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  • Puerto Rico's Tax Benefits—More Than 'The Better Florida'

    Source: Editors, The Gold Report (4/9/14)

    www.theaureport.com/pub/na/puerto-ricos-...

    Nick GiambrunoAlex DaleyTodd HagermanPuerto Rico promises to now do for Americans what Singapore and Hong Kong have done for bankers and businessmen from London. In this interview with The Gold Report, three experts with in-depth knowledge of the pros and cons of living and investing in Puerto Rico share what it is like on the ground for investors.InternationalMan.com Senior Editor Nick Giambruno and Casey Research Chief Technology Investor and Puerto Rico resident Alex Daley join Sterne Agee's Managing Director of Equity Research Todd Hagerman in clearing up some of the confusion about this "misunderstood" island and why the tax benefits for Americans make it "The Better Florida."

    The Gold Report: Alex and Nick, you just co-authored a report on Puerto Rico titled "Pocket Enormous Tax Savings in Puerto Rico." Can you give us a rundown on the tax incentives in Puerto Rico?

    Alex Daley: Sure. The first thing your readers should understand is that for Americans, this is truly a unique option and a tremendous opportunity for the right people.

    Puerto Rico recently passed what are known as Act 22 and Act 20, or the Individual Investors Act and Export Services Act. They allow new residents of Puerto Rico to be completely exempted from Puerto Rican taxation on their capital gain, dividend and interest income. And the Export Services Act levies a top 4% tax rate on earnings from businesses that perform services, like professional consulting, asset management, research and development, computer programming, and so forth, in Puerto Rico for clients outside of Puerto Rico.

    Before Puerto Rico's new laws, it was immensely difficult for Americans to take advantage of incentives like these. For decades, programs in countries like Panama and Singapore sought to attract investors with tax breaks-but Americans couldn't take advantage of them. Unlike countries in Europe, Asia and Canada, American nonresident citizens are taxed on their worldwide income. The only exceptions have been in far smaller jurisdictions-never before in a country with the modern infrastructure and a deep labor pool that Puerto Rico offers.

    Todd Hagerman: In addition to Acts 20 and 22, the International Financial Center Regulatory Act, referred to as Act 273, is specifically designed to attract foreign investment outside the U.S.

    Nick Giambruno: When I first heard about these tax incentives, I thought for sure it had to be something that was too good to be true. This motivated me to dig deeper. After extensive research, it became clear that the benefits were not an illusion and were 100% legitimate. For many Americans, including individuals operating on a modest scale, they are a huge opportunity that could really be game-changing. They've already helped a couple of my colleagues at Casey Research, like Alex.

    TGR: Alex, tell us your rationale for moving to Puerto Rico. How is life there working out for you?

    AD: I was no stranger to Puerto Rico and had been to the island a number of times previously. I had long been considering relocating to the Caribbean. Of course, Act 20 and Act 22 were a huge draw, but so is the tropical weather, beautiful white sand beaches, lower cost of living and the adventure of all of it. Just like everywhere else, of course, Puerto Rico has its negatives. Make a decision like mine and inevitably you will hear something about the crime. But to extrapolate these statistics to the entire area is a mistake. It would be similar to not moving to Michigan because there is crime in Detroit. Like any state with a dense metropolitan area, there's crime in some areas. If you steer clear of those areas or take the same precautions you would in any big city around the world, you'll be fine. In fact, one of my colleagues lives right on the beach in the touristy Condado neighborhood and just loves walking to the nice restaurants. For me, the more far-flung areas of the large island were more of a draw.

    TGR: What makes these incentives in Puerto Rico different from, say, the Cayman Islands or other low-tax jurisdictions?

    AD: It has better infrastructure, more familiar goods from home and because the U.S. is the only country that taxes its nonresident citizens on their income no matter where they live and no matter where they earn their money, it has huge tax benefits. This means that while a Canadian could relocate to a place like the Cayman Islands and pay zero tax, an American could not. The American would still have to pay taxes anywhere in the world by virtue of his citizenship; for Americans there really was no escape. . .until now.

    NG: Yes, that's exactly right. Because Puerto Rico is an unincorporated territory of the U.S., it's not quite a state and not quite a foreign country; it's a commonwealth. This arrangement allows it to have a unique tax situation. Namely, Puerto Rican residents who derive their income from Puerto Rican sources do not pay taxes to the U.S. government-they pay them to the Puerto Rican government. The same is true of the U.S. Virgin Islands, for instance, in a state of affairs that has been all but unchanged since the 1950s. Combine this commonwealth status with the new tax incentives, and mainland American citizens have a window to legally lower some of the burdens of U.S. taxation. There isn't another jurisdiction in the world that offers such an opportunity for Americans. You can obtain most of the tax benefits of renunciation without giving up your U.S. passport.

    TGR: Why would Puerto Rico want to make such an attractive offer to new residents?

    NG: Quite simply, the Puerto Rican economy needs it. The island needs to boost its economy to reduce its debt burden, and that's what gave impetus to Act 20 and Act 22. So in that sense, Puerto Rico's economic troubles are a blessing in disguise. Puerto Rico is no novice at sculpting tax rules to attract foreign investors and expatriates. For decades, the country has offered tax incentives to many types of businesses, especially manufacturers, which is why today you'll find plants belonging to Praxair (PX:NYSE), Merck (MRK:NYSE), Pfizer (PFE:NYSE) and other big names dotting the island's interior. However, after watching India attract knowledge workers and Singapore attract asset managers, it was glaringly obvious that it could up its game and bring in less environmentally impactful businesses. After all, the populace is better educated, speaks English more fluently as a whole and doesn't have to man the graveyard shift to work with American customers due to time-zone differences. So, the government set out to attract service businesses.

    TGR: Is it working? Are people taking advantage of the benefits, moving to Puerto Rico and opening businesses?

    TH: The intended outcome hasn't been realized to this point. I think that part of the challenge is that Puerto Rico has been having a difficult time publicizing and promoting the various tax incentives, and, at this stage of the game, while the incentives were clearly designed to attract foreign investment largely in the manufacturing sector and facilitate job creation, they really haven't lived up to expectations. Those who have participated have been largely professional investors who put money into properties, assets and other types of alternative investments to take advantage of the act. Unfortunately, those investments, while they create tremendous tax incentives for the investors, don't create the jobs.

    TGR: So will the government keep the incentives in place?

    TH: It will. The legislation has been extended several times, and I believe it will continue to be extended until the government feels it is on more solid ground from both an economic standpoint, as well as an employment standpoint.

    TGR: Couldn't the U.S. government force Puerto Rico to change its tax incentives?

    AD: Of course the U.S. government could pressure the government here, but it likely wouldn't affect those who have already obtained the benefits. Such an action would just close it off to new participants. But we believe that is unlikely. The U.S. government understands that Puerto Rico needs to boost its economy to help it address its debt problem. Act 20 and Act 22 help the island do just that. The last thing that the U.S. government wants is a disorderly default or to have come to the rescue in the form of an unpopular bailout. As of right now, it looks like Act 20 and Act 22 are here to stay.

    NG: There's also the issue of Puerto Rico becoming the 51st state or its legal status otherwise changing. That would also be something that would end the tax incentives. However, this issue has languished for decades; the Puerto Ricans themselves are divided-some want statehood, some want the status quo, and others want complete independence. I think it is very unlikely that Puerto Rico's current commonwealth status will change any time soon.

    TGR: Todd, you said in a recent industry report that Puerto Rico's economic activity is stabilizing. What specific steps have had the most success in slowing the year-over-year decline in Puerto Rico?

    TH: There are a couple of different things. Puerto Rico typically changes administration every four years and there is a strong correlation with declining economic activity post the election year. That is often the result of the incumbent increasing spending to improve chances of getting elected. As usual, after the last change in administration a couple years ago, we immediately saw a drop off in economic activity compared to the election year.

    TGR: Are some of the reform measures, like pension reform and passing a neutral budget, working to improve the economy?

    TH: It remains to be seen. Clearly, part of the stabilization in the economy right now reflects the fact that the employment participation rate continues to tick higher. Revenues are exceeding government expectations, largely through the immediate implementation of the corporate tax hike in July. But we probably won't see the full impact of austerity measures on consumers and small businesses until the latter part of 2014, after we've had a full year of the budget.

    TGR: Are there any publicly listed stocks with exposure to Puerto Rico worth discussing?

    NG: If you want to get exposure to Puerto Rican stocks through your brokerage account you don't have many options. You are basically limited to investing in Puerto Rican retail banks listed in New York. There are four such banks that most investors look to for exposure to Puerto Rico: Popular Inc. (Banco Popular) (BPOP:NASDAQ), First Bancorp (FBP:NYSE), Doral Financial Corp. (DRL:NYSE) and OFG Bancorp (Oriental Bank) (OFG:NYSE).

    If you wanted to make a bullish bet on Puerto Rico, Banco Popular is your safest choice. It's by far the largest retail bank on the island. It will likely be a primary beneficiary from any economic activity spurred by Act 20 and Act 22. Banco Popular has a market cap of around $3 billion, ample liquidity, a healthy Tier 1 capital ratio of 19.2%, a relatively low nonperforming loan ratio of 2.5% and is trading at 68% of its book value.

    If you are more of an extreme contrarian or crisis investor, you may want to check out Doral Bank. It is one of the island's primary mortgage providers and took a huge beating last quarter as its loan book deteriorated in tandem with the general economy.

    Doral's stock is down around 45% year-to-date-near 10-year lows-and is only trading at a mere 15% of its book value. Its nonperforming loan ratio is 11.3% and its Tier 1 capital ratio is 9.7%. It's definitely a very risky proposition, but it could be an interesting play for speculators looking to profit from a potential economic upturn in Puerto Rico.

    TGR: Todd, you have three of Puerto Rico's banks as Buys. What are the individual catalysts for each company?

    TH: The banks on the island were some of the most troubled institutions as we went through the financial downturn a few years ago. The banks in Puerto Rico were treated differently during the bailout than their U.S. counterparts. After a six-year recession, we are finally starting to see an inflection point where the credit quality at these institutions is becoming more manageable, bank capital levels have reached all-time highs and liquidity levels have improved. The underlying financial footing of each of the banks in Puerto Rico is significantly stronger than where it was only a couple years ago.

    That said, these banks continue to operate under pretty close supervisory scrutiny from the various banking regulators. But we're at a point where, with credit quality becoming more manageable, companies such as Banco Popular and First Bank are in a position to exit their various regulatory agreements. Banco Popular also has Troubled Asset Relief Program (TARP) debt that was provided from the Department of the Treasury during the downtown, and it is now in a position to repay that debt. All of these issues would be positive not only for the individual banks but also collectively. It's signaling to investors that the banking authorities are now more comfortable with the financial condition of these companies and Puerto Rico's economy.

    TGR: For Banco Popular, is the improvement in the credit quality the most important factor?

    TH: It is. The biggest problem asset class that each of the banks has in Puerto Rico is residential mortgage assets. Similar to the U.S., Puerto Rico has been experiencing a modest rebound in housing, particularly at the lower end of the market. Puerto Rico lagged the U.S. both in the recovery, as well as the downturn. This is certainly not a surprise, but we are seeing ongoing housing improvement. Thus, the banks are becoming that much healthier as we go forward.

    TGR: Oriental Financial Group is also processing a merger. How is that going?

    TH: Oriental was able to do what we consider to be a transformational merger with Banco Bilbao Vizcaya Argentaria S.A. (BBVA:NYSE). That purchase from the Spanish parent company effectively doubled the size of Oriental, giving it a meaningful delivery channel in the form of branches that it didn't have before. It also provided much-needed diversification to its loan portfolio and its balance sheet so it looks more like a commercial bank than what we've seen in Puerto Rico in the past.

    TGR: Do you have a favorite of the three?

    TH: I think each one has a fair amount of upside from current levels, but Banco Popular is the one name that stands out. It is now in a great position to move forward by exiting the regulatory orders and repaying the TARP funds. That could have a meaningful impact on the stock price to the positive in the very near term. Once that happens, it's going to send a very positive message to investors as a whole and have a residual benefit to the other banks on the island.

    TGR: Do you have any final advice for investors who are either thinking of moving to the island to take advantage of some of the tax benefits or investing in Puerto Rico?

    TH: Puerto Rico has long been a very interesting market, but it is also a very misunderstood market because of its commonwealth status. Many U.S. investors are unfamiliar with the laws and how that may impact them as an individual or as a company. But it has a lot of potential, particularly from a manufacturing standpoint. It has a tremendous education system, infrastructure to support a fair amount of growth and programs that have been put in place to stimulate investment and the economy, and underlying job growth. So I think we're in the early innings, but the base has been set for growth going forward. It's just going to take some time.

    TGR: Thank you all for your insights.

    Learn more at the Puerto Rico Investment Summit April 24-25 or access The Casey Research Guidebook to the tax advantages of residing in Puerto Rico. To contact some of the investors who have made the move and ask questions, simply email QandA@streetwisereports.com.

    Nick Giambruno is senior editor at InternationalMan.com. He has lived in Europe and worked in the Middle East. Most recently in Beirut and Dubai, where he worked as a research analyst covering Middle East and North Africa equities for an investment bank. Giambruno is a CFA charterholder and holds a bachelor's degree in finance, summa cum laude.

    Alex Daley is the senior editor of Casey's Extraordinary Technology. In his varied career, he's worked as a senior research executive, a software developer, project manager, senior IT executive and technology marketer. He's an industry insider of the highest order, having been involved in numerous startups as an adviser to venture capital companies. He's a trusted adviser to the CEOs and strategic planners of some of the world's largest tech companies. And he's a successful angel investor in his own right, with a long history of spectacular investment successes.

    Todd Hagerman joined Sterne Agee in March 2011 to lead the firm's research coverage of the commercial banking sector, primarily focused on U.S. multinational and regional banks. Prior to joining Sterne Agee, Hagerman was head of regional bank equity research at Credit Suisse Securities (USA), where he focused on the regional banking sector. Prior to joining Credit Suisse in 2007, Hagerman spent eight years as a senior banking analyst at Fox-Pitt, Kelton in New York and well more than a decade at the Federal Reserve Bank, which encompassed various roles in bank supervision and regulation at both the Federal Reserve Bank of New York and Federal Reserve Bank of San Francisco. His work at the Fed included various management positions in bank surveillance and review, bank examinations, and policy and special studies. Hagerman holds a Bachelor of Science in finance and economics from the University of Arizona and received his Master of Business Administration from the Marshall School of Business at the University of Southern California.

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    DISCLOSURE:
    1) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. Streetwise Reports does not accept stock in exchange for its services.
    2) Todd Hagerman: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    3) Nick Giambruno: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Alex Daley: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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    Apr 09 3:08 PM | Link | 1 Comment
  • Zachary Schumacher's 'State Of The Rare Earths' Address

    Source: Brian Sylvester of The Mining Report (4/8/14)

    www.theaureport.com/pub/na/zachary-schum...

    Zachary SchumacherAs China's rare earth production winds down, other sources worldwide could shape up to reward early investors. But there are different ways to play this (slowly) growing market. Zachary Schumacher, international market analyst with Asian Metals, tells The Mining Report how investors can go medium or long on rare earths, and why joint venture and offtake partnerships are the biggest factors in creating value.

    The Mining Report: Zachary, it's good to have you with us. Many rare earth element (REE) projects are uneconomic at current REE prices. Please give us your "state of the sector" address.

    Zachary Schumacher: There are a lot of challenges in the market. There's a good portion of projects that are uneconomic. Current REE prices make it difficult to justify projects. On top of that, there are some environmental issues with processing. Until we see a real change in the market, very few projects stand out.

    TMR: Prices for heavy rare earths (HREEs), at least, have shown some signs of price recovery. What's most likely to create shareholder value in REE equities: higher REE prices, joint venture(JV) offtake agreements, vertical integration or perhaps other factors that you deem to be relevant?

    ZS: That's a difficult question. There's a timeframe for a lot of things. Long-term investors would be more interested in higher REE prices. If you're looking for a project to go into production, JV and offtake agreements are important.

    TMR: Interesting. Is that because there's just not a lot of easy access to capital to develop these projects and JV partners provide that, or is it simply about confidence that a given name is on board?

    ZS: JVs give access to more capital, which eliminates a huge barrier. Processing costs are a huge capital expenditure for REEs. It also provides somebody who arguably is going to be consuming or utilizing the material in some other aspect in the production chain. It provides a level of technical expertise that reassures investors.

    Take Avalon Minerals Ltd. (AVI:ASX) partnership with Solvay. Solvay offers technical experience with processing. You have an opportunity to be outside of China. This partnership is a good way for Avalon to show that it recognizes the cost of doing it alone may be unfeasible. So you have a political, technical and economic benefits.

    TMR: Avalon is hoping that this agreement with Solvay will ultimately result in a JV or offtake agreement with a much larger suitor. Does this deal get Avalon closer to a cash-rich partner?

    ZS: It definitely improves its position. It shows that it has an option for processing. It's got to put it high on the list of potential partners looking at sources outside of China.

    TMR: The capex for Nechalacho means that a partner will have to be a big-time player. Avalon likes to tout is that it's the only REE company that has a bankable feasibility study. Does that increase the chances?

    ZS: The feasibility study helps. It shows its willingness and the realism of the project. Yes, the partner would have to be a company with deep pockets. The thing is that a lot of these companies need reliable sources of the material.

    TMR: Are there any companies outside of China that you consider vertically integrated?

    ZS: Molycorp Inc. (MCP:NYSE) is close, but its processing is in China. Rhodia Inc., which is part of Solvay, would probably be the closest. It does some of its processing out of La Rochelle in France. There is some internal consumption, and some is sold downstream. There are a few projects styled to be vertically integrated that aren't active right now.

    TMR: What about Great Western Minerals Group Ltd. (GWG:TSX.V; GWMGF:OTCQX)?

    ZS: Great Western is selling the less-than-common alloys, which is driving its REE project. But it's not in production for its rare earth oxide yet.

    TMR: Which companies have shareholder-friendly offtake or JV partnerships?

    ZS: Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX) and Toyota Motor Group have a good one from Matamec's point of view. Toyota is not asking that much of Matamec. It provides a good avenue for offloading the material and a background of technical experience similar to Solvay and Avalon.

    Frontier Rare Earths Ltd. (FRO:TSX) and Korea Resource Corp., or KORES, have some people questioning what role a government organization like KORES will have. At the moment, it's a confidence booster that provides a level of structural government political support. The offtake agreement is a 10% stake in the company and KORES is obligated to offtake 10% as well. If there's an increase in the interest, it would up KORES's control to about 50% and up the offtake of the material to about 50%. That may worry some investors that a government organization could control about 50% of a company, but it's an economic deal. KORES wants the company to do well. It recognizes, being right next door to China, the need to have alternative sources outside of China. I'm less worried about political ramifications.

    TMR: What should an investor who is looking to gain exposure to this sector look for?

    ZS: A lot of projects are suffering from being uneconomic at current prices and demand. There are two big issues: where you do processing and how you do processing. Also, how cost effective is your processing and how much material can you process-what volumes are you looking at?

    TMR: What's a suitable capex range?

    ZS: Projects can range from $300-400 million ($300-400M) or higher. Anything below $300M is more plausible.

    TMR: Greenland Minerals & Energy Ltd. (GGG:ASX) has an agreement with China Non-Ferrous Metal Industry's Foreign Engineering and Construction Co. Ltd., or NFC. The deal states that Greenland will use NFC's separation plant to process its concentrate from Greenland's Kvanefjeld project in Greenland. As an investor, would you prefer projects that produce oxides or is a simple concentrate the better option because of the lower capex and thus lower risk?

    ZS: I'm inclined to say oxides, but producing an REE concentrate is much more feasible. It may be more attractive for investors to say, "Hey, I know this company may not be getting into the downstream industries, but I can rely on the overall market to improve demand for HREEs in the long term."

    TMR: Let's get into another aspect of this business. Some companies, like Namibia Rare Earths Inc. (NRE:TSX, NMREF:OTCQX) in Namibia, are in jurisdictions where it's easier to get a REE mine permitted. How much of an advantage is that?

    "Namibia Rare Earths Inc. has a good project. It's definitely smart for the company to be where it is."

    ZS: Namibia as a jurisdiction is desirable, with the environmental regulations, distance to ports and the political support that a company like Namibia Rare Earths can gather for a project. Investors want to look at a place that where they can rely on a readiness, a history and a legal framework.

    Namibia Rare Earths has a good project. It's definitely smart for the company to be where it is. It's an area where it'll be easier to get started.

    TMR: If you were handicapping this race, what is the next publically traded REEs company to have a JV?

    ZS: A few have good projects that could warrant a partnership. Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX) is high on my list. It has a good base and understands the market very well. Many had concerns about the area's infrastructure. Alaska obviously has good reserves of a number of materials, but it can be difficult to get them to port. However, the recent passing of SB 99 by the Alaska State Senate puts an additional $145M toward infrastructure development for this project alone. Investors should be pleased to find local political and economic support for a project, but more importantly, financial assistance at this level can offer real assurance to companies looking to partner, as well.

    Texas Rare Earth Resources Corp. (TRER:OTCQX) has an interesting project as well. The company is new to the sphere, so investors may be a little standoffish, but I like the project.

    TMR: I don't think a lot of investors know the story with Texas Rare Earths. Can you tell us?

    ZS: Texas Rare Earths has been around for several years. It's one of the smaller projects. It is based in Texas, which the company likes to highlight as a positive. The regulatory environment for setting up a business can be friendlier there.

    One of the things that may be holding it back is that it doesn't really have a lot of its documentation up yet. It doesn't have a feasibility study, and it's going to update its existing preliminary economic assessment. It's looking at a long-term mine that will be able to produce small volumes of 5,000 and 8,000 tons per year (5-8 ktpa) for 20 years.

    TMR: Does management have experience?

    ZS: I've talked to some of the management. They have a technical background. CEO Daniel Gorski has been in the mining industry a lot of years. I think he understands it. He doesn't come from a background of REEs, but he worked with a uranium explorer previously. It goes a long way in REEs if you understand the difficulty of dealing with radioactive material or even have close ties with people who might offtake some of that material or store it.

    TMR: What public company could be the next to bag an offtake agreement?

    ZS: I like Quest Rare Minerals Ltd. (QRM:TSX; QRM:NYSE.MKT). Strange Lake is an interesting middle-sized project. Extraction is an issue. Companies are going to look at that and know it. Its location in Québec, an area of Canada that has history with mining, goes a long way.

    TMR: Even with the poor performance of the REE sector during the past few years, new players, like Texas Rare Earth Resources, continue to enter the space. Does that mean there's still money to be made?

    ZS: Maybe it's the other way around. It may be that mining companies recognize that there is still interest in the market from investors. Is there still money to be made on the investors' behalf? Yes. There's definitely a level of opportunity out there, should a company get far enough to get into production.

    But is there still room? The market is flushed with JV companies that are not quite in production, and even new ones. The difficulty of getting one of these companies into production may be insurmountable even for great projects with good management, good background and low capex. There may be a bit of overconfidence among some people going into new projects.

    It's a two-sided coin. The REEs market is still suffering from the doldrums of the bubble popping. If prices were high, any of these projects would be plausible to come on-line. For the short term, it looks like a number of these projects have no chance.

    There's a timeframe where you can see that there's growing demand for these products. Look at neo magnets: There's very few ways to avoid using them. That market's big in the U.S. The magnet market hasn't shrunk. They haven't had any incentive to leave now that prices are falling. It just makes their production cheaper. At a certain point you're going to see a flattening out of price. Long-term demand for magnets in a hundred industries will likely continue to grow. There's space for a company or two outside of China to produce, to do processing and to be a very promising investment opportunity for plenty of investors. It's finding the right one. That's been the game for the past two years.

    TMR: If getting a mine into production was the only way to make money as a mining investor, there wouldn't be a mining sector. There's such a small percentage of any mined commodity that actually reaches production. If there was a sudden, dramatic swing again in REE prices, investors could make money on some of these names even if their chances of getting into production didn't increase at all.

    ZS: That's definitely true. The perception that the market is not doing very well is driven by REE pricing. Consumption is still there. People who consume the material, they recognize that they need to use it. It's in their cost analysis. They anticipate long-term projections for these materials. Not because the market's going to flatten out and disappear, but because they need to use it and everybody else needs to use it. If you do see a turnaround in REE prices, there are a number of companies that could benefit investors-even without the project going into production. Investors can still tap into the growing market.

    TMR: The message then to an investor is to be long REEs.

    ZS: Yeah. Be long or find your moment. Wait for the moment when you see REE prices bottoming out. And we may be fast approaching that level. The future of REEs isn't bad.

    TMR: Thanks, Zachary.

    Zack Schumacher joined AsianMetal Inc. as a rare earths and tech metals analyst in 2013. He covers fluctuations in the prices and consumption of these materials and manages several indices that list current market prices. Schumacher received his Bachelor's degree from the University of Pittsburgh in international relations and Chinese and completed his Master's of International Business from New York University.

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    DISCLOSURE:
    1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Namibia Rare Earths Ltd. Streetwise Reports does not accept stock in exchange for its services.
    3) Zach Schumacher: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.

    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Apr 08 2:04 PM | Link | Comment!
  • Ted Dixon: What Gold Stock Insider Trading Tells Us

    Despite the recent big gains in gold stocks, company insiders and institutional investors are still 2.5 times more likely to be buyers than sellers. According to Ted Dixon, co-founder and CEO of INK Research, this shows that those in the know are still quite bullish, despite the pullback in March. In this interview with The Gold Report, Dixon names the top insider buyers by dollar amount and by volume and explains how investors should interpret this data.

    The Gold Report: The price of gold fell more than 6% in March. To what do you attribute this?

    Ted Dixon: Gold took a one-two punch in late March. The first was the widening of the renminbi trading ban in China by 2%, which added extra costs to buying and hedging gold. The second was the surprisingly hawkish tilt of the U.S. Federal Reserve, pointing to interest rates rising a little bit sooner. Tighter monetary conditions do not usually benefit gold.

    TGR: Increased import duties in India haven't reduced gold buying there. Why would China be different?

    TD: I think the flows are different. In China, there is a lot of financial activity related to gold, whereas in India gold buying is cultural and driven by consumer consumption.

    TGR: We've heard about greatly increased governmental buying in China, have we not?

    TD: There have been rumors of that, and the Chinese media has called for the government to boost its gold reserves. That could provide a longer-term counterbalance to the shorter-term renminbi pressure.

    TGR: DataQuick's latest U.S. national homes sales snapshot shows that "prices are flatlining or drifting lower while sales are sinking like a stone." Meanwhile, "The big private equity firms [are] exiting the [housing] market." These data don't suggest a U.S. economic recovery, do they?

    TD: Basically, insiders are telling us that stock prices now have priced in a lot of good news, so it would be interesting to see how they react to whips to the downside. One has to be cognizant that much of the U.S. equities rally has been driven by the Fed and, arguably, has little to do with GDP growth one way or the other.

    TGR: With regard to this hawkish tilt, it has been assumed for several years that we'd see higher interest rates and an end to quantitative easing [QE] only after an economic recovery. Given how weak the U.S. economy remains, can we assume that the Fed believes it is close to exhausting the utility of zero interest rates and quantitative easing?

    TD: The Fed has a big ticking time bomb on its balance sheet. It is still piling up reserves, and I'd love to be a fly on the wall in staff meetings that don't get reported. I have to assume there is much concern about what happens to those reserves, particularly if the economy does surprise on the upside. In this sense, the low-altitude economy has been a blessing for the Fed.

    We may have a little game of bluff going on here. The Fed is taking a hawkish stance now, saying it has to move rates up earlier, but, of course, if the economy remains weak, and the Fed has to backtrack, that opens up risks on the other side. The Fed has been running a big monetary policy laboratory over the past few years, and sometimes in laboratories accidents happen. At this point, however, the stock market seems to have assigned a very little risk premium to something bad happening.

    TGR: It has been argued that if you remove the Fed's monthly stimulus from the monthly GDP report, GDP is actually shrinking, not growing.

    TD: The Fed has certainly manipulated the economy. It has picked its favorite sectors, housing and autos. I believe that Operation Twist and QE have hurt the commodities base because they have favored interest-sensitive industries. Now, however, these industries will have to stand on their own two feet, and we'll see how this experiment in industrial policy works out. Usually, planned economies have a day of reckoning when stimulative measures run out of steam.

    TGR: Your company, INK Research, tracks the legally reported buying and selling by public company executives and institutional investors. What does this tell us about the status of individual companies in particular, and the gold sector in general?

    TD: In general, U.S. market-insider indicators have been languishing at 25% for a long time. Insiders do not see very many bargains. This suggests that value strategies are going to be very important going forward if you're looking to make money in the broad market.

    A year ago, in the gold sector, insider buying went through the roof as the prices of gold and gold equities tumbled down. This was a bit early, but it basically confirmed a bottom in the equities last spring. The S&P composite gold index finally moved above 1,800 and then pulled back, with some insider selling into that run-up. We're seeing a measured profit taking. It's nice that there can be some profit taking in the gold sector, given how beat up it's been, but money has come off the table, and that could foreshadow some short-term weakness.

    TGR: As of March 24, 2014, your INK sentiment indicator of Toronto Stock Exchange [TSX]-listed stocks is 85.2%. What does that figure mean?

    TD: It means there's less insider buying than trading. At 100%, you have an equal amount of insider buys and sales. So the indicator rating is Overvalued.

    TGR: For the TSX Venture-listed stocks in total, the figure is 341.1%.

    TD: Right. That includes not just gold stocks but also the other miners and technology and energy juniors. But the TSX Venture Exchange is heavily weighted toward junior mining.

    For the overall TSX gold sector, the indicator is 250%. So we're seeing 2.5 companies with insider buying for every one that's selling. This means that gold stock insiders are still quite bullish, despite the recent pullback.

    TGR: And that indicator reading equals Undervalued?

    TD: Right. The junior miners have been toughing it out for years. The TSX Venture Index moved 20% above its 2013 lows in March, and it's been a long time coming. The insiders were early, but they're not packing their bags now.

    TGR: You publish a list of Top 50 Insider Buys by dollar amount over the past 60 days. What's the significance of this?

    TD: The dollar amount is a good initial screen to examine. Of course, you want to look at it with regard to the overall market cap of the company. So $1 million [$1M] bought in a large-cap company is not as significant as $1M bought in a medium- or micro-cap company. We also look at both the company's valuation and its price direction because they put the insiders' signals in context.

    For example, if a stock is going up and there's a lot of insider buying, that could mean insiders are buying into the news. On the other hand, if the stock has fallen and there's a lot of insider buying, that could signal a value opportunity, that the market has overreacted. Then you want to dig a little deeper and see who specifically in the company is doing the buying.

    TGR: Which gold and silver miners are in the Top 50 insider net buying by dollar volume as of March 24?

    TD: B2Gold Corp. (BTG) is No. 13 with $579,106, Barrick Gold Corp. (ABX) is No. 25 with $335,720 and IAMGOLD Corp. (IAG) is No. 32 with $221,188.

    TGR: To what extent can insider buying be attributed to confirmation bias? In other words, this must be a good company, otherwise I wouldn't be working for it.

    TD: That is something to be aware of. There may be examples of that, but we find that insiders tend to buy when they think they can make money. They are usually pretty picky, and they usually like to spot opportunities for bargains. And one has to keep in mind again that insiders tend to be early, and I think that's a more important consideration than confirmation bias.

    The one big exception to this is when companies issue good news, and insiders buy. This could be a signal that the market hasn't yet fully priced in that news.

    TGR: Pretty much every company in the list above has seen a significant share price fall in the second half of March. To what extent, particularly among the juniors and the micro caps, could insider buying be seen as an attempt to bolster investor confidence?

    TD: That's why we must look at each stock individually. In addition, it's best to look at insider signals on a portfolio basis. We've found that when investors have a portfolio of stocks that use insider signals as a key input, they are going to have a few big winners, a number of stocks that do better than the market and a number that do worse. Investors certainly want to avoid the tendency to zero in on one company on an insider-buy basis and then put all their eggs in one basket. That would not be prudent.

    TGR: How often do you track insider buying and selling?

    TD: All our indicators are updated overnight, like a rolling poll. They are aggregated across the sectors, so they tend to even out company-specific situations. We update individual companies daily because, as I mentioned, when a news release comes out, it could change company fundamentals. So we want to see how insiders react to that change.

    TGR: How about Barrick, in particular? It took a hit March 24 after a Barron's article cited a Credit Suisse Group analyst who continued to rate Barrick and Newmont Mining Corp. (NEM) shares Neutral. Would the insider buying and selling in the days after this event be pretty significant?

    TD: In our view, it would be. We don't consider analysts ratings' in our models, but investors can do both and compare, if they like.

    TGR: What does it tell you when Barrick has had so much bad news lately, and yet it appears in the Top 50 list of insider buying by dollar amount?

    TD: Well, insiders as a group are suggesting that the prospects for Barrick going forward are likely pretty good. It doesn't mean the numbers wouldn't get dragged down should the gold price take a tumble, but there's enough insider buying there for us to have put Barrick in the top 30% of all stocks we rank. Our rankings are not an investment recommendation, of course.

    TGR: How significant is it for a company to rank near the top of the list?

    TD: Actual volume is another good first screening, but most of the companies that appear here tend to be small. When stocks are light traders with market caps under $20M, you've got to do more homework to ascertain what might be motivating insider activity. Is this company a value proposition, or is something else going on? You want to take a good look at the company's management and its cash position.

    TGR: What can you tell us about your INK Edge rankings?

    TD: Our Morning Hour Report stocks use our INK Edge process, which looks at insider activity, valuation and price rank. We call it VIP criteria of valuation, insiders and price, and what we're looking for is the stocks that have insider buying that are good value and have good price strength. That's what we scour the market for every day.

    TGR: So based on your various indices, which stocks stand out in insider buying, good value and good price strength?

    TD: I'll repeat the caution that investors should take a diversified approach. I've already mentioned Barrick, which ranks quite well on our screens. Investors with very high risk tolerances to take a look at some of the smaller stocks near the top of our list.

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

    This interview was conducted by Kevin Michael Grace of The Gold Report and can be read in its entirety here.

    Ted Dixon is co-founder of INK Research [Insider News and Knowledge], Canada's first online financial news and research service dedicated to providing data on public company insider trading. [Free services are found on CanadianInsider.com and InsiderTracking.com.] He worked previously for Connor, Clark & Lunn Financial Group in portfolio strategy and product development, the Fraser Institute as an analyst, TD Bank as a treasury specialist and the Vancouver Stock Exchange as a floor trader. He has lectured in corporate finance at the BC Institute of Technology and is a Chartered Financial Analyst and member of CFA Vancouver. He holds a Master of Business Administration in financial management from the University of Chicago.

    Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

    DISCLOSURE:
    1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. Streetwise Reports does not accept stock in exchange for its services.
    3) Ted Dixon: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Apr 07 4:51 PM | Link | Comment!
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