The Metals Report: Recently, you've been writing about the beginning of a new inflationary cycle and an uptick in inflation. How does the new inflationary environment differ from where we've been since the financial crisis?
Jeb Handwerger: For several months, there has been a surprising rebound in the Chinese and Asian markets as evidenced by strong demand and associated price increases in iron ore, copper, industrial metals, uranium, the heavy rare earth elements (HREEs) and platinum. For a long time, investors predicted a hard landing in China—and they have been wrong. As a result, we're seeing a very powerful "risk-on" rally. Investor expectations over the past couple of years have been for deflation and the associated "risk-off" trade. The situation is beginning to flip and inflation expectations are beginning to creep back into investors' minds. The early investors and the smart money are making "risk-on" trades as equities hit new highs and as investors flee currencies.
The numbers show that the Chinese economy is rebounding strongly. Banks are lending, and investments for commodities are increasing. After almost two years of economic contraction in China, I believe the Chinese economy decisively turned upward as of year-end 2012. For approximately the last two years, metals prices consolidated while the bond and the equity markets rallied. Notably, the bond market rallied before the equity market. Times when bonds and equities outperform commodities are usually predictive of inflation. Eventually, profits should flow from equities to commodities in the traditional inflationary business cycle. It is only a matter of time before capital hits the commodity and junior mining markets.
I believe the strongest evidence that an inflationary rally has started is the outperformance of industrial metals, as well as precious metals that have an industrial component, such as platinum and silver. Copper is beginning to outperform gold. For the past two years, as markets were risk-off, gold outperformed. However, from 2000 to 2008 before the credit crisis, the industrial metals and the miners outperformed the risk-off assets. We're beginning to see a rotation from a deflationary cycle to an inflationary cycle. All the money that's been pumped into the system by central banks worldwide and this competitive currency devaluation in order to boost anemic economies may be unleashing the beginnings of a long-term inflationary rally.
TMR: Do you think platinum will outperform gold in an inflationary environment?
JH: Investors who understand the long-term inflationary cycle should diversify across the metals, but now is a good time to be overweight in the precious metals that have an industrial component, such as platinum. The supply-demand fundamentals are better for platinum than for gold. Three-quarters of platinum supply comes from South Africa, and the strikes and labor disputes there are widely covered. North American platinum group metals (PGMs) miners are an alternative to South African miners. The most prominent miners in North America include Stillwater Mining Co. (SWC:NYSE), North American Palladium Ltd. (PDL:TSX; PAL:NYSE) and a developer, Prophecy Platinum Corp. (NKL:TSX.V; PNIKF:OTCPK; P94P:FSE), which has the Wellgreen project in the Yukon. Prophecy is interesting because a new management team has come aboard with mine-building and financing experience to take this project to the next level. The company could be a supplier of PGMs to the North American market.
On the demand side, we are seeing auto sales as the largest driver of incremental platinum usage. Auto sales in China are at record levels, with China surpassing the U.S. as the largest consumer of automobiles and General Motors selling more cars in China than it's selling in the U.S. All this new automobile production requires substantial PGMs. It is interesting to note that automotive sector troubles pushed the platinum price down during the GM bankruptcy. The large reduction in U.S. auto sales caused a big drop in platinum demand.
The last consideration for platinum over gold is the historically low relative valuation. Not that many years ago, platinum was almost 2.5 times more expensive than gold. Since then, it has dropped below parity. That is rare and has only been seen a few times in the past 30 years. Whenever that has occurred, it's been an excellent buying opportunity for platinum. Considering that platinum production is much smaller than gold production, this represents an excellent buying opportunity.
TMR: Do you favor miners over bullion for PGM exposure?
JH: Absolutely. First of all, miners in a "risk-on" rally usually outperform the bullion. Second, miners provide great leverage to an increasing bullion price. If you find the right projects, the right management teams, in the right jurisdictions—all of which are crucial for mining investing—then these projects could be a great opportunity for early-stage investors. The majors are going to have to look for projects in mining-friendly jurisdictions, and there needs to be a secure supply of platinum for the North American automobile sector.
TMR: You mentioned Prophecy Platinum. Do you have an update on the company?
JH: The new CEO, Greg Johnson, has a huge amount of experience. He was a co-founder of NovaGold Resources Inc. (NG:TSX; NG:NYSE.A). Given the supply-demand fundamentals, there is going to be a time, and the time is coming soon, where these deposits become extremely valuable.
TMR: Could rare earth elements (REEs) benefit from the increasing "risk-on" trade and inflation?
JH: Yes, but not just REEs—most critical metals, too. Not only is demand growing, but supply is tight. Markets we follow include heavy rare earth elements (HREEs), tungsten, antimony, molybdenum, graphite, niobium, PGMs and even thorium. These are some of the metals with tight markets that investors should begin putting on their radars over the next few years.
TMR: Do you have any specific miners that you would like to highlight?
JH: For HREEs, we like Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX). The most valuable elements that are in critical supply risk are the HREEs such as yttrium, dysprosium, terbium and europium. Ucore has a high grade and concentration of the HREEs at Bokan Mountain.
TMR: How close is Ucore to producing?
JH: Near-term production is one of the many reasons why I like Ucore. In 2012, Ucore was one of the few "Buy" recommendations that we maintained in the REE sector. Ucore recently announced a preliminary economic assessment (PEA), and there are many highlights to the project. First, Bokan may be the closest U.S.-based HREE project to production. The PEA suggests a construction timeline estimated at about three years, which includes the construction of a pilot plant. Ucore may be one of the frontrunners in the near-term race.
Ucore also released good news recently. One of the things that I've always liked about the company is the local political support. Ucore just announced that U.S. senators from Alaska, Murkowski and Begich, jointly introduced a bill in Washington to authorize construction of a road to the Bokan Mountain project. Political support is crucial because the legislative initiatives could expedite project development by the government.
Technology is also a differentiator for Ucore. The plan is to use solid phase extraction (SPE) nanotechnology. This is revolutionary and may transform the whole sector. SPE could result in lower capex by potentially having a refinery on site. SPE is a more advanced technology compared to the solvent exchange method used in China and elsewhere. Ucore has partnered with the U.S. Department of Defense and hopes to pilot this technology in 2013. An updated resource should be announced shortly. The bankable feasibility study will be based on the performance of the pilot plant. This is very exciting for Ucore and the entire industry.
TMR: What other types of miners do you believe will benefit?
JH: We've been looking at mixed deposits of uranium and REEs. The uranium price has begun trending up on supply concerns. There are two companies that I follow that have both the uranium and the REEs deposits.
One of the two companies is U3O8 Corp. (UWE:TSX; OTCQX:UWEFF). It has a very interesting deposit in Colombia called the Berlin deposit. That deposit has a newly released PEA showing zero cash cost uranium production because of byproducts credits from REEs, vanadium and phosphate. Investors need to realize that the PEA covered only one section of a large property, so there's a lot of room to grow there. This deposit may be of interest to some larger miners in the future as an acquisition target.
TMR: You were mentioning another developer with a combined uranium and REE deposit?
JH: Yes, that is Pele Mountain Resources Inc. (GEM:TSX.V) with the Eco Ridge mine in the Elliott Lake camp of Ontario. The Elliott Lake camp was a major producer of uranium and also commercially produced REEs. The company should be on investors' radar as well, especially if we see a rebound in uranium. As the uranium price goes up, the cash costs of producing REEs from this deposit become that much more economic. These are massive deposits and can provide a lot of REEs and a lot of uranium. Recent drilling shows a larger extent of mineralization and higher grades—there is a lot of this material in Elliott Lake. It could be producing uranium and REEs for a generation.
TMR: One company you mentioned in the past is Zimtu Capital Corp. (ZC:TSX.V). Any updates on the company?
JH: Zimtu is an investment company that focuses on the early-stage startup, getting in early on unique properties and strategic metals. It understands the strategic metals space. It has a network of prospectors and geologists. It looks for commodity opportunities. Zimtu shareholders have exposure to a wide range of commodities. If one of the holdings is successful and advances, the net asset value of Zimtu increases. Another benefit of Zimtu is its access to seed-level financings usually only reserved for industry insiders.
Zimtu gives investors diversified exposure to a basket of resources and companies at the ground-floor level, companies that are able to advance from the early stages to development and production. Its current portfolio includes exposure to graphite, niobium, REEs and precious metals. It is also investigating new materials, such as fluorspar. Zimtu is a good way to get diversification across a basket of strategic metals, without making a single concentrated bet on one company.
TMR: Are there any other unusual companies or strategic metals that you are watching?
JH: Antimony is also a strategic metal, most of which is supplied by China. The Chinese had a producing mine in Atlantic Canada called the Beaver Brook mine. It was a large producer of antimony, but it is not currently in production. There's a small company called Great Atlantic Resources Corp. (GR:TSX.V) that's looking for tungsten and antimony in Atlantic Canada. It's early stage, but the company has a strong technical team. People who know Atlantic Canada may know it's an area with producing antimony and tungsten mines.
Great Atlantic is looking in the right area and has the right people. It's a ground-floor opportunity in of the best mining jurisdictions in the world.
TMR: To bring it back to how these investments fit into a portfolio—what should investors be looking for in the market in this inflationary cycle?
JH: Investors must be willing to accept that these markets are extremely volatile. We have just lived through a long and painful downside. The reversal, when it comes, will be powerful. There have been trillions of dollars pumped into the financial system by central banks worldwide. This may be unleashing long-term inflationary forces. This challenge could be with us not only over the next couple of years, but possibly into the next generation, perhaps with gut-wrenching price increases.
This is why I maintain a long-term position of diversification across the precious metals, uranium and strategic metals. Short to medium term, we're in a consolidation phase. Eventually, the capital will flow to the quality, which are the cheap commodities and undervalued miners. It's important to be patient in these sectors and to realize that these may be excellent discount buying opportunities.
You have to understand that most bear markets last 18 months. In order to be successful in the market, 99% of the people have to think you're wrong. In order to make money in the market, you have to buy sectors that are undervalued and are off of the majority of investors' radar and out of the mainstream news. That's why we're in the hard assets. The smart money, the billionaires such as John Paulson and Carlos Slim, what are they buying? Miners. Precious metals. Hard assets. And they are not the only ones.
TMR: Thanks for talking with us.
JH: It has been a pleasure.
Jeb Handwerger is a newsletter writer who is syndicated internationally and known throughout the financial industry for his accurate and timely analysis of the equities markets—particularly the precious metals sector. Jeb Handwerger will be presenting his thoughts on how to select good investments in the resource sector at the upcoming PDAC 2013, taking place at the Metro Toronto Convention Centre March 3–6.
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DISCLOSURE:
1) Alec Gimurtu conducted this interview for The Metals Report and provides services to The Metals Report as an employee or as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Metals Report: Prophecy Platinum Corp., U3O8 Corp. and Zimtu Capital Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Jeb Handwerger: I or my family own shares of the following companies mentioned in this interview: Pele Mountain Resources Inc., Ucore Rare Metals Inc., Great Atlantic Resources Corp. and Zimtu Capital Corp. I personally or my family am paid by the following companies mentioned in this interview: None. My company has a financial relationship providing corporate development and consulting services with these sponsors on my free website and newsletter with the following companies mentioned in this interview: Prophecy Platinum Corp., Ucore Rare Metals Inc., U3O8 Corp., Pele Mountain Resources Inc., Zimtu Capital Corp. and Great Atlantic Resources Corp. See all my sponsors and disclaimer by clicking here. 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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