By CentralBankNews.info
Australia’s central bank left its benchmark cash rate unchanged at 2.50 percent, as widely expected, and reiterated that “the most prudent course is likely to be a period of stability in interest rates” as the current accommodative policy stance should help foster growth in demand in keep inflation consistent with the bank’s target.
What Portuguese bond rates tell you about Australia’s stock market
In 2008 things got really bad. Stock markets crashed.
From 2010 to 2012 things got really bad again. This time it was in Europe. Stock markets crashed.
It appeared the end of Europe’s economy was nigh. Your editor even wondered if the European Union and the euro currency would survive.
But both have survived. And not only that, but despite the cries of impending doom for Europe there’s now the belief that Europe is already well on the road to recovery.
What happens next…?
First off, it has been a big turnaround.
We’re sure you remember all the stories about the PIIGS a few years back. That reference is to the initials of Portugal, Ireland, Italy, Greece and Spain.
It was a somewhat unkind and demeaning reference. It was usually tied in to stories about southern Europeans (except Ireland of course) being good-for-nothing layabouts, and that a financial crisis was what they deserved.
There was a justification to some of the arguments. But pinning the blame on ordinary folks wasn’t fair. Their nations’ governments had promised a bunch of welfare goodies in return for nothing. Who wouldn’t gladly accept that?
Many Europeans did gladly accept that deal. That’s why they got so angry when it all came to an end. Remember the riots in Athens?
The ‘good old days’ of financial crises
But times have changed since Greek rioters were burning bank buildings just a stone’s throw from the Parthenon.
And it seems a century ago that Europe appeared to be on the verge of civil war between the supposedly thrifty north and the spendthrift south.
You only need to look at a five-year chart of the yield for Portugal’s 10-year bond to see how much things have changed:
Did Portugal’s 10-year government bond rates really spike to above 15%? Yes, they did.
That was during the period of time we mentioned above, when Europe was on the brink of collapse.
But since then the bond yield has gone in pretty much one direction — down. Today Portugal’s 10-year government bond yield is just 3.63%. Of course, that may not mean much unless we compare it to something else. Check out the next chart:
It’s a comparison of Portugal’s 10-year bond yield (orange) with Germany’s 10-year bond yield (green).
Ignore the numbers on the left and right. They don’t relate to the interest rate, they are simply index points, with zero being the starting point for the chart.
But you can see what happened. From 2010 through to 2012 the bond yield on German government debt dropped, because investors saw it as a safe haven investment. They sold Portugal’s debt (causing rates to rise) and bought German debt (causing rates to fall).
It’s a neat diagram demonstrating the mentality of investors at the time.
Amongst the rubble and trouble, opportunities exist
But what has happened since the European debt crisis in 2012 is equally interesting. During that time the German bond yield has steadied and even risen slightly. By contrast Portugal’s bond yield has sunk to the current level of 3.63%.
Why? It shows you that since then investors have embraced taking risks again — partly through choice and partly through force, as they have to accept more risk for lower returns.
Investors haven’t only snapped up Portugal’s government bonds. Investors have bought into the country’s stock market too.
Since early 2012 Portugal’s PSI 20 index has gained 64.5%. That beats the US market’s 41.9% gain, and it trounces the Australian share market’s 34.4% gain over the same timeframe.
But you probably haven’t heard much about that in the press. The PIIGS story got less interesting for the press as the country’s interest rates fell, the stock market began to climb, and rioting in Europe died down.
But the good news for Portugal doesn’t end there. It appears that Portugal is about to shut the book (at least for now) on its troubles as it officially exits the three-year 78 billion euro European Union/International Monetary Fund bailout.
Who says a financial crisis can’t have a happy ending?
Look, as always this isn’t about declaring the bailouts a success. Portugal isn’t really out of trouble. It has just cut its budget deficit. But it’s still running a deficit, which means it needs to raise taxes or go further into debt.
If you need proof, Portugal’s Debt to GDP will be 129% this year, compared to 108% in 2012. In other words there’s an element of ‘smoke and mirrors’ to Portugal’s recovery.
But that’s not important. The important message is that if you want to make good money in financial markets you often need to look past the headline in order to find the opportunities.
Two years ago few spotted the opportunity to invest in Portugal due to the fuss about bailouts and budget deficits. That was a mistake. Today we see investors making the same mistake as they worry too much about events in Russia, Ukraine, China, and even here in Australia.
The world economy isn’t perfect right now. But if you’ve learnt one thing over the past few years it should be that you don’t need a perfect world in order to make healthy returns.
Cheers,
Kris+
From the Port Phillip Publishing Library
Special Report: Secure and Protect Family Wealth for Generations
Here’s Proof the Government Hates Technology and Innovation
Without innovation, the world stands still.
We need to innovate to continue advancing society and our way of life. Innovation and technology are vital to the coming future of our world.
However, not everyone likes innovation or wants it to succeed. Sometimes self-interest and protectionism get in the way.
And there’s no bigger example of this than the existing taxi industry in Australia.
But first you have to realise that innovation is inevitable. Those that innovate thrive. Those that don’t…die.
Soon in Australia two of the most innovative companies in the world will go head to head against the taxi industry. One already is, another is coming. And both combined will spell the end of taxis as you know them.
As you’d expect I’m the biggest fan of how technology can help improve our lives. I think it’s possibly the single most important thing in the modern world.
In general the average person in the street probably appreciates, in one form or another, the technology around us. Particularly in Australia this appreciation of technology comes through the humble smartphone.
Most of us carry one. And most of us use a variety of apps and programs to manage our day-to-day lives.
So on the balance of it, society recognises the need for technology and innovation.
However, there’s one massive hurdle that stands in the way of progress. And the scary thing is this roadblock is supposed to be representative of society.
That’s right, the single biggest threat to the progress of society through technology and innovation is the government.
This isn’t a local problem confined to Australia, either. This is a global problem.
Government is the biggest control-freak in the world. There’s little they won’t stick their noses in to mess about with. And they’re killing innovation.
Victorian Transport Minister, Terry Mulder, and the Taxi Services Commission (TSC) highlighted this last week.
Mulder and his Vic government cronies look set to do their best to stifle any kind of innovation in Victoria.
This has all come to a head because Uber has started to advertise for people to join their Uber network.
Let me explain this in a bit more detail. You see, why Uber is advertising is as important as why the government wants to shut it down.
Need a Lyft? This will be the only way to get around town
There’s a company in the US that is a ‘ride sharing’ company. Their name is Lyft. Now Lyft isn’t your typical car sharing company. How Lyft works is you log into the app, say where you’re going and then someone, anyone, just an ordinary person can give you a ‘lyft’ to your destination.
You get the name of the person giving you a lyft, you see their car, and can track their progress to your location. So it’s all very above board and every driver is background checked before being accepted into the network.
When you arrive at your stop you pay through the app with the payment card stored on the system.
It’s safe, secure, convenient and easy.
One thing to note is this isn’t a taxi service. This is ordinary people, people like you and me, who own a car, giving people rides for an affordable rate. It sounds like a taxi service, but it’s not. It’s not like anything before it. And that’s what government can’t handle.
You see Lyft is the perfect example of a thriving company in a reputation-based economy.
That means if a driver has a bad reputation, they don’t get pick-ups. And likewise if a ride had a bad reputation no driver will pick them up.
Lyft is a thriving, growing company in the US. And soon they’ll be branching out across the globe. Lyft is a direct threat to the existing taxi industry. But even more so, they’re a direct threat to Uber.
So rather than ‘sook-up’ and go whinging to the government like the taxi industry does, Uber is being proactive.
Competition breeds innovation. And Uber is one of the most innovative companies in the world. So they’ve decided to use their existing network and technology to expand the Uber offering.
UberLowCost is Uber’s alternative to Lyft.
So now Uber effectively has four services levels. Uber Lux, Uber Exec, Uber X and soon…UberLowCost.
You want a luxury ride. No problem. Or maybe you want a black car, something comfy but not too pricey? Easy. How about just a normal cab-like car? Done.
Now, you can even just catch a ride with a friendly neighbour. UberLowCost and Lyft will dominate the way we pay to get a ride around town.
And not just dominate. These two companies will literally shut down existing taxi networks.
Well, I say that on the assumption the government doesn’t ban them completely.
Government: Kings of protectionism
The government doesn’t like too much change. And innovative companies like Uber and Lyft, they really dislike.
A spokeswoman for the transport minister told The Age, ‘The TSC is currently investigating this practice and will take appropriate action if such activity is detected in Victoria.’
The minister’s office is directly talking about Uber. More specifically it’s Uber’s new low cost service that’s really thrown the cat amongst the pigeons.
‘UberLowCost’ is coming. And it seems the government might even outlaw Uber all together because of it.
They further said, ‘The Taxi Services Commission strongly discourages any members of the public applying for any job advertisements that offer quick cash for providing taxi and hire car services using a private vehicle.’
So not only are they preparing for the worst, they’re actively trying to turn people away from Uber.
What is happening is another example of government persecuting technology-based companies for challenging the norm. All Uber and Lyft do is provide an alternative to the traditional means of getting around town.
They simply provide a network for people to make their own decisions and choices. They use technology to enable and empower people to take command of their lives.
Like AirBnb empowers homeowners to make extra money from their property, Uber and Lyft empower car owners to do the same with their cars.
Now these companies wouldn’t be as successful as they are if there wasn’t a demand for a better service. And they certainly wouldn’t work if the existing system catered to the needs of people.
There’s a social revolution underway.
The attitude of the younger generation has already shifted. Their trust is in their technology networks. Whether that’s Facebook, AirBnb, Uber, SnapChat, Instagram or Tinder, all are examples of trusted networks.
This is a trend you’ll only see more of. People place more trust in technology driven networks like Uber and Lyft as opposed to old, broken, bureaucratic systems like the current Taxi Service.
The key themes are trust, reputation and a technology driven network of like-minded people.
These are all elements government cannot handle. Government also doesn’t have the skills or resources to innovate like these companies can.
That means your typical Silvertop taxi will continue to run. And they’ll continue to flounder in a failing system. But Uber will only get bigger, and more powerful. And then Lyft will find its way to Australia. Together, they will crush the taxi industry.
But again the only thing that will stand in the way is government. Legal challenges, legislation, and media beat-ups are already flowing thick and fast.
A massive showdown is brewing here. In one corner is the broken, corrupt, failing bureaucratic system we call government. In the other corner are innovative, intelligent, reputation based technology companies like Uber and Lyft.
The winner will be decided by the way in which we act. The weight of numbers of society will prove that we want a better way. That we deserve a fairer go. And it’s through these technology companies that we get it.
Already you can see the writing on the wall. In fact, we’ve already chosen the winner, and that’s why the government is terrified.
Regards,
Sam Volkering+
Editor, Tech Insider
Ed Note: The above article was originally published in Sam Volkering’s Tech Insider.
Outside the Box: Is There a Biotech Bubble?
By John Mauldin
I’m bringing you a special Outside the Box today to address a very specific question that is on many investor’s minds: is there a bubble in biotech? To answer that question, Patrick Cox, editor of Mauldin Economics’ Transformational Technology Alert, teases apart the data on stock performance in the biotech space and then goes beyond the data to show us how the unique characteristics of the sector bear on the question of bubble or no bubble.
The answer isn’t a simple yes or no, but Patrick’s clear, deeply informed perspective can help us make smart investment decisions in an industry where both gains and losses can be precipitous and outsized.
Your ready and willing to be transformed analyst,
John Mauldin, Editor
Outside the Box[email protected]
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Is There a Biotech Bubble?
By Patrick Cox, Editor, Transformational Technology Alert
FDA approvals for new drugs have accelerated over the last few years.
In 2013 alone, the FDA approved 27 new drugs. That followed a banner year in 2012, in which 39 novel drugs were approved—the most in 15 years.
Demographic trends will support the need for continued growth in the sector for years to come, as the aging US population increases demand for pharmaceuticals and other healthcare services. However, is this new paradigm enabling the growth potential of biotech firms or fueling the fire of yet another bubble?
A Brief History Lesson
The S&P 500′s biotech stocks are up more than 250% from the March 2009 bottom, versus a gain of roughly 180% for the rest of the market. This figure—although staggering on its own—does not include the hundreds of small- and mid-cap biotechs that have gone up even more.
The Nasdaq Biotechnology Index, which does include some of these smaller names, gained 66% last year, double the S&P 500′s return. In fact, biotech was the #1 performing sector in each of the last three years.
Since 2012, biotech stocks also began a full-scale invasion and colonization of the healthcare sector.
For comparison, here’s a look at the percentage of biotech market-cap weighting in the healthcare sector SPDR (XLV) by year:
| Percentage Weighting of Biotechnology Stocks in Healthcare Sector SPDR (ARCX:XLV) | |
March 2010 | 11.62% |
March 2011 | 9.60% |
March 2012 | 10.65% |
March 2013 | 14.44% |
March 2014 | 19.00% |
The pace of biotech stock growth is accelerating, but this isn’t enough evidence to say that we’re in a bubble. To properly label biotech’s rise and fall, let’s look at how the performance came about in the first place.
Numbers are being tossed about to show very high total returns, but they ignore the preceding sluggish period.
As shown below, biotechs were one of the laggard groups in the 2009-2011 period, outperformed handily by the Nasdaq Index, where the majority of biotech firms trade:
The chart above shows how the boom can be broken down into three phases:
- 2009-2011 = underperformance
- 2012 = catch-up performance
- 2013-recent = outperformance.
From 2009 through 2011, there was little to no public market capital for anything remotely risky, and so young biotech companies were forced to sell out to larger drug companies on the private market. This makes sense, as valuations on the private market were actually much better.
Meanwhile, as sluggish global growth persisted, investors began to favor large-cap biotech companies, such as Gilead, Pfizer, and Amgen. Unfortunately, there weren’t enough reputable biotech franchises to go around, thanks to a period of industry consolidation that included a buyout of Genentech by Roche for $46.8 billion, Merck acquiring Schering-Plough for $41.0 billion, and Sanofi taking over Genzyme for $20.0 billion, coupled with a shortage of public offerings. All the while, institutions took the remaining large biotech stocks to all-time highs.
Spreading the Wealth
In most markets, there are examples of both huge winners and terrible losers, and biotechnology is no different.
Here’s what the distribution of returns looks like for 172 US biotechs with a 12-month performance return:
While there were many small companies with monstrous returns, the returns were widely distributed, suggesting that this market is more selective than we would expect from a general bubble. However, it remains possible that many of these individual companies carry inflated valuations.
IPOs
In the first quarter this year, there were about 50 IPOs; 45% of these offerings were for pre-profit biotechnology companies. In other words, they all lost money, yet they were valued at a median of $199 million.
Half of those biotech IPOs had no revenue at all. For those that did have some, the median 12-month sales amounted to only $200,000. That compares with median revenue of $125 million for non-biotechs with initial offerings.
However, although this may look fishy to the untrained eye, it’s not unusual for a small biotech company to have no earnings or revenue, as the company’s value is derived from potential future earnings and revenue from a product that’s currently in development.
That said, the bubbly part of this IPO market is that the average gain for these new biotech offerings is over 50%.
There has also been a spike in deal activity: last quarter M&A in the life-sciences sector spiked 24%, as 31 companies were bought for a total of $37 billion.
So yes, 2013 was a banner year for biotechnology IPOs—there’s no denying that. But when you look at the long-run trend, biotechs had been depressed for a decade. The truth is that there are hundreds of small startup companies that have great ideas, great products, and great futures, but they have yet to go public.
What’s lost in the hubbub about all these new IPOs soaring are two things:
- First, a lot of them have gone down in value, not up.
- Second, and more importantly, the surge in IPOs only reflects the shortage of biotech IPOs in the last 10 years. 35 or so IPOs in one year for biotechs may seem like a lot, but averaged out over the last 10 years, it’s nothing. Predictions are for another 35-40 to go public in 2014, for an annual total of almost 100.
From these mostly small, focused companies can come blockbuster, patented products. Once a privately funded biotech has reached a certain level in its development, an IPO can furnish it with the funds necessary to move through the next stages. Not all of these companies will be successful, but for the ones that are, the payoff can be large—even enormous—and that’s what keeps investors interested and willing to pay a premium for the opportunity.
Valuing the Biotech Market: One Size Does Not Fit All
Here’s the big picture via Brendan Conway of Barron’s:
“The price-earnings ratio of the SPDR S&P Biotech ETF is a rich 33 times trailing earnings, versus the S&P 500′s 17, says Morningstar. But Morningstar removes unprofitable firms from the tally. Add them back in and tally the losses against the prices, and the P/E multiple would be a negative 19, according to ETF.com’s Matt Hougan–if such a thing were possible.”
Some companies look more expensive and some look more reasonable today, compared to 2000. The real challenge with these companies is whether or not they’ll be successful in pushing their products through the pipeline and into the market.
Based on earnings forecasts, large-cap biotech companies including Amgen, Celgene, and Gilead are trading at 13.5x 2016 earnings and 11.7x 2017 earnings, which is cheaper than 14.2x and 13.5x, respectively, for the S&P 500. Of course, these are based on the assumption that the biotechs will recognize 21.5% annual earnings growth through 2017, versus 5.5% for the S&P 500—and both of these assumptions may prove to be too optimistic.
However, biotechs are often improperly “group analyzed.” Each company is in its own mini-field, at its own development stage, with its own potential return and risk outlook. Most currently listed biotechs have some sales, but few have positive earnings. Yet we read that the stocks are overpriced because the average P/E ratio is high. Here are the key statistics:
- All listed US biotechs = 215
- Some sales = 173 (80%)
- Meaningful sales (a price/sales ratio of 10 or less) = 45 (21%)
- Positive current earnings = 29 (13%)
- Positive estimated (forward) earnings = 35 (16%).
There’s a wide disparity among the 215 companies. Looking at market capitalizations, we can see a great divide between the few mega- and numerous mini-biotechs:
More to the point is the relationship between market cap and earnings yield (E/P). This graph shows the great number of money-losing, smaller biotechs.
Clearly, using a one-size-fits-all traditional industry analysis and valuation comparisons misjudges biotechs. Each company must be analyzed individually, as no two companies are addressing the same market with the same product and the same stage in their development.
But as a whole, the biotech sector still looks attractive when factoring in its growth potential. The price-to-earnings growth ratio (which is similar to earnings per share; however, it takes earnings growth into account) for biotech is around 0.7, around half the value of the S&P 500.
Broader Market Implications
Growth stocks are on their own tracks and will proceed according to their own developments and investor views.
In short, it’s beginning to look a lot like 1999 or early 2000, but not for the whole market or large-cap stocks. Those crucial areas could be overvalued after five years of enormous gains, but the numbers suggest that the overall Standard & Poor’s 500-stock Index compares favorably with the stratospheric prices that investors routinely paid in 2000.
In 2000, for the 10 biggest stocks in the S&P 500 by market cap, the P/E ratio was 62.6. Today, the comparable figure is only 16.1. Back in March 2000, Cisco had the highest P/E ratio among the 10 biggest stocks, at 196.2, followed by Oracle, at 148.4. Those figures were so high that when sentiment turned, the stocks plummeted.
Today, only one stock in the big 10 has a P/E above 30: Google, the sole Internet company in the group. Its P/E is 33, double the current average for the S&P 500’s 10 biggest companies, but compared with the levels that prevailed in 2000, it’s reasonably priced. If earnings grow rapidly, Google could conceivably be profitable for investors at its current valuation.
The point is that even if prices are high in the overall market, they’re being backed up by earnings to a much larger extent than in 2000. That’s important, because—as I’m sure many of you remember—when the dot-com bubble burst, the downdraft brought most companies down with it.
Moving Forward
Many of our subscribers have written to us asking how the most recent selloff will affect our analysis moving forward.
In short, not at all. We examine individual companies based on the merits of their technology. We evaluate the potential market value of their products and adjust for the probability that they’ll pass through clinical trials based on their particular stage of development. This results in a highly defensible valuation for the company that changes as the company’s products move through clinical trials.
The important factor that many analysts ignore is the probability for a product’s success, which varies by the clinical trial phase and therapeutic area. This, among other factors, is how many of the high valuations have been justified.
Our analysis, however, remains grounded in reality. Even the best companies can be priced too high or too low, and our recommendations focus on the best companies with the best risk-adjusted returns.
This, in our view, is the only way to come to a realistic valuation in this unique market.
– Patrick Cox, Senior Editor, Transformational Technology Alert
– Robert Ross, Senior Analyst, Mauldin Economics
– Andrew Wagner, Analyst, Mauldin Economics
—————————-
If you’d like to learn more about Mauldin Economics’ Transformational Technology Alert, the groundbreaking advisory in which Patrick Cox leverages his 30+ years of industry research experience to identify promising development stage technology firms, click here.
You can start a risk-free trial of Patrick’s work today and preview his ability to find the tech and biotech plays with the potential to radically alter both the markets and society. It’s fascinating reading, and once again, you can learn more about Patrick’s research and trial his service risk-free for 90 days by clicking the link above.
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PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor’s interest in alternative investments, and none is expected to develop.
The article Outside the Box: Is There a Biotech Bubble? was originally published at mauldineconomics.com.
Chris Ecclestone: Right Size, Right Metals Signal Success for REE Projects
Source: Brian Sylvester of The Gold Report (5/5/14)
The rare earth elements sector is smaller than it was a few years ago, and Chris Ecclestone, mining strategist with Hallgarten & Co., thinks it needs to get smaller still. The only way to succeed, he tells The Gold Report, is by finding the right-sized project with the right REEs. He also shares his theories on China’s manipulation of REE prices and touts the mineral wealth of Spain and Portugal.
The Gold Report: In a March Hallgarten & Co. research report, you noted that rare earth elements (REEs) had “come out of hibernation.” Did they wake up happy or grumpy?
Chris Ecclestone: The REEs have run hot and cold since 2009. They had a run for about a year, went off the boil, then had another run.
At the peak, Molycorp Inc. (MCP:NYSE) had launched and everyone was excited about Lynas Corp. (LYC:ASX). Both had market caps in excess of $1 billion ($1B). An array of midtier stories, like Avalon Rare Earth Metals (AVL:TSX; AVL:NYSE; AVARF:OTCQX) and Rare Elements Resources Ltd. (RES:TSX; REE:NYSE.MKT), had market caps in the high hundreds of millions of dollars. Juniors proliferated. In total, there were 50–100 REE stocks listed on the TSX and TSX.V. That’s a big group considering the size of the total universe of specialty metals stocks.
Then, the sector was scorched. The price of REEs plummeted. Molycorp and Lynas both encountered cost overruns and Lynas had environmental issues in Malaysia, where it was building its processing plant. These two bellwether stocks became damaged goods. Investors began to think, if the two big ones can’t make money in REEs, who can?
This all coincided with the worst overall mining equity market in 10–15 years. Thus, REE stocks were doubly out of favor.
Beginning this year, there’s been a better vibe in the mining markets in general. REEs have started to pick themselves up off the floor. They look like a viable investment alternative again. However, I believe that we need at most 20 REE stories. Right now, two are in production. Another four or five will get into production over the next few years. We probably don’t need the rest. There will be a race to get into production. If you can’t win that race, you might as well pack up your tent and go home.
TGR: Do you see higher REE prices? Has the sector bottomed?
CE: Prices have bottomed, yes. Some people remain bearish on lanthanum and cerium, which are in massive oversupply. Those prices may go lower. However, I believe it’s not in the Chinese interest to see those two metals go lower. Lanthanum and cerium make up the bulk of what China produces in the REE space, but they’re not the value-added metals. Metals like europium may enjoy better prices, but they’re a small part of the whole REE complex.
China’s bread and butter comes from Bayan Obo, which is not a rare earth mine at all. It’s an iron ore mine that produces REEs as a byproduct. The Chinese can’t stop producing REEs at Bayan Obo because they’d have to stop producing the iron ore as well.
One of the intriguing things about REEs is that you can’t just take the ones you want and leave the others behind. You have to go through the whole chemical extraction process to get those with the biggest market or the best price. You can’t send a metal into the tailings pond because it doesn’t have a good price today. You have to do them all.
You’re stuck in a reverse economy of scale; the more you process, the more unprofitable it could be.
TGR: Given the margins on producing a concentrate or even an oxide, is vertical integration the only way to make money in the REE space?
CE: The ideal scenario is to be vertically integrated. That is a bit of a challenge for some of the juniors. Molycorp is the only company that has the REE soup-to-nuts combo. Molycorp put that together by buying Silmet, an Estonian-based processor. The company then bought Neo Material for its factories around the world and its distribution system. Putting that together cost Molycorp a lot of money and a lot of dilution.
Like silicon technology, the mining is not the sexy part of the REE business. No one would say that digging silica out of the ground is the quality end of the tech business. The quality is at Intel’s factory, where the silicon chip is put on the circuit board. The mere insertion of the word “rare” in the name was a marketer’s dream and has ended up being an investor’s nightmare. They’re not rare; they’re as common as dirt.
TGR: The World Trade Organization (WTO) recently ruled in favor of the U.S. in a trade dispute over Chinese exports of REEs, tungsten and molybdenum. Does that change the playing field for junior REE development companies?
CE: No, because it won’t have much effect on the REE market. I recently attended an antimony conference, where we heard about China’s quota on antimony exports and the fact that it never reaches its quota. Yet, according to the official statistics of individual European countries, their individual imports of antimony from China are higher than the entire Chinese export quota. Chinese export quotas do not affect daily life in the REE sector. They will be smuggled out; they will be walked across the border and become Vietnamese REEs.
I think the Chinese are more interested in controlling the prices of REEs than the supply. Call me conspiratorial, but I think that the Chinese sunk the REE prices in 2011 after having pumped it up. They did that because there was a sudden proliferation of REE properties out of nowhere in the west. The Chinese thought, oops, we’ve shot ourselves in the foot here by attracting all these additional mines. If we let them run down the track with these high prices, five years from now there will be massive overproduction. At that point, the Chinese sunk the prices.
The REE market is easy for the Chinese to manipulate because they have the stockpiles. In 2011, the Chinese released a deluge of product. That sank the price and 75% of the listed REE equities into oblivion. I think the Chinese want to see the prices rise again, but only when they can be confident higher prices won’t trigger another surge of new REE companies.
TGR: How is China’s role today different from its role in 2010–2011, when the sector exploded?
CE: It plays essentially the same role now. In 2011, China was pretty much the only game in town. India, Malaysia and Brazil had small amounts of production. Today, Molycorp and Lynas look like wounded beasts. They have, just barely, managed to spoil the lanthanum and cerium market for the Chinese. Their existence means that the Chinese don’t control those markets anymore. I still don’t see either one as competition for the Chinese, but they are price spoilers at the cheap end of the REE space, in lanthanum and cerium.
TGR: If China is the kingmaker and in control, why would an investor wade into these waters?
CE: There are niche categories. One of them is strategic metals. In 2010, you heard a lot about the perception that the West had made itself too vulnerable to Chinese supply of the strategic metals that the western defense establishment needs. Here we are four years later. China is as threatening or as non-threatening as it was back then.
Will the U.S. do anything about it? So far, not much has happened. The U.S. needs to say, “We need a big stockpile of yttrium, of terbium and samarium and other scarce REEs.” Ironically, when you’re talking about rare earths used for, say, night vision goggles, the U.S. defense establishment is probably buying the rare earth oxides that go into those from Japan or China. Meanwhile, Japanese are dependent upon the Chinese. Many of the Japanese plants for processing REEs are being forced to move to China because the Chinese have said, “You’re not getting it unless you move your plant over here.” They’re almost like captives of the Chinese and the Japanese don’t like that. The U.S. doesn’t seem to care.
TGR: In a recent interview, Asian Metals Analyst Zachary Schumacher said, “Very few REE projects stand out.” Which ones stand out for you?
CE: Great Western Minerals Group Ltd.’s (GWG:TSX.V; GWMGF:OTCQX) project in South Africa is one. Steenkampskraal is an old thorium mine with phenomenal grades in its gigantic tailings. It should be in operation now, but the company seems to be going a bit soft on the pedal because it doesn’t want to come to production in this grim market.
TGR: Are you following other REE names?
CE: I like Texas Rare Earth Resources Corp.’s (TRER:OTCQX) Round Mountain project. It’s easy to get to and it’s more than an REE project; it has beryllium and lithium. It also has yttrium fluorite and it can extract fluorspar, as well as yttrium.
Ucore Rare Metals Inc.’s (UCU:TSX.V; UURAF:OTCQX) Bokan Mountain is just the right size. Ucore saw the light early on and halved the size of the project. It’s the companies that are sticking with their oversized projects that will come to grief.
One project without pitfalls in terms of good infrastructure and location is Tasman Metals Ltd.’s (TSM:TSX.V; TAS:NYSE.MKT; TASXF:OTCPK; T61:FSE) Norra Karr in Sweden. Scandinavia is where REEs were first found. Norra Karr might come to fruition.
TGR: What about African rare earth players? Prospects? Do you know Mkango Resources Ltd. (MKA:TSX.V)?
CE: Africa is interesting for REEs. While Latin America is rather poorly endowed with REEs, Africa is exactly the opposite, at least the southern half of the continent seems to have quite a number of resources of economic proportions. The ones I am acquainted with are in South Africa (Great Western at Steenkampskraal), Namibia with a couple of projects, Tanzania with a couple and Malawi with quite a number, disproportionate to its size. The Japanese, through its agency JOGMEC, have taken a particular interest in the latter country.
I do know Mkango and it seems to be not only one of the more determined and serious players in the REE space, but it has some hefty institutional players behind it (Sprott, Genesis, Och-Ziff) that mark it out from those stocks that are reliant upon retail investors. It has skipped the preliminary economic assessment phase and is heading toward a feasibility study to be published in coming months. This will give us a better idea of its prospects and capital expenses. It seems it will come in at the lower end compared to many of the Canadian REE contenders.
TGR: Does Medallion Resources Ltd. (MDL:TSX.V; MLLOF:OTCQX; MRD:FSE) fit into your thesis of having the right metals and a relatively small footprint?
CE: I know Medallion Resources very well. Its concept is to get REEs as a byproduct of ilmenite and rutile mining. The company wants to put its project at the entrance to the Persian Gulf. That’s a smart move because of the cheap energy. Most of the world’s ilmenite and rutile production is around the Indian Ocean.
TGR: Is ilmenite your favorite mineralization to host REEs?
CE: Ilmenite is not my favorite. It is a titanium-driven product. If the price of titanium goes to hell in a hand basket, some ilmenite projects would follow. The danger Medallion faces is its dependence on what happens with titanium demand; the REEs are only a byproduct.
I love xenotime because you get yttrium along with it. I like yttrium because of its high-tech uses in anything that must be coated to protect them from very high heat, like jet engines. it’s a very interesting strategic metal.
Northern Minerals Ltd. (NTU:ASX) and Spectrum Rare Earths Ltd. (SPX:ASX) are working deposits in Australia. Spectrum claims to have the only ionic absorption clay deposit outside China. It hasn’t yet been proven to be adsorption clay, but it definitely contains REE. Ionic adsorption clay is the holy grail of REEs.
TGR: The Alaskan Senate recently approved $145M in long-term bonds to finance Ucore’s Bokan Dotson Ridge project. Does that guarantee the mine will be built?
CE: With REE prices going lower, all bets are off. However, you could build a mine with that amount of money.
TGR: Besides financing, what else does the Bokan Dotson project have going for it?
CE: It’s the right size. It’s better to have a project that runs out in 10 years rather than trying to build the biggest project.
It will be 2016–2017 by the time Bokan Dotson gets built. Some REE prices will be higher then: praseodymium and neodymium, the ones used in wind turbines and in hybrid autos. The Chinese are trying to deal with urban pollution by a wholesale shift toward hybrid autos.
We’ve seen this over and over in China. When China needs something, it starts by using all of its own product. Then it starts importing the product because demand outstrips production. That’s not to say that China will become a net importer of REEs, but if China goes for a big paradigm shift into hybrid autos, it could generate massive demand for neodymium and praseodymium, to be used in the magnets in the engines.
TGR: The WTO ruling also covered Chinese tungsten. Can you update our readers on the supply/demand equation for tungsten and your investment thesis?
CE: One of the main uses for tungsten is the filaments in electrical light bulbs. The shift toward low energy-consuming bulbs reduces tungsten demand in that industry.
It’s also used for hardening, including machine tools. China wants to muscle in on the traditional European strength in machine tools. That means using more tungsten, which is what led to the Chinese export quotas on tungsten. Those quotas frightened a number of European companies that depended on Chinese tungsten.
Sandvik AB (STO:SAND), the big Swedish company that produces a lot of heavy machinery, is an example. Sandvik decided to buy an old Austrian mine and get it going again as a source of tungsten outside of China. Sandvik also invested in Wolf Minerals Ltd. (WLF:ASX), which is developing a tungsten mine in the southeast of England.
Global Tungsten & Powders Corp. is a big producer of tungsten powders from mines around the world. GTP backed Malaga until its demise last year. It is now backing Almonty Industries Inc. (AII:TSX.V), which owns the Los Santos Mine in Spain. It has been producing for five years.
We’re seeing more tungsten mining in Europe, a place regarded by many as having too many regulations and expensive labor to be worth the effort to start a mine. Australia has a number of projects coming down the track, too.
Size is a problem for North American Tungsten Corp. Ltd.’s (NTC:TSX) Mactung project in the Yukon. It has a $400M budget. The current tungsten price is good, but not phenomenal. If you have an existing mine, that’s great, but trying to rustle up $400M today is pushing a rock up a hill. I don’t think Mactung will get going until the tungsten price is much higher.
TGR: As far as Almonty goes, how much mine life does Los Santos have?
CE: It has four or five years left. However, Almonty made an abortive bid last year for Ormonde Mining Plc (ORM:LSE). Ormonde’s project is also in the Salamanca Province of Spain, which gives Almonty lots of potential economies of scale. Right now, it’s in the prefeasibility stage. Almonty would bring its skill set to get the mine going.
Spain is one of the most prospective areas in the world for a lot of minerals, actually. Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) was founded there as a lead-zinc mine. Gold, lead, zinc, even iron ore, tungsten, tin, antimony—Spain has it all, Portugal as well. Lundin Mining Corp. (LUN:TSX) operates big mines in Portugal. Colt Resources Inc. (GTP:TSX.V; COLTF:OTCQX) has a tungsten project outside Lisbon.
In the Iberian Peninsula, you get the added juice of tin in many tungsten deposits. If you really hit the jackpot, you get tantalum as well. You don’t need to go to exotic locations or troll around the top of the Andes. Just catch a flight to Madrid.
TGR: What should investors expect in 2014 and beyond in the REE space?
CE: I compare the REE space to a science-fiction movie, where the spacecraft crew is cryogenically frozen. Some of the crew will defrost the way they’re supposed to, but others will be lost.
In the REE space, it will become clearer over the next 12 months which five or six projects are most likely to survive. Many of the other REE companies will change their names and become totally different companies seeking other metals in other countries.
I don’t think there will be a second wave of new REE stocks. This is the universe we have, and it’s getting smaller, not bigger.
TGR: What’s your advice to investors Chris?
CE: Diversify. If you want to take on REE stocks, buy two or three to mitigate risk.
TGR: Chris, thanks for your time and your insights.
Christopher Ecclestone is a principal and mining strategist at Hallgarten & Company in New York. He is also a director of Mediterranean Resources, a gold mining company listed on the Toronto Stock Exchange, with properties in Turkey. Prior to founding Hallgarten & Company in 2003, he was the head of research at an economic think tank in New Jersey, which he had joined in 2001. Before moving to the U.S., he was the founder and head of research at the esteemed Argentine equity research firm, Buenos Aires Trust Company, from 1991 until 2001. Prior to his arrival in Argentina, he worked in London beginning in 1985 as a corporate finance and equities analyst and as a freelance consultant on the restructuring of the securities industry. He holds a degree from the Royal Melbourne Institute of Technology.
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DISCLOSURE:
1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his 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: Northern Minerals Ltd., Ucore Rare Metals Inc., Mkango Resources Ltd. and Medallion Resources Ltd. Streetwise Reports does not accept stock in exchange for its services.
3) Christopher Ecclestone: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: In the past, I have consulted for Ucore Rare Metals Inc. and Texas Rare Earth Resources Corp. My company has a financial relationship with the following companies mentioned in this interview: None. 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.
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GBP/JPY Falls Back To Its Old Range Habit
Technical Sentiment: Neutral
Key Takeaways
- The long term triangle formation was breached towards the upside yet price quickly fell back down;
- GBP/JPY cleared stop losses below 171.90, major support confluence lies at 171.24;
- British Services PMI expected to print a small increase on Tuesday;
Last week’s rally ended on a sour note on Friday, when GBP/JPY ran into a lot of selling pressure just ahead of March’s top at 173.56. The day ended as a bearish engulfing bar and today the price action pattern was confirmed as the sell-off continued throughout the Asian and European session. The pair is expected to consolidate between 171.75 and 172.80 ahead of the British Services PMI.
Technical Analysis
GBP/JPY is currently trading above 172.00 after testing the 4H 100 Simple Moving Average. Although volume is thin and the pair has invalidated April 30th Low of 171.92, April 28th Low of 171.24 remains the most recent higher low on the Daily timeframe and the actual key support level. The 200 Simple Moving Average on 4H, 38.2% Fibonacci retracement from 167.75 to 173.44 and the triangle support trendline are located in this area.
If the Services PMI will print an increase to 57.9 or above expectations, GBP/JPY will put the resistance levels to the test, starting with 172.76 and ending with 173.56. The 173.56 resistance is unlikely to break before Thursday, as the markets will wait for BOE’s Official Bank Rate announcement. In case of a rally above the previous tops, 174.82 will immediately become the main attraction point.
Towards the downside, 171.24 should be watched for either a bounce or a strong break. A strong break below 171.24 will end the bullish higher lows configuration and open the way towards 170.00 (61.8% Fibonacci retracement from 167.75 to 173.43). This scenario has the most potential to increase volatility, as long traders will be shaken out of their positions and forced to reverse. On the other hand, a rejection has less potential as GBP/JPY will further consolidate in this choppy region.
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Prepared by Alexandru Z., Chief Currency Strategist at Capital Trust Markets
Proof the Incentive to Work Is Fading
by Michael Lombardi, MBA
I keep hearing about the economy improving, but I keep asking, where? I ask because the facts continue to say otherwise.
The U.S. Bureau of Economic Analysis reports gross domestic product (GDP) came in at just 0.1% in the first quarter of 2014. To remind my readers, in the fourth quarter of 2013, U.S. GDP grew by 2.6%. (Source: U.S. Bureau of Economic Analysis, April 30, 2014.)
These GDP figures reaffirm what I have been saying for some time now: the U.S. economy is headed towards an economic slowdown, not growth.
All we need to do is look at our exports. Exports from the U.S. economy to the global economy collapsed in the first quarter of 2014, declining by 7.6%. That’s definitely not helping GDP.
The Baltic Dry Index (BDI), an indicator of how demand in the global economy looks, is in a sharp downtrend, as illustrated in the chart below.
Chart courtesy of www.StockCharts.com
And consumer spending is facing headwinds. I can see this in the amount of inventory businesses are stockpiling. In the first quarter of this year, private business inventories rose by $87.4 billion after increasing by $111.7 billion in the fourth quarter of 2013. Businesses increasing inventories suggests customers are buying less, as each business’ inventory isn’t turning over; it’s stockpiling. GDP cannot grow without consumer spending.
Finally, last Friday, we heard the “good news” that the U.S. economy added 288,000 jobs in April—the biggest increase since January 2012. But the underemployment rate, which includes people who have given up looking for work and people who have part-time jobs but want full-time jobs, stands stubbornly above 12%.
Look closer at the data, and you’ll find the number of people actually in the workforce, known as the “participation rate,” fell to 62.8%—the lowest level since 1978. (Source: Economic news release, Bureau of Labor Statistics, May 2, 2014.) With the government supporting so many people these days via different programs, I see the incentive to work actually fading.
But have no fear, dear reader. The Federal Reserve will look at the unemployment numbers and cheer. It will continue to cut back on its money printing program. It will take the brake off historically low interest rates and slowly let them rise. Rising interest rates: just what the economy needs for GDP growth!
This article Proof the Incentive to Work Is Fading was originally posted at Profit Confidential
Crude Prices Lifted On Ukraine Tension
Crude prices were lifted on Monday, rising for the first time in three days as traders continue to focus on the escalated tensions in Ukraine, raising worries that the crises may weigh on global supplies. The North American WTI crude was boosted by the positive jobs data.
The European benchmark Brent crude for June settlement edged 0.13% higher at $108.74 per barrel on the London-based ICE futures Europe exchange at the time of writing. While futures for the North American West Texas Intermediate (WTI) crude for June delivery climbed 0.55% higher at $100.31 per barrel on the New York Mercantile Exchange.
The ongoing tension in Ukraine continues to weigh on the oil market and determine the oil prices.
“Oil production at Libya’s second-largest oil field, which has a daily production capacity of 340,000 barrels, cannot be resumed because other protesters are continuing to block a pipeline needed to transport the oil. If production can be resumed, this would significantly increase Libyan oil production and weigh on the Brent price accordingly,” according to a Commerzbank Corporates & Markets analyst note.
Crude – Ukraine
Over the weekend, the crises in Ukraine escalated, as Ukraine’s Interior Ministry forces were sent to drive out militants and release hostages, according to Minister Arsen Avakov. The crises in Odessa left 46 dead.
The US and European Union are blaming Russia for the ongoing crises in the eastern region of Ukraine and have threatened Russia with further sanctions.
In 2012, Russia produced 10.4 million barrels of crude a day and exported 7.4 million, according to reports from the EIA.
Crude – US Jobs
The US jobs reports released on Friday showed that 288,000 jobs were added in the jobs sector in April, marking the fastest pace of employment since February 2012 and surpassing analysts forecast of 218,000. Meanwhile the unemployment rate dropped from the previous figure of 6.7% seen in March to 6.3% in April.
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Stocks Market Report 5th May
Stocks – Europe
Stocks in the European region began the trading week lower as investors focus on the ongoing tension in Ukraine as the crises escalated over the weekend.
The European Euro Stoxx 50 slid 0.39% lower opening at 3,165.62, while the German DAX fell 23% to start at 9,534.04 at the time of writing. At the same time, the French CAC 40 lost 0.24% opening the session at 4,447.57, while markets in the UK were closed for a public holiday.
Economic Estimates
The European Commission will be publishing its spring economic forecasts for the European Union member states later in the day. The European Union executive arm will be releasing its forecasts for the euro region’s gross domestic growth, employment, debt and budget deficits for last year, this year and 2015.
The Eurogroup meeting will begin later in the day in Brussels and will be discussing a string of important topics including the ongoing tension in Ukraine, the inflation and exchange rate developments for the eurozone and more.
Meanwhile, the Portuguese Prime Minister, Pedro Passos Coelho, said that Portugal will end its three-year bailout program without seeking a precautionary credit from the European Union.
Stocks – Asia
Asian stocks were seen falling on Monday as the key Chinese manufacturing gauge contracted for the fourth month in a row, raising concerns that the world’s second largest economy’s slowdown is worsening.
Hong Kong’s Hang Seng index fell 0.98% to 22,043.53 points at the time of writing, while the mainland Chinese benchmark Shanghai Composite slid 0.88% to 2,008.53 points. HSBC’s Purchasing Managers’ Index (PMI) for last month came in at 48.1 from 48.3, coming in lower than analysts forecast of 48.4. Readings below 50 indicates contraction.
Markets in Japan and South Korea were closed on Monday for public holiday.
Australia
In Sydney, the benchmark S&P/ASX 200 index slipped 0.19% lower to 5,447.90 points as of 2.55am GMT. Mining company, Rio Tinto traded 1% higher, while BHP Billiton edged 0.7% higher on Monday.
Investors will be focusing on Tuesday’s cash rate announcement from the Reserve Bank of Australia (RBA), with forecasts that the banks 2.5% benchmark rate to remain unchanged.
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HY MARKETS News: Forex Report: EUR/CHF
EUR/CHF continues to fall after the recent reversal from the lower boundary of the resistance zone lying between the resistance levels 1.2225 and 1.2250. Both of these resistance levels stand close to the corresponding Fibonacci Correction levels of the preceding sharp intermediate impulse wave (1) from the start of January (38.2% and 50%).
The latest corrective wave (2) stopped at the top of the aforementioned resistance zone – interesting with the upper resistance trendline of the daily up channel from March. EUR/CHF is set to fall to the next sell target at 1.2150.
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