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  • Swiss Asset Manager Florian Siegfried: Look For Value Opportunities And Put Your Capital To Work Selectively In This Market

    In a junior mining market that doesn't value good news, M&A could be the golden ticket that pays investors a premium for their patience. In this interview with The Gold Report, AgaNola Asset Manager Florian Siegfried evaluates recent deals and points to the companies that could be the next takeovers. Plus, he makes a bold prediction for what the recent takeout activity and fallout from the Greek crisis could mean for the resource market as soon as October.

    The Gold Report: When we talked in November, you warned that there would be downward pressure on gold this year. What are you anticipating for the balance of 2015 and into next year?

    Florian Siegfried: We were being cautious in November when we published guidance that indicated gold could trade as low as $1,070 per ounce [$1,070/oz] as a support zone. And that is pretty close to where it is trading right now. But I think that we have to distinguish between the paper price of gold and the physical price, which trades at a premium. For example, the U.S. Mint currently sells gold at around $1,400/oz.

    This suggests that there is some tendency toward increasing premiums in the market for physical metal. Where we go by the end of the year is a difficult question because it's always hard to catch the bottom of the market. But a look at the last three or four years gives us some clues. Hedge funds were maximum net long in gold at the peak of 2011, and now they're maximum net short, which could be a good contrarian indicator.

    It looks as if $1,080/oz could be the bottom. It's not defined yet, but the sentiment is definitely at extremes.

    The turn in gold will come from short covering, and the short covering will come when the bearishness really reaches a climax event. Probably we are there, but we will have to wait and see. It is difficult to make a call for year-end because there are so many factors influencing the gold price, and sentiment is extremely negative. The trigger for moving up could come from the bond market, which is in a difficult spot right now. Liquidity is down. Yields and credit spreads are rising. When something goes wrong there, where will the conservative money go to? I don't think it is going to go back into government funds. As investors lose confidence, that could be the trigger for gold. We are probably going to see this in the fall, by September or October. I think the bond market is about to turn around.

    TGR: What are some of the other triggers you're watching? Are you monitoring the U.S. Federal Reserve and whether that rate hike happens in the fall?

    FS: I think the Fed is testing the market because it knows we are in a massive bubble and is talking to see what happens. I have four simple reasons why I would not expect a rate hike in September:

    1. The Fed sits on a US$4 trillion balance sheet. Raising rates would mean bonds go down in value, and this could wipe out the Fed's capital. That's the last thing it wants.

    2. The impact to the carry trades, which the banks always need, would be drastic. The banks get free Fed money now that they can invest in treasuries and multiply it tenfold, making a profit basically at no risk. An increase in rates would put pressure on the banks, something the Fed doesn't want either.

    3. U.S. exports are already suffering with a strong dollar, and a rate hike would make the dollar even stronger.

    4. This fragile economic situation is also something that the Fed doesn't want. That is why quantitative easing is somewhat like the Hotel California. You can check out, but you can never leave.

    I would expect more market dislocations because I think the Fed is between a rock and a hard place. Generally my advice is to play it safe and not to put all your capital at work at this time.

    TGR: You're in Switzerland. Are you more worried about what's happening in Europe or what's happening in the U.S.? Do you think the Greek crisis is now behind us and we've solved that problem or will that continue to haunt us the rest of the year?

    FS: I would be more concerned about Europe right now because Greece is not fixed. It's an exercise to save the banks because everybody knows that if Greece defaults, it will trigger a chain of events that becomes uncontrollable.

    The market seems to like the short-term fix and the U.S. dollar is benefitting. If you are looking to park your money, probably the U.S. is the only place you want to go. I don't know how long it will last because the markets in the U.S. are shaky. I think we are lurking on a major top in the equity markets. But people still like the dollar, and it's probably the best currency right now.

    TGR: Are premiums being paid for rare high-quality silver projects?

    FS: Yes. First Majestic Silver Corp. (NYSE:AG) recently bought SilverCrest Mines Inc. (NYSEMKT:SVLC)[SVL:ASX] . Both are silver producers in Mexico. This was a friendly all-share deal for the Santa Elena high-grade mine. It is probably strategically important for a company like First Majestic to add to its footprint to realize the vision of becoming the leading silver producer in Mexico. The deal also adds net cash to its balance sheet on the order of CA$25M. That means the company is improving its balance sheet and it has another high-grade deposit to add to its portfolio.

    In this market, there aren't too many companies that can offer a $120M transaction, so it's a buyer's market. In a rising silver price environment investors will revalue the whole company and see the wisdom in the timing.

    TGR: Will these deals set a precedent for pricing going forward?

    FS: It really depends on quality.

    TGR: A lot of these are paper deals. Do you think that's going to be the standard?

    FS: The companies buying now can dictate the terms. No one wants to pay a premium in cash because cash is rare, and companies need the cash for their mines, as we probably won't come out of the downturn any time soon. So they use their share price as currencies, and that's exactly the right thing to do. But it's going to change when the market gets more buoyant, companies make cash and accumulate a treasury, and banks prove more willing to lend. It's all cyclical.

    TGR: Based on those deals, what are some companies that look attractive today, either as M&A targets or as projects that could be well positioned once the gold price does turn?

    FS: The big mining companies, AngloGold Ashanti Ltd. [AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE], Barrick Gold Corp. [ABX:TSX; ABX:NYSE] and Newmont Mining Corp. [NEM:NYSE] are currently disposing of nonstrategic assets. They have to shrink their portfolios and fix their balance sheets. Sooner or later, these companies have to refill their production pipeline, and they will have to do this by acquiring.

    When you are betting on M&A, one way is to evaluate smaller exploration companies that are in a good position financially because they're backed by major shareholders who can fund their exploration programs through the downturn. Even better are companies with solid brownfield assets, which make it rather easy to prove up a substantial gold resource.

    TGR: What are a couple of companies that might be good acquisition targets?

    FS: Two names that still circle around as acquisition targets are Detour Gold Corp. (OTCPK:DRGDF)[DGC:TSX] and Pretium Resources Inc. (NYSE:PVG).

    TGR: What position is Detour in?

    FS: In terms of mine life and annual gold production Detour is the only major Canadian deposit that is still in the hands of a single asset producer now that Osisko Mining Corp. is gone. Detour is highly leveraged to the gold price, but it has been volatile. Sometimes it makes money, sometimes it doesn't, based on mining and milling rates. I think there is still some financing risk in a persisting low gold price environment as Detour currently has some CA$500M in outstanding convertible debt. What Detour really needs is an elevated, high gold price environment. Then it would make sense for an acquirer to buy. Right now, I don't see that. It's just a name circling around.

    TGR: Pretium is busy moving the Brucejack deposit ahead in British Columbia. It recently announced new permitting and infill drilling in Valley of the Kings. Are there any key catalysts we should be looking for there?

    FS: The great thing about Pretium is the sheer size of the deposit, as well as the grade. It's one of those mines that brings a long mine life and high grade in a safe jurisdiction. Pretium is probably clicking the box there as well, but it's also hard to say if an M&A premium is factored in. It recently received an Environmental Assessment Decision Statement from the Federal Minister of the Environment that also includes agreement with the Nisga'a Nation treaty. CA$80M in new Chinese money has been invested in the company. Pretium is a third name that I hear regularly in M&A discussions.

    TGR: What is a company worth watching?

    FS: When you look for value, where do you turn? Companies that suffered dramatically in the current downturn, but generate cash flow at current metal prices, have cash in the bank and no debt. I think one of them is Gold Resource Corp. (NYSEMKT:GORO). It just put out Q2/15 financials. Despite an illegal mine protest and work stoppage in May, the company earned US$9.4M in operating cash flow and is paying around a 4% dividend yield, which should be sustainable given the strong balance sheet. It has cash in the bank. It's debt free. It has a nice, high-grade silver-gold project in Mexico and plenty of exploration potential; nevertheless, the stock is down to US$2.50/share after the company announced a decrease in metal production for the second quarter. I think the selling is overdone. I remember in 2009 it moved from $1 or so to close to US$30/share in 2011 and it wasn't even in commercial production. Now, Gold Resource is in production and the market cap is down to $120M, and it is still paying a dividend. The good news is it didn't dilute all the way down. I think the sentiment there is very negative and consider the stock undervalued.

    TGR: You also follow Australian companies. What will the precious metals mining landscape look like there once the dust settles on the OceanaGold deal?

    FS: I think the Australian producers with West African operations get virtually no attention in this market regardless of the quality of the assets. The Australian dollar is so weak that gold there is at a two- to three-year high. That makes the local producers with mines in Australia look attractive.

    TGR: Do you have any final words of wisdom for readers looking to survive 2015?

    FS: Every bear market eventually turns into a bull market again. Things are cyclical. So don't get depressed. You can never pick the bottom, but you can prepare for the next upturn. Be patient. Don't get frustrated. The cycle will turn. I think it's probably coming in late 2015 or early 2016. When we see the best teams in the mining industry buying assets, that gives you some confidence that the bottom can't be far away.

    TGR: Thank you for taking the time to talk with us, Florian.

    This interview was conducted by JT Long of The Gold Report and be read in its entirety here.

    Florian Siegfried is head of precious metals and mining investments at AgaNola Ltd., an asset management boutique based in Switzerland. Previously Siegfried was the CEO of Precious Capital AG, a Zürich-based fund specializing in global mining investments. Prior to this Siegfried was CEO of shaPE Capital, a SIX Swiss Exchange-listed private equity company that was founded by Bank Julius Baer & Co. Siegfried holds a masters degree in finance and economics from the University of Zürich.

    Bottom of Form

    DISCLOSURE:
    1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an employee. She owns, or her 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: Great Panther Silver Ltd., Timmins Gold Corp., St Andrew Goldfields Ltd., Pretium Resources Inc., Romarco Minerals Inc. and TerraX Minerals Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Florian Siegfried: I own, or my family owns, shares of the following companies mentioned in this interview: Timmins Gold Corp. 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 determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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.

    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (NYSE:I) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    Aug 17 5:34 PM | Link | Comment!
  • Doug Loud And Jeff Mosseri: Supply And Demand Will Rescue Gold Soon

    Money managers Doug Loud and Jeff Mosseri of Greystone Asset Management LLC. have some simple advice for gold investors: Relax. Supply and demand will reassert its reign quite soon, and, when that time comes, both gold and gold equities will appreciate quickly and significantly from their current levels. In this interview with The Gold Report, they highlight several producers and explorers with the management, cash and projects needed to spring forward when the market turns.

    The Gold Report: The gold sector entered full-blown panic mode in July with the Bloomberg analysts forecasting a dip below $1,000 per ounce [$1,000/oz) this year, and Deutsche Bank forecasting $750/oz. Is this just fear feeding on fear, or is there something else going on?

    Jeffrey Mosseri: It is fear feeding on fear, but there are two other things going on. The first is the strength of the dollar, and the second is the weakness in the price of oil. Combined, these two factors have greatly and negatively affected the prices of all metals in U.S. dollars. Over the past year, gold is up 20-40% in many currencies.

    TGR: In the last couple of years, the idea that the price of gold is being manipulated downward is no longer dismissed entirely as a conspiracy theory.

    Douglass Loud: I wouldn't want to use the word "manipulation," but you could have an analyst predicting a gold price of $1,050/oz, followed by someone on the trading desk shorting it down to $1,050/oz, without any collusion.

    TGR: How big a role does China have in setting the gold price?

    JM: The biggest purchaser of gold in 2014 was the Russian central bank. China was second. This year, as gold has fallen below $1,100/oz, imports to China are headed for a record. I wouldn't call this manipulation necessarily, but the Chinese are definitely taking advantage of the lower price, as are the Russians, the Indians and the central banks of many other countries.

    TGR: It is rumored that China intends to float a new reserve currency, backed fully or partially by gold bullion. What effect would this have on the supremacy of the U.S. dollar?

    JM: The U.S. dollar remains, as I like to say, the cleanest dirty shirt in the laundry basket. There is an entirely clean shirt in the closet, however, and that's gold. At some point, investors will want to own that clean shirt, at which point the U.S. dollar will follow all the other currencies downward.

    TGR: Jeff, you said in our last interview, "Demand for gold and silver bullion is quite high, but the paper market is about 50 times the size of the physical market, so games can be played in the paper market." Given the domination of the gold market by paper gold, is it still proper to call gold a safe haven?

    JM: Absolutely. There's a lot of shorting going on in the commodity markets today, but supply and demand will win in the end, and the paper market will follow the bullion market. When this happens, we're going to see short covering, as we've had in the past, which will result in a gold rally of a couple hundred dollars or more.

    DL: It's like going to the beach, watching the waves, and waiting for the tide to come in. One of these days there's going to be a big catch-up in gold when the tide finally comes in, regardless of what the waves are doing.

    TGR: Can gold producers continue to make money at $1,100/oz?

    JM: The current gold price is flirting with the cash cost per ounce for many mines. Should gold fall much below the current price, and stay there for a while, we'd soon see mine closures. If that occurred, the gold supply side would be greatly reduced, which would put upward pressure on the gold price.

    DL: Gold supply is impacted by other factors as well. First Quantum Minerals Ltd. [FM:TSX; FQM:LSE) is being forced to shut down its Sentinel copper mine in Zambia because it can't get the electricity it needs. Gold mines there and in South Africa, as well, are being hit with lack of power. And that will affect the supply of gold.

    TGR: The oil price collapse is now nearly a year old. Doesn't this suggest a fundamental weakening of the world economy expressed by a reduction in demand?

    JM: Not necessarily. What we have is a huge amount of supply at the moment. So much of it is stored in tankers that we have a tanker shortage. But this oversupply will eventually work its way through the market. In the meantime, cheap diesel fuel has resulted in a dramatic reduction in mining costs, and this has lengthened the amount of time that gold will sell at a lower price.

    TGR: When do you see a rebound in the price of gold?

    JM: It's difficult to predict, in view of all the factors mentioned above, but we will probably see a bounce in the second half of this year, and more thereafter.

    TGR: Why are you confident that gold equities will soon make a comeback?

    JM: Gold equities are now selling at ridiculously low valuations. These valuations will be adjusted when it is believed that the price of gold will rise. A breakout in the equities will be the signal that the gold price has bottomed and will be moving significantly higher.

    TGR: Which near-term junior gold producers are your favorites?

    JM: We like Pretium Resources Inc. (NYSE:PVG) and its 6.9 Moz Proven and Probable deposit in the Valley of the Kings section of the Brucejack project in northern British Columbia. This a beautiful deposit: about half an ounce per ton. The project is now fully permitted and by 2017 should be producing 500,000 ounces [500 Koz) per year for the first few years. All Pretium needs now is to put together the financing, which the company is working to secure, as we speak.

    TGR: Brucejack's capital expenditure is $747 million [$747M), and Eagle's is $383M. How doable do they look in today's market?

    JM: As for Brucejack, anything under a billion dollars today is more doable than it was a year ago. Pretium has a great project with great grades and a great management team, so capital should be readily available for it.

    TGR: Are you worried that a well-connected spinoff group from the Sierra Club is determined to kill the 5.2 Blb KSM project?

    JM: It can try, but that doesn't mean it will be successful. Any company with enough money to buy KSM would be a company with enough money to fight any environmentalists.

    TGR: Which junior gold and silver producers do you like?

    JM: Among the midsize producers, we like Agnico Eagle Mines Ltd. (NYSE:AEM). This company has excellent management. With its takeovers of Cayden, Osisko and Soltoro, it has been buying good projects cheaply and then integrating them really well.

    TGR: This company's shares are down 40% over the last two months. Is there a buying opportunity here?

    JM: Indeed. But in this market, any producer with good management, whose share price has been punished along with the rest of the market, is a buying opportunity.

    DL: But investors have to be a little more patient. These companies aren't going to look good by the end of the week.

    JM: Another midsized producer we like HudBay Minerals Inc. (NYSE:HBM). The company has gold and copper. It's really interesting at its current price. It's more than doubled copper production in the last year and has succeeded in successfully integrating its Constancia mine in Peru, and solving the transportation problems that caused the company some headaches last quarter. Its Augusta in-situ copper project in Arizona is going to take a little more time, but I feel confident that HudBay will be successful in putting the mine into production.

    TGR: Which smaller junior producers are you fond of?

    JM: Klondex Mines Ltd. (OTCQX:KLNDF) [KDX:TSX] is one.

    TGR: How well is that company succeeding in finding synergies between its Fire Creek and Midas projects in Nevada?

    JM: On Aug. 4 Klondex announced the discovery of new veins at Fire Creek, including 9.1 grams per ton gold over 17 meters. It is doing exactly what it should be doing: developing both mines side by side.

    TGR: How good is Klondex's cash flow?

    JM: It's $41M. The company has 128M shares outstanding and earnings before interest, taxes, depreciation and amortization of $74M, so it is deploying its cash correctly. This is an especially unappreciated company at this price level.

    TGR: Do you believe First Majestic Silver Corp.'s (NYSE:AG) [FR:TSX] takeover of SilverCrest Mines to be a portent of things to come?

    DL: With the new Mexican tax situation, with its tax and accounting changes, operating in Mexico will be a specialized field for a while, but we believe that it will pay off in the end. Companies operating in that country are incentivized to take out other Mexican miners.

    TGR: You like the takeover?

    DL: We liked SilverCrest, and we like First Majestic eating it.

    TGR: Which other silver producers do you like?

    JM: First Majestic is our favorite. And we also like Silver Standard Resources Inc. (NASDAQ:SSRI)[SSO:TSX], but it is in the middle of a management change. So we'll have to wait and see how the new CEO will steer the ship.

    TGR: How about junior near-term silver producers?

    JM: We still like MAG Silver Corp. (NYSEMKT:MVG)[MAG:TSX], but that's further down the road. What we like most about the company is its partnership with Fresnillo Plc [FRES:LSE].

    DL: The silver market is challenging now. First Majestic has more silver in the ground and is producing more silver than when its shares were at $20 or $25. Now its shares are around $4. The gold/silver ratio is also way out of whack; it's about 80:1, instead of 50:1, or 60:1.

    JM: We think that when the gold turns, silver will turn harder.

    TGR: It has been reported that silver producers are hoarding bullion.

    DL: First Majestic has been known to keep some off the market.

    TGR: Is this a sound practice?

    JM: It makes sense, if the company believes the price of silver will rise.

    TGR: Assuming that you are correct and that a comeback in gold equities will signal a new bull market in gold itself, what qualities should investors be looking for in gold stocks?

    DL: First off, you've really got to take a serious look at country risk and infrastructure risk. The First Quantum Sentinel mine problem is really serious. This electricity shortage could envelop much of Africa, even including the Democratic Republic of the Congo.

    We liked a bunch of exploration projects in Mali and Burkina Faso, and then that whole region got caught up in revolution. I would advise sticking to North America and Central and South America first, and then Australia.

    JM: Investors should be looking for companies with good management, good projects and lots of cash on the balance sheet. For the time being, you want to avoid marginal producers and marginal explorers that need to keep on financing at lower and lower prices. Those will be the last companies to turn around, if they're not taken out or haven't gone bankrupt by then.

    TGR: Jeff and Doug, 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.

    Douglass N. Loud joined Greystone Asset Management LLC. at its founding in 2005 and has been senior managing director of Axiom Capital Management Inc. since 2009. Prior to that, he was with Murphy & Durieu, where he served as executive director of the Private Clients Group. Loud has over 35 years of investment management and securities industry experience. He holds a degree from Yale University and a law degree from the University of California, Berkeley.

    Jeffrey N. Mosseri established Greystone Asset Management LLC. in 2005 and became a director of Axiom Capital Management Inc. in 2009. He was a stockbroker and investment manager at Goldsmith & Harris for 20 years. Mosseri also worked as a stockbroker and investment manager for Carnegie Capital, the investment advisory division of Prescott Ball & Turben, where he ran the international arbitrage division and developed the gold mining research and investment department.

    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 a list of recent interviews with industry analysts and commentators, visit our Interviews page.

    DISCLOSURE:
    1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an employee. 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: Pretium Resources Inc., Klondex Mines Ltd., and MAG Silver Corp. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Doug Loud: I own, or my family owns, shares of the following companies mentioned in this interview: First Majestic Silver Corp., Klondex Mines Ltd., and Pretium Resources Inc. In addition, my clients of Greystone Asset Management LLC. own shares in none of the companies mentioned in this interview. 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 determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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) Jeff Mosseri: I own, or my family owns, shares of the following companies mentioned in this interview: First Majestic Silver Corp., HudBay Minerals Inc., and Klondex Mines Ltd. In addition, my clients of Greystone Asset Management LLC. own shares in First Majestic Silver Corp., Hudbay Mining Inc., and Pretium Resources Inc. I personally am, or my family is, paid by 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 determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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.
    5) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    6) 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.
    7) 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.

    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (NYSE:I) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    Aug 13 2:58 PM | Link | Comment!
  • Thinking Outside The Commodity Box: Benchmark's Investment Primer For Lithium, Cobalt And Graphite

    It's often difficult to understand the global markets for critical minerals so The Gold Report narrowed it to three-lithium, cobalt and graphite-and brought in Simon Moores, managing director of London-based Benchmark Mineral Intelligence, and the firm's analyst, Andrew Miller, to provide insight into minerals that they say need to shed their labels as traditional commodities and embrace their future as niche, raw-material solutions for a growing list of technology manufacturers. As Benchmark prepares to embark on its World Tour, Moores and Miller discuss supply chain visibility and the impact of disruptive technologies on these markets, as well as companies seeking to leverage lithium, cobalt and graphite into investable business models that will lure investors with a long-term outlook.

    The Gold Report: In a recent Benchmark Mineral Intelligence report, "Mineral Supply Chain Visibility: Impact of Disruptive Technologies on Critical Raw Materials," you make the case that supply chain visibility will become increasingly important in the critical minerals space. Please briefly explain why.

    Simon Moores: We've noticed that during the rare earth element bubble in 2010-2011, people didn't know what these niche minerals that go into everyday critical technologies were or where they were sourced. We've seen that knowledge grow in the last five years and downstream companies like Apple Inc. [AAPL:NASDAQ] and Tesla Motors Inc. [TSLA:NASDAQ] are now aware of what the raw materials are and where they come from.

    Awareness in these niche minerals of growing importance, such as graphite, lithium and cobalt, is now occurring throughout the supply chain and not just in the upstream portion with the mining or processing companies. The downstream companies are paying attention and they buy the raw materials to manufacture these disruptive technologies. Supply chain visibility is rising.

    Andrew Miller: Supply chains are going to become increasingly important. As these new technologies rapidly develop, both traditional industrial end users and newer high-tech buyers of these raw materials need to know more about the global supply pattern-factors that can impact their business. It's basic risk management in today's world.

    They can't just rely on their traders or distributors for intelligence. End users are now aware of the need for a more global, independent picture on supply, demand and prices.

    TGR: Is that happening?

    SM: We haven't seen companies completely change their raw materials buying patterns yet, but some are preparing for it. In the U.S., the Conflict Minerals Act was the first time specific political restrictions have been put in place for these minerals in the West for ethical reasons. Europe will introduce similar legislation early next year.

    The industry will have to start thinking about buying from reputable suppliers that meet certain standards. That means that end users may no longer opt for the lowest-cost source of raw materials from places like China and Democratic Republic of the Congo [DRC] if producers in these regions don't fall in line with environmental or ethical rules. And that is key. It's not just about price anymore. It means people will start paying a premium for more ethically sourced raw materials.

    TGR: In the same Benchmark report you suggest that disruptive technologies are the most important new market for critical minerals. What are disruptive technologies and what are two or three specific ways these technologies are changing the markets for critical minerals?

    AM: Disruptive technologies are completely new markets that are creating new value chains, products such as smartphones, electric vehicles and different types of energy storage. Growth in these new markets are affecting not only their own supply chains, but also those of existing industrial markets that rely on the same raw materials.

    In the longer term there will be a real need for new critical mineral supply to come onto the market. In many cases that's also going to require suppliers to become more flexible. It's not just the production out of the ground that's going to have to increase; the refining and processing capabilities have to improve and expand too. The material required by traditional critical minerals markets is quite different and more tailored from the majority of product that is needed in these new high-tech spaces.

    TGR: So companies developing these critical minerals projects not only have to get these elements out of the ground, but then they also have to process them in such a way to meet the specific requirements of these new end users, which can vary greatly.

    SM: That's right. The grades that the critical minerals sector has traditionally served up and that have become industry standards over the past few decades are now changing, and that's why critical minerals like lithium, cobalt and graphite aren't really commodities. They can't be mined out of the ground in large volumes and directly used; they are tailored specifically for the end user.

    With commodities it is more of a logistics game, with critical minerals is a processing game-this is where they are fundamentally different.

    TGR: And that is often without any firm commitment from the end users. Is the traditional offtake deal dead in the critical minerals market, at least in specific cases?

    SM: Offtake deals are familiar financing methods for resource companies, but it's difficult to apply that model to these minerals, which are specialist products. Critical minerals are not usually traded in the volumes that offtake contracts often serve, like, for example, iron ore. If these markets grow to reach huge volumes in the future, perhaps then they will be traded in the same way as large-scale commodities.

    TGR: Lithium supplies appear tight even before Tesla Motors' Gigafactory and similar factories around the world start producing lithium-ion batteries. Please give us a brief lithium market overview.

    SM: A lack of new supply coming onstream over the last three years in the face of steadily increasing demand from the battery sector, especially in Asia, has resulted in a lithium shortage. This lithium demand is not coming from a new megafactory like the Tesla Gigafactory or an expansion from LG Chem Ltd. [051910:KSE; 051915:KSE; LGCLF:OTCPK] or Panasonic Corp. [6752:TYO; PCRFY:OTC]-it is coming from existing plants making more batteries for mobile phones, laptops, and power tools, which are all migrating toward lithium-ion. We're seeing a natural increase in demand with a lack of new supply, which has caused carbonate "spot" prices to increase by 20% on average this year and hydroxide by even more.

    Adding to supply problems are the well-documented political pressures in Chile where the government is revisiting the mining licenses of several operators in the Atacama Desert. It is an issue that Sociedad Química y Minera de Chile S.A. [SQM:NYSE; SQM-B:SSX; SQM-A:SSX] is dealing with at the moment, and one that has been well documented by Bloomberg.

    There is one new plant in the Atacama, a 20,000 tonne per annum carbonate plant owned by Albemarle Corp. (NYSE:ALB), that could provide some lithium to the market in 2015, but probably not enough to correct the market deficit.

    Orocobre Ltd. (OTCPK:OROCF) [ORL:TSX; ORE:ASX] continues to ramp up lithium production at its Olaroz lithium mine in Argentina, but to ask any new plant to reach its full capacity within a 12-month period is probably too tough an ask. But there are not enough new players like Orocobre entering the lithium space; they can't yet get the funding.

    TGR: Has Tesla CEO Elon Musk said where the elements of these batteries are going to come from?

    SM: Musk and Tesla have been very quiet on any deals they may or may not have made with suppliers. I do, however, expect Tesla to announce raw materials deals by the end of 2015 or the beginning of 2016. The Gigafactory will start production in some form in Q1/16.

    I still believe the first phase of the Gigafactory will be a pack assembly plant rather than a battery plant.

    Most of the initial manufacturing work will consist of taking lithium-ion cells from Panasonic and assembling them on a bigger scale in Nevada for Tesla's Model S and the new Model X, which is out in September.

    At Benchmark, we believe the Gigafactory will evolve into a true battery producing plant in 2017 where the anode [graphite] and cathode [lithium, cobalt] components will be produced on-site. Therefore, raw materials suppliers have roughly another year to finish off supply deals, and Tesla will have to make a tough call on which ones to back.

    TGR: Cobalt is a component in lithium-ion cathode for batteries. Tell us about the cobalt market.

    AM: Cobalt is similar to the lithium market in the sense that you have one or two large producers that dominate supply. The DRC is where the majority of the raw material is produced. Outside of the DRC, cobalt is produced in a number of countries, but all of that production is limited and there's little capacity for short-term expansion. The key issue with cobalt is security of supply, particularly with the increased demand from the battery sector. Over the past five years or so, cobalt demand from the battery sector has increased threefold, and 2014 battery demand made up 45-50% of the total market.

    TGR: Cobalt prices have slipped some over the summer. Is that the beginning of a downturn in cobalt prices or a summer dip?

    AM: It is more of a short-term trend than anything. When we look at the macro dynamics for the cobalt market, supply is tightening. In H2/15 and certainly into next year we're going to see the market move into deficit, and that will obviously prompt rising prices.

    TGR: Graphite is probably one of the most misunderstood markets that The Gold Report covers. Please dispel some of the common graphite market myths.

    SM: First, it's not just about volume. Graphite is a niche market, so if a firm is trying to develop a graphite mine, it is going to have to examine the volumes end users use, the growth in those areas and whether it can tailor a specific grade for that customer. Saying that, if a company is going down the volume route and wants to produce in excess of 50 Kt annually, then it needs a unique deposit. Not every graphite deposit can yield 100 Kt per year that can be sold into multiple end-use markets.

    TGR: Is grade overrated?

    SM: High grade obviously helps project economics but grade isn't necessarily king. You can have high-quality graphite at a low grade. A lot of the deposits that are commercially active grade 3-7% graphite. But what we're seeing now in the graphite industry is the result of five years of intensive modern-day exploration that has uncovered some of the best graphite deposits the industry has ever seen. The industry can really choose which one to bring to market-it's a very strong position to be in.

    TGR: Do you believe in graphene from natural graphite?

    SM: Graphene is one micro layer of graphite and isolating that one layer from a flake source is proving too difficult at the moment. Three layers is the accepted standard for now and end users appear to be happy with this new form of nan-graphite. I believe that graphene has great long-term potential. The question is when. I think we're looking at in excess of 10 years.

    TGR: Have batteries overtaken refractories as the major market for graphite?

    SM: The significant demand growth in graphite is all about batteries. For an article in our Battery Special, the second issue of our magazine, Benchmark took production and export numbers from China since 2009, and the average growth rate in battery-grade graphite production has been 27% compounded for the last five years, which surprised us considering that for the majority of that time people have assumed that it's been a down market.

    At Benchmark, we also like to crosscheck our data and analysis with other mineral industries used in batteries.

    If you take cobalt's threefold demand increase in the last five years or the fact that lithium is now in shortage, it's clear that batteries are no longer a prospect but an immature industry that is here now and growing.

    TGR: You're about to embark on the Benchmark Mineral Intelligence World Tour. Tell us about it.

    SM: We will offer a series of free seminars that examine the battery supply chain and the raw materials that fuel it. We start our World Tour in London on Sept. 11 and continue in New York, Toronto, Vancouver, Hong Kong, Tokyo, Sydney and Melbourne. These are the world's mining investment hubs and places that have shown interest in the battery supply chain. People can find more information by visiting Benchmark Minerals and clicking the World Tour tab.

    TGR: Please share one tidbit for investors to keep in mind as they conduct their due diligence on critical minerals equities.

    SM: Don't treat critical minerals like commodities. The basic process of analyzing commodities has relevance to specialist minerals but they're not entirely the same. Critical minerals are niche products at this stage that require a long-term outlook. It is no surprise that the people that invested in the critical minerals supply chain in the past-namely Japanese and Korean companies-are long-term thinkers. These companies now control the majority of these supply chains. A longer-term way of thinking is crucial.

    TGR: Thank you for talking with us today, Simon and Andrew.

    This interview was conducted by Brian Sylvester of The Gold Report and can be read in its entirety here.

    Simon Moores is managing director of Benchmark Mineral Intelligence, an online publishing and consultancy business specializing in critical minerals and metals, disruptive technology and emerging markets. Moores has also worked as a business journalist focusing on non-metallic minerals such as lithium, graphite, rare earths, potash, TiO2 pigment and feedstocks such as rutile and ilmenite.

    Andrew Miller is an analyst at Benchmark Mineral Intelligence and specializes in the first-hand data collection of niche minerals and metals, especially graphite, lithium, cobalt and fluorspar. Miller's primary role at Benchmark is price collection for these industries and creating and maintaining indices including Benchmark's new Graphite Price Index.

    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 a list of recent interviews with industry analysts and commentators, visit our Interviews page.

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