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Tuesday
Mar302010

Uranium Draws Interest From China

Wall Street Journal Logo.JPG

The Wall Street Journal carried this article on uranium that focuses on China's future requirements and which uranium stocks may benefit from it, a number of Aussie stocks get a mention.

MELBOURNE, Australia—Surging Chinese demand for uranium looks set to drive a fresh wave of Chinese investment in Australia-listed miners as nuclear power generators seek supply for dozens of planned reactors.

Chinese state-owned enterprises have been active in Australia's mining sector for years, largely focusing on iron ore and coal used in steelmaking.

Now, with an unprecedented nuclear reactor project under way, China is turning its sights to Australian yellowcake stocks. Many miners see the country as a cheap funding source, and analysts expect deals to flow this year.


China Guangdong Nuclear Power Holdings Corp.'s purchase last year of a controlling stake in Energy Metals Ltd., for $83.6 million Australian dollars, highlighted both China's interest and the Australian government's willingness to approve Chinese investment in uranium projects.

China currently has 11 nuclear reactors in operation with 20 under construction. Another 36 are on the drawing board, and there are proposals for another 157 plants.

Nuclear-power-generation capacity in China is set to increase sixfold by 2020 to 60 gigawatts with a further increase of up to 160 gigawatts expected by 2030, according to the World Nuclear Association.

China is already ramping up uranium imports, recognizing that domestic supplies are insufficient to meet its needs.

In January, China shipped in around 3,337 metric tons of uranium, with 57% coming from Kazakhstan and smaller volumes from Russia, Namibia and Uzbekistan. Import volumes were up more than 10 times year-to-year.

Comments from Chinese executives suggest this may be the tip of the iceberg. Guangdong Nuclear Power's annual uranium needs will jump to 10,000 tons in 2020 from 2,000 tons in 2009, Zhou Zhenxing, chairman of the company's uranium-supply unit, said in November.

No surprise then that Australian uranium miners, some of which have projects in resource-rich Africa and Canada, have received informal approaches from Chinese entities.

"Certainly last year everybody had been speaking to the Chinese—there were lots of conversations, and there's still a lot of interest," said John Wilson, an analyst at Resource Capital Research.

China isn't the only Asian buyer vying for new sources of uranium—Japan, India and South Korea are also keen to lock in supply. But China's access to cheap capital gives it a competitive advantage.

Mr. Wilson believes the Chinese focus more on securing supply rather than price, and this means they are willing to pay for companies which have defined a resource or are producing.
Analysts say Australia's biggest independent producer, Paladin Energy Ltd., ticks many boxes. It has expanded annual output at its Langer Heinrich mine in Namibia to 3.7 million pounds of uranium, while ramping up its Kayelekera mine in Malawi to 3.3 million pounds a year.

With uranium resources of more than 335 million pounds, Perth-based Paladin wouldn't come cheap. Its market capitalization is $2.8 billion Australian dollars, and buyers would likely need to pay a premium.

Chinese buyers are likely among those looking at Extract Resources Ltd., which has resources of nearly 300 million pounds and is focused on developing the Rossing South discovery in Namibia.

But Extract's cluttered share register means a full takeover looks unlikely, unless the Chinese can reach an agreement with Rio Tinto Ltd., which has a 15% stake and an adjacent mine.
BBY Ltd. analyst Gavin van der Wath said there are few uranium resources on Australian soil not controlled by major miners, but there are many Australian-listed companies with projects overseas, which offer access to future production.

Bannerman Resources Ltd., A-Cap Resources Ltd. and Berkeley Resources Ltd. are junior miners with projects that would be of interest, he said.

This article was written by Alec Wilson





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Thursday
Mar252010

Jon Hykawy: Lithium Heats Up as Demand Increases

Jon Hykawy.JPG
Source: Interviewed by Ellis Martin, of The Energy Report 3/25/10
http://www.theenergyreport.com/pub/na/5914

Lithium is hot, hot, HOT—according to Byron Capital Markets Lithium Analyst, Jon Hykawy, who foresees continuing demand growth as technology is perfected and consumer demand increases globally. The Energy Report recently caught up with Jon to learn more about the range of factors currently supporting both the lithium and vanadium markets, as well as some exciting lithium-producing prospects.

The Energy Report: Jon, you're a very strong proponent of lithium and from what you've told us previously you believe it's hot. How hot is it?

Jon Hykawy: Hot and getting hotter. What we've seen recently is a number of deals coming to market looking for financing and those deals are getting done. We're currently in the midst of one Toronto IPO. It's an Australian-listed company called Orocobre Ltd. (AU:ORE). The company just put out press releases suggesting that they're going out and raising $22 million, to be exact. There's a rumor that we're going to see their direct neighbor on the salar in Argentina come to market soon with their IPO. We've seen a number of offtake and partnering agreements being signed including the Toyota Tsusho (OTCBB:TYHOF.PK) agreement with Orocobre. The interest in the sector has never been greater.

TER: How are these deals getting financed so easily compared to other rare earth deals?

JH: I think part of it is we're seeing so much media attention paid to electric vehicles. I was actually just at the Geneva Motor Show. That particular event was actually being referred to by people in Geneva as the "electric car show." I went in at the behest of my company president to take pictures some of the new hybrids and electric vehicles that are available. I realized about 10 minutes in that I was going to have to ration the number of flashes I was expending from my cell phone camera because I was going to run out of battery. Every major dealer of motor vehicles in the world was represented there and each of them had new hybrids and/or new pure electric vehicles.

TER: Is the lithium ion battery going to be sustainable over the next two years with potential new technologies coming into the market?

JH: Absolutely. The new technologies that are potentially coming to market are largely new iterations of lithium ion batteries with new chemistries in the cathodes and new materials being used for anodes. You can improve lithium batteries considerably from here. Keep in mind this is a technology that's only really been under development since the mid '80s and commercially since about the late '90s. This is a technology that has a long way to go.

TER: You mentioned in one of your research reports that you're recommending that investors consider a basket of lithium companies. A lot of these are development companies from what I understand. Are they long-term plays?

JH: They are. Well some of them are longer-term than others. There's really no way to play lithium directly out of the existing producers with the possible exception of Talison Lithium (currently a private company) coming to market; should they come back for the IPO and should that succeed. Talison, in the minds of most investors, I believe, is not going to play a major part in the battery industry. What you're looking for is lithium development companies that can play that role producing inexpensive battery grade lithium. That largely consists of brine and clay producers. That's the basket that we're referring to. It's companies similar to the ones we have under coverage like Western Lithium Corp (TSX.V:WLC), Rodinia Minerals Inc (TSX.V:RM) and Salares Lithium Inc. (TSX.V:LIT).

TER: Explain the difference between brine and clay producers, if you don't mind.

JH: With regard to brine producers; lithium is commonly produced today by pumping salty water out of dry salt lakes in South America. This has historically continued to be the least expensive way to produce lithium. The lithium is in the brine in the form of lithium chloride salt. What you do to simplify it dramatically is you basically evaporate the water leaving behind the lithium in the brine and then treating it to produce a chemically tractable form. The clay producers are a different story. Western Lithium is one of those companies with an extremely large deposit of a lithium-bearing clay in Nevada, actually near the northern border with Oregon. They have the ability to produce, according to their scoping study, relatively inexpensive lithium. It should be very clean lithium which also brings the cost down for producing that ultra pure battery grade. We're very positive on that possibility and we have a couple of other brine companies that we believe have relatively low cost and can find their way into the market as well.

TER: You stated earlier that brine-based lithium supplies are active and cannot be produced too quickly, referencing evaporation. If the supply is there, won't it come down to companies that can bring it to market quickly in the long run as far as share value is concerned?

JH: It has to get to market relatively quickly and relatively inexpensively. With any commodity industry, your biggest issue is maintaining control of your costs. You must make sure that when the inevitable price decreases do hit the market, you are not one of the companies that fail as a result. Our basic approach at Byron has been to build a model for what we believe the pure variable cost for production out of a specific deposit is and then look to find the lowest cost potential producers.

TER: Is the potential nationalization of lithium in Bolivia and Chile where Salares is going to potentially affect the price of lithium?

JH: Actually it's not even potential anymore. Bolivia has announced that they're going to be creating a national lithium company whose mandate I believe is to go out and develop Salar de Uyuni as a source. The media hype over the last year has been that Bolivia is the pending Saudi Arabia of lithium. That Salar de Uyuni is the greatest deposit in the world. I'm afraid that is going to be much more problematic than most people think. Our original lithium report indicated that one of the major cost drivers is the amount of magnesium dissolved in the brine along with lithium. The higher the level of the magnesium, the more expensive it is to produce the lithium and Uyuni is an absolutely marvelous source of magnesium. You're going to have a significant problem developing that economically.

We don't have any shortage of lithium. What we have is a shortage of inexpensive lithium and that's going to come back to bite the Bolivian company. I just don't see how they're going to be able to develop Uyuni at present price points. As far as Chile is concerned, there's been one senator that's proposed nationalizing the industry. The government has just changed recently to a more central right government as opposed to the left-leaning party that was in power previously. I think you're going to see a much more pro-business and pro-mining stance taken by the government there. I don't think nationalization is in the cards.

TER: When you're looking at a company like Salares in Chile and comparing them with Western Lithium in Nevada, would you as an investor take position in both?

JH: There are different risks associated with each. No one has yet produced commercial quantities of lithium from clay in Nevada or anywhere else for that matter. You have to balance the technology risk. We believe it's relatively minimal because the processing of clay for lithium looks very much like the processing of hematite or magnetite ores for vanadium. That's a process that's been conducted commercially for decades now. Balancing the two, I think you're probably better off finding a basket of collectively low cost potential producers. Fifteen percent of world production comes from FMC Lithium Corporation (NYSE:FMC) at a place in Argentina called Salar del Hombre Muerto. That is expensive lithium and it's not an inexpensive place to produce from. It's significantly more expensive than Atacama. It leaves a fair bit of room for others to come in and try to take up some of that 15% market share.

TER: That helps drive the market, does it not?

JH: It absolutely does. It's not only growth in the market overall which we see being significant over the next few years; it's the potential to displace some of the expensive supply that's in the market place today.

TER: How many companies are in the lithium basket?

JH: We have three names under coverage and they are Canadian-listed companies. We haven't touched companies like Orocobre which has signed an off-take agreement with Toyota Tsusho. This will provide Toyota Tsusho with the ability to buy up to 25% of their first project. That's a significant endorsement making Orocobre a pretty strong company in the space. Beyond Rodinia Minerals, Salares Lithium and Western Lithium, which we like and have under coverage, another Canadian-listed name that is an obvious candidate would be Lithium One Inc (TSX.V:LI). We don't have a recommendation on it at this point but people can look it up. What they'll find is that Lithium One is sharing Salar del Hombre Muerto with FMC. When you have a company producing 15% of the world's lithium just down the road, it's a pretty good indication that you know you might have a commercially viable project on your hands as well. Literally they are right across the salar from one another, so this is not a proximity play. This is a direct neighbor on the same producing salar. That's good in some ways having that proximity. It's bad in other ways in that they are sharing the same water.

TER: Cobalt is a more prominent component of the lithium-ion battery. Is there a basket of cobalt companies we should be looking at?

JH: I'm going to have to say definitively no and there's a good reason for it. You're right. In current lithium ion batteries cobalt is a significant component. I know a number of institutional clients that have been approached and told that you have to own cobalt and lots of it because there will be huge demands on this as electric cars roll out. But we're also all familiar with what we've seen on YouTube and television regarding battery failure. The fact is that very occasionally these batteries do explode, and at the very least burst into flames. That's actually a function specifically of the cobalt that's in these less than modern lithium-ion batteries.

The cathode material that's in the battery you have in your laptop computer actually contains a material called lithium cobalt oxide. It has the unfortunate property that at the same temperature that it reaches when it's operating and/or being charged it can start to give off oxygen gas. That liberation of oxygen gas is exothermic. That means that the battery heats up even more. So you get into this vicious spiral where the battery heats up and even more so it gives off more oxygen. Before you know it, the battery is very hot and the pressure's built up inside the cell. What's supposed to protect that battery is a small device called a thermistor. That senses the temperature in the battery and if necessary either cuts off charging or cuts off function of the battery entirely until it cools down. Sometimes the thermistors don't work. When the thermistors and other safety systems fail, the battery bursts open and you have a hot battery exposed to oxygen and everything catches fire. The auto manufacturers decided a long time ago that they would not risk the small likelihood or probability of one of these battery cells catching fire. So they've come up with a number of battery chemistries for the cathode that don't include cobalt. This would include the lithium manganese oxide that's intended to be used in the Chevy Volt. It would also include a number of the lithium polymer designs that the Japanese are working on as well as the lithium iron phosphate that A123 Batteries out of the United States has. The lithium vanadium phosphate that BYD Company Ltd. (OTCBB:BYDDF) in China is researching is also relevant. All of these chemistries are inherently safe. None of them have that same potential of popping the battery and causing a fire that lithium cobalt oxide does and none of them contain cobalt.

TER: Isn't that devastating news for cobalt companies?

JH: I don't believe so. Cobalt companies by and large trade on the strength of the use of cobalt in various steel alloys. Steel is still a very high growth area with demand coming in out of China and other developing regions. If they're trying to trade on the potential of huge uses of cobalt in automotive batteries, I would say they're out of luck. You will probably see a pullback in the use of cobalt even in devices like cellular telephones and PCs with time. The analysis we've done indicates that on a raw material basis, because of the price of cobalt, other materials higher in phosphates, vanadium phosphates, magnesium dioxides which combine with lithium are significantly cheaper than cobalt oxide.

TER: What is vanadium exactly?

JH: Vanadium is a metal that has some very interesting electrical as well as physical properties. One of the odd things it does is it dissolves in iron and steel creating an alloy. At relatively low levels it can produce extremely strong construction steels. It's used to significantly strengthen and bring up the quality of steels at a very reasonable price point. But at 4% or 5% alloy in steel, vanadium actually makes it strong enough to become high speed tool steels. So these would be the cutting bits in milling machines and that kind of thing. There's not really another material that can do that. People are probably familiar with molybdenum as a steel alloying agent. You run out of the capacity to dissolve molybdenum in the steel long before you reach the strength point that you can achieve with even small levels of vanadium. Niobium is another material you can substitute but it's only about one-third as effective. Therefore, it usually trades about one-third the price of vanadium in the market. More than eighty percent of it goes into steel use like this but we believe there are significant other uses building.

One of those uses is lithium vanadium phosphate cathodes in lithium-ion batteries. There's been a significant amount of research in the last couple of years on which cathode materials make the best potential lithium battery. What you want in a lithium battery is a battery that produces relatively high voltage because voltage equates somewhat directly to power out of a battery. But you also want to produce a battery that has significant energy content. It can hold more per charge than the standard lithium cobalt oxide battery that's out there. Fortunately vanadium phosphate satisfies both criteria. It has a higher voltage—around 4.7 volts or 4.8 volts—compared to about the 3.7 that the standard battery produces today. It also has about 22% more energy content. If you factor that into a car, what you would get is a battery that is inherently safe. It can likely recharge faster because it won't matter if you heat it up a little bit more. It will accelerate and have the capability of accelerating faster because it can produce more power. It will take you 20% to 22% further down the road per charge all at a lower price than a lithium cobalt oxide battery. So we're fairly excited about that and the potential for these batteries to roll down into smaller electronics like laptop computers where operating life is important. The other place where we see it being important is in the manufacture of grid storage technologies like vanadium redox batteries. These redox batteries are very, very large scale storage systems. They last from years to decades before they fail. They can store megawatt-hours worth of energy which is grid level storage and can produce megawatt levels of power. They are not small batteries by any means and are about the size of the building that would contain a big-box store. They can do some very interesting things in terms of backing up intermittent or less reliable forms of alternative energy generation during winter months.

TER: With all the variations of uses for vanadium would you expect it to see a basket of vanadium companies?

JH: Well we think the potential is certainly there. One of the things that you have to be aware of is that the battery side of the business hasn't hit yet. You don't know with technology. It may or may not work out. We believe it will. We built that into our projects but even the basis of increasing steel demand you need more junior vanadium companies. You need more vanadium in the world.

TER: Do you see that happening anytime in the near future?

JH: We do. One company that we have under coverage is Largo Resources Ltd (TSX.V:LGO). They have an excellent deposit in Brazil outside a small town called Maracas. It's in fact the highest grade deposit that we've seen. It's not the largest resource that we've seen, but the important thing is getting it out of the ground economically. They have what we believe is one of the lower cost potential vanadium projects in the world. Their likely cost for production is around $13 per kilogram. Vanadium has never gone below about $20 per kilogram in selling price. In the last economic downturn that we've just come out of, a large number of vanadium producers shut their doors because vanadium had dropped to around $30. This company could've easily weathered that and taken a significant market share away from others. They'll be in production we believe relatively soon and are in the process of finalizing project financing for the Maracas project.

TER: Do you see the demand for this metal increasing since its only use is in steel at this point?

JH: No doubt about it. You're getting significantly higher demands out of China on the basis of Chinese growth alone simply because the Chinese are mandating better and better grades of construction. So your choices in construction are: use twice as much conventional steel at a much higher cost or use vanadium dope steels. Use significantly less steel build buildings that are just as strong but have more workable room inside of them that you can actually lease to people. It comes down to a much easier choice. Stronger grades of vanadium dope steels are used and that's the best choice for any sort of construction today.

TER: Are there any supply issues related to this metal?

JH: Sadly there are and that's been an unfortunate aspect that may well contribute to curtailing its use in batteries. We've seen the price of vanadium over the last two years fluctuate between currents level of $25 or $30 and as high as $80 or $85 per kilogram. You can't have a material that you're using in significant quantities in a battery vary by that kind of amount and expect to build a business off of it. I can give you some concrete numbers in that regard. If you look at something like the Nissan Leaf and the battery that would go into driving a Leaf, that's a 24 kilowatt hour battery. This is very significant capacity in terms of energy storage. It would use roughly 20 to 25 kilograms worth of lithium carbonate equivalent. Lithium carbonate today sells for about $5,000 a ton. So you're looking at about $100 to about $125 worth of raw lithium going into that battery. The battery will sell for $10,000, a fairly insignificant amount. Were that battery to be constructed using lithium vanadium phosphate chemistry, it would contain several thousand dollars worth of vanadium. If it were to suddenly triple in price it might go from $2,000 worth of vanadium to $6,000 or $7,000 worth of vanadium. Suddenly the manufacturer of that battery doesn't see any margin on any sale. In fact they might be selling those batteries at a loss. No one's going to risk a long-term contract on those batteries. If there's no long-term contract the automotive manufacturers certainly aren't going to use it. What you need to really satisfy the requirement for stable pricing is additional supplies in the market.

TER: Are there potential projects out there where we'll find more vanadium or is it just truly a supply issue in the world?

JH: I know of four listed companies in Toronto. As well as Largo, there's a Chinese play called Sino Vanadium (TSX.V:SVX) as well as Energizer Resources (OTCBB:URST;FWB:YES) (formerly Uranium Star) that has a project in Madagascar. There is also a company called Apella Resources Inc (TSX.V:APA;FWB:NWN). There are absolutely projects, but here again it's a matter of finding economic deposits. They're tougher to come by in the vanadium space than many because it is a relatively scarce material.

TER: This has been very informative. Thank you for your time.

Toronto-based Jon Hykawy, who earned his PhD in physics (University of Manitoba, 1991) and an MBA (Queen's University, 1997), spent four years in capital markets as a clean technologies/alternative energy analyst before being named lithium analyst at Byron Capital Markets in August. Jon began his career in the investment industry in 2000, originally working as a technology analyst concentrating on the lithium space. Jon has become a valuable resource on everything about the light, silver-white metal—from supply and demand to exploration and production. He has extensive experience in the solar, wind and battery industries, conducting significant research in the areas of rechargeable batteries, from alkaline to lithium-ion to flow batteries.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.
DISCLOSURE:
1) Ellis Martin of The Energy Report conducted this interview. He personally and/or her family own shared of the following companies mentioned in this interview: None
2) The following companies mentioned in the interview are sponsors of The Energy Report or The Gold Report: Western Lithium Corp., Salares Lithium Inc.
3) Jon Hykawy does not own any of the stocks mentioned in this article, nor does he receive compensation from any of the companies mentioned.

Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.
Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.
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Tuesday
Mar232010

China to Build 28 More Nuclear Power Reactors by 2020

Business Week Logo 24 March 2010.JPG

China, the world’s second-biggest energy user, approved the construction of 28 more nuclear power reactors under a revised target for 2020 to meet rising demand for clean energy and accelerate development of the industry, according to Bloomberg.

Each of the one-gigawatt reactors will cost as much as 14 billion yuan ($2.1 billion), Mu Zhanying, general manager of the state-run China Nuclear Engineering Group, said in an interview in Beijing today. One gigawatt is enough to power 800,000 average U.S. homes.
Under the original plan announced in 2005, China was to spend 400 billion yuan to add 40 gigawatts of nuclear capacity by 2020 to help reduce reliance on more polluting coal and oil. The capacity will exceed 70 gigawatts by then under the revised plan, Wang Binghua, chairman of the State Nuclear Power Technology Corp., said on March 20.

“China will be the world’s nuclear industry leader in terms of technology and also in terms of planning for long term 30, 40 years,” Tony De Vuono, senior vice president and chief technology officer at Atomic Energy of Canada Ltd., said in a separate interview in Beijing. “It’s pretty close to that right now. The Chinese government is very committed to nuclear.”

Construction of 20 of the 28 reactors has already begun, Sun Youqi, vice president of China National Nuclear Corp., said at an industry exhibition in the Chinese capital today. It would take 50 months to build one reactor, according to Mu.

The country currently has 9 gigawatts of nuclear capacity in operation, the China Electricity Council said on Aug. 14. Details of the government’s revised plan will be announced this year, China National Nuclear’s President Sun Qin said on March 5.

Interesting to note that they can build a reactor in 50 months or just over 4 years when it takes between 8 and 10 years to build one in the west. I guess we can expect to them to compete with your local nuclear power plant builder some time soon.


Have a good one.

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Monday
Mar222010

Australians Require Assurances Regarding Uranium Exports

Sydney Morning Herald Logo.JPG


It would appear that not Australians are confident that their exported uranium will be used solely for peaceful purposes and more assurance is needed that the right protocols are in place.

A 2005 survey of 1200 Australians found that 56% of us believe that the International Atomic Energy Agency's nuclear 'safeguards' system is ineffective.

Barely half as many believe the system is effective.

Public concern will be heightened by the Rudd Labor government's response on Thursday to a parliamentary inquiry into proposed uranium sales to Russia.

The inquiry – carried out in 2008 by the treaties committee – refused to endorse the uranium export agreement signed by John Howard and Vladimir Putin. One of the reasons was the failure of the agreement to specify meaningful safeguards arrangements to provide confidence that Australian uranium will remain in peaceful use.

The treaties committee was unmoved by the claim of the Australian Safeguards and Non-proliferation Office that "strict" safeguards conditions would "ensure" that our uranium remains in peaceful use. All the more so after Friends of the Earth revealed that there hasn't been a single International Atomic Energy Agency (IAEA) safeguards inspection in Russia since 2001 – information which the safeguards office conspicuously failed to provide to the committee.

But resources minister Martin Ferguson isn't fussed.

His statement on Thursday asserts that the Howard-Putin agreement "would ensure that any uranium supplied could only be used for peaceful purposes". It doesn't – but Mr Ferguson isn't going to let the facts get in the way of a good story and he isn't going to let concerns over safeguards get between the uranium mining companies and a bucket of money.

Mr Ferguson asserts that "the safeguards enshrined in the Agreement are consistent with Australia’s long-standing and strict requirements to ensure the peaceful use of Australian uranium." But that is precisely the problem, Mr Ferguson – Australia exports uranium with no requirement for IAEA inspections to take place.

Moreover, the Howard-Putin agreement makes no provision for independent, Australian inspection and verification and we are therefore totally dependent on IAEA safeguards – which are non-existent! It would be funny if it wasn't true ... and if it didn't involve feedstock for Weapons of Mass Destruction.


To read the article in full please click here.



Have a good one.

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Sunday
Mar212010

Regime Change in Niger Prompts Audit of Mining Contracts

Map of Niger 22 March 2010.JPG


The new military government in Niger has decided to instigate an audit of the mining contracts starting with the uranium and gold sectors, which usually means that they would like a larger share of the cake. Companies such as Areva SA and Semafo Incorporated operate in Niger and no doubt will be concerned as to how these changes will impinge on their operations.

Niger, the world’s sixth-largest uranium producer, will review mining agreements with companies including Areva SA to ensure they’re fair to the West African country, a mines ministry official said.

Minister of Mines and Energy Souleymane Mamadou Abba, appointed by Niger’s military rulers on March 1, hasn’t yet set a schedule or format for the audit, Mahaman Laoun Gaya, an official at the ministry and a former government minister, said by phone today from the capital, Niamey.
“The military authorities have decided to audit all the uranium and gold contracts,” Gaya said. “These are the most important ones to look at. The new government has only just taken office, so we don’t have any details yet.”

Niger made up about 6 percent of world uranium output in 2008 and it may reach 9 percent by 2015, BMO Capital Markets analyst Edward Sterck wrote in a Feb. 19 note. Most of the output is managed by Areva, which is investing 1 billion euros ($1.36 billion) in its third mine in the country, he wrote.

Salou Djibo, a squadron leader in the military, on Feb. 18 overthrew President Mamadou Tandja, who changed the constitution to allow himself a third term in office. The military junta hasn’t set a date for the democratic elections it promised.

Areva, the world’s biggest supplier of nuclear reactors, “is ready to meet the Nigerien authorities if they wish to review the mining agreements signed with their government,” the company said in an e-mailed response to questions.

‘No Problem’

Chief Executive Officer Anne Lauvergeon said March 4 that Niger’s president “clearly stated that there was no problem” with Areva. “My understanding is that some announcements have suggested that certain mining permits, with other companies, were not established in a completely transparent way.”


Nigerien transparency campaigner, the Network of Organizations for Budgetary Transparency and Analysis, on March 12 called for a review of all mining and oil deals in the country. The group “strongly recommends a commission of inquiry on the mining and petroleum contracts as soon as possible,” it said in an e-mailed statement.

Canadian gold producer Semafo Inc. operates the Samira Hill mine in Niger, which produced 56,900 ounces in 2009, Jean-Paul Blais, the company’s vice-president of corporate affairs, said by phone from Montreal, Canada today.

To read the article in full please click here.



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Thursday
Mar182010

John Kaiser: Game-Changer on Rare Earths Horizon?

John Kaiser.JPG

Source: Interviewed by Sally Lowder of The Energy Report 3/18/10
http://www.theenergyreport.com/pub/na/5856

Kaiser Bottom-Fish Report editor John Kaiser, caught for this exclusive Energy Report interview as this year's PDAC was winding down, suggests that the bigger the event grows, the fewer the opportunities to pick up buzz during informal networking. Still, he did come away from the 2010 Prospectors & Developers Association of Canada International Trade Show & Investors Exchange in Toronto last week with a bit of news that may be a game-changer in the rare earth space.

The Energy Report: You're a long-time participant in the annual PDAC convention. Everybody who wasn't able to be there wants to know about any compelling stories or particularly interesting tidbits that you learned this year, when the event brought people into Toronto from more than 100 countries around the world.

JK: In the past few of the 20 years I've been going to this conference—and this year is no exception—it has become increasing difficult to pick up any prominent buzz, be it about a sector being red hot or be it about a major new discovery.

TGR: Why do you suppose that's happening?

JK: The reason is simple; this conference has become so big, so global. What in 1994 would have been the big Voisey's Bay's buzz that everybody was talking about or Bre-X in the following year, even if something like this did come along now, the collective size of 400 companies exhibiting would dwarf it. . .There are several hundred trade show exhibitors; numerous talks covering everything from country-focused issues to deposit models to new discoveries and so on. It's very difficult for any single thing to stick out.

Even worse, because it is now so large and dispersed, you do not have that intensity of networking of the past, the random networking where you would bump into people you hadn't seen for a long time and hear about this or that. By the end of the conference you had all these bits and pieces gelling in your head and you could say, "Oh, yeah, this was what was interesting." No, now it's more you know in advance what you're looking for; you make the sessions; you track down those companies, and you have the face-to-face you planned with these. So, the old aspect of serendipity of bumping into stuff and stuff floating to the surface just does not happen in this environment.

TER: Did you come away with any sense of how people are feeling about the economy?

JK: There was no irrational exuberance at all at this conference. In fact, it's a bit like a teeter-totter poised to go either way. There is hope that China will pull the global economy back on track and reinvigorate Europe and the United States. On the other hand, there also is concern that this will fall apart, and that as the fiscal stimulus packages come to an end interest rates start to rise that we will see a double-dip recession in the North American markets. And if that happens to coincide with a problem in China, which has been going hell-bent at an incredible pace thanks to its $585 billion fiscal stimulus program, there is concern that this could end very badly.

So we are almost in the eye of a hurricane, and everybody's wondering where we will be next year.

TER: Which way are you leaning?

JK: My own feeling is that if we come out of this with the global economy back on track and the disparate signs of life that we see in the North American economy are actually more than just flickers, next year we should see the supercycle that dominated the talk at this conference from '03 to '08. This time it will be taken seriously, and massive amounts of money will flow into the sector. But as I say, it all hinges now on where the global economy goes.

TER: Anything else that stands out from your PDAC experience this year?

JK: Quite a few of the rare earth companies were represented, there were several rare earth receptions and a whole morning devoted to talks about the rare earth deposits, geology, market and so on. These were surprisingly well-attended for a Wednesday morning, when traditionally 90% of the delegates are still in bed. So that is actually a pretty good indicator of the interest in this space.

Particularly with the assistance of one of the stocks listed going up during the days of the conference, I would say that the rare earth space is probably on the threshold of achieving a whole new level of serious attention from investors.

TER: Any companies in that space that you find particularly interesting?

JK: The interest has been a lot of talk and a lot of tire-kicking, but not really a lot of money going into the treasury. This may change in the not-too-distant future, though.

TGR: How so?

JK: I had an interesting meeting with a representative of Molycorp Minerals, who explained their timeline of activities. If I understand it correctly, we could see a Molycorp IPO before the summer. What the institutional market is missing in the rare earth sector is a vehicle large enough for serious investments. There has been incredible media buzz about the rare earth space. The Chinese are very clearly interested in seeing rare earth deposits developed outside of China to take the pressure off them to export what they consider a resource they need to hoard for the long term.

Having said that, nobody wants to buy stocks such as Quest Uranium Corporation (TSX.V:QUC) to any large degree. With these smaller players, there are so many uncertainties about whether the feasibility study will indicate a profit margin, whether they'll ever get a permit to get to production, or whether the metallurgical process actually will work. An aversion to investing in these very risky single-asset projects has inhibited the serious money coming into these plays. If a major company such as Molycorp does an IPO and lists on the New York Stock Exchange, though, it will validate the space and pull a lot of money into all the smaller companies. So I sense the timeliness for this improving over the next two or three months.

TER: Do you see any other companies besides Molycorp with an asset base that could actually pull off something as significant as an IPO and list a rare earth play on the New York or Toronto Exchange?

JK: A counterpart is Lynas Corporation Ltd. (ASE:LYC), listed on the Australian Stock Exchange. This company has a market cap of AU$815 million, and last year raised AU$450 million basically from institutional investors around the world after the Australian Foreign Investment Review Board said no to a Chinese proposal to put up debt and equity financing in exchange for majority control of Lynas. So this has already happened in Australia, but that market is not as liquid and popular as, say, the New York Stock Exchange.

I wouldn't be surprised if Lynas Corp. also seeks a New York Stock Exchange listing; however, the significance of Molycorp is that this is a home-grown, American deposit, and on April 1, we're supposed to hear the results of the RESTART bill proposal, an analysis of what America's vulnerabilities are to rare earth supply. If they decide that we have a problem here, the intensity of the hand-wringing about what to do about it would increase and companies such as Molycorp will receive a lot of attention as at least a major part of the solution to the problem. As you may know, Molycorp has been in the process of getting its Mountain Pass deposit back into production, and it also has the ability and the knowledge base necessary to acquire other projects elsewhere in the world to beef up its rare earth supply potential.

TER: Thank you, John. You also mentioned RESTART in a previous Energy Report interview a couple of months ago ("John Kaiser: Balancing Security of Supply Worries with Optimism on the R&D Front"). We recently saw a news release about this recently, and for readers who aren't familiar with it, RESTART stands for "Rare Earth Supply-chain Technology and Resources Transformation" (for more information, see below).

John Kaiser, a mining analyst with 25-plus years of experience, produces the Kaiser Bottom-Fish Report. It specializes in high-risk Canadian resource sector securities and seeks to provide investors with a framework for intelligent speculation. His investment approach integrates his "bottom-fishing strategy" with his "rational speculation model." After graduating from the University of British Columbia in 1982, John joined Continental Carlisle Douglas, a Vancouver brokerage firm that specialized in Vancouver Stock Exchange listed securities, as a research assistant. Six years later, he moved to Pacific International Securities as research director and also became a registered investment adviser. Not long after moving to the U.S. with his family in 1994, John cast his own line in the water, so to speak, with publication of the premier edition of the Kaiser Bottom-Fish Report.

******
Note: RESTART, proposed as a means of reviving a competitive rare earths industry in the U.S., has been put forward as potential legislation by an organization known as USMMA, the United States Magnet Materials Association. USMMA reported submitting this proposal, designed to create a path forward toward "a ‘whole-of-government' approach to resolving the Rare Earth Elements (REE) supply crisis," to a number of federal entities—the U.S. Department of Commerce, U.S. Department Energy, U.S. Department State, U.S. Department of Defense, Office of the U.S. Trade Representative, and Office of Science and Technology Policy within the Executive Office of the President. The RESTART proposal calls for up to $1.2 billion in funding to reestablish domestic rare earth mining as well as U.S. facilities for refining, alloying, melting and production of rare earths and rare earth-based products.

USMMA said that it has already successfully advocated for inclusion of a congressionally-mandated study of the rare earth supply-chain in the FY10 National Defense Authorization Act. The organization was founded by three high-performance magnet producers and suppliers in 2006: Thomas & Skinner, Inc. (Indianapolis, IN), Hoosier Magnetics (Ogdensburg, NY) and Electron Energy Corporation (Landisville, PA) in 2006. U.S. Rare Earths, Inc. (a private company) joined the group in 2009.
******

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1) Sally Lowder of The Energy Report conducted this interview. She personally and/or her family own none of the companies mentioned in this interview.
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Wednesday
Mar172010

Canada Relaxing Foreign Investment Rules in the Uranium Sector

Uranium Chart of Countries 17 March 2010.JPG


With uranium prices continuing to slump, what's the outlook for one of the world's largest uranium producers? And how will relaxing foreign investment rules for uranium mining in Canada change the industry's dynamics?

Jerry Grandey, president and CEO, Cameco.JPG


BNN speaks to Jerry Grandey, president and CEO, Cameco, please click here to watch the clip.

Jerry Grandey argues the case for reciprocity in that he would like to see other countries offer Canada the same terms for investment in their countries.

There is also an interesting chart showing one analysts opinion of the possible oversupply going forward, to which Gerry responded that we are still producing 125 million pounds a year and using 175 million pounds a year.


As for new nuclear plants in Ontario he reckons it could be towards the end of this decade or the next one and will be driven by the demand for clean air.

Uranium Glut 17 March 2010.JPG


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Tuesday
Mar162010

New Baghdad and the Collapse of Capitalism

Dubai 17 March 2010.JPG


By Doug Hornig, Casey Research

Forty years ago, it was a small town on the Persian Gulf, merely one of seven sheikdoms joined in federation in 1971 to create the United Arab Emirates. Basically, there was nothing there but sand. Yes, oil had been discovered under that sand, and the city/state was enjoying its first economic boomlet. From about 60,000 in 1968, population tripled by 1975, doubled in the next ten years, and nearly doubled again by 1995.

Problem is, especially compared with many of its Gulf neighbors, it didn’t have all that much oil to begin with, and its reserves were falling fast. What it did have was Sheikh Mohammed bin Rashid Al Maktoum, the most influential member of the family that had ruled for more than a century and a half. And the sheikh had a vision.

Sheikh Mohammed believed that the Muslim world needed a New Baghdad, a center of commerce and learning and culture that would shine like the hub of the old caliphate, which had dominated the civilized world a thousand years earlier. He was determined to erect a dazzling, ultra-modern new metropolis, starting from scratch.

On the sands of Dubai.

The rest of the story is pretty well known. The crown prince, and later ruler, of Dubai had his way. His emirate became one of the richest and gaudiest places on the planet. Population shot to almost 1½ million, about 90% of them immigrants – from unskilled Bangladeshi laborers to software engineers from the U.S. – all lured by the promise of better-paying jobs than they could find at home.

Even more striking was the explosion of construction projects. Up went mansions, office skyscrapers, artificial islands, stadiums, a speedy Metro, a busy international airport, and the world’s only 7-star hotel, among other things. And the capstone was, of course, the Burj Khalifa, formally opened on January 4.

The Burj Khalifa is the tallest manmade structure on earth. Not by a little, mind you; halfway is not a word in Sheikh Mohammed’s vocabulary. Tallest by so much that it boggles the mind. It’s 2,717 feet high. That’s more than half a mile. For comparison purposes, take New York’s late Twin Towers. Stack them one atop the other. Now you’ve got the Burj Khalifa.

Begun in late 2004, the building was originally budgeted at US$869 million. Final tally as we entered 2010 was something north of a billion and a half. That bought the first luxury hotel to bear the Armani name, four swimming pools, a 158th-floor mosque, 57 elevators, and an observation deck at 1,450 feet, along with 52,490 square meters of office space and 288,000 square meters divided among 900 apartments.

Its coming-out party, with 10,000 fireworks and synchronized fountains shooting jets of water 150 feet into the air, was a spectacular light show, worth watching if you haven’t yet seen it, here http://www.youtube.com/watch?v=yRxxv6AZ_xg&feature=fvw . Hard to believe that you’re looking at a bone-dry desert.

You may also be looking at a gargantuan white elephant. Although every unit in the Burj Khalifa has supposedly been sold, some unknown percentage of buyers (likely very large) was speculators who opted in during the height of the world real estate boom. Properties were flipped like it was Southern California. At the market peak, modest flats were fetching more than $2,700/sq. ft. No wonder Emaar Properties, developer of the project, claims it has already recouped its capital outlay from these suck--, er, investors.

Those prices have now plummeted by up to 50%. Of the folks left holding the bag, how many of the 25,000 slated to live in the building will actually do so? We don’t know, and no one who does will talk vacancy rates. In terms of transparency, Dubai makes the Bush administration look like an ad for Window World.

What we do know is that at the moment the structure is the Big Empty. Western critics have limbered up their keyboard fingers in order to pound out expressions of disdain, everything from “The Final Monument to Excess” to “Bling City Is Dead” to “The End of Capitalism.” The first may be apt, as we’ll probably not see the likes of the Burj Khalifa again, but the last? That’s something we want to look at more closely. There is a lesson to be learned.

The truth of the matter is that there were two key, and contradictory, elements to the Dubai miracle, and when the world recession hit in 2007, one overrode the other and the whole thing came tumbling down.

First: As noted, Sheikh Mohammed didn’t have a river of oil money to rely on. So how did he manage to build his gleaming city by the sea? On the surface, it was simple. Turn Dubai into one of the world’s premier places to do business. Make it essentially tax free. Create investment incentives. Attract entrepreneurs from all over. Enlarge and capitalize on the city’s status as a deep water port. Replace traditional smuggling with legit import/export operations. Become a world financial center.

In short, install the best aspects of free-market capitalism, then send an Open for Business letter to the world.

It worked. Capital, resources, and personnel flooded in. By 2005, oil and gas were responsible for only 6% of the emirate’s GDP. Property and construction was the biggest contributor at 22.6%, followed by trade at 16%, entrepôt (duty-free import/export business) at 15%, and financial services at 11%.

No one, apparently, thought it ominous that nearly a quarter of GDP was generated by the construction and trading of properties, nor paused to consider what would happen when the music stopped and supply exceeded demand. Dubai was riding high, a model for other resource-poor, developing nations, showing them how to get rich.

Today, the hot desert wind blows through half-buildings that will never be finished. Immigrants, their work visas rescinded, are rounded up and sent home. Mercedes Benzes and Jaguars have For Sale signs taped to their windows or are just abandoned at the airport. Real estate prices tanked by 50% in 2009 and are projected to suffer another 30% haircut this year. The stock market has plunged 70%. Unmaintained, the artificial islands designed as millionaires’ playpens have begun to sink beneath the sea.

The glorious ride is over. But just in case there was any doubt, the point was hammered home last November, when Dubai World – one of the country’s leading development conglomerates – told creditors it was declaring a six-month moratorium on repayments it could no longer make.

That sent shock waves through financial markets the world over. Everyone, it seems, had invested in Dubai during the boom times. Now they’re staring at a very unfavorable restructuring at best and flat-out default at worst.

Dubai’s debt, or at least as much of it as its rulers will reveal, is about US$80 billion, or 140% of GDP. Bad enough, but it may well be significantly understated. One local investment banker puts the real number in the $120-150 billion range; with no balance sheets to pore over, we can’t know. Dubai will ask oil-rich fellow emirate Abu Dhabi for help, but there are no guarantees help will be forthcoming. Abu Dhabi has always cast a disapproving eye on Dubai’s helter skelter expansionism, and if it does step in, it will probably demand a whole lot of collateral.

Critics of a certain bent have pounced. History’s grandest experiment in unfettered free-market capitalism ran aground, they cry. Therefore the system doesn’t really work.

Which brings us to the second element in the Dubai miracle. It was built on a mountain of debt that couldn’t survive an economic downturn. And who supported that debt? The government. All of those go-go corporations, like Dubai World, are essentially government owned. Sheikh Mohammed wanted his New Baghdad, no matter the cost.

Granted, private enterprise businesses are imperfect. When in trouble, they will lie and cheat like anyone else. But in the end, they have a bottom line that they have to reveal at some point. Accounting tricks are eventually exposed. Capitalism, like a computer, is strictly binary. A company with sound finances prospers; a company that fails in the marketplace simply disappears.

Government-sponsored entities have no such limitations. They’re actively encouraged to overreach, to take risks that no sane CFO would approve. Because if they bleed red ink, the government is there to step in and prop them up. All of Dubai’s corporations were “too big to fail.” But fail they did, and in the process pushed the government into insolvency as well.

The takeaway from this story is simple. Dubai was no more free-market capitalist than Soviet Russia. Or the U.S., for that matter. If the government is the guarantor of last resort or just perceived as the ultimate reliable source of bailout money, a business has no incentive to be well run. When government (with taxpayer funding) takes a stake in even that most American of corporations, GM, capitalism truly has collapsed. Not, however, because of its shortcomings. Because government has not allowed it to function properly.

Though we lack a symbolic last gasp like the Burj Khalifa, make no mistake about it: we’re all fellow travelers with Dubai now. Washington would do well to study what happened there and hopefully learn a thing or two. Because we’re speeding toward the same crack-up.

The U.S. economy is like an out-of-control sports car in search of a tree, and the government is not “here to help you.” Take matters in your own hands and prepare as best as you can for the crash that will come. To find out what to expect in 2010 and how to bullet-proof your assets, read our FREE special report “The Good, the Bad, and the Ugly.” More here


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Sunday
Mar142010

The reemergence of world nuclear energy

President Sarkozy 15 March 2010.JPG

An interesting 'take' on the financing of nuclear power by the French President, Nicolas Sarkozy, who advocates the deployment of funds from The World Bank for such purposes.


Hosting a meeting at the headquarters of the Organization for Economic Cooperation and Development (OECD) in Paris, French President Nicolas Sarkozy said on 8 March that international organizations such as the World Bank should begin financing the non-military use of nuclear energy. “I don’t understand and I don’t accept the exclusion of nuclear energy from international finance,” Sarkozy, a proponent of nuclear power, said at the opening of a two-day conference in Paris on making atomic power more widespread.

Representatives from some 60 nations gathered at the Paris nuclear energy conference. Iran, whose nuclear program is the target of international concern, was not invited to the talks. But Syria, whose nuclear interests have stirred controversy, was present.

The French President noted that international organizations do not finance nuclear energy. “This condemns countries to using energies that are more expensive and dirtier,” Sarkozy said.

France has 58 nuclear reactors - and two modern EPR reactors under construction - which currently meet about four-fifths of the country’s electricity demand. He said that financing for countries that want to build nuclear reactors would help France’s nuclear energy industry, including Areva and EDF.

The French president told more than 700 conference participants from 65 countries that “the responsible development of non-military nuclear energy” was vital to combating global warming. Sarkozy made a number of proposals to promote the availability and use of nuclear power, including the allocation of carbon credits to non-carbon emitting energy projects after 2013.

He also said that France plans to set up an international institute of nuclear energy to produce skilled engineers and technicians, in addition to establishing a Franco-Chinese centre with a campus in Canton. Sarkozy also proposed the creation of an independent authority on nuclear safety and an evaluation system to rate available reactors on their safety.

To read the article in full please click here.


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Thursday
Mar112010

Rick Rule: Energy Bull



Source: The Energy Report 3/11/10
http://www.theenergyreport.com/pub/na/5809

Rick Rule and Sam Kirtley in Auckland recently.JPG
Rick Rule and Sam Kirtley in Auckland recently

Having had the privilege of talking to Rick on a one on one basis we can tell you that he is very interesting and knowledgeable and well worth listening to, uranium bugs, don't miss his 'take' on Urani-Mania Rerun, in this article.

Rick Rule probably could draw an audience if he were talking about the weather, but combine his presence with knowledge, understanding, experience and a track record of success, particularly in the resource arena, and the crowd falls silent. Founder and chairman of Global Resource Investments, Rick recently made himself available for a brain-drain, the foundation of the piece that follows. . .

Economic Indicators

Lest you think the rallying stock market serves as a leading indicator that good times will soon roll again, along comes Rick Rule to rain on your parade. "The greatest bull market in history, beginning in 1982," he says, has trained people "to believe things will do well and get better"—training he considers lethal—and conditioned them to "buy the dips." Furthermore, he adds, "The amount of liquidity being injected into the system is truly spectacular. A lot of the stock market rally has been liquidity-driven." Interestingly, he notes, that liquidity is short term; while banks are still avoiding long loans that they can't resell to the federal government, Rick sees plenty of short-term money, lots of margin, ample lending to hedge funds, capital markets firms and individual investors.

He considers the markets "seriously overvalued" with the economy in no condition to support the capitalization rates, but expects the rally to continue on the basis of those two reasons plus the gradual thawing of bank credit for merger and acquisition activity.

Bottom line, though, Rick calls it "a bear market trap, a real sucker rally. . .driven by liquidity rather than valuation. And when the inevitable shock to liquidity hits—from additional foreclosures, a collapse in commercial real estate, implosion of municipal markets or wherever—this bull market will be over in a tremendous hurry. He sees a variety of potential catalysts that could take this market down. There's no way of knowing when it will happen and how bad it will be, but he compares the likelihood of it happening to walking through a minefield. The odds are you'll step on a mine and it will explode. "This is a minefield that it would be helpful if you were extremely drunk to stagger through. I do not like the probability of us getting through this without a couple more ugly, ugly, ugly shocks. The idea that we're going to get through this unscathed just doesn't make any sense."

What could go wrong? Leveraged buyout loans in a weak economy. Additional reset loans in the residential market. Commercial real estate lending and commercial real estate capitalization rates. Municipal bond markets.

Rum to Treat Tequila Hangover

As Rick sees it, "The entire set of circumstances that led us into the crash 18 months ago is before us again. . .None of the underlying causes of the problem have been dealt with at all. We had a balance sheet problem; as a society we'd lived beyond our means and our liabilities exceeded our assets both in short and long term. As a society, we've decided to spend more and borrow more. We had too much collective debt, so we took debt from $2 trillion to $9 trillion. We've exacerbated the problem. It reminds me of a mathematical truism—you cannot add a column of negative numbers and get to a positive. That's not the way it works. This is the equivalent of trying to cure a tequila hangover by switching to rum."

Speaking of mathematical truisms, Rick referred to the "cashless earnings" recently reported by a major financial institution. Though he's much smarter than the average bear, Rick confesses that he has "a very difficult time understanding the concept 'cashless earnings,' but the idea that people are excited about it from a bank whose assets are largely ephemeral and whose deposit liabilities people believe are real—that seems very, very problematic."

The idea of ephemeral assets leads to the topic of the U.S. dollar. Isn't its recent strength an encouraging sign? Rick repeats a wisecrack he hears (and makes): "The dollar is in fact the worse currency in the world except all the others." He also alludes to Doug Casey's description of the dollar: "IOU Nothing" (and the euro "Who Owes You Nothing"). As Rick sees it, "currency crises in the last couple of years have always been kicked off by the dollar because people understand its counterfeit nature. For example, if one measure of value is scarcity, they've made the dollar substantially less scarce in the last 18 months by printing so many of them. But so has everyone else. The race to the bottom in the context of the debasement of currencies is a hotly competitive arena. . .the descent will be gradual but punctuated by air pockets. I can't tell you when we'll hit dollar or euro or yuan or peso air pockets, but I guarantee it won't be pleasant on the way down."

When it comes to the debate about whether the current environment is inflationary or deflationary, he thinks the coin falls in favor of inflation. "From a traditional economic viewpoint, you'd have to say the circumstances are deflationary. We are in the midst of a balance sheet recession. We have lived beyond our means and can't service our debts. The normal way to get out of that would be to stop consuming, start earning, paying down debt, defaults and foreclosures—that's clearly deflationary."

The Yield-to-Politician Factor

But ours is a political economy, he argues, and therefore "If you look at inflation-versus-deflation in yield-to-politician (which is what matters), you find a politician has no yield whatever from deflation. A politician who presides over foreclosures and unemployment will get kicked out of office."

Looking ahead to the effects of this economic climate on the resource sector, it's not too surprising to hear Rick say he anticipates a mixed bag. He does expect resource stocks to face some trouble, because "when liquidity is drawn out of the market, either intentionally or as a consequence of hitting an iceberg, there's no mercy. When speculators have to sell, they sell what they can, not necessarily what they want to."

For those reasons, Rick sees "extraordinary volatility. . .with a downward bias in equities markets in general" over the next 12 months. He's been increasing his energy exposure, though; even in a weak economy, "I'm attracted to all forms of energy."

Energy: Powerful Attraction

He describes his outlook on oil prices over the next five years as "very, very bullish." The primary reason is that major oil producers are busy "reducing supply while stimulating demand." Contrary to popular belief, Rick explains, the familiar names we see on the gas pumps aren't culprits here; the major producers are the national oil companies of the world. For an extended period of time, he says, many of the those companies have diverted too much cash flow to "politically expedient domestic expenditure, including starving the oil and gas businesses for reinvestment capital while at the same time subsidizing gasoline, kerosene and heating oil prices." Even if they change direction now, he adds, it's "already too late to forestall declines that are built into their production."

The upshot? "Important exporting countries, especially Mexico, Venezuela, Peru, Ecuador, Indonesia and Iran, could very likely cease to export any oil at all within five years. A market where export demand is growing at 1.5% a year and export supply falls by 25% is in very dangerous imbalance. So without the influx of substantial new production from only three jurisdictions—Saudi Arabia, Kuwait and Iraq—much higher world prices are inevitable."

Rick isn't worried that the oversupply of natural gas will be a serious dampener of the crude oil price in that timeframe. While the infrastructure investment necessary to substitute liquid natural gas for gasoline as a motor fuel is coming, he doesn't see it on the near horizon. In the meantime, "demand for motor fuel will pull up residual fuel oil prices, which will steady the natural gas price." That's as good as it gets for as an energy investor, in Rick's opinion: "Steadily rising prices with moderating costs of production."

Energy investors may also be interested in Rick's take on the future of Canadian income trusts. Although he expects tax law changes taking effect next year to lead to restructuring, he also expects some of the corporations that emerge to remain active in plays that have presented unusually good opportunities to recycle free cash flow. Although investors who purchased trust units for yield might not like it, Rick says, "In the context of energy prices I see five years from now, I forecast actually a relatively bullish future for these companies. In particular, companies with large land exposure in areas where new technology has led to the revitalization of historic plays will grow their asset base by recycling the cash that they would otherwise distribute to unit holders," he says. He specifies four such plays:

The Viking light oil play in Saskatchewan, where the advent of horizontal drilling and multi-stage frac completion techniques are enhancing oil recovery.

The Bakkan in southern Saskatchewan, where wells tend to produce upwards of 200 barrels a day of sweet, light crude oil with 41 degree gravity—higher quality than Saudi oil.
The Cardium in central Alberta, which is somewhat similar to the Bakkan, and where—also similar to the Bakkan—companies are using new horizontal drilling technologies and hydraulic fracturing techniques to exploit the formation's light oil assets.

The various shale gases—Horn River and Motney shales in the Deep Basin in British Columbia, for instance. The potential of the Deep Basin in western Canada, on the eastern flank of the Rocky Mountain foothills was recognized in the late '70s, but only a fraction of that potential has been realized, because gas prices didn't rise the way they had to in order to justify exploration and development spending. Now, escalating gas demand and rising prices—plus the widespread availability of the aforementioned advanced drilling and completion technologies—are changing the economics.

Speaking of economics, Rick foresees North American natural gas trading in the range of $4 to $8 or $8.50 per million BTU, with occasional spikes lower or higher "over an extended period of time." At the lower end, few of the North American shale plays can produce economically, so drilling and production will fall off dramatically when gas prices are low, spot shortages will result and prices will rise in response. The higher price will re-stimulate drilling and production because it would be economic once more, until the price drops to the lower end of the band again and the cycle repeats.

"If you assume the middle of that band ($6 per million BTU) and fully loaded that the industry will be able to deliver gas in the shales for $4.50," Rick says, "the recycle ratios—the ability to redeploy earned capital to grow reserves and production" should make the North American natural gas industry be very lucrative for 10 to 15 years for the most efficient producers.

Furthermore, he states that the "very stable nature of the supply. . .will lead to increasing utilization of gas in North America across a variety of activities, including peak power generation but also ultimately as a motor fuel. In fact, he expects that with "incredible increases" in transmission infrastructures—largely out of Russia and North Africa into Europe and for LNG—natural gas will come to substitute for oil, at least in generation and petrochemicals. "And I think you'll see within five years fairly widespread adoption of natural gas as a motor fuel."

Rick acknowledges that North America has a systemic oversupply of natural gas, but he calls this "a really wonderful thing—good for investors, good for consumers, good for producers, good for everybody."

In summary, he says, "I feel better about the oil and gas sector than I do any other resource sector, with the sole exception of alternative energy."

Size, Scale and Mass Matter

While Rick sees constraints on the supply side (particularly in crude oil) over the next five years, he also sees energy demand (particularly from emerging markets) continue to climb. Societies are now competing for energy supplies that didn't have the financial wherewithal to do so 20 years ago. The increasing demand for energy crosses the spectrum from traditional fossil fuels to renewable resources. Of course, as he points out, alternative energy has an advantage over conventional energy in being politically correct. "You can permit this stuff; there is social and political acceptance of all forms of alternative energy. Because credit delivery is increasingly controlled by governments that have bailed out banks), financing is available for alternative energy projects.

Rick divides the alternative energies into basically two camps—those that work in an economic sense and those that work only in a political sense. He puts certain hydroelectric projects and many geothermal propositions in Camp A. Solar and wind occupy Camp B.

He considers geothermal the best of the bunch for major utilities because it generates baseline power consistently. It provides 24/7 power. Other alternatives present challenges: "Hydro, which I also like, has problems during a drought, during the summer. It requires water flow. Wind requires that the wind blows, and places where wind is a very efficient energy source are lousy places to live—the plains of North Dakota. Solar has this overarching problem—night."

Compelling Economics

The economics factor in the equation is compelling, too. In the U.S., Rick says that geothermal practically locks in secure near-term internal rates of return. "Utilities are being forced to offer feed-in tariffs for alternative energy that makes solar and wind economic. And the economic threshold of geothermal is much lower, so the impact of those feed-in tariffs on geothermal companies is a huge explicit subsidy. The other subsidy is even more explicit: gifts and subsidized loans from the Department of Energy." Rick posits that a geothermal operator can earn a 22% internal rate of return with a cost of capital less than 5%—far better than returns generated by solar or wind projects. "Cost of capital as a consequence of subsidies in the 5% range while unleveraged project and IRR can exceed 20% seems like an opportunity too good to forego," he says.

Penalties, too, add weight to the geothermal case. While it appears that Washington has put cap-and-trade legislation on the back burner for the time being, Rick says that penalties on coal are coming to the U.S. "Despite the political strength of senators and representatives from the coal states, who are doing whatever they can to forestall it, it is absolutely inevitable. And when it comes, major power producers who generate a lot of power from coal will need to diversify their energy sources to non-carbon-generating production. The best baseline non-carbon generating production out there, at least in the alternative sphere, is geothermal."

The economics are convincing enough that Rick says geothermal companies of "the correct size, scope and scale should focus most of their near-term activity in the U.S. while at the same time providing a pipeline in other areas of tertiary volcanic activity that will give them growth three to five years out. "In terms of security of cash flow and ease of financing, the low-hanging fruit is in the U.S.," he says. "The chances for quantum improvements, however, come in parts of the world where the geothermal resource has been less thoroughly explored and exploited. There are gigawatts of energy to be discovered and exploited in places like the Philippines, Indonesia and in particular Chile."

In his opinion, the geothermal arena does not appear to favor small players. Consolidation makes sense, at least in the U.S., and Rick says that's largely because the combination of the direct subsidies and incentives the utilities offer via power purchase agreements to meet government mandates put a premium on organizations with experience in financing, developing and operating plants. They have to attract management teams that have done it in the past and can do it now. Obviously, according to Rick, this doesn't lend itself well to market capitalization of $50 million or $100 million. "Size, scale and mass matter." For that reason, from economic point of view, small geothermal operators that can't raise money in $100 million and $200 million chunks are nonviable. As he sees it, "The only thing that could change the equation for the small entrants would be a real near-term boom in alternative energy stocks, that sort of rising tide that floats all ships."

Absent that rising tide, the thinks the consolidation up the food chain would be rational: "the micro-juniors absorbed into the mere juniors and the juniors themselves absorbed either by utilities or global power producers" until the whole sector is ultimately "upstreamed into the power generation sector, which is a very large, global, multi-billion dollar sector."

A potential geothermal spoiler arose in December. The day after the Swiss government permanently shut down a geothermal project in Basel blamed for causing earthquakes, a supposedly similar California project that was part of the administration's geothermal development program came to a halt. Although the two were not linked explicitly, the timing led to speculation that the California project ended for the same reason.

"People get cause-and-effect back-asswards," Rick states. "Geothermal activity that works engages in areas of tertiary volcanics and very young volcanic rocks. Young volcanic rocks are there because the areas are tectonically active. They have earthquakes. Apparently you can create micro seismic activity by changing the flow of water through subterranean rocks," he adds, "but the idea that a 12,000-foot hole 6 or 8 inches in diameter will be the catalyst that unlocks the San Andreas Fault is one of the silliest scientific rumors I've been exposed to in my life."

Unfortunately, he goes on, "Given the fact that our society seems to make all kinds of decisions based on how they feel as a substitute for having to think, I guess I can see this being a political issue. People tend to lend a lot more credence to the easy thing rather than spending 10 to 15 hours acquainting themselves with the basic tenets of geology or even thinking about how much 12,000 feet of strata weighs on top of a zone that might be impacted by the withdrawal of water. Ninety-nine percent of the people don't reflect. They react."

Still, the geothermal space holds great appeal for Rick and he thinks it remains politically correct. "It's useful to see that a major U.S. utility got an $8 billion subsidy from this administration to build nuclear plants in Georgia. If nuclear is going to be politically acceptable, I cherish the thought of well geothermal producers will be regarded."

Run-of-River Works, too

In addition to geothermal, run-of-river hydroelectric projects constitute the other alternative energy that works for Rick. Conventional hydro means building great big dams that not only cost a lot but do a lot of environmental damage. "In run-of-river hydro," he explains, "you are allowed, to store no more than 24 hours' flow, which means you don't do a lot of damage to the riparian environment."

Because run-of-river projects require cascading water to work, the best places are (not surprisingly) mountainous, such as North America's West Coast, with the Sierras and the Rockies, works well, as do the Andes in South America, the Himalayas in Asia, the Central African Rift. "You're taking water out of the water course in a cascade and returning it to the river at the bottom of the cascade. This doesn't impact fish life, either, because they don't live in places where the water pressure is so great," Rick says.

"There are many, many gigawatts of undeveloped run-of-river hydro projects around the world. The financing to put them in production is available, the technology is off-the-shelf, the engineering talent to build and operate these things is freely available." He expects junior companies to be able to build themselves over a period of eight to ten years, and when they reach critical mass because of the incredible stability of the cash flows they exhibit and the incredible ease of obtaining project financing, these companies will be sold at good multiples to power users."

Sounds a bit like a no-brainer, but Rick finds that it doesn't appeal to speculators. "The idea that somebody would put money in the face of a rational rate of return over an extended period of time in a bull market rather than gamble wildly to try and discover which penny stock the tooth fairy's going to alight on, sadly pulls capital from run-of-river toward tooth fairies. For me, that's wonderful. That I can buy stabilized internal rates of return more cheaply is a very good thing."

If? Or When?

According to Rick's analyses and observations over the years, "In bull markets at least, most speculators prefer 'if' questions. 'If' questions regard a fundamental speculation as to whether there will be a return of capital rather than a return on capital. So to the extent I can involve myself in undervalued speculations that have 'when' rather than 'if' answers, I prefer those. I consider a run-of-river project in terms of a 'when' question. When will project financing occur? When will the project go into production? Having gone in production, when will somebody else pay more for the cash flow that the company's current shareholders are paying?

Rare Earths: Too Much Ado?

Rick considers rare earth metals the latest of a fairly interesting, basically North American phenomenon, sector rotation. In a bull market, where sectors get ahead of themselves, promoters make money dreaming up new stories, and stories in a sector where people haven't been burned before are the easiest to sell. "Nobody had ever lost money in niobium or gallium or germanium because nobody could pronounce them or spell them" until these stories came out, he notes. "I think this is an enormous bubble that's going to crash. I have been delivering a lecture at some conferences about the real emerging minerals in this market—storium, fraudium, scamium, or for those who saw Avatar, my new favorite, unobtainium."

'"Yes, this stuff can be used in cell phones (in miniscule amounts). Yes, lithium has some future in batteries." But the fact is, Rick says, the worldwide market for rare earth elements is about $2 billion. As he works out the math, it doesn't work. "If you assume a 30% margin (which I don't know is reasonable number)," he figures, "you are talking about $600 million in EBITDA. At a 10 times EBITDA number, you're talking about a $6 billion prospective market cap of that industry."

He cites another mystifying bit of math. "The largest lithium producer in the world is now down to 140 years' supply of lithium. The only reason they don't have a bigger supply is there's no particular sense spending money now to develop resources that you'll need in 150 years."

Urani-Mania Rerun

In contrast to the rare earth elements' tale, Rick believes that the uranium story that fed the mania three years ago remains credible. In fact, he says, "Everything that was true in the uranium story three years ago was 10 years ago and it's all true today, but it's been priced differently." That's because uranium—which first captured his attention in the early 2000s when it was pretty unpopular, trading below $10 per pound and bottoming out at $7.10 on December 25, 2000—"is a strategic fuel that has a great place in the world's energy mix. The world is consuming more uranium than it produces. . .the above-ground supply will eventually go away and there will be shortages."

He lost interest during the manic period of 2007, when the uranium price peaked at nearly $138 per pound, but is looking at uranium stocks again, with yellowcake prices pretty much confined to the $40 to $50 band since the end of 2008. Because we consume more than we produce, we will have shortages, and the competition among users who need it will drive up prices, he reasons. "Many countries are staking their energy future on uranium. I don't believe all of the plants that are planned and talked about now will be built, but enough will be built that there will be severe supply shortages. The uranium price has to go up to reflect that," he says, "and more importantly, it can go up. The price of uranium is a fairly small component of the cost of the electrical production from a nuclear power plant; the price could double and still not have too measurable an impact on the power price that comes out of the reactor."

As he surveys the uranium landscape, Rick sees a world that "hadn't looked for uranium for 20 or 25 years as a consequence of the fact that they were losing so much money on the uranium that they had found. When uranium prices rose and the uranium companies were able to attract cheap capital and deploy it to exploration, there was an amazing amount of low-hanging fruit because for all practical purposes it was a new activity. There have been some very attractive recent discoveries that haven't been rewarded with the escalation of market capitalizations that you would have seen with a discovery of equivalent value in the gold business," he adds.

A new twist to the uranium story makes it even more compelling than before, in Rick's view. "In the past, the development of a uranium mine was really the sole province of a major or a super-major," he observes, "but increasingly—due to the strategic nature of uranium deposits—juniors that discover major uranium deposits will have financing options open to them that were not open in the past." He explains that lenders increasingly are requiring plant operators to lock in supplies of uranium over the entire amortization period of the loan. For example, if an operator were to build a new reactor in for $6 billion and borrowed $4 billion over 30 years to finance it, the bank would require them to lock in a million pounds of uranium a year for 30 years. Given that there are well over 100 reactors planned for the next 10 years, probably 50 of which will be built, I believe there will be incredible demand to lock in supplies. Those off-take agreements can be used by fairly small companies to finance the construction of uranium mines."


Make Volatility Your Ally

The "extraordinary volatility" Rick foresees in the equity markets might scare some investors away, but he argues, "Volatility's good if you use it as opposed to being used by it. It allows you to pick up assets on the cheap. I don't try to mitigate volatility. I think volatility is a tool. I try to enhance it. I have learned to react with absolute delight when a stock I think is worth a dollar falls to 50 cents. I buy the hell out of it at 50 cents. I seek to profit from volatility rather than to guard against it."

Rick Rule, founder of Global Resource Investments, began his career in the securities business in 1974, and has been principally involved in natural resource security investments ever since. He is a leading American retail broker specializing in mining, energy, water utilities, forest products and agriculture. Rule's company has built a national reputation for its specialist expertise in taking advantage of global opportunities in the oil and gas, mining, alternative energy, agriculture, forestry and water industries.

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