The Gold Report's  Instablog

Source: Brian Sylvester of The Gold Report (5/16/12)

http://www.theaureport.com/pub/na/13381

Silver has been called the most volatile of metals. But volatility produces opportunity, according to Chris Thompson, a top-ranked StarMine analyst with Haywood Securities. In this exclusive interview with The Gold Report, Thompson forecasts a strong year-end for the devil's metal, despite price weakness so far in Q2/12, and shares the names of a select group of companies that stand to profit.

The Gold Report: Chris, Haywood Securities' estimated silver price for 2012 is $36/ounce (oz), but the "devil's metal" has averaged less so far in 2012, closing above $36/oz only once. Are you expecting a significantly stronger second half for silver?

Chris Thompson: Silver performed relatively well in Q1/12. We hope that the silver price will find support at current levels of ~$28/oz through Q2/12 and Q3/12, with potential for a strong Q4/12.

Looking at the silver price right now, I see that it's struggling to hold its head above $28/oz. If we do see a significant breakdown from $28/oz, it may somewhat compromise our forecast for this year averaging $36/oz.

TGR: Do you think investors shy away from the silver space given its overall size and susceptibility to manipulation?

CT: Silver is often referred to as the most volatile of all precious metals. In that sense, it's not for the faint-hearted investor. However, with volatility comes opportunity as long as timing is right. The benefit that silver provides is that it finds value as a store of wealth, as well as an ingredient used in industrial applications, so it offers investors a dual benefit where silver fundamentals benefit from economic growth as well as economic uncertainty.

TGR: In an April 23, 2012, research report, you told investors to "look for quality over quantity" when it comes to silver equities. What makes quality?

CT: A lot of investors look at the size of an in-situ metal resource hosted by a project when looking for a value opportunity presented by exploration and development-stage companies. They tend to ratio that against the enterprise value (EV) of that company to derive a valuation.

Silver is often mined with other metals as by-products. Just recognizing a straight EV dollar/ounces in the ground valuation can be a little misleading. Also, silver is inherently more challenging to recover metallurgically than other precious metals, which influences operating costs and recoveries.

When you layer these peculiarities into the picture, it becomes a complicated story and one that really cannot be valued based on a straight EV dollar/ounce in the ground valuation. We also look at size potential. We look at operating margins on the tonne, as well as jurisdiction. It's a sector where participants should be evaluated on a number of factors rather than just how much silver they have in the ground.

TGR: What sort of opportunities is the volatility creating?

CT: Silver has broken down from its highs in Q1/12. The sector has sold off, which has been exaggerated in some instances. If you're a believer in silver holding its head above the $28/oz mark, opportunities exist where equities have been beaten up more than they should have been based on weakness in the silver price. When the silver price exhibits volatility, volatility in equities is exaggerated, and that creates opportunity.

TGR: The performance of equities has lagged their underlying commodities in the precious metals space for almost 18 months. Why don't the equities respond the same way when the commodity goes up?

CT: We've definitely seen a dislocation between equity valuations and metal price since late 2010. The Toronto Stock Exchange Venture Index is currently at about the same level it was in in the middle of 2010 when the silver price was $17/oz and gold was $1,200/oz. Equities, whether they're exploration, development or even cash-flowing equities, haven't reflected strength in metal prices for some time now.

TGR: They are, but only to the downside.

CT: In the last six months, we have seen a lot of worry and concern about operating costs; capital costs; and jurisdictional, geopolitical and permitting risk. It's not just a story of metal prices anymore. Performance now relates to a whole host of other factors that determine how quickly and easily development-stage projects can advance to production or exploration-stage projects can advance to development.

TGR: Do you expect more mergers and acquisitions (M&A) in the silver space, perhaps based on this garage sale effect that's going on right now in the equities space? What market factors prompted that conclusion? Is that conclusion unique to the silver space among precious metals?

CT: We have to look at the industry from two points of view. First, we have to look at it from an acquirer's perspective. What companies are positioned to purchase assets? What companies are looking to grow their production profiles through making acquisitions? Second, you have to look for prospective acquisition targets. What companies have good-quality assets that are suffering in today's market because of lack of funding and weak investment sentiment for development- and exploration-focused stories?

What we find in the silver sector is that despite the current soft silver price, operating margins that a lot of silver producers are enjoying are some of the best in the sector. The average industry cash costs for silver producers are less than $10/oz, which implies a healthy operating margin at a silver price of ~$30/oz. A lot of silver producers are generating significant cash flow in this environment.

Realizing that investor sentiment in the mining sector is weak, a lot of companies that are trying to advance exploration projects or development-stage projects are battling to finance the advancement of their development and exploration plans. You coined it-it is pretty much a garage sale out there for exploration and development stories. The acquirers have healthy treasuries and the ability to generate additional cash flow to support larger treasuries and the targets are being starved of funds to develop their project-it's a buyer's market.

TGR: Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE), recently paid AuRico Gold Inc. (AUQ:TSX; AUQ:NYSE) $200 million (M) for AuRico's El Cubo gold mine and a couple of other smaller exploration projects in Mexico. Do you believe AuRico will use that cash for M&A?

CT: I can't talk about AuRico, but I can talk about Endeavour. Endeavour is an emerging midtier silver producer. It is currently working toward delivering upward of 5 million ounces (Moz) silver production annually over the next two years. Endeavour and other emerging midtier companies are growing their production base through acquisition. What seems to be a more common acquisition target in the sector right now are not development-stage or exploration-stage projects, but companies with operations. Endeavour's purchase of the AuRico assets fits very well into this focus and is not a surprise. First Majestic Silver Corp. (AG:NYSE; FR:TSX; FMV:FSE) used the same sort of strategy by acquiring Silvermex Resources Inc. (SLX:TSX; GGCRF:OTC). There is, especially in the emerging midtier subsector, a consolidation of players.

TGR: El Cubo's total resource is 1.14 Moz gold and 53.5 Moz silver. At $1,600/oz gold, that's $1.8 billion (B). At $30/oz silver, that's another $1.6B. That's a total of $3.4B in all categories. Even just the proven and probable reserves of 322,000 oz (322 Koz) gold and 18.5 Moz silver amounts to more than $1B. It seems like quite a bargain. Why did AuRico do that deal?

CT: I would argue that this is not a core asset for AuRico. AuRico has a relatively aggressive production growth plan. It is guiding toward more than 500 Koz gold production by 2014. Obviously, this comes with significant capital cost commitments. As far as silver valuation is concerned, Endeavour will pay about $250M for the asset and some exploration projects. Layering that into a reserve base of about 38 Moz silver equivalent (Ag eq), it is paying about $6.75/oz Ag eq. This is a little expensive, but understand that it's a producing asset. The same calculation using the resource base arrives at about $1.70/oz Ag eq, which is fair value for an asset portfolio that includes an operating mine. The value opportunity for Endeavour will be its ability to turn the operation around economically.

TGR: What about the exploration potential of the other two projects that were part of this deal-Quadalupe and Calvo?

CT: They present blue-sky opportunity for Endeavour. More important, Endeavour can generate value for the company by improving the operating efficiency of El Cubo, bringing down cash costs, adding ounces at the operation and developing the exploration assets.

TGR: Did you raise your target on Endeavour after that deal was announced?

CT: No. We still have a target of $10.50/share for Endeavour. We're waiting for the company to finalize the transaction, as well as provide more details about how it's going to be financing the $250M acquisition.

TGR: You were recently awarded the 2011 StarMine No. 1 Stock Picker award for the Canadian metals and mining sector. Congratulations. What are some of your favorite picks among the primary silver stories?

CT: I define a primary silver story as one that's more valuable for its silver metal value than other metals using Haywood's long-term metal price assumptions. We regard Bear Creek Mining Corp. (BCM:TSX.V) as a company that's of interest primarily because of the development potential offered by its flagship asset, the Corani deposit in Peru. In time, Corani could offer +10 Moz silver production annually supported by byproduct credits. There are not too many projects at the feasibility stage of development that can offer that sort of annual silver production potential. Bear Creek is our preferred large-project developer.

TGR: It's a world-class deposit, but Bear Creek is having permitting problems that are preventing its low-cost Santa Ana silver project from moving to production. It can't bring Corani to production without the cash flow from Santa Ana. What's the likelihood of Bear Creek finding a joint venture (JV) partner?

CT: There's concern relating to Bear Creek's ability to finance Corani. The company is in the throes of applying for permits for Corani. We do regard this asset as being financeable. Also, we do regard Peru as a world-class jurisdiction for exploration and project development in the mining space.

TGR: What are the estimated costs to bring Corani to production?

CT: We're looking at just under $575M.

TGR: And it could do that without a JV partner?

CT: Preferably it would like to sell the project for the right price, but the company isn't waiting to be acquired. It is aggressively developing the project to production. The company has just under $100M in cash. Santa Ana was the company's second-tier project. The advantage of Santa Ana was it is a relatively cheap mine to build and bring into production.

TGR: Bear Creek recently hired Renmark Financial to do some investor relations. Will that be enough to change the perception of the company in the marketplace?

CT: We need to see a rebuilding of investor confidence in Peru as a favorable jurisdiction for mine development. The company can't do much more than what it's currently doing to develop Corani. The company needs to continue to promote the benefits of Corani, as one of the world's largest undeveloped and economically viable silver projects, and work with the local communities.

TGR: How about some other primary silver producers? Would you put Kimber Resources Inc. (KBR:TSX; KBX:NYSE.A) in that category?

CT: Kimber, with its Monterde project in Mexico, is a very interesting company. Monterde is a development-stage gold-silver deposit. Based on the company's current stock price, and what the project can offer, it is cheap. We know the company is in the throes of putting together another resource update for Monterde. We see Monterde as being a very attractive potential acquisition target for a midtier silver or gold producer. There's a large gold silver resource with a high-grade core, which has been the focus of the company's current deep drilling program. It's a neat little project from an acquisition perspective.

TGR: Who are the would-be suitors?

CT: There is a small group of companies: Endeavour Silver, Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) or First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE), a company with operations in Mexico that knows the jurisdiction. It's an asset that would look good in the portfolio of a midtier producer-a company that is aiming to tag on 2 Moz silver production annually with a good gold credit. The challenge is that this group hasn't yet showed any interest in buying projects-just operating mines.

TGR: Kimber has had some good drilling results at depth at Monterde. Could those results change the picture for a potential suitor?

CT: They support the high-grade potential offered by Monterde at depth. Monterde has been mistakenly perceived by the marketplace as being a low-grade project. The drill results that the company has released over the last six to eight months suggest there is a high-grade core at depth. It's going to be very interesting to see what comes out when the company releases its revised resource estimate, which is anticipated in the next month or two.

TGR: We've seen some recent examples of nationalization, most notably in Argentina. The Argentinian government recently expropriated the assets of Yacimientos Petrolíferos Fiscales (YPF:NYSE), which is a Spanish oil company. Could there be ripple effects felt in the mining industry?

CT: It paints Argentina in a poor light as a prospective jurisdiction for mining and exploration. It's very unfortunate this has happened. It creates a lot of uncertainty, worry and fear over development of any resource-based asset in the country. We do like the exploration potential that the country offers. We follow a number of companies in Argentina, one of which has a very substantial land position in the Santa Cruz province.

TGR: Which one?

CT: Mirasol Resources Ltd. (MRZ:TSX.V). It's unfortunate. It's these issues that really are beginning to have an overriding influence on the sector and, in many senses, taking away some of perceived opportunity that higher metal prices offer.

TGR: Do you see that having a direct effect on the share price of companies like Mirasol?

CT: It creates uncertainty with regard to how easy it would be for Mirasol, or any company in a similar position, to advance the development of an asset in Argentina. I do see this development as being damaging to the share prices of companies active in Argentina based purely on the uncertainty that comes with this sort of geopolitical risk.

TGR: Tell us about Mirasol's flagship project and why the company merited coverage.

CT: When we look at an exploration-focused company, we have to be satisfied with the team and the property portfolio that the company offers. Mirasol has a very well qualified, experienced exploration-oriented team and a very attractive property portfolio.

In addition to that, the company has a JV with a major silver producer, Coeur d'Alene Mines Corp. (CDM:TSX; CDE:NYSE). Coeur d'Alene is earning a 61% interest in the Joaquin project, with Mirasol being the JV partner. The Joaquin project is arguably the most important development-stage asset that Coeur d'Alene Mines has, something that is needed to grow its production profile.

TGR: Do you believe that Mirasol is a potential acquisition target given the size and scope of Joaquin and Coeur d'Alene's majority interest?

CT: I think so. We've always looked at Mirasol as being a potential acquisition target. We know Coeur d'Alene's interest in Joaquin and see that as potentially being a trigger for an acquisition based on consolidation of ownership. We also recognize that the company has a very attractive land position, which ranks as one of the most prospective jurisdictions for precious metals exploration today.

TGR: There are a number of interesting silver explorers, even some developers, on Haywood Capital's Watch List. Which ones are you following most closely?

CT: Exploration company Soltoro Ltd. (SOL:TSX.V) could potentially deliver a significant resource base at its El Rayo project in Mexico.

International Northair Mines (INM:TSX.V) may deliver a maiden silver resource at its La Cigarra project in Mexico in mid-year.

Developers Kimber, Bear Creek, South American Silver Corp. (SAC:TSX; SOHAF:OTCBB), MAG Silver Corp. (MAG:TSX; MVG:NYSE), Extorre Gold Mines Ltd. (XG:TSX; XG:NYSE.A; E1R:FSE) and Tahoe Resources Inc. (THO:TSX; TAHO:NYSE) may offer development opportunities in the space, as well as producers Endeavour Silver, Fortuna Silver and Aurcana Corporation (AUN:TSX.V; AUNFF:OTCQX) may offer growing production growth profiles.

TGR: How far away is Aurcana from being an American silver producer?

CT: Aurcana is in production. It has two assets, the La Negra asset in Mexico and the development-stage Shafter project in Texas. Our understanding is that it's in the process of commissioning Shafter right now. We're also anticipating a revised resource estimate on La Negra. We're looking at a company that can deliver just over 4 Moz/year silver production at a little north of $8/oz cash costs.

TGR: Tahoe Resources is a very big resource at this stage.

CT: Tahoe is a very interesting company. It's a development-stage story at the moment, but it offers potential to be a near-term producer. The company recently announced a revised resource estimate that showed a 50% increase in Indicated silver resource to 367.5 Moz.

But it comes at a price. The market cap for Tahoe is ~$2.6B. That's what you pay right now for one asset that can deliver $20M silver/year and a potentially higher production rate with further development. Escobal also offers potential to achieve good operating margins.

It's a company we're watching very closely. We want to see the company get its permits. The permit is a very important milestone because it will remove a level of jurisdictional risk.

TGR: What approach to silver equities, especially those in the exploration and development phases, will best serve the average retail investor?

CT: Looking at silver equities is no different from looking at equities focused on developing, advancing and exploring for other metals. One of the most important attributes of any company is management. You need a good team that can deliver efficiencies in what is a relatively challenging time for mining based on a lot of cost creep and margin squeeze. It's all about the team. In silver we look for quality over quantity. Look at the ounces in the ground that will work from an operating perspective rather than just the size of the inventory.

TGR: High grade, too?

CT: Grade, good metallurgy, safe jurisdiction. As I've said before, people throw out silver projects in many senses as offering size potential, but there is no value in having hundreds of million ounces silver in situ in the ground if you can't mine them profitably. Also, be wary and recognize that silver is arguably the most volatile of all precious metals and equities, by extension, are also volatile.

TGR: Thanks for your time and insight.

Chris Thompson was trained in South Africa and has over 20 years of industry experience working as a geologist for major through to junior mining/exploration companies, in addition to a stint working as a mineral economist for the South African state. He has a bachelor's degree from the University of the Witwatersrand, a graduate degree in engineering, a master's in mineral economics and a PGeo designation. Thompson has been with Haywood Securities for over six years and specializes in junior exploration and the silver and PGM sectors. Thompson was recently awarded the 2011 StarMine No. 1 Stock Picker award for the Canadian metals and mining sector.

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DISCLOSURE:

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

2) The following companies mentioned in the interview are sponsors of The Gold Report: Fortuna Silver Mines Inc., Silvermex Resources Inc., South American Silver Corp., MAG Silver Corp., Extorre Gold Mines Ltd., Aurcana Corp., Kimber Resources Inc., and Tahoe Resources Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.

3) Chris Thompson: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this story.

4) Haywood Securities Inc. has reviewed lead projects of Endeavour Silver Corp. (EDR-T), Bear Creek Mining Corp. (BCM-V), Kimber Resources Inc. (KBR-T) and Mirasol Resources Ltd. (MRZ-V) and a portion of the expenses for this travel have been reimbursed by the issuer.

5) Haywood Securities, Inc. or one of its subsidiaries has received compensation for investment banking services from Endeavour Silver Corp. (EDR-T), Bear Creek Mining Corp (BCM-V), Kimber Resources Inc. (KBR-T) and Mirasol Resources Ltd. (MRZ-V) in the past 24 months.

6) As of the end of the month immediately preceding this publication either Haywood Securities Inc., one of its subsidiaries, its officers or directors beneficially owned 1% or more of Bear Creek Mining Corp. (BCM-V) and Mirasol Resources Ltd. (MRZ-V).

7) Haywood Securities Inc. or one of its subsidiaries has managed or co-managed or participated as selling group in a public offering of securities for Kimber Resources Inc. (KBR-T) and Mirasol Resources Ltd. (MRZ-V) in the past 12 months.

8) Haywood Securities Inc. pro group holdings exceed 10% of the issued and outstanding shares of Mirasol Resources Ltd. (MRZ-V).

9) An individual officer or director of Haywood Securities Inc. or one of its subsidiaries owns >10% of Mirasol Resources Ltd. (MRZ-V) outstanding shares.

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Source: Karen Roche of The Gold Report (5/16/12)

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If the people and politicians of the U.S. can't muster the will to reform Social Security and Medicare, the country will slide on down toward what internationally renowned economist Lacy Hunt calls the "bang point." What we'd face on the other side would be bad news indeed. But in this exclusive interview with The Gold Report, Hunt goes on to list a few steps to turn the tide on economic growth. The route won't be an easy one but it would address the debt and begin to improve living standards.

The Gold Report: In January, the Federal Reserve's extension of a near-zero rate interest policy to the end of 2014 stunned a good many investors. Unless the Fed changes its mind again, that will mean six years of artificially low rates. You've indicated that interest rates have nothing to do with the Fed and that they're really governed by the velocity of money and the health of the economy. Would you elaborate on that?

Lacy Hunt: To clarify, the Fed can control the short-term rates, but the long-term rates are in the hands of the marketplace. The Fed's influence there is very minuscule. Some may think the Fed has produced the low interest rates today and a long yield market. I don't think its influence has been that important. It is a reflection of the economy's poor performance.

The U.S. didn't have a Federal Reserve and the country was on the gold standard when it experienced a tremendous debt build-up in the 1860s and 1870s. Brought on by building the railroads and the industries that fed into them, the debt build-up badly damaged the economy. Economic activity languished. The panic year, 1873, launched a long, difficult period of economic adjustment. For 15 years in the late 19th century and the early part of the 20th century, long-term Treasuries were around 2%-without any type of central bank intervention.

Fast-forward to the 1920s and another huge build-up of debt. By then, the Federal Reserve existed. Indeed, Fed policies encouraged and facilitated this surge in debt. The debt bubble burst in the panic year of 1929. The Fed did some things-not as well as people wanted-to try to bring interest rates down. Its efforts certainly were not consistent; there was intermittent tightening during the period. But in 1941, when the U.S. entered World War II, the long-term Treasury yield was at 2% and trending lower. In other words, very low rates occurred in the aftermath of a huge period of over-indebtedness. Thus, there are two examples of extreme over-indebtedness, one with and one without central banks. But in both cases, long-term interest rates fell to very low rates and stayed there for a long time.

TGR: One of the core points you make is that the quality of debt determines the velocity of money. If the debt is productive, the velocity increases. At this time, the velocity of money is moving in the other direction. What's wrong with our debt?

LH: The debt problem is complex. U.S. debt is about 360% of the Gross Domestic Product (GDP), public and private-too much relative to GDP. We have about $55 trillion (T) in debt and only $15T of GDP. The debt-to-GDP ratio is more than 100 points higher than in 1997-1998, yet our standard of living is unchanged. A key problem is that the composition of the debt has deteriorated. A greater proportion now supports daily consumption, either directly by consumer borrowing or indirectly via the Fed. Such loans won't generate future income. The debt is unproductive or even counterproductive, and the more it grows, the more it diminishes our ability to service the debt. As long as we proceed along this course, the velocity of money will continue to decline.

It's a very interesting question you raise. Just within the last couple of years, velocity has fallen below the post-1900 mean of 1.68. In the first quarter, velocity fell to 1.58-a very significant deviation from the mean and about the lowest level in 50 years. The decline in velocity confirms that the quality of the debt is deteriorating.

There is another way to observe the deterioration. We need increases in productive lending to generate increases in output per hour, which in turn is necessary to generate increases in income. Prosperity is measured by income, not GDP. GDP only measures spending, and although we've had some GDP expansion, disposable income per capita has basically been close to zero for most of the last two years. The spending only supports daily consumption; it won't generate the productivity needed to raise our standard of living.

TGR: But isn't productivity being driven by the fact that companies are making money through development of high-tech products that consumers are buying? Aren't the free cash flow and the growing sums of cash these companies have on their balance sheets driving the economy?

LH: Individual firms are making good use of loans. As you suggest, there's investment in the high-tech sector, for instance, and substantial resources are going into developing shale and certain types of new oil products. But these investments amount to no more than $200 billion (B)-with a federal budget deficit at $1.3T and rising. So while some creative and productive things are going on, the bulk of our debt is going to counterproductive uses and we aren't going to be able to service this rising debt. We don't know what the outcome of the Affordable Care Act will be, but the Congressional Budget Office (CBO) says it will cost $200B a year. One of the Medicare Trust Fund trustees claims CBO's calculations are low; that it will cost at least $360B and maybe as much as $540B.

TGR: You've also written about a "bang point" that occurs when credit to government and private borrowers is cut off because the marketplace has no confidence the debts will be repaid.

LH: That's what's happening in some European countries today. In the U.S., during the first six months of the fiscal year that started in October 2011, for every dollar the federal government spent, $0.58 came from tax revenues and $0.42 was borrowed. Some of the weaker European countries, in the southern tier, have the reverse situation. They're trying to borrow 65%, 70%, 75% and an even higher percentage of the euros they spend, and the marketplace has no confidence that they can repay their previous loans. They've managed to put together interim financings to patch the system together, but basically the marketplace is no longer willing to lend and some of these governments are very close to the point at which they'll be forced to fall back on their revenue bases alone.

The U.S. has not reached the bang point, but covering 100% of its expenditures from the revenue base-instead of the 58% it is now-would create very destructive conditions. That's the path we'll take if we continue to let the debt rise relative to GDP and without turning it to productive purposes.

TGR: Does Congress have the will to make the necessary changes?

LH: I'd like to think we have the political will to try to tackle the problems, but I'm fearful we do not. Here's the problem. Federal outlays have been running at 25% of GDP for each of the last three years, which is the highest since 1942-1944. Based on existing laws that govern Social Security and Medicare, at that rate federal outlays will account for 40% of GDP in 25 years.

TGR: That's frightening.

LH: Yes, but I personally don't believe it can happen. We'd have to transfer 15% of our resources from working households to retired households, either through tax increases or indirectly through some other means. I cannot see that happening. Unfortunately, there doesn't seem to be any urgency to deal with the problem. Unless that changes, I'm afraid we'll reach the bang point, the markets will take control and we'll have to make the adjustments in some type of crisis situation. It will be much the same as it is now in some of the European countries, which have to make adjustments in the midst of market crisis.

TGR: How long will it take for the U.S. to get to the bang point?

LH: We really don't know. A lot of economic analysis historically has downplayed the role of debt. I've done an exhaustive search of the literature, and never found a model that indicates when you reach the bang point. A host of parameters can play into the situation, but one of the triggering elements concerns the percentage of the revenue base of the governmental entity that must go to interest expense. As the interest expense rises, it absorbs a bigger and bigger portion of the revenue.

TGR: Is there a typical tipping point?

LH: We haven't been able to identify one. There are some indications. Interest expense right now is about 10% of revenues. If you make the heroic assumption that market interest rates hold through 2030-which they won't-the interest expense would be 20% of federal revenues by the end of the decade and 35% by 2030. Right now, the largest components of the federal budget are Social Security, Medicare, defense and interest. By the end of the decade, interest jumps above defense. And that's under the heroic assumption that these market rates hold.

TGR: It also gets to your point of the makeup of the debt.

LH: Totally counterproductive. It doesn't build one bridge or create one innovative idea. It doesn't move you forward. So we're on a path here that historically has not worked. The sum of the problematic areas that occurred historically seemed to be when the interest expense gets above 50%.

TGR: But that means we have a long way to go.

LH: It may occur sooner than we think. If interest rates in the marketplace were to go up 200 basis points, it would add approximately $350B a year to the federal budget deficit. Of course, you'd have to borrow that, and then borrow more and more in succeeding years. So the interest expense is really a potential time bomb. I don't think a rise in long-term rates is at hand, but it's very problematic as we go forward.

TGR: You also write about a negative risk premium-when the total return of the S&P 500 is less than the return on long-term Treasuries and thus equity investors aren't being rewarded for the risks they take. It seems to contradict the concept that we're marching toward this bang point. Will the negative risk premium continue until we reach the bang point?

LH: First of all, let me explain a bit more about the negative risk premium. We know that over very long periods of time investors in stocks have received a premium over investors in long-term Treasuries. If that didn't hold true over the long run, people wouldn't take the risk. But there have been significant exceptions. Following the build-up of debt in the 1860s and 1870s, we had a 20-year span during which the S&P 500 return was lower than long-term Treasury returns. Then, even though World War II interrupted, another period of negative risk premiums lasted from 1928 to 1948. In both instances, 20 years was a long time to wait for risk to be rewarded. Certainly there were quarters, even years, during those spans when the S&P 500 returns were better than the Treasuries, but when you stand back and you look at the entire period, risk was not rewarded.

We've had another massive build-up of debt over the last 20 years, and since 1991 we've been in another negative risk premium cycle. We've past the 20-year point already, and if we continue along the path toward increased indebtedness, we'll extend the negative risk premium interval this time around. I think it will be very difficult for the normal economic conditions to prevail.

A lot of the pioneering work on the role of debt was done by Irving Fisher. He thought the economy operated on a normal business cycle model, one to two bad years, four to five good years. The one to two got a little testy, but it was over and you went on. That's why he was fooled by the Great Depression. He freely admitted he was fooled. He made some outrageous statements about the health of the economy in 1929, but he did his mea culpa, reexamined what he thought and concluded that the normal business cycle doesn't work in highly over-indebted situations. In those situations, the indebtedness controls nearly all other economic variables-including the risk premium. The normal bounds don't work, just as they did not work after the panics of 1873, 1929, and 1989, when risk was not rewarded.

So by trying to solve this over-indebtedness problem by getting further in debt, the standard of living will not rise and, in the final analysis, the stock market will reflect how well our people are doing. And our people are not doing well. Of course, the bang point is a point of calamitous development, but it would mark the climax of a prolonged period of underperformance and financial risk management. It's not at hand. We have the ability to control it, but we have to have the political will to do so. At present, it doesn't appear to be forthcoming.

TGR: You've indicated that the only way for developed nations to get out from under this debt burden is austerity, not inflation or more Quantitative Easing (QE). With the income of average American citizens stagnant, at best, for a decade already, what would spark the political will to force austerity measures on a beleaguered populace?

LH: No one wants austerity. Neither the politicians nor the public want it. The McKinsey Global Institute did an outstanding study of what happens to highly overleveraged countries that get into crisis situations. It found 32 cases that have fully played out, starting with the 1930s. In 16 cases of the 32-or half-austerity was required. Only eight cases were resolved by higher inflation, but they were all very small, emerging economies. A small country with no major role in world markets can get away with debasing its currency, but a major player cannot do that.

TGR: Exactly how does a country's role in world markets come into play when it comes to devaluing currencies?

LH: A major economy that tries to correct debt problems by dropping the value of its currency will bring on immediate retaliation-and a race to the bottom. In today's world, devaluation is not really an option. This isn't new. Starting in the late 1920s, there had been a huge build-up of debt around the world. Some of the heaviest build-up was in resource countries. We were on the gold standard at the time. The Dutch East Indies devalued because it could no longer service its debt and then Australia shortly thereafter. They gained a momentary advantage, but lost it when competitors in Latin America and elsewhere also were forced to devalue.

By 1931, the British devalued. A lot of the countries that had devalued previously devalued more. The U.S. tried to hang on to the gold standard, but between April 1933 and January 1934, the U.S. devalued by 60%. It had been devastated by a loss of export markets, as everyone else had been devaluing. Like the Dutch East Indies and Australia in the late 1920s, the U.S. temporarily regained some benefit, but lost it when France and the gold bloc countries devalued in 1937 and 1938.

Then, when the U.S. entered World War II, a tremendous surge in exports took place. We were able to sell anything American mines, factories and farms could produce. Its citizens were paid for that work, but with mandatory rationing, they couldn't spend the money they were making. They couldn't buy new cars, washing machines and houses.

TGR: The result was forced savings.

LH: People were willing to stand for the austerity because we were in an endeavor they believed was worthwhile. If they needed 10 pounds of sugar and could only get one, they took it. If they needed 20 gallons of gasoline and they could only get five, they stood for it. So they saved their funds. The saving rate went up to 25% for three consecutive years. We paid off the debt. By the end of World War II, the U.S. was a wealthy nation once again, and it fueled the post-war boom.

TGR: But that history doesn't appear likely to repeat itself.

LH: In the current environment, the European countries that are in trouble don't want austerity. France's budget deficit is deteriorating badly, but it's quite possible that it's going to engage in more deficit spending. It's not as bad as in Italy and Spain, but France already has a massive problem.

TGR: What if the European Central Bank (ECB) decided to devalue the euro? Would it just be the first domino to fall?

LH: Yes. It would start another race to the bottom.

TGR: What would happen to investments?

LH: Investment values would decline. It would be chaos.

TGR: We'd only have bonds in the secondary market at that point.

LH: You wouldn't want to be in debt. And you'd want assets you can control and have complete confidence in-assets such as an income-producing property that you're confident of the income stream or if you have an asset that is perfectly acceptable in exchange.

Europe today has not yet really gone to austerity. The ECB policy objective was to try to stimulate a recovery, boost the revenue base and bring their deficits under control. These bridge financings didn't solve the underlying problem. Instead, their economies deteriorated and the deficits worsened.

TGR: So if there is no willingness to save, will the endgame be either that bang point or QE?

LH: I think it will be the bang point, but it's hard to say.

TGR: If they go with the bang point, forced austerity would reverberate through other countries that export to Europe.

LH: There is a pathway out for the U.S., but it requires very intelligent uses of what we know about the multipliers for government expenditures, what we call the tax expenditures or loopholes, the marginal tax rates and general behavior. The U.S. has too much debt now and will have even more. The government expenditure multiplier is very close to zero; it might even be slightly negative. So the U.S. needs to cut down government spending, but is not going to be able to do so unless there's shared sacrifice by taxpayers. The magnitude of the problem is too great.

The U.S. has options on the tax side. It could raise the marginal tax rates or eliminate loopholes. The econometric work indicates that the multiplier on the marginal tax rates is between -2 and -3, meaning that raising the marginal tax rate by $1 would lower GDP by $3 after about three days. In other words, raising the marginal tax rate would be immediately counterproductive.

It appears that the multiplier on the tax loopholes may be only -0.5, a bet that is not nearly as powerful. The evidence for that is what happened in 1986. Bill Bradley, a Democratic Senator from New Jersey, and Ronald Reagan, a Republican president, worked out a revenue-neutral tax bill that brought marginal tax rates down and eliminated the loopholes. Ten years later, the economy progressed very nicely. So the U.S. could cut government spending and get the shared sacrifice on the tax side from the elimination of loopholes. From my standpoint, I would eliminate them all, let the private sector allocate that capital, and hold the marginal tax rates. The preferable thing would be to lower the marginal tax rates and substitute for them some type of small consumption-based tax.

The great philosopher who had a huge impact on Thomas Jefferson and the other founding fathers was Thomas Hobbes. He wrote a book called Leviathan, in which he said that income measures your contribution to society. Spending measures what you take from society. The U.S.' problem is that it has been overspending and has had insufficient income. So it needs to cut government spending. Social Security and Medicare certainly must be reformed. If that cannot be done, I wouldn't even try on the other proposals-just slide on toward the bang point.

But if we could cut government spending, reform Social Security, have sacrifice on the tax side by eliminating the loopholes, reducing the marginal tax rates a little bit and instituting a consumption-based tax, the economy would begin to grow over time. But this requires a lot of political will and leadership, plus some sort of mechanism to explain it and to get the American public on board. Right now, I can't be optimistic. There are some very smart people who have looked at this and basically most of the programs have these elements in them.

TGR: All of the scenarios we've been talking about are multi-years in the future. What should investors be focusing on now? Aside from physical assets that we can control and be confident about, what are the investment opportunities until we get to the bang point?

LH: For the time being, I think Treasuries will continue to perform strongly, but I think we'll see the long Treasury yields go down to 2.5%, possibly even 2% for a while. As I said, we went to 2% on the long Treasuries in the late 19th century and again in 1941. Japan has experienced less than 2% for many years. As long as the U.S. and European debt levels continue rising, we will see the longer Treasury yields continue to work irregularly lower and be very volatile. It's not for the faint of heart.

TGR: Thanks for your insights.

Lacy H. Hunt is executive vice president of Hoisington Investment Management Company (HIMCO), a Texas-based registered investment adviser specializing in the management of fixed-income portfolios for large institutional clients. The firm has more than $4.5 billion under management, with a client base of corporate and public funds, foundations, endowments, Taft-Hartley funds and insurance companies. An internationally known economist, Hunt joined HIMCO in 1996. His background includes roles as chief U.S. economist for the HSBC Group, one of the world's largest banks, executive vice president and chief economist for Fidelity Bank, vice president for monetary economics at Chase Econometrics Associates, Inc. and senior economist for the Federal Reserve Bank of Dallas.

A native of Texas, Hunt earned a Bachelor of Arts degree from the University of the South, a Master of Business Administration from the Wharton School of the University of Pennsylvania, and a doctorate in economics from Temple University. He has authored two books, A Time to Be Rich and Dynamics of Forecasting: Financial Cycles, Theory and Techniques, and numerous articles in leading magazines, periodicals and scholarly journals. He is an honorary life trustee of Temple University and served on the board from 1987-2010.

For more of Hunt's insights in HIMCO's Quarterly Reviews, click on "Economic Overview" at Hoisington Management's website.

Hunt was a speaker at the May 2-4 Strategic Investment Conference sponsored by Altegris and John Mauldin.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

DISCLOSURE:

From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise. Interviews are edited for clarity.

Streetwise - The Gold Report is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

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

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

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The Rare Earths Industry Is Only Just Beginning: Jon Hykawy

Source: Brian Sylvester of The Critical Metals Report (5/15/12)

http://www.theaureport.com/pub/na/13348

Is the rare earths space an industry in decline, a bubble popped? Not so, according to Jon Hykawy, head of global research and a clean technologies analyst at Byron Capital Markets. Hykawy tells The Critical Metals Report in this exclusive interview that establishing a supply outside of China could breathe new life into this exiled market. While the winners in the industry may be as rare as the elements they mine, Hykawy believes that the financial community is going to have to revisit rare earths once companies start to produce meaningful cash flows.

The Critical Metals Report: Most analysts outside the rare earth elements (REE) space suggest steering clear of this industry. To some extent, even you are suggesting that-except for a handful of players. Can you elaborate?

Jon Hykawy: We've been fairly adamant from the moment that we initiated coverage that the space would have, at most, a few winners and a very large number of losers. We refined the number down to a select few because we're right about that. If you have more than a few companies producing, especially in the light rare earth (LREE) space, they will absolutely crush the market and some will go out of business. Very few companies in the LREE space will succeed in coming to market.

TCMR: Why is the market punishing LREE equities?

JH: Just about every LREE junior ran up dramatically through 2011, whether they had anything resembling a winning hand in the space or not. Now, every company in the space is getting punished, even those with winning hands.

TCMR: What's going to turn this sector around?

JH: Well, in spite of the sector's grim general performance, our picks have performed well. We initiated coverage on Great Western Minerals Group Ltd. (GWG:TSX.V; GWMGF:OTCQX) at around $0.18/share and the stock is trading up around $0.50/share. We initiated coverage on Molycorp Inc. (MCP:NYSE) when its stock was down around $16/share; the stock is now near $24/share. Granted, neither has done well in the last six months, considering all resource stocks have been taking a bit of a hit and LREE prices are dropping off significantly.

In order for the sector to turn around, companies need to start making money. We need to see Lynas Corp. (LYC:ASX) come to market and show that it can actually produce meaningful cash flows out of an LREE business. We need to see Molycorp come to market, start producing alloys and magnets, and demonstrate that added downstream processing contributes dramatically to both revenue and profitability. We need to see Great Western complete the reopening of its mine, the construction of its hydrometallurgical and solvent extraction facilities, and demonstrate that moving those materials into Less Common Metals in Birkenhead allows it to dramatically improve its cash flows. If those things happen, investors will start to concentrate on the metrics and on the names that matter in the space.

TCMR: In other words, we're now in the "don't tell me, show me" stage.

JH: Yes. The names that are able to actually translate the capital that they have on hand into an operation that generates substantial cash flow can't be ignored.

TCMR: Rare earth oxide (REO) prices shot up in 2010 after China curtailed exports, but you argue that those prices should be largely dismissed when determining valuations for equities. Why?

JH: China imposed a quota that spiked REE prices. But the pre-quota prices matter much more. If you assume a Western supply chain is going to be developed and supply sufficient material, then the prices will be based on a freely trading market. To say that we're suddenly in a different world because of the quotas, that the quotas will never be taken away and the higher prices will last until the end of time, is a pretty facile and erroneous analysis.

A better approach would be to conduct a proper economic analysis, which almost no one has done. That involves actually looking at the individual REEs.

Currently, we only price the seven that we're able to obtain sufficient data on. Heavy rare earths (HREEs) will drop down in price, but will still be well above historical levels because they're rare and will remain rare no matter what we do.

The prices of lanthanum and cerium, which are fairly prevalent in all deposits and are the most commonly available REEs, are going to crater to prices below their historic, pre-quota levels.

The price of neodymium will stay above the historical range, because high-quality REE magnets are in demand for a number of industries, but prices are likely going to be nothing like where they are trading today. We forecast $80/kilogram (kg) for neodymium and praseodymium because that is the economic threshold for the wind turbine industry.

TCMR: If you're building models based on that conservative price deck, don't you risk missing a couple of players that might succeed if you were slightly more generous in your pricing?

JH: A number of metrics are important. A company might be the most economic player in the space, but if it comes to market three years after five other companies, it doesn't matter. That is why we prefer less expensive, less complicated, relatively faster-developing companies to those that are going to spend very large quantities of money to develop what could be very large projects in the middle of nowhere.

For example, if Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX) is going to need $1.3 billion (B) to bring a project to market and it really isn't going to come into serious production until 2017, investors better be darn sure that there aren't six or eight smaller projects entering the market before that.

It's not just a matter of which company is going to produce when, or which is going to produce at exactly the right price point, or which is the cheapest stock. When a company actually comes to market is a major factor, along with how well they fit into the demand curve.

TCMR: You have a Sell rating on Avalon. Is Avalon's biggest fault simply its timing, and not its deposit?

JH: The problem is definitely not the deposit itself, though the timing and the money required are a function of the metallurgy. In our estimation, with our admittedly conservative price deck, Avalon is a bad place for investors to put their money. There are a large number of potential HREE projects that have shorter development horizons and are much less expensive to bring to market that could fill the gap that Avalon wants to fill.

TCMR: The other company that you have a Sell rating on is Orbite Aluminae Inc. (ORT:TSX). It's created quite a stir, as there were some questions raised around its preliminary economic assessment (PEA) and its ability to extract REEs from its alumina clays. You looked at it more closely and decided that the numbers didn't add up.

JH: Every company has risk associated with it. The issue that we saw with Orbite is that the perception of risk within the broader market was far more optimistic than we believe the actual situation to be. The PEA noted that natural gas would be the primary source of energy for the project, yet even the PEA quite plainly stated that there is no natural gas available in the area. There is no development available to provide natural gas to that project site-and there may not be for a substantial period of time.

We believe that the pricing of alumina as well as the REEs and rare metals in the PEA were optimistic. Using higher-than-rational pricing for these materials inflates a company's net present value. We felt that needed to be addressed.

There was also technical risk. The process is not a slam dunk. There is a substantial amount of work to be done. Even some of the developers of some of the technology that's required to execute the plan in the PEA acknowledge that. Combining all of those things, we questioned whether a value of about $3/share was justified. A price of $0.90/share would make us more comfortable.

TCMR: Let's move on to some of the companies you do like. One of your long-time favorites is Great Western Minerals, but its share price has continued to trend lower since July. What's going to turn Great Western around?

JH: There are three things that will certainly help. One of the long-time criticisms of Great Western is that there hasn't been an NI 43-101 available on the deposit. There haven't been that many people who've actually visited the Steenkampskraal project. However, geologists who have visited Steenkampskraal tend to come away with far less concern about the abundance of monazite available there, primarily because of the way the deposit is structured and the visible extent of that structure.

We should see an NI 43-101 published relatively soon, however, likely before the end of May. Drilling has been largely completed. The company has indicated that it may be able to report higher grades on the historical material than what was earlier reported because the historical testing tended to underestimate the amount of REEs available. The company may also be able to report a superior elemental distribution. That will obviously be very positive for the story.

If the company completes the refurbishment of the mine and reopens, it would be a very positive step. The company has indicated mine operations will recommence within Steenkampskraal before the end of the year.

It also needs to commence construction of the hydrometallurgical and solvent extraction plants in South Africa. A finalized design from its partner, Ganzhou Qiandong Rare Earth Group Ltd., for the solvent extraction plant would be a very welcome step for the company. Ganzhou Qiandong is well known as a leader in the solvent extraction space.

TCMR: You wrote in a recent report, "Great Western Minerals will, we believe, be producing magnet alloy for customers from its own material near the beginning of H2/13." Is that soon enough?

JH: I believe so. It's probably going to be a bit of a horse race between Molycorp and Great Western Minerals in trying to get those home-produced magnet alloys into people's hands. Lynas, assuming the political situation in Malaysia and its permitting situation is resolved, is going to be producing material for sale to companies like Hitachi Inc. (HIT:NYSE), Shin-Etsu Chemical Co. Ltd. (SHE:Fkft) and others.

One of the big issues causing the reduction in demand for REEs has been the insecurity of supply. If a global auto manufacturer is contemplating whether it's going to use an REE motor or an induction motor in a new hybrid vehicle, the fact that it really can't count on Chinese supply for those REEs has to weigh on its decision. It's likely pushing a number of manufacturers into using induction motors because they can't afford the possibility that they won't be able to source material. Having producers outside of China would make a big difference in purchasing decisions.

TCMR: What are some of the other companies you favor in the REE space?

JH: Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX) is an interesting name. We have a $0.50 target and a Speculative Buy recommendation. Its pending partnership with Toyota Tsusho Corp. (TYHOF:OTC; 8015:JP) is a solid indication that this is a fairly tractable project in a good jurisdiction. It's not the absolute cheapest-per-ton of total REOs produced, but it's fairly inexpensive in terms of its capital spending and should be relatively quick to come to market.

We have a Speculative Buy on Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX) and an $0.80 target. Ucore has exactly the right address. It has an HREE project located in the U.S. It's of interest to a number of players like Molycorp that want to produce their own magnets and are going to require a reasonable amount of dysprosium to do so; automotive companies that want their own magnets for use in drives; and a number of other potential end markets in Western Europe. Its location near deep water in Alaska, with the backing of the Alaska state government and the U.S. federal government, speaks well of the company.

TCMR: Ucore had a 93% success rate using x-ray sorting technology (XRT) to recover REEs. Does that change the economics of that project?

JH: It definitely improves the economics. Generally speaking, the economics of an REE project are not defined by mining. A bigger factor is the cost of processing that material. The use of x-ray fluorescence as a method of determining which particular pieces of rock contain the minerals they're interested in and which ones can be safely rejected without losing anything of value is a very positive development.

TCMR: Texas Rare Earth Resources Corp. (TRER:OTCQX) is about to put out a PEA later this month on the Round Top project in Texas. What are you expecting from that?

JH: I'm trying to temper my expectations. I've been very impressed by some things at Texas Rare Earths. A lot of us comment that the most important thing within any mining company is its management team. Marc LeVier, chief executive at Texas Rare Earth, is a guy who's been recommended to me by a number of people whose opinions I trust. He has a pedigree to back that up. He knows what he needs to do to declare this an economic deposit. He is practiced enough to know it's not a perfect deposit.

The PEA's results are going to be pinned on the head grade, acid consumption and reagent consumptions going into the mill. This is a relatively low-grade deposit. If the company can separate out the minerals it needs, it may still have a very positive economic result. It's a bit of a dice roll still.

TCMR: Is there another company that has your attention?

JH: I'm going to actually discuss one that I have a Sell rating on, although that rating causes me a few headaches. Quest Rare Minerals Ltd. (QRM:TSX; QRM:NYSE.A) is a name that has been problematic for us in the sense that we like the potential of the deposit and we're positively disposed toward management. The biggest issue is that it's a project that's rather isolated and that will be fairly expensive to build. The company has also had issues with its plan and has taken some of the comments we've made to heart. It has started to move toward incorporating a solvent extraction plant and moving downstream. It is not just trying to produce concentrate anymore.

TCMR: Are there any companies with plans to just produce concentrates anymore?

JH: I don't think there are any companies left that have plans to only produce concentrates, with the possible exception of some ionic clays outside of China. Everyone else has started to realize that it's going to be expensive enough to develop the project and that nobody is interested in buying another problem. The companies have to provide a finished product-an end product-and that means separated and purified oxide at minimum.

TCMR: There was a recent article in The Globe and Mail about Quest in which you were quoted as saying, "I hope they realize they're in a race." Can you express your thoughts behind that statement?

JH: When I do the analysis with my admittedly conservative price deck, I end up with about a $1.75 target. We're starting to bang on the door of that level here. There have been delays in the project, which is unfortunate because the faster it can get to market with something that's tractable, the more likely it's going to be in the market long term. By the same token, it's a good deposit. It could be economic. For the most part, Molycorp, Lynas, Great Western Minerals, Quest, Avalon and so on produce positive cash flow even with my conservative estimates for future rare earth prices. It's really a question of whether that cash flow justifies all the up-front expenditure. Quest, to me, is a borderline call. That $1.75 point is a very interesting one.

TCMR: Would a partner change that for you?

JH: It could certainly help. There is no shortage of interest within the broader industry and within the end-user markets for at least obtaining an off-take agreement for a meaningful amount of the REEs. But if a company can't produce an economically viable, relatively simple flow sheet, it's probably not going to convince a partner that it has something that's worth its money and time. Quest is on the bubble for me. If it gets down toward $1.75 or we see anything that indicates that it has the potential to come to market sooner, it's something we'll have to revisit.

TCMR: Some precious metals companies, such as South American Silver Corp. (SAC:TSX; SOHAF:OTCBB), have found their way into your coverage universe. Does this have more to do with the Street's lack of interest in REEs at the moment or are these companies being considered legitimate electric metals plays?

JH: It's not a case of running off after a "borderline" electric metal like silver because we're not getting any love on REEs. This company is filled with projects that are going to produce what are definitively electric metals. It produces not just silver from its Malku Khota project in Bolivia, but indium and gallium. It also has copper in its Escalones project in Chile. That company is replete with electric metals. Even silver, whether most people realize it or not, has an extremely large industrial component of demand, made up primarily of conductive pastes that are used in things like the solar photovoltaic industry and solder used in electronics worldwide.

TCMR: Do you have any parting thoughts?

JH: We've said from day one that we're not subscribers to the beliefs that REEs are essential, irreplaceable or anything of the sort. I've always told people that REEs are very nice to have at the right price. It looks like there may be a viable supply chain for REEs developed outside of China. That is going to improve the security of supply, reduce reliance on Chinese manufacturing and production and allow companies to reliably get materials without worrying about what next year's quota is going to look like. It could have the positive effect of bringing the prices down to the point where many manufacturers and end users are going to be willing to look at using REEs again. The industry is just beginning to develop, whereas a lot of the financial community is looking at it as a popped bubble. That's not the case. The financial community is going to have to revisit REEs down the line, when some of the companies start to produce really meaningful cash flows from their operations.

Jon Hykawy is currently with the research team at Byron Capital Markets, with a specialized focus in the lithium and clean technology/alternative energy industries. Jon holds both a Ph.D. in physics and an MBA from Queen's University and has been working in capital markets as a clean technologies/alternative energy analyst for the last four years. He began his career in the investment industry in 2000, originally working as a technology analyst. His current area of focus is the electric metals sector, ranging from availability and production of various metals to lithium battery technology. He has extensive experience in the solar, wind and battery industries, conducting significant research in the areas of rechargeable batteries-ranging from rechargeable alkaline to lithium-ion to flow batteries.

Want to read more exclusive Critical Metals Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators and learn more about critical metals companies, visit our Critical Metals Report page.

DISCLOSURE:

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

2) The following companies mentioned in the interview are sponsors of The Critical Metals Report: Matamec Explorations Inc., Quest Rare Minerals Ltd., South American Silver Corp., Texas Rare Earth Resources Corp. and Ucore Rare Metals Inc. Streetwise Reports does not accept stock in exchange for services.

3) Jon Hykawy: I personally and/or my family own share(s) of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports to do this interview.

Streetwise - The Gold Report is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

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

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

101 Second St., Suite 110

Petaluma, CA 94952

Tel.: (707) 981-8999

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Email: jluther@streetwisereports.com