -18 per cent and +18 percent, with a 95 per cent probability. More extreme movements would happen with a 5 per cent probability.
Over a period of 84 days, roughly speaking, we’d have expected this 95 per cent range to run from -8.6 per cent to +8.6 per cent. Compared with that, a 12.1 per cent move is a bit unusual.
It’s only a bit unusual because the historical volatility of the INR/USD, in the period of the float, was rather low. The USD/EUR rate,
which is perhaps the world’s most liquid market, has had an annualised volatility from January 1999 onwards of 10.3 per cent. The INR/USD has got to surely be more volatile than this, given the inferior liquidity of the INR and given the greater macroeconomic volatility in India. Hence, I think we should consider the 9 per cent vol, that was seen in the early days of the float, as relatively unusual. The future will most likely hold bigger values for this vol.
The implied volatility of the INR/USD at the NSE has reared up to values like 14 per cent annualised. That sounds more sensible to me.
What about other currencies?
We tend to do wrong by focusing too much on the bilateral INR/USD rate. In the recent days of distress, as fear has resurged, people
have taken money out of everything under the sun and put it into US Treasury bills. This has given a strong dollar at the expense of
essentially every other currency. Here’s the picture for the INR, against the four major currencies of the world, from 1 July till 22
September:
|
1 July |
22 Sep. |
Depreciation |
|
|
|
(per cent) |
| USD |
44.585 |
48.821 |
9.50 |
| EUR |
64.804 |
66.103 |
2.00 |
| JPY |
0.553 |
0.636 |
15.01 |
| GBP |
71.720 |
75.481 |
5.24 |
The picture of the rupee is much more complex than that implied by simply watching the bilateral rupee/dollar rate.
Can RBI block such a large depreciation?
Let’s think through the steps which would follow if RBI tried to sell dollars in trying to prop up the INR:
- Global trading in the INR stands at roughly $75 billion a day. If you want to manipulate this market, you need a big stick. Small trades will do nothing. If preventing INR depreciation is the goal, RBI has to go into this with trades of $2 to $5 billion a day, with the willingness to stick it out for the long run. With reserves of $281 billion, there is not much hope here. Specifically, if RBI sells $80 billion in reserves, the market will see that. They will know that further rupee defence is now going to be hard (since $200 billion of reserves is starting to look like a small hoard), and speculators across the world will start betting that RBI’s defence of the rupee will fail.
- Reserve money is only $275 billion. For each $27.5 billion that RBI sells, reserve money drops by 10%. At a difficult time like
this, a sharp and sudden monetary tightening will be an unpleasant side effect of defending the rupee. (This trading can be sterilised, but that has its own problems. I just want to emphasise that selling reserves is not easy and is not a free lunch).
- The rational speculator knows that the exchange rate will eventually find its level. When RBI prevents a large INR depreciation today, they are giving a free lunch to the speculator, who would take a bet that INR would depreciate in the future. Specifically, it would be efficient for domestic and foreign investors to dump assets in India, take money out at (say) Rs.45 to the dollar which is the artificial price, wait for the gradual depreciation to Rs.50 to the dollar, and come back into India to buy back the same assets. This trade generates 11% returns over a short period and is thus very attractive. In other words, a defence of the
rupee would trigger off an asset price collapse in India.
Meddling in the affairs of the currency market is thus highly ill-advised for a central bank.
Should RBI try to block INR depreciation, even if they could?
Let us play a thought experiment where RBI had $2810 billion, i.e. 10x larger than what’s with us today. In that case, RBI could
play in the currency market, selling $2 to $5 billion a day for a year without serious distress. Is this a good idea?
I would argue that this is not a good idea. When times are bad, the rupee should depreciate. This drives up the profit rates of all
Indian tradeables firms and thus bolsters the economy.
Under a floating rate, in good times, the INR appreciates (which pulls back the exuberance of tradeables) and in bad times, the INR
depreciates (which fuels profits and thus the physical investment in tradeables). This is arguably the only element of stabilisation
in Indian macroeconomic policy.
RBI is playing this mostly right
From early 2007 onwards, the INR has been quite flexible. In particular, after early 2009, RBI’s trading on the market has tailed
off. There have been a few months with minor amounts of trading by RBI. This trading has mystified me, since these small trades can do nothing to influence the price. In practice, the INR has been a float.
A floating exchange rate is exactly the right stance for difficult times like this. In bad times, the best thing that can happen for
India is a big INR depreciation, thus bolstering the tradeables sector.
Let’s evaluate an alternative policy platform: To peg the INR in normal times but to let go in difficult times. Is this feasible?
Yes. But this is very disruptive: if economic agents have been given an implicit promise that the INR will not move, then the large move (which will surely come) would cause pain. It is far better to stay out of the market all the time, and create a trustworthy structure of expectations in the minds of economic agents about what the future holds.
We had a large depreciation in the crisis of 2008, and that served India well. In similar fashion, we should welcome the INR depreciation that is accompanying global gloom.
The only element of RBI policy where I have a major disagreement is communication. RBI has never used the words floating exchange rate. RBI needs to clearly communicate to the economy that the rupee is now a market determined exchange rate, and RBI is no longer in the business of trading in this market. There is greater clarity of thought at RBI as compared with the quality of communciation; the speech writing still suffers from twinges of 1960s economics.
What is the collateral damage of a large INR depreciation?
There are three things that go wrong alongside a big INR depreciation:
- Firms who have unhedged foreign currency borrowing get hurt, because they have to pay back more than anticipated. A person who borrowed Rs.100 (in unhedged USD) has to pay back Rs.110, owing to the 10 per cent INR depreciation. The stock market is doing a fine job of identifying these firms and beating down their stock prices.Of crucial importance is the fact that from early 2009 onwards, the INR had already moved to a float with a 9 per cent annualised vol. So CEOs and CFOs knew that the INR/USD rate was going to fluctuate. They were not lulled into complacence thinking that the exchange rate was going to be stable. By avoiding this moral hazard associated with pegged exchange rates, RBI’s decision to float in early 2009 laid a good foundation for the structure of firm borrowing as of July 2011.
When a country has a pegged exchange rate, you tend to see a big buildup of unhedged currency exposure on corporate balance sheets. When the big depreciation comes, the big businessmen then queue up to the central bank begging for defence of the LCY. Prevention is better than cure: It is far better to have high exchange rate volatility all along, so that firms do not undertake such risks, and the toxic political economy does not come into play.
- With an INR depreciation, tradeables become costlier. On one hand, this bolsters the profitability of tradeables firms, and
thus their investment plans. But at the same time, this feeds into inflation. In recent months, tradeables inflation has been sleeping while non-tradeables have contributed to the high CPI-IW inflation. We will now see a resurgence of tradeables
inflation. This will exacerbate the inflation crisis. RBI will need to stay on the project of raising rates in order to combat this
inflation.
- The government’s subsidy program with petroleum products and fertilisers gets costlier when the INR depreciates. So India’s
fiscal crisis gets a bit worse when the INR depreciates.
This logic is rooted in high levels of de facto capital account openness. Sometimes, policy analysts think that you can have your cake and eat it too, and try to dodge these arguments by utilising capital controls. This has not worked in India, and the levels of de facto
openness have only grown through the years.
In summary, what should RBI be doing?
RBI should be focused on using the short-term interest rate as a tool to bring CPI-IW inflation under control, without distortions of
interest rate policy caused by trying to meddle in the currency market. This should be accompanied by liberalisation of the Bond-Currency-Derivatives Nexus so as to achieve an effective monetary policy transmission. These are the two things that RBI needs to focus on.
India shifted away from government interference in the currency market, from 2007 onwards but particularly after 2009. This is one of the biggest achievements in India’s economic liberalisation. This is a bigger issue in economic liberalisation than (say) decontrol of petroleum product prices. The INR is now a market. Nifty and INR are the two most important markets in the economy. It is time for all of us to analyse the INR as we analyse Nifty: as the outcome of a market process.
Is RBI back to trading the INR?
We don’t know. The data only comes out at monthly resolution, with a two month lag. But early signs that would show up would be unusual jumps in the weekly data about reserves, reserve money, etc. Greater transparency from their side would help greatly.
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By The Gold Report, on September 22nd, 2011
 Downgrades for U.S. debt, austerity programs across Europe and political uncertainty all point to a continued uptrend in gold prices according to Brien Lundin, publisher and editor of Gold Newsletter. For long-term investors, Brien Lundin says in this exclusive interview with The Gold Report, small-cap, precious metals equities are one place to take advantage of the coming upward gold price trend.
The Gold Report: Brien, cited the escalating European and U.S. debt crises as triggers for the August 22 spike in gold prices, when it briefly eclipsed the $1,900/ounce (oz.) mark. Since then, the French bank Société Générale has been downgraded and austerity measures are forcing the Greek economy further into recession. Despite these significant catalysts, the gold price remains range-bound between $1,750 and $1,850/oz. Why isn’t gold reacting?
Brien Lundin: If the European debt crisis and the S&P downgrade of U.S. sovereign debt had happened separately, say a couple of months apart, I think gold would have risen just as far, but the rise wouldn’t have been as steep and the market wouldn’t have overheated. But they happened to occur right on top of each other, so the market got ahead of itself and went nearly parabolic. Speculators who were merely trend-following traders came into gold, but the end of the rally sent them all packing at once. That dealt a sharp psychological and emotional blow to the market that we are still recovering from. Since then, we have seen a lot of very fluid, hot money coming in and out of the market.
More recent news from Europe hasn’t had quite the same effect. We have seen some itchier trigger fingers, people playing the news of the day and getting right back out. We have also seen physical gold buyers from Asia come in on the price dips.
The result has been rallies tempered on the upside by the speculators abandoning trades more quickly. We have also seen drops tempered by bargain-hunting, physical gold buyers coming in on the downside. In short, gold is in a consolidation phase, awaiting the next trend, which I think will continue to be headed upward.
TGR: You mentioned Asian physical buying. Recent rumors suggested China could be buying Italian debt to help Italy out of its problems. Is that bolstering the euro and keeping investors out of gold?
BL: I think that China helping out Italy hurts the gold price in an indirect way. It’s a sign of China knowing which side its bread is buttered on and knowing that it needs a stable Europe to support its economy.
We saw that need for stability when the European Central Bank and other central banks announced a coordinated U.S. dollar liquidity program and Germany and France said that Greece would definitely stay in the euro. All of this is part and parcel of trying to calm the markets down in the interim and to show that the gold price is essentially capped or that the rise is being dampened by official intervention.
TGR: Are you implying that the euro is doomed?
BL: I believe the euro is doomed as it currently exists. I think there is very little chance Greece will remain in the European Monetary Union. The rest of the PIIGS (Portugal, Ireland, Italy, Spain) remain to be seen. After all, what’s the use of a club if you can’t kick anyone out?
Obviously, the risks here are the implications of such an event, the dominos that would fall in the European banking system. The fact that Germany and France are so reluctant to kick Greece out of the euro zone shows that the problems could be very deep and widespread. I think they are just prolonging the situation. Ultimately, the euro of the future will not be the euro we see today.
TGR: What effect has the news out of Europe had on the gold price?
BL: There may have been some official manipulation in the gold price recently to bolster the idea that things are calming down. When the Swiss announced its cap on the franc, the news was incredibly bullish for gold; gold in effect became the last safe-haven investment standing. But shortly after that news broke, the metal sold off about $50/oz. overseas in just a few seconds. Investors wondered who could have known that news was coming, who could have reacted that quickly and sold so dramatically. The evidence points toward official management of the gold price.
TGR: In the September issue of Gold Newsletter you wrote that “long-term factors still favor a continued uptrend” in the gold price. Can you give us more detail?
BL: When we look at the S&P downgrade of U.S. sovereign debt, the problems in Greece and the potentially cascading effects across the banking system in Europe, what we see is the result of far too much debt being created on both the governmental and private level. Too much money has already been created and will have to be created in the future to inflate away all that debt. It is mathematically and politically impossible for austerity programs to be severe enough to overcome these debt loads. There is no way, especially under the weight of those austerity programs, that growth can be robust enough to overcome these debt burdens. At some point and to some degree, inflation will have to depreciate those debts away. That is the very reason why investors with a long-term view are buying gold. They aren’t concerned about gold having come so far over the past 10 years. They are looking down the road and seeing the amount of currency that will have to be created to get out of our tremendous fiscal problems.
TGR: With the aid of Ron Greiss, at thechartstore.com, you note that gold prices should continue to move higher at least until the 2012 election in the United States. Why?
BL: I don’t see any chance of fundamental fiscal reform in the U.S. to address the debt problems before the 2012 elections. No one is going to move off center and no one is going to take the political heat to make the dramatic reforms necessary to get the U.S. back on its feet.
We have about 14 more months, at least, in this bull market. If you look at the long-term trading channel for gold going back to the beginning of this bull market in 2000, you see that that channel, while fairly broad, has not really been violated, except by the 2008 credit crisis. If you extend that trading channel, it brings gold up to a price range of around $2,100 to $2,500/oz. by the 2012 elections. That would be a very nice gain from current levels.
After 2012, gold’s future depends on the results of those elections. If it is status quo politically, I think all bets are off on the gold price. I wouldn’t even hazard to guess what the ultimate upside could be.
TGR: And who knows where the euro will be by then.
BL: Right. We are on the brink of a massive inflationary reaction to the debt loads around the world. A number of people are afraid of a deflationary collapse, but I learned long ago that central bankers will never let that happen. Their primal instinct is to inflate in a situation like that and that’s exactly what they’ll do. They will take the lesser of two evils.
TGR: Nonetheless, most precious metal stock prices are falling, especially among the juniors. It’s increasingly difficult to convince people that small-cap, precious metals equities remain the place to be. You recently heartened Gold Newsletter readers by reminding them that you recommended Millrock Resources Inc. (MRO:TSX.V) “at $0.06 a share in November 2008 and it subsequently traded well over a dollar a share. I expect similar profits to be created in the months ahead.” Which profit makers are you high on now?
BL: Back then, I recommended Millrock because of the company’s extraordinary attributes and an overriding belief that, at some point, the sun does come out. I still like Millrock. They will have a lot of news out in the weeks ahead.
Looking at the Yukon, I like Wolverine Minerals Corp. (WLV:TSX.V). I have owned that stock for some time and recommend it because the company has a truly exceptional property portfolio, one that gives them a lot of kicks at the can in the Yukon.
TGR: Brent Cook called Wolverine a high-risk exposure to the Yukon when it was trading at $0.63. He called that a good entry point. Now it is trading at around $0.38; I guess that would make a very good entry point. Do you agree with Cook that it is high-risk exposure to the Yukon?
BL: Brent is a very conservative speculator, if you can imagine such a thing. When he recommends something, he must really, really like it. He is such an astute geologist and has seen so much in his career that he picks holes in just about anything.
I think what he liked about Wolverine, much to my consternation because he beat me to the punch, was the property portfolio, the people behind it and the management team. I think folks from Strategic Metals Ltd. (SMD:TSX.V) put the property portfolio together and are acting as operators in the exploration program.
Good management, good expertise in the ground, an outstanding property portfolio and a varied property portfolio gives you a number of tickets in the lottery.
As far as being high risk, these are all high-risk plays. You need to have companies with a number of properties and a number of these companies in any kind of a serious portfolio to spread the risk around. You also need to get out when you make some profits or take some money off the table along the way.
TGR: Any other names?
BL: Another one that I own and recommend is Golden Predator Corp. (GPD:TSX). This company also has an extensive property portfolio and a very astute management team. It has already made a couple of very exciting discoveries.
TGR: That includes impressive drill results on the Sleeman zone, which is part of the Brewery Creek project. What can you tell us about those results?
BL: Today’s exploration market is not so much in a phase of discovery, but of rediscovery right now. Companies are going back and reworking projects that were economic failures at much lower gold prices. Resources in the ground that weren’t economic with gold prices of $400/oz. are wildly economic and profitable at today’s prices.
That’s precisely what Golden Predator is doing with Brewery Creek. The company is not only expanding on the resources that were left there, it is making some really dramatic discoveries of new zones, like Sleeman, that previous operators overlooked. It is benefiting from the power of current prices and applying some really innovative new geological thinking to these projects.
TGR: Golden Predator has been rewarded with some good gold-silver intercepts so far. It also helps to have Mike Burke, who used to head up the Yukon Geological Survey, working for you.
BL: Yes, and Bill Sheriff, Golden Predator’s president, has done it before as well.
TGR: In February, you told our readers about Revolution Resources Corp.’s (RV:TSX; RVRCF:OTCQX) efforts to find gold in the Carolinas. Recently, Revolution acquired the rights to Lake Shore Gold Corp.’s (LSG:TSX) New Mexican property portfolio. Is this just a matter of diversifying or are things not going well in the Carolinas?
BL: I think everything in the Carolinas is going according to plan. I think the key to the Carolinas is that the region represents an emerging gold play. What Revolution is doing is twofold. First, the company is building value in the property it has. Second, it is expanding its property position to make it a must-have company or must-have land position for a big company wishing to get into that play.
The New Mexico acquisition wasn’t a matter of diversifying Revolution’s geographical position; it was just too good of an opportunity to pass up. The portfolio of properties Revolution acquired includes some outstanding prospects. If there aren’t proven resources, there are identified high-grade intercepts that scream to be followed up on.
TGR: What are other companies that you are following or that you think offer value in this economic climate?
BL: One company we have followed for some time is Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX). This company is making progress and has a great business plan in this high gold price market. It is building up a multi-million-ounce inventory of lower grade resources in Nevada using a number of deposits around existing central milling and processing operations to which ore can be trucked in. It is trying to consolidate a number of different resources, perhaps any single one of which would not be sufficient to support a standalone operation, but together represent a sizeable resource. It is also packaging that for eventual sale to a major and it has been getting good results as well.
TGR: Isn’t Rye Patch drilling the Garden Gate Pass property, not far from Barrick Gold Corp.’s (ABX:TSX; ABX:NYSE) Cortez Hill Gold Mine? Barrick has also discovered what it is calling the Red Hill and Goldrush deposits. Rye Patch believes it owns property that also encompasses the gold structure that hosts Barrick’s newly found deposits. That has to be good news.
BL: We have seen a nice uptick in Rye Patch’s share price as a result. The project lies along the strike of the Barrick discoveries, around 3 kilometers away. The structure looks good. Coincidentally, a drilling program was already in progress and we are eagerly awaiting results on that.
TGR: Are we six months or so away from a resource?
BL: I think longer than that. The program is only 5,000 meters. We hope to get a sniff of the kind of results that you look for in Nevada that are indicative of a much larger deposit.
TGR: Any other companies that you would like to talk about?
BL: Rare earth plays have come back a bit and represent great long-term opportunities regardless of what happens with gold. They are longer-term plays on the growth of technology. We were the first to recommend Rare Element Resources Ltd. (RES:TSX; REE:NYSE.A) and we still like it at current levels. We like Quest Rare Minerals Ltd. (QRM:TSX.V; QRM:NYSE.A) and were also among the first to recommend that. Tasman Metals Ltd. (TSM:TSX.V; TASXF:OTCPK; T61:Fkft) is also very attractive right now.
We just started recommending Elissa Resources Ltd. (ELI:TSX.V; E30:Fkft). It is a very early stage REE play. Its Thor Project in Nevada is only about 16 miles away from Molycorp Minerals’ (MCP:NYSE) Mountain Pass project. The idea is that if Elissa proves up or gets any solid indications of a REE close to Molycorp’s project, the share price will fly. It’s really an exploration play—high risk, but very high potential reward.
I also like Hathor Exploration Ltd. (HAT:TSX.V). It is the subject of a takeover bid from Cameco Corp. (CCO:TSX; CCJ:NYSE) that dramatically undervalues the company’s real value. That is a uranium play. It is a very high grade, probably the third-highest grade uranium deposit in the world.
I like a lot of plays in West Africa, for example, Keegan Resources Inc. (KGN:TSX; KGN:NYSE.A). I also like the Yukon. We recommend an array of companies in that area. It’s just a matter of buying on the dips and having the 12–18 month timeframe to see any real results.
TGR: Is that the advice you would give to a novice investor right now, to invest long term?
BL: Yes. You have to think down the road a bit, especially with strategic investments in plays like the Yukon, where news shuts down in the winter and you can pick up bargains at that time. It typically takes at least two exploration seasons for companies in the Yukon to get indicative results. A number of the companies that were hotly recommended last year aren’t going to make any real news until next fall. You can pick up bargains now; you just need the patience to wait 12–24 months rather than expecting drill results within a few weeks.
TGR: Brien, as always, thank you for your time and insights.
With a career spanning three decades in the investment markets, Brien Lundin serves as president and CEO of Jefferson Financial, a highly regarded publisher of market analyses and producer of investment-oriented events. Under the Jefferson Financial umbrella, Brien publishes and edits Gold Newsletter, a cornerstone of precious metals advisories since 1971; he digs into not only small caps of every type but also macroeconomics and geopolitical issues that ultimately affect every resource investor. Brien also hosts the New Orleans Investment Conference, the oldest and most respected investment event of its kind that, each year, gathers together the giants of investing, economics and geopolitics. Touted as “the world’s greatest investment show” by Money Magazine, the New Orleans Conference stands today as one of the few investment events that maintains a focus on value for the attendee, presenting independent, objective views from top experts, and charging attendees for the value they receive.
By Christopher Briem, on September 22nd, 2011
Things that fascinate me. From the Legal Intelligencer on Marcellus Shale induced migration to Pittsburgh… of lawyers of course.
See: Marcellus Shale Attracts Laterals From Miles Around
Curious quote in there. I can’t quite figure why it is there:
“I don’t want to be a wannabe,” he said. “Somebody once said to me, ‘There are a lot of people with great ideas in cemeteries; they just never spoke to anybody about those ideas.’
Ok then… We’ve become the place to self-actualize. The New New Pittsburgh. I was born somewhere else.
By Simon Grey, on September 22nd, 2011
Aside from these lies, Social Security is a Ponzi scheme. The major difference between Social Security and Bernie Madoff’s Ponzi scheme is his was illegal. Three Nobel laureate economists have testified that Social Security is a Ponzi scheme. Dr. Paul Samuelson called it “the greatest Ponzi game ever contrived.” Dr. Milton Friedman said it was “the biggest Ponzi scheme on earth.” Dr. Paul Krugman predicted that “the Ponzi game will soon be over.”
The media and government need to take a hint here. When two Nobel-prize-winning Keynesians say that Social Security is a Ponzi scheme, it’s safe that Social Security is a Ponzi scheme.(Because if there’s anyone who knows Ponzi schemes, it’s going to be a Keynesian.)Incidentally, I was also ahead of the game in demonstrating that Social Security is a lie, at least in terms of guaranteed benefits. While I only focused on Flemming v. Nestor, it is important to also look at Helvering V. Davis: Another lie in the Social Security pamphlet is: “Beginning November 24, 1936, the United States government will set up a Social Security account for you. … The checks will come to you as a right.” Therefore, Americans were sold on the belief that Social Security is like a retirement account and money placed in it is our property. The fact of the matter is you have no property right whatsoever to your Social Security “contributions.”
You say, “Williams, you’re wrong! We have a right to Social Security payments.” In a U.S. Supreme Court case, Helvering v. Davis (1937), the court held that Social Security is not an insurance program, saying, “The proceeds of both (employee and employer) taxes are to be paid into the Treasury like internal revenue taxes generally, and are not earmarked in any way.” In a later Supreme Court case, Flemming v. Nestor (1960), the court said, “To engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands.” [Emphasis added.]
Of course, Social Security is not technically a Ponzi scheme because one is not forced to pay taxes contribute to a true Ponzi scheme: It’s true that Ponzi engaged in fraud; his victims never would have “invested” with him, had he accurately explained the business model. Libertarians therefore agree with everybody else that Charles Ponzi was a criminal and would have to face legal consequences in any just legal order.
However, so far as we know Ponzi never threatened anybody. He didn’t tell struggling young workers, “Give me 15 percent of your paycheck every week, so that I can make you a fantastic return — or else I’ll send goons to kidnap you.”
In this respect, Social Security isn’t a Ponzi scheme after all. It’s more analogous to mobsters shaking down people for protection money, because otherwise “bad things could happen.”
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By B.P.T., on September 22nd, 2011
At 8:30 AM EDT, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 420,000 new jobless claims last week, which would would be 8,000 less than the previous week.
At 9:45 AM EDT, the weekly Bloomberg Consumer Comfort Index will be released, providing an update on Americans’ views of the U.S. economy, their personal finances and the buying climate.
At 10:00 AM EDT, the FHFA House Price Index for July will be released, providing more information about the direction of the housing market.
Also at 10:00 AM EDT, the Leading Indicators report for August will be released. The consensus is that this index was unchanged last month, following an increase of 0.5% in the previous month.
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.
By Bron Suchecki, on September 21st, 2011
Record prices spawn new wave of China gold bugs: “More investors are moving into paper gold because of the lower capital costs. The prospect of making big and quick bucks by betting on gold’s ascent is beginning to look like a fairly easy way to make money.” Keep this in mind to temper they hype the next time you hear how China is going to be a huge physical market. One could argue that the gambling like nature of Leverage would have more appeal in the East than the West.
More than 2.8m tonnes of hidden copper stocks: “…how much copper is being stored ‘off market’ in private inventories…” Guess what, there is a lot of off market (in that we don’t know who and where) gold and silver. At least we know the overall stock figure is circa 160,000t. When you have that much overhang relative to new mine flow, “…sudden and violent liquidation could pose a major threat to market fundamentals…” Of course a sudden and violent flow of dollars into gold could cause the same problem.
Another Lawsuit Filed Against JP Morgan For Silver Price Manipulation: I nearly fell off my chair reading this from Zero Hedge – “a lot of the content in the filing is regurgitated filler” and “at time reads like a diary of a conspiracy nutjob, and unfortunately that is how the conflicted legal system will see it”. What happened to their usual goldbug ra ra ra? BTW, not much in the 100+ page filing and it wasn’t very convincing for me.
Dutch Socialist Party puts gold questions to treasury secretary: Note that the Reserve Bank of Australia, in contrast to most central banks, answers these two questions in its past annual reports -
“2) Why are gold and gold loans stated as one line item in the annual report 2010 instead of mentioned as two separate items?
3) Can you give an overview of the yearly yields of the gold loans during the past years?”
If the RBA can disclose this information, why not the other central banks? Interestingly, the RBA has wound back all of its gold leasing. Would you take counterparty exposure to a bullion bank for 10 or 20 basis points return?
By The Gold Report, on September 21st, 2011
 Lithium-ion batteries may be named for the alkali metal they contain, but graphite is actually used in greater amounts. Mackie Research Strategic Metals and Clean Tech Analyst Matt Gowing says investors would be wise to shift their attention to this still under-the-radar electrical conductor. While lithium supply concerns have made for splashy headlines, the graphite market is quietly ramping up to meet increasing demand. In this exclusive interview with The Critical Metals Report, Gowing discusses mining operations poised to ease supply gridlock as well as how to measure a mine by the size of its flakes.
The Critical Metals Report: Matt, companies with graphite deposits are somewhat unusual in the mining space. What’s the investment thesis for graphite?
Matt Gowing: I look at graphite from the perspective of high-tech, high-demand applications, such as the lithium-ion battery, which will see its penetration in the market significantly increase due to the proliferation of electric vehicles. The demand side of the equation is very interesting, but the supply side of the equation is even more interesting. It’s little understood that there’s approximately 15 times the amount of graphite in a lithium-ion battery as there is lithium. Many graphite mines have actually ceased production in the past five years due to dropping prices. However, more recently, there’s been a strong price improvement in graphite as the supply has come down.
New, high-tech applications require more and more graphite production. In China, which produces 70% of the world’s graphite, they’re essentially running out as mines are depleted. They are extracting graphite from deeper in the mines, which increases operating costs and prices. There is a very severe need for new graphite projects to come online in the world.
TCMR: The highest grade of graphite—crystalline, large flake, which runs between 94% and 97% carbon—traded at a high of $1,350/Mt. (million ton) in 2009. How much does 1 Mt. of crystalline, large-flake graphite sell for now?
MG: Generally, the range of between 94% and 97% carbon can be characterized as the highest purity graphite. Prices are positively correlated with the large flake size. Then mesh size is considered. Large flake generally starts at 80 or higher mesh size.
For example, the price for plus-80 mesh, large flake with 94%–97% carbon purity has probably doubled over the past year and tripled in the past three years to $2,500-$3,000/ton. The market remains tight and prices will continue to trend higher. Graphite producers have strong pricing power.
TCMR: Could the market face the risk of another price drop if more projects come into production?
MG: Absolutely. Prices are going to be driven by the dynamic of supply versus demand, but new mines take a number of years to be completed. And not every mine will prove to be commercial. There could still be a prolonged period with strong graphite prices and moderate increases. However, our long-term modeling for graphite companies is conservative. We are taking into account increasing supply. After continued modest increases in the graphite price over the next few years, we are looking for prices to moderate in the order of magnitude of about 25% from where they are now.
That being said, different pockets of the market lack new supply prospects—in particular large-flake graphite, which is a niche within the industry. A lot of the mines coming online will produce medium, small-flake and amorphous graphite. We think it’s quite possible that prices for large flake could remain higher and even increase despite increasing supply in general graphite.
Another price factor is synthetic graphite, which essentially comes as a byproduct from steel production. A lack of excess capacity can be used to produce the synthetic graphite in the furnaces where steel is produced. As a result, we’ve seen synthetic graphite prices dramatically increase toward about $20,000/ton. Synthetic graphite and natural graphite are not direct substitutes of one another, but in those markets where they compete, synthetic graphite prices have trended up. Synthetic graphite is a competitor of natural graphite in the next generation of batteries for the electric vehicle market. That’s another very important market dynamic that plays positively into the graphite price.
TCMR: It’s a rare commodity, indeed, where China is not a major pricing influence these days. Since China controls a majority of the supply and there are now concerns over supply gaps in the West, is graphite becoming a strategic resource targeted by governments?
MG: A lot of these governments have identified that need. The European Union identified graphite as one of the most critical on a list of 41 critical minerals in the world. This is a theme that, we believe, we’ll start to see more.
TCMR: The lithium battery is one technology driving up the graphite price. What other graphite-related technologies are seeing dramatic growth?
MG: There are several. A lot of nuclear plants under construction in Asia are large users of graphite. There is a new technology within the nuclear plant industry called pebble-bed nuclear reactors that takes advantage of graphite’s unique properties.
The solar industry also uses graphite. More and more fuel-cell applications are in development every year. The auto industry has also identified graphite as a substitute for asbestos in car brake linings. Sparks plugs have been another very important addition.
What’s really exciting is the graphene industry, which may in itself be a few years away from coming up with any product that can be commercially produced with economic technologies. The graphene market is very exciting because of the potential applications in construction and medical devices.
TCMR: What are the differences between graphite and graphene?
MG: Graphene is basically a flat-lining structure of the carbon. It creates challenges for its production because the carbon elements never want to be flat lined against each other. Graphite naturally wants to bunch up into a 3D crystalline structure. Flattening out the carbon elements is really the challenge for the developers of graphene.
But if graphene can be economically produced, and if this is ultimately proven, it creates a very strong material that may even replace steel and concrete in many construction applications. There are a lot of other natural advantages to having graphite-based products within the construction industry. It’s a very good conductor of electricity. It can withstand very high temperatures as well. It’s been contemplated that graphene could play a very important role in heating buildings. It could play a very important role in conducting electricity and even capturing the energy from the sun in solar panels. It’s a very exciting market.
TCMR: Graphite and graphene are, pound for pound, stronger than steel.
MG: Absolutely. There have been claims made in the industry that if the World Trade Center buildings had been made of graphene that the damage and destruction could have been reduced.
TCMR: How large is the global market for graphite right now?
MG: The market is about 1 Mt./year valued at about $2.5 billion. That breaks out into about 400,000 tons of natural graphite.
TCMR: What do you estimate the market worth could be in 2015?
MG: We believe graphite demand will grow. The battery industry should increase its consumption of graphite. We estimate that batteries currently represent about 10% of graphite consumption in the world. We think that segment of the market should have compound annual growth in the low double digits for the next 10 years. It could be driven higher than that if penetration of electric vehicles is higher than our estimate.
The rest of the graphite segments of the market should grow more in line with global gross domestic product. Considering all this, we expect consumption for graphite to grow at mid- to high-single-digit growth rates, somewhere around 7% compounded over the next 10 years.
TCMR: What are some essential characteristics of an ideal graphite deposit?
MG: The most important characteristic is if the mine can prove that it has a very high percentage of its graphite production coming from large flake. While China accounts for about 75% of the world’s graphite production, very little of that is large flake. China has to actually import a lot of its large-flake graphite requirements, according to reports. A project with proven large-flake material will realize a higher value per ton produced and that positively impacts its gross profit margin per ton.
Second, we look for higher grades. Having higher grades allows less processing through the mill at a project and lowered operating costs. And the combination of a large percentage of large flake and very high grade—you can’t get any better than that.
Outside of those elements, we look for features that are important to just about any mining investment: access to infrastructure, if the location is friendly for mineral development and if the project is scalable.
TCMR: You initiated coverage of Northern Graphite Corp. (NGC:TSX; NGPHF:OTCQX) in August with a speculative buy and a 12-month target price of $2.10. It’s trading at around $1.10 now. What about this project makes you bullish on it?
MG: We’re very excited about Northern Graphite. Its Bissett Creek project has the largest flake material ever produced in the industry that we’ve seen. We believe the value of its production is just under $3,000/ton. The grades are respectable at about 2.5%, implying operating costs of roughly $1,000/ton.
The project doesn’t require a lot of capital, especially when you compare it to a lot of other mining projects outside of the graphite space. We believe the company can build the project for about $70 million (M) and be up-and-running in the second half of 2013, producing about 20,000 tons /year.
Another aspect that I like about the project is its ability to be scaled higher. It has recently reported the results from a 51-hole drilling campaign that are highly encouraging.
TCMR: What about its NI 43-101?
MG: That’s the catalyst that should be out in the next several weeks to months. The NI 43-101 is going to summarize the drilling program, but the company has already released the assay results in a press release. The results show that it is a highly continuous deposit. It has grades that fairly tightly trend right around 2.5%.
More of the inferred resources may be upgraded to indicated. Some of the indicated resources may be even upgraded to measured. But what’s really exciting to us is that the holes extend to the north from the current core zone. We think this deposit will ultimately show the market that it can be scaled higher and, within the next few years of the project coming to production, the company could significantly increase production and even double the production. The fact that these holes are extending northward and extending the zone is highly encouraging.
TCMR: The preliminary economic assessment had a resource of 14.7 Mt. indicated and approximately 18 Mt. inferred. Would that be considered a large resource by global standards?
MG: It would probably be considered a medium-size deposit within the graphite industry. That level of resource would really be enough to support a graphite mine producing 40,000 tons/year for roughly 20 years. An average-size graphite mine is probably from between 20,000 and 40,000 tons/year. The largest mines in the world are producing roughly 80,000 tons/year.
TCMR: Does the company have other potential drivers for appreciation?
MG: An aspect of Northern Graphite that’s fairly exciting is the potential construction of an anode-material plant. An anode-material processing plant is going further down the value chain within the graphite industry and not simply selling a run-of-mill graphite product, but upgrading it to what’s called battery-grade graphite. To do that, graphite from the mill at the mine is essentially upgraded through an anode-material processing plant. It significantly increases the value of that tonnage by over three times at a relatively low marginal cost. If Northern Graphite does, in fact, pursue that line of expansion, it could add $1 or more of net-present value to our $2.10 target price.
TCMR: This is an operation that is in far northern Ontario. Generally speaking, people don’t like large, open-pit mines in their backyards. What’s the political and public sentiment toward this operation?
MG: I think you raise an important point. There’s always the not-in-my-backyard sentiment for any type of industrial facility. If you take a look at Northern Graphite itself, the Bissett Creek mine actually was an operational mine at one point in its history. It didn’t produce that much graphite, but it was in production. There were some issues around the recovery process and the method that was developed to process and mill the graphite. There was a dry recovery process that was tested and attempted by previous operators. Now Northern Graphite is using a wet recovery process, which is more traditional, lower risk and proven out. It’s very important to note that this was a project that had received all of the required permits in the past, and we believe that’s a strong case that it should again get those required permits to get the project operating.
TCMR: You recently had a site visit to the Focus Metals Inc. (FMS:TSX.V) graphite project. The company claims to have the largest “technology graphite resource in the world” at 17% grade technology graphite.
MG: It doesn’t have an NI 43-101 resource report, but it has completed a lot of its drill work. There are analyses by assay labs that are currently being conducted and an NI 43-101 is planned for the not too distant future. It’s believed that that grade is going to be proven out. There have been a couple of feasibility reports done on the project about 15 years ago. That was the grade that was defined on the project then.
The production is not as large flake as Northern Graphite—it’s quite a bit smaller generally speaking—but there is a large percentage of the project that can be sold into the electric vehicle industry and other technology markets. However, 100% of Northern Graphite’s production will qualify for that technology industry.
I think the important thing to remember on Focus Metals is that it is very high grade, and this is going to translate into a lower operating cost. But the fact that it is smaller flake will detract from its average selling price. It’s going to have an average selling price lower than Northern Graphite. I think both of the projects are very interesting and they both offer very attractive ways to play the graphite market.
TCMR: What were some of your thoughts during your visit there?
MG: The site is located in Northern Quebec, about an hour-and-20-minute drive south of Labrador City. It’s a stone’s throw distance from considerable mining infrastructure in the area.
ArcelorMittal S.A. (MT:NYSE), one of the largest mining companies in the world, is nearby. It has what I believe to be the largest open-pit, iron ore mine just outside of Wabush, Quebec. Cliffs Natural Resources Inc. (CLF:NYSE) also has a very large, open-pit, iron ore mine in the area. These are operations that employ thousands of mining professionals and mining laborers. The ArcelorMittal mine has been in operation for 50 or 60 years. A lot of the infrastructure is there. This is only going to benefit Focus Metals when it ultimately builds its project.
I think another thing that really struck me at the mine site was a visual look at the rocks. You’re able to split them open with your hands and visually see the high-grade graphite. That bodes well for the project.
TCMR: Something unique to graphite and rare earths is that the companies really need people who understand the end uses and the markets for these particular elements and metals. Does the management team of Focus bring that to the table?
MG: Yes, I think so. The management team is one of the most important factors when you’re evaluating a mining company. I believe both Northern Graphite and Focus Metals have a very strong knowledge of the graphite industry. They also have put together teams that are very rich in resource development experience and have a track record.
TCMR: What are some other companies in this space that are exciting?
MG: Ontario Graphite Ltd. is a privately held miner, which has the graphite project adjacent to the west part of Algonquin Park. It’s probably the most-advanced Canadian graphite project that’s being put back into operation. I find this company interesting because it can be back up and producing graphite with a relatively small capital investment.
There are also some considerably early-stage companies in the graphite industry, some of which are private. MEGA Graphite Inc. and Archer Exploration Ltd. (AXE:ASX) both have Australian-based graphite projects.
Last week, we saw a transaction within the graphite space. A company called Strike Gold Corp. (SRK:TSX.V) agreed to acquire mining rights to a couple of graphite projects in Saskatchewan.
There is also a Chinese company trading in the U.S. called China Carbon Graphite Group Inc (CHGI:OTCQB) that has graphite processing facilities producing advanced, value-added graphite products and marketing them worldwide.
TCMR: Do you have some practical advice on investing in graphite plays that you can leave our readers with?
MG: In this particular market, I think investors want to focus on projects that are more advanced and have visibility to get to production and line up the customers. Having those relationships with the markets and consumers of graphite is going to be a key variable in sourcing capital.
TCMR: Are we going to see that in the form of offtake agreements or other contracts?
MG: I’m looking for some agreements similar to what we saw in the lithium industry. A lot of the lithium developers partner up with the large lithium users. The world’s largest automotive companies are realizing they need to position their companies to take advantage of the vehicle electrification trend. They have to secure access to long-term sources of lithium now.
The financing structures that we’ve seen in these lithium partnerships should be very similar to what unfolds in the graphite space. That’s going to be very exciting for all the graphite companies.
TCMR: Thanks Matt; this has been very informative.
Matt Gowing is a research analyst covering strategic metal and clean tech. Gowing joined Mackie Research in 2008 as a research associate, assisting in the industrial products group. Matt has over seven years of investment experience, including investment management, research and banking in several industries, including diversified industries, consumer products, oil and gas and income trusts. Previously, Gowing worked at London Capital Management as an investment analyst, helping to manage both U.S. and Canadian equity funds as well as co-op terms at Blackmont Capital (then First Associates) and Scotia Capital. Gowing completed his B.A. (Honors) in Business and Administration at Wilfrid Laurier University and is also a CFA Charterholder with the CFA Institute.
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