As a general rule, the most successful man in life is the man who has the best information

In July 1944, delegates from 44 nations met at Bretton Woods, New Hampshire - the United Nations Monetary and Financial Conference - and agreed to “peg” their currencies to the U.S. dollar, the only currency strong enough to meet the rising demands for international currency transactions.

Member nations were required to establish a parity of their national currencies in terms of the US dollar, the "peg", and to maintain exchange rates within plus or minus one percent of parity, the "band."

What made the dollar so attractive to use as an international currency was each US dollar was based on 1/35th of an ounce of gold, and the gold was to held in the US Treasury. The value of gold being fixed by law at 35 US dollars an ounce made the value of each dollar very stable.

The US dollar, at the time, was considered better then gold for many reasons:

• The strength of the U.S. economy
• The fixed relationship of the dollar to gold at $35 an ounce
• The commitment of the U.S. government to convert dollars into gold at that price
• The dollar earned interest
• The dollar was more flexible than gold

There’s a lesson not learned that reverberates throughout monetary history; when government, any government, comes under financial pressure they cannot resist printing money and debasing their currency to pay for debts.

Lets fast forward a few years…

The Vietnam War was going to cost the US $500 Billion. The stark reality was the US simply could not print enough money to cover its war costs, it’s gold reserve had only $30 billion, most of its reserve was already backing existing US dollars, and the government refused to raise taxes.

In the 1960s President Lyndon B. Johnson's administration declared war on poverty and put in place its Great Society programs:

• Head Start
• Job Corps
• Food stamps
• Medicaid
• Funded education
• Job training
• Direct food assistance
• Direct medical assistance

More than four million new recipients signed up for welfare.

During the Nixon administration welfare programs underwent major expansions. States were required to provide food stamps. Supplemental Security Income (SSI) consolidated aid for aged, blind, and disabled persons. The Earned Income Credit provided the working poor with direct cash assistance in the form of tax credits and welfare rolls kept growing

Bretton Woods collapsed in 1971 when Nixon severed (known as the Nixon Shock because the decision was made without consulting the other signatories of Bretton Woods, even his own State Department wasn’t consulted or forewarned) the link between the dollar and gold – the US dollar was now a fully floating fiat currency and the government had no problem printing more money. With gold finally demonetized the US Federal Reserve (Fed) and the world’s central banks were now free from having to defend their gold reserves and a fixed dollar price of gold.

The Fed could finally concentrate on achieving its mandate - full employment with stable prices - by employing targeted levels of inflation. The Fed’s  ‘Great Experiment’ had begun – the objective being a leveling out of the business cycle by keeping the economy in a state of permanent boom - gold's "chains of fiscal discipline" had been removed.

But there was a problem - because of the massive printing of the US dollar to cover war and welfare reform costs Nixon worried about the strength of his country’s currency – how do you keep the U.S. dollar as the world’s reserve currency, how do you keep demand strong, if one you remove gold’s backing and two print it into oblivion?

Recognizing that the US, and the rest of the world, was going to need and use more oil, a lot more oil, and that Saudi Arabia wanted to sell the world’s largest economy (by far the US) more oil, Nixon and Saudi Arabia came to an agreement in 1973 whereby Saudi oil could only be purchased in US dollars.  In exchange for Saudi Arabia's willingness to denominate their oil sales exclusively in U.S. dollars, the United States offered weapons and protection of their oil fields from neighboring nations.

Nixon also abolished the International Monetary Fund’s (IMF) international capital constraints on American domestic banks. This allowed Saudi Arabia and other Arab producers to recycle their petrodollars into New York banks.

Global oil sales in U.S. dollars caused an immediate and strong global demand for US dollars – the ‘Petrodollar’ was born.

By 1975 all OPEC members had agreed to sell their oil only in US dollars in exchange for weapons and military protection.

“In a nutshell, any country that wants to purchase oil from an oil producing country has to do so in U.S. dollars. This is a long standing agreement within all oil exporting nations, aka OPEC, the Organization of Petroleum Exporting Countries. The UK for example, cannot simply buy oil from Saudi Arabia by exchanging British pounds. Instead, the UK must exchange its pounds for U.S. dollars…

 

This means that every country in the world that imports oil—which is the vast majority of the world's nations—has to have immense quantities of dollars in reserve. These dollars of course are not hidden under the proverbial national mattress. They are invested. And because they are U.S. dollars, they are invested in U.S. Treasury bills and other interest bearing securities that can be easily converted to purchase dollar-priced commodities like oil. This is what has allowed the U.S. to run up trillions of dollars of debt: the rest of the world simply buys up that debt in the form of U.S. interest bearing securities.” Christopher Doran, Iran and the Petrodollar Threat to U.S. Empire

As developed economies grew and prospered, as developing economies took center stage with their massive urbanization and infrastructure development plans their need for oil grew, and so too did the need for new U.S. dollars, as demand grew the currency strengthened.  The U.S. Dollar quickly became the currency for global trades in almost every commodity and most consumer goods, it wasn’t used just for oil purchases anymore. Countries all over the world bought, had to buy, more and more dollars to have a reserve of currency with which to buy oil and ‘things.’ Countries began storing their excess US dollar capacity in US Treasury Bonds, giving the US a massive amount of credit from which they could draw.

There’s no disputing the U.S. greenback is the world's currency - the dollar is the currency of denomination of half of all international debt securities and makes up 60 percent of countries foreign reserves.

The Petrodollar replaced the Gold Standard

Currently the only source of backing for the U.S. dollar is the fact that oil is priced in only U.S. dollars and the world must use the Petrodollar to make their nation’s oil purchases or face the weight of the U.S. military and economic sanctions. Many countries also use their Petrodollar surplus for international trade - most international trade is conducted in U.S. dollars.

It’s very obvious that the United States economy, and the global economy, are both intimately tied to the dollar's dual role as the world’s reserve currency and as the Petrodollar.

“Trade between nations has become a cycle in which the U.S. produces dollars and the rest of the world produces things that dollars can buy; most notably oil. Nations no longer trade to capture comparative advantage but to capture needed dollar reserves in order to sustain the exchange value of their domestic currencies or to buy oil. In order to prevent speculative attacks on their currencies, those nations’ central banks must acquire and hold dollar reserves in amounts corresponding to their own currencies in circulation. This creates a built-in support for a strong dollar that in turn forces the world’s central banks to acquire and hold even more dollar reserves, making the dollar stronger still.” Harvey Gold, Iran’s Threat to the U.S. – Nuclear or the Demise of the Petrodollar?

It’s also very obvious that if global Petrodollar demand were ever to crumble the use of the U.S. dollar as the world’s reserve currency would abruptly end.

The consequences:

• Energy costs would rise substantially. American’s, because their dollar is the world’s reserve currency and they control it, have been buying oil and gasoline for a fraction of what the rest of the world pays.

• There would be substantially less demand for dollars and U.S. government debt. All nations that buy oil and hold U.S. dollars in their reserves would have to replace them with whatever currency oil is going to be priced in - the resulting sell-off would weaken the U.S. currency dramatically.

• Interest rates will rise. The Federal Reserve would have to increase interest rates to reduce the dollar supply.

• Foreign funds would literally run from U.S. stock markets and all dollar denominated assets.

• Military establishment collapses.

• There would be a 1930s like bank run.

• Dollar exchange rate falls. The current-account trade deficit would become unserviceable.

• The U.S. budget deficit would go into default. This would create a severe global depression because the U.S. would not be able to pay its debts.

Buying Dead Flowers

No Dutch Disease In Greenland

Richard (Rick) Mills
Ahead of the Herd

As a general rule, the most successful man in life is the man who has the best information

Greenland is located in the North Atlantic Ocean adjacent to the Canadian arctic archipelago. About 80 per cent of Greenland is ice cap that can be up to 3kms thick. Approximately one-twentieth of the world's ice and one-quarter of the earth's surface ice is found in Greenland – the ice-free zone around the ice cap is up to 300 kms wide and covers an area of 410,000 km² (area of Germany is 357,000 km).

Norsemen settled on the uninhabited southern part of Greenland in the 10th century.

“The descendants of the Vikings had persevered in their North Atlantic outpost for almost 500 years, from the end of the 10th century until the mid-15th century. The Medieval Warm Period had made it possible for settlers from Norway, Iceland and Denmark to live on hundreds of scattered farms along the protected fjords, where they built dozens of churches and even had bishops.” Günther Stockinger, Abandoned Colony in Greenland: Archaeologists Find Clues to Viking Mystery

Greenland has been inhabited, on and off, by Arctic peoples for up to 5,000 years. The Thule are the prehistoric ancestors of the current Greenlandic Inuit population. They left Alaska about 1000 AD and arrived in Greenland, via dogsleds (usually made of driftwood with whalebone runners) and umiaks (large whaling and travelling boats constructed with a frame of walrus ribs covered with walrus hide), in the 13th century.

The Norse colonies had disappeared by 1500 AD, beaten by a cool climate turned much colder by the Little Ice Age – a period of cooling extending from about 1350 to roughly 1850.

According to radio-carbon dating of plant material it was almost the geological equivalent of turning off a light switch. Between 1275 and 1300 AD summers suddenly turned very cold, seas normally open froze over and glaciers started their inexorable advance. Between 1430 and 1455 AD the cold intensified substantially.

Contact was re-established between Scandinavia and Greenland in the early 18th century and Denmark established rule over Greenland.

In 1979, Denmark granted home rule to Greenland. In 2008, Greenland voted to transfer more power from the Danish royal government to the local Greenlandic government. This became effective the following year. The 2009 Act on Greenland Self-Government gave Greenlanders authority over a number of new sectors including mineral resource activities.

Copenhagen remains constitutionally responsible for Greenland’s foreign, defense and security policy.

As previously mentioned approximately 80 percent of Greenland is covered by ice with the exposed area forming a fringe around the coast. These non ice covered coastal areas - geological terrain that is simply an extension of the Canadian Shield - expose numerous mineral belts that are highly prospective for gold, lead, zinc, uranium, molybdenum, copper, tantalum and niobium, iron ore, nickel, several forms of industrial minerals, platinum group elements (PGE), diamonds, cobalt, rubies and rare earth elements (REEs).

As competition from the developing world pushes up the price of energy and minerals finding new sources of supply is crucial.

The combination of a stable political and regulatory landscape, global warming thawing Arctic sea lanes and large mineral reserves have made ‘Kalaallit Nunaat - Country of the Greenlanders’ an increasingly attractive location to look for minerals.

The population of Greenland is 56,648 with 14,719 inhabitants living in the capital Nuuk (formerly Godthab). The majority of Greenland’s population live in towns along the fjords in the southwest of the country where the climate is relatively mild.

There are no roads between the towns on the coast so people travel by airplanes, helicopters or by boat.

Greenland is far from financially self-sufficient – currently there is just the revenue from fishing and a little tourism, there is no manufacturing sector.

Half of the Self-Rule administration’s revenue is derived from the annual 3.5 billion kroner grant from Denmark.

A shortage of labor and the lack of infrastructure are the most formidable challenges facing the country. Both are huge stumbling blocks in the countries quest for self sufficiency and financial independence by utilizing its natural resources. 

The benefits from the country’s emerging mining industry will include:

• Employment and job training for some of the highest paying jobs in the country. Provide jobs in ‘rural’ areas of the country with involvement of local laborers and local companies
• Education
• Infrastructure improvements in communities/cities. Also improvements in remote areas that remain long after each particular mine has shut down
• Financial independence from Denmark, significant tax revenues or royalties for government
• Business and investment opportunities

Mines need their own power plants and transportation facilities such as runways. Other projects, such as the planned construction of an aluminium smelter (Alcoa Inc. plans to launch a US$ 2 billion aluminum-smelting project in Greenland with an annual capacity of 360,000 tons as well as two hydroelectric power plants) would require first building basic infrastructure - roads, power plants and port facilities. It is estimated that the aluminium smelter alone would require over 5,000, mostly imported, workers to build.

Greenland, with a population of just over 56,000 and a workforce of only 36,000, is unable to provide the necessary labor to tackle their infrastructure issues on anything but a much smaller scale.

That is why the Greenlandic Parliament passed an act allowing large-scale extraction projects to use imported labor and contractors during the development phase of the projects. When the development phase is over the migrant workers must leave the country and the indigenous workforce will replace them.

Greenland’s Bureau of Minerals and Petroleum (BMP) has so far awarded 150 licences for mineral exploration with around 600 million kroner spent by companies in 2012 - just ten years ago there were almost no requests for mining licences. Figures from the BMP show that the area covered by mining licenses increased over the last ten years from approximately 6,000 km² to well over 40,000 km².

A list can be downloaded here showing all active licenses and current applications.

Plans are on the table for a 12 billion kroner iron ore mine. London Mining (London Mining is a United Kingdom (UK) company, but most of the finance and direction comes from China) is going to use Chinese workers to build the mine, as well as to build power plants, new roads and a port near Nuuk - construction could start at the Isua iron ore deposit in 2013 and Greenland stands to earn a billion kroner in tax revenue.

China is presently leading the race to develop Greenland’s resources with several Chinese companies trying to establish a presence in the country.

Chinese investors are reportedly preparing to put 1.3 billion kroner into major infrastructure projects, including three new airports and the expansion of port facilities in Nuuk - Chinese labor will be used in these projects.

But Greenland has strong historical ties to the European Union (EU) through Denmark and the Chinese will face stiff competition from not only the EU and Denmark, but from South Korea as well.

EU Industry Commissioner Antonio Tajani was in Nuuk last summer (2012) to sign a letter of intent (LOI) to cooperate with Greenland on its raw materials. South Korean President Lee Myung-bak signed several memorandums of understanding (MOU) with Nuuk in 2012, paving the way for Korea-backed science, exploration and resource development efforts in Greenland.

Currently Canadian and Australian listed company’s dominate the mining exploration sector.

Proponents of Chinese investment say it will leave behind the infrastructure the country needs to develop but can’t build on its own. Detractors would say that while Chinese investments were first welcomed by African states (there are roughly one million Chinese nationals working in Africa) poor construction, questionable business practices and a reluctance to use local workers brought a swift end to China’s African honeymoon.

“Once the projects get started, they will influence many aspects of life in Greenland along the way.” Kuupik Kleist, Greenland’s highest elected official

Conclusion

Dutch disease, in economics, means that an increase in revenues from natural resources will make a nation's currency stronger compared to that of other nations. The stronger currency has the effect of making exports more expensive for other countries to buy, thus making the manufacturing sector less competitive.

Greenlanders are soon going to reap the possible benefits - economic self-sufficiency and full independence from Denmark - of an international push to exploit its abundant natural resources.

The Danish Centre for Environment and Energy (DCE) has helped government officials in Nuuk carefully lay out stringent environmental guidelines. Mining activities, in regards to environmental, health and safety protection are also regulated by the Mining Act passed in 2009.

The rewards sure to come from investing in a few quality junior resource companies working in Greenland should be on all our radar screens. Is investing in Greenland on your screen?

If not, maybe it should be.

Richard (Rick) Mills

rick@aheadoftheherd.com

www.aheadoftheherd.com

Richard is the owner of Aheadoftheherd.com and invests in the junior resource/bio-tech sectors. His articles have been published on over 400 websites, including:

WallStreetJournal, SafeHaven, MarketOracle, USAToday, NationalPost, Stockhouse, Lewrockwell, Pinnacledigest, UraniumMiner, Beforeitsnews, SeekingAlpha, MontrealGazette, CaseyResearch, 24hgold, VancouverSun, CBSnews, SilverBearCafe, Infomine, HuffingtonPost, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Wealthwire, CalgaryHerald, ResourceInvestor, Mining.com, Forbes, FNArena, Uraniumseek, FinancialSense, Goldseek, Dallasnews, SGTReport, Vantagewire, Resourceclips, Indiatimes, ninemsn, ibtimes, jsmineset and the Association of Mining Analysts.

If you're interested in learning more about the junior resource and bio-med sectors, and quality individual company’s within these sectors, please come and visit us at www.aheadoftheherd.com

***

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.

Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified.

Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.

Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

What makes a metal critical:

·         The availability or lack of these elements can have major impacts on energy systems and significantly increased demand could strain supply. That could cause massive price increases or even unavailability and therefore discourage the use of new technologies

·         Most of these critical elements are produced as byproducts in the production of other metals so ramping up production can be extremely difficult

·         Relentless demand for high-tech consumer products in emerging countries

·         Ongoing material research that is exploding uses for these critical metals

·         Very low substitutability

·         Virtually no recycling

·         Because of the relative scarcity of critical metals their extraction often involves processing large amounts of materials which sometimes causes unacceptable environmental damage and, because critical metals are often a byproduct of the production of other metals, the timeline required for new production is dependent on the price of those other metals

·         Critical metals also have a very high supply risk because a large share of the worldwide production comes mainly from a handful of countries

The U.S. Department of Energy says materials used in four clean energy technologies: wind turbines, electric vehicles, solar cells and energy efficient lighting are critical now. The American Physical Society's Panel on Public Affairs and the Materials Research Society coined the term "energy critical element" to describe elements that are essential to one or more of the new energy-related technologies. The European Union commissioned a report that identified 14 materials critical to the EU.

Only four metals or element groups made all three lists: Rare Earth Elements (REE), platinum group elements (PGE), lithium and cobalt.

Cobalt

Green initiatives have become a global focus point for many investors.

There can be absolutely no dispute that cobalt holds a critical role in the future green energy economy for its use in solar panels and in the blades and magnets for wind turbines and for its use in the rechargeable batteries used in electric vehicles and consumer electronics. Cobalt is also used in the high-speed, high-strength wear-resistant alloys that are used in aerospace and military technologies. Cobalt also has many industrial uses such as a catalyst in desulfurizing crude oil and in hydrogen generation oxidation. It is used in natural gas-to-liquid technology, orthopedics and life sciences.

Even though cobalt is one of the thirty most abundant elements in the earth's crust, it has an extremely low concentration, just 0.002 percent so it is rare to find it in economical standalone deposits.

“Identified world cobalt resources are about 15 million tons. The vast majority of these resources are in nickel-bearing laterite deposits, with most of the rest occurring in nickel-copper sulfide deposits hosted in mafic and ultramafic rocks in Australia, Canada, and Russia, and in the sedimentary copper deposits of Congo (Kinshasa) and Zambia.” United States Geological Society USGS

Approximately 48% of the world's 2007 mined cobalt was a byproduct of nickel mining from sulfide and laterite deposits. An additional 37% was produced as a byproduct of copper operations, mainly in the Democratic Republic of the Congo (DRC) and Zambia. The remaining 15% of cobalt mining came from primary producers.

There are very, very few primary cobalt deposits in the world today.

Democratic Republic of Congo (DRC)

The DRC holds two major distinctions. First, it is the richest country in the world in terms of mineral wealth, at an estimated $24 trillion, and it is the country in which the highest number of people - estimates go as high as ten million -  have died due to war since World War II.

“The wars in that country have claimed nearly the same number of lives as having a 9/11 every single day for 360 days, the genocide that struck Rwanda in 1994, the ethnic cleansing that overwhelmed Bosnia in the mid-1990s, the genocide that took place in Darfur, the number of people killed in the great tsunami that struck Asia in 2004, and the number of people who died in Hiroshima and Nagasaki -- all combined and then doubled.”  Vava Tampa, Why the world is ignoring Congo war

The DRC, rated by the IMF as the world’s poorest country, is widely regarded as the world’s richest in natural resources.

The Congo’s staggering economic potential (the DRC contains five percent of the world’s copper and 50 percent of its cobalt) is matched only by its poverty and corrupt mismanagement.

The Democratic Republic of Congo ranks last on the UN Human Development Index (HDI) rankings which represent an annual assessment of measures of progress in human well-being. Countries at the bottom of the list suffer from inadequate incomes, limited schooling opportunities and low life expectancy rates due to preventable diseases such as malaria and AIDS.

The report stresses that a lot of the problems encountered by countries with low rankings are worsened by armed conflicts and its devastating consequences.

Life expectancy in the Democratic Republic of Congo is less than 48 years, one of five children will die before age five and almost sixty percent of the country’s 71 million people live on less than $1.25 per day.

The DRC ranks as one of the least equitable countries in the 2011 Gender Inequality Index (GII), which shows rankings of gender equality based on a composite index of reproductive health, years of schooling, parliamentary representation, and participation in the labour market.

Transparency International’s 2011 corruption perception index ranked the DRC tied with Libya at 168 - at the time the countries were ranked Libya was embroiled in a civil war.

UN special Representative Margot Wallstrom called the DRC “the rape capital of the world” and both government forces and the militias in control of various parts of the country practice it.

“In 1994 the world watched Africa in horror as some 800,000 people were killed without regard for sex or age over the course of some hundred days; it was the Rwandan Genocide and commanded global guilt if not global action. In March, 1998, President Bill Clinton stood on the tarmac of Rwanda’s Kigali airport and expressed to on looking crowds his failure to stop the genocide was the “biggest regret” of his presidency. Only six months later residual Hutu-Tutsi hostilities ignited the Second Congo War which lasted five years, directly involved eight African nations and twenty-five armed groups, claimed 5.4 million lives, and garnered little global attention. While the deadliest conflict since WW2 may have been initiated by deep ethnic and political tensions, the violence and bloody aftermath which perpetuates today was driven in large part by something deeper still: Congo’s mineral wealth.

Many of Africa’s resource-rich countries emerge from years of civil war with residual conflict zones, but in this case Congo is in a tragic class of its own. The enduring legacy of the Second Congo War is the continuing conflict in Congo’s eastern provinces...Known as the Kivu Conflict, in 2004 this armed struggle between government forces and rebel militias picked up the Second Congo War’s bloody baton and continues today due to innumerable artisanal mines funding a perpetual conflict whose brutality includes mass rape, mutilation, and cannibalism. The UN believes over 50% of the region’s 200 mines are controlled by armed forces which employ illegal taxation, extortion, forced labor, and violence to ensure the flow of mineral wealth. According to one CNN report eastern Congo’s armed groups generate some $180 million through the illicit trade of tin, coltan, tungsten, and gold which are easily traded across the porous eastern frontier and funneled into the international market…This volatile mixture of extraordinary mineral wealth, ethnic tension, and proxy armies can drag the region into another brutal war…With tensions high and 1994’s genocide still casting its shadow over the region another devastating war remains a looming and distinct possibility.” Nathan William Meyer, Deal of the Century: Will Chinese Investment Save Congo

The copper deposits in the Katanga Province of the Democratic Republic of the Congo are the world’s top producers of cobalt and the political situation in the Congo influences the price of cobalt significantly. The politically unstable Democratic Republic of Congo contains approximately half of known global cobalt reserves and 40-50 percent of incremental cobalt production, over the next five years, is anticipated to emanate from the DRC.

Security of Supply

Access to raw materials at competitive prices has become essential to the functioning of all industrialized economies. As we move forward developing and developed countries will, with their:

• Massive population booms
• Infrastructure build out and urbanization plans
• Modernization programs for existing, tired and worn out infrastructure

Continue to place extraordinary demands on our ability to access and distribute the planets natural resources.

PricewaterhouseCoopers, Resource Scarcity

Threats to access and distribution of these commodities could include:

• Political instability of supplier countries
• The manipulation of supplies
• The competition over supplies
• Attacks on supply infrastructure
• Accidents and natural disasters
• Climate change

Accessing a sustainable, and secure, supply of raw materials is going to become the number one priority for all countries. Increasingly we are going to see countries ensuring their own industries have first rights of access to internally produced commodities and they will look for such privileged access from other countries.

Numerous countries are taking steps to safeguard their own supply by:

• Stopping or slowing the export of natural resources
• Shutting down traditional supply markets
• Buying companies for their deposits
• Project finance tied to off take agreements

Mining Laws Changed

The Democratic Republic of Congo is seeking to enlarge its stake from five percent to 35 percent in projects that are "free of charges and non-dilutable" and increase royalties to gain greater state revenues from the sector.

Proposals also include doubling royalties on some minerals and introducing a 50 percent levy on miners' "super profits" - when a commodity's price rises over 25 percent compared with its level at the time of the project's feasibility study.

Other proposed changes include scaling back the length of exploration permits to three years, from the four and five year permits available under the current code.

The exploitation phase of mining licenses will be reduced to 25 years from 30 years.

Conclusion

More than two-thirds of the world’s cobalt is supplied by the Democratic Republic of the Congo.

Demand for cobalt is expected to rise at about seven percent yoy to over 100,000 tonnes by 2016 and industry experts say more stable sources of cobalt are needed.

A junior with a primary cobalt deposit should be on all our radar screens. Have you got one such junior on your radar screen?

If not, maybe you should.

Richard (Rick) Mills

rick@aheadoftheherd.com

www.aheadoftheherd.com

Richard is the owner of Aheadoftheherd.com and invests in the junior resource/bio-tech sectors. His articles have been published on over 400 websites, including:

WallStreetJournal, SafeHaven, MarketOracle, USAToday, NationalPost, Stockhouse, Lewrockwell, Pinnacledigest, UraniumMiner, Beforeitsnews, SeekingAlpha, MontrealGazette, CaseyResearch, 24hgold, VancouverSun, CBSnews, SilverBearCafe, Infomine, HuffingtonPost, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Wealthwire, CalgaryHerald, ResourceInvestor, Mining.com, Forbes, FNArena, Uraniumseek, FinancialSense, Goldseek, Dallasnews, SGTReport, Vantagewire, Resourceclips, Indiatimes, ninemsn, ibtimes, jsmineset and the Association of Mining Analysts.

If you're interested in learning more about the junior resource and bio-med sectors, and quality individual company’s within these sectors, please come and visit us at www.aheadoftheherd.com

***

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.

Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified.

Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.

Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

As a general rule, the most successful man in life is the man who has the best information

In 2001 and 2002 miners were producing gold for sub-$180 cash costs - the operational cost of the mine divided by the ounces of production. By 2005 cash costs had risen 45 percent to US$250. Data from GFMS shows world gold production costs for the first half of 2009 averaged $457/oz. Average cash costs in 2011 were US$657.

According to the Thomson Reuters GFMS’s Gold Survey 2012 global gold mine production was flat (output rose 0.1 percent to 1,366 metric tons) in the first half of 2012. The average grade of ore processed globally dropped 23 percent from 2005 through the end of last year and is forecast to decline another four percent in 2012.

The report also said the average cash cost across the gold mining industry for mining an ounce of gold is a record $727 per ounce. The average cash margin dropped to $872 an ounce in the second quarter from as much as $1,032 an ounce in last year’s third quarter

.

 Operating costs, the bullshine the industry is publishing as cash costs, are increasing, yields are declining and total expenditure has grown in line with the gold price.

Average operating/cash cost figures include only those costs directly associated with the production of the gold such as;

• Wages
• Cost of energy
• Raw materials such as steel, explosives etc

Thomson Reuters GFMS

But there’s more, a lot more to costs than most realize.

A complete breakdown of costs, an all-in cost figure, courtesy of CIBC, shows cash operating costs pegged at $700 an ounce, sustaining capital, construction capital, discovery costs and overhead at $600. Add in $200 for taxes and you get US$1500.00 as the replacement cost for an ounce of gold. Using the all-in figure provides a more accurate and definitive picture of actual mining cost and profit. Also, according to CIBC World Markets, the sustainable number gold miners need is $1,700/oz. As I write this gold is trading at $1726.00/oz.

It’s obvious that its very expensive to operate a gold mine and it’s not going to get any cheaper. The reasons behind flat-lining gold production, and record cash and all-in costs, are numerous:

• Production declines in mature mining areas
• Slower than expected ramp-ups of output
• Development time up
• The entire resource extraction industry suffers from a lack of skilled people
• Extreme weather
• Labor strikes
• Protests

Additional challenges include:

• Increasingly more remote and lacking in infrastructure projects
• Higher capex costs
• Increased resource nationalism
• Increased environmental regulation
• More complex metallurgy
• Lower cutoff grades

The biggest worry the industry has is that despite a significant investment in exploration (a record $8b in 2011) there’s a lack of discovery with few large high grade deposits being discovered.

Here’s some excellent insight from Brent Cook, explorationinsights.com.

“Major gold mining companies are facing a big problem. They are unable to find and develop enough ounces to keep up with demand, for the simple fact that economic gold deposits are extremely rare. Production shows a very simple trend: it rose until about 2000 and has fallen since then. This reduced production occurred even as the price of gold has increased nearly 400% in the past ten years. This incongruity tells us something fundamental: there’s a problem.

 

There are three main reasons why gold production increased up to 2000 despite declining gold prices.

• The first is the advent of new mining and processing technologies that made previously uneconomic low grade deposits economic. This was mostly a result of heap leach technology and bulk mining methods. Meaning, mining companies could now scrape up large areas of low grade mineralization and sprinkle a cheap solution of cyanide on the rock to recover the gold. This primarily worked on near surface oxidized deposits in relatively dry climates.
• The second is that vast regions of the world that had previously been closed for various reasons were opened up to exploration. These new areas include much of Latin America, Africa, and the former Soviet Union. I was part of that movement; we were able to walk onto obvious deposits with new eyes and rapidly drill out those resources. It also became markedly easier to get into these areas, so we were able to go deeper into the jungles and deserts.
• The third is that geologists had a whole slew of new exploration tools with which to scan the earth. These include satellite imagery, geophysics, and more sensitive chemical tools.

The net result was that new technologies kept old deposits going longer and made previously uneconomic ones viable, thereby ramping up production into the early 90’s. New deposits in previously unexplored and off-limits areas kept that production going until about 2000. All well and good but the industry is not finding as many new deposits as they need to in order to maintain current production levels. And, although we can expect incremental technological improvements in processing, mining, and exploration, there is nothing revolutionary on the horizon.

 

This is a worrisome slide for major gold producers—they are unable to sustain themselves. For the most part they are surviving via old deposits that are running out of ore and newer deposits that are quickly headed into the “old” deposit category. Reserves from these aging deposits are not being replaced by new discoveries. Producers’ problems are further exacerbated by rising exploration and development costs, plus the significant time it now takes to permit and finance a new deposit.”

Here’s Paul van Eeden (paulvaneeden.com) on reserve replacement, this was written in 2001:

“Worldwide gold production from mining is approximately 80 million ounces per year. A few years ago, a world-class gold discovery, which rarely occurs, would have been anything over a million ounces. Perhaps a few such deposits are discovered in a decade yet we mine the equivalent of 80 such deposits a year. Due to recent mergers and acquisition in the mining industry, the bar has been raised and the major mining companies now require deposits to be in excess of 5 million ounces before they become excited. Perhaps only one or two such discoveries are made in a decade. 

Anglogold mines over 6 million ounces of gold a year. Newmont mines roughly 4 million ounces of gold a year, Barrick 3, Harmony almost 3, Normandy 2, you get the picture. Each of these companies need to make a world-class discovery every year, and some of them need several, just to prevent the natural depletion of their mineral reserves from retiring the entire business. Note that mergers and acquisitions do not add any new resources to the mining industry, it merely changes the ownership of mines. The gold mining industry needs to discover 80 million ounces of gold every year just to prevent it from shrinking and it is highly unlikely that we will ever discover 80 million ounces in any given year, never mind do so on a continuous basis.”

Barclays Plc predicts global gold mine output may increase 0.7 percent in 2013, the slowest pace since 2008, while forecasting total physical supply may shrink 0.4 percent in 2014.

Gold miners have been able to survive rising costs because of rising gold prices – if gold prices do not start going up marginal projects are not going to get funded and a whole lot of forecasted gold production is not going to come on stream.

Global gold demand in Q3 2012 was 1,084.6 tonnes (t), slightly above the five year quarterly average of 984.7t, according to the World Gold Council's Gold Demand Trends Report.

“Gold is beginning to re-establish itself as part of the fabric of the financial system. In the medium term, the quantitative easing initiatives in the West and the continuing growth story in the East, particularly in India and China, coupled with the seasonally strong quarter coming up in Asia, are excellent indicators for further growth in the gold market…it is clear from five year rising demand trends that gold's fundamental property as a vehicle for capital preservation continues to endure, as evidenced by this quarter's increase in global ETF investment, up 56% and continued purchasing by central banks, the ultimate long term investors.” Marcus Grubb, Managing Director, Investment at the World Gold Council

From Sy Harding, over at streetsmartreports.com, comes some important information on the state of the U.S. economy:

“The CFNAI is an index comprised of 85 established economic indicators and trends drawn from all areas of the economy. It was first compiled in 1967 and has a remarkable record for identifying early on when the economy has entered a recession.

 

The numbers are reported monthly. A positive level for the index indicates the economy is growing, while a negative number indicates the economy is slowing.

 

 

The index has been of concern for a while. The monthly reading of the index was in negative territory for five consecutive months before improving to the flat-line at 0.0 in September.

 

Unfortunately, that improvement lasted only one month. The report this week shows a sizable drop to -0.56 in October.

 

More ominously, it’s more important 3-month moving average also dropped to -0.56 in October from -0.36 in September. It was its 8th straight month of negative readings, and getting ominously close to the -0.70 level the Fed considers “an increasing likelihood that a recession has begun.” It is the solid line in the Fed’s chart.

 

The index has only dropped beneath the recession warning level of -0.7 eight times since 1967. That was in 1970, 1974, 1980, 1981, 1989, 1990, 2001, and 2008. Each time the economy was indeed in a serious slowdown, usually a recession, and seven of those eight times the stock market was already in a bear market or soon rolled over into one. The most recent occasions were in 2001 and 2008, certainly not pleasant memories for the country.

 

The financial media and investors don’t pay much attention to the CFNAI, and most of the time it is not of much importance.

 

But with the 3-month moving average in negative territory for 8 straight months, and now at -0.56, so perilously close to -0.70, it should have everyone’s attention.”

From Axel Merk, over at merkinvestments.com, comes three key reasons to support an investment in gold:

•  
  • A form of protection against inflation
  • Safe haven investment
  • Minimize downside deviations in the value of an overall portfolio, reduce overall volatility, and enhance returns

“Over recent years, gold has performed remarkably well relative to other asset classes, in terms of both absolute performance and risk-adjusted performance. Over the preceding 10 years, an investment in gold would have significantly outperformed a corresponding investment in the S&P 500 Index or U.S. bonds, not to mention international and emerging market equities. Over the past 10 years, gold outperformed U.S. equities by over three times.

 

On a risk-adjusted basis, gold has produced superior returns, as measured by the Sharpe ratio. Over the 10-year period ended September 30, 2012, gold’s performance generated a Sharpe ratio of 0.85. In comparison, the S&P 500 Index generated a Sharpe ratio of just 0.30, as did international equities.

 

Gold’s Sharpe ratio was nearly as high over the five year period, as it was over the 10-year period ended September 30, 2012, while comparable equity indices produced negative Sharpe ratios. In fact, over each time period analyzed, gold outperformed domestic and international equities on a risk-adjusted basis.”

merkinvestments.com

“The disadvantage of fiat money [.i.e. non-convertible money], relative to commodity money, rests precisely in the fact that its scarcity, being thus contrived, is also contingent. A matter of deliberate policy only, it is subject to adjustment at the will of the monetary authorities or, if those authorities are bound by a monetary rule, at that of the legislature. Consequently, although a fiat money can be managed so as to not only preserve its purchasing power over time, but also so as to achieve the greatest possible degree of overall macroeconomic stability, there is no guarantee that it will be so managed, and market forces themselves offer no effective check against its arbitrary mismanagement.” economist George Selgin

Conclusion

It’s very clear that over the last decade gold has been a very good investment, and will continue to be so for the foreseeable future, but there is one asset class that will do even better then bullion, a lot better.

As mentioned previously, producers are not able to replace their reserves because there’s a lack of discovery, few large high grade deposits are being discovered and most of those that have been discovered aren’t owned by producers …

“Today, the major producers and their majority-owned subsidiaries hold 39 percent of the reserves and resources in the 99 significant discoveries made in the past 15 years.” Metals Economics Group (MEG)

Only 39 percent, so who owns the other 61 percent, who actually owns the worlds future gold supply?

A Junior exploration company’s place in the food chain is to acquire and explore properties. Their job is to make the discoveries that the mid-tiers and majors takeover and turn into mines. Junior exploration companies own the majority of the world’s future gold mines.

But the bottom line is, new exploration, despite a record amount of money being thrown at it, is not keeping up with reserve depletion. Juniors are not getting enough funding to do the necessary exploration to keep up - from June 2011 to June 2012 funding for juniors has dropped by $9b.

It’s time to be a stock picker, you need to find the quality management teams with money in the treasury, the ability to raise more and having the advanced projects that are well along the development path towards a mine. A mine that is going to be a long life, lowest quartile all-in cost producer. These companies are the world’s future gold producers and of course most will be in the sights of mid-tier and major producers for takeover candidates as reserve replacement targets.

I’ve got several precious metal juniors that fit that very specific bill on my radar screen, do you have any on yours?

If not, maybe you should.

Richard (Rick) Mills

rick@aheadoftheherd.com

www.aheadoftheherd.com

Richard is the owner of Aheadoftheherd.com and invests in the junior resource/bio-tech sectors. His articles have been published on over 400 websites, including:

WallStreetJournal, SafeHaven, MarketOracle, USAToday, NationalPost, Stockhouse, Lewrockwell, Pinnacledigest, UraniumMiner, Beforeitsnews, SeekingAlpha, MontrealGazette, CaseyResearch, 24hgold, VancouverSun, CBSnews, SilverBearCafe, Infomine, HuffingtonPost, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Wealthwire, CalgaryHerald, ResourceInvestor, Mining.com, Forbes, FNArena, Uraniumseek, FinancialSense, Goldseek, Dallasnews, SGTReport, Vantagewire, Resourceclips, Indiatimes, ninemsn, ibtimes, jsmineset and the Association of Mining Analysts.

If you're interested in learning more about the junior resource and bio-med sectors, and quality individual company’s within these sectors, please come and visit us atwww.aheadoftheherd.com

***

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.

Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified.

Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.

Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

As a general rule, the most successful man in life is the man who has the best information

All through human evolution we have been harnessing increasingly effective forms of energy. From human power to horse power, to wood, coal, natural gas and Uranium we’ve been working our way up the energy efficiency ladder. In reality what we’ve been doing is searching for the highest energy density to make energy production more efficient.

“The release of energy from splitting a Uranium atom turns out to be 2 million times greater than breaking the carbon-hydrogen bond in coal, oil or wood. Compared to all the forms of energy ever employed by humanity, nuclear power is off the scale. Wind has less than 1/10th the energy density of wood, wood half the density of coal, and coal half the density of octane. Altogether they differ by a factor of about 50. Nuclear has 2 million times the energy density of gasoline.” William Tucker, Understanding E=MC₂

Ahead of the Herd recently interviewed Richard (Rick) Mills about the dark cloud of negative sentiment hanging over the nuclear power industry…..

Ahead of the Herd (AOTH): Japan’s reactors are offline, Chinese demand has slowed considerably as well. German demand has evaporated and many miners are being forced to sell into the spot and mid-term market. This selling has dropped the much watched spot price of Uranium to US$40.00 lb.

RM: Japan’s inventories are thought to be an overhang in the spot market as are German inventory sales. There’s been very limited Chinese demand lately because of the country’s revised nuclear new build schedule.

Buyers are sitting on the sidelines waiting for prices to come to them.

AOTH: The Chinese authorities took a timeout in regards to new nuclear builds to implement stringent safety standards in the wake of the Fukushima disaster.

RM: Yes they did. But China has recently released its new energy plan and it effectively ends the pause on new nuclear construction. Any reactors currently under construction will be allowed to continue but new reactors will be required to use third-generation technology, the EPR or AP1000.

This is a major industry catalyst as it paves the way to commence building a lot of reactors very soon. Currently China has 12.57 GW in operation with 26 GW under construction. The Chinese government had previously stated that its goal was establish 40GW of nuclear power capacity by 2015 and to reach 80 GW by 2020.  

AOTH: It’s not hard to raise money in China for nuclear power.

RM: China Guangdong Nuclear raised 1.5 billion yuan or US$240 million through a *dim sum bond offering. The offering was oversubscribed by a factor of four, that equates to a lot of interest.

* A bond denominated in Chinese yuan and issued in Hong Kong. Dim sum bonds are attractive to foreign investors who desire exposure to yuan-denominated assets, but are restricted by China's capital controls from investing in domestic Chinese debt – INVESTOPEDIA.

AOTH: And where is Japan?

RM: The current Democratic Party of Japan (DPJ) government tabled a new nuclear energy policy in September 2012 that would see all reactors phased out in the 2030s. The Cabinet refused to ratify it and Japanese utilities are spending money upgrading their reactors and JOGMEC, the Japanese governments exploration arm, has entered into a joint venture with the government of Uzbekistan to explore for Uranium for export to Japan. You would not do all these things if you weren’t going to restart.

AOTH: Japan has a new regulatory agency.

RM: Yes, the Nuclear Regulatory Authority (NRA) replaces the old NISA. The key takeaway here is that the power utilities, in addition to the NRA green-lighting their restart, will only need the consent of the host municipality and the prefectural governor, no higher levels of government are involved.

An initial regulatory framework will be drafted by Mar-2013 and, after a public comment period, written into law by Jul-2013. Inspections, to see if plants are up to the new code, will be allowed prior to the July legislation so I expect the next restarts in the third quarter of 2013.

AOTH: Germany is walking away from nuclear power and selling its fuel inventory.

RM: Germany is greenwashing the world. They need to import more and more nuclear produced electricity from Holland, the Czech Republic and France to cover their self-inflicted power shortfall. Germany touts itself as the poster child for green energy yet they are sucking up nuclear generated power at a prodigious pace, just not from reactors on their soil.

And that’s not all there is to this story. France relies on electric heaters for heating many of its homes, the country’s energy needs rises over 2,000 MW, the equivalent of two nuclear plants, for every one degree drop in temperature. Germany helped cover their own, and the French energy shortage, by using its existing coal-fired plants. There are twenty three new coal fired power plants under construction in Germany. Why so many? Because Germany is worried about the increasing cost of electricity.

Here’s a staggering reality, Germany opened a $3.4 billion 2,200 MW coal fired power plant in August 2012. It vomits 13 million tonnes of CO2 instead of the 15 the old ones do by being 10 percent more efficient and burning only the ‘cleanest’ of coal, lignite. In one year, in just one year that one coal burner will generate one million times more CO2 than Germanys entire nuclear fleet would have over 20 years!

The top five coal fired power producers are; China, the U.S., India, Germany  and Japan.

AOTH: Mainstream media, many internet bloggers and newsletter writers are ‘reporting’ the U.S. has 100 years of NG supply. There’s a widely held perception that there are so many shale natural gas discoveries being made in the U.S. that nuclear energy is dead.

RM: Nothing could be further from the truth. The key to the U.S. natural gas boom is the use of new technology. Hydraulic fracturing, fracking, and horizontal drilling have tapped huge resources previously thought unrecoverable.

However the decline rate of shale gas wells is very steep. A year after coming on-stream production can drop to 20-40 percent of the original level. If the best prospects were developed first, and they were, subsequent drilling will take place on increasingly less favourable prospects. Can you imagine how much drilling would have to take place just to keep even with the existing production rate? Not, imo, going to happen.

Here’s James Howard Kunstler, author of "The Long Emergency" and his take on the situation;

“In order to keep production up, the number of wells will have to continue increasing at a faster rate than previously. This is referred to as "the Red Queen syndrome" which alludes to the character in Alice in Wonderland who famously declared that she had to run faster and faster just to stay where she is.”

Here’s something else, it’s a piece from an interview with energy expert Bill Powers;

“My thesis is that the importance of shale gas has been grossly overstated; the U.S. has nowhere close to a 100-year supply. This myth has been perpetuated by self-interested industry, media and politicians. Their mantra is that exploiting shale gas resources will promote untold economic growth, new jobs and lead us toward energy independence.

In the book, I take a very hard look at the facts. And I conclude that the U.S. has between a five- to seven-year supply of shale gas, and not 100 years. That is far lower than the rosy estimates put out by the U.S. Energy Information Administration and others. In the real world, many companies are taking write-downs of their reserves.” Bill Powers, author ‘Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth’ in a Energy Report interview

AOTH: What’s the state of the U.S. Uranium market?

RM: The U.S. has 104 nuclear reactors operating requiring 55 million pounds of Uranium. This is the largest fleet of nuclear reactors and the US is the world's largest Uranium market. There are also two reactors currently under construction in the U.S.

U.S. Uranium mines produced only 4.1 million pounds U3O8 in 2011, three percent less than in 2010.

AOTH: In its just released outlook, the IEA said global energy demand would grow by more than a third over the period to 2035, with China, India and the Middle East accounting for 60 per cent of the increase.

RM: We need to de-carbonize energy. The earth’s population is projected to climb from its current seven billion people to upwards of ten billion by 2050, most of this population growth will come from developing countries. All the people without power and all the new people will want power, they want TV’s, air conditioners, washers and dryers, phones, clean drinking water etc, they will want electricity. They all want the very same amenities we in the West take for granted, this will take enormous amounts of energy.

The quote below is from an article by James P. Hogan, Nuclear Power, It's No Contest

“A year's operation of a 1,000-MW coal plant produces 1.5 million tons of ash – 30,000 truck loads, or enough to cover one and a half square miles to a depth of 40 feet – that contains large amounts of carcinogens and toxins, and which can be highly acidic or alkaline depending on the sulfur content of the coal. Also, ironically, more unused energy is thrown away in the form of trace Uranium in the ash than was obtained from burning the coal. Getting rid of it is a stupendous task, and it ends up being dumped in shallow landfills that are easily leached out by groundwater, or simply piled up in mountains on any convenient site. And that's only the solid waste. In addition there is the waste that's disposed of up the smokestack, which includes 600 pounds of carbon dioxide and ten pounds of sulfur dioxide every second, and the same quantity of nitrogen oxides as 200,000 automobiles.

An equivalent-size nuke, by contrast, produces nothing in addition to its cubic yard of high-level waste, because there isn't any chemical combustion. No ash, no gases, no smokestack, and no need for elaborate engineering to generate and control enormous air flows. Because of its compactness, nuclear power is the first major industrial technology for which it is actually possible to talk about containing all the wastes and isolating them from the biosphere.”

Natural gas systems were the largest anthropogenic (refers to greenhouse gas emissions that are a direct result of human activities or are the result of natural processes that have been affected by human activities) source of methane emissions in the United States in 2009. Methane is more than 20 times as effective as CO2 at trapping heat in the atmosphere.

AOTH: Life-cycle emissions definitely favor nuclear power.

RM: Nuclear power's life-cycle emissions range from 2 to 59 gram-equivalents of carbon dioxide per kilowatt-hour. Only hydropower's range ranked lower at 2 to 48 grams of carbon dioxide-equivalents per kilowatt-hour. Wind came in at 7 to 124 grams and solar photovoltaic at 13 to 731 grams. Emissions from natural gas fired plants ranged from 389 to 511 grams. Coal produces 790 to 1,182 grams of carbon dioxide equivalents per kilowatt hour.

Nuclear energy is the only proven technology that can deliver base-load electricity on a large scale, 24 hours a day, 7 days a week, regardless-of-the-weather, without producing carbon dioxide emissions. Nuclear power plants emit no carbon pollution - no carbon monoxide, no sulfur oxides and no nitrogen oxides to the atmosphere - nor do they need costly electricity storage options.

The bottom line? One ton of Uranium produces more energy than several million tons of coal and oil. Fuel transportation costs are less and there is less impact on our environment from mining or fracking shale gas.

AOTH: Nuclear power plants aren’t cheap to build.

RM: Neither are $3.5 billion coal fired plants. Here’s a bit more from the same article I quoted from earlier…

“A 1,000-MW solar conversion plant, for example – the same size as I've been using for the comparisons of coal and nuclear – would cover 50 to 100 square miles with 35,000 tons of aluminum, two million tons of concrete, 7,500 tons of copper, 600,000 tons of steel, 75,000 tons of glass, and 1,500 tons of other metals such as chromium and titanium – a thousand times the material needed to construct a nuclear plant of the same capacity. These materials are not cheap, and real estate doesn't come for nothing. Moreover, these materials are all products of heavy, energy-hungry industries in their own right that produce large amounts of waste, much of it toxic. So much for "free" and "clean" solar power.”

When it comes to cost, upfront money isn’t everything.

Compare the costs of nuclear/gas, nuclear/coal or nuclear/hydro. The operational cost of nuclear power was 1.87 ¢/kWh in 2008 which is 68% of the electricity cost from coal and a quarter of that from gas, and who wants to dam a bunch more rivers?

One pound of yellowcake (U3O8 - the final product of the Uranium milling process) has the energy equivalence of 35 barrels of oil. One seven gram Uranium fuel pellet has an energy to electricity equivalent of 17,000 cubic feet of natural gas, 564 liters of oil or 1,780 pounds of coal, that’s energy density.

Natural gas accounts for 80 percent of the cost to produce power from an NG power plant while Uranium accounts for 5–10 percent of the price of nuclear energy. The future price of Uranium matters little, yet if Mr. Powers is right what is going to happen in regards to NG produced electricity pricing in a few short years? Never mind the environmental cost.

AOTH: Without a much higher incentive price to make most new production economical we’re heading towards a serious shortage of mined Uranium. Many existing Uranium mining operations will not be able to withstand a protracted period of prices in the low-US$40s, particularly publically-owned entities with high cost mines and high exposure to spot.

RM: There’s not a lot of people that get that, yet it seems fairly straight forward that without sufficient price incentive, pipeline mine supply will continue to erode thus exacerbating the future shortfall. There are several significant deposits which were progressing down the development path but have been put on hold due to the fall in the Uranium price.

The supply side of the equation needs at least US$70/lb., some analysts are saying as high as $85lb, to encourage new projects and it takes up to ten years to develop, permit and build a Uranium mine. We’re talking about facts, real supply side issues that will keep the market tight over the next several years. Expected and new projects/production are at risk at current prices.

AOTH: There are recent developments backing up what you say.

RM: The Olympic Dam, Kintrye, Millennium and Langer Heinrich Stage 4 expansion deferrals have removed a potential 22 million pounds of U3O8, or 1.5x the supply provided by Cigar Lake, from the market.

Areva placed its 9 Mlbs/yr Trekkopje development project on care and maintenance citing a projected US$75/lb break-even price.

Energy Fuels (EFR-TSX) stated on Oct-17-12 that it will cease operations at two of its mines due to current market conditions.

Cameco has cut its long term Uranium production forecast trimming guidance by six MM lbs to 36 MM lbs U3O8 in 2018.

AOTH: China is Uranium deposit hunting and security of supply is going to be a huge issue moving forward, especially for the U.S. which was short 51 million pounds of Uranium in 2011.

RM: Here’s four good examples of what’s happening to future supply.

China’s Guangdong Nuclear Power Corp.’s subsidiary Taurus Minerals did a A$2.2 billion acquisition of Australian listed Extract Resources. Extract owned the Husab Uranium project in Namibia which is said by Extract to be the fourth largest Uranium-only deposit in the world having measured resources of 84 million pounds Uranium and indicated resources of 274 million pounds (Swakop Uranium is the local wholly-owned subsidiary of Taurus and is developing Husab).

Canadian PM Stephen Harper met with India’s Prime Minister Manmohan Singh to fast-track the 2010 India-Canada nuclear deal so a lot of Canadian Uranium will be going to India.

Australia-India talks that were recently concluded resulted in an agreement to see Australian Uranium exported to India for its huge pending nuclear power program. Again this is a deal tying up a lot of Uranium.

Turkey imports more than 70 percent of its energy, primarily fossil fuels, and electricity demand has been growing an average of eight percent per year over the past decade. Current Turkish leaders plan to turn the country into the nuclear energy poster child. Russia is going to build, and own, the Turkish plants, running them presumably using fuel from the motherland. This is now the adopted Russian business model for selling its nuclear technology to nuclear newcomers. If successful, and there’s no reason to believe they won’t be highly competitive, this will take a lot of Russian supply off market.

Of course all of these long term deals locking up future supply means less Uranium for the rest of the world going forward.

AOTH: There are more reactors under construction and planned now than there were before Fukushima.

RM: Without higher prices, we won't see the necessary Uranium mines coming on stream to keep up with the ever increasing Uranium demand from the nuclear power industry.

AOTH: Do you see Uranium prices recovering anytime soon?

RM: According to a recent report from the International Atomic Energy Agency (IAEA) and the Organization for Economic Cooperation and Development (OECD), by the year 2035:

“World nuclear electricity generating capacity is projected to grow from 375 GWe net (at the end of 2010) to between 540 GWe net in the low demand case and 746 GWe net in the high demand case, increases of 44% and 99% respectively.

There are several catalysts that should spur utilities to pick up their buying activity short term.

The restart of Japanese reactors and the Chinese resumption of construction for their reactors should at the very least firm up spot prices. The new Chinese energy plan reiterates a nuclear capacity goal of 60-70 GW by 2020 which is in line with previous expectations.

Under the terms of the 1993 government-to-government nuclear non-proliferation agreement (Megatons to Megawatts program), the United States and Russia agreed to commercially implement a 20 year program to convert 500 metric tons of HEU (Uranium 235 enriched to 90 percent) taken from Soviet era warheads, into LEU, low enriched Uranium (less than 5 percent Uranium 235). The HEU agreement ends late in 2013 and removes 24 million pounds of Uranium supply from the U.S. market.

AOTH: The U.S., if naysayers like Bill Powers are proven correct, has no energy security. They don’t in Uranium, your feed for 24/7 base load power and don’t in natural gas. Supplying a meaningful percentage of the U.S. population with renewable power, solar/wind, is pie in the sky dreaming.

Does anybody else out there, besides the Indians and Chinese, understand the absolute importance of energy security – security of supply?

RM: Oh absolutely, EDF of France has dropped US$200 million in cash a full seven years in advance of delivery from one producer for 13 MM lbs, and has contracted 78 MM lbs from another.

Three billion dollars worth of sales contracts from the United Arab Emirates appears to cover a full seven years of Uranium supply for its first four reactors.

I would not be surprised if Saudi Arabia follows these examples and buys long term supply for their planned 16 reactors, if all this doesn't sound like worry about security of supply, then nothing does.

AOTH: Thank you Rick.

Conclusion

Set up in 2008 the Committee on Climate Change (CCC) was to advise the UK government on climate change issues. Their very first report stated; “It would be possible to decarbonise electricity generation with very significant nuclear deployment.”

Concerns about climate change, carbon footprints, energy security and the rising cost of fossil fuels spurred a revival of interest in nuclear power generation. In early 2010 we saw the start of a of a global nuclear renaissance. It was derailed when the unfortunate Fukushima-Daiichi nuclear power plant accident paused the renaissance.

Whether you believe in a nuclear renaissance or not, the security of supply issue for today’s global reactor fleet of 436, coupled with future demand for the 60 nuclear reactors under construction and the approximately 150 reactors planned, is an issue of paramount importance and should be on every investors radar screen. Is energy security on yours?

If not, maybe it should be.

Richard (Rick) Mills

rick@aheadoftheherd.com

www.aheadoftheherd.com

Richard is the owner of Aheadoftheherd.com and invests in the junior resource/bio-tech sectors. His articles have been published on over 400 websites, including:

WallStreetJournal, SafeHaven, MarketOracle, USAToday, NationalPost, Stockhouse, Lewrockwell, Pinnacledigest, UraniumMiner, Beforeitsnews, SeekingAlpha, MontrealGazette, CaseyResearch, 24hgold, VancouverSun, CBSnews, SilverBearCafe, Infomine, HuffingtonPost, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Wealthwire, CalgaryHerald, ResourceInvestor, Mining.com, Forbes, FNArena, Uraniumseek, FinancialSense, Goldseek, Dallasnews, SGTReport, Vantagewire, Resourceclips, Indiatimes, ninemsn, ibtimes, jsmineset and the Association of Mining Analysts.

If you're interested in learning more about the junior resource and bio-med sectors, and quality individual company’s within these sectors, please come and visit us at www.aheadoftheherd.com

***

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.

Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified.

Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable]]> Mon, 26 Nov 2012 14:36:00 -0500 http://www.proactiveinvestors.com/columns/ahead-of-the-herd/2680/the-red-queen-syndrome-2680.html http://www.proactiveinvestors.com/columns/ahead-of-the-herd/2575/global-copper-production-under-stress--2575.html

As a general rule, the most successful man in life is the man who has the best information

Capital inputs account for about half the total costs in mining production - the average for the economy as a whole is 21 per cent. Obviously many of the costs, once incurred, cannot be recovered by sale or transfer of the fixed assets.

Mining is an extremely capital intensive business for two reasons. Firstly mining has a large, up front layout of construction capital called Capex - the costs associated with the development and construction of open-pit and underground mines. There are often other company built infrastructure assets like roads, railways, bridges, power generating stations and seaports to facilitate extraction and shipping of ore and concentrate. Secondly there is a continuously rising Opex, or operational expenditures. These are the day to day costs of operation; rubber tires, wages, fuel, camp costs for employees etc.

Copper mining has become an especially capital intensive industry - the average capital intensity for a new copper mine in 2000 was between US$4,000 - 5,000 to build the capacity to produce a tonne of copper, now capital intensity is north of $10,000/t, on average, for new projects.

Capex costs are escalating because:

• Declining copper ore grades means a much larger relative scale of required mining and milling operations
• A growing proportion of mining projects are in remote areas of developing economies where there’s little to no existing infrastructure

The bottom line? It is becoming increasingly expensive to bring new mines, especially new copper mines, on line and run them:

• Antofagasta’s Esperanza Sur project capex went from under US$3 billion to US$3.5 billion
• Inmet’s Cobre Panama project capex climbed to US$6.2 billion from US$4.8 billion, that’s a capital intensity north of $15,000/t
• Teck’s Quebrada Blanca’s capex is US$5.6 billion. The amount of money required to build Teck’s new, and very large copper mine in a difficult environment, corresponds to a US$28,000/t capital intensity.

There are several serious concerns in regards to global resource extraction that we need to consider:

• Resource nationalism/Country risk
• A looming skills shortage
• Smaller areas open for exploration
• Competition with Chinese mining investment
• Low hanging fruit, the high quality large deposits have already been found
• Supply bottlenecks for equipment
• Lack of financing options for smaller deposits
• Lack of innovation and technological advancements
• Incredibly difficult and lengthy permitting processes
• Declining open pit production
• Ongoing operational issues
• Environmental group and labor risks
• Natural disasters
• *Lower economic attractiveness of new projects.

*Capex and Opex cost inflation have been felt across the entire mining industry for the past several years in what many say is the most severe cost escalation environment in decades.

The International Copper Study Group (ICSG) recently released its 2012 Statistical Yearbook. According to ICSG data the mine capacity utilization rate averaged 81% from 2008-2011 and mine production grew by an average of only 0.9%/yr. The ICSG Yearbook says the low numbers were a result of numerous factors including lower head grades, labor unrest, technical problems, and temporary shutdowns or production cuts.

Consider the following…

Resource nationalism is increasing - Xstrata Plc’s plans to create a $5.9 billion copper-gold project in the Philippines has been halted because of a mining reform bill.

At least 15 mining projects in Peru (world’s second largest copper producer) have been delayed with their start dates set-back for up to two years because of social unrest, mining investment in the country is expected to fall 33% in 2013 because of the unrest.

Barrick Gold Corp. has lowered its copper production outlook for 2013 due to permitting delays at its Jabal Sayid project in Saudi Arabia.

Chile is the world’s top copper producer but the country as a whole is woefully short of power. The country’s power generation capacity currently stands at 17,000 megawatts. It is estimated that the country will need at least 30,000 megawatts of power by 2020 to keep up with the demand, the increased demand coming primarily from mining projects. Unfortunately the government only plans to add 8,000 megawatts between now and 2020 and there is serious opposition to these plans from environmental groups who have, so far, been wildly successful by suspending several key projects and more than $22 billion worth of power investment. The Chilean Supreme Court recently struck down the planned 2,100-megawatt, $5 billion Castilla thermoelectric power plant project, citing environmental concerns.

Codelco, the Chilean state owned copper company, and the world’s largest copper miner with 20% of global copper reserves, said that their 2012 first half copper production fell 6.4% because of lower grades mined. Codelco’s direct cash costs increased 27% year-on-year mostly because of paying higher prices for electricity from the drought stricken SIC grid.

Many copper mining companies are having to go back to the drawing board in regards to their economic studies trying to lower their cost of production.

Zambia is Africa’s largest copper producer (and wants to directly market its copper), in second place is the DRC. The copper-belt which straddles Zambia’s and the Democratic Republic of the Congo’s borders is being tied up for internal development by the two countries. The DRC and Zambia are amending their mining codes to enable the government to raise taxes and implement a 35-percent minimum ownership threshold for state shareholding in projects.

According to the World Bureau of Metals Statistics (WBMS), the global copper market had a deficit of 129,000 tonnes (t) for the first six months of 2012 on consumption of 10.2 million t.

China uses 43% of the worlds copper. Chinese copper prices are in line with LME prices, Chinese traders are not de-stocking and the countries copper imports are on track for a record pace.

“Total copper product imports improved 4% YoY and 11% MoM and are up 5% YTD, in line with our expectations of copper consumption growth in China this year. We attribute this result to the emerging pockets of strength for copper use in China, namely in power infrastructure, white goods restocking and auto production.” Morgan Stanley

Commodities expert Jim Rogers said there are three questions you need to ask (and answer) to determine if a commodity is headed higher in price.

Lets answer based on coppers perspective:

Q1 - How much production is there worldwide?

A – Not enough, most older existing mines, the foundation of our supply, have increasing costs with production rates stagnating or even declining because of lower grade ore. Half of the world’s copper reserves are more than 50 years old and four of the seven largest copper producers are over 70 years old.

Q2 - Are there new sources of supply?

A – Yes, but the rate of depletion is much greater than the rate of discovery.

We are also faced with increasingly complicated and more expensive extraction of metals from increasingly harder to find, lower grade ore bodies in almost inaccessible and hostile parts of the world

Q3 - Are there new potential supplies?

A – Yes, if energy was cheap and unlimited then recoverable resources would be unlimited. The metal content of copper ore has been falling since the mid 1990s. A miner now has to dig up an extra 50 percent of ore to get the same amount of copper. As grade drops the amount of rock that must be moved and processed per tonne of produced copper rises dramatically – all the while using more energy that costs several times more than it use to.

With the lower grades of ores now being mined energy becomes more and more of a factor when considering economics. The cost of energy is climbing, the amount used is climbing but the returns from energy expended is declining. Eventually the quantity of resources used in the extraction process will be 100% of what is produced

Conclusion

Increasingly we will see falling average grades being mined, mines becoming deeper, more remote and come with increased political and nationalization risk. Extraction of metals from the mined ore will become increasingly more complex and expensive, even more so when one considers the effects of increased energy costs – the cost of technology innovation to power mining will be very high.

The facts are:

1. Highly capital-intensive greenfield projects in geo-political risky developing countries requiring significant infrastructure investment beyond the ordinary scope of the mining operations are associated with a higher risk of delays and capex overruns

1. Capital intensity best determines a project’s potential return and capital intensity clearly favors Brownfield projects in countries with adequate existing infrastructure

“In 2014, substantially all the mine production growth will come from new greenfield projects and these are subject to higher risk of production shortfall. New production from Africa, where infrastructure is less developed, also faces higher risk of shortfall particularly from power disruption.” FitchRatings, Base Metals Update

BMO’s London-based mining analyst Tony Robson said; “Major copper projects required to meet demand long term are located in riskier jurisdictions, and come with increased execution risk; 75% of estimated additional supply required between 2010 and 2025 is from greenfield projects.”

“This lack of inventory growth is the hardest indicator that there has neither been a significant negative shock to demand nor a pronounced destocking cycle.” Andrew Keen, Head of Metals and Mining Equity Research for Europe, the Middle East and Africa, CNBC’s Asia Squawk Box

The few new mines that are being developed in geo-politically safe jurisdictions in close proximity to existing mines should be able take advantage of:

• Pre-existing infrastructure such as transport corridors, processing and power plants
• A known, established permitting process
• No green, or environmental opposition

In 2005 copper prices collapsed to under $3,000 a tonne leading many miners to rethink mine development and expansion plans, prices nearly tripled by 2007 because of a vastly under supplied market.

Perhaps higher Opex costs, Capex overruns, permitting delays, social unrest and resource nationalization should be on all our radar screens. Are they, and a brownfield copper investment opportunity, on your screen?

If not, maybe they should be.

Richard (Rick) Mills

rick@aheadoftheherd.com

www.aheadoftheherd.com

Richard is the owner of Aheadoftheherd.com and invests in the junior resource/bio-tech sectors. His articles have been published on over 400 websites, including:

WallStreetJournal, SafeHaven, MarketOracle, USAToday, NationalPost, Stockhouse, Lewrockwell, Pinnacledigest, UraniumMiner, Beforeitsnews, SeekingAlpha, MontrealGazette, CaseyResearch, 24hgold, VancouverSun, CBSnews, SilverBearCafe, Infomine, HuffingtonPost, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Wealthwire, CalgaryHerald, ResourceInvestor, Mining.com, Forbes, FNArena, Uraniumseek, FinancialSense, Goldseek, Dallasnews, SGTReport, Vantagewire, Resourceclips, Indiatimes, ninemsn, ibtimes and the Association of Mining Analysts.

If you're interested in learning more about the junior resource and bio-med sectors, and quality individual company’s within these sectors, please come and visit us at www.aheadoftheherd.com

***

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.

Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified.

Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.

Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

Chasing the Rainbow

Richard (Rick) Mills

Ahead of the Herd

As a general rule, the most successful man in life is the man who has the best information

Robert Lee Hatcher was born June 24th 1867 in Montague, Texas. He arrived in Alaska in 1888. Hatcher had started prospecting in White Oaks, New Mexico, came north at twenty-one, spent time prospecting in Atlin, Canada, and southeast Alaska before heading to south-central Alaska.

In September 1906, Hatcher located hard rock gold. The Skyscraper Vein was a quartz gold claim 1,200 feet above the floor of Fishhook Valley and nearly 5,000 feet above sea level. It was on a ridge below Skyscraper Mountain in the southern Talkeetna Mountains.

Robert Lee sold a 25 percent interest in his gold discovery for $1500.00 worth of cash and some food. In 1909 Hatcher and his partner, J.H. Carnegie, sold the remaining 75% of the claims for $6000.00. The $7500.00 received for the claims is worth over a quarter of a million dollars today.

In 1910 Hatcher was back in Alaska prospecting on the Kenai Peninsula with a new partner, C. A. "Scotty" McPherson. The Hatcher-McPherson Groundhog claim was sold for $30,000. The purchaser was Samuel I. Silverman who started, and sold stock in, the Seward Gold Company.

Within a year Silverman had sold the Seward Gold Company for $225,000 to a group of British investors. Unfortunately the ledge pinched out, the gold disappeared and the first payment was never made.

By 1943, Robert Lee Hatcher had been responsible for the discovery of the Independence, Martin, Talkeetna, Jam, Ray Wallace and Gold Mint mines.

At the age of seventy-six he announced what he called the greatest gold discovery of his career. There was no interest from investors even though the grade, at an estimated $7 per ton, was very high. In 1933, US President Franklin D. Roosevelt had increased the price of gold from $20.67 to $35.00 per ounce. The increase in price led to more gold mining in Alaska. This expansion continued until the early years of World War II when federal order E-208 shut down gold mines throughout the United States - the United States War Production Board thought gold mining was not essential to the war effort.

In 1950, Hatcher was found in his cabin on Ptarmigan Creek twenty-three miles north of Seward; he was paralyzed on his left side and unable to speak. Robert Lee Hatcher died in Seward, Alaska, 24th September 1950 and was buried October 1st 1950 in an unmarked grave in the Seward Pioneer Cemetery.

Seekers Of Gold

“You see we prospectors are a dying breed. The world doesn't function around us anymore like it used back in the gold rush. The people who care for you can’t understand. What in the world would make you want to risk your life to look for gold? They don’t understand the dream, but in the old days everybody understood. You didn’t have to worry about your wife leaving ya or your friends scorning you because you wanted to find the gold.

Everyone was doing it. Everyone dreamed of the day when they would be the one to strike it rich. represent freedom for all, but what does it mean to people today? I’ll tell you, a big house and a nice car. People don’t see that it’s so much more than just finding the golden score. It’s not seen as a building block for freedom. It’s been twisted and messed up to the point of being stuck on a scratch and win ticket. That is what is left of the prospector’s dream in today’s world. All the people around you don’t understand, they can’t see the freedom and the hope it brings you when you chase the dream. They just think you’re dreaming, but we know the truth don’t we?

The truth is you’re living and they are the ones that are dreaming. Their search for the big car and the nice house. Ha! Illusions I tell you brought onto their brain less minds by a media machine. How I wish I could chase after it still, but the fight’s over for me lad. I’ve got a bad ticker you see, but you can, can’t you son?" he explained eyeing me almost enviously, there is nothing better than standing high up on a mountain top and gazing down upon the world. It makes you feel like your own man. Free from all prison that the world tries to make of your life. You see the world doesn’t want you to be your own man. If they did, they wouldn’t be trying to make you swallow the lie all the time and you know how they do it. Through that little box over there, he said pointing to the television across the room.

Look at those people over there, he explained pointing to the people staring at the TV. They’re swallowing every word of it and it makes me sick. Our pioneer brothers are rolling in their graves I tell ya. They wouldn’t have wanted it this way, this isn’t freedom. People today don’t know what freedom is. That little box over there tells them that they’re free, but they’re not. You see when somebody tells you something enough times you’ll start to believe it. Tell me you won’t give up, tell me you will follow the dream to the ends of the earth. If not for yourself then do it for your pioneer brothers who help create this world and you become one of them. Remember freedom is worth dying for and I’m not talking about dying in a war fighting for some illusionary freedom that your government tells you have. I’m talking the real stuff that comes from the open spaces and when you spent enough time in the mountains you’ll know what I’m talking about. It will grab your soul and won’t leave you until the day you die. It’s what pushes all great men and once you see it you’ll chase it for the rest of your days.”

Seekers of gold is dedicated to all the prospectors out there who have searched for the dream and all of those who are still out there searching for it. Daryl Friesen author, Seekers Of Gold

Conclusion

Prospectors are today still scouring the bush, in remote, and not so remote places – chasing the rainbow and its pot of gold - looking for the next discovery. Alaska, Canada’s Yukon Territory and Province of British Columbia are still vast and underexplored places.

Prospecting is of course the integral first step in the process of discovery, walking the bush and hammering rocks means boots on the ground. It's people walking through the bush that have found the worlds mines. Staking claims and making a deal with a junior resource company, a vendor’s agreement, is often the second step – the prospectors claims are turned over to be worked for shares and or cash and a one or two percent net smelter royalty (NSR) from a mine if the showing goes all the way. Most prospectors don’t have the wherewithal, the money raising capabilities or the expertise to develop a showing so this is where a junior would come in. Being publically traded they have access to capital and expertise the prospector most often does not.

Only a few prospectors among the many thousands who search ever find an economic to mine deposit. But prospecting success and drill programs that are targeting these showings should be on every investors radar screen.

Most of us can’t be prospectors, but we can dream of discoveries made and money hard won, we too can chase the rainbow through our publically traded junior resource companies. Have you got an exploration, or drill program, on your radar screen?

If not, maybe you should.

Richard (Rick) Mills

rick@aheadoftheherd.com

www.aheadoftheherd.com

Richard is the owner of Aheadoftheherd.com and invests in the junior resource/bio-tech sectors. His articles have been published on over 400 websites, including:

WallStreetJournal, SafeHaven, MarketOracle, USAToday, NationalPost, Stockhouse, Lewrockwell, Pinnacledigest, UraniumMiner, Beforeitsnews, SeekingAlpha, MontrealGazette, CaseyResearch, 24hgold, VancouverSun, CBSnews, SilverBearCafe, Infomine, HuffingtonPost, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Wealthwire, CalgaryHerald, ResourceInvestor, Mining.com, Forbes, FNArena, Uraniumseek, FinancialSense, Goldseek, Dallasnews, SGTReport, Vantagewire, Resourceclips, Indiatimes, ninemsn, ibtimes and the Association of Mining Analysts.

If you're interested in learning more about the junior resource and bio-med sectors, and quality individual company’s within these sectors, please come and visit us at www.aheadoftheherd.com

***

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.

Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified.

Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.

Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

Copper Shenanigans from Beijing

As a general rule, the most successful man in life is the man who has the best information

Fact - China is the world’s largest user of copper.

Copper is critical for China and the country has imported unbelievable tonnages over the years, but according to the copper bears the story could be coming to an end.

There are several reasons investors might question the longevity of China’s copper story:

•      Concerns about weak global growth, investors are worried about China’s exports slowing and its implications for industrial metal demand
•      China is thought to have high inventory levels of copper
•      China’s economic growth has slowed to a three year low of 7.6 percent
•      Surplus capacity 
•      Extraordinarily tight cash

According to the Beijing Antaike Information Development Co. copper consumption is expected to expand this year at the slowest rate since 1997.

Copper Market

“This lack of inventory growth is the hardest indicator that there has neither been a significant negative shock to demand nor a pronounced destocking cycle.” Andrew Keen, Head of Metals and Mining Equity Research for Europe, the Middle East and Africa, CNBC’s Asia Squawk Box

According to the International Copper Study Group (ICSG):

“The apparent refined copper balance for the first half 2012 indicates a production *deficit of 473,000 t (a seasonally adjusted deficit of 292,000 t)…As of the end of August, copper stocks held at the major metal exchanges (LME, COMEX, SHFE) totaled 434,277 t, a decline of 110,334 t from stocks held at the end of December 2011 and a decrease of 14,520 t from stock levels at the end of July 2012.”

*In September, the ICSG projected that global refined copper demand in 2011 would exceed refined copper production by about 200,000 tons, continuing the production deficit experienced in 2010.

The World Bureau of Metal Statistics said that from January to June 2012  worldwide copper demand surpassed production by 129,000 tons.

Also, according to ICSG Copper Market Forecast 2012-2013, in 2012, world refined copper production is projected to increase by only about 2.5% to reach 20.15 million metric tonnes (mmt). Global Industry Analysts Inc. forecasts that the global market for copper is projected to reach 27.5 mmt by the year 2017.

The world will need 7.35 million metric tonnes or 1.47 million metric tonnes of new copper production per year for the next five years to meet anticipated demand. How much copper is that? Thanks to about.com let’s look at copper production figures for 2010 from the world’s top copper miners.

Codelco - the Corporación Nacional del Cobre de Chile – controls about 20 percent of the world's reserves of copper. In 2010, Codelco produced approximately 1.76 million metric tons of refined copper, about 11% of total world copper production.

Freeport-McMoRan Copper & Gold Inc. (FCX) is the world's largest publicly traded copper producer. The company's assets include Grasberg, the world’s largest copper and gold mine in terms of recoverable reserves. FCX produced 1.44 million metric tons (mt) of refined copper in 2010, equal to 9% of the world total.

Xstrata Plc’s copper production in 2010 was over 900,000 metric tons, Rio Tinto produced approximately 700,000 t of copper, Anglo American 645,000 t, Groupo Mexico 645,000 t, Glencore 542,000 t, Southern Copper 542,000 t and KGHM Polska Miedz at 425,000 t.

FCX is the world’s largest publicly traded copper producer – 1.44 million metric tonnes of copper per year, the worlds going to need 1.47 million metric tonnes of new copper production per year, is another Freeport out there? Perhaps another Glencore, Southern Copper and KGHM will be built each year?

China’s Copper Market

According to Beijing Antaike, the state run nonferrous metals consultancy, Chinese copper consumption was up 7.8 percent in 2011 to 7.33 mt, is expected to grow 5.9 percent to 7.76 mt in 2012 and to reach 10 mt per year by 2020.

Currently there is an estimated two million metric tons of copper in China’s warehouses.

“That has to be put in context that over the next 5 years, China will probably consume 50 million tons of copper. So there is a major strategic shortfall in the copper market from a Chinese perspective and those warehouses are really part of that longer-term solution…We don’t think it’s a big problem for the copper market going forward.” Andrew Keen

Let’s consider Chinese copper inventories from another perspective – 2011’s 7.33 mt of copper usage works out to 20,082 tonnes a day, so two million tonnes of copper is 99 days of inventory – just three months worth of copper, two million tonnes for a country that, even if copper usage does not grow another tonne, will use 36.65 mt over the next five years, remember no one is forecasting Chinese copper consumption to stop growing, just slowing to between 2-4 percent growth.

At the end of August, copper stocks held at the major metal exchanges (LME, COMEX, SHFE) totaled 434,277 t.

Also consider:

“A market can appear to be in a deficit and a surplus simultaneously because economic forecasts only look at production and demand for the calendar year and exclude excess stocks carried over from the past. The current oversupply – high inventory levels - are a consequence of the economic conditions of the last three years, current and future supply deficits will be strong enough to digest that oversupply.

As much as one million metric tons of surplus isn't available for sale, it has to be part of the ebb and flow of moving copper down the line to the ultimate end product

Up to 600,000 metric tons is kept as China's rainy-day fund.” - Justin Lennon, metals analyst, Mitsui Bussan Commodities

The impact of a build-up of inventory due to Chinese rail delays – there was a build-up of goods in transit due to transport delays on Chinese railways - sales of copper cathode were slowed.

The outgoing Chinese government bosses, while waiting for a leadership change set for November 2012, are trying to prevent expansion from slipping below the 7.5 percent target set in March of this year.

China's powerful economic planning body, The National Development and Reform Commission (NDRC), announced approvals for 60 infrastructure projects worth more than $150 billion.

The new Chinese leaders are expected to introduce more policies to support the economy.

"Losses in base metal prices will be capped despite weak fundamentals and global economic worries, as investors expect Beijing to do the necessary fine-tuning to stabilise the economy before the 18th Communist Party Congress." CIFCO Futures analyst Zhou Jie, referring to China's leadership transition event scheduled on Nov. 8.

Demand/Consumption

Two factors are involved in increasing consumption. One is the growth in population:

2011 7 billion

2020 7.6 billion

2027 8 billion

2030 8.2 billion

2040 8.8 billion

2046 9 billion

2050 9.2 billion

The second factor is the growth in wealth in the major developing countries - China, India, Africa and Indonesia have enormous numbers of people who are already middle class and hundreds of millions still to become middle class.

According to the UN report “RESILIENT PEOPLE RESILIENT PLANET A Future Worth Choosing” the number of middle-class consumers will increase by three billion people over the next 20 years.

Copper consumption in developed countries remains stagnant but the appetite for copper in developing countries is growing at an astonishing pace.

The annual per-capita consumption of copper in India is 0.47 kg., China's is 5.4 kg. and the world average is 2.7 kg.

North American consumers use about 10kg of copper per capita. As China undergoes massive urbanization, builds its infrastructure and becomes more of a consumption orientated society, more like the west, copper consumption will start to approach North American levels. Because of the huge population differences between East and West just a slight increase in Asian and Indian consumption will translate into enormous demand growth.

"From a copper-specific perspective, we believe global copper consumption growth will continue to be underpinned by continued robust growth in completions until at least late 2013. This growth in completions is set to be complemented by a forecast pick up in property sales in 2013; higher property sales are associated with higher consumer appliance related copper demand. Together, these findings represent the backbone of our constructive view on copper over the next 6-12 months. The current wave of construction projects in China originated with the implementation of a stimulus package in 2009. Internal and external copper wiring (connection to grid) tends to be installed around project completion, and can account for as much as 50% of Chinese copper consumption. The construction cycle for the first wave of projects launched in 2009-2010 are now in their late stages, resulting in a sharp fall in new projects and rising building inventories.

A second wave of projects has started to gain momentum; "This second wave has yet to crest, underpinning global growth in 'late-cycle' assets or finishing commodities such as copper and aluminum.” Goldman Sachs analysts

Supply

The copper market is already in deficit as miners struggle with operational and labor problems and LME copper stocks are strongly held.

Lets state the obvious:

• For over the last ten years supply has struggled to keep pace with demand
• Metal supply is finite and subject to compounding demand from developing nations
• Metal production is highly cyclical, with intermittent peaks and troughs which are closely linked to economic cycles - declining production has historically been driven by falling demand and prices, not by scarcity
• Rates of production and amounts of reserves continually change in response to movements in markets and technological advances
• Most mineral resources will not be exhausted in the near future
• If energy was cheap and unlimited then recoverable resources would be unlimited

But

• Discovery and development is increasingly becoming more challenging and expensive
• Average ore grades are in decline for most minerals, yet production has increased dramatically
• Our most important metals are suffering from declining ore quality and rising extraction (ore is a different and inferior chemical or structural composition) costs
• Our prosperity has always been based on the fact that producing resources yielded more resources than it cost. However the cost of *energy is climbing, the amount used is climbing but the returns from energy expended is declining. Eventually the quantity of resources used in the extraction process will be 100% of what is produced
• Most older existing mines, the foundation of our supply, have increasing costs with production rates stagnating or even declining
• The rate of discovery is not keeping pace with the rate of depletion, let alone being higher

*Energy can be thought of as a proxy for labor, materials, energy and externalities – environmental, community impact etc.

The metal content of copper ore has been falling since the mid 1990s. A miner now has to dig up an extra 50 percent of ore to get the same amount of copper. As grade drops the amount of rock that must be moved and processed per tonne of produced copper rises dramatically – all the while using more energy that costs several times more than it use to. With the lower grades of ores now being mined energy becomes more and more of a factor when considering economics.

“We took the nice, simple, easy stuff first from Australia, we took it from the U.S., we went to South America. Now we have to go to the more remote places.” Glencore CEO, Ivan Glasenberg in the Financial Times describing why his firm operates in the Congo and Zambia

Conclusion

China has recently, and for the first time ever, revealed the size of its *copper inventories - and they **scared the hell out of investors when they did it.

*China's Non-Ferrous Metals Industry Association announced that the country's copper inventories were at about 1.9 million tons at the end of 2010.

**The International Copper Study Group had their published number at up to 1.5 million tons, no one was too worried about 1.5 mmt’s at the time but add another 400,000 t’s today…

If you were a buyer - and at 40% of world usage China is THE big buyer – and you needed stock would you want lower or higher prices?

Remember, a Chinese copper buying spree in early 2009 triggered a price rally from the lows of the financial crisis to new records above $10,000 a tonne.

Do you think China might have an interest in inflating the size of its stockpiles to push prices down? And really, does it matter if they have two million tonnes or three million tonnes today?

“Whatever the Chinese say that stocks are, in the end they still need copper.” George Cheveley, metals and mining portfolio manager at Investec Asset Management

Tomorrow they need more, a whole lot more, even if future economic growth “only” clocks in at an annual 7.5 percent compounded.

“over the next 5 years, China will probably consume 50 million tons of copper. So there is a major strategic shortfall in the copper market from a Chinese perspective”

Are Copper Shenanigans, and the investment opportunities presented, on your radar screen?

If not, maybe they should be.

Richard (Rick) Mills

rick@aheadoftheherd.com

www.aheadoftheherd.com

Richard is the owner of Aheadoftheherd.com and invests in the junior resource/bio-tech sectors. His articles have been published on over 400 websites, including:

WallStreetJournal, SafeHaven, MarketOracle, USAToday, NationalPost, Stockhouse, Lewrockwell, Pinnacledigest, UraniumMiner, Beforeitsnews, SeekingAlpha, MontrealGazette, CaseyResearch, 24hgold, VancouverSun, CBSnews, SilverBearCafe, Infomine, HuffingtonPost, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Wealthwire, CalgaryHerald, ResourceInvestor, Mining.com, Forbes, FNArena, Uraniumseek, FinancialSense, Goldseek, Dallasnews, SGTReport, Vantagewire, Resourceclips, Indiatimes, ninemsn, ibtimes and the Association of Mining Analysts.

If you're interested in learning more about the junior resource and bio-med sectors, and quality individual company’s within these sectors, please come and visit us at www.aheadoftheherd.com

***

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.

Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.

Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

As a general rule, the most successful man in life is the man who has the best information

Gold no longer has a legal role in the world’s monetary system, but because of a collapse of faith in sovereign obligations - fiat currencies/paper money – and a coming complete lack of trust in governments and financial institutions, gold is going to quickly become a core banking asset.

So why do I believe gold is going to become a core banking asset, what exactly does gold have going for it to make this possible?

"Gold, measured out, became money. Gold's beauty, scarcity, unique density and the ease by which it could be melted, formed, and measured made it a natural trading medium. Gold gave rise to the concept of money itself: portable, private, and permanent.”  A brief History of Gold, onlygold.com

Historical Risk

“The history of reserve currencies reveals that the position of a country as a superpower (whose currency acts as a reserve currency) tends to rotate in a natural cycle of around 100 years. Will history repeat? From 1450 to 1530 it was Portuguese (80 years). From 1530 to 1640 (110 years) it was Spanish. From 1640 to 1720 (80 years) it was Dutch. From 1720 to 1815 (95 years) it was French. From 1815 to 1920 (105 years) it was British. And then the US dollar gradually dominated the scene….” Richard Russell

A Fiscal Cliff

“Gold has firmly established itself as a portfolio asset. Investors are not likely to abandon it…Gold is the only insurance available to protect one from the Obama fiscal cliff set to cause the U.S. economy to fall into recession in January.” Gold Thoughts, Ned W. Schmidt

Increases in taxes and, to a lesser extent, reductions in spending, the infamous $600 billion “Fiscal Cliff” that’s looming in the new year, will reduce the US Federal budget deficit by 4 - 5.1 percent of Gross Domestic Product (GDP).

The US Congressional Budget Office (CBO) analyzed two different scenarios if the fiscal cliff was left in place:

1. As measured by Fiscal Year - the combination of policies under current law will reduce the federal budget deficit by $607 billion, or 4.0 percent of gross domestic product (GDP), between fiscal years 2012 and 2013. The resulting weakening of the economy will lower taxable incomes and raise unemployment, generating a reduction in tax revenues and an increase in spending on such items as unemployment insurance. With that economic feedback incorporated, the deficit will drop by $560 billion between fiscal years 2012 and 2013.
2. If measured for calendar years 2012 and 2013, the amount of fiscal restraint is even larger. Most of the policy changes that reduce the deficit are scheduled to take effect at the beginning of calendar year 2013, so budget figures for fiscal year 2013—which begins in October 2012—reflect only about three-quarters of the effects of those policies on an annual basis. According to CBO’s estimates, the tax and spending policies that will be in effect under current law will reduce the federal budget deficit by 5.1 percent of GDP between calendar years 2012 and 2013 (with the resulting economic feedback included, the reduction will be smaller).

Under those fiscal conditions, which will occur under current law, growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5 percent, CBO expects—with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half. Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession.

Safe Haven/Preservation of Purchasing power

Institutional investors tend to prefer investments that are thought to contain the potential for growth, growth = sprouts. An investment has to produce a growing revenue stream - if it doesn’t grow it doesn’t compound. Gold is rejected as an investment because it doesn’t produce sprouts, meaning the steady income and systematic growth so sought after by institutional investors just isn’t there.

Gold performs two jobs that fiat currencies, or any other financial innovation, cannot do; gold acts as a safe haven in times of turmoil - to escape Nazi Germany, or buy food and water in a crisis. Perhaps even more important gold preserves your purchasing power. In 1913 (the year the US Federal Reserve was born) the US dollar was well a dollar and gold was US$20 an ounce. Today, at almost the 100 year anniversary of the Fed the dollar has lost over 95 percent of its purchasing power and gold is almost $1800.00 an ounce.

In 1913, US$1000.00 would of bought you 50 ounces of gold (that’s $88,150.00 worth of today’s paper money). A thousand of today’s dollars will buy you 17 grams – just over half an ounce of gold.

Gold, sprout-less yes, but irreplaceable in its functions.

“The FED’s QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the US economy and, by extension, credit quality. Issuing additional currency and depressing interest rates via the purchasing of MBS does little to raise the real GDP of the US, but does reduce the value of the dollar (because of the increase in money supply), and in turn increase the cost of commodities (see the recent rise in the prices of energy, gold, and other commodities). The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power.” Credit Rating Agency Egan-Jones

Collateral

Lenders loan money based on the criteria of:

• The borrower’s ability to service the debt - cash flow

• The borrower’s collateral

• A combination of both cash flow and collateral

“Given the regulatory pressure to collateralize exposures, regardless of transaction type, there is a greater need for collateral. But going forward, there may be a risk of a shortage of good-quality collateral.” Olivier de Schaetzen, director, Euroclear

Debt has a maturity, and when maturity is reached borrowers look to roll it over. Unfortunately for borrowers the value, and high levels of esteem, of what has traditionally been thought of as good collateral (sovereign obligations – currencies) has collapsed.

According to Bloomberg borrowing costs for G-7 nations in 2012 will rise as much as 39 percent from 2011.

“The great corollary of over indebtedness is the relative scarcity of good collateral to support the debt load outstanding. This imbalance of debt to collateral is impacting the ability of banks to make loans to their customers, for central banks to make loans to commercial banks, and for shadow banks to be funded by the overnight Repo market. Hence the growth of gold as a collateral asset to debt heavy markets is inevitably in the cards and is de facto occurring. Gold is stepping up to the plate as “good” collateral in a world of bad collateral.” Professor Lew Spellman, former economist at the Federal Reserve and former assistant to the chairman of the President’s Council of Advisors

In February 2011, J.P. Morgan Chase & Co. said gold is at least as good an investment as triple-A rated Treasuries. J.P. Morgan started allowing clients to use gold as collateral in some transactions where traditionally only Treasury bonds and stocks have been accepted.

On May 25, 2011, the European Parliament's Committee on Economic and Monetary Affairs (ECON) agreed to accept gold as collateral.

Real Interest Rates

The demand for gold moves inversely to interest rates - the higher the rate of interest the lower the demand for gold, the lower the rate of interest the higher the demand for gold.

The reason for this is simple, when real interest rates are low, at, or below zero, cash and bonds fall out of favor because the real return is lower than inflation - if your earning 1.6 percent on your money but inflation is running 2.7 percent the real rate you are earning is negative 1.1 percent - an investor is actually losing purchasing power. Gold is the most proven investment to offer a return greater than inflation (by its rising price) or at least not a loss of purchasing power.

Gold's price is tied to low/negative real interest rates which are essentially the by-product of inflation - when real rates are low, the price of gold can/will rise, of course when real rates are rising, gold can fall very quickly.

There’s a saying that “six percent interest can draw gold from the moon,” undoubtedly true, but rates below two percent draw investors to gold.

The Feds interest rate is 0.25 percent and the Fed, in starting its third round of quantitative easing, has said rates will remain low for several more years.

“The FOMC is attempting to drive money out of bonds and INTO equities based on the fact that they have guaranteed practically no return as far as yields go on short term Treasuries for at least two years. Think about that. As an investor would you want to lock up money for that long for that kind of yield or would you want to buy stocks and attempt to capture a bit better return on your investment capital. After all, something beats nothing as far as returns go, especially if you think that this easy money policy is going to feed into further asset appreciation as the Dollar further succumbs to the news…the Fed is obviously sacrificing the Dollar in an attempt to keep a low interest rate environment in which stocks are rising.” Dan “Trader Dan” Norcini

Tier 1 Capital

“Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. It is composed of core capital which consists primarily of common stock and disclosed reserves (or retained earnings) but may also include non-redeemable non-cumulative preferred stock. Banks have also used innovative instruments over the years to generate Tier 1 capital; these are subject to stringent conditions and are limited to a maximum of 15% of total Tier 1 capital." Wikipedia

The Basel Committee for Bank Supervision (BCBS), the maker of global capital requirements and whose Basel III rules form the basis for global bank regulation, is studying making gold a bank capital Tier 1 asset.

“Gold has historically been classified as a Tier 3 asset. When determining how much money a bank can loan, the bank's gold holdings have traditionally been discounted 50 percent of the current market value. With value cut in half, banks have little incentive to hold gold as an asset.” Frank Holmes, usfunds.com

If gold is made a Tier 1 Capital asset banks could operate with far less equity capital than is normally required. Gold would be the new backstop for debt, currencies and bank equity capital.

"Anyone who understands gold’s historic role will grasp the importance of the argument behind extra bank leverage. Direct ownership of bullion by a bank is superior to holding the fiat money issued by a central bank. It should increase confidence in any bank and the system as a whole. Given relative values, bank purchases of bullion will drive the value of gold as Tier 1 capital up relative to other qualifying assets, increasing its desirability for regulatory purposes further without a gold-owning bank doing anything." Alasdair Macleod, resourceinvestor.com

If the Basel Committee agrees to banks using gold as Tier 1 Capital it would create substantial demand for physical bullion and be an important step toward gold’s re-monetization.

Central Bank Gold Buying

Following many years of net annual sales in the 400 to 500 tonne range, central banks, underweighted in gold and overweight in dollars and euro’s, became net buyers of gold in 2009.

In 2012 countries have continued the trend of gold buying reducing the "free-float" available to meet future demand.

Names on the list of recent central bank buyers include:

Mexico, Russia, Turkey (bought 6.6 tons in August), China, Argentina, Bolivia, Kazakhstan (bought 1.4 tons in August), Ukraine (bought 1.9 tons in August), Colombia, Venezuela, Thailand, Turkey, Belarus, Sri Lanka, Mauritius and Bangladesh.

Paraguay is the latest country to begin buying gold, their reserves went from a few thousand ounces to over eight tons.

South Korea’s gold reserves increased nearly 30%, from 1.750 million troy ounces in June 2012 to 2.260 million troy ounces in July - a 70 metric ton increase.

North Korea has exported more than two tons of gold to China over the last year.

Russia increased its gold tally to 30,113 million troy ounces in July 2012 from 29,516 million troy ounces in June.

In 2009 China purchased four tonnes of gold bullion from Hong Kong. In 2011 China purchased 46 tonnes of gold bullion.

China is also buying up the production from its own gold mines, as is Russia.

According to the World Gold Council (WGC) nations bought 96.7 tonnes of gold in the first quarter of 2012. Gold buying accelerated in the second quarter with central banks buying 157.5 tonnes of gold, up 63 percent quarter-over-quarter and up 137.9 percent year-over-year.

The European Central bank kept its gold reserves at 16,142 million ounces.

The U.S. kept its reserves the same from June to July - 261,499 million ounces.

The IMF said that central bank demand in 2012 may be even higher than the 456.4 tons they bought last year – the most in almost fifty years.

“The International Monetary Fund (IMF) is planning to purchase more than $2 billion worth of gold on account of rising global risks. The IMF currently holds around 2800 tonnes of gold at various depositories.

The Fund is facing increased credit risk in light of a surge in program lending in the context of the global crisis. While the Fund has a multi-layered framework for managing credit risks, including the strength of its lending policies and its preferred creditor status, there is a need to increase the Fund’s reserves in order to help mitigate the elevated credit risks. Bloomberg quotes a report by an IMF staff while also adding that a $2.3 billion gold purchase is in the planning.” IMF to buy Gold worth $2.3 billion as credit risk increases, inverlochycapital.com

Gold and Drunken Sailors

"It will come as no surprise to those who know me that I did not argue in favor of additional monetary accommodation during our meetings last week. I have repeatedly made it clear, in internal FOMC deliberations and in public speeches, that I believe that with each program we undertake to venture further in that direction, we are sailing deeper into uncharted waters. We are blessed at the Fed with sophisticated econometric models and superb analysts. We can easily conjure up plausible theories as to what we will do when it comes to our next tack or eventually reversing course. The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course. And nobody – in fact, no central bank anywhere on the planet – has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank – not, at least, the Federal Reserve – has ever been on this cruise before.

This much we do know: Our engine room is already flush with $1.6 trillion in excess private bank reserves owned by the banking sector and held by the 12 Federal Reserve Banks. Trillions more are sitting on the sidelines in corporate coffers. On top of all that, a significant amount of underemployed cash – or fuel for investment – is burning a hole in the pockets of money market funds and other non-depository financial operators. This begs the question: Why would the Fed provision to shovel billions in additional liquidity into the economy's boiler when so much is presently lying fallow?...

One of the most important lessons learned during the economic recovery is that there is a limit to what monetary policy alone can achieve. The responsibility for stimulating economic growth must be shared with fiscal policy. Ironically, and sadly, Congress is doing nothing to incent job creators to use the copious liquidity the Federal Reserve has provided. Indeed, it is doing everything to discourage job creation. Small wonder that the respondents to my own inquires and the NFIB and Duke University surveys are in 'stall' or 'Velcro' mode.

The FOMC is doing everything it can to encourage the U.S. economy to steam forward. When we meet, we consider views that range from the most cautious perspectives on policy, such as my own, to the more accommodative recommendations of the well-known 'doves' on the committee. We debate our different perspectives in the best tradition of civil discourse. Then, having vetted all points of view, we make a decision and act. If only the fiscal authorities could do the same! Instead, they fight, bicker and do nothing but sail about aimlessly, debauching the nation's income statement and balance sheet with spending programs they never figure out how to finance.

I am tempted to draw upon the hackneyed comparison that likens our dissolute Congress to drunken sailors. But patriots among you might take umbrage, noting that a comparison with Congress in this case might be deemed an insult to drunken sailors.

Just recently, in a hearing before the Senate, your senator and my Harvard classmate, Chuck Schumer, told Chairman Bernanke, "You are the only game in town." I thought the chairman showed admirable restraint in his response. I would have immediately answered, "No, senator, you and your colleagues are the only game in town. For you and your colleagues, Democrat and Republican alike, have encumbered our nation with debt, sold our children down the river and sorely failed our nation. Sober up. Get your act together. Illegitimum non carborundum; get on with it. Sacrifice your political ambition for the good of our country – for the good of our children and grandchildren. For unless you do so, all the monetary policy accommodation the Federal Reserve can muster will be for naught." Dallas Fed President Richard Fisher

Banking Up the Wrong Tree With the Phillips Curve

The Phillips Curve refers to the inverse relationship *thought by many to exist between inflation and unemployment - when inflation is high, unemployment is low, and vice-versa.

*Since 1974 seven Nobel Prizes have been given for work critical of the Phillips curve.

“Instead of adopting a "pure" monetarist target -- say a 5pc trend growth rate for nominal GDP -- the Fed is implicitly arguing that a little more inflation is a worthwhile trade-off if it creates more jobs.

Bill Woolsey from Monetary Freedom says we are back edging back towards the `Phillips Curve' temptations of the 1960s and 1970s, which ended with stagflation and the misery index.

"Targeting real variables is a potential disaster. Expansionary monetary policy seeking an unfeasible target for unemployment was the key error that generated the Great Inflation of the Seventies," he said.

Bernanke's attempt to push down borrowing costs is at odds with monetarist orthodoxy. Woolsey argues that successful QE should cause rates to rise -- not fall -- because the goal of such policy should be to put money into the hands of businesses that then invest, spending on machinery and real expansion.

The Fed is barking up the wrong tree with its doctrine of credit yield manipulation, or "creditism", straying far from the quantity theory of money.” Ambrose Evans-Pritchard, International business editor, The Telegraph

Global Production Flat, Costs Jump

Investments are not made on profit, investments are made on sustainable margins.

According to the Thomson Reuters GFMS's Gold Survey 2012 Update, global mined gold production was flat, in the first half of 2012, for a variety of reasons:

• Declining grades
• Construction and commissioning delays
• Extreme weather
• Labor strikes

"These are not the only headwinds producers have to face. The relative stagnation of the gold price, coupled with further rises in production costs, has seen producers' cash margins eroded by 16% over the past nine months, while upward revisions to capital expenditure forecasts will place additional pressure on free cash flow going forward." GFMS

GFMS's ‘all-in cost’ metric reflects the full marginal cost of mine production, it has recently risen to $1,050/oz.

Danger Will Rogers Danger

Consider also:

• A high risk of default of sovereign states
• Gold’s bull market has been stealthy - most investors and institutions have not participated
• Geo-political risk is climbing and there are very few deposits of over one million ounces in geopolitically safe areas

Conclusion

Gold is unique, it is the only non-Tier 1 asset to be universally regarded by investors the world over as a flight to safety asset. Gold, if moved from a Tier 3 to Tier 1 asset would be competing as a safe haven investment against un-backed bonds yielding less than zero in inflation adjusted terms and issued by over indebted governments.

Gold is set to become the new “good collateral.”

Central banks, while endlessly creating their own fiat currencies, continue to buy up, and hold in their vaults, the world’s gold. A few countries are buying up their domestic gold production - even the IMF is buying more gold to reduce their risk exposure. All of this gold buying is drastically reducing the number of gold ounces/grams available to the world’s citizens.

The world’s central banks and their respective governments are out of sync, monetary and fiscal policies are not being coordinated.

Governments can’t print gold, or silver, and no government controls them, that’s why precious metals are the only medium of exchange that have survived throughout history.

"QE is not a rising tide that will take all boats. It is good for gold. Gold will move from one of the weakest commodities this year to one of the best performers over the next few quarters.” Paul Horsnell, head of commodity research at Barclays

The people who find gold and silver, and the companies they run, should be on every investors radar screen. Are quality management teams on yours?

If not, maybe a few should be.

Richard (Rick) Mills

rick@aheadoftheherd.com

www.aheadoftheherd.com

Richard is the owner of Aheadoftheherd.com and invests in the junior resource/bio-tech sectors. His articles have been published on over 400 websites, including:

WallStreetJournal, SafeHaven, MarketOracle, USAToday, NationalPost, Stockhouse, Lewrockwell, Pinnacledigest, UraniumMiner, Beforeitsnews, SeekingAlpha, MontrealGazette, CaseyResearch, 24hgold, VancouverSun, CBSnews, SilverBearCafe, Infomine, HuffingtonPost, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Wealthwire, CalgaryHerald, ResourceInvestor, Mining.com, Forbes, FNArena, Uraniumseek, FinancialSense, Goldseek, Dallasnews, SGTReport, Vantagewire, Resourceclips and the Association of Mining Analysts.

If you're interested in learning more about the junior resource and bio-med sectors, and quality individual company’s within these sectors, please come and visit us at www.aheadoftheherd.com

“We just had a crop report today, which indicated a significant reduction in corn production as well as bean production, lower forecast for wheat, soybean, soybean oil, soybean meal, and corn, lower forecast for milk, beef, pork, broilers, and turkey. And it's obvious that weather is having an impact on the estimates of crops. Despite the fact that we have more acreage planted this year, we still are looking at significant reductions, and despite the fact that we may even with the corn estimates, as they have been reduced, would still have the third largest crop of corn in our history, nearly 13 billion bushels, and a very large soybean crop. We need to be cognizant of the fact that drought and weather conditions have really impacted and affected producers around the country.” Agriculture Secretary Tom Vilsack

Corn, the biggest ingredient in livestock feed, is a mega-crop, there are more than 4,200 different uses for corn products;
Adhesives, aluminum, aspirin, clothing starch, cosmetics, cough syrup, dry cell batteries, envelopes, fiberglass insulation, gelatin capsules, ink, insecticides, paint, penicillin, powders, rugs and carpets, stamps, sweetener’s, talcum, toothpaste, wallpaper, vitamins, processed and fast foods and of course as fuel - ethanol.
Extreme heat and drought conditions hit the Midwest just as the corn crop was suppose to pollinate - the key yield determining growth phase for corn. Crop ratings have fallen to their lowest level in 24 years - the most recent estimate pegged the crop as just thirty-one percent of the U.S. corn crop in good or excellent condition as of July 15, the least for the date since 1988.

Cattle Country

The U.S. beef herd has shrunk to its smallest since 1956.
"Feed costs account for about 40 to 50 percent of total costs of production, and when a rancher or poultry producer or dairy producer is faced with higher feed costs it's less profitable to produce that animal. Often times you will see animals brought to market before they reach full weight. In dire cases, producers will liquidate the entire herd and don't expand as much as they might have." Joseph Glauber, chief economist at the U.S. Department of Agriculture.

The drought in the Midwest comes on the heels of one last year in the southern Plains, the heart of Texas cattle country - the 11 months through August 2011 were the driest since at least 1895 in Texas.
A record 54 percent of pasture and rangeland is in poor or very poor condition. The drought has destroyed a lot of pasture, and the lack of rain has hit hay and alfalfa production hard. Ranchers normally start feeding their animals hay in December or January (as cold temperatures kill the grass) and stop in late spring as grass becomes available in pastures. 

This year many ranchers haven’t stopped feeding hay because what grass was in their pastures withered.
Ranchers are again selling off part of their herd. In the week ending June 30, 52,700 cows were slaughtered. That’s a three percent rise higher, year over year, then during the peak of the Plains drought. Farms are sending young cattle to feedlots earlier than normal and slaughtering more beef cows because pastures have no grass and hay prices have more than doubled.

Corn prices are up so much feedlot margins are drastically reduced or non-existent, feedlots buy year-old animals that weigh 500 to 800 pounds - these young animals are called feeders. They are fattened on corn for four or five months until they weigh around 1,200 pounds, then they are sold to meatpackers.
Fewer cows today means fewer beef and *dairy cattle tomorrow.
 
Economic Outlook Overview: U.S. Beef/Cattle Industry, Kansas State University

Short term meat prices might drop because of the extra cattle (and hogs and **chickens) going into the meat market. Unfortunately when those cattle should have been sold there'll be no cattle to sell, so meat prices will go up, a lot, and stay that way for a considerable time, until the herds are rebuilt.

*Expect dairy prices to skyrocket up, not only because part of the herd is being sold off but, if feed is of poor quality dairy production goes down, if there’s less milk given per cow and its of lower quality it will, for example, take more milk to make the same amount of cheese as from higher quality milk.

** Poultry meat and eggs will see the earliest price increases since these shorter lived birds are raised almost entirely on corn.

Global Food Prices

The good news – the United Nations Food and Agriculture Organization’s (FAO) indices show that in June global food prices were down by 13 percent from their June 2011 peak and prices for cereals by 14.7 percent.

According to the FAO, global cereal output rose to 2.3 billion tonnes in 2011/12, a record.

The bad news - food prices have more than doubled since 2003/4. The FAO estimates that since 2004, world food prices, on average, have climbed 240% as average incomes have declined.

“The forecast for world cereal production has been lowered from last month, which is likely to result in a smaller build-up of world inventories by the end of seasons in 2013 than previously anticipated.

FAO’s latest forecast for world cereal production in 2012 stands at 2,396 million tonnes, a record level and 2 percent up from the previous high of last year, but as much as 23 million tonnes less than reported in June. While the bulk of the increase in cereal production from last year is still expected to originate from a significant expansion in maize production in the United States, the deteriorating crop conditions due to the continuing dryness and above-average temperatures in much of the major growing regions of the country have dampened this outlook.” United Nations Food and Agriculture Organization
Three main factors are seen as driving prices higher:

•    Weather
•    Higher demand
•    Crops diverted to biofuels
 
 

Global food prices remain high, and only 6% below their February 2011 historical peak.” World Bank
Domestic prices remain high in many parts of the world, with the magnitude of increases typically exceeding price declines across countries. If the current production forecasts for 2012/13 do not materialize, global food prices could reach higher levels, underscoring the need to remain vigilant and improve the monitoring of early signals of global and regional crises.” Food Price Watch, World Bank report April 2012.

Frosts early in the year are responsible for the higher fruit and vegetable costs experienced by consumers.

Social Unrest

“Social unrest may reflect a variety of factors such as poverty, unemployment, and social injustice. Despite the many possible contributing factors, the timing of violent protests in North Africa and the Middle East in 2011 as well as earlier riots in 2008 coincides with large peaks in global food prices.” M. Lagi, K.Z. Bertrand and Y. Bar-Yam, "The Food Crises and Political Instability in North Africa and the Middle East" New England Complex Systems Institute

The increase in the price of food is the straw that breaks the camel’s back - the real cause of angst is the rising cost of living being felt in developing areas of the world. Many of these people, already living in poverty, and those on poverties edges, are far less capable of absorbing the increased costs of what is really just basic survival for themselves and their families. Yet this is the first group of people who are impacted by the coming unstoppable waves of inflation and real shortages - whether localized or temporary because of supply chain breakages or poor harvests.

Hundreds of millions of marginalized people, people perhaps counted by the billions, across all nations, will feel the extreme pinch of increased prices, across all asset classes, on their household budgets. But especially so in what those people need the most – water, food and clothing – the bare essentials necessary for survival.
The relief we’ve recently experienced from this food, or rather from this higher cost of survival driven social unrest - is very temporary, a calm before the storm. A shortage of fresh clean water for irrigation and drinking, fragile and easily disrupted food supply chains and extremely expensive (or non-existent) food, clothing and energy basics for emerging and developing nations is going to be the coming norm. And it’s going to cause chaos.
A global currency race to worthless, inefficient supply chains, intensified weather phenomena and a race to secure dwindling supplies of commodities by developed economies (and their richer inhabitants) all mean the very basics of human survival will become increasingly scarce for the poorer people in the developing world.

Conclusion

“World agricultural markets have become so finely balanced between supply and demand that local disruptions can have a major impact on the global prices of the affected commodities and then reverberate throughout the entire food chain.” HSBC report
The US is the world’s largest producer of corn, soybeans, and wheat, accounting for one in every three tons of the grains traded globally - the US dominates the global corn market but the government has cut its projected corn harvest to the lowest yield since 2003 and Doan Advisory Services said the drought may lead to the smallest corn harvest since 2006.

Living on the edge - US grain production filled critical shortages in world supply three times in the last five years:

•    2007-08 drought hit Australian wheat
•    2009 drought hit Argentine soybeans
•    2010 drought hit Russian wheat

We’re one poor harvest away from a food supply catastrophe and a repeat of the food shortages that caused the Arab Spring. This fact should be on everyone’s radar screen. Is it on yours?
If not, maybe it should be.

As a general rule, the most successful man in life is the man who has the best information

Sarfartoq Carbonatite Complex

The Sarfartoq Carbonatite Complex, in west Greenland, is 100% controlled by Hudson Resources TSX.V – HUD and is one of the worlds largest carbonatite complexes having approximate dimensions of 13km X 8 km.

The minerals of economic interest are:

Pyrochlore - a niobium and tantalum oxide. In the core of the complex there are high uranium levels corresponding with exceptionally high concentrations of niobium and tantalum, concentrations which are unusually high in comparison to other such deposits throughout the world - the Sarfartoq Project has produced some of the highest known niobium intercepts.

Uranium is directly associated with the niobium in the pyrochlore and is an effective prospecting tool used to identify other pyrochlore occurrences on the project.

Red Ankerite - the bulk material containing bastnaesite and monazite which are host to the rare earth elements. The Sarfartoq Carbonatite’s rare earth elements (REE) are generally found along the outer margins of the carbonatite.

The distribution of individual rare earth oxides, as a percentage of the total rare earth oxides, demonstrate a high proportion of neodymium oxide to total rare earth oxides.

The high grade rare earth oxides on the Sarfartoq Project are associated with low levels of thorium. As a result, the thorium radiometric signature is an effective prospecting tool for identifying additional REE occurrences.

A 2002 radiometric survey identified over 30 targets on the Sarfartoq Project but a significant portion of the area is covered by disaggregated material which may be masking additional radiometric anomalies.

Sarfartoq Project Historical Work

The Sarfartoq Carbonatite Complex was the focus of limited exploration activity after its discovery by Greenland government geologists in 1976.

Hecla Mining completed a small initial drill program in 1989 which was followed by New Millennium Resources spending in excess of five million dollars on exploration from 2000 to 2002.

Non-compliant NI 43-101 historical results include a trench sample grading 14.4% Nb2O5 over 200 meters and a diamond drill hole averaging 12.13% Nb2O5 over 20 meters starting from near surface.

Bench-scale metallurgical test work carried out on the pyrochlore material from 2000-2003 demonstrated that recoveries of over 95% for niobium and uranium are achievable utilizing solvent extraction.

No follow up work was ever done on some highly anomalous REE results in a number of areas within the outer ring structure of the carbonatite - the north area, despite the average combined lanthanum, cerium and neodymium oxides samples averaging 1.1% (a number of samples exceeded 4.0%), saw little advanced exploration.

Infrastructure

The Sarfartoq Complex is 20 minutes by helicopter from a major airport, is located near tidewater - in a year round ice free area of Greenland - and is adjacent to very good potential hydroelectric (run of river) sites.

Alcoa is currently evaluating a hydroelectric site within 15 km of the Sarfartoq project to support an aluminum smelter to be built on the coast. The hydroelectric facility would have an installed capacity of 600 to 750 megawatts. Civil infrastructure, including harbors, camps, roads and heliports would be developed to support construction of the project.

Hudson has had preliminary discussions with the Greenland government and Alcoa to ensure access to this clean, cost effective power source should it be constructed.

Moratorium On Uranium Exploration

The Government of Greenland amended the Standard Terms for Exploration Licenses and will permit - subject to their approval - the exploitation of minerals that co-exist with radioactive elements above normal background concentrations. There has been no change to the moratorium on uranium exploration and the government retains all rights to radioactive elements.

Because of the current controversy surrounding uranium mining in Greenland, and the exceptional grades of uranium - consistently hitting one percent - Hudson is not, despite average niobium grades of five percent, committing itself to working in the core of the Sarfartoq Carbonatite Complex at the present time. Instead, it is Hudson’s intention to focus on development of its rare earth prospects, in particular the REE(s) associated with the manufacture of today’s powerful miniaturized magnets.

Todays Sarfartoq Carbonatite Neodymium Mine Project

Hudson has recently released the results of a Preliminary Economic Assessment (PEA) for its Neodymium Mine Project.

The Study shows a Net Present Value of $616M and an Internal Rate of Return of 31.2 % with a 2.7 year pay-back period. The Study was based on the Company’s 43-101 compliant inferred resource of 14.1Mt at 1.5% TREO at the ST1 Zone.

A total of 16,514 meters in 71 holes were drilled in 2011 and these results have not yet been incorporated into the resource estimate or the PEA.

“We are very pleased with the results of the PEA which demonstrate the robust economics of the project. Having the project located adjacent to tidewater provides significant economic benefits in both capital and operating costs. Looking ahead, we expect to have an updated resource estimate completed in early 2012, which will incorporate all of the 2011 drill results which includes dozens of high-grade sections from 2.0% to 6.5% TREO.

We plan to update the PEA with the results of the updated resource estimate in early 2012. As the project economics are quite sensitive to grade, we are optimistic that higher project valuations will be reported in the updated PEA." James Tuer, Hudson’s President

Assays from a five tonne bulk metallurgical sample, collected on surface at the ST1 Zone, graded 2.5% Total Rare Earth Oxides (TREO). Neodymium oxide averaged 20% of total REO’s.

“The extraction of the five tonne metallurgical sample is very exciting for several reasons. Firstly, it confirms the presence of a significant amount of high-grade rare earth material at surface. Secondly, and possibly more importantly, it provides a sufficient quantity of material for us to take the metallurgy through to pilot scale testing. This sample will be incorporated into our updated resource model which we expect to have out in the first quarter of 2012.” James Tuer, Hudson’s President

Recent metallurgical test work from SRC has demonstrated successful extraction of rare earths utilizing acid baking and leaching. Test work showed that two hours of baking, at 220°C and approximately one tonne of acid per tonne of mineralized feed (concentrate) recovers 94% of the TREO.

Neodymium

The U.S. Department of Energy, in its Dec. 2011 report Critical Materials Strategy examined the role that rare earth metals and other key materials play in clean energy technologies such as wind turbines, electric vehicles, solar cells and energy-efficient lighting.

Five rare earth metals – dysprosium, neodymium, terbium, europium and yttrium are considered to be the most critical of the elements considered in the report.

Neodymium is the key to making the highest coercivity rare earth permanent magnets – the superior high strength permanent magnets used for many energy related applications, such as wind turbines (the most efficient turbines require approximately 1,000 kg of neodymium for each megawatt of electricity to be produced) and hybrid automobiles. The shift away from electromagnetic systems towards permanent magnetic-based direct drive systems is increasing demand for these high powered magnets.

Neodymium is in short supply in the global marketplace causing prices to remain robust with neodymium oxide currently quoted at US$200/kg, FOB China, and at US$100/kg, within China, according to metal-pages.com

Neodymium Mine

The distribution of individual rare earth oxides, as a percentage of the total rare earth oxides, from the Phase Two program at HUD’s Sarfartoq Carbonatite’s ST1 Zone are documented in the table below. The results are consistent with previous assay results and demonstrate a high proportion of neodymium oxide to total rare earth oxides at 19% - based on the present inferred resource the ST1 Zone at Sarfartoq represents one of the industry’s highest ratios of neodymium to total rare earth oxide (TREO).

Note that the gross amount of neodymium (Nd203, 40 Mkg in total) oxide is approximately the same at each of three locations, this is important for development of the project as a neodymium mine.

Also note; Hudson’s ST1 Zone represents one of the industry’s highest ratios of neodymium and praseodymium to TREO, totaling 25%, and that drilling at ST40 continues to intersect a very high ratio of neodymium oxide to TREO at 46%.

 Management & Board

  James Tuer - President & Director;

MBA, Mechanical Engineer. CEO of Hudson since 2000. Public company & corporate finance background (TD Securities)

  Jim Cambon – VP Project Development;

B.Sc. Geology. Over 20 years international mining/engineering project experience (AMEC, Bateman) including specific arctic project experience (Ekati, Snap Lake)

  John McConnell - Director

Professional Mining Engineer with an extensive background developing and operating mining projects, particularly in arctic regions. President of Victoria Gold

  Flemming Knudsen - Director;

Retired CEO of Royal Greenland A/s, Greenland’s largest company. Extensive world-wide business experience. Strong connections in the EU.

  John Hick - Director;

Has served in a senior capacity and/or on the board of directors of major mining companies (Placer Dome, TVX Gold, Rio Narcea) .

  Dr. John A. McDonald - Director;

He and his technical team were directly responsible for the discovery and development of the Snap Lake diamond deposit, acquired by De Beers for $480 million in 2000.

  Dr. Peter Le Couteur – Consulting Mineralogist;

A mineralogist with significant experience working with carbonatites. Ex-Cominco.

  Dr. Mike Druecker – Consulting Geologist:

Ex-Hecla, professional geologist, one of the pioneers in rare earth exploration dating back to the 1970’s.

  John Goode– Consulting Metallurgist:

48 years experience with numerous rare earth projects in China, Canada and the USA.

2012

Hudson’s plans for 2012 include the commencement of a prefeasibility study (PFS) and an extensive drill program which will further delineate the high grade zones encountered in 2011 as well as other prospective targets that have been identified around the 32 km circumference of the Sarfartoq Carbonatite Complex. With current working capital of $12.5M, the entire 2012 program could be accomplished with the current treasury.

Conclusion

There currently exists a formidable demand for Hudson’s primary target, neodymium and its other potential by-product credits ie praseodymium. Neodymium is in a supply deficit, both in China and in the west - the magnet industry demand for neodymium is expected to grow by about 10% per year.

Hudson’s Neodymium Mine Project should be on everyone’s  radar screen. Is it on yours?

If not, maybe it should be.

As a general rule, the most successful man in life is the man who has the best information

The two most common methods used by companies to return "excess" cash to their shareholders are dividends and stock buybacks – stock buybacks are currently favored.

S&P Indices data shows 305 S&P 500 companies purchased their shares in the first quarter of 2011 – at a cost of $89.8 billion. This compared to 270 company’s conducting buyback programs during the fourth quarter of 2010, 261 in the third quarter, 257 in the second quarter and 251 in the first quarter of 2010.

S&P 500 stock buybacks increased 21.6% to $109.2 billion during the second quarter of 2011 - there has been eight consecutive quarterly increases in stock buybacks.

"Companies returned to the $100 billion quarterly buyback level in the second quarter as they continued to match and control employee options, thereby protecting their earnings per share. At this point, companies are continuing to use buybacks to prevent earnings dilution from employee options, as well as shares used for dividend reinvestment programs. Few companies are venturing outside of the box to purchase additional shares, as was the common practice from late 2005 through mid-2007." Howard Silverblatt, Senior Index Analyst at S&P Indices.

Let’s consider why management might favor buybacks over one time special dividends, starting or increasing dividends:

- Management receives compensation - usually in the form of stock options - that is tied to the company stock price. The higher the stock price the more they make cashing out their options

- When a stock buyback occurs the short term implications on the stock price are positive. If a company’s stock is suffering from low financial ratios ie earnings per share (EPS) and price earnings ratio (PE) buying back stock can give them a temporary boost because they are based on the number of outstanding shares. Earnings don’t change but the EPS looks better because you’ve reduced the number of shares outstanding so management meets goals for profit growth and earn bigger bonuses

- Dividends may work against the stock price of a company by reducing the book value of the stock

- Managers do not immediately benefit from dividends as their options do not qualify for dividend payments

According to TrimTabs Investment Research companies announced $124 billion worth of stock buybacks in Q2 2011 while insiders used less than $2 billion of their own money to buy stock in the same quarter. This is one of the highest ratios of announced company share buybacks to insider stock purchases since the investment research firm began keeping records in 2004.

“We’ve never seen such a sharp contrast between what insiders are doing with their own money and what they’re doing with the money of the companies they manage. While insiders are willing to use corporate cash to try to support the value of their stock-based compensation, they don’t seem to think their stocks are attractively priced.

The ratio of announced stock buybacks to insider buying topped 70 in the first two quarters of this year.

They were by far the highest levels in our records.  How many of the analysts and journalists, cheering the big buybacks, realize that the people rolling them out aren’t buying anything themselves?” Charles Biderman, CEO of TrimTabs

TrimTabs data shows that insider buying occurred at only six of the 30 companies with the biggest announced stock buyback programs this year - totaling $168 billion dollars. The insider buying at these six firms amounted to less than $10 million, which makes an announced buyback to insider buying ratio of 16,800 to 1.

According to istockanalyst.com, insider buying decreased by 50% the first week of December with insiders purchasing just $20.6 million of their stock compared to $41.01 million the week before. Selling increased during the same time period - insiders sold $926.4 million worth of stock compared to $558.9 million the week before.

The insider Sell/Buy ratio is calculated by dividing total insider sales in a given week by total insider purchases for the week. The ratio for the first week of December 2011 is 926.4/20.6 = 44.9. In other words, insiders sold very close to 45 times more stock then they purchased.

Oh, there ain't no rest for the wicked

Money don't grow on trees

I got bills to pay

I got mouths to feed

There ain't nothing in this world for free

“Ain't No Rest For The Wicked” Cage The Elephant

Consider:

- Reducing a company’s outstanding shares does make each dollar of earnings more valuable on a per share basis. Unfortunately shareholders will not benefit after a stock buyback program has been undertaken if companies fail to reduce their share count because they have issued new stock to replace employee stock options

- Stock buybacks are almost always initiated in good times – when stock prices are high. Stock buybacks do not happen in bad times when stock prices are low. Purchasing stock at inflated prices, paying a dollar for .50 worth of stock is not an effective use of cash and some companies borrow money to pay for their stock buyback programs

- According to Fortuna Advisors companies that spent the most on stock repurchases, over the last ten years, had a total shareholder return of 37 percent versus 127 percent for companies that spent the least. Spending money on stock buybacks can halt or delay development of new products, acquisitions, diversification and spending on new plants and infrastructure

- Stock buybacks are more tax efficient than dividends. But dividends drive shareholder returns – over the last 50 years 56 percent of returns from the stock market have come from dividends

- Dividends are the only form of returns on investment that shareholders achieve during bear markets

- Dividends are valuable indicators of whether or not a stock is undervalued or overvalued and dividends put a floor under a stock

- Dividends are flexible, they give investors options by allowing them to time, and direct, income flow to where they think the best investment opportunities are at any given moment

- Dividends are a predictable and reliable source of income in retirement, relying on stock buyback programs not so much

- Research has found that paying dividends increases earnings growth

- Companies that regularly pay dividends have imposed fiscal discipline on their managers. There’s no empire building, instead focus must be on improving the bottom line without sacrificing return on equity

- Stock buyback programs can be cancelled and most investors would not notice while dividend payments are highly visible to shareholders and cutting or eliminating a payment creates warning signals something is amiss

Conclusion

Knowing what we now know, in regards to current stock buyback programs and insider selling, is it any wonder that managers prefer stock buybacks as opposed to special one-time dividends, starting or increasing existing dividends?

Each companies share buyback program will have to be individually judged by their shareholders as to its worth – but with very few corporate insiders willing to put their own money where they are putting corporate cash and with heavy, long term insider selling taking place, perhaps existing shareholders and potential investors had better take a hard look at just what is happening.

Whether or not there is a relationship between buybacks and insider selling in the company you own, the bottom line is that share buybacks usually do nothing to create long term shareholder value and are never a match for a steady, and sustainable, dividend.

There are many studies, easily accessible online, that have shown that the companies with the most consistent, and quickly rising dividends have greatly outperformed the overall market.

For those in search of appreciating retirement income streams, or income in bear markets and times of uncertainty, dividend paying stocks – companies returning “excess” cash to shareholders in the most beneficial manner - should be on every investors radar screen.

Have you got a few good dividend stocks on your radar screen?

If not, maybe you should.

Richard (Rick) Mills
rick@aheadoftheherd.com
www.aheadoftheherd.com

If you're interested in learning more about the junior resource sector, bio-tech and technology sectors please come and visit us at www.aheadoftheherd.com

Site membership and our AOTH newsletter are free. No credit card or personal information is asked for.

***

Richard is host of Aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 300 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell, Uranium Miner, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FNArena, Uraniumseek, and Financial Sense.

***

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.

Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report. 

As a general rule, the most successful man in life is the man who has the best information

I’ve read the following articles so many times I can just about recite both from memory. I found them years ago, there were no author’s name attached, no credit given, but anon thank you, you’ve helped keep me focused.

I hope readers find both pieces as useful as I did.

Richard (Rick) Mills

***

Two Bullets

Several years ago, I met someone, Trader Joe, who was an expert technical trader. I call him an expert because he lived off of his profits, he was financially independent, and he frequently went on random scuba diving and bird watching vacations at the drop of a hat.

Since this was a time when I was diligently honing my trading skills, I often corresponded and spoke with him about trading. I already had a system in place, so that’s not what we concentrated on. Instead, he helped to educate me about the mental side of trading. And what he shared with me has helped to define my success as a trader.

To that point, I had never really acknowledged that there was a mental side to trading. After all, I was just looking at charts and playing the setups. But I have to admit, playing the setups wasn’t working out too well.

At the time, I was making about 7-10 trades per month. Most didn’t do so well, but the ones that did always made up for the losses and kept me at a small gain. My account was up, so I figured I was doing okay. But I also knew that the great traders like Paul Tudor Jones and Ed Seykota were able to consistently make many times the returns I was making. In case you’re wondering, Seykota increased one of his clients accounts by 250,000% over a 16 year period (after withdrawals) and Jones realized five consecutive triple digit return years.

I knew there were flaws in the way I was trading, but I didn’t understand what I was doing wrong. So, I shared my predicament with Trader Joe. I asked him why in the world I could not make a yearly gain over 12%.

He laughed... and then he gave me some of the best advice I’ve ever received.

But he didn’t tell me directly. He imparted his wisdom in the form of a story:

“Imagine that you’re a deer hunter and you only have two bullets. You cannot get any more bullets until next month. If you miss your shots, you won’t be able to eat any meat this month. But if you make one of the two shots, you’ll eat well.

“Now every time you walk into the forest you patiently wait… and wait… and wait. Most of the time in the forest you don’t even see a deer. Some days you might see an occasional rabbit hopping around. Do you shoot at the rabbit hoping that later you can get a deer? Or do you wait?

“If you hit the rabbit you can eat for a day. But if you miss, you have just wasted one of your bullets on the chance for a small meal. You decide the rabbit is too small for the risk involved, so you keep waiting.

“A few days later you see a deer, but it’s not a clear shot. Do you shoot? If you miss, you’ll have only one bullet left. You decide the risk in missing the shot is too great, so you wait.

“The next day, you see a big buck in clear sight about a hundred yards away. Now the shot is nearly guaranteed. You take your shot and you nail it.”

I immediately understood what he was saying.

I’m the hunter, the market is the forest and my money is my ammunition. Once I run out of money, game over. But if I choose only the best shots, I will do well. In other words, you only want to trade when the odds of winning are heavily in your favor.

In my case, I was trading on setups that were mediocre. To pull the trigger, I needed four of my indicators to line up and scream buy or sell. But when I looked at my past record, I discovered that most of the trades I entered were not based on my system. I would become impatient, often trading when only two of my signals lined up, instead of all four.

In other words, I was shooting at rabbits and taking difficult shots at deer that were out of range. Sure, I might have made a lucky shot here and there, but the odds were not in my favor.

By simply reducing the number of trades and only making those that were optimal, I dramatically increased the profits I earned.

Trader Joe told me I wasn’t alone in making these mistakes. He said new traders do this all the time, perhaps that includes you.

Maybe you become impatient, looking for excitement and feeling that you are missing opportunities if you’re not in the market. Nothing could be further from the truth.

By simply limiting the number of trades you make to those which put you at the greatest odds of winning, you will save money on commissions AND put more money in your account. After all, trading isn’t about excitement; it’s about making money.

There’s no question that Trader Joe’s advice has improved my success. I can’t thank him enough. And I hope that you will benefit from his advice as well. So the next time you’re looking at your trading record and you see less than optimal results on a high number of trades, just ask yourself:

You only have two bullets. What do you do?

Author unknown

***

Baron Rothschild

Let's play a little game – it's called “Baron Rothschild,” who once said “I made my fortune by selling too early” (a comment also made by Bernard Baruch). It's a lot like various kids' games where you know something bad will happen but you don't know when. These include “Musical Chairs,” “Don't Break the Ice” (where you take turns hammering out little ice blocks hoping that you won't cause the whole surface to collapse), or “Kerplunk” (where a load of marbles rests on sticks that have to be removed one by one). My impression is that investors are playing this sort of game here.

Suppose that the dealer lays cards down, one after another. Each is an annual market return. At any time, you can call out “Baron Rothschild” and go to a defensive position, or you can gamble and get the market return the dealer shows next. The gain cards read - 15%, 20%, 25% and 30%. If you're in a defensive position you lag the market by 10% when the market return is a gain, but you get 5% if the market return is a loss.

There is one -20% loss card. Once it appears, the game ends and everyone counts their dough.

It turns out that if the loss comes anytime before the 5th card, you're almost always ensured to beat or tie the dealer by immediately blurting out “Baron Rothschild” even before the first card is shown. For example,

20%, 20%, 20%, 5% beats 30%, 30%, 30%, -20%.

15%, 15%, 15%, 5% beats 25%, 25%, 25%, -20%.

20%, 10%, 5%, 5% beats 30%, 20%, 15%, -20%.

5%, 5%, 5%, 5% ties 15%, 15%, 15%, -20%.

You can easily prove to yourself that even for a six-year market cycle, you still generally win even if you call out “Baron Rothschild” after year two. Meaning it just doesn't pay to risk the big loss.

The point of this isn't that investors should always take a defensive stance - some market conditions are associated with very strong return/risk profiles that warrant substantial exposure to market fluctuations. The point is that the avoidance of significant losses is generally worth accepting long periods of defensiveness - the mathematics of compounding, large losses have a disproportionate effect on cumulative returns.

Remember that historically, most bear markets have not averaged 20%, but approach 30% or more. A 30% loss takes an 80% gain and turns it into a 26% gain. It's difficult to recover from such losses.

The avoidance of significant losses is typically worthwhile even if, like Baron Rothschild, one is defensive "too soon."

Author unknown

***

Richard (Rick) Mills
rick@aheadoftheherd.com
www.aheadoftheherd.com

If you're interested in learning more about the junior resource sector, bio-tech and technology sectors please come and visit us at www.aheadoftheherd.com

Site membership and our AOTH newsletter are free. No credit card or personal information is asked for.

***

Richard is host of Aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 300 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell, Uranium Miner, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FNArena, Uraniumseek, and Financial Sense.

***

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.

Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report. 

As a general rule, the most successful man in life is the man who has the best information

Today I’m speaking with Patricio Varas, P.Geo., Chief Executive Officer and Director of Western Potash Corp. TSX – WPX

Pat has over 24 years experience in exploration, project development and corporate management. Mr. Varas has worked and collaborated with major, multinational and junior mining companies in exploration and development projects that span North and South America, Europe, Africa, Asia and Australia.

Pat was involved in the discovery of the Diavik Diamond mine as a project manager while at Kennecot Canada Inc. and was instrumental in the project management that led to the discovery of the Santo Domingo Sur iron and copper deposit in Chile with Far West mining.

Rick: Let’s do an overview of the global potash market - what’s going on out there regarding potash from a global perspective. And then we’ll bring it down into Saskatchewan and then get right into Western.

Pat: Sure. From a needs perspective, and you’ve been saying this all along in your letters, the world needs more food and it’s going to continue to need more and more food. World grain production has simply not kept up with the rising demand. You can’t get away from utilizing the NPK fertilizers, they are responsible for 50% of the current crop yields. In fact, you’re going to see an increasing demand, in particular for potash, as a part of the new global balanced fertilization approach. Potash application rates will benefit as it is currently the most under applied nutrient. However, a balanced application of fertilizers improves the efficiency of all the nutrients and therefore provides significant economic return to farmers.

The bottom line? There’s going to be more people, and more money in more pockets and they are all going to want to eat more and better foods, as you say they will climb the protein ladder. When grain and oil seed production is converted into meat protein and fuel this effect is magnified. So the long-term and short term outlook is that the industry expects record global demand for potash to continue. You wouldn’t have the BHPs, the Rio’s and the Vale’s becoming involved or getting more involved if this wasn’t so. BHP is forging ahead and developing potash resources. Why?

Because they also believe there is going to be a lot of demand for it. They’re not going to go into the market and kill it. They think that the market is going to grow.

We at Western Potash want to be one of those expansion mines, and of course with a solution mine like ours that can be done in a fairly short period of time compared to other types of mines.

Rick: Some investors have been asking me am I worried about the existing larger players ramping up production and deliberately causing overproduction and a subsequent price drop. My answer is no, there’s 220,000 more mouths to feed every day. That’s how many people are being born every day. You’ve got an increasing disposable income in a growing middle class. You’ve got a huge loss of arable land, topsoil degradation. You’ve got desertification and climate change. There’s many reasons that the market will absorb any kind of a ramp up.

Pat: In the next 40 years, the chances are that some older mines are going to become more inefficient. Some of them may be lost, people don’t think about that. There’s also, as I have been saying, an underutilization of potash, Africa is an example, they don’t use a lot of potash. So in terms of demand we’re talking about A) the countries whose economies are starting to develop and have the ability to really get into farming and B) underutilization which is part of the balanced fertilizer approach that I spoke about earlier.

Rick: Africa’s got a billion people. They’ve got a middle class that could be approaching 300 million, they’re going to be climbing the protein ladder. You get this picture of drought and famine in some African countries, that’s a tragic picture but it’s not the whole picture. A lot of African countries have better incomes than Indians and their stock markets, their GDP, are growing much faster than India’s and China’s.

Pat: We’re not too worried about the demand picture. I’ve been travelling to India and China, we’ve talked to all kinds of fertilizer companies and distributors. We go to a lot of these fertilizer conferences, and we get lots of interviews, one on ones, with people who want to buy potash because their projections see that they need potash, and they also need a diversity, they need other people to buy from.

There is no competition out there. They feel like they’re under the gun buying from one supplier. So are they are going to support an independent producer like we’re trying to be? I think they would.

Rick: China and India have to be very interested in securing some Saskatchewan potash.

Pat: I know for a fact they are because we’re talking to various groups from China and India and our impression is that they’re very keen on acquiring assets. I expect they’re more than keen. They have a mandate from their governments to acquire assets, and in particular, potash assets.

Rick: That’s both the Indians and Chinese?

Pat: Absolutely. You know in India they’ve had all kinds of food riots. The Indian government is very aware they have to feed their people, remember that in India potash buyers get hugely subsidized. The budget for fertilizers in India is bigger than their military budget.

Rick: That’s interesting.

Pat: India’s economy is 60% agricultural based so there is no surprise that  they imported 6.3 million tonnes of Potash in 2010.

Rick: How bad is the Chinese market in this regard?

Pat: The Chinese are in the same situation. They currently produce 30% of what they utilize, and all they’re seeing is an increase in demand with minimal increases in domestic production.  The Chinese are very keen to acquire potash assets. Potash Corp has predicted that consumption in China has the potential to increase from 9MT to over 25MT if they adopt a balanced fertilization approach.

Rick: Some other large population bases, Indonesia for example, are they in the same boat, Pat?

Pat: Yes. They’re players you don’t hear much about but when we go to the conferences, we meet with them. They want to find out how they can get off-take agreements, how can they get some security of supply. In these countries palm oil (an extremely lucrative crop) is the major driver of potash demand.

Rick: There are quite a few players, and wannabe players, both countries and companies, that can afford to step into or expand their presence in Saskatchewan, Canada.

Pat: Absolutely, absolutely.

Rick: Western seems to be sitting in a pretty sweet spot. Why don’t you tell us how this came to be. Give us the basic rundown on how you put it together.

Pat: Our group has been involved in mineral exploration and building mines our whole careers. We’ve worked with Rio Tinto, we were involved with the discovery and development of the Diavik diamond mine. Most recently I put together the Santo Domingo Sur iron and copper deal in Chile. I put together the land packages and the programs that discovered that deposit, this was all done through an alliance with BHP Biliton. That project was bought out by Capstone, and they’re going to take it to production.

Over the last 10-15 years we’ve gotten a pretty good insight into what BHP and Rio Tinto have been working on. Around 2007 we recognized that both of those big mining companies were getting involved in potash. We thought that if these big companies are becoming involved there’s a business there, there’s huge opportunity.

That’s because the only businesses they’re interested in are big businesses. All our careers we’ve been looking for the kind of mines that these big businesses want, so why not look for one in our own vehicle? We created Western Potash to go out and look for potash assets that had merit.

Rick: You and your team saw the opportunity and leveraged your skill sets and experience to try and build something of value.

Pat: We’re a very, very competent exploration group having done a lot of great exploration all around the world. We started at square one, the jurisdiction of course had to be Saskatchewan, Canada. When you go into a new district, you have to first compile the data. We went and bought all the data we could and started our research.

Rick: In my article “The Ready Bullion Boys” I said “Prospecting success, finding showings, is still possible after a careful study of mining records from areas with favorable geology and drill programs that are targeting these showings should be on every investors radar screen.” This applies equally as well to potash as it does to gold.

Pat: Research is key. We recognized that there were reasons why, at the time, there was a lot of open land in Saskatchewan. We thought, why are Potash Corp, Mosaic, and Agrium not securing more land around their projects? 

If you want to build a conventional mine, you need to be in the part of the potash belt that is closest to the surface because the deeper you go, the more expensive your CAPEX (cost to build the mine) is and the higher your operating costs are.

Yet we saw a solution potash mine run by Mosaic called the Belle Plaine Mine. That mine is at the very southern edge of the basin and its very deep at 1600 meters.

We thought, why there, why so deep? To liberate potash from solution you need lots of energy, in the form of natural gas (NG), to heat the solution, evaporate the waters and recover your salts. The higher the temperature of the underground solution you start with the more potash dissolves into it, and less NG, less energy is used for evaporation.

Obviously your yields and economics improve.

These two things drove our land selection, conventional or solution mine. Right or wrong, our due diligence was a process in which we had to look for advantages that were going to have long-term effects. The idea was, if we discovered something that had the right grade and the right thicknesses then we were looking at having better economics simply because we had selected the project with a little bit of thought.

Rick: The recent prefeasibility study (PFS) for Milestone was very strong, but at the same time understates just how robust this project is.

Pat: I think that what we’ve proven with the Milestone Project is the time we spent doing the research was time well spent. We’ve delivered what I think is an outstanding project. We’re now talking about a project that has terrific grade, better than what you see at the Belle Plaine Mine and what you see at Potash One’s Legacy Project. Our thicknesses are quite adequate and in fact they make up a very significant resource. The mine plan in the PFS is for 40 years but our resource has more than 90 years of mine production and beyond available to us.

A lot of our potash is in the inferred category and was never included in the PFS. This potash will be moved into the measured and indicated categories over the lifetime of the mine.

The PFS shows a project with an impressive net present value (NPV). It’s an incredibly valuable project, Milestone is a big mine, a mega mine. If Milestone was in production today it would likely generate revenues better than $1.2 billion a year. That’s a big project.

Of course that brings up our next challenge, to try and secure the financing to put it into production. And that’s no small task when you’re talking about a CAPEX upwards of $3 billion.

Rick: The numbers are right off the charts, $1.2 billion and $3 billion. On the other hand, K + S bought Potash One’s Legacy Project last year for damn near $450 million, and potash prices were some 20 percent lower last year than they are now.

Pat: K+S were thinking long term, Legacy is going to be in production for 100 years. The $450 million, that’s just their ante, they are still going to have to spend another three billion to put it into production on top of that. (K+S has just announced they are moving forward with building their Legacy Mine at a cost of $3b – Rick)

Rick: Yes, three billion for building the Legacy mine, $2.7b for Milestone, but nobody ever mentions that your building a mine that will be generating $1.2 billion a year for close to a century at today’s potash prices. Hard to believe these mines will still be producing potash to feed the world after almost everybody who is born in the next twenty some years dies.

Pat: Exactly. You recover the purchase price and CAPEX in just a few years - but the big hurdle is getting the funds to get the mine built, people think it’s a big apple to take a bite of.

Rick: Western needs to show the market your capable of attracting partners and signing off-take agreements.

Pat: We’re professionals, we’ve got a process in place. What we’ve done is put together a commercial team whose task is to go out and find all the parties that can execute on a project like this, who want to have an  ownership piece of a potash mine. We’re looking for the people who want to build real value, real mines and we’re talking to a number of them.

Rick: Some people think the Milestone project is too big for a junior and it needs to be in the hands of a major mining company.

Pat: Well that could happen. Somebody could come in tomorrow and offer $2.50 a share. For a lot of investors that’s a pretty good win. But they forget that if they were to hold on and stick around till we’re valued on earnings the stock would be valued at 10 or 20 times what it trades today.

What big businesses are looking for is a return, they would like to buy us at the lowest price possible. What we’re trying to do internally is to find a partner(s) that’s going to help us and leave our shareholders with a large or a significant portion of the shares so that we can benefit from that uplift, from the value creation being a producer gives us.

Do I think that partner is there? Well, like I said, we’re in discussions with a number of groups and if we seal one of those deals we’ll be having a different conversation next time.

Rick: I look forward to that discussion. We first talked two years ago, the progress that’s been made by you and your team since then is tremendous.

Pat: We’re pretty proud of what we’ve done. The crew that I have, they’re really good. They’re technically sound, and they have experience managing some big projects around the world, we have a lot of confidence that we can get this done.

Rick: A lot of people think juniors are nothing but a crapshoot, but I’m not one of them. I think that’s absolutely the furthest thing from the truth. I firmly believe that this is a people’s game, you do not invest in projects or share structures, you invest in people with ideas and the ability to carry them to fruition.

Pat: Yes, look at our track record. Western Potash is not that old. We were formed in 2008, that’s when we went public, we started drilling the Milestone Project in June 2009, look where we are today.

We’re already embarking on a feasibility study. We’ve raised well over $80 million. I don’t think that you could raise $80 million if there weren’t people who believe in us. A lot of our shareholders have been with us before on other projects, or they’ve seen us do some really great things working with Rio and other major companies. They believe in our abilities, and of course at the end of the day like you say, people are what make a company, one that delivers projects. It’s people.

Rick: It’s the people that drive the events news releases are about, without the right people steering the ship, it’s a fact that the company is going nowhere.

Pat: And we’re moving this, we’ve brought it along to a place where people are starting to pay notice. We’re getting more coverage by the analysts and most of them are pretty positive. The ones that are not so positive are the ones that think the task is too large. How about that, you start with the intention of, and do all the necessary work to find a monster mine, you find one, and now the task is too large.

Rick: You’ve got a very positive prefeasibility study, you’ve got your commercial team talking to potential partners. What’s our next step on the road to developing Milestone, can you lay that out for us over the near and middle term, Pat?

Pat: We have several teams working. Concerning our operations people, their task is to continue to bring the project along, so we have people that are working on memorandums of understandings (MOU) for rail and port access and water and of course there’s teams working on the environmental and the engineering sides.

In the near future and into the midterm you are going to see different kinds of news, mostly things that happen when you build a mine, you’ve secured power, you’ve secured a railway contract, maybe we lease cars, maybe we buy them.

What you might see is news regarding a deal with a potential partner or securing a deal with a financial group to continue to fund, with equity, some of the development parts.

What you’ll definitely see is us continuing to move this company forward in its development process.

Rick: Anything you want to add?

Pat: When a company actually has a real asset a lot of the smaller investors lose interest because you’re just going to be building a mine, the discovery phase is over, there’s a resource. Until you have a different evaluation based on the money for production having been raised and being closer to earnings sometimes stocks suffer.

Rick: Yes, money is secured, construction is ongoing and investors can see cash flow coming over the horizon. Magic things happen to the share price, but you’re right, there’s always that dead spot.

The bottom line is, and shareholders might not even realize it, but value is continually building. You can have what looks like the nicest deposit in the world, but until you have all your studies done and your permits in place, you don’t have a mine.

Pat: Exactly. When you have a PFS that’s telling you this is going to be such a nice mine it gives you the drive to make it a reality. Rest assured, we’re going to continue to put our heads down and bring this project forward.

Rick: Potash is not something that is ever going to fall out of favor. You’re not going to feed today’s population without it, and you’re certainly not going to feed the 4.5 billion people that we’re going to add in the next forty years without more of it.

Pat: A lot of people, including some analysts and financial guys, see Western and Milestone as a great M&A buying opportunity. My biggest fear has nothing to do with the project itself, whether it’s a good project or whether it has the right grades, it’s nothing like that. My biggest fear is that we’re going to get people out there realizing how great this project is and they’re going to try and buy it from us or from the market.

Rick: I’d be surprised if they didn’t. But that’s two realistic outs, get bought out or move forward with a partner. Investors need to show some patience, wait for it to play out.

Pat: Exactly.

Rick: Thank you Pat, it’s been a pleasure.

Richard (Rick) Mills
rick@aheadoftheherd.com
www.aheadoftheherd.com

If you're interested in learning more about the junior resource sector, bio-tech and technology sectors please come and visit us at www.aheadoftheherd.com

Site membership and our AOTH newsletter are free. No credit card or personal information is asked for.

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Richard is host of Aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 300 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell, Uranium Miner, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FNArena, Uraniumseek, and Financial Sense.

***

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sourc]]> Mon, 05 Dec 2011 13:22:00 -0500 http://www.proactiveinvestors.com/columns/ahead-of-the-herd/642/ahead-of-the-herd-with-western-potash-0642.html http://www.proactiveinvestors.com/columns/ahead-of-the-herd/634/worlds-largest-miners-like-potash-0634.html

As a general rule, the most successful man in life is the man who has the best information

Miners are looking to enter the potash business, or expand existing operations, as they look for increased demand from developing nations such as China, India and Brazil.

BHP Billiton - In the spring of 1869 a German Chemist named Charles Rasp immigrated to Australia for his health. Unable to find work in his chosen trade Charles learned to ride a horse and began wrangling sheep. One day, while out riding his horse at Broken Hill, he discovered mineralized rock. He took out a mining lease, punched holes in the ground and eventually found rich veins of silver. The Broken Hill Proprietary Company – BHP - was incorporated in 1885 while mining silver and lead at Broken Hill in western New South Wales.

Billiton was a mining company that got its start in September 1860 when the articles of association were approved by a meeting of shareholders in the Groot Keizerhof Hotel in The Hague, Netherlands. Shortly afterwards the company acquired the mineral rights to the tin-rich islands of Banka and Billiton off the eastern coast of Sumatra.

BHP Billiton - also known by the nickname "the Big Australian" - is the world's largest mining company. It was created in 2001 by the merger of Australia's Broken Hill Proprietary Company and Anglo-Dutch Billiton. Today BHP produces - oil, natural gas, bauxite, aluminum, copper, silver, lead, zinc, uranium, diamonds, coal, titanium, well, you get the idea, they’re miners, they pull “stuff” out of the ground and sell it.

BHP, seeking to benefit from surging demand for fertilizer made a $40 billion hostile bid for Potash Corp. of Saskatchewan Inc. Yielding to political pressure, Canada’s Federal government nixed the deal.

BHP paid $341 million, C$8.35/share, to acquire Saskatoon's Athabasca Potash (TSX: API). This acquisition will give BHP Athabasca’s Burr Project, which is located next to BHP’s Jansen Project.

BHP Billiton announced on 24th June 2011, a further investment of US$488 million to support development at its Jansen Potash Project. This piece of additional capital will fund site preparation and the procurement of long lead time items during the project’s feasibility study. This funding will also enable BHP to develop the first 350 meters of the production and service shafts.

The announcement takes BHP Billiton’s investment in Jansen to, so far, $1.2 billion.

BHP likes big stories, the unfolding potash story is one of the biggest and in this author’s opinion it can only get bigger.

Vale S.A. - Formerly known as Companhia Vale do Rio Doce (CVRD) was founded by the Brazilian Federal Government in June 1942. The company was privatized in 1997 when the Brazil Consortium bought just over 40% of the Federal Government’s stock.

Even though Vale has operations in the energy and logistics sectors both sectors combined contribute less than ten percent to Vales total revenues. Vale is a miner and controls the Brazilian iron ore industry owning all Brazilian iron ore exporters.

In recent years, in an attempt to diversify its operations, Vale has made a string of purchases getting into copper, kaolin, nickel and coal. In October 2006 Vale bought Canada’s second largest mining company, Inco, for $18.9 billion. Vale also produces manganese, ferroalloys, bauxite, potash (Sergipe mine in Brazil), alumina and aluminum.

Vale S.A. has moved into the fertilizer business in a big way:

In January of 2009 Vale bought Rio Tinto’s potash assets in Argentina and Saskatchewan Canada for US$850.

In January 2010 Vale announced it would acquire all the shares of Bunge Participacoes e Investimentos S.A. (BPI). Vale will pay $1.65 billion US for BPI - for its wholly owned phosphate mining operations in Brazil - and another $ 2.15 billion US for its 42.3 percent in Fertilizantes Fosfatados S.A. (Fosfertil) - a leading Brazilian fertilizer company.

Engineering work has started at Vales Rio Colorado solution mining potash project in Mendoza, Argentina. Estimated start-up is for the second half of 2014 with a nominal capacity of 4.3 Mtpy year of potash.

Vale said it’s planning to consolidate its position in the potash industry by taking its fertilizer unit private. The change would give the Brazilian-based miner more control over the business that now represents about 2 per cent of global potash production. Vale is planning to build a $3 billion potash project in Saskatchewan, and has other potash projects in its pipeline.

Rio Tinto – A site along the Rio Tinto river in the Andalusian Province of Huelva, Spain has been mined for copper, silver, gold, and other minerals since 3000 BC.

After being lost for centuries the mines were rediscovered in 1556, the Spanish government began operating them in 1724 but sold them in 1873

to Matheson and Co. Hugh Matheson formed a syndicate consisting of Deutsche Bank (56% ownership), Matheson (24%), and railway firm Clark, Punchard and Company (20%). The syndicate registered the Rio Tinto Company on 29 March 1873. The Rothschild family had control by the end of the 1880s.

After selling its South American and Saskatchewan, Canada potash assets in 2009 to cut debt Rio has re-entered the potash business. The company is teaming up with North Atlantic Potash Inc. - the Canadian subsidiary of Russia's JSC Acron, a fertilizer producer - to hunt for potash in Saskatchewan.

A joint venture between Aluminum Corp. of China (Chinalco) and Rio Tinto has received approval for exploration in China. The JV will initially focus on exploring for copper in China but has plans to expand into coal and potash.

"This is a solid business and the big mining companies agree. If they can find a way to participate in it, they will.” Mark Connelly, New York brokerage Sterne Agee.

As I’ve just shown you, three of the world’s biggest miners are moving into fertilizer in a big way.

Consider this plus $3.6 billion investment into potash…

K+S AG - Bought Canada’s Potash One, the previous owners of Legacy, in a 2010 deal worth $434 million. Potash prices at the time were 40% lower than today.

After saying on March 8^th 2011 that it expects global demand for potash to rise 3-5 percent per annum, Europe's largest, and the worlds fourth largest potash producer, Germany’s K+S AG said on November 29th 2011 that it will move forward with construction of its $3.2 billion Legacy project in Saskatchewan.

The reality is the potash story is just starting. Unlike other resource plays there is no cycle, demand is always going to be there and its rising year over year making potash an excellent play in what will be a long term agricultural commodities bull market.

“Just when we need more soil to feed the 10 billion people of the future, we’ll actually have less—only a quarter of an acre of cropland per person in 2050, versus the half-acre we use today on the most efficient farms.” David Montgomery, author of the 2007 book Dirt: The Erosion of Civilizations

Fertilizers are going to become increasingly important for many reasons:

• There’s 220,000 people being born every day, that’s 220,000 more mouths to feed every day
• An increasing disposable income in a growing middle class, more money in more pockets means more and more people climbing the protein ladder
• Loss of arable land, topsoil degradation
• Desertification and climate change
• The Green Revolution's impact on crop production is declining, in some cases reversing
• Some older mines are going to become more inefficient or be lost
• Underutilization of potash in many countries
• Demand from the countries whose economies are starting to develop and have the ability to get into farming
• Security of supply

Conclusion

Two junior potash players who are trying to become independent producers are on this authors radar screen. Both could threaten the industry dominance of the two main potash marketing companies.

Canpotex Ltd. and Belarusian Potash Co. control two-thirds of the global market - Canpotex markets potash produced in Saskatchewan by Potash Corp., Mosaic Co. and Agrium Inc. while BPC is an arm of Belaruskali and Russia’s Uralkali.

China produces just 10% of the potash it utilizes, India’s economy is 60% agricultural based and the country produces very little potash. Brazil is one of the worlds breadbaskets and imports most of its potash. Both the Chinese and Indians have groups given government mandates to secure potash assets. Brazil’s government is also very active in regards to its agricultural sector.

There’s a global macro theme - “Feeding the World” - and certainly longevity to the potash story.

Potash should be on every investors radar screen. Is it on yours?

If not, maybe it should be.

Richard (Rick) Mills

rick@aheadoftheherd.com

www.aheadoftheherd.com

If you're interested in learning more about the junior resource sector, bio-tech and technology sectors please come and visit us at www.aheadoftheherd.com

Site membership and our AOTH newsletter are free. No credit card or personal information is asked for.

***

Richard is host of Aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 300 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell, Uranium Miner, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FNArena, Uraniumseek, and Financial Sense.

***

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report. 

No company’s mentioned are sponsors of Richards site aheadoftheherd.com

Richard does not own shares of any company’s mentioned in this article