Luisa Moreno: Graphite, Lithium and REEs Essential to Hot Technologies

Graphite. Lithium. Rare earth elements. What do these metals and minerals have in common? They are playing bigger and more critical roles in widely used big kid toys like smartphones, tablets and electric vehicles. Investors can't stay on top of every hot commodity but Luisa Moreno, mining analyst with Euro Pacific Canada, offers some companies developing graphite, lithium and REE resources for the toys and technology of the future in this interview with The Mining Report.

The Mining Report: What are the key advantages of vein or lump graphite deposits over flake deposits?

Luisa Moreno: Two advantages of vein or lump graphite deposits would be the natural high-grade purity of the graphite in the ground, as well as the relatively low cost of production, most of which comes from Sri Lanka. Another important point is that it is usually sold at a premium price relative to natural flake graphite.

TMR: Are there any advantages flake deposits have over vein deposits?

LM: I think an advantage is that they have more applications. The flake graphite market is much larger. Vein deposits are quite rare and make up less than 1% of the market.

TMR: Flake graphite deposits can be high grade too, can't they?

LM: Flake graphite deposits can be high grade but you won't find deposits grading 90–99% in the ground. Flake deposits tend to run 2–3% graphite. Some deposits in Quebec have 16–20% grade. It seems that there's a correlation between grade and the recovery of larger natural flake. For instance, Northern Graphite Corporation (NGC:TSX.V; NGPHF:OTCQX) has a deposit grading about 2% graphite yet it has been able to recover more large flake relative to others with higher-grade deposits.

TMR: Which one should an investor prefer?

LM: To start, investors should look at these graphite companies just as they would look at any other mining company. They need to understand the feasibility of the project—the capital requirements, operating costs, etc. For industrial and critical materials it is also important to understand size of the market, the project time to market, the type of product it will produce and how much it could be sold for.

We talked about flake versus lump graphite deposits, but within the flake type products there are the finer flake, the medium and the larger flake, and it is important to understanding how much of each a mine can produce, as they are sold at different prices. The shape of the flakes and other characteristics also influence the price and applications. In the case of lump graphite, the market is estimated to be ~5,000 tons (5 Kt) per year, but it's relatively rare. If there is a company with a lump or vein graphite deposit that requires low capital and operating costs, has secured an offtake agreement and the project has strong economics, that could potentially be a good investment.

TMR: Where's that 5 Kt coming from now?

LM: It's coming mainly from Sri Lanka. AMG Advanced Metallurgical Group N.V. (AMVMF:OTC) is a major producer. It's a German firm that owns a subsidiary called Graphit Kropfmühl, which owns a lump graphite mine in Sri Lanka. The asset produces about 3 Kt of the 5 Kt estimated world production. The rest comes from a private company owned by the Sri Lankan government. Elcora Resources Corp. (ERA:TSX.V) has also secured a lump graphite deposit in Sri Lanka, and expects to bring the project into production in a short period of time. It seems that the company is attracting great interest from end-users looking for additional supply of lump graphite.

TMR: Each electric car uses about 50 kilos of graphite and electric carmaker Tesla Motors Inc. (TSLA:NASDAQ)is proposing a battery-producing plant in the U.S. dubbed the Gigafactory. Graphite juniors are touting a potential boost in demand for graphite. Should investors believe the hype?

LM: By sourcing materials and building a Gigafactory in North America, Tesla is trying to lower the production costs and thus the price of its electric vehicles (EV). But I don't think the Gigafactory is a done deal. Investors should closely follow what's going on with Tesla and understand its business. Standard & Poor's recently rated Tesla's credit as "junk" and that could certainly affect its ability to raise funds. I don't think it will deter Tesla from going ahead with its Gigafactory. There will likely be some challenges, but the company seems determined to build the factory to lower its production costs and make its advanced electric cars more affordable.

TMR: What was your reaction when you read Tesla's Gigafactory news release?

LM: When I first read it I thought that it could potentially be a game-changer, not just for electric cars, but for the strategic materials sector, namely lithium, graphite, cobalt and other materials that might be used in the EV batteries.

TMR: Some experts believe it could be easier for Tesla to rely on synthetic graphite rather than natural graphite. What's your view?

LM: The two aspects that Tesla likely will be looking at are performance of the materials and cost. If natural graphite can compete with synthetic graphite on cost and performance in lithium-ion batteries, I think natural graphite has a good chance to secure a position in Tesla's supply chain.

TMR: What are some publicly traded companies that have graphite projects that could meet Tesla's requirements?

LM: In the natural graphite space most of the listed companies have essentially flake graphite type deposits and it has been suggested that at the moment flake graphite has a more direct application in lithium-ion batteries. The most advanced company in the flake graphite space is Northern Graphite. It was the first graphite company listed on the Toronto Stock Exchange (TSX) to complete a feasibility study. Northern is now pursuing financing for its plant.

Another company that just completed a feasibility study is Focus Graphite Inc. (FMS:TSX.V; FCSMF:OTCQX; FKC:FSE). The company's Lac Knife deposit has relatively high grades, and metallurgical tests show that Focus can recover a good percentage of the large flake, which carries a higher price and could potentially be used in lithium-ion batteries. Focus is the only TSX-listed graphite company that has been able to secure an offtake agreement (up to 40 Kt per year) with an end-user. I think that's very positive.

TMR: Focus has a project in Québec. Northern has a project in Ontario. Are they in a better position because they are North American-based companies?

LM: Tesla has indicated that it would prefer to source its battery materials in North America, so these companies would likely be favored over companies that are not in North America. That said, if Tesla can achieve the sales that it believes it can by 2020, that could launch a new trend where we could see an increase in the sales of EVs across the board, not just with Tesla.

Recently Tesla CEO Elon Musk indicated that he is willing to share Tesla's intellectual property with other companies. Tesla is clearly trying to generate a much wider adoption of these vehicles, and we may see an increase in the adoption of EVs not just in North America, but also in Europe and Asia. While North American graphite projects could be favored by Tesla in its Gigafactory, other projects with sound economics would be in a very good position going forward as well.

TMR: We should note that you don't cover any graphite companies but that you may at some point. Lithium is also used in EV batteries. Could this factory also possibly change the economic outcome of certain companies in the lithium space?

LM: Certainly. EVs use more lithium and more graphite than hybrids. If we see a greater adoption of EVs, we would definitely see an increase in demand for lithium carbonate and lithium hydroxide—the lithium products that go into these batteries.

Our forecast for lithium is based on the sales of hybrid vehicles only, which could reach 3.8 million (3.8M) per year by 2020 versus less than 2M now.

Current estimated annual lithium demand is roughly 170–180 Kt. If EV adoption rates meet projections, estimates suggest that demand could go north of 250 Kt by 2020. That is a significant increase and it will offer the opportunity for new projects to be developed.

TMR: How many EVs are currently being produced?

LM: Industry estimates indicate that there are currently over 400,000 EVs on the road, compared to about 100,000 EVs in 2012. It seems that EV sales have doubled every year for the last three years and if this trend continues, over 1 million EVs may be on the road in three years.

TMR: Do you cover any lithium companies?

LM: We cover RB Energy Inc. (RBI:TSX), which was formed as a result of the merger between Sirocco Mining, an iodine mining company with assets in South America, and Canada Lithium, which has the Québec lithium deposit. RB Energy is advancing the Québec mine and plant and expects to reach annualized name plate capacity of 20 Kt by the end of this year.

TMR: RB Energy recently closed a $22M bought-deal financing. What will the funds be used for?

LM: It's for working capital, as well as for improvements at the plant. When the new management took over the Quebec lithium project, it decided to slow down commissioning to make plant improvements that would lower costs. Those include an ore sorter, as well as a gas pipeline.

TMR: Do you cover other lithium companies?

LM: The other name that we cover is Nemaska Lithium Inc. (NMX:TSX.V; NMKEF:OTCQX). Nemaska has the Whabouchi project, the second-highest lithium grade deposit in the world. It's also in Québec and has 20 million tons in Measured and Indicated resources. It is a project that we are watching very closely. It's in the early stages, but it has great potential.

TMR: Is having the second-highest grade deposit in the world enough to get a small modular plant built near James Bay in Québec?

LM: The grade alone wouldn't do it, but the fact that Nemaska has a sizeable deposit close to good infrastructure—hydropower, road access—and a positive feasibility study, means it could potentially build an economically competitive lithium mine and plant in Quebec.

TMR: In a June research update you listed four rare earth elements (REE) companies that recently arranged financings. These financings occurred at near record low share prices. One even offered a half a warrant with its deal. Is this simply life in the rare earths space right now or poor management?

LM: I think it's life in the mining space. If we look at the performance of most mining companies, especially the juniors, they've been struggling for a while. The REE juniors are no exception. Some investors are looking more at more advanced projects like Largo Resources Ltd. (LGO:TSX.V), which has a vanadium deposit that is close to reaching production, or Orbite Aluminae Inc. (ORT:TSX) and RB Energy, which are also close to commercial production. Companies with projects that only have a preliminary economic assessment or prefeasibility study and require $15–25M or more to reach the feasibility stage are finding it difficult to raise funds.

TMR: Are there signs the REE market could improve sooner rather than later?

LM: According to global economic estimates, we should see an increase in economic growth in the West, as well as in China, through the next couple of years. If we see that, I think that will be good news for REEs, as well as other critical metals. There could be a little light at the end of the tunnel here.

TMR: Some recent reports suggest that China may replace REE quotas with taxes. Please tell us more about the potential impact on the market.

LM: The World Trade Organization (WTO) ruled against China and its use of quotas. If China decides to comply with the recommendations of the WTO, I think that increasing taxes on REE exports or adopting tariffs would be effective ways China could still impose its policies.

China is determined to use rare earths resources to benefit its economy. China was supplying more than 90% of the world's REEs but only has about 36% of the world's resources.

TMR: Do you see the Gigafactory having any impact on REE demand?

LM: It is likely, as electrified vehicles use larger quantities of rare earth elements in magnets for their electric motors and in their more complex automotive systems.

TMR: A recent research report suggests that REE demand will grow at 6–10% annually through 2020. What accounts for that growth?

LM: It appears that some end-users are still using the stockpile material that they accumulated in 2011. Once those stockpiles diminish further we will see more end-users coming back to the market.

The other part of that is the normal growth in the economy. Demand for electronic products—cell phones, tablets, etc.—is in double digits in emerging markets. If we see the economic growth that's expected in the West and an increase in demand from emerging markets, over the next six years we may see a significant increase in REE demand.

TMR: Roughly speaking, how many development-stage REE projects reaching production would that growth in demand support?

LM: It depends. Some projects have production targets of 3 Kt, others 20 Kt. There is definitely opportunity for a few projects. We might see the need for about 100 Kt of new REE supply by 2020 if the global economy improves in a sustainable fashion. Asia is going to take some of the new supply as the consumption of China relative to the rest of the world may not change. I believe we should continue to see China as the largest consumer, followed by Japan.

TMR: What are some REE developers that you cover that are positioned to meet that demand?

LM: Some of the companies that may be well positioned are those that have been able to complete a positive feasibility study and those that have made significant advances in their metallurgy, examples include Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX) and Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX). Matamec is optimizing its metallurgical tests, while Avalon is focused on financing. Those two companies seem relatively well positioned to capture a significant increase in demand.

Another company that has made significant improvements in metallurgy is Northern Minerals Ltd. (NTU:ASX). Northern is now working toward a feasibility study. The company has a unique Xenotime REE deposit in Australia that favors the heavy rare earth elements (HREE). Without any chemical treatments, Northern has been able to produce a concentrate, unique to its deposit type, which is about 20% total rare earth oxides (TREO). Most others are not able to concentrate to those levels, so that's positive.

Another company with some positive results is Commerce Resources Corp. (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX), which has the Ashram deposit in Québec. The company recently has shown that it can produce a concentrate running 40% TREO. Commerce introduced a leaching step and with that it has been able to achieve a much higher grade concentrate. Both companies have shown positive metallurgy results.

TMR: Avalon recently did a deal with Solvay SA (SOLB:NYSE; SOLB:BRU) to eventually process in France concentrates from Avalon's Nechalacho REE project. What are your thoughts on that news?

LM: We saw a benefit in that Avalon should be able to decrease its capital costs by not having to build a separation facility. Also, the company will be effectively decreasing technical risk by entering this agreement with Solvay, which has rare earth refining experience. We're still waiting for an updated feasibility report from Avalon to give us a better sense of what the new capital and operating costs will be; the feasibility should be completed this year.

TMR: Can you get us up to date on what is happening in Alaska?

LM: The Alaskan state government has proposed a $144M bond that would help finance the development ofUcore Rare Metals Inc.'s (UCU:TSX.V; UURAF:OTCQX) Bokan-Dotson Ridge REE project. I think it's unprecedented. We haven't before seen local support such as what Ucore has received in Alaska. It shows that the Alaska government recognizes the Ucore project as strategic for the state and, likely, the U.S. The financing arrangement has been signed into law and is contingent upon the completion of a feasibility study for the Bokan project and positive due diligence by the Alaska Industrial Development and Export Authority (AIDEA). Ucore has received some funding as well from the Department of Energy and is working with different research groups in the U.S.

Ucore's deposit leans toward HREEs so the company would be able to produce some of the less common and more critical elements. Ultimately the company still has to complete a feasibility study and prove that the metallurgy is feasible; Ucore is diligently advancing forward the feasibility study.

TMR: Do you have some parting thoughts for critical metals investors?

LM: Over the previous five years or so industrial metals and minerals have been increasingly adopted for use in advanced technologies. For instance, europium and thulium are used in LCD screens. High purity alumina and some rare earths are used in LED lights, which are replacing less efficient incandescent lights. Some rare earths are used to make magnets that go into motors. And these metals are being used to create even lighter strong metals. For instance, scandium and aluminum alloys have strength similar to titanium with the lightness of aluminum. There are so many different applications, but essentially these strategic materials are being used to improve our technologies and they're here to stay.

TMR: Thank you for taking the time to talk with us, Luisa.

Luisa Moreno is a mining and metals analyst with Euro Pacific Canada. She covers industry metals with a major focus on electric and energy metal companies. She has been a guest speaker on television and at international conferences. Moreno has published reports on rare earths and other critical metals and has been quoted in newspapers and industry blogs. She holds bachelor and master degrees in physics engineering, as well as a Ph.D. in materials and mechanics from Imperial College, London.

Want to read more Mining 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) 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: Commerce Resources Corp., Focus Graphite Inc., Largo Resources Ltd., Nemaska Lithium Inc., Northern Minerals Ltd. and Ucore Rare Metals Inc. Streetwise Reports does not accept stock in exchange for its services.
3) Luisa Moreno: 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: None. 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.
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.

Streetwise – The Mining Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Source Page Read more: http://www.theaureport.com/pub/na/luisa-moreno-graphite-lithium-and-rees-essential-to-hot-technologies

Gissen & Berol: The Hidden Factors Affecting Gold Prices

The Gold Report: Malcolm and Marshall, the GOP and the Obama administration are at a stalemate over how to tackle America's $1.4 trillion deficit. The problem has rating agency Standard & Poor's threatening to lower America's top-notch credit rating unless a solution is reached soon. A similar stalemate could happen again in a few weeks when Congress votes on whether or not to raise America's debt ceiling above $14.3 trillion to avoid defaulting on existing loans. Is partisan politics in America threatening America's long-term financial security and, ultimately, driving up the gold price?

Malcolm Gissen: Absolutely. We are concerned that such hostile environments in state capitals and in Washington D.C. have made it very difficult for Democrats and Republicans to work together for solutions that benefit all of us. It seems everything is about getting elected and re-elected instead of doing what's best for the country. We believe this factor will continue to drive up the price of gold and silver. The stalemate over the budget, both in various state houses, and in Washington, has so polarized our country that we believe it's having a detrimental impact on markets. All of this plays well into hard assets because when people are worried about their economies, inflation and their own lifestyles, they tend to invest in hard assets. And this is something we've taken advantage of with the Encompass Fund and our client accounts. 

Marshall Berol: While Malcolm and I often agree on investment philosophies and style, we have somewhat differing views on political issues. But I certainly agree with him that party politics are negatively affecting the people and country and that it's one of a number of aspects driving up the gold price.

TGR: Gold recently climbed past $1,500/oz. Do you believe further upward momentum could be curtailed by the inevitable "sell in May and go away" sentiment?

MB: It could be, but the emphasis would be on "could." If so, it would be a short-term effect. We remain very positive about the upward trends for gold and silver on a longer-term basis and that's 6 months, 12 months and further out. There could be some correction over the next few months and it could be related to sell in May and go away, or it could be the summer doldrums. More likely there would be some profit taking due to the fact that gold is now over $1,500/oz.—a new all-time high and silver is roughly $48/oz. and also approaching a new all-time high. 

Our experience in managing the Encompass Fund and individual client accounts over many, many years is that, when a concept or theory becomes well known, it often doesn't continue to work. Sell in May and go away is certainly in the forefront of people's thinking this year and probably the last couple of years. It very well could be that, because it is foremost in people's consciousness, it's not going to happen.

MG: We invest in a number of junior mining companies, including precious metals juniors. The companies the Encompass Fund invests in tend to be those making lots of progress. They're exploring, drilling, moving toward production and enhancing their value. There's a stream of good news that's coming out of these companies and that moves the stock price regardless, almost, of what's going on in the markets. As these companies make terrific progress, the Encompass Fund believes they will be rewarded in the marketplace. We don't invest more or less in gold companies based on the time of the year; the Encompass Fund invests in outstanding companies that we believe are making progress.

TGR: How much is your fund up so far this year?

MG: The fund is up about 3% this year. Morningstar puts the Encompass Fund in the World Stock Fund category and for one year, the category was up 14.17%. As of March 31, 2011, the fund was up 51.5%. It's very unusual for a fund to outperform its category by more than 1, 2 or 3 percentage points. So, to outperform by 36% is very unusual. Over three years (to March 31), the Encompass Fund has gained a 19.6%-per-year average annual return, compared to about 1% for the World Stock Fund category.

TGR: And to what do you attribute that?

MB: The fund is set up as a no-load mutual fund on a go-anywhere basis. We can invest in companies of any size. We can invest domestically or internationally, and we do; we can also invest in any industry or sector. While we've focused on gold and resource companies since we launched the fund in June 2006, we're not solely a resource or gold fund. We have holdings in other categories. We're stock investors—we don't use futures. It's the focus on the resource companies that has enabled the Encompass Fund to perform so well because the gold and silver stocks and rare earth elements (REE), copper, uranium, coal, gas and other commodities are doing very well. 

MG: We have four people here who are involved in sourcing ideas, doing research and monitoring the positions in the fund. All of us have a minimum of 15 years' experience and a few of us have 25 years' experience. Over the last 10 years, we've formed relationships with brokerage firms doing business around the world. Those relationships not only provide us access to outstanding analysts and their best ideas, but it also brings us opportunities for private placements in companies on very attractive terms. These are companies that have very high growth potential; thus, we provide exposure to sectors and companies that very few, if any, other American mutual funds provide.

TGR: Indeed. As Marshall said, your fund is heavily weighted toward resource companies and particularly junior explorers seeking economic concentrations of hard assets like gold, silver, oil and gas or uranium. These small segments of the market are currently outperforming the broader market, but how long do you think that's going to continue?

MG: We live in unusual economic times, and we believe the explosive growth we're seeing in developing economies will likely continue for the next 10–20 years. This growth requires enormous amounts of resources whether they be energy, precious or other metals; and as a result, we believe that resource companies should perform very well over the longer term. 

MB: Historically, the small caps have outperformed the large caps. We're investing for the long term and our experience has been that the smaller companies—the mid-cap, small-cap or micro-cap companies—are more likely to have that long-term growth than are large companies. A large company is more stable but it's less likely to have the kind of growth that we think can be obtained with smaller companies. Some examples would be Barrick Gold Corp. (TSX:ABX; NYSE:ABX) and Newmont Mining Corp. (NYSE:NEM). Those are fine companies but they're not going to grow their companies and, hence, the stock prices as quickly as many of the companies we have in the Encompass Fund portfolio. Having said that, we do have positions in some larger companies, such as Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), which we think is just an excellent copper and gold company. It's the world's largest publicly owned copper producer and also a large gold producer; very well managed. But we tend to lean toward the small-cap and micro-cap companies.

TGR: Could you tell us about a few of those companies? Let's start with some names in the gold and silver space.

MG: A gold company that we have invested in for about three years is Avion Gold Corp. (TSX:AVR; OTCQX:AVGCF). Initially, we invested at roughly $0.10 about three years ago. Avion has since become a gold producer in West Africa and is now trading at around $1.65. 

TGR: Was that initial position part of a private placement? 

MG: Yes it was, and then we bought more in the open market and got stock in warrants. In fact, we're exercising the warrants now because they expire in a couple of weeks. The warrants were at $0.65; so, we've had a very big gain. Avion's production was about 51,000 ounces (Koz.) in 2009 and around 87 Koz. in 2010. This year, it anticipates producing about 100 Koz. With gold at $1,500/oz., that's $150M in cash flow. Avion has very good grade in its mines in Mali. The company's doing further exploration and getting very good results. In addition, it has and is exploring properties in Burkina Faso, also in West Africa. The results look promising and the company expects to complete an NI 43-101-compliant resource estimate during the second quarter of this year.

TGR: Avion owns 80% of the Segala, Tabakoto and Dioulafoundou gold deposits in Mali. Those are currently open-pit operations, but Avion is going to head underground at some point, correct?

MG: That's correct. And we believe, with the grade it's getting and the exploration results, Avion should be expanding its resource. The 43-101 will be important because it will provide verification for what the company's doing. Many larger gold companies wait for junior miners to produce a 43-101 report before they start getting interested in the junior, in terms of a possible acquisition.

TGR: One thing raising some eyebrows with Avion is its cash costs per ounce. What are your thoughts on that?

MG: Avion's cash costs have been a bit high. The company has focused on reducing cash costs and expects that it will reduce them.

MB: It's also a function of increased production. Avion has increased production steadily and feels that it will continue increasing production, which should bring down the cash costs. Cash costs are certainly an important factor to look at; but regardless of whether you're looking at $450–$500, or even $550/oz. cash costs, with gold at $1,400–$1,500/oz., that's still a healthy margin for any company.

TGR: Have you met with Avion management?

MG: Yes. We should point out that we meet with the managers of almost all the companies in which we invest. We try to get very close to these companies, so we can call and talk to them on a regular basis and get updated on any developments. A good number of the CEOs of the companies in which Encompass invests call us regularly. I should point out this is not insider information, but we do like to keep abreast of the companies in which Encompass is invested.

MB: With a smaller company, we find that it's more valuable to have met and sized up management. 

TGR: It's also a matter of reducing the risk because, if you meet and get a good sense of management, you go into that investment with a greater feeling of security.

MB: That's very true, and each of the four of us involved in portfolio decisions has a good amount of experience in meeting with companies. We feel it's very helpful in determining whether or not to invest in a company, or whether to sell some or an entire position in a company after we've invested. We also believe in doing site visits to the projects of the various companies in which we're invested or interested.. We find it's very helpful to meet not just top management, but also the people involved in exploring the project or running the mine.

TGR: What about some other silver and gold names that you like?

MG: Another company that we like is Extorre Gold Mines Ltd. (TSX:XG; NYSE.A:XG; Fkft:E1R;), which is a Canadian company that has some excellent projects in Argentina. It was spun off from Exeter Resource Corp. (TSX:XRC; NYSE.A:XRA; Fkft:EXB). What we like about Extorre is that its projects are near a lot of infrastructure—and those projects are extremely high-grade. The company recently announced some additional drill results from its flagship project, Cerro Morro, and the grade was very impressive. Also, the project should be easy to get into production—maybe even by the end of 2012. Of course, we like the management. Extorre's a very aggressive driller, which we also like and the drilling results have been incredibly attractive. Extorre has a lot going for it.

TGR: Cerro Morro is not far from Goldcorp Inc.'s (TSX:G; NYSE:GG) Cerro Negro gold-silver project in Argentina, which it bought from Andean Resources for $3.5B last year. Does that increase the odds of Extorre being a takeover target?

MG: Extorre certainly could be a takeover target and its management pointed that out when Andean was taken over by Goldcorp, including what it paid. However, Extorre Cochairman Yale Simpson recently said: "We are not selling; we have a lot further to go. We have a great resource and want to continue drilling, and we are not going to sell the company."

MB: Most companies have managements that portend to continue exploration—drilling, then on to an NI 43-101 report, then prefeasibility and feasibility studies, developing a mine and getting it into production. That happens, sometimes. But more often, another company comes along with an offer that's too good to refuse and the company either winds up selling the project or the company. That was the case with Andean. Depending on whose numbers you use, Andean was bought for $900–$1,100/oz. gold in the ground—but Goldcorp recently reported a doubling of the amount of reserves at that project. 

We don't buy a company because we think it will be bought or because its project is going to be bought. That's the icing on the cake. The Encompass Fund isn't buying based on takeout rumors—it's buying based on good, solid projects and good, solid companies. If a buyout comes, and the Encompass Fund has had several buyouts over the course of its life, that's great and we're happy to get the additional premium that comes with the deal.

TGR: Extorre is trading in the $9–$10 range. How much did you pay for it?

MB: Several years ago, we bought Exeter; as a matter of fact, when we started Encompass Fund in June 2006, we bought Exeter and added to it over the succeeding years. Then in early 2009, Extorre was spun out of Exeter on a 1-for-1 stock basis. On the suggested tax-basis split of 80% of the original cost to Exeter and 20% of cost to Extorre, Encompass' cost was roughly $0.40 per XG share. Subsequently, we sold some Extorre when the Fund had a very substantial gain—and sold more when it continued to go up. After that, we bought additional shares because of the company's continued excellent drilling results. Extorre is making excellent progress. We continue to like it and buy it.

TGR: In addition to your success with gold and silver juniors, you've also had success with rare earth plays. What are some REE plays that you're excited about?

MB: Encompass Fund initially invested in Avalon Rare Metals Inc. (TSX:AVL; NYSE.A:AVL; OTCQX:AVARF) in September 2007 at $1.81 and has added to it since then. Avalon's current price is about $9/share. Another company that is involved with REEs, but with a very different business model, is Dacha Strategic Metals Inc. (TSX.V:DSM; OTCQX:DCHAF). Dacha is an investment company that is focused on the acquisition, storage and trading of strategic metals, primarily REEs. We think Dacha is very attractive and underappreciated in the marketplace. 

As your readers are aware, 95% of the current REE supply comes from China, which has been enforcing export quotas. And the prices of the metals are rising due to industrial countries' increasing difficulty to source them. Dacha was set up a couple of years ago with the proper licenses to buy REEs in China, store them (primarily outside of China), and then sell and trade them to various customers. It's been doing this successfully for a couple of years now. Dacha's a low-priced stock—it currently has a net asset value (NAV) around CAD$0.68/share—but it's trading at about CAD$0.46/share. There are some concerns about whether the company can source the material coming out of China, warehouse it and sell it. But Dacha's been able to do that so far, and we think it will continue doing so, which is why the Fund owns it.

TGR: Could one of the other reasons that Dacha's share price is lagging its NAV be that its biggest customer base is in Japan? As we all know, Japan suffered a major earthquake and tsunami and a lot of its manufacturing has been affected.

MB: It's possible. I can't comment on if it's selling as robustly as it would like to, but it is selling. Some sales have been reported over the last several months. The situation in Japan is tragic and it's extremely unfortunate, but it's not going to affect Japanese manufacturing on a long-term basis; it's a shorter-term situation. Another aspect of Japan's earthquake and tsunami is the aftereffect on uranium stocks. We have since added to Encompass' positions in uranium stocks we already own and initiated some positions in other uranium producers because those stocks effectively went on sale.

TGR: Can you provide a few uranium names that you were able to get at lower prices given the onset of the nuclear problems in Japan?

MB: Yes, one of the larger holdings in the Encompass Fund portfolio is Uranium Energy Corp (NYSE.A:UEC). Before the Japanese disaster, it was selling at over $5/share and very briefly dipped down to $3/share. We added to our position at around $3.25–$3.40 per share. Another company that we liked and wanted to have a position in but at a better price is Ur-Energy Inc. (NYSE.A:URG; TSX:URE), which also went down 40%–45% in price. We initiated a position in URG and have since added to it. Another company I will mention quickly is Tournigan Energy Ltd. (TSX.V:TVC, FSE:TGP), which has a uranium project in Slovakia.

TGR: What do you think is the next milestone for gold? And will we reach it in 2011?

MB: The next milestone is further all-time highs. At the Encompass Fund, we've invested in certain gold companies and added various others for the last several years while people were saying things like, "It's a bubble," "It's a top" or "It's not going higher." We didn't believe that was the case, and we still don't think that's the case regardless of whether pundits gave it a $1,500/oz. price target. We're there and now they're talking about $1,600, $1,800 or $2,000/oz gold. We'll likely get to those amounts, we just don't know when. It is very difficult to put any specific price on it. So, at this point, we'll continue to stay tuned and invested. We're holding a larger amount of cash now than we often do—around 30%. And we're looking for opportunities to put that cash to work. 

TGR: Thank you for talking with us today, gentlemen.

Malcolm Gissen founded Malcolm H. Gissen & Associates Inc., an investment advisory services firm, in 1985. He has been an investment advisor since 1985 and has managed separate accounts since 1999. Mr. Gissen's management experience has focused primarily on investments in publicly traded companies. Mr. Gissen has a BS degree from Case Western Reserve University and a JD from the University of Wisconsin. 

Marshall Berol has been engaged as an investment manager in San Francisco, CA since 1982. Since 2000, he has been the chief investment officer of Malcolm H. Gissen & Associates, Inc. In addition, Mr. Berol has owned his own investment firm, BL/SH Financial for more than 20 years. His investment management experience has focused primarily on investments in publicly traded companies. Mr. Berol did his undergraduate work at the University of California (Berkeley) and received a JD from the University of San Francisco School of Law.

Mr. Gissen and Mr. Berol cofounded Encompass Fund, a no-load mutual fund, in June 2006 and are the Fund's coportfolio managers.

Want to read more exclusive 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 Expert Insights page.

DISCLOSURE: 

1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Gold Report or The Energy Report: Avion, Extorre, Exeter, Goldcorp, Dacha, Uranium Energy Corp. and Ur-Energy.

3) Malcolm Gissen: I personally and/or my family own shares of the following companies mentioned in this interview: Encompass Fund, Freeport-McMoRan, Avion, Extorre, Exeter, Dacha and Uranium Energy Corp. I personally and/or my family am paid by the following companies mentioned in this interview: None.

4) Marshall Berol: I personally and/or my family own shares of the following companies mentioned in this interview: Encompass Fund, Freeport-McMoRan, Avion, Extorre, Exeter, Dacha, Uranium Energy Corp. and Tournigan. I personally and/or my family am paid by the following companies mentioned in this interview: None.

Source Page Read more: http://www.businessinsider.com/gissen-and-berol-the-hidden-factors-affecting-gold-prices-2011-5#ixzz36sXSVPgH