Energy Metals Bonanza: Chris Berry
Source: Brian Sylvester of
The Energy Report
(3/27/12)
http://www.theenergyreport.com/pub/na/12928
It's a great time to be invested in energy metals, says Chris
Berry, president and founder of House Mountain Partners. The
current worldwide desire for a higher quality of life is a trend
that will continue, argues Berry. In this exclusive interview
with
The Energy Report
, Berry highlights the amount of research and development
underway in the tech and energy sectors and why it spells a
bullish message for lithium, graphite and uranium.
The Energy Report:
Please tell our readers about TIMBIs and CIVETS and their
expected contributions to global gross domestic product (
GDP
) growth over the next five years and beyond.
Chris Berry:
About 10 years ago, Jim O'Neill from Goldman Sachs coined the
term BRICs: Brazil, Russia, India and China, referring to major
emerging markets that will drive above-trend global growth. Since
then, other acronyms have emerged as investors hunt for other
countries offering higher returns. Not long ago, HSBC coined the
phrase "CIVETS" to refer to Colombia, Indonesia, Vietnam, Egypt,
Turkey and South Africa. Recently, the magazine
Foreign Policy
created an acronym for Turkey, India, Mexico, Brazil and
Indonesia, now referred to as the TIMBIs. Clearly, investors are
looking for additional avenues of growth aside from the BRICs and
many believe these countries are the answer.
What makes these countries unique and has put them on the
radar screen of investors is that they're characterized by
several consistent factors: a young population, a growing
population, relative political stability and a diversified
economy.
China has been the linchpin of global economic growth for some
time now, but there are troubling signs on the horizon: Wages in
China have risen by at least 15% for eight straight years. In
2000, the average hourly wage in China was $0.50/hour, and today
it's $3.50/hour. We met with investors in southern China in
December and had an opportunity to talk about some of these data
points and confirm some of our suspicions. We know that inflation
is indeed a problem on the mainland.
A bigger, silent problem with China is whether or not the
country will grow rich before it grows old. The country is facing
a serious demographic crisis. Census data tells us that more than
50% of China's population is urbanized. That's about 691 million
(
M
) people. By way of comparison, the U.S. reached this milestone
of 50% of the population being urbanized in 1920, and the United
Kingdom reached it in 1851. So that gives you an idea of how long
it takes societies to urbanize and what happens with respect to
growth rates once they do. I think that China will continue to
grow for some time at above-trend GDP growth rates, but it's
clearly unsustainable and it's going to slow down. A young and
growing population can sustain economic growth and based on
current demographic trends, China is in trouble.
!["Chris](http://www.ibtimes.com/"file:///C:/Users/tchourre/AppData/Local/Temp/msohtmlclip1/01/clip_image001.jpg")
Source:
Foreign Policy
So, coming back to CIVETS and TIMBIs, we think that a focus on
second-tier or additional emerging markets for growth is prudent
going forward. It's what we use in screening for discovery
investment companies.
China's population is at 1.33 billion (
B
), and the collective population of the TIMBIs is about 1.79B. I
know India is included in that number, but it tells you that
should China slow, either marginally or dramatically, there is a
ready, willing and able group of consumers out there that could
potentially sop up any fall in demand from China.
TER:
China's GDP, though declining, is expected to remain well above
7% in 2012 compared with about 2-2.5% for the U.S. this year. Do
you expect China's GDP to dip below 6% before 2017?
CB:
It's hard to know for sure. China's 2011 GDP was $5.87 trillion (
T
). The combined GDP of the TIMBIs in 2011 was $6.29T, so we can
see that sufficient demand exists in these other countries as the
collective TIMBI GDP is growing, and it's already larger than
China's. I think that paints an optimistic picture should China
slow down. If we assume that the TIMBI GDP collectively grows at
6.5%/year out to 2020 and China grows at an average rate of 7.2%
over the same timeframe, then the collective TIMBI GDP will be
$11.12T and China's GDP will be $11.06T. This is only
back-of-the-envelope math, but it shows us that the potential
exists for other countries to absorb a lack of commodity demand
from China. This is dependent on the GDP growth rates in the
TIMBI countries remaining static with China slowing. In truth,
this is only one of any number of scenarios.
Taking that one step further, when I conducted this analysis,
I chose to ignore GDP growth in other parts of the world like the
U.S., EU and Japan. It's clear that these three regions face some
serious structural headwinds, but if substantial growth ever
returns, you're looking at additional commodity demand.
TER:
You've said the electrification of developing countries can be
interpreted as a new form of cold war. Could you elaborate on
that concept?
CB:
One of the core tenets of our investment philosophy is that
innovation will drive commodity demand. By this I mean innovation
in materials science will spur demand for commodities,
specifically for metals. As tens of millions of people join the
middle class, that puts upward pressure on commodities and leads
to an infinite demand for finite resources. The only way I can
see to remedy this, short of lowering our overall consumption, is
to innovate and essentially do more with less. So with respect to
a higher quality of life, the genie is out of the bottle in the
emerging world and can't be put back in.
What we're seeing now in countries such as China and the U.S.
is the spending of enormous sums of R&D dollars to innovate
and patent next-generation discoveries focused on energy
generation or energy storage. I liken this loosely to the Cold
War in that during that era, the Soviet Union and the U.S. were
trying to outspend each other militarily to ensure global
supremacy of land, sea and air. The main difference between then
and now is that the endgame in the Cold War was mutually ensured
destruction and the endgame today, in terms of R&D spending
on cleantech and greentech, is ownership of cutting-edge
intellectual property and patents. That is what can sustain and
foment a higher quality of life and also create jobs. Survival is
still at stake; it's just in a different context.
TER:
Is there a lack of consistent supply right now that's keeping
innovation from driving demand? Or is it just a matter of needing
more mines with more time for that to occur?
CB:
I don't think there's a lack of supply just yet. Again, it's hard
to use a broad brush to paint a picture when you're talking about
so many different metals and materials. However, I think that
we're looking at a supply crunch for select metals in the near
term. This is dependent on above-trend growth in the CIVETS and
TIMBIs as well as growth emanating from China. The rise of this
new middle class has created a new paradigm for investors. So
despite the fact that certain energy metals, like lithium, are a
little out of favor, I think that it's an interesting time to be
looking at the energy metals because if innovation will truly
drive demand, as I think it will, we're going to need many more
mines onstream and we're going to need them on soon.
TER:
What are some energy-related commodities that you expect to
benefit from additional demand from the TIMBIs and CIVETS as this
electrification theory takes hold?
CB:
Many commodities will benefit, but lately I've been spending most
of my time on lithium, graphite and uranium. Those are the three
that immediately come to mind.
TER:
What are some ideas in the lithium space that you're
following?
CB:
Lithium is unloved right now, to say the least, and I think that
investors probably took their focus off of lithium when the
run-up in the rare earth elements (REE) stocks began. That said,
lithium is still squarely in the crosshairs of research
scientists looking for the next breakthroughs in battery
technology. The lithium market today is an oligopoly in the sense
that you have four primary producers. As such, there really only
is room for the most promising juniors. Companies that I'm
following in the lithium space include
Talison Lithium Ltd. (TLH:TSX)
,
Lithium One Inc. (LI:TSX.V)
,
Western Lithium USA Corp. (WLC:TSX;
WLCDF:OTCQX)
and
Rock Tech Lithium Inc. (RCK:TSX.V; RCKTF:OTCPK;
RJIA:FSE)
.
Lithium One impresses me with solid management. This is a
proven team of mine builders and they know how to raise money-two
skills any junior must possess. The company also has a beautiful
brine deposit in Argentina called Sal de Vida, which is adjacent
to
FMC Lithium Corporation's (FMC:NYSE)
Fenix property. A preliminary economic assessment (PEA) was
completed on Sal De Vida in 2011 and confirms solid economics,
which I think will allow Lithium One to ultimately compete with
the established producers. The PEA demonstrated an operational
expenditure of about $1,537/ton (t) lithium carbonate and $184/t
potassium chloride. One of the main keys to success in the
lithium space is the ability to produce byproducts because it
lowers the overall cost of production. That is how an advanced
exploration play such as Lithium One can compete. The company has
also released an updated NI 43-101 resource estimate that
increased tonnage by 30% and also increased the grade of the
deposit by 10%. This was already a beautiful resource, and it
continues to get better. As Lithium One will be producing potash
as a byproduct, it has a ready customer in next-door neighbor
Brazil-a country with a voracious appetite for fertilizer.
A final strength of Lithium One is its ability to strike
strategic partnerships. The company has partnered with a Korean
consortium to carry it to feasibility on Sal De Vida. Lithium One
also has a hard-rock pegmatite project in James Bay, for which it
has partnered with
Galaxy Resources Ltd. (
ASX
)
. Given the expertise that Korean companies have demonstrated in
lithium battery technology and many of the synergies that the
Galaxy Lithium deal offers Lithium One, I am very confident that
these partnerships will pay off for shareholders in the future.
One final note, in the PEA the company produced on Sal De Vida,
the annual revenue from potash sales is planned to exceed the
operating expenses. This means the company will essentially
produce lithium for free.
TER:
Talison, which is the other company you mentioned, is already
producing and is a big supplier to China.
CB:
It's a huge supplier. Talison is, in my opinion, a misunderstood
stock. When you look at the overwhelmingly powerful position that
this company has in the lithium space and then you look at its
share price performance, there's clearly a disconnect. Talison
provides China with 75% of all of that country's lithium needs,
and it continues quarter after quarter to post strong financial
results. It has huge pricing power and was able to negotiate a
15% price increase beginning in January 2012 with its customer
base. Its production increased year over year by 7%. Included in
this is a 10% decline in cash operating costs/ton, so Talison is
raising prices and it's lowering its costs. So what do you think
that means going forward for cash flow? It's going to continue to
get better and better. Company management has told me they view
chemical- and technical-grade lithium demand as firm and only
getting stronger. Finally, the company is in the early stages of
planning a facility to produce lithium carbonate. This will help
it capture additional margin across the value chain. The real
catalyst for Talison is that this pricing power should translate
into increased cash flow and continued dominance in the lithium
markets.
TER:
We'll get to those other two companies that you mentioned, but I
want to ask this question. As you suggest, the lithium space is a
bit cool right now. Other than Talison's recent merger with
Salares Lithium Inc., in Chile, the consolidation that industry
experts were expecting hasn't occurred. What do you believe is
the path to shareholder value now?
CB:
Many juniors in the lithium space have been able to sustain
themselves through joint ventures or having a strategy of cash
conservation while exploring and defining a resource. A lack of
consolidation in this space speaks to how the lithium space is
structured. A small number of producers with large resources are
expanding. Talison is planning on doubling its production
capacity, and FMC has committed to increasing its capacity by 30%
in coming years. Rockwood has announced plans to increase
production capacity to 50,000 tons by the end of 2013. This has
really deferred consolidation as many aren't sure if there is
room for numerous additional players in the lithium space.
Clearly there is a lack of willingness to risk the capital
necessary. If there's an up-tick in electric vehicle or e-bike
demand, lithium will come back to the front pages, and then we
might start to see some consolidation. But right now, because
these producers own the market, it's really tough for anybody but
the best to break in. I don't believe that Talison, FMC, Rockwood
and
Sociedad Química y Minera de Chile S.A.
(SQM:NYSE; SQM-B:SSX; SQM-A:SSX)
need to be in an acquisitive mode just yet, as they are clearly
focused on organic growth through expanding current capacity.
TER:
Tell us about those other two names you're watching.
CB:
Western Lithium has a clay deposit in northern Nevada called
Kings Valley. It recently completed a prefeasibility study, which
shows very strong economic potential. Western Lithium will have
the ability to produce up to 27 thousand tons (Kt)/year of
lithium carbonate several years down the road after commercial
production commences. One of the keys to Western Lithium is its
potential operating costs, which are sub-$1,000/t when byproduct
credits are included. This is what would allow a company like
Western Lithium to compete with the big boys. I talked earlier
about research innovation, and Western Lithium is working with
the U.S. Department of Energy's Argonne National Laboratory to
develop lithium carbonate for various battery applications. That
tells an investor that the company can successfully partner with
research labs and produce battery-grade material, which is what
end users like LG Chem and Samsung need. You can't just dig these
resources out of the ground and then hand them off. Lithium
carbonate is highly specific to the end user. When a lithium play
has proven that it can produce a high-purity form of lithium
carbonate, it has a huge feather in its cap.
TER:
Western Lithium also brought some properties and royalties in
Nevada from Western Uranium Corp. (now
Concordia Resource Corp. (CCN:TSX.V)
). What do you make of that deal?
CB:
In the junior space, you're on a treadmill and what you try to do
is defray dilution during the march to commercial production or a
take out. Junior resource companies take their dilution in the
stock through equity offerings or take their dilution in the
ground through joint ventures. Any royalties that a company can
pick up are going to be beneficial to long-term shareholders as
they effectively allow the company to side-step shareholder
dilution and strengthen the balance sheet.
TER:
What's your view of Rock Tech and its Georgia Lake project in
Ontario?
CB:
This is one of the smaller companies that I follow in the lithium
space. I have been up to visit the Georgia Lake property, and
have seen the pegmatite outcroppings here. Rock Tech recently
completed a drill program and these results should add to the NI
43-101 resource estimate it currently has at Georgia Lake. In
Discovery Investing parlance, we refer to Rock Tech as an
incubator company. It is in the early stages of exploring its
properties and there is a chance for upside because of the
"mystery" surrounding what the drill results may tell us. Rock
Tech has also demonstrated the ability to produce battery-grade
lithium carbonate and will need to add to the size of this
resource, continue to define it and then I'd like to see it look
for some sort of a partner in the same way that Lithium One has
done with its James Bay property.
TER:
On to graphite.
CB:
The share prices of almost all of these graphite juniors in the
last couple of months have gone parabolic. Graphite is likely to
be the story of 2012 and we're fielding a lot of questions from
our subscribers on how to interpret this space and how to invest
accordingly. It is exciting, and there's a lot to learn about it
and a lot of potential for growth, but there also is apparent
excess capacity in China, which we think argues for extreme
prudence when choosing where to invest. That's one caveat that I
would offer in terms of thinking about investing in this space:
the potential that China could ramp up production, including
high-purity, large-flake graphite production.
TER:
We're also starting to hear about spherical graphite. Does this
form have any advantages, for example, through use in specific
applications?
CB:
The key to manufacturing an efficient lithium-ion battery is to
try and achieve the highest energy density for a given surface
area. Producers essentially shape flake graphite into a sphere to
realize the maximum energy density for the battery in the annode.
As this is a highly specialized product, it commands a higher
price on world markets. Access to spherical graphite isn't the
most important issue. More important is the ability to access the
large-flake, high-purity graphite in a stable geopolitical
jurisdiction at the lowest cost. Large-flake natural graphite is
currently one-third the price of synthetic graphite, which is
predominantly what's used in batteries. A real challenge to
vehicle electrification is the cost of the car and the bulk of
this cost is associated with the battery. If you can lower the
cost of the battery either through breakthroughs in
electro-chemistry or by using lower-cost raw materials, mass
adoption of electric vehicles may be here sooner than we
think.
TER:
What are some plays that you're following?
CB:
Northern Graphite Corporation (NGC:TSX;
NGPHF:OTCQX)
is a company that we've followed from before its initial public
offering and still really like. It has extremely strong
management that has experience in graphite mining. The metallurgy
of its Bissett Creek property right off of the Trans-Canada
Highway is very well understood, thanks to recent findings by the
company as well as a great deal of historical work. Northern
Graphite is well on its way to producing a bankable feasibility
study in Q112 or Q212. It's a highly scalable resource that
appears open in multiple directions and is likely to grow the
overall tonnage. Bisset Creek demonstrates a low capital
expenditure of CAD$70-80M and competitive cash costs of $1,000/t.
Finally, Northern Graphite released successful pilot plant test
results earlier this year, where results showed that more than
50% of the concentrate produced will be jumbo-size +48 mesh
flake, averaging 97.7% graphitic carbon. All of this adds up to
what I think will be a very high-margin business.
We also have been following
Standard Graphite Corp. (SGH:TSX.V)
. Again, when we look at these types of companies, the first
thing we look for is management. We would characterize this an
incubator company and the CEO, Chris Bogart, has experience in
the energy metals space. He ran Magnum Uranium Ltd., which was
taken out by
Energy Fuels Inc. (EFR:TSX)
. The vice president of exploration for Standard is Antoine
Fournier, who was on the team that discovered the Lac Knife
deposit, which is now the primary asset of
Focus Metals Inc. (FMS:TSX.V)
. It has 100% ownership of 12 properties in Ontario and Quebec,
all of which are early stage. There is no resource estimate on
any of these properties, but several of its properties surround
Bissett Creek and the Lac Knife deposit, so you can very loosely
use what we know about those properties as a proxy for what the
Standard Graphite properties might resemble with respect to
grades and tonnage. Standard also owns properties near the Lac
des Illes graphite mine currently owned by Timcal.
One of Standard's properties is also near a past-producing
graphite mine in Ontario called Black Donald. This was a prolific
producer of high-grade, large-flake graphite for many years.
Having 12 wholly owned properties is a good thing. I view it as
de-risking-in other words, you can conduct exploration on these
properties and find the best resource(s) and move forward on it
as opposed to putting all your chips in one basket and hoping
that your single project is a world beater, when it might not be.
The company is going to spend $5M this year on an exploration
budget. It's conducting electromagnetic (EM) surveys right now on
the properties and should have drill targets prioritized by this
summer. The stock has moved upwards in tandem with other graphite
plays this year, but I think it holds additional potential for
upside pending results from its exploration program.
TER:
Tell us briefly your thesis in the uranium space.
CB:
That's a timely question because, of course, of the recent
one-year anniversary of the Fukushima disaster. Uranium will be
in a supply deficit soon. The Megatons to Megawatts Program
between the U.S. and Russia is coming to an end in 2013. There is
a real question as to whether or not that will be renewed under
the same terms. Numerous countries, like Saudi Arabia, China, and
Russia are moving ahead full steam with a nuclear reactor
buildout. Nuclear power is one of the only sources, if not the
only source, that can provide reliable baseload electricity going
forward. So I see significant demand for uranium in the future
and it doesn't appear that supply will maintain the same growth
rate. This will put upward pressure on the price of uranium
soon.
TER:
Other than perhaps geothermal, but that's a ways off.
CB:
Yes. Nuclear is here and now. It's proven, and we know it works.
Advances are being made every year in nuclear technology in terms
of making it more reliable and safer through improved pebble bed
reactors or different reactor designs. So the technology today is
much different than it was 30 or 40 years ago. The demand for
cheap, affordable and reliable electricity paints a very bright
picture for uranium going forward.
We are watching
Strathmore Minerals Corp. (STM:TSX;
STHJF:OTCQX)
. Management has a great deal of technical and practical
experience in the uranium sector. The company has completed
strategic partnerships on its two primary deposits in Wyoming and
New Mexico, which are two of the most prolific uranium mining
districts in the United States. In Wyoming, the area of focus is
the Gas Hills district and Strathmore has executed a strategic
agreement with KEPCO, which is the Korea Electric Power Corp.
KEPCO now owns 14% of the company acquired through an $8M private
placement. I like this because it can lead to an off-take
agreement and provide Strathmore with a ready and willing
customer for its product. There is additional opportunity for
KEPCO to fund up to $32M worth of exploration at Gas Hills and
earn-in to 40% ownership of the project. The property in New
Mexico is called Roca Honda. This is a joint venture that
Strathmore has entered into with
Sumitomo Corp. (8053:TKY; SSUMF:OTCPK)
. It's a 60/40 joint venture in favor of Strathmore. This
property could be one of the largest and highest-grade uranium
mines in the United States we've seen in quite some time.
Currently, the project is in the permitting stage with a
feasibility study due later in 2012. I am hopeful for a mine
permit decision sometime in 2013. This is a company that has
high-quality assets in a solid jurisdiction, and it's done the
right thing in terms of partnering with potential end users who
also see the value in the company by spending so much time and
money to help develop the assets.
Another uranium company I've just started following is
European Uranium Resources Ltd. (EUU:TSX.V;
TGP:Fkft)
. It used to be called Tournigan Energy Ltd. This company can be
thought of as both a "pure" play and an "area" play. Its sole
focus is on developing uranium assets in Europe (Slovakia, Sweden
and Finland). With over 160 operating nuclear reactors in Europe
today, this seems to me to be a sound strategy irrespective of
what some European countries have said about a long-term move
away from nuclear power. European Uranium has a sound technical
team in place and a strategic investor in
AREVA (AREVA:EPA)
, which provides a huge stamp of credibility for the company. It
has recently released a prefeasibility study, which demonstrated
that the company could potentially be one of the lowest-cost
producers of uranium globally with a life-of-mine cost of $23/lb.
Going forward, the catalysts are additional drilling on its
centerpiece deposit in Slovakia, called Kuriskova, and a full
feasibility study that will provide additional clarity on the
economics of this property.
TER:
You recently launched your scorecard. How does it help investors
select these companies so they can reap rewards for them?
CB:
The DIS, or Discovery Investing Scoreboard, uses a word score to
rank each one of the 10 discovery factors. We use a word score as
opposed to a simple number to take out the subjectivity
surrounding the evaluation of these small cap companies. Rather
than subjectively assuming that Bissett Creek is a 7 out of a 10,
what you're able to do is say, "I think it's a very good asset."
What we then do is take all of these word scores that the crowd
provides us and combine them into a number. It's not a straight
weighted average. We want to see that the crowd scores-in other
words, the combined scores that you, I or anybody else who ranks
Northern Graphite might come up with-serve as a leading indicator
of share price performance. This can help investors make
decisions. Your readers can sign up for free at
www.discoveryboard.com
.
TER:
Thanks for talking with us, Chris.
Chris Berry
, with a lifelong interest in geopolitics and the financial
issues that emerge from these relationships, founded House
Mountain Partners in 2010. The firm focuses on the evolving
geopolitical relationship between emerging and developed
economies, the commodity space and junior mining and resource
stocks positioned to benefit from this phenomenon. Berry holds a
Masters of Business Administration in finance with an
international focus from Fordham University, and a Bachelor of
Arts in international studies from The Virginia Military
Institute. He co-authors a newsletter with his father, Dr.
Michael Berry, called
Morning Notes.
You can subscribe for free at
www.discoveryinvesting.com
.
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DISCLOSURE:
1) Brian Sylvester of
The Energy 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 Energy Report:
Energy Fuels Inc., Focus Metals Inc., Lithium One Inc., Northern
Graphite Corporation, Rock Tech Lithium Inc., Standard Graphite
Corp., Strathmore Minerals Corp., Talison Lithium Ltd. and
Western Lithium USA Corp. Streetwise does not accept stock in
exchange for services.
3) Chris Berry: I personally and/or my family own shares of the
following companies mentioned in this interview: Talison Lithium
Ltd., Northern Graphite Corporation and Standard Graphite Corp. I
personally and/or my family am paid by the following companies
mentioned in this interview: None. I was not paid by Streetwise
for participating in this story.
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