Markets go up and down. They are fundamentally propelled by supply and demand but markets are also propelled by investor exuberance over the latest fad. For a while it was gold. We've also seen uranium as the "everyone's-talking-about-it" metal, and copper, and rare earth elements. Right now, the term "critical” is a popular term for a particular group of metals among speculators.
But is it the special sub-category of metals investment that speculators are making it out to be? When we have challenging, contrarian questions like that, the one person we KNOW we can get straight answers from is Mickey Fulp. Mr. Fulp, also known as The Mercenary Geologist, was at the recent Cambridge House Vancouver Resource Investment Conference and participated in a panel on rare earth elements. We caught up with him there and spoke briefly about the critical problem with critical metals.
Mr. Fulp's strong (and often contrarian) opinions always provide a refreshing look at the industry, especially when investor excitement starts to cloud good judgment. "I'm not sure why critical metals are called 'critical metals'," said Mr. Fulp. "They used to be called 'rare metals', before that they were 'strategic metals', and before that they were ‘specialty metals’ or 'minor metals'."
The name change has surely created some confusion, he asserts, but it has also falsely accelerated the importance of some hard commodities. Mr. Fulp explains: "I object to the idea that they are 'critical' metals… Specialty metals are gaining focus because they were initially confused with rare earth elements. Last year, they were all called 'rare metals' and most people in junior resource investing didn’t know the difference between rare earth elements and rare metals."
Then he listed some metals that are sometimes called "rare" or "critical" and he questioned whether they were either: "There's nothing rare about molybdenum," he said. "It just has a smaller market than some other industrial metals. I recently heard aluminum referred to as a rare metal. Aluminum has the second largest demand in the world, next to iron. The industry is huge and it's controlled by major companies with major mines, refineries, and manufacturing facilities all over the world. In order, iron, aluminum, and copper are the three most-used metals in the world."
So why are minor or specialty metals called critical metals?, We wondered what his opinion was on the definition of critical metals: "The symposium dealt with what I would call 'metals that do not have a large presence in terms of tonnage or value on the world market'. That doesn't mean they aren't essential for modern-day manufacturing processes. They have reached notoriety lately because I think they've followed the lead of the rare earth elements."
Mr. Fulp continued by describing a problem with specialty metals: "In many cases, these metals are supplied by one country or one mine or one company. Take the niobium market, for example. Of the entire niobium demand in the world, supply is provided by just three mines. The largest is nearly a monopoly owned by CBMM in Brazil. They have the world's largest deposit, the world's highest grade, the world's most easily mined deposit, and the capacity to supply world demand. In my opinion, you can't compete [against them] in the niobium market."
Tantalum is another metal that has seen its share of price fluctuations and popularity. However, Mr. Fulp points out that tantalum isn't the hot commodity it once was: "In 2009, the world's three major tantalum mines shut down because there was zero tonnes of demand for tantalum. There was tantalum stockpiled in 2008, the price went crazy, then the world's economic system was on the verge of collapse, and the annual demand for tantalum, which is used in capacitors for small-scale electronics, completely dried up. There were plenty of stockpiles so all three mines shut down (although one of them has recently reopened). "
Another metal that is getting undue attention is vanadium. "Vanadium is a steel alloy. It strengthens steel," explained Mr. Fulp. "All of the vanadium used in the world is a product of steel smelters or a by-product of uranium mining. What has changed [and made vanadium popular] is a projected new demand in battery innovations. But this is just PROJECTED demand based upon a potential new use. Building a stand-alone vanadium mine is a pipedream that in my opinion won't happen in the foreseeable future. So, after his critical review of specialty metals, it's only fair to wonder what metals Mr. Fulp is interested in. That was an easy answer for him: "I'm looking at tungsten at this point. We have several past-producing tungsten mines in the Americas. There were many small sources found in China, and although they weren't particularly compelling deposits, the extremely low cost of labor made it viable to produce. Starting in the late 1970's, and continuing in the 1980's, China slashed the prices for FOB tungsten coming out of China. It undermined the US and Canadian markets and those producers shut down and have not restarted. However, there is now a shortage and tungsten mines that have been worked in the Americas before could re-open."
Unfortunately, for those interested in tungsten, the sector can be difficult to understand: "The spot price is about $350/tonne but the tungsten market is confusing because there are prices for tungsten oxide, tungsten metal, ferrotungsten, and several tungsten compounds so you have to make sure you're comparing the right product on the spot price."
Along with tungsten, Mr. Fulp is investigating a few new companies: "The companies I cover have not changed since our last interview”, he said, "But I'm looking at some new prospect generators. Free subscribers to my exclusive Mercenary Alert newsletter got a hint in early January about the ones I'm looking at. You will see me covering new companies in the future and I would encourage everyone to go to MercenaryGeologist.com and sign up to be a free subscriber."
Lastly, we asked Mr. Fulp for some advice and market insight that investors can use to cut through the clutter of investing exuberance to find the real value. Here is what he had to say:
"The junior markets are overbought; it's frothy and risky. It's a good time right now to take some profits. I think we're looking at an ongoing correction in the price of gold. [At the time of this interview,] we're looking at a 7% correction off of the year's high gold price," he said.
Another piece of advice had to do with a warning about how to find value in companies: "The price of many of specialty metals has gone up and the sharks and charlatans and snake charmers in Vancouver and Toronto are quick to pick up. You're going to see companies formed and old recycled projects started back up. To know whether they have any viability, you have to do your own due diligence and learn about the commodities. Look at the people involved in the companies and what successes they have had. Look for tight share structures. And, look to see if the exploration properties are viable for development, especially considering we're at all-time highs in pricing right now. Remember that any project you're looking at will take a minimum of 5 years to develop."
And for investors wondering how China plays into the metals market, Mr. Fulp approaches the topic with some well-founded scepticism: "The case in most of the specialty metals is that China has supplies of most of them and it needs a lot of those metals for its own country. The catalyst that really set this off was China coming out in early fall and announced that they are stockpiling 10 minor metals. That news alone woke up the world to the fact that China supplies most of the world with the majority of these metals. And since they are stockpiling, it may mean they see a future need that they cannot meet. We don't know whether China's sole motivation is to take care of their own or to monopolize a resource of any particular metal so they can increase prices to the West. Who knows what their ultimate motivation and goals are in this scenario. It's a centrally planned, communist leadership combined with private capitalism, which seems to work in China, and they are secretive and opaque. It's hard to get good numbers or answers. Even experts who work there admit that they don't know what's going on. But look at the history of China. They destroyed the tungsten market in the West so they could take control of the market. They cut rare earth element prices in the 1990's to establish a monopoly in rare earths. They did the same thing to the barite industry in the late 1970's and 1980's, which resulted in closing most of the barite mines in Nevada. So what makes us think that their intentions are completely honourable and friendly to the West today when their history shows that it's not been the case in the recent past?"
Buyers who find a hot commodity and ride it to profitability are being smart, but only if they have done their due diligence and found a company that has real value. Buyers who buy on exuberance tend to lose money because of the boom and bust nature of the exploration and mining industry. Investors would do well to keep a clear head about the so-called "critical metals" and listen to the wisdom of Mickey Fulp.
REFERENCE
Cambridge House's Vancouver Resource Investment Conference
http://cambridgehouse.com/conference-details/vancouver-resource-investment-conference-2011/15
Mickey Fulp
www.mercenarygeologist.com
CBMM
http://www.cbmm.com.br/english/index.html