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Three mining stocks that don’t count on commodity prices

Metals for hybrid cars, diamonds and gold make for intriguing investments at a time of slumping commodity prices, says this expert.

If you missed it on TV, we’ve got it for you now.

Recently, Mr. John Kaiser, editor of the Bottom-Fish Action Report, visited Vancouver from his home in California, and was asked to appear on BBN’s Commodity Mailbag.

He was supposed to discourse on the market in general, answer some “mailbag questions” and make three picks.

All of a sudden his time was cut short as BNN had an opportunity to talk to a group of uranium executives about exploration in India.

So Mr. Kaiser had 45 seconds to talk. All he could do was give his three picks and a brief explanation as to why he liked them.

“The common theme behind these three picks was that their potential for significant upside is independent of commodity price trends.” This makes them perfect speculative buys for bottom-fishers who want to get back in the market but are “leery about the near term economic outlook.”

With a chance to expand in his latest report, Mr. Kaiser devotes the most space to the first of these three speculative picks. This is a mining firm that stands on the brink of a brave new world of transportation.

Hybrid cars and rare earth metals

Avalon Rare Metals Ltd. (TSX-AVL) has time on its side. Its Thor Lake deposit, says Mr. Kaiser, “has enough rare earth metals to supply the market for the next hundred years.”

That’s an imposing long-term proposition. “The company’s main task,” he adds, “is to figure out precisely where within the deposit are located the highest grade beds, what the optimum recovery process should be, and securing a social license from the Northwest Territories’ native groups.”

The timing is certainly right for Avalon. The gathering trend away from gasoline and toward cleaner transportation favours hybrid cars and eventually, plug-in cars. And their production calls for just the kind of rare earth metals that Avalon has in the ground.

“The problem with this trend is that China presently controls all of the world’s supply of the rare earth metals that are critical ingredients in the super magnets that are part of the hybrid power-train,” explains Mr. Kaiser. “China is now on record with declaring its goal to become the world’s biggest electric-car manufacturer, which poses a problem for American, Japanese and Korean carmakers with the same ambition.”

Right now, the Chinese can beat up the price of rare earth metals, discouraging capital from backing the rather high cost of rare earth development projects.

“But we are now at a juncture where the demand for these obscure metals could explode due to the commercialization of new technology which is driven by both environmental and strategic concerns.”

Three possible outcomes

There are three possible outcomes for Avalon. One, a consortium of end-users could buy and develop Thor Lake in order to be able to compete with the Chinese. They would operate Thor Lake as a break-even mine but profit from car revenue growth.

The other two outcomes would lead to the development of what Mr. Kaiser calls “a vertically integrated alloy fabricator.” He cites the example of a firm called Brush Wellman that runs a low grade beryllium mine in Utah, but makes its money selling beryllium-based alloys to end users.

Thor Lake has a high-grade beryllium deposit. In the eighties, a firm backed off the exploitation of that deposit in order to avoid jeopardizing its pipeline from Brush Wellman. But today an alloy fabricator intrigued by the “clean energy” trend could step in to buy and develop Thor Lake.

The third scenario is one in which Avalon itself evolves into the fabricator thanks to its strategic control of the minerals. It could do this with fresh funding, or it could be taken over altogether by a larger firm.

Not least, Mr. Kaiser believes that the native groups in the Territories, watching the depletion of the Slave diamond mines, will probably see the wisdom of establishing Avalon as a world-class, long-lived mine with the kind of “downstream” possibilities that never existed with diamonds.

“So I like Avalon very much in this kind of market where base metals are probably not going significantly higher for a long time, and gold will go significantly higher when it wants to and not when I want it to.”

Diamonds and gold

Mr. Kaiser’s two other picks require less explanation but get no less enthusiasm. Peregrine Diamonds (TSX-PGD) is a pure exploration play. It is now drilling at its Chidliak mine in south Baffin Island.

“The current economic slump and the damper it has put on diamond demand is irrelevant because it would take at least 8 years to get Chidliak into production if the goods are there, and by then the diamond pipeline would have undergone further depletion.”

The editor is not among those who believe that synthetic gem diamonds will kill the market for natural diamonds. There is no substitute for them, he insists.

And if this depression stretches out, gold and gold stocks will do very well, which in turn should generate the wherewithal to embed diamonds into gold jewelry. So, if Chidliak starts to deliver the goods this year, Peregrine’s share price should move substantially.

As for gold, PC Gold Inc. (TSX-PKL) has a million or so ounces in the ground at its Pickle Crow project that would benefit from “a meaningful increase in the price of gold,” says Mr. Kaiser.

But even more promising is the possibility that this firm can repeat Goldcorp’s experience at Red Lake in the early nineties “where the deeper investigation of an old gold camp revealed significant and richer gold grades at depth.”

Pickle Crow is in the same belt of rocks “and has evidence that grade may intensify at depth,” adds the editor.

The market seems skeptical of this deeper potential, which means that if management is right about a Red Lake replay, “the stock will become a very hot market play and eventually go up a hundred times in price.”

All three of these stocks are funded for the next six months, which is no small matter in the bottom-fishing world. And all have significant profit potential whether commodity prices go “up, down or nowhere,” concludes the editor. He said it on TV, and he’s sticking to his story.