The Critical Metals Report: Let's talk about specialty metals that present opportunities for investors. What's on your radar screen?
Rick Mills: There are several metals that we've taken for granted because the prices are low, such as nickel and uranium. I shake my head that copper is only $3.50/lb. A lot of what's going on in copper can be extrapolated to the other metals as well.
Let's start with capital expenditures, or capex. Mining is definitely one of the more capital-intensive businesses. There are large, upfront costs for construction of the mine. As the low-hanging fruit has been picked, companies have to go off the map to find deposits in remote areas with lower grades and more complex metallurgy. There is little to no infrastructure, so it can cost from $5 billion ($5B) to $9B to build today's mine.
TCMR: That's true of any metal you might mine.
RM: True enough, but some metals are more supply-side challenged than others. Operational expenditures are also continually increasing. These are day-to-day costs of operation—wages, tires, fuel and camp costs for employees. The average capital intensity, or the capacity to produce 1 ton (t) copper, for a new mine in 2000 was $4,000–5,000 ($5K). Today, capital intensity is north of $10K/t on average for a new copper project.
Some projects that are $5.5B are going to produce 60,000 tons (60 Kt) copper per year. Do the math; capital intensity numbers are scary. Capex costs are escalated because declining copper ore grades mean a much larger relative scale of required mining and milling operations, and a growing portion of mining projects are in remote areas of developing economies where there is little to no existing infrastructure.
TCMR: Could the declining growth of China, which is probably the world's largest consumer of copper, be contributing to a slowdown?
RM: China recently published figures saying that it has 1.9 million tons (Mt) copper in its inventory. It brought over a bunch of analysts and showed the copper all stacked up, the stacks leaning over and the ground compressing. The analysts came away suitably impressed that China has too much copper when, in fact, nothing could be further from the truth.
China has 1.9 Mt copper. About half of that would be in the supply line somewhere. It's going to be used. China usually keeps around 600 Kt as a rainy day fund. The bottom line is China needs 50 Mt copper during the next several years. If you needed that much copper, what would you be doing? What kind of games would you be playing if you knew you had to buy it in the open market? You'd be telling everybody that you had way too much. Let's face it: China needs copper. It's going to grow 7.7% this year. It has been growing at an average rate of 9–11%/year for 20 years.
TCMR: How does an investor capitalize on increasing copper demand and shrinking copper supply?
RM: Do you invest in an off-the-map area in a geopolitically risky country? I don't. There's enough risk in this sector without purposely increasing it. I also want something that's high quality yet small enough that capex and opex are not going to be a killer.
I look for a company that turns the negatives, the increased capex/opex, the increasing resource nationalism, the increased environmental regulation, etc., into nonexistents. One on my radar is VMS Ventures Inc. (VMS:TSX.V) There's little risk of resource nationalism on the Reed Lake deposit in Canada. Its well-funded partner, HudBay Minerals Inc. (HBM:TSX; HBM:NYSE), operates several mines in the area. One of them is going to be closing shortly, so the skilled people will become available. Reed Lake is a high-quality deposit. It's underground, but it already has infrastructure in the area. It already has the mill and the processing facility. Financing is not going to be a problem. Permitting is not going to be a problem because most of it is already permitted. The area is a well-known mining camp. I don't see any operational issues. There's little risk from environmental groups and/or labor.
It's an economically attractive project, because the risk has been removed. The cash flow for VMS is about $100 million (M) over the present mine life. It's a very attractive position for investors to start taking as this company is going into production next year. It will pay back its partner HudBay from its first year of production. In 2015, VMS is going to have an enormous amount of money in its coffers.
TCMR: Is it still exploring?
RM: Yes, the company is exploring the area around the mine and will drill from underground, trying to increase even further the size of the deposit, and VMS will shortly be releasing its winter drill plans on its 100%-owned projects.
TCMR: VMS' stock is trading at $0.19 with a $23M market cap. To what do you attribute the lag?
RM: The best time to buy a junior is when it's still exploring and hope it makes a discovery, or secondly, just before it puts out its first NI 43-101 or just before it goes into production. We're in that period of time now when there is not really a heck of a lot to report. It's that quiet time in front of production and its winter exploration program.
TCMR: What other metals are suffering supply shortages?
RM: Investors should be looking at nickel. It's present in more than 3,000 different alloys used in more than 300,000 different products.
About 65% of nickel is in alloy with chromium and other metals to produce stainless and heat-resisting steels. Another 20% is used in noncorrosive and super alloys. About 9% is used in plating and 6% is used for other uses, such as in coins, electronics and nickel-hydride batteries in cellular phones. Then there are nickel-cadmium batteries to power cordless tools and appliances.
The U.S. Department of Energy is funding research and development of renewable energy sources. That is expected to expand the use of nickel. It's quite interesting what they're discovering as new uses and increasing the old uses of nickel.
Nickel used to be produced from laterite deposits. When the Sudbury sulphide nickel camp was discovered in Canada in the early 1900s, it completely dominated global production.
The problem is that nobody is finding those large sulphide deposits anymore. We're going back to laterites, which are big, layered deposits of often a billion tons or more located close to the surface. Unfortunately, they necessitate different metallurgical applications and recovery processes for each zone or layer.
The processes have enjoyed a highly mixed performance record and can be extremely expensive. It's a little different for each deposit. A lot of the companies are having major problems with the metallurgy. Because it's lower grade, they have to go with that economy of scale.
Because the laterites are caused by weathering of ultramafic rock, they typically occur in equatorial zones. That means that a lot these deposits are located in the sketchier countries that carry heightened geopolitical risk versus the sulphides, which seem to happen in places like Greenland and Canada. The same thing that happened with copper is happening to laterites, with capital intensity shooting through the roof. Here's what's happening to a few of the deposits many are counting on for future global nickel supply:
Vale S.A.'s (VALE:NYSE) New Caledonia project, which used to be called Goro, is many years behind schedule. It's almost become the bad boy poster child for problems with one method of nickel mining technologies, HPAL (high pressure acid leach processing). Sumitomo Corp. (8053:TKY; SSUMF:OTCPK) and Mitsui & Co. Ltd. (8031:TKY) have reduced their participation. Vale has problems in its Onca Puma project. It doesn't even have a return of production yet. It shuttered its Frood mine.
Xstrata Plc (XTA:LSE) has increased the capex at its Koniambo project due to growing labor costs from competition from the oil and gas sector for an extremely limited labor pool on a very remote island. Its first pour was supposed to be earlier this year, but there has been no news from it. Xstrata has closed its Cosmos mine.
BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) has been trimming costs at its Australian operations.
Anglo American Plc (AAUK:NASDAQ) closed its 17 Kt/year Loma de Níquel mine due to disputes over mining concessions.
TCMR: With mines slowing down or shuttering production, have we seen any increases in the basic commodity price for nickel?
RM: The nickel glut is nonexistent and nickel is going to rally. There is no doubt nickel has been the worst-performing metal lately. However, BNP Paribas is now forecasting a much smaller-than-expected supply in 2013. It has cut its projection three times since April. Credit Suisse and Citigroup have lowered their forecasts. They're saying nickel is going to average 15% more in the second quarter than now.
TCMR: Where can an investor find companies with deposits that are cheaper to process in areas without jurisdictional and geographic problems? How can an investor participate in the nickel market if there's this kind of a looming shortage?
RM: One of the reasons market watchers are paring the supply forecasts is because all of these projects are falling behind schedule. The market balance is much tighter than everybody, except apparently me, has been predicting. There are a lot of operations and capacity that have run into various issues. Investors have to figure out which companies don't have these problems.
One that doesn't have these issues is North American Nickel Inc. (NAN:TSX.V). It owns a nearly 80-kilometer trend of historical nickel mineralization in Greenland. It has done a small drill program this year to start to define one of its almost 80 targets and had some very encouraging assays come back. It is going to be able to put together a much larger program and get at it next year.
The company is well backed by The Sentient Group and a large institutional player. VMS Ventures owns 26% of its shares and doesn't want to be diluted; financing is not going to be a problem. This is a company in which an investor can start to take a position and slowly increase it, knowing that there is some time to work on it.
TCMR: Are there any other metals that you want to talk about today?
RM: One that investors are missing the boat on is uranium.
TCMR: What's your take on uranium stocks right now?
RM: The question is: When do you buy? We talk about this all the time. It's when nobody else is buying, when the herd doesn't love it. That fits uranium pretty well right now. The fact is that investors aren't paying attention to what's going on on the supply side. The demand side is going to increase. Japanese reactors are off-line. Germany took its reactors off-line almost overnight. Chinese demand slowed as they do some serious safety studies.
Fukushima put a dark cloud of negative sentiment over the entire industry. Demand fell through the floor. People were worried, and rightly so. Everybody was watching the spot price. Utilities weren't buying; they were sitting on the sidelines, waiting for prices to come down.
China has released its new nuclear energy plans. It has moved toward safety. Any reactors currently under construction will be allowed to continue, but the new reactors will have to use the third-generation technology, the European Pressurized Reactor or the AP1000.
This is a huge boost for the demand side. China has 12.5 gigawatts (GW) in operation with 26 GW under construction. It wants 40 GW in nuclear power by 2015 and to reach 80 GW by 2020. China is back in the market. Yes, the Germans are going to sell, but now we're finding out that Japan is reopening its nuclear reactors, and I have no doubt it is going to build more.
TCMR: And Germany?
RM: Germany is totally green-washing the world. The monkeyshine coming out of Germany today is off the wall. It is importing more and more nuclear-produced electricity from Holland, the Czech Republic and France than it ever was. It touts itself as a poster child for green energy, yet its industry is suffering and leaving in droves because of blackouts or brownouts and the high cost of electricity. Germany is sucking up nuclear-generated power, just not from reactors on its own soil.
A lot of people don't know that Germany is currently building 23 new coal-fired power plants because it is worried about the increasing costs of electricity and its industry leaving. If you can't do business because of brownouts and blackouts, you're going to move to where you can get a steady supply of electricity.
Germany opened a $3.4B, 2,200-megawatt (MW) coal-fired power plant just in August. Instead of the 15 t of carbon dioxide (CO2) the old ones vomited, these new ones, which are 10% more efficient and burn only the cleanest coal ignite, still pump 13 Mt CO2 into the atmosphere. In just one year, this coal burner is going to generate more CO2 than Germany's entire nuclear fleet would have over 20 years. Germany's "green energy" plan doesn't work; the country can't afford to be without nuclear energy and it's very obvious that Japan can't, either.
TCMR: Let's talk about uranium companies that you like, Rick.
RM: Nuclear power is not going away. In fact, it will increase exponentially. Mine supply is at $40/lb spot price. You need $70–85/lb incentive price to get new mines going. And then it takes 10 years to get a uranium mine up and running.
Let's focus on the U.S. The U.S. uses 55 million pounds (Mlb) uranium per year. It produces 4 Mlb. Where is the U.S. going to get its uranium? There are two companies that are going into production right away. I'm not going to mention a certain name because I don't like being negative, but one of the companies might not make it. Apparently, there are some sage grouse nests on its property. We're going to save the birds.
TCMR: Which one will go into production?
RM: The one that's going to make it into production next year is Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.MKT) in Wyoming. It is fully permitted. It is building the pads for the first deep disposal well, which should take several months. Then it will need to build a second. The Nuclear Regulatory Commission has to do an inspection. It will probably take about a month to complete the inspection. I expect Uranerz, barring any inspection delays, to be in production by the end of July 2013. It has two offtake agreements already signed at a much higher price than spot. It has Cameco Corp. (CCO:TSX; CCJ:NYSE) doing its processing. It is going to be producing 600–800 Kt/year yellow cake. It's in-situ leaching and the company is the world's leading expert on it.
TCMR: I really enjoyed our conversation.
RM: It's been a pleasure, thank you.
Aheadoftheherd.com, as well as publisher, editor and host of the website. Focusing on the junior resource sector, Mills has had articles appearing on more than 400 different publications, including The Wall Street Journal, Safe Haven, The Market Oracle, USA Today, National Post, Stockhouse, LewRockwell, Pinnacle Digest, Uranium Miner, Beforeitsnews.com, Seeking Alpha, Montreal Gazette, Casey Research, 24hgold, Vancouver Sun, CBS News, Silver Bear Cafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FN Arena, UraniumSeek, Financial Sense, GoldSeek, Dallas News, VantageWire and Resource Clips.
