AN INTERVIEW WITH JOHN KAISER EDITOR, BOTTOM FISHING REPORT
(As of September 13, 2009)
We are with John Kaiser of the Bottom Fishing Report and
John is always looking for cheap stocks that are dear to
many out there, but John’s had an amazing role in the last
few years because he was one of the first to recognize the
potential for rare earths which he feels is going to become
a mania.
First we need some comments from John on what
he sees for the world economies and particularly commod-
ity stocks because he is essentially a follower of resource
David Pescod: So John, how do you see the economies of
the world and the principal metals?
John Kaiser: The economic boom we had after the dot
com bust was driven largely by a boom in credit made pos-
sible through mortgage securitization which fueled a real
estate price boom that reinforced the lending process. The
rising equity in people’s homes became the means for fuel-
ing a consumption binge which also enabled China to build
up enormous production capacity and to export deflation
through very, very cheap goods.
Ultimately, this spun out
of control and we had the financial crash of 2008 where this
party is over. So we now have the biggest economy of the
world (United States), no longer able to manufacture paper
that it can ship overseas as payment for the goods that are
imported and this has created a problem for China too,
which had an enormous export dependency. China's reac-
tion has been to use its $2 trillion foreign reserve to go on
a global asset-buying binge and to use it as collateral for
its internal infrastructure development by extending trans-
portation and energy infrastructure inland where more than
half of the population exists and is comparatively poor,
relative to the people on the coast where the export indus-
try evolved. So, they are solving several problems with
this approach.
One is that they are defusing the social
tension that has been building up between the coastal and
inland populations. Secondly, they are enabling a domestic
consumer economy to grow, and thirdly, and this is really
interesting with regard to my belief that rare earth mania is
going to kick in – China, despite its reluctance to partici-
pate in any sort of Kyoto protocol climate change agree-
ments and so on, is seriously embracing clean energy and
emissions control strategies because China sees its des-
tiny as becoming the greatest nation ever.
But what is the point of celebrating that achievement
when it happens decades from now in a cesspool? So
they are now embracing green technologies and they are
starting to think about the commodities that are critical to
new stuff like wind turbines, electric cars and so on.
To get back to your earlier question about the global
economy, this infrastructure build up by China is enabling
demand for raw materials to bounce back from the shriek-
ing halt it hit in 2008 when the global economy ground to
a halt. In the United States, following the election of
Obama, we are seeing infrastructure build-up as a form of
fiscal stimulus – old fashioned Keynesian stimulus by
running big deficits. If we are going to indebt the younger
generation, we might as well do it by rebuilding the energy
infrastructure in a new way that’s going to enable the
United States to survive for many decades.
Because the United States’ edge has always been techno-
logical innovation, again the rare earths are becoming
very topical because they have these unusual properties
which can push materials to do things that have never
been imagined before.
D.P: If you are seeing a bit of this economic recovery,
particularly in Asia, a person should feel comfortable with
current commodity prices for copper, nickel and so forth
and that they might stay at these levels? I guess we
should get you to make a comment on the one metal that
everyone is talking about these days with gold at $1000?
J.K: I agree that the pessimism about raw material de-
mand is completely overdone. We had a situation where
demand momentarily screeched to a halt, we had metal in
the supply pipeline that kept coming so the prices came
down. But then all kinds of new production plans were
shelved, marginal mines were shut back, so this imbal-
ance was corrected very quickly. Both the Chinese and
the European/American infrastructure strategies are long-
term pulling up the demand for raw materials. As part of
my vision of the United States losing its role as the domi-
nant economy, I see net investment demand for gold ris-
ing, rising, rising. For 25 years, gold has been one of the
worst investments out there but that was because we saw
gold rise ten to 20 times from $35 in 1972 to a peak of
$800 – back to $400 and then the market spent 25 years
digesting Central Bank selling and all this new gold that
came on stream from mines that were suddenly in the
money big time. Because it takes four to eight years to
put a mine into production, we had a massive rush to take
all these gold systems and put them into production dur-
ing the eighties.
Similar to what we saw in the commodity sector during
the last five years with nickel and copper, we are now go-
ing to see that happen with gold again because after 25
years of supply digestion, the marginal costs for gold
mines have gone way up and for more new supply to
come on stream, we need a dramatic real increase in the
price of gold. So we have a classic imbalance developing
where net demand is rising while supply declines or stays
flat.
D.P: Which gets us to the next point of course…just
where do you see gold going in the coming years?
J.K: I’m not of the view that the U.S. dollar is going to
collapse and the mighty Euro is going to dominate. I see
gold rising against all currencies and possibly in the long-
run we will see a global, but I do see a real rise in gold
prices. I see gold going to $1200 to $1500 in the next six
to 12 months without a corresponding decline in the U.S.
dollar which has an offsetting inflationary impact on the
cost structure of gold mines. Such a move, which would
be 20% to 50% from the current $1000 level, is huge for
companies which have ounces in the ground because that
type of real move is going to put the net present value
calculations into the money big time. I see rising invest-
ment demand as a long-term process where more and
more people simply put small portions of their wealth into
gold as way to deal with the uncertainty that will charac-
terize the next 20 to 30 years. There will be plenty of geo-
political crises, extreme currency fluctuations, and you
cannot count on paper assets such as debt and even eq-
uity in real companies holding their value. But whenever
one of these crisis happens, if you own gold wait for the
dust to settle, you still will own gold. So globally, I see the
demand now reaching the tipping point where it is going
to go and gobble up much more than is available and that
will result in a dramatic upwards re-pricing of gold. It will
not be as extravagant as the 1970’s where gold emerged
after 100 years of a controlled price. While a 50-100%
move from current levels over the next five years in real
terms is considerably tamer, the leveraged impact such a
move would have on the value of undeveloped gold de-
posits will be substantial.
D.P: When you are talking about the gold price, we notice
that sales of gold coins are down. Sales of jewelry in In-
dia are down and ETF’s seem to be making a big differ-
ence. Where is the demand for gold going to come from?
J.K: The demand for gold comes from all sorts of places.
In the United States – the ETF buying comes mainly from
people aged 55- 65 buying it in their retirement accounts
as a long term investment.
It is estimated that $2 trillion is sitting in various money
market funds around the world earning next to nothing.
All you need is a portion of that to shift into gold to cre-
ate that price tipping point. One of the important things
about gold is that gold is no longer owned to make a
profit. It’s owned as a long-term investment and all the 5
billion ounces in the world right now are worth only $5
trillion. So it’s the incremental increase in investment
demand coming from all these accounts around the
world which in my view is going to drive it higher.
D.P: Let’s get into something that is so hot, with a cou-
ple of questions and we should point out that John Kai-
ser in his Bottom Fishing Report has been following rare
earths for some time and after decades where no one
even talked about it, all of a sudden it’s the big rage. So
what should we know about rare earths and name a cou-
ple of companies that you are following.
J.K: Rare earths are on the bottom part of the periodic
table. There are 16 of them with complicated names with
way too many syllables. I’ve actually finally memorized
them and I even think I can spell them correctly! They
are not very rare, but their availability in concentrated
form is very, very rare. So there are a few major deposits
in the world that have historically supplied the world's
needs. California’s Mountain Pass deposit supplied eve-
rything for about 30/40 years, until the late 1980’s when
China started to come on stream with its own rare earth
production. We have had a bit of a holiday in terms of
prices for them because of the surplus Chinese supply
which was more than what has been needed for super
magnets, display panels and so on. But now new techno-
logical applications have evolved and there are plans to
build electric cars and hybrids on very large scales and
even China itself is very big on pushing these types of
technologies. For the next four years or so there will be
no shortage of rare earth but when you start looking five
years and beyond, there are going to be problems be-
cause Chinese rare earth production has been so cheap
no mine outside of China could be developed. China
thinks in decade multiples – not two, three, four years -
and has realized that it might run out of rare earths if it is
the primary supplier to the world. So they are starting to
make noises about consolidating the mining industry to
make it more efficient and restricting the export of rare
earths. If anybody needs these raw materials for their
products, they will have to base their manufacturing fa-
cilities in China, which would offset the drop in Chinese
export of consumer goods that this global recession has
created. China, in a way, is doing the West a favor by
raising all these red flags because Western capital is now
on alert to the problem and the solution is very simple.
Put those non-Chinese deposits that have rare earth ele-
I think the rare earth mania can go completely insane over
ments into production. It will take at least four years (4-8
the next while because you cannot quantify the limit of
years) to push most of them through the development
how big this could get, especially when you start control-
cycle, even those which already have the pounds in the
ling the downstream applications – the alloys and all the
ground because this is a very complicated business.
other special metals you can create by adding rare earths.
Processing the ore to extract these metals is not as sim-
You can’t add uranium to very much except nuclear
ple as it is with base or precious metals. There are
bombs and that’s not a viable business, but with rare
lengthy R&D periods to create the right process. So the
earths you can. So I expect the mania to produce extraor-
timing is now. Get these things financed, get them going
dinary valuations for those companies which control
and then the big companies can start making decisions
these deposits, not because you can do the math and get
about where will we build millions of electric cars, be-
a net present value calculation that’s worth $1 billion or $2
cause if they don’t have these magic ingredients, there is
billion, but because the strategic value of long-term con-
no point doing any of that. Rare earth mania has global
trol of these raw materials is going to lie in the imagina-
appeal because in a sense it is linked to the future of the
tion of the visionaries behind the big, large corporations
planet as a viable planet.
that are controlling the economic future of the world.
D.P: Now you are mentioning this rare earth mania, a lot
D.P: That’s good preliminary, but now we get to the meat
of rare earth stocks have just flown in the last six months.
of the matter and that’s getting some names to watch. So
It kind of reminds me of uranium two or three years ago
with the gold sector, which would be some of your favor-
when uranium went through the roof and then all of a sud-
ite picks at this time and also in the rare earth metals? Of
den just died. We saw six companies become 600 and
interest, seeing as we’ve just spent some time in Ketchi-
many of those 600 have since disappeared. Are you now
kan, Alaska, what would be your thoughts at this time for
suggesting that rare earth could fly for some time?
one junior explorer – Ucore Uranium?
J.K: I will say there are similarities and differences be-
J.K: Let’s start with gold. A lot of gold companies have
tween uranium and the rare earth elements. The similarity
already started to move in anticipation of higher gold
is that uranium itself is less than 5% of the cost of running
prices. One that I would be watching that’s only moved
a nuclear power plant. So it is quite insensitive to price.
modestly and has a valuation that’s still fairly cheap is
You are going to need your nuclear fuels no matter what
Brett Resources (BBR). They have a 4.8 million ounce gold
the price is. The rare earth elements are like that too. So
deposit in Ontario that can be developed as a low cost
they can see their prices go up substantially if suddenly
open pit mine. It’s not so great at $900 gold, but it is in the
there is a shortage. But unlike uranium, there are not a lot
kind of scenario where I am envisioning $1200 - $1500
of rare earth deposits in the world. There are lots of rare
gold in real terms without oil having soared to $200 a bar-
earth showings, little veins here and there, but the major
rel. They have fewer than 100 million shares outstanding
systems are few and far between, especially enriched with
and control 5 million ounces of gold. I can see this stock
rare earth elements.
becoming a $5.00 to $10.00 stock if people realize that
gold has finally breached $1000 and is going to stay
above that level and gradually move higher over the next
There are lots of uranium deposits all over the world, so it
two years.
was predictable that when the uranium prices shot up be-
cause of a shortage of supply, there were going to be hun-
For rare earths, one of the earliest ones I recommended
dreds of companies all boasting pounds of uranium in the
was Avalon Rare Metals (AVL) and I originally picked it as a
ground. There is another important difference between
“bottom fish” in 2005 at $0.15. I recommended it again in
uranium and rare earth. With uranium – you can predict
2007 at about $1.75 after I visited the project. I had to en-
future demand. The predictions are correct that there is
dure it going to $0.30 in the crash of 2008, but I stuck to
an imbalance and a lot more uranium deposits have to go
my guns in recommending it and it’s now in the $3.50 -
into production to meet the demand as these 40 to 70
$4.00 range, properly financed and one of the more ad-
power plants on the drawing board eventually come on
vanced companies.
stream. Rare earths are different as their special proper-
ties open up material science research opportunities. If
Another one which is a much more recent recommenda-
these raw materials are actually available, the work will go
tion is Quest Uranium (QUC) and this is a refugee from the
into finding out what these things can do, developing
uranium sector which had managed to stake an area cov-
commercial applications and setting plans to commercial-
ering part of the Strange Lake deposit. They have rein-
ize them. You could see the market for these rare earth
vented themselves as a rare earth company.
elements blossom in ways that are unimaginable.
This one has shot from the ten cent level where I recommended it in late April, to as high as $2.94 recently and
there are some major developments taking shape which we now feel have the potential to be one of the rare earth
stocks that goes to $10 to $20. As a large $15 to $20 billion gross value for rare earth pounds in the ground starts
to take shape as it already has for Avalon, I expect big money to come in and say, yes, we need to throw $50 or
$100 million at this project to push it through the feasibility cycle, for we see a footprint capable of delivering a 30 –
50 year supply from this deposit. At current prices the market is valuing Quest's Strange Lake project at about $120
million, which is cheap compared to evaluations we saw during the uranium boom.
Right now we just finished a tour of the Bokan Mountain property which Ucore Uranium (UCU) controls and is an-
other company which started as a uranium project which happened to include rare earth deposits that had been
outlined by government geologists 25 years ago. These have the unusual quality of having very elevated grades of
heavy rare earth elements which are the more obscure ones that are now coming into vogue. The Bokan Project is
extremely interesting because it has never been formally explored, but it has all these back-of–the-napkin calcula-
tions done by smart geologists. This was done as part of a scoping study for the U.S. Military, which wanted to
know where it could get these heavy rare earths if a problem emerged where they could not get them from normal
sources such as China. Now it is owned by the private sector (Ucore Uranium) and they are at the stage where they
need to raise in my view, another $5 to $10 million right away to get the machinery in place to delineate the main
dyke system and start exploring the system's potential for much more than the ten to 20 year supply metal the gov-
ernment geologists saw in the dykes. It is upside in the form of a 20 to 50 year supply which deep-pocketed inves-
tors are seeking. So far, what I am seeing is very encouraging. Bokan has good grades and an excellent distribution
of the valuable rare earths. What I am looking for now is to see the results of the drilling program so that I can de-
termine if this system also has the capacity to host $10 to $20 billion worth of rare earth elements in the ground.
The key to being a participant in rare earth mania lies in demonstrating this big potential, because that is the key to
attracting the big bucks needed to crack the minerals that harbor these very special metals that are going to drive
part of the future economy of the world. A rare earth project may fail the test of economic logic, but it becomes a
development contender if it meets the requirements of long term strategic logic.
D.P: Okay John, most mining analysts seem to only cover 10 or 20 stocks, you seem to cover two of three hundred,
so let’s ask the most obvious question…if you could only buy one stock today, what would it be?
J.K: Right now I would buy Quest Uranium.
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