Critical Reading for Rare Earth Metals Investors

Rare earth element coverage has exploded since The Gold Report started covering this sector in early 2009. At that point, the REE junior mining market was a $2 billion industry. Today, REE juniors are a $10 billion+ industry—give or take a one-day market fluctuation, and Streetwise Reports now has a dedicated newsletter to cover the sector: The Critical Metals Report. Let’s look back at how far we have come.

A quick search of media stories from the month of December, 2009 shows 24 clips including references to the 15 lanthanides and their related elements scandium and yttrium. By contrast, one day in December, 2011 produced 56 stories on the same resources. Even the tone of REE coverage has transformed over the years. Two years ago, an analyst piece from veteran metals consultant Jack Lifton titled “Underpriced Rare Earth Metals from China Have Created a Supply Crisis ” was a common headline as the world discovered that cheap supplies had left manufacturers vulnerable to a monopoly with an agenda. That supply fear made REE the investment de jour and sent almost all of the rare earth prices through the roof. In December of 2010, the headlines in big outlets like The Motley Fool announced that the “Spot Price of Rare Earth Elements Soar as much as 750% since Jan. 2010.”

Reality soon set in as investors realized that this was not a simple supply and demand industry. First, demand was still vague, subject to change and very specific about the type and purity of the product being delivered. Second, the ramp-up period for companies exploring, getting approval for development, mining, processing efficiently and delivering to an end-user was very, very long. Some became discouraged. That is why this year, the consumer finance site, The Daily Markets ran an article with the headline: “Why You Shouldn’t Give Up on the Rare Earth Element Minerals” by Gold Stock Trades Newsletter Writer Jeb Handwerger.

Through it all, Streetwise Reports has focused on cutting through the hype to explain what is really driving demand, how the economy and geopolitics shape supplies going forward and which few of the hundreds of companies adding REE to their company descriptions actually had a chance of making a profit.

Back in June of 2009, in an interview titled “The Race to Rare Earths,” we ran an interview with Kaiser Research Online Editor John Kaiser that concluded “China’s export-based economy, once dependent on American greed, is now but a fading memory. While the U.S. was busy printing and preening, the Chinese were long-range planning. But America wasn’t the only country caught off guard by China’s strategic, if surreptitious, supply procurement.” Even while other analysts were panicking, Kaiser was pointing out how investors could be part of the solution–and make a profit in the process.

“For the juniors, the opportunity right now is to source these projects. They get title to them, and when these end users want to develop them, they’re going to have to pay a premium to have these projects developed,” Kaiser said. “So it will not be economic logic that results in these companies getting bought out and having their deposits developed. It’ll be a strategic logic linked to long-term security-of-supply and redundancy concerns. And we’re seeing that sort of psychology at work in this market. It’s a bit of a niche in this market. Not as big as gold, but it is an interesting one because of the long-term real economy link implications.”

After years of covering the space by interviewing the growing chorus of analysts and newsletter writers singing the praises of rare earth elements, in June of 2011, we launched The Critical Metals Report to give exclusive coverage to the entire space, including rare earth elements, strategic metals and specialty metals. One of the first experts interviewed was Emerging Trends Report Managing Editor Richard Karn in an article called “50 Specialty Metals under Supply Threat.” He warned that investing in the space is not as simple as some other mining operations. “The market is just starting to become aware of the difficulty involved with processing these metals, which, in many cases, more closely resemble sophisticated industrial chemistry than traditional onsite brute processing. Putting flow sheets together that process these metals and elements economically is no mean feat.”

In this early article, Karn busted the myth that manufacturers would find substitutions, engineer out or use recycled supplies for hard-to-access materials. “The advances we have seen especially in consumer electronics over the last decade and a half have not been driven by lone inventors or college kids tinkering in their parents’ garages, but rather by very large, well-equipped and well-staffed research arms of powerful corporations. The stakes are high and if a certain metal is critical in an application, they will buy it regardless of the price,” he said.

Similarly, a July 2011 article for The Critical Metals Report featured Energy and Scarcity Editor Byron King sharing “The Real REE Demand Opportunity” driven by the automobile industry and beyond. He was one of the first to point out that not all rare earths are the same with Heavy Rare Earth Elements demanding big premiums.

“Going forward, the serious money will be in HREEs, which have a lot of uses other than EVs,” King said. “For example, yttrium is used in high-temperature refractory products. There’s no substitute for yttrium. Without it, you can’t make the refractory molds needed to make jet-engine turbine blades. If you can’t make jet-engine turbine blades, you don’t have jet engines or power turbines. The price points for these HREEs will reflect true scarcity and unalterable demand. People will bite the bullet and pay what they have to in order to get the yttrium.”

House Mountain Partners Founder Chris Berry also addressed the impact of electric vehicle demand on vanadium, a popular steel alloy strengthener now being used in lithium-ion batteries in the interview “Can Electric Vehicles Drive Vanadium Demand?

“The use of vanadium in LIBs for EVs is not significant yet, but could eventually become important as the transportation sector electrifies. One of the real challenges surrounding LIBs is settling on the most effective battery chemistry. In other words, what battery chemistry allows for the greatest number of charge recycles, depletes its charge the slowest and allows us to recharge the fastest? Today, based on my research, lithium-vanadium-phosphate batteries appear to offer the highest charge and the fastest recharge cycle. It seems that the lithium-vanadium-phosphate battery holds a great deal of promise, offering a blend of substantial power and reliability. I am watching for advances in battery chemistry here with great interest,” Berry said.

In September, Technology Metals Research Founding Principal Jack Lifton shared his insights on why some junior REE companies are prospering while others wither and die. In the article, “Profit from Really Critical Rare Earth Elements,” he said: “Rare earth junior miners are now being culled by their inability to raise enough capital to carry their projects forward to a place where either the product produced directly or the value to be gained from the company’s development to that point by a buyer can be more profitable than a less risky investment. The majority of the rare earth junior miners do not understand the supply chain through which the critical rare earth metals become industrial or consumer products. Additionally, they do not seem to recognize the value chain issue, which can be stated as ‘How far downstream in the supply chain do I need to take my rare earths in order to be able to sell them at a profit?’”

Then Lifton made this important point for Critical Metals Report readers. “It is very important for the small investor to understand that the share market does not directly benefit the listed company unless the company either sells more of its ownership or pledges future production for present, almost always sharply discounted, revenue.” As always, Lifton encouraged investors to follow the money to a specific end rather than the general market demand often envisioned by investors accustomed to the more defined gold market.

In October, JF Zhang Associates’ Principal Consultant and Chief China Strategist J. Peter Zhang shared his insights on “U.S. Manganese Supply as a Strategic Necessity.”

Manganese is now largely used largely in the production of low quality stainless steel, but is being incorporated into lithium-ion batteries. That increased demand is focusing attention on the limited supply outside China. “There really is no electrolytic manganese metals production in the U.S. or anywhere outside China except for a small percentage from South Africa. We don’t produce even a single ounce in North America. Relying on other countries to supply essential commodities (like oil for instance) is always a problem. If China suddenly decided to reduce production, or in the likely event that its domestic demand increases, the world would be out of options. Policymakers need to understand this risk and Congress needs to take action to minimize the potential impacts,” he said. “From the end of 2008 to 2009, China tied things up. Since then, the price has doubled, tripled and quadrupled. That should be a wakeup call. North America needs to either establish a strategic reserve system for critical metals or build production capacity to mitigate supply risk. I think there is some sense of urgency right now, but a lot more needs to be done.”

Picking the right junior is the trick. In the November article “Navigating the Rare Earth Metals Landscape” Technology Metals Research Founding Principal Gareth Hatch outlined the odds. “TMR is tracking well over 390 different rare earth projects at present; I can’t see more than 8-10 coming onstream in the next 5-7 years. Projects already well past exploration and into the development and engineering stage, and beyond, clearly have first-mover advantage.”

Just this month, in an interview entitled, “The Age of Rare Earth Metals” Jacob Securities Analyst Luisa Moreno compared the impact REEs will have on our daily lives with the transformation in the Bronze Age.

“There is an economic war over the rare earths, with China on one side and other industrialized nations on the other—Japan, the United States and the E.U. China is probably winning. It has decreased exports in the last few years and increased protection. It has attracted a great deal of the downstream business and it is positioning itself well. At this point, it produces most of the world’s rare earths, and prices are at record highs. Japan and the other countries have been left with few options, and those options are more expensive, such as substitution, recycling and adapting production lines to use less efficient materials.” Moreno then pointed to the seven companies that could come to the world’s rescue and usher in a miraculous new world of smaller, stronger, more powerful gadgets based on a steady supply of REE materials from reliable sources.

Macro-economic insights, specific investment ideas and the most current expert advice: That is why we have become critical reading for the REE investor today and will continue to be required reading in 2012. Are you getting the latest information on Critical Metals companies? Sign up here and enjoy a year of TCMR free. You can also hear top experts in the space commenting on the ideal way to start REE investing on our YouTube page.

I’ll gladly pay you Tuesday for a hamburger today

Was it Popeye’s friend, Wimpy, who kept asking for a hamburger on credit? Today’s credit markets are anything but robust, with reduced demand and supply for borrowed funds. Always eager to find obscure terms for modern dilemmas, economists refer to this condition as a liquidity trap. With a little prodding from Facebook friend and neighbor, Patrick, we’ll give the concept a once over.

Jumping to the conclusion (and resisting the academic approach of a slow, careful warm-up) there is bad news and good news about liquidity traps. The bad news is that they make it difficult for the Federal Reserve to execute monetary policy. Creating 100s of billions of dollars has a muted impact on our economic recovery. The good news is that the liquidity trap dampens the significant inflation we might expect with the creation of all that money.

OK, back to the beginning. During times of slow or no growth and high unemployment the Federal Reserve can create/inject money, largely by increasing reserves that banks have in their accounts with the Fed. They can do this by buying U.S. treasury bonds on the open market, or even by buying troubled/toxic assets from banks. This increase in the supply of money allows interest rates to fall, which in term spurs demand for more consumption and investment. This is classic monetary policy. With mild downturns this is often enough to increase growth and kick start the economy. For the most recent 2007-2009 recession the Fed took these actions, a number of times in a number of ways, and those actions were not sufficient. Now the target short term interest rate – the Fed Funds rate – is essentially at zero. The Fed can’t lower the interest rates any further. Here’s a graph of the Fed Funds rate since 1980. The big peak at the beginning of the graph was the result of aggressive Fed action to contain inflation. Now, though, the rate has sunk to the very floor.

Fed Funds Rate - St. Louis FRED databaseFed Funds Rate – St. Louis FRED database

One thing that is happening is that while reserves are building up in our financial system, the banks are holding on to them rather than increasing their lending. Some argue that the banks are using the added funds to improve their balance sheets, which were hurt by the dramatic loss in value of securitized mortgages and other derivative assets, and to build up enough cash to pay executive bonuses. The banks argue that demand for credit by qualified borrowers is low. I don’t put much credence in the latter explanation.  One apt analogy for this situation is that the Fed is trying to push on the end of a string, in order to get the economy going.

There is another layer to the liquidity trap concept, and that has to do with the buying public’s (people and business) expectation for inflation. The theory goes that if buyers expect inflation in the future, they will increase buying now. They expect the value of their cash or savings to go down during inflationary times, so they seek to use it now, while its value is still high. This works with traditional monetary policy where an injection of money would be expected to increase inflationary pressures.

On the other hand if purchasers believe that inflation will be controlled, then there is less pressure to buy now. That’s what is happening now. Despite what some politicians suggest, inflation is not right around the corner, and buyers are in no hurry to convert their cash into goods. We see evidence of this with the continuing low interest rates on U.S. bonds. Expectations of high inflation would push those interest rates up. Low inflation expectations, even in the face of increasing money supply is another symptom of a liquidity trap.

This scenario played out, to grim effect, in Japan in the 1990s, as their central bank poured money into the banking system and no one responded. Their “lost decade” was one of almost zero growth.

This paper by a New York Federal Reserve staff economist explains things in more detail, complete with impenetrable equations.

Compelling Proof of the College Bubble

In Academically Adrift, Arum and Roksa paint a chilling portrait of what the university curriculum has become. The central evidence that the authors deploy comes from the performance of 2,322 students on the Collegiate Learning Assessment, a standardized test administered to students in their first semester at university and again at the end of their second year: not a multiple-choice exam, but an ingenious exercise that requires students to read a set of documents on a fictional problem in business or politics and write a memo advising an official on how to respond to it. Data from the National Survey of Student Engagement, a self-assessment of student learning filled out by millions each year, and recent ethnographies of student life provide a rich background.

Their results are sobering. The Collegiate Learning Assessment reveals that some 45 percent of students in the sample had made effectively no progress in critical thinking, complex reasoning, and writing in their first two years. And a look at their academic experience helps to explain why. Students reported spending twelve hours a week, on average, studying—down from twenty-five hours per week in 1961 and twenty in 1981. Half the students in the sample had not taken a course that required more than twenty pages of writing in the previous semester, while a third had not even taken a course that required as much as forty pages a week of reading.

One of the subtle cultural shifts arising from the education bubble has been how people are inclined to view college. It used to be that people went to college for an education. Now people go to college in order to ensure having a good job later on.* In essence, the role of college has shifted from education to credentials.

As such, it should not be surprising that colleges dumb down both their admission requirements and their curriculum, for the goal is not education. Rather, the goal is giving students customers a piece of paper that says they are smart. This claim doesn’t have to reflect reality in any meaningful way because most students don’t bear the direct costs of their “education.” Therefore, students are considerably more willing to spend their parents’ money and their future income on degrees that become less and less valuable.

Basically, then, the dumbing down of academic standards is proof of the education bubble because the free and cheap money subsidizes marginal students who would otherwise have no business being in college. This subsidy is then seen in the dumbed-down curriculum, for students expect to have something to show for the time and money they’ve put into college, and it’s easier to satisfy customers by giving them a degree regardless of their actual accomplishments.

*One thing that always puzzles me is how parents think that four to six years of extended adolescence is better for their children’s future than having an actual full time job is. But that’s for another post.

Economic Events on December 30, 2011

At 3:00 PM Eastern time, the Farm Prices report for December will be released, giving investors and economists an indication of the direction of food prices in the coming months.

Join the forum discussion on this post - (1) Posts

Coming Full Circle

The newest bubble appears to be (wait for it…) real estate. Specifically, farmland:

The latest Grant’s Interest Rate Observer reports that farmers in Sioux County, Iowa bidding on a 74-acre tract forced a winning bid price of $20,000 an acre, far higher than the previous record price of $16,750 per acre set in October.

The price surge of Iowa dirt is the highest since 1977, with prices up 31% in the 3rd quarter from a year ago, and prices 7% higher from the just the previous quarter.

At the height of the housing bubble, farmland located close to major metropolitan areas was developed into suburbs. When the housing bubble popped, some of these developments were not yet finished. Now, thanks in large part to (quelle surprise) federal subsidies, there’s a strong chance that the farmland that was converted into housing developments will now be converted back into farmland. Now Lord Keynes’ ditch-digging plan can be enacted on an even grander and presumably more efficient scale!

Don't Let Short-Term Volatility Inform Investment Decisions: James West

James West James West isn’t interested in timing the precious metals market—that’s a good way to end up butchering perfectly good investments. As the editor of The Midas Letter and portfolio advisor of the Midas Letter Opportunity Fund, West doesn’t even check the daily trading of the stocks he’s following. He’s more interested in making sure companies meet their long-term goals so he and his investors can cash out in the black. In this exclusive Gold Report interview, West reveals some little-known names that he’s watching to be the next big winners.

The Gold Report: Since you launched the Midas Letter Opportunity Fund earlier this year, some might suggest The Midas Letter is beholden to companies held by funds and is not as objective as it once was.

James West: It’s definitely not as objective as it was once. I’m very biased toward the companies I choose to cover because I am invested in them, my retail subscribers are invested in them and now my institutional clients are invested in them. But the caveat is that the companies are now beholden to me—not vice versa—because if they don’t deliver on what they represent, I will ensure that the whole world knows about that.

TGR: You’re developing a Midas brand. Earlier this year, you were forming the Midas Letter Gold Capitalization Fund, which will lend companies capital to bring gold and silver projects into production.

JW: We are continuing to develop infrastructure and partnerships with other entities that can provide the financing-engineering component. For this fund, the money is not really the hard part. There are a lot of funds that are going from company to company and saying, “We’ll lend you some money in exchange for a portion of your offtake.” Everybody’s trying to capitalize on the commodity-stream model.

The difficulty is in identifying the companies to extend those loans to. Companies don’t want to do deals in these conditions because the terms are too onerous. The guy with the money is able to drive a hard bargain because the market is weak.

The fund continues to evolve, but it’s still a ways off yet. The state of the market is such that there is a lot of wait-and-see going on.

TGR: The royalty model has worked well for Royal Gold Inc. (RGLD:NASDAQ), Franco-Nevada Corp. (FNV:TSX) and Silver Wheaton Corp. (SLW:NYSE). Sandstorm Gold Ltd. (SSL:TSX.V) is now taking the same path. Will too many companies in that space kill the model? If these companies start competing too much, the margins could disappear.

JW: That is largely why the fund is essentially on hold. There are all these firms trying to throw money at various gold deals. Most of the companies are saying, “No, your financing is attractive, but you’re looking to encumber our asset.” They want a portion of the offtake, a warrant kicker, a negotiable conversion rate and they want to be the first creditor on the asset. The gold in the ground is not going anywhere. It’s only growing in value. But companies are going to start running out of money soon and there will be bargain-basement prices in equity financings. That is going to make debt financings more attractive.

TGR: Most pundits think gold is headed lower before it heads higher. The markets would seem to agree. What’s your outlook for gold?

JW: I have unrestrained bullishness for the future of the gold price. I look at the 10-year picture: Gold has increased every year by 21%, and 2011 is no exception. Let’s take the well-known pundit Dennis Gartman, who said on CNBC this week that he has completely exited his gold positions because he thinks gold is going to $1,450 an ounce (oz). If you were to look at all of the times that he has gone on CNBC and said that. . .anytime I hear Dennis Gartman say it’s time to sell, that’s when I start buying gold again! When he says he’s bullish on gold, he’s trying to catch a falling knife. He has done that repeatedly in the five years that I’ve been tracking those statements. He must have very bloody hands and no fingers left because he is consistently wrong.

TGR: You share Eric Sprott’s perspective on silver, which is to say there is roughly 16 times more silver in the ground than gold, thus the silver price will eventually reach one-sixteenth the price of gold. Sprott recently said that silver-producing companies should withhold a portion of their production rather than sell it for cash that just sits in banks and depreciates. What do you make of his statement?

JW: Every company that produces silver should hold it on the balance sheet as opposed to cash. It’s the smart thing to do. If you subscribe to the ideas that the gold:silver price is going to be 16:1 and precious metals have nowhere to go but up because of the debasement of currencies in growing numbers of sovereign jurisdictions, it makes perfect sense.

TGR: Nonetheless, silver companies measure their profits in dollars.

JW: If a company has silver on its balance sheet, then it should be able to count that as part of a liquid-asset holding denominated in dollars.

TGR: There’s not an analyst on the Street that wouldn’t significantly discount a company’s silver holdings given that if it liquidated them all at once that would drive the silver price down.

JW: I agree that there are few analysts who would not penalize a company for that. However, some analysts, and I think they’re the most credible analysts, would actually give the company a premium for such thinking. What that demonstrates to me is a flaw in the thinking of most analysts. It’s a deficiency in generally accepted accounting practices. In the future, we’ll look back to this point in history and say, “Boy, were we ever dumb back then.” We should be valuing gold as money. It should be valued at a premium to cash on the balance sheet, as should silver. Analysts should value those companies accordingly. It’s not conventional wisdom. However, I believe that one day it will be and that it’s a superior analytical perspective.

TGR: What’s your outlook for silver?

JW: Its price is going to be one-sixteenth of the gold price so it’s already undervalued by at least two-thirds. Gold and silver are both going to continue to appreciate. I agree with Sprott when he says that silver is going to outperform gold.

TGR: What companies in northern Ontario’s Red Lake gold camp do you find interesting right now?

JW: Confederation Minerals Ltd. (CFM:TSX.V), Prodigy Gold Inc. (PDG:TSX.V) and, just outside of Red Lake, Foundation Resources Inc. (FDN:TSX.V). Foundation has recently become a top pick in that region because it has 860,000 ounces (oz) gold and an NI 43-101 valued at $5.80/oz in the ground based on its share price. It’s just a spectacular opportunity.

TGR: Prodigy put out a new resource estimate on its Magino project Nov. 2 that said there’s about 55% more gold there than previously thought. What are your thoughts on that project?

JW: We hold Prodigy in the fund and I continue to follow it. That new resource certainly demonstrates the deposit is growing. It’s still open in multiple directions. The company is aggressively developing it. The market hasn’t been kind to Prodigy, but Prodigy is absolutely one to hold because it’s an excellent opportunity at a great price.

TGR: What stands out about Confederation?

JW: Confederation is really interesting. Its joint-venture partner on the Newman Todd project is Redstar Gold Corp. (RGC:TSX.V), which holds 30%. Think about this: The company that owns 30% is valued at $50 million (M), but the company that owns 70% is valued at $17M. Redstar’s other projects are not really interesting projects. I’ve got to assume that its share-price valuation is based on Newman Todd. There’s very little risk of this not becoming a mine. We’re headed toward an era similar to 2008 where the prices are astronomically low. Fortunes are going to be made in the years ahead by the people who were smart enough to pick up these high-caliber deals at super low prices.

TGR: Let’s head to Nevada. You follow a couple of companies there, including Scorpio Gold Corp. (SGN:TSX.V) and Meadow Bay Gold Corp. (MAY:TSX.V; MAYGF:OTCQX). What’s Scorpio’s horoscope?

JW: Scorpio is going to be an absolute home run. Peter Hawley, who heads the company, has a great track record and is well regarded. If anyone can drive this thing forward, it’s him. But really, all an investor needs to look at is the most recent intercepts: 24 meters (m) grading 5.9 grams per ton (g/t), 3m grading 15 g/t. It looks to be a major discovery—a winner.

TGR: What were your impressions of the recent drill results from Meadow Bay’s Atlanta Gold Mine project where there was one intercept of roughly 20m of 3.5 grams gold equivalent?

JW: Meadow Bay is a fault-controlled system. Everywhere along the fault, which has been traced north to 5 kilometers (km), has 20–40m intercepts grading 1–3 g/t gold. That should take the company to more than 1 Moz in the near term. There are two giant porphyries, one of which was the 60m intercept grading just over 1 g/t gold and copper, as well as this new one. The potential for Meadow Bay with these two porphyries, as well as the fault-controlled system, which continues to be open to depth to the north and south, is very interesting. The potential is certainly multiple million ounces.

TGR: Does it have enough cash to ride out the storm that might be coming to the financial sector?

JW: It has about $3M in the bank, but it has one drill on the ground now so it doesn’t need to raise any money for at least three years. One drill can move all over the place and demonstrate a lot of potential.

TGR: Let’s move to Latin America where you’ve had a lot of success stock picking. The Midas Letter Opportunity Fund has a position in Newstrike Capital Inc. (NES:TSX.V), which is developing the Ana Paula project in Mexico.

JW: Ana Paula is an astonishingly fantastic deposit. It seems like at least once every two months it puts out a new intercept. The most spectacular intercept on Nov. 23 was 135.5m grading 5 g/t and 75m grading 4 g/t. It has had other jaw-dropping intercepts. It’s the gift that keeps on giving. The share price is not reflecting the immensity of the potential largely because there is no resource calculation. When the resource calculation comes out by the end of the first quarter of 2012, Newstrike will start to see the valuations it deserves.

TGR: Newstrike’s burn rate was about $820,000/month through the first eight months of 2011, according to an investor presentation. How long can it last before it has to do another financing?

JW: The company had $19M in liquid assets recently, so it will be late 2013 before it runs out of money. Newstrike will likely see how the market responds to its resource calculation and what the market conditions are at that time. If it’s getting the valuation that it deserves then it could do a financing. The company won’t wait until it is at $0 to raise money, but it’s certainly not going to do it at these valuations.

TGR: Ana Paula certainly seems to have massive open-pit potential. Are there others that you would compare to this?

JW: I would compare it to Ventana Gold Corp. (VEN:TSX) in terms of performance. It’s got all the earmarks of a super high-grade deposit.

TGR: There’s another company further south called Corazon Gold Corp. (CGW:TSX.V). What can you tell us about them?

JW: Corazon raised a pile of money at a great price. It has some of the best funds in Canada and the U.S. involved. It has drilled about 40 holes and hit some good intercepts of up to 20 g/t at the Santo Domingo project in Nicaragua. But it didn’t hit what the market wanted to see, so there was a major sell off. The company’s stock went from a high of $1.16 down to $0.18.

It just started a phase-two drilling program. I regard it as one of the most promising companies out there because it’s on the same geology and vein system as B2Gold Corp.’s (BTO:TSX; BGLPF:OTCQX) La Libertad project. La Libertad just intersected a new vein called Jabali, which has added another five years of mine life. It’s high grade, rich and large. If Corazon Gold is on the same geology, how likely is it that a similar vein as the Jabali is going to be discovered on the Santo Domingo project? The potential is very high. Given the price, it’s a great entry point. It’s very well cashed-up with $7M in the bank. It’s one that I own personally and that I watch with a bit of excitement.

TGR: What do you know about Corazon President and CEO Patrick Brauckmann? He seems rather new to the space.

JW: He’s new to the space, but he’s had corporate success in the technology sector in the past. He’s surrounded himself with geologic rock stars, including Dr. Carl Hering as principal geological consultant, who has a long history in Nicaragua.

Brauckmann also has Lockwood Financial behind him. Those guys are deep pockets that tend to support a stock long term. When they get behind a stock, they can make the stock move. He’s surrounded by people that can get him where he needs to go in the mining space.

TGR: Are there any other companies you’re intrigued by right now?

JW: I own one million shares of Hunter Bay Minerals Plc (HBY:TSX.V) because I’m particularly fond of it. I’m so fond of Hunter Bay because it’s headed by Dr. Chris Wilson, head geologist for Ivanhoe Mines Ltd. (IVN:TSX; IVN:NYSE) when Oyu Tolgoi in Mongolia, arguably the world’s largest copper-gold system under development presently, was discovered. Since he’s been out on his own, he’s been looking at other people’s projects. He’s been a consulting geologist for SRK Consulting and he’s written a lot of NI 43-101s.

What’s got Wilson excited about Hunter Bay is its Sela Creek Deposit in Suriname. Sela Creek is one of the last great, unexplored greenstone belts in the world and it’s near to IAMGOLD Corp.’s (IMG:TSX; IAG:NYSE) 14 Moz Rosebel mine. Channel sampling and all of the geophysical work that Wilson and his team have done at Hunter Bay indicate that this could be another Rosebel. The valuation of the company versus the potential—it’s an outstanding entry-level play. It’s my biggest position and one that I’m most bullish on.

TGR: It’s a name I don’t think many people have heard of.

JW: That’s another reason I like it.

TGR: You’re often ostentatious and outspoken, which are just some of the reasons we like to talk with you. In an interview with BNN last month, you said investors often have the attention span of “gnats.” What did you mean by that?

JW: How many substantial financial crises have there been since the late 1980s? Probably six? In that timeframe, one should become accustomed to the idea that markets go up and down, sometimes drastically. As soon as investors see a market that goes down by 10–15%, such as recently, they dump everything. A successful investor cannot focus on a short time horizon. It is possible to have some success as a short-term trader, but ultimately it’s like Las Vegas—the house always wins. To win in resource investing, take a long view and set an agenda.

For example, say I buy Newstrike at $2.40 because I believe there is going to be 5–10 Moz there and the company will justify a valuation of roughly five times of what I paid for it. Then I am going to give it five years and I’m going to hang onto it. I’m not even going to look at the daily trading because that’s irrelevant. In five years, when it has proved up and it is heading into production, I’m going to sell it. As opposed to jumping in and out of a stock and trying to catch a falling knife. Don’t let short-term volatility inform investment decisions.

TGR: That is very good advice. Thanks.

Midas Letter is the Journal of Investment Strategy of the Midas Letter Opportunity Fund, a Luxembourg-based Special Investment Fund that specializes in Canadian-listed emerging companies in the resource sector with a focus on precious metals explorers and miners. James West is the portfolio and investment advisor to the fund. Every month, West’s Midas Letter Premium Edition deconstructs the economic and political events of the past and upcoming week, and identifies risks and opportunities to investors seeking to profit while the majority of investors are losing money.

Tortoise or Hare? Pittsburgh Real Estate

I really do suspect one could blog/comment/opine daily on assessments in Allegheny from now until…  some undefined date long in the future, but who wants to endure that.  So to connect a bit the assessment crescendo just beginning with the bigger picture, and for a good end of the year post…  just what is going on with Pittsburgh real estate?

Some benchmarking of data from the Federal Housing Finance Agency is below.  I should add a note that this is their Purchase Only index of housing prices among the 25 largest MSAs in the nation. This is an index normalized to the beginning of 1991, so the graph is showing relative changes, not actual dollar values in any sense.

Pittsburgh is in fact the current median in that dataset which they label as the 25 largest MSAs, but includes some Metropolitan Divisions as well.  Nonetheless, if you bought real estate in Pittsburgh in 1990 it would on average have been a better investment than in half of the other regions.  I suspect some here will just refuse to believe that.

It is all unctuous bafflegab I tell youÜber unctuous maybe.. or is it Über bafflegab?

and for the curious, the region tracing out the north face of the Eiger is Miami.

Economic Events on December 29, 2011

At 8:30 AM Eastern time, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 372,000 new jobless claims last week, which would would be 8,000 more than the previous week.

At 9:45 AM Eastern time, 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.

Also at 9:45 AM Eastern time, the Chicago PMI Index for December will be announced. The consensus index value is 60.7, which is 1.9 points lower than last month, but is still above the break-even level at 50.

At 10:00 AM Eastern time, the pending home sales index for November will be announced.  The consensus is that the index increased 1.4% last month.

At 10:30 AM Eastern time, the weekly Energy Information Administration Natural Gas Report will be released, giving an update on natural gas inventories in the United States.

At 11:00 AM Eastern time, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in the United States.

At 4:30 PM Eastern time, 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 Eastern time, 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.

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Renewed Faith in Oil and Gas: Jim Letourneau

Jim Letourneau According to Jim Letourneau, author of the Big Picture Speculator, oil and gas aren’t going away any time soon. Indeed, new technologies offer the industry and investors profitable opportunities. Read more about why Letourneau considers shale gas, shale oil and enhanced oil recovery “game changers” in this exclusive Energy Report interview.

The Energy Report: Jim, in a nutshell what is the big picture in the oil and gas space right now?
Jim Letourneau: Despite a big renewable trend, oil and gas are still critical to world energy markets. We will need both for the foreseeable future, at least the next decade.

TER: You recently wrote about fear paralyzing the market. What effect is fear having on you as a newsletter writer?

JL: When people are scared, they want dividends, U.S. dollars and precious metals. No matter how interesting or exciting the company is, in a really strong bear market it will not matter unless the assets are productive today. People will look at a mine that is in production and has cash flow. A project that involves lots of drilling to build out a deposit is a tougher sell.

Most newsletter writers, myself included, do not like talking about companies whose stocks do not appreciate. Fewer people want to be invested in the stock market because they don’t see why they should be. However, even that can be an opportunity. When people are fearful, sometimes the market can turn and have a really nice run. If we do not have new lows over the next couple of months and the trend changes, we would hypothetically be able to enjoy that for quite some time.

TER: Some oil and gas companies are boosting dividends in an effort to get attention in the market. Do you expect that to continue?

JL: That is a way of showing off, of saying “Look, we are so comfortable with our business model that we can afford to pay out dividends.” If there is a bull market in dividend-paying stocks, there also could be a time when that popularity will end. It could be just a passing phase.

TER: But it does provide a bit of flexibility: A company can increase or decrease its dividend. It is one of the cards a company can play if it has a lot of free cash flow.

JL: Exactly. Some of the major gold producers are increasing their dividends. Everything else being equal, I would rather have a dividend from a gold producer than from a financial institution. Banks will tell you everything is great until the day before they collapse. If people are looking for dividend-paying stocks, at least gold mines or oil and gas companies have productive assets; they produce something of value. That’s where I would concentrate.

TER: That seems to be where the Chinese are concentrating. Sinopec just bought Daylight Energy Ltd. (DAY:TSX) for a little more than $10 a share, more than double the closing price the day before the bid. Do you think China will continue to turn its dollars into hard assets while dollars still have value?

JL: The short answer to your question is yes. China is making acquisitions all over the world every day of anything that is productive.

It tells you something about the state of the market that Canadian investors thought Daylight was worth less than $5/share and China waltzed in and paid $10 without any haggling at all. This was an opportunistic move by Sinopec.

Chinese companies have taken the clever strategy of going for lesser-tier companies. If they go for a bigger one, they will take a minority interest so it is not seen as a takeover.

TER: What did Daylight have that the Chinese wanted?

JL: Daylight has oil, natural gas and high-content natural gas liquids in a few different plays in western Canada. The Chinese are buying companies with the potential for productive assets.

I think China also has a very long-term horizon concerning its energy policies. The country is willing to invest in the long term over a broad portfolio of energy sources. The Chinese know that all the investments may not all work out, but they can afford to do it.

We are still building out the capacity to export natural gas from North America. If that happens, our low-price North American natural gas will be very attractive to China.

TER: At a recent investment conference in Montreal, you told the audience about three “game changers” in the oil and gas space: shale oil, shale gas and enhanced oil recovery (EOR). Can you please give our readers the nuts and bolts of your presentation?

JL: All three of those things involve new technologies that are squeezing more oil out of the ground than we ever thought possible.

In terms of shale oil, the best example is the Bakken in North Dakota and Saskatchewan, and possibly Montana and Southern Alberta. The Bakken really changed the oil and gas landscape in North America to the point of using trains to transport gas from North Dakota to Texas. And there are a lot of other source rocks that have the same characteristics and will be developed over time.

Shale gas was actually the first big game changer. Five years ago we were building natural gas import terminals because we thought we would run out of domestic natural gas. Today, North America has the cheapest natural gas in the world and we are building export terminals. It started in Texas, in the Barnett Shale. For every argument that says shale gas will not work, there are arguments that say it will. A lot of the technical problems that exist today will be solved in the not-too-distant future. That is one of the reasons I am not a huge believer in peak oil; yes, you can extrapolate present-day trends, but you cannot predict what human innovation will come up with to increase supply.

That leads to the third category, which is enhanced oil recovery. Big picture, roughly a third of the oil that has been discovered has been produced. Getting the next third out will take some innovation. There are a lot of interesting technologies in EOR that make it quite likely that the next third will be produced. Recovery factors can move up from 33% to 50% or 60%.

TER: I see your point on shale oil and EOR. But gas prices on the NYMEX are at record lows. Very few companies can make money at that level. The only shale-gas companies seeing an uptick in their share price deal with natural gas storage, and they are running out of places to put it. How can an investor make money in shale gas?

JL: There are two sides to the story. First, abundant, cheap shale gas is good for consumers of natural gas. Second, all commodity bull markets end.

Natural gas is not the best place to invest, but, it does point to the opportunities. The service companies that unlock the shale gas are doing fairly well. I suggest that people look not so much at the producing side but more on natural gas being used as transportation fuel. Some petrochemical industries and the steel industry will benefit from cheap natural gas. So, you have to be a little bit nimble.

TER: Could you give our readers a name or two in the shale-oil space?

JL: I really like Shoal Point Energy Ltd. (SHP:CNSX) because not too many people pay attention to the company. It discovered Green Point, an oil-in-shale play in Port au Port Bay in western Newfoundland. The Green Point shale can be over 2,000m thick, compared to the Bakken, which is typically 30m thick. The extra thickness really changes the amount of oil per section. Shoal Point has an oil-in-place number of at least 100 billion barrels, calculated from volumetrics. Production will be the challenge, but that is just too big a resource to ignore.

TER: The company also has the Ptarmigan oil-in-shale play in Newfoundland and the South Stoney Creek gas play in New Brunswick. How is Green Point progressing?

JL: There was a delay for further testing and Shoal Point had to wait for permits. Investors got a little discouraged because everybody wants results right away, and the share price languished.

Now, the company has the permits and will deepen the well and test it soon.

TER: In other Newfoundland oil projects, the provincial government has wanted a piece of the action. Does the government have a piece of this?

JL: I’m not sure. But, I cannot imagine Newfoundland not having a royalty interest because that is typically how we do things.

TER: Are there other shale oil plays?

JL: There are a lot in the Alberta Bakken, in Montana and southern Alberta, where that play has yet to really ignite and catch on fire. Companies are also looking in the Duvernay in Alberta. That is a deeper, Devonian shale that sourced a lot of the Leduc oil.

TER: Do you have any names in the shale gas space?

JL: Given that the price of that commodity keeps dropping, one way to play shale gas is through service companies. GasFrac Energy Services Inc. (GFS:TSX) has gotten a lot of attention for using gelled propane as the carrier fluid instead of water.

There has been a lot of concern about the use of water in fracking. Very few people realize that most oil and gas production in North America involves about 10% oil and 90% water.

People like GasFrac because it does not use water. But more importantly, in certain types of formations having a liquid hydrocarbon that changes to the gas phase when the pressure drops helps avoid the formation damage and other problems that can happen when you use a massive water-based frack.

TER: In terms of enhanced oil recovery, what names are you following?

JL: There are very few specific companies; usually it is an oil company with a project. One that I have been following for a long time, and worked for, is Wavefront Technology Solutions Inc. (WEE:TSX.V).

All versions of EOR involve injecting a fluid. It could be water, CO2, chemicals or nutrients. The more uniform and evenly distributed those fluids are, the better the process will work. Wavefront has patented an injection process that provides that uniform fluid distribution.

The company is not quite profitable yet, but the growth will come quickly from its Powerwave application for EOR.

TER: Wavefront now has a market cap of around $68 million (M). It would not take long for a major producer to get older assets to market if this technology works as well as you suggest.

JL: The biggest upside for oil companies using the technology is that they can increase their reserves without infill drilling. The oil industry does not just jump and try new technology; it likes to see some proof. Wavefront now has proof. The longest Powerwave installation is over four years old. It has numerous case studies that document how the technology works and how it makes money for the client. It has made the transition from an unproven technology to a proven technology. It is now a commercial technology with a lot of upside.

Wavefront is essentially a technology company that licenses its technology to oil companies. Wavefront will not have a lot of additional expense to sell 100 tools or 150 or 200. The scalability is exciting.

TER: If a major can apply that technology in its old basins, it would not take long to reach perhaps, $70M worth of oil.

JL: Definitely. Of course it depends on the size of its fields, but increasing ultimate production by 5-10% provides some big numbers. More and more people are seeing exactly that. Wavefront could become a takeover target. The company has roughly $24M in cash. It has a lot of staying power.

TER: Jim, what should investors be keen on in the oil and gas space in 2012?

JL: I would still look to oil and gas service companies with the right technology. Shale gas fracking companies are interesting plays to look at.

I would not be too excited about natural gas producers. Those producers who are moving toward liquid rich natural gas are a little more interesting.

Overall in the oil space, the only thing that would move oil prices any higher would be severe geopolitical tension. And I wouldn’t be shocked to see some unpleasant geopolitical tension in 2012. Economic news is creating tension all over the world. When that happens it’s usually pretty bullish for energy prices.

TER: Jim, thank you for your time and insights.

Jim Letourneau is a public speaker, geologist, corporate evangelist, and investor in emerging technologies and discoveries.

Cleveburgh Watch: A Tale of Two Banks

So to admit upfront, this is all parasitic on some neat reporting from Bloomberg out on the Analytic Journalism frontier.  They have acquired and made available to the public (which means they want us to use it right?) data as they describe “Once secret ” from the Federal Reserve on its lending to major banks during during the peak of the financial crisis.

As they describe it in detail the data:

The data reflect lending from the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, the Term Auction Facility, the Term Securities Lending Facility, the discount window and single-tranche open market operations, or ST OMO.

Got that?  I have pulled the files for PNC and National City which now are one of course.  Some may recall there was a certain bit of angst up the Turnpike that for some reason National City was denied TARP funding that might have kept it around a bit longer.  The PNC takeover followed immediately on the heels of the government’s denial of TARP dollars.  Some thought it a bit less than fair since along the way PNC used some of the same money to implement the takeover.

Well.. if there is any doubt over the flawed logic of a straight one on one comparison of the financial situation of the two banks at the time, here is what the Bloomberg data has for Fed lending to the two institutions as a percentage of their market capitalizations day by day.

Yes at one point near the end, Fed lending to National City well exceeded its market capitalization. PNC’s lending looked to be in itinerant blocks of a billlion.  I am speculating completely when I wonder if that was $ pushed by the Fed as it wanted to shore up confidence in the system.. not really money desperately needed by PNC at the time.