Jim Rogers on Timeless Investing Strategies You Can Use to Profit Today

Jim Rogers on Timeless Investing Strategies You Can Use to Profit Today By Nick Giambruno September 15, 2015 Recently I spoke with Jim Rogers about the most important investment lessons he has learned over the years. Jim is a legendary investor and true international man. He’s always ahead of the game. Jim made a bundle by investing in commodities in the 1990s when they were out of favor with Wall Street. He’s also made large profits investing in crisis markets. Jim and I spoke about timeless strategies that are truly essential to being a successful investor. You won’t want to miss this fascinating discussion, which you’ll find below. Nick Giambruno: You’ve said that many times throughout history, conventional wisdom gets shattered. What are some widely held beliefs that will be shattered in the next 10 years? Jim Rogers: That’s a very good question. Well, for one thing, I know bond … Continue reading

Thomas Drolet Warns of a Coming Grand Canyon of Uranium Supply Deficit and Shares Three Ways to Profit by It

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The Energy Report: We have heard for years that Japan could be restarting its reactors any time. Is it really happening now?

Thomas Drolet: It is happening; one has just restarted. The intelligence I have gathered from my visits and telephone conferences with Japanese utility people since the Fukushima-Daiichi accident indicates that the restart will be measured, formal and slow. Only 25 of the original 54 reactors will eventually be restarted, in my opinion. The reasons are varied, but include local opposition, proximity to fault lines, regulatory barriers and excessive capital reinvestment needs.

TER: Once they are restarted, how long will it take to work through Japan’s uranium supply backlog?

TD: Utilities—and Japanese utilities are no different than North American, European or Canadian utilities—prefer to buy in the long-term markets. They usually buy somewhere between two and five years’ forward supply. That has left the nine Japanese utilities that have nuclear reactors on their systems stockpiling inventory to fulfill long-term contracts. A few of those utilities paid a penalty to get out of the contracts. But the majority stuck with them, so they do have a lot of inventory on hand.

An average utility that restarts four reactors would burn through excess uranium inventory in about five to seven years. Some reactors will start sooner than the average of the 25, and work through supplies faster, but some will take longer.

TER: In the meantime, how much of an impact can Chinese and Indian nuclear construction have on demand in the uranium market?

TD: Several hundred reactors are being planned or are under construction in China, India, Russia, Saudi Arabia, Argentina and the United Arab Emirates. That doesn’t include the smaller reactor business in places like Turkey, Jordan, Bulgaria, Bangladesh and Vietnam. That means a Grand Canyon of a deficit in supply from known sources—approximately 30-35 million pounds per year (30-35 Mlbs/year) in what is currently a 155 + Mlbs/year market—will open up by 2020-2022. The way in which the deficit gets filled is going to be a complex process.

TER: If it takes decades to develop a uranium resource, that puts the focus on the junior space, where we have seen a flurry of mergers and acquisitions (M&As) lately. Is that a good sign for uranium mining equity prices for the rest of this year?

TD: First, we have to get through this doldrums period of oversupply over the next few years. We have the big existing suppliers right now in Kazakhstan, in Canada— AREVA SA (AREVA:EPA), Cameco Corp. (CCO:TSX; CCJ:NYSE) and Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT)—and in Australia. Some smaller in situ recovery (ISR) suppliers work the U.S. and Australia, but that is not going to be enough to fill the approaching canyon. All of this current supply is going to be gobbled up by U.S., European, Chinese, Canadian and Indian users. We’re going to have to look for new supplies from Canada, South America, Europe, the U.S. and Africa.

We are indeed headed for a deficit situation, and it is going to be a real problem for baseload electricity supply in the world. As much as 16% of the world’s electricity today is generated by nuclear reactors, and over the next decade or two, that will ramp up toward 20+%. The supply of last resort would have to be to gain access to some national strategic stockpiles which, in and of itself, would have major geopolitical implications.

TER: Will that mean more M&A, as majors look to replenish resources? Or perhaps exploration for fresh sources?

TD: I think both. M&A is the way of the world in the oil, gas and mineral exploration and production (E&P) game. The juniors find the uranium, prove its existence and its economic extraction potential, and then, because the juniors don’t have the capital, the bigger companies step in to put their finds into operation. This process will continue in the future world of uranium as well.

TER: One of the biggest deals recently was the Denison acquisition of Fission Uranium Corp. (FCU:TSX). Do you see that deal as a benchmark for future acquirers and premiums?

TD: In Fission’s neighborhood in Canada’s Athabasca Basin, well-managed juniors like Lakeland Resources Inc. (LK:TSX.V) and Skyharbour Resources Ltd. (SYH:TSX.V) are developing many properties. The biggest challenge faced by Fission/Denison and the nearby juniors is eventual access to milling of the ore. It is a long and expensive process to drill in hard rock, and then to invest the capital for the mill itself. We are talking in the billion-dollar-plus range to develop and operate a mill. That said, the very high U3O8 concentrations being found make the Athabasca Basin one of the best, if not the best, long-term supply regions in the world.

TER: Lakeland just announced a strategic merger with Alpha Exploration Inc. (AEX:TSX.V). Is that indicative of what is to come?

TD: I call that a merger of two juniors to strengthen the balance sheet, increase resource science capabilities, and bring together experienced management teams and board members. That is a different kind of M&A. It is more a merger of two juniors that want to stay in the E&P extraction business, get on with drilling and strengthen their balance sheets.

TER: Skyharbour is in the midst of a drilling program. How did the Fission deal impact that company’s profile with investors?

TD: A deal the size of Fission-Denison impacts everything in the area. I don’t think Skyharbour’s share price got a bump, because all the uranium juniors are on the floor right now.

“Only 25 of the original 54 Japanese reactors will eventually be restarted, in my opinion.”

I am an advisor to Skyharbour, and I know the company has an adequate amount of money to invest in its current drilling program. It also has, I believe, access to capital to make progress on a subsequent drilling program. Skyharbour and its syndicate partners are well managed and have a wide variety of properties. I would assume we would see an announcement about this summer’s results later this fall or in early winter.

TER: What else in the Athabasca should investors be watching?

TD: I think we should be watching for investor interest to come from outside of the normal sources used to date—not from the current players. The Chinese and Indian governments and their agencies and other business enterprises are looking for long-term sustainable supplies. I think Russia will concentrate on a closer relationship with Kazakhstan to supply its turnkey projects in Turkey, Pakistan, Bangladesh and Vietnam. This shift could limit what Kazakhstan sells on the general market in the future.

TER: What about outside of the Athabasca? Are you watching any projects in South America?

TD: I am watching one company in particular. U3O8 Corp. (UWE:TSX; UWEFF:OTCQX) is managed by CEO Richard Spencer, who has a great staff working with him, including a noteworthy complement on the board of directors.

U3O8 Corp. has a number of project possibilities in South America. First in line is in Argentina, which, by the way, has a very active nuclear reactor building program. A third Argentinian reactor has just come online, and the country has announced programs to build three more starting later this year. By 2025, the government hopes to source 21% of its electricity supply from nuclear reactors, and is eager for a domestic supply of uranium to close out a nationally driven fuel cycle. Argentina is also developing a small reactor supply business for export potential (potentially to power desalination plants in Saudi Arabia, for example). Argentina already has this prototype reactor under construction as proof of concept for this export-oriented business model.

“Price increases usually show up first on the spot market, and then the long-term market follows fairly quickly. That market may start to move up by the end of 2016.”

U3O8 Corp. has found a very shallow deposit in which the uranium is in the sandy component of loose gravel in the Laguna Salada region of south-central Argentina, which can be easily and cost-effectively extracted—the cash cost of extraction is about $22/pound, which is in the lower quartile of the uranium industry. There are also expansion possibilities into the adjacent La Susana and La Rosada discoveries. The amount of capital required is, because of the ease of extraction, fairly low per million pounds of uranium in the ground. The loose gravel would be scooped up, washed with water to remove the sandy component from the pebbles, and the separated sand would be treated with washing soda and baking soda in an alkaline leach process to remove the uranium—a very simple process.

The ease of mining and extraction, coupled with the resource expansion capabilities, makes this company one of the very best emerging smaller juniors to watch in the new supply world of uranium. U3O8 Corp. also has uranium projects in the pipeline in Colombia and Guyana.

TER: Are there upcoming catalysts we should be watching that might have an impact on the stock price? I saw that the company just released some radon test results.

TD: Radon measurements for some of the areas adjacent to the deposit—La Susana and La Rosada—say that a lot more uranium, some of it at even higher concentrations than in the Laguna Salada area, are possible. The company’s business development model calls for U308 Corp. to take a non-majority equity position in the projects and look for a third-party injection of capital for development. I think that model is the right way to go for a couple of reasons. The Argentine government and its associated business groups are possible sources of financing that could move the project along in a number of ways. Third-party financing from China or India is also a possibility.

TER: Are there other companies that our readers should be watching?

TD: Ualta Energy Ltd. (private) of Canada is managed by a couple of geologists—Michael Fox of Calgary and Paul Pitman of the Toronto area—who have decades of experience in mineral exploration, including the extraction of uranium. They have discovered two potentially very large bodies of uranium mineralization hosted in porous remains at fairly shallow depths in the plains region of southern Alberta, a mining-friendly jurisdiction ranked highly by the Fraser Institute. The two zones of uranium mineralization each measure more than 15 miles in length and 2 to 8 miles in width, and have been defined by down-hole gamma ray logging in 55 drill holes drilled by oil and gas companies in southern Alberta, southeast of Calgary. The two mineralized zones show low concentrations of uranium, but the mineralization is fairly evenly distributed in the sandstone over a very extensive area. Ualta’s management proposes to extract the uranium using an innovative, low-cost combination of horizontal drilling and proven ISR techniques. The size of the zones has led to estimates of U3O8 in the 500+ Mlb range, which management considers could be extracted at costs in the near-$20+/lb range. The surface ISR plans would be simple and of very low capital cost. Ualta Energy is a start-up company looking for capital. This is a new, promising company to keep our eyes on.

TER: Do you envision it going public at any time soon?

TD: Not until it gets private capital financing to prove out in the ground what it’s seen from the oil and gas drilling core data. But soon after that, I think it’s a distinct possibility it will list on the TSX.V.

TER: What words of wisdom do you have for investors who’ve been waiting for uranium prices to turn around?

TD: I’m starting to notice that some of the big suppliers, faced with low spot and long-term prices, are entering into shorter-term user contracts because they do not want to be locked into longer-term contracts at the current very low price. This is a sign that producers expect uranium prices to rise. I believe the whole supply system will soon recognize the looming demand pressure from the 66 reactors under construction worldwide. Price increases usually show up first on the spot market, and then the long-term market follows fairly quickly. That market may start to move up by the end of 2016. We will have to wait and see.

TER: Thank you for your time.

Thomas Drolet is the principal of Drolet & Associates Energy Services Inc. He has had a 44-year career in many phases of energy—nuclear, coal, natural gas, geothermal and distributed generation, with expertise in nuclear commercial aspects, nuclear research and development, engineering, operations and consulting. He earned a bachelor’s degree in chemical engineering from Royal Military College of Canada, a master’s degree in nuclear technology/chemical engineering and a DIC from Imperial College, University of London, England. He spent 26 years with North America’s largest nuclear utility, Ontario Hydro, in various nuclear engineering, research, international commercial and operations functions.

Want to read more Energy Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

DISCLOSURE:
1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, and The Life Sciences Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: none.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Fission Uranium Corp. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Thomas Drolet: I own, or my family owns, shares of the following companies mentioned in this interview: U308 Corp. I personally am, or my family is, paid by the following companies mentioned in this interview: Skyharbour Resources Ltd., Lakeland Resources Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

( Companies Mentioned: LK:TSX.V,
SYH:TSX.V,
UWE:TSX; UWEFF:OTCQX,
)

Veteran Investment Strategist Joe McAlinden Reverses View, Predicts Recovery for Gold, Oil and Housing

The Gold Report: For more than a decade, you led Morgan Stanley Investment Management’s global investment strategy; now you own your own research firm based on your observations of the industry for more than 50 years. How do you explain the volatility in the markets right now and how should investors position themselves to prepare for what is coming?

Joe McAlinden: It has been a wonderful bull market, a wild ride going all the way back to 2007 when the market made its top. That was followed by a horrendous plunge. We’ve not only made that back, but the market has reached highs that were 36% above the 2007 highs. I had been concerned recently, however, that price-earnings ratios have become elevated and we are seeing other spooky similarities to the conditions that prevailed prior to the 1987 crash, including the absence of a more than a 10% correction for three years and a breakdown of small-cap stocks. The market could be vulnerable to some kind of major shock. I believe that the big shock is only beginning to unfold and that as it does, this correction will get considerably worse, perhaps double what we’ve had so far and maybe even worse than that.

TGR: What do you think the market expects the Federal Reserve Board to do?

JM: The market is hoping the Fed will bail them out by postponing the tightening, but I don’t think that’s going to happen. It is appropriate for the Fed to begin the tightening process now. It’s not the Fed’s job to regulate what’s going on in the stock market. It’s job is to maintain the purchasing power of our currency. The Fed is tasked with keeping inflation and inflation expectations stable and fostering full employment.

“It is appropriate for the Fed to begin the tightening process now.”

The U.S. government should not be in the business of trying to manipulate the stock market the way the central planners in Beijing do. We’re supposed to be a free market economy. The Fed should not allow monetary policy actions to be determined by what the Dow does on a given day. I think that, as some Fed officials have indicated, it should and will go ahead with the quarter-point move in September.

I am worried about the tremendous gap between the Federal Open Market Committee (FOMC) members’ expectations and the market’s perception about the path ahead for the federal funds rate. When you look out to 2017, the gap is about 130 basis points. That is a big deal because we all learned in securities analysis 101 that stocks are worth the present value of the future stream of earnings. In the case of high-growth equities, future earnings are a big part of the current value, especially when the discount rate is influenced by the current policy of zero interest rates in the U.S. So my concern is that a) the market is overvalued, b) there are these similarities to 1987, and c) the gap between market expectations and what the Fed plans to do needs to be closed. My guess is that as it closes, there will be downward adjustment in equity prices and bond prices.

TGR: What were the causes of the “flash crash” that happened at the end of August? Are there black swans that could bring back painful 2008 scenarios?

JM: The consensus interpretation of the flash crash is that the volatility was due to the China slowdown. I don’t argue that is not a factor, but the bigger problem was China’s peg of the currency to the dollar, which just kept getting stronger. They couldn’t hold the peg any longer and did that devaluation. I think it will probably not be the last.

Derivatives, which have proliferated throughout the markets, are vulnerable to jolts. It is unknown to what degree big players afraid of being exposed to liquidity problems played a role in the crash. The ability of banks to step in with capital has been greatly diminished and that could have played a role, along with Dodd-Frank and other reporting requirements. Many hedge funds today are driven by algorithms, so there is no human compassion in place to make rational decisions when anomalies occur. More corrections are likely.

The big question is: Where can investors hide if we are heading into major correction territory? I think we’re going to see the relative strength of precious metals turn up sharply—it already appears to have perked up—simply because when you get into a scary environment, there tends to be that flight into hard money. But I think there’s more involved here.

Conventional wisdom is that a hike in interest rates is going to hurt gold, but that is not borne out by history. When rates have gone up in the past, gold has risen, as have other precious metals. That is what will happen again. That makes me positive on gold, which, to be honest, I haven’t been in a long time.

“When rates have gone up in the past, gold has risen, as have other precious metals.”

Oil follows the same trends. Interest rates rose in the mid-1970s by a ginormous amount, but so did oil and gold. I was there and I can tell you I witnessed a broad move in precious metals and hard assets. Energy also enjoyed a tremendous move. Last month, I wrote a piece for our subscribers called “Time for Value” that predicted the value side of the market, which includes a lot of hard asset categories, will outperform on a relative strength basis. In other words, if you were short growth and long value, I think you’d make money irrespective of how deep this correction goes. A part of that call would be to go out there and catch a falling knife on the energy and precious metals side of the market.

TGR: Are there specific areas in the energy sector that you see thriving in the scenario you describe?

JM: Crude oil prices are the key to the sector. There are a lot of moving parts. Fracking is becoming more economic and competitive. Production costs continue to fall in the U.S. But the world depends on non-U.S. production. Countries like Saudi Arabia and Russia need higher oil prices to pay for the social programs that keep leaders in office, creating pressure on prices. That includes prices for production from North American shale and tar sands.

At the same time, technology is improving for solar production and prices are coming down. That is where the future lies.

TGR: Streetwise Reports looks for investing ideas across all sectors. Where else would you find value?

JM: I’ve been very positive on the U.S. residential housing market, largely because of demographics. Home-ownership for American families is the hard asset of choice. Home prices will continue to rise to above where they were at the so-called bubble peak in 2006–2007.

The problem with housing up until recently has been that people born after 1980 have been slow to form new households. It is part of the “failure to launch syndrome,” where folks are staying with family because jobs have been hard to find. Job data for that age cohort has picked up dramatically and, as a result, household formations have spiked up like a hockey stick. For several years, household formations were running around 500,000 per year. Now, they’re in the 1.5–2 million per year range. A lot of that is going into rentals, but now rentals have skyrocketed, vacancy rates are down and young people are being motivated to find a way to buy a first home. First-time home buyers as a percentage of the total are up from where they were a year ago. This is true across the country, in large and small cities. The negative view of housing after the crash and the disinflationary environment will be reversed as people continue to see housing prices rise. They are already up at least 35% from the bottom, with way more to go.

Just as in the 1970s, when a housing recovery was driven by a shortage due to underbuilding in the previous decade, prices will go up. The Case Shiller statistics show that home prices dropped 35% from the peak in 2007 to the trough, and they’ve come back more than halfway over the better part of a decade. At the peak, house prices were probably higher than they should have been at the time. But when you look at some of the components of what it takes to build a house, like construction wages, the average hourly pay of construction workers is actually 20% higher now than it was in 2007. That is a sign replacement costs are increasing, which indicates home prices will continue to move higher. That is why I think housing is the other area that will do well in spite of what’s going on in the broader market.

TGR: I know you are a true hedger. I understand your concept of shorting growth and being long value, but is there an exchange-traded fund that would capture this real estate play? Would you be buying the builders or the apartment Real Estate Investment Trusts (REITs)? Where should our readers be looking?

JM: I think the home builders are going to continue to do well and outperform the market. I think everything related in that food chain—home furnishings and home improvement—is part of that story. It helps existing home sales as well.

I’m reluctant to make a general statement about REITs because there are so many different kinds. Sometimes you think you’re buying real estate but you’re really getting the mortgages. But if you can find a true equity play on the value of the underlying residential asset, whether it’s apartments or single-family homes, there is shopping to be done in the REIT space.

“I’ve been very positive on the U.S. residential housing market, largely because of demographics.”

If I’m right, we’re going to see bond prices continue to erode from the cyclical highs that they hit at the end of January when yields got down to a one handle on the 10-year government bond. Over the next several years, I think we are heading toward a three handle and maybe between a four and a five for the 10-year treasury.

TGR: What else can investors do to protect themselves?

JM: The Nobel Prize winning economist Paul Samuelson joked in the 1960s that the stock market has correctly predicted nine out of the last five recessions. More often than not, when you have a major stock market crash, it’s a sign the economy is going into a recession, but every once in a while, a historic drop is not followed by an economic downturn. That’s what I think we’re dealing with here. This is a market and financial asset phenomenon, and it’s going to be part of a re-allocation globally away from financial assets and toward hard assets. That takes you to a lot of commodity-cyclical stocks, the precious metals and real estate to the extent that it gives you exposure to the equity side.

TGR: You are a wise man who has seen a lot from your perch at Morgan Stanley and now in the companies you founded, McAlinden Research Partners and Catalpa Capital Advisors. How are you positioning yourself based on what you see coming?

JM: I work with hedge funds and portfolio managers and, now, increasingly other investors, doing market strategy research. I focus on change and only write about a sector when I see a shift. We are at a major turning point in the macro picture right now. There is potential for big moves up and down in sectors and specific securities.

For my own portfolio, right now, I’m very heavily in cash. I’m getting ready to deploy some money in energy. Precious metals are also going to be a safe haven.

TGR: Thank you for your insights.

Joe McAlinden has over 50 years of investment experience. He is the founder of McAlinden Research Partners and its parent company, Catalpa Capital Advisors. Previously, McAlinden spent more than 12 years with Morgan Stanley Investment Management, first as chief investment officer and then as chief global strategist, where he articulated the firm’s investment policy and outlook. He received a bachelor’s degree cum laude in economics from Rutgers University and holds the Chartered Financial Analyst designation. McAlinden has served on the board of the New York Society of Security Analysts.

Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

DISCLOSURE:
1) Gordon Holmes conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and is a principal of Streetwise Reports.
2) Joe McAlinden: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
3) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
4) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

Veteran Investment Strategist Joe McAlinden Reverses View, Predicts Recovery for Gold, Oil and Housing

The Gold Report: For more than a decade, you led Morgan Stanley Investment Management’s global investment strategy; now you own your own research firm based on your observations of the industry for more than 50 years. How do you explain the volatility in the markets right now and how should investors position themselves to prepare for what is coming?

Joe McAlinden: It has been a wonderful bull market, a wild ride going all the way back to 2007 when the market made its top. That was followed by a horrendous plunge. We’ve not only made that back, but the market has reached highs that were 36% above the 2007 highs. I had been concerned recently, however, that price-earnings ratios have become elevated and we are seeing other spooky similarities to the conditions that prevailed prior to the 1987 crash, including the absence of a more than a 10% correction for three years and a breakdown of small-cap stocks. The market could be vulnerable to some kind of major shock. I believe that the big shock is only beginning to unfold and that as it does, this correction will get considerably worse, perhaps double what we’ve had so far and maybe even worse than that.

TGR: What do you think the market expects the Federal Reserve Board to do?

JM: The market is hoping the Fed will bail them out by postponing the tightening, but I don’t think that’s going to happen. It is appropriate for the Fed to begin the tightening process now. It’s not the Fed’s job to regulate what’s going on in the stock market. It’s job is to maintain the purchasing power of our currency. The Fed is tasked with keeping inflation and inflation expectations stable and fostering full employment.

“It is appropriate for the Fed to begin the tightening process now.”

The U.S. government should not be in the business of trying to manipulate the stock market the way the central planners in Beijing do. We’re supposed to be a free market economy. The Fed should not allow monetary policy actions to be determined by what the Dow does on a given day. I think that, as some Fed officials have indicated, it should and will go ahead with the quarter-point move in September.

I am worried about the tremendous gap between the Federal Open Market Committee (FOMC) members’ expectations and the market’s perception about the path ahead for the federal funds rate. When you look out to 2017, the gap is about 130 basis points. That is a big deal because we all learned in securities analysis 101 that stocks are worth the present value of the future stream of earnings. In the case of high-growth equities, future earnings are a big part of the current value, especially when the discount rate is influenced by the current policy of zero interest rates in the U.S. So my concern is that a) the market is overvalued, b) there are these similarities to 1987, and c) the gap between market expectations and what the Fed plans to do needs to be closed. My guess is that as it closes, there will be downward adjustment in equity prices and bond prices.

TGR: What were the causes of the “flash crash” that happened at the end of August? Are there black swans that could bring back painful 2008 scenarios?

JM: The consensus interpretation of the flash crash is that the volatility was due to the China slowdown. I don’t argue that is not a factor, but the bigger problem was China’s peg of the currency to the dollar, which just kept getting stronger. They couldn’t hold the peg any longer and did that devaluation. I think it will probably not be the last.

Derivatives, which have proliferated throughout the markets, are vulnerable to jolts. It is unknown to what degree big players afraid of being exposed to liquidity problems played a role in the crash. The ability of banks to step in with capital has been greatly diminished and that could have played a role, along with Dodd-Frank and other reporting requirements. Many hedge funds today are driven by algorithms, so there is no human compassion in place to make rational decisions when anomalies occur. More corrections are likely.

The big question is: Where can investors hide if we are heading into major correction territory? I think we’re going to see the relative strength of precious metals turn up sharply—it already appears to have perked up—simply because when you get into a scary environment, there tends to be that flight into hard money. But I think there’s more involved here.

Conventional wisdom is that a hike in interest rates is going to hurt gold, but that is not borne out by history. When rates have gone up in the past, gold has risen, as have other precious metals. That is what will happen again. That makes me positive on gold, which, to be honest, I haven’t been in a long time.

“When rates have gone up in the past, gold has risen, as have other precious metals.”

Oil follows the same trends. Interest rates rose in the mid-1970s by a ginormous amount, but so did oil and gold. I was there and I can tell you I witnessed a broad move in precious metals and hard assets. Energy also enjoyed a tremendous move. Last month, I wrote a piece for our subscribers called “Time for Value” that predicted the value side of the market, which includes a lot of hard asset categories, will outperform on a relative strength basis. In other words, if you were short growth and long value, I think you’d make money irrespective of how deep this correction goes. A part of that call would be to go out there and catch a falling knife on the energy and precious metals side of the market.

TGR: Are there specific areas in the energy sector that you see thriving in the scenario you describe?

JM: Crude oil prices are the key to the sector. There are a lot of moving parts. Fracking is becoming more economic and competitive. Production costs continue to fall in the U.S. But the world depends on non-U.S. production. Countries like Saudi Arabia and Russia need higher oil prices to pay for the social programs that keep leaders in office, creating pressure on prices. That includes prices for production from North American shale and tar sands.

At the same time, technology is improving for solar production and prices are coming down. That is where the future lies.

TGR: Streetwise Reports looks for investing ideas across all sectors. Where else would you find value?

JM: I’ve been very positive on the U.S. residential housing market, largely because of demographics. Home-ownership for American families is the hard asset of choice. Home prices will continue to rise to above where they were at the so-called bubble peak in 2006–2007.

The problem with housing up until recently has been that people born after 1980 have been slow to form new households. It is part of the “failure to launch syndrome,” where folks are staying with family because jobs have been hard to find. Job data for that age cohort has picked up dramatically and, as a result, household formations have spiked up like a hockey stick. For several years, household formations were running around 500,000 per year. Now, they’re in the 1.5–2 million per year range. A lot of that is going into rentals, but now rentals have skyrocketed, vacancy rates are down and young people are being motivated to find a way to buy a first home. First-time home buyers as a percentage of the total are up from where they were a year ago. This is true across the country, in large and small cities. The negative view of housing after the crash and the disinflationary environment will be reversed as people continue to see housing prices rise. They are already up at least 35% from the bottom, with way more to go.

Just as in the 1970s, when a housing recovery was driven by a shortage due to underbuilding in the previous decade, prices will go up. The Case Shiller statistics show that home prices dropped 35% from the peak in 2007 to the trough, and they’ve come back more than halfway over the better part of a decade. At the peak, house prices were probably higher than they should have been at the time. But when you look at some of the components of what it takes to build a house, like construction wages, the average hourly pay of construction workers is actually 20% higher now than it was in 2007. That is a sign replacement costs are increasing, which indicates home prices will continue to move higher. That is why I think housing is the other area that will do well in spite of what’s going on in the broader market.

TGR: I know you are a true hedger. I understand your concept of shorting growth and being long value, but is there an exchange-traded fund that would capture this real estate play? Would you be buying the builders or the apartment Real Estate Investment Trusts (REITs)? Where should our readers be looking?

JM: I think the home builders are going to continue to do well and outperform the market. I think everything related in that food chain—home furnishings and home improvement—is part of that story. It helps existing home sales as well.

I’m reluctant to make a general statement about REITs because there are so many different kinds. Sometimes you think you’re buying real estate but you’re really getting the mortgages. But if you can find a true equity play on the value of the underlying residential asset, whether it’s apartments or single-family homes, there is shopping to be done in the REIT space.

“I’ve been very positive on the U.S. residential housing market, largely because of demographics.”

If I’m right, we’re going to see bond prices continue to erode from the cyclical highs that they hit at the end of January when yields got down to a one handle on the 10-year government bond. Over the next several years, I think we are heading toward a three handle and maybe between a four and a five for the 10-year treasury.

TGR: What else can investors do to protect themselves?

JM: The Nobel Prize winning economist Paul Samuelson joked in the 1960s that the stock market has correctly predicted nine out of the last five recessions. More often than not, when you have a major stock market crash, it’s a sign the economy is going into a recession, but every once in a while, a historic drop is not followed by an economic downturn. That’s what I think we’re dealing with here. This is a market and financial asset phenomenon, and it’s going to be part of a re-allocation globally away from financial assets and toward hard assets. That takes you to a lot of commodity-cyclical stocks, the precious metals and real estate to the extent that it gives you exposure to the equity side.

TGR: You are a wise man who has seen a lot from your perch at Morgan Stanley and now in the companies you founded, McAlinden Research Partners and Catalpa Capital Advisors. How are you positioning yourself based on what you see coming?

JM: I work with hedge funds and portfolio managers and, now, increasingly other investors, doing market strategy research. I focus on change and only write about a sector when I see a shift. We are at a major turning point in the macro picture right now. There is potential for big moves up and down in sectors and specific securities.

For my own portfolio, right now, I’m very heavily in cash. I’m getting ready to deploy some money in energy. Precious metals are also going to be a safe haven.

TGR: Thank you for your insights.

Joe McAlinden has over 50 years of investment experience. He is the founder of McAlinden Research Partners and its parent company, Catalpa Capital Advisors. Previously, McAlinden spent more than 12 years with Morgan Stanley Investment Management, first as chief investment officer and then as chief global strategist, where he articulated the firm’s investment policy and outlook. He received a bachelor’s degree cum laude in economics from Rutgers University and holds the Chartered Financial Analyst designation. McAlinden has served on the board of the New York Society of Security Analysts.

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DISCLOSURE:
1) Gordon Holmes conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and is a principal of Streetwise Reports.
2) Joe McAlinden: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
3) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
4) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

Flinders CEO Blair Way: What Tesla Needs to Know about the Graphite Sector

Flinders Article Chart 1

The Gold Report: What is the state of the current global graphite market and what impact might Tesla’s construction of a battery Gigafactory in the desert in Nevada have on future demand for the mineral?

Blair Way: Because graphite is used in many energy-related applications (including electric vehicles, Pebble Bed Nuclear Reactors, fuel cells, solar panels and electronics ranging from smartphones to laptops), it has been categorized as a critical, strategic mineral by several governments including the United States and Europe.

What does this really mean? At this point in time it means nothing—graphite is in oversupply and prices are low. However, if China decided to stop supplying graphite to the world, then the West would be in trouble. This is highly unlikely to ever happen. As far as the impact of the Tesla plant on the greater market, that’s yet to be defined in detail, but it will create more demand for graphite, both natural and synthetic.

TGR: How big is the graphite market?

BW: The graphite market combined—the natural flake and synthetic market—is worth approximately $13 billion ($13B). Synthetic is 90% of that market, and natural flake graphite is 10%.

TGR: How big is the natural flake graphite market?

BW: The worldwide natural flake graphite market hovers around 1.1 million tons a year (1.1 Mtpa) of which 75% is from China, 11% from India, 6% from Brazil, 3% from North Korea and 5% from the rest of the world. Consumption of graphite is also approximately 1.1 Mtpa, and 65% is consumed in China. The balance of the production is consumed in Brazil and India (200,000 tons), with 100,000 tons in Europe and 100,000 tons in North America. Of this 1.1 Mtpa, more than 60% is fine and medium graphite while the balance of 40% is flake graphite. The majority of this flake graphite is micronized for the end user.

TGR: How important is it to understand the graphite market in terms of dollar value?

BW: World production and consumption of natural flake graphite is often claimed to be almost as large as the nickel market (1.8 Mtpa) by volume.

The market should be considered by dollar value not just tons per annum. As a comparison, the 1.1 Mtpa of graphite is worth $1.3B while 1.8 Mtpa of nickel is worth $26B. As a new entrant to the market, nickel is a significantly larger market than graphite. So to put the graphite market in perspective, the non-Chinese natural flake graphite market is a $300 million ($300M) market. This is the market in which all the Western graphite producers (current and future) are vying for position.

That is why a new graphite production facility must start small and build relationships in the current market while developing products that can supply the anticipated future markets. Cash flow for a graphite business must be sensible in today’s market.

Chart provided by Flinders Resources

TGR:What is the size of a big graphite mine and what kind of revenue stream should investors expect from a natural flake graphite mine selling into the traditional market?

BW: A large graphite mine would be 10,000–20,000 tons per year (10–20 Ktpa) and would have a revenue stream of $10–20M. Profit could be in the range of $3–8M. This is similar in scale to a 10,000–20,000 ounce gold mine. Any graphite miner claiming a large-scale operation will not be able to achieve the sales as a new entrant to the market. It is possible that the mine could grow to a much larger size over time, but the sales must drive expansion of production. If too much concentrate is produced and it does not sell, then working capital will diminish quickly and the business will be in trouble.

TGR: What sort of revenue should you expect from a high-purity natural flake graphite miner selling into the battery market?

BW: High-purity natural flake graphite can and does displace some synthetic graphite. The market for synthetic graphite is about 1 Mtpa, which at prices of $5,000–10,000 per ton indicates a market size of $5–10B annually. Approximately 50% of the synthetic graphite produced is used for electrodes in the steel industry. The uses of synthetic graphite are varied, but for batteries the quantity of natural flake graphite consumed is less than 100 Ktpa. The synthetic graphite market is as private as the natural graphite market, so figures quoted can vary greatly. There are multiple new uses for high-purity graphite beyond conventional batteries, so there is huge potential for the growing market for high-purity natural flake graphite.

TGR: We often hear about the importance of offtake agreements. Can you explain to us the important distinction between offtake agreements and sales agreements?

BW: Offtake agreements are not sales agreements—they are non-binding agreements to purchase future production if a number of provisions are met. A sales agreement is a commitment to quantity and price per ton for a set period of time. Most junior mining companies are not signing sales agreements because graphite consumers want to lock in prices below known market prices.

To evaluate the offtakes you have to ask the questions: Did the buyer invest hard cash in the graphite business to facilitate the start of production? Does the contract with the buyer protect the producer or the buyer? Is there a guaranteed minimum or maximum price when the market price is constantly changing? Is there a minimum price in the agreement? Is it a take-or-pay agreement? What are the escape clauses for the buyer to get out of the agreement? Does the agreement cover all grades produced by the graphite producer, or is it just the grades the buyer requires? What happens to the products that the buyer is not interested in?

There is little to no hedging of graphite because it is not a publicly traded commodity, and it is very unlikely a trader will hedge for a producer. If a trader does offer to buy at a set price it would be at historically low prices. This will benefit the trader and not the producer. Typical refractory customers do not buy graphite in large enough quantities to justify locking in prices. They can also stockpile if required to ride out higher pricing. Even high graphite prices do not have a huge impact on overall pricing of the end product because graphite, by cost, is a small part of the cost of the products.

TGR: One of the buzzwords we hear when companies in the graphite space tell their story is “graphene” and the potential for their company to one day produce it. How important should graphene exposure be to an investor or speculator when deciding what companies in the graphite space to invest in?

BW: Graphene is 10–20 years away from being commercially viable, so one cannot justify a graphite mine based on the graphene market. The graphene market will take an extremely long time to develop products for everyday use. Additionally, a small amount of graphite goes a long way in making graphene.

There are two kinds of graphene. One is made from chemical vapor deposition, in which a graphene coating is made on top of another substrate, then the substrate is removed, leaving only the graphene. Most of the graphene being used today is made that way. That is the graphene the electronic industry wants because it’s ultra-high purity and can be easily controlled.

The lower-cost way uses natural graphite as the precursor. That market will take longer to develop, but it will be a bigger market because that kind of graphene can be used in the more practical, higher-volume products that we use every day. As a graphite producer, it is important to be part of the R&D process and to drive it towards commercialization. Flinders Resources Ltd. (FDR:TSX.V) is an active part of this R&D process supplying graphite to research facilities.

Graphene will not have positive impacts on a graphite producer’s cash flow until commercialization has taken place and there is a real market for it. Graphene will be produced by specialists, not miners. Miners will supply the materials to enable graphene manufacturing.

TGR: What should be on an investor’s checklist when considering a potential investment or speculation in the graphite space?

BW: Production of graphite is only one step to becoming a graphite producer. Sales must be secured to ensure all concentrate produced will sell. The market is a closed market and if sales are not secured for production, selling product is extremely difficult. Can the company sell its product at a profit?

There are four key elements to determine the quality of a graphite company:

1) Capital costs of the project:

Capital expenditures (capex) is a huge driver and this is what really kills a project–especially a low-revenue business like graphite. Consider many nickel laterite projects and how typically the first owner runs out of cash, and it is the second or even third owner that actually makes the business work. The capex kills the first owner almost every time. Aluminum is similar too. Both these commodities have a huge market to supply; graphite does not. The scale for graphite is much smaller, but the same elements of capex are at play.

2) Marketing/production rate:

Bigger is not better—except it is often required to justify high capex. The market does not support the mega graphite projects (anything over 10–20 Ktpa). If the company cannot make money at modest rates, the project will most likely fail. The marketing section of most feasibility studies to date do not have a credible source of information. If a gold project was to sign off its own marketing section of a feasibility study claiming to use an average selling price of gold at $2,000 per ounce, there would be an uproar. That is what appears to be happening in graphite for most studies.

There are no expert traders who can or will provide an independent opinion on the market for a particular project’s product. If they did, it would not serve the project well. That is one of the reasons we approached the Woxna project in Sweden the way we have—to test the market in real time to be sure we understand it. You could never do this for a base metal or precious metal, but the scale of graphite is such you can and we have. Being a graphite producer and selling into the market means we know more than most about the market.

3) Operating cost (Opex):

Can the product be sold at a profit for all fractions of the production? Every deposit produces a mixed bag of concentrate with fine, medium and large flakes. The large flakes will naturally have the higher carbon content and the medium less and fine less again. The quantity of each will have a big impact on the average selling price. Sometimes the fines do not sell at all–or for very little. This can increase the cost of the higher value concentrate. All producers hoping to start up must have a high-purity strategy. They will not be profitable until they can value add all the concentrates.

4) Value adding the concentrate to increase margins:

Does the company have a credible high-purity strategy–a flow sheet defined and tested? Anyone can purify with a leaching plant or thermal, but it can be very costly. The flow sheet must not only prove technical success but also be economic. It must be less than $1,500/ton to produce to 99%+ carbon. This is rarely, if ever, discussed in the high-level, high-purity strategies. To ask a lab to confirm it can be done is almost worthless; the economics must be defined. All graphite samples can be purified to 99%+. The company must have done the work to define the economics and how to build and operate the high-purity plant. To discuss what purity can be achieved through flotation is a start, as the higher the carbon content feeding the HP plant, the lower the cost of the HP concentrate.

TGR: As an investor/speculator, what questions would you have for companies when evaluating their feasibility (FS) and preliminary feasibility study (PFS)?

BW: These are requirements under the NI 43-101 regulatory framework for all Toronto Stock Exchange-listed public companies. It is a requirement of greenfield projects to demonstrate technical and economic viability. A feasibility study is the final study before commencing detailed design and construction of the project, so it must include the permits to construct and operate the mine and facility. These studies are designed for large projects such as gold, copper, silver, nickel or zinc projects. Typically these are mines and processing facilities that cost hundreds of millions of dollars to build and generate revenues of hundreds of million dollars a year. A PFS can cost in excess of $5M and an FS can cost upwards of $10–20M for the most basic of projects.

When conducting a PFS or FS for a graphite project, these study costs are prohibitive. The revenue stream for the largest graphite mine in production today would be about $30M a year. This is the largest graphite mine in the world and it is located in China. The next largest mine is about 10 Ktpa, and that equates to a revenue stream of $10M a year. You will see many FS and PFS for graphite companies creating large revenue stream models as this is the only way to rationalize the capital costs to get these facilities in operation and build an impressive story for promotion. This is the challenge for graphite.

TGR: How relevant is the marketing component of a graphite study?

BW: In my opinion the marketing sections in the FS and PFS technical reports published by public companies are rubbish. There is no authority to go to for understanding the graphite business. There are a number of providers who publish reports on the graphite business, selling these reports for over $5,000, but the actual information on the market and actual buyers is minimal to non-existent. The reports are based on voluntary surveys sent to private businesses that are not obliged to supply accurate data, and in some cases it is beneficial to provide incorrect data.

These private organizations do not want their business to be known so they provide misinformation; the reports lack accurate data. Often the marketing sections of the studies published by graphite companies are signed off by insiders of the company. I have seen the marketing section signed off by the CEO—this is not independent and is highly biased. It is almost impossible to get real marketing information because the traders benefit by the confidential nature of the market. The commercial publications are paid-for publications, and they are not bound by any regulations to be reporting facts.

When you study these detailed reports on the production, which are also based on very poor information gathering techniques, and marketing you find limited detail on the actual end users and who buys the products and what they pay for it. This is due to the confidential nature of the graphite market. There is no way to accurately understand it without being in the business and selling product into the market.

TGR: Can you share some insight into what to look out for when interpreting metallurgical results?

BW: Many companies press release the results of bench scale or “pilot plant” test work and how they are achieving carbon contents as high as 97% or even 98% from flotation. These results are achievable in a full scale flotation plant but the engineering firm must have demonstrated experience in designing and building a graphite processing plant.

Another important point is the “pilot plants” purported to belong to the various companies claiming to have operated a pilot plant are actually modular plants constructed by a lab using the various components they have in inventory. This “pilot plant” is assembled using these components and then dismantled once the test is complete. This is not the same as many companies in other commodities that actually build small plants that test the flow sheet at reasonable scale on their sites. No graphite company has done this to date.

Flake size distribution in the lab-scale tests can vary quite significantly to the real-world, full-scale facility. Flotation of graphite is tricky. The natural flakes float best but as the feed is processed, more fine material is created during milling, and intermediate grinding impacts flake size distribution negatively. What this means is it is most likely that flotation will produce a mixed bag of flake sizes. Generally a 30–40% distribution of each fraction is expected. Each ore will perform slightly differently but there will always be a decent percentage of fine and medium flakes. The problem with this is that impurities also float into these medium and fines, which reduces carbon content to the low 90% range or even into the 80s for the fines. This results in a number of products when sorted into fine, medium and coarse and the associated carbon content of the fines in the mid-80s, mediums in the low 90s and large at 94%. The large flake is most valuable and the medium and fine will bring the average selling price down. It is unrealistic to expect to produce coarse, medium and fine concentrates all at 94%.

TGR: How important is flake size?

BW: Flake size is important primarily because during flotation the flakes liberate (float) most efficiently and these will yield the highest carbon content. As the flake size diminishes, typically the entrained impurities increase and the carbon content goes down. Customers specify large flake often to ensure they get the carbon content, even though they often grind or micronize the flake graphite for their processes.

Even spherical (SP) graphite, which often is thought must come from large flake, is misunderstood. SP is very fine graphite due to the mechanical process to create it. It must be natural flake graphite but it does not need to be large or even medium flake.

Some customers do require large flake sizes, but that is less significant than what is published in the industry. Carbon content is the most important factor in defining the value of the graphite concentrate. Some customers will pay a premium for micronized natural flake with high carbon content. The important issue is what fraction of the total concentrate product is high carbon content?

TGR: What are the flake size designations?

BW: Coarse, natural flake graphite is plus-50 mesh/300 μ, medium flake is plus-80 mesh/180 μ and fine flake is minus-80 mesh/180 μ.

TGR: How are prices for natural flake today?

BW: Prices are down for all natural flake graphite. This is due to the drop in demand, which is a direct result of the decline in the steel sector. Current medium to large flake 94% graphite is selling for less than $700 per ton and, in some cases, just not selling as there is a surplus of concentrate currently. Buyers are making low offers to producers to secure cheap concentrate for the future market.

TGR: How important is resource size?

BW: The resource size is not as important as many would like the public to believe. Graphite is not that rare so it is quite easy to find a large deposit that would deliver 10–20 years life of mine for a 10–20 Ktpa business. It is important to keep in mind the size of the graphite market when compared to the size of the resource. For example, 100% of the graphite market in Europe could be met by a resource of 1 Mt at 10% Cg. So 10 years and 100% European supply is 10Mt at 10% Cg. This is for 100% of the market which, of course, is unrealistic. A new entrant to a market would be lucky to get 10–20% market share. To identify hundreds of millions of tons of resource is not as valuable as is the case for base metals or precious metals.

TGR: How important is the grade of the resource?

BW: The resource grade is important primarily due to mining costs. The lower the grade, the more material that must be moved to produce a concentrate. Typically a lower grade deposit will be more costly to mine. Anything under 5% is a concern given that there are many graphite deposits in the world with higher grades.

TGR: When analyzing any deposit, we always look for the fatal flaw. What is really important in a graphite deposit?

BW: The location, configuration and metallurgy of the deposit are critical. The deposit must be near all key infrastructure, including sealed roads, inexpensive electricity, port facilities, and preferably an existing processing facility. To include the cost for roads, electricity or long transportation distances to port and customers in capex will severely impact a new graphite project. These three elements will have a significant negative impact on both capex and opex. Sunk cost on the infrastructure is the most cost effective way for a graphite business to establish itself. Equally important is access to a decent work force and skilled labor for maintaining the mine and processing facility.

The deposit must be easy to mine–high grade and low stripping ratios are critical. The metallurgy of the deposit is hardest to understand–who is actually testing the deposit? Have they ever designed an operating graphite plant? What experience is there to actually assess the metallurgy and design an efficient full scale flow sheet?

TGR: How do you purify natural flake graphite? Do you use a chemical leach or thermal?

BW: Leaching is the chemical breaking down of impurities in a flotation concentrate and typically uses hydrofluoric, hydrochloric and sulphuric acid as a minimum to achieve the high-purity concentrations. These acids must be used to consume the impurities that cannot be removed by flotation. This can be costly and the cost per ton of 99.9% concentrate can range from $500–3,000/ton, depending on concentrate feed carbon content, mineralogical compositions, operation conditions, permitting requirements and availability of acids.

Thermal purification is simply the heating of a concentrate in a special oven to 3,000 to 4,000˚ C to burn off all impurities. This is simpler but generally more costly because of the high energy requirements to heat the concentrate. The costs of this can vary from $1,500–10,000/ton, depending on energy cost.

TGR: Where does Flinders fit in the graphite mining landscape?

BW: Flinders Resources is the only Western public company with a permitted, fully operational modern mine and production facility able to produce natural flake graphite and is in a strong position to place itself as a supplier of choice for the rapidly expanding and game changing lithium-ion battery energy storage.

The company has been working on optimizing a flow sheet to produce high-purity graphite that was substantially developed in the early 2000s by the previous owner of the Woxna project. We are negotiating with existing high-purity technological providers.

Flinders has a market cap of less than CA$10M; CA$4M is backed by cash. With a fully constructed, permitted and producing plant and mine, zero debt and cash on hand, the company is well positioned to leverage its first-mover advantage to concentrate its resources on research to produce high-purity grade graphite and initiate the relevant permitting.

TGR: Thank you, Blair, for your time.

Flinders Article Chart 2
Chart provided by Flinders Resources

Blair Way, CEO, president and director of Flinders Resources, has over 25 years of management experience within the resources and construction industry throughout Australasia, Canada, the United States and the United Kingdom. Prior to joining Flinders Resources Way was vice president of project development for Ventana Gold (Vancouver), advancing projects in Colombia. Way also previously served as president and project director for OceanaGold Philippines, project manager with Hatch Associates (Brisbane) and project director for BHP’s Major Projects division (QNI Pty Ltd) in Townsville, Queensland. Way holds a Bachelor of Science in geology from Acadia University in Nova Scotia, Canada, a Masters of Business Administration from the University of Queensland, Australia, and is a Fellow of the Australasian Institute of Mining and Metallurgy.

DISCLOSURE:
1) JT Long edited this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
2) Flinders Resources is a banner advertiser on Streetwise Reports.
3) Blair Way had final approval of the content and is wholly responsible for the validity of the statements. Opinions expressed are the opinions of Blair Way and not of Streetwise Reports or its officers.
4) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

( Companies Mentioned: FDR:TSX.V,
)

Flinders CEO Blair Way: What Tesla Needs to Know about the Graphite Sector

Flinders Article Chart 1

The Gold Report: What is the state of the current global graphite market and what impact might Tesla’s construction of a battery Gigafactory in the desert in Nevada have on future demand for the mineral?

Blair Way: Because graphite is used in many energy-related applications (including electric vehicles, Pebble Bed Nuclear Reactors, fuel cells, solar panels and electronics ranging from smartphones to laptops), it has been categorized as a critical, strategic mineral by several governments including the United States and Europe.

What does this really mean? At this point in time it means nothing—graphite is in oversupply and prices are low. However, if China decided to stop supplying graphite to the world, then the West would be in trouble. This is highly unlikely to ever happen. As far as the impact of the Tesla plant on the greater market, that’s yet to be defined in detail, but it will create more demand for graphite, both natural and synthetic.

TGR: How big is the graphite market?

BW: The graphite market combined—the natural flake and synthetic market—is worth approximately $13 billion ($13B). Synthetic is 90% of that market, and natural flake graphite is 10%.

TGR: How big is the natural flake graphite market?

BW: The worldwide natural flake graphite market hovers around 1.1 million tons a year (1.1 Mtpa) of which 75% is from China, 11% from India, 6% from Brazil, 3% from North Korea and 5% from the rest of the world. Consumption of graphite is also approximately 1.1 Mtpa, and 65% is consumed in China. The balance of the production is consumed in Brazil and India (200,000 tons), with 100,000 tons in Europe and 100,000 tons in North America. Of this 1.1 Mtpa, more than 60% is fine and medium graphite while the balance of 40% is flake graphite. The majority of this flake graphite is micronized for the end user.

TGR: How important is it to understand the graphite market in terms of dollar value?

BW: World production and consumption of natural flake graphite is often claimed to be almost as large as the nickel market (1.8 Mtpa) by volume.

The market should be considered by dollar value not just tons per annum. As a comparison, the 1.1 Mtpa of graphite is worth $1.3B while 1.8 Mtpa of nickel is worth $26B. As a new entrant to the market, nickel is a significantly larger market than graphite. So to put the graphite market in perspective, the non-Chinese natural flake graphite market is a $300 million ($300M) market. This is the market in which all the Western graphite producers (current and future) are vying for position.

That is why a new graphite production facility must start small and build relationships in the current market while developing products that can supply the anticipated future markets. Cash flow for a graphite business must be sensible in today’s market.

Chart provided by Flinders Resources

TGR:What is the size of a big graphite mine and what kind of revenue stream should investors expect from a natural flake graphite mine selling into the traditional market?

BW: A large graphite mine would be 10,000–20,000 tons per year (10–20 Ktpa) and would have a revenue stream of $10–20M. Profit could be in the range of $3–8M. This is similar in scale to a 10,000–20,000 ounce gold mine. Any graphite miner claiming a large-scale operation will not be able to achieve the sales as a new entrant to the market. It is possible that the mine could grow to a much larger size over time, but the sales must drive expansion of production. If too much concentrate is produced and it does not sell, then working capital will diminish quickly and the business will be in trouble.

TGR: What sort of revenue should you expect from a high-purity natural flake graphite miner selling into the battery market?

BW: High-purity natural flake graphite can and does displace some synthetic graphite. The market for synthetic graphite is about 1 Mtpa, which at prices of $5,000–10,000 per ton indicates a market size of $5–10B annually. Approximately 50% of the synthetic graphite produced is used for electrodes in the steel industry. The uses of synthetic graphite are varied, but for batteries the quantity of natural flake graphite consumed is less than 100 Ktpa. The synthetic graphite market is as private as the natural graphite market, so figures quoted can vary greatly. There are multiple new uses for high-purity graphite beyond conventional batteries, so there is huge potential for the growing market for high-purity natural flake graphite.

TGR: We often hear about the importance of offtake agreements. Can you explain to us the important distinction between offtake agreements and sales agreements?

BW: Offtake agreements are not sales agreements—they are non-binding agreements to purchase future production if a number of provisions are met. A sales agreement is a commitment to quantity and price per ton for a set period of time. Most junior mining companies are not signing sales agreements because graphite consumers want to lock in prices below known market prices.

To evaluate the offtakes you have to ask the questions: Did the buyer invest hard cash in the graphite business to facilitate the start of production? Does the contract with the buyer protect the producer or the buyer? Is there a guaranteed minimum or maximum price when the market price is constantly changing? Is there a minimum price in the agreement? Is it a take-or-pay agreement? What are the escape clauses for the buyer to get out of the agreement? Does the agreement cover all grades produced by the graphite producer, or is it just the grades the buyer requires? What happens to the products that the buyer is not interested in?

There is little to no hedging of graphite because it is not a publicly traded commodity, and it is very unlikely a trader will hedge for a producer. If a trader does offer to buy at a set price it would be at historically low prices. This will benefit the trader and not the producer. Typical refractory customers do not buy graphite in large enough quantities to justify locking in prices. They can also stockpile if required to ride out higher pricing. Even high graphite prices do not have a huge impact on overall pricing of the end product because graphite, by cost, is a small part of the cost of the products.

TGR: One of the buzzwords we hear when companies in the graphite space tell their story is “graphene” and the potential for their company to one day produce it. How important should graphene exposure be to an investor or speculator when deciding what companies in the graphite space to invest in?

BW: Graphene is 10–20 years away from being commercially viable, so one cannot justify a graphite mine based on the graphene market. The graphene market will take an extremely long time to develop products for everyday use. Additionally, a small amount of graphite goes a long way in making graphene.

There are two kinds of graphene. One is made from chemical vapor deposition, in which a graphene coating is made on top of another substrate, then the substrate is removed, leaving only the graphene. Most of the graphene being used today is made that way. That is the graphene the electronic industry wants because it’s ultra-high purity and can be easily controlled.

The lower-cost way uses natural graphite as the precursor. That market will take longer to develop, but it will be a bigger market because that kind of graphene can be used in the more practical, higher-volume products that we use every day. As a graphite producer, it is important to be part of the R&D process and to drive it towards commercialization. Flinders Resources Ltd. (FDR:TSX.V) is an active part of this R&D process supplying graphite to research facilities.

Graphene will not have positive impacts on a graphite producer’s cash flow until commercialization has taken place and there is a real market for it. Graphene will be produced by specialists, not miners. Miners will supply the materials to enable graphene manufacturing.

TGR: What should be on an investor’s checklist when considering a potential investment or speculation in the graphite space?

BW: Production of graphite is only one step to becoming a graphite producer. Sales must be secured to ensure all concentrate produced will sell. The market is a closed market and if sales are not secured for production, selling product is extremely difficult. Can the company sell its product at a profit?

There are four key elements to determine the quality of a graphite company:

1) Capital costs of the project:

Capital expenditures (capex) is a huge driver and this is what really kills a project–especially a low-revenue business like graphite. Consider many nickel laterite projects and how typically the first owner runs out of cash, and it is the second or even third owner that actually makes the business work. The capex kills the first owner almost every time. Aluminum is similar too. Both these commodities have a huge market to supply; graphite does not. The scale for graphite is much smaller, but the same elements of capex are at play.

2) Marketing/production rate:

Bigger is not better—except it is often required to justify high capex. The market does not support the mega graphite projects (anything over 10–20 Ktpa). If the company cannot make money at modest rates, the project will most likely fail. The marketing section of most feasibility studies to date do not have a credible source of information. If a gold project was to sign off its own marketing section of a feasibility study claiming to use an average selling price of gold at $2,000 per ounce, there would be an uproar. That is what appears to be happening in graphite for most studies.

There are no expert traders who can or will provide an independent opinion on the market for a particular project’s product. If they did, it would not serve the project well. That is one of the reasons we approached the Woxna project in Sweden the way we have—to test the market in real time to be sure we understand it. You could never do this for a base metal or precious metal, but the scale of graphite is such you can and we have. Being a graphite producer and selling into the market means we know more than most about the market.

3) Operating cost (Opex):

Can the product be sold at a profit for all fractions of the production? Every deposit produces a mixed bag of concentrate with fine, medium and large flakes. The large flakes will naturally have the higher carbon content and the medium less and fine less again. The quantity of each will have a big impact on the average selling price. Sometimes the fines do not sell at all–or for very little. This can increase the cost of the higher value concentrate. All producers hoping to start up must have a high-purity strategy. They will not be profitable until they can value add all the concentrates.

4) Value adding the concentrate to increase margins:

Does the company have a credible high-purity strategy–a flow sheet defined and tested? Anyone can purify with a leaching plant or thermal, but it can be very costly. The flow sheet must not only prove technical success but also be economic. It must be less than $1,500/ton to produce to 99%+ carbon. This is rarely, if ever, discussed in the high-level, high-purity strategies. To ask a lab to confirm it can be done is almost worthless; the economics must be defined. All graphite samples can be purified to 99%+. The company must have done the work to define the economics and how to build and operate the high-purity plant. To discuss what purity can be achieved through flotation is a start, as the higher the carbon content feeding the HP plant, the lower the cost of the HP concentrate.

TGR: As an investor/speculator, what questions would you have for companies when evaluating their feasibility (FS) and preliminary feasibility study (PFS)?

BW: These are requirements under the NI 43-101 regulatory framework for all Toronto Stock Exchange-listed public companies. It is a requirement of greenfield projects to demonstrate technical and economic viability. A feasibility study is the final study before commencing detailed design and construction of the project, so it must include the permits to construct and operate the mine and facility. These studies are designed for large projects such as gold, copper, silver, nickel or zinc projects. Typically these are mines and processing facilities that cost hundreds of millions of dollars to build and generate revenues of hundreds of million dollars a year. A PFS can cost in excess of $5M and an FS can cost upwards of $10–20M for the most basic of projects.

When conducting a PFS or FS for a graphite project, these study costs are prohibitive. The revenue stream for the largest graphite mine in production today would be about $30M a year. This is the largest graphite mine in the world and it is located in China. The next largest mine is about 10 Ktpa, and that equates to a revenue stream of $10M a year. You will see many FS and PFS for graphite companies creating large revenue stream models as this is the only way to rationalize the capital costs to get these facilities in operation and build an impressive story for promotion. This is the challenge for graphite.

TGR: How relevant is the marketing component of a graphite study?

BW: In my opinion the marketing sections in the FS and PFS technical reports published by public companies are rubbish. There is no authority to go to for understanding the graphite business. There are a number of providers who publish reports on the graphite business, selling these reports for over $5,000, but the actual information on the market and actual buyers is minimal to non-existent. The reports are based on voluntary surveys sent to private businesses that are not obliged to supply accurate data, and in some cases it is beneficial to provide incorrect data.

These private organizations do not want their business to be known so they provide misinformation; the reports lack accurate data. Often the marketing sections of the studies published by graphite companies are signed off by insiders of the company. I have seen the marketing section signed off by the CEO—this is not independent and is highly biased. It is almost impossible to get real marketing information because the traders benefit by the confidential nature of the market. The commercial publications are paid-for publications, and they are not bound by any regulations to be reporting facts.

When you study these detailed reports on the production, which are also based on very poor information gathering techniques, and marketing you find limited detail on the actual end users and who buys the products and what they pay for it. This is due to the confidential nature of the graphite market. There is no way to accurately understand it without being in the business and selling product into the market.

TGR: Can you share some insight into what to look out for when interpreting metallurgical results?

BW: Many companies press release the results of bench scale or “pilot plant” test work and how they are achieving carbon contents as high as 97% or even 98% from flotation. These results are achievable in a full scale flotation plant but the engineering firm must have demonstrated experience in designing and building a graphite processing plant.

Another important point is the “pilot plants” purported to belong to the various companies claiming to have operated a pilot plant are actually modular plants constructed by a lab using the various components they have in inventory. This “pilot plant” is assembled using these components and then dismantled once the test is complete. This is not the same as many companies in other commodities that actually build small plants that test the flow sheet at reasonable scale on their sites. No graphite company has done this to date.

Flake size distribution in the lab-scale tests can vary quite significantly to the real-world, full-scale facility. Flotation of graphite is tricky. The natural flakes float best but as the feed is processed, more fine material is created during milling, and intermediate grinding impacts flake size distribution negatively. What this means is it is most likely that flotation will produce a mixed bag of flake sizes. Generally a 30–40% distribution of each fraction is expected. Each ore will perform slightly differently but there will always be a decent percentage of fine and medium flakes. The problem with this is that impurities also float into these medium and fines, which reduces carbon content to the low 90% range or even into the 80s for the fines. This results in a number of products when sorted into fine, medium and coarse and the associated carbon content of the fines in the mid-80s, mediums in the low 90s and large at 94%. The large flake is most valuable and the medium and fine will bring the average selling price down. It is unrealistic to expect to produce coarse, medium and fine concentrates all at 94%.

TGR: How important is flake size?

BW: Flake size is important primarily because during flotation the flakes liberate (float) most efficiently and these will yield the highest carbon content. As the flake size diminishes, typically the entrained impurities increase and the carbon content goes down. Customers specify large flake often to ensure they get the carbon content, even though they often grind or micronize the flake graphite for their processes.

Even spherical (SP) graphite, which often is thought must come from large flake, is misunderstood. SP is very fine graphite due to the mechanical process to create it. It must be natural flake graphite but it does not need to be large or even medium flake.

Some customers do require large flake sizes, but that is less significant than what is published in the industry. Carbon content is the most important factor in defining the value of the graphite concentrate. Some customers will pay a premium for micronized natural flake with high carbon content. The important issue is what fraction of the total concentrate product is high carbon content?

TGR: What are the flake size designations?

BW: Coarse, natural flake graphite is plus-50 mesh/300 μ, medium flake is plus-80 mesh/180 μ and fine flake is minus-80 mesh/180 μ.

TGR: How are prices for natural flake today?

BW: Prices are down for all natural flake graphite. This is due to the drop in demand, which is a direct result of the decline in the steel sector. Current medium to large flake 94% graphite is selling for less than $700 per ton and, in some cases, just not selling as there is a surplus of concentrate currently. Buyers are making low offers to producers to secure cheap concentrate for the future market.

TGR: How important is resource size?

BW: The resource size is not as important as many would like the public to believe. Graphite is not that rare so it is quite easy to find a large deposit that would deliver 10–20 years life of mine for a 10–20 Ktpa business. It is important to keep in mind the size of the graphite market when compared to the size of the resource. For example, 100% of the graphite market in Europe could be met by a resource of 1 Mt at 10% Cg. So 10 years and 100% European supply is 10Mt at 10% Cg. This is for 100% of the market which, of course, is unrealistic. A new entrant to a market would be lucky to get 10–20% market share. To identify hundreds of millions of tons of resource is not as valuable as is the case for base metals or precious metals.

TGR: How important is the grade of the resource?

BW: The resource grade is important primarily due to mining costs. The lower the grade, the more material that must be moved to produce a concentrate. Typically a lower grade deposit will be more costly to mine. Anything under 5% is a concern given that there are many graphite deposits in the world with higher grades.

TGR: When analyzing any deposit, we always look for the fatal flaw. What is really important in a graphite deposit?

BW: The location, configuration and metallurgy of the deposit are critical. The deposit must be near all key infrastructure, including sealed roads, inexpensive electricity, port facilities, and preferably an existing processing facility. To include the cost for roads, electricity or long transportation distances to port and customers in capex will severely impact a new graphite project. These three elements will have a significant negative impact on both capex and opex. Sunk cost on the infrastructure is the most cost effective way for a graphite business to establish itself. Equally important is access to a decent work force and skilled labor for maintaining the mine and processing facility.

The deposit must be easy to mine–high grade and low stripping ratios are critical. The metallurgy of the deposit is hardest to understand–who is actually testing the deposit? Have they ever designed an operating graphite plant? What experience is there to actually assess the metallurgy and design an efficient full scale flow sheet?

TGR: How do you purify natural flake graphite? Do you use a chemical leach or thermal?

BW: Leaching is the chemical breaking down of impurities in a flotation concentrate and typically uses hydrofluoric, hydrochloric and sulphuric acid as a minimum to achieve the high-purity concentrations. These acids must be used to consume the impurities that cannot be removed by flotation. This can be costly and the cost per ton of 99.9% concentrate can range from $500–3,000/ton, depending on concentrate feed carbon content, mineralogical compositions, operation conditions, permitting requirements and availability of acids.

Thermal purification is simply the heating of a concentrate in a special oven to 3,000 to 4,000˚ C to burn off all impurities. This is simpler but generally more costly because of the high energy requirements to heat the concentrate. The costs of this can vary from $1,500–10,000/ton, depending on energy cost.

TGR: Where does Flinders fit in the graphite mining landscape?

BW: Flinders Resources is the only Western public company with a permitted, fully operational modern mine and production facility able to produce natural flake graphite and is in a strong position to place itself as a supplier of choice for the rapidly expanding and game changing lithium-ion battery energy storage.

The company has been working on optimizing a flow sheet to produce high-purity graphite that was substantially developed in the early 2000s by the previous owner of the Woxna project. We are negotiating with existing high-purity technological providers.

Flinders has a market cap of less than CA$10M; CA$4M is backed by cash. With a fully constructed, permitted and producing plant and mine, zero debt and cash on hand, the company is well positioned to leverage its first-mover advantage to concentrate its resources on research to produce high-purity grade graphite and initiate the relevant permitting.

TGR: Thank you, Blair, for your time.

Flinders Article Chart 2
Chart provided by Flinders Resources

Blair Way, CEO, president and director of Flinders Resources, has over 25 years of management experience within the resources and construction industry throughout Australasia, Canada, the United States and the United Kingdom. Prior to joining Flinders Resources Way was vice president of project development for Ventana Gold (Vancouver), advancing projects in Colombia. Way also previously served as president and project director for OceanaGold Philippines, project manager with Hatch Associates (Brisbane) and project director for BHP’s Major Projects division (QNI Pty Ltd) in Townsville, Queensland. Way holds a Bachelor of Science in geology from Acadia University in Nova Scotia, Canada, a Masters of Business Administration from the University of Queensland, Australia, and is a Fellow of the Australasian Institute of Mining and Metallurgy.

DISCLOSURE:
1) JT Long edited this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
2) Flinders Resources is a banner advertiser on Streetwise Reports.
3) Blair Way had final approval of the content and is wholly responsible for the validity of the statements. Opinions expressed are the opinions of Blair Way and not of Streetwise Reports or its officers.
4) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
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NexGen Energy: A Bold New Uranium Venture for a World in Short Supply

The Energy Report: Will the no-longer hypothetical restart of the Japanese nuclear reactors move uranium prices into the production range?

Leigh Curyer: The restart of the first reactor since Fukushima is very good for our business, psychologically. Japan does not have the capacity to fill its power grid with fossil fuels. It needs nuclear power to provide the country with sustainable and cheap power. On top of that, the carbon emissions from fossil fuels are not sustainable globally. Another positive of the reactor restart, beyond the psychological effects, is the fact that there was a fear that Japan was going to flood the market with some of its stockpiled uranium. But that fear has now been predominately removed. There are a number of Japanese reactors in the final stages of safety review and approval, which should only help to eliminate that risk of Japan’s stockpiles entering the spot market.

“Because Arrow is high grade, basement-hosted and land-based, we believe it will also be competitive on the global stage.”

The demand side issue is much bigger than Japan. There are 63 reactors under construction worldwide. Nuclear energy is forecast to grow at 2–4% per annum globally according to both the International Energy Association (IEA) and the World Nuclear Association (WNA). On the supply side, roughly 90% of the world’s primary production is either under a severe technical or sovereign risk. There have been major interruptions on the supply side, with Energy Resources of Australia Ltd.’s (ERA:ASX) Ranger Deeps not going ahead, and supply interruptions at the Olympic Dam mine (BHP Billiton Ltd. [BHP:NYSE; BHPLF:OTCPK]) and also at the Rössing mine. Obviously, the world needs more uranium mines to come on line—particularly mines with low cost structures from stable jurisdictions. Saskatchewan is arguably the best jurisdiction in the world for mining, and specifically uranium mining. Additionally, it is the home of high grade and high tonnage. Grades seen in the Athabasca Basin are regularly in excess of 100 times that of average global production. Cameco Corp. (CCO:TSX; CCJ:NYSE) remains one of the lowest-cost producers of uranium due to the grades seen at its mines.

TER: Do you have a prediction on where the price of uranium is headed?

LC: It’s hard to put a specific number on any commodity in my view, but at NexGen Energy Ltd. we feel strongly that the price of uranium will rise based on the worldwide production cost structure. Based on our estimates, marginal global production costs on average are in the mid-US$60s per pound (mid-US$60/lb); hence, the current spot and term price remaining below this level means that production should start to come offline as term contracts expire. It’s a fairly straightforward supply-demand equation really.

TER: Is NexGen Energy counting on the price stabilizing above US$60/lb, or can you deal with the price being a little lower?

LC: NexGen’s Arrow project does not yet have a feasibility study or an NI 43-101 resource estimate, but we are confident that, given the early development results at Arrow and the technical characteristics it hosts, the project will be incredibly competitive on a world scale. Arrow is an extremely high-grade asset situated amid comfortable mining conditions. The mineralization is hosted in competent basement rocks commencing from 100 meters (100m) from surface, which creates the opportunity for simple and traditional mining scenarios as opposed to the challenging conditions Cameco has had to overcome at its Cigar Lake mine on the east side of the Basin. Our focus moving forward is to define the mineralization with a resource estimate in the first half of 2016, and then determine the project’s economic potential soon thereafter.

Travis McPherson: There is a good analogy to Arrow on the east side of the Basin with a mine called Eagle Point, which is owned and operated on a 100% basis by Cameco. The geological characteristics of the Eagle Point mine are similar to our Arrow project, even in its early stage of development. Eagle Point is producing about 4 million pounds a year (4 Mlb/year) at a grade of 0.57–0.6% uranium at approximately 500m below surface, with plans to go toward 800m.

Cameco wouldn’t be producing out of that mine unless it was competitive in terms of its operating costs. Although we still need to prove it with the necessary studies, because Arrow is high grade, basement-hosted and land-based, we believe it will also be competitive on the global stage, just like Eagle Point.

TER: You have been reporting lots of good news from Arrow. What are the details?

LC: Late in the winter 2015 drill program, we released an assay on Hole AR-15-44B at Arrow that had 56.5m at 11.55% U3O8, including 20m at 20.68%—and even included 1m at 70%. The continuous GT (grade times thickness) of that hole is one of the largest on public record for a basement-hosted uranium intercept in the Basin.

“We have formed great partnerships through the development of NexGen.”

We were so encouraged with these results that we decided to be quite bold in testing the extensions of Arrow to the southwest of 44B. A stepout of 15m is considered bold in this particular environment. We have stepped out to 50, 100 and 210m to the southwest of 44B, and hit intensive, off-scale radioactivity in all three of those stepouts. Now, for the remainder of the summer program, we intend to further define this new high-grade mineralized extension within Arrow. To be frank, Arrow continues to surpass what we previously estimated. It feels like we are still just scratching the surface of Arrow.

TER: What clued you in to the existence of this bonanza?

LC: One, it’s located in the Athabasca Basin, which is the home of high grades and high tonnage. We spent three years reviewing over 200 properties in the Basin prior to starting NexGen. We selected the properties in NexGen’s portfolio because they straddle the edge of the Athabasca Basin boundary and also go into the Basin. This is where you find your most economic mineralization. Additionally, the portfolio covers all the known conductor corridors in the southwest. Finally, the majority of the properties in the southwest were put together by a well-respected geologist based on scientific merit.

Our geophysical studies revealed numerous strong anomalies on the Rook 1 property. And with the very first drill hole on the Arrow geophysical anomaly, we hit mineralization. We then stepped out aggressively, upward of 200m, and continued to hit mineralization. That was in February 2014. Since then, we have drilled a number of holes using a deliberate drilling methodology, with the goal of Arrow becoming the lowest-cost discovery of size in the Basin’s history. We have hit in 95% of holes drilled across a very wide grid.

TER: Were you able to pick up these properties at a discount due to the Fukushima situation?

LC: They were not as expensive as they otherwise would have been. But also, with the technical team that we have on board, the seller was more than happy to come under our tutelage given our experience in the uranium sector. We have formed great partnerships through the development of NexGen.

TER: What level of operational and financial experience does your management team bring to the business?

LC: Our team covers all facets of discovery, feasibility, permitting and production. Chris McFadden, our chairman, was the head of business development at Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK), covering the uranium division and operations. On the Board of Directors, we also have Craig Perry, who is a geologist and was at Rio Tinto and then Oxiana Ltd., which was merged with Zinifex Ltd. in a $12 billion deal to create OZ Minerals Ltd. (OZL:ASX). We also have Jim Currie from a mining engineering perspective; he won the 2014 E.A. Scholz Award for excellence in mine development for his involvement at New Afton (New Gold Inc. [NGD:TSX; NGD:NYSE.MKT]). We really could not have a better-qualified mining engineer on the board to oversee the move into production.

“Arrow is conventional, with simple metallurgy, which should help simplify the permitting process.”

I have worked in the uranium sector since 2002 as a chief financial officer for Southern Cross Resources. While there, I worked on feasibility and permitting of the Honeymoon project in South Australia, as well as a number of merger-and-acquisition transactions, which eventually led to us forming Uranium One Inc. I left six months after that transaction and spent the next three years in private equity, working for First Reserve International and looking at uranium projects around the globe from a technical, economic and sovereign risk perspective. I have generated project capital for mines of the size and magnitude that Arrow will likely be.

When we discovered Arrow we approached Garrett Ainsworth, and he came on board as our vice president of exploration. Garrett’s contribution to the discovery of Patterson Lake South (now Triple R) is evident from the Association for Mineral Exploration, British Columbia (AME BC) Colin Spence award that he won in 2013. Given Garrett’s track record in uranium discovery in the southwest Athabasca Basin, we approached him after only eight holes, and he immediately agreed. Given our hit rate and the rate of development at Arrow, it is clear that he and the rest of the technical team understand the mineralization.

TER: What is the stage of the Arrow permitting process?

LC: We are about to conduct baseline environmental monitoring studies at Arrow, which will form the basis of an eventual environmental application. First, we have to define the size of the asset, which we will get an initial feel for with the maiden resource planned for H1/16. Then we can get a better idea about initial aspects of mineability, which will provide a basis for preliminary scoping work and eventual feasibility studies. Once we have a firm idea of the scope and scale of the project we will work on submitting permits.

TER: Do you see any obstacles to permitting?

LC: Not any major obstacles. Saskatchewan is, in my opinion, the best jurisdiction in the world in which to permit and operate a uranium mine. Arrow is conventional, with simple metallurgy, which should help simplify the process. Due to the fact that the mineralization doesn’t affect any water body, Arrow is showing the characteristics of an underground operation, as are all the current operating mines in Saskatchewan. Mineralization starts from 100m of surface down to 920m, and is open in every direction. It is hosted in competent basement rocks the whole way, which makes it amenable to traditional underground mining methods. We do not foresee any major land or water surface issues.

During the 1990s, the Cluff Lake mine, located 70 kilometers (70km) northwest of Arrow, produced 60 Mlb of 0.9% uranium. The region’s regulators are familiar with permitting a mine and plant in the southwest. The nearest town is 155km away, so our footprint will have no impact on human or agricultural activities. The southwest Basin is actually an ideal place for permitting a uranium mine and mill.

TER: What is the mining infrastructure like in the area?

LC: The biggest piece of infrastructure we will need is a mill. Given that there’s a brownfields site 70km to the northwest at Cluff Lake, and the fact that the area where Arrow is located is actually quite benign, there are a number of sites that would be appropriate for a mill. Additionally, given the size profile of Arrow, the area would justify its own mill.

As far as other infrastructure goes, there is a 240km all-weather highway that runs right near our project, which was put in place just to service the Cluff Lake mine. Power is located about 80km from Arrow. There is a strong labor force in the region, and also access to water. We will need to develop some infrastructure at the site, but it is not a grassroots situation; nothing too costly or challenging.

TER: How is NexGen financing these plays?

LC: We have issued equity. In April, we closed a $27.3M bought-deal financing, which brought in a lot of institutions from outside Canada. We are well financed through 2017 given our current development plan and our treasury. We also have some warrants that are currently well in the money that could extend the financing period even longer.

“We are pure-play uranium professionals who feel fortunate to be working on an asset like Arrow.”

Going into production, we will, of course, need a larger capital component. But given our team’s background in mining finance and development, I believe we are well situated for that when the time comes. Arrow’s characteristics show that it could be one of the most desirable uranium projects in the world, and these types of projects attract capital and get built.

TER: When are you looking to go into production?

LC: It is quite early to be precise with that figure, but we believe post-2020 would be an accurate schedule, and one that fits well with our forecast of uranium fundamentals. Based on estimates from the IEA and the WNA, post-2020 is when major supply deficits are expected, given relatively stable demand growth and a very challenging supply. We will have our hands full until then, doing the feasibility study and permitting, and optimizing the economics of the project.

TER: Do you anticipate taking on any debt before going into production?

LC: As we are pre-revenue, taking on a debt facility is challenging given the interest and principal payments that must be made. We are focused on equity financing for the time being, as it is the most compatible form of capital for our business strategy at this time. When the time to push the production button arrives, we will assess the best financing option at that time, and that could include a debt component. But again, much more work is needed to determine that.

TER: Do you anticipate selling the Arrow project to a major, or do you intend to take it forward yourselves?

LC: NexGen’s management and board have all the skills needed to take this project through to production. We will bring in additional uranium professionals at certain points of development as needed and as the project develops into engineering and permitting.

We are pure-play uranium professionals who feel fortunate to be working on an asset like Arrow. Given the early stage of its development, it would be hard for the board to recommend a bid because we don’t know the true size of Arrow yet. Additionally, with our full land holdings, we believe the potential for multiple Arrows is self evident, in which case our properties could create one of the most valuable uranium land holdings in the Basin.

TER: What’s the next milestone in the development of your project?

LC: The initial resource on Arrow will help give us an idea of the size and grade profile of the asset. We will continue to post drill results throughout the fall and into early next year. Those results will culminate in the initial resource, which will emerge in Q1/16 or Q2/16. A consequence of the large stepouts is that we now have to do a lot more drilling between AR-15-44B and the 210m stepout to incorporate the extended strike length into a resource model. We are busy executing our plan to do that at the moment.

Because we have been so efficient with drilling, as a result of utilizing directional drilling, we are going to expand the summer program to take advantage of the summer conditions, and also to have enough pierce points in the southwest strike extensions to include that in the maiden resource estimate.

TER: How has your stock been performing? Why should investors buy NexGen now instead of waiting for more developments?

LC: The stock has been performing very well compared to its peers. We are up about 65% from the start of the year, but still feel there is a lot of upside remaining in the price. I think the speed at which NexGen has developed has caught the market off guard, even though we have doubled on the year. People might ask, with only 50-odd holes, how can we predict such size and scale at Arrow? The unique thing about our drilling methodology is that it’s very rare to start out with such a bold stepout program across a uniform grid and hit mineralization in 95% of the holes. It tells you two things: One, our technical team understands the geology and the system well; and two, the system itself is quite large. This is highlighted by the recent tripling of the high-grade strike extension with the 50, 100 and 210m stepouts.

The other thing about Arrow is, because the mineralization is in three parallel panels, when we drill one hole, it goes through two, if not three, of the panels simultaneously. We get two or three holes for the price of one. We have amassed a considerable amount of information quickly.

The awareness of what we are doing has not yet fully permeated into the market. And every new drill hole exceeds our previous estimates for the scope of Arrow. Every drill hole is extremely exciting, and potentially game-changing for the company and share price. It’s a very exciting time!

TER: Thank you both for your time.

Leigh R. Curyer, chief executive officer and director of NexGen Energy, has more than 18 years’ experience in the resources and corporate sector. Mr. Curyer was previously the chief financial officer and head of corporate development of Southern Cross Resources (now Uranium One). In addition, for three years Mr. Curyer was head of corporate development for Accord Nuclear Resource Management, assessing uranium projects worldwide for First Reserve Corporation, a global energy-focused private equity and infrastructure investment firm. Mr. Curyer’s uranium project assessment experience has been focused on assets located in Canada, Australia, the U.S., Africa, Central Asia and Europe, incorporating operating mines, advanced development projects and exploration prospects. While chief financial officer of Southern Cross Resources, Mr. Curyer managed the exploration, permitting and feasibility study of the Honeymoon Uranium project in South Australia, ensuring full compliance with NI 43-101 reporting, and was involved in the raising of over $250M of equity in North America, the U.S., Europe and Australia. Mr. Curyer is a member of the Institute of Chartered Accountants Australia.

Travis G. McPherson, NexGen Energy’s corporate development manager, has worked in the global mining sector across a variety of commodities and jurisdictions for six years. Most recently he was head of corporate development for a TSX-listed gold producer and developer, where he was involved in a variety of corporate transactions including acquisitions, mine permitting and development, project finance and corporate budgeting. Mr. McPherson began his career in the natural resource group at a leading independent investment bank in Canada. He holds a bachelor’s degree in commerce from the Sauder School of Business at the University of British Columbia.

Read what other experts are saying about:

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DISCLOSURE:
1) Peter Byrne conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the company mentioned in this interview: None.
2) The following companies mentioned in this interview are sponsors of Streetwise Reports: NexGen Energy Ltd.
3) Leigh Curyer and Travis McPherson had final approval of the content and are wholly responsible for the validity of the statements. Opinions expressed are the opinions of Leigh Curyer and Travis McPherson, and not of Streetwise Reports or its officers.
4) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

( Companies Mentioned: NXE:TSX.V; NXGEF:OTCQX,
)

Could a President Trump Put People Back to Work and Help the Dollar?: ShadowStats’ John Williams

Chart 3

The Gold Report: In honor of Labor Day, let’s discuss unemployment. You estimated that when all workers are counted, the unemployment rate in July was 23% compared to the government’s reported rate of 5.4%. What is different about the job market today than before the recession?

John Williams: In a normal economic recovery, people who have lost their jobs start working again as the economy improves. That hasn’t happened this time, at least not to the extent suggested by a 5.4% unemployment rate (U3), where the government’s headline definition of “unemployed” is quite narrow. To be counted among the headline unemployed, you have to be out of work and actively to have looked for work in the last four weeks. If you want a job, but have given up looking, the government counts you as a “discouraged worker” or “marginally attached worker” and you don’t show up in the headline number. [Editor’s note: The Bureau of Labor Statistics’ reported unemployment at 5.1% in August in a report released on Friday.]

If you haven’t looked for work in more than a year, even if you would like to work, then the government just doesn’t count you in even its broadest measure of unemployment (U6); you just disappear from any of the unemployment measures. As a result, when the government says that 200,000 fewer people are unemployed in a month, and the headline unemployment rate drops, often there isn’t an increase of 200,000 people who are re-employed. They just have been defined out of existence. My broad unemployment estimate includes those no longer tracked by the government, those who cannot find a job, who have given up looking for work for more than a year because nothing is available, yet they still would like to find a job, even though they may be doing other things—like taking care of grandkids. That broader unemployment number is around 23%.

TGR: Have the types of jobs changed? Are we seeing fewer jobs in manufacturing and finance now than there were before? Are there other areas that are growing, like technology and service jobs?

JW: Generally, the government has done a great deal to encourage the offshoring of U.S. production and the growth in the U.S. trade deficit. On average, lower-paying jobs are the ones left behind domestically. Real average weekly earnings, adjusted for the consumer price index, peaked in the early 1970s. It’s generally been downhill since then.

That is a challenge to a sustainable economic recovery because lack of income growth, and other constraints on consumer liquidity, inhibit healthy expansion in the consumption of consumer goods and services. We have a consumer-based economy. Seventy percent of our gross domestic product (GDP) relies on the consumer. If income is not growing, if consumer debt expansion is limited and if confidence is weak, then the consumer does not have the ability to fuel sustained growth in consumption. There’s no way the economy has recovered, nor is it about to recover.

TGR: Unemployment is just one of the data points that show whether an economy is doing better. The revised GDP report shows that the U.S. economy grew at an annual rate of 3.7% in Q2/15. Is that a positive sign for the economy?

JW: The GDP numbers are nonsense. They’re very heavily inflated. They’re gimmicked. Government agencies long have put a little upside bias into the numbers to avoid the political embarrassment of understating actual economic activity. After a few years, those numbers usually get revised lower, as happened in this year’s benchmark revisions to the GDP. The next big comprehensive GDP revision will be in 2018, so it may be that long before we start to see headline details approaching reality.

The patterns of revision show consistently that the economy has not been as strong as it’s been reported. Effectively, we’re seeing a broad, multiple-dip economic downturn that began in the housing industry in 2005. It’s not a happy circumstance. Separately, headline GDP growth is overstated by the use of too-low an inflation rate in deflating the series. Use of understated inflation results in overstated real, or inflation-adjusted, growth. Corrected for the inflation issues, actual GDP plunged into 2008 and 2009 and has been in low-level stagnation since. Official GDP plunged into 2008 and 2009 and then fully recovered, despite a number of key related series not following suit.

Chart 2Courtesy of ShadowStats.com

That said, the GDP is not the broadest measure of U.S. activity. Gross national product (GNP) is the better and broader indicator because it includes international flows in interest and dividend payments. In the most recent reporting, GNP was 3.2% instead of the GDP’s 3.7% in Q2/15. Instead of being up by the GDP’s 0.6% in Q1/15, it was down by 0.2%.

Gross domestic income (GDI) measures the economy on the income side of the national income balance sheet, definitionally the equivalent of the consumption side of the GDP, and yet the GDI showed growth essentially stagnant in H1/15. That same pattern was confirmed in several very important economic series, including industrial production, which showed a contraction in Q1/15 and Q2/15. We never get consecutive quarter to quarter contractions in production without a recession. Retail sales adjusted for inflation also contracted in Q1/15. It showed some growth in Q2/15, but it was flat for H1/15. Again, we never see patterns like that except in a recession. We’re in a recession. It just isn’t being formally recognized in the GDP statistics. I figure it will surface in formal recognition in the next six to nine months. We’ve been in a period of low-level stagnation, and now the economy is actually turning down again.

TGR: If the Federal Reserve is using the GDP number, what will the consequences be if it raises interest rates on an economy that is not growing?

JW: It actually might help it. The Fed here has not been fully honest with the American people. It didn’t institute quantitative easing (QE) to stimulate the economy. The Fed has a mandate from the Congress to keep the economy growing and inflation under control, but the Fed’s primary function in life is to keep the banking system afloat. The Fed did whatever it had to do in 2008 to keep the banks in business. It bought some time. But it did very little fundamentally to alter the factors that triggered the 2008 crisis. The dollars from QE3 never made it into the money supply to help the economy. The economy has not recovered, and the banking system still is not fully stable, even though it has been enjoying the risk-free income of storing that QE3 money at the Fed.

Now, the Fed wants to raise rates to begin restoring some sense of normalcy in the monetary system. On the plus side, it would give bankers a little extra margin for lending, possibly to higher-risk borrowers, which could help business activity. It also would help people living on fixed incomes to enjoy higher, safer returns in assets such as certificates of deposit. But because of the unstable global conditions and obvious lack of domestic growth, everyone is nervous about raising rates. The Fed probably will blame the employment numbers that come out at the beginning of September and leave open the possibility of raising rates in December.

TGR: What impact would raising rates or deciding to delay raising rates have on gold? Gold Newsletter publisher Brien Lundin recently suggested to me that a rate hike could be a blessing for gold prices because the decision has already been priced in and investors are just waiting for the shoe to drop.

Chart 3Courtesy of ShadowStats.com

JW: Interest rates affect gold because they affect the dollar. Higher relative interest rates attract capital into the markets, making a currency stronger. A delay in raising interest rates—or further easing—would effectively debase the dollar. That’s a big positive for gold and also a big positive for dollar-denominated oil. Having the decision out of the way likely also would have its positive impact, where I agree that it’s already discounted by the stock market, and, even if the rate hike comes, it will be small.

Nonetheless, the underlying problem is that the U.S. economy is not recovering. Again, we are looking at a new recession, although I’ll contend it is an ongoing element of the economic collapse into 2008–2009. Once that becomes apparent, there will be massive dollar selling, a big spike in gold prices and oil prices will again move higher as the dollar weakens.

TGR: You warned in a special commentary that the world is increasingly out of balance and that dollar selling could be on its way. What are the triggers we should be looking for?

JW: The big issue still remains the long-term solvency of the U.S. The big spike in gold prices came when Standard & Poor’s downgraded the Treasuries as Congress argued over the debt ceiling. That has never been resolved. Politicians in Washington are just burying their heads in the sand.

We are going to see increasing pressures to dump the dollar as the world’s primary reserve currency. Who in the world is going to buy U.S. Treasuries? The Fed was a big buyer, but it has exited that part of QE3. China was a big buyer, but it has had to sell because of its market problems. Much of the rest of the world also has been moving out of the dollar.

TGR: Could a President Trump help the dollar and commodities?

JW: Donald Trump is talking about addressing problems that the political establishment has refused to address, ranging from fiscal conditions to the lack of actual economic recovery. From that standpoint, it well could be viewed as a positive for the dollar and commodities. Certainly, it would not be viewed as a positive by the establishment politicians unwilling to address the issues. How people will react remains to be seen. I wish Mr. Trump well, as I do anyone who looks to take on the mantle of control in an extraordinarily dangerous and unstable circumstance.

“My broad unemployment estimate includes those no longer tracked by the government; that broader unemployment number is around 23%.”

Main Street USA is suffering and it recognizes that it’s suffering, and that is why there is such a negative political environment for incumbents. Of the presidential candidates, Mr. Trump appears to be the one drawing Main Street’s support.

TGR: You mentioned China. We saw the U.S. market panic at the end of August when China’s growth numbers came out. What is supporting the upward climb of the Dow, NASDAQ and S&P 500 based on the real numbers you’ve been talking about?

JW: Nothing that I can see as fundamental. I view the stock market as highly speculative, very heavily intervened in, manipulated and hyped. I don’t think it’s really an open market anymore. The issues from 2008 still overhang the markets. While people still hope that things are going to work out, none of the major underlying issues triggering the 2008 panic were addressed meaningfully. The measures taken then were all stop-gap and just pushed the problems into the future. Now the economy is out of control.

“We’ve been in a period of low-level stagnation, and now the economy is actually turning down again.”

In prior times, the Fed wouldn’t have debated back and forth for over a year whether or not it was going to raise interest rates. That’s nonsense. It would have just done it, and if it made a mistake, it might address it later on. The Fed is trying to prevent a stock crash, but there is no fundamental strength underneath the economy, stocks or the U.S. dollar. In terms of economic reality, consider corporate revenues. Sales of the companies in the S&P 500 were down year-over-year in the first two quarters of 2015. Again, that doesn’t happen outside of a recession. We’re in a recession. The stock market will recognize it, along with the global financial community. That is why I am avoiding the market and the U.S. dollar.

TGR: What is an indicator you are watching that will signal a return to favor of commodities in general, gold and oil in particular?

JW: I’m not looking at a stable economy for some time. The U.S. dollar is the key indicator. I’m looking at inflation problems domestically as the dollar takes a hit. In the process, we will see a very sharp increase in the price of gold. Frankly, I would look at holding gold for the long term and riding out what’s going to be a terrible financial storm. Physical gold will retain the purchasing power of the assets invested in it and will have the liquidity that you might not have in other assets.

TGR: Thank you, John, for your time.

Walter J. “John” Williams has been a private consulting economist and a specialist in government economic reporting for more than 30 years. His economic consultancy is called Shadow Government Statistics (www.ShadowStats.com). His early work in economic reporting led to front-page stories in The New York Times and Investor’s Business Daily. He received a bachelor’s degree in economics, cum laude, from Dartmouth College in 1971, and was awarded a master’s degree in business administration from Dartmouth’s Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar.

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DISCLOSURE:
1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an employee.
2) John Williams: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
3) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
4) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

How to Make Sure the Government Can’t Freeze Your Bank Account

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