Major potash stocks are beginning to raise eyebrows with impressive profit margins. But as this developing market expands, industry giants will face competition from greenfield and brownfield projects in the works. In this exclusive interview with The Energy Report, Mackie Research Capital Analyst Jaret Anderson debriefs us on some fascinating development stories that are poised to change where and how the most successful potash producers operate.

TICKERS: AAA; ALLRF, FED; FED.WT, SDFG, KRN, POT, RVD, NPK, WPX

Source: Zig Lambo of The Energy Report  (2/9/12)

The Energy Report: You last spoke with The Energy Report in June 2011. What has transpired in the fertilizer and potash business since then, both in Canada and in Brazil’s emerging market?

Jaret Anderson: The tail end of 2011 saw a period of weak demand for Canadian potash. Fourth-quarter shipments at Potash Corp. (POT:TSX; POT:NYSE) dropped by about one-third year over year (YOY). General concern over the economy gave dealers an incentive to avoid stocking up their warehouses, resulting in soft shipments, higher unit operating costs and quarterly earnings below expectations. However, Potash Corp. posted a 68% gross margin in its potash segment during the quarter, making it one of the most profitable publicly-traded businesses of this scale.

Meanwhile, Brazil overtook India as the top global importer of potash in 2011, with imports of about 7.5 million tons (Mt) KCl. This figure was up 21% YOY, drawing even more attention to the country’s chronic domestic potash deficit.

TER: What should fertilizer producers expect in the next few years?

JA: We’re going to see bullish prospects for fertilizer producers over the next 12–18 months. Demand for fertilizer products is likely to remain soft in Q112, but as the spring planting season in the northern hemisphere kicks into gear in Q212, we expect markets to tighten.

TER: You put out a report last December showing a fairly large global number of both new and expansion projects in the works. How will these projects affect the supply and demand equation over the next five years?

JA: We actively track 19 different brownfield expansion projects and 26 different greenfield projects around the world, totaling ~67 Mt of planned capacity. If all of those projects were built on the timelines put forward by their respective owners, we would see a massive glut of capacity in the back half of this decade. The reality, though, is that only the best of these projects are going to be built, and those are likely to experience significant delays compared to their projected timelines. Potash demand in 2011 was about 55 Mt. If we assume demand growth of 3%/year for the remainder of the decade, that implies we’ll need an incremental 17 Mt of supply by 2020 in order to maintain operating rates at 2011 levels. That is pretty close to the 20 Mt of brownfield projects currently on the drawing board. Any demand growth beyond this 3% level or further delays of brownfield projects would tighten markets further.

TER: You don’t expect an oversupply or downward price pressure?

JA: In any commodity, things don’t go up forever. At some point, the supply-demand balance is going to shift in favor of the buyers. The next several years however, look very positive for potash producers.

TER: Saskatchewan is the potash capital of North America, and although it’s a major supplier to other parts of the world, the North American market is relatively mature. What North American potash companies are still attractive buys at this time?

JA: In my view, the most attractive greenfield potash project in Saskatchewan is Milestone, which is being developed by a company called Western Potash Corp. (WPX:TSX.V). The company has a very large in situ resource of about 3.5 billion tons (Bt) KCl and has the highest grade of any existing solution-potash mine in Saskatchewan. Milestone looks very similar to the former Legacy project of Potash One Inc., which was purchased by K+S Potash Canada (SDFG:FKFT) in November 2010 for $434 million (M). At a market cap of $200M today, we believe Western Potash represents the lowest-risk greenfield potash company in the world, with a very attractive valuation.

TER: Another Saskatchewan company you’ve discussed in the past is Karnalyte Resources Inc. (KRN:TSX). It is developing a relatively low-cost, solution-mining project. What are your thoughts on the company’s risk-reward ratio?

JA: Karnalyte is focused on a different type of project that will seek to extract carnallite mineralization at its Wynyard property. While its carnallite mineralization is only about half the grade of a project like Milestone, Karnalyte’s engineers have designed a plant that can be built in stages, which offers some advantages in terms of capital expenditures. Karnalyte’s shares suffered a significant decline in December after the company pulled a $115M financing. We upgraded the shares from “Hold” to “Buy” during December and believe that below $10/share, the company represents good value. However, it may be difficult to see performance for Karnalyte until it successfully raises capital to begin construction at its Wynyard project in the spring.

TER: Are its prospects reasonable for the company as long as the market holds up?

JA: Its shares now represent good value. That said, I believe Western has a more attractive valuation and project than Karnalyte. But there is a difference between a good project and a good stock. Because Karnalyte has taken a large hit of late, it has some decent upside, especially below $10/share.

TER: You recently visited Brazil to get a little better picture of the country’s fertilizer business. That’s a very large, growing market. Tell us what you learned.

JA: Each time I visit Brazil, I come away with more anecdotes that convince me of the need to find ways to invest in Brazil’s agricultural future. Brazil has over 400 million hectares of arable land, but uses less than 15% of it today for agricultural purposes. It is the largest global exporter of beef, poultry, sugar, coffee and orange juice, and that production should grow for many decades. The problem is that its Cerrado region is generally nutrient-poor and requires significant quantities of fertilizer. Brazil has only one operating potash mine and imports more than 90% of the potash it consumes. In 2011, Brazil was the world’s largest importer of potash, at about 7.5 Mt. The Brazilian government has set a goal of becoming fertilizer independent by the end of this decade and we believe investors should be looking for ways to gain exposure to Brazilian agriculture and fertilizer markets.

To that end, two companies we’ve focused on are Verde Potash (NPK:TSX.V) and Rio Verde Minerals Development Corp. (RVD:TSX). Verde Potash controls the Cerrado Verde project in Minas Gerais state, which contains a large, at-surface deposit of potash-rich verdete slate. The company has developed and patented a process to convert verdete slate into KCl, the same standardized product that’s produced in Saskatchewan and Russia today. This is known as the Cambridge process. It’s very exciting, as it could allow for large-scale potash production in Brazil from an open-pit operation—something that hasn’t been done anywhere in the world.

Verde Potash recently published a Preliminary Economic Analysis that indicated an operating cost of US$274/t during the early years of production, ramping up to $291/t over the 30 year life of mine as the stripping ratio increases. That would give Verde Potash the lowest delivered cash costs to Brazil of any large-scale competitor globally. The potash producers in Canada and Russia have lower operating costs, but face very large transportation costs to deliver product to farmers in Brazil. Capital costs for Verde Potash’s project are estimated at US$800/t, which is about 25% below a typical greenfield solution mining project in Saskatchewan. Based on these attractive economics, we recently increased our 12-month target to $19.00/share. With the stock trading at about $7.00/share today, this is a very interesting story.

Another name we believe offers good exposure to Brazil is Rio Verde Minerals, which controls a land package near Aracaju in Northern Brazil. It is located adjacent to Taquari-Vassouras, the only operating potash mine in Brazil. Rio Verde is still at an early stage of development, having completed drilling on its first drill hole in November. We visited the site a couple of months ago and inspected the core. We await assay results from that hole. Rio Verde plans to drill three holes at its Sergipe potash property and to publish an NI 43-101 resource during Q212. Given the strong outlook for good potash grades on the property and the company’s ideal location in Brazil, with nearby access to a port, roads, power and natural gas, Rio Verde looks to us to offer excellent risk-reward at current levels. Based on our target of $1.30/share, Rio Verde offers more upside to our target than any other company in our coverage universe.

TER: Can you elaborate on the Cambridge process you mentioned?

JA: In December 2010, Verde announced that it had patented a process to convert its verdete slate into KCl. This process was developed by Dr. Derek Fray at Cambridge University in the United Kingdom. This process was tested and optimized by Hazen Research in Denver, CO, and by FLSmidth in Allentown, PA, and SRK Consulting, which resulted in the publication of a Preliminary Economic Assesment in late January. We visited FLSmidth’s facilities in Pennsylvania last week and observed the process in operation. The process is relatively simple and bears many similarities to the cement production process. It employs a rotary kiln, like cement, but uses different inputs, namely Verde Potash’s verdete slate rock, limestone and salt. The Verde Potash KCL production process takes place at lower temperatures than that of cement, about 900C vs. cement at about 1,450C.

TER: Do you expect the Cambridge process to work on a commercial scale?

JA: It’s moved from a bench scale at a university to a pilot plant. To move to a commercial scale is another jump. Staff at FLSmidth and SRK have indicated to us that they typically see fewer problems with commercial scale facilities than they do with pilot plants. Every indication we have points to the commercial scale kiln as being well within the technical ability and experience of the teams at FLSmidth and SRK.

TER: There’s also been some development on the African continent, and a couple of Canadian juniors are working on projects there that are projected to go online in about five years. How are they progressing?

JA: Allana Potash Corp. (AAA:TSX; ALLRF:OTCQX) and Ethiopian Potash Corp (FED:TSX.V; FED.WT:TSX.V) are both working to develop greenfield potash projects in the Danakil depression in Northern Ethiopia. Allana is the much better capitalized of the two companies. It has published a large NI 43-101 resource based on its successful drill program over the last couple of years. The projects in Ethiopia are interesting in that the high year-round temperatures in the Danakil may allow for solar evaporation, thereby materially lowering energy costs in the solution-mining process. Ethiopia is also located relatively close to China and India, two important potash consumers.

Ethiopian projects face a major challenge, however, in that the logistics of moving thousands of tons of potash per day from the project site to the port at Djibouti some 600 kilometers (km) away over roads of varying quality may be a significant hurdle. We believe the transportation costs will end up being materially higher than current estimates.

Both Allana and Ethiopian Potash have seen their share prices languish over recent months and are both near 52-week lows. We believe both stocks have room to move up as the projects are derisked and as Allana moves toward a feasibility study in August of this year. While Ethiopian Potash has more leverage to positive developments given its smaller enterprise value, it is a much riskier investment given its very low cash levels. Allana, on the other hand, has more than $65M in cash on its balance sheet, providing it with a lot of time and resources to derisk its project and make it more attractive to potential suitors.

TER: Will Allana rely on a rail link to be built in order to get its product to market?

JA: There are plans in Ethiopia to build a rail network in the country, and that rail network is planned to approach Allana’s project site. We’ve met with the minister of transportation in Ethiopia on this topic. That project is probably a number of years away from completion, and for at least the first several years of production, Allana is going to need to find a way to transport its product by road via truck. You can’t assume the rail network is going to be ready in the next few years, in our view.

TER: What effect will trucking the material have on the project economics?

JA: Trucking will be much less economic than a rail network. Allana has published its own cost estimates for transporting the product from its project site to the port at Djibouti. We find its estimate of $12/t to be very low. We see a number closer to $50/t, based on the figures we’ve seen at other operations in existence today, such as those in Saskatchewan.

TER: Do you have any other interesting stories that our readers might find useful?

JA: The potash industry today is generating very high cash flow and strong returns on capital for incumbent producers. Potash Corp. generated a gross margin in its potash business last year of 68%. Apple Computer, by comparison, posted a gross margin of 41% in its fiscal 2011. The levels of free cash flow generated by this business and the strong secular trends in agriculture are going to attract capital and will ultimately lead to new greenfield production. With so many companies chasing so few quality projects though, we would caution investors to think carefully about the merits of each individual project. The size and grade of the deposit, the infrastructure in place, the proximity to major potash-consuming countries and the geopolitical risk are all critical drivers of value.

TER: Do you see any further consolidation in this business at this point? Or is it still too early?

JA: We’ve had a lot of consolidation in this business. The successful business strategy that greenfield potash companies have employed in the past has been to identify a good project; then derisk it by defining the resource through engineering and feasibility studies to make it more attractive to well-capitalized companies. A number of greenfield potash companies have had success with that strategy by ultimately selling to large mining companies like BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK), Vale S.A. (VALE:NYSE) and Rio Tinto (RIO:NYSE; RIO:ASX). I think this process makes sense and is going to continue.

TER: What are your top picks at this point?

JA: Our top picks in the sector for 2012 are Verde Potash and Rio Verde Minerals. Both companies offer good leverage to the Brazilian fertilizer market and have the potential to generate meaningful returns to equity investors. By their nature, development-stage resource companies involve much more risk than an operating company. We believe, though, that 2012 is likely to see very strong results for the greenfield companies with the best-quality assets, in the right locations, with attractive valuations. In our view, Verde Potash and Rio Verde check all of those boxes.

TER: Thank you for your time.

JA: Thank you.

Jaret Anderson is a research analyst covering agriculture and fertilizer at Mackie Research Capital. Anderson has 13 years of experience in the investment industry and was rated #1 for earnings estimate accuracy by Starmine in 2006 and #2 for the quality of his reports in 2005. Prior to joining the firm in July 2011 Anderson worked at UBS Securities Canada where he covered Canadian paper and forest companies, as well as chemical and fertilizer industries. Most recently Anderson covered Canadian fertilizer and chemical companies for Salman Partners. He received a Bachelor of Commerce, with honours (Finance) from the University of British Columbia, and was awarded the CFA designation in 2000.

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DISCLOSURE:
1) Zig Lambo of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Allana Potash Corp., Karnalyte Resources Inc. and Verde Potash. Streetwise Reports does not accept stock in exchange for services.
3) Jaret Anderson: I personally and/or my family own shares of the following companies mentioned in this interview: Verde Potash Plc and Rio Verde Minerals Development Corp. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise for this interview.

The list of once-obscure metals and minerals that are becoming “strategic” seems to be growing daily. However, population growth and rising living standards in developing countries are driving demand for most raw materials. In this exclusive interview with The Critical Metals Report, Institute for the Analysis of Global Security Senior Fellow Jack Lifton explains how increasing demand and harder-to-mine deposits are raising prices on these essential materials.

TICKERS: FMS, NGC; NGPHF, SER

Source: The Critical Metals Report Editors  (2/7/12)

The Critical Metals Report: In the last five years, investors discovered lithium and the rare earths. What will be the next big thing?

Jack Lifton: The answer is graphite. Graphite has traditionally been considered a boring, mundane industrial mineral, evoking thoughts of pencils, golf clubs and tennis racquets. Investors should think again. Traditional demand for graphite in the steel and automotive industries is growing 5% annually, and graphite prices have tripled. New applications such as heat sinks in computers, lithium-ion batteries, fuel cells, and nuclear and solar power are all big users of graphite. These consumers are beginning to place substantial demands on existing production—and over 70% of that production is from China, which is no longer selling this resource cheaply to the rest of the world as the country’s easy-to-mine, near-surface deposits are becoming exhausted.

Graphite’s criticality and potential scarcity has been recognized by both the United States and the European Union, which have each declared graphite a supply-critical mineral. Recently, the British Geological Survey ranked graphite right behind the rare earths and substantially ahead of lithium in terms of supply criticality. Clearly, there is much more to graphite than pencils.

TCMR: What about graphite makes it so important to all these end-users?

JL: Graphite and diamonds are the only two natural polymers of carbon. Both are very strong, can withstand extreme heat, and resist attack from chemicals and corrosion. While a diamond is a three-dimensional crystal structure of carbon, graphite possesses a two-dimensional flake crystal structure. Graphite is also a very good conductor of heat and electricity. Due to its amazing chemical and physical properties, new industrial, commercial and high-technology uses for graphite are constantly being discovered.

The lithium-ion battery is one of the fastest-growing uses of graphite. Each one actually contains greater than 10 times more graphite than lithium. These batteries are already widely utilized in the consumer electronics industry in devices like mobile telephones, laptop and tablet computers, and media players.

Other new technologies like fuel cells, will also drive demand. Fuel-cell-powered forklifts are in use in American warehouses. Some fuel-cell-powered taxis and buses are already found on city streets, and most major car companies will join Hyundai in producing fuel cell vehicles by 2015. To be clear, electric and fuel cell vehicles will not replace the internal combustion engine, however, they are part of the solution to reducing dependence on non-renewable energy resources and make a great deal of sense in many applications. Telecommunications companies are employing fuel cells around the globe for primary or backup power at cell phone towers and substations. A range of facilities, including stores, universities and business parks, are also using this clean, efficient technology for low-cost power that works independent of the grid.

Fuel cells convert chemical energy from a fuel source, often hydrogen but also natural gas or even an alcohol like methanol, that chemically reacts with an oxidizing agent like oxygen to create electricity. Because they operate at relatively low voltage, fuel cells are typically placed in series or parallel circuits to increase voltage and current. Fuel cells generate fairly low levels of emissions, as well as water and heat. In large installations, this heat can be captured and used for climate control and to produce additional power through cogeneration.

General Motors has already invested more than $2 billion in automotive fuel cell research and development, and is believed to be seeking additional investment from industry peers in exchange for rights to use the technology. German automotive companies BMW and Volkswagen both own stakes in SGL Carbon SE, the world’s largest maker of carbon and graphite products. Just how much graphite will be required for fuel cells? The proton exchange membrane fuel cells being developed for use in cars would require 100 pounds of graphite per vehicle. The U.S. Geological Survey noted in 2010 that “large-scale fuel cell applications are being developed that could consume as much graphite as all other uses combined.”

Graphite is also projected to be a key component in next-generation nuclear reactors, which are expected to reach temperatures of 1,000 degrees Celsius—triple the temperature inside today’s commercial reactors. Graphite is one of the few substances that can resist such heat, with initial tests by researchers at the Idaho National Laboratory indicating that it can actually absorb heat as high as 3,000 degrees Celsius. Pebble bed nuclear reactors are small, modular reactors that are safer than conventional reactors because they “die” on their own when shut down. They are fueled by tennis-ball-sized graphite spheres with uranium embedded in them. Substantial amounts of graphite are required to charge the reactor at startup, and a percentage of the balls must be replaced each year as the fuel is spent, which creates ongoing demand for graphite. China has an operating prototype and is now building the first two commercial units, with plans to have 30 by 2020. These reactors are one of the top 16 priorities in China’s 2020 strategic plan.

The vanadium redox battery, which offers great potential for storing excess energy generated by renewable energy sources like wind turbines and solar cells, is another notable emerging technology that would require significant amounts of graphite to produce. These batteries, which offer significant storage capacity, long life, low maintenance requirements, and a nominal environmental footprint, require some 300 tons (t) of flake graphite per 1,000 megawatt of storage capacity.

TCMR: Isn’t there plenty of graphite in the world to go around?

JL: Natural graphite deposits can generally be characterized as one of three types: crystalline flake, amorphous or lump, also known as vein graphite. Total annual global graphite production increased substantially in the 1990s as China dumped graphite on world markets. Prices crashed and exploration and development in the rest of the world ceased. Production has now held steady for several years at approximately 1.1 million tons (Mt) as China appears to have reached the limit of its productive capacity and the commodity super cycle has soaked up excess supply. Since 2005 prices have basically tripled, and supply is tight.

Graphite mining and processing is currently limited to a small handful of countries, with China, India, Brazil and Canada the leading suppliers. Only 40% of world production yields flake graphite, the most desirable type for its suitability in high-value, high-growth applications. Only flake and synthetic graphite, which is made from petroleum coke through a very expensive process, can be used in lithium-ion batteries, the current demand driver for this crucial substance.

321energy.com owner Bob Moriarty recently commented, “If you believe in lithium-ion batteries, you would do far better by investing in a good graphite company than a good lithium company. . .With demand for graphite growing at 50% per year and prices reaching $2,500-3,000 a ton, the future for graphite companies with actual projects is excellent.”

TCMR: What about the introduction of graphene, single-atom-thick sheets of crystalline flake graphite? How will the use of this material in phones and touch screens impact demand?

JL: Professors Kostya Novoselov and Andre Geim of the University of Manchester were awarded the 2010 Nobel Prize in Physics for their work with graphene. British Chancellor of the Exchequer George Osborne recently committed ~$80 million (M) to graphene research, a quest embarked on by almost every major research center and university as well as hundreds of companies, from IBM and Intel to Silicon Valley startups.

Graphene is being studied for use in ultra-high-speed microprocessors, as it conducts electricity at a rate 30 times faster than silicon. IBM is examining whether graphene’s magnetic traits will allow it to be utilized in medical devices to spot diseases in their earliest stages. The company is also working with the U.S. Department of Defense’s Defense Advanced Research Projects Agency to investigate whether graphene can improve mobile phone efficiency, wireless signal clarity and radar quality. Nokia is researching graphene’s potential use in cell phones and touch screens, with the latter usage expected to become commercialized relatively soon, potentially in a foldable phone. One U.S. Department of Energy researcher believes that graphene’s energy storage potential will lead to the development of batteries that will triple the range of today’s electric vehicles without increasing battery size or weight.

In collaboration with South Korea’s Sungkyunkwan University, Samsung researchers have created a flexible touchscreen several feet wide from “printed” graphene that could eventually be commercialized in strong, lightweight, flexible solar cells, touch sensors and flat-panel screens, perhaps maybe even directly integrated into clothing. While research-and-development activity is moving from university labs to corporate workplaces, scientists estimate that the first commercial applications of graphene technology are 5 to 10 years away.

TCMR: If the price goes too high will manufacturers simply engineer graphite out of their products?

JL: At the recent Graphite 2011 conference in London, Colin Cooper of Graphexel Ltd. said “new technologies [are] unlikely to overtake the graphite market demand for traditional end uses—such as refractories, metal casting, and lubricants—as the fundamental need for graphite in these lower value sectors [is] not going away.” However, these traditional industrial users will find themselves competing for supply with those producing new technologies as there are very few, if any, economically feasible alternatives available and very little recycling of graphite.

The main technology that these traditional uses will be competing with in the near term is rechargeable lithium-ion batteries. Graphite serves as the anode in lithium-ion batteries, and there is no substitute for it in this application. Due to their advantages relative to other battery types—including their comparatively light weight, lack of memory effect, slow self-discharge rate and environmental safety—the lithium-ion battery industry is growing 30 to 40% annually as products such as power tools, consumer electronics, and hybrid and all-electric vehicles switch from other, inferior battery technologies.

Already, plug-in electric vehicles like the Chevy Volt, Nissan Leaf and Tesla Roadster rely on lithium-ion batteries, and the gasoline-electric hybrid models that have used nickel-metal hydride batteries for the past decade are making the transition to lithium-ion technology. The electric vehicle market is expected to grow as much as 20% annually by 2020, with expectations that between 3–6M such vehicles will be manufactured in 2020, each of which will require approximately 40 pounds of graphite for the battery system alone. Both U.S. President Barack Obama and Chinese leaders have stated that they want to see 1 million electric vehicles on the roads by 2015. An estimated 1 Mt additional graphite will be needed annually by 2020 for electric vehicles and other emerging applications.

TCMR: If current annual flake production is around 400,000 tons, where will all this new production come from?

JL: This booming demand will require more than a doubling of current global graphite production to meet the needs of traditional markets like North America and Europe, as well as such emerging markets as China, India, Russia and Brazil. Total graphite production across the globe has been consistent in recent years at approximately 1.1 Mt annually.

China’s production is suitable only for industrial applications such as steelmaking and lubrication rather than high-tech uses like batteries and graphene. China already imports a significant amount of the graphite mined in North Korea.

Fortunately, graphite reserves are present around the world, though many sites would require several years of development and significant investment to begin production. Countries known to have reserves of highly valuable flake or crystalline graphite include Austria, Norway, Germany, Italy, Madagascar, Sri Lanka, Russia and Canada.

Governmental bodies have shown increasing concern about graphite’s importance. The U.S. Department of Homeland Security’s Critical Foreign Dependencies Initiative lists Chinese graphite mines as essential sites that would damage American interests if attacked. Graphite was also determined to be high in terms of both economic importance and supply risk in a 2010 European Commission study of 41 raw materials.

TCMR: What mining companies could fill this growing demand in the coming years?

JL: There is only a handful. Northern Graphite Corporation (NGC:TSX; NGPHF:OTCQX) is, in my opinion, the leading public graphite company. Northern Graphite has the “three Ps” of investing in junior resource companies: people, property and price.

Seven members of Northern Graphite’s board and management team have significant senior management experience with mining and exploration companies and are widely known and respected in the mining and investment communities. CEO Gregory Bowes was senior vice president of Orezone Gold Corp. (ORE.TSX) and Ron Little, a director, is Orezone’s CEO and founder. Orezone drilled off a 5 million ounce gold deposit in Burkina Faso, Africa, completed a bankable feasibility study and permitting, and started construction before its Essakane project was taken over by IAMgold Corp (IMG.TSX) in a $350M transaction. Iain Scarr, another Northern Graphite director, was commercial director of Rio Tinto’s (RIO:NYSE; RIO:ASX) industrial minerals division for many years and is now vice president of corporate development at Toronto-based Lithium One Inc. (LI:TSX.V). Jay Chmelauskas, a director, is CEO and a director of Vancouver-based Western Lithium USA Corp. (WLC:TSX; WLCDF:OTCQX). Don Baxter, president, was mine superintendent at the Kearney Graphite mine in Ontario when it operated in the 1990s and was CEO of Ontario Graphite, which is presently attempting to reactivate the mine, before being lured away by Northern Graphite. George Hawley, technical advisor, started in the graphite business more than 40 years ago and is a leading minerals industry expert.

Northern Graphite’s Bissett Creek graphite project has a number of significant advantages over other graphite deposits. It is located about two hours east of Ottawa, the nation’s capital, and 10 miles from the TransCanada highway and associated natural gas pipeline, power lines and small communities where workers can live. It is five hours by truck from the port of Montreal and less than one day by truck from the major steel and automotive centers in the northeast United States.

Bissett Creek itself is a very large, low-grade deposit that is located right at the surface, which means it will be mined by simple open pit methods and will have a very low waste-to-ore ratio. It is also very flat lying and therefore production can be expanded by moving laterally rather than going deeper, which is much more expensive. North Graphite’s original NI 43-101 report contemplated an operation producing 20,000 tons of graphite per year for over 40 years. Since that time, the resource has more than doubled and it is still open to the north and down dip. This indicates the deposit could support production of 70-80,000 tons per year and still have a mine life of more than 20 years. We do not know of any other graphite deposit in the world that has this degree of scalability and believe that at this production level it would be the largest graphite mine in the world. This feature should make it very attractive to potential strategic partners that want to secure a stable source of long-term supply to meet growing demand.

Another feature that makes Bissett Creek quite unique is that almost 100% of production will be large-flake (+80 mesh), high-purity graphite. Recent metallurgical test results have shown that 50% of production will be even larger, +48 mesh jumbo flake, which will result in premium pricing. We believe Bissett Creek will produce concentrates that have the highest average value per ton in the industry. While Bissett Creek will not be the lowest cost operation due to its relatively low grade, its near-surface nature and low strip ratio will help to balance this disadvantage out, meaning that costs will be in the middle of the pack. Bissett Creek should generate the highest margin per-ton of concentrate in the industry.

Northern Graphite expects to complete a bankable feasibility study in the first quarter of 2012; full permitting should be completed shortly thereafter. It will take approximately $80M and one year to build the mine, so Bissett Creek could potentially be in production in mid-2013. With the bankable study and permitting near at hand, Northern Graphite has a substantial head start on many other companies that have yet to commence either.

Northern conducted its IPO in April of 2011 at CDN $0.50 per share and closed the year at $0.94, which is fairly good performance considering that the TSX Venture Exchange was down about 40% over the same time period. However, with only 37.4M shares outstanding and 45.8M fully diluted, the company has a market capitalization of less than $40M. We consider this very cheap considering the quality of both management and the asset itself, as well as the advanced stage of the project. The company has a minable, diluted resource of over 1.3 Mt of graphite in the indicated and inferred categories, and almost all is large flake, high purity. Accordingly, the market is valuing the company at less than $30 per ton for a product that sells for close to $3,000 per ton and has a margin well over 50%. As the bankable feasibility study and permitting are completed in the near term and the investment profile of graphite goes mainstream, we expect the share price to move substantially higher.

Other possible future graphite suppliers include Focus Metals Inc. (FMS:TSX.V). It owns the Lac Knife graphite deposit near Fermont in Northern Quebec. Lac Knife has measured, indicated and inferred resources of approximately 8 Mt grading 15.6% graphite and is still open. Strategic Energy Resources (SER:ASX) is a junior Australian resource company that has interests in a number of mineral and oil & gas projects, including 100% of the Uley graphite deposit. Uley operated in 1993 and has a 14,000 ton per year (t/year) plant on site that is intact but will need to be refurbished. A recent Joint Ore Reserves Committee compliant resource estimate totals 6.6 Mt grading 8.7% graphitic carbon in the indicated and inferred categories.

Burke Resources Ltd. is a private Canadian company that intends to complete a qualifying transaction that will involve acquiring and reopening the Woxna graphite deposit in Sweden. The deposit has a resource of 6.9 Mt grading 8.8% (non NI 43-101) and a fully permitted 13,000t/year plant. It is anticipated that production could restart in two years.

TCMR: Any other advice for investing in a commodity that has doubled in price in three years?

JL: I expect prices to increase further. Mines old and new will accelerate their production efforts. Both existing mining and processing companies and startups will require investment; those who get in earliest will profit the most from the Great Graphite Rush.

Jack Lifton is an independent consultant and commentator, focusing on market fundamentals and future end-use trends of the rare metals. He specializes in sourcing nonferrous strategic metals and due diligence studies of businesses in that space. He has more than 47 years of experience in the global OEM automotive, heavy equipment, electrical and electronic, mining, smelting and refining industries.

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.

DISCLOSURE:
1) The following companies mentioned in the interview are sponsors of The Critical Metals Report:Northern Graphite Corporation and Focus Metals Inc.
2) Jack Lifton: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.

Jason Burack is an investor, entrepreneur, financial historian, Austrian School economist, and contrarian. Jason co-founded the startup financial education company Wall St for Main St, LLC, to try to help the people of Main Street by teaching them the knowledge, skills, research methods, and investing expertise of Wall Street. You can also find Jason’s work at his blog website at http://www.jasonburack.com.

TICKERS: CUV; PCCRF, MIN, GIX, KSK, KTN, NGC; NGPHF, RVS, TMM

Source: Brian Sylvester of The Gold Report   (1/27/12)

The Gold Report: Philip, welcome. In a recent Union Securities research report, you wrote, “Despite global market volatility and foreign debt issues, we believe market valuations for mining companies, particularly in the precious metals sector, appear to be at incredibly low prices, on level with values seen prior to Q310′s commodity bull run. This is regardless of gold and silver being approximately 30% and 50% higher, respectively.” I agree that current share prices in the junior precious metals space are comparative to that timeframe, but we have been in a risk-off sector investing environment since last July, and you are operating in a high-risk sector. Share prices are low but without investors bidding up prices, how are we going to see a rebound in junior precious metals equities?

Philip Ker: We are seeing current market conditions affect the junior mining space, but also educating investors and helping them identify lower-risk opportunities in projects that are backed by strong management, and ones that can provide value growth in the future. We will need to see continuous positive news, particularly from the senior and midtier producers, at which point it should give more traction toward junior equities. I also expect mergers and acquisitions (M&A) activity to be a key factor for the juniors as a result of the strong balance sheets senior producers continue to build; as they look to replenish diminishing production portfolios they will target junior developers coming online.

TGR: Are you saying to stay on the sidelines at your peril?

PK: Not necessarily. It is more or less identifying the correct opportunity and the projects that are most targeted for growth that would be a good fit for a senior producer in its portfolio.

TGR: One thing, though, with regard to M&A activity, we recently watched Kinross Gold Corp.’s (K:TSX; KGC:NYSE) shares fall about 20% after it announced there were problems with its Tasiast gold mine in Mauritania, which it acquired through the takeover of Red Back Mining Inc. (RBI:TSX) early last year or the year before. Do you think something like that might make the majors think twice about dipping into the sector with some juniors with prospects that look promising?

PK: What was skeptical about that original takeover was that Kinross was stepping outside of the gold space and more into a copper play. Getting that project into development has been a task for Kinross and, as seen recently with the write-down along with the higher-than-anticipated costs, affected them considerably.

TGR: Will that have any trickle-down effect on the sector at large in terms of potential takeovers?

PK: No. There is always going to be M&A. The seniors need to do their due diligence in order to identify the best-fit projects and ones that they can develop or take over at a stage where they can restructure or integrate the management and more efficiently operate the new project.

TGR: You recently made some changes to your outlook for metals within foreign exchange numbers.

PK: For my gold forecast, my long-term price remains the same at $1,000/ounce (oz). The main change has been in the short term where we see average prices being sustained slightly higher over the next one to five years. With respect to gold, we just slightly increased it over the next few years, as we see a higher average price to come. For silver, we were previously using a gold:silver ratio of 42:1. I felt that was a little high, so we are now using a 50:1 ratio going forward. For copper, our long-term price didn’t change. The slight decrease for 2012 was to reflect a pretty strong pullback in prices, but we remain quite bullish, as India and China continue to grow and develop their rapidly expanding economies.

TGR: Can we also have a specific 2012 price for gold, silver and the U.S. dollar?

PK: Sure. 2012 gold: $1,725/oz, silver: $34.50/oz, copper: around $4/pound (lb). Keep in mind that these are average prices over the year. For the U.S. dollar, over most of 2011 it was at par with, or subpar to, the Canadian dollar. What we have seen in the last quarter was the strengthening of the U.S. dollar, so we made adjustments to compensate for these changes within our models and in our target prices.

TGR: Please tell us briefly about your coverage universe.

PK: I am about 50–60% precious metals as well as some bulk materials, including iron ore, potash and coal. I also have a great story on Northern Graphite Corporation (NGC:TSX; NGPHF:OTCQX), which we brought public in April 2011.

TGR: Another company you cover is Geologix Explorations Inc. (GIX:TSX), whose primary project is the Tepal copper-gold porphyry project in Mexico. Despite a downgrade in your outlook for copper prices, your 12-month target price on Geologix did not change. Tell us why you remain bullish on that junior.

PK: The downgrade in the copper price was only affecting models in the short term, whereas Geologix’s target is based on a discounted cash flow for its production scenario. This did not affect the production model using the long-term price for its Tepal project. I’m still quite bullish on Geologix as the economics only become more attractive should copper prices remain above our long-term outlook. The company’s Tepal project in Mexico is an attractive play that has become more appealing on top of its already robust economics. Recent drilling has demonstrated a higher-grade zone below the current pit shell, which is showing two to three times the grades used within the existing resource. It is currently at a valuation suggesting approximately $5/oz gold equivalent (Au eq).

TGR: Recent drill results seem to indicate that the copper-gold mineralization continues at depth. What is the earliest the company could test that theory?

PK: Geologix is testing it now. It has completed a substantial drill program to define the outer limits of the deposit. There are still 96 holes of assays to come from this drill program.

TGR: If you believe that copper and gold prices are going to continue to rise over the medium to long term, this looks like a good bet.

PK: The economics are robust for Tepal and I am astonished at such a low valuation that the market is giving it at this point. My 12-month target is $1.25, and it is currently trading at about $0.25.

TGR: There are certainly some gains to be had there. Another company where changes to your outlook for metal prices did affect the target price was Timmins Gold Corp. (TMM:TSX.V; TMM:NYSE.A). You cut your target price on Timmins to $3.90, which you said reflects “the leverage to the decreased gold price and stronger U.S. dollar outlook in the short term.” You are expecting Timmins to go from earnings per share of $0.02 in Q212 to $0.8 in Q312. What is going to bring about that kind of jump?

PK: I toured this property last August and initiated coverage shortly after. What happened in the previous quarters is the company was struggling with lower-than-expected recoveries, which ultimately resulted in lower-than-expected gold production. The good thing, however, is that it was not a geological or depositional issue, but more of an operating efficiency problem. The company brought in some specialists who recommended adjustments to the leaching cycle at the San Francisco mine. Timmins has now adjusted the flow rates and the irrigation setup and has now shown that it has recovered 30% more gold this quarter than the previous, and increased recoveries from 50% to 65%. As well, it demonstrated recoveries of 76%, ultimately achieving a record 8,500 oz gold production in December.

TGR: What sort of production are you expecting this year?

PK: I’m quite optimistic for Timmins this year and expect around 115,000 oz of production. With the increased recoveries as well as an increase to its throughput expected later this year from the addition of a mobile crusher, Timmins should be able to achieve this target.

TGR: Could a company like Timmins be looking to acquire another mine or project in the vicinity in order to leverage its current cash flow?

PK: It is quite possible because Mexico has great gold and silver deposits. At this point, Timmins is focused on extending the mine life at San Francisco, as well as identifying additional mineralization from La Chicharra to increase reserve life to San Francisco.

TGR: You wrote that you determined the companies on Union Securities’ 2012 Watch List by “strategically selecting precious metals exploration companies in various stages of project development. The general focus is on properties located in prominent regions of hosted gold and silver mineralization.” One company that fits that bill is Kiska Metals Corp. (KSK:TSX.V), whose Whistler gold-silver-copper project is in the same region as Alaska’s Northern Dynasty Minerals Ltd. (NDM:TSX; NAK:NYSE.A) Pebble copper-gold porphyry deposit. Tell us about how Kiska’s ongoing drill efforts at Whistler are growing the project’s gold-equivalent ounces?

PK: Whistler is a huge land package with an abundance of targets. With a limited field season in Alaska to test these targets, Kiska needed to be more efficient with prioritizing the targets, which were generated from geophysics. It has utilized a scout drilling program that allowed it to drill shallow holes around 100 meters (m) deep and allowed it to test multiple targets in the shorter timeframe. This was a successful exercise and demonstrated at its Rainmaker target that the scout drilling extended mineralization 110m along strike. This program also helped show that non-anomalous magnetic signatures do contain mineralization, as scout drilling identified gold-copper mineralization at its Dagwood target and quartz stockwork veining over 138m. These targets will be followed up this year.

TGR: There was also a high-grade intercept on its Island Mountain deposit.

PK: Island Mountain has now been expanded to more than 300m by 300m, and it is particularly open to the north. The high-grade zone that you are speaking of was about 2.2 grams/ton over 100m within the brecchia zone at that porphyry target. What needs to be done now is infill between the north zone and the southern zone to test the continuity between them.

TGR: Those results will not be included in the resource estimate that is due in the second half of 2012, right?

PK: They should be. Toward Q212, I am expecting close to 7 million ounces (Moz) Au eq. Its past resource was 5.4 Moz Au eq.

TGR: That is a significant increase. Will that be a significant catalyst in the share price to get it back up to that $1.50/share level?

PK: It definitely will start to get more traction for Kiska. Its ultimate goal is to get close to 10 Moz. I think this scouting drill program was a good step in the right direction to target certain proprietary targets in order to achieve this goal. Our target is $1.40 and is currently trading around $0.29.

TGR: What are some other junior precious metals companies that could rebound significantly in 2012?

PK: I like Kootenay Gold Inc. (KTN:TSX.V). It has the Promontorio silver deposit down in Mexico and is currently engaged in a 25,000m drill program. It has been successful with extending mineralization outside of the current resource pit, particularly in the northeast and southwest zones. It is aiming for almost five times its current resource, targeting 100 Moz Ag eq.

TGR: What does that tell you about the project and the deposit?

PK: This northeast zone at Promontorio is not a one-hole wonder. It is continuing to intersect this zone along strike as well as along different fence lines within the zone. There definitely seems to be a high-grade area that can add significant resources in the upcoming NI 43-101.

TGR: What are you expecting from that?

PK: It is targeting 100–105 Moz Ag eq. In terms of silver prospects, it is mid to small size, but it is definitely in a good district. Mexico is one of the largest silver producers on the planet.

TGR: If it keeps hitting intercepts like that, it will not be long before that resource doubles. What is your 12-month target price for Kootenay?

PK: $2.50.

TGR: What about some other juniors?

PK: One copper story I cover is Excelsior Mining Corp. (MIN:TSX.V). Its North Star deposit has an in situ resource of close to 5 billion tons copper at about 0.3%. This project in Arizona is targeting an in situ recovery method that would produce 80 million pounds/year. Arizona is a mining friendly state, and copper mining is one of the leading producers toward the state’s gross domestic product. This is more of a permitting and development story that is ultimately going to come into production down the road. Right now, the company is engaged in a feasibility study to better define the metallurgy and engineering needed to increase its overall expected recoveries.

TGR: The key thing with in situ recovery is that it really lowers the cost of mining copper. In this case, you would be able to produce 1 lb copper for under $1, and that’s really good.

PK: That’s right. Excelsior is looking at costs of approximately $0.94/lb and would become significantly lower should it add an onsite acid generation plant. It would bring down its operating costs to about $0.68/lb.

TGR: The preliminary economic assessment done on the North Star project calculated a net present value (NPV) of $480M with an internal rate of return (IRR) of 34%. How does that compare with its peers in the space?

PK: It is quite comparable, particularly to Curis Resources Ltd. (CUV:TSX.V; PCCRF:OTCPK). I do not cover Curis, but Excelsior does have a higher NPV and relatively similar IRR with a shorter payback period. Excelsior is also looking at an annual production rate that is higher than that of Curis. My 12-month target on Excelsior is $1.75, and it is currently trading around $0.57.

TGR: I would like to talk about one more and then move onto Northern Graphite.

PK: One that I do not cover is Riverstone Resources Inc. (RVS:TSX.V) in Burkina Faso. I have this featured on my 2012 Watch List. It has recently expanded its Karma deposit to 2.7 Moz of gold resources across five main targets. This company is moving the project in the right direction as well as within a good jurisdiction for mining. The initiative right now in Burkina Faso is to electrify the country, and the International Finance Corp. is funding two major power lines that will be within close proximity to Riverstone’s Karma asset.

TGR: Right, part of the World Bank.

PK: The big overhang on this right now is the final transaction needed from Golden Star Resources Ltd. (GSC:TSX; GSS:NYSE), for the option agreement to take over 90% of the project. Once that is cleared up, we will be able to see the full direction and the continued growth of the asset.

TGR: Is that 2.7 Moz open-pittable gold?

PK: Yes, and a majority of it is contained within the Indicated category. That material will be easily accessible within an open-pit mine.

TGR: What do you think the upside is on Riverstone in terms of ounces?

PK: The Kao zone is open along strike and down dip particularly to the northeast. Riverstone also has other targets that have yet to be tested on the property that could be other mini-pits to add future throughout in a production scenario. I think a 4 Moz global resource for Karma isn’t out of the question.

TGR: Finally, some graphite. This may be saving the best for last. It is a graphite play, and probably not a four- or five-hour drive from your office in Toronto. The company is named Northern Graphite. A year ago, virtually no one knew about this company, and now it is about to publish a feasibility study on the Bissett Creek graphite project in central Ontario. Tell us why you believe the share price will double this year.

PK: The graphite space is something that we are really bullish on. We brought Northern Graphite public in April 2011 through an IPO. The Bissett Creek graphite project is a large-flake, high-quality, carbon graphite deposit where the large flakes within the deposit are abundant—greater than 50%. Large-flake graphite currently sells for around $2,500/ton (t). The upside for Northern Graphite is that its jumbo-flake graphite will be sold on the market for a substantial premium to $2,500/t. It is on the fast track to production and already has a mine permit plan in place with the Ontario government and can begin construction with permit approval. There should be a feasibility study by the end of Q112, and I expect it to have a strategic offtake partner in place that could emerge right around the time of that feasibility study.

TGR: Is that likely to be a Chinese partner?

PK: It is quite possible as China is the world’s leading producer and consumer of graphite, and has dwindling resources available to meet its growing demands.

TGR: The project is not far from Algonquin Park. Do you expect any issues with regard to bringing a mine into production in a relatively well-traveled part of the province?

PK: No, I don’t. The water drains in the opposite direction of the park from the project site and the tailings are not acid generating so this is a definite positive for Bissett Creek to become a mine.

TGR: As far as an NPV goes, what sort of numbers are we looking at with Northern Graphite?

PK: It depends on which discount rate you use for Bissett Creek; using 10%, I have it at about $125M. The upcoming feasibility study should provide further insight into what to expect from Bissett Creek.

TGR: For how long would that mine be in production?

PK: It could easily expand the existing resources and increase its production scenario, but our model uses a 35-year mine life.

TGR: Any parting thoughts?

PK: I am pretty optimistic that we will see a strong market for 2012 and, particularly, I favor junior advanced exploration and development stories that can either be developed by the existing management groups or ones that would be targeted by a senior midtier company to fit its project portfolio for future production.

Philip Ker is a mining analyst for Union Securities Ltd., a company formed in 1963 that is now one of the largest independent brokerage firms in Canada. The company has offices all across Canada as well as one in London, England. He has field experience as an exploration geologist working across Canada on gold, diamond and base metal projects. He joined Union Securities in June 2011 after completing his Master of Business Administration degree in finance at the University of Alberta. He holds a Bachelor of Science degree in geology. 

Want to read more exclusive Gold 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 Exclusive Interviews page.

DISCLOSURE: 
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Northern Graphite Corp., Geologix Explorations Inc., Timmins Gold Corp., Kiska Metals Corp. Streetwise Reports does not accept stock in exchange for services.
3) Philip Ker: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise for participating in this story.

The lithium market is currently dominated by a handful of major producers, but investors naturally look to smaller junior exploration and production (E&P) companies for the real growth. Economist Daniela Desormeaux of Santiago, Chile-based signumBOX takes a global macroeconomic view of the lithium industry and concludes that supply will meet demand, but if the adoption of vehicular lithium ion batteries occurs sooner than the market expects, demand could overtake supply. In this exclusive interview with The Energy Report, Desormeaux discusses some of the juniors that could ultimately add some energy to portfolios.

TICKERS: CLQ:TSX; CLQMF:OTCQX, FMC:NYSE, GXY:ASX, LIEG:OTCBB, LAC:TSX; LHMAF:OTCQX, NMX:TSX.V; NMKEF:OTCQX, ROC:NYSE, RM:TSX.V; RDNAF:OTCQX, SQM:NYSE; SQM-B:SSX; SQM-A, TLH:TSX

Source: George Mack of The Energy Report  (1/26/12)

The Energy Report: Daniela, over the past three months the small-cap lithium developers have on the whole been in positive territory. Are we at the beginning of a long-overdue bull market in lithium equities?

Daniela Desormeaux: Most of the smaller-scale suppliers trading in the open market are young, junior mining companies. The stock price fluctuations observed during recent months reflect the market’s sensitivity to the companies’ announcements and news.

TER: What is currently driving lithium demand? What will drive it in the future?

DD: Lithium demand has a promising future. Rechargeable batteries are the largest application, accounting for about 30% of the lithium demand. This is also the segment with the highest growth rate for the next 10–15 years, by which point we believe batteries will represent more than 50% of demand. The main driver is the automotive industry. Electrification of transportation is now driving the use of lithium in energy storage devices for hybrid and electric cars. The amounts of lithium required in these batteries are significant, from between 5–60kg lithium carbonate equivalent (LCE) depending on the battery type and specification. When compared with the lithium required for mobile phone batteries, for example, the difference is huge. A mobile phone battery device requires less than 5g LCE. Other battery applications will also show very interesting growth rates in the coming years. These include smartphones, tablets, power tools and batteries for grid storage, among others. Other current lithium applications include glass and ceramics as well as lubricating greases. Considering all of its applications, we estimate lithium’s average demand will grow around 10%/year, which is greater than the growth of the economy.

TER: How are lithium prices holding up currently?

DD: In the last few months we have seen lithium prices going up in response to announcements made by FMC Lithium Corporation (FMC:NYSE) and Chemetall (a unit of Rockwood Holdings Inc. (ROC:NYSE)). Both companies announced price increases of around 20% on all of their lithium products last year. According to the companies, the main reason behind the rise in prices was higher raw material costs. So, we might be seeing an inflation phenomenon in this industry. In real terms, prices have remained stable, and probably will go down since new capacity is being added. Talison Lithium Ltd. (TLH:TSX) is expanding capacity in Western Australia, and Chemetall is also expanding in the U.S. Other new projects are in the pipeline coming from Galaxy Resources Ltd. (GXY:ASX) in Australia and from other projects in Argentina and Canada.

TER: So, for the moment there is currently some pricing power in the market?

DD: In general terms, prices are driven by the balance between production capacity and demand. If the market is tight, prices go up. Nevertheless, this industry has been, and still is, very concentrated and the largest, lowest-cost lithium chemicals producers drive prices. However, we have seen more competition in the market. Chinese lithium hydroxide producers have entered with an aggressive price strategy in order to gain market share from the other producers.

TER: But not all the large producers are raising prices, right?

DD: So far, Sociedad Química y Minera de Chile S.A. (SQM:NYSE; SQM-B:SSX; SQM-A) has kept prices stable. It hasn’t announced any price increase the way FMC or Chemetall have. The company probably wants to give a signal to the new competitors that they can “afford” higher costs. Most of the Chinese lithium hydroxide is produced from lithium concentrate, which is obtained mainly from spodumene. Producing lithium hydroxide from hard rock pegmatites has competitive advantages compared with producing from the lithium carbonate like Sociedad Química y Minera de Chile does, and so the Chinese can compete better in this field.

TER: Here in the U.S. we are seeing proliferation of TV ads for hybrid and electric cars (EVs). Manufactures are beginning to advertise these cars with some zing. Will this jump start hybrid and EV sales?

DD: It is difficult to know because these are still considered “luxury” cars because of their high price. We have tested a statistical model on how hybrid car sales in the U.S. responded to changes in the economic cycle and changes in gasoline prices. Conclusions are very interesting. We found some price elasticity with gasoline prices, as higher gasoline prices incentivize decisions to buy more efficient cars. But income elasticity is huge, which means these cars are very sensitive to the economic cycle. Of course these conclusions will change in the future when these cars become more affordable.

TER: Investors need to see double-digit sales and real increases in cash flow, and small companies have the tremendous advantage of not having the law of large numbers work against them. Can any of the companies you follow begin to double production and revenue and create exciting bottom lines?

DD: In the short term I don’t think so, but it’s likely in a future. Main sources of uncertainty are how fast/slow hybrid and electric cars will enter into the market in a massive way (at lower prices), and how fast/slow producers will respond to the demand. In the last years we have seen that in more than 90 projects under evaluation. We believe that 4–5 projects have chances to become part of the lithium supply very soon. That means that more competition will be added in the market.

TER: I’m recalling the way the mobile phone industry took off in less-developed countries in Asia and elsewhere because there was no pre-existing buildout of copper wire infrastructure. Mobile phones were an instant success in those areas. Why then are we not seeing large lithium ion storage batteries powering neighborhoods in the developing world where power grids have not been developed?

DD: Well, the thing is that batteries are expensive. The technology has only been in development since the early 90s. It took 30 years to make progress in developing batteries for mobile phones and electronic devices, and these are small batteries and less costly than larger batteries. This is where the industry has been focused, and now we are seeing a shift from batteries for cell phones and electronic devices to electric cars.

The requirement in terms of energy storage capacity is huge, and so the cost so far is also huge. That’s why we haven’t seen implementation of these batteries in neighborhoods and in small towns. There are also some projects that try to store energy for the grid, but in order to make these projects profitable, you have to store an important amount of energy. For a power grid, the main issue is cost.

TER: With a lot of new lithium supply coming onto the market over the next few years, will supply overpower demand, or will it be the other way around?

DD: Again, while demand is growing, so is supply. Talison Lithium Ltd. in Australia, for example, is performing a very aggressive expansion plan. We see expansions in Argentina and in the U.S., and the Chinese are also expanding capacity. The main question mark is how fast or slow electric cars will come into the market. But without subsidies and without incentives from the government, it’s very difficult to enter the market because the electric and hybrid vehicles are expensive right now. If demand for lithium grows sooner than expected, we might see a delay if supply is unable to meet demand, but I don’t think this is going to happen. In short, I think supply will meet demand.

TER: Which types of projects do you favor?

DD: There are projects based on pegmatites and projects based on brines. These are two completely different worlds. I think projects based on lower-cost brine have better chances to compete with current low-cost producers.

TER: What companies are interesting to you?

DD: Australian company Galaxy Resources Ltd. extracts lithium from pegmatite and has already started producing. Apparently, the company is competitive, and it has started to ship concentrated spodumene to its lithium carbonate plant in China.

Other pegmatite projects include Canada Lithium Corp. (CLQ:TSX; CLQMF:OTCQX) and Nemaska Lithium Inc. (NMX:TSX.V; NMKEF:OTCQX). All of these projects have a chance to become part of the lithium supply. In Argentina there’s Lithium Americas Corp. (LAC:TSX; LHMAF:OTCQX),Lithium One Inc. (LI:TSX.V) and Orocobre Ltd. (ORL:TSX; ORE:ASX). These and the previous ones I mentioned have the highest project ranking by our methodology and have more chances to become part of the lithium supply.

TER: What about Li3 Energy Inc. (LIEG:OTCBB)? Back in December, it executed a letter of intent to acquire a 100% mining interest in one of the biggest assets to be had near the Maricunga Salar in Northern Chile. That makes Li3 Energy a potential major player in Chile and one of the few developers inside of Maricunga. What does this mean to the company, particularly with regard to the ban?

DD: Li3 is developing a project in the Salar de Maricunga, the second-best salar after Atacama in Chile. The company has a project and has a strategic partner (POSCAN), but current Chilean regulation does not allow newcomers to exploit lithium. We have a ban that only allows lithium extraction from those mining concessions that were assessed before 1984, which is the case of most of the mining concessions at Atacama. I think that the ban will be removed this year, but we really can’t yet know the formula that the government will use.

TER: Lithium One is close to production, and it has established a good relationship and a joint venture with Korea Resources Corp. I believe the stock has been supported by this relationship. What are the prospects here?

DD: Lithium One is in a very advanced stage of development, and it is very well ranked in our signumBOX ranking. One of its upsides is that it is located in Salar del Hombre Muerto. It’s the only startup that actually is operating in Argentina. So it has really good prospects for the future.

TER: Back in November, Rodinia Lithium Inc. (RM:TSX.V; RDNAF:OTCQX) delivered results of a preliminary economic assessment (PEA) for the Salar de Diablillos lithium brine deposit. There are estimates of 15 kilotons (kt)/year production of lithium carbonate and 51 kt/year of potash. This implies a 34% internal rate of return (IRR), which is excellent. Is this a viable project?

DD: I think it can work, but Rodinia faces huge competition. The company estimates costs will be in the range of $1,500/t lithium carbonate. But I think that it is very different to have an estimated cost before starting production than when you’ve already started producing. I think that Rodinia can be a player in the lithium industry, but like other players in Argentina it will face huge competition. It will have to be competitive because new production is coming from China and Australia. And if Chile removes the ban, they will have to deal also with that.

TER: Talison Lithium is the leading global producer of lithium, and it’s a pure play. It’s a mature company. How much can it grow?

DD: Yes, Talison is the largest lithium concentrate producer, but it’s not the lowest-cost producer. It produces lithium concentrate in Australia and most of its product is shipped to China, where it’s converted into chemicals. I think Talison will face more competition, and that’s why it has expanded production capacity. It has performed a very aggressive expansion plan at its Greenbushes project in Australia. Nevertheless, its deposit has a short mining life; that’s why it is looking for other sources of lithium and performing an evaluation project in Chile.

TER: Daniela, thank you very much for your time.

DD: Thanks to you.

Daniela Desormeaux is an economist and an expert in industrial chemicals and natural resources. She runs signumBOX, a Chilean-based company with extensive experience in the lithium industry. signumBOX has issued several reports regarding the use of lithium in batteries and vehicles and its prospects and trends.

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 Exclusive Interviews page.

DISCLOSURE:
1) George Mack of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Li3 Energy Inc., Lithium Americas Corp., Lithium One Inc., Nemaska Lithium Inc., Rodinia Lithium Inc. and Talison Lithium Ltd.
3) 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. I was not paid by Streetwise for participating in this story.

Fayyaz Alimohamed, CEO of Altair Ventures Inc. and publisher of the Acamar Journal, offers historical perspective and predictions on the global economic crisis. In this exclusive Gold Report interview, he foresees a “mania” in junior mining stocks and recommends holding physical gold outside the banking system as a safety net.

Source: Source: Brian Sylvester of The Gold Report  (1/25/12)

The Gold Report: Fayyaz, in June 2008, using readily available economic data, you wrote that the global economy was on the verge of financial collapse. What do those sources tell you about where the global economy is headed today?

Fayyaz Alimohamed: In November 2006, I predicted that the U.S. was headed into a recession. Seven months later, the Bear Stearns funds cracked, beginning the crisis. By June 2008 it was obvious to me that the crisis would escalate into a crash.

Today, the U.S. cannot meet its gargantuan future unfunded liabilities. Europe and Japan face debt levels that ensure eventual sovereign debt defaults and declining standards of living. There is potential for all of this unwinding to seriously affect an entire generation.

These economies cannot grow their way out of their problems and the cuts needed to balance budgets would create massive social turmoil because the cuts themselves would lead to sharp drops in gross domestic product, creating vicious negative spirals. The current solution being utilized is more debt and quantitative easing. That can only keep things afloat until it can’t anymore. I would say that we will have the next major crisis within the next two years.

TGR: I would like to flesh that out a bit. What do you believe will trigger the next crisis?

FA: Genuine reform has not been implemented. This crisis was caused by unprecedented levels of consumer and corporate debt and Wall Street greed. When the crisis happened, government rescued distressed debt by massively increasing its own debt. For example, the Federal Reserve and the European Central Bank are using their balance sheets at about a 30:1 leverage. This is the same sort of leverage that Wall Street banks had recklessly indulged in. When government debt was substituted for corporate and consumer debt, the whole system rolled over into a much more dangerous phase.

TGR: Do you think the European debt crisis will remain the dominant theme in 2012 or will other themes take center stage?

FA: The European crisis is simply a proxy for a global debt crisis. It happens to be focused on Europe because Germany has not been as eager as the Federal Reserve to print money. Germany remembers the hyperinflation of 1924, when unbridled money creation led to prices doubling every two days.

Today, governments have a preponderant influence on the economy, while large corporations, through lobbying, have inordinate influence over the government, to the detriment of other stakeholders. As the danger of a deflationary depression increases, governments are attempting to reinflate the economy; they may well overreach and create hyperinflation.

Thus, the broadest theme by far is debt and the reaction to debt. We just saw France’s debt downgraded and a negative watch put on the European Financial Stability Facility. This negative spiral will continue. Even though the U.S. has tepid signs of economic growth, it is at the cost of enormous amounts of stimulus being put into the economy.

Given that the U.S. and Europe are its two largest export markets, China also is headed for a hard landing unless it can increase internal consumption substantially.

TGR: Much of the discussion of the European crisis has centered on Greece. But a recent auction of six-month Italian bonds was priced at an interest rate of 6.5%—the highest rate of a bond auction since Italy joined the Eurozone 13 years ago. What do you make of that?

FA: In literature, readers are invited to enter into a “suspension of disbelief” to go along with the story, even if implausible. Before the 2008 crisis, that was the mindset of investors. Now they want to believe that governments can solve these problems.

Greece was not the primary cause of the European crisis. It was caused by German, French and U.S. banks. These banks are all insolvent if they were to mark their assets to market and not to theoretical models. But, we are suspending disbelief because we all have skin in the game and need things to work out.

The drive for austerity ensures that Portugal, Ireland, Italy, Greece and Spain (PIIGS) will continue to see their economies shrink, leading to lower tax revenues and the continued inability to meet budget targets, which will require larger debt relief. It is a vicious downward spiral that will lead to declining standards of living.

Greece, Portugal and Ireland would be much better off leaving the EU, defaulting on their debts and devaluing their currencies. That is a time-honored tradition. After some pain things will work out, as they did in Argentina and Russia in the 1990s.

Investors want to believe that heavily indebted countries can solve the problems of other heavily indebted countries; that an insolvent banking system can be rescued by governments through more debt issuance and debt monetization.

TGR: The European Central Bank has floated the idea of euro bonds, backed by all 17 members of the Eurozone, as a solution to this problem. But Germany does not want to go down that path unless the indebted countries adopt more severe austerity measures. Do you think we’ll ever see euro bonds?

FA: We are really into the realm of absurdity. For example, the European Financial Stability Facility is a private company authorized to borrow €450 billion (B) from the private sector backed by a guarantee from all the EU members who are already heavily in debt and being downgraded periodically. One proposal I saw was that it would use the €440B of debt as collateral to borrow another €1–2 trillion of debt to lend to the PIIGS!

Can this type of thinking ever end well?

As Europe enters a recession, the problems will only get worse. Euro bonds issued by indebted countries just mean France and Germany are putting their own balance sheets at risk. It may provide time, but it does not solve the problem. The question is, should they bailout the PIIGS or take the same money and bailout their own banks? There are no good solutions.

A final thought on yields: when I studied economics we were taught that U.S. Treasuries were the risk-free asset to be used as an absolute benchmark. Given the recent downgrade and outlook, perhaps the economics profession should start looking for another risk-free benchmark, just as the U.S. dollar replaced the pound sterling.

TGR: Given all of this, how are you protecting yourself?

FA: One of the primary measures of protection is a healthy cash balance. You have to be in a position where you are able to ride out any crisis and also to take advantage of valuations in case of a crisis. If the crisis is as bad as I think it will be, you will be able to find and acquire assets at generationally low prices.

The other way to protect yourself is to invest in precious metals. I believe precious metals will do well whether we continue to stagnate or actually see another crisis. I think silver and gold equities will do very well in the long run.

TGR: Investors have been seeking greater security for at least seven months. How long do you think that risk-off sentiment will last?

FA: Brian, U.S. domestic stock funds have seen net redemptions for five straight years. Due to negative real interest rates, equities are undervalued in historical terms. This is tempered by the dangerous, rising systematic risk. Fund managers are paid to perform or else they face redemptions. So, the bias is for stocks to rally as we are seeing now, unless the second phase of the crisis clearly emerges, which in my opinion is inevitable.

Ironically, in another crisis, governments will likely turn to quantitative easing with a vengeance, which means that, despite a crisis in sovereign debt, we will see a substantial rally in commodities, particularly gold and equities, as substantial sums of newly created money finds its way into the system and money leaves the bond markets. You may find prices rising while the economy is being undermined.

TGR: Fayyaz, your background is in insurance and finance, how did you find your way into the gold and silver space?

FA: From 2001 onward, I realized that the U.S. seemed to lack the political will to deal with its increasing levels of budget and trade deficits. In fact, the Fed was creating asset bubbles that were bound to end badly. At the same time, I knew from history that fiat money generally ends badly, starting with Kublai Khan. I came to anticipate the decline of the U.S. dollar and the rise of gold. I believe that the price of gold will be much higher in the coming years and that gold will become part of the monetary system in some capacity.

Gold is interesting in another way. Throughout history booms have been localized geographically. As an example, the average Canadian investor is unlikely to invest in, say, Argentinian real estate or in its stock market even if they are booming. The Internet bubble was the first time that a global audience became aware of an asset category that was rising dramatically, ironically thanks to the Internet itself. But you could not participate unless you had a U.S. brokerage account. Gold is the first truly global asset boom that investors at all levels can participate in. Today investors are more savvy and more heavily invested across markets and categories but gold is fundamentally money and all investors and savers can buy it. Local yet global.

TGR: Investors also have different tools.

FA: That’s right. They can do a lot of research. They have a lot more liquidity. The potential impact on the market for gold as an asset class is phenomenal. It appeals to all levels of investors. Someone buying a few grams of gold in China creates demand that directly helps the value of your gold holdings. I mean, how many people sleep with a barrel of oil tucked under their mattress?

TGR: Not if you could help it.

FA: Historically, gold and silver equities leveraged the returns on gold. In 2011, mining companies were producing gold at an average cash cost just under $600/ounce (oz) and were getting about $1,600/oz in revenue. Cash flows are very impressive and price earnings are healthy. Mining companies continue to buy juniors with good assets, especially at these low share-price values. I moved into the sector to take advantage of this bull market in gold. And, I believe we will see a mania in junior mining stocks before this is over.

TGR: And, when will that be?

FA: I think we will see this happen within the next two years as people begin to realize that solutions to the global economic situation are not forthcoming. There will be more and more nervousness and gold will find a larger and larger audience.

We now have a situation where central banks, which were net sellers of gold for 20 years, became net buyers in 2009 and are accelerating their buying programs. We are seeing tremendous support for gold from central banks, institutional and retail investors across the world.

TGR: Do you have positions in any gold and silver juniors?

FA: Yes, one is Colombia Crest Gold Corp. (CLB:TSX.V; EAT:FSE). This company has a huge land package in a prolific gold belt, surrounded by several large deposits including Sunward Resources Ltd.’s (SWD:TSX.V) 8 Moz Titiribi project. IAMGOLD Corp (IMG:TSX: IAG:NYSE) took a 19.9% stake in October 2011, which validates Colombia Crest’s exploration program. With many large, prolific gold targets, the company will commence a 5,000m drill program next month. It also has a high-grade gold resource in Bolivia, a $25 million (M) market cap and $6M in cash. There is good upside potential as the company gets decent drill results.

TGR: Is there one project that will attract notice to Colombia Crest Gold?

FA: It has two projects in Colombia called Venecia and Fredonia.

TGR: And are they underground mine systems or bulk tonnage targets?

FA: I think Colombia Crest has a number of prolific targets. Some will be potential heap leachable targets and others are underground and, therefore, higher grade. So, the company has a dual approach in the Antioquia Province.

TGR: As far as management goes, are there people onboard that you are confident in?

FA: I mostly talk to Hans Rasmussen, the president and CEO. He strikes me as being very focused. He is a geologist and geophysicist and has worked with a number of senior companies. He was brought in by a group of investors to sort out various issues and he created the opportunity in Colombia. Rasmussen is the kind of person that you can have confidence in.

TGR: Do you have another junior name?

FA: I would also mention Coral Gold Resources Ltd. (CLH:TSX.V) with a 3.4 million ounce (Moz) Inferred resource. Its Robertson property in Nevada sits adjacent to Barrick Gold Corp.’s (ABX:TSX; ABX:NYSE) 14 Moz Cortez Pipeline mine, which produces gold at a cash cost of $312/oz. The preliminary economic assessment just came out, showing a net present value at a 5% discount at $1,500/oz gold of $147M for just three of its multiple zones. Its market cap is about $15M. Coral is a natural takeover target. I believe there is good value here for a patient investor.

TGR: Coral has not put out any news since February 2011. The lack of news for almost a year has done nothing but erode shareholder confidence. What is the problem?

FA: From what I understand, unlike nearby exploration companies, Coral has had its mine for a couple of decades and is a past producer. The company was given some very rigorous regulatory environmental conditions to meet regarding migratory patterns of birds and insects and such. Coral had to study these for a given period of time, which delayed its drilling permit. I think that situation is now on the verge of being resolved.

If that happens, Coral has the cash and is ready to drill. You should see movement in terms of activity and, potentially, share price appreciation.

TGR: Let’s move to silver. Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.A) is led by Bob Archer, a real veteran. The company is producing from its Guanajuato mine in Mexico. In 2012, the company plans to produce 1.72 Moz silver, up from 1.5 Moz last year. It also expects to produce 10–11 thousand ounces (Koz) gold, up from 7.8 Koz in 2011. That news, although good, was not met with much enthusiasm from the market. What are your thoughts?

FA: I think a 20% year-over-year increase is very healthy for any producer. The company’s profit margins are excellent. It has a 30% net margin for the year to date. So, it should generate very decent cash flows going forward. Great Panther has $40M in the bank. It is growing the resource at the San Ignacio project, is looking for acquisitions and it is mining a recently discovered high-grade zone in Cata.

Overall, the junior sector has stagnated over the last few months and I think Great Panther has just been part of that process.

TGR: What are your thoughts on what Bob Archer has done there?

FA: I think Bob has delivered tremendous value for shareholders. He is very competent and is a man of integrity. I think his share price is closely linked to the price of silver, which is generally true for most silver producers. Guanajuato has a rich history. It was mined by the Spaniards and has been in production for 400 years. It was once considered the richest silver mine in the world. Bob has taken it from when silver was down to $4/oz, resurrected it, capitalized it, built out infrastructure and delivered tremendous value.

TGR: In your time in this space, what have you learned that the average retail investor ought to know?

FA: This is a very volatile sector, subject to investors jumping in when there is a bullish trend and a lot of enthusiasm, and those same investors not wanting any part of equities when there’s a pullback in prices.

Given the overall increase in volatility in the markets, investors really should take a look at gold and silver. If they are bullish, any pullbacks in the commodity prices or in the associated equities should be seen as buying opportunities. When there is a lot of enthusiasm, it should be seen as creating selling opportunities.

You also have to have physical gold and silver in your possession. We learned a lesson with MF Global. We saw $1B of segregated funds in clients’ accounts vanish. My understanding is that some of those funds were comingled and used to settle MF Global’s liabilities to other financial institutions. There is this whole issue of counter-party risk, which gold does not have. That should be a cautionary reminder to people. You need to have physical cash balances. You need to have physical gold and silver outside of the banking system as a safety net because, as Warren Buffet said, we are in uncharted waters now.

TGR: You grew up in Pakistan, where gold is part of the culture, given as gifts at weddings and such. Do you think you would have that same opinion about physical gold as a personal asset if you had grown up somewhere else?

FA: Not in my case. I had no involvement or affinity with gold. I was a finance professional. My involvement with the gold sector is purely intellectually driven, from looking at trends within the macro economy and realizing that gold and silver really are hedges against turmoil and currency debasement.

But that is a very good question and it points up the importance of watching out for biases in the commentaries that you read. People have vested interests and they do tend to have agendas, both in the mainstream media and elsewhere. For your own protection, you need to be sensitive to those influences and to study track records at key inflection points before relying on other people’s judgment.

TGR: Fayyaz, thank you for your time and your insights.

Fayyaz Alimohamed is president, CEO and director of Altair Ventures Inc. and publisher of the Acamar Journal. He has over 20 years of experience in investment management, finance and consultancy. He previously worked at the Aga Khan University Hospital, Financial and Management Services Ltd. (a management consultancy set up by Morgan Grenfell & Co. Ltd. and Booz Allen Hamilton Inc.) and as the chief financial officer of the Key Capital Group before becoming director of investments for the Cupola Group, a large operating and investment conglomerate based in Dubai. He holds a Bachelor of Science (Honors) degree in economics from the London School of Economics, University of London, and is a Certified General Accountant (CGA).

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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following company mentioned in the interview is a sponsor of The Gold Report: Great Panther Silver Ltd. Streetwise Reports does not accept stock in exchange for services.
3) Fayyaz Alimohamed: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reportsfor participating in this story.

Last year marked the third-largest growth in the potash industry, but hesitancy from India and China may put things on hold in 2012. However, MGI Securities Analyst Corey Dias still expects to see a lot of positive news coming out of the junior potash space. In an exclusive interview with The Energy Report, Dias specifies which companies he’ll be following for progress.

Source: Brian Sylvester of The Energy Report  (1/24/12)

The Energy Report: Total potash demand in 2011 was estimated at 56 million tons (Mt), and the market has traditionally grown at a rate of about 3.5%/year. Do you believe we’ll see a similar increase in 2012?

Corey Dias: I think 3.5% could be at the high end of growth for 2012. I would expect slightly lower growth this year given that India is delaying its potash purchases until the end of Q112. China is also determining its exact needs, and there are rumors that it may reduce its imports this year versus 2011. Everything tends to depend on price. Canpotex (the marketing company for Saskatchewan potash producers) and its Belarusian counterpart are holding out for higher prices than India and the China currently seems willing to pay. With those delays, demand will probably be slightly below the historical 3.5% growth rate.

TER: Potash Corp. (POT:TSX; POT:NYSE) of Canada has shut down two mines in that country, and The Mosaic Company (MOS:NYSE) says potash buying is slow right now as buyers are taking a wait-and-see approach. What do you make of Potash Corp shutting down those two mines?

CD: It is a prudent approach. The company doesn’t want to flood the market with product as it would like to sustain a reasonable potash price that could provide a reasonably profitable return. By shutting down these mines, it’s limiting the output and that should keep the price at a fairly stable level. It’s not a question of shutting down so much capacity that prices are going to spike; it’s simply a way to keep potash prices relatively stable until the moment when a larger buyer comes back into the market, whether it’s India or China.

TER: In 2011, potash had the third-largest price increase among the 32 commodities ranked by the Scotiabank Commodity Index and, over the span of 2011, potash rose about 32%. The leading indicator of potash prices is often the price for corn, which is down significantly after some bumper corn crops in Eastern Europe, Russia, and Australia. What do you believe will be the average price per ton (t) for potash in 2012?

CD: Potash prices seem to be ranging between $450 and $550/t at the moment, depending on the port of delivery. It will probably stabilize around the $500/t level in the short term. I don’t see any reason for a significant spike in the price at this point. Although the corn price has recently seen a dip, it still remains above its historical average. Moreover, given the fact that the U.S. Department of Agriculture said that its stocks-to-use ratio is still well below the historical average, it would take a significant amount of corn production to reach the normal level of 15–20% in terms of that ratio, and reaching that level of production to meet this ratio could be a real challenge, especially when corn demand continues to grow. Therefore, while corn is slightly down, I don’t think there is going to be a downward trend in the corn price, or a complementary downward trend in potash.

TER: You don’t believe that potash will be in the top 10 performing commodities in 2012?

CD: I think it will have a fairly average year. I don’t think it will repeat its price performance in 2012 as it had a relatively low price point from which to start in 2011. It will probably stay somewhere in the middle of the park vis-à-vis other commodities.

TER: In an interview with The Energy Report in May 2011, Dundee Securities’ senior analyst Richard Kelertas predicted that we would see $750/t potash at some point before May 2013. What’s your perspective?

CD: As you said, that was in May 2011. The market looks a little different now than it did then. The fact that India is pushing back on pricing and delaying its purchases and China is reassessing are going to mitigate the potential upside of the potash pricing. Probably $600–650 is a reasonable price going to 2013, but there are a number of different factors that come into play in addition to India and China, whether it is production capacity being added to the market via brownfield or greenfield projects, whether or not there is a recovery in the European market, or whether or not the U.S. recovery continues. The fact that farmers seem to have a lot of money coming out of 2011 could, at worst, bode well for holding a pricing floor on potash at current levels and could potentially even support a higher price. I think that $600–650/t is reasonable.

TER: Tell us about your coverage universe and the types of companies you cover.

CD: I’m now ramping up coverage in the potash space. My first report was about Passport Potash Inc. (PPI:TSX.V; PPRTF:OTCQX), a name that I’ve followed since early 2011 when I was working in an institutional equity sales capacity at MGI. I really like this story and the fact that it’s in a safe, mining-friendly jurisdiction. An opportunity to build a mine in a potash-rich region—the Holbrook Basin—with only two competitors in the Basin could provide an opportunity for consolidation. It is a story with a great deal of appeal.

Generally, I’m looking at small-cap developers and am not restricted to North America. There are developers in Africa and South America that could be appealing in the same way. It will be up to clients to decide whether or not they have the risk tolerance for assets outside North America.

TER: Is that typically the type of company that MGI covers even in the other sectors?

CD: We tend to cover smaller-cap names. Large-cap names would be a bit more difficult for us to champion in a lot of ways because we wouldn’t necessarily get the mind space from clients for large-cap ideas because clients are well covered by banks and bulge bracket firms that are looking at the Potash Corps of the world, companies like Agrium Inc. (AGU:NYSE; AGU:TSX) and Mosaic.

TER: Passport Potash’s share price took a beating in 2011. It’s currently developing the Holbrook Basin potash project in Nevada. Why do you believe that junior is going to rebound this year?

CD: Part of Passport’s problem this past year was based on the market itself being quite volatile, especially toward the end of the year. In general, small-cap names tend to suffer the most in those circumstances. But management made a few promises to the market that it was unable to keep and probably didn’t realize the extent to which it would be punished by the market by having missed deadlines. However, I believe that the company is starting to right itself. It is in the process of putting together an NI 43-101-compliant resource estimate, which we expect to be released by the end of Q112. Following that, we should see a preliminary economic assessment or scoping study and, further, a prefeasibility study from Passport in order to show the economic viability of its project. In addition, there was an announcement on January 18th that Passport has brought on a new chairman who has significant operational experience gained during his time with Rio Tinto (RIO:NYSE; RIO:ASX). It also has added Ali Rahimtula, who has experience in India, which is key in this type of business because there is the potential for an offtake agreement with an Indian partner. Passport has acknowledged the fact that it needs more relevant experience on the board, and has clearly begun to address this shortfall.

Like most of the names in the junior developer space, there tends to be a rerating—in terms of valuation—of these types of businesses once milestones are met along the road to production. As Passport meets its milestones, the market will likely provide the company with a more positive valuation via a re-rating of its stock. The company’s stock price hit bottom at $0.17 toward the end of last year. Since then, it has been able to at least project to the market that it does have some deadlines, which it intends to meet. Passport has engaged the engineering firm ERCOSPLAN to complete its NI 43-101. ERCOSPLAN has a really good reputation in the marketplace and has done a lot of work for developers in the potash space worldwide. The market now understands that the company is working very hard to meet its current deadline and, once met, Passport will have a potash resource estimate to put to the market. The market at that point will respond favorably, in my opinion.

TER: A competitor operating in the same basin that Passport is operating in, the Holbrook Basin, already has an NI 43-101 resource of 125 Mt potassium chloride (KCl). How large do you expect Passport’s resource to be once it’s published?

CD: The competitor has about 94,000 acres of land, while Passport has about 81,000 acres. If we were to use a ratio of acres to contained tons of KCl for the competitor and apply it to what Passport has, Passport would probably come in somewhere about 100–101Mt of contained KCl. Remember, this is in no way a forecast that I am making as to the size of Passport’s resource. Even if Passport has something like 80% of that number, I think it’s still a decent-sized resource. In my report, I am forecasting that Passport will produce about 1Mt/year over 40 years. That implies about 40Mt of in situ KCl. If we’re talking somewhere between 80–100Mt of contained KCl, there is significant opportunity for Passport to increase the size of production on an annual basis, or it gives a bit more leeway in terms of what the potential resource size could be, on a contained-ton basis.

TER: You have a Speculative Buy on that particular equity. What is your 12-month target?

CD: My 12-month target for Passport is $0.75.

TER: Another junior in that space, Allana Potash Corp. (AAA:TSX; ALLRF:OTCQX), jumped out of the gate in 2011 and slipped above $2 in June 2011 before spending the rest of the year retreating from that benchmark. It now sits well below $1. Will that junior rebound this year? If so, what are the catalysts that are going to make that happen?

CD: I think so. Allana probably jumped up based on speculation more than anything else, but as the actual resource-related numbers come in, then it tends to start trading at some kind of multiple based on its enterprise value (EV), whether it’s EV:resource or EV:ton KCl, et cetera. When the market sees that it’s getting closer and closer to production, that’s when the valuation will start to improve. I think that is something that could happen this year. When one has an asset that doesn’t have any economic information tied to it, it’s very easy to speculate as to what you think the value should be. Obviously, the closer one gets to production, then there are hard and fast numbers that one can start applying some kind of multiple to in order to value a company like Allana Potash. That’s probably why it’s now down below $1. It’s probably more reasonably priced here and as more news comes out that’s favorable to the company, then you should start seeing the stock move back up.

TER: What are your thoughts on the Danakil potash project in Ethiopia?

CD: The Danakil project is interesting because it’s a near-surface project, which means the capex should be low. I think that it will have a fast track to production, which is another positive. And the fact that it’s probably selling to India, and perhaps China, is another positive because there is a quicker trade route to those countries when compared to North American or South American potash producers.

That said, there is no domestic demand for the product in Ethiopia. The companies that I believe have an advantage are those that have domestic demand or significant domestic demand, whether it’s a place like the U.S., which imports most of its potash needs, or South America—Brazil in particular—where 90% of its potash needs are imported. Ethiopia is also landlocked, that is, it has to go through another country in order to reach the port. Moreover, there is a greater possibility of political risk in Africa than in the U.S. or in Brazil. However, if everything remains stable, I think there could be a big opportunity for Allana, especially given its low operational cost base.

TER: What are some other small-cap potash plays that you expect will outperform in 2012?

CD: Verde Potash (NPK:TSX.V) is planning to produce a unique product called Thermopotash. Thermopotash, derived from the combination of glauconite and limestone, is a slow-release potash product with no chloride, which is great for crops like tobacco, coffee and oranges. In addition, the company is exploring the use of a new technology—the Cambridge process—which could potentially convert Verde’s potassium-rich rock to regular KCl. This would be a massive opportunity in Brazil. In terms of available infrastructure, Brazil falls behind North America but is certainly ahead of Africa.

Rio Verde Minerals Development Corp. (RVD:TSX) is another small company operating in Brazil that recently confirmed that it has potash on its property. The stock has moved up a little bit on the back of that news. Once an NI 43-101 resource estimate is released for Rio Verde Potash’s potash asset, we should see another re-rating of the stock.

Karnalyte Resources Inc. (KRN:TSX) is another one. Once again, I tend to favor the junior potash developers that have a bit of a unique element or bring something a little bit different to the table. Karnalyte is focusing on extracting potash from the potash-bearing carnallite layer, which is unusual for Saskatchewan because other producers and developers target the sylvinite layer that is usually closest to the surface. Karnalyte’s deposit is based on an anomaly where there is a significant carnallite layer that is relatively near-surface vis-à-vis the sylvinite layer. The technology that it is planning to use also could provide a magnesium byproduct and sodium chloride byproduct, both of which the Company could potentially market and sell in the future. Karnalyte has a number of things going for it; I think management is very strong. The fact that it has four patents pending for its technology could mean that what it ends up with is going to be very unique. It has a massive land holding and has only conducted advanced exploration on 20% of it. Fnially, it plans to expand its plant by using cash flow generated from its initial buildout.

TER: It has done a nice job of managing its share flow, too, with only about 21M shares outstanding vs. something far greater for a company like Allana.

CD: Yes.

TER: Or do you prefer a larger share count, such as Allana, with its 193M shares verus 20M for Karnalyte?

CD: When you’re in the small-cap space—and especially if your float is small—it becomes a bit riskier for clients to hold when the markets are a bit more volatile. It’s one thing to get into a stock, but when the market is volatile and a client is looking to exit a position, it’s very difficult to do if the trade volumes aren’t there. That’s the risk with Karnalyte. The average trade volume is 34,000 shares a day. So if you have a position that’s 100,000 shares, it’s going to take you roughly three days to get out of that position, and that assumes that you can be 100% of the trading volume over those days. And you could end up driving its price down significantly while you’re trying to exit your position. Having a more liquid position in a stock like Allana that you can get in and out of a lot more easily would likely appeal to portfolio managers.

TER: Could you give our readers an outline of what to look for in the small-cap potash space over the next year or so?

CD: You’ll see a number of companies starting to reach the prefeasibility and feasibility stages. At that point, these companies will start to look for strategic partners, whether it’s to fund the buildout of the products or secure an offtake agreement for the product that’s going to be produced a few years out. At that point, we’ll start to see which projects are going to be viewed as more viable. There probably won’t be enough demand to drive a need for every single junior potash developer that is currently out there to actually move into production. That said, there is also the possibility that some of these companies will be absorbed by larger entities that are looking to enter the potash space given the future, positive fundamentals for potash or those that are currently in the market and are looking to increase potential capacity moving forward. I expect to see a lot of positive news coming out of the junior potash space, especially as a few of these companies meet milestones in order to get a little bit closer to production and production becomes more of a reality.

Corey Dias has worked in the capital markets industry since 2003 and has spent eight years in institutional equity research and institutional equity sales. In addition, he has worked for a U.S. hedge fund, where he shared responsibility for the running of a $400M portfolio and sought out assets for private equity investment on behalf of the fund. Mr. Dias holds a Master of Business Administration from the Richard Ivey School of Business at the University of Western Ontario.

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DISCLOSURE:
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Passport Potash, Allana Potash, Karnalyte Potash and Verde Potash. Streetwise Reports does not accept stock in exchange for services.
3) Corey Dias: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise for this interview.