Sunday, December 31, 2006
Saturday, December 16, 2006
|Largest Weekly Spot Uranium Price Jump in History|
December 16, 2006
By Julie Ickes, Editor of StockInterview.com
‘Feeding Frenzy’ Sends Weekly Spot Uranium Price to Record $72/Pound
The TradeTech Weekly Spot Uranium Price Indicator has soared
by more than 97 percent during 2006.
As StockInterview.com predicted a week ago, uranium sellers got what they were expecting - a price bump. For the week ending December 15, the weekly spot uranium price indicator jumped by $7/pound, or more than 10 percent, to $72/pound per pound U3O8. According to Treva Klingbiel, editor of Nuclear Market Review, this was “the single largest increase reported since NUEXCO began publishing prices in 1968.” TradeTech posts the weekly spot uranium price change on the company’s website – http://www.uranium.info
The price increase resulted from a number of bids for an offering by a U.S. uranium producer of 260 thousand pounds of U3O8. According to Klingbiel, “The producer received multiple bids with the winning bid at, or very near, today’s Uranium Spot Price indicator of $72/pound.”
At least nine buyers remain active in the market seeking about 5 million pounds of U3O8, according to TradeTech, which releases the weekly spot uranium price indicator through widely followed industry magazine, Nuclear Market Review. Klingbiel reported this week’s auction of uranium created a ‘feeding frenzy’ among buyers, writing, “Meeting this expectation, competition was indeed fierce, as buyers exhibited a willingness to pay a strong premium in order to purchase material at a fixed price.”
Looking ahead, one U.S. utility hopes to secure 3.5 million pounds for delivery in 2012. A non-U.S. utility seeks to secure 10 million pounds for delivery starting in 2009. Another two non-U.S. utilities are attempting to purchase more than five million pounds in the long-term market, starting as early as 2009. Fifteen more utilities are evaluating long-term purchases for more than 35 million pounds for delivery between 2007 and 2020. Only one U.S.-based seller is currently evaluating bids for 1.2 million pounds of uranium for delivery as early as 2008.
Clearly, the spectacular price rally of 2006 will continue into early 2007 as the impact of the flooding at, and subsequent delays of uranium production from, Cameco Corp’s Cigar Lake project in northern Saskatchewan. Because of the past two week’s news reports, there was concern about the Department of Energy future auctioning from uranium inventories. These auctions may not begin to take place until mid 2007.
Thursday, December 14, 2006
This week, the company announced a definitive agreement with Jiangxi Copper, the largest copper producer in China. They will run a 50:50 JV venture to build and operate a plant currently under construction, with licensing terms negotiated for an additional five plants. The initial plant was designed to produce 1.5MM - 4.5MM pounds of copper/year. Operating costs are expected to be less than $0.60/pound.
The stock is now at an all-time high and looks like it is ready to make a move to a new level:
Tuesday, December 12, 2006
Sunday, December 10, 2006
April 1, 2006
Topic: A Look at the Gold Market From the Perspective of a Geologist
Note: With the benefit of hindsight, we can appreciate this interview more. We know now what Keith Barron must have known as he gave it, that Aurelian was on the verge of announcing one of the most significant exploration discoveries in many years. In this interview, Jim Puplava solicits Dr. Barron’s thoughts on everything from geology and exploration to market psychology and what to expect in the course of the gold bull market.
Jim Puplava: Well, we’re definitely in a bull market. Over the past five years we’ve seen the price of gold go from a low of $255 in April of 2001 to today’s record on Thursday of 588.10. We’ve seen silver prices go from $4.06 to $11.70. And the gold index, the AMEX gold index has gone from a low of 41 to 340. But this bull market is going to be different from previous bull markets in the past. And that’s mainly having to do with supply. To talk about that issue, joining me on the program today is Dr. Keith Barron, a Director of Aurelian Resources.
And Keith, I want to go back to a study that was done a couple of years ago that was done by a geologist by the name of Ralph Bullis, and he took a look…in many ways he reminds me of Matt Simmons, looking at all the world’s producing oil wells, he looked at all the world’s gold deposits. Either they were in production, pre-feasibility or discovery stage. And I wonder if I might start our discussion there, because it was a very telling study.
Keith Barron: Yeah, it certainly was. Actually there’s been a couple of other studies done. There was one by the BHP group too. Basically examining the number of deposits, the number of new discoveries that have been made, well, not new discoveries, but discoveries made over the last fifteen years, what their sizes are and really the consumption levels, the draw down of various deposits as we see in production scenarios today. Production of the major companies is pretty healthy and if you want to replace those deposits, a lot of people out there in the investing community don’t realize that a mine is what we call a “wasting asset”. Meaning that, when you start mining it from day one, eventually it’s going to run out. And these things always do run out. Some of them carry on for a hundred years like Homestake, but the typical life for a gold mine is about eight years. And that’s pretty much the industry norm.
And there really haven’t been a lot of big, monster deposits found in the last five, six years. And, you know, some of the huge ones that we had back in the early 90s, like the Pierina deposit which ended up being 12 million ounces, Yanacocha, which is huge, that’s like, I think that’s well over 10, maybe getting up to 15 million ounces, maybe even larger than that, they simply haven’t been found in the last five, six years. I think we’ve had three discoveries that have been in the 5 million ounce realm. And that’s it. A lot of that’s got to do with the fact that there was very, very little exploration activity out there when the gold price was down in the dumps, in the $250-260 range, and it really had to spike up above $350, $375, $400 to start to jump-start that cycle again.
JP: I want to come to that because we’ve spent a lot of money in exploration over the last five years but despite the amount of money that’s been spent on exploration, we haven’t had these major discoveries. In other words we haven’t found a North Sea or a
KB: Well that’s certainly one component. And part of that access is a profusion of new national parks and new wildlife sanctuaries and also jurisdictions in the world where the chances are if you make a discovery you’re going to simply come up against a lawsuit by a number of environmental groups. But all that being said, I think when this cycle restarted, and it really did start to take off around 2003, we saw a lot of junior companies simply going out there and picking up old discoveries, some really rather tired things that have been kicked around for a long time because they could quickly and easily do it and make some coin in the marketplace.
It does take a number of years of sustained exploration activity to work these things up and to find new deposits. And I think we’re starting to see things bear fruit now. But all that being said, I do think that as far as the industry goes, the low-hanging fruit is long gone. I think that a lot of the easy parts of the world have been walked over, they’ve been looked at numerous times it’s getting more and more expensive to find these deposits. Companies have to go deeper. They have to use sophisticated techniques like geophysics and geochemistry to find these things. And it’s simply not a case of walking over the ground and stumbling over a quartz vein full of gold and yelling “
So I think that as we go forward and we look towards the future in the gold mining and silver mining industries, I think the companies are going to have to start to get a little more realistic about what their expectations are. And in the latter couple of years we’ve seen a lot of the major companies, a lot of the senior producers up their, I guess, qualifications for a deposit that they want to get interested in. And when I started in this business back in the early 80s, companies were looking at one million ounces. Soon thereafter it became two and then it went to three. And for a lot of them now, the threshold’s at five. Five million ounces or they’re not going to play. Well, five million ounces…those types of deposits are scarce as hen’s teeth [laughs]. And certainly the record of discovery over the last five, six years is bearing that out.
So I really do think that the companies are going to have to set their sights lower and start being a little more realistic and even start looking at deposits that are one million ounces or perhaps even smaller. You know, quite often the companies are fixated on the number of ounces in the ground, but you have to think about quality ounces, too. And there are a lot of deposits out there that are quite lucrative that are only a million ounces. They’re high grade things, they may not have a long duration mine life, but nevertheless you can make a nice tidy sum of money at them. And I think really that’s where the future of the industry’s headed.
JP: You know, you’ve been in this industry for twenty-five years. You’ve worked at the majors such as Goldfields. And you just made a comment that when you were in the industry, a one million ounce deposit or one million ounces of production, I mean, if you take a look at Newmont’s production going back to 1988, it was under a million ounces a year.
KB: Um huh. Yeah, indeed. Well, you know, the way that it works in the market place these days, if you’re…the larger you are, the more money you attract from the funds and that’s one reason why these companies have very much been engaged in mergers and acquisitions and gobbling each other up. Because size in the resource sector really, really does matter. So, the kingpins, the Newmonts and the Barricks of the world are the ones who are going to attract the attention from the investment bankers. And not so much the smaller players. So that’s one reason why…you know, to significantly grow your ounces on a percentage basis, you have to go out and acquire these large reserves.
So, really what we’ve seen over the last couple of years now has been a shift away from actual exploration, to acquisition. And companies have gone out and they’ve started to gobble each other. And we’ve seen that, we saw Homestake go. Just very recently we saw Placer now go. And I think this is a trend that’s going to continue, if these senior producers continue to be fixated on having to grow their resource base by huge increments.
JP: I want to contrast today’s gold market with what went on in let’s say the late 60s and the 70s, because during that period of time there was no shortage of supply, the
KB: Well, it’s really quite interesting. There’s a lot of difference now in the market place from what we saw back in those days. And a lot of it has got to do with the fact that the price of gold is quoted in US dollars. So if you’re a producer in South Africa, for instance, you have to pay your costs, your labor costs, in Rand and the Rand is appreciating against the US dollar, meaning it’s going up in US dollar terms, and the gold price is not going up in US dollar terms as fast, then you’re going to end up being a loser. And some of the companies working in foreign jurisdictions like
I think that there’s some very interesting stuff going on now, though. And I think a real big trigger as to what’s happening in the market place has been this latest…this recent acquisition of Virginia Gold by Goldcorp. And I don’t know if you’re familiar with this Jim, I’m sure that some of your listeners are, but this is a real significant, maybe even a bellwether event, because Virginia Gold had a deposit in
[Note: On September 12, 2006, Aurelian Resources appointed Andre Gaumond, President and CEO of Virginia Gold to their Board of Directors.]
Now there was a lot of rumor on the street, a lot of very good drill holes, a lot of very good results that came out and people were thinking it looked like maybe four million ounces or so. And it got snapped up before there was actually a number put to it. And I think this is very significant. This is telling us that some people in the industry realize the problem here, realize that these things, these big deposits are scarce as hen’s teeth and if they get wind that a little company is on to one of them, they’re going to get snapped up early. I think this is really, really interesting.
JP: And that’s the surprising thing. I get reports, I take a look at gold production, Keith, I take a look at all the majors, what’s happening to their production. I’m taking a look at all the rising costs, declining production, declining profit margins and then I’m also looking at, just as I am in the oil industry, you look at replacement of reserves and how many of these large majors are replacing their reserves every year? They’re not.
KB: They’re not at all, in fact they’re reserve base, their profile is declining for most of them. There’s not just currency considerations, there are huge costs, especially due to fuel and we saw the gold price spike up today but we also saw the oil price spiking up today. So, you know for a producer, it’s expensive to produce. Diesel, gasoline, lubricants, rubber tires which are made out of petrochemicals. All of this stuff is getting very, very expensive and it adds to the cost of production.
JP: You know another aspect to this that I see is the human element. And that is, a shortage of qualified people: geologists, I mean, who wanted to go in the gold-mining industry or the mining industry in the 90s? If you were studying, you wanted to become a programmer, get in to technology or go on Wall Street. How many people wanted to go dig for oil or for that matter, copper or gold?
KB: Well, I did, but I was one of the few [laughs]. But, I taught in the university for a little while, and I remember back in the late 80’s there were very few students around. There were lots of students being openly courted by…to go in to environmental science and things like that. Geology just wasn’t sexy enough. And there’s been a lot of comment in the last year in the industry that you know, 2010, 2015 we’re going to have real problems in the industry because we’re just simply not going to have the personnel there.
JP: If you were advising somebody on a career, would you tell them to go in this industry, today? Because the very same things you’re saying about the mining industry people in the oil industry are echoing the same sentiments.
KB: Well, yes, that’s true. And both industries, as you know, are very cyclical. And it’s not for everyone’s palate, but they also can be very lucrative and very exciting. I just love it. I think it’s great!
JP: Keith I want to move on to another element about this bull market, because everybody’s talking about central banks are tightening, but I looked at the money supply globally, we’re a world run on fiat currencies. European money supply growth is over 8% and at the least the last time they reported M-3 growth here in the
KB: Well, I think that’s certainly the case and gold and silver for thousands of years have been regarded as a safe haven. And we’ve seen many cases in history where countries have inflated their money supply right away to nothing and the ones who had gold and silver hard assets were the ones who ended up surviving the crisis very, very well. In fact, some of them did extremely well. You know during the Great Depression in the
I think, you know the sentiment in the
You know, the
JP: I think that explains why we’re seeing gold break out against most major currencies. Keith, I want to come back to gold exploration, because you’re a geologist and that’s your expertise. Are there places in the world today that maybe we don’t have access to that we know there’s gold or silver, but we just don’t have access to because of political reasons or environmental reasons. In other words are there spots out there?
KB: Oh, I’d say there’s lots of spots. I’d say that there’s lots of places, say in the
JP: [laughing] I wonder why.
KB: I wonder why, yeah, ha ha. Places with extreme political risk. You know, as time goes by, more and more of these frontier areas are going…they’re being investigated, it’s getting harder and harder to find places that haven’t been touched before.
JP: Another aspect to that is I’ve been told today that realistically, where, let’s say if you were to go back two decades ago, it might have taken five years or maybe even less from the time of discovery to the time of production. I am told by people in the industry today that you’re even looking at closer to ten years today. So, even if we were to go out and discover a North Slope or a
KB: Yeah, I think that’s certainly the case. You know, this is not the 1960s, there’s a high level of environmental consciousness out there, not just from the environmental groups, I’m talking about from the actual companies and the people who perform the work, such as myself. We’re all aware of having to protect the environment and do things in a responsible manner and this kind of stuff takes time.
Also, in the late 90s, we did live through a very large fraud that was perpetrated in Indonesia and now there have been all kinds of safeguards put in place on various countries, Australia, Britain, Canada, the US, their mining industries are all much more heavily regulated. And in terms of going through the various stages of exploration and reporting and raising money and doing that kind of stuff, companies have to be a lot more careful, they have to be a lot more professional in their work, they have to record things a lot better, and keep better records and all that stuff takes time, too.
Like for instance, talking in terms of how long it takes to get a big gold mine up and running, Barrick has a fabulous deposit called Pascua Lama which is right on the border between Argentina and Chile. And to get at it, they’re going to have to move a glacier. Now this has been a point of contention with several different groups, I understand that in the engineering sense it’s not a huge thing that has to be overcome. But obviously this kind of thing has to be done with some sensitivity and it needs comment and discussion from the various parties who are stakeholders in this kind of stuff. And all this does take time. So I think it’s going to take a number of years before we see that one getting up and into production, even though it’s been known for quite some time now.
JP: You know, another aspect about this market, we’ve talked about the majors not being able to replace their reserves, we’ve talked about that there just aren’t that many five million ounce plus gold deposits out there. Yet, you have people like for example, you have the head of Goldfields talking about we’re revising our acquisition targets and we’re looking at five-million ounce properties plus. Does he see something or know something that none of us are aware of?
KB: I doubt it. He might be taking a little bit of flack from the operations in
JP: Let’s take a look at the exploration side. Let’s say I’m running a gold fund, a gold account and I want to send you out on a project to look at it before I finance it or before I invest in it. Why don’t you take us through, from your perspective, what do you look for, as a geologist, if you’re doing due diligence on a property?
KB: Well, I would say, one of the most important things that I always look at first, are the people who are involved. And I’m not just talking about the management who are in the head office, I’m talking about people on the ground. I like companies that have their own personnel, rather than employing contractors or contracting firms. Because, quite often people who are on the site, if they work for the company, they’re probably getting rewarded with some stock options, they have a vested interest in making it work and they all work a little bit harder, I think, than maybe disinterested contractors would. So I think that’s important. It’s very important to look into their backgrounds and at their experience and see where they’ve been and how many years they’ve spent in the business.
And then, looking at the project itself, there’s always…location is an extremely important thing, the jurisdiction where it is, political jurisdiction, infrastructure, how close is it to sources of power, roads, air strips, things like that. What’s the availability of skilled personnel in the country? Can you find a source of workers for the mine nearby or do you have to bring them in from another country? That’s very important. I know there are some companies working in
So that’s a real important consideration. A lot of people e-mail me and they ask me about political risk and they say “You know, we’d be a lot happier if you had a project that was in the
JP: Keith, what are you going to see if you were going out to view a project, you just talked about the company having its own personnel, environmental restrictions, things of that nature, but let’s that I’m an analyst or a newsletter writer, I’m not a geologist, I’m going out to a project. What are thing you’re going to pick up on that perhaps, I wouldn’t see?
KB: Well, most of the analysts that I run into actually do have a geological background. They might have put a couple of years in to the business before going in to the banking side or the investment side. So a lot of these guys certainly know the buzzwords and the right questions to ask. I guess there are a number of things. I know certainly I can go through a press release, there are often things that are not implicitly said there are sometimes errors of omission [laughs] in press releases.
JP: What we don’t tell you that you don’t need to know, huh?
KB: That’s right. And that’s a…well, here’s a for instance and this is something that I ran into back in the late 90s. It was a company that had a copper deposit in
Now that’s very, very important and very significant for some of us in the business because we know that’s about the limit that you can go on an open-pit mine. And there’s not going to be any company in the world that’s going to move 450 metres of waste rock which has no value, to get at the goodie zone. So really, that property was quite valueless. And there were a bunch of guys who were bagging the market on it. So, you know, we call these things sins of omission, and they’re out there. Certainly the lay person, if you read enough stuff and you make yourself familiar with the business, you can pick these things up. You do not have to be a university trained professional to pick up on this. Really a lot of companies have cleaned up their acts since the mid 90s, early 90s, there’s not much of that kind of stuff that goes on, but every now and then I do see things like that.
JP: You know, one aspect that has struck me, Keith, is I believe in this bull market that there the juniors are going to be the place to be. I mean, that’s where you’re going to see the growth. Whether it’s a junior producer that can go from, I don’t know, 25, 50,000 ounces of production to maybe a hundred, two hundred. Or maybe a 200,000 ounce producer that goes to 500. What are the key things that you would be looking at if you were investing your own money in a junior.
KB: Well, I think one very important thing is blue sky. There are a number of projects out there that have been shopped around numerous times, have had lots and lots of exploration done on them and really they’re at a stage where there’s not much blue sky potential in them. Meaning there’s not a lot of expectation that they’re going to come up with something that’s going to be huge and big and new and not seen before.
Let me just back track a little bit, let me back track here. A company, XYZ Company goes in to
JP: What about development plays, where you take a company that perhaps is drilling out and developing a piece of a property, they have a sizable ore deposit. They also have a large enough land package so they’ve got other discoveries that they’ve made on the horizon. In your mind, what make a company attractive for a takeover?
KB: Well the scenario you just discussed was exactly what Virginia Gold was when it got taken out. It was a company that had been very successful finding gold and base metals in various places. And they had one exceptional project that looked like it was going to be a multi-million ounce producer and that’s why it got scooped up. So, a great scenario, great package of land, lots and lots of blue sky and it’s an area that Goldcorp can be looking at for years. Or, you know, Goldcorp could choose to, you know, get something to a certain stage and vend it off or vend an interest to somebody else and develop it with partners. It gives companies a lot of freedom of choice and a lot of ways to move.
JP: Keith what about scenarios where you have a deposit that is a long-life deposit or that is a sizable one, but it’s also in a more politically stable area of the world? For example, I would be somewhat reluctant to go into
KB: Well, certainly those are extremely prospective areas. Parts of
But there are other jurisdictions in the world, right now I’m involved in
JP: Keith, you’ve been in this business, what, twenty-five, thirty years now?
KB: Um-huh, twenty-five.
JP: What would you say is the most important thing that you’ve learned from a geologist’s point of view?
KB: Oh, boy! [laughs] There’s so many different things…
JP: Top of the list…
KB: Always keep your mind open to new things. We’ve seen various things…since I started in this business, there’s been a lot of discoveries of different commodities made in parts of the world that we thought didn’t have any potential. Like for instance, the diamond deposits found in the
So, like for instance, right now there are a lot of people interested in uranium deposits. There has been no exploration done, really, on uranium from really the early 80s. And there’s a lot of new concepts and new techniques, there’s something called in situ leach that was never used, back in the 80’s, that’s revolutionizing the uranium extraction industry. And we could very much see similar sorts of things shaping up at some point for the gold and silver industries. Who knows what’s on the horizon?
JP: Alright, that’s from a geological point of view. What about from an investment point of view?
KB: Well I think that this is a time that we won’t see for many generations to come. I think that the stars have aligned themselves to such an extent…I really do think that the huge gains that were made in the gold and silver markets back in ’73 and then again in ’79, ’80…all of that is going to be surpassed. I think there are a lot of people out there, a lot of investors now who are much more comfortable with investing money in the stock market, there are more players in the stock market than ever before, a higher proportion of the population. And because really due to globalization and the Internet and technology, you’re able to…for instance, I can invest in South African gold companies, I can invest in companies in
I think what we could see here, and I’ve talked about this on my own web site a couple of times, I think that what we could see, if this market really starts to break out, you could see something that resembles the Dot.Com boom in the gold and silver market. Right now there’s a very, very small percentage of the investing public that have caught on to the massive rises and gains in the gold and silver market and you know, it’s not being broadcast by BubbleVision on the TV, but it is getting around by word of mouth and certainly by your program, Jim. And the word’s getting around and it’s going to spread like wildfire. And when this thing really starts to take off, I think you’re going to see some massive gains in the market place.
JP: You know I couldn’t agree more. What really surprises me, Keith, if you take the AMEX gold index, which bottomed in the first part of 2001 at 41, on the day you and I are talking on Thursday, the AMEX gold index hit 340.81. That’s an increase of 731%. In the last five years. Now imagine what they would be doing on CNBC if tech stocks were up 731…I mean, Cramer would be doing headstands.
KB: He certainly would! He’d be shouting even louder than usual. It amazes me that this stuff doesn’t happen. But, unfortunately it’s going to have to keep moving through cocktail chatter and people you meet on the bus and listening to great programs like yours and things like that and that’s how the word’s going to have to get out, because the mainstream media doesn’t seem to want to carry this stuff. In time they will. In time it’s going to be so big and so hot that it’s going to be impossible to ignore. And then they’re all going to start getting on the bandwagon. In fact, they’re going to start fighting for position [laughs] to report these various things. I really do think that’s going to happen. I was around in ’79 and ’80 when gold went up to eight hundred bucks and silver took out fifty bucks. I just think to myself “Good Lord, what would happen if you had the Internet around, back in those days?” And I think that kind of stuff is headed our way. I think you’re going to see some of the valuations of these companies just take off.
JP: You know, the thing that strikes me about that, one of the turning points in my career, was watching what happened to the stock market from 1982 to 1995, you made good money if you were investing in the stock market. But the final one third, when the public came in, 95% of the money that came in to mutual funds came in from ’95 to 2000. And what I can’t help but think about, Keith, is look how small…I mean, we could take and roll up all the world’s gold mining companies and they would be less than the value of General Electric or Microsoft. So imagine what happens when we get to Stage Three in this bull market?
KB: Yeah. And a lot of people have talked about that, that’s what they call in markets the manic stage. And it’s going to get there. And that’s the stage when you’re going to be having a sandwich during your lunch hour and you’re going to be overhearing people talking about the gold price. You’ll hear it talked about on the subway, you’ll hear about it in the elevator, going up to your office. And this is what’s going to happen. And I think it’s coming. There’s just so many signs out there. Just in the last couple of weeks we’ve seen what’s happened with the restating of results that’s coming from GM and you know, I look at that situation and I think, boy, you know those poor people who are employed by GM, what’s going to happen to them? Somebody’s going to have to come in and rescue their pensions or something and it’s going to be done with public money. Mr. Bernanke is going to open the pockets and spread his largesse and the M-3 money supply, even though it’s not quoted anymore, is just going to burgeon. And certainly everyone knows that that’s going to happen. I think that the
JP: Yeah, one would have thought, doubling of gold prices, more than doubling of silver, gold stocks up 730% would capture people’s attention, but I don’t think, maybe we’re too early yet, but Keith, as we close, why don’t you tell people about your website. You write pieces, some of it published on our web site and tell people about the companies you work with.
KB: Well, okay, I have my own web site, it’s called Straight Talk on Mining.com. I’ve got a number of different pieces on there that people can download for free and I just write it when I get the chance. It’s a completely free site and I write about general things that interest me, mining, there’s a little bit of geology on there, I try not to make it too tough for the lay person to understand. So I do that just as a hobby. I’m a Director of Aurelian Resources which is a gold and copper exploration company working in
And I’ve also been working on a uranium play, in a different company, in
JP: Well I couldn’t agree more. Well, Keith, I want to thank you for joining us on the Financial Sense Newshour and sharing your knowledge with our listeners. I want to wish you all the best and I hope you’ll come back and talk to us.
KB: Well it’s certainly been my pleasure Jim and I’d be more than happy to come back any time.
Interview Audio: http://www.financialsense.com/Experts/2006/Barron.html
Dr. Keith Barron’s FSO Guest Editorials: http://www.financialsense.com/editorials/barron/main.htm
Friday, December 08, 2006
Sometimes technicals and fundamentals come together in a powerful way. Those are the set-ups that I like the best. I believe that JER.V is currently presenting such an opportunity.
I have been following JER Envirotech since early 2004. The company was brought to my attention by one of the VC's that is involved with Carmanah Technologies. Clearly, sustainable technologies is an area where they focus. I found it attractive as an investment for several reasons. They had already completed a few years of R&D and were ready to move towards production. The intellectual property was developed in conjunction with the Canadian government, which would be important for a small company. The markets were easily identifiable, ripe and massive.
- JER manufactures wood-thermoplastic composites, also known as WPC.
- JER's composites come in two forms: pelletized for injection molding applications and extruded 4’ x 8’ panel board
- The composite combines polypropylene and organic fibers: sawdust, rice husk, palm fiber, coconut fiber, etc.
- Patents were developed in conjunction with Canadian Natural Resources Council. Canadian government owns the IP, licensed exclusively to JER for ten years.
- First production plant established in 2005 in Delta, BC.
- Joint ventures created to build plants in
, Malaysia , Philippines ( India and China in the works). Indonesia
So, if the story is so good, why does the chart look so bad? In September 2005, the stock broke out and doubled in three months. After hitting a high of 1.45 in November, it has not since regained that high. The stock looked like it was recovering in August but by September, it had risen up to the downtrend line and was turned back there. On the next leg down, though, it made a higher low and has been consolidating since then, coiling tighter and tighter.
Over the past several months, progress at JER has stalled. The equipment that is built for JER’s production facilities is highly-specialized. The lines that they obtained to produce the panel board were delivered with a die that cut 4’ widths exactly. The problem is, JER needed boards slightly wider than 4’, so that the edges could be trimmed for perfect size and consistency. Re-ordering the dies has meant months of delays in starting panel board production at the plant in
The dies were scheduled to be delivered at the end of November. I suspect that the dies were delivered and that is the reason that the volume spiked today. Once the panel board lines are up and running then we should know shortly thereafter what the order flow is going to be. There’s a lot more to the story, but I thought I should keep this as brief.
Thursday, December 07, 2006
Wednesday, December 06, 2006
Sunday, December 03, 2006
I did not intend to become the unofficial transcriber of the conference calls, but backed into it first by trying to take detailed notes which then morphed into a full-blown transcription. I now have a colleague that shares the effort, but it is still a time-consuming undertaking. I have pasted the most recent call below. He's not brief in his comments, but I find it is usually worth the effort. What I find particularly valuable about Don's work is that he always applies his broad and deep insights to actionable recommendations. Enjoy...
Nesbitt Burns Institutional Client Conference Call for December 1, 2006
December 1st, 2006
Thank you all for tuning into the call which comes to you not from India but from Chicago. And, yes, I had a spectacular experience in the intervening month since we’ve communicated with each other. That will be all unfolding in the December issue of Basic Points, but what we want to talk about today, focus on the big acquisition that has been made while we were away, which was the agreement for Phelps Dodge to be acquired by Freeport. And the chart that we faxed out was Phelps Dodge and our tag line was “Endangered Species”.
So, what we want to do is reiterate, I think, the importance of the thesis we’ve had for the last few years, which is, that what the mining industry in this cycle will not be doing is anything like what it did in previous cycles and therefore that the fundamental valuation of these stocks continue to be out of whack and that the people who best understand that are other mining companies. And so what we have though is a situation where there just are not going to be many of them left.
Assuming this acquisition goes through, and there’s been rumors that either BHP or Rio Tinto or even Anglo American might come in and top the bid, but if we assume that’s not the case, then what we’ll have is there’ll be only one metal mining stock left in the S&P, which will be Freeport McMoran. And meanwhile, of course, in Canada, the two biggest metal mining stocks have been taken off the market, Inco and Falconbridge. And so that what we have is a situation in which if you have the kind of bullish attitude toward the base metal industry that we have been espousing for all this time, the range of options to you keep shrinking.
So on the one hand of course, we are pleased when the company who is left standing, which has the most conspicuously dubious management is being acquired, that Phelps Dodge, who managed to blow about a billion dollars of the stockholders money in betting against the price of copper going up and then proceeded to shock the market by joining in in a bid to acquire both Inco and Falconbridge based on the assumption that metals prices are going to stay high for years.
So, that, plus the fact that the company is committing to spending what they say is a billion dollars in developing a gigantic copper ore body in the Congo. And Freeport has said that their experience in operating mines in Indonesia, fits them for managing a mine in the Congo. What I think the truth of the matter is, is that the value of unhedged reserves in the ground in Arizona and in Chile that Phelps Dodge has, plus the fact that they’re buying it at about six times earnings, means that they can ignore this Congo operation entirely and still be buying it very very cheap.
But for those of you who have been listening to these calls faithfully over the years, then I assume that on the lines is a significant percentage of all the public stockholders in Phelps Dodge. And the question arises then, what do you do with the proceeds?
So now we look at the broader stock market and the US stock market which was on a tear is now suddenly starting to show signs of doubt about the US economy. Now we had these signs of doubt coming up from time to time in the last six months, but while I was away the stock market proceeded to put those aside. It also ignored the election outcome. Now this is the first election that I can recall in a long time where the Republicans getting clobbered by Democrats produced a rising stock market.
You can argue that that was the right outcome and certainly if there ever was a Congressional delegation that deserved to get a kick in the behind for its behavior it was the Congressional Republicans. But we’ve got a lot of stock market history that at least on a near-term basis that the investor class and that’s a group who gets polled in all the elections and that’s a group who owns ten thousand dollars or more of common stocks, the investor class has been second only to one subset of the population and that is those who go to church at least once a week, as being loyal Republicans.
And so, I haven’t seen how those who go to church once a week voted in the election because we were away for all of that, but it’s quite apparent that the investor class has become disenchanted and has assumed that the Democrats are going to be a cleansing force. And certainly on the evidence there’s nothing that you can argue hard with that proposition. But still, it was an interesting outcome that the stock market would be so strong after this.
Charles Rangel is going to be head of the Ways and Means Committee, and he is…you know he’s one of the old bulls of the Democratic Party. He’s always been one of my favorite Democrats because he’s such a colorful character. When they had the Democratic National Convention in Chicago ten years ago and he was being interviewed and he said “When I die, I want to be buried in Chicago so I can remain active in politics.” And that reflects the reality that the most conspicuously Democratic constituency in so many elections in Chicago, most notably the one in 1960, is a graveyard vote. But it’s good to have somebody who’s that candid about it. And he is a very attractive figure and you don’t stay in Washington as long as he has without learning how things are done.
So, I think in that sense, that the voters, the investors are probably doing the right thing in saying “Well, there will be lots of talk and so forth, but there’s not going to be anything radical done.” And so we look at the economy itself then. And we have been adopting, as you know, an attitude that the best way to play this is to be underweight US equities compared to global equities, particularly emerging markets and within equities to be way overweight the commodity stocks. But given that they are cyclicals, that what you do is you hedge, in a balanced portfolio, by owning long zero coupon bonds.
So that was the strategy that we’ve been annunciating over and over and over. And in looking at what happened while we were away, what seemed to happen was that you really didn’t need the hedge, but both sides of the hedge did very well, thank you. We’ve got a strong bond market and yet we also have a strong commodities market. And although the commodity stocks have fluctuated quite a bit, when I look at their prices, they’re pretty much where they were and they;’ve done reasonably well against the overall stock market.
So ordinarily with a hedge, you only expect to win on one side of it. So I don’t think that’s going to last. But what the currency markets are saying is that the US economy is going to be slow relative to other major industrial areas. If you take the latest figures out of the Euro zone, we have that rare experience where on a six month basis now, if you take their numbers and one assumes that they’ll get revised and massaged so one is cautious about taking them, the Euro zone has been growing faster than the US economy in that time. And since it has been more or less an article of faith that the Euro zone is a zone of stasis and the US is a dynamic and progressive area, that’s at least a blow to the American ego, but it’s also been reflected in the value of the American Dollar.
And the DX index, which is the one that’s measured against all of the major currencies is hovering near its long term support and if it breaks through that we’ve got a fairly high risk situation out there.
Now, what’s happened is the strength, though, has not been the Canadian Dollar. Because Canada is seen to have two arguments against it. One is that it’s a commodity currency and the other is that a third or so of Canadian GDP is exports to the US. So if you’re bet is that you want to get out of the weakening US economy at a time the Euro zone is as strong as its been relative to the US in many a year, you buy the Euro and then you can also buy the Yen. And the strength of the Yen is, I think, one reason why the US bond market has been so good. Because what that means is, at least at the margin, that The Great Symbiosis is intact.
Which is, that Japan and China will be buying Dollars. And although you never get the figures on these cash flows until well after the event, the fact that the Yen has moved up at the same time as the Ten Year Note has moved up, is the kind of related performance that we’ve seen a good part of the last few years. I’;ve been reading some of the markets commentary since I’ve been back and one of the thihngs they’re expressing is amazement that the US long bond market has done so well. The TLTs as I follow them are at a new high. And they’re saying “But gold is way up, so how can this be? If gold is up and the Dollar is down and the US economy is underperforming then why if the US Dollar is down, why would anybody be buying long US bonds?
So I think that the answer to that is first of all asset allocators within pure US Dollar portfolios, like the kind that Harris Investment Management manages and then more importantly though on a global basis what you have is that it still remains in Japan’s and China’s interest to cushion the fall of the Dollar. And although they keep talking about diversifying their currency exposure, insofar as their currencies are being managed strategically as opposed to maximizing profits in them, then they’ll be buying Dollars rather than Euros. And the Euro’s getting all the support it needs from genuine investors as opposed to those who have other skin in the game.
Well, anytime you’ve got a situation where oil is no longer looking like it’s going to touch fifty dollars and copper holding well above three dollars and zinc and other metals…nickel trading at all-time records, what you have is confirmation that the global economy, that is the economy outside the US, may well be stronger than people had thought and in which case what happens is that those people who had dumped the commodity stocks are going to be getting back in to them.
And now we come back to our theme. There are only a few names that large-cap investors can buy. There’s only been two base metal companies in the S&P ever since they took Inco out of it, when they created purely national S&Ps, when they became involved with Canada and Europe and so forth. So they kicked Inco out of the S&P, so that left Freeport and Phelps Dodge and we’re going to be down to Freeport.
Within the Canadian market, so few, and even when you start looking abroad, there’s been so much consolidation that for large-cap investors there are few options. And Freeport McMoran has the problem that, at least up until now, that their reserves were entirely in an area of the world that has political risk associated with it, namely Indonesia. Now they happen to be in a good island in Indonesia, from a political risk standpoint, but the central government is an unknown quantity and there’s allegations that they’ve been paying the cost of Indonesian troops to protect the mines and those things, I don’t know if those stories are true but you don’t operate what is the second biggest income generator for the Indonesian government, second only to Mobil’s natural gas operation, you don’t operate that in Indonesia without having a, shall we say, complex relationship with the people in Jakarta.
So, what Freeport is accomplishing here, and I think it’s a great acquisition for them, is that their total reserve picture now, will be balanced between areas of political risk. So if we assume that the United States and Chile are about as good as it gets in mining, so we assign those a Triple A status and then we put Indonesia in at a Double B Minus status and if we take the Congo in as Zed Plus status, then what we have overall is, you’ve got a company that’s going to have the largest copper reserves in the world outside the Chilean government’s Codelco and maybe as big as Codelco, with production on three continents, debt-free, that can be put on after the acquisition but that can be paid off in a hurry. So it’s going to be a core investment for global investors in looking at their bet on copper.
Now BHP is going to have Olympic Dam operating flat out which will mean that they will be a major factor, but since BHP has so many operations and with over a third of their revenues coming from oil and gas, it’s not a pure play.
Meanwhile, for Canadian investors, and for a lot of Canadians I’ve talked to, Phelps was their biggest foreign mine. Their attitude was, I don’t need to invest outside Canada to get exposure to the mining industry. Well, when Inco and Falconbridge get taken away, what that leaves you with is Teck Cominco, a wonderful company, but it’s very diversified and they didn’t get involved in the nickel mining operation despite their attempts. So they have a copper mine in BC, but it’s a short duration ore body. And beyond that, what they are is basically zinc and coal and they’re getting in to the oil sands, with gold it’s a fine portfolio, but it’s one…that’s the big-cap stock left in Canada. Beyond that then, you get in to middle and small-cap stocks and I’m no expert, but we’ve got lots of people who are. But it’s going to be difficult for major investors to put significant amounts of capital into the Lionore’s and FNX’s and Inmet Mining’s that are sort of left in the Canadian market.
Well it doesn't take much exposure to the third world to understand that the demands for commodities are going to continue to increase. So when you look at the market cap that's out there of the companies that are left standing in relation to the demand there is going to be over the next ten years for their products, we have what I still believe, and even more so believe, is the greatest mismatch between the value of the companies who have to find, develop and produce the metals that are needed and the demand out there from economies who absolutely have to have these metals.
So, my view then on endangered species, is that if you could have been in the St. Louis zoo in about 1908 if I remember, and suddenly realized that you had the last twelve passenger pigeons left alive, you'd have done everything you could to get them to breed. Instead they didn't think about that and they all died. So, here we have an industry that is absolutely necessary, that is crucial to the expansions that are going on in the dynamic economies of the world. Still crucial by the way - yes, admittedly because of the US housing situation, copper demand in this country is falling - but what we've got is a trivial market capitalization. And it can only get more intensified as a result of this merger.
So I counsel you that you should probably be thinking about it, those of you who have the Phelps or those of you who got out of the group entirely when Inco and Falconbridge were taken away, that you probably shouldn't be waiting too long to get that money redeployed within the group.
As far as the golds are concerned - and what we have always said was that you buy the golds for a matter of insurance - but there again what we're looking at is a factor of political risk. Glamis got taken out on the basis that they've got a big, big new mine in what has been deemed to be a political risk free country, Mexico. However, it's sad to report that all of a sudden Mexico is going from the absolutely safe area, to one where one has to ask a few questions.
And meanwhile in Latin America, we've got Hugo Chavez coming up for another ratification vote and one way or another he's going to be reconfirmed and he's going to be more of a problem than ever. And that leads us to the final group that we've talked about a lot and where there's been some news which was adverse - namely the oil sands stocks - because of the change in Canadian tax laws the second biggest market cap company of that group, the Canadian Oil Sands stock was hit and we'll be dealing more with that later I'm not in a position to comment on it now, but what this also illustrates is the endangered species concept. There are only a few oil sands stocks. And the news out of Russia, it gets even worse in terms of security.
So, as we come into this festive season where people are feeling positive about things, I think that it's a good time to take out the idea of the Sierra Club and the conservationists which say protect endangered species, but in this case you protect them in your own interest. That's it. Any questions?
Question 1 (Douglas Elmore): Good morning, Don and welcome back. We have, we’re told by Craig Miller, a lot of Southwestern Resources which is a gold, silver and base metals company with properties in Yunan province in China in our retail system. And I'm worried about China and Peru, as I think I should be, and I just wonder if you can comment on that 'cause he's warned us that China wants to limit the number of juniors operating in China and rather have large-cap companies, which could make this a takeover target possibly. The geology seems to be there. So that's the China story. And then as far as Peru goes, I keep massaging my concerns by thinking that the Bank of Nova Scotia’s big in South America and in Peru by its banks, but should I feel comfortable. I just wondered what your thoughts might be about mining in China
DC: Okay, well, we'll talk about Peru first. There was a big sigh of relief in the mining industry when the supposed good guy, Garcia, won the election. And his C.V. included being associated with something like 5,000% inflation when he had previously been in power, but he was supposedly somebody who had learned from his experience. What was interesting that within a couple of weeks the mining industry expressed its gratitude for being saved from a foam-flecked Chavista, by announcing a voluntary grant of 3/4 of a billion dollars for education and health in the provinces where they operate. This is an epiphany, indeed.
The people in the mining industry that I know are fine people but that they all of a sudden discovered their enthusiasm for making gifts of these proportions and that they're not doing it. They're not building the hospitals and they're not building the schools but it's going to the government which shall we say reduces somewhat the amount of sense of charity that you might have in this whole but it suggests that maybe there was some coercion subtle or otherwise. Now, if you assume that there was some sort of coercion and this becomes a form of danegeld and what we know about it is you never stop. Once you've paid the danegeld, you never get rid of the Dane. So Peru I think, has at least a big question mark over it.
China, I am not in a position to comment there. I am in a position to comment on the treatment of mining companies in India but that's not what you asked. I'm of the view that the Chinese like to either deal with situations where it's Chinese companies who control the assets or deal with very big companies that go into joint ventures and do all the work and put up the capital and Chinese companies get a free ride. And none of this suggests to me that a small-cap company can assume that it’s going to be able to maintain things all the way through to production and they're going to get all the required licenses. Let's just say that there is a risk factor there which is truly unquantifiable and that this is not, therefore, a complete alternative as an investment.
You know, when you invest in gold mines, the risks you have are that the US dollar will be strong, that we will have neither inflation nor deflation, that the global economy will be strong and that people won't feel they need insurance and that therefore that there will not be an enthusiasm for gold. So those are enough risks it seemed to me without getting involved in it, because of what you are talking about political risks. The people that I know that have been goldbugs forever, are people who have a hatred of politics and politicians which is truly visceral. And that's because they assume that the central bankers of the G7 are collectively set out along with the politicians to debase and debauch the major currencies.
Well, if you have that kind of attitude towards governments that are democratically elected and where there is a lot of ways of analyzing how things are done seems to me that it is sort of perverse to go out and be putting your money into an area where you are dependent on Chinese politicians and Chinese bureaucrats' good faith. So those are the concerns I would have. Thanks for the question.
Question (Noel Loehmer): Don, hi. I've been wanting to ask you this question. My overall question is, what will the effect of a falling US dollar have on growth in emerging markets and demand for resources in emerging markets. The question revolves around, starting with Stephanie Pomboy's comment that the deteriorating US credit environment that she expects from a housing bust will send liquidity in retreat. And if the US economy slows and rates fall, the US dollar will fall and the question also revolves around the idea that many emerging markets have currencies linked to the US dollar. So if their currencies are not inflation…if the economies are not inflated by the value of the US dollar but in fact are deflated by a falling US dollar then will that slow down their economies and will that slow down world demand for resources
DC: Well. there's a lot of subtext to your question. Let me just take sort of an overall view that as a general rule that we've known back over the decades, a falling US dollar providing it doesn't set off a huge rise in inflation, is good for emerging markets because emerging markets have a disproportionate percentage of their foreign debt in dollars And so therefore what it does is it reduces their carrying costs or indeed it improves their balance sheets. And that a strong US dollar is fundamentally negative for emerging markets.
And if you look at what happened in the debt crises of the last 30 years, that's been a very good rule. That what causes when you have this rule of that an emerging market is one that you cannot emerge from in an emergency, all of those occurred at a time of a strengthening US dollar. So if we have a gentle slide in the US dollar that doesn't send the global inflation rate up, then that's actually, for emerging markets as overall asset class, is good news.
Now you may say "Well, wait a minute they are exporting one way or another to the US," well it depends then we've got to start talking about the specifics of each economy as to what kinds of products they send to the US, that sort of thing. It's very complex. But what we can say without any question is that a very strong US dollar fundamentally reduces the amount of global liquidity. Because the way you measure global liquidity is in dollar terms.
So therefore, you look at an emerging economy and you take the money supply growth measured in their own currency as to what percentage growth there's been. Well if their currency has strengthened against the dollar then dollar-adjusted liquidity has grown. And that's actually a good way to look at it because again I'm just frankly looking at India, what happens in this kind of environment is it makes it easier for them to acquire assets abroad. It makes it easier for their people to travel abroad. All sorts of good things happen.
So I would not be concerned, given the fact that overall global inflation, I mean you look at Brazil which is 3 to 3 1/2% I mean the idea of Brazilian inflation being at that level is almost supernatural. The overall picture in the world of inflation is reassuring leaving the obvious disaster areas like Zimbabwe out of the calculation. So, of the things to worry about with a falling US dollar, I think low on your list should be emerging markets. I think that in general you can say based on four decades of history, that that will be likely at least modestly stimulative to the economies and a net benefit. Thank you. Any other questions?
Question (Robert Rosetti): Hi, Don, how are you doing and welcome back. You just covered what I wanted to talk about so, thanks again.
DC: Very good. Any other questions?
Question (Stephen Ottridge): Just wanted to get back to you with your view on the Congo. I think that when you're rating it with a "Z" whatever, that's rather the old page one news of the past and I think that you've got to look at the page 16 news of them having had quite a successful election. I saw the BBC news coverage on it talking about it's an absolute miracle and then there was another piece in the province of Ituri some more rebels have given up there. I don't think you should have it rated that far down the scale.
DC: Well, thank you, Stephen. My attitude towards the Congo is based on having followed things in that country since 1961 and that there have been all sorts of times where people have said "This time they're going to get it right." And I hope that's the case but it's not the kind of thing where I would want to bet a serious amount of personal money on the fact that this time it will be stable. And if it is a miracle, then it is truly a miracle. But I'm not sure what price/earnings ratio one should have on the assumption that the miracles will continue and I hope it works out that way. And I wasn't trying to be deliberately scornful but it's been an ongoing tragedy ever since Patrice Lumumba took over from the Belgians. And so, all bad stories eventually come to an end. And maybe this is a good story and if so this will be the second best news to come out of Africa in the last 15 years. The first of course being what's happened in South Africa. Let's hope that's what it is, but my "Z" rating is based on four decades where all hopes ended up getting dashed.
SO: But isn't that rather like the Phelps Dodge management? Copper has always been down low so it will always be low into the future?
DC: Well, you've got a good argument and I hope you're right, okay? I guess that my basic bias is to…I think that my enthusiasm for these commodity stocks means by definition, that I'm saying that you should be willing to take on what the markets think is a significant amount of commodity price risk and invest in them. And that I think I can get some kind of handle on. The political risk is something where I try to stay away from it if I can.
Maybe we’re going to get forced in to it. If all these companies get bought up and there's nothing but the Congo’s and Zimbabwe’s to invest in, then we're going to have to get good at that. But at the moment at least what I'm saying is if we can stick to the rule of investing in unhedged reserves in the ground in politically secure areas of the world, if you can find the ways of doing that, then that's what you should do. And particularly if you only have to pay price/earnings ratios like 5 to 9 times earnings for it. If we can get to the stage where you're paying 30 times earnings for copper in Arizona and 3 times earnings for copper in the Congo, maybe that's the time to make your move. Thanks, Stephen. Any other questions?
Operator: There are no further questions, Mr Coxe.
DC: Thank you all for tuning in. We'll talk to you at the regular time next week.
Don Coxe profile from the BMO websites:
Donald G.M. Coxe is Chairman and Chief Strategist of Harris Investment Management, and Chairman of Jones Heward Investments. Mr. Coxe has 27 years experience in institutional investing, including a decade as CEO of a Canadian investment counseling firm and six years on Wall Street as a 'sell-side' portfolio strategist advising institutional investors. In addition, Mr. Coxe has experience with pension fund planning, including liability analysis, and tactical asset allocation. His educational background includes an undergraduate degree from the University of Toronto and a law degree from Osgoode Hall Law School. Don joined Harris in September, 1993.
Danegeld: The Danegeld was an English tribute raised to pay off Viking raiders (usually led by the Danish kings) to save the land from being ravaged by the raiders. The term has come to be used as a warning and a criticism of paying any coercive payment whether in money or kind.