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Geopolitical Metals

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CHRIS BERRY founded House Mountain Partners in 2010. It focuses on three topics: 1) The geopolitical relationship between emerging and developing economies; 2) Commodities; and 3)Junior mining and resource stocks. Chris has 13 years' experience working in sales and brokerage roles on Wall Street. He invites readers to subscribe to Morning Notes, which provides complimentary analyses of emerging geopolitical, technological and economic trends. You can subscribe at www.discoveryinvesting.com.

In this interview, Chris tells The Gold Report about the geopolitical changes that are driving renewed interest in areas previously considered too risky or insufficiently profitable.

The Gold Report: Investing in junior mining companies across the Americas requires balancing risk and reward. What has changed in countries like Colombia, where violence and corruption hampered investment in the past, that make it worth considering investing in gold and nickel companies today?

Chris Berry: Historically, Colombia has been one of the largest gold producers in South America. Strife brought on by the FARC (Fuerzas Armadas Revolucionarias de Colombia, or the Revolutionary Armed Forces of Colombia) rebels changed that. It wasn't long ago that many considered Colombia to be on the verge of being labeled a failed state. 

Over the past 10 years, however, two pro-business presidents (Álvaro Uribe and Juan Manuel Santos) came into office and instituted business-friendly policies and directly took on the criminal elements in the country with the help of the United States. This has fostered economic growth and offered companies — Canadian juniors among them — an opportunity to do what they do best in an under-explored region. Don't forget about oil and coal either, as they're plentiful there and also have helped put Colombia back on the map as a resource-investment destination. 

Colombia produces and exports about 85 million tons (Mt.) of coal each year, making it a top-five global exporter. An interesting note is that it's not just Canadian juniors and investors that have rediscovered Colombia's potential. A story came out not long ago that China has made a serious proposal to the Colombian government to build a railway from Cartagena to the country's Pacific coast in direct competition with the Panama Canal — a sign that things have changed for Colombia, to be sure. 

The country also is on the verge of finalizing a free trade agreement with the US and is working to create a regional stock exchange, inviting more investment into the country.

TGR: In a 2010 interview with The Gold Report, you estimated that gold miners would invest $4.5 billion in Colombia during this decade. Is that number still accurate and how long will it be before those companies see returns on those investments? 

Chris Berry:  As far as I know, yes, it is accurate. The country's credit rating recently was upgraded to investment grade, which is a good sign for increased foreign investment. Economic growth is forecast to increase more than 5% next year, according to Colombia's Finance Minister Juan Carlos Echeverry. So, from a macroeconomic perspective, the country appears to be gaining strength that is underpinned by strong commodity prices. 

Returns on any project, though, are dependent on a host of factors, such as making a discovery that has good economics behind it, solid management and serendipity. Each project is different in this regard. A number of companies have been investing in Colombia for years and, as their projects move toward feasibility and production, I'd anticipate seeing a return on their investments by then. 

TGR: How does that compare with the risks and rewards in Mexico?

Chris Berry:  Mexico has been in the news for all the wrong reasons. The stories are well known and I won't belabor them here; but keep in mind that dozens of junior and senior miners are operating successfully and safely in Mexico and have done so for years. Mining is a part of that country's culture. I know the government has made valid attempts to confront the scourge of drug gangs and that must continue. The fact that Colombia has been able to minimize that threat within its borders is a huge feather in its cap from an investment perspective.

TGR: What about the rest of South America?

Chris Berry:  Like many other parts of the world, South America has preferred investment destinations and others that are shunned. While a country like Venezuela is synonymous with the threat of expropriation and nationalization of natural resources, Venezuela still provides the US with a great deal of its oil imports, so that country will muddle along with foreign assistance and likely continue to be a regional thorn in the side of the US. 

Also cries of potential nationalization of lithium assets in Argentina and Chile are something to keep an eye on. This is all likely a natural outcome of rising commodity prices and governments looking to raise additional revenue to get their "fair share". But overall, countries like Chile, Argentina, Colombia and Peru offer many opportunities for investors looking at exploration, as well as production in the resource space. 

TGR: You also follow strategic metals companies and have written about the importance of electrolytic manganese metal (EMM), a key component in the manufacture of steel for infrastructure worldwide. How are geopolitical trends impacting demand for this metal?

Chris Berry:  The demand for steel is clearly emanating out of Asia, as that region continues its infrastructure buildout unabated. Manganese is critical in steel manufacturing and, as such, deposits around the world should be given a good, hard look by investors. EMM is interesting in that its production, effectively, is controlled by a single country, China, to the tune of 97%. 

With the size and scale of the infrastructure buildout happening there, it's no surprise that China controls its production. And it stands to reason that more and more of the EMM produced could be kept "onshore" to eliminate any need to import this critical element. Electrolytic manganese metal is used to upgrade steel, aluminum alloys and electronics — and it's a 2.6 billion-pound-per-year (Blb./year) market growing at 26%.

TGR: How do you quantify the variables of grade and production cost when evaluating a company?

Chris Berry:  In the metals and mining sector, grade and cost of production are two of the most important variables — right up there with quality and management experience. While they are both important, sometimes it's difficult to quantify without a resource estimate. We use a multi-step process known as Discovery Investing, which looks at 10 distinct factors to rank a resource stock and get a better handle on whether or not a company merits investment. 

TGR: Another steel component that seems to be enjoying increased demand is vanadium. In a January interview with The Gold Report, you said, "Vanadium can be the next big thing" and referred to its use in cleantech energy-storage technology. How do you see international market forces impacting vanadium prices in the coming years? 

Chris Berry:  Right now, about 85% of the vanadium produced globally is used as an alloy in strengthening steel. So, like manganese, vanadium is certainly a metal to learn more about if you believe the infrastructure buildout in emerging markets will continue. 

What excites me the most, though, is vanadium's budding role in energy storage. One of the knocks against renewable energy, such as wind and solar, has always been the fact that it is "lumpy" or unreliable, forcing the install of backup systems when the wind isn't blowing or the sun isn't shining. This is what many people mean when they refer to renewable energy as "uneconomic." The vanadium redox battery (VRB) can store a great deal of energy and release it into the grid during peak hours when demand is higher. These batteries have some flaws but, currently, they're being used in Utah and offshore in Japan for grid-level energy storage.

As more governments confront the realities of increased energy demand in the future, renewables absolutely will play a role in addition to traditional sources like hydrocarbons. There is a tremendous amount of federal money now being funneled to universities, research labs and companies involved in innovating next-generation energy storage; and vanadium, along with lithium and manganese, is at the forefront. Obviously, this could have a positive effect on vanadium and the juniors with deposits. 

Almost all of the vanadium produced today comes from China, Russia and South Africa, so we like to look for deposits that are near production and a little closer to home. 

While vanadium supply and demand is currently in balance, I like the idea of a domestic source of this metal — especially with so much at stake regarding clean energy technologies and "owning" the intellectual property around the innovations.

TGR: For investors eager to capitalize on these trends but looking to limit their exposure to risk, what role can publicly-traded resource-investment companies play?

Chris Berry:  I'm not a registered investment advisor, so please remember anything I've said thus far is my opinion only and should not be relied upon. That said, investing in junior mining stocks is a high-risk proposition and there's no substitute for extensive due diligence and a stomach for volatility. 

If an investor is looking to eschew risk altogether, I'm not sure that this is the ideal market sector. I think there is a place in everyone's portfolio for a certain level of risk and, generally, the younger you are, the more risk you can take. Investing in silver or gold bullion is certainly on the rise, as people are looking to a store of value in the face of depreciating fiat currency values. The limitation there is that you don't get the same amount of leverage you would by investing in junior resource companies.

I am watching developments in the cleantech space now because, in my opinion, those applications paint a positive picture of future demand for various metals. I've also been closely following events in locations like Colombia and the Yukon, as recent political changes there have welcomed mining investment and given a number of juniors a real chance to succeed. 

TGR: Chris, we appreciate your time.

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