Investing in a Resource-Constrained World (Part I)

We are living in a resource constrained world, due to rapid depletion of many of the none-renewable natural resources, like oil, coal, and metal mineral resources. As the main stream media wake up to the Peak Oil reality, I believe it is important to keep the reality of a resource constrained world in our mind, when making investment decisions. In this article I want to talk about precious metals, including gold, silver, platinum and palladium, the rare metal tellurium and selenium, coal mines, agriculture, sugar, and fertilizers. Relate to these resources I will talk about the following stocks: PAAS, CDE, SLW, PAL, SWC, OMG, FSLR, JRCC, IPSU, POT, SEED, TNH, COIN, not necessarily in that order. This is the first part in a series. I will take about them in more detail in the future.

First on First Solar Inc. (FSLR) and tellurium, because I have some breaking news! I have previously written about FSLR and its critical reliance on tellurium supply, and about the fact that tellurium is increasingly being used on important new applications, which could force FSLR out of business. I also suggested buying physical tellurium as an investment.

The breaking news I discovered about FSLR, is from 5N Plus Inc. (VNP.to). VNP recently went IPO and they have just made the first public release of quarterly operating results, for the quarter ending Nov. 30, 2007. Find it on Sedar.com. I was shocked to discover that VNP saw virtually NO growth in sales revenue over several of past quarters. Here are the numbers of quarterly sales revenues:

Nov. 30, 07 $6.796MAug. 31, 07 $6.394MMay.31, 07 $6.400M (extrapolated from year total)Feb.28, 07 $5.700M (extrapolated from year total)Nov.30, 06 $4.890MAug.31, 06 $4.903M

We know that 55% of VNP's sales are CdTe sales to FSLR, so that's about $3.75M per quarter. We know during this time period, FSLR saw incredible production capacity expansion, going from one production line to three at the end of 2006, and then seven during Q3, 2007, due to the new Germany factory reached full capacity. The thoughput speed of the production lines also increased greatly.

Such rapid growth would mean a lot more production consumption of the CdTe raw material, and a lot more purchases from 5N Plus. However the growth was NOT reflected in 5N Plus's quarterly sales revenue. The sales had been flat for 3 or 4 quarters. Why?

On page 26 of VNP's IPO prospectus, it explains that VNP currently has an annual production capacity of 100 metric tons of CdTe, and it is building a new factory in Germany to double the capacity to 200 metric tons, and then some further improvement to bring the capacity to 350 metric tons per year. They have also reserved empty land lots in Germany so that they can build another facility to further double the capacity. Such an aggressive expansion plan was the result of contract obligation to FSLR. The contract mandated that the Germany factory must reach full production by July 31, 2008.

That's a pretty aggressive expansion plan. Clearly both FSLR and VNP saw that the quantity of CdTe needed by FSLR warrants such an expansion. However, such a desperate need of more CdTe is NOT reflected in sales revenue growth of VNP, which almost stalled in recent quarters.

What's the road block? The roadblock is neither VNP's current production capacity, nor the lack of demand from FSLR. Judging from the number of $3.75M quarterly sales to FSLR, VNP's current production capacity is under-utilized. The only conclusion I can draw is they are not getting enough raw tellurium for the production!

My estimate is the cost of CdTe in whole sale price is probably $350 per kilogram or more. I saw 10 times higher retail price at GoodFellow.com, at $3500 for one kilogram CdTe of 99.999% purity. Assuming $350 per kilogram, the latest quarterly CdTe sale to FSLR was roughly 10 metric tons. FSLR's current capacity is 40 MW per production line per year, and 7 lines. So that's 70 MW per quarter. Each 1 MW of solar PV production costs about 250 kilograms of CdTe. So the need is about 17.5 metric tons of CdTe per quarter. They are getting far less than that!

First solar might end up having to shut down some production lines if it can not find more tellurium supply soon! Don't forget they have another 4 Malaysia factories being build, each as big as the Germany factory. Where are they going to get the tellurium supply? I think there is a looming catastrophe here in First Solar.

But there is an ongoing catastrophe in my favorite long stock PAL right now. The catastrophy is not with the company's business, but rather, with the company's stock price! I predicted a palladium super bull cycle and recommended buying PAL and SWC. The palladium price rallied to multi-year high recently, but the PAL stock price reached multi-year low. That rather defies the logic! In a previous article I analyzed why PAL stock was punished, and called a bottom on Dec. 13. Looking back, the bottom price of $3.40 a share was called correctly. But PAL has yet to rally above $4 credible.

I encourage people to buy PAL below or near $4 a share. The reasons are not just the strong rally in precious metals recently, but more importantly, PAL's Q4 earnings will be released at the end of January or beginning of February. Since a considerable portion of the mine produced metal was not sold in Q3, but will be added to Q4 sales, it can be expected that the Q4 earnings result will be fantastic, boosting stock price.

More importantly, I sense that an explosive palladium rally is imminent now we have entered 2008. Traditionally, each year the Russians sell about 2 million ounces of extra palladium, from the government stockpile, flooding the global market and capping the metal price. They always shipped the government stockpile sale of palladium in one batch to Switzerland in the month of December. So far, year 2007 has ended, and there was no indication they shipped any palladium stockpile.

Palladium rallied in previous years despite of Russian stockpile sale. Now, when the fact that the Russians have finally depleted the stockpile becomes public knowledge, and people know that there is an industrial shortage without the Russian extra supply, you can expect the palladium price will explode.

SWC is also a good buy here, but relatively, PAL has better value at this price. You get more palladium production per dollar of stocks. Read my detailed comparison between the two.

I am also pondering other potential stocks to buy, OMG looks like a fantastic titanium metal player, with unbelievably low P/E. I have not done enough DD to determine if the P/E is real, but I feel the stock may be a bit high to buy here, do your DD and wait for a dip to buy.

Among silver players, PAAS and CDE seems to be the best of breed, SLW is the purest of pure silver play. SLW seems to be an excellent trade vehicle if you like volatility. But I do not like it as a long term investment. Do not get me wrong. All these stock should go up long term. But if in comparison with silver they are less worth than silver as an investment, then you are better off buying physical silver than buying these stocks. PAAS's market capital current can buy more silver, than the worth of its underground mineral resources. The same could not be said abut CDE, however. So I think CDE is better than silver, and PAAS is worse than silver.

Besides precious metals, I also pay attention to other resource investments. I don't buy oil players. Too many people have thought about oil already. When too many people doing the same thing, it diminishes your investment return. However I like coal. JRCC is a coal player that I have been paying attention for a long time. It has a super low price/sales ratio. So if the coal price raises to the level that allows it to make a profit, the profit will be very remarkable. The problem with JRCC is it has too much debt, so during the ongoing credit crunch JRCC may suffer a bit in short term. I am going to watch for JRCC to come down a bit more before I will buy it. Another thing to keep in mind is coal is still abundant in this country.

Sugar is sweet! I noticed that sugar price recently has bottomed and is going up again. Fortunately I also noticed a sugar player, IPSU, which for some reason, is being naked shorted. I think IPSU$18 a share looks like a very attractive buy. But will need to spend more time to study the sugar fundamentals.

Every one knows Jim Rogers is favorable in agriculture. In a TV interview, he said that he liked palladium better than gold and platinum! That I agree with him. He also said he liked agriculture better than palladium. That I totally disagree. I agree with him that agriculture is bullish. But agriculture is LESS bullish than palladium. The reason is very simple, palladium, the precious metal, is price inflexible in its industry applications. How inflexible? Just look at rhodium, it went from $300 an ounce, to now more than $7000 per ounce, and there seems to be no stopping. The demand can not go away, now can supply catch up. That's price inflexible.

Agriculture is quite price flexible, both on supply side and demand side. On the supply side, you just plant more and produce more. On the demand side, you have demand destruction. Demand destruction happens in the most vulnerable section of the human society: people who are poor and can not afford adequate food. So the demand destruction actually happens at pretty low price point, because poor people don't have much money. They either have to settle for less expensive, lower quality food, or in the worst case, just die off in famines. It's cruel to say that. I am not being insensitive, but it is a fact of life that this world see famines just too often whenever there is a food shortage crisis. The charities are always too little, too late.

Of course, the better hope is increased agriculture production. That is exactly what's happening. However, increased agriculture production poses increased fertilizer demand. That's why there is a sudden boom in the fertilizer sector. So it is worthwhile to check out why the fertilizer sector suddenly becomes so hot. I recommend have a look at POT, TNH, CF, MOS, AGU, COIN, SEED. All those are related to fertilizers and/or agriculture. I have not done a sufficent DD study on them to give a definite recommendation of buy or sell. I hope you do your DD and tell me what you think about these stocks. And I hope to discuss them in more details in the next article.

Disclosure: I am heavily invested in PAL and also own some SWC positions. I am short in FSLR and plan to add more short positions. I am invested in physical tellurium and plan to buy more. I do not own any of the other stocks I meantioned here but do intend to buy some of them at appropriate time and price.

Comments

[Buffettz]

Could it not be that 5N Plus revenue did not shout up as they are full capacity until the new German facility comes on line? They have repeatedly stated that they do not see access to Tellurium a problem.

[Mark Anthony]

Buffettz:

Regardless what you think the reason is, the hard number is 5N Plus does not see a significant increase in sales revenue, and hence it is NOT selling more CdTe to FSLR despite of rapidly expanding FSLR production. If FSLR can not get more CdTe, they will sooner or later run into a problem when inventory CdTe is used up.

The amount of quarterly CdTe purchase, below $4M for a quarter, is just too low, and it is not increasing.

Interested party should call FSLR and ask them to clarify their CdTe supply. So far they refuse to comment. When enough people ask they will have to say something.

[Mark Anthony]

One correction. I meantioned GoodFellow carry retail CdTe for $3500 per kilogram. It is actually Alfa Aesar, item #14365. 100 grams for $347. Pretty expensive stuff.
www.alfa.com/alf/index...

[tessant]

if you are interested in solar/fslr, check out my social network i created that focuses on solar/alt energy/growth stocks. facebook meets yahoo finance meets seeking alpha....

growthportfolio.ning.c...

[kkin365]

Good detective work. Could FSLR be buying its raw materials from other sources? Also, your response to Buffettz that "5N+ does not see a significant increase in revenue, thus it is not selling more CdT to FSLR" is difficult to interpret.

[Buffettz]

I have been doing some more investigation into the 9N Plus/FSLR situation and by my analysis 9N Plus is only at about 50% of its current CdTe capacity. However FSLR was at about 93% of its total US and German capacity last quarter and the Malaysian plant does not start its ramp until Q1 2008, so we can expect low, approx 8%, quarter on quarter revenue growth from FSLR from Q3 to Q4 2007.
I expect that is the simple explanation for 9N Plus' revenue growth. I repeat they are claiming that currently Tellurium supply is not a problem. In the conference call they also said the CdTe sells for $300-$500/kg which equates to just 6-10 cents/watt.

[Mark Anthony]

KKin365:

If you read 5N Plus's IPO prospectus, they proud themselves as the world's foremost advanced CdTe supplier, with sophistication of technology, low production cost and high production capacity that few competitors in the world can match. I do not see FSLR finding a replacement supplier who can match the quality and quantity of CdTe that 5N Plus provides. More over, there is a binding contracts between FSLR and 5N Plus, FSLR can not just walk away from 5N Plus nor does it has a reason to. The contract mandate that 5N Plus must carry out rapid production capacity expansion. 5N Plus is building a new factory in Germany to double capacity and then to further increase to 350 metric tons of CdTe per year. It has an obligation to FSLR that the Germany factory must reach full production no later than July 31, 2008.

So both FSLR and 5N Plus see a rapid increasing reliance on each other on the CdTe supply. But the fact is 5N Plus failed to deliver increased amount of CdTe to FSLR.

My response to Buffettz was meant to say that as the sales revenue indicated, FSLR is NOT getting more CdTe from 5N Plus. Regardless what caused it, FSLR is in trouble if it can not receive enough CdTe raw material to keep its production lines running.

I think the cause is global tellurium shortage. Even if you disagree with that, you still have to admit that no sales revenue growth on 5N Plus mean FSLR will see a CdTe shortage soon as it ramped up solar panel production.

[yellowking]

where can i buy physical tellurium ingots? if you know, please email me at [e-mail]

[Buffettz]

I can find no evidence that FSLR is not receiving all the CdTe it requires from 5N Plus. I think you will see when FSLR releases its Q4 results that its Q4 on Q2 growth will be similar to 5N Plus' Q2 on Q1 revenue growth to FSLR.
If you crank the numbers to estimate 5N Plus' year on year revenue growth to FSLR (which we do not have exact figures for) then it is in line with FSLR's year on year growth.
If your theory is true both companies are willfully deceiving their shareholders, which in this day and age lands you in jail. The simplest explanation is usually the correct one, which is that the growth in 9N Plus' revenue from FSLR is a leading indicator of FSLR's revenue growth.
It isn't long until FSLR releases its next results and we will see who's right.

[TMartin]

EASTERN PLATINUM COM NPV (Toronto: ELR.TO ) the best platinum play.

[Francesco]

nice reading but I have very hard time trusting you are short on fslr basing your position on your analisys , there's also chance fslr is now going to recatch up momentum don't think being short on fslr is THAT smart choice as you want to show you are about

[User 140088]

More people disagree with you, more fuel for you. I've read your first blogs on shortage of CdTe a couple weeks ago and since then went through many articles, opinions. Now your writings seem a little simplified, full of assumptions. The same prediction is that production of tellurium could slightly gradually increase and they use Te efficiently to cover demand...
( I've never had position in FSLR, but I do have in 5N Plus - VNP.)

[Mark Anthony]

YellowKing:
I know where to buy tellurium. But I am not willing to disclose publically. Do your web search to find out. If I disclose publically it will instantly destroy a source and no one can buy any more.
Francesco: I am short in FSLR. Whether that is a smart choice or not, you wait till me cover below $20 a share before saying anything.
Palladium is poised to rally big time now that people are picking up the sense that probably the Russian annual stockpile sale is OVER. So this is a great time to buy PAL and SWC, the only primary palladium producers in the whole world.

TMartin:
I do not trust any mining penny stocks based some where in a hotel room in Canada. Go with one that is actually producing.

User 140088:
I am trying to make the article brief and give links and encourage people to do their own research. I could go with more details but I feel that a concise article helps people to quickly get the ideas. I am neutral in VNP.to. I do not own position in it.

[TMartin]

ELR.TO is not a PENNY STOCK and is NOT base in a hotel Room

Eastplats Added to New S&P/TSX Global Mining Index
Monday June 18, 2007 5:00 am ET

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - June 18, 2007) - Mr. Ian Rozier, President and CEO of Eastern Platinum Limited ("Eastplats"... (TSX:ELR - News; AIM:ELR)(JSE:EPS), is pleased to report that Standard and Poor's Canadian Index Operations has added Eastplats as a constituent onto the new S&P/TSX Global Mining Index.


"We look forward to enhanced liquidity in our stock as a consequence of this inclusion onto the Global Mining Index. This further enhances the stature of Eastplats in the international mining investment community and is recognition of the enormous progress the company has made over the last year," stated Ian Rozier.

Total Shares Issued and Outstanding: 667,778,194

S&P TSX Composite Index

[TMartin]

S&P/TSX Global Mining Index
Effective after the close of December 31, 2007
SYMBOL COMPANY MARKET
1 AEM Agnico-Eagle Mines TSX
2 AGI Alamos Gold Inc. TSX
3 AA Alcoa Inc NYSE
4 ARLP Alliance Resource Partners L.P. NASDAQ
5 ANR Alpha Natural Resources NYSE
6 AWC Alumina Ltd. (ADS) NYSE
7 ACH Aluminum Corp. of China Ltd. (ADS) NYSE
8 ACO Amcol Intl Corp NYSE
9 ANO Anatolia Minerals Development Limited TSX
10 AAUK Anglo American PLC (ADS) NASDAQ
11 AU AngloGold Ashanti Ltd. (ADS) NYSE
12 AVM Anvil Mining Limited TSX
13 SIL Apex Silver Mines Ltd. AMEX
14 AQI Aquiline Resources Inc. TSX
15 ACI Arch Coal NYSE
16 ARZ Aurizon Mines Ltd. J TSX
17 AXU Aurora Energy Resources Inc TSX
18 ABX Barrick Gold Corporation TSX
19 BHP BHP Billiton Ltd. (ADS) NYSE
20 BBL BHP Billiton PLC (ADS) NYSE
21 BWR Breakwater Resources Ltd. TSX
22 BW Brush Engineered Materials Inc NYSE
23 CCO Cameco Corporation TSX
24 CG Centerra Gold Inc. TSX
25 CENX Century Aluminum Co NASDAQ
26 ELC CIC Energy Corp. TSX
27 CDE Coeur d'Alene Mines Corp NYSE
28 RIO Companhia Vale Do Rio Doce Sponsored ADR NYSE
29 BVN Compania de Minas Buenaventura S.A. (ADS) NYSE
30 CMP Compass Minerals Intl NYSE
31 CNX CONSOL Energy Inc NYSE
32 KRY Crystallex International Corp. TSX
33 DML Denison Mines Corp. TSX
34 ELR Eastern Platinum Limited TSX
35 ELD Eldorado Gold Corporation TSX
36 EQN Equinox Minerals Limited TSX
37 EGU European Goldfields Limited TSX
38 EEE Evergreen Energy Inc. AMEX
39 FM First Quantum Minerals Ltd. TSX
40 FNX FNX Mining Company Inc. TSX
41 FDG.UN Fording Canadian Coal Trust TSX
42 FCL Foundation Coal Holdings NYSE
43 FCX Freeport McMoRan Copper & Gold NYSE
44 FRG Fronteer Development Group Inc. TSX
45 FCC Frontera Copper Corporation TSX
46 GBU Gabriel Resources Limited TSX
47 GAM Gammon Gold Inc. TSX
48 GMO General Moly Inc. AMEX
49 GEA Gold Eagle Mines Ltd. TSX
50 GFI Gold Fields Ltd. (ADS) NYSE
51 G Goldcorp Inc. TSX
52 GSC Golden Star Resources Ltd. TSX
53 GBG Great Basin Gold Ltd. TSX
54 GUY Guyana Goldfields Inc TSX
55 HMY Harmony Gold Mining Co. Ltd. (ADS) NYSE
56 HW Harry Winston Diamond Corporation TSX
57 HL Hecla Mining Co NYSE
58 HRG High River Gold Mines Ltd. J TSX
59 HBM HudBay Minerals Inc. TSX
60 IMG Iamgold Corporation TSX
61 IMN Inmet Mining Corporation TSX
62 ICO International Coal Group Inc NYSE
63 IRC International Royalty Corporation TSX
64 IVN Ivanhoe Mines Limited TSX
65 JAG Jaguar Mining Inc TSX
66 KALU Kaiser Aluminum Corp. NASDAQ
67 KAT Katanga Mining Limited TSX
68 K Kinross Gold Corporation TSX
69 KGI Kirkland Lake Gold Inc TSX
70 LAM Laramide Resources Ltd. TSX
71 LIHR Lihir Gold Ltd. (ADS) NASDAQ
72 LUN Lundin Mining Corporation TSX
73 MDI Major Drilling Group International Inc. TSX
74 MEE Massey Energy Co NYSE
75 MGA Mega Uranium Ltd. TSX
76 ML Mercator Minerals Ltd. TSX
77 MR Metallica Resources Inc. TSX
78 MFL Minefinders Corporation Ltd TSX
79 NEM Newmont Mining Corp NYSE
80 NGX Northgate Minerals Corporation TSX
81 NG NovaGold Resources Inc. TSX
82 PDN Paladin Energy Ltd. TSX
83 PAA Pan American Silver Corp. TSX
84 PCX Patriot Coal Corporation NYSE
85 BTU Peabody Energy Corp NYSE
86 QUA Quadra Mining Ltd TSX
87 GOLD Randgold Resources Ltd. (ADS) NASDAQ
88 RBI Red Back Mining Inc TSX
89 RTP Rio Tinto PLC (ADS) NYSE
90 RGLD Royal Gold Inc NASDAQ
91 RTI RTI International Metals Inc NYSE
92 S Sherritt International Corporation TSX
93 SGF Shore Gold Inc. TSX
94 SSO Silver Standard Resources Inc. TSX
95 SLW Silver Wheaton Corp. TSX
96 SVM Silvercorp Metals Inc. TSX
97 SKR Skye Resources Inc. TSX
98 SWC Stillwater Mining Co NYSE
99 TKO Taseko Mines Limited TSX
100 TCK.B Teck Cominco Ltd. TSX
101 TCM Thompson Creek Metals Company Inc. TSX
102 TIE Titanium Metals Corp NYSE
103 UEX UEX Corporation TSX
104 UUU Uranium One Inc. TSX
105 URRE Uranium Resources Inc. NASDAQ
106 URE UR-Energy Inc. TSX
107 USU USEC Inc NYSE
108 WGI Western Goldfields, Inc. TSX
109 YRI Yamana Gold Inc. TSX
110 YZC Yanzhou Coal Mining Co. Ltd. (ADS) NYSE

[Mark Anthony]

TMartin:

Thanks for your comment. I had a closer look at ELR.TO, you are right. It is not a penny stock. It's a producing PGM mining company, with mines in South Africa.

My comment is any primary platinum producers must already be making tons of money and their stocks must already be expensive to reflect their profit. So you do not have much to gain buying those stocks. The way to make money in stock investment is buy cheap and sell high.

I would rather buy stocks of a company which is not currently making money, but will be very profitable soon. That's exactly the reason I urge people to buy PAL and SWC. Of course the stocks are now depressed due to disappointing previous quarterly results. But the metal prices are going up and they will soon be profitable if the metal keeps going up.

When a company transition from not making money, to start to make money, that's where the stock appreciate fastest. A good example is PCU. Look at the maximum length multi-year chart of PCU. Do you see the transition in mid 2003? PCU turned profitable in mid 2003 and that was a pivital point.

PAL and SWC are extremely unique in that you look around the world and you really can not find a third company which produces palladium as the main product. They are the only ones. Even as big as Norilsk, their primary product is nickel, not palladium. So any one interested in palladium investment will sooner or later find their way into either PAL or SWC, which will make these two stock very crowded places.

[The smallAristotle]

I comment only with respect to the suggestions. Unbelievable that anyone would suggest investment in CDE over PAAS or SLW. Of course, there is no real analysis given for the selection and the picker would be wise to give some reason. I used to own CDE and realized after holding it for months that management simply has no clue. Look at a 5 year chart. It tells the woeful story of CDE. If you want to wallow at under $5 per share while silver takes off to the stratosphere, CDE may be a good bet. On the other hand look at 5 year charts of PAAS and SLW, if you want to make money I suggest looking there.

[Mark Anthony]

For the transcript of 5N Plus's last earnings conference call, for the quarter ending Nov. 30, 2007. Use this link:
seekingalpha.com/artic...

[cmoher3]

Thanks for your great blog Mark Anthony. Being a newbie to mining investment (albeit a highly successful one...Falconbridge & Alcan ;>)
can you tell me a good website to track real time metals prices and historical data ? Would it be the LME ?

[Mark Anthony]

User 183527:

You can track real time and historic precious metals prices at:
www.kitco.com/charts/

APMEX, a favorite online precious metals dealer, also displays real time quote but no historic quote:
www.apmex.com

For base metals, there is KitcoMetals:
www.kitcometals.com/ch.../

For commodities futures charts:
futures.tradingcharts..../

Another favorite site I use is INO:
www.ino.com/

For daily enjoyment of PGM metals related news, Platinum Today:
www.platinum.matthey.c.../

I hope those information could be useful to you. Of course Seeking Alpha itself is a good treasure trove as people from different walk of life post discussions and share references to information all the time.