The Three Ms of Specialty Metals

In the last few months, metals prices have skyrocketed from their 2008 lows, fueled in particular by Chinese demand. And the rise isn't limited to just the usual suspects, like copper and iron. Across the board, so-called prices of "specialty metals" have also climbed spectacularly, showing little signs of slowing down.

This is good news for investors, says Larry Reaugh, CEO of the Reaugh Group of Companies, a British Columbia-based trio of precious and base metals miners. With 44 years' experience in the mining industry, Reaugh knows his specialty metals. He's been directly involved in the mineral exploration, discovery and production of junior resource companies for more than two decades.

HAI Associate Editor Lara Crigger recently sat down with Reaugh to talk specifics about specialty metals, including growing Chinese consumption, how to play "the Three M's" and why the next big correction is still several years away.

Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): You recently wrote that "specialty metals will become the investment of choice in late 2009, early 2010." So what exactly are specialty metals, and why are they such a promising asset?

Larry Reaugh, CEO of Reaugh Group (Reaugh): Specialty metals might include cobalt, tungsten, molybdenum, magnesium, manganese and so on. I call those last three the Three M's. In particular, molybdenum is the leader of the specialty metal group. It's certainly on a spectacular rise right now, back up to around $18/lb. I figure this will spill over specifically into manganese and magnesium, because the markets are much broader.

For example, they're both used in lithium batteries. Certainly magnesium is big time in the automobile industry; it's strong, it's lightweight - it can even replace some plastics. And it's comparable in pricing. To make a longer-life, stronger vehicle with less weight, it just makes a lot of sense. And it's not just for the automobile industry; specialty metals move into things like pipelines - you can reduce the amount of steel needed by adding more molybdenum.

Manganese is pretty critical. About 90% of its use is in the steel industry. You can talk about the other 10%, its niche applications, but you just don't have steel unless you add manganese. There's no substitution. So it's a huge market; you're close to 30 billion pounds a year, not too far behind copper.

Another reason I think these two are critical is because of China. China's involved in the manufacture of most of the manganese and magnesium metals; on the electrolytic side on manganese, they're 95% of the supply. That leaves the rest of the world, especially in the battery industry, hanging as regards to where supply is going to come from.

Crigger: Especially since China's domestic consumption is growing, too.

Reaugh: Right. Soon a time will come when China won't export any electrolytic manganese, or magnesium, or so on. They'll just put on bigger export duties and quotas, because they want to consume it domestically.

In all my studies on commodities, the real central focus is China. China's the only one out there doing anything. If you look at the prices of commodities out there, they've made a staggering comeback, and that's going to continue. China's like a big snowball: Every time it rolls over, it grows that much bigger.

Crigger: Is that just because China has more supply than anyone else?

Reaugh: When it comes to specialty metals, China is 60-95% of the supply. Certainly other countries have metals, but I focus on China because they also consume the most. To me, that will just continue. Forget about India or the other BRIC countries - China's the real focal point.

I think in the West, we tend to underestimate what's happening in China, because let's face it - the U.S. has been the largest consumer of metals (or anything) for decades. And it's now losing that position, because China's there.

Crigger: With all the effort China has put into stockpiling commodities, do you think they're angling to become a kind of OPEC for the metals market?

Reaugh: After this last fight over the price of the iron ore, I think that certainly is a great possibility. China is going to want more control on the pricing of the metal, simply because they're the largest end user. They don't want to be at the mercy of the producers.

But also, China has a long-term plan. We look at tomorrow for the stock market, or at most, maybe a year out. Five-year plans are considered "long term" in the West, in terms of infrastructure build-outs. But I think China's got a 100-year plan. In my opinion, they're setting themselves up to own enough resources so that their infrastructure can just continue to grow. They don't want to be hamstrung or slowed down by a lack of metal supply.

So those of us in the metals business are going to enjoy some good rides. But that said, you're certainly going to see corrections. They'll be similar to what we had in last year, but they won't drop as far.

Crigger: Speaking of corrections, you've also said that you expect the super bull market in metals to last another three years before the next big correction. Why so long?

Reaugh: Well, I think it will take three years because by that time we'll have more mines starting up, we'll have more supply. We'll reach a tipping point, which won't necessarily happen because of what's happening in the commodities world or what's happening in the financial world.

What happens when you see a rising stock or rising commodities price is that speculators get involved in the market. I think you're going to see a lot of speculation in the market in the next two or three years. And then eventually we'll hit a tipping point, where you'll see another sell-off.

Crigger: How can investors looking to take advantage of the opportunity in specialty metals jump in?

Reaugh: Start looking at companies involved in production, development or exploration. Obviously, I run companies that do just that, and I'm not saying anybody should be involved in these specifically. I'm saying do your due diligence, do your homework. Because there's just not a lot of companies out there at this time.

Crigger: Right. For many specialty metals, there's just not a lot of pure-play options available.

Reaugh: Well, molybdenum certainly has a lot. Go back to 2004 - we were the only company out there in molybdenum. Nobody could even pronounce it; everybody said "moly-be-denum." It had totally fallen off the radar screen, because hardly anybody had been exploring for it for the past two and a half decades. All the production was under the auspices of major companies. But now, if you look at today, there are several hundred companies involved in molybdenum or copper-molybdenum.

So I think you're going to see the same thing happen with manganese and magnesium, as the commodity prices keep going up. Currently, the major companies dominate those markets. Take BHP's manganese projects. One of their projects added $125 million to their bottom line in 2006, something like $287 million (give or take $10 million) in 2007 and $1.5 billion in 2008.

Crigger: Yet you just don't think of BHP as a manganese miner.

Reaugh: Right. But they're huge in manganese.

Until now, these companies have had the game pretty much to themselves. But today, with the demand in commodities, you're going to see more emerge. That demand isn't going away.