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Friday, September 24, 2010

DYSPROSIUM WAR: CHINA HALTS RARE EARTH EXPORTS TO JAPAN.

Japan today announced that it is releasing the captain of a Chinese fishing boat arrested two weeks ago in disputed territorial waters of two uninhabited islets you've never heard of in the East China Sea. China quickly declared economic war, suspending shipment to Japan of dysprosium, a rare earth metal of which youve also never heard. Dysprosium is highly valued for its magnetic coercivity, a property of which youve also probably not heard. Dysprosium is important in the production of hybrid cars, such as the Toyota Prius. So why do rare earths have to come from China? They don't; rare earths (the lanthanide series plus scandium and yttrium) are actually fairly abundant in the Earth's crust, but 20 years ago China began marketing rare earths at well below production cost, forcing mines outside China to shut down, creating a monopoly. For other nations, including Japan, to resume mining would involve considerable delay. The word "dysprosium" is derived from Greek meaning, "difficult to get at."

Source >> http://bobpark.physics.umd.edu/
 
You Don't Bring a Praseodymium Knife to a Gunfight
China thinks it can withhold its exports of obscure but important minerals to get its way with its neighbors. Why it picked the wrong weapon.
BY TIM WORSTALL | SEPTEMBER 29, 2010


Click the link below to read the enlightening article
http://www.foreignpolicy.com/articl...-a-praseodymium-knife-to-a-gunfight?page=full

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It has been a long time coming, but it is so nice to see some enthusiasm returning to the market. I'm seeing it here on ASF where people are starting to talk stocks again. Money is also going into the resource sector with some fabulous results (ie. PEK). So people are starting to play higher risk stocks again. I breath relief.
 
October 04, 2010

Metals And Bonds Both Rise, Indicating That The Market Has Yet To Decide Whether Inflation Or Deflation Is The Greater Threat
By Rob Davies
www.minesite.com/aus.html [Free Registration]


Investing has always been about securing returns - the best returns. In the past achieving that goal has often involved reliance on a lot of educated one-way bets. These days, though, the pioneering work of Harry Markowitz and others in developing Modern Portfolio Theory is beginning to show through in a big way. The concept is quite simple: asset diversification can increase returns by reducing risk, even if some investments underperform. It’s all about not putting all your eggs in the same basket.

Coincidentally, acceptance of this idea took root at the same time as the dramatic improvement in connectivity that the world experienced with the advent of the internet. Not only has the importance of different asset classes now been recognized, but the ease and ability with which one can invest in them has improved. Any change, positive or negative, in one asset is now rapidly detected by the market, and adjustments made accordingly.

Frustratingly, though, this combination of improved theory and communications has actually made the business of investing even harder because the market has become ultra-efficient and price distortions are harder to exploit. Fortunately they have not completely disappeared, and that is partly because not everyone believes that the price moves are genuine.

Last week base metal prices, as measured by the LME Index, rose by a healthy 0.9 per cent, but that lagged the 1.9 per cent advance made by gold. It was, though, in line with the rise in equities in major markets. All of which have to be seen in the context of a 2.1 per cent slide in the dollar.

In the short term these moves can be confusing and disorientating. What a credible investment process needs is a long term strategic asset allocation, so that short term moves in asset prices can be exploited to the investor’s advantage without them having to second guess what each move means. Even though all asset prices are rising at the moment some will be rising faster than others. And that provides an opportunity to rebalance portfolios by trimming some assets and topping up on others.

The key to this process is to have a clear understanding of the current environment and what this could mean for the future. While the market might be efficient for today’s scenario, it doesn’t mean that it is correctly discounting what might happen next. The battle in the minds of investors between the need to protect assets and the need to grow assets is beautifully reflected in the simultaneous rise in prices for bonds and metals.

Bonds are viewed as safe and unlikely to hurt investors, especially if deflation becomes embedded in the western world, as it has done in Japan. The risk that inflation will erode capital value is regarded as less important. Conversely, metals provide no income but will protect holders from the ravages of inflation.

The bizarre fact is that rising prices for both bonds and metals suggests that the markets are equally worried about inflation and deflation. Both views cannot be correct, and it remains to be seen who will be proved right. But at least as insuring against the return of inflation is concerned, holding metals as part of diversified asset allocation strategy continues to make a lot of sense.
 
October 11, 2010

Commodities Hit Multiple Highs Again, But Analysts Will Continue To Err On The Side Of Caution
By Rob Davies
www.minesite.com/aus.html [Free Registration]

Much of what passes for news these days is actually speculation about what an upcoming report might say, or what prominent businessmen or politicians might say, or do. The media is also keen on punditry as regards stock markets, interest rates, exchange rates and commodity prices.

But almost without fail the opinions expressed publicly are close to the current consensus, with a variation of 10 per cent to one side or the other.

Yet the big money is to be made in really large calls that might take decades to play out. If anyone had told Gordon Brown not to sell gold at US$300 an ounce in 1999 because it would be worth over US$1,000 more in ten years time he or she would have been laughed out of the Treasury.

In a similar vein anyone forecasting a tenfold increase in the price of nickel, or a fourfold rise in copper over the first eight years of this century would not have been given house room at the Association of Mining Analysts. In practise, it is far safer to take the current price and add 10 per cent for next year’s price target.

But that misses the point. What really matters are major geopolitical events like the rise of China, the creation of a shadow banking system in the US, democratisation of new countries and the usual elbowing around of one country by another.

Right now, every country in the world is trying to devalue its currency in order to paper over huge fault lines in their respective domestic economies. Only Europe is not engaged in this process because even though it has one currency, it is not one country. The likes of Ireland and Greece are just collateral damage.

This process of global devaluation is doing wonders for commodities. Half a dozen of them hit new highs last week, including gold at US$1,364 an ounce, copper at US$8,261 a tonne, tin at US$26,500 a tonne , not to mention rubber and a bunch of other agricultural commodities.

Some, like those sages at the FT, argue that these price rises will ultimately desTroy these markets, as consumers look for cheaper substitutes. Widespread substitution is definitely a possible outcome in the current environment, but it would be difficult to execute when everything else is going up as well.

In reality the current price trends are not so much to do with the metals going up, as the dollar going down. The dollar’s one per cent fall over the week is certainly not being viewed as anything approaching the end game, given the rumours about the launch of a second round of quantitative easing.

A bold analyst now would say that in view of the approach taken by all financial authorities, but especially by those in the US, the price of gold is likely to double in the next few years and possibly increase tenfold in the next few decades.

And if that were to happen, other commodities, including base metals, would all experience strong nominal gains, although probably not to the same extent. The only mechanism that might prevent this would be the appointment of a new, monetarist, Chairman of the Federal Reserve.

It was one such appointment, that of Volcker in 1979, that slayed the inflationary dragon in the late seventies and early eighties. Unless, and until, that happens hard commodities look like a one way bet. But don’t expect any serious analysts to forecast US$2,500 gold until it gets to US$2,400.
 
October 13, 2010

A World From Upside Down: A Private Investor’s View Of The Growing Strength In Commodities
By Susie Boeckmann
Source: www.minesite.com/aus.html


Interesting times for some of the Minesite team. One is preparing to spin off another company (think it’s a girl). Another key player has just completed high definition drilling and results are eagerly awaited. DFS to follow (get well soon Charles). Meanwhile, this occasional contributor and private investor, on constant exploration watch, is now looking at blue sky for three months (broken vertebrae from car crash).

One small positive in that otherwise dismal development is the opportunity for stepping aside from the hustle and bustle to consider the complexities of today’s mining scene from a broader perspective, and especially the obvious two tier differences that are emerging globally. With output and workforce not about to grow in Europe and US in the foreseeable future, the growing fight between countries to devalue their own currencies has made the long-running arguments of believers for investing in commodities ever stronger.

Minesite began several years ago, keenly supporting companies and the mining community. Many of those companies have now made the transition from exploration to production, whilst retaining exploration upside. Some are even paying regular dividends or are predicted to do so shortly.

If one looks beyond the mainstream media, and talks instead directly with the mining companies, it transpires that the companies and their directors are cautiously optimistic. Those with good exploration projects are raising finance, often from within the mining community itself, or from high net worth individuals. Finance houses are also loosening the strings as they see the increasing upside in the commodity cycle against other asset classes.

IPOs are emerging again and companies are spinning off various assets into new vehicles, as their exploration target burgeon, and some move towards development. Following on from the global financial crisis, many companies that have survived are lean, careful, and, what’s more interesting, cash flow positive.

And in spite of the Australian problems over the proposed mineral resources tax, and unrest and uncertainty in South Africa, those mining iron ore, coal, zinc and other base metals are making record profits, and gold looks likely to go higher as long as currency volatility continues and Asia prefers to continue on in its historical addiction to gold.

Ever better exploration methods are available, therefore revealing new prospects for ongoing exploration. Parts of Africa are emerging as major mining centres, and in areas which would have been inconceivable five years ago. Burkino Faso, Mozambique, and Eritrea have both started to emerge as serious mining jurisdictions, and both now play host to serious mining operations and even more development opportunities.

Other parts of the world may be regressing but, all told, there has never been such an exciting time for the private investor to research, network and travel the world, forgetting government cuts, strikes, unemployment, and the relative merits of the US and China. Far better to be on the ground with an intrepid mining company, and part of an intrepid mining community.

So roll out the blue sky, says this investor lying on a flat bed (not truck) for the next three months, buckle down, and get researching! Minesite will be with you all the way.
 
October 16, 2010

That Was The Week That Was ... In Australia
By Our Man in Oz
www.minesite.com/aus.html [Free Registration]


Minews. Good morning Australia. So, now that you’ve scaled the heights of dollar parity, what next?

Oz. Interesting question, and one which has a lot of people scratching their heads. I’m one of them, but my head scratching is taking place in New York, where I can say that having suffered the problems of shopping with an Aussie dollar valued at just US60 cents a few years ago, and even with the Aussie as low as US48.5 cents in 2001, it feels pretty damned good to be getting one US dollar for one Aussie dollar, especially as some people used to call ours the South Pacific Peso.

Minews. Good for your bar tab, but what does it mean for the market?

Oz. Uncertainty. That’s the short version of how things look through Australian eyes. The market last week was pretty nervous, as a global currency war threatened to escalate into a full-scale trade war. For a country heavily dependent on exports, even if the exports are mainly raw materials, a trade war could be pretty costly. The other big issue for Australia is working out who our best friends are. The US, with its protective military umbrella and decades of alliance, or China, which is where the money is coming from?

Minews. Interesting times, indeed. Across to the markets now with a run-down of the week’s prices, please.

Oz. It will have to be an abbreviated report this week because of the time difference we’re dealing with, but the big event for Australian financial markets last week was the push to parity. This is starting to cause a few domestic problems. You can see where the problems lie by a quick reckoning up of the scores on the different market indices. Metals and mining added 2.3 per cent last week, as commodity prices continued to rise, at least in US dollar terms, but the all ordinaries could only manage a rise of 0.3 per cent, as currency issues hit exporters not exposed to commodity prices. The gold index was also muted as the currency effect cut in, posting a modest rise of 1.4 per cent.

Minews. Let’s look at gold first, because that remains the hot commodity as the US accelerates its paper-money printing experiment.

Oz. Gold stocks were up, as you would expect, but most rises were not significant, and we even had a few falls too. Top performer was Alkane (ALK), shares in which are being driven as much by its rare earth assets as its two promising gold investments. Alkane added A26 cents to close at A$1.06, but did reach a 12 month high of A$1.19 on Thursday, five-times its low for the year of A23 cents. Avoca (AVO) was the second best performer, putting in a rise of A40 cents to A$3.30, but they were the stand out performers. Other gold stocks to do well, but not by much after a very weak Friday, included Medusa (MML), up A26 cents to A$5.51, Kingsgate (KCN), up A20 cents to A$12.15, Perseus (PRU), up A9 cents to A$3.00, Troy (TRY), up A3 cents to A$3.52, and Ampella (AMX), up A4 cents to A$2.49. Meanwhile, Eleckra (EKM) which seems to be attracting a steady increase in interest, added A1.5 cents to A15.5 cents. Among the few companies to swim against the modest upward trend was Azumah (AZM), which slipped A3 cents lower to A61 cents, and Adamus (ADU), which lost A4.5 cents to A63.5 cents.

Minews. Over to iron ore, as it seems to be attracting revived interest.

Oz. Among the iron ore companies Fortescue Metals (FMG) generated the most interest, as it continues to plot a major production expansion, perhaps inspired by the failure of BHP Billiton and Rio Tinto to win German approval for their big iron ore merger. On the market, Fortescue rose by A34 cents to A$6.14. Atlas (AGO) was another winner from the ongoing uncertainty in the iron ore trade after the big merger was sidelined, and added A13 cents to A$2.68. Other iron ore companies on the rise included Sundance (SDL), up A2 cents to A30.5 cents, Brockman (BRM), up A12 cents to A$3.86, BC Iron (BCI), up A12 cents to A$2.11, and Gindalbie (GBG), up A6 cents to A$1.05. Among the few iron ore companies to lose ground was Territory (TTY), which slipped A1 cent lower to A31.5 cents. Sherwin (SHD) was also weaker, down half a cent to A22 cents, and Northern Iron (NFE) was chopped back a sharp A19 cents to A$1.60 after announcing a big capital raising.

Minews. Base metals next please, starting with copper.

Oz. Star of the copper companies, although we’ve yet to find out why, was Marengo (MGO,) which shot up an eye-catching A10 cents to A27 cents. In the wake of that strength the company requested a voluntary suspension as interest grew in its selection of a development partner for its big Yandera project in Papua New Guina. Another company with a copper interest that was attracting support was Breakaway resources (BRW). Breakaway rose A2.2 cents to A8.6 cents on news that the Eloise mine in Queensland will re-open. Sandfire (SFDR) was another copper company that performed well, closing at a fresh high of A$8.04, up A56 cents over the week. Sandfire’s near-neighbour, Talisman (TLM) was less of a star, slipping A2 cents to A$1.14. Other copper movers included Rex (RXM), up A4 cents to A$2.81, OZ Minerals (OZL), up A7 cents to A$1.64, Equinox (EQN), up A21 cents to A$6.00, and Discovery (DML), down A16 cents to A$1.17.

Nickel companies were weaker, despite a nickel price of close to US$11 a pound. Mincor (MCR) lost A4 cents to A$1.97. Minara (MRE) fell by A4.5 cents to A78.5 cents. Western Areas (WSA) dropped A23 cents to A$6.34, and Poseidon (POS) closed at A18.5 cents, down A2 cents. Independence (IGO) was the only nickel miner to gain ground, putting in a rise of A54 cents to A$7.08, but that was largely thanks to interest in its gold assets.

Zinc companies were firmer, a continuation of a developing trend which might be a pointer to a better year for those with exposure to what’s become an almost forgotten metal. Perilya (PEM) added A7 cents to A58.5 cents. Kagara (KZL) gained A12 cents to A79 cents, and Blackthorn (BTR) closed A4 cents higher, at A73 cents.

Minews. Coal and uranium next, please.

Oz. It was a mixed bag for both coal and uranium. The best of the coals was Coal of Africa (CZA) which added A12 cents to A$1.50. Also stronger was Continental Coal (CCC), another of the Aussies exploring in Africa. Continental rose by A1.4 cents to A7.7 cents. Other coal movers included Whitehaven (WHC), up A6 cents to A$6.20, Aston (AZT), down A8 cents to A$5.82, and Bathurst (BTU), down A5 cents to A43 cents.

It was similar story with the uranium companies. Extract (EXT) was the best performer, putting in a rise of A78 cents to A$6.90. Paladin (PDN) also attracted revived interest, to recover recently lost ground with a gain this week of A44 cents to A$4.10. After that it was less interesting. Manhattan (MHC) slipped A7 cents lower to A67 cents, and Berkeley (BKY) added A13 cents to A$1.66.

Minews. Let’s finish with the tin and lithium companies, and any specials please.

Oz. The two tin leaders, Venture (VMS) and Kasbah (KAS), went separate ways. Venture slipped A1.5 cents lower to A57 cents, but Kasbah crept half a cent higher to A32.5 cents. It was the same with the lithium leaders. Galaxy (GXY) added A5 cents to A$1.40, but Reed Resources (RDR) slipped A2.5 cents lower to A54.5 cents.

Minews. Thanks Oz. See you in London next week.

Oz. Looking forward to it, especially with the Aussie dollar at 62 pence. It seems like yesterday that it was half that rate.

Minews. I guess means it’s your buy at the pub.
 
October 18, 2010

The Fed’s Policy On Inflation Will Lead To A Thirty Per Cent Erosion In The Spending Power Of Individuals
By Rob Davies
www.minesite.com/aus.html [Free Registration]

Inflation is like pregnancy. You either have it or you don’t. However, Ben Bernanke, Chairman of the US Federal Reserve, has formed the view that the US hasn’t got enough inflation - it still isn’t pregnant enough. So he has indicated that he will continue debasing the economy and the dollar, until he gets proper, full blown inflation with morning sickness to prove it. This time he has put a number on it: two per cent.

His mechanism for doing that is to declare an inflation target of two per cent and then buy US bonds to make sure that the target is hit. Bearing in mind that annual core inflation is currently only 0.8 per cent in the US he clearly has a job of work to do. In such an environment it is not surprising that the American peso dropped another one per cent last week, pushing gold to a record price of US$1,378 an ounce, and driving base metals up another 4.1 per cent, as measured by the LME Index.

What is intriguing about commodities at the moment is that they are benefitting from the perfect storm, with three factors all acting together to drive prices up. One, a lack of investment over the last three decades has left the industry with no spare capacity; two, China has emerged as a totally new, and large, source of demand; and, three, investors are fleeing to hard assets as paper currencies, especially the dollar, are being actively devalued.

Conventional economics tells us that higher prices should trigger higher supply but the fivefold increase in the gold price over the last decade has done nothing to increase output. Indeed, the industry struggles just to find enough gold to replace the 2,000 tonnes it mines every year. A related factor is that the currencies of many countries that host gold mines have risen against the dollar, so the local gold price has not risen as much.

More generally, the slow pace at which exploration and development has been taking place means that there often is a long lag between prices rising and development decisions on new mines. Even when economic deposits are discovered, the ability to finance them has been seriously reduced by the financial crisis. It is easy for an established credit like BHP Billiton to raise funds to buy an existing business in the developed world like potash. But try asking for a few billion for a new mine in an emerging market and you get a sharp intake of breath. Even the innovation of a coupon linked to the price of zinc did not allow Zincox to raise funds for its Jabali project in Yemen.

China’s rise and rise is doing more for base and industrial metals than it is for gold, but it provides a strong underpinning for all commodities, and there is no sign it is about to disappear.

But the scariest factor of all is the official recognition that the Uncle Sam now has an official policy of debasing the dollar. It is true that on the face of it two per cent doesn’t sound much. But take that over the couple of decades that an individual might be saving towards a pension and it amounts to a 30 per cent erosion in spending power.

In effect, last week’s statement from Bernanke has given gold a real interest rate of two per cent, even though its nominal interest rate is zero. Investors should now factor that into their analysis when looking at competing asset classes. It is bad enough contemplating a yield of 2.55 per cent on 10 year Treasuries. It is even worse when you realise that it is only 0.55 per cent in real terms.

Expressed in a different way the prevailing policy implies that in two decades time a gold price of over US$2,000 an ounce and a copper price of over US$12,000 a tonne are on the cards just to maintain valuations in real terms.

Have bond holders really thought how they are going to finance the 21st birthday party for this inflationary child of our times? Because it doesn’t look as if holding bonds will do the trick.
 
Great Power Politics and Energy Insecurity
By Zachary Keck

Summary: China's growing needs for energy and natural resources will lead to some tension and strategic competition with the West, but that ultimately China's and the West's long-term interests are aligned.

To read the full article, please click the link below:
http://www.foreignaffairs.com/2010_Student_Essay_Contest_Winning_Entry

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Rare Earths

In the New York Times, Paul Krugman says China's restriction of rare earths shows its government is "dangerously trigger-happy, willing to wage economic warfare on the slightest provocation."

Please click the link below to read to read the article:
http://www.nytimes.com/2010/10/18/opinion/18krugman.html?_r=1

The article has more than 300 comments from readers. To read them, just click in "Comments".

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November 01, 2010

Beware the bond market
By Rob Davies
www.minesite.com/aus.html [Free Registration]


Bill Clinton famously said he would like to come back as the bond market because it was more powerful than any government. Yet in this financial crisis holders of fixed income securities could not be more accommodating to the desires of nations to borrow like drunken sailors and then, buy in the debt through their central banks to raise its price.

This legerdemain has been accepted by the populace and the capital markets but it has all the credibility of that short period of time between the road- runner going over the edge of the cliff and then plummeting earthwards. Bill Gross, Le Grand Fromage at Pimco, the world’s biggest bond investor says that this tussle between states and the debt market has never been larger.

Indeed, he goes as far as to describe it as a huge Ponzi scheme. What is odd is that at the moment the states are winning. It is though only a matter of time, he asserts, before the bond market reasserts its authority.

There is no doubt that when that happens there will be the mother and father of sell-off in the bond market that will mark the definitive end to the 30 year bull market that has been underway since Paul Volcker tightened monetary policy in the US at the end of the seventies.

In the face of this impending tsunami why so many investors are still long bonds is a mystery to lots of people including Warren Buffet. Maybe bond holders reckon they can jump out of the way just before the wave of selling hits them. Possibly. More likely there will be disorderly queue to get out at any price resulting in prices gapping down in one big lurch.

This matters to other asset classes because it has huge implications for how much wealth will be destroyed in this process and how much will be left over to go into commodities and equities. Bonds represent the largest asset class in the world, followed by equities, property and commodities so its fortunes have enormous implications for the others.

These other asset classes benefit more from growth than bonds do. Recent data on this has been encouraging with surprisingly strong data from many countries including the US and the UK. Few governments have claimed ownership though as they know this recovery is not untypical after a sharp recession and much of the heavy lifting has been done by central banks keeping interest rates low and the injection of $1.75 trillion into the US economy from the first round of quantitative easing.

Like the First World War, when thousands of lives were lost to secure the advance of few hundred yards, this victory might be pyrrhic. There will come a point when the cost of success will simply be too high to be tolerated. That is when the challenge for other classes will arrive.

Where will the money coming out of bonds go? Will it sit on deposit in a bank and earn no interest or will it go into risk assets that have already started to move up? Is gold at $1,349 an ounce or copper at $8,320 a tonne already too high? In the Looking Glass of today’s economies that may not be the right question. Perhaps more relevant is what would happen to theses assets if even a tiny fraction of the global bond market moved across.

Here there is a one difference between equities and commodities. As we saw in the tech boom a decade ago it is easy to create more shares in a company; either through an IPO or by using them as currency for acquisition.

It is a very different story for commodities. Even a fivefold increase in the price of gold over that period has not increased supply from the two and half thousand tonnes a year it was. Copper has had a better supply response. Even so, mine output has only doubled as prices quadrupled.

Knowing that someone cannot easily increase the supply of something you have just bought is what gives commodity investors a warm feeling in their portfolios. Something bond holders will never get.
 
November 02, 2010

How To Make, Or Lose, A Fortune In Junior Exploration Stocks
By David Galland, Managing Director, Casey Research
Source >> www.minesite.com/aus.html [FREE REGISTRATION]

The first thing to know about junior resource exploration stocks is that they are volatile. You can make 50 per cent in a day, and you can lose 50 per cent in a day.

This is due largely to the fact that they tend to be thinly traded. Thus, a whiff of good news, or bad, can overwhelm opposing trades. In the absence of a countervailing bid, the stock can move sharply until it reaches the point that someone is willing to step up and take the other side of the trade. If the news is bad and there’s no bid, things get ugly really quickly. Conversely, if the news is good – for example, the recent case of the AuEx buy-out – the volume of buyers rushing to get a hold of stock can blow the proverbial doors off.

Is volatility bad? Not hardly. If you play these stocks intelligently, that volatility can act like a portfolio rocket booster. The alternative: a widely followed stock has little chance of surprising the market on the upside and so can tie up your capital for a long period of time – plodding along while you remain exposed to general market risk with almost no hope of serious appreciation.

By contrast, a junior exploration company punching holes into interesting geology is all about the potential for surprise. If the surprise is good, your stock is headed for the moon. But a poor drill hole is not necessarily a ticket to the basement – not if the company has not overinflated expectations by aggressive promotion and is following a methodical process in its exploration program.

The topic of aggressive promotion brings me to the second thing to know about junior resource stocks – namely, that many of them are borderline frauds. Many of the companies involved in the junior resource sector are headed up by management teams that have no special expertise in finding or developing economic deposits. Rather, what they’re good at is telling a really good story based on the loosest of “facts” in order to get investors to pay their overhead and, hopefully, allow them to trade out of their free or low-cost shares at a big profit.

While there are a number of signs you can look for that will give you some sense of the management’s abilities and ethics, one is that the bad apples will tend to shift their stated focus between breakfast and dinner, depending on the flavor of the day. One minute, they are a junior gold company, the next they are on to the world’s hottest lithium find – then sometime after lunch, they morph into being a uranium explorer.

That’s not to say that there aren’t times when competent management teams are faced with the reality that their primary resource target is going to draw a blank, and move on – it happens all the time. The trick is to be able to discern the difference between a strategic retreat and an opportunistic bunny hop into another area where the management has no real expertise or value to bring to the game.

The next thing to focus on is the size, and the general set-up, of the targeted resource. I saw an exploration company advertising on a major financial web site that was breathlessly talking about the 30,000 ounces of gold it had discovered.

Building expensive advertising campaigns around 30,000 ounces of gold – a truly inconsequential amount – would indicate that management is hopelessly ignorant of the realities of the business. And the reality today is that, depending on a number of variables – location, geology, local politics, metallurgy, infrastructure, etc. – the minimum resource required for a company to have any chance at success is in excess of one million ounces of gold. But, really, you should only be focusing on companies with the very real potential to prove up two million or more ounces.

In exploration plays, size counts.

And don’t confuse gross metal value with anything remotely resembling reality. In fact, any company that would even mention the gross metal value of its resource is sending you a very strong signal that something fishy is afoot. For those of you new to the game, gross metal value is derived by doing the simple math of multiplying the companies’ ounces (or pounds, depending on the metal) in the ground by the current price of the commodity.

Thus, a company with a market cap of, say, C$50 million and a resource in the ground of one million ounces of gold might tout a gross metal value, based on a gold price of US$1,250 per ounce, of $1.25 billion. The implication being that the market cap of the company will soon rocket in the direction of the gross metal value… wink, wink, get it while it’s hot and all that.

Now, I don’t have time to list all the ways that the gross metal value gets hammered down to a net that is a fraction of the total… and, more likely than not, even to the point where the deposit is uneconomic. But I’ll give it a quick try anyway.

For starters, there’s the cost of the infrastructure required to actually extract the mineral. While even the cost of building an open pit mine is huge, if the deposit is too deep for that, then you’re talking about going underground, which can be much, much more expensive. Depending on where the resource is located – and most new discoveries are very remote (Congo, anyone?) – and the depth and structure of the mineral resource, building out the mine infrastructure can cost in the hundreds of millions of dollars, and even billions.

Then there are local politics. For instance, how much of the mine will the government want to keep for itself? How high will the taxes and royalties be? Is the area secure? There are projects I’m aware of that, in order to be built, will require essentially maintaining a private army to keep local revolutionaries and thugs at bay.

How’s the metallurgy? Extracting metal from close to surface, oxidized deposits can be relatively easy and effective, with recoveries in the 90 per cent area. But if the target mineral is bound up with all sorts of detrimental minerals, the processing costs will soar and recoveries plummet… often to the point where the overall costs, and the challenges of disposing of the toxic waste, can torpedo even a very large project.

Mining requires a huge amount of power… where’s it going to come from? Can you imagine the cost and hassle of having to build, say, 60 miles of power lines? How about if the deposit is located in a remote corner of the Yukon?

I could go on and on… but you get the idea. There’s a reason that well over 90 per cent of even legitimate resource discoveries never become economic mines. That doesn’t mean you can’t make money off a discovery play – but if it has little chance of becoming a mine, then you need to be clear on why you own it and when it’s time to sell.

So, how do you sort out the difference between the good guys and the bad? And the good projects and the doomed?

First and foremost, you have to live and breathe the industry. Then you have to have a deep network to use as a sounding board for your analysis.

The bottom line on how to make serious money as a speculator in anything – the junior resource exploration business merely provides a convenient example – is to identify a volatile, high-risk/high-return investment sector, and then get to know the sector intimately. By doing so, you can eliminate much of the risk… leaving you mostly with the huge upside. And what risk is left is very manageable.

And don’t forget – I’m talking about investing only a relatively small part of your portfolio… 10 per cent to 20 per cent. You can tuck the balance of your portfolio into assets with a much lower risk profile. These days, that might include gold and, for the time being, cash.
 
HK mining discussion on apacresources site at mining confy - gives an idea on where mining is going in HK/Shangers/Mongolia. It has got a few resource specialists on the panel covering questions fired by audience.

Q1: Chinese people love risks yet we see a little amount of mining activity. What needs to be changed to increase the mining activity for junior mining sector here in Hong Kong?
Q2: What is your view with respect to Shanghai Stock Exchange now having an international listing? Do you see a threat to the Hong Kong Stock Exchange, if not this or next year?
Q3: We’ve had a number of talks during the conference on how Hong Kong is not sophisticated in mining and we have also talked about how Hong Kong offers higher valuation than other markets. Are they linked? Where
do you think the arbitrage period is?
Q4: The perception is that mining is new to Hong Kong, there is no expertise in Hong Kong. Do you see a risk or concerns, if any? Or because Hong Kong sees that cash is king so this is not a problem?
 
Silver gets no respect.

Silver has been the Rodney Dangerfield of commodities this year. Even this week, gold has grabbed headlines with a rally of 4%, but silver is up more than double that at 9%. As shown below*, silver is up 37.6% year to date, while gold is up 27%. Recently, when gold has been rallying, silver has been rallying even more.


* http://www.bespokeinvest.com/thinkbig/2010/11/5/silver-gets-no-respect.html
 

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