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-- Posted Thursday, 6 May 2010 | | Source: GoldSeek.com
Equities and Economics Report writer Victor Gonçalves says the cobalt story is still yet to come. In this exclusive Energy Report interview, Victor also explains how to tell the real rare earth companies from the wannabes.
The Energy Report: Victor, one of the big headlines since we last spoke is the loan that Europe is giving Greece. Some are calling it an EU bailout. As an economist, how do you see this move?
Victor Goncalves: I think it's a positive thing actually, given the parameters. A lot of your Austrian guys would say this is the devil's work and you don't do that kind of thing. Given the economic policies of the European Union, that's probably one of the only options it has.
TER: What impact is that going to have on the markets?
VG: It'll have a positive impact because what it basically says is we're not having a country go into default. That's the short-term impact. The longer-term impact isn't just Greece. It's more the broader side of things. Will more countries come out of the closet with bad debt? I don't know if that's the case, I'm suspecting that might happen. I was just in Portugal, and things are not looking good there.
TER: When we last spoke with you in January, you said that the economic fundamentals weren't stellar and you were expecting some sort of correction within the markets; the TSX is still trading around 1,200 now, the Dow remains around 11,000. Do you still see a correction coming and if so what's your opinion on the timeframe for that?
VG: We did actually get a correction, albeit a small one. We did have about a 10%, 11% drop in the market. It wasn't as much as I would've liked to have seen, but it still happened nonetheless. The market really acts in weird ways, so I'm not sure we're going to see the correction we should see in the short term. Technically, we should be seeing one quite soon. We should've seen one already.
If you look at the TSX Venture, which is a better barometer because it shows a better picture of who is putting money in venture capital, it's moved up parabolically recently. So that has to cool off a bit. Whether it will do it now or in a couple of months, that's a lot harder to tell. It's a situation where investors really need to watch the market a lot closer for the volatility. Investors need to watch for the change in sentiment. It's a little harder to figure out now, compared to what it was even a couple of years ago when you could better predict when these things would happen.
TER: Victor, in our last interview with you, we focused on solar and on the use of rare earth metals in many of the technologies the world is relying on for green energy. Are these still the main areas in energy that you're focused on?
VG: Oh yes, absolutely. There's a nice little saying that goes, if you're going to bet on a war, don't bet on either side, one of them is going to lose. What you want to bet on is the arms dealer because you're guaranteed no one is going to kill him and he's going to walk away with a pile of money.
So in this situation, you can bet on, let's say, solar or wind, but you run the risk of one of them not working as they are still not mainstream in terms of percentage of representation of total energy use. What you really need to do is bet on the required raw metals for it. You're guaranteed those are not going to be out of demand. When it comes down to these new technologies, rare earths are critical. Rare earths, lithium, all these things are critical. So that being said, I'm certainly still very interested on the lithium side of things, on the rare earth side of things and all these kinds of metals that are going to be a huge part of green energy. The demand story right now is great, but the supply side is exceptional. These metals are going to be quite important going forward.
TER: Is there a way for an investor to play that whole field, or do they have to do these all individually?
VG: Primarily you want to do these individually, because a company that's going to explore for rare earths, or for lithium, can't really try and explore for all of them. They have to really focus their attention on one thing because it is quite dollar-intensive. If you're going to be looking for multiple groups of these metals, you either need to have a huge team or a large, large budget.
The one thing I like to caution people is to look for experts. You have to understand that some people call these "the weird metal sector." Weird metals are not common. So to have 25 companies saying, "we're doing something right, we know what we're doing," is probably a little misleading. You need companies with excellent management teams, guys who have done their research on rare earths. That is what you need to look for. Obviously projects are important, but you can't do much in the project if you don't have the right people to really know what to do.
TER: There's been so much buzz about lithium. Is it still a good play for investors?
VG: Oh, absolutely. It does us no good to create all this green energy if it can't be stored. Without that, solar, wind power and all these types of technologies are completely and utterly pointless. It's just a science experiment unless you can store it. I mean that's the whole point of this. Like a hybrid car, you can't really have a hybrid car unless you can store the additional power that it creates. So, lithium batteries are hugely important. As far as the lithium story goes, there's a lot of lithium around, but it's a question of economics, as is everything. It's also a question of imminent supply, and right now there is quite a bit of lithium globally. Right now, the lithium story is finding economic deposits and getting them to a point where they can be exploited. So lithium is absolutely huge right now, and I don't see that changing anytime soon.
TER: Lithium and cobalt are closely linked in battery technology. What's your assessment on the market for cobalt?
VG: Cobalt is going to be equally important, or if not equally, at least quite important. Not necessarily always for the same thing. You can use cobalt in batteries, yes, but it's also used in things like generators. Those are two very big applications for cobalt and it's not yet really recognized. So I think the cobalt story is yet to come. That's excellent because companies can position themselves, and more importantly, investors can buy these things cheaply, as opposed to waiting for the run up and then trying to find the stories that are still inexpensive. The cobalt story is one still yet to come, but that's exactly where you want to be, in places that are yet to come.
TER: Earlier in the interview you were saying that the rare earths are critical and also the last time that we spoke we discussed the need for and progress toward mining rare earth metals. Can you give us an update on any of the new developments in that space, including the progress toward finding and mining those rare earth elements?
VG: Everything comes down to economics. The reason why I say this is because it's absolutely crucial. There are 17 elements and not all of them are worth a lot. The categories are light rare earths and heavy rare earths. The heavy rare earths are typically pricier, and what makes a deposit economic. However, the issue behind that is that there is such a small percentage of heavy rare earths that you need light rare earths in the deposit. Typically, what I like to look for is deposits that have yttrium or neodymium. They're expensive lights to supplement the value of the heavies. Then you also need to worry about metallurgy. Are they easily extractable? Once you've got all that sorted out, the deposit doesn't have to be very big to be economic.
TER: How does an investor determine the real rare earth companies from the wannabes?
VG: The real rare earth companies will have seasoned management or at least a set of advisors that have 20, 30, 40 years in this business. They'll have advisors who have worked for some of the major companies, who have done their research on this. This is completely different from mining gold and silver. So that's the number one in my opinion.
The other thing you want to look for as an investor is what is the ratio between the light rare earths and the heavies? That's key because the economics are what matter and we discussed this already. If you don't have enough heavies in your deposit, you will not have the economic ability to extract them out of the ground.
Another issue is that you also want to make sure the metallurgy is good. That's a long way of saying, can you extract one rare earth from the other? Can you extract it from the host rock? If you can, but at a very low rate, you're going to need a lot more of them to get the same amount of metal. So good metallurgy is always something that's important. That's typically something you can find by looking at similar deposit. Deposits that look the same in other parts of the world have all the same properties.
TER: You mentioned the ratio of light-to-heavy, saying that obviously you want to have more of the heavy metals there. Do you have a specific ratio that you look for?
VG: I don't have a specific ratio that I look for only because it comes down to a dollar valuation. Extraction costs versus what you make. So it comes to what it is actually worth. A good rule of thumb is if you have 20% heavies or more, that looks pretty good. If you're 35%, 40% heavies, that's significant. Now, if you're less than 20% heavies, you've got to look at what the lights are. Because if you've got 20% or 30% neodymium, and a whole lot of yttrium, you can probably make a sufficient enough amount of value on those to offset the lack of heavies. Then again, that comes down to number crunching.
TER: Typically do you look more for long-term investment?
VG: As a newsletter writer, I look at a few different types. I look at long-term stock and at the exploration stuff. You also need to weigh out your risk. I have readers from all over the place, from all walks of life, so I like to provide various different risk levels for everybody, so that way it certainly is something that everybody can have a look at. I personally like to have development stuff, especially with a market that's a little bit shaky. We're doing well now, but with a market that is not certain I like having less risk in my portfolio. With the risky stuff, I still want it because you have to be exposed to new developments and new discoveries but it's certainly something you have to watch a lot more tightly.
TER: Victor, thanks for spending this time with us today.
A proud and avowed Keynesian, Victor Gonçalves developed a strong background in economics at the University of Winnipeg, where he served as a Professor's Assistant as well as earning his degree. His Equities and Economics Report has been accurately picking winners and calling market direction. In 2007, for instance, he correctly predicted the Dow Jones topping 14,000 points and pegged uranium reaching $136 per pound and many more. In addition to EER, Victor also produces the Green Dollar Report as well as writes for a number of print and electronic publications including CIM Magazine (Canadian Institute of Mining), Western Standard, Barron's and Kitco. He also has been featured on BNN, Mining Industry TV and at numerous industry events and conferences.
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-- Posted Thursday, 6 May 2010 | Digg This Article | Source: GoldSeek.com
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