🕐08.03.11 - 15:54 Uhr
Siddharth Rajeevs Commodities Rundown, From Au To V
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Siddharth Rajeevs Commodities Rundown, From Au To V
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Brian Sylvester of The Gold Report 03/07/2011
There is more to the periodic table-and to investing opportunities-than gold,
silver and copper.
Siddharth Rajeev, vice president and head of research at Fundamental
Research Corp., sums up the market prospects for rare earth elements (REE) and
a host of metals.
He unearths some new names and some historical finds in this
exclusive interview with The Gold Report.
The Gold Report:Sid, today were going to talk about a number of different metals:
gold, silver, vanadium, copper and rare earths.
Could you handicap each of those
metals for us, starting with gold, copper and silver?
Siddharth Rajeev:Lets look first at the factors that have been driving up commodity
prices.
We think two key factors are responsible.
Number one is increasing global
demand; the second is the continued weakness in the U.S.
dollar.
Lets look at increasing global demand.
We believe in the Brazil, Russia, India
and China (BRIC) story and we expect continued growth from those countries.
We
believe that the U.S.
economy will continue to see a gradual recovery.
So, we
expect increasing demand from the U.S.
and continued demand growth from the BRIC
countries to keep the demand side strong.
Thus, the first factor looks good for
the commodities market.
However, we expect the second factor, which is the U.S.
dollar, to gradually improve
with respect to other currencies as the U.S.
economy improves.
That should have
a negative impact on the commodities market.
So, we expect to see some sort of correction this year.
For example, copper is
at $4.45/lb.
We do not think these prices are sustainable in the long term and
therefore we expect to see some kind of correction.
In terms of gold, we believe that as the U.S.
economy recovers and the U.S.
dollar
strengthens, investors would move away from safe-haven assets such as gold and
put their money where it could achieve higher returns.
So, over the long term
we expect the gold price to soften.
But, in the near term, uncertainty regarding
the U.S.
and European economies and inflationary scares should give us high gold
prices.
As to copper, we dont think its sustainable at such prices over the long term.
Even though demand looks very strong, we expect prices to drop with the gradual
recovery in the U.S dollar.
Silver is unique as it behaves like a capital preservation asset, such as gold,
as well as like a commodity due to its industrial applications.
The uncertainty
in the U.S.
and Europe and inflationary pressures, combined with continued demand
growth from Asia and the BRIC countries, are some of the reasons we think silver
has been one of the best movers recently.
Although we think silver should soften in the long term, we think that silver
should stay strong in the near term due to the same reasons as gold.
In our valuation
models, we use a long-term (2014+) price of US$18.35/oz.
TGR:What price are you using for gold price?
SR:We use a long-term gold price of US$1,000/oz.
TGR:What can you tell us about vanadium and rare earths?
SR:Unlike other commodities, vanadium prices have not been as volatile in the last
18 months.
Theyve stayed around $7/lb.
for over a year.
Over the long term we
have a good outlook on the commodity.
We believe strong growth in steel consumption,
especially from China and India, will be the key demand drivers.
Steel accounts
for 90% of vanadium demand; so vanadium demand is highly correlated to the steel
segment.
The use of vanadium in battery and renewable energy storage devices is expected
to drive the demand up.
Vanadium supply is expected to remain quite stable from
the three major producing countries-China, Russia and South Africa.
We think the
demand side should keep prices high.
The main factor driving up rare earth prices is the supply side.
China accounts
for 97% of all production, and has been cutting down significantly on its rare
earth exports.
China also has been increasing the demand for rare earths.
The U.S.
currently imports nearly 100% of its rare earths consumption.
We are bullish on
REE prices primarily because of the concentrated supply conditions.
TGR:So, the more obscure you get, the better the outlook.
There seems to be a
bit of a contradiction in that you see softening prices for copper, but strengthening
prices for vanadium.
Both of those metals have the same sort of investment thesis.
Why are you bullish on one and not so bullish on the other?
SR:Thats because copper has moved up by 40%-50% in the last 12 months, while vanadium
has stayed pretty constant.
For the last 12 months vanadium has been around $7/lb.
It has not really moved up, while copper has moved up significantly.
So we think
copper will have a higher price correction.
TGR:What would have to happen in the Middle East before you would be willing to
be bullish on the gold price?
SR:Obviously the turmoil in the Middle East is positive to commodities such as
gold and oil.
But, we think those factors are short-term catalysts.
Over the long
term, we do not think these incidents should play a role.
Historically, all of
these geopolitical tensions around the world cause sudden and short-term spikes
in prices.
Theyve not really had an impact over the long term.
TGR:In the 1970s there was an oil crisis that lasted about five years that paralleled
a run in the gold price.
Five years is pretty long term.
SR:High oil prices typically result in high inflation and high gold price.
So if
the problems in the Middle East somehow impact long-term oil supply, we will see
high gold prices for a prolonged duration.
We have not seen anything so far in
the Middle East that brings up concerns over the long-term supply of oil.
TGR:The other thing to consider is that if a company looks good at $1,000/oz., it
will look very good at any price above that.
SR:Certainly.
TGR:Quite a few of the small cap companies in your coverage universe are exploring
for gold.
Many of them have never appeared in The Gold Report.
Could you give us
a few under-the-radar names that our readers should know about?
SR:I will name three companies today that we really like.
Ill start with Rio Alto
Mining Limited (TSX.V:RIO; BVL:RIO; OTCQX:RIOAF)
It has an advanced-stage project.
We picked them up for coverage in January 2010,
when they were at $0.46.
Today, its price is over $2.40.
The main deposit is the
La Arena Deposit, which has over a million ounces of gold in oxide.
The company
also has a copper gold sulphide resource (adjacent to the oxides), which has close
to 2.9 billion pounds of copper and over 3 million ounces (3 Moz.) of gold.
The
company plans to put the oxide into production in Q211.
Construction commenced
in August 2010.
The sulphide should go into production in the next three to four
years.
The company has an extremely strong management team.
They recently raised
close to $58 million in equity financing.
TGR:One noteworthy thing about La Arena is that its not too far from Barrick Gold
Corporations (TSX:ABX; NYSE:ABX)
Norte project.
Do you see Rio Alto as a possible takeover target?
SR:Yes, especially these days when investors and majors are more interested in
higher quality assets because of the volatility in commodity prices.
Investors
and majors are looking for more advanced, quality projects.
We believe Rio Alto
fits into that category.
We cover about 150 small- to mid-cap companies, and we
think Rio has one of the best deposits in our coverage.
TGR:And your second gold name?
SR:Evolving Gold Corp.
(TSX.V:EVG; Fkft:EV7)
made a huge discovery at its Rattlesnake Hills Gold Project in Wyoming.
The company
also has the Carlin project in Nevada.
They have done aggressive drilling in the
last couple of years and the results have been extremely impressive.
Evolving Gold
doesnt have an NI 43-101 resource estimate, but we came up with an internal resource
estimate.
We think the project should have at least 1.5 Moz.
gold.
This company
also has a strong management team and a strong cash position.
In July 2010, Goldcorp
Inc.
(TSX:G; NYSE:GG)
$15 million in Evolving Gold, which is a huge vote of confidence for investors.
TGR:Whats the next stage for Evolving? Could we see a preliminary economic assessment
(PEA) in the near term?
SR:I think the next step is a NI 43-101- compliant resource estimate.
TGR:When can we expect that?
SR:We would like to see it sometime this year.
TGR:And your guesstimate was 1.5 Moz.
But, you tend to be on the conservative side.
SR:Right.
For valuation purposes were slightly on the conservative side.
Our fair
value on Evolving is $1.40 per share.
We have a BUY (Risk 5: Speculative) rating.
TGR:And your third gold name?
SR:This is a slightly different company from the previous two I mentioned.
The company
is called 49 North Resources Inc.
(TSX.V:FNR)
Its a resource investment company based out of Saskatchewan.
It is Saskatchewans
first publicly traded resource investment company, with close to $65 million in
assets under management.
It invests in early stage resource projects, including
minerals, oil and gas.
Right now, the majority of the investments are in oil and
gas and precious metals.
We think this company offers investors a very good opportunity to hold a diverse
portfolio of assets in different sectors, different regions.
Investors also get
the opportunity to participate in the upside potential of private company investments.
FNR shares are currently trading at a 30% discount to the NAV (net asset value).
We will be initiating coverage on this company shortly.
TGR:Its quite a diverse group of assets that 49 holds: coal, diamonds, uranium,
base metals, a little bit of gold.
What are your thoughts on that business model?
It is a bit unusual.
SR:Yes.
For example, the company owns 150 to 200 stocks in its portfolio, but the
top 15 of its holdings account for over 60% of its NAV.
We think its a very good
business model, especially because the CEO and President Tom MacNeill has a lot
of experience and is well known in the industry.
One of its best success stories so far include its investment in Athabasca Potash,
which was later acquired by BHP Billiton Ltd.
(NYSE:BHP; OTCPK:BHPLF)
FNR made a 611% gain in that investment.
Basically, this model offers investors an opportunity to get exposure to the upside
of the junior resource market with lower risk due to the fact that the company
holds a diverse portfolio.
We think the return/risk ratio is higher for this kind
of model.
TGR:Lets move on to silver.
Silver outperformed gold in 2010 on a percentage basis
and is off to a very good start in 2011.
Although you see some softness in silver,
what are some silver names that our readers might be interested in?
SR:We cover two very good silver stories right now.
One is an advanced stage company
called SilverCrest Mines Inc.
(TSX.V:SVL)
In September, the company announced the first gold and silver pour at the Santa
Elena Project in Mexico.
We expect commercial production to be announced this quarter.
SVL expects annual production of 35,000 oz of gold and 0.6 Moz.
of silver.
This
is an open-pit, heap-leach operation.
The company plans to expand operations to
over 100,000 ozs.
in the next couple of years.
Again, this company has a strong
management team; something which is important for any junior.
Our fair value for
SilverCrest is $2.84 per share.
TGR:Whats the second silver name?
SR:It is a relatively under-followed, under-explored company called Thunder Mountain
Gold Inc.
(TSX.V:THM, OTCBB:THMG)
Its key property is the South Mountain Project in Idaho.
Its a past-producing
mine.
It currently has a resource of 3.4 million tons (Mts.) of indicated and
inferred resource.
Its a polymetallic deposit, in which the primary metal is silver.
The deposit is open at depth and along strike.
The company is also developing a
new gold target close to the historic mine which we think should add more resources.
Its working on a PEA and an updated resource estimate.
Our fair value on the stock is $0.70 and its trading at $0.25 per share.
To value
the stock we looked at the average enterprise value to resource ratio of its peers.
Thunder Mountain is trading at $0.47/silver oz., while the peer average ratio is
$1.34.
We think that its undervalued at this price.
TGR:Thats precisely the kind of name were looking for.
Now lets move on to rare
earths.
Their price appreciation was dramatic in 2010.
What are some companies
with REE projects that could show some promise in 2011?
SR:We cover a lot of companies in the rare earth segment.
I will talk about three
of our top companies, starting with Commerce Resources Corp.
(TSX.V:CCE; Fkft:D7H;
OTCQX:CMRZF)
Its focusing on its Blue River Project in British Columbia, which is an advanced
stage project.
Then it has an early-stage exploration project in Eldor, Quebec,
where its done some aggressive drilling and is getting very impressive results.
Based on the results at Eldor we believe that the continuity, depth and thickness
of the mineralization are positive signs for a near-surface REE deposit.
The company
announced an updated resource estimate at Blue River in February, with significant
increases in tonnage and tantalum oxide and niobium oxide content.
REE prices have gone up significantly.
Lets look at tantalum.
Its price moved
up by 42% in the last four months, from $120/lb.
to $171/lb.
We continue to believe
that demand for tantalum, which is used in electronic products, will increase.
The supply side is very concentrated.
For example, Australia and Brazil alone account
for 50% of the production.
The concentrated supply and increasing demand, and
lack of production in the U.S.
shows the importance of advanced stage tantalum
explorers like Commerce.
Our fair value on Commerce Resources stock is $1.51 per share.
Right now, I think
its trading at around $1.00.
To get that valuation, we used long-term tantalum
price of $120/lb.; the current price is $171/lb.
For niobium, which is used in
making steel, we used $15/lb.; the current price is $23/lb.
Even based on our conservative
price forecast, we think it has an economic deposit at Blue River.
TGR:Any other REE names?
SR:Another name is Quantum Rare Earth Developments Corp.
(TSX.V:QRE; FSE:BR3; OTCQX:QREDF)
Its developing the Elk Creek carbonatite complex in the U.S.
It has had historic
exploration.
The historical resource is 39 Mts.
of 0.82% niobium oxide.
According
to the U.S.
Geological Survey, this property may hold one of the worlds largest
resources of niobium and REE.
A few months ago, the company raised close to $6.5
million.
Our valuation on the stock is $0.85 per share, and it is trading at $0.53.
TGR:What do you think of Quantums CEO Peter Dickie?
SR:Weve been following Peter Dickie and his associates for several years.
Theyve
been involved in some good projects in the past.
We believe Quantum has a good
management team.
TGR:Can you give us one more name?
SR:In the rare earth segment is a lithium company called Rock Tech Lithium (TSX.V:RCK;
Fkft:RJIA)
Its exploring for lithium and rare metals in Ontario and Quebec.
The main project
is its 100%-owned Georgia Lake Project, which has historic resources of 9.8 Mts.
with grades of 1.18% lithium oxide (Li2O).
The company is conducting a 4,000-meter
drilling program that should be completed in the first week of March.
The company
expects a NI 43-101 resource by mid-2011.
TGR:Its hit high-grade spodumene there.
And you can get lithium out of spodumene,
correct?
SR:Yes, thats right.
TGR:In terms of other similar deposits around the world, is the Georgia Lake project
similar grade, higher grade, lower grade?
SR:I would say the grades are good..
TGR:Whats your fair value on Rock Tech?
SR:We are currently updating our valuation on the company.
TGR:Do you cover any vanadium plays?
SR:Theres a company called Apella Resources Inc.
(TSX.V:APA; Fkft:NWN)
based out of Vancouver.
Its exploring for vanadium and titanium in central Quebec.
Its Iron-T property has a resource of 11.6 Mts.
inferred and 0.73% vanadium oxide
equivalent.
But this resource estimate covers only a small portion of the known mineral-bearing
complex.
We feel that the company can significantly increase the resource outside
of the current resource area.
We valued the stock by looking at similar stage
vanadium projects.
The average ratio of enterprise value to vanadium resource is
around $0.06/lb.
We used that multiple to value Apellas projects.
Our fair value
on APA is $0.65.
The shares are currently trading at $0.21.
TGR:To close, what do you see happening, on a macro level, over the next year or
so?
SR:Overall, we expect to see some sort of correction in the commodities market
with the gradual recovery in the U.S.
dollar.
Precious metals should stay relatively
strong in the near term due to the continued uncertainties in the U.S.
and Europe
and inflationary pressures.
For investors at this point, because of the uncertainty in the markets and the
volatility in commodity prices, the main strategy should be to look for companies
with quality advanced stage assets.
TGR:Sid, thanks for your time.
Siddharth Rajeev joined Fundamental Research Corp.
in April 2006.
At FRC, he oversees the research department, and also covers a broad
array of companies, primarily in the energy, mining, and technology sectors.
Prior
to FRC, he has had a mix of engineering and finance experience including corporate
finance experience at a leading Investment Bank in Kuwait.
Sid has ranked as a
four-star analyst in the energy and mining sectors by Deutsche Asset Management,
a division of Deutsche Bank.
Sid holds a bachelor of technology degree in electronics engineering from Cochin
University of Science & Technology, and an MBA in finance from The University of
British Columbia.
He is a CFA Charterholder, and has completed studies in exploration
and prospecting at the British Columbia Institute of Technology.
Sid is sought
by the media for commentary on the valuation of small cap stocks and industries
he covers, and is a speaker at various investment conferences.
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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview.
He personally and/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 Gold Report:
49 North, Commerce, Evolving, Goldcorp, Rio Alto and Silvercrest.
3) Siddharth Rajeev: I personally and/or my family own shares of the following
companies mentioned in this interview: None.
I personally and/or my family am
paid by the following companies mentioned in this interview: None.
FRC provides
fee-based coverage on some of the companies mentioned in this article.
APELLA RESOURCES INC.
will be at the TORONTO PDAC MINING CONFERENCE Until March
9, 2011
at Booth # 3115 and will be presenting in the Rare Earth Room at the PDAC at 11:15AM
on March 9, 2011
This will be a great opportunity to talk with our Leading Geologist, Dr.
Christian
Derosier, PGeo
and
W.
Adrian Bakker
VP of Corporate Communications
Apella Resources Inc.
==================================================
Contact W.
Adrian Bakker
Direct Phone: 604.641.4474
Toll Free: 1.800.663.8990 or
Email: [mailto:]
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