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

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.

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)
LANDED WEALTH
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).