The Gold Report: In the Nov. 10 issue of the HRA Journal
under the title, "Janet's Kool-Aid Stand," you set your sights and
took some shots at U.S. Federal Reserve Chairman Janet Yellen. All the while,
her policies have helped bolster the U.S. dollar, the U.S. stock markets have
stabilized after an August swoon and seem poised for further gains. What's
not to like?
Eric Coffin: Janet Yellen has done an OK job. The biggest mistake
the Fed made was not raising rates in early 2014. The simple truth is that
the Fed has cornered itself. It has a major credibility issue given how
markets reacted to its wimping out in September. If the market stops
believing in its guidance, it has a bigger problem.
Frankly, I'm not as sold as everyone else is on the amount of upside the
market has right now. I'm concerned the timing may turn out to be fairly bad
for this rate increase even though the Fed doesn't really have much choice.
TGR: What do you think the Fed will do?
EC: I don't think this is going to be a traditional tightening
cycle where you see a rate increase at every meeting—far from it. After its
25 basis point increase yesterday, the Fed is going to go to extraordinary
lengths to convince the market that it's going to be a very slow upward move
in rates. It doesn't want to spook the market. It could be quite a while
before it raises rates again.
TGR: You follow macroeconomic indicators more than most newsletter
writers. What are two or three things that Eric Coffin is most focused on?
EC: In the U.S. I watch the Institute for Supply Management
indicators, both manufacturing and service. The manufacturing index turned
negative in the last couple months; service is still fairly strong, although
it has dropped too.
I watch the Cass Freight Index because that's a bit more of a coincident
indicator. Everyone obsesses about the U.S. payroll numbers. Obviously,
payrolls are important but there's a three- to four-month lag there in terms
of what the economy is actually doing today.
I'm also nervous about the divergence between the equity markets and the
higher yield market. I realize a lot of that is about what's happening in the
oil and gas sector because a lot of the high-yield debt is loans to the oil
and gas sector. But the divergence is becoming quite large. In my experience
it's quite often the debt guys who see market problems first. I'm not saying
problems in the debt market guarantee that the equity indices are going to
roll over but it's foolish to ignore it.
TGR: What's a telltale sign when you're looking at that market?
EC: If you stick an S&P 500 chart and a high yield index chart
side by side, you would notice that they tend to move more or less together.
A divergence basically started when Quantitative Easing 3 ended last year,
but the divergence has become significantly bigger in the last few months.
The S&P 500 has been bouncing along its recent highs, yet the high yield
index is probably 15% off its high. That's unusual. Either the S&P 500 is
going to new highs and the high-yield index will move up again or the S&P
500 will come down to meet it. Historically, more often than not, the S&P
500 comes down to meet it. Keep an eye on that.
S&P 500 and
High Yield Index Comparison
TGR: Uranium is one of the few commodities that seems poised for
gains. Please give us a brief overview of how you see the uranium market
shaping up in 2016.
EC: We have a mined supply deficit, but ever since the Fukushima
meltdown in Japan in 2011 two things have happened: uranium prices have
dropped significantly and supply has been coming into the market via destocking
by different utilities that no longer require uranium following the total
nuclear shutdown in Japan and a partial shutdown in Germany. Prices have been
declining almost continuously since Fukushima but if you're running a big
nuclear plant, the cost of uranium pellets is a relatively small part of your
operating costs. Obviously, you'd rather pay $35 a pound ($35/lb) versus
$100/lb, but the big factor for those utilities is that they need to make
sure they have deliveries.
Utilities commonly buy uranium with long-term contracts, which normally
make up about 80% of the uranium market. But in the last three or four years,
utilities haven't really deemed it necessary to sign long-term uranium
contracts, preferring instead to buy it on the spot market. There is a lot of
unfilled utility demand between now and 2025—some estimates put it as high as
1 billion pounds. The question is when do these utilities start getting
nervous and decide to go back into the market to make certain they have
enough. There will probably be a slight oversupply next year when you include
destocking supply and mined uranium. But 2017 is the point at which
you're probably going to see a real price move.
TGR: At what price do new uranium mines get built?
EC: If you want to incentivize mining companies to build uranium
mines, you probably need a uranium price in the $70/lb or $80/lb range. At
$35/lb, these companies are not going to build uranium mines. There will be
no new mine supply.
TGR: Are you following any uranium companies?
EC: The one uranium story that I'm following, which will be
presenting at the Metals Investor Forum, is Energy Fuels
Inc. (EFR:TSX; UUUU:NYSE.MKT; EFRFF:OTCQX). The company produces uranium
from both in situ recovery (ISR) and at the White Mesa mill in Utah, the only
operating conventional mill in the U.S. Energy Fuels will probably produce
700,000 to 800,000 pounds next year, not a big producer. It makes a little
money on production and has a good working capital position. It has permitted
a number of small resources close to the mill and is working on expanding
ISR.
TGR: Could Energy Fuels ramp up production if there is a sudden
price increase?
EC: Management doesn't really want to expand production unless the
uranium price moves sufficiently higher, but it is one of the few companies
that it is in a position to write long-term sales contracts and deliver into
them at two, three or four times its current production rate.
The company is adding a couple more header houses at its ISR operation.
Energy Fuels could probably take Nichols Ranch, which is the current unit,
the Hank unit and Jane Doe, which it is just finishing permitting on, up to
1.5–2 million pounds (1.5–2 Mlb) per year. That would probably take a year or
two, but it only makes sense to boost production at above $50/lb uranium, at
a minimum. The selling that it is doing right now is on long-term contracts
priced at about $55/lb.
TGR: What about its hard rock uranium assets?
EC: It has two or three smaller hard rock uranium resources in
breccia pipes fairly close to its White Mesa mill. Three of those, ranging in
size from 0.5, 1, 1.5 Mlb each, are already permitted. Its lead time on those
is probably from three to nine months. It has a couple of larger resources as
well, though they are not as far along in the permitting process. And White
Mesa is permitted for 8 Mlb/year, so it's not remotely close to capacity.
TGR: Are you following other uranium companies?
EC: Yes, but not formally in the newsletter. I'm a technical
adviser to Roughrider Exploration Ltd. (REL:TSX.V). If something
happens that's worth talking about, I talk about it in the HRA Journal,
but I don't put a rating on the company. It has a large land position on the
eastern side of the Athabasca Basin in northern Saskatchewan, basically
sub-basement rocks. Most of the large uranium discoveries in the last few
years, namely by Fission Uranium Corp. (FCU:TSX) and NexGen Energy
Ltd. (NXE:TSX.V; NXGEF:OTCQX) on the other side of the basin, were in
sub-basement rocks. That's part of the rationale behind these exploration
plays, that they find something that's not 1,000 meters below surface.
TGR: What's your advice to equity investors in the throes of
tax-loss selling season?
EC: Try to identify companies that are going to be subject to
tax-loss selling but that don't have to finance in the short term. You don't
want to be buying into a deal that's going to get hit on tax-loss selling and
then have to do a massive placement a month later. So you want a company
that's financed to carry it through next year or farther. You also want
strong management and projects that look practical at today's metal prices.
Then put in a stink bid and see what happens.
TGR: What are you going to talk about at the Metals Investor Forum
and why is this different from other resource events?
EC: I'm either going to be talking about why I was right about the
U.S. dollar topping or I'm going to be explaining why I wasn't. I think
there's real potential that the NYSE topped six months ago and that things
are going to look a lot uglier in two months. It's still a 50/50 proposition.
It's a fairly dangerous looking market in the U.S. There are very few companies
carrying that rally. I don't think we can ignore the potential for a bear
market in the near term. That potential is quite real but maybe Janet Yellen
can still save the day.
To address the second part of your question, unlike most other resource investor
conferences, the Metals Investor Forum brings you a curated list of companies
(such as some of the companies I discussed above) followed by one or more of
the newsletter editors that host it. It's invite-only for companies and the
number of presenting companies is strictly limited. Just as important, it's
invite only for attendees and we use a venue that limits the amount of total
attendance. This is not about making a room look full. It's about getting the
best list of presenting companies and an audience of subscribers that really
want to hear their stories together. You can't just walk in. You need an
invitation to register and attend.
After the success and positive feedback from our first event, we decided
to add a winter event so that our attendees could benefit from our experts'
advice during peak investment season. Serious investors have the rare
opportunity to meet the companies' executives in person, ask the hard
questions and really get to know the people managing your investment dollars
firsthand.
Streetwise Reports readers are invited to attend the free Metals Investor
Forum—click here now to register while seats are still available.
TGR: Thank you for your insights, Eric.
