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Mickey Fulp: Race to Rare Earths Heats Up

-- Posted Friday, 22 January 2010 | | Source:

Mercenary Geologist Mickey Fulp says that 2009's "flavor of the year"—rare earth elements—will sport that same label in 2010. A major driving force, the momentum building in green technology, is expected to take global consumption to 200,000 tons annually by 2015 (from approximately 108,000 tons in 2007). At the same time, tight supplies will shrink further for at least another two or three years, until deposits outside China ramp up into production. Among the companies Mickey likes in the space are the integrated mine-to-market players. In this exclusive interview with The Energy Report, he also tells us he's bullish on uranium, too, but finds it scary to see likes of Kazakhstan emerging as the world's top supplier.

The Energy Report: 2009 turned out to be quite a successful year for equities even though a lot of the economic trends showed only mild improvement, if any. How would you summarize what happened in 2009?

Mickey Fulp: The markets were so beat up in 2008 that I think equities became a place of safe haven. A lot of cash—itchy money, if you will—sitting on the sidelines poured into equities. In times of financial duress you'll see times where equities become the preferred investment vehicles. It surprised everybody, I think, but 2009 turned out—especially in our junior resource sector—to be one of the best years on record.

TER: And what do you think 2009's performance means for 2010?

MF: I don't want to venture there right now. I am still digesting things that happened in 2009 and trying to make up my mind about where I see things going. Maybe we can talk about that the next time we talk.

TER: Certainly. You specialize in finding undervalued junior resource companies and clearly there were a lot of them at the end of '08. How does that picture shape up going into 2010?

MF: I don't see a lot of undervalue, except that the uranium sector is still pretty beaten up. There's not a lot of undervalue in the other sectors I follow—mainly precious metals and rare earths—so you have to start looking for specific companies that haven't reacted yet or have catalysts pending. There are a few of those I'm looking at.

TER: Would you say the market's overvalued at this point?

MF: The market is valued at what the market says; it's oftentimes driven simply by psychology, and those are touchy-feely things that are hard to get a handle on. The junior resource sector is certainly valued a lot higher than it was last year. Will it go higher or lower or will we see a correction? I think a lot of that depends on the price of gold.

TER: In your last Mercenary Musing, you wrote about how we are led to believe things from trusted sources such as Santa Claus and the Easter Bunny. More relevant, you discuss the government talking about organizations that are too big to fail that we have to bail out, and pundits telling us that gold prices will climb to multi-thousands of dollars per ounce. As an investor yourself, what are you hearing that really can't be trusted?

MF: I mitigate the risk of promotion with very detailed due diligence and research. As a retail investor, you need to do your own due diligence and your own research on anything you consider, looking at the three key criteria—share structure, people and projects. If you follow my investment philosophy, you're looking for stocks that have a strong chance to double within 12 months. Everything and everyone gets promoted. You can reduce your risk by doing your own research and figuring out what's real and what isn't.

TER: Last October, you talked to us about rare earths as the "flavor of the year." We're now in a new year, a new decade. Will they continue to be the flavor of the year in 2010?

MF: I'll answer that with an emphatic "yes." The U.S. government is partly behind this through the green technology economy, which creates additional demand for rare earths. Rolling Stone came out this summer with an article about Goldman Sachs called "The Great American Bubble Machine." Goldman Sachs is involved with rare earths. Molycorp, owner of the Mountain Pass Mine, is a private company, and Goldman Sachs is a large shareholder.

TER: Hmm.

MF: So I foresee that the rare earth sector will continue to be promoted. Demand certainly will increase. The Chinese are continually making news about curtailing exports. A few weeks ago, The New York Times wrote about the heavy rare earths ionic clays in China, the environmental damage that has gone along with that and the decreasing supply as they enforce environmental regulations., I see increased demand with some supply coming on board in North America or Australia in the short to midterm. I'm still very bullish on the rare earths sector.

TER: Is it a supply-demand issue that's causing rare earths to go up or the fear that China is going to minimize exports and force production in China?

MF: I think both. But I don't see that China will be able to supply the world with rare earths. I recently saw a chart that showed increased Chinese demand and rest of worldwide demand.

TER: So we do have a supply issue. A lot of people are talking about China restricting exports.

MF: They're doing that because they see their own internal demand increasing and they want to take care of their own.

TER: When you look at rare earths, do you have preference over either the light or heavy earths when they're going into production?

MF: The prices for heavies are so much higher than the prices for the lights. The lights trade at generally less than $10 per kilogram and some of the heavies trade in the hundreds of dollars a kilogram. From that viewpoint, the dollars per ton of a heavy rare earth deposit is worth more than a light rare earth deposit. But that said, the heavies are rarer and are contained in much lower concentrations. I think you need to look at good companies with the best deposits, whether those deposits are light or heavy.

TER: At the San Francisco Hard Assets Investment Conference in November, Jack Lifton indicated that the real race is who can bring rare earth mining into production first. He says that the next two or three companies to get to production can satisfy the rest of the world's demand; so those that are much further behind would not be as good as investment opportunities. How do you feel about that?

MF: I think there's validity to that. It doesn't mean, though, that some companies that are just starting out won't be good investments. We don't always need to make mines to make money in the stock market. We can mine the stock market, too.

TER: But that requires a bit more timing.

MF: Yes, it does.

TER: You brought up uranium in the context of off-take contracts. With the green focus that everyone talks about, many say nuclear energy is poised to resurge. However, the Obama administration hasn't really embraced it. Do you expect uranium to make a comeback in 2010 with more nuclear energy on the horizon, or is it a longer-term play?

MF: I personally think we've begun to see resurgence already. If you're talking about prices, no, we haven't seen that, but demand for nuclear fuel for power plants is increasing. A lot of power plants are being built worldwide and those are demand reasons that the world will continue to use more uranium on a yearly basis. My views haven't changed.

You are right about the Obama administration. They talk from both sides of their mouths about nuclear energy, in my opinion. They won't embrace nuclear because that would offend far left-wing Democrats, and they can't afford to do that.

TER: If an investor is watching spot prices of uranium, that doesn't necessarily integrate with the profitability of uranium mining companies, does it? How do you factor in the off-take contract element?

MF: You are right. The spot price does not necessarily factor in to profitability because most uranium mining companies have higher long-term prices on their off-take contracts. The average contract price now is somewhere between $60 and $70 a pound. The spot price this week is $43.50. Plus or minus 85% of the world's uranium is supplied on long-term contracts, but some uranium miners will sell on the spot market as utilities have increased demand or want to stockpile some uranium when the spot price is low.

Unfortunately, the uranium equities market trades based on the spot price. It doesn't make a lot of sense from an economic viewpoint, but what causes uranium companies to go up and to go down at times is this weekly spot price. The spot price is very nebulous because what happens is every week a few people look at whether any spot uranium was bought or sold on the open market in the last week and at what price. They'll compare short-term contracts and then publish a spot price for the week.

TER: So how can an investor decide whether to put our money into companies that are fluctuating based on a few people in a room or on a conference call deciding what the spot price is?

MF: That's a good question. I think you've got to look for uranium companies of value. Look for potential developers or explorers in the right part of the world and pick companies that are going to be viable no matter what the spot price does.

TER: Any other comments on uranium?

MF: Sure, I'll give you some supply and demand ideas about uranium. The "Decade of the 'Aughts' ('00s)", if you will, saw uranium's spot price go from about $7 to about $45 a pound—so a 600% increase in a decade. Uranium production must grow because demand is increasing on a yearly basis, driven largely by China but there are many nuclear power plants on the drawing boards or under construction worldwide.

We are losing feed from the conversion of nuclear weapons into low enriched uranium. Deals with the Russians are running down, so with uranium demand increasing, mine production must increase.

A scary thing in all of this is the country that became the world's largest uranium producer in 2009 is Kazakhstan. In the Decade of the Aughts, Kazakhstan went from a 5-million-pound producer to a 36-million-pound producer, and is projecting production of 47 million pounds of uranium in 2010. Kazakhstan's government is very corrupt, and is not especially friendly to the West. Rumors came out early this month that Kazakhstan signed a uranium supply contract with Iran. In terms of production, Kazakhstan has basically become the Saudi Arabia of uranium production. But that production likely is not sustainable as these are ISR fields that will have fast decay curves.

TER: Is the scary part more who Kazakhstan is willing to sell to or that the large supply is in danger because the government is unstable?

MF: Both.

TER: So how should an investor interpret this risk?

MF: It just makes me more bullish on North American prospects for uranium. As I say, I invest in uranium companies that are located in North America, that operate in stable parts of the world, and that are not involved uranium plays in Africa or Asia or Kazakhstan or other relatively unstable places. Although I am willing to invest in gold companies in countries with geopolitical risks, that is not the case for uranium.

Michael S. "Mickey" Fulp—aka The Mercenary Geologist—is a Certified Professional Geologist with a bachelors degree in Earth Sciences with honors from the University of Tulsa (1975), and a master's degree in Geology from the University of New Mexico (1982). He has nearly 30 years' experience as an exploration geologist searching for economic deposits of base and precious metals and other resources. Mickey has worked for junior explorers, major mining companies, private firms and investors as a consulting economic geologist for the past 22 years, specializing in geological mapping, property evaluation and business development. Respected throughout the mining and exploration community due to his ongoing work as an analyst, Mickey launched in late April 2008 and can be reached at

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