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Sean Daly is Associate Director of Global Strategy at Alpha Creative Capital, a New York-based investment advisory group. He has written extensively on Asian economic development, exploring issues as diverse as Chinese urbanization, CMI multilateral currency swap arrangements, energy geopolitics... More
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  • Second Time's A Charm For Marc Andreessen

    It's déjà vu all over again for Marc Andreessen.

    On (or around) May 17 (or June 17, depending on your sources), Facebook (FB) will go public.

    The IPO will likely juice the animal spirits of the retail investor like no name since Netscape in the summer of 1995.

    Seventeen years ago, the American public was still a bit gun-shy of equities. 1987's October crash, fallow employment figures, and a winnowing recession a few years earlier had kept people out of speculative investments. But the magic of the browser and "this thing they call the World Wide Web" had quickened the pulse and fired up the public's then dormant imagination. The purse strings were loosened.

    On August 9, 1995, Netscape Communications went public at a price of $28. The stock climbed to $74 that first day and would ultimately end the day at $58, thirty bucks above its opening price.

    Andreessen was there, presiding over his baby, the company that brought us the Mosaic browser. Despite the ignominy of later seeing Microsoft's (MSFT) weedy Explorer despoil his product's rightful destiny, he did fairly well for himself. Netscape hit a split-adjusted all time high of $174 four months later. It later disappeared into AOL (AOL).

    As an early investor of Facebook, Marc will be sitting in the box seats again. Expect the stock to gap up the way Netscape did. The average American's intimate proximity to this product, the amped coverage of Social Media / Web 2.0 in general, as well as IPO's unique May Day moment in the "2012 Recovery" all make for a ferocious cocktail. Retail stockownership is presently back to 1998 levels after a brutal decade of market volatility shook out an entire generation. The Pre-Netscape era had a similar "licking of the wounds" quietude.

    A year from now, will the first year of Facebook as a public stock trace out a similar pattern as Netscape's (see above)? Let's wait and see. FB's robust activity in the private capital markets will have probably altered how the selling will occur in the post-lockup period.

    And unlike "one-product" Netspace, Facebook arrives public as a broad and staggeringly robust platform, its network effect making it impervious to free "give-aways." As I mentioned in a private report last week, it's deep and wide. It's deeply embedded into people's lives (15% of their online time, in fact) and now widely international, with impressive leadership gains in Brazil, Indonesia, and even Cyworld's own South Korea in just the past six months.

    The FB IPO will be another "rendezvous with tech history" for Andreessen. And we wish him more to come. The same guy that gave "baby internet" its motor skills in the form of a visual, graphical, spatial-izing browser will now see the brooding, "deeply social" teenager finally head out to college. Macbook and Harvard hoodie optional. . . .

    Tags: FB, GOOG, AOL, IPO, tech
    Apr 28 2:08 PM | Link | Comment!
  • Ucore: About to Meet the General?


    Looking at the recent price action of Ucore (OTCQX:UURAF), I was shocked to see a sustained, pronounced rally over the past two days from .70 to .84.  When we last highlighted this company back in November, it was trading at .42.[1]



    Why the run-up on no news?  I have no idea.  But such run ups are often suggestive of insider purchases ahead of a buyout or an important news event. Keep your eyes on the news flow.  

    Who might buy? Why the spike now?  Especially after the late December run up of the REE industry on the news China will again be reducing exports? 

     
    A few thoughts come to mind:

    One possibility is the recent surge in uranium prices and Cameco’s (NYSE:CCJ) recent deal with China.  These two developments may be affecting any company with uranium wealth. 

    Another is that, with the new year of 2011 arriving, the political machinery is gearing up.  On the state-level, Alaska is gung-ho for rare earths mining at Ucore’s Bokan site.  Gov. Sean Purcell’s new budget allowance for REE mining and Senator Murkowski’s recent comments in the Alaska Dispatch certainly suggest such.[2]  Steve Borell, executive director of the Alaska Miners Association, has been reaching out to large US companies.  He would like to see “a major company” that has a need for REEs back a mining operation in Alaska:

    "I'm talking about somebody that sees a long-term strategic need -- a Boeing (NYSE:BA) or General Dynamics (NYSE:GD), for instance -- that can put together a processing facility, somebody that can withstand the challenges the Chinese are likely to bring to the marketplace." [3]

    On the national front, the Restart Act was tabled late last year post-Election day.  It had passed the House and should resume passage through the Senate this year.  The DoD also recently issued a requirement of only American-made solar panels for use at military facilities, suggesting a new "get tough" approach to sourcing from China. 

    It is clear that Defense Secretary Gate's trip to Beijing this week did not help relations. The “Stealth fighter” photo leak by the PLA hours before the trip was either an intentional effort to embarrass the Secretary, or suggests that Hu Jintao is not in full control of the PLA’s ambitious alternative agenda.[4] 

    Neither possibility bodes well for the “easy, breezy, just-in-time from somewhere” sourcing patterns that characterized rare earths distribution over the past 15 years.  Getting back to domestic sources for yytrium, neodymium, samarium, terbium and dysprosium –essential for US guided missiles, lasar gun sights, and sonar systems -makes sense, particularly in the wake of China’s stated goal of repulsing US forces in the Far East to the secondary island chain. Again, Ucore’s Bokan ridge property is the only place in the US where those specific "heavier" elements are so richly found. 

    Beyond the upturn in uranium and the American domestic sourcing agenda, there is a third possibility.   It is finally hitting companies that this new-fangled “rare earths crisis” is not going away, and that prices are sticking. 

    The WSJ published an article two days ago about the effects that the scarcity is having on the refiners which use the REEs for their catalysts. It suggests a frightening new trend.  The Journal quotes the National Petrochemical and Refiners Association: 

    Although rare earths account for only up to 4% of catalysts used in these units, their recent price increase has added as much as an extra 25% to catalyst costs. [5]

    For the first time in history, chemical companies --which supply catalysts to refiners-- have started indexing the cost of their product to rare-earth price movements. [6]  The extra cost is averaging $147,000 a month for one refiner.  


                                                      ----

    In light of these developments, the deal that US chemical provider W. R. Grace (NYSE:GRA) cut with Molycorp back in November on assured REE supplies for eight years looks downright prescient.

    Of course, oil refiners use the less pricy LREEs in their catalysts.  For tech manufacturers in Japan and Korea, this development may be making them very uncomfortable, as they are dependent on the even less abundant heavier REEs.

    According to Stratfor, the risk consultancy firm, if world prices were to go back to 1980s levels --a non-Chinese supply-- the developed world would be seeing a very different cost structure for many now pervasive products –including computer drives, compact fluorescent bulbs, electric cars, even those Apple ibuds.[2]

    Take, for example, the 13.5 kilograms of REEs in the Toyota (NYSE:TM) Prius battery system. In 2009, the elements were responsible for a mere .9% of the car’s total cost in 2009.  A year later, that percentage rose to 2.9% due to higher lanthanum costs. But most worrisome: that percentage would rise to 15.2% of the car's total cost if pre-China prices were applied.[7]

    As I mentioned in my November report, domestic Chinese demand for terbium and dysprosium will be huge in the coming decade due to its Green Revolution.  The price of Dysprosium FOB China went from $50.00 in 2005 to $290.00 in late 2010, and looks to rise further.  Back in October, China’s Ministry of Commerce voiced fears that the country would “run out” of its terbium and dysprosium within 15 years at the present rate of production.[8]

    Beijing may have no choice but to stop the export of these two modernization-critical HREEs.  In a classic example of disconnect, most Westerners see China’s export reduction as mercantile and a violation of free trade. Most Chinese, on the other hand, see it as a necessary push back on Western exploitation of their dwindling resources, a "sweeping back of the locusts.

    According to Professor Xu Guangxian of Peking University, “China used to have about 43% of rare earth reserves worldwide, but this may have fallen to about 30% now.”[9] Popular opinion inside the mainland is quite favorable of the export reductions.

    Like Molycorp’s (NYSE:MCP) Mountain Pass mine, Ucore’s Bokan Mountain site was a focus of US Cold War-related scrutiny and procurement. In 1989, the area was studied by the US Bureau of Mines for its heavy rare earths content. The study -- which proceeded NI 43-101 compliance -- estimated 37.8 million tons grading at .50 TREO, tilted highly to HREEs.

    This summer, the US Geological Society sent a team to Bokan, following the July 10th Chinese state intervention in its rare earths industry.  The field work was completed by September, and analyzed vein-type REE deposits throughout a number of areas including Sunday Lake –a zone which apparently yielded the highest HREEs on record for a North American location.

    The company’s own May 2010 drilling for two specific areas -- Dotson and I&L -- also suggest an impressive yield. The revised model generates 3.5 to 6.5 million tons with a grade ranging from .76% to 1.42% total rare earth oxides, 40% of which is heavy rare earth content.

    One distinguished geologist has voiced genuine concerns about the selective mining methods necessary at the site, but the increasing rarity of HREEs, the US location and the political nature of US federal subsidies are likely to make this less important.  Especially if companies continue to see REE prices sticking as they have for the refining industry this month. 

    Whether the future buyer is a big US defense name, a Japanese or Korea manufacturer, or even a fellow miner like MCP hoping to become the "one stop shop," the Bokan real estate is getting increasingly valuable.

    Like I said in November, highly speculative UURAF is a “call option on a geological fact meeting a geo-political imperative.”[10]  Keep your eyes on the news flow.  There might be a rendezvous.  

     



    [1] seekingalpha.com/article/234090-the-post-china-price-what-beijings-green-revolution-means-for-rest-of-us

    [4] latestchina.com/article/?rid=27316

    [5] online.wsj.com/article/BT-CO-20110107-710219.html

    [6] online.wsj.com/article/BT-CO-20110107-710219.html

    [7] seekingalpha.com/article/234090-the-post-china-price-what-beijings-green-revolution-means-for-rest-of-us

    [10] seekingalpha.com/article/234090-the-post-china-price-what-beijings-green-revolution-means-for-rest-of-us



    Disclosure: I am long MCP, OTCQX:UURAF, CCJ, GD.
    Jan 12 11:37 AM | Link | Comment!
  • The East China Sea Crisis: Parsing out its Political and Economic Repercussions

    Part 1: Beijing’s Diplomatic Blunder

    Last Friday Japan stated it will be returning the fishing boat captain at the center of the China Trawler incident.   Some media reports –including the Rebecca Blumenstein’s piece at the WSJ – quickly suggested that Japan had “caved” to Beijing on the issue.   

    I could not disagree more.  In fact, I see Japan’s approach to the incident as rather well-played.   This crisis may be Beijing’s worst foreign policy blunder since its bizarre seizure of Mischief Reef in the mid 90s.   Its response to this recent incident will likely be remembered as a shrill over-reaction that crystallized the mistrust of its neighbors and set back its regional objectives a decade.  

    Since the collision on September 7, I’ve been following this unfolding East China Sea crisis intently, as it has so many direct corollaries to the Sino-Vietnamese confrontation over the Paracel Islands in the South China Sea earlier this year.   (For my earlier analysis on this:  policyinnovations.org/ideas/commentary/d...)
     

    Both crises started with the arrests of fishermen in the vicinity of uninhabited islands, atolls still contested due to their consequence in dictating exclusive economic zone privileges for the surrounding waters.  Both arrests lit up histrionic nationalism in the aggrieved nation.  Both led to combative stalemates that immediately frosted over relations and impacted the regional politics as a whole.
     

    The irony of course is that --in the case of the Paracels-- China was quite comfortable arresting Vietnamese fishermen indefinitely, keeping both crew and cargo.   Over the past year Hanoi experienced rough treatment by Beijing on the issue of fishing in disputed waters.  It has been diplomatically brushed aside by China on the issue at later ASEAN meetings. 

    And the further irony: by UNCLOS precepts, China has a far more tenuous basis for ownership over these South China Sea islands than Japan has to the Senkaku.  The written record of Japanese administration is pronounced.  Japan surveyed the unoccupied islands in the 1880s and following a written act of cabinet officially placed a physical marker on them in January 1895 to formally incorporate the islands into their territorial jurisdiction. 

    Unlike Taiwan and part of the Pescadores Islands, the tiny islets were not ceded to Japan by China in the Treaty of Shimonoseki of May 1895.  And they were not included in the territory which Japan renounced under Article II of the San Francisco Peace Treaty in 1945.  

    According to Japan, the fact that Taipei or Beijing never objected to the status of the islands being under the administration of the United States under Article III of the San Francisco Peace Treaty clearly indicates that both governments did not consider the Senkaku Islands as part of Taiwan.   The US controlled the islands from 1945 to 1970, using them for bombing practice, and then formally ceded the islands to Japan.  Tokyo has administered them since and even built a lighthouse.    The US-Japan Treaty of Mutual Cooperation and Security, signed in 1969, applies to territories under the administration of Japan, including the Senkaku Islands.
     

    Despite this historical record of Japanese sovereignty and the questionable actions of the trawler captain himself, China immediately swung to a wounded, imperious reaction.  

    It was astonishing just how quickly this crisis cascaded into every aspect of Sino-Japanese relations.    Following the arrest, China canceled cultural exchanges, dropped tourism and energy plans, and spoke ominously of economic consequences.  It categorically rejected a summit meeting.  A covert embargo of rare earth elements aimed to wobble the Nikkei’s (NYSEARCA:EWJ) high tech exporters provided a “brave new world” twist to the Chinese response.  (It spiked non-Chinese suppliers like MCP and REE and may have a permanent effect on sourcing by Korean and US manufacturers—more on this in Part 2).   Tracing out the lines of Chinese reaction, it is hard not to think that other nations will now expect a similar spasm of consequences if Beijing is crossed.    

    Far from “caving,” Tokyo’s timing of the Captain’s release was artful.   The delay suggested it was not deterred by Chinese bluster.   More importantly, it allowed Japan to keep the issue at a steady boil as East Asian officials met in NY this week.  Many ASEAN representatives were also in NY discussing with the US their own maritime issues with China. 

    Japan may have solidified regional recognition of China’s shrill response.   As Vietnam and other ASEAN nations confront maritime disagreements with the emerging super power, these strident “hard ball” tactics over a trawler suggest their own uncomfortable future.   

    As the issue carried into a week of UN meetings, the US could now wade in.  Two issues Beijing had hoped to keep quietly bilateral were now been fully “internationalized.”
     

    Last Thursday President Obama proclaimed the Japan-US alliance is a security “cornerstone” of world peace.  Several US military officials quietly stated full support for their treaty obligations.  This clarified to the Chinese that actual intervention – say, the sending of armed vessels to protect gas drilling activity in the area-- would not be applicable. 

    On Friday, the President stated the US has an “enormous stake in the South China Sea” and will be playing a major role in resolving disputes there.   By re-iterating the words Secretary of State Clinton in July, when she called the waters a “national interest,” the Washington has now formally interceded between China and its Southeast Asian neighbors.  It has taken Beijing’s preferred bilateral approach to dealing with these “smaller neighbors” off the table for the foreseeable future.  

    When Tokyo released the trawler captain late Friday, the damage had been done.  The Charm Offense was in tatters.  China will now see a full swath of maritime neighbors edge decisively back under the US umbrella.   As Japanese Foreign Minister Seji Maehara said Friday: “countries the world over watched how China reacted” to the incident.   In the court of world opinion, Tokyo’s muted “sumimasen” diplomacy clearly won out over Beijing’s immature theatrics.
     

    Today’s rumor that the trawler captain may in fact be a PRC military officer has also cast doubts on China’s motivations.  Though I don’t believe that the whole incident was a planned provocation, his covet identity may have spurred him to ram the Coast Guard boats in order to escape detection.  It would also suggest that the flood of Chinese of fishing boats into the area recently may not be as accidental or economics-driven as originally appeared.  

    The unresolved issue of China’s maritime borders will haunt the Asian century, and perhaps even undermine it.  The deeply-felt sense among Han Chinese that their nation has not yet been made whole following their “century of humiliation” can not be underestimated.  But their view of a complete China is invariably romantic, pinned at that golden era of Sung expansionism that may have lasted a few decades out of a millennium.
     

    Fitting the Celestial Kingdom’s vast sui generis cloth to the brass tacks of existing international law will not be easy. 

     

                                                                                                

     

     

     

     

     

     



    Disclosure: no positions

    Disclosure: no positions
    Sep 29 4:05 PM | Link | Comment!
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