By B.P.T., on September 7th, 2011
The Mortgage Bankers’ Association purchase index will be released at 7:00 AM EDT, providing an update on the quantity of new mortgages and refinancings closed in the last week.
At 7:45 AM EDT, the weekly ICSC-Goldman Store Sales report will be released, giving an update on the health of the consumer through this analysis of retail sales.
At 8:55 AM EDT, the weekly Redbook report will be released, giving us more information about consumer spending.
At 2:00 PM EDT, the Beige Book report will be released, giving us more information about economic conditions in each Federal Reserve district in advance of the next Fed meeting.
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By The Gold Report, on September 6th, 2011
 In March of 2011, Global Resource Investments Founder and Chairman Rick Rule predicted a time of unprecedented volatility. As investors struggle to recover from what, indeed, turned out to be one of the most up-and-down months in history, this special Gold Report from his latest web broadcast outlines his secrets for using volatility as a tool to take advantage of new opportunities.
Scientists define volatile organic compounds as naturally occurring or man-made chemicals with low boiling points, a condition that allows these molecules to easily evaporate into the air, potentially causing irritation and creating an explosive environment. As Global Resource Investments Founder and Chairman Rick Rule predicted last March, man-made volatility has clouded the economic environment for the last month and could continue to do so for the next 12 months, according to his analysis. But volatility doesn’t have to be painful, he says, if you prepare yourself with plenty of cash and courage. “Volatility is like cyclicality. It is really a series of opportunities to buy low and sell high. And, if you understand volatility for what it is and accept it, it could be a tool as opposed to a threat. ”
The Un-Recovery
First, he outlines the reasons for the volatility. Rule doesn’t see a recovery in the United States. “I see government-induced liquidity in the market and I see some recovery in equities prices as a consequence of very, very, very low—make that negative—real interest rates as well as hope on Wall Street and in Washington,” he says. The problem with this paper recovery is that liquidity wasn’t what caused the recession. The issue is that individual and government balance sheets are unbalanced. Many of the assets are ephemeral. Unfortunately, liabilities are almost always real. “As a society, we owe an amount that is unserviceable relative to what we produce,” he says.
By encouraging people to spend more money they don’t have, the government is making the problem worse. Instead, he thinks people should rebalance their balance sheets and invest more in this country. “The idea that we can fix the fact that we owe too much money by encouraging borrowing and spending is an example of the idiocy that comes out of Pennsylvania Avenue and will continue to weigh down the recovery.” He says, “Until we deal with the problems that confront us in society, we are not going to have a U.S. economic recovery.”
Rule points to a war against savers. “The Fed has declared war on productive elements of society in order to distribute the benefits to the less productive elements of society. This is not the key to prosperity.” Drilling down interest rates punishes savers and rewards spenders. “This is perverse, truly perverse,” he says. He equates “quantitative easing” to a fancy way of saying “counterfeiting.” Increasing the nation’s money supply without increasing society’s ability to create utility through the provision of goods and services is simply fraud. You can’t maintain the value of a currency unit if you create it out of thin air far in advance of the society’s ability to generate value. That is true in the U.S. and abroad. “I have always said that the U.S. dollar is the worst in the world except perhaps for all the others,” he jokes. Rule is not alone in his low opinion of paper currency. Casey Research Chairman Doug Casey famously noted that the U.S. dollar is an I.O.U. nothing. The euro is a “who owes you” nothing. “It’s an artificial construct,” Rule says. “Europe truly is the triumph of politics over economics.”
One example of the irrational European economic policy now in fashion is the decision to “bail” Greece out of the trouble it was having servicing debt that was 150% of GDP by requiring the struggling country to service debt that is 165% of GDP. “I defy the European Union to explain to me how by adding a big column of negative numbers they end up with a positive number; very, very, very problematic,” Rule says. And, problems get deeper. “Because of the extremely close ties between the big banks on both sides of the Atlantic with large amounts of primary capital represented by sovereign debt, many of the large private sector banks have multiples of shareholder equity invested in securities by issuers like Italy, Spain, Portugal, Ireland and Greece that are insolvent. This means by real accounting standards most of the big banks in Europe are broke.”
This economic reality doesn’t mean that banks are going to fail any time soon, Rule explains. It simply means that the shareholder’s equity in the bank—the value of assets minus the value of the liabilities—is probably negative if the securities that these banks have in sovereign—as opposed to solvent—issuers were removed. “The test going forward will be the test between those two words,” Rule says. “Sovereign does not make solvent.” He takes issue with the words of the famous CEO of Citicorp, Walter Wriston, who said countries don’t go broke. “That was wrong. Countries do go broke. Countries will go broke. The question in Europe now is whether the savers—Finland, Austria and Germany—will decide that they and their children are going to carry the lifestyle of the rest of the Europe.”
The discussion going on in Europe right now is the same as the one going on in the United States, he says. “Who should benefit from production—the producer or the non-producer?” He points to a war worldwide between these two factions. “Sadly, non-producers outnumber producers and, in a democracy, the war is often won by the non-producer.” He likens democracy to a vote by five coyotes and a lamb over what to have for lunch. “That’s really the nature of the debate that’s taking place in the United States and Europe today.”
Free-ish China
“The good news about China,” Rule says, “is that over the last 30 years the place has become more, as opposed to completely, free. More than 30 years ago, Deng Xiaoping, then leader of the Chinese Communist Party, said ‘to become rich is glorious’ and China has become very glorious as a consequence of that.” Ironically, in this allegedly Communist country, there is no social safety net, meaning that people are on their own in China, Rule says. “As a consequence, savings are extraordinarily high, as much as 40% of a household income. So, China is generating enormous, enormous, enormous savings in direct contradiction to us, of course.”
Rule also points to more capital investment-friendly tax laws in the East. “In the United States if a big producer builds a big piece of manufacturing equipment, it may be required to amortize that equipment for tax purposes over 30 years. In China, that same producer is allowed to expense the equipment, meaning that there is a huge incentive to add the capital necessary to raise the utility of the workers operating that machinery. China is much, much, much friendlier to capital formation. The United States is much, much, much friendlier to consumption.” For these reasons and many more, Rule says “China, India and the frontier markets appear legitimately to be on the road to progress—a very different road than their European and North American cousins appear to have chosen.”
But, all is not bright in China. “Some 10,000 people rule 1.3 billion people and official sector misallocation is always a threat. The government decides what sectors should succeed, what sectors should fail. Expect the road to progress in China to be bumpy,” Rule warns.
The combination of domestic and international challenges on the horizon set the stage for more volatility, Rule concludes. “So many black swan events are looming that they resemble a flock of black swans. The idea that one of those black swans could precipitate an event like the ‘07–’08 liquidity crisis appears to me to be a very, very, very good possibility.” He goes so far as to suggest that in the next 18 months to 2 years, we could see a shut down for some period of time in interbank lending and frozen debt market liquidity. “In that set of circumstances you would want to have some cash,” he warns.
Golden (and Platinum) Opportunities
All of this darkness could shine a light on the metals—gold, silver, platinum and palladium, Rule says. “The most important part of the pricing of these metals is the continued debasement of fiat currencies. Metals prices worldwide are denominated in U.S. dollars. If the value of the denominator itself continues to decline, which I think it will, the nominal price for precious metals should continue to increase.” The increase may not be steady. “I suspect that these prices both up and down will be volatile for a few reasons,” Rule says. “Gold markets in particular, maybe silver markets as well, are determined by both of the primary economic motivators in the world—greed and fear. A raging bull market, which I think we might get into, compels people to buy gold bullion because they are afraid of the depreciation in dollars. This, in turn, stimulates the greed buyer who buys simply because the price went up and he or she understands the thesis. The price escalation in bullion that was driven by the greed buyer reinforces the fears of the fear buyer. And, the prices reverberate higher and higher as fear buyers and greed buyers compete with each other. That’s the market that we saw in 1979–1981—the single strangest bull market that I have experienced in my career. I suspect that we are likely in the early stages of a market that resembles that.”
The second set of circumstances Rule identifies as pushing gold prices up over the next year is supply-based. “In classical economics you are taught that higher product prices lead to increased supply. Because mining is a capital-intensive business, the response of the producers to increased commodity prices is not direct or immediate, particularly if interbank lending dries up debt financing needed for the large capital-intensive projects. There will be supply constraints that are, in some fashion, artificial.”
For supply-side reasons, Rule is increasingly attracted to the platinum business. More than 80% of platinum and palladium—PGM metals—come from three countries: South Africa, Zimbabwe and Russia. He cites local political turmoil as a limiting factor in the continued production in these areas. “Increasingly, South African governments are calling for more social rent—higher taxes, government participation in wage negotiations and, in some cases, outright nationalization. This will absolutely constrain the industry from making the investments in increasing production and sustaining their existing production over the five to seven years. Given that South Africa is the most important platinum producer in the world and it’s highly likely that the South African platinum producers will continue to constrain working capital investments, I would suspect that on a five-year going forward basis platinum production will falter.”
Moving north to Zimbabwe, Rule is no more optimistic. “President Robert Mugabe and his associates stole everything in the country that had any value. Now they have decided that about 150 people should control 51% ownership of the platinum mines in Zimbabwe. If you look at the track record of the black political elite in Zimbabwe managing the assets they have stolen over the last 20 years, you will see that the potential impact on platinum supplies as a consequence of their stealing productive capacity will be catastrophic.”
Rule sees Russia as a bright spot. “Russia gets slowly better over time. Yes, there are problems. The place is corrupt. They tend to attempt to mediate commercial disputes by shooting each other. There are problems with alcoholism. But, gradually things are improving in Russia. The difficulty isn’t Russian politics, but the fact that the big platinum and palladium producer there is running into lower and lower grades and having to go farther and farther down in the mines. Its production problems are organic as opposed to political.”
The bottom line for Rule is that there are going to be supply-side challenges in the platinum business at the same time that demand for platinum both as a precious metal for investment purposes and as an industrial metal for auto catalysts continues to increase. Rule acknowledges that a slowdown in the economy in Western Europe and North America will constrain vehicle demand there, but cites exploding vehicle demand in emerging markets, particularly China and India. Western air quality standards being imposed in both of these countries means that auto catalysts using platinum and palladium have kept pace with vehicle sales in those markets. “Strong demand and declining supplies point to very, very, very interesting opportunities in platinum markets,” he concludes.
Disconnected Equities
Good news for commodity prices has not always translated to rising junior mining stock prices. Rule sees four reasons for this disconnect. The first is historical. He credits the dramatic rise in precious metal stocks five years ago to an anticipation of the increase in bullion prices. “Some of the reaction that you might have expected in the equities prices might have occurred before the event took place,” he explains.
The second reason is what he calls “dismal corporate performance” over the last 10 years. “One would expect with the gold price increasing from $260 an ounce (oz.) to $1,800/oz. and silver increasing from $4/oz. to $40/oz. would result in absolutely skyrocketing free cash flows generated from the companies, but that didn’t happen. The operating response relative to the increase in product prices was, to be charitable, anemic.” The financial services industry, which had spectacular cash-generating expectations based on the returns of the 1970s, has been particularly disappointed. “There has been widespread disgust among gold share investors to the cash-generating performance of the companies relative to the escalation in their product prices,” Rule says.
The third factor is sector market-cap explosion. “Issuers—the mining companies and their cohorts in the financial services community—were engaged in inflation in the same way that governments around the world have issued lots of paper. Mining companies have issued billions of shares so that although the share price escalation has not been dramatic, the combined market capitalization of the precious metal sector producer, developer and explorer has grown at an extraordinary pace. There are many more issuers now than there were 10 years ago and every one of those issuers has many, many, more shares outstanding. You have to be very careful when you buy these things.”
The fourth point Rule makes is another cautionary one. “In the junior exploration sector, as many as 90% of market participants have absolutely no value. They are worth nothing. So, the sector as a whole can’t experience dramatic price appreciation when 90% of the paper in the sector is counterfeit or valueless. In fact, the gold shares are suffering from the same type of value depreciation as the U.S. dollar. You need to pay particular attention to defending yourself and your portfolios from these valueless, zombie security issuers.”
Rule stresses the importance of carefully evaluating a portfolio now, before the precious metals equity markets start experiencing price appreciation in the next three to six months. Why now? “Any price appreciation anticipation is over,” he says. “There is no premium built into the metals prices relative to the commodity anymore. In fact, this disparity has been noted. We think for the first time in some time the precious metals equities are reasonably priced relative to the metal itself,” Rule says.
Rule is also more positive on the issue of executive competence. “Corporate performance, which has lagged terribly over the last five years has begun to increase,” he says. For the last two or three years, the industry as a whole has generated about $2 billion (B)–$2.5B a year in surplus cash. This year, he expects the industry to generate between $4.5B–$5B, a clean double in 12 months. “The performance that hasn’t occurred hitherto is beginning to occur now,” he says. This cash on company balance sheets will enable them to do many things—greenfield and brownfield developments in their own portfolios along with mergers and acquisitions.
These are all positives for company prospects, Rule says. “We are now truly in a discovery cycle. For the last nine years the exploration industry has been well funded and well staffed. That spending cycle is beginning to yield discoveries. There is nothing, nothing that adds both liquidity and courage to junior equities markets like discovery.” Rule points to the last discovery cycle in ‘95 and ‘96 when some stocks went from $0.30 to $30.00 in 19 months. “My suspicion is that the underperformance of select precious metals equities for the next three to six months is over. Will it be volatile? It will absolutely be volatile. But, the fact is anticipation is no longer in the market; there isn’t a bullish outlook, which perversely is good. There is liquidity in the system. There is the will and the urge to merge so consolidation will take place. And, all of this will be punctuated by discovery.”
Rule also advises balance when it comes to choosing between seniors and juniors. “For those of you who are investors, for those of you who look at a return on capital employed rather than praying for a return of capital employed, you would go to the senior producers and the senior producers would do well. We particularly favor acquisition strategies that involve buying select seniors and your global broker can help you in that selection. And, then selling puts and calls against core positions. That is, allowing the market to pay you to buy low and sell high or acquiring the position simply by selling a put. We think the seniors are uniquely priced. We don’t think, by the way, that you pile in and build 100% position right now. We think you take a third position or a half position relative to where you want to end up because we are going to experience incredible volatility. But, we think this is the time to begin to establish positions.”
Rule cautions that investors need to be willing to take more risk with juniors. “The volatility will be more pronounced the farther out the quality scale you become. But the potential for reward is outsized too.” He anticipates a lot of mergers with juniors acquiring each other and juniors being acquired by the intermediates and intermediates and juniors being acquired by the seniors. “Given the relative underperformance of the juniors this year to last year, in November and December of this year—during tax-loss selling seasons—could be a once-in-a-decade acquisition opportunity.”
Rule ends by reiterating his words of warning about the volatility in the air. “This will not be stair steps to heaven. This market will not go straight up. The buzz word and I’m going to say it again and again and again in this broadcast is going to be volatility.” Again, he looks to the past to illustrate what could happen in the coming year. “Some of you will remember the 1970s bull market in precious metals when the price advanced from $35/oz. to $850/oz., a truly breathtaking ascent. You need to bear in mind that in 1975, in the middle of that ascent, the gold price fell from $210/oz. to $104/oz., a 50% decline. And the share price decline in the mining shares was even more dramatic. Did it matter over the course of a decade? No. Did it matter to people who suffered through the decline personally? Absolutely. So, while we think the sector is a good place to be don’t think of it as a place without risk.”
Founder and CEO of Global Resource Investments (GRI), Rick Rule began his career in the securities business in 1974 and has been principally involved in natural resource security investments ever since. He is a leading American retail broker specializing in mining, energy, water utilities, forest products and agriculture. Rule’s company has built a sterling reputation for its specialist expertise in taking advantage of global opportunities in the resources industries. Last month, Rule closed a landmark deal with Eric Sprott, another famous powerhouse in the arena. With GRI now a wholly owned subsidiary, Sprott, Inc. manages a portfolio of small-cap resource investments worth more than $8 billion and boasts a workforce of more than 130 professionals in Canada and the U.S. This article is based on Rule’s August 31Global Resource Investments webcast. Listen to the entire webcast.
By Christopher Briem, on September 6th, 2011
Wiz man… take a break. Grill a hot dog on that big NatGas grill or something. Give the 2nd shift the weekend off.
But if you insist on reading, the peanut gallery would be interested in your take on the WSJ’s: Obama Burns Gas Drillers on Ozone.
Always expect the unexpected eh? Don’t worry, I’m sure it will not abate the near term Marcellus (and Utica) rush, but it is the type of thing that will clearly have an impact on natural gas futures… which you would think would be capitalized into the value of the leases and eventually royalities.
Makes for some interesting politics in the Greater Appalachian Basin. When do gas politics outweigh coal politics?
By Claus Vistesen, on September 6th, 2011
The cage fight between the SNB and FX speculators continue with the most recent round seeing the SNB coming out fists flying aiming for a knock-out.
Quote Bloomberg
The Swiss central bank said it’s setting a minimum franc exchange against the euro and will defend the target with the “utmost determination” if needed.The Swiss National Bank is “aiming for a substantial and sustained weakening of the franc,” the Zurich-based bank said in an e-mailed statement today. “With immediate effect, it will no longer tolerate a euro-franc exchange rate below the minimum rate of 1.20 francs” and “is prepared to buy foreign currency in unlimited quantities.”
And the result, cold steel for the long swissies.
For now …
By B.P.T., on September 6th, 2011
At 10:00 AM EDT, the ISM non-manufacturing index for August will be released. The consensus estimate is that decreased by 1.7 points to a value of 51.0, and will continue to signal economic growth as it remains above the mid-point of 50.
By B.P.T., on September 2nd, 2011
With the stock market off to a poor start to September due to a weak jobs report, and following the wild swings in the market last month, it might not seem like the best time to invest. However, there are always opportunities to make money in the stock market, and I hope to lead you towards them by offering some suggestions based on my experience and the recommendations of others.
Historically, September is the worst month for the stock market, averaging a loss of almost 1% in the month over the last 40 years, so one easy way to make money could be to short the entire market using an ETF for the S&P 500, Russell 2000, or another broad index. It’s simple, would be profitable based on historical data, and offers protection against the weakening economy.
On the more positive side, you could look for stocks or sectors that historically perform well in September. Since the market is usually down for the month, there aren’t many options here, but the best performing sectors in this month are utilities and consumer staples, so a high yielding stock in one of these sectors or an ETF covering the entire sector could be a good choice.
Another option is to look forward to what performs well in the fourth quarter of the year and buy it on dips in the market so you are in at a good price and ready to profit in the future. The best performing sectors in the last quarter of the year are the materials and energy sectors, so getting into them when the opportunity presents itself could be a good decision.
Finally, if you don’t feel comfortable making your own stock picks but still want to invest, you can follow suggestions from professional investors like Timothy Sykes, and buy their best stock picks.
Investing in the stock market is a path to long term wealth, and knowing when you should buy and when you should sell can add thousands to your portfolio over time. As always, invest carefully and wisely, and only with money that you could afford to lose if the worst happens.
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By The Energy Report, on September 2nd, 2011
 Although lithium equities have not elevated moods much recently, House Mountain Partners founder Chris Berry makes his case that over the longer term the element will be in such strong demand for the electric vehicle (EV) revolution that investors will no longer be able to ignore explorers and emerging producers. The crucial growth driver is the nascent lithium-ion battery industry that will be vital to management and allocation of energy sources ranging from nuclear and coal to wind and solar. In this exclusive Energy Report interview, Chris has identified several publicly traded lithium juniors priced low enough to reward patient investors with big multiples on investment.
The Energy Report: I’m looking at an unweighted basket of lithium stocks and it’s down about 17% since July 22. During the past six months, these stocks have underperformed the S&P 500 by about 30%. Chris, what does this tell you? Is it heralding a slowdown in manufacturing and the economy in general? Or, are lithium equities a screaming buy here?
Chris Berry: I think it tells us both. If you look at recent gross domestic product (GDP) data in the United States or, most recently in Germany, many Western economies are in stall speed with second quarter GDP numbers barely coming in above zero. So, the world economy is at a little bit of a crossroads—the West is slowing down and relying on the East as the sole engine of economic growth. There is a risk of a double-dip recession here in the United States, but I think it remains to be seen if that will happen. Regarding whether lithium equities are a “screaming buy,” I think there are some lithium stocks that are undervalued at their current levels, but it’s not safe to assume that all lithium stocks are a buy right now.
There are two reasons you’ve seen lithium equities get pushed down in the last couple of months. The first has to do directly with uncertainty in Western economies. Second is the fact that there are likely too many junior exploration companies in the lithium space based on current and near-term supply and demand. So based on these two factors, everyone is just getting pounded. It’s a flight to quality, and it’s a reaction of fear in terms of where to put your money, which is why you’ve seen gold hit historic highs. Lithium, itself, is an industrial metal, whether or not it’s used for polishing glass, as a grease, or its most popular current-day use—in batteries. The long-term potential of lithium rests with growth and innovation in the automotive industry. Electric vehicles are a key growth driver for lithium demand in the future. So electrification in the automotive industry, energy storage and consumer electronics demand are all themes to focus on when developing an opinion on long-term lithium demand. There is a great deal of debate in scientific circles regarding what the optimal battery chemistry is or will be. Lithium will play a central role here, but there are other choices, as well, clouding the end game.
TER: Will some look back at this as a missed opportunity in lithium equities?
CB: I think so as long as you are selective. One of the main themes that we look at in our research at House Mountain is how GDP growth is directly related to access to cheap and reliable energy. How that energy is generated is a question with a number of different answers. If you think about the potential that lithium has in terms of energy storage and generation, it will no doubt play a role in the world’s future energy mix. Hydrocarbons will always be with us thanks to their availability and energy density, but lithium will, in my opinion, play a central role in transportation. This isn’t something that is going to all shake itself out next week or next year. We are looking at a process that is slowly evolving.
TER: At the end of June, Rockwood Holdings, Inc. (NYSE:ROC), a $4 billion market-cap company announced a 20% lithium price increase and the stock really responded quite well until things began to turn down. What is driving that kind of pricing power?
CB: You are absolutely right about Rockwood. I believe a week or two after the Rockwood announcement FMC Lithium, a division of FMC Lithium Corporation (NYSE:FMC) raised prices as well. The prices of select lithium end products were increased by 20–25%. What I read into this was the fact that there is a substantial amount of raw materials inflation globally and these companies are passing higher costs on to their customers. It remains to be seen whether these higher prices stick.
TER: Right now, given the current economic environment, what is the bull case for lithium?
CB: I’m not sure the bull case is particularly compelling, again, because you’re looking at a predominantly industrial mineral facing a slowing global economy; granted some economies are expanding faster than others. I think the lithium industry draws an interesting parallel with the rare earth industry. You are at the beginning stages of a huge shake out in the rare earth space where many of the junior explorers there won’t achieve production as the small size of the market cannot support the 200-plus companies involved in rare earth exploration. With lithium, you’ve got four primary global producers and a couple near-term producers in a market that today has too many participants given the current global lithium demand picture.
But I do think over the coming years as this emerging growth phenomenon in countries like China, Brazil and India continues and other economies recover, the case for lithium is strong. Lithium can play a huge role, whether or not it’s in electricity generation, electricity storage, or the transportation sector. I don’t want to underestimate how critical a viable transportation sector is to any economy. If you think about supply chains and what they mean to a given economy in terms of the movement of raw materials, the transportation sector is absolutely critical to maintaining or sustaining any increased quality of life.
TER: I know you travel to Latin America at times. Exports from Chile and Argentina are up over last year, and the lithium industry looks very positive down there. What’s going on in South America? Is this a resource issue, a policy issue or both?
CB: I think it’s a mixture of both. When you talk about Chile and Argentina, they are two of the top lithium producers and exporters in the world. Most, if not all, of the producers are brines and they are solidly economic. You have healthy demand for lithium and lithium carbonate coming from Asia so that’s, in my opinion at least, why you are seeing these export numbers increase from Chile and Argentina. Both of these countries have mining as a central driver of their economic growth. Various provinces in both countries have been mining metals—lithium, gold, copper, you name it—for hundreds of years. They also understand how important mining is to local economies. I know, for example, in some provinces in Argentina, the mining industry accounts for up to 70% of the local economy. So it’s an overwhelming engine of growth. That’s not lost on local and national politicians in these countries. These countries are stable geopolitical jurisdictions with a set rule of law and very clear royalty schemes. That is what attracts foreign direct investment and creates jobs.
TER: I don’t know if you go to Australia, but it’s friendly to mining as well, isn’t it?
CB: I was actually in Australia visiting Talison Lithium Ltd.’s (TSX:TLH) Greenbushes project in April. Australia is an extremely mining friendly country. What is interesting there, however, is that the last few heads of state have tried to push ahead with a carbon tax. It’s no surprise that the proposed higher taxes have been viewed unfavorably by large producers with operations there—Rio Tinto (NYSE:RIO; ASX:RIO) and BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF) for example. It remains to be seen what will come of this legislation, but it is really one of the only potential stumbling blocks I see in an otherwise solid mining jurisdiction.
TER: Speaking of Talison, its chart is an inverse or mirror image pattern to Sociedad Química y Minera de Chile S.A. (NYSE:SQM; SSX:SQM-B, SQM-A). I was comparing them because they are the two largest producers of lithium. Over the past six months, Sociedad Química is up 10%, and Talison is down 41%. Talison is the world’s largest producer, and it’s set to double production by 2013 with expansion of its Greenbushes project you just spoke about. Why has it underperformed so badly?
CB: I have followed Talison for a long time and visiting the site provided a lot of new perspective. This is a company that has been producing high-grade lithium for 25 years. It has a very strong technical team that knows exactly what it is doing. It is mining an asset that is actually the highest grade hard rock lithium in the world. I don’t know if that is necessarily lost on the market, but in the mining industry one of the themes in terms of evaluating a project is that grade is king. If that’s the case, then Talison is a runaway winner. You have an asset with a substantial mine life with an incredibly high grade in a safe geopolitical jurisdiction that supplies China with upwards of 75% of that country’s lithium needs. Think about the growth taking place in China in cleantech research and the battery manufacturing business. The overwhelming majority of the lithium used here comes from Talison.
Talison is the only pure-play lithium producer in the world. So comparing it to a company like FMC or Sociedad Química or Rockwood is not exactly fair because those are chemical companies that produce fertilizers and other chemicals aside from lithium.
TER: At the risk of comparing apples and oranges once again, Sociedad Química is a brine producer of lithium. Talison is a hard rock producer. Which method do you prefer?
CB: On a cost per-ton basis and on a head-to-head evaluation, the brines are cheaper. But it can take 18 months to extract and evaporate the brine and produce lithium carbonate, whereas with hard rock you can do it much faster. How Talison competes with brine producers is interesting. In many cases, it can out-compete brine producers because it is producing such high-grade product. Even though mining may be more expensive for Talison compared to a brine producer, its higher grade allows it to capture a higher margin for the end product that it sells.
TER: Chris, what other companies are you talking to investors about?
CB: One, in particular, that we are focusing on right now is Lithium One Inc. (TSX.V:LI). This is a company that has two assets—a brine asset in Argentina, which is its centerpiece project, and a hard rock pegmatite property in the James Bay region of Quebec. The company is planning on producing lithium carbonate and potash from the Argentinean property named Sal de Vida. In the lithium space, I like to see this because if you can produce a byproduct profitably, that is going to lower your overall cost of production. Additionally, you have very strong management in Paul Matysek and Patrick Highsmith.
TER: Do you give Lithium One an advantage because it produces from both hard rock and brine?
CB: The company isn’t yet producing from either, but plans on production from the brines first. I suppose there is an advantage in having a diversity of supply, but the real advantage will be that it will be predominantly producing lithium from the brine along with potash and lowering overall cost of production. So that is the advantage. This asset borders a property from which FMC is now producing and has substantial grades of both lithium and potash.
Near-term catalysts for this company are a preliminary economic assessment in Q311 and a prefeasibility study in the middle of 2012. We are looking for positive catalysts over the next 6–12 months here.
One of the other things we really like about Lithium One is the fact that it has done strategic joint ventures for each of its assets. For the Sal de Vida property, it has partnered with a Korean consortium of three different companies—LG International Corp., Korea Resource Corporation (KORES) and GS Caltex Corp. The consortium will fund the project to feasibility in exchange for up to a 30% ownership of the property. The key benefit for the consortium is to lock up a secure supply of raw material. For Lithium One, the company is carried to feasibility. It is important to consider how a company is going to ultimately start generating cash. Is it going to continue to dilute through share issuance to get there? In my opinion, Lithium One has really executed a masterstroke in negotiating a partnership with this Korean consortium.
On its James Bay asset in Quebec, Lithium One has done the same thing with Galaxy Resources Ltd. (ASX:GXY), which is a company that just started producing lithium in Australia on its own. Galaxy can earn up to 70% of the James Bay property by completing a definitive feasibility study by the end of 2012. So Galaxy can ensure security of supply and Lithium One is carried to definitive feasibility on the project.
Another interesting company is Western Lithium USA Corp. (TSX:WLC; OTCQX:WLCDF). It’s a little bit of a hybrid as it’s not a traditional brine or hard rock play. This is a very large clay asset in Nevada called Kings Valley. Western Lithium recently updated its NI 43-101 resource estimate, which I think was received positively as the tonnage and grade of the deposit increased, which helps the already good economics of the project. When you talk about lithium, one of the keys is security of supply. When the electric vehicle revolution really takes hold, the idea of having a ready domestic supply of the key asset lithium carbonate is of paramount importance. I’m currently reading a book titled “Bottled Lightning: Superbatteries, Electric Cars, and the New Lithium Economy” by Seth Fletcher. In the book, the “story” of Western Lithium is told and WLC CEO Jay Chemelauskas is featured prominently. The book is an interesting read on the history of lithium’s role in electrification and more importantly, it’s future.
TER: What about earlier stage plays?
CB: We have talked about Rock Tech Lithium Inc. (TSX.V:RCK; OTCPK:RCKTF; Fkft:RJIA) before. This is a very early-stage play. It’s not quite as far along as Lithium One or certainly not as far as Talison. Rock Tech is a hard rock explorer and it has several assets in Ontario and Quebec. The primary property is the Georgia Lake lithium deposit about 200 km. north of Thunder Bay, Ontario. It has a historic resource, and it will be updating and releasing information on that before the end of the year. So we will get an idea of the tonnage and grade of its Georgia Lake asset. It also has an asset in Quebec that borders Lithium One’s hard rock deposit. You can take a look at the tonnage and grade specifics for Lithium One at James Bay and infer what Rock Tech might have if the geology underlying the deposits is consistent and continuous.
TER: Will that upcoming resource estimate be an NI 43-101? What has been the historic estimate?
CB: It will be a qualified NI 43-101 resource estimate. The historic estimate at its Georgia Lake prospect is 9.8 million tons of lithium oxide at a grade of 1.18%. Rock Tech is conducting bulk sampling, and has produced very high-quality lithium carbonate from one of the bulk samples. So the metallurgy there is very close to being understood, and that is a huge key with a lot of these lithium plays.
TER: Do you expect Rock Tech’s NI 43-101 to be a market-moving event?
CB: I think it will be significant because what you are looking at now is historic or backwards information. So you have an idea of what this company has and what the size and grade are, but you don’t really know. So an NI 43-101 is certainly a significant step in Rock Tech’s future. I don’t know if I would necessarily say it is market-moving. One of the keys with juniors, whether you are dealing with lithium or gold, is patience. A lot of times patience can wear thin, but I think with a company like Rock Tech, patience may ultimately be rewarded despite the fact that the lithium space has too many participants
TER: Thank you very much, Chris. It has been a pleasure.
CB: I think a lot of what you guys do at Streetwise. Thank you.
With a lifelong interest in geopolitics and the financial issues that emerge from these relationships, Chris Berry founded House Mountain Partners in 2010. House Mountain firmly believes that the emerging quality-of-life cycle emanating from Asia is a “game-changer” that will affect everyone throughout the world for decades. With that in mind, the firm focuses on the intersection of three topics: 1) The evolving geopolitical relationship between emerging and developed economies; 2) The commodity space; and 3) Junior mining and resource stocks are positioned to benefit from this phenomenon. Chris spent 14 years working across various roles in sales and brokerage on Wall Street before founding House Mountain Partners. He holds an MBA in finance with an international focus from Fordham University and a BA in international studies from the Virginia Military Institute. Chris is also a member of the Canadian American Business Council. He invites readers to receive a complimentary subscription to Morning Notes, which provides analyses of emerging geopolitical, technological and economic trends. Go to www.discoveryinvesting.com.
By Christopher Briem, on September 2nd, 2011
This is fascinating, and is a great lesson in creating or just plain reading charts. Lots of buzz over a piece put out by the uber data wonks at the Energy Information Administration under the headline: Pennsylvania drives Northeast natural gas production growth. You just knew folks would obsess over that. The echo came first I think via NPR’s new Stateimpact site, but spread at least to places like the PG’s Pipeline, and of course was picked up by the Marcellus Shale Coalition and others by now I am sure.
As best I can tell, few bothered to read what the EIA had to say as much as obsess on this one graphic they put out there.
So you look at that chart and say OMG, look at all the net new natural gas is coming online! You have to believe that the storage capacity of the US is filling up quick and what I would really like to hear with winter approaching is that the price of natural gas must be collapsing. Soon they will be giving away the stuff. It’s not like there has been enough time for any meaningful new demand to soak up all that new gas production. Still a long way from fleets of natural gas cars on the roads and we have made it past the peak energy demand of the summer.
Of course, it isn’t the case just yet. Natural gas prices are relatively low, but have been stable for much of the last year or so. Natural gas in storage is not too far from normal parameters. So what gives?
If you looked at that graphic too quickly.. or didn’t bother to look into the context more you might have assumed that the graphic depicted all US natural gas production. Go look again, it clearly says it is just for Northeast production. Remember also that natrual gas is shipped around the country in pipelines so it really is a national, or probably best described as a continental market with the entire Northeast not exactly a big part of the production story. So it is the supply and demand cumulative across North America that really impacts the market prices.
Just for fun, here is a bar chart I made quickly of Pennsylvania’s natural gas production compared to the United States’ production as of June 2011. You will need to scroll down to get to Pennsylvania’s data:
And if you are still reading.. it might be good to go back and read the EIA’s (yes, the same EIA that made the first chart) current description of energy resources in Pennsylvania. In particular scroll down to the subsection titled “Natural Gas”. The state of things as they describe it for Pennsylvania is:
” Natural Gas: Although minor, Pennsylvania’s natural gas production has grown in recent years. The State’s Marcellus shale region, in particular, has experienced markedly increased new development over the past few years. However, compared to Pennsylvania’s total natural gas production, shale gas production remains minimal. “
Note they start out with the description ‘minor’.
Clearly the ‘minimal’ part is changing, but even with the big increases in the last year, Pennsylvania is still far from a big part of total US production and a small fraction of production in Texas. You might not think so reading all the hype. A few folks I have had conversations with recently really believe Pennsylvania is now, as in already, the biggest natural gas producer in the nation. Some PR folks out there somewhere really deserve bonuses.
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By B.P.T., on September 2nd, 2011
The Monster Employment Index for August was released today, and the index moved up 3 points from last month to a value of 147, which is 8.1% higher than last August’s value.
At 8:30 AM EDT, the Employment Situation report for August will be announced, and the consensus for non-farm payrolls is an increase of 60,000 jobs compared to a gain of 117,000 in the previous month, the consensus for private payrolls is an increase of 75,000 jobs compared to a gain of 154,000 in the previous month, the consensus for the unemployment rate is that it will remain at 9.1%, the consensus average hourly earnings rate is expected to increase 0.2%, and the consensus for the average workweek is 34.3 hours.
By Simon Grey, on September 1st, 2011
The justification for pushing people around like this is the NHS. Shouldn’t people have to pay for their own illnesses? Well, yes – that’s how personal responsibility works. But having an NHS removes the personal responsibility, and artificial attempts to inject it into the system are doubly illiberal and wrong.
The government (and the electorate, for that matter) forces people to be in the NHS. You have no choice in the matter, and you can’t opt out of it. Jamie Whyte put it well: “first the do-gooders conjure up the external costs by insisting that no one should have to pay for his own medical care, then they tell us that they must interfere with behavior that damages our health because it imposes costs on others.” This is perverse and illiberal. The tax would only affect the poor – rich people’s spending habits wouldn’t be dented. How easy it must be for doctors to pontificate about the need for a fat tax, knowing that such a tax would hardly affect them at all.
This creepy, controlling paternalism has plenty of fans in politics on both sides of the partisan divide. Doctors are the politicians’ enablers, lending the weight of their “expertise” to the nanny instinct of the political class in exchange for the feeling of being important. No amount of expertise – medical or otherwise – should give somebody the right to interfere with another adult’s choices. Nor should democracy be used as an excuse to violate the sovereignty of the individual. If fat people are costing the NHS money, that’s a mark against having an NHS, not against having fat people.
Sam Bowman is perfectly correct in noting that the problem with obesity is a mark against the NHS. The NHS has essentially reduced people’s incentive to avoid unhealthy behavior and, unsurprisingly, people have engaged in unhealthy behavior. If the NHS were abolished, people would revert to more healthy behaviors. This is the basic economics.
However, regulating people’s diets and behaviors is the natural consequence of having the NHS. If a government is going to dispense “free” health care, the only way to control costs is to limit health care and control individuals’ behavior. If the government is going to provide something for you, it is eventually going to have to control you. Government benefits and government control go hand in hand.
Therefore, if people do not wish to be controlled by their government, they must give up their benefits (and in this case pity can be offered to those in Britain because NHS is not opt-out, so there are likely some in Britain who are part of system they simply want no part of). And if people desire certain benefits from the government, they must be prepared to cede control of themselves to the state. Those are simply the natural consequences.
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