by Apoorva Gupta.
The recent announcement that dismantled the levy and monthly release mechanisms, in the sugar industry, will make the industry more efficient and competitive. But much remains to be done. This is a good time to look at the government interventions in this industry, the implications of recent decisions, and the way forward.
Major government controls
With an aim of offering farmers, firms, and consumers a fair deal, the government intervenes in production and distribution through various controls:
- Minimum price for cane: Under the Sugarcane (Control) Order, 1966 (SCO), the Central government announces a `Fair and Remunerative Price’ (FRP) to ensure a good return to farmers. The state governments announce a `State Advised Price’ (SAP) which has typically been higher than the FRP, thus making the FRP redundant. In 2010-11, the SAP was 47% higher than the FRP.
- Cane Reservation Area: To guarantee continuous and sufficient supply of cane to all mills, the area from which a mill can procure cane is reserved. It is also obligatory for the farmer to sell all produce to the mill in that area. The state has the power to reserve this area under the SCO.
- Minimum Distance Criterion: The Central government, under the SCO, has set a requirement of a 15 km. minimum distance between two mills to ensure supply of cane to all. States are authorised to increase this limit with prior approval from the Center. Punjab, Haryana and Maharashtra have a minimum distance requirement of 25 km.
- Levy Obligation: Under the Levy Sugar Supply (Control) Order, 1979, till recently, mills had to sell 10% of their produce to the government at a price lower than the market price, and this sugar was distributed through the public distribution system.
- Monthly release mechanism: The central government dictated the amount of sugar a mill could release each month in the open market, under the Essential Commodities Act, 1955 and the SCO. This allowed the government to control the prices of sugar in the market. In 2012, the release orders became quarterly.
- Trade Policy: To ensure national food security and contain price volatility, the government has historically used quantitative restrictions on export and import, depending on domestic and foreign conditions.
- Controls on by-products of sugar manufacture: Molasses is used to produce alcohol which is used in the production of potable alcohol, chemicals and blending with petrol. States impose restrictions on the movement of molasses, and artificially reduce the price for the benefit of liquor barons. The Center has not yet released a clear policy on pricing of ethanol for blending in petrol. The state also imposes restrictions on open access sale of power generated from bagasse.
- Compulsory jute packaging : The central government has made it compulsory for mills to pack 40% of the sugar produce in jute bags.
These controls add up to a comprehensive central planning system that blankets the sugar industry.
No one gains!
Each of these controls has created distortions.
#1: The minimum support price aims to ensure a fair price for cane to farmers, but on the contrary, it is the leading cause of accumulation of cane arrears (Rs 5495.04 crore for 2011-12 sugar season). The SAP is often not commensurate with the market price of sugar, making it hard for the mills to pay the farmers in time. Farmers shift to cultivation of a different crop because of delayed payments and this leads to shortages of cane. With lower production of sugar and higher market prices, the mills are able to reduce cane arrears and this incentivises the farmer to shift back to cane cultivation and the cycle is repeated. The graph below shows these fluctuations.
The figure above shows cyclicality in total production, total cane arrears and the average PBDIT of a balanced panel of 50 sugar companies observed in the CMIE Prowess database. There is a direct relationship between the production of sugar and the cane arrears, and an inverse relationship between total production and firm profit. This cycle is characteristic of the present restricted industry industry. The price and supply of sugar are extremely volatile, even though consumption has been growing at a steady pace. The mills are often working under capacity and many small ones are shut down in the lean season since production is not economically viable. Farmers are burdened with delayed payments, and consumer welfare is reduced due to volatile prices.
#2 and #3: The cane reservation area and minimum distance requirement have fostered creation of monopolies. The farmer is obliged to sell his produce to a mill irrespective of its past payment record and cannot search for the best price for his produce. This gives monopoly power and artificial protection to firms, and helps inefficient firms to persist in the market. Currently, there are approximately 500 mills, some of which operate only in times when the cane is in surplus, produce as little as 500 tonnes of sugar in a year, and have a very low ratio of recovery of sugar from cane. Moreover, these controls do not allow high productivity firms to expand and achieve economies of scale, invest in increasing the acreage and sucrose content of cane.
#4 and #5: The levy obligation imposed a direct cost on mills to the tune of Rs.3000 crore in 2011-12. In 2011-12, the levy sugar price was Rs. 1904 per quintal, while the price of non-levy sugar was Rs. 2749 per quintal, excluding excise. The mills passed on these losses to consumers in the form of higher prices, and to farmers by delaying payments. The monthly release mechanism led to high inventory accumulation costs and made it hard for mills to manage cash flows. These two controls also incentivised mills to hoard inventory, increasing the administrative and litigation costs of implementing these controls.
#6: The abrupt and unanticipated trade barriers in the form of duties and outright bans, has not achieved the desired reduction in price volatility. Besides the dead weight loss of restricting trade, the unstable policy regarding export and import has reduced the ability of mills to foster long term contracts abroad.
#7 and #8: Mills lose money by selling molasses to liquor barons at an artificially low price. The unclear policy on ethanol pricing for oil marketing companies leads to unfulfilled contracts between sugar mills and OMCs and increases losses for both industries, since blending ethanol reduces the price of petrol for OMCs, and mills do not get revenues from the sale of molasses. The restriction on open sale of power generated from bagasse imposes an environmental cost. Compulsory packing in jute bags adds Rs 0.40 per kg of sugar. These policies, which try to develop one industry at the cost of another, eventually increase the cost for consumers and farmers.
Rangarajan Committee recommendations
The Rangarajan Committee was appointed to study the issues related to regulation of the sugar industry in early 2012. They recommended phased decontrol of the industry.
The recommendations include immediate removal of the levy obligation and monthly release mechanism, and phasing out of cane reservation area, minimum distance criterion and trade barriers over the next couple of years. Concerning cane pricing, the committee recommends that cane price should be a combination of FRP and a share in value of sugar. On international trade, they suggest that the current policy should be replaced by moderate duties not exceeding 5-10 percent. The need to deregulate the movement, pricing and quantitative restrictions on by-products of sugar, and abolish mandatory packaging or sugar in jute bags is also emphasised.
Recent decisions on decontrol
The Cabinet Committee on Economic Affairs has recently approved the removal of levy obligation and the monthly release mechanism (#4 and #5), as suggested by the Rangarajan Committee. The markets welcomed this decision, with a cumulative abnormal return of the CMIE COSPI Sugar Industry Index of 9% over the 2 days after the announcement. The spot price of sugar also spiked after the announcement. The market was over-exuberant at the partial decontrol of the industry and some of these gains have been reversed.
The implications of this partial decontrol are:
- Impact on finances: The removal of levy implies a direct increase in profit for mills of about Rs.3000 crore since they no longer have to sell 10% of the produce at significantly low prices. With the freedom to release stock, the mills will have choices about selling in India and abroad. The mills facing financial problems can liquidate their inventory when needed.
- Reduction in cane arrears: Mills with large cane arrears will now be able to release stock to make pending payments. But as elections come closer, there is a possibility that the SAP is increased and cane arrears accumulate. This will hurt the financial health of the firms.
- Volatility in prices: If mills release too much stock to reduce cane arrears or due to sheer inexperience with a free market, prices might plummet. The strategic moves of mills, rather than decisions of politicians and bureaucrats, will determine prices.
- Greater trading: Since cane is crushed seasonally and the mills have full freedom to release sugar, the trading on futures market will matter more. The futures market will become much more important in shaping decisions of everyone involved in sugar.
- Survival of the best: Until now the government regulated the amount of sugar released in the market, and the firms had no experience in thinking strategically. Reaching a Bayesian equilibrium will involve learning by doing, and creative destruction in the industry. Mills will require building up financial depth and skills in hedging using futures. Large firms, which have diversified into production of power and alcohol, will have an upper hand.
- Stability in acreage and cyclicality: The ability to manage cash flows would increase the security of payment to farmers, incentivising them to continue with cane cultivation. The mills and farmers (in the area reserved for them) might enter into contracts where the supply of cane is guaranteed, in return for timely payments. This can considerably reduce the amplitude of the sugar cycle and lead to an improvement in cane acreage.
- Impact on the growth of sector: With a better balance sheet, mills will be able to invest more. The global perception of the industry is going to change from highly regulated to partially decontrolled and this might give greater foreign investment. The freedom to release stock in domestic and foreign markets (provided export policy is not binding) will increase the international presence of mills.
Of the list of eight controls, the government has removed two. Most of the pending controls come under the purview of the state governments and decontrol of this industry is now largely their task.
#1: Reforming the regulation of price is essential to reduce cyclicality in cane production, which is a leading cause of cane arrears and low profitability. The recommendation of the Rangarajan Committee on pricing of cane suggests that the farmer will be better off as he is protected from uncertainty in the market due to a guaranteed FRP, and also encourages him to invest in increasing the yield of cane for he has a share in the value.
#2 and #3: Abolishing the minimum distance requirement and the cane reservation area will lead to competitive bidding for cane and farmers would be able choose the best price on offer across an array of choices [analogy]. The increased competition to acquire cane might encourage mills to enter into long term contracts with farmers and offer them other benefits such as timely payments irrespective of the phase of the cycle, make them shareholders, and also assist in increasing cane yield. The inefficient firms are likely to perish with more competition in the market, leading to a more consolidated industry.
#6: Removal of trade barriers is likely to make trade more stable, foster global relationships between firms and make Indian firms internationally competitive. In the recent past, imports were duty free and export release orders were removed, suggesting that the government is slowly liberalising trade.
#7 and #8: Decontrolling movement, pricing and allocation of molasses can contribute significantly to the reduction of cyclicality in the sugar industry. In years of a bumper stock, cane can be used to produce molasses directly and can be distributed to all players at competitive prices. This will also make the sector more profitable. Co-generation from bagasse can become a reliable source of power. Removing restriction on sugar packaging will lead to a direct cut in costs of manufacturing.
The government needs to hasten the process of adopting the Rangarajan Committee recommendations. The job of the government is to focus on public goods, such as improved road and rail networks for the transportation of a heavy and perishable good like cane, improved irrigation facilities to reduce the dependence on monsoons and improved information dissemination for price discovery. Market forces will furnish higher efficiency and growth in the system by ensuring the survival of the best firms, fostering mutually beneficial contracts between the farmers and mills, and stabilising the price of sugar for the consumers.
This article has greatly benefited from suggestions from Dr. K. P. Krishnan, Dr. Ajit Ranade and Dr. G. S. C. Rao.
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Taxation of transactions in India began with the equity market in 2004. Prior to 2008, the securities transaction tax (STT) was allowed as a rebate against tax liability against Section 88E of the Income Tax Act. This treatment was withdrawn by the 2008 Budget announcement. After that, STT became a substantial influence on the equity market. In understanding the consequences of the STT, there is an absolute perspective and there is a relative perspective.
In absolute terms, suppose you embark on a spot-futures arbitrage and do an early unwind. In this, you buy shares (pay 10), sell futures (1.7) and then reverse yourself (10). Your tax burden is 21.7 basis points. This is a lot of money when compared with the typical bid-offer spread of the Nifty futures which is around 0.5 basis points. The dominant cost faced in doing spot-futures arbitrage is taxation.
In relative terms, there are two issues. The first is an intra-India comparison between equities and commodities. When activity on the equity market was taxed, eyeballs and capital moved to commodities trading. Commodity futures trading has grown by 3.5 times after 2008, while equities activity has stagnated. Most policy makers think this was an undesirable effect, particularly given the fact that India can free ride on global price discovery for non-agricultural commodities but must foster liquid markets in its own equities.
And then, there is an international dimension. When the activities of non-residents in India are taxed in any fashion, they favour taking their custom to places like Singapore, which practice `residence-based taxation’ where the tax base comprises the activities of residents only. We got a sharp shift in equities activity towards locations outside India.
Putting these absolute and relative perspectives together, from 2008 onwards, equity market liquidity has fared badly. This yields an elevated cost of equity capital.
The budget speech has done two things. First, it has dropped the STT rate on futures on equity underlyings from 1.7 basis points to 1 basis points. This is helpful for certain kinds of trading strategies but not for others (e.g. the spot-futures arbitrage described above will gain little). HF strategies that do not involve the spot market will particularly benefit – e.g. imagine an options market maker who does delta neutral hedging on the futures market. Second, it has introduced taxation for non-agricultural commodity futures on an identical basis to the equity futures (i.e. at 1 basis points).
This will have the following interesting implications:
- Capital and labour in securities firms will be less inclined to be in non-agricultural commodity futures. It will tend to move towards agricultural commodity futures, currency futures and equity futures.
- The comparison between offshore venues and the onshore market will move in favour of the onshore market for certain kinds of trading strategies.
- The bias in favour of equity options will reduce; some business will move to equity futures.
- The pricing efficiency of futures will go up.
In this environment, there seems to be a fair arrangement between the equity futures and commodity futures. Conditions seem to be unfair with the equity spot (too high), equity options (too low) and currency derivatives (too low). The next moves on this may appear in July 2014 when the new government unveils its next budget.
One more announcement of the budget speech concerns currency futures: it was stated that FII activity on currency futures will commence. This will also give more activity on currency futures; we now have two reasons for expecting more activity on currency futures (the taxation of commodity futures and the entry of FII order flow). However, the shifting of FII order flow will be a slow process, and a lot of time will be lost on their due diligence of the exchange, safety of the clearinghouse, and so on. While, in the long run, removing capital controls against FII order flow in India is a good thing, it is not an effect that will kick in quickly. Apart from this, most of the action will take place fairly quickly, in early April.
Future finance ministers will need to navigate the difficult landscape of gradually scaling down taxation of transactions while retaining low taxation of capital gains (which has unfortunately come to be seen as a linked issue in the Indian discourse). Along this path, the first priority should be to remove distortions. Our first priority should be to achieve a low rate, a wide base, and the minimal distortions. Reduced rates will always yield welfare gains. The Budget 2013 announcement makes progress on two things (reduction from 1.7 to 1, and reduced distortions between equities and non-agricultural commodities). There is much more waiting to be done: integrating currencies and fixed income, bringing sense to options, and getting away from the very high rates on the equity spot market.
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Global population growth and escalating food demand underpins long-term upside for potash, phosphate and nitrogen producers, but fertilizer oligopolies may have jumped the gun last year with aggressive rates that priced farmers out of the market. As farmers expand acreage rather than boost yields in now-tired fields, grain prices have backed off recent highs. That’s why Robert Winslow, agriculture research analyst and director at National Bank Financial, is picking his stocks with care. In this interview with The Energy Report, he shares where he sees strengths and weaknesses in the industry and names some interesting contrarian plays.
The Energy Report: Your last interview took place in April of 2011. What have been the major developments on the agricultural front impacting the fertilizer markets since then?
Robert Winslow: Increased weather volatility, like last summer’s drought in the U.S., which led to modern-era highs in corn, wheat and soybean prices, have had a significant impact on the market. Although grain prices have softened of late, I believe you’re likely to see somewhat higher-than-usual grain prices through at least the first half of 2013, given the persistent dryness in the U.S. corn belt and wheat-growing regions. Grain prices drive farmer sentiment and buying, and therefore the price and the demand for fertilizer.
We’ve seen some disconnects when it comes to potash, such as in India: Because the rupee was devalued about 20% through 2012, Indian farmers can’t afford to pay the prices that the potash companies would charge, and this resulted in subdued demand. Chinese demand has been somewhat subdued as well. Globally, we’ve had this really interesting dichotomy with high grain prices buoying larger demand in places like North America and even Brazil, but softening demand in yet other parts of the world with country-specific issues. In total, we haven’t seen the demand strength in potash that you might have otherwise expected with this high grain-price environment.
Some would say it’s partly because grain prices are not sustainable at these high levels. We are actually of that view. Like any commodity, when the price gets too high, two very simple things play out: demand destruction and supply response. You’ve seen demand destruction over the last 3–6 months. For example, high-cost ethanol plants have been shuttering production. High-cost producers of cattle, pigs and chickens have been culling their herds because they can’t afford the feed costs unless meat prices rise in conjunction, which they have not.
Then there’s supply response. Farmers are expanding acreage by moving into marginal land. You may not get robust yield on that land, but you can still increase production, which we’re seeing play out now. Brazil is expected to increase soybean acreage by 8–10% this year. With these dynamics playing out, the grain prices are beginning to come down. We expect that by the second half of 2013 you should start to see lower fertilizer demand reflected in pricing, even in the U.S. and Brazil. That is why we maintain a fairly cautious view on the fertilizer sector at this stage.
TER: How might continuing climate change and severe weather affect grain prices and fertilizer demand?
RW: Nobody really knows the answer. I don’t pretend to, but I will say that the stocks-to-use ratio for grains right now, globally, is about 68–69 days of supply. It’s relatively tight compared to the last 30 years or so, and it doesn’t take much to tip over and get a real spike—or falloff—in grain prices. When you do get these supply shocks through floods or droughts, the relatively tight supply situation can move prices quite dramatically, which we saw just this past year.
Many investors don’t believe such price spikes are sustainable and they aren’t going to pay for them. We’re probably at least two years away from where we have a bit more of a buffer in the stocks-use ratio to get us away from this tightness that is causing more volatility in the grain price. In the meantime, we can expect continued volatility in both grains and fertilizer equities.
TER: How have the various segments of the fertilizer industry performed in the last year and a half?
RW: Potash has been the commodity with the most interest. We’ve been a bit of an outlier in the investment community, with a rather bearish view on both the commodity itself and on some of the senior potash producer equities. We are of the view that the potash oligopolies (and we all know who they are) have been rather aggressive with their pricing. In a perfect world, you might be able to raise your prices every year, but we don’t live in a perfect world. Places like India just couldn’t afford the higher prices, so they bought less. The oligopolies and agronomists are right in saying that parts of the world, like India and China, need more potash in the soil, but ultimately, demand is price dependent.
In 2012, global potash demand looked to be in the neighborhood of 50 million tonnes (50 Mmt), which is below the levels we saw back in 2004. Thus, the commodity usage has been basically flat to down over the last 7–8 years—not a compelling investment theme. But the potash price more than tripled over that period. This aggressive pricing has since come back to bite the oligopolies. I expect a demand recovery in 2013 because India has been under-applying fertilizer, and it will need to make up for that at some point. I doubt India would purchase its full allocation, which would be 6–7 Mmt, unless it can buy potash near or below $400/Mmt. And if it does buy the 6-7 Mmt, then there’s a good chance India might buy less again in 2014, with Indian farmers trying to mine the soil. Of course, if the rupee comes back with vigor, India would have more buying power.
On the supply side, there’s tremendous brownfield supply expected over the next three to four years. Most of it is coming from the oligopolies themselves. It looks like the global supply will be growing about 4% per year, on average, over the next four years. So if your demand is flat and supply is up 4% per year, it doesn’t bode well for potash prices. That doesn’t include the greenfield supply that could come on from BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK), K+S Potash Canada (SDFG:FSE) or any of the juniors that are working to build mines. So the supply/demand dynamics are not, in our view, compelling for potash over the next two years, particularly if we get less volatile global weather patterns and grain prices trend down.
TER: How do the prospects look in the other fertilizer segments?
RW: Phosphate is looking rather interesting here. Not unlike potash, there’s a bit of an oligopoly situation, with Morocco controlling half or so of the global phosphate rock market. It appears that Moroccans really want to move more into the higher-margin business. Instead of just selling rock to the world, they figure they can make monoammonium phosphate and diammonium phosphate, which are finished fertilizer products. This will make it rather challenging for the non-integrated phosphate producers and/or companies that still rely on imported rock. U.S. phosphate producers like The Mosaic Co. (MOS:NYSE) and Agrium Inc. (AGU:NYSE; AGU:TSX), for example, rely or expect to rely to some extent on Moroccan rock.
On the other hand, that should provide some interesting opportunities for the greenfield phosphate companies, certainly in North America, that are developing phosphate deposits. There are a couple of companies in particular that you might want to keep an eye on. One is d’Arianne Resources Inc. (DAN:TSX.V; DRRSF:OTCBB; JE9N:FSE) and the other is Stonegate Agricom Ltd. (ST:TSX, SNRCF:OTCPK). Both are working on projects here in North America. The next few years could be interesting for them.
TER: Then how about the nitrogen products?
RW: Unlike potash and phosphate, nitrogen isn’t reliant on ore bodies. It’s produced all over the world, so you don’t get the sort of concentration you get in potash and phosphate. If you’re investing in that sector, you have to be a little careful, because we believe that nitrogen producers in North America, in particular, are near peak margins due to the low price of natural gas, which is a big input component. In our view, you shouldn’t generally buy equities that are about to post peak earnings and peak margins, especially when the market already expects those peak results.
Two companies in particular, Agrium Inc. (AGU:NYSE; AGU:TSX) and CF Industries Holdings Inc. (CF:NYSE), have share prices near their all-time highs, and the market’s already valuing some pretty robust results for them. We would be very cautious, and, in fact, we have an Underperform rating on Agrium. That stock’s trading a little over $102 today, and we have an $87.50 target on it.
TER: How are current commodity and financial market conditions affecting plans for junior mining companies in the project development stage?
RW: It’s a challenging time. Finance risk is the key challenge for a lot of these junior companies, whether it’s potash or phosphate. That means that if you have an ore body or an asset, it needs to have some competitive advantages, for example by being a low-cost operation either at the mine level or through low distribution costs. We look at projects like Allana Potash Corp. (AAA:TSX; ALLRF:OTCQX) in Ethiopia, for example, which looks to be well positioned as a low-cost operation at the mine gate and could be one of the lowest-cost delivered potash suppliers into India, which has no domestic potash. Companies are better off when they have these types of strategic advantages, but at the end of the day, the finance risk is still an overwhelming one today.
There is one development stage fertilizer company that we’re most intrigued by, and that’s MBAC Fertilizer Corp. (MBC:TSX; MBCFFOTCQX), because its finance risk is now largely behind it—it is about to move into production in the next few months or so. It has a phase one phosphate project in Brazil called Itafos, right in the Cerrado, which is the breadbasket of Brazil. It also has another phosphate asset to the north of the Cerrado. This company has a logistic advantage because half of the phosphate fertilizer manufactured in Brazil uses imported rock from Africa. We are extremely interested in this stock and it has our Top Pick rating in the sector. We have a $5.25 target on the stock with an Outperform rating. Frankly, the company is a potential acquisition target because there are parties that appear to be aiming to consolidate the phosphate fertilizer sector in Brazil. We believe MBAC Fertilizer is one to own for 2013.
TER: It’s nice to see some blue sky on the horizon.
RW: I’m not a complete bear on the sector. There are some bright spots in my coverage list.
TER: Do you expect any other interesting M&A activity in this industry due to current market conditions?
RW: I don’t see much particularly different about 2013 versus 2012 as far as the macro call goes. There’s been expectation for some time that the Indians and/or Chinese would come in and buy up more of the junior fertilizer companies to help secure supply, particularly in the potash sector. That just hasn’t happened yet. One thing that’s different about 2013 is that there should be a number of bankable feasibility studies completed this year, which will help derisk a number of the early-stage projects. It looks like Allana Potash is expecting its bankable feasibility any day now and d’Arianne Resources is expecting a bankable feasibility mid-year. Elemental Minerals Ltd. (ELM:TSX; ELM:ASX; EMINF:OTCPK) has a bankable study expected in the second half of 2013 on its potash project in the Republic of the Congo. Even IC Potash Corp. (ICP:TSX; ICPTF:OTCQX), which is a company looking to develop a sulfate of potash fertilizer project in the U.S., expects a bankable study in mid- to late 2013 as well.
There are number of bankable feasibility studies coming, which will help derisk these projects and could spur some investment by the likes of the Indians, the Chinese and even the Brazilians as they look to secure fertilizer, but time will tell. Because finance risk is quite significant for these companies, they ultimately need strategic partnerships and/or offtake agreements to help mitigate that risk. So as these studies come out in the next 6–12 months, that could change the equation for many of them. We’ll have to wait and see how that plays out.
TER: You talked about MBAC, which you like. What’s the situation with PotashCorp. (POT:TSX; POT:NYSE)?
RW: We’re bearish on that one. I believe we have the only Sell rating for that stock on Bay Street and Wall Street. So if you like contrarian views, that’s us. The potash commodity supply/demand situation is not particularly compelling. In terms of valuation, we look at that company as having mid-cycle earnings around $3.05 a share in our 2014 estimate. A typical multiple on mid-cycle earnings tells us this stock is overvalued at $41–42. The Street and most analysts seem to love it. They believe it’s worth $50+. Considering the cyclical downside potential for grain, we’re not of that view. We had a sell on it for most of 2012 and it’s been the right call. We’ll have to see how 2013 plays out.
TER: What do you see ahead for fertilizer producers and how can investors position themselves in this industry, if they like the future prospects?
RW: It’s as simple as this: The correlation between grain prices and agricultural equities, particularly the fertilizers, is quite high. Grain prices have retreated of late but still appear to have more downside risk than upside and we would argue over the next year or so, barring unforeseen supply shocks, the trend for grain prices is for further downside. If you’re of that view, then the bias for the agricultural equities would be down as well. So we’re pretty cautious here. We’d be inclined to sell into strength, if these agricultural equities rally, and focus more on the supply/demand fundamentals for grains. With that view, we have only a select few buys and we’re more cautious with a number of sells in our universe.
TER: And there’s a little bit of news on the horizon for mid-year with some of the smaller companies if they can get their act together.
RW: That’s correct, on the bankable feasibility studies coming out.
TER: We greatly appreciate your time and input today, Robert.
RW: Thank you very much.
Robert Winslow is an agriculture research analyst and director at National Bank Financial (NBF). Prior to joining NBF, Robert was an analyst, managing director, and the head of research at Wellington West Capital Markets Inc. (WWCM). Prior to WWCM, Winslow was a special situations analyst at Orion Securities. Winslow began his career at Solar Turbines Inc. (a Caterpillar company) in Dallas, TX, where he was a senior product engineer. He has a Bachelor of Science in mechanical engineering from Queen’s University, a Master of Science in mechanical engineering from Texas A&M University, and a Master of Business Administration from Cornell University. He also holds the Chartered Financial Analyst (CFA) designation.
Violent strikes and supply disruptions in South Africa put platinum in the headlines last year, and the metal spent 2012 selling at a discount to gold. Is a platinum discount the new normal? How will the market shift in the labor strike fallout? And will mining asteroids transform supply fundamentals? CPM Group Platinum Analyst Erica Rannestad met with The Metals Report to share her price and cost forecasts for 2013 and discuss the supply and demand trends to watch this year.
The Metals Report: Across the mining sector, investors are concerned with rapidly rising costs. How did the 2012 strikes in South Africa affect operating costs in the platinum group metals (PGM) mining industry specifically?
Erica Rannestad: We expect a 12% decline in PGM output in South Africa. These lower output levels are expected to have the most significant impact on cash costs. Cash costs are a key performance measure used in the mining industry and are typically stated on a per-unit basis. Cash costs mostly refer to direct mining expenses such as labor, fuel and electricity.There are many variations for the calculation of cash costs, so it is important to keep in mind that this measure is not exactly comparable across companies. Because it is stated on a per-unit basis, cash costs can be quite unpredictable, especially if operations are located in high-risk countries. Input costs, particularly labor and electricity costs, significantly increased in 2012, which amplified the already strong increase in cash costs as a function of lower output. In summary, the majority of the increase in cash costs is due to lower overall annual production with the balance coming mostly from labor and electricity cost increases.
TMR: What is the average cash cost for South African producers?
ER: We monitor cash costs on a C1 basis, which standardizes cash cost statistics. C1 cash costs refer to a standard definition of what figures must be used to calculate cash costs, making the measures comparable across the board. Last year, South African cash costs per ounce of PGMs were about $753 per ounce ($753/oz). Cash costs outside South Africa was much lower at about $570/oz. But you need to consider that South African PGM production, or output value, is relatively higher in platinum, which is why the cash cost is higher than the global average.
TMR: Is your analysis based on the combined output of platinum, palladium and rhodium?
ER: Yes. Other metals would be considered by-products.
TMR: What is the trend for cash costs in South Africa next year?
ER: For 2012, we have a preliminary estimate of a ~25% increase in cash costs to $940/oz. The key point here is much of that increase is due to the significant drop in output. The actual increase in cash costs could range between 15–25%. There are several ways companies can mitigate costs, such as mining higher-grade regions.
Cash costs of $925/oz puts some of the high-cost mines in the red in the near term. The near-term cash cost increase doesn’t suggest that these mines will close, because in most cases they were profitable during prior years. This year was unusual and very event driven. However, the current cost environment puts these operators at a higher risk.
TMR: Your report states that two of the five highest-cost PGM mines were already shut down in 2012. What is the story there?
ER: Those are the Everest and the Marikana mines. Both of them are partially owned by Aquarius Platinum Ltd. (AQP:ASX), which had quite an interesting and trying year. Those operations were closed, with Aquarius citing an adverse operating environment and low PGM prices. Management expects to restart operations when conditions improve, which may not be until 2014 at best. Another notable high-cost mine is the Bokoni mine. That operation is undergoing some restructuring between Anglo American Platinum Ltd. (AMS:JSE) and Atlatsa Resources Corp. (ATL:TSXV; ATL:NYSE.MKT; ATL:JSE). Its medium-term success depends on how smoothly that restructuring proceeds.
TMR: Are there other mines at risk for near-term closure either due to labor or infrastructure issues?
ER: Anglo Platinum’s Rustenburg operations may be at risk of temporary closure, or at least some shaft closures. This operation suffered a six-week-long strike that began in September. Costs are expected to increase significantly in 2012. These examples aside, most of the mines in South Africa, while at risk of poor operating performance due to the inherent issues unique to South Africa, are fairly positioned for the current price environment to continue operations in the long term.
TMR: What could happen to prices if output reverts to pre-2012 levels?
ER: This year the market reacted in two different ways. First, supply shocks increased uncertainty about supply, cut off supply flows and drove prices up sharply and rapidly. Platinum had a 24% trough-to-peak price increase during the Lonmin strike, for instance. Second, prices would drop nearly as fast upon the resolution of an illegal strike as investors started focusing on the dismal demand picture once again. My forecast is for a narrower price range in 2013. There’s less uncertainty about supply shocks—we have experienced strikes at all the major operations in South Africa and we have seen how the market reacted. The probability of a repeat of 2012 is low. But there still is a lot of pessimism about demand. As a result, I’m targeting approximately $1,450/oz for platinum as a low and $1,800/oz as a high for 2013.
TMR: What are your expectations for the demand side? Can you explain the major market segments and what is driving them?
ER: The largest user of PGMs is the auto industry. Auto demand will be driven by an improvement in Europe’s economy, possibly in H2/13. Expectations for improvement in the U.S. and Chinese economies this year would also be positive for fabrication demand. Overall, we expect positive, but tepid, demand growth for PGMs from the automotive sector. In auto catalysts there’s very little substitutability outside the PGM complex. Alternatives have been tried, but nothing else is as reliable and efficient. The auto makers are going to be buying PGMs despite the price for the foreseeable future.
The second-largest source of demand for platinum is jewelry. Platinum jewelry demand is dominated by China. We expect a lower growth rate compared to previous years—positive, but growing slower. Lastly, we expect modest growth from electronic fabrication demand, which mostly applies to palladium. Overall, we are looking for modest growth relative to 2012 levels.
Jewelry users of PGMs are much more price sensitive. Platinum is the largest jewelry component in the fabrication demand portfolio. When prices rise, jewelry demand typically comes off. Jewelers try to keep their price points stable for customers and one way to do that is to reduce metal content, which translates to the industry buying in lower volumes.
TMR: Investors are increasingly participating in the PGM markets—how is 2013 market sentiment looking?
ER: Especially in the case of platinum, investors in 2012 looked to the economy in Europe for clues about PGM market direction. That resulted in a very negative view. Currently, there are expectations for improvement in H2/13 for the European economy that should improve the outlook for PGMs. There may be buying activity in anticipation of that economic growth.
Slightly stronger growth in China and the U.S. obviously would also be positive for investor views on PGMs. PGMs are seen as a way to play an overall increase in industrial and economic activity.
TMR: PGM exchange traded products (ETPs) have grown globally in the last few years. Are the ETPs a significant force in the market yet?
ER: The introduction of the physically backed PGM ETPs has helped to expand marketing efforts for these markets. The PGM markets are much smaller than the gold or silver markets. The ETPs have really contributed to an overall expansion of the PGM investor base. Specifically, they have provided retail-level investors with a lot more access to these markets.
TMR: Platinum has been hovering at roughly a $100 discount to the price of gold for the last several months. Is this a transient condition or the new normal?
ER: The run-up in gold prices above platinum makes sense because of all the layers of uncertainty in the global financial markets in recent years. The historically large premium that gold has over platinum at present reflects the unusually high level of uncertainty about future economic growth, fiscal deficits, monetary issues and the host of other problems that came to light during and after the financial crisis. We believe a lot of the run-up in gold prices based on these layers of uncertainty are priced into the market now. Once these layers of uncertainty begin to dissolve, we expect to see the platinum price move above gold once again. In the long term, we see platinum’s fundamentals as more positive than gold, so we expect to have platinum prices rising, whereas we see a lot of potential for gold prices to decline in the medium term. Potentially as early as 2014, we could see the annual average price of platinum exceed that of gold. On a daily basis, this could happen sooner—perhaps by late 2013.
TMR: Besides bullion or ETPs, another option for investor exposure would be mining equities. What companies are you watching?
ER: Despite a lot of exploration spending in Canada, the main area of interest remains South Africa. Approximately 85–90% of the pipeline for future PGM mine production is located in South Africa with the remainder completely in North America.
In North America we expect several miners to develop PGM projects over the next 10 years. Those include Stillwater Mining Co.’s (SWC:NYSE) Marathon project, Polymet Mining Corp.’s (POM:TSX; PLM:NYSE.MKT) NorthMet project and Panoramic Resources Ltd.’s (PAN:ASX) Thunder Bay North project.
TMR: Because prices have been strong for some time, the PGM recycling rate is high. Does PGM recycling compete with mine supply?
ER: At this point it’s not competing (albeit it is a critical component of supply in today’s market), but we expect strong growth in platinum and palladium recycling rates over the next 10 years. Palladium began to be used more in gasoline engines in the late 1990s, with or replacing platinum. Many of those converters are due to be recycled, so growth in palladium recycling is expected to be stronger relative to platinum recycling over the next few years. Secondary supply will account for a much larger portion of total supply in the future. We see it rising from a current 10–15% of supply to 20–30% over the next decade.
TMR: What are the major differences between platinum and palladium in terms of price performance?
ER: Palladium prices respond much more strongly to investor views on industrial activity. Platinum will trade somewhat as a financial asset like silver and gold. Palladium is much more an industrial play.
TMR: At present, are investors or industrial users the main driver of the PGM market?
ER: While investors might be a marginal component in terms of absorbing supply, they are critical in rapidly adjusting the market price. Investors have driven PGM prices this year. The 2012 price chart looks like a roller coaster—clearly influenced by supply shocks when investors were bidding up the price. When the supply shocks were resolved, investors would focus on their views about economic conditions. That resulted in reevaluating fabrication demand expectations, which were very negative based on the state of the economy.
TMR: Do you expect a similar situation going forward?
ER: Yes. I expect investors to attempt to capture any upside in the market that develops due to supply constraints and/or positive demand expectations. That said, we expect volatility to be somewhat reduced from 2012 levels.
TMR: Many or most platinum equities have had dismal stock market performance in 2012 —much worse than their underlying commodities. Is there a light at the end of the tunnel for equity investors in the PGM mining sector?
ER: The PGM mining sector is still the mining sector. It has been a tough time, but especially bad for the PGM miners because of the huge reliance on South Africa. A bad mining industry environment plus illegal strikes and large increases in cash costs equals poor equity performance. One way mining companies have attempted to address this is changing management. The CEOs in the top-four largest PGM companies all changed in 2012. Lonmin Plc’s (LMNIY:OTCBB) Ian Farmer stepped down due to illness and was temporarily replaced by Simon Scott, CFO. Aquarius’ former CEO, Stuart Murray, was replaced by Jean Nel, former chief operating officer for the company. Impala Platinum Holdings Ltd.’s (IMP:JSE) David Brown was replaced by Terence Goodlace, the former CEO of Metorex Ltd. (MTX:SJ). Finally, Anglo Platinum CEO Neville Nicolau resigned and was replaced by Chris Griffith, who was CEO of Anglo’s Kumba Iron Ore Ltd.
TMR: It’s a similar phenomenon to what has been taking place among North American senior gold miners.
ER: It is a sign that the industry is taking a more aggressive position in seeking solutions to its challenges.
TMR: New mining frontiers have made headlines in 2012, both underwater and airborne. Asteroids have come into focus as a potential source for PGMs. What’s your view on this topic?
ER: Asteroid mining is a novel idea. I get asked about novel technologies in the PGM sector all the time. The central point to remember is that these technologies are not near-term potential contributors to the market. In this case, there would be a tremendous amount of equipment development required and staggering logistical requirements. That’s going to take decades.
Commercialization of new and novel technologies takes much longer than many people might think. One example, which is also an emerging application of PGMs, is fuel cells. Fuel cells were developed over 100 years ago, but they’re only now being applied to commercial-scale markets. Mining asteroids for platinum is interesting. . .but is a long way off.
TMR: CPM Group publishes excellent market commentary. How can investors access those?
ER: We produce a monthly Precious Metals Advisory and a Base Metals Advisory, both of which contain price projections, relevant market information and supply and demand tables. It is released in the third week of the month. These are annual subscription products. More casual market participants can join our distribution list to receive free market commentaries. CPM Group also publishes three precious metals Yearbooks that are effectively the “year in review” for the gold, silver and PGM markets, released during the first six months of every year.
TMR: Thanks for your time—it has been interesting.
ER: My pleasure.
Erica Rannestad is a commodity analyst at CPM Group. Rannestad covers the precious metals and agricultural softs markets as well as currency markets. She is responsible for building CPM Group’s supply and demand statistics for the precious metals Yearbooks and Long-Term Outlook reports. Rannestad is currently most closely monitoring the silver and platinum markets, providing near- and medium-term price forecasts for these metals in CPM Group’s Precious Metals Advisory, a monthly publication. Rannestad also often contributes to and supports CPM Group consulting projects and regularly presents CPM Group’s market views at conferences and seminars around the world. Rannestad holds a Bachelor of Science degree in finance from Fordham University’s Gabelli School of Business.
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Investors who want to play in the iron and copper space should look to small-cap producers for attractive valuations and lower risk, says Matt Gibson, institutional research analyst with CIBC World Markets. In this Gold Report interview, he says he believes iron has found its floor in 2012 and names iron ore and copper companies with upside potential.
The Gold Report: Matt, you cover four companies in the iron space with market caps that range from Cliffs Natural Resources Inc. (CLF:NYSE) at $4.2 billion and Labrador Iron Mines Holdings Ltd. (LIM:TSX) to Alderon Iron Ore Corp. (ADV:TSX; AXX:NYSE.MKT) and New Millennium Iron Corp. (NML:TSX) with market caps around $200 million. In Q1/12, all of them were worth double what they are trading at today. Why should investors be interested in these companies?
Matt Gibson: We have started to see positive trends in the iron ore space. Chinese port inventories have started to tick down, while capacity utilization globally and in the U.S. has started to tick up for steel companies. Iron ore prices have rebounded from lows of $86/metric ton (Mt) to the $118–120 Mt level.
TGR: Are larger companies like Cliffs being punished for their acquisitions or is the across-the-board share price decline all about low steel prices and global economic fears?
MG: I think most of it has to do with iron ore prices and sentiment regarding Chinese growth.
“We have started to see positive trends in the iron ore space.”
For Cliffs, the slow ramp-up at its Bloom Lake mine, which has led to elevated cash costs at the facility and lower margins, has not helped. Delays to the planned expansion and the downward revision of the mine plan to an ultimate capacity of 14 Mt have not helped either. Finally, higher operating costs put pressure on the company’s balance sheet.
TGR: A recent CIBC World Markets’ research report stated, “Despite elevated inventories of steel and iron ore, Chinese steel mills continue to maintain daily crude steel output near record levels.” As you mentioned, that seems to be changing. But is it changing quickly enough?
MG: I think China’s infrastructure announcement earlier in the fall helped draw down some of the inventories. Certainly, the overcapacity issue in China has a lot to do with the fragmented nature of the industry there, and that will take some time to play out. However, the Chinese government has been putting efforts into consolidating production into larger, more efficient operations.
TGR: The Chinese bought in at much higher prices on several juniors in the iron space. Do you think the Chinese regret that decision or was this always about the long term?
MG: China’s real interest is not so much from an investment point of view as it was about longer-term offtake, securing supply of iron ore and being able to diversify away from reliance on the big three producers.
TGR: In September, you dropped your 2012 near-term iron ore price forecast from $143/Mt cost, insurance and freight (CIF) to $128/Mt CIF. That also caused you to lower your target prices for the four iron companies you cover. Have we reached a bottom to the price drop?
MG: Near term, I believe prices found a floor in the $110–120/Mt level. That’s pretty much where most estimate the average cost of production to be in China.
That being said, the upside or potential price increases will be limited by growth in China and economic growth in Western Europe.
TGR: Would you say your view of global economic growth is reasonably bullish?
MG: There are some positive indications and I am optimistic that 2013 will be a better year than 2012, and that will be good for the iron ore sector.
TGR: Let’s move to your coverage, starting with Alderon Iron. Your 12-to-18 month target price on that company is $5.20, more than double its current share price. What about Alderon and its Kami Iron Project engenders that kind of confidence?
MG: Alderon’s management team has experience developing and building these types of assets. Several people on the management team have a background with Consolidated Thompson or with the Iron Ore Company of Canada, which have operated in the Labrador Trough for a long time.
Copper remains one of the tightest markets from the fundamental supply-and-demand perspective.”
Alderon also has a strong partnership with the largest Chinese steel producer. This is a producer that has only a small fraction of its iron ore supply captive right now.
Finally, there are potential catalysts on the horizon, including the release of definitive feasibility studies, rail agreements and permitting.
TGR: Cliffs Natural Resources went on a spending spree a few years ago, buying Consolidated Thompson, KWG Resources, Freewest Resources and Spider Resources, among others. Earlier, you attributed some of that drop to issues at Bloom Lake. But do you think Cliffs took on too much in those acquisitions?
MG: I think Cliffs got caught in a difficult position when it bought development assets just when prices turned. In retrospect, it looks as if the company may have stretched or overextended itself, but if prices stay stable things will look different a year from now.
TGR: You have a Sector Perform rating on Cliffs and a $55 target price, not quite double its current price. What will it take to get Cliffs from here to there?
MG: Cliffs needs to get up to full production at Bloom Lake. It has been ramping up and doing a lot of predevelopment stripping for a number of different mining phases. In U.S. accounting practices, all of those expenses have to be expensed on the income statement and impact cash costs. In other jurisdictions, those cash costs would be capitalized and amortized over a period.
Now that the stripping is done, Cliffs has multiple phases up and running. When Bloom Lake hits the 7 Mt annualized capacity mark, it should be able to drive its costs down on a per tonne basis.
TGR: Next, let’s talk about Labrador Iron Ore Royalty. It started out as an income trust—a form of company that does not exist in the U.S.—and is now a dividend-paying corporation. Why did the company make that change and how will it affect investors?
MG: As an income trust, Labrador Iron Ore Royalty was basically a flow-through vehicle for the royalty income and dividend stream coming out of the Iron Ore Company of Canada. It was organized that way for tax efficiency purposes. The Canadian government changed its stance on how those types of vehicles are taxed and most of the income trusts converted back into dividend-paying corporations.
“In the near term, small-cap producers offer some attractive valuations and a lower risk way to play copper compared to development companies.”
I really do not think anything has changed in how Labrador Iron Ore Royalty will operate. The company also is expanding annual capacity from 17 Mt to 23.3 Mt on an asset at Iron Ore Company of Canada that is run by Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK). Increased sales volume from that should contribute to higher royalty income and likely a large special dividend from Iron Ore Company of Canada in the latter half of 2013.
TGR: Should shareholders be pleased with this change in structure?
MG: The real impact for an individual investor is the change from getting part of the distributions in the form of interest payment, to getting it all as a dividend. For individual investors in Canada, it is more advantageous to receive everything as a dividend; I’m not sure about the tax implications for U.S. investors.
This actually represents one of the lower-risk plays in iron ore if you want exposure to iron ore while getting paid to hold the stock. Over the last 12 months, Labrador Iron Ore Royalty has distributed $1.50/share to shareholders, which represents about a 5% yield on the current stock price. The distribution could increase to $2.30/share in 2013.
TGR: Is your target price on Labrador Iron Ore still $40?
MG: Yes, it is.
TGR: The fourth company you cover is New Millennium Iron Ore. It is developing the Direct Ship Ore (DSO) project in Northern Québec. Tata Steel Ltd. (TTST:LSE; TATLY:OTC) has already agreed to take 100% of the ore produced, correct?
MG: Yes. The DSO Project is under construction. In 2012, it produced around 300,000 tons of sellable product, and will probably do about 2–2.5 Mt in 2013.
TGR: The total resource at DSO is 125 Mt. How does that compare to other companies of similar size in this space?
MG: The DSO resource base is similar to Labrador Iron Mines Holdings Ltd.’s (LIM:TSX) resource located nearby. Labrador Iron is more of a seasonal operator and delivers its product through Iron Ore Company of Canada.
New Millennium will operate year round in an enclosed structure and sell its product initially through port facilities owned by a local aluminum plant in Sept-Îles and later through the multiuser port that the Port of Sept-Îles is now building. That facility should be completed at the end of 2013 or early 2014.
TGR: Do you consider it an advantage that 100% of the offtake at DSO has been secured by Tata Steel?
MG: I suppose one could see that as a potential risk. But at the end of the day, Tata is the lead operator of the DSO project and New Millennium has a free carry into production. Unless Tata’s view of the Corus steel manufacturing facility in the U.K. changes, this offtake should be fairly secure and on typical commercial terms priced on international benchmarks.
TGR: Do you think New Millennium is secure enough in exchange for that 100% offtake agreement?
MG: The offtake agreement gets New Millennium to the point of generating cash flow; making that transaction positive for any junior.
Whether it is a fair deal or not, getting DSO up and running was really just an entry point for Tata Steel into the Labrador Trough. The strategic value of that will really be reflected when New Millennium starts developing and getting the larger taconite projects into production. That will require further investment decisions by Tata. The cash-flow implications for New Millennium from getting the larger, taconite projects up and running could be a real game changer.
TGR: What is taconite?
MG: Taconite is a colloquial term used to describe banded iron formations.
The investment decision required for the larger taconite project will be predicated on the definitive feasibility study that should be published in the next few months. We expect the investment decision in mid-2013.
TGR: How big an issue is transportation for New Millennium at both DSO and the taconite projects? Does it need a rail agreement to induce Tata to sign on to those taconite projects?
MG: The taconite project requires a slurry pipeline from the processing facility in the north down to a pelletizing facility in Sept-Îles.
There’s potential for New Millennium to sign an agreement with a consortium of the Canadian National Railway and the Caisse de Dépôt that is contemplating building a new rail line to where this project is going to be located. Canadian National Rail will head up construction and the Caisse de Dépôt will provide financial backing.
It signed a rail agreement for DSO with Québec North Shore and Labrador Railway in January 2012.
TGR: What is your target price on New Millennium?
MG: It is $4.30, almost triple where it is right now, based on a discounted cash flow model.
Lately in the Labrador Trough, a lot of players have been painted with the same brush as Cliffs and Labrador Iron Mines, and similar discounts have been applied across the board. But I think New Millennium is operating differently from other startups.
TGR: Is that due to its management team?
MG: Yes, it is due to a solid management team. This team understands how the business operates and the pitfalls of not owning your own infrastructure.
TGR: I would like to move on to copper. Copper traded down in October but looked to be rebounding at the end of November. What is your near-term outlook for copper?
MG: We see some marginal upside to copper prices in 2013, although not materially higher than today’s $3.60/pound (lb). We are forecasting $3.75/lb for 2013; overall, some strength, but limited downside from current price levels.
TGR: What is your central thesis for the primary copper plays you cover?
MG: Copper remains one of the tightest markets from the fundamental supply-and-demand perspective.
Right now, the junior producers are heavily discounted compared to the more senior players. A lot of the juniors have no value reflected in the market for some of their growth projects.
I think development or preproduction plays offer the opportunity to gain a lot of torque to the copper prices albeit with higher risk. They also offer investors the opportunity to participate in derisking projects, growing resources and the potential to rerate when a play moves from development into production.
TGR: Which companies do you cover in the copper space?
MG: Starting at the top of the alphabet, Augusta Resource Corp. (AZC:TSX; AZC:NYSE.MKT; A5R:FSE) is really a permitting story at this point. We expect it to obtain its record of decision early in 2013. This is a very robust project from a capital intensive point of view.
In terms of upcoming catalysts, Rio Alto Mining Ltd. (RIO:TSX.V; RIO:BVL) should come out with some 2013 guidance in January, along with a new reserve calculation and mine plan. We expect its life-of-mine rates to increase substantially on the back of recent grade reconciliations from production and a previous resource model, as well as exploration results from work done this year.
Rio Alto is also starting a regional exploration program on its land package; we expect those results to boost the stock.
TGR: How did Rio Alto perform against guidance in 2012?
MG: The company revised guidance upward twice in 2012. The original estimate of 100,000 ounces (100 Koz) was revised at midyear to 160 Koz and again to 200 Koz toward the end of the year. We believe Rio Alto will reach 200 Koz, mostly due to positive grade reconciliations.
TGR: Rio Alto’s La Arena is a massive open-pit mine in Peru. What is its expected mine life?
MG: Right now the oxide has an expected mine life of about six to seven years for the material close to surface. The sulfide deposit will have a much longer life.
Those mine lives are based on what the company has drilled off to NI 43-101 standards to date. It has a large land package, so I would expect the mine life to be extended on the gold side through exploration.
TGR: What are your targets on Augusta and Rio Alto?
MG: My target on Augusta is $5/share and Rio Alto is $8/share.
TGR: Finally, what is up with Western Copper and Gold Corp. (WRN:TSX; WRN:NYSE.MKT) and its massive Proven and Probable reserve?
MG: That project has the potential to move the needle for a major copper producer. We expect the results of a definitive feasibility study in the near term to provide some clarity around power options for the project. The investment community and potential joint venture partners have both focused on that issue. Clarifying the power issue should pave the way for the company to find a joint venture agreement with a major copper producer or lead to an outright sale of the company.
TGR: But the big copper producers do not like to share. Which company could swallow something this large?
MG: It would have to be a company the size of a Teck Resources Ltd. (TCK:NYSE; TCK.A:TSX), Rio Tinto, BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) or Antofagasta Plc (ANTO:LSE).
TGR: Do you have any parting thoughts on the infrastructure material space for our readers?
MG: In the near term, small-cap producers offer some attractive valuations and a lower risk way to play copper compared to development companies.
I would look for companies with strong balance sheets, capable management teams and good projected growth over the next five to seven years for near-term returns.
TGR: And would you include the iron companies in that?
MG: Yes, absolutely. The criteria are very similar.
TGR: Matt, thanks for your time and your insights.
Read about Matt Gibson’s ideas for investing in critical metals here.
Matt Gibson joined CIBC’s Equity Research Department in February 2009. He covers the junior base metal, rare earth, uranium and iron ore spaces. His more macro focus and financial acumen have helped to support commodity-related calls and augment the wealth of technical expertise on the mining research team. Gibson holds a Master of Business Administration from McMaster University, where he focused on financial markets and business valuation, and a bachelor’s degree (Honors) in economics from McMaster University.
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If you doubt the world is flat, there is now clearly a direct link between the economic Ch’i of both Canonsburg and Rajasthan:
Wall Street Journal this morning: For Guar Gum, a Bubble Goes Pop
Followed up this evening on Marketplace: How fracking affects a bean grown in India
Now is the moment to take a hard look at the state of supply for zinc and platinum, says Matthew O’Keefe of Mackie Research Capital Corporation. In an exclusive interview with The Gold Report, O’Keefe explains how market fundamentals are about to pop up some serious game changers in this space. International demand for zinc and the platinum group metals is booming, but the global supply is about to seriously contract. Well-financed mining corporations will celebrate, while others miss the party.
The Gold Report: What is the current state of demand in the international zinc market?
Matthew O’Keefe: As a base metal, demand for zinc mirrors economic growth. When industrial growth is slow, demand for zinc is slow. The zinc supply is currently about 13.2 million tons (Mt) per year versus demand of about 13 Mt per year. Due to the current gap between supply and demand, inventories are high.
But things are going to change pretty dramatically during the next year or so. In Q1/13, the first of a number of large zinc mines is slated to close down.
MO’K: Zinc mines tend to be smaller than gold and copper mines with fewer very large producers. But early next year, the first of several large mines will close; the Brunswick No. 12 mine owned by Xstrata Plc (XTA:LSE) with production of about 275,000 tons (275 Kt) a year.
“As a base metal, demand for zinc mirrors economic growth.”
Later in the year, another large one, Xstrata’s Perseverance mine in Quebec, is scheduled to shut down. Along with a few smaller operations, the market will lose more than 0.5 Mt next year alone, which is a big chunk of production. That will start the trend of depleting zinc inventories. In 2014, more large mines will close: Lisheen in Ireland, and Iscaycruz in Peru. These are structural changes in the industry because there are no large operations to replace them. The global decline in inventory should perk-up the price of zinc.
TGR: Why are these mines scheduled to close?
MO’K: These mines are at the end of their lives. Zinc mines, like all mines, have finite life spans. But they also tend to be fairly discrete deposits compared to the large porphyry deposits that dominate the copper industry that can often be expanded to capture lower grades. But the issue is more one of timing as the closure of several large zinc properties is occurring close to the same time. Usually, closures are offset by the development of new mines, but there is only one new large producer starting up: the Perkoa mine in Burkina Faso with about 90 Kt per year. That’s less than half of what the larger mines are producing, highlighting the looming supply-demand imbalance.
TGR: With gold mines, as technology improves and the price of gold goes up, you can access tailings and basically re-mine the property.
MO’K: There have not been major changes in the mining technology for zinc. And zinc has not enjoyed the sustained price rise of gold or copper. Therefore, not much money has been thrown at improving zinc mining technology.
TGR: What is the primary use of zinc?
MO’K: Zinc is mainly used for galvanizing steel. It’s used in brass and some other manufacturing so it’s a true base metal used almost entirely for industrial purposes. Underneath that nice paint job on your car, it is the galvanized steel that keeps it from rusting. It’s a major metal in construction. All of the high rises, and many houses, use galvanized steel studs. Duct work is galvanized steel. Growing economies require growing supplies of zinc.
TGR: What regions are rich in zinc?
MO’K: Zinc is globally available, but most zinc production comes out of China, South America, Australia and Canada.
TGR: How will the imbalance between supply and demand affect the price of zinc?
MO’K: A supply shortage should drive the price of zinc up. And with it, capital will flow to bring more mines into production. It’s a typical exploration cycle. When prices are high, there’s money available to explore and develop new mines. When prices are low, belts tighten and there is not a lot of extra money allocated to exploration or development. Losing the big producing mines means that there will be more demand for zinc to close the supply gap. A number of junior projects are well staged to succeed, if they get funding.
TGR: Such as?
MO’K: I recently screened North America-listed zinc names looking for companies positioned to take advantage of an increased zinc price balanced with the window of reduced supply. They all have relatively short time frames to production and good exposure to the zinc market.
Trevali Mining Corp. (TV:TSX; TREVF:OTCQX) is a near-term producer with two assets and it will be the only real pure play zinc producer around. It has almost completed building the Santander mine in Peru with partner Glencore International Plc (GLEN:LSE; 0805:SEHK) and is scheduled to commence production in early 2013. In mid-2013, if all goes well, production will commence at Trevali’s Halfmile mine in New Brunswick. That is a much larger operation, with a significant amount of upside in the area. It will be the cash-flowing zinc name—the next Breakwater Resources or Farallon Mining story.
In the development stage there is Canadian Zinc Corporation (CZN:TSX; CZICF:OTCQB), which is awaiting final permitting for its Prairie Creek deposit in the Northwest Territories. Prairie Creek was made famous by the Hunt brothers, who first developed and built it back in the 1980s for its significant silver byproduct. By 2015, it could be a large zinc producer exploiting a very high-grade deposit with a significant silver byproduct.
Chieftain Metals Inc. (CFB.TSX) is another developer but not as well known. It has recently signed a memorandum of understanding (MOU) on project financing for its Tulsequah Chief project in northern British Columbia. Chieftain is only about one-third zinc levered, so you don’t get as much torque in it but the copper and gold co-products are also quite attractive.
Moving to advanced explorers I cover Foran Mining Corp. (FOM:TSX.V). Foran is planning to complete a preliminary economic assessment (PEA) on its McIlvenna Bay project in Saskatchewan over the next six to eight months, which constitutes a major derisking exercise. Foran’s project could be a perfect fit for HudBay Mining (HBM:TSX; HBM:NYSE) and its complex in Flin Flon, Manitoba, about 60 kilometers away, and could be more of a takeover target than some of the others on this list. Foran will be an interesting one to watch.
Rathdowney Resources Ltd. (RTH:TSX.V) is another exciting explorer with its Olza project in the zinc district of southern Poland. It’s earlier stage, but has the potential to leapfrog ahead with a deal to access the nearby Pomorzany mill that is running out of ore. In the meantime, it continues to add to drill around its 20 Mt zinc-lead resource, which has the potential to grow significantly in terms of tons and grade.
TGR: You also cover platinum. What is the story there with supply and demand?
MO’K: Platinum, palladium and rhodium are the principal platinum group metals (PGMs) or platinum group elements (PGEs). Platinum is mainly used for making catalytic converters for reducing noxious fumes from cars. The automotive market is a bit flat in North America and Europe, but a rapidly growing middle class has created huge demand for cars in Brazil, China and India. Because environmental standards in these countries are going up, new cars are being fitted with catalytic converters, which use 3–7 grams platinum and palladium.
“In South Africa, there have been a couple of success stories in discovering new platinum deposits outside of the traditional Western Bushveld Complex.”
The supply side for platinum is fairly fixed. There is some production in North America and other places. But 85% of platinum comes from South Africa. Most palladium is mined in Russia. There is a need to find additional supply elsewhere because South Africa and Russia pose various types of obstacles for foreign investors.
In South Africa, foreign firms are required to find a black economic empowerment partner, a “BEE” partner, to cover 26% ownership interests. The agreement includes commitments for management control, employment equity skills, socioeconomic development—important steps but BEE is very well supported in South Africa so it’s not an obstacle any more. The real issue for platinum and palladium explorers is access to good ground. The bulk of the metal comes out of the Bushveld Complex in South Africa, and that real estate is mostly controlled by three majors—Anglo Platinum Group (AMS:JSE), Lonmin Plc (LMNIY:OTCBB) and Impala Platinum Holdings Ltd. (IMP:JSE)—but a few explorers have managed to squeeze into the Bushveld Complex. And in South Africa, there have been a couple of success stories in discovering new platinum deposits outside of the traditional Western Bushveld Complex. Some pretty interesting deposits, possible game changers, have turned up in the Northern Bushveld.
TGR: Do you have names?
MO’K: On the production side, Platinum Group Metals Ltd. (PTM:TSX; PLG:NYSE.MKT) has a joint venture in the Western Bushveld, and its project is in one of the last, best areas to mine because it’s relatively shallow. To put this in context, the bigger companies are sinking very large, very expensive, very deep shafts spending $1.5 billion (B) to build these challenging projects. Platinum Group Metals, on the other hand, has shallow mineral resources, which mean simple ramps and declines, lower capital costs—about $506 million—and relatively short timeframe to production. The company should be finished with construction on its Western Bushveld project next year.
“The recent disruptions in South Africa have brought to the fore the fact that South Africa is our major supplier of PGMs; extracting that supply is getting more challenging and more expensive.”
On the exploration side, Platinum Group Metals has discovered a new platinum-palladium and gold deposit in the North Limb of the Bushveld—called the Waterberg—which is thicker than the traditional Bushveld. The biggest problem with the Western Bushveld is that it’s a very thin zone—only about 4–5 feet (ft) thick. That means operations have to employ a lot of manual labor, a lot of guys chipping away at it, crouched over, in very harsh conditions. The North Limb deposit is 10–20 ft thick. These greater thicknesses are suitable for mechanized mining, which is much more efficient. It also means fewer potential labor issues and lower operating costs. This deposit could be a game changer in a country where labor issues are becoming more and more critical.
TGR: What is the life span of those mines likely to be?
MO’K: In the Bushveld, the life span is related to PGM prices. At higher prices, a miner can afford to go deeper. There is a lot of PGM resource in South Africa. The question is economics. A lot of the platinum mines are not economically viable at present; they cannot support new development. Some of the majors are shelving new development projects. Prices need to rise. There is a lot of cost pressure in South Africa on labor and capital costs. Mines deeper than 1,500 meters are just too costly.
TGR: Why is South Africa so blessed with platinum?
MO’K: Geology. The Bushveld Complex is a very special, layered intrusion in the 2-billion-year-old geological basin. It has concentrated platinum, palladium, rhodium and some other metals within a very thin five-foot zone. A century ago, it was mined from the surface. Miners have been following the sheet down dip ever since. But the deeper the mine, the higher the costs.
TGR: Are we looking at a constriction in the supply of platinum?
MO’K: Yes, I would say so because there’s nothing like the Bushveld anywhere else in the world. The PGM deposits that have been found outside of South Africa don’t have the same amount of platinum, they’re mostly palladium, and they’re nowhere near as big. There are some other platinum deposits around the world, but, again, it’s a cost issue. We really need to see platinum sustained over $2,000/ounce (oz) to support new development from these lower-grade deposits.
TGR: Will price rise as supply contracts?
MO’K: I think so. Some of the South African mines are closing and some have been producing at a loss for quite some time. You can almost hear a board of directors saying to itself, “We can spend $1.5B to develop another one of these mines, which we know is going to be marginal if the price stays below $2,000/oz. Why not look at the new discoveries in the Northern Bushveld? It is amenable to mechanized mining and contains tens of millions of ounces. Maybe we should move toward a mechanized, more modern-type mining.”
TGR: Are labor costs going to continue to increase?
MO’K: Yes. In South Africa, there have been violent incidents with striking platinum workers. They want higher pay. There have been regular increases in pay over the last few years, but it’s become more and more acute. The issue is not going to go away. In fact, it has recently spread to the gold, iron ore and trucking industries.
TGR: Can rising labor costs be absorbed by price increases?
MO’K: They should—prices have to rise. When the strikes started happening in South Africa, the price rebounded quite strongly, because mines were losing production. There is greater awareness now that there is a supply constraint, and that we are relying on South Africa for the bulk of our platinum production.
TGR: Are there any other juniors outside of South Africa?
MO’K: Prophecy Platinum Corp. (NKL:TSX.V; PNIKD:OTCPK; P94P:FSE) is a North America-based company with a copper-nickel-platinum-palladium discovery in the Yukon. Originally, it was a high-grade, small resource that had been around for a while. Prophecy took a new look at the drill data, and updated the resource to include a larger halo of “disseminated mineralization,” which is lower grade, but large and continuous. This year, the Prophecy completed a PEA, which shows a very robust project potential. It’s still in the early days, but potential PGM production is a couple hundred thousand ounces a year, which is a sizable supply. It is continuing to explore and develop that deposit.
TGR: Given that the two metals that we’ve talked about—zinc and platinum—appear to be on a trajectory of diminishing supply, are the majors in this field going to be scooping up prospects?
MO’K: With zinc, the Glencore/Xstrata merger is happening right now. Those are super seniors and the merger should add more discipline to the sector. But I expect takeovers, rather than mergers, in the junior and middle space, because that’s what we’ve seen in the past. There aren’t many names in zinc, and what seems to happen is that after a good zinc asset is derisked it is promptly scooped up by Xstrata, Glencore or Nyrstar (NYR:EN Brussels). We saw that in 2011 with Breakwater and Farallon. They were small producers and both got scooped up by Nyrstar. The big guys want to lock in production. They own smelters, and they want to guarantee supply of concentrate.
Trevali will be a prime candidate for a takeover when it’s ramped up toward 200 Kt/year. Perhaps it’s the new Breakwater. Foran seems an excellent fit for HudBay. And there are new players on the scene. China CAMC Engineering Co. Ltd., which is a Chinese company, acquired Procon Holdings Inc. as a Canadian subsidiary and through Procon signed the MOU with Chieftain to acquire up to 30% of the company and its projects, which might just be the beginning. Rathdowney is well positioned in the Olza zinc district to consolidate some existing mining assets or be consolidated for its growing resource and land package.
Then, on the PGM side, you have to look at Platinum Group Metals and its excellent prospects. There is an overhang on the stock until the debt gets finalized but it should still be very attractive for its Waterberg discovery. Either it can sell that mine off or get acquired by a larger company that wants the new production and access to the game-changing region.
Then there is Ivanplats Ltd., a private company formed by Robert Friedland. It is slated for an initial public offering next month. It has several assets including a PGM deposit in the Northern Bushveld, which is very similar to Platinum Group Metals’ Waterberg discovery. When the IPO makes that valuation public, we will have a better data point on the actual value of the Waterberg discovery.
TGR: Any final thoughts?
MO’K: Platinum and palladium are timely right now. Prices are running up, for good reasons. The recent disruptions in South Africa have brought to the fore the fact that South Africa is our major supplier of PGMs; extracting that supply is getting more challenging and more expensive. Prices have to go up in response.
We’re early on zinc. The snapshot of the zinc market today looks as if it’s in oversupply and there’s lot of inventory so it’s not that exciting. But watch it at the end of Q1/13 when Brunswick No. 12 closes. This should start a steady drop in inventories and rise in prices.
TCR: Matthew, glad to have you join us today.
MO’K: It’s my pleasure.
Matthew O’Keefe is managing director, mining research at Mackie Research Capital Corporation. O’Keefe was selected as the #1 mining analyst in the Wall Street Journal’s 2010 ‘Best on the Street’ survey. O’Keefe has 11 years of investment experience, and began his career as an exploration geologist with a number of major and junior mining companies, spending five years in the field before becoming a mining specialist for Griffiths McBurney & Partners. Most recently, O’Keefe was a mining analyst with Cormark Securities. O’Keefe received a Bachelor of Science in geology from the University of Toronto, a Master of Science in geology from Queen’s University in Kingston and an MBA from the Richard Ivey School of Business at the University of Western Ontario.
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Supply threats in the Middle East have governments around the world hoarding oil, largely in secret. But it didn’t get past Raymond James Director for Energy Research Marshall Adkins, who noticed the 200 million-barrel discrepancy between what was pumped and reported global oil reserves. Where did the missing oil go, and why don’t prices reflect this substantial surplus? More importantly, what happens once the reality of an oversupply sets in?—A tough six months, Adkins expects. Read on to find out where you can hide when prices plummet.
The Energy Report: You’ve written a provocative research report titled “Hello, We’d Like to Report a Missing 200 Million Barrels of Crude.” It argues that the global oil inventory should have grown by over 200 million barrels (200 MMbbl) during the first six months of 2012. Where did this oil go? And a better question is, why hasn’t this surplus shown up in pricing?
Marshall Adkins: When the U.S., the European Union and the United Nations imposed sanctions against Iran, the world responded by putting oil into storage. China rapidly began filling its strategic petroleum reserves. Saudi Arabia topped off its surface reserves. Iran put oil in the floating tankers.
TER: Why isn’t this storage being reported? Is it normal for this oil to not go into the regular reporting channels?
MA: Yes. Unfortunately, it takes three or four months, and often six months, to get good data from the Organization for Economic Cooperation and Development (OECD). It’s a lag, but at least you usually get the data. We estimate that OECD data accounts for about two-thirds of global oil inventory capacity. The other third, which is just an estimate, is off the radar. Few sources really track this non-OECD data. The International Energy Agency (IEA) does not track it either, because there’s simply no reliable way of getting the information. China is probably the best example of that. It just does not tell us exactly how much it has.
TER: Could this result in dumping at some time in the future, potentially after the November election in the U.S.?
MA: It could. But even if they don’t dump it, we think there is an even bigger structural problem. We are running out of places to put the growing supply of oil. Based on our supply-demand numbers, the world is poised to build significant inventories in early 2013. There is a very real possibility that if Saudi Arabia does not initiate production cuts sometime in early 2013, we will run out of places to put this oil around the world.
TER: Your particular specialty area is oilfield services. You maintain a U.S. rig-count table, which showed a 6% drop year-to-date as of August 31, 2012. Does this indicate that it’s getting easier to get oil horizontally than it is to drill straight down?
MA: There is no question that the application of horizontal oil technology has completely changed the game for both oil and natural gas here in the U.S. Yes, it’s just a much more efficient way of extracting oil and gas, particularly from formations that are very tight. This is a trend that’s going to be here for a long time. It has led to an incredible increase in production per well.
TER: I noted dry gas rigs in your table are down 57% during that same one-year period. Even wet gas rigs are down 40%. How long can this go on before gas prices turn around?
MA: The decline in the overall rig count this year is mainly a function of the falling natural gas rig count, both wet and dry gas rigs. Early on, oil rig growth offset a lot of that gas decline, but the growth rate in oil has stagnated. So, low prices for natural gas are causing a meaningful decrease in gas drilling, but we think there will continue to be reasonable growth in gas supply from the oil wells in operation. That said, gas prices should gradually rebound as we build out infrastructure and consumers start to take greater advantage of extremely low gas prices in the U.S. Next year, we think the overall U.S. rig count will continue to deteriorate with lower oil prices. As that happens, overall gas production growth should flatten. That allows growing gas demand to offset stagnating supply growth. That should eventually drive U.S. natural gas prices higher. It will take a while, but we expect gas prices to improve steadily over the next several years.
TER: Natural gas prices were up about 35–40% before summer. Was this just a bounce, or could this be the beginning of a bull market in natural gas?
MA: I wouldn’t call it a bull market in gas. Gas prices have certainly improved, but I think most people who are out there drilling for gas would say that $3 per thousand cubic feet ($3/Mcf) isn’t exactly a bull market. They simply aren’t making a whole lot of money at that price. That said, today’s prices are much better than six months ago and things are looking better. We think natural gas prices will average closer to $3.25/mcf next year and $4/Mcf the year after. Yes, we think the gas price bottom that we saw earlier this year, $2/Mcf, is well behind us. Directionally, things should continue to improve.
TER: Should investors be bullish on any segment in energy right now? If so, which ones?
MA: In light of our relatively bearish overall stance on crude, we don’t have any Strong Buy recommendations in our oil services universe. We’re not recommending a whole lot of exploration and production (E&P) names at this stage either. The ones that we think do perform here are refiners that benefit from the price differential between West Texas Intermediate (WTI) and Brent crude. In addition, infrastructure companies such as master limited partnerships (MLPs) and companies that service either pipelines, refineries or other new infrastructure should outperform over the next several years.
TER: Any final thoughts?
MA: The bottom line is that we have a tough six months ahead of us for crude oil prices as inventories continue to build in Q1/13. Sometime in early 2013, oil prices should deteriorate as much as 30% from where we are today and hit bottom in mid-2013. At that point, we’ll probably get a lot more constructive on oil services and E&P names.
TER: Thank you very much.
MA: Thank you for having me.
Marshall Adkins focuses on oilfield services and products, in addition to leading the Raymond James energy research team. He and his group have won a number of honors for stock-picking abilities over the past 15 years. Additionally, his group is well known for its deep insight into oil and gas fundamentals. Prior to joining Raymond James in 1995, Adkins spent 10 years in the oilfield services industry as a project manager, corporate financial analyst, sales manager, and engineer. He holds a Bachelor of Science degree in petroleum engineering and a Master of Business Administration from the University of Texas at Austin.
New deposits and economic triggers will drive gold stocks, says Eric Coffin, the editor of HRA Journal. In this exclusive interview with The Gold Report, Coffin identifies the management characteristics of gold juniors that make money for investors. A successful gold explorer in his own right, Coffin names his picks from the Yukon to the Caribbean.
The Gold Report: Eric, why is there a bear market for metal mining companies in a season of bulls?
Eric Coffin: Post-recession, there was a good bounce for commodity stocks. Two problems have slowed things down during the last year. One was fear of the fiscal cliff as the politicians in Washington argued about raising the debt ceiling. Banks were blowing up in Europe. Most important, weakening numbers out of China scared off a lot of investors, particularly from the base metals. There are simply a lot of people concerned about the economy in general, and, specifically, the growth economies where metals are keys to industrial development.
On the gold and silver side, the real issue is that gold is over $1,700/ounce (oz) and silver is now over $30/oz. It sounds as if I’m being ironic, but I’m not. At the start of this major cycle, gold prices were $300/oz. It was not the price-earnings (P/E) ratio that was determining the value of a lot of mining companies, it was the P/E ratio plus a very large amount added for in-the-ground resources. Goldbugs at the start of this cycle expected gold and silver prices to go up 500%. They were as interested, if not more interested, in the leverage, the “ounces in the ground per share” that gold stocks represented.
I’m not going to assume that gold is going to $10,000/oz. I’d be really happy if it does, but I’m not expecting it. What we are seeing now is that the P/Es for the gold firms are returning to the market average. In the past, gold companies could trade at 80–90 P/E. The earnings part didn’t matter very much. It was all about the amount of gold resources on hand. Now investors are taking a harder look at how much money these firms are actually making. We can’t just assume that gold is going up another 400–500%. So the P/Es have normalized.
Another concern is profit margins. Costs have gone up very rapidly in the mining business. For a long time that was because there was a skills shortage. Part of the reason why we expected this to be a long secular bull market was because we knew how short the industry was on all kinds of skills, material and equipment. The mining sector was not going to turn around and suddenly start producing twice as much copper, zinc or whatever at the same cost. As the price of metals rises, so does the price of a geologist, the price of an engineer, the price of a ball mill.
The situation will improve over time as more professionals are trained and the production capacity of industry suppliers is increased, but this takes time. The final piece of the cost equation for many metals is grade. As the “low hanging fruit” is picked and the industry moves to tougher terrain with less infrastructure and deposits with lower average grade, the cost of production rises. While I’m not a big believer in things like “peak copper” (at least not any time soon), supply is very much a function of price. If the world wants ever increasing amounts of metals it will have to pay up and pay the mining industry to supply them. The days of cheap metals, in most cases, are over.
TGR: You observed recently in HRA Journal that the currently depressed junior gold explorer market is showing signs of life. Can you explain that?
EC: One reason is that the market is running out of sellers. People who wanted out of gold equities are largely gone; there is a huge amount of money on the sideline. That puts in a bottom but doesn’t cause a turnaround. I think the spark that gets the juniors moving again, as it has in many past cycles, is new discoveries. We haven’t seen many discoveries that grabbed the market’s attention in the last couple of years.
Exciting discovery stories are critical to the junior mining sector. People need to be reminded of why they buy these high risk stocks. Investors do not buy a $0.10/share junior as a widow or an orphan stock, they buy it because they are swinging for the fences. It’s hard for investors to talk themselves into swinging for the fences unless they are seeing others hitting one out of the park.
A couple of recent home runs have generated a bit more liquidity in the market, but not as much as I’d like to see. The summer is always slow. The real test is going to come in the next month or two. However, we are starting to see financings close again. And companies that have done well off of drill discoveries are getting big increases in stocks prices and, critically, we are seeing more of these companies maintaining higher prices; that generates money that gets redeployed.
TGR: Let’s talk about the discoveries.
EC: GoldQuest Mining Corp. (GQC:TSX.V) is a big win for me. David and I had specifically advised people to buy GoldQuest for its drill program and then it made an amazing blind discovery in the Dominican Republic. The best drill hole at this new zone, Romero, is on the order of 235 meters (m) of almost 8 grams/ton (g/t) gold and 1.5% copper. It has reported seven holes in a small area, but doesn’t understand the geometry yet. It started out with small stepouts in an area measuring about 100×100m and is now starting larger stepouts. Not only are the grades strong, but also the zone is thick. GoldQuest is looking at 200–250m+ intercepts, and all of the holes have bottomed in the zone. The small area drilled should contain over a million ounces and it’s still wide open. That is a pretty impressive discovery, and GoldQuest stock reacted accordingly. It was $0.07/share when it announced the first drill hole. It’s about $1.60/share now. It has raised $20 million in the last month and a half, most of that at $1.25/share.
GoldQuest will drill the heck out of this. It has two drill rigs going. There’s a third one in customs, which should be onsite in a week, and a fourth rig on the way. And, the success of this target increases the value of its other targets. For instance, it has 40 kilometers (km) of contiguous holdings covering a rock formation called the Tireo Volcanics. With cash from the new discovery in hand, GoldQuest can and will up its exploration budget on that set of properties that have several other early stage discoveries in addition to Romero.
TGR: Are you following any particular gold miners in North America?
EC: In the Yukon, ATAC Resources Ltd. (ATC:TSX.V) is putting out really good holes. Kaminak Gold Corp. (KAM:TSX.V) is also putting out good holes, although it is not putting them out as often as I would like. It has obviously gone to the whole batching idea.
I also really like the look of Comstock Metals Ltd. (CSL:TSX.V). It is operating on the other side of the Yukon River from the Golden Saddle discovery. Golden Saddle was discovered by Underworld Resources Inc. (UW:TSX) four years ago, which kicked off the whole Yukon area play. It was subsequently taken out by Kinross Gold Corp. (K:TSX; KGC:NYSE). Kinross hasn’t published a new formal gold resource number, but the jungle telegraph says it’s between 2.25–2.5 Moz.
Comstock has the same rocks and very similar mineralization on the other side of the Yukon River, the north side. It is about 15 km away. It put out a very strong 75m trench about a month and a half ago, averaging 3.75 g/t. Last week, Comstock put out another set of trench results, extending the zone to almost 400m of strike length on surface. The average thickness is probably 70–80m. It compares quite favorably to Underworld’s discovery. That was followed a few days later by the announcement of a drill start. This is in the far North. Just how much drilling gets completed this fall is weather dependent but based on those trenches, it’s a strong-looking target.
TGR: Are there other explorers in northern Canada that have your eye?
EC: On the opposite corner of the Yukon, there are really high-grade numbers—up to hundreds of grams per tonne gold—coming from Northern Tiger Resources Inc.’s (NTR:TSX.V) 3Ace project this year. The company drilled several short holes in this new one but hasn’t released results yet. The main question is how big is this thing? The deposit will have to be thick to get the market excited, but the grades are high enough that the tonnage could be small and yet still prove to be profitable.
TGR: What about in the U.S.? Any names there?
EC: I have liked Premier Gold Mines Ltd. (PG:TSX) for several years. It has developed nice land positions in Nevada and in Ontario. It’s a good story at many levels, and it has one of the best management groups in the junior sector. Premier has several very good advanced projects in Ontario and Nevada where it’s growing resources with ongoing exploration. It’s a very solid stock with a wide following.
Evolving Gold Corp. (EVG:TSX; EVOGF:OTCQX; EV7:FSE) is drilling a project in the same area of Nevada as Premier. It has put out some good holes and some not-so-good holes. It needs to drill a range of deep holes to figure out the geometry. But it definitely has a Carlin zone. And in the Carlin mineralization, the gold tends to be very fine grained. It requires a lab assay. But there’s no real shortcut for getting the wedge holes done in order to figure out which direction to chase the zone and determine if the one is large enough to justify larger drill programs.
TGR: How does a smart investor in gold juniors separate the wheat from the chaff?
EC: It’s wise to focus on a geographic area that’s already generated a lot of good news. If a company is looking for a bulk tonnage open-pit-type deposit, I look at the target size to be sure there is enough scale potential. I don’t have a problem with the high-grade ore. Good high grade deposits can be very profitable even though the market tends to focus on the big low grade systems. But to get the market’s attention for an underground operation, there needs to be a minimum of 6–8 g/t and, ideally, more than 10 g/t in intercepts.
In many areas you can make money on lower grades than that if there is good thickness but the market tends to ignore grades below 10 grams unless they are at least several meters thick. With bulk tonnage, you can get away with 1 g/t or 1.5 g/t, but for drilling at those grades, you want to see 60, 80, 100m drill intercepts. The property has to look strong from the outset, because the company has to keep raising money. That being the case, one looks for a management group with a strong brand and a track record of success—both in market terms and in technical terms.
Things can get difficult even when a discovery has been made if management isn’t able to get the market to take notice. Having access to capital is huge for a junior. It’s even more critical when the market is weak as it has been the past 18 months. When the market’s great, everybody’s happy, people will say “yes” to anything and it’s much easier to raise money. But when the market is weak, management must be able to convince people to write a check. Of the 1,500 or so junior companies, there may be 100 that can do that in this type of market on non-dilutive terms and no more.
TGR: How’s it going with Precipitate Gold Corp. (PRG:TSX.V), which is in both the Dominican Republic and the Yukon?
EC: I’m pretty happy with it. By way of disclosure, as you know, Precipitate was founded by my late brother, David, and me and our friend Scott Gibson. We were very fortunate to be joined from the start by such a strong board and management team. Adrian Fleming is the chairman; he ran Underworld before it was taken out and has huge business credibility. The board includes Quinton Hennigh, a good friend and one of the smartest geologists I’ve ever met. Both Adrian and Quinton know how to talk to the market. Our friend Gary Freeman is also on the board. Gary is a great financier. David and I had been involved with him in the early development of Pediment Gold Corp. (PEZ:TSX; PEZGF:OTCBB;P5E:FSE), which was taken out by Argonaut Gold Inc. (AR:TSX). Darryl Cardey, who was the chairman of Underworld, is also on the Precipitate board of directors. Darcy Krohman, another longtime friend who has the unusual combination of dual professional standings both as a P. Geo geologist and a CA, is the president.
Due to its very credible management team, Precipitate was able to do a $0.40/share initial public offering on early-stage, Yukon properties in May with no warrants. Believe me, that wasn’t a piece of cake. People bought the stock as a bet on management. Though we like the Yukon projects, it was no secret everyone involved with the company was, and still is, on constant lookout for projects that would be accretive and add value to the company.
As it happens, just before Precipitate listed, GoldQuest made its discovery in the Dominican Republic. I’m very good friends with Bill Fisher and Julio Espaillat, who run it. I’ve always liked that belt of rocks. And it is not an exaggeration to say that GoldQuest and Gold Fields Ltd. (GFI:NYSE) invented the Tireo as an exploration destination. They did the regional work that focused on those rocks and the belt has generated several discoveries in its short 10 year exploration history. If Precipitate had said six months ago, “Hey, we have a property next to GoldQuest,” most people would have said, “Who the hell is GoldQuest?” Now, it’s a different story.
As soon as its first drill hole was announced, I was trying to find projects in the right rocks for Precipitate. That is not easy to do because the belt was largely tied up even before the Romero discovery, but we were lucky to get a large concession that has the right geology along its eastern side bordering Goldquest. This is early stage exploration but it’s a great address and Romero is already looking as if it could be a world class discovery after only seven drill holes.
TGR: Let’s pull out and look at the macroeconomic level for a minute. What kinds of economic triggers are likely to affect gold equities positively or otherwise in the foreseeable future?
EC: For the next three months, it’s central banks, central banks and central banks. Everybody is expecting Federal Reserve Chairman Ben Bernanke to kick in Qualitative Easing 3 (QE3). I’m slightly less convinced, but I’m not going to complain if he turns on the printing press. The latest monthly employment report in the U.S. was quite weak so that may be the trigger for a QE announcement. What Bernanke said at Jackson Hole brought the gold price back up through $1,700/oz. We are seeing similar indications out of the European Central Bank (ECB). Mario Draghi is telling the European countries that are anti-stimulus, “I’m going to do it with you, or without you!” And Germany’s Chancellor Angela Merkel, who hasn’t exactly been a proponent of bond buying, is now saying they have to stimulate. It looks like we could have stereo printing presses humming along on both sides of the Atlantic before long.
Perversely, weak employment numbers and weak purchasing manager index numbers help precious metals. Weak economic indicators convince traders that Bernanke and the ECB are going to have to pull the trigger. On the base metals side, the easing could have the opposite impact, with one exception. If we continue to see weak numbers out of Beijing, the traders will think that Beijing is going to stimulate, too. But not with bond buying. The Chinese can simply loosen reserve requirements for the banks. They hold trillions of dollars in foreign reserves. Unlike Washington and most of the debtor countries in Europe, China can simply start writing checks. It, too, has been putting out weaker numbers and making more noise about stimulating. China does have slightly higher inflation, which makes things trickier, but I expect it to step up stimulus toward year-end as the next generation of Communist Party leadership is sworn in.
TGR: What effect would QE3 have on mining interests, generally?
EC: It will help. QE3 will weaken the U.S. dollar. It will cause traders to buy treasuries all the way up and down the yield curve, thereby lowering the yields. In the last couple of weeks, the U.S. dollar index has dropped a couple of points, which is a fairly big move. As it moves lower, gold and silver prices in U.S. dollars will strengthen. Then we will see better numbers in the U.S. as businesses gain confidence and start hiring. Those hiring decisions are being held back right now because managers aren’t comfortable with the slow growth rate. Virtually all traded commodities are priced in U.S. dollars, so it should help them all, though precious metals will get the biggest, quickest boost.
TGR: How will monetary easing affect mining in Mexico?
EC: In Mexico, the peso is relatively weak by historic standards, which helps with mining costs. It has good mining infrastructure and good mining legislation. It doesn’t have any real royalties to speak of. You don’t get a lot of surprises there. However, areas of the country are bloody dangerous; that’s the one thing that has held Mexico back recently. The drug cartels have scared people out of some areas. Nobody really knows who is calling the shots. You certainly don’t get the impression that it is the Federales; the drug cartels do whatever they want. But people more or less know where the growing is and where the drug routes are, so they stay out of those areas. I’d like to think that crime is not going to be a long-term problem. There are still plenty of areas in Mexico that work out fine for miners.
You must have agreements with the local ejitos, however. Although the ejitos don’t own the mineral rights, they do have surface rights and they have local political power. So you need to sit down, talk to the locals and make sure that everybody is happy, because an angry ejito can really make your life miserable. There are some ejitos who just don’t want development. And when the locals don’t want you, there’s just no point in bothering. All that said, it’s a good country with lots of good geology and plenty of recent discoveries. If the government can get the crime issue under control, I don’t doubt the high level of mining investment would continue and probably grow again.
TGR: Are there any other companies that you think are hot?
EC: I’d keep an eye on Reservoir Minerals Inc. (RMC:TSX.V). Its joint venture with Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE) is pulling some amazing drill holes in Serbia. It just put out the second one today—the copper equivalent was almost 10% through 160m. That’s a heck of a drill intersection. Freeport is not fooling around. It is doing big stepouts. It wants to know right away if it’s the real thing and already has four drill rigs at work.
At a more advanced level, I like EurOmax Resources Ltd. (EOX:TSX.V). It is in several countries in Eastern Europe, including Serbia. It has a new management group that came directly out of European Goldfields Ltd. (EGU:TSX; EGU:AIM), which was taken out about a year ago for about $1.5 billion. These guys have huge credibility, especially with European institutions. Euromax is drilling to expand Ilovitza, a copper-gold porphyry in Macedonia. It has a couple of nice projects that have gold resources on them, but there is room for some more gain simply by the current management group going around and telling the story. Management views the asset set as very comparable to that of European Goldfields Ltd. (EGU:TSX; EGU:LSE) but with one tenth the current market value.
Speaking of Mexico, if you’re interested in a production level story we like SilverCrest Mines Inc. (SVL:TSX.V; SVLC:NYSE.MKT). We have followed the company since inception. I have a very high regard for the management team, which has been delivering on time and on budget for years. SilverCrest is generating nice profits from its Santa Elena gold-silver mine in Sonora and plans are in the works to add a mill to this heap-leach operation and start mining deeper parts of the system and double the production rate by 2014. SilverCrest is also drilling its La Joya bulk tonnage silver-base metal project in Durango. There should be an updated resource estimate by the end of the year and it looks like it’s going to be big, probably close to 200 Moz silver equivalent. SilverCrest has gotten a lot of traction as gold and silver prices jumped recently but if they keep going up, the company should too.
Lastly, HRA is offering a free report for your Gold Report readers. It’s actually our latest HRA Journal, which discusses in more detail some of the companies that we have covered in this interview, such as Precipitate Gold, Comstock Metals and GoldQuest. To access the report for FREE, all you need to do is sign up through our page at HRAdvisory and you’ll automatically receive a copy of the Journal via email.
TGR: Thanks, Eric.
EC: You’re welcome.
Eric Coffin is the editor of the HRA (Hard Rock Analyst) family of publications. He has a degree in corporate and investment finance and extensive experience in merger and acquisitions and small-company financing and promotion. For many years, he tracked the financial performance and funding of all exchange-listed Canadian mining companies and has helped with the formation of several successful exploration ventures. Coffin was one of the first analysts to point out the disastrous effects of gold hedging and gold loan-capital financing in 1997. He also predicted the start of the current secular bull market in commodities based on the movement of the U.S. dollar in 2001 and the acceleration of growth in Asia and India. Coffin can be reached at email@example.com or the website www.hraadvisory.com.
Lisa Reisman describes herself as a “classic libertarian,” but the managing editor of MetalMiner.com nonetheless believes government has a role to play in protecting and developing domestic supplies of critical metals. In this exclusive Critical Metals Report interview, Reisman argues for private/public partnerships and explains why today’s low prices don’t faze her—or surprise her.
The Critical Metals Report: Lisa, many of the companies in the rare earth elements (REE) space are trading near 52-week lows. Has the bubble burst or is this a consolidation?
Lisa Reisman: To some extent, the bubble has burst. But this is true for a number of commodities, not just REEs. The current lows are directly related to the same policy changes that caused the upswing in the first place. When China, the 800-pound gorilla in the sector, shifted to a policy limiting exports, buyers tended to hit the panic button and bought forward for a long period of time. Prices got a boost at the time, but those large buyers were then out of the market while they subsisted off their stockpiles. Thus, we would expect the stocks of the REE producers to fall a little bit.
TCMR: The MetalMiner IndX on MetalMiner.com tracks a number of markets, such as aluminum, raw steel, rare earths, precious metals, renewables, copper, automotive and construction. By far the worst performing index is REEs; it has lost almost half of its value. Why?
LR: There is an adage that goes “nothing kills high prices like high prices.” When things begin to get frothy, people get nervous and sell. Investors use the opportunity to take some profit.
The REE prices got too frothy. This is a spot market; the published prices tell you what current demand looks like. And it is looking dour. The same is true for other metals. For most of them, the slope in the aggregated chart is down to the right.
Also, when people start to panic over export controls, they start to look for product substitutes and alternative materials. That cannot be done across the board or quickly in all cases, but where it can be done, it is done. This creates demand destruction. To some extent, that is what we are seeing in REEs.
TCMR: How much of a role does China’s economic slowdown play in REEs’ price weakness?
LR: It plays a significant role. Many of the large buyers, like the original equipment manufacturers (OEMs), have bought or are buying forward. Once the big companies are taken care of, who is left in the REE spot market? The companies that did not plan ahead, often smaller companies, are the only ones buying in the spot market right now.
TCMR: The U.S., the European Union and Japan are quietly fighting with China through the World Trade Organization (WTO) over China’s export restrictions. What do you think is the likely outcome?
LR: I think the WTO will rule in favor of the Western nations by finding that some of the export restrictions, or perhaps the way China has implemented them, violate WTO rules. But China is holding fast and makes some valid points in its defense. The environmental factors, China asserts, are a legitimate rationale for export limitations.
TCMR: If that happens, will China change the way it does business?
LR: It might not be business as usual for China, but China will look for other levers to manipulate and it will attack the problem from a different direction. China is enough of a player in every market that when it decides to buy or not, it will affect pricing.
The real question for the WTO goes beyond REEs. It hears cases over steel and aluminum quite often. In general, China does not play by the same set of rules as everyone else. That has to come to an end at some point.
TCMR: How are manufacturers that use REEs responding to supply risk?
LR: The largest OEMs—the Boeings, Apples and HPs of the world—have very extensive supply-risk management strategies in place. They track, rank and rate all the materials they buy. The aerospace sector has been brilliant in identifying sources of supply around the world. The Toyotas of the world are looking not only at the supply end, but also on the recycling end to bring materials back. They are rethinking the whole supply chain.
Things get a little more dicey among the middle-market and smaller firms. Some of them face tremendous risks for not thinking through the supply options for REEs. For example, I spoke at an event over a year ago on base metals markets. But peoples’ questions centered on REEs. It was obvious that REE price spikes were making these companies frantic and export price controls put tremendous strains on their businesses because they were not prepared with alternative sources.
It’s not a clean division by company size, but you see different levels of sophistication amongst companies in terms of how they handle supply risk.
TCMR: Do you believe REE prices will stabilize where they are now or is there room for more downward momentum?
LR: When I look at the REE trend line, I do not see a floor. A floor would be a flat line for a couple of months. Instead, we see a steady descent with a little upward blip in April and May. Since May, the numbers have continued to fall. I am not suggesting prices will move down again in September, but the fact that we have not seen a floor tells us that further weakness remains.
TCMR: Will the heavy rare earths (HREEs) find the floor faster than other REEs?
LR: That is possible. The place to look, particularly with HREEs, is their end-use applications: the wind energy industry or the magnets used in hybrid electric vehicles. Some of those end-uses look good; the U.S. auto market for electric vehicles seems to be holding its own from a demand standpoint. However, the energy tax credits for the wind industry in the U.S. are set to expire, which may decrease HREE use.
TCMR: Other critical metals are experiencing price corrections or price weakness—tantalum and manganese, for example. What is happening with their prices?
LR: A lot of what has happened with tantalum prices is the result of the Dodd-Frank Act. The Dodd-Frank financial reform legislation contains a clause that requires firms to show that they are not obtaining certain minerals from “conflict regions.” The minerals include gold, tin, tungsten and tantalum. And the “conflict regions” are not necessarily entire countries, but can be regions within a country.
Now that the rules have been published requiring third-party formal audits (e.g., attest services), the market for these metals will begin to stabilize. Uncertainty forced companies to stop sourcing these minerals from the DRC altogether. Purchasing behavior shifts as a result of policy changes, but now that the rule has come out, companies know where they can source materials and we suspect prices will stabilize.
A company can buy tantalum from the Democratic Republic of Congo (DRC). It just cannot buy tantalum mined in a conflict region within the DRC. Prior to the publishing of the rule, the company may have panicked and decided to source its tantalum from Brazil or China. That starts to create havoc with pricing. By changing companies’ behavior, Dodd-Frank has had an effect on tantalum prices.
Companies in search of safe supplies are buying forward or on contract, or they are buying less. There is no more spot buying from Joe Trader. That puts pressure on prices.
TCMR: Are there similar problems with manganese?
LR: To some extent, yes, although manganese is not a conflict mineral. It is, however, mimicking the REE markets because China also closely controls manganese supply. Because the U.S. is not producing a lot of these metals, we are beholden to Chinese policies. China of course wants prices to be higher.
TCMR: Do you believe the U.S. government should get involved in developing domestic supplies of critical metals?
LR: As a classic libertarian, I do not want government involved in much of anything. However, to the extent that some of these metals play a role in national security, the answer is yes. There is a compelling reason for the government to get involved. The U.S. needs to make sure it has clean lines of supply.
Domestic mining is one great solution because we are sitting on some of these minerals. But I also support identifying alternative sources of supply and opening up other channels. We should be creating closer private/public partnerships with junior mining firms in Canada and other friendly regions.
The government certainly could be more mining friendly. For example, American Manganese Inc. (AMY:TSX.V; AMYZ:OTCPK; 2AM:FSE) has mines here in the U.S. From a strategic and military standpoint, we ought to foster the development of a junior mining firm like American Manganese so it can get to market faster.
And it goes beyond manganese. The steel producer Nucor Corp. (NUE:NYSE) had to cope with complicated and uncoordinated rule making and different agencies in the permitting process at its DRI facility in Louisiana.
The federal government needs to create more streamlined rules. I do not mean we should skirt environmental laws—just make them more effective. Rather than taking a “why should we do this project” approach, the Environmental Protection Agency could shift its attitude to “is there any reason why we should not do this project.”
TCMR: Are there other companies that could benefit from government taking a more active role in fast-tracking projects or declaring certain metals strategic assets for development?
LR: The American Resources Policy Network uses a pyramid to illustrate the priorities for each strategic metal. Once you’ve located the metal in the pyramid, you need to look at the companies in the space. For example, Commerce Resources Corp. (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX) comes to mind as a tantalum miner. We have next to no domestic supply, but Commerce Resources is pretty far along in its process. It would benefit from streamlined rules and public/private partnerships. Dozens of other junior mining firms would also benefit.
That approach is popular in Canada and Japan. The Japanese government brought together junior mining firms from Canada with the largest Japanese end-users and paired them up, like a matchmaker. The U.S. government does not do that.
TCMR: The sector’s biggest player, Molycorp Inc. (MCP:NYSE), recently announced it will raise almost $600 million through equity and bond financing. But it recently missed the Street’s Q2/12 targets by a fair margin. What happened there?
LR: Wall Street’s expectations do not always reflect what is happening in the industrial market. The Street is unhappy because it invented earnings targets for Molycorp based on last year’s frothy price scenarios.
Molycorp is sitting on the most amazing book of business of any metal producer in the U.S. Everything it produces is booked out and sold going forward. Molycorp is in an envious position compared to other producers.
TCMR: Will Molycorp’s struggles keep investors away from the sector?
LR: That is a different question and the answer could be yes. Molycorp has been the golden child of the REE industry. If you look back a few years, the green economy has not quite developed as people had expected. In the last four years, natural gas production has been the biggest winner, not wind energy. With the expiration of the tax credits, people are not buying and building windmills in the same volume as they were two or three years ago. Other trends are not exactly on target either—the move to hybrid electric vehicles and small cars, for example. I think Molycorp is modeling what is happening with all these trends. But overall, it remains in a great position.
TCMR: Why should investors in companies that are developing critical metals assets or projects remain optimistic?
LR: Investors in general focus on the short term. When they see low REE prices, they hit the panic button. That is why they might be more negative on the sector.
We look at the world in terms of control of these key metals. Do we want to be beholden to one country, and a communist country at that? When you see countries controlling more than 90% of the global supply of something, to me that is a no-brainer. It tells me just how important it is to support these junior mining firms.
You also need to look at the domestic end-use need. Yes, we all like our iPhones and our iPads and such. But we also need REEs for weaponry, satellite systems and for our national defense. That is why I am focused on the long term. We need to stay optimistic and not be so sensitive to what the prices do next quarter.
Ultimately, the passage of these rules will create a more level playing field among producers and suppliers of these minerals. Legitimate and legal sources of supplies coming from locations outside of the prohibited conflict zone stand to gain (or have already seen some benefit) as companies have already started to shift supply sources. Those that would have received an immediate benefit will already be in the production phase of their projects. Newer projects may also see some lift, particularly if metal shortages ensue though we don’t see material shortages for these materials in the short term.
TCMR: Lisa, thank you for your time and your insights.
Lisa Reisman is co-founder and executive editor of the highly acclaimed metals website MetalMiner with over 36,000 monthly readers. MetalMiner provides sourcing and trading intelligence for global metals markets and publishes over 30 original pieces of content on a weekly basis. MetalMiner has been referenced in a wide range of publications including The Financial Times Blog, The Wall Street Journal Blog, CNN, Forbes, The Christian Science Monitor as well as American Metal Market and a range of metals trade publications. Earlier this year, MetalMiner launched its global metals pricing service, MetalMiner IndX(SM), which includes over 600metals price points in an easy-to-use web interface.