Investing In a Resource Constrained World Part One

We are living in a resource constrained world, due to rapid depletion of many of the none-renewable natural resources, like oil, coal, and metal mineral resources. As the main stream media wake up to the Peak Oil reality, I believe it is important to keep the reality of a resource constrained world in our mind, when making investment decisions. In this article I want to talk about precious metals, including gold, silver, platinum and palladium, the rare metal tellurium and selenium, coal mines, agriculture, sugar, and fertilizers. Relate to these resources I will talk about the following stocks: PAAS, CDE, SLW, PAL, SWC, OMG, FSLR, JRCC, IPSU, POT, SEED, TNH, COIN, not necessarily in that order. This is the first part in a series. I will take about them in more detail in the future.

First on First Solar Inc.(FSLR) and tellurium, because I have some breaking news! I have previously written about FSLR and its critical reliance on tellurium supply, and about the fact that tellurium is increasingly being used on important new applications, which could force FSLR out of business. I also suggested buying physical tellurium as an investment.

The breaking news I discovered about FSLR, is from 5N Plus Inc. (VNP.to). VNP recently went IPO and they have just made the first public release of quarterly operating results, for the quarter ending Nov. 30, 2007. Find it on Sedar.com. I was shocked to discover that VNP saw virtually NO growth in sales revenue over several of past quarters. Here are the numbers of quarterly sales revenues:

Nov. 30, 07 $6.796M
Aug. 31, 07 $6.394M
May.31, 07 $6.400M (extrapolated from year total)
Feb.28, 07 $5.700M (extrapolated from year total)
Nov.30, 06 $4.890M
Aug.31, 06 $4.903M

We know that 55% of VNP's sales are CdTe sales to FSLR, so that's about $3.75M per quarter. We know during this time period, FSLR saw incredible production capacity expansion, going from one production line to three at the end of 2006, and then seven during Q3, 2007, due to the new Germany factory reached full capacity. The thoughput speed of the production lines also increased greatly.

Such a rapid growth would mean a lot more production consumption of the CdTe raw material, and a lot more purchases from 5N Plus. However the growth was NOT reflected in 5N Plus's quarterly sales revenue. The sales had been flat for 3 or 4 quarters. Why?

On page 26 of VNP's IPO prospectus, it explains that VNP currently has an annual production capacity of 100 metric tons of CdTe, and it is building a new factory in Germany to double the capacity to 200 metric tons, and then some further improvement to bring the capacity to 350 metric tons per year. They have also reserved empty land lots in Germany so that they can build another facility to further double the capacity. Such an aggressive expansion plan was the result of contract obligation to FSLR. The contract mandated that the Germany factory must reach full production by July 31, 2008.

That's a pretty aggressive expansion plan. Clearly both FSLR and VNP saw that the quantity of CdTe needed by FSLR warrants such an expansion. However, such a desperate need of more CdTe is NOT reflected in sales revenue growth of VNP, which almost stalled in recent quarters.

What's the road block? The roadblock is neither VNP's current production capacity, nor the lack of demand from FSLR. Judging from the number of $3.75M quarterly sales to FSLR, VNP's current production capacity is under-utilized. The only conclusion I can draw is they are not getting enough raw tellurium for the production!!!

My estimate is the cost of CdTe in whole sale price is probably $350 per kilogram or more. I saw 10 times higher retail price at GoodFellow.com, at $3500 for one kilogram CdTe of 99.999% purity. Assuming $350 per kilogram, the latest quarterly CdTe sale to FSLR was roughly 10 metric tons. FSLR's current capacity is 40 MW per production line per year, and 7 lines. So that's 70 MW per quarter. Each 1 MW of solar PV production costs about 250 kilograms of CdTe. So the need is about 17.5 metric tons of CdTe per quarter. They are getting far less than that!

First solar might end up having to shut down some production lines if it can not find more tellurium supply soon! Don't forget they have another 4 Malaysia factories being build, each as big as the Germany factory. Where are they going to get the tellurium supply? I think there is a looming catastrophy here in First Solar.

But there is an ongoing catastrophe in my favorite long stock PAL right now. The catastrophy is not with the company's business, but rather, with the company's stock price! I predicted a palladium super bull cycle and recommended buying PAL and SWC. The palladium price rallied to multi-year high recently, but the PAL stock price reached multi-year low. That rather defies the logic! In a previous article I analyzed why PAL stock was punished, and called a bottom on Dec. 13. Looking back, the bottom price of $3.40 a share was called correctly. But PAL has yet to rally above $4 credible.

I urge people to buy PAL below or near $4 a share promptly and do not wait too long. The reasons are not just the strong rally in precious metals recently, but more importantly, PAL's Q4 earnings will be released at the end of January or beginning of February. Since a considerable portion of the mine produced metal was not sold in Q3, but will be added to Q4 sales, it can be expected that the Q4 earnings result will be fantastic, boosting stock price.

More importantly, I sense that an explosive palladium rally is imminent now we have entered 2008. Traditionally, each year the Russians sell about 2 million ounces of extra palladium, from the government stockpile, flooding the global market and capping the metal price. They always shipped the government stockpile sale of palladium in one batch to Switzerland in the month of December. So far, year 2007 has ended, and there was no indication they shipped any palladium stockpile.

Palladium rallied in previous years despite of Russian stockpile sale. Now, when the fact that the Russians have finally depleted the stockpile becomes public knowledge, and people know that there is an industrial shortage without the Russian extra supply, you can expect the palladium price will explode into the stratosphere!!!

SWC is also a good buy here, but relatively, PAL has better value at this price. You get more palladium production per dollar of stocks. Read my detailed comparison between the two.

I am also poundering other potential stocks to buy, OMG looks like a fantastic titanium metal player, with unbelievably low P/E. I have not done enough DD to determine if the P/E is real, but I feel the stock may be a bit high to buy here, do your DD and wait for a dip to buy.

Among silver players, PAAS and CDE seems to be the best of breed, SLW is the purest of pure silver play. SLW seems to be an excellent trade vehicle if you like volatility. But I do not like it as a long term investment. Do not get me wrong. All these stock should go up long term. But if in comparison with silver they are less worth than silver as an investment, then you are better off buying physical silver than buying these stocks. PAAS's market capital current can buy more silver, than the worth of its underground mineral resources. The same could not be said abut CDE, however. So I think CDE is better than silver, and PAAS is worse than silver.

Besides precious metals, I also pay attention to other resource investments. I don't buy oil players. Too many people have thought about oil already. When too many people doing the same thing, it diminishes your investment return. However I like coal. JRCC is a coal player that I have been paying attention for a long time. It has a super low price/sales ratio. So if the coal price raises to the level that allows it to make a profit, the profit will be very remarkable. The problem with JRCC is it has too much debt, so during the ongoing credit crunch JRCC may suffer a bit in short term. I am going to watch for JRCC to come down a bit more before I will buy it. Another thing to keep in mind is coal is still abundant in this country.

Sugar is sweet! I noticed that sugar price recently has bottomed and is going up again. Fortunately I also noticed a sugar player, IPSU, which for some reason, is being naked shorted. I think IPSU below $18 a share looks like a very attractive buy. But will need to spend more time to study the sugar fundamentals.

Every one knows Jim Rogers is favorable in agriculture. In a TV interview, he said that he liked palladium better than gold and platinum! That I agree with him. He also said he liked agriculture better than palladium. That I totally disagree. I agree with him that agriculture is bullish. But agriculture is LESS bullish than palladium. The reason is very simple, palladium, the precious metal, is price inflexible in its industry applications. How inflexible? Just look at rhodium, it went from $300 an ounce, to now more than $7000 per ounce, and there seems to be no stopping. The demand can not go away, now can supply catch up. That's price inflexible.

Agriculture is quite price flexible, both on supply side and demand side. On the supply side, you just plant more and produce more. On the demand side, you have demand destruction. Demand destruction happens in the most vulnerable section of the human society: people who are poor and can not afford adequate food. So the demand destruction actually happens at pretty low price point, because poor people don't have much money. They either have to settle for less expensive, lower quality food, or in the worst case, just die off in famines. It's cruel to say that. I am not being insensitive, but it is a fact of life that this world see famines just too often whenever there is a food shortage crisis. The charities are always too little, too late.

Of course, the better hope is increased agriculture production. That is exactly what's happening. However, increased agriculture production poses increased fertilizer demand. That's why there is a sudden boom in the fertilizer sector. So it is worthwhile to check out why the fertilizer sector suddenly becomes so hot. I recommend have a look at POT, TNH, CF, MOS, AGU, COIN, SEED. All those are related to fertilizers and/or agriculture. I have not done a sufficent DD study on them to give a definite recommendation of buy or sell. I hope you do your DD and tell me what you think about these stocks. And I hope to discuss them in more details in the next article.

P.S. Full disclosure: I am heavily invested in PAL and also own some SWC positions. I am short in FSLR and plan to add more short positions. I am invested in physical tellurium and plan to buy more. I do not own any of the other stocks I meantioned here but do intend to buy some of them at appropriate time and 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.

A Cinderella Metal That Breaks Physics Laws

Frank McAllister, CEO of Stillwater Mining (SWC), would call palladium a Cinderella Metal. I agree with him not only on reasons he cited, but more importantly, palladium (Pd) really is a very romantic fairy tale metal that breaks several known physics laws, literally! I am not a crackpot theorist trying to overthrow modern science. But let me explain why palladium defied several physics laws.

First, palladium defies the oldest known physics law, Isaac Newton's gravity law. The Russians have accumulated large strategic stockpile of palladium since the Soviet Era, they have been selling off the stockpile ever since late 90's. In 2000, a rumor that the Russians may stop the government sale caused a global market panic and drove the price up to $1100 a troy ounce. In the chaos Ford (F) and GM purchased large amount of palladium right at the top of the price. The Russians promptly resumed export of the stockpile palladium. The global market was flooded with huge surplus of palladium supply, and the price collapsed, forcing Ford to write down a $1B loss as a result. The price bottomed in 2003 at $142. It's the law of gravity in the economy of supply and demand: When something is over-supplied, the price has to fall.

The Russians continued to sell about 2 million ounces from the stockpile per year, on top of mine production. Global mine production was roughly 7 million ounces a year. So the total supply was about 9 million ounces while demand was only 7 million ounces. So in a huge surplus situation, the gravity law says the price must continue to fall. That was the conclusion of Allan Williamson in 2003. He was non-reservedly pessimistic in prediction that palladium price should continue to fall, due to continuing massive oversupply condition.

But palladium defied the gravity and rallied off the $142 bottom of 2003, and pushed toward $400, and proved Allan Williamson as well as all other metal analysts wrong. Why was it so? It really shocked me and forced me to research the reason why it defied gravity. And I found many good reasons of why. One of the reasons is as shown on this futures chart, palladium open interest dramatically increased starting in the middle of 2003. Some strong hands started to hoard all the excessive palladium because they see some huge potential in the future. These are not speculators. They have a firm belief in palladium's future, and have been driving price up in the past few years. One of the potential is increased demand of palladium used in jewelries, like in China. But it's way much more than that. I also came to realize that the Russian stockpile is not an infinite supply. It will come to an end. We will then see structural deficit in palladium.

Palladium's many emerging usages relate to the fact that it defies another physics law. It is a solid metal. But it absorbs hydrogen gas, lots of it! Palladium can absorb up to 900 times its own volume of hydrogen. It also absorbs deuterium, a heavier form of hydrogen with an extra neutron in its nucleus. Palladium's absorption of deuterium is extremely important that I will talk about later.

Since palladium absorbs hydrogen, that makes it very useful. Like platinum it can be used as catalyst in many important industry chemical reactions, like oil refinery and fertilizer production, synthetic fiber etc. It is most widely used in autocatalysts to reduce air pollution.

Palladium is also used in hydrogen purification. Both platinum and palladium can be used as catalyst in fuel cell batteries, a red hot industry sector being developed. There are already hydrogen fuel cell vehicles being driven on American roads, and hydrogen refueling stations in New York and Shanghai. Commercial hydrogen fuel cell vehicles will come to the mass market next year. There are also miniature fuel cell batteries, called Direct Methanol Fuel Cell (DMFC), being developed for mobile electronics, like cell phones, laptop computers and digital cameras, providing extremely long lasting battery power, such consumer fuel cell devices will also go to the mass market beginning next year! This will be a great hit because who wouldn't want a cell phone that does not need recharging overnight? See the Fuel Cell Today web site for lots and lots of exciting news stories about fuel cell, and Platinum Today for any news related to PGM metals.

The point is all fuel cells must consume PGM metals as catalyst. So that will be a booming demand to drive PGM metal prices to crazily high levels, which will definitely help the stock prices of SWC and PAL in the long term.

Coincidentally the middle of 2003 was a very important pivotal point for SWC and palladium. Palladium price bottomed in mid 2003 and rallied strongly up, defying gravity. Strong hand investors suddenly become interested in palladium in 2003, and open interest in the futures market boomed. Russian Norilsk acquired 54% stake in SWC, with the blessing of the Bush administration, thus dominate more than 50% of the global palladium market, and Mr. Craig Fuller, former White House Chief of Staff to the senior President Bush, was elected to the Board of Directors of SWC. And in that year President Bush started to pitch hydrogen economy to the nation, and tried to get America weaned of dependency on Middle-East oil. All in the same year.

There was also another coincidence in the year 2003 that few people except maybe the palladium strong hand noticed. That was that there were experimental breakthroughs reported in the field of Cold Fusion, a 1989 science discovery that was too quick to be denounced as science hoax and be dismissed. The repeatable new experiments re-ignited the science community's renewed interests in Cold Fusion. The reseach activities boomed.

That brings us to the last, and most shocking deed of our fairy tale metal, palladium, in totally defying the ultimate physics law, the modern quantum mechanics and nuclear physics. The textbook of physics says that nuclear fusion, where two deuterons fuse into one helium nucleus, releasing tremendous energy doing so, could not happen at room temperature, because the positively charged deuterons will expel each other. You must pack the deuterons to high density and raise to extremely high temperature, let the nucleuses smash into each other at high speed in order to fuse them together against the Coulumb Barrier. How could it be possible at room temperature?

But palladium defied the known physics and proved scientists wrong. Palladium absorbes 900 times its own volume worth of deuterium. When driven by an electric current, the heavily packed deuterium atoms within palladium, with the catalyst of the palladium crystal lattice, was able to fuse and release huge amount of energy. The experiments were done, repeatedly, by the US NAVY researchers and hundreds of other research groups worldwide. Excessive heat and energy was measured, helium was detected, neutron release detected, some experimental instruments blowed up, a successful failure that proved there's huge energy released. There are also amazing YouTube videos showing the effect of cold fusion. You MUST watch the video series The War Against Cold Fusion, part 1, part 2, part 3, part 4 and part 5. Read all about cold fusion on LENR-CANR web, and on New Energy Times.

The business of science is that when experiments are done, repeatedly, defying the theory, it must be accepted as real science and the theorists must scratch their heads to come up with some new physics to explain the experiments. Beginning in 2007, the American Physical Society conducted dedicated Cold Fusion sessions in their March Meetings. They will continue to have Cold Fusion sessions again in March, 2008. Cold Fusion is gaining footstand and is being accepted by the main stream scientific community as a legitimate science.

It's relevant because cold fusion must use palladium. A success soon in commercial cold fusion products, as claimed by private companies like D2Fusion, or by a Russian scientist, will provide humanity with virtually inexhaustible new energy from the ocean water, and overcome the Peak Oil Crisis althgether. But it will also drive the palladium price to unimaginably high level. A residential cold fusion device of the size of a washer machine, containing just 1/10 of an ounce of palladium, will provide your energy need of your whole family for the life of the house and you never have to pay for electricity, natural gas or winter heating ever again. How much you are going to pay for it? I am willing to pay $100K for that device containing 1/10 ounces of palladium. That figures to a palladium price ONE THOUSAND TIMES current gold price.

You would be very glad that you have hoarded some palladium. You would be even happier that you invested in PGM producers SWC and PAL if cold fusion happens. You would regret that you invested in high flying solar companies like First Solar (FSLR) which uses an extremely rare metal tellurium to make solar panels, the business probably will break down due to a tellurium shortage crisis. You would also regret that you followed the mob and invested into expensive and red hot solar players like AKNS AMAT ASTI BTUI CSIQ CSUN DSTI ESLR FSLR HOKU JASO LDK SOLF SPWR STP TSL WFR YGE, a whole bunch names which was once hot, but going no where selling expensive solar panels when governments cut down spending and eliminate solar subsidies. You were chasing those fly fliers but you missed the real alternative energy gem, SWC and PAL. Frankly the whole solar energy sector will not provide us much energy, and will become obsolete when we have virtually inexhaustible cold fusion energy.

So if you are really inteterested in alternative energy play, the absolutely unbeatable future winners will be the little heard about SWC and PAL, due to fuel cell technology and cold fusion development. You need to buy these two stocks while they are dirt cheap right now. I often like to compare SWC in 2007 to PCU in 2003. PCU was bearly profitable in 2003 and stock was flat for 8 years, but it was the best time to get into PCU as it was poised to go on an incredible rally on copper bull.

You also need to contact your Congressional Representatives and Senators, and the President. Urge them to fund and support the cold fusion research and speed up the adaptation of a hydrogen economy, wean us of the dependency on fossil fuel. Cold Fusion is the best and last hope we have to acquire abundant alternative energy source to replace the quickly depleting fossil fuels, saving us from the Peak Oil Collapse. For the sake of the humanity's future, and of course for the sake of our own prosperity for those of us invested in SWC/PAL, we'd better hope that Cold Fusion will be a beautiful dream come true!

Palladium is really a magical and romantic fairy tale Cinderella Metal which the humanity can not live without! It works silently in the catalyst converters of our cars to reduce air pollution; It works in water treatment factories to clean our ground water to save our environment; It provides fuel cells so we can drive pollution free, high energy efficient hydrogen fuel cell cars; It may also provide cold fusion energy to replace our fossil fuel energy sources. It's the nature's best gift to the human race. We should cherish it.

Please buy your loved one a palladium ring for the ThanksGiving, and tell him/her the romantic story of palladium, the Cinderella Metal.

On this ThanksGiving Day, I have a lot to be thankful, among which I am thankful for the existance of this magic metal, and for that I finally learned the facts about the metal, 18 years after I first heard about Cold Fusion in 1989. I am thankful that America is still the world's best country and I wish our prosperity will continue into the future.

Full disclosure: I am heavily invested in SWC and PAL, and I have short positions in FSLR and may also short other over-priced solar players. I hoard palladium metal and tellurium metal.

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