Rare Earth Stocks Show Signs of Life, But Will The Uptrend Stick?

The New York Times recently published an article discussing this further, stating that a cheese pizza costs $30 in Brazil due to a host of factors. This is another example of why the average Brazilian citizen is upset.

The inability of governments to manage the demands of their citizens has serious implications for foreign direct investment. Citizen demands for more wealth can also drive resource nationalism, which has been a major problem for mining companies in recent years. As a commodity investor, this is a serious consideration and is why I favor miners with deposits in the safest geopolitical jurisdictions.

TMR: Based on most economic data, growth in China is slowing. What are the implications of an economic downturn in China for the junior resource sector?

CB: We’ve seen the effects of a China slowdown in the commodity complex since 2011 when many commodities topped. Since then, commodity prices of all types have suffered. With China as the world’s largest producer and consumer of numerous commodities and the Chinese GDP growth rate targeted for 7.5%, down from 10% just a few years ago, this implies lower demand for commodities.

It’s important to keep in mind that China, growing at 7.5% a year today, is a much bigger economy than China growing at 10% a few years ago. It’s growing from a larger base despite the lower growth rate. China is slowly rebalancing and opening its economy, which is another plus in the longer term. We can see this in a number of ways, most recently with the increasing number of currency swap deals that the country is entering into with other countries like the UK, Australia, Brazil, Singapore, and South Korea. The goal is to begin to establish the Chinese yuan as a trading and, ultimately, reserve currency. This is a positive development in the long run. It’s a positive development for the entire commodity complex.

Let’s also not forget that the emerging middle class extends well beyond China. Although economic growth has slowed in other countries like Brazil, as we have talked about, or Indonesia, the long-term picture for the average citizen in these countries, striving for and attaining a higher quality of life, is still very much intact. I’m a firm believer in the thesis that no middle class has either sustained itself or increased its standard of living without access to reliable and affordable energy. This is why I’m so optimistic about commodities over the longer term, in particular the energy metals that I tend to focus on. This is despite the current economic headwinds.

TMR: And China is not the only story out there, is it? There are also the other BRIC and developing countries.

CB: A lot of ink has been spilled about the commodity supercycle being over. I just don’t believe it. The commodity supercycle is evolving toward being more consumer centric.

We’re on the verge of witnessing what I call “the acceleration of affluence.” By this, I mean more people than ever are experiencing a higher quality of life, and they’re experiencing it faster than ever before. To date, the commodity supercycle has been dominated by infrastructure investment, and I don’t expect that to stop outright. But I think you’ll see consumer demand become an increasingly large part of this supercycle in the coming years.

Due to the ubiquity of technology, anybody with an Internet connection can access high-quality education for free on websites like Coursera.com or EdX.org. I think it’s important to remember that quality of life is about more than just owning a car or an iPhone. It’s about self-worth and a longer and healthier life. Advances in technology are allowing this to happen for more people than ever before in human history. This paints a very positive picture for commodity demand going forward—if you can handle the volatility.

TMR: The metals prices are pretty transparent compared to unemployment and GDP numbers. Do you think investors pay too much attention to metals prices and especially to the bottoming of metal prices?

CB: Prices are certainly less convoluted than macroeconomic data. I think your question speaks to the ability to accurately time the market. Calling a bottom can be very lucrative, but it is very difficult. I prefer to look at economic data in metals or minerals usage to understand when a cycle has turned. It’s possible to bottom and stay there a long time. V-shaped recoveries are preferred, but rare. The quote attributed to John Maynard Keynes comes to mind: “Markets can remain irrational longer than you can remain solvent.” So this implies the need for patience and courage in your investing discipline today.

One of the most beneficial indicators I use is statements from end users of given commodities and participants along the entire supply chain. As an example, I pay particular attention to statements made by management from Rockwood Holdings Inc. (ROC:NYSE), the largest lithium compound producer in the world. Or I look at a company like GrafTech International Ltd. (GTI:NYSE) or SGL Group (SGL:XETRA) to gauge any imbalances in supply and demand for graphite. Right now, for most industrial metals, I just haven’t seen enough evidence of a turn to convince me that a new metals cycle has begun. With earnings season in full swing, I’m anxious to hear what a number of CEOs across different commodities are seeing in their respective markets.

TMR: If GrafTech International is your graphite bellwether, what companies would you consider as potential investments in this space?

CB: Despite the underperformance of graphite shares in 2013, the long-term value proposition is still intact. That said, there likely won’t be a need for more than a couple of new deposits to integrate into global supply chains, so speed is of the essence for graphite companies. GrafTech released its Q2/13 earnings this morning and discussed a very challenging environment dominated by declining steel production and overcapacity in the graphite electrode business. Pricing power is a problem and this presents a stern near-term challenge for graphite juniors.

As investors, you can either invest in early-stage companies with lots of question marks that may make discoveries and dramatically increase their share prices, or you can exert patience and invest in more sustainable stories with proven management, advanced studies on their deposits and clarity around capital expenditures. Both methodologies have their pros and cons.

We know a great deal about Northern Graphite Corporation (NGC:TSX.V; NGPHF:OTCQX) and its Bisset Creek deposit. While the company awaits approval of its mining lease, we can also anticipate an updated bankable feasibility study to enhance the overall economics. A new resource model and mine plan will be included as well.

Northern Graphite has also proven to the marketplace that its graphite concentrate can be used to produce spherical graphite—ideal for use in the lithium-ion battery business. This value-added processing is a way that the company can enhance its margins in the future. Many people who invest in graphite are hung up on the importance of grade, but I think there are more important issues to consider, such as what is the composition of the company’s deposit, what will it be producing, who will it be selling it to and in what volumes? These issues really drive the economics of a graphite company more than anything.

Flinders Resources Ltd. (FDR:TSX.V) has rebounded nicely due to the fact that it has recommenced sales of previously mined graphite to customers in Sweden and Germany. So we now know that the processing portion of the operation is functional. This validates Flinders’ product and is a major positive catalyst. The company also announced that the metallurgy of the Woxna deposit has exceeded expectations by demonstrating very strong recoveries (96%+), as well as larger flake sizes and higher purities than the past operators could achieve. As the company prepares to publish a preliminary economic assessment, news like this will help the overall economics and we’ll have an initial sense of capital and operating costs.

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