Energy & Commodities

The Secret to Making Money on China's Stealth Metal Demand

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Posted by Sally Lowder of The Critical Metals Report

on Tuesday, 11 December 2012 05:48

When it comes to supply and demand dynamics, Aheadoftheherd.com Publisher Rick Mills does his own math. China may make a show of its alleged copper surplus and Germany may downplay its need for efficient energy sources, but Mills foresees demand spikes in a number of specialty metals. In this interview with the Critical Metals Report, Mills discusses the positions he's establishing while looming supply shortages remain under the mainstream radar.


The Critical Metals Report: Let's talk about specialty metals that present opportunities for investors. What's on your radar screen?

Rick Mills: There are several metals that we've taken for granted because the prices are low, such as nickel and uranium. I shake my head that copper is only $3.50/lb. A lot of what's going on in copper can be extrapolated to the other metals as well.

Let's start with capital expenditures, or capex. Mining is definitely one of the more capital-intensive businesses. There are large, upfront costs for construction of the mine. As the low-hanging fruit has been picked, companies have to go off the map to find deposits in remote areas with lower grades and more complex metallurgy. There is little to no infrastructure, so it can cost from $5 billion ($5B) to $9B to build today's mine.

TCMR: That's true of any metal you might mine.

RM: True enough, but some metals are more supply-side challenged than others. Operational expenditures are also continually increasing. These are day-to-day costs of operation—wages, tires, fuel and camp costs for employees. The average capital intensity, or the capacity to produce 1 ton (t) copper, for a new mine in 2000 was $4,000–5,000 ($5K). Today, capital intensity is north of $10K/t on average for a new copper project.

Some projects that are $5.5B are going to produce 60,000 tons (60 Kt) copper per year. Do the math; capital intensity numbers are scary. Capex costs are escalated because declining copper ore grades mean a much larger relative scale of required mining and milling operations, and a growing portion of mining projects are in remote areas of developing economies where there is little to no existing infrastructure.

TCMR: Could the declining growth of China, which is probably the world's largest consumer of copper, be contributing to a slowdown?

RM: China recently published figures saying that it has 1.9 million tons (Mt) copper in its inventory. It brought over a bunch of analysts and showed the copper all stacked up, the stacks leaning over and the ground compressing. The analysts came away suitably impressed that China has too much copper when, in fact, nothing could be further from the truth.

China has 1.9 Mt copper. About half of that would be in the supply line somewhere. It's going to be used. China usually keeps around 600 Kt as a rainy day fund. The bottom line is China needs 50 Mt copper during the next several years. If you needed that much copper, what would you be doing? What kind of games would you be playing if you knew you had to buy it in the open market? You'd be telling everybody that you had way too much. Let's face it: China needs copper. It's going to grow 7.7% this year. It has been growing at an average rate of 9–11%/year for 20 years.

TCMR: How does an investor capitalize on increasing copper demand and shrinking copper supply?

RM: Do you invest in an off-the-map area in a geopolitically risky country? I don't. There's enough risk in this sector without purposely increasing it. I also want something that's high quality yet small enough that capex and opex are not going to be a killer.

I look for a company that turns the negatives, the increased capex/opex, the increasing resource nationalism, the increased environmental regulation, etc., into nonexistents. One on my radar is VMS Ventures Inc. (VMS:TSX.V) There's little risk of resource nationalism on the Reed Lake deposit in Canada. Its well-funded partner, HudBay Minerals Inc. (HBM:TSX; HBM:NYSE), operates several mines in the area. One of them is going to be closing shortly, so the skilled people will become available. Reed Lake is a high-quality deposit. It's underground, but it already has infrastructure in the area. It already has the mill and the processing facility. Financing is not going to be a problem. Permitting is not going to be a problem because most of it is already permitted. The area is a well-known mining camp. I don't see any operational issues. There's little risk from environmental groups and/or labor.

It's an economically attractive project, because the risk has been removed. The cash flow for VMS is about $100 million (M) over the present mine life. It's a very attractive position for investors to start taking as this company is going into production next year. It will pay back its partner HudBay from its first year of production. In 2015, VMS is going to have an enormous amount of money in its coffers.

TCMR: Is it still exploring?

RM: Yes, the company is exploring the area around the mine and will drill from underground, trying to increase even further the size of the deposit, and VMS will shortly be releasing its winter drill plans on its 100%-owned projects.

TCMR: VMS' stock is trading at $0.19 with a $23M market cap. To what do you attribute the lag?

RM: The best time to buy a junior is when it's still exploring and hope it makes a discovery, or secondly, just before it puts out its first NI 43-101 or just before it goes into production. We're in that period of time now when there is not really a heck of a lot to report. It's that quiet time in front of production and its winter exploration program.

TCMR: What other metals are suffering supply shortages?

RM: Investors should be looking at nickel. It's present in more than 3,000 different alloys used in more than 300,000 different products.

About 65% of nickel is in alloy with chromium and other metals to produce stainless and heat-resisting steels. Another 20% is used in noncorrosive and super alloys. About 9% is used in plating and 6% is used for other uses, such as in coins, electronics and nickel-hydride batteries in cellular phones. Then there are nickel-cadmium batteries to power cordless tools and appliances.

The U.S. Department of Energy is funding research and development of renewable energy sources. That is expected to expand the use of nickel. It's quite interesting what they're discovering as new uses and increasing the old uses of nickel.

Nickel used to be produced from laterite deposits. When the Sudbury sulphide nickel camp was discovered in Canada in the early 1900s, it completely dominated global production.

The problem is that nobody is finding those large sulphide deposits anymore. We're going back to laterites, which are big, layered deposits of often a billion tons or more located close to the surface. Unfortunately, they necessitate different metallurgical applications and recovery processes for each zone or layer.

The processes have enjoyed a highly mixed performance record and can be extremely expensive. It's a little different for each deposit. A lot of the companies are having major problems with the metallurgy. Because it's lower grade, they have to go with that economy of scale.

Because the laterites are caused by weathering of ultramafic rock, they typically occur in equatorial zones. That means that a lot these deposits are located in the sketchier countries that carry heightened geopolitical risk versus the sulphides, which seem to happen in places like Greenland and Canada. The same thing that happened with copper is happening to laterites, with capital intensity shooting through the roof. Here's what's happening to a few of the deposits many are counting on for future global nickel supply:

Vale S.A.'s (VALE:NYSE) New Caledonia project, which used to be called Goro, is many years behind schedule. It's almost become the bad boy poster child for problems with one method of nickel mining technologies, HPAL (high pressure acid leach processing). Sumitomo Corp. (8053:TKY; SSUMF:OTCPK) and Mitsui & Co. Ltd. (8031:TKY) have reduced their participation. Vale has problems in its Onca Puma project. It doesn't even have a return of production yet. It shuttered its Frood mine.

Xstrata Plc (XTA:LSE) has increased the capex at its Koniambo project due to growing labor costs from competition from the oil and gas sector for an extremely limited labor pool on a very remote island. Its first pour was supposed to be earlier this year, but there has been no news from it. Xstrata has closed its Cosmos mine.

BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) has been trimming costs at its Australian operations.

Anglo American Plc (AAUK:NASDAQ) closed its 17 Kt/year Loma de Níquel mine due to disputes over mining concessions.

TCMR: With mines slowing down or shuttering production, have we seen any increases in the basic commodity price for nickel?

RM: The nickel glut is nonexistent and nickel is going to rally. There is no doubt nickel has been the worst-performing metal lately. However, BNP Paribas is now forecasting a much smaller-than-expected supply in 2013. It has cut its projection three times since April. Credit Suisse and Citigroup have lowered their forecasts. They're saying nickel is going to average 15% more in the second quarter than now.

TCMR: Where can an investor find companies with deposits that are cheaper to process in areas without jurisdictional and geographic problems? How can an investor participate in the nickel market if there's this kind of a looming shortage?

RM: One of the reasons market watchers are paring the supply forecasts is because all of these projects are falling behind schedule. The market balance is much tighter than everybody, except apparently me, has been predicting. There are a lot of operations and capacity that have run into various issues. Investors have to figure out which companies don't have these problems.

One that doesn't have these issues is North American Nickel Inc. (NAN:TSX.V). It owns a nearly 80-kilometer trend of historical nickel mineralization in Greenland. It has done a small drill program this year to start to define one of its almost 80 targets and had some very encouraging assays come back. It is going to be able to put together a much larger program and get at it next year.

The company is well backed by The Sentient Group and a large institutional player. VMS Ventures owns 26% of its shares and doesn't want to be diluted; financing is not going to be a problem. This is a company in which an investor can start to take a position and slowly increase it, knowing that there is some time to work on it.

TCMR: Are there any other metals that you want to talk about today?

RM: One that investors are missing the boat on is uranium.

TCMR: What's your take on uranium stocks right now?

RM: The question is: When do you buy? We talk about this all the time. It's when nobody else is buying, when the herd doesn't love it. That fits uranium pretty well right now. The fact is that investors aren't paying attention to what's going on on the supply side. The demand side is going to increase. Japanese reactors are off-line. Germany took its reactors off-line almost overnight. Chinese demand slowed as they do some serious safety studies.

Fukushima put a dark cloud of negative sentiment over the entire industry. Demand fell through the floor. People were worried, and rightly so. Everybody was watching the spot price. Utilities weren't buying; they were sitting on the sidelines, waiting for prices to come down.

China has released its new nuclear energy plans. It has moved toward safety. Any reactors currently under construction will be allowed to continue, but the new reactors will have to use the third-generation technology, the European Pressurized Reactor or the AP1000.

This is a huge boost for the demand side. China has 12.5 gigawatts (GW) in operation with 26 GW under construction. It wants 40 GW in nuclear power by 2015 and to reach 80 GW by 2020. China is back in the market. Yes, the Germans are going to sell, but now we're finding out that Japan is reopening its nuclear reactors, and I have no doubt it is going to build more.

TCMR: And Germany?

RM: Germany is totally green-washing the world. The monkeyshine coming out of Germany today is off the wall. It is importing more and more nuclear-produced electricity from Holland, the Czech Republic and France than it ever was. It touts itself as a poster child for green energy, yet its industry is suffering and leaving in droves because of blackouts or brownouts and the high cost of electricity. Germany is sucking up nuclear-generated power, just not from reactors on its own soil.

A lot of people don't know that Germany is currently building 23 new coal-fired power plants because it is worried about the increasing costs of electricity and its industry leaving. If you can't do business because of brownouts and blackouts, you're going to move to where you can get a steady supply of electricity.

Germany opened a $3.4B, 2,200-megawatt (MW) coal-fired power plant just in August. Instead of the 15 t of carbon dioxide (CO2) the old ones vomited, these new ones, which are 10% more efficient and burn only the cleanest coal ignite, still pump 13 Mt CO2 into the atmosphere. In just one year, this coal burner is going to generate more CO2 than Germany's entire nuclear fleet would have over 20 years. Germany's "green energy" plan doesn't work; the country can't afford to be without nuclear energy and it's very obvious that Japan can't, either.

TCMR: Let's talk about uranium companies that you like, Rick.

RM: Nuclear power is not going away. In fact, it will increase exponentially. Mine supply is at $40/lb spot price. You need $70–85/lb incentive price to get new mines going. And then it takes 10 years to get a uranium mine up and running.

Let's focus on the U.S. The U.S. uses 55 million pounds (Mlb) uranium per year. It produces 4 Mlb. Where is the U.S. going to get its uranium? There are two companies that are going into production right away. I'm not going to mention a certain name because I don't like being negative, but one of the companies might not make it. Apparently, there are some sage grouse nests on its property. We're going to save the birds.

TCMR: Which one will go into production?

RM: The one that's going to make it into production next year is Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.MKT) in Wyoming. It is fully permitted. It is building the pads for the first deep disposal well, which should take several months. Then it will need to build a second. The Nuclear Regulatory Commission has to do an inspection. Remember, this is the first uranium mine that's been opened in the U.S. since 1996, so the NRC's going to be very thorough. It will probably take about a month to complete the inspection. I expect Uranerz, barring any inspection delays, to be in production by the end of July 2013. It has two offtake agreements already signed at a much higher price than spot. It has Cameco Corp. (CCO:TSX; CCJ:NYSE) doing its processing. It is going to be producing 600–800 Kt/year yellow cake. It's in-situ leaching and the company is the world's leading expert on it.

TCMR: I really enjoyed our conversation.

RM: It's been a pleasure, thank you.


Richard (Rick) Mills is the founder, owner and president of Northern Venture Group, which owns Aheadoftheherd.com, as well as publisher, editor and host of the website. Focusing on the junior resource sector, Mills has had articles appearing on more than 400 different publications, including The Wall Street Journal, Safe Haven, The Market Oracle, USA Today, National Post, Stockhouse, LewRockwell, Pinnacle Digest, Uranium Miner, Beforeitsnews.com, Seeking Alpha, Montreal Gazette, Casey Research, 24hgold, Vancouver Sun, CBS News, Silver Bear Cafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FN Arena, UraniumSeek, Financial Sense, GoldSeek, Dallas News, VantageWire and Resource Clips.

Want to read more exclusive Critical Metals Report articles 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 and learn more about critical metals companies, visit our Critical Metals Report page.

1) Sally Lowder of The Critical Metals Report conducted this interview. She personally and/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 Critical Metals Report: Uranerz Energy Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Rick Mills: I personally and/or my family own shares of the following companies mentioned in this interview: North American Nickel Inc. I personally and/or my family am paid by the following companies mentioned in this interview: North American Nickel Inc., Uranerz Energy Corp. and VMS Ventures Inc. are paid sponsors of my website, Aheadoftheherd.com. I was not paid by Streetwise Reports for participating in this interview.


Energy & Commodities

The No-Brainer Investment of the Decade

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Posted by Simon Black - Sovereign Man

on Friday, 07 December 2012 12:52

views corn farmIt seems these days I spend at least 50% of my time looking at farms for sale in Chile. And with good reason.

I've written before at length why agriculture seems like the no-brainer investment of the decade: given the fundamentals of supply and demand, the absolute best-case scenario is rising food prices. The worst-case scenario is shortages.

Owning farmland is comparable to owning physical gold. And I'm buying as much of it as I can, specifically in Chile.

Farmland in Chile is incredibly rich. It's like Iowa meets California, but at a fraction of the cost. Highly productive farmland here runs anywhere between $2,000 per acre and $6,500 per acre. By comparison, farmland in Iowa and California can cost $10,000 to $12,000 per acre for similar quality.

What's more, the production yields are typically as strong... and in some cases, even stronger. The UN Food and Agriculture Organization estimates that Chile's corn production per acre is 20.13% higher than in the US, and 33.57% higher than in Canada, and the numbers are similar for wheat.

My own experiences match these statistics. For example, Michigan is the production leader in the US for 'highbrush' blueberry cultivars that we grow here in Chile. Yet, according to the USDA's National Agricultural Statistics Service, Michigan yielded 3,850 pounds per acre last season. In the same period, my production yield in Chile was 60% greater... and rising.

What's more, because Chile is in the southern hemisphere, our harvests are counterseasonal to those in the northern hemisphere. Supply is tighter when we harvest, which means the price we fetch is higher.

In 2010, for example, Michigan blueberry farmers were paid $1.23 per pound for their July-August harvest. In Chile, the price paid to farmers for export quality blueberries is around $1.75 per pound... 42% higher.

In addition to better revenue potential, labor costs in Chile are much lower. Laborers in the area near my farm command wages of just 2-3 dollars per hour, and even a seasoned manager with decades of experience will barely register more than $1,000 per month.

In the US, Canada, and UK by comparison, a veteran farm manager can command $60,000 to $80,000 annually.

So in addition to achieving optimal revenues, the operating costs in Chile are much lower. Higher revenues. Lower costs. More profit.

And the tax breaks for agriculture here are spectacular. The government allows what's called 'deemed income reporting' for farmers, which reduces not only the tax liability, but also the time and costs of compliance. It's incredibly simple.

Plus there's no insane government regulator breathing down your neck, or big multinational like Monsanto mopping up the entire market.

Even if you don't want to take any operational risks, you can simply buy property and lease it out to another farmer, achieving yields of between 6% and 11%. Residents of Chile can also obtain low-interest financing, so you can mitigate your risk while generating a superior cash on cash return for doing absolutely nothing.

And for foreigners, it's incredibly easy to become a resident in order to obtain financing on agricultural property. I'm currently working on a way to borrow in dollars to buy farmland down here... so that I can simultaneously go long agriculture and short the dollar. I can't think of a better investment.

Bottom line, if you believe that out of control money printing and world population demographics will contribute to significant food price inflation in the coming years, owning farmland is one of the smartest investments you can make.

And, taking into account all the factors-- price, production, operating risks, etc., conditions here in Chile are ideal.

Until tomorrow,
Simon Black
Senior Editor, SovereignMan.com

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Energy & Commodities

America On The Verge Of A Big Energy Explosion

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Posted by Matt Insley - Daily Resource Hunter

on Friday, 07 December 2012 10:06

It's been a big week for natural gas, which means one thing: big opportunity for you!

Two telling reports have dropped out of the stork's mouth and landed on your editor's desk.

Both have to do with the future of natural gas. And both also lead to an all-but-guaranteed way to profit from the cheap and abundant fuel source...

If you've been looking for a 5-year price forecast in natural gas -- you'll want to take note of the Energy Information Administration's 2013 Annual Energy Outlook (early-release.)

"With increasing natural gas production, reflecting continued success in tapping the nation's extensive shale gas resource, Henry Hub spot natural gas prices remain below $4 per million Btu (2011 dollars) through 2018" the report portends.

From my perch this seems to be the most realistic estimate for prices ($3-5 in the next 5 years) -- especially considering we've barely scratched the surface of our natural gas riches. Take a look at it in chart form:


......read more HERE



Energy & Commodities

Energy Sector Storm Brewing – Oil & Gas Stocks

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Posted by Chris Vermulen - GoldandOilGuy.com

on Thursday, 06 December 2012 10:13

Oil and gas along with their equities have been underperforming for the most part of 2012 and they are still under heavy selling pressure.

I watch the oil futures chart very closely for price and volume action. And the one thing that is clear for oil is that big sellers are still unloading copious amounts of contracts which is keeping the price from moving higher. Oil is trading in a very large range and is trending its way back down the lower reversal zone currently. Once price reverses back up and starts heading towards the $100 and $105 levels it will trigger strong buying across the entire energy sector.

Crude Oil, Energy & Utility Sector Chart – Weekly Time Frame

The chart below shows the light crude oil price along with the energy and utilities sectors. The patterns on the chart are clearly pointing to higher prices but the price of oil must show signs of strength before that will happen. Once XLE & XLU prices break above their upper resistance levels (blue dotted line) they should takeoff and provide double digit returns.


Looking at the XLU utilities sector above I am sure you noticed the steady rise in the price the last couple of years. This was a result in the low interest rates in bond price and a shift from investors looking for higher yields for their money. Utility stocks carry below average risk in the world of equities and pay out a steady and healthy dividend year after year. So this is where long term investment capital has/is being parked for the time being.

Utility Stock Sector – Deeper Look – 2 Hour Candle Chart Time Frame

Last week I covered utility stocks in detail showing you the Stage 1 – Accumulation base which they had formed. The chart below shows the recent price action on the 2 hour candle chart and recent run up. You can learn more about how to take advantage of this sector here:http://www.thegoldandoilguy.com/articles/its-the-season-to-own-utility-stocks/


Oil and Gas Services – Daily Time Frame

This chart shows a very bullish picture for the services along with its relative strength to oil (USO) at the bottom. While the sector looks a little overbought here on the short term chart, overall it’s pointing to much higher prices.


Energy Sector Conclusion:

In short, crude oil looks to be trading in a VERY large range without any sign a breakout above or below its channel lines for several months at the minimum. But if the lower channel line is reached and oil starts to trend up then these energy related sector ETFs should post some very large gains and should not be ignored.

Get These Weekly Trade/Investment Ideas In Your Inbox FREE: www.TheGoldAndOilGuy.com

Chris Vermeulen


Energy & Commodities

Rogers: Buy Silver, Too Much Speculation In Gold

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Posted by JIm Rogers via Index Universe

on Wednesday, 05 December 2012 17:28

silver-bullionJim Rogers is still shorting bonds, favors silver over gold and is looking for ways to go long on Russia.

Jim Rogers takes no prisoners in the way he makes the case for commodities. The author of “Hot Commodities” is so bullish—particularly on agriculture these days—that hearing what he has to say can leave you a bit unsettled. When IndexUniverse.com Managing Editor Olly Ludwig caught up with Rogers recently, he said new RBS’ lineup of commodity ETNs that have his name on them are so far superior to the competition.

Surveying the world of agriculture, Rogers talked about the growing shortage of farmers around the world at a time of tight food supplies. He also reaffirmed his bullishness on gold—and his bearishness on bonds—both of which are closely tied to his skepticism that the U.S. and the rest of the industrialized world will ever get out from under all its indebtedness without some additional crisis.

His most surprising revelation? After dismissing Russia for years as a dangerous investment destination, where losing money was almost guaranteed, he said Russian President Vladimir Putin has changed his approach to foreign investment. That means Rogers is poking around the commodities-rich country looking for ways to profit.

Ludwig: What commodity or commodities are flying under the radar that perhaps investors ought to be looking at more closely right now?

Rogers: I’d have to say agriculture, because agriculture is very depressed on any kind of long-term basis. Sugar prices, for instance, are down about 75 percent or so from their all-time high in 1974—38 years ago. We have been consuming more agricultural commodities than we have been producing in the world for the last decade or so. So inventories are near historic lows, which, of course, is a dangerous situation.

But worse still, we’re running out of farmers. The average age of farmers in America is 58; in Australia it’s 58; in Japan it’s 66. In America, more people study public relations than study agriculture. So the farmers are dying and retiring, and no young people are coming into agriculture. Agriculture is facing a serious, serious problem, so prices have to go much, much higher, or we’re not going to have any food at any price.

Ludwig: So a broad approach would serve investors well, say, in a multicommodity futures-based ETF, such as PowerShares’ DBC or United States Commodity Funds’ USCI?

Rogers: I prefer the Rogers indexes, because they are better constructed to outperform the others. But yes, a broad fund.

Ludwig: Let’s talk about your new securities that just went live here in the United States, the broad family of contango-mitigating RBS ETNs. Can you offer some observations about them—the broad one, and the ones focused on agriculture, energy, industrial metals and precious metals—first in relation to the pre-existing Merrill Lynch “Elements” ETNs that are already on the market and that don’t have a contango-mitigating feature?

Rogers: As you know, the markets do have contango and backwardation. It’s always been the case with commodities, and always will be. These products attempt to mitigate the problems of contango. And so far, the ETNs have been able to do a good job, better than the regular, original index. Will that be the case in the future? I don’t have a clue.


.....read page 2 HERE


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