Investing In a Resource Constrained World Part Five

In a previous article I touched the topic of Peak Oil and even meantioned the Malthus Theory. The validity of both theories can not be disputed because both are extremely simply and perfectly logical derivatives of mathematics. In the case of Peak Oil, it's been validated by the peaking of individual giant oil fields, and we are just now experiencing the peaking of global oil supply. In the case of Malthus Theory, it has been validated by hundreds of historic events thoughout the human history.

The purpose of my articles is to talk about investments. But it is necessary to divert away a little bit to talk about the paradigm shift of our society first, before I come back to talk about investment ideas.

We are experiencing some gigantic paradigm shift as crisis unfold right in front of our eyes, due to natural resource depletion. It is important for individual investors to understand what are those crisis and how do we cope it, in order to survive and prosper in the looming crisis.

Unlike most Peak Oil advocators who are extremely pessimistic, I am an optimist. I have been pessimistic the first time I learned the Peak Oil concept. But the knowledge about the Malthus Theory actually turned me into an optimist. Humanity have faced many many crises before, each could have wiped out humanity from the surface of the earth, but we survived for millions of years nevertheless. So the looming resource crisis is no different and probably no worse from any of the previous crises humanity has faced.

Let me explain Malthusian in simple terms. A fish in the ocean, for example, can lay a few million eggs at a time. Each egg, given the proper opportunity, can grow into an adult fish and it can lay a few million eggs of its own. If you multiply a million by a million and keep multiplying, pretty soon you reach an astronomical number that total number of fish can easily fill the whole ocean, or fill up the whole galaxy. Of course that could never happen. Most eggs got eaten by other fish as food, before or after it is hatched. A pessimist would think that what if all one million eggs are eaten and not even one survives to grow up? Then the fish could go extinct pretty fast. That does not happen either. It just so happens that out of 1,000,000 eggs, 999,999 will not survive but in average exactly one will survive to lay eggs, no more and no less. The nature has a way of regulating fish population based on available natural resources like food and habitat. The Malthus Catastrophe happens on a daily basis for fish. But I do not see any fish being pessimistic. They have been living happily for millions of years and just keep laying as many eggs as they can. Life goes on. Shouldn't human society, with our collective intelligence, cope with our own Malthus Catastrophe better than fish?

The unfolding energy and natural resource crises, in my opinion, is a population crisis. The global population simply exceed what the earth's natural resources can support. If we have one billion people instead of six billion, then we still have plenty of oil and other natural resources left for every one to consume. There are ways to cope with it, peaceful ways, through conscious population control (like the family planning policy in China), and conscious reduction of consumption. We must abandon our American lifestyle of materialism. China, with a population five times that of the USA, and consumes only one third of the oil, and it manages a much robust economy than the American one. So America should be able to survive with much less oil consumption.

Skyrocketing oil price has already forced many American families to try to adopt and cope with over $4 a gallon gasoline prices. Abandoning driving altogether is impossible for most Americans. But abandoning SUVs and big pickup trucks in favor of smaller, more fuel efficient cars, is what people have been doing. The trend is very clear, sales of SUVs have stalled, but sales of cars are booming. The total auto sale in recent month have dropped some what, only because auto makers have not been able to respond to the demand change fast enough. My opinion is auto sales actually will see a few years of hyper boom, because people will retire SUVs and other inefficient vehicles, well before the useful lifespan of these vehicles. There will be a huge demand on new fuel efficient cars, to replace these SUVs on early retirement.

My advise to people is SELL your SUVs now, while you can still fetch a decent price for it and use the proceedings to buy a new fuel efficient car. You wait longer and more of these oil guzzlers will show up to flood the used car market, and dent the resale value. You should also buy a Prius, the most fuel efficient car you can buy today. I do not own stocks of Toyota Motors (TM) and I do not think they make a terrible amount of money on Prius. But I am getting 66.6 miles per gallon so I can afford a much higher gasoline price than most people do. Toyota could not produce a lot of Prius due to battery shortage. It costs a lot of nickel metal to produce the hybrid batteries. So buy a Prius while you can still lay your hands on one.

I can see there will be continued global nickel shortage due to auto makers rapidly ramp up hybrid vehicle production, but also due to ramped up effort to develop deep sea oil resources. You need gigantic oil platforms, called oil rigs, made of millions of tons of stainless steel, which needs nickel. There is a global shortage of oil rigs, so expect stainless steel and nickel demands ramp up just on this account. Check out the phenomenal raise of RIG and you know there is a severe rig shortage. Buy any producer of nickel while they are now cheap thanks to the recent nickel price correction, which now seems to have bottomed. That of course includes my favorite palladium stock, PAL, because nickel is the most important byproduct of PAL. I am also thinking about TGB, which I once owned in 2006. I still like it's low P/E ratio. Was its recent fall due to nickel? If then, it's good reason to buy on the dip, since I see nickel has bottomed in the current round of correction, especially in light of the big blow up in west Australia.

The solar sector has been hot in recent months but have cooled down some what. Do I consider any solar stocks a good buy here? I have longed and shorted TSL and LDK in the past but I considered them merely trade stocks and I no longer own them. My opinion is Solar PV is NOT the solution of our energy crisis, not silicon based ones, and definitely not the CdTe solar panels that First Solar (FSLR) produces. I suggest that you read an article called Order of Magnitude Morality. The point to make is production of solar PV products are extremely energy intensive. Although it looks like the energy consumed in producing these solar panels will eventually be paid back, due to their long lifespan, it does take up to ten (10) years to payback the energy consumed, fifteen (15) years if you count in everything, including transportation, sales, installation and maintenance. Massive ramp up of solar PV production will consum a great portion of our existing limited energy supply, make the energy shortage that much worse, before the energy contributed by these solar panels can start to make a difference.

Because of energy payback time as long as 15 years with everything counted, we could NEVER ramp up Solar PV fast enough to replace our energy supply. We don't have the time. For example, if we immediately dedicate 5% of today's global energy supply to solar PV manufacturing, which is a stretch because the world can hardly afford even 1% of spare energy supply now. But let's say 5% is available. By the end of the year, we will have produced enough solar panel to provide 5%/15 = 0.33% of the world's energy needs, reduce our reliance on fossil fuel to 99.67%. The next year we can dedicate 5%+0.33% = 5.33% of the energy to solar PV industry. And by the year end we have another 0.355% available. It would take 11 years for solar PV energy supply to reach 5% of the world's needs, and another 11 years to reach 15% of world's energy supply, and another 11 years to reach 35%. 33 years and we are still only at 35% of the world's energy needs.

I do not like any of the solar players in the market today. They all rely on government subsidies in order to prosper. I am a believer of free market and I am against all government intervention in the marketplace. Let the free market speak if it is something beneficial for the society. I am disturbed by the fact that why my tax dollars should help to pay for 60% of the cost of solar installation for my neighbor 100 houses down the street? He may think he got a good deal from the tax break. But he will continue to pay tax to help the No. 99 neighbor to install solar panels, and then No. 98, 97 etc. At the end of day whatever tax break he initially enjoyed, he pays back in future taxes. The tax money doesn't come from no where but from our own pockets.

One exception is ENER, which I meantioned before favorably, and still consider it a favorite long term play due to it's hybrid battery technology and other unique technologies. I consider inventor Standford Ovishinsky the Thomas Eddison of our time. The stock is very volatile so I would recommend buy it on the dips, not on the rallies.

The solar sector is hyped up by the Wall Street. If you have learned a lesson from the 2000 IT bubble, the lesson is don't follow the hypes! That reminds me of another sector wall street hyped up two years ago, the ethanol sector. The most notable stock in this sector is PEIX. I noticed it in early 2006 and I told folks don't buy it at $40. You will lose your money. Turning the food, corn, into the fuel ethanol, is never a very profitable idea. It is never a solution to the energy crisis. Don't listen to the hype, even if Bush himself hyped ethanol. Today, unfortunately PEIX trades at merely $3 a share. Ethanol price has gone up, but corn price has gone up even more, making PEIX barely profitable. All of a sudden every one now denounces the ethanol industry of consuming all the corn in the world, causing global food crisis and famine and all that.

I am a big believer of contrarian thinking. I did not buy JRCC and just watched it rally to $16 in early 2007 when there were all the drum beatings. But I rushed in and bought tons of it at $4 when no one wanted to touch it. Today JRCC is well above $46 and there are lots of drum beatings again. My advice to people is sell JRCC now. I am not saying it is the top. Don't try to catch the top, which no one can. There are much better opportunities else where than to squeeze the last few dollars out of JRCC.

I am tempting to apply some contrarian thinking in PEIX at below $3 now that no one touches it. I do not view it as the savor of the world. My investment goal is not to save the world. The ethanol industry is not the solution to the world's energy crisis. But it has its reason to exist as a legitimate business, satisfying some legitimate needs. When we truly run into oil shortage, and we can turn corn into ethanol to supplement the gasoline supply, I don't see why not! Burning food as fuel for transportation needs is nothing new. The First Emperor of China practiced exactly that 2222 years ago, i.e., burning food as bio fuel for transportation needs in order to bring supplies to his powerful army thousands of miles away. The transportation vehicles he used were driven by machines called horses, they consume food as biofuel in order to obtain the energy to drive the carts. 90% of the food transported is consumed by the humen and horses on the trip, and only 10% reached the destination to supply the army. If the trucks have no diesel fuel, no food can be delivered to your local stores. I would rather prefer to allow part of my food converted to bio fuel to allow the trucks to bring the rest of food to my grocery store. So maybe we should give it some thought if this is the right time to buy some PEIX or other ethanol players. Could PEIX develop alternative feedstock than corn?

I have a big dream that the success of Cold Fusion, now called low temperature nuclear reactions, may become a reality and we will have solved humanity's energy crisis for good, and saved civilization from catastrophic collapse. I know that from the fundamental point of view of quantum mechanics, which says that particles always have certain possibility to tunnel through energy barriers, cold fusion is NOT impossible. Think of all the hundreds of scientists who have resisted tremendous amount of peer pressures and continued the experimental research of cold fusion for 19 years of best of their times. Do you think they are all clueless crackpotists, or they are really up to something? Recent successful public demo by Yoshiaki Arata, a highly respected physicist in Japan, should bring people renewed hope that cold fusion could become a reality and could be the perfect solution for our energy crisis. Of course if that is the case, palladium price has got to go up a lot higher. Palladium is used to trigger cold fusion reactions. I recommend people to watch the video series War Against Cold Fusion to understand it. Instead of advocating for drilling the ANWR and depleting America's last bit of remaining oil as fast as possible, shouldn't America at least spend a few million dollars to check out the reality of cold fusion, when other countries like Russia, China, Japan, India and Isreal already beat us in the cold fusion research? Shame on the short-sighted politicians who only know ANWR!

Metals are my favorites. Base metals and precious metals. My all time favorite metal is tellurium, which I discovered when I studied the prospectus of FSLR. I talked about tellurium here and here. On a side note, I can not believe how stupid the street is, I talked about FSLR's RoHS risk back on Nov. 27, 2007. It's been so long since my article was published and no one paid any attention. And now they suddenly discovered the toxicity of cadmium, and speculate that CdTe solar panels could be banned in Europe. I think it is irresponsible market manipulation. Any competent analyst should have read FSLR's prospectus from day one and know about cadmium and RoHS. On this I want to come to FSLR's defence. They have documented the RoHS risk in the prospectus and in annual filings so they have not hidden anything. Recent news fuss made it sounds like FSLR just made an announcement and that a EU ban on CdTe solar panel is suddenly imminent. I think it remains just as speculative today as last year whether Europe will take actions to ban CdTe solar panel or not. I so far have heard nothing that indicates a move to ban is imminent, so it remains just a speculation of a possible event so far. Was it an attempt of the street to lure in some unsuspective fresh shorts, and then run another round of short squeeze? I remain skeptical because I know how this market could be rigged in either directions, with analysts often selectively distribute information they see fit.

The real risk of FSLR remains how it is going to resolve it's tellurium supply. I talked about it quite a lot and I tried to dig out information. But the FSLR management do insist that they have adequate tellurium supply. Since they have never revealed the actual data on their tellurium supply, we the outsiders can only speculate and discuss opinions, and the fact remains something only FSLR knows, until such time they are willing to come to the public and discuss it. Maybe they need more time for insiders to sell? One thing that I think I am sure is one day my stash of tellurium hoard might be worth its value in gold. I wish there is a tellurium mining stock to buy.

But really palladium and platinum are the next best thing. They are way much better than gold and silver. I could never bring myself to like gold. I did once buy gold stocks like NG and NXG. Now NG is less than half where I last sold it at $16+. I now frankly think gold is the worst of commodity investment, and gold mining could be worse. Of course as fiat currency depreciate, gold's nominal value in fiat money looks higher. But you still have nothing to gain. Go to Zimbabwe. You can exchange a gold coin for one trillion Zimbabwe Dollars. You feel good being a trillionaire but you are not getting rich.

Gold is money since ancient time and is still money today. I have a problem with that fact! Money, as an exchange media, must be something that people are willing to take in and equally willing to let go. If people want to hoard it but do not want to let it go, or people are rather happy to give it out and hate to take it in, then it can not be exchanged freely as a trade media. So by the virtue of gold being the money, it is something perceived to have near constant value in real term, people have a neutral sentiment in owning it or dishoarding it. and that is exactly the reality. There are more than 160,000 tons of gold being hoarded by different people and organizations. Any trade of gold, is largely between some hoarders of gold and some other hoarders of gold. The mine supply and jewelry industry demand, in this case, is relatively small in comparison, and does not have a material impact on gold's price. There could never any shortage nor any surplus of gold. I would rather buy silver than gold on the Friedman Theory. On silver have a look at SIL and CDE. Could be good bottom fishing target. While PAAS is now more expensive than silver itself. If you want leveraged gain on silver then buy some SLV. Similarly use USO and UNG to play on the oil and natural gas commodity prices.

I would like to look at things from the point of view of basic supply and demand relationship. If I want to invest in a commodity, I need to know that it's price must go up. I need to know that it is in demand and that there is a supply shortage. I also need to know how elastic or inelastic that the price change may affect the supply and demand, and bring back the balance. Something that is price elastic, that higher price could easily boost supply or cause people to reduce usage or seek alternatives, will have less room for price gain. On the other hand, if it is something price inelastic, that higher price will neither boost supply, nor persuade industry users to stop using it, or there is simply no alternative or replacement, then it is a commodity that has a lot more room for price to appreciate.

Palladium and platinum fits such description of commodity that is in short supply, that is in ever increasing demand that is rigid and non-negotiable. The supply is in shortage because the ongoing electricity crisis in South Africa, which greatly impacts production in this main PGM metal supplier of the world. The electricity crisis sees no solution until at least 2012, according to ESKOM and other reports from South Africa. The PGM production disruption is well documented for any one willing to dig out first hand information, instead of relying on second hand guesses. On page 9, table 3, you see the March, 2008 PGM production is down 28% from last March. SA supplies 85% of the world's platinum and 35% of palladium so that's a lot of global supply reduction.

Curiously, the trade of platinum and palladium so far has not followed the way the fundamentals of supply shortage dictates. Instead they follow gold and silver. Gold up and PGM up. Gold down and PGM down. What does PGM's own industry supply/demand has anything to do with gold or inflation hedge? I guess the metal traders are just slow in digging out useful information. If it takes the street almost two years to dig out something well documented in FSLR's IPO prospectus, it doesn't surprise me at all that the reality of South Africa's electricity crisis hasn't even sink in yet even in the minds of some of the most well known metals analysts, let alone the average investors. But soon the PGM fundamentals have to kick in. Industry users must buy for their consumption. The price movement will wake up investors.

I know one hedge fund manager, a physics graduate and very successful in his career, manages billion dollars of assets and claims to be a good friend of a briliant trader, Brian Hunter, whose one single mistake killed Amaranth Hedge Fund. I tried to talk to him about palladium and he told me right away he knew palladium, and there were lots of palladium mines in Canada, and he knew many funds who bought the physical metal. He totally believed he knew it but he really didn't. If a bright guy with such a good background could be so clueless, the average wall street investors must be in total darkness, and of course the computers they use to trade is even more clueless about fundamentals of the markets.

So be patient, spend your time do your own DD. Dig out first hand information and do your own analysis. If you have done so you have beaten the street already. If you further have the determination of sticking to fundamentals and not be swayed by the mindless computer trading of the big funds, then you will win big time at the end of the day. I am sticking to my investment in PAL and SWC since I have done my homework, and checked them many times and could not find any thing wrong with my analysis. And I will patiently wait for the market to wake up to the reality I have discovered long ago. Meanwhile I am taking pride in my legacy of the first individual tellurium investor in the whole world. I made the correct call at the lows of JRCC and ENER, so I know I have the sharp vision. I am not envy about the recent astonishing rally of JRCC and ENER, because I know in time, PAL and SWC will do much better.

P.S. The author is heavily invested in the stocks of PAL and SWC. I have hoarded physical to speculate on tellurium price appreciation.

Peak Oil and Alternative Energy Investments

Peak Oil is for real and it is already upon us. The phrase "Peak Oil" now frequently occurs in main stream medias nowadays, as the oil prices are skyrocketing. As I drive my Prius to work each day, I noticed the gasoline price is going up 5 or 10 cents a day recently. Who wouldn't notice the skyrocketing gasoline price? 99.99% of the people have noticed the raise of gasoline price. But I believe less than 0.01% of the people really truely understand peak oil, a very simple yet hard to accept concept.

I believe there are less people who can understand Peak Oil Theory, than people who can understand Einstein's Relativity Theory. Einstein published his theory in 1905. By 1912, it was already well accepted and his name became a household name. In 1956, King Hubert published his Peak Oil Theory, a pure and simple mathematical derivative of any presumed limited natural resource. Today, half a century has passed, and the point of Peak Oil has even just passed, but Hubert Peak is still treated as a crackpot theory by some of the best educated people on this planet. As for the Malthus Theory, an even simpler and purer mathematical derivative. It's been two centuries but it is still being treated as an absolute hoax. I wish to find another occasion to talk about Malthus, since the topic is just too emotionally stressful, especially when it's put together with Peak Oil.

Humans are incredibly stupid animals, when the rational thinking is jeopardized by emotional rejections, especially by emotions of greed, fear and utter unbelief when a vast amount of interests is involved. Warren Buffett had long discovered that Mr. Market could never think straight or rationally. Mr. Market either over-valuate something, or under-valuate it. He keeps oscillating between the two extremes. That's the basis why it is possible for an investor to overcome the emotions and make profit by defeating the irrational Mr. Market.

All of the world's biggest giant oil fields are in steep decline: No. 1 Guawar in Saudi Arabia; No. 2 Mexico's Cantarell; No. 3 in Kuwait; and No. 4 China's Da Qing. Shortly after the crackdown of the Gang of Four, which ended the Cultural Revolution, a period of ten years of utter political craziness that turned the mentality of one billion people upside down, I remember that China vowed to discover ten more giant oil fields each as big as Da Qing. No one ever thought about the question how we could find ten Da Qings, if there was none exist in nature for people to discover in the first place? Again when the population thinks as a group, the intelligence level is extremely and hopelessly low. We as individuals may think we are smart, but as a group, we are often incredibly foolish.

The depletion at Cantarell is shocking even to experts who know about it. Daily production drops to 1.07M barrels recently. A year ago it was 1.57M. Two years ago it was 2M barrels a day. People in denial of Peak Oil, those so called economists who recently predict oil to fall back to below $100 a barrel really need to take a closer look at Cantarell and the depletion at other giant oil fields. When supply can not be raised, there must be demand destruction to forcefully reduce demand down to the level of available supply. I don't see oil demand destruction at current price level yet. If people can spend $20K to buy a new car, they can surely afford $4 a gallon or even $10 a gallon to use that car, or even $20 a gallon. On a side note, there is an interesting article about the Bakken Formation.

But people surely are responding and trying to cope with the reality of ever increasing gasoline prices. According to GM, Ford, Toyota, Sales of fuel efficient cars are booming, while those of big trucks and SUVs are falling. I am seeing more and more Toyota Prius on the roads. If you are about to buy a new car lately, I urge you to buy a Prius now, before the big wave. At a 66.6 MPG fuel efficiency that I personally achieved, Prius is the best of the breed. The production is constrained by raw material supply. Global annual automobile sale is 70M, but Toyota only recently reached cumulative one million sales of Prius. Hybrid vehicles like Prius can never become a main stream commuting vehicles due to the global resource constraint.

That brings me to the topics of hybrid electric vehicles, fuel cells, battery technologies, and a few of my favorite base metals. Hybrid cars like Prius use a 50 kilograms battery package called NiMH to store and re-use energy. Toyota is also developing a plug-in hybrid, which may require a battery package almost ten times as big for practical range of driving without gasoline. I estimate 60% of the mass of NiMH is the metal nickel. That's 30 kilograms of nickel per Prius. One million such cars would cost 30,000 tons of nickel, whose global annual supply is roughly 1.5M tons. So Prius hybrid batteries along consume 2% of global nickel production. 20% if annual hybrid sales reach 10M. Much higher when plug-in hybrids go to mass production soon. I will be the first to buy a plug-in hybrid. We are talking about the equivalent of 50 cents per gallon gasoline if we can re-charge from the electric grid.

Toyota, Nissan and Volkswagen all announced recently they are buiding new factories to produce NiMH battery packs for hybrid vehicles. All these of course will translate into greater demand of the nickel metal. That's bullish for my favorite mining stock, PAL, North American Palladium, which produces nickel as a main metal byproducts. The battery fever of auto makers even caught the attention of Jack Lifton at Resource Investors. Read what he had to say.

The coal stock JRCC has been super bullish! I meantioned JRCC before and recommended it. I had watched it since early 2007 and when it dropped to $4 I loaded it up big. But I sold it right before it reached $8 a share, because I thought a correction may come. The correction did came two days after I sold, and brought it all the way down to $4.76, almost erased the gain completely. But I wasn't in a position to buy at that time, I never bought back. I thought those folks who did not sell at $8 and saw it drop back to $4-ish must felt the hurt. Today JRCC reached $40+, a 3 year target that I gave JRCC. I am the one who hurts. Lesssons learned!

I don't understand it! JRCC released a Q1, 2008 loss much worse than expected and worse than last year, due to higher cost, and the share price rallied from $22 to $40 after the bad news. All those folks who was watching then and would not touch $4 JRCC with a ten feet pole, now fight hands over fists to pay $40 a share. Long term coal should be bullish. But I am skeptical how much of recent coal rally is due to real shortage, and how much is speculative buy by the funds.

Mean while, PAL reported a Q1, 2008 profit of 16 cents per share, far better than expectation, on top of that they reported world class high grade drill result, even the VP was saying this was a good result no one else has seen. And now after some initial excitement, PAL falls right back to where it closed before the May 12th earnings release, $5.22 a share.

Another stock I missed is ENER. I discovered ENER when I was researching about tellurium. I liked it and made a bullish call on it but I thought it was a long term play. Recently ENER reported a Q1, 08 profit of 17 cents per share, versus 14 cents loss last Q. ENER rallied almost 75% to more than $61 since the good news! ENER is a good company to own on two critical technologies, the tellurium based ovonic materials, and its NiMH battery technology, which is now hot for hybrid vehicles I just meantioned. I have no doubt ENER share price should go to triple digits and beyond. But I would wait for a significant pull back to buy. Progress of technology developments takes time.

Comparatively PAL also reported a similar 16 cents per share profit in Q1, 08, same as ENER. I don't understand why PAL still only deserve $5.22 a share, while ENER deserve $61.30 a share, almost 12 times more expensive for the same amount of profit per share. Buying $5.22 a share PAL is like day time bank rubbery! In a previous article I point out two extremely bullish developments for platinum and palladium: the termination of Russian palladium stockpile sale; and the ongoing electricity crisis in South Africa.

Latest SA government statistics (see page 9) show that South African PGM metal production in March, 08 dropped 28% from March, 07 due to the ongoing electricity crisis. The march production is even worse than January, when a 5 day mine stoppage due to electricity crisis caught the attention of the world. South Africa produces 85% of the world's platinum and 35% of palladium, so if they lose 28% that's a huge shortfall. The metal prices must go up dramatically soon, as South Africa is entering winter, when the electricity demand is high. Higher metal prices will immediately impact PAL's quarterly result, as they are totally unhedged.

So why people have not rushed in to buy PAL at $5.22? Must be the same people who avoided to touch a $4 JRCC with a ten feet pole.

Most market participants surely are stupid. But I feel even more heart breaking for folks who bought into the hype of FSLR. Please read my past articles. I wrote about FSLR's vulnerability in tellurium. My tellurium article has been cited and quoted all over the internet. And none of the folks holding FSLR shares even feel uncomfortable about the tellurium vulnerability, or even bother to give FSLR a call and demand an answer? I currently hold no FSLR short position only because I think the PGM metals sector, the PAL and SWC stocks, will give me more profit potential than shorting FSLR. Two recent developments in FSLR's tellurium supply struggle are shockingly disturbing, in my opinion. One is a recent FSLR job posting which revealed a secretive Tellurium Initiative Department. Another one is this news item I discovered, which is pretty interesting because FSLR is obviously interested in a potential poor grade gold mine in Australia just because there might be 59 grams tellurium per ton of ores. I will stop here at the facts and reserve my own opinions till next time. Let people speculate on their own. What I don't understand is if you like solar players, why don't you buy more legitimate silicon based companies like LDK, TSL, JASO, CSIQ, ESLR? At least these companies have a bright future. I am all for solar energy, but using tellurium to generate a few watts of electricity is a waste of precious natural resources.

P.S. The author is heavily invested in SWC and PAL stocks, and has hoarded physical tellurium metal to speculate on the price.

Tellurium: A Supernova In The Making

Tellurium, one of the rarest elements on earth, was once not thought to be very useful. According to USGS and a Mining Journal Review article, half of its traditional use is as an alloying agent in iron and steel to improve machinability; 25% of it is in catalysts and chemical use; 10% of it in alloying with non-ferrous metals like copper and lead; 8% of it is in electronic application and the remaining 7% in other applications, including as pigment agent in ceramics.

Annual global tellurium production is about 170 tons to 200 tons, based on various different estimates. It's mainly produced from the anode slime accumulated during electrolytic process of copper refining. According to this detailed analysis, copper produced from different places contain vastly different tellurium content. Typically, one ton of copper contains 100 grams of tellurium and only 33 grams are extracted and produced using existing technology. That caps the current global tellurium production at no more than 400 tons, without major investment to improve the tellurium extraction efficiency, assuming globally 12.4 million tons of copper is produced using electrolytic process per year. Because of the low quantity and thin revenue of tellurium in comparison to the revenue from main copper product, copper refineries are UNLIKELY to invest money, time and effort to improve the tellurium extraction rate, unless tellurium price goes up a lot from here, approaching gold price levels.

According to USGS, tellurium price started 2004 at $10 a pound. By the year-end it reached $22.50 a pound. In 2005 the price quickly rallied to $130-$180 a pound in mid year, then flat down to $100-$130 a pound. In 2006, it once again ran up to $155 a pound and then settled for the year at $50-$75 a pound.

So what prompted the rapid price raise? First Solar's (FSLR) CdTe solar panel was one of the demand factors. FSLR produced 60 MW in 2006 and about 20 MW in 2005. At 8 grams of tellurium per panel and 60 watts per panel, that's 8 tons tellurium consumed in 2006 and 2.7 tons in 2005. That's barely 4% and 1.4% of the supply. It's a factor in demand increase, but not the major factor.

The main Te demand increase was from other applications. CD-RW discs use tellurium, as do DVD-RW discs. And even later, ReWritable Blu-Ray DVD discs were developed by Panasonic, using a material called tellurium-suboxide-palladium.

Recently, Intel (INTC) announced a new type of phase change memory chips to start mass production in later 2007. This also uses tellurium. To understand the background of this break through, you need to read an old article: A 30-year memory problem solved?

All those electronic applications mentioned above, CD, DVD and memory chips, relate to the same phase change material called chalcogenide, which contains tellurium. Chalcogenide, the material used in ovonics, is really the cultimation of decades of scientific research on amorphous materials, which was once considered of very little practical use, but of academic interest only.

I originally connected these dots from an article I read entitled "Is There a Tellurium Rush in the Making?". Kudos to Sergio Garcia de Alba for submitting the article Energy Conversion Devices: An Amorphous Gem, which finally allowed me to connect the dots. It's all related to tellurium. Energy Conversion Devices Inc. (ENER) was funded by Stanford Ovshinsky, who invented the amorphous semiconductor materials and coined the name Ovonics. He has numerous important inventions. Chalcogenide, which is a tellurium containing material, is one of them.

Today, after many decades of quiet research and perfection, chalcogenide has suddenly become a very very useful material, having revolutionized and is continuely revolutionizing the whole electronic industry. I like to compare the precious element tellurium to a supernova. It's been quiet and ignored for so long, but all of a sudden it erupts into an extremely bright superstar. The tellurium supernova shines so brightly that it could KILL.

Let's follow the ENER article a little bit:

...a little company called Ovonyx...licensed its memory technology to
semiconductor giants like Intel (which is a partner in Ovonyx), Samsung, Elpida,
Hynix, Qimonda, and ST Microelectronics. The memory technology is based on
chalcogenidephase change memory. It is expected to replace NOR flash memory, and could also eventually replace DRAM and NAND flash. Samsung has announced
production of a 512Mbit part in 2008, and Intel a 128Mbit part that could arrive
as soon as the end of this year or early 2008 (Intel's part codename is
Alverstone). ...What's interesting for investors is that phase change memory
could become a $40 billion+ market in a few years.

This phase change material thing is really HUGE! $40B+ market just in memory chips and we have not even included all the rewritable CDs, DVDs and Blu-Ray DVDs. And it ultimately could also replace the hard disk drives so future computers would no longer need a hard disk drive.
If you are not shocked so far, then read this article about phase change memory. Let me quote from page 2:

A person using a computer with PRAM could turn it off and back on and pick up
right where he left off -- and he could do so immediately or 10 years later.
Such computers would not lose critical data in a system crash or when the power
went out unexpectedly. 'Instant-on' would become a reality, and users would no
longer have to wait for a system to boot up and load DRAM. PRAM memory could
also significantly increase battery life for portable devices.

How wonderful it would be!

Needless to say, this whole new chalcogenide based electronic industry will consume a lot of tellurium, probably all the global tellurium production and then some more. It will drive the price of tellurium to a crazily high level, maybe at gold price, maybe at platinum price, and in doing so, it will kill a lot of trivial, low added value industry users of tellurium.

The kill of this tellurium supernova will probably include FSLR. This company is most vulnerable because it uses a lot of tellurium in its solar panels, any dramatic tellurium price will increase its cost to the level that it can no longer have a profit margin. When a business no longer has a profit margin, it cannot survive. But the tellurium kill probably will go behind that. Tellurium as an alloying agent will probably have to end, as will tellurium used in portable electronic beverage coolers.

My advice to people would be to buy and hoard some tellurium metal ingots if you can still find anything at decent price. If you have FSLR long positions, I recommend that you sell them before it is too late. Tellurium, such a scarce and precious natural resource, is one of nature's best gifts to human kind, and it was never meant to be used on trivial things like generating a few watts of solar electricity; rather, it should only be used in high value added and far more useful things like advanced computer memory chips.

FSLR started on the wrong technology using the wrong material, the extremely toxic cadmium plus the extremely rare tellurium, a deadly combination leading this otherwise aggressively growing company onto a death march. It's a tragedy of nature's making, not the management's fault. But the FSLR management really need to wise up and realize that their sole CdTe product will lead them to nowhere. They must diversify into other technologies, or they may have to shut down business just a few years down the road.

Full disclosure: I currently do not have any ENER position but is looking for opportunity to buy some. I have short positions in FSLR and am planning to short more when it starts the eventual collapse. I am also actively buying physical tellurium metal ingots as investment.

P.S. This article is now on Seeking Alpha.