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Thursday, September 22, 2005

Petroleum Market Outlook

The world is currently experiencing an energy shortage. There are several reasons for the shortage:

  1. Excessive intensity of consumption by the US
  2. Strong growth by the US, China & India in particular, as well as other emerging markets
  3. Shortfall of refining capacity

Upstream Sector – Exploration
Contrary to investor perceptions, there is no shortage of oil. For the last 30 years oil reserves have remained between 30-40years of annual consumption, or 1 trillion barrels in absolute terms. The bulk of these reserves lie in the Middle East – Saudi Arabia, Iraq, Kuwait, UAE, etc. For this reason, the OPEC countries are likely to increase their share of production capacity. In addition, there are still a lot of areas which are still eventually virgin exploration targets. These areas include:

  1. Deep water areas of existing & new basins
  2. Russia – particularly the Siberian peninsula
  3. West Africa
  4. India and the Bay of Bengal (delta)

Downstream Sector – Refining
The reason for high oil prices is not lack of oil, but largely poor planning to ensure adequate refining capacity to get that oil to the market. There are several reasons for this:

  1. Planning & government licensing, eg. Land availability, government permitting greatly slows down the development of new refineries.
  2. Capital intensive: Refineries are expensive so industry participants are reluctant to build new capacity
  3. Diversification of energy products: Governments are demanding that producers improve the environmental rating of their fuels, which results in a broader variety of products. This greater variety complicates the product mix and reduces the flexibility of producers and consumers to purchase from other suppliers, creating bottlenecks. This results in a risk premium being added to product prices.
  4. Poor returns on investment in the 1990s mean corporations were reluctant to build new capacity. Part of the problem was that corporations were more concerned with complying with meeting environmental compliance measures.

Other Factors
A number of non-market factors also have contributed to the market shortage for oil products:

  1. Poor strategic planning & cooperation between governments and the private sector
  2. Excessive reliance on oil for transport by many western countries. Sweden and Japan are 2 countries that have adopted transport systems to reduce oil reliance. The USA, Britain and Australia have overly relied on cars, choosing to underfund rail despite declining domestic oil production.
  3. Excessive growth in the US and China in particular is creating a pressure no global refining infrastructure. These demands are the result of monetary stimulus.
  4. Subsidised oil products: A number of countries have subsidised their oil product markets so the market signals are not being communicated to the market. These countries include India, Indonesia and China – whom are among the largest oil consumers.

Energy Market Outlook
The outlook for the energy markets is down for a number of reasons:

  1. Softer demand: The strong global growth recorded in 2004 was cooled off in 2005, and is likely to fall further in 2006.
  2. Market pricing: Those countries which are subsidising oil products are likely to remove this support because of a deteriorating in their public finances, as well as pressure from the USA and EU.
  3. Substitution: There is likely to be some degree of substitution for other forms of energy which will free up capacity.
  4. Inflation: Higher oil prices will feed through to general price levels, eventually causing higher interest rates, which will reduce demand.
  5. Investment: Higher oil prices will spark investment in new oil capacity, but that will take time to come on-stream. When it does, there is often over-capacity, particularly as shortages usually arise during periods of excess demand.
  6. Alternatives: Higher oil prices will encourage development and investment in alternative sources of energy, as well as products that utilise these types of energy. Examples include industrial batteries for energy demand (peak load) management, cars and computers powered by fuel cells.

Its already evident that higher oil prices have forced other energy sources higher. Eg. Uranium prices have risen from $US12/lb to $US28/lb, and coal prices have doubled, so additional capacity will grow in these areas as well. Because much of the global trade has grown due to US consumer largesse, its safe to say that a large over-supply will arise.

The positive aspect of higher oil prices is that you can make money out of it, whether by investing in:

  1. Petroleum Refiners & other energy processors, producers, explorers equities
  2. Petroleum & other energy product futures
  3. Alternative energy exposures, eg. fuel cells, battery suppliers, etc
  4. Railway locomotive manufacturers

In Australia my favourites are:

  1. Capathian Resources (CPN): It is developing small oil fields in the Czech Republic. Because these are small, land-based fields they are cheap to develop, but under-valued, since close to infrastructure.
  2. ZBB Battery Systems (ZBB): They have developed a zinc bromide-based battery to compete with the old, less efficient lead-acid batteries. Higher energy prices should prompt greater use of batteries in those markets still dependent on oil for local power generating capacity. This tends to be markets like China and India which are growing very quickly, but also countries like Venezuela and Saudi Arabia that use their abundant oil to fuel power generation, and thus are paying a significant opportunity cost. The batteries allow companies to buy power at off-peak rates and use it at peak periods, saving during those periods.

Monday, September 19, 2005

Gold - Short term price action

The gold price is rallying on fears of inflation. This is not a surprising development because of the precarious state of the US economy. What are the implications. Looking at the following chart, we might expect several things to happen.
Most people focus on the $US price of gold because gold is denominated in $US. But for people holding non-$US assets, this matters little.
The interesting news is the break-out of gold prices in non-$US terms. The chart above shows gold prices in UK pounds, Euro, and we can see that the gold price has broken up into new highs. Its the same with the Yen and $Australia. The implication is that its no longer just $US currency action, its a rise in the inherent value of gold. Gold is valued when markets are fearful of any of the following:
  1. War: There is no great threat of war at the moment that threatens the financial system, however the Iraqi war has contributed to the inflationary threat.
  2. Stability of the financial system: Asset values are very high, and with inflation rising, the threat of higher interest rates poses a great threat to the home affordability of new homeowners. Forced sales under a property crash is likely to send prices plummeting. Inflation is good for property, but only when valuations are reasonable. The other fear is an oil crisis as Iran attempts to pursue a nuclear option.
  3. Inflation: This spells the erosion of the value of money because governments increase the supply of money relative to the amount of goods produced. Over the last decade, the global money supply has grown much faster than the global economy because of credit growth.
  4. Yields: With the outlook for higher inflation, the yield on bonds and equities looks shaky. In these circumstances the 'non-yielding' precious metals look attractive. Real interest rates are essentially negative at the moment, so the capital gain on gold is attractive.
  5. Supply shortage: Too much is made of the supply shortage of gold and the Indian & Chinese demand. These countries are still quite poor and the propensity of its traditional buyers to buy falls at higher prices. Industry nor jewellery will not lead this boom, it will be hedge funds and individual hedging against inflation. There is too much money in the global economy, that will feed into gold & other precious metal markets.

Its apparent from the chart above that the price of gold is heading for $US500/oz, the high posted in 1987. This point will be a major point of resistance, which is unlikely to be broken. We are already at $US466/oz, so we are looking for another 8% move. Interestingly, the outlook for gold in non-US terms is less compelling. We are less likely to see strong gold prices in other currencies, except $A terms as global commodities demand collapses with inflationary (oil) pressures and higher interest rates. Most of the gold price action will relate to a fall in the $US - despite the prospect of higher interest rates in the US. The Fed is still well behind the curve when you consider rising inflationary expectations. In fact there is no way for the US government to avoid inflation. The only corrective action is higher interest rates and credit defaults, which will burst the credit bubble, unwinding credit instruments, and thus reducing the money supply. Household super funds will be the biggest losers.

The question remains - Will the gold price in Euro and Pound terms break out of their long term uptrend? One would think so given that the Euro money supply is currently growing at 4x the growth in the EU economy. That means too much money chasing too few goods - that's inflationary.

The relationship between the $US and the gold price remains. Some analysts assert that the correlation has disappeared, but leveraged institutional investors are merely trading the $US by going long (or short) gold. Because the gold market is a lot smaller than the $US currency market, the gold price is much more volatile. Another reason for the departure of gold prices from $US correlation is that investors are taking positions in the gold market in anticipation of $US exchange rate moves. Short term trading merely obscured the relationship between the $US dollar and gold prices.

There is often the fear that European & US central banks will sell their gold reserves into the boom. The reality is that these sales are likely to be peripheral to the speculative demand. In any case, it does not change the story. There is no where else to place money safely.

In fact buying physical gold is not the best way to get exposure to gold. I would be going for the emerging miners which don't require hedging, and which have resource upside.

Go gold!

Sunday, September 18, 2005

Nickel - a declining story

Nickel has been one of the most actively traded metal commodities because of its volatility and reasonable liquidity. It is a highly cyclical market, largely tied to the demand for stainless steel. Some 80% of nickel is use to produce steel products - with stainless steel being particularly important. Stainless steels are used in the building industry, automobiles, food & beverages and water industries.

Nickel is produced from a number of sources:
  1. Layered intrusives: When ultramafic layered intrusives (molten rock) is emplaced in the earth's crust and precipitates layers of chemically-distinct minerals, its possible for commercial quantities of nickel to accumulate, perhaps in association with chromite, cobalt, copper of platinoid metals (PGMs).
  2. Nickel laterites: When layered intrusive complexes are subjected to erosion on the earth's surface, the nickel sulphides are oxidised and re-precipitated sub-surface, forming an enriched layer of 'laterite' that often grades 0.5-2% nickel.

The bulk of nickel is produced in just 5 countries - Russia, South Africa, Australia, New Caledonia and the USA, although the Philippines, Indonesia and other African nations are significant producers. Nickel is not rare, so the focus is on the higher grade deposits that can be competitive at low prices, since nickel processing requires considerable investment to produce a high grade concentrate.

In the 1990s, the nickel market was particularly votaile for a number of reasons. The threat of new 'laterite' supply using new high-temp autoclaves meant prices were expected to fall, but 2 keystone projects in Canada & Australia had major setbacks, which undermined the financing for similar projects. The technology has been proven viable, but the experience did demonstrate the risks of new technology. The theory was proven fine, but it was design issues that undermined the project.

Investing in nickel

There are several ways to invest in nickel:

  1. London Metals Exchange: You can buy spot or forward nickel contracts on the LME - see
  2. Equities: You can buy nickel/cobalt producers on the ASX, JSX, TSX and VSE in all shapes and sizes. The largest nickel producers are Minara Res (MRE.ASX) and Sudbury Mines (TSX). You can also buy equities in stainless steel producers in EU, US and Thailand.

The outlook for nickel

In the short term we are likely to see a fall in nickel prices since the US & Chinese property markets are over-priced, as the Western property bubble comes to a close. The US has trailed other markets, but it is set to fall soon. Auto sales in the US fell 12% in Aug'05, the largest fall since 2001. Nickel prices are however unlikely to fall back to prior lows since there are now considerable cost pressures in mining. eg. Raw materials, labour and oil have risen by 30-50%. Much of the price rise has also been caused by weakness in the $US. Higher interest rates will also end the speculative demand by traders for nickel, unless the $US starts falling again.

Nickel prices can be expected to fall back to a consolidation level - remembering that the commercial building sector is still healthy and Japan might yet stage a modest recovery. In addition, buildings are not likely to cancel mid-construction, so we can expect some residual demand to flow through the market.

Long term the outlook for nickel is very strong - driven by Asian construction - particularly in China, India and Eastern Europe. But today, these are very small markets. In 3-4 years, after capacity has been absorbed, we would again expect western markets to dictate market action.

  1. Nickel applications: See
    Nickel recycling: See There are strong incentives for recycling nickel, though its applications and chemical stability mean that the product has a long life cycle, thus limiting the available scrap supplies. eg. Buildings last for 50yrs.


  1. Base See News service on nickel and other base metals.
    The Nickel Institute: See, established to promote new & existing nickel consumption.
  2. London Metals Exchange: They provide statistics on spot & forward nickel prices and stockpiles. See
  3. Nickel production: Find some stats??
  4. Nickel consumption: Find some stats??
  5. Nickel recycling: Find some stats??
  6. Stainless steel production: See ??

Copper - a declining story

Copper is amongst the most important commodities, and hence one of the most traded commodities. The metal can be traded in several ways:
  1. London Metals Exchange (LME): They quote spot & forward prices, current inventories.
  2. Chicago Commodities Exchange (COMEX): They quote spot & forward prices in the US market.
  3. Equities: There are a range of companies listed on the Australian Stock Exchange (ASX), Toronto Stock Exchange (TSX), Vancouver Stock Exchange (VSX), Johannesbourg Stock Exchange (JSE) and the Alternative Investment Market (AIM in London) for investing in copper equities (ie. production). The impact of exchange rates tends to increase forex gains, but reduce equity price gains.

Copper has a multitude of industrial applications including building, automotive, electrical & electronics, tube & piping, marine applications, machined products, telecommunications. For more details see In the US, the building industry accounts for about 46% of copper demand. Little surprise then that copper prices have rallied whilst the US housing market has boomed. Those homes are also furnished with electrical appliances requiring copper.

Copper production has recently staged a recovery as demand-led price recovery signalled a need for further capacity. Yet looking at, its apparent that the supply of new copper has been flat for a number of years. The reason for this is clearly innovation, since global growth was strong throughout the 1990s. In addition, copper stockpiles were high in the early 1990s, but its clear that miniaturisation has reduced demand (see ). It was in the early 1990s that prices were languishing below $US0.80/lb, well below the current prices of around $US2.00/lb. Partly this rise can be attributed to the weak $US in which commodities are denominated.


Despite the subdued demand for copper, producers have largely maintained discipline. Larger companies are prone to finance exploration through the 'explorers' rather than go at it alone, developing their own projects. This synergistic relation worked well at low prices, but with higher prices, 'explorers' are able to finance their own projects, so we can expect market discipline to unravel in future. The amount of new capacity has been limited to date because little money has flowed into resource equities. Regardless, commodity prices were low for so long. In the interim however, we can expect a demand-price slump by virtue of the end to US-Chinese largesse. The mercantilist policies of Asia, combined with the debt-exposure of the western markets will limit consumption for about 4 years. In the interim, the 'savings culture' of Asia is unlikely to see consumption expand greatly to cover the shortfall.


For more information on the copper market, follow the following links:

  1. International Copper Association - see
  2. Copper Development Association - see
  3. Base - see
  4. London Metals Exchange - see - for copper stop & forward prices, inventories

Copper Statistics

  1. Global Copper Consumption - chart - see
  2. Global Copper Mine Production - see
  3. Impact of emerging technologies on the copper market - see

Sunday, September 04, 2005

Iron Ore - market Outlook

The iron ore market has been a very profitable division for the major multinationals that dominate the industry in year years. The 5 biggest players below account for about 80% of global supply:
  1. Rio Tinto (Aust, India?)
  2. CRVD (Brazil)
  3. BHP (Aust, Brazil, India)
  4. Assamang (South Africa, Morroco)
  5. ?? (forget the French company)
About 8-10 years ago, these companies engaged in alot of takeovers to consolidated the industry. They might have thought they had the industry wrapped up because they bought into a lot of the strategic 'long-life' resources in the major existing provinces. Since then, a number of alternative project sponsors have arisen, developing smaller deposits, some abandoned projects (AUX) & mines from previous times (AZR, TEA). Iron is concentrated in the earth in different styles of deposits, including:
  1. Magnetite deposits, eg. formed by weathering of iron-rich rocks I think. They are typically higher grade. eg. WA, Brazil
  2. Magnetite sands, eg. In NZ & Indonesia you get magnetite sands being concentrated along coastlines in ancient & modern deposits.
  3. Haematite deposits, eg. Primary skarn (metamorphic) deposits associated with intrusive igneous rocks
  4. Peat bog deposits, eg. Philippines, Indonesia, formed by chemical deposition of iron from iron-rich volcanic brines.
  5. Titanomagnetite deposits, eg. Africa and WA. These are associated with layered intrusives.
The highest grade deposits are 60-70%Fe, however some of the lower grade deposits are just 30-40%Fe. This may or ma not be an issue if crushing & grinding (at cost) can release the higher grade iron. Of course few people consider the higher cost element whilst prices are running at $US100-120/tonne. Unfortunately, by the time a great number of thee projects are commissioned, the major producers will have expanded, Chinese demand would have slumped and a raft of new suppliers will have emerged. Perhaps my pessimism is premature. Regardless, there is money to be made in the short term, as long as global economics is a "growth story" rather than a "yield (bonds) story".

So lets consider some of these prospective projects. Most of them arise because sponsors have managed to get the support of brokers keen to earn commissions. Some of the projects have merit. Most of them justify themselves by reference to an "unquantified" China growth story. Regardless, its always possible to find an opinion which supports your project. Regardless, these are investments you trade. Certainly in the long term China will require alot of iron ore, but make no mistake, it will be found. I guess there will be a surplus of resources in another year, and the consequent surplus will probably take 2-3years to be absorbed by the market. Lets consider all the projects that I'm aware of:

  1. Aztec Resources (AZR): Developing an old BHP mine in the Pilbara region, WA.
  2. BHP, Rio expansions: These expansions are in the Pilbara region of WA.
  3. Hancock Mining: Private company with project in Pilbara, WA. Financed by iron ore mining royalties
  4. Fortescue Metal (FMG): Listed ASX company developing a Pilbara based mine, using established rail & port.
  5. Lynas Corp (LYC): Project in the Pilbara area.
  6. AKD Ltd (AKD): Indonesian peat bog iron deposit
  7. Aurox Resources (ARX): Aurox Res titanomagnetite deposit in WA.
  8. Mineral Commodities (MRC): South African titanomagnetite deposit (RSA financed)
  9. Territory Iron (TEA): Intrusion-related skarn deposits in the Northern Territory, Australia. These were mined by Sumitomo in the 1970s. Close to the new railway.
  10. Anooraq Resources (ARQ.TSX): Yemen titanomagnetite deposit (Canada financed)
  11. Indian projects: I am sure there are Indian companies expanding projects to get their hands on foreign exchange.

The Rio & BHP-inspired consolidation of the iron market was intended to deliver premium prices for producers. They have benefited from that strategy for about 10years, but it was never going to last forever. The problem being they are victims of their own success. Higher prices spark new project sponsors. In defence of their strategy, these circumstances arose because of Chinese demand, not over-rationalisation to create tight market conditions.

Of the above companies, Aztec Res at 18c looks like particularly good (technical) buying, and the Aurox Res project in Indonesia is also attractive. Unfortunately I can post charts here.

Thursday, August 18, 2005

Tin - new application

Tin was traditionally used in tin cans, long since abandoned in favour of aluminium. The benefits of tin is that its a chemically inert mineral easily fashioned into shapes. But its lastest application is for ammunition. Lead has long been used for ammunition, but there is growing environmental opposition to its use. Lead was until recently very cheap, since its no longer used in paints or `leaded` petrol, but while lead-acid battery recycling has placed a dampener on demand, the demand for new cars in China has changed that. But its hard to imagine tin going into ammunition - just base on price differences

Tin $US 9000/tonne
Lead $US 800/tonne

Tin has few suppliers, so its hard to enter the market. Tin mining is dominated by Malaysia, Africa, Thailand, Australia, China?

In Australia, it was only recently that the only tin producer went broke - Marlborough Resources, and in the process bought down alot of local shareholders in the Arthelthan community of NSW. Since then, Bluestone Tin Ltd has been floated. This company is in far better shape than its predecessor Murchison United (MUR). MUR went into administration after the company entered into a number of unfavourable hedging contracts on the $A and tin price. They made a desperate bid for Iberian copper-tin assets in Spain, but failed.

Bluestone controls 4 important tin assets:
  1. Renison Bell UG tin mine & processing plant
  2. Mt Bischoff OC resource
  3. Rentails waste dumps containing 0.45%Sn (NPV of $190mil)
  4. Exploration interests in Queensland tin provinces

Free of MUR's financial burdens, Renison Bell is a profitable mine, though reserves are running low. Bluestone is attempting to extend the life of the mine, and will feed Mt Bischoff into the plant in due course, as well as undertaking a regional explorational program. The company is cashed up for this purpose. The Rentails project offers another opportunity, but now is not the time to commission such a large project. I suspect the Rentails project will be developed as a supply substitute for Renison plant when that mine faces closure.

The tin price is well off its highs of $US12,ooo/tonne, now around $US7,500, compared to its lows of $US4,800 a few years ago. LME stockpiles remain low.

Platinum - watch for substitution

I expect platinum prices to loose some gloss in coming years as an increasing number of platinum consumers switch to palladium for their catalyst converters. That`s not to say that platinum prices will collapse to the levels of palladium (currently $US183/oz), but rather I see jewellery demand making up the slack. I think platinum prices will not fall below $US600/oz because platinum will continue to carry more cache than gold as a jewellery investment. Strong Asian demand will help underpin that demand.

Price forecast Pt Pd $US/oz
Aug05 890 183
Nov05 850 230
Mar06 750 280
Jun06 650 350
Dec06 600 400
Jun07 750 500
Dec07 900 700

Wednesday, August 17, 2005

Gold - a long term bull market

Gold has been a long time favourite of mine for several reasons:
  1. Political: It was always more than an investment > Supporting real money
  2. Depth: No other segment of the Australian market is as deep. There must be in the realm of 30 listed gold producers, 150 gold explorers
  3. Knowledge: I have a background well-suited to understanding these companies, even though my arm-chair analysis is sometimes misguided.

Unlike a great deal of other commodities - gold is not just about supply and demand, or at least not in the sense as it applies to other commodities which have industrial applications. It gives in several respects:

  1. Political: Gold is the most tangible form of money because its value is recognised more widely than any other commodity, and that value cannot be subverted like the common `fiat` paper currencies.
  2. Stockpiles: There is a huge above-ground surplus of gold held by central banks around the world. The abolition of the gold standard has meant that a number of central banks have resorted to selling their official gold reserves, and substituting them for other currencies and foreign treasuries in their Foreign Exchange reserves. This is a huge mistake given the lack of monetary discipline exhibited by treasuries worldwide. The worst offender is the US.

Capitalism encourages people to build wealth, or in times of crisis to seek stores of value, to protect what they have. Gold is a strategic asset class that earns little interest (from gold leasing), but which can yield great returns if other classes of assets yield little return. The alternative asset classes are:

  1. Bonds: A great deal of wealth is held in these paper assets. A threat to the value of these assets is inflation and debt repudiation.
  2. Property: A great deal of wealth is held in property assets. During times of economic booms like now, a higher proportion of property is held as an investment. If market fortunes change, a great risk is posed to holders of this asset class.
  3. Equities: Corporate stocks are a large store of wealth, particularly in economic booms when earnings are high, and valuations are similar.
  4. Commodities: Raw materials have value in exchange, but may be traded.
  5. Forex: Paper is a less tangible value than others because it has a relative value to other currencies since the gold standard was abolished in the 1970s.

The sad reality is that economic booms are pushed by governments to the brink in order to retain government as long as possible. They are seldom based on sustainable demand fundamentals, but rather are the product of a variety of government stimulus in the form of:

  1. Easy monetary policy: Whereby a governmnt manipulates the supply of money in the economy to keep interest rates low, to facilitate an expansion of credit, as well as an asset bubble in order to support even more credit creation.
  2. Public debt financing: The government uses its power to print money or issue debt securities to finance public spending.
  3. Tax cuts: When an economy seems to be sluggish, a government might resort to tax cuts to stimulate even more spending.

There are however several positive ways of creating wealth which exist in the economy:

  1. Technology: Break throughs in design, engineering and pure science can lead to new & improved products that improve the productivity of workers.
  2. Deregulation: Governments are capable of removing the costs of production by liberalising markets, particularly the trade between countries. The opening up of low cost manufacturing bases has a huge impact on product pricing, and often product innovation as product margins soar.

Together these 2 factors increase what we understand to be Factor Productivity. Together these 2 factors have resulted in huge economic booms in prior centuries, starting with the tobacco and cotton booms in the New World in the 1630s and 1650s. It was the same in the early 1900s with the development of the mass-produced car. Deflation is often viewed as a negative factor in the economy, but it depends on the cause. Improvements in productivity mean businesses can produce more for less. Competition results in these savings being passed onto consumers in the form of lower prices. The implication is that consumers are winning real gains in purchasing power as a result of falling prices. Unfortunately evidence of productivity are often concealed by the government`s manipulation of the money supply, which has an inflationary impact.

We can however look to markets to tell us when gold is valuable. That time is when other asset classes - which have historically yielded higher returns are no longer. In the US, property and equity prices are still soaring, so now is not the time. But given the level of indebtness in the western markets, and dependence on US consumption for fuelling global demand, there is reason for caution. Equity markets generally are the most forward thinking - so we should look for sluggishness in US equity markets.

Nominal yields on bonds are around 1-5.5% depending on the each market, but consider the impact of inflation, and its hard to get a grip on the right figure with the governments in some countries tampering with the figures. Irrespective of real interest rates, governments cannot unprint the money needed to pay off the debt securities they have issued. As a consequence, the only way that governments can reduce money supply is by raising interest rates to a point to cause defaults. But they are not inclined to do that....better to create inflation by printing money.

With real estate yields as low as 2% there is no income-reason for holding property or shares. But there is excess money sloshing around the economy, so its just a matter of time before personal debt levels become unsustainable...because they are not supported by growing incomes. Higher prices for oil are likely to become the dampener on the economy, followed by inflation. High oil prices will of course benefit oil producing countries, but sadly their wealth is not distributed throughout their economies.

So gold is looking better - and no asset class improves in an instance. It takes time. Gold has risen from $US260/oz in 1995 to $440/oz today...but this is just median prices where people start to judge monetary values. Derivatives still appear a more attractive way to protect positions...but that`s only as long as investors trust their counter-party to honour their financial commitments. 

It will be an interesting 2006.

Tuesday, August 16, 2005

Zircon - an industrial (abrasive) mineral

Zircon is the basic oxide mineral from which the bulk of the world`s zirconium is sourced. Because of its stable geochemistry (relative inertness & hardness), it is mostly used as an industrial abrasive in competition with garnet. Other types of zirconium such as badeyellite are used for chemical applications that require higher purity product.

Zircon occurs naturally in acid igneous rocks such as granites. The erosion of these primary source rocks lead to their eventual concentration in ancient & modern beach environments, in what are called beach strand deposits. The hardness and higher density of zircon results it the mineral being cast up the beach front during storms along with other `mineral sands` such as rutile, ilmenite ( the most common beach sand - a shiny black mineral).

Mineral sand deposits commonly stretch over vast lengths of coastline, eg. Along the east & west coastlines of Australia, the southern coast of Africa, the east coast of india, the Florida coast of the USA. Deposits vary in their grade of heavy mineral concentrate, their specific proportions of each mineral sand (zircon being worth more than ilmenite), the depth of the mineral sands, the grain size, the presence of contaminants like thorium, uranium and chrome, the presence of water, the lateral extent & vertical depth of the mineral sand resource, as well as availability of infrastructure, eg. power, roads, etc. The presence of extraneous minerals like magnetite, fine muds (slimes) and organic material can also be important for processing.

Perhaps the greatest contingency for mining mineral sands is environmental factors and land rights, whether claims conflict with indigenous people, or freehold titles. Beach fronts are valued lands, so mining can be contentious. this is despite the fact that mining is often well behind present beach fronts, can be very shallow, allows easy replacement of sand and actually cleans the sand of extraneous mineral matter, organics and the mineral sands which are not visually attractive. Sand stabilisation can be managed.

One of the most promising aspects of mineral sand mining is that it generally involves very simple processing using plant that costs not more than $1.5mil, compared to $10-20mil for a typical gold treatment plant. A beach sand mining plant comprises a set of spirals using gravity techniques to separate the `heavy minerals` from the sand and organics. Magnetite and ilmenite are removed by magnetic separators, and zircon is separated from rutile using finer gravity methods, ie. Wilfrey `shaking` tables. Its a very cheap process. Since these parameters extend to most deposits, its the natural characteristics of the deposit that determine its commercial appeal. The critical factors are mentioned above. Strategic factors are also important, such as proximity to existing processing & refining plant, sovereign risk of the country and grade of the deposit. The best mineral sand projects are inadvertently takeover over by the majors. eg. Iluka Minerals, Ticor Ltd, etc. Both these companies are listed on the ASX. More promise perhaps lies with:
  1. Matilda Minerals (MAL): MAL is developing a series of small, high grade mineral sand deposits on Meville Island, in the Northern Territory of Australia. The attraction of these deposits is their high grade and high zircon content, since zircon prices are $US480 compared to just $US85/tonne for ilmenite. Whilst the deposits are small, they are high grade and near the surface. There is also considerable potential to expand resources beyond the current 3year mine life given the broadness of such deposits, and the demonstrated 200km of surface indications. The company has had its mining, environmental plans approved, as well as gained the support of the aboriginal land council. There is some risk that fringe aborigines might oppose mining...though not likely.
  2. Alkane Exploration (ALK): they are developing a gold mine in central west NSW, Australia, but also hold title over an interesting badellyite deposit (chemical zircon deposit) in the Dubbo area nearby. The metallurgy of this deposit has proved more difficult, prompting its Japanese partner to pull out. A similar fate might occur with a new Chinese partner. Its a very large niobium-zirconium-yttrium deposit with a likely 100+ year minelife.
  3. Australian Zirconia Ltd (AZC): Previously called Southern Titanium, this company is developing a Zircon-ilmenite project at Horsham, Victoria. They have 16years of reserves, however they have been forced to re-engineer the project to make it commercially attractive. This is a large scale project, but the $A70mil capital cost was excessive. They are currently buying 2nd hand equipment.

Whilst ALK has speculative appeal, the MAL project offers alot of upside, though the company will be undermined by any softness in commodities markets. The easy of mining mineral sands is likely to impact greatly on producers, so short term trading/investment based on chart indicators is a must. Takeover remains a possibility, though the majors will be more impressed by the strategic zircon suite than the small size of the deposits.

Palladium - another good industrial metal

Palladium is a rare, precious metal. It is part of the platinoid group of metals (PGMs), and is generally found in association with any of the PGMs in the approximate ratios of Pt (20%), Pd (75%), Rhodium (3%), others (2%). The price of these metals is currently:

  1. Platinum > $US890 / ounce
  2. Palladium > $US183 / ounce
  3. Rhodium > $US2000 / ounce

Platinum and palladium are the 2 principally traded metals and both have similar applications. Both platinum and palladium are used in car catalytic converters, as well as other catalyst based industrial process equipment like oil refining. Platinum is also used in growing amounts in jewelry.

It was not long ago that palladium demand rose to $800/oz. that moved sparked considerable investment in PGM mining, but Chinese car & jewelry demand has since also skyrocketed. By boosting Pd supply, Pt supply was also increased. Whenever the prices between these 2 metals gets too wide, it sparks conversion of catalyst plants to utilise the cheaper metal. The disparity in Pd & Pt prices currently favours a speculative investment in palladium.

the question is how?

  1. There are few companies that produce palladium only
  2. Most of the world`s PGM are produced by a small number of companies. eg. Lonmin (LSE,JSE), Aquarius Platinum (ASX), Anglo American (LSE,JSE), ???
  3. Palladium futures
  4. Palladium metal coins (Perth mint)
  5. Other derivatives (contracts for difference)

Platinum never occurs alone, usually palladium is more abundant, but less valued. The 2 metals substitute, but it requires plant adaptation. Consider the following charts. With platinum prices so high, and its demand expanding in cars (catalyst converters) and jewellery, expect greater substitution in future. Apparently 1/3 of jewellery sales are now platinum, but other PGMs (palladium) are alloyed with it to reduce cost.
Fundamental analysis
It would be normal to see substitution of Pt by Pd, but we must remember that the PGMs are another form of ‘real money’, and during times of excess liquidity, there is a lot of money that can flow into PGMs. Whether PGMs appeal as a ‘safe investment’ remains in question because the market is not as liquid as gold (with annual production just 10% that of gold). Production mostly (80%) comes from Sth Africa and Russia, though the majors (Impala, Lonmin & Anglo) no longer have a monopoly over RSA reserves with black empowerment. But the appeal of PGMs is growing because of the growing jewellery demand, so that will eventually change. But it might not happen in this economic cycle because platinum is already expensive. But Palladium is a different story – its comparatively cheap, but not recognised as an investment, though you can buy investment products. The other benefit of PGMs is that they are scarce, and better still, there is no huge stockpile held by the central banks. I don’t think the Russian government holds large inventories anymore either??

Importantly all PGM producers benefit from the mix, but different regions have different PGM ratios.

Technical analysis
Looking at the chart below, it appears that platinum prices could be
peaking, as we see a double top pattern. Its not convincing however because the price action between the 2 (double) peaks is assymetrical, suggesting an ascending wedge – culminating in a price break out! Either way the price action over the next few months will tend us.

Looking at the palladium price – the price outlook is less apparent. There is a possible wedge break-out due within the next 3-12 months depending on whether the support is broken on the upside or downside. Regardless, its safe to say that palladium metal is a safe long term bet. Futures and options over the metal are more risky until the downtrend is broken.

Rhodium is by far the most valuable component of PGM production, but it comprises just 3-5% of mine output, and is not sold as an investment product. Its high price however adds to mine revenues, and thus the upside to PGM producers.

Having looked at the metal technicals & fundamentals, its worth having a look at my postings on the best spec-entries into the palladium market.

Tantalum - best industrial commodity

Because we are in the midst of a property bubble that is supporting unsustainable levels of consumption, its difficult to recommend any industrial materials in the metals sector. One of the new good ones is tantalum.

Tantalum is primarily used in the production of capacitors, important components in the manufacturing of mobile phones, laptops, PDAs, game devices, digital cameras. Since developing markets are critical to growing demand for raw materials, its important to look at the types of products which poor countries will by first. Having spent alot of time in SE Asia, I would suggest to you that the `common human` holds the following values:
1. Food + water + basic clothes
2. Shelter
BASIC JOB - in a shopping mall, etc
3. Mobile phone
3a. Bicycle
4. Nicer clothes + MTB
5. Better mobile phone
6. Scooter
6a. Computer
GOOD JOB - often with foreign company (JV)
7. Motor bike
7a. Laptop
8. Car > They are likely to live at home long term
9. Home (mortgaged)
10. Home (if family helps to buy or high interest rates)
10. Furnishings
11. Imported foods & branded clothes

Mobile phones are important status symbols - followed by clothes, but they tend to wear rip-offs of branded clothes. Its apparent therefore that the intensity of consumption of tantalum is going to stand up better than copper (construction, electronics), lead (car batteries), zinc (galvanised steel), etc. Whilst tantalum will suffer a slump, we can expect the slack demand to be absorbed quickly. Many countries are developing mobile networks before they develop their land lines.
Another positive for tantalum is that speculative demand is strongly tied to market fundamentals because its difficult for speculators to take large positions, hence the speculation is done by traders taking physical positions, not financial institutions trading derivatives.
One does have to be concerned about too many projects being developed given the illiquidity of the market, however given that these are contracted markets, as opposed to the terminal (LME) markets, project sponsors need to pre-sell at least 70% of their production capacity generally to get financing, so its difficult to conceive of over-capacity on the supply-side, though manufacturers can over-contract on the demand side. Some contracts are just MOU, others have firm take-or-pay contracts.

In the tantalum market, the best entry is Gippsland Ltd (GIP) listed on the Australian Stock Exchange (ASX).
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