The Gold Report: Do you see gold trading range-bound through
the remainder of this year?
Paul Renken: Unfortunately, yes. We recently had to downgrade our
outlook both on gold and silver for the year. We're looking at an average
price of $1,225 per ounce ($1,225/oz) gold in 2015. We were always convinced
that gold wasn't going to test below $1,100/oz and we're still convinced. By
the same token, we're not seeing the overall macroeconomic growth rates that
would cause more risk-averse interest in precious metals.
TGR: What are some small, lesser-known gold companies that you're
following?
PR: We've been following Eagle Hill
Exploration Corp. (EAG:TSX.V) for quite some time. It's a stock that
Dundee Capital Markets President and CEO Ned Goodman had taken a significant
position in a couple of years ago. I always liked the geology of the Windfall
Lake deposit. I could essentially see that the grade was going to be there
and that the feature containing the gold mineralization had not been
sufficiently drilled. Further drilling now indicates that Windfall has
significant size at significant grade.
The share price, however, was eroding, much to the detriment of
shareholders who believed in the story, but now it's involved in the roll-up
of several different companies that Goodman has significant positions in. The
marketplace for Toronto Stock Exchange junior gold stocks is such that
consolidation is essentially an imperative for a number of companies in order
to get development capital.
TGR: Any others in the micro-cap space?
PR: I like Serabi Gold Plc (SBI:TSX; SRB:AIM). The company's primary
interest is the Palito gold mine in the Tapajos region of northern Brazil. I
like that stock because it is expanding its production capacity on a
higher-grade satellite project nearby to its Palito underground mine named
Sao Chico. It will soon have two producing underground mines near each other
and it is increasing its mill capacity to take advantage of that. We can soon
expect some positive news from Serabi.
TGR: How about other gold companies that you mentioned the last
time you talked
with The Gold Report?
PR: There is Hummingbird Resources Plc (HUM:AIM), which picked up Gold
Fields Ltd.'s (GFI:NYSE) non-core Yanfolila gold project in Mali. Yanfolila
was just not large enough for Gold Fields to take forward but it is a
decent-sized deposit for a company the size of Hummingbird. And the company
has made Yanfolila its first priority and plans to bring it into production
as soon as possible. It also has Dugbe gold project in Liberia. The
investment community, at least on this side of the pond, had some success
backing Aureus
Mining Inc. (AUE:TSX; AUE:LSE), which just put its New Liberty gold mine
into commercial production in Liberia. A lot of people are now shifting into
Hummingbird with the idea that Hummingbird might be the next one.
TGR: Changing the subject, a major component in batteries, which
are on investors' radar due to Tesla
Motors Inc.'s (TSLA:NASDAQ) Nevada-based Gigafactory, is graphite,
especially large-flake graphite. China also has major battery manufacturing
facilities in the works. Is there a shortage of large-flake graphite in
China?
PR: Yes and no. There is a shortage of what you would call the
"premium" material. But, no, there isn't an overall shortage of
flake graphite. The graphite market is still about 90% dominated by the finer
flake or amorphous-size material, which goes into the refractory market and
not the battery market, which takes the coarser flake material. In fact, a
number of producers are grinding larger flake material into finer sizes
because that's what 90% of the offtake market demands. Unfortunately, because
of the softening Chinese economy, large-flake prices are down about 30% in
the last nine months, whereas the prices for finer sizes are only down about
15%.
TGR: Do you see China becoming a net importer of graphite?
PR: I see China importing specific grades of graphite. Most of the
mines there have worked through the easy material and now, due to new
regulatory requirements and higher production costs, it is difficult to find
certain grades and qualities of graphite.
TGR: What do you look for in a graphite company?
PR: I want two things. First, I want to know whether a particular
company has a clear vision of the target market for its product and supply.
The impurities in a particular graphite deposit will limit the end users. If
you have a natural, high concentration in elemental graphite, as in some of
the vein deposits in Sri Lanka, you have a ready-made market regardless of
the flake size. On the other hand, you may have a large deposit with a lot of
embedded silica or other waste material, which could make the graphite costly
to upgrade.
Second, I want a company that can bring its contained carbon grade up into
the high 90% range, where it would fetch premium pricing. Once graphite falls
below 90% carbon, you end up with low concentrate pricing due to impurities.
That makes a huge difference in the production margins.
TGR: Which graphite companies have a clear vision of the market
they're looking to supply?
PR: We follow a couple of names. Flinders
Resources Ltd. (FDR:TSX.V) brought an old graphite deposit in Sweden back
into production. Its marketplace, at least for now, is in the refractory
market, which requires the finer-size grades of graphite.
We also follow a company on the Australian Securities Exchange called Talga Resources
Ltd. (TLG:ASX). Talga's Vittangi deposit is also in Scandinavia. It's a
near-surface deposit with grades of over 16% graphite, which is three to four
times the average grade of other deposits around the world. It's only
exceeded by a couple of vein graphite deposits in Sri Lanka. It has a natural
grade advantage, and should be able to compete on a coarse-flake graphite
basis with anyone in Europe.
TGR: Any others?
PR: Syrah
Resources Ltd. (SYR:ASX) comes to mind. We follow Syrah, but not because
the deposit is particularly interesting in terms of geology or grade. The
bottom line is that its Balama graphite and vanadium deposit in Mozambique is
so large it could essentially produce all the graphite needed in the world
for the next 100 years, according to any reasonable outlook.
TGR: Is Balama meeting expectations?
PR: Syrah is taking a measured approach because if it produces as
much as it possibly could, it would flood the market. All of these graphite
producers and their deposits are unique in metallurgy, and in what it takes
to get to the grades that offtakers want. There can't be a cookie-cutter
approach from one deposit to the next; each has to be carefully engineered.
TGR: Do you have at least one more?
PR: StratMin
Global Resources Plc (STGR:AIM), a small-scale producer in Madagascar, is
listed on the London AIM Exchange. That's an interesting situation because
the company has boosted its concentrates up to 94% purity, which is close to
premium-pricing grade. Its position in Madagascar should provide some cost
advantage in delivering carbon to refractory or battery businesses to either
South Africa or India. We watch StratMin pretty closely.
TGR: Do companies like Syrah and StratMin have a certain advantage
given that it is not that difficult for them to ship product to China from
southern Africa?
PR: The graphite market is small enough that the logistical
distance isn't so much of an issue as the quality of graphite produced at
individual operations. If there is more than adequate supply, like there is
now, then whoever gives you the best quality at the best price gets your
order, and everybody else has to wait. When there is a shortage, compromises
can be made in terms of concentrate grade or how far you have to ship.
TGR: Rare earths elements (REEs) are used in all sorts of modern
technology. Are you starting to see the global impact of China's recent
policy changes for domestic REE producers?
PR: In one of the most recent policy changes, the Chinese
government has moved to comply with the World Trade Organization
determination that its prior method of controlling supply in and out of China
was improper. China still allocates a certain amount of REE production to
each domestic producer, but it has imposed a series of taxation measures for
exports, which is essentially what other countries do. That makes the
availability and cost of Chinese REEs more transparent, and it becomes about
who has the best margins producing REEs and can afford the export taxes.
REE prices are weak due to oversupply, mostly as a result of the economic
slowdown in China. In time, just like in the graphite market, that will work
itself out, because the Chinese REE producers have to meet regulatory and
environmental standards and that means some will go out of business. If the
Chinese government can gain greater control of illegally exported REEs, then
we should see an improvement in prices, particularly in what are considered the
heavy rare earth elements (HREEs).
TGR: You said there was an oversupply of REEs. Does that pertain to
all of them?
PR: Some REEs are in a supply-demand balance, such that their
prices are holding firm. The rest are in oversupply—particularly the light
rare earth elements (LREEs), including cerium. REE deposits are going to
produce excess amounts of cerium in almost every situation. Cerium is still
used, particularly as a polishing compound for optical glass, but its supply
greatly exceeds demand.
But that creates opportunity for manufacturers, because firms will come up
with new uses for a material when they know that for the next two decades or
so it's going to be a relatively low-cost raw material.
TGR: What are three things you look for in an REE company?
PR: With REEs, just like graphite, it depends on how complex the
recovery process is; how difficult it is to get the REEs separated into
individual elements. Historically, REEs were in monazites. Then, in China in
recent years, REE-bearing clays became the primary source.
Now, there is focus not only on REE clays, but also on REE-bearing
apatite. Mkango
Resources Ltd.'s (MKA:TSX.V) Songwe Hill rare earth project in Malawi has
its REEs contained in an REE-bearing apatite. Apatite is a phosphate mineral
that's been recovered for decades, so the metallurgy is well known and
processing it is simple.
With REEs, it's not necessarily about the overall grade. A deposit's
mineralogy and metallurgy are the most important components. For example, Tasman Metals
Ltd. (TSM:TSX.V; TAS:NYSE.MKT; TASXF:OTCPK; T61:FSE) is developing the
Norra Kärr REE deposit in Sweden, which has a relatively low grade at just
under 0.5%. But for whatever geological reason, Norra Kärr is skewed toward
the HREEs, the valuable ones that go into magnets. It's a significant
deposit.
TGR: What other companies are you following?
PR: We also follow Commerce Resources Corp. (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX),
which is developing its Ashram REE deposit in far northern Québec. That
deposit is quite large, but we need to know how companies are going to
overcome the logistics of being a distance from established infrastructure.
TGR: Any progress on that?
PR: The Québec provincial and federal government's investment in Plan
Nord will see a new road built closer to Commerce Resources' Ashram
deposit, but the site is even farther north than the road. It will be
interesting to see, as Plan Nord proceeds, how it will change the
overall flow of materials moving into the northern part of Québec. As that
improves, so too will the logistical possibilities for Commerce getting
Ashram into production.
TGR: Do you have some parting thoughts?
PR: Mining has been such a poor investment for institutions over
the last three or four years. But by the same token, it looks like the London
market has turned. It's leading the other markets like the Toronto Stock
Exchange and the Australia Securities Exchange in that regard.
TGR: Thank you for talking with us today, Paul.
Paul Renken has a broad range of experience in various
aspects of the mining and minerals business. He began his career as a
geologist for Canadian junior resource companies in the Western United
States. Owning a stake in a private consulting firm as vice president of exploration,
Renken searched for various base metals, precious metals and industrial
minerals. In the UK, he worked in the equity market media outlets of
Digitallook and Hemscott before joining VSA as mining analyst in 2006.