Sunday, October 24, 2010

Peak Oil, Alternative Energy and Platinum Group Metals

The world's attention is increasingly turning towards alternative energy as the reality of Peak Oil is sinking in, even though the public discussion of Peak Oil is still only just wispering, with majority of investors unware of the looming global crisis.

Fossil fuels are cheap and convenient: they are easily produced, and the fuels themselves serve two purposes at the same time: They are both energy source, and energy storage. When you fill up your car with 15 gallons of gasoline, you acquires both the energy needed to drive your car a few hundred miles, as well as ways to store the energy: the energy is stored in the gasoline until it is burned in the internal combustion engine.

Any alternative energy development must address these two issues as well: energy source, and energy storage. Alternative energy sources we talk about, like solar, wind, ocean wave, nuclear, addresses only the problem of energy source, but not the energy storage.

While scientists are making some progress in developing high energy density batteries, the basic physics is that energy density in any battery could never come even close to the chemical energy density in either hydrogen, or carbohydrate fuels. The best energy storage solution we can find is to synthesize carbohydrate fuels using energy derived from solar, wind, nuclear or coal fired power plants. Such synthesized carbohydrate fuel can then be transported using the existing infrastructure before they can be utilized. Finally, fuel cell batteries can extract energy from the carbohydrates and turn it into electricity energy, at an efficiency much higher than simply burning them in a combustion engine.

So this is the alternative energy recipe scientists have given us:

  1. First electricity is generated from alternative energy sources like solar, wind, ocean wave, nuclear, hydropower, etc.

  2. Second electricity is used to synthesize carbohydrate fuels, allowing the stored energy to be easily transported and utilized.

  3. Third fuel cells are used to generate electricity from carbohydrate fuels to provide end energy usage, like driving a vehicle or other electricity driven machines.

Do you realize that for steps 2 and 3 to be possible, a category of rare and expensive precious metals are need. You need the so called PGMs (Platinum Group Metals), namely platinum and palladium. These two metals serve as catalysts in synthesizing cabohydrate fuels. They also serve as catalysts in fuel cell batteries.

Among the two PGM metals, palladium is probably even more important. Palladium is very unique in its extreme affinity to hydrogen: one volume of palladium is capable of absorbing 900 times the volume of hydrogen. Such extreme affinity to hydrogen makes palladium an ideal catalyst in any chemical process that involves hydrogen, including, of course, the chemical process to synthesize carbohydrate fuels, or the chemical process to turn carbohydrate fuel into water, carbon dioxide and electricity, as it happens in fuel cells. There is no shortage of efforts by scientists to look for alternatives to the expensive platinum and palladium, in the last one hundred years. Unfortunately no practical substitute could be found so far.

No wonder when President Bush advocated hydrogen economy in a State of the Union address in 2003, some one reminded us that you can NOT have a hydrogen economy without palladium, and that the USA is lucky to have one of the world's only two primary palladium mines: the Stillwater Mine (SWC) in Montana. The other palladium mine is North American Palladium (PAL). Read "The Russians Are Coming" by Mother Jones.

Recently there is an investor mania in the sector of rare earth metals, just like the one in solar energy a few years ago, due to recent news that China is limiting production and export of rare earth metals. The rare earth metals mania is not without a good reason. The alternative energy development is a huge investment theme due to Peak Oil. In the alternative energy development, you need efficient electric motors to turn mechanical energy (like wind power or hydropower) into electricity and turn electricity into mechanical power (like in a hybrid car), and you need high energy density batteries to store the electricity energy. The high density batteries need rare earth metals. To make the strong magnets needed to build electric motors, you need rare earth metals. Not to mention the advanced electronics technology need rare earth metal as well. No wonder the whole world panicked when China begin to cut back rare earth metals expert quotas, and there is an investor mania to rush into potential rare earth mining plays like MCP, REE, AVARF.PK and UURAF.PK these days.

But let me be clear: rare earth metals are not rare at all. China could not cut the world off on rare earth metals even if she wants to. There are plenty of rare earth resources else where in the world that can be developed. They just won't be cheap.

But here are these two other metals that are truely rare, and that all alternative energy technology more critically depend on, and which China has zero domestic sources. China runs the danger of being cut off by the world on these two critical metals if there is a resource war.

Those two metals, as I just mentioned, are palladium and platinum. Supply of these two metals concentrate in just a few spots in the world: Russia's Norilsk Nickel (NILSY.PK) mine, South Africa PGM mines, and these two palladium mines in North America: SWC and PAL. Price of platinum but even more so that of palladium, have been surging up relentlessly due to strong supply/demand fundamentals. China, Japan and other nations without their domestic sources of these two metals, better begin to think about accumulate their strategic reserved of these two critical strategic industry and war time metals.

Likewise, investors would do much better hoarding physical palladium metal bullions, than hoarding a basket of 2 dozen different rare earth metals and not knowing which one will do best in the near future.

In the next two articles I will talking about how effects of resource peaking in two countries will impact global supply of platinum and palladium catastrophically, causing market panick in the near future, sending prices of these two metals surging to unimaginable high levels:

Peak Coal in South African and the Global PGM Supply

-How South Africa is running out of coal. How booming India coal demand will deplete South Africa's coal supply. And how these will impact South Africa's electricity supply and therefore constraint that country's platinum and palladium supply.

Peak Nickel in Russia and the Russian Checkmate on Palladium

-The Russian checkmate on global palladium supply are in two aspects: First the end of Russia strategic palladium stockpile sale, due to the stockpile depletion. Second, palladium production of Russia's Norilk Nickel (NILSY.PK) mine declines dramatically, as ore grade deteriorates. Third, More shockingly, Norilsk Nickel is now considering the more cost effective Activox Process technology, which it acquired by spending US$6.5B to acquire LionOres a few years ago. The Activox Process will dramatically cut sulphur dioxide pollution. But the new technology will only extract base metals nickel and copper, leaving platinum and palladium in the residue un-extracted, unless the price is high enough to provide the economic incentives to extract the precious metals using alternative approaches. This change would be a catastrophic loss of global palladium supply and will be sure to cause market panic.

Full Disclosure: The author has large long positions in palladium mining stocks SWC and PAL, in addition to silver mining stocks like SSRI, CDE, HL, and coal mining stocks PCX and ACI. The author has no position in rare earth metal plays REE and MCP.

Tuesday, October 5, 2010

The Ultimate Energy Investments

You read that title right, I am talking about The Ultimate Energy Investments, not the "Alternative Energy" investments. Alternative energy is a very sexy word to the ears of investors, in recent years. I am all for alternative energy developments. But I am not a big fan of most of the alternative energy developments. They are too costly in terms of energy and money invested, in terms of energy return, and none of them can be ramped up quickly to meet even a fraction of energy demands in today's global economy. I believe LENR, or Cold Fusion, which involves precious metal palladium, is humanity's only solution to Peak Oil energy crisis.

We face the Peak Oil reality, a reality that the total energy supply of the world will begin to decline, instead of continue to increase. The world must cope with and live within the reality of ever declining energy supply, until a new abundant energy source can be developed to replace the depleting fossil fuels of the earth.

It makes sense to hoard something when supply is in shortage. Wouldn't it be nice to physically hoard energy itself, as a commodity investment? This is why I gave the title of this article as "The Ultimate Energy Investments". Yes I am talking about HOARDING ENERGY itself.

How do you hoard energy? Energy is invisible, has no shape or form. Energy price is still cheap but it won't stay cheap. One kilowatt hour of electricity is worth about 5 US cents at whole sale. You can hoard energy by storing it in a battery, but it is an ineffective investment: One set of Toyota Prius hybrid car batteries, costing a few thousand dollars, stores about 500 watt hour of energy fully charged, or less than 3 cents worth of energy. Is it so impossible to hoard energy?

It is not possible to hoard energy directly, but it is possible to hoard energy indirectly. It can be a very good investment. Energy drives all activities of the society. All goods or services we produce or consume ultimately depends on energy in one way or another, directly and indirectly. When you take a hair cut in a barber's shop it costs lots of energy: Electricity is used to drive the hair clipper. The hair clipper itself is made of plastic and metal parts. You need energy to produce the plastic and produce the metal from minerals. You need energy to turn raw plastic and metal into parts and then assembly into a hair clipper. The barber needs to eat food. You need energy to produce the fertilizer needed to grow grocery foods that the barbers and every one of us consume daily. Everything costs energy.

The ultimate energy investments are investments in commodities that cost a huge amount of energy to produce in the first place. Such commodities may be extremely rare, and can be very expensive, reflecting the huge amount of energy it costs to produce these commodities.

Precious metals, particularly PGM metals, platinum and palladium, are such ultimate energy hoarding investments, because these metals cost huge amount of energy to produce. According to the annual report of Anglo Platinum (AGPPY.PK), the direct electrical energy cost of producing just one ounce of PGM metal, is almost 7GJ in 2008, or 7x10^9 Joules. In terms of electricity that's roughly 2000 kilowatt hours of electricity to produce just one ounce of PGM metal. At retail electricity rate of US$0.15 per KWH, it costs US$300 just in direct energy cost to produce one ounce of PGM metals. Indirect energy cost, e.g. the energy cost to produce the mining equipments, explore and develop the mine, as well as costs to pay salary to feed the mining workers and their families, is probably several times higher.

I guestimate that all direct and indirect energy cost combined, it costs about 10,000 KWH of electricity worth of energy to produce one ounce of platinum or palladium, or the equivalence to the energy contained in six tons of coal.

ONE OUNCE of PGM metal equals SIX TONS of coal. Remember that and think about it!

The platinum engagement ring you bought for your wife contains about 1/6 of an ounce of platinum. It costed one ton of coal to produce the metal. Your wife is wearing one metric ton of coal right on her ring finger. Just tell her that there is one ton of coal sitting on her finger!!!

When you buy a one ounce platinum or palladium coin, you have hoarded 6 tons of coal under your pillow, without taking up any space in your backyard. When South Africa exports one ounce of PGM, they consume six tons of their coal. By the time South Africa depletes its coal reserves, they won't be able to produce a single more ounce of PGM metal, even if there is still be plenty of metal lying underground.

As energy becomes more expensive, it costs more to produce the precious metals. The value of a physical asset is generally decided by the replacement production cost, the ounces of precious metal you hoard will grow more valuable over time, as Peak Oil starts to take its toll in societies.

Isn't it great that you can hoard energy itself, by simply hoarding bullions of precious metals, without costing space in your backyard to store a small mountain of coal! Just remember this: one ounce of platinum or palladium equals to six metric tons of coal.

The concept can be applied to other precious metals and base metals. Gold production is also extremely energy intensive, having to sort through tons of rocks to extract just a fraction of an ounce of gold. One base metal that is tightly correlated to energy cost, is aluminum. There is no scarcity in the raw material to produce aluminum. Aluminum production is merely a matter of applying electricity energy to separate the aluminum metal by electrolysis. When you buy an aluminum bar, you bought a certain amount of electricity, stored in the metal, in the form of energy consumed to produce the metal.

If you want to hoard electricity, you can hoard aluminum bars instead. I do not know how many kilwatt hour of electricity it costs to produce one kilogram of aluminum. Probably you can check the annual reports of producers like Alcoa Inc. (AA) or Aluminum Corp. of China (ACH) to find out. One thing is sure, as electricity price goes up, so will the cost of aluminum production, and so will the market price of the metal.

Recently, another energy source, natural gas, has become a hot topic of discussion in the investor community. I agree with the general sentiments that current natural gas price is unreasonably too low in comparison with other energy sources. Current natural gas price does not fairly reflect the production cost, particularly the shale gas production cost. The low price is unsustainable. It must go up soon.

What can you buy to invest in natural gas, besides producers like CHK, COG, APC, PETD? Many people talk about natural gas ETF funds like UNG, FCG, UNL, WCAT. I must point out that people should NOT touch any of these ETFs that are based on nothing but paper. Ask managers of these ETF funds: Do you hoard even one cubic feet of natural gas? Do you have any facility they can show you that contains natural gas? If they don't have the physical goods, then they only have worthless papers created out of thin air by counter-parties. I have learned my lesson in UNG, fortunately without suffering any loss. I argued why people should NOT invest in UNG, USO, or any other paper based ETFs. It is extremely important that you read it and try to understand the difference between paper and physical goods.

Is there no way to hoard physical natural gas for an investment? Well, there IS a good way of hoarding natural gas, without giant steel storage tanks. Natural gas is used to produce a very important agriculture commodity whose other raw material for production is free: the air! It's called urea, a nitrogen fertilizer. The nitrogen comes from the air. The hytrogen, as well as the energy needed to produce urea, comes from natural gas. No other raw material is involves. Urea is stable, safe and cost effective to store. By hoarding urea, you are hoarding natural gas in solid form. Current urea price is at multi-year low, reflecting the current low natural gas price and therefore the low production cost of urea. The urea price must go up when natural gas price goes up, and when global food demand goes up, driving more urea demand in agriculture.

Go ahead to hoard urea at current low price if you want to invest in physical natural gas.

As for me, I have been a long term advocater of palladium investment. There is now even more reason to invest in palladium, besides the bullish factors I have talked about repeatedly. At current price of only $578/oz, it is nice to know that one ounce of palladium represents at least six metric tons of coal, right at your finger tip. Since the December, 2008 lows of precious metals, the performance of palladium has beaten other precious metals: gold, silver and platinum. Palladium will continue to outperform the other precious metals, until at least it reaches a price parity with platinum.

Not to mention that there are hundreds of gold or silver mining stocks to pick from, notably like ABX, GG, AU, NEM, PAAS, SSRI, CDE, HL, just to name a few.

When it comes to platinum, there are much fewer choices: AGPPY.PK, IMPUY.PK, LNMIY.PK, AGPBF.PK and NMPNF.PK.

When it comes to palladium, the only primary mining plays available is Stillwater Mining (SWC), and North American Palladium (PAL).

Full Disclosure: The author holds shares in SWC as the largest long position. The author also holds shares in PAL, SSRI, CDE, PAAS, HL, PCX. The author hoards physical palladium metal but currently has no plan to hoard physical urea due to lack of suitable market access. The author has no long or short position in any of the ETF funds mentioned.