Well-known and highly regarded throughout the mining and exploration community, Mercenary Geologist Mickey Fulp returns to discuss the brightening prospects for the junior sector with The GOLD Report readers. A Certified Professional Geologist, he is particularly intrigued these days by companies operating in emerging environments where the geological potential is under-explored. Another area of keen interest Mickey talks about in this exclusive interview is the re-emerging rare earths elements sector, a potential source of neodymium, lanthanum and heavy rare earth elements needed to produce energy-efficient hybrid vehicles.
The Gold Report: Mickey, you just got back from the Cambridge House Conference in Vancouver. Can you give us your impressions of major trends discussed there?
Mickey Fulp: The junior gold sector looking up was the general theme of the conference. There are wads of investment money looking for homes right now. In our previous interview I think we discussed how the seniors had raised a lot of money and the fundraising was then at the mid-tiers. Now it's filtering down to the juniors. So you're seeing lots of bought deals and a significant amount of money for advanced exploration and near-term production projects.
The other thing that I gathered from the conference was there's quite a buzz in the rare earth element sector and that buzz probably started in February and has been building. That's when people started realizing that China controls the market and North America needs to develop its own rare earth element deposits.
TGR: Before moving into rare earth elements, let's talk about gold. Our last couple of interviewees projected gold to go above $1,000 before the end of the year and trade somewhere above that for at least another year. You may have a slightly different view. What do you think gold will do?
MF: I thought gold was going to be range-bound between maybe $750 on the low side (although I actually don't think it's going to go back down there) to perhaps $1,050 in 2009. It tried to test $1,000 in the past few weeks and once again didn't make it. There are fundamental reasons for that. Gold is a supply-demand commodity now and when it gets to the current price, India and the Middle East, by far the largest retail markets, quit buying. Scrap sales in North America have exceeded jewelry demand, so these run-ups in gold have just failed because of supply and demand fundamentals.
Right now, ETF investment demand, i.e., paper gold, drives the market on the upside. And once again, we've seen correlation of the gold price with the dollar. The dollar was weak a few weeks ago; gold goes up. The dollar strengthens a bit; gold goes back down. This has changed since the first two months of the year when the dollar and gold were in lock step.
I've been told for over 29 years that gold was going above $1,000 an ounce. It's hit that price for a total of four days in the past 29 years, so it rings a little hollow for me when the gold bugs keep preaching to us that gold's going to the moon.
TGR: Doesn't their reasoning relate to the massive influx of new money in stimulus packages around the world? Aren't they looking at gold as a hedge against inflating or devaluing currencies?
MF: Sure it's a hedge and that point is well taken. It just becomes a matter of what you think this devaluation or inflating of the currency is going to amount to and whether gold will react directly. I'm not a fan of Bernanke's and Geithner's policies and I think we'll be looking at an inflationary scene at some point, but certainly not hyperinflation.
TGR: So where does gold go in that environment?
MF: I'm not really sure, though it seems logical that the price of gold should go up as the money supply grows. But I'm one who thinks the past lends valuable lessons to the present and the future. We just haven't seen a correlation of gold price with dollar inflation in the past 38 years and I don't see it happening in the near future. I'm probably taking a shorter-term look at gold, perhaps to the end of this year. Who knows what's going to happen with the economy and gold in 2010?
TGR: You mentioned buzz at the conference about the gold juniors sector looking up. If the gold price remains in the range of $925 to $960, will their equities really have any more appreciation?
MF: If we look at valuations at the height of the junior market, which was November of '07, they're still beaten up pretty bad from those highs. The junior resource sector was the canary in a coal mine. Our bust started in early December of '07, basically when Galore Creek cratered. Although it didn't really culminate until after the major market crash in October and November of '08, the junior gold issuers were on the downtick for more than a year. They're still trading at less than 50% of their high valuations. So there's room for upward movement, especially in well-run companies with good share structure, good projects, good people, and cashed up with advanced exploration or near-term production plays.
TGR: Were their high valuations realistic or optimistic, just over-traded?
MF: They were certainly overbought at their highs, but there also are certainly stories out there that are still undervalued. Recently we're seeing a lot of bought deals in this sector in which a private placement is announced at a particular price and then the stock goes well above that price before it closes. That's quite unusual. We didn't see that in January when the market started turning. I do think there's plenty of room for stock appreciation in specific companies.
TGR: Do you have any favorites among the companies you're covering?
MF: Absolutely. I've been a long-term shareholder and supporter of Animas Resources (TSX.V:ANI). I very much like this story and wrote that exact line a couple of months ago. It has a big target play in a past-producing district of Mexico, there is exploration risk, but they recently did a private placement with a strategic long-term investor and they're planning a 10,000-meter drill program. It will test the very best targets that they developed on their property in Santa Gertrudis, Sonora since their last drill program ended in the fall of '08.
Others I very much like are Lydian International Ltd. (TSX:LYD), Pediment Gold Corp. (TSX:PEZ) (OTCBB:PEZGF) (FSE:P5E) and Eurasian Minerals Inc. (TSX.V:EMX). Lydian has a million-ounce inferred resource in Armenia in one season of drilling and is also involved in an advanced base metal play in Kosovo. Pediment is gearing up for a drill program on a relatively recent acquisition that has historic production and resources on the order of 4.5 to 5 million ounces, the La Colorada mine in Sonora, Mexico. Pediment has somewhere around $15 million in cash. Eurasian has a couple of very nice gold prospects in Haiti joint-ventured to Newmont Mining Corp. (NYSE:NEM).
I just visited Northern Freegold Resources (TSX.V:NFR), which has the Mount Freegold District in the Yukon, and some very interesting drill intercepts on their Nucleus zone. I will be in Indonesia around the end of July looking at a couple of really interesting projects that East Asia Minerals Corporation (TSX.V:EAS) has developed and will start drilling soon.
As you can see, my list includes a couple of companies involved in Mexico, my favorite place to develop a gold mine, one in a relatively unexplored district in the Yukon, and then in the case of Lydian, Eurasian, and East Asia Minerals, companies working in so-called emerging environments. I recently wrote a piece, Exploration in Emerging Environments, discussing reasons that companies take on geopolitical risk for the potential reward of finding new deposits in parts of the earth where geologists haven't mapped and sampled every rock in sight. In my opinion, the next big discoveries are going to be made in those areas. So Eastern Europe, certainly Haiti, and parts of Southeast Asia, including Indonesia, are on my radar screen. I'm casting about in those parts of the world.
TGR: Are there serious geopolitical risks in some of these countries?
MF: There's always geopolitical risk in emerging market countries and it isn't always easy to assess. But when you start seeing the World Bank and other multi-national banking institutions getting involved in financings, majors doing joint ventures with juniors, free market economies, democratically elected governments, and a political commitment from the international community, it helps mitigate that risk.
That said, geopolitical risk is a wild card that changes with every dealt hand, so a company must assess and balance those risk-reward scenarios. In the instances I've talked about, the scenarios are skewed toward the reward side because of the geological potential to host world-class ore bodies, unlike most recycled projects in the more developed parts of the world. There is under-explored territory in many emerging market countries.
TGR: Speaking of under-explored territory brings us back to the rare earth elements arena. There seems to be growing concern that China controls the whole sector, and that we need to find and develop more rare earth deposits elsewhere in the world. Could you share your perceptions of this sector with our readers?
MF: You are exactly right about China. It controls 97% of the world's mine supply of rare earth elements. In the late '80s and early '90s, China instituted price policies that basically undermined, if you will, the major mine in North America. At that time, the world's largest producer was Molycorp's Mountain Pass, California deposit. With low prices and environmental issues, Molycorp could not keep that mine open at a profit, which left China to become the world's rare earth element producer.
Over the last few years, China has instituted export quotas and tax benefits in an effort to keep all their rare earth element production in China and has encouraged processors and materials manufactures in the rare earth element sector to relocate to China. The Chinese president has said that China is the OPEC of rare earth elements.
TGR: So China essentially put its cards out on the table.
MF: Yes, and that's a bit scary for North America and also Japan. Rare earth elements are necessary for super magnets, for iron-boron-neodymium magnets that power hybrid cars and commercial air conditioners. Heavy rare earths dysprosium and terbium are heat resistive and also essential in these magnets. Critical metals in the light rare earth sector include lanthanum, which is required for nickel hydride batteries, and cerium in catalytic converters. As North America becomes greener, more energy-conscious, and focused on reducing its carbon footprint, we are seeing increasing demand for rare earth elements, including in numerous strategic, high tech, and defense applications. The list of essential uses for the 16 REE's is astounding.
TGR: How closely do you follow this sector?
MF: I've been following the rare earth element sector for two years now, and am involved with a couple of companies - Avalon Rare Metals Inc. (TSX:AVL) and Rare Element Resources Ltd. (TSX.V:RES). Both have advanced rare earth element deposits in North America.
TGR: Can you tell us a little bit about what they are mining? Are they currently in production? Or when we should expect production?
MF: We have no current production in North America other than processing ore stockpiles at Mountain Pass. There have been positive developments at Mountain Pass in the last six months as it was sold by Chevron to a consortium of four private companies headquartered in Denver and it's called Molycorp again. That's positive for North American supply as they are permitting to reopen the mine.
The two most advanced projects in North America are Avalon's Thor Lake deposit in the Northwest Territories and Rare Element Resources' project in the Bear Lodge Mountains of eastern Wyoming. Avalon's is a unique deposit as it's highly concentrated in the heavy rare earth elements. Again, they are essential for the aforementioned heat tolerant super magnets required in hybrid cars. I visited Thor Lake a year ago and will again later this summer.
I was also on tour of the Bear Lodge property last September, and was impressed with what Rare Element Resources has done there. It's a light rare earth element deposit similar geologically to Mountain Pass and hosted by carbonatite dikes. They recently came out with a 43-101 qualified resource estimate and are now assaying some old holes that were never completely assayed before. From what I gather, they're finding some additional zones within these historic drill holes. They intend to do more drilling this year than they've probably done in the last three or so years to advance this deposit, Metallurgical testing is progressing and initial indications are it's going to be positive.
Another thing I like about Rare Element Resources is they actually have two plays on the project. Adjacent to the rare earth element prospects is a Cripple Creek-style gold prospect that's joint-ventured to Newmont, with an exploration permit pending. Newmont's interest tells you what size potential they can see. They went for a 200-acre disturbance permit and although that's taken a lot longer to get, I would expect that permit to be granted in the very near future and Newmont will start a major program of drilling the gold project, too.
TGR: Nice place to be in this environment.
MF: It really is. I like the Rare Element Resources story. There's been big movement in the sector in the last few weeks and the valuations of these stocks have close to doubled. Interestingly, a prominent newsletter writer who we all knew as the original gold bug, then the original uranium bug, is now the original rare earth element bug.
TGR: There is a big push here to move toward hybrids, but because China's already producing, don't the Chinese have the ability to once again lower prices, which in essence would make these two potential mines unprofitable?
MF: I think what we're going to see are off-take agreements. This is a specialty metals market, and although it's growing at about 10% a year, it's a very small market - something on the order of 125,000 tonnes of total rare earths last year. Toyota is committed to building the Prius hybrid and they need a secured supply. So instead of a worldwide pricing situation with users buying on the open commodities markets, what I envision are mines having off-take agreements with specific companies, much like the uranium sector has done, where utilities buy long-term contracts to secure supply. That's a scenario that could happen with the Japanese and maybe U.S. automakers. It might not be the automakers doing the deals, but integrated companies with the processors and manufacturers taking guaranteed supply contracts from the miners and making deals with the end-users for the products.
In Avalon's case, we're probably looking at 2013 or perhaps 2014 for initial production, assuming the deposit is proved up as an economic ore body and that remains to be done. For Rare Element Resources, it's too early to project a timeframe for mining, but they have a qualified resource and they are going all in to advance the project to its next decision point this year. There are very good people behind these companies and, in both instances, they are committed to the company's shareholders and its long-term success.
In summary, I think there are good things to come for the REE sector.
DISCLOSURE: Mickey Fulp
I personally and/or my family own the following companies mentioned in this interview: Animas Resources, Eurasian Minerals, Lydian International, Rare Element Resources; I personally and/or my family am paid by the following companies mentioned in this interview: Animas Resources, Eurasian Minerals, Lydian International, Pediment Exploration, and Rare Element Resources are sponsors of my website.
The Mercenary Geologist, Michael S. Mickey Fulp is a Certified Professional Geologist with a bachelor's 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. Mickey is respected throughout the mining and exploration community due to his ongoing work as an analyst for public and private companies, investment funds, newsletter and website writers, private investors and investment brokers. He launched MercenaryGeologist.com in late April 2008 and can be reached at Mickey@MercenaryGeologist.com
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