Minor metals, major money

Minor metals, major money
It isn’t just the well-known metals that have been on the up in recent years, says Dave Forest of Casey Research. Many of the ones you’ve never even heard of have been soaring too.

Encouraged, no doubt, by the spectacular gains in uranium, many investors have come to realise that there is money to be made outside the centrally traded metals.

A number of the lesser-known metals, flying under the radars of most investors, have quietly outperformed gold, silver, copper and nickel many times over.

Probably the best-known example is molybdenum – a steel additive – which has appreciated over 1,000% in two years. But even iron ore has jumped 71.5% so far in 2005.

There is a host of other “minor metals”, which are less well-known, but, in many cases, equally profitable. The following is a quick reference guide, from antimony to vanadium, to some of the lesser-known metals, covering their uses, production, price history and, of course, the firms that benefit from selling them.

Not all of the companies mentioned are ones that we watch very carefully here at Casey Research, and some therefore haven’t been subjected to our detailed due diligence. Rather, they are included here to give you some “first-pass” ideas for further research. As always, your odds of coming out ahead are enhanced if you do your homework before investing.

Antimony

Antimony is used in flame retardants, plastics, glass for TVs and computer monitors, and in lead-acid batteries. Production is mainly concentrated in China, which accounted for 85% of world output in 2000. The average annual US price for antimony has increased more than 100% over the last five years, from $0.66/lb in 2000 to $1.27/lb in 2004, spiking as high as $1.55/lb in October last year. The current price is about $1.45/lb.

These price increases may not be sustainable as there are a variety of metals and compounds that can be substituted for antimony if prices get too high. As prices strengthened in 2004, global consumption dipped, with use in the US falling to a five-year low. Yet because secondary US production of antimony has fallen 47% in the last five years, US stockpiles in 2004 were still reportedly at a five-year low.

One of the companies we watch, Eurasian Minerals (V.EMX), is currently carrying out exploration in the Zajaca district of Serbia, which has been a large producer of antimony in the past.

Crosshair Exploration (V.CXX) is exploring Newfoundland’s Botwood basin, a region that has significant antimony reserves. Both these firms could benefit from credits on the metal if the price keeps rising.

Beryllium

Beryllium is used to make speciality alloys for electronics, defence applications and the automotive industry, and demand strengthened in 2004, with US consumption rising to 220 tons from 180 tons in 2002.

The metal’s high-end applications give it a small but steady market. Prices are set on contract and have thus remained steady over the past five years. About 65% of beryllium reserves are found in the US, although the only mine production during the past year has come from one private Utah-based firm, Brush Resources. Reserves are also known in China, Kazakhstan, Mozambique and Russia.

Avalon Ventures (V.AVL) recently acquired Canada’s Thor Lake beryllium property and will reportedly soon begin auditing its resource estimates. QGX Ltd (T.QGX) has a project in Mongolia that reportedly contains beryllium.

Bismuth

Bismuth may have significant growth potential as it is increasingly being used as a steel additive and as a non-toxic lead substitute in other alloys. US consumption reached a five-year high in 2004 at 2,400 tons, up 12% from 2003.

The metal is mainly produced as a byproduct of lead ore, which has meant limited production over the past few years, as there have beenfew lead mine start-ups. This may change now that the lead market is is picking up.

The bismuth price rose significantly throughout 2004, averaging $3.43/lb in the fourth quarter – up 19.5% from $2.87/lb in 2003 – and spiking as high as $3.85/lb in New York. If the price stays high, the market may see some moth-balled capacity come back online, notably the Tasna Mine in Bolivia, which is one of only two facilities in the world producing primary ore.

Tiberon Minerals is in the process of completing a final feasibility study on its Nui Phao deposit in Vietnam, and Fortune Minerals (T.FT) is working up a feasibility study at its NICO project in the Northwest Territories. QGX’s Mongolian property also contains bismuth.

Update: Tiberon Minerals was acquired by private equity fund Dragon Capital in 2007.

Cadmium

The market for this toxic metal has shrunk over the past few years, due to tightening environmental controls, with US consumption shrinking about 70% since 2000. More than three-quarters of the cadmium still used for industrial applications now goes into batteries.

The decline in production has recently caused the price to rise to an average $0.60/lb in 2004, up from $0.16/lb in 2000. Most recent price reports show the pace of price increases has accelerated in 2005, with cadmium currently going for as much as $0.90/lb.

The market may soon be hit by an EU proposal to ban batteries containing more than 0.002% cadmium, but consumption for battery making in developing nations may offset this. Klondike Gold Corp (V.KG) holds several mines in British Columbia that have in the past produced some 200 tons of cadmium. Noranda also produces cadmium as a zinc byproduct.

Update: Noranda merged with Falconbridge Ltd in 2005, which was in turn acquired by Xstrata in 2006.

Chromium

Largely used as a component of stainless steel and superalloys, chromium has benefited from the strength of the global steel market, with the average price for chromite ore rising to $100/ton in 2004, up from $54/ton in 2003.

The price rise was partly due to the strengthening of the rand. South Africa produces more than half the world’s chromite, and the strong currency has forced producers to up prices in order to stay profitable.

The price rises have continued this year, with some ores fetching $195/ton. The outlook is good. If prices were to fall, it would probably force higher-cost producers in China and India to shut their doors, thus tightening supply. Noble Metal Group (V.NMG) is planning a drill programme this summer on its Kiethley Creek project in British Columbia. Niogold Mining (V.NOX) also has chromium targets on its Le Tac property in Quebec.

Cobalt

Cobalt is used in a variety of speciality chemical and metallurgical applications, such as jet-engine superalloys and, to a lesser extent, steel.

Cobalt enjoyed a surge in price during 2004: the average price on the year jumped to $24.50/lb from $10.60/lb in 2003. But toward the end of the year, high prices encouraged substitution, causing the price to drop back to its current $16.50/lb.

The cobalt market may be adversely affected by the development of copper-cobalt projects in the Democratic Republic of Congo, a nation that hosts nearly half the world’s cobalt reserves, which have largely gone untapped in recent years. With peace breaking out in the area, these reserves should hit the market – and the cobalt price.

Tenke Resources and International Barytex (V.IBX), both of which we follow at Casey Research, are both advancing projects in the DRC containing significant cobalt credits. Such operations can produce cobalt relatively cheaply as a byproduct and could greatly increase the global supply of the metal.

Update: Tenke was acquired by Lundin Mining Corp in 2007.

Manganese

Manganese is a steel additive and consumption in the US increased by 50% in 2004 to 925,000 tons, reaching its highest level since 1981. Prices have risen accordingly, from an average $2.30 per metric ton unit of manganese content in 2002 to as high as $4.50 earlier this year.

The major driver behind the run-up in the manganese market has been increased steel production, both in China – where output was up nearly 25% in the first four months of 2005, year on year – and the US. Between 2001 and 2004, use of chrome-manganese steels grew 125%. Barring a major collapse in commodities markets, steel – and therefore manganese – should stay strong.

Peruvian explorers Vena Resources (V.VEM) hold the Azulcocha project, which has produced manganese in the past and hosts an estimated 3,295,000 tons of high-grade zinc and manganese ore. The firm is currently completing a feasibility study on the property.

Selenium

Selenium has been one of the biggest movers over the last year, with its price up from an average of $5.68/lb in 2003 to a current $51/lb – nearly an 800% increase.

The metal is used as an additive in glass, in the manufacture of electronics, as a dietary supplement and as a component of alloys. The price has risen even in the face of a sell-off in 2003 of large stockpiles of the metal, which had accumulated during a period of low prices.

Much of the world’s production is committed to long-term contracts, which means there is almost no selenium available on the spot market, a factor that has helped drive prices up as panicked buyers searched for supply. Selenium is almost entirely produced as a byproduct of zinc and copper mining.

This is another reason for the recent price strength; depressed production of these metals over the years meant there was little output of selenium. With base-metals production now ramping up, there are several producers who could put out significant amounts of “sweetener” selenium. As global production of copper, zinc and nickel increases, it is almost certain that selenium output will rise too.

Most of the world’s known selenium reserves are in the US, Canada, Chile, and Peru. Increased prices for the metal have recently breathed life into a number of formerly uneconomic projects, including Yukon Zinc’s (V.YZC) Wolverine deposit in the Finlayson district of the Yukon. Partners Atna Resources (T.ATN) and Consolidated Pacific Bay Minerals (V.CBP) are also working the Ty Property, which reportedly contains selenium.

Tungsten

Tungsten is primarily used in speciality alloys. China is, again, the key to the historically volatile tungsten market. In 2004, the Chinese produced 88% of the world’s tungsten. Given this near monopoly, the tungsten price is vulnerable to events in China. Over the past five years, the Chinese government has moved to restrict tungsten ore exports.

The move has been motivated by greater domestic demand for the metal and by a shift toward exporting finished tungsten products rather than raw ore. In 2004, US imports of Chinese raw tungsten averaged 783 tons per month. In January of 2005, it was only 694 tons.

In 2003, the market was also hit by the closure of the only operating Canadian tungsten project (operated by North American Tungsten, V.NTC). The resulting supply shortage has driven the spot price up from an average $50 per metric ton unit (mtu) in 2003 to recent highs of $220/mtu.

Given this run-up, NTC is now considering reopening Cantung, which, along with another of the company’s deposits, holds 15% of world tungsten reserves. NTC’s share price has skyrocketed, recovering from as low as C$0.15 in late 2004 to a current C$1.42 – up 850%.

Sultan Minerals (V.SUL) recently acquired a mine in British Columbia, and Copper Ridge Explorations (V.KRX) is looking into a project in the Yukon. But the hopes of getting a bigger bang out of the market are looking less well founded, given that NTC is planning to restart production in August of this year, something that will increase the supply by 6.67%.

With that in mind, and remembering that world supply and demand are reported to be close to balanced, it’s unclear how much room will be left for producers coming late to the party. That said, NTC did recently suggest that it had received interest from buyers for significantly more tungsten than Cantung can produce.

Vanadium

Vanadium is mostly used in metallurgical applications and the price for vanadium pentoxide has risen from a five-year low of $1.34/lb in 2002 to a recent high of $22/lb, a gain of 1,542%.

While the surging steel market increased US vanadium demand by about 13% in 2004 (and by an undetermined, but large, amount in China), the market has also benefited from tightness on the supply side following the apparently permanent closure in 2003 of two major producers, including Australia’s Windimurra Mine and South Africa’s Vantech Mine, taking some 11,500 tons of annual production off the market, over a quarter of total world output in 2003.

Chinese output also appears to have played a role; in 2003, mine production from the country dropped to 13,200 tons, down from 33,000 tons in 2002, in the face of increased domestic demand and closures of low-quality operations.

As with metals such as manganese and molybdenum, the fate of vanadium is largely dependent on the steel market. However, there has already been a significant supply response to the increased vanadium price, with global production rising 9% in 2004.

South Africa’s Highveld Steel and Vanadium has announced plans to increase its output of the metal by 30% over the next two years, which would bring 20,000 tons of new metal to market, increasing global output by nearly 50%. As Xstrata, one of the world’s largest vanadium producers, points out, this means that the short-term outlook for vanadium demand might look healthy, but it is “unlikely to be sustainable over the longer term”.

Another development that may speed the decline of the vanadium price is the boom in uranium. Vanadium is often found within uranium deposits. As more uranium mines are brought on stream, more vanadium may begin to turn up. Such operations may be a better way to play the vanadium market, as combined uranium/vanadium producers will be more stable than primary vanadium miners.

Uranium Power Corporation (V.UPC) recently optioned the Sahara uranium mine in Utah, which contains equal amounts of uranium and vanadium. Utah-based Energy Metals holds the Velvet uranium property, which also reportedly holds significant vanadium.

Update: Energy Metals was aqcuired by Uranium One in 2007.

Dave Forest is senior editor at Casey Research

How do you choose between the minor metals?

Obviously there are real investment opportunities to be had in the minor metals. And there are more niche markets than the ones mentioned above, such as rhodium, gallium, thorium and osmium.

But when it comes to non-exchange-traded metals, there are a few important considerations to bear in mind. First, the overall size of the market: while some of the metals mentioned here, particularly the steel-making compounds, have global markets in excess of a billion dollars annually, many minor metals only trade in the millions per year.

This is important, because without a central exchange to buy metal, it’s up to producers to seek out buyers and secure purchase contracts. In a market that only does a small volume of business yearly, it’s harder for a start-up operation (the type speculators look for to yield sizeable returns) to break in. In a billion-dollar market, the range of opportunities is usually larger.

Also consider the diversity of the market for the various metals. Molybdenum, manganese, chromium and vanadium are all mainly dependent on a strong steel sector. If this market turns down – which it could in the event of a significant softening in the US or Chinese economies – prices for these metals will also drop. However, metals like antimony and selenium are used in more diverse applications, and so are more robust in the face of shifting economic dynamics.

Finally, it pays to cast a sceptical eye over pure plays in these metals, given their historically volatile price ranges. Considering that it can take several years to identify, prove up, permit and put a deposit into production, firms just starting now on a vanadium or tungsten deposit may find themselves behind the curve – the price may be falling just as they begin putting out their first metal.

That’s not to say there won’t be opportunities for pure producers; it’s possible that the steel sector, for example, could stay strong for several more years, providing a market for new manganese or molybdenum miners.

Investors shouldn’t get giddy looking at current lofty prices, but must think on a mid- to long-term basis. Ask the management of firms you’re interested in: “How low can the price of the metal go and your deposit still prove economic?”

A number of the minor metals are byproducts of larger-market metals, such as uranium and copper. If you like a minor metal, consider plays in the co-produced, larger-market metals as lower-risk vehicles for investment. If minor metals prices stay strong, these producers garner added profit. If not, they don’t totally lose out.

Land titling in India

India’s Space Program May Help Fix Land Market: Andy Mukherjee

Commentary by Andy Mukherjee

May 6 (Bloomberg) — A rocket head being carried on the backseat of a bicycle.

That’s how French photojournalist Henri Cartier-Bresson’s camera captured the initial years of India’s space program, which began in the early 1960s.

Many of the program’s critics noted at the time that Prime Minister Jawaharlal Nehru was squandering the country’s severely limited budgetary resources on an elitist reverie far removed from the realities of the newly decolonized, poor nation.

Author and former United Nations diplomat Shashi Tharoor described the tension in his 2003 biography of Nehru. “There was no limit to his scientific aspirations for India,” Tharoor wrote in “Nehru: The Invention of India.” “And yet the country was moored in the bicycle age at least partly because of his unwillingness to open up its economy to the world.”

Four decades after Nehru’s death, his economic legacy, especially a dangerous flirtation with Soviet-style state planning, stands largely discredited.

Yet his scientific aspirations are coming to fruition in an India that is twice as open to the world as it was just a decade ago, judging by the flow of trade and overseas investments in relation to the size of the economy.

Last week, India put 10 satellites into orbit in a single mission, creating a new world record.

Among the payloads was Cartosat-2A. It’s an indigenously developed remote-sensing satellite that has already begun beaming high-resolution pictures of the Indian hinterland, setting the stage for what may be a revolution in the nation’s finance.

Satellite Communication

India has already made extensive use of domestically developed communication satellites.

In the mid-1980s, satellites made it possible for India to export computer software written in Bangalore to the U.S. In the 1990s, the same technology enabled India to set up a modern, nationwide, electronic stock market circumventing the lack of a robust, terrestrial communication network.

In the southern Indian state of Andhra Pradesh, students in remote villages get access to an English teacher in the city via a satellite link. Later during the day, the same link may be used to set up a video conference between an urban doctor and his rural patients.

Indian scientists have also effectively used images from outer space to map the missing nutrients in barren land so it can be reclaimed for agriculture. The next step is to combine satellite pictures of landholdings with field surveys and create a unified register of property titles.

Land Titles

That’s going to be a key use of the images obtained from Cartosat-2A. These will have a resolution that’s 36 times sharper than that of the images clicked by India’s first remote-sensing satellite in 1988.

“Land is probably the single most valuable physical asset in the country today,” a government-appointed committee on financial-sector development noted last month. “Unfortunately, the murky state of property rights to land makes it less effective as collateral than it could be,” said the panel headed by University of Chicago economist Raghuram Rajan.

Improving the collateral value of land will mean more bank credit to more entrepreneurs at cheaper rates.

The first stumbling block to achieving this goal in India is the absence of reliable visual representations of what a landholder actually owns; surveys in India have traditionally covered farmland because the British rulers had a strong revenue interest in it.

Rural and urban dwellings have largely been left out. Not just that. A survey in Andhra Pradesh found that 9 percent of village maps were either torn or faded; an additional 29 percent were missing from official records.

Gains Forgone

“Unless alternative options — for example, use of satellite imagery — can be explored, reconstituting village maps in the 30-40 percent of cases where these are either missing or not usable will require huge amounts of fieldwork,” noted a 2007 World Bank study. “Given the cost involved, it isn’t surprising that this has rarely been done in practice.”

More than five years ago, McKinsey & Co. warned that India was losing as much as 1.3 percentage points of economic growth because of distortions in the land market, including titles that weren’t legally foolproof.

One of the indirect costs shows up in very small farmers not leasing out their land to those who actually have the stomach for taking the risks associated with agriculture.

`No Assurance’

If the owners of small strips of land were assured that by handing possession of their holdings to someone else they weren’t diluting their ownership rights, they would gladly do so and come to cities to supplement their rental incomes. Urbanization will accelerate; manufacturing industries will gain a competitive advantage from cheaper labor. None of this is happening now because of dodgy property rights.

“Land title in India is uncertain and there is no assurance of clean title,” Ascendas India Trust, a Singapore-based owner of office property in India, told potential investors last year. “Title records provide for only presumptive title rather than a guaranteed title to the land.”

All that may change. The Indian government is planning a mammoth resurvey of all land — partly using satellite imagery — with the ultimate objective of creating a digital repository of all land records.

The spirit of private enterprise that was stymied during Nehru’s rule — and crushed under his daughter Indira Gandhi’s reign — is already witnessing a surge. And it’s getting a boost from Nehru’s insistence on inculcating a scientific temper among his countrymen. Even when the last of the state-owned companies in India is sold off, this aspect of Nehru’s legacy will endure.

(Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are his own.)

Ireka: An interesting play?

My feel is that it depends on what is on the order book, and whether projects are scheduled to come online sooner rather than later. Bit more skeptical on the assigned value of ASPL, not sure the listed firm is worth what it’s worth.

02-05-2008: Ireka – defensive property and construction play

Email us your feedback at fd@bizedge.com

IREKA Corp (RM1.13) is one of the country’s oldest construction companies, tracing its roots back to 1967. Today, the property and construction company has a very different and unique business model – one that is asset-light, with sustainable income streams and relatively defensive in nature despite operating in two cyclical industries.

Its shares are also trading at attractive valuations – at just 5.4 times FY March 2009 earnings (which are sustainable and excludes large exceptional gains in FY08), and 0.5 times book. Dividends are attractive with a sustainable net yield of over 6%. We recommend a buy.

Over the past year, Ireka has quietly undertaken a major restructuring exercise that has unlocked substantial value and created an asset-light balance sheet with recurring income streams.

In January 2007, Ireka sold the prestigious but loss-making Westin Kuala Lumpur for RM455 million cash, setting a new benchmark of over RM1 million per room and clearing the bulk of debts. This was followed in April 2007 with the listing of Aseana Properties Ltd (ASPL) on the London Stock Exchange and the concurrent disposal of four other property assets to the company.

In total, Ireka has unlocked RM673.8 million worth of assets, realised RM203 million in one-off profits and pared all its debts – all for a company with a market capitalisation of just RM129 million. It is now in very good financial shape.

With its new corporate structure in place, Ireka has a steady stream of sustainable earnings, balanced with cyclical construction profits. From ASPL, it will earn annual fees from managing its US$250 million (RM795 million) assets, dividends and upside from performance fees. Through ASPL it also has access to a large war chest for future investments in Malaysia and Vietnam.

The construction arm’s order-book will grow from RM360 million to around RM860 million by May, with the inclusion of the Seni Mont’ Kiara project. This is likely to grow further given the pipeline of new projects in Malaysia and Vietnam undertaken by ASPL. It is turning more aggressive as the strengthened balance sheet allows it to bid for bigger and better projects.

Earnings outlook
In FY March 2007, Ireka posted a net loss of RM33.3 million, largely from some external construction projects that were hit by rising costs. These losses continued in 1HFY08, but have since ceased as all external projects have been fully completed. The construction arm now caters for in-house projects, namely those developed by ASPL.

We expect Ireka to post a net profit of RM172.7 million in FY March 2008, or a sizable RM1.52 per share, boosted by exceptional gains from the disposal of properties to ASPL. After being distorted by exceptional gains though, FY09 will provide a more realistic picture of future and sustainable earnings.

We expect construction revenue of RM350 million, with pretax margins of 6%. Together with IDM’s management fees, we estimate Ireka’s total FY09 pretax profit at RM32 million, net profit at RM23.7 million and EPS at 20.8 sen. This translates into a very low P/E of just 5.4 times and 0.5 times its projected book value of RM2.36.

Undervalued, with high yields
At the current market price of US$0.88, the 19.6% stake in ASPL is worth RM138 million – more than Ireka’s market capitalisation of RM129 million.

This means no value is accorded to its other assets, namely the construction arm and stream of management fees – both of which will drive Ireka’s earnings going forward. In fact, investors are effectively buying into ASPL at a 7% discount through Ireka, and the other assets come free.

We estimate Ireka’s RNAV at RM2.33 per share – more than twice the current share price. If we accord a 25% discount to RNAV, its shares should be worth RM1.75 over the longer-term.

Ireka is not only undervalued, but is a fairly defensive stock with relatively good and sustainable dividends. We expect dividend payout rate of 31%-34% in FY09-10 – on a sustainable basis – which translates into net dividends of 7 sen and 7.5 sen per share, respectively. This will provide investors with high net dividend yields of 6.2% and 6.6% respectively.

The banker’s comp uproar

The FT, this morning has another  op-ed, this by William Cohan, the author of the Lazard history, arguing that regulators should step in to regulate banker’s pay. This is the same line of attack that Raghuram Rajan has been taking.

The reasons given are the following:

1. Bankers take risks with shareholder money, are rewarded when things go right, but don’t pay a price when things go wrong.

2. Pay should be contingent on longer term outcomes of deals and loans.

3. If all the banks do it, then the big fear that they will lose top talent to competitors is unfounded. Where else would banker’s earn what they do?

Underlying all of this is a belief that bankers are paid more than they are worth anyway, and the industry is due for a correction in wages.
While I do think banker’s are overpaid, and I do agree than long term comp should be tied to results of deals, I doubt that the regulation remedy will be effective.

Firstly, bankers already do have downside when things go badly. Base pay at a bank for a director is about US$150k. Bonus for the average MD is about US$1 mil. In a bad year, when an MD is not paid a bonus, he bears the opportunity cost of not working somewhere else where he would have been paid that bonus. And US$150k does not go far in most financial capitals.

Secondly, bankers are currently underpaid. That’s right. A survey of graduates at any business school will tell you that everyone wants to work at a hedge fund. Guys who stay long term at banks these days consciously make a decision to give up the opportunity to make more money in return for a more stable career. This is a risk return decision. If you look at the job opportunities available to intelligent, highly educated A-type personalities it would read:

Private equity, hedge fund, investment banking, management consulting followed by a senior corporate position, Senior corporate position, entrepreneurship

Each of those professions has a different risk return curve, but all of them have high absolute levels of compensation. Pay bankers less, and they would move to professions where they would be paid more.

Longer term compensation structures may end up costing more to shareholders than the current system.  If you pay someone a percentage of profit on a deal, and it’s written into a contract instead of being discretionary, then you may end up getting some truly amazing comp structures especially for the outperformers. Are you really ready for billion dollar payouts to individuals? Because that is what will happen with deferred payouts. A single guy in a bank who made the right decision at the right time may walk away with more than the entire 10,000 employee pool. The employee pool at a bank is like a store of out of the money call options. You pay the option premium with the hope than a few of those options convert in any one year and massively pay you. But the guys who are always in the money will demand and get more and more of that premium.

Finally, regulation will bring with it both transparency on pay and better protection for employees. This is going to be horrible for bank shareholders. Opacity rewards those in possession of better information, and currently bank HR departments have much better information than their counterparties: the bankers. Better protection for employees will result from them being able to take banks to court if they are not in line with regulation, which is different from the current arbitration system where a panel of people with vested interests in keeping payouts low adjudicates. This will be horrible for bank shareholders, as the amount of dirty laundy to be washed in court will be immense.

At the end of the day, only junior bankers really need banks to gain experience and build reputation. Senior bankers can usually bide their time till they can write their own ticket somewhere else. And people hate getting insulted by being paid less than they think they’re worth on an order of magnitude.  See Mark McGoldrick