Energy & Commodities

Diversification Is Key to Energy Value

Posted by Frank Holmes & Brian Hicks of U.S. Global Investors

on Thursday, 30 May 2013 20:30

Calling the energy space underowned and a great value, Frank Holmes and Brian Hicks of U.S. Global Investors view shale oil plays as integral to an energy renaissance. Still, to hedge their bets, the two experts recommend diversification across the entire natural resources sector, including agriculture and food. In this interview with The Energy Report, they list opportunities in upstream oil and gas production, refining stocks, master limited partnerships and potash.

COMPANIES MENTIONED : CF INDUSTRIES HOLDINGS INC. : ENTERPRISE PRODUCTS PARTNERS L.P.   : HOLLYFRONTIER CORP. : HORNBECK OFFSHORE SERVICES INC. : KINDER MORGAN ENERGY PARTNERS L.P. : MARATHON PETROLEUM CORP. : PIONEER NATURAL RESOURCES CO. : PLAINS ALL AMERICAN PIPELINE L.P. : POTASHCORP. : SMITHFIELD FOODS INC. : THE MOSAIC CO. : TYSON FOODS INC. : WILLIAMS PARTNERS L.P.
……………
RELATED COMPANIES: BIG SKY PETROLEUM CORP. : CHESAPEAKE ENERGY CORP. : ENERGY TRANSFER EQUITY L.P.

 

The Energy Report: Frank, you wrote a contrarian manifesto of sorts at the beginning of May titled “A Case for Owning Commodities When No One Else Is.” It showed that energy is the most underowned class by a long shot. That situation was last seen at the end of 2008, just before a major rally in natural resource stocks. Is history repeating itself?

Holmes Chart A

Frank Holmes: To a certain degree, yes. The big difference is that America, thanks to the new introduction of fracking technology, is in a different position than the rest of the world. This is positive for America’s trade deficits and its costs of manufacturing.

Holmes Chart 1

The population of the rest of the world continues to grow. China and India account for about 40% of the world’s population growth. Both countries import energy. There is not enough water in China for it to benefit from fracking.

Brian Hicks: Water is a very large constraint in fracking, along with other geologic factors. Over the last several years, the game changer has been the development of shale plays here in the U.S. We now import less oil than China because of the amount of shale oil we have.

FH: The U.S. has had huge success in drilling and exploring for natural gas, followed by all this gas coming onstream. The inverse of that was when drilling rigs slowed down because gas prices were falling. The rig count went to an all-time low.

“Very few North American natural gas plays are economic at a price below $4/Mcf.”

People do not realize that looking for energy is like being a gerbil on a wheel—you have to drill continuously to replace production. When drilling slowed down to a fraction of what it had been, gas prices went up. What are they now, Brian?

BH: They fell as low as $1/thousand cubic feet ($1/Mcf). Now we are in the $4/Mcf range. We had a clear overshoot to the downside. Now we are back to a more normal level.

We are in the shoulder months for natural gas. If we see a warm summer, the gas price could easily approach $5/Mcf. Right now, people are in a wait-and-see mode.

The natural gas market looks constructive. There is more commercial usage. The rig count is down. If we start to see more demand on the horizon, natural gas prices could go back to $5/Mcf pretty quickly.

TER: Do you agree with the Porter Stansberrys of the world, who say the U.S. will be a gas exporter within the next few years, or do you lean toward the Bill Powers‘ school of thought, that wells will be decimated a lot faster than anticipated and there is no supply glut?

BH: I do not think we have a supply glut. We have had a severe oversupply for the last few years, but that has started to change. The change is reflected in rebounding equity prices and a more normal price range for natural gas. In terms of government policy, natural gas is considered a winner, with coal losing market share.

“We have seen a pretty good lift in upstream oil and gas producers here in the U.S.” 

Very few North American plays are economic at a price below $4/Mcf. To incentivize more capital investment in natural gas drilling and build a stronger rig count, we need to see prices sustained above $4, closer to $4.50–5. If gas falls below $4/Mcf and stays in that range, the rig count will continue to erode and supply will diminish.

This year’s somewhat longer winter shored up the overall inventory picture, which is more or less back to normal. If we have typical summer weather, we could enter the heating season with inventories slightly below average.

The new wells being drilled—the shale natural gas plays—come on at very high rates and decline very quickly. For some plays, questions remain as to where their flow rates will bottom out. Despite the strong supply response of this new technology, there are still question marks as to what the normalized rates will be.

TER: Almost 19% of your Global Resources Fund is in energy stocks: 9.98% in oil and gas and 8.8% in energy infrastructure. Which is the biggest growth area: exploration, production, transportation or services?

BH: We have seen a pretty good lift in upstream oil and gas producers here in the U.S. Internationally, a number of stocks are trading at compelling valuations that could go higher. On the service side, we have seen a good bounce year-to-date.

“The expansion of the U.S. crude oil supply has prompted a massive need for pipeline infrastructure.”

Refining stocks is an area we see as an inverse derivative play of new production in shale oil plays. The refiners are the beneficiaries of all of the crude coming on-line. They can source cheaper feedstock and produce refined diesel product at lower costs than their global peers. The U.S. is exporting large quantities of refined product. The margins of refining companies have expanded, and they are generating a lot of free cash, paying dividends and buying back stock. Thematically, we have enjoyed the refining space at the larger cap level because of that competitive advantage.

We also see that competitive advantage reflected in chemicals, another source of strength. Even more broadly, this energy renaissance is helping lower manufacturing costs. It has benefited the overall U.S. economy.

More upside potential remains in services. If the North American rig count expands, I think pressure pumping and drilling stocks will improve. We have invested for a number of years in an offshore theme: infrastructure, supply, manufacturing. A lot of capital is being spent in the offshore space off Brazil and in the Gulf of Mexico. That is another area that looks compelling.

TER: What are some examples of stocks in your portfolio that have done well in each of those areas?

BH: Starting in the refining space, HollyFrontier Corp. (HFC:NYSE) had a very good 2012, as didMarathon Petroleum Corp. (MPC:NYSE). Both benefited from strong midcontinent refining margins.

In upstream oil and gas production, we own Pioneer Natural Resources Co. (PXD:NYSE), which has a lot of opportunities in the Permian Basin. It expanded its overall resource by doing some lateral drilling, and is seeing big success there.

In the services area, I mentioned the offshore theme. Hornbeck Offshore Services (HOS:NYSE) has started to gain traction with increased drilling activity in the Gulf of Mexico. It is an offshore supply boat company. You are starting to see significant earnings power generated in the Gulf of Mexico because of increased day rates and more activity after the Macondo oil spill.

TER: You have four master limited partnerships (MLPs) in your fund. What role do they play in balancing your risk exposure?

BH: Our energy infrastructure allocation comprises mostly MLPs. You might think of higher dividend-paying, higher-yielding stocks as lower growth, but that is not the case with these MLPs.

The expansion of the U.S. crude oil supply has prompted a massive need for pipeline infrastructure. In the South Texas Eagle Ford shale play, we see tangible signs of pipeline takeaway infrastructure. We like investments that pay us a dividend every quarter—some between 5–7%—and that are growing at double-digit rates because of the build out taking place in MLPs. We think that could continue for some time.

With MLPs, you get the added benefit of a strong inflation-adjusted yield that will increase along with prices for the underlying commodity, and at a faster rate than consumer price index inflation.

TER: What are some of the best performers in the MLP space?

BH: Kinder Morgan Energy Partners L.P. (KMP:NYSE) has been a strong performer for us. We have owned Plains All American Pipeline L.P. (PAA:NYSE), but sold that after a big move.

Enterprise Products Partners L.P. (EPD:NYSE) is a major name in the space. Williams Partners L.P. (WPZ:NYSE) has done well for us also.

TER: You also invest in fertilizer, in the form of potash. Why are you bullish on agriculture? What is the best way to invest in that space?

BH: We are very bullish on agriculture and food from a long-term, thematic standpoint.

The overall theme is rising income levels in emerging markets, which increases demand for protein, whether from cattle or chicken. More protein requires more feed, so you can see demand for corn strengthening. Global population growth and per-capita income growth are also driving the demand for more food.

We have chosen to play that in two ways with companies that package and produce food and protein, such as Tyson Foods Inc. (TSN:NYSE) and Smithfield Foods Inc. (SFD:NYSE).

You also have the fertilizer stocks such as PotashCorp. (POT:TSX; POT:NYSE); CF Industries Holdings Inc. (CF:NYSE), which produces nitrogen, also used in fertilizer; and The Mosaic Co. (MOS:NYSE). Those stocks have done very well over the years, and should continue to do well given the macro theme.

TER: Is that your advice for contrarians looking to profit in the energy sector—diversification?

BH: This is an unprecedented time with respect to macro policy, considering the economic conditions in Europe, the expansion of the money supply in the developing world and central banks increasing their balance sheets. There are lots of crosscurrents. We have chosen to negotiate those crosscurrents by being diversified. Our resources fund is balanced across the spectrum of natural resources.

Within the energy sector, we have an allocation in all segments of the energy value train: refining, MLPs, upstream oil and gas production, domestic and international stocks. Having our hand in all of these areas helps us navigate volatility and capitalize on mispriced stocks wherever we find them.

We try not to make large, concentrated bets in any one particular area. This strategy makes sense whether you are an institutional investor or an individual investor. We look for sustainable, long-term themes—companies that can generate cash flow in bullish commodity environments or in a commodity environment that is not quite so bullish. In other words, we look for lower-cost producers with solid management teams.

TER: Frank and Brian, thank you for your time and your insights.

FH: Thank you.

BH: It’s been a pleasure.

Frank Holmes is CEO and chief investment officer at U.S. Global Investors Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company’s funds have earned many awards and honors during Holmes’ tenure, including more than two dozen Lipper Fund Awards and certificates. He is also an adviser to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Holmes co-authored “The Goldwatcher: Demystifying Gold Investing” (2008). Holmes is a former president and chairman of the Toronto Society of the Investment Dealers Association, and served on the Toronto Stock Exchange’s Listing Committee. A regular contributor to investor-education websites and a much-sought-after keynote speaker at national and international investment conferences, he is also a regular commentator on the financial television networks and has been profiled by Fortune, Barron’s, The Financial Times and other publications.

Brian Hicks joined U.S. Global Investors Inc. in 2004 as a co-manager of the company’s Global Resources Fund (PSPFX). He is responsible for portfolio allocation, stock selection and research coverage for the energy and basic materials sectors. Prior to joining U.S. Global Investors, Hicks was an associate oil and gas analyst for A.G. Edwards Inc. He also worked previously as an institutional equity/options trader and liaison to the foreign equity desk at Charles Schwab & Co., and at Invesco Funds Group Inc. as an industry research and product development analyst. Hicks holds a master’s degree in finance and a bachelor’s degree in business administration from the University of Colorado.

Want to read more Energy Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Interviews page.

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DISCLOSURE: 
1) JT Long conducted this interview for The Energy Report and provides services to The Energy Reportas an employee. She or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Brian Hicks: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
4) Frank Holmes: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
5) The following securities mentioned were held by the Global Resources Fund as of 3/31/13: HollyFrontier Corp., Marathon Petroleum Corp., Pioneer Natural Resources Co., Hornbeck Offshore Services Inc. Kinder Morgan Energy Partners LP, Enterprise Products Partners LP, Williams Partners LP, Tyson Foods Inc., Smithfield Foods Inc., Potash Corp. of Saskatchewan Inc. (PotashCorp.), CF Industries Holdings Inc. and The Mosaic Co. 
6) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent. 
7) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. 
8) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

 

Flake Graphite Prices Have Bottomed

Posted by Brian Sylvester - The Metals Report

on Tuesday, 28 May 2013 17:06

Growth potential among end-users and underinvestment on the supply side makes graphite an obvious go-long play, according to Simon Moores, manager of Industrial Minerals Data. China’s consolidation of graphite production plays a role in that scenario. Now is the time to look for responsible junior graphite miners that base their economics on current (lower) prices, says Moores in this interview with The Metals Report.

COMPANIES MENTIONED : ENERGIZER RESOURCES INC. : FOCUS GRAPHITE INC. : IMERYS : NORTHERN GRAPHITE CORPORATION : SYRAH RESOURCES LTD. : TALGA RESOURCES LTD. : ZENYATTA VENTURES LTD.
 

The Metals Report: Simon, the Chinese government says it is no longer willing to sacrifice the environment to mine and export commodities. You recently visited several graphite mining operations in China. Is this for real or just paying lip service?

Simon Moores: When you visit these mines and see how dated and wasteful some of their mining practices are, the environmental issues are apparent. But while this stance is partially to benefit the environment, it’s also about China wanting to retain raw materials and use them to manufacture higher-value products. China does have some leading graphite producers that are now investing in not only improving their products as well as their mining practices. This is something non-Chinese companies will have to keep track of.

TMR: If China is “going green,” what are the ripple effects that graphite investors in the West will feel?

SM: China’s “going green” is twofold. Green from the mining side means becoming more efficient with graphite mining and using less hazardous materials for processing the material. This will result in less material being available for export. Buyers outside of China have no choice but to eventually find supplies elsewhere.

From the market side, going green undoubtedly means expanding the electric vehicle market. The growth for batteries, especially lithium-ion batteries, could be explosive. This could transform demand for key raw materials, especially flake graphite.

TMR: What were the biggest takeaways from your visit to China?

SM: The biggest one was China’s willingness to control the industry. Its amorphous graphite industry has been consolidated. In Hunan province, the government consolidated close to 230 small-time mines into one company that now controls 50–60% of the production in that area. Another takeaway is that flake graphite is on China’s radar. Although it was the amorphous graphite mines that were consolidated, flake graphite, which is the bigger business, was being discussed.

BlackDragonGraphiteMine

The Black Dragon graphite Mine in China. Photo credit: Laura Syrett

 

TMR: Some people have speculated that the consolidation strategy in flake graphite could ultimately lead China to flood the market with graphite, much like it did in the mid-’90s, forcing some graphite miners out of business. You disagree. Tell us why.

SM: Today is a completely different situation from the mid-’90s. A generation ago, China was on its way up. It was getting its primary industries underway, growing as quickly as possible, taking in as much revenue as possible. Back then, China could mine cheaply, export cheaply, undercut everybody and get quick money. There was no competition. Now, China needs to move its economy to the next level, to the value-added level. It wants to compete with South Korea, Japan, Europe and the U.S. Cheap exports are not the way to do that.

Its challenge is to appease the mining companies through things like tax breaks on higher-value products to push these companies to develop value-added products such as battery-grade graphite and even the batteries themselves. The car industry is a perfect example. Ten years ago, China didn’t have one; now I expect to see Chinese cars on European and North American roads in the next three years.

TMR: China also has a source of flake graphite in North Korea. What is going on there?

SM: China has exported flake graphite from North Korea for the last decade from a mine that once was a joint venture between North and South Korea. It exported about 1,000 tonnes in 2012. The graphite goes to China, where it is blended with other products. This is a captive source for China that has historically been used internally.

TMR: Why is this Korean source being talked about more now?

SM: I am not sure. Our research indicates that China is not getting as much flake graphite from North Korea as previously thought. The problem is that bad information gets around really quickly, especially when it is free. Everyone thought North Korea was sending 30,000 tonnes per year (tpa) of flake graphite to China. We think it was actually less than 1,000 tonnes in 2012. North Korea was considered the fourth-largest producer in the world. If the data are wrong, that could indicate there is a lot less flake graphite in the market than people realized.

The same problem exists with India. The Indian production figures that are freely available for flake graphite indicated production of 140,000 tpa when, according to our research, in the last 12 months it was actually 35,000 tpa. If that is the case, the rest of world production could be well overestimated.

TMR: The price of flake graphite has been dropping since May 2012, mostly owing to softer demand from steel refractories and lubricant markets.How is this affecting the economics of flake graphite projects?

SM: Obviously, lower prices would have a negative effect on projects whose economics were done 12–18 months ago using the very high prices we saw then. Prices have come down about 50% on average from the 2011-2012 peak. On that basis, some companies are already reevaluating.

“Graphite buyers need supply security; the price volatility of the past five years has not been good for business.”

TMR: Does that invalidate their preliminary economic assessments and other economic studies?

SM: “Invalidate” is probably too strong a word, but the more responsible graphite juniors are revaluating their economics based on lower prices. Typically, these companies use price averages for their analyses. Predicting the future price of graphite price is always guesswork. Whether they take a 12-, 18- or 24-month average, it will be an average, and there will always be problems with that.

But understandably, miners have to use a price and this is where we come in, as the only independents pricing natural graphite.

NaturalGraphitePricetrends1

TMR: What is the current price of flake graphite?

SM: Using our most commonly quoted grade, the +80 mesh, 94–97% carbon, the price is now $1,400/tonne. It has dropped about 50% since the highs of 2011 and 2012.

TMR: What price do you predict through 2015?

SM: I think the industry has seen the bottom of graphite prices and should expect a rise from here or in Q3/13. Flake graphite prices have settled higher than expected. They remain 60% higher than pre-recession levels in 2008-2009. Other commodities, especially fluorspar, have crashed and hit all-time lows. Graphite has not done that.

TMR: What is the path forward for companies developing graphite projects?

SM: It depends on the company, whether it is coming from an industry perspective or, like most of the juniors, from a stock market perspective. From an industry perspective, the hope is to move away from dependency on China. Graphite buyers need supply security; the price volatility of the past five years has not been good for business. For a company producing refractories, raw materials are by far the biggest input cost, and price volatility does not allow for long-term business planning. For long-term supply security, companies are looking away from China.

TMR: Does that make graphite a go-long play?

SM: Yes, because the fundamentals will not change any time soon.

TMR: The other great debate in this sector is whether graphene is worth talking about as part of an economic thesis.

SM: I do not think graphene will ever be a volume business for any graphite producers. The value for graphite companies going into graphene, which only a handful are doing, is the research and development (R&D) and new technology that will allow them to produce graphene from natural graphite. This technology will be a game changer for materials science, and the graphite industry will be pretty irrelevant in terms of global impact.

Some companies are experimenting with carbon sciences, merging carbon materials into their applications. Companies will never make money from selling large volumes of graphite to make graphene.

TMR: Realistically, how far away are we from producing graphene from mined graphite?

SM: A few companies are pioneering that technology. Grafoid Inc. has an R&D agreement with Focus Graphite Inc. (FMS:TSX.V) to investigate and develop a graphene-based composite for electrochemical energy storage for the automotive and/or portable electronics sectors. They have just launched the world’s first trademarked graphene product—MesoGraf. But this material is still in the R&D phase.

The value of these companies is their research into the best methods to produce graphene and finding applications for it. No one really knows how to use it—the graphene pioneers have to build an industry and convince people to use it. Everyone now knows the theory, but the reality—the real world application—is something that will take time.

“There have not been any new mines opened in a generation. When you have this kind of growth potential, matched with underinvestment on the supply side, it doesn’t take a genius to work out that something has to change.”

I went to a graphene event last month, and it struck me that people are not worried about how to produce it, they are more focused on developing the market, on getting end-users to try to make products that include graphene.

TMR: What will be the next graphite project to reach production?

SM: If the press releases are anything to go by, I would say Ontario Graphite Ltd. (private). But it is hard for us to analyze because it is a private company that does not put out much information. We look less at the tonnages in the ground and more at the flake distribution of the deposit. Ultimately, these companies will need to sell material. Flake fines, or smaller-flake graphite, is the hardest to sell, while large flake the easiest.

TMR: Suppose, just for the sake of argument, that Ontario Graphite did add the 20,000 tonnes it says it will to the market. With TIMCAL (a member of Imerys [NK:PA]) already operating at a roughly similar production rate, could both operations continue at a profit?

SM: No, I do not think those two mines could both operate at that rate for very long—not in today’s market conditions. The good news is that the production rate at TIMCAL’s Lac des Iles mine has always been falling, while costs have been rising for a while now. TIMCAL has been looking at other options and other mines, at other graphite juniors. You can pretty much assume that Lac des Iles is on its last legs, which is good news for graphite juniors.

TMR: What does that news from TIMCAL mean for a company like Northern Graphite Corporation (NGC:TSX.V; NGPHF:OTCQX), which also has an advanced-stage graphite project in Ontario?

SM: It is great news for companies like Northern Graphite. The TIMCAL mine is a generation old. Northern Graphite has been around for ages under a different name prior, but I think that will pay off because of the amount of information the company has on that deposit. I think everything it’s been working toward will pay off.

TMR: As a graphite deposit, what does Bissett Creek have going for it?

SM: The large flake size is the key attraction. The grade is very low, but that’s not much of a problem with graphite mining if you can economically extract it. Northern Graphite has a much higher distribution of large-flake material, which is what the industry wants.

TMR: What are the next steps for Northern Graphite?

SM: The next step is to redo the economics. The company released more drill information and increased its confirmed resource data. From there, it is a matter of riding out the storm until the market cycle comes around again. When that happens, it will be one of the strongest junior graphite companies.

TMR: In our last interview you talked about Energizer Resources Inc. (EGZ:TSX.V; ENZR:OTCBB) and its Green Giant project in Madagascar. Can you give us an update?

SM: Energizer Resources is doing something very similar to Northern Graphite. It has its asset, its project and a lot of information gathered already. Energizer has to get the word out and go to the market to get funding. I think management is focusing on that, because there is only so much drilling and reporting public companies can do. In other news, Energizer is planning on making an agreement with the nearby Sakoa Coal Field project that would allow Energizer to purchase “over-the-fence” power and share infrastructure, reducing its operating costs.

Logistics is a major factor, particularly in somewhere like Madagascar. If the company can team up with a much larger operation, then it will be a compelling project.

TMR: Can you share a couple of other graphite stories that have compelling narratives?

SM: Talga Resources Ltd. (ASX: TLG) has been working on a JORC-confirmed (Joint Ore Resources Committee) graphite resource in Sweden. In terms of volume, it is smaller than deposits in Canada or Africa, but in terms of quality it is up there. I would look out for it.

Syrah Resources Ltd. (ASX: SYR) is the leading graphite junior in Australia. It also is developing the Balama graphite project in Mozambique. Syrah had a great 12 months when everybody else struggled.

Zenyatta Ventures Ltd. (ZEN: TSX.V) has made a lot of headlines in recent months and enjoyed a high share price when everyone else has suffered. The company has a unique project with very high carbon purities. Zenyatta has been coy about allowing others to test this so far. The data it has released is very impressive on the carbon purities front, but because it’s so unique, the question is whether or not it can be used in the same markets as flake or synthetic graphite. Only time will tell.

TMR: What thoughts would you leave investors with for the rest of 2013?

SM: Look at the long-term basics in the graphite industry. Look at where graphite is used. Traditional volume markets include refractories, which is the steel industry. High-tech uses include electric vehicle batteries and portable electronics. Very few raw materials have this balance.

Look at the supply situation. China continues to dominate, and there have not been any new mines opened in a generation. When you have this kind of growth potential, matched with underinvestment on the supply side, it should not take a genius to work out that something has to change.

TMR: Simon, thank you for your time and your insights

Simon Moores is manager of Industrial Minerals Data, a business that sets prices for natural graphite and fluorspar industries from offices in London and Shanghai. He has been reporting on, researching and analyzing the non-metallic minerals sector since 2006, when he joined London-based publishing and research house Industrial Minerals. He has specialist knowledge in critical and strategic minerals including graphite, lithium, rare earths and titanium. He led the research and publication of the market study, “The Natural Graphite Report 2012: data, analysis and forecast for the next five years.” He has chaired conferences and given keynote presentations around the world. He has also been interviewed by international press including London’s Times regarding Chinese control on world graphite production, and The New York Times with regard to rare earths after breaking the story that China blocked exports to Japan in 2009.

Want to read more Metals Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page. 

 

DISCLOSURE: 
1) Brian Sylvester conducted this interview for The Metals Report and provides services to The Metals Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Metals Report: Energizer Resources Inc. and Northern Graphite Corporation. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Simon Moores: I or my family own shares of the following companies mentioned in this interview: None. I personally or my family am paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent. 
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. 
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

 

 

Riding A Copper Horse

Posted by Richard (Rick) Mills: Ahead of the Herd

on Friday, 24 May 2013 17:39

As a general rule, the most successful man in life is the man who has the best information

My last article, ‘Give It A Doubt’ was about population growth, urbanization in developing countries and the one billion people predicted to join the consuming classes by 2025.

“One billion people will enter the global consuming class by 2025. They will have incomes high enough to classify them as significant consumers of goods and services…” McKinsey Global Institute, Urban world: Cities and the rise of the consuming class

Some of these new consumers are going to be Americans but the majority are in developing countries, they might not want to be Americans but they do want at least a modest piece of what we’ll call the American lifestyle, the cell phones, flat screen TV’s, a nicer apartment, a car or maybe a motorcycle, washer/dryer, a fridge, AC – the amenities of a modern society and all the necessary infrastructure that goes with a well functioning competitive modern economy.

But what if all these new one billion consumers were to start consuming, over the next 12 years, just like an American? What’s going to happen to the world’s mineral resources if one billion more ‘Americans’ are added to the consuming class? Here’s what each of them would need to consume, per year, to live the American lifestyle…

In 2010,  more than 38,000 pounds (19 tons) of minerals and fuels were needed per person to maintain the American lifestyle.

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Out of the 38,000 total pounds needed, 21,675 pounds were energy fuels  – the coal, petroleum, natural gas, uranium – required for transportation and to heat, cool and light homes and businesses.

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One billion new consumers by 2025. Can everyone who wants to, live an American lifestyle? Can everyone everywhere else have everything we in North America have?

The answer is a resounding NO!

“The data also show that nations such as South Africa and China will need to increase their average urban per-capita copper stock-in-use by seven or eight times to achieve the same level of services as the developed countries if they use existing technology.

Is there enough copper to meet this potential requirement?

Concern about the extent of mineral resources arises when the stock of metal needed to provide the services enjoyed by the highly developed nations is compared with that needed to provide comparable services with existing technology to a large part of the world’s population. Our stock data demonstrate that current technologies would require the entire copper and zinc ore resource in the lithosphere and perhaps that of platinum as well. Even a lower level of services could not be sustained worldwidebecause a continuing supply of new metal is needed to make up for inevitable losses in the recycling of the metal stock-in-use.

Substitution has the potential to ameliorate this situation, but one should not automatically assume that technology will produce a satisfactory substitute for every service at an affordable price and precisely when needed.

…anthropogenic and lithospheric stocks of at least some metals are becoming equivalent in magnitude, that world-wide demand continues to increase, and that the virgin stocks of several metals appear inadequate to sustain the modern ‘‘developed world’’ quality of life for all Earth’s peoples under contemporary technology…Do we really envision a developed world quality of life for all of the people of the planet…?”  R. B. Gordon, M. Bertram, and T. E. Graedel, Metal Stocks and Sustainability

Copper ETF

The U.S. Securities Exchange Commission (SEC) approved the first copper exchange traded funds (ETF) to actually hold the physical metal. J.P. Morgan and Blackrock received approval to each start copper ETF’s that will allow speculators to buy and hold copper in warehouses – up to 183,000 tons – the more shares investors buy, the more copper is taken off the market.

JPMorgan’s fund would store LME copper valued at up to $499,761,150. BlackRock’s iShares Copper Trust – Goldman Sachs owns the warehousing company Metro BlackRock intends to use to store its copper – would use up to 121,200 tonnes of copper as guarantee against shares in its fund.

As of writing the two funds would equate to 30 percent of current copper stocks in LME-bonded warehouses.

Credit Suisse/Glencore, Deutsche Bank and Citigroup are also looking at physical copper ETFs. Goldman Sachs signed a copper off-take agreement with Spanish miner Emed in 2012.

“ETFs…can immediately take metal out of the market, potentially leading to physical scarcity. If investment in ETFs proves to be highly responsive to news, such as an earthquake in Chile for example, a relatively modest supply disruption could turn into a much larger one, directly impacting on the ability of consumers to buy the red metal.” Bloomsbury Minerals Economics’ Copper Briefing Service

Future Production

Some of the major copper projects either going into production or continuing to ramp up are:

  • Buenavista, Mexico
  • Antapaccay, Peru
  • Los Bronces, Caserones and Esperanza, Chile
  • Salobo, Brazil
  • Konkola Deep, Zambia
  • Morenci, U.S.
  • KOV and Tenke Fungurume, Democratic Republic of Congo (DRC)
  • Oyu Tolgoi, Mongolia

 

Two of the world’s largest existing mines – Escondida in Chile and Grasberg in Indonesia – should start seeing higher output again.

In April of 2013 the Chilean Copper Commission (Chile is the world’s largest producer of copper) predicted global demand for copper will rise by 1.4 percent this year to 20.829 million mt. Global mine production will rise 3 percent to 17.526 million mt to create an estimated world surplus of 68,000 mt, rising to 89,000 mt in 2014.

There are many reasons to be bullish on copper

Global surpluses of 68,000 mt in 2013 and 89,000 mt in 2014, are, in the world of copper supply, fairly tight conditions. Perhaps even more significant, no one is calling for much in the way of a price decrease.

Why are analysts not calling for much of a price decrease? Well, many mines do not come online on time and the disruption rate, the amount of promised copper that fails to materialize is now as high as 8 percent – operating mines can suffer production stoppages/slowdowns or move into lower grade ore.

A long term structural trend became evident in the industry in 2012 – shortfalls in targeted production were characterized by a fall in grades and recoveries rather than unexpected disruptions.

Chile produces a third of the world’s copper and has seen a seven fold increase in energy costs over the last ten years, also because of a severe water shortage in the high desert, where most of the country’s major copper mines are located, water must be pumped from the ocean to almost 800 meters above sea level and then pumped hundreds of kilometers to the mines, of course the seawater must also be desalinated.

CRU estimates Chile’s copper production costs have risen 60 percent over the last seven years compared to a world average of 30 percent. Chile’s state copper giant, Codelco, has seen a 57 percent cash cost increase between 2010 and 2012.

Chinese end demand is growing and consumer destocking has ended.

Many of the world’s largest mining companies have delayed or outright halted expansion plans – BHP Billiton, the world’s largest miner, has said it will not spend the $80 billion slated for expansion by 2015.

There is a lack of good substitutes, plastic piping replaces copper piping but this has been going on for years, aluminum can replace copper in electrical cables but more is necessary for the same effect and connections are poor which can cause fires, this has lead to municipal building codes actually banning aluminum from being used for residential wiring.

There has been a recent surge in warehoused copper stocks, the increases reflect incentives offered to store metal in those locations. Glencore owned Pacorini has been offering incentives of more than $100 to deliver copper to their warehouses. These incentives have drawn usually unseen stocks into the public’s eye perhaps distorting impressions.

Perhaps the biggest reason to get bullish on copper are the massive costs and risks involved in finding and opening new mines in often geo-political risky countries where a miners social license to operate is shaky at best.

Copper prices need to be significantly above marginal cost, in other words, prices need to stay high enough to provide miners with an adequate return on their investment for building today’s much more expensive and riskier new mines. There is also a significant additional cost in keeping production constant year over year.

If copper does not stay well above miners marginal costs the much needed new mines will not be build.

Conclusion

Global growth is on the path for continued improvement in 2013 – metal consumption will expand. Excess copper stocks are being taken up by traders, warehousing companies and soon ETF’s.

Copper, one billion new consumers, over 800 million people to be born between now and 2025 and a massive current, and future, infrastructure deficit should all be on our radar screens.

Is an investment opportunity in copper on your radar screen?

If not, maybe one should be.

Richard (Rick) Mills

rick@aheadoftheherd.com

www.aheadoftheherd.com

Richard is the owner of Aheadoftheherd.com and invests in the junior resource/bio-tech sectors. His articles have been published on over 400 websites, including:

WallStreetJournal, USAToday, NationalPost, Lewrockwell, MontrealGazette, VancouverSun, CBSnews, HuffingtonPost, Londonthenews, Wealthwire, CalgaryHerald, Forbes, Dallasnews, SGTreport, Vantagewire, Indiatimes, ninemsn, ibtimes, businessweek.com and the Association of Mining Analysts.

If you’re interested in learning more about the junior resource and bio-med sectors, and quality individual company’s within these sectors, please come and visit us atwww.aheadoftheherd.com

***

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.

Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified.

Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.

Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

 

 

Uranium – a Hot Commodity

Posted by Casey Research

on Friday, 24 May 2013 1:44

Today there are no fewer than 60 nuclear plants under construction in 14 countries, with another 163 planned and 329 proposed.

Many countries without nuclear power are on the cusp of building their first reactors, including Vietnam, Turkey, Indonesia, Egypt, Kazakhstan, and several among the Gulf emirates. And while many countries with nuclear reactors took a moment to pause and reassess safety standards in light of the Fukushima disaster, almost all have reasserted their support for nuclear power as a major component of their energy strategies.

130515opedimage1Uranium is simply the only fuel right now that can reliably produce large amounts of electricity without the release of greenhouse gases and other hydrocarbon pollutants.

Demand is clearly ramping up, and the world is already short on uranium. In 2011, world industry consumed 165 million pounds of U3O8 but produced only 143 million pounds.

Indeed, the world hasn’t produced enough uranium to meet demand for some two decades.

Secondary supplies have been filling the gap to date. For example, since 1993 the Megatons-to-Megawatts agreement between Russia and the United States has been working toward the goal to recycle 500 tonnes of highly enriched uranium (HEU) from Russian nuclear weapons into the LEU that reactors use to produce electricity. But remember, that deal is set to end next year.

The end of Megatons-to-Megawatts will eliminate 24 million pounds of uranium supply just as demand starts surging. The World Nuclear Association predicted global uranium demand will have increased 33% by 2020, and will then climb almost that much again in the next 10 years.

Those are huge increases. In 2011, the world consumed about 70,000 tonnes of uranium. By 2024, we are expected to need 100,000 tonnes. Can production keep up? Not likely.

If every potential uranium mine on the horizon were approved, built, and commissioned on schedule, supplies might just keep up with demand. But current uranium prices are rendering many potential mines uneconomic, and global economic uncertainty is making it very difficult for uranium companies to obtain the cash they need to build mines. It all adds up to one conclusion: a supply gap is looming.

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…..read the entire essay HERE 

Soros Buys the Miners!!

Posted by The Daily Bell

on Wednesday, 22 May 2013 12:32

imagesGeorge Soros switches from physical gold to gold stocks and that is very bullish for gold prices … Ever the investor who loves to confuse markets – remember how his description of gold as the ‘ultimate bubble’ confused some folk as he bought the metal himself – George Soros has done it again with his gold ETF sales. Today the global financial press is awash with reports that Mr. Soros has sold gold again. True. But he has reinvested that money in a far more risky investment in gold miners whose performance is leveraged against the gold price. They go up faster than the gold price and they fall further when it comes down too. – GoldSeek

Dominant Social Theme: Gold, the barbaric metal.

Free-Market Analysis: We learn in this short article that billionaire investor George Soros is betting on mining stocks. “Very bullish,” for gold, the article tells us. Here’s more:

…..read more at TheDailyBell.com HERE