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Kaiser Watch April 28, 2023: EPA please make doing it right a lot faster!


Posted: Apr 28, 2023JK: Kaiser Watch April 28, 2023 with Jim Goddard and John Kaiser
Published: Apr 28, 2023KRO: Kaiser Watch April 28, 2023: EPA please make doing it right a lot faster!
Kaiser Watch is a weekly 15-30 minute audio show produced by KaiserResearch.com with Jim Goddard and John Kaiser discussing the junior resource sector. The show has three parts: the first is a general topic, the second discusses developments involving the KRO Favorites which as of January 1, 2022 are no longer exclusive to KRO members, and the third is a peek inside the members only KRO Bottom-Fish Workshop. KRO is transitioning into a Do-It-Yourself research platform that covers all Canadian and Australian resource listings and which also features a Bottom-Fish Workshop where John Kaiser highlights juniors with solvable "missing pieces". Companies that graduate from the Workshop may become part of the Annual Favorites collection whose profiles and related commentary are unrestricted for non-members. Visit the KRO Favorites Dashboard for quick access to all the unrestricted Favorites related content. KRO is not sponsored or compensated directly or indirectly by public companies. The business model is based solely on membership fees in the form of a USD $450 Annual Individual Membership that at some point will increase substantially to reflect KRO's shift to a research platform. However, when the change happens active members will be grandfathered to renew indefinitely at the current rate provided they maintain a continuous paid membership. Kaiser Watch is available at Kaiser Research YouTube and as a Podcast downloadable from KaiserResearch.com. Each episode will be made available through the publication of a Kaiser Media Watch blog report which will provide links to specific questions and include supplementary graphics. All episodes will be archived at Kaiser Watch.

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Kaiser Watch April 28, 2023: EPA plase make doing it right a lot faster!
Jim (0:00:00): The resource junior sector has suffered declining volume and value traded during the past week. What is causing this lull in market interest?

The most obvious explanation for the sag in trading activity is gold's failure to hold its price above $2,000, showing that $2,000 still appears to be a ceiling for gold rather than a new base. But the slump is also affecting non-resource juniors on the TSXV which have no linkage to the gold price trend. The bigger problem is the siren call of short term interest rates. The 3 month US treasury is now just above 5% and money market funds are offering over 4%. This is the first time the short term T-Bill has been above 5% since 2007. From the end of 2008 onward its yield has been close to zero until 2016 when it began creeping higher as the Federal Reserve sought to escape the trap created by its QE policy in terms of responding to a new economic crisis. It peaked at about 2.5% in Q1 of 2019 when President Donald Trump had a hissy-fit about his chairman appointee Jerome Powell harming his re-election chances with these higher interest rates. Trump jawboned Powell to pulling the rates back to about 1.5% by Q1 of 2020, but when Covid-19 proved to be the real thing and not just another mainstream media tactic to undermine Trump's re-election chances, the Federal Reserve dropped the rate back to effectively zero, pulling the 10 year treasury down to 1%. Once again nobody was making any yield on their savings.

The supply chain shocks created by the pandemic launched inflation into an uptrend, helped out by massive direct stimulus payments by both Trump and his successor Biden, but it was ignored until mid 2022 because it was assumed it was a temporary problem that would disappear once the covid restrictions had been relaxed. Compounding the problem was China's foolish ego-driven zero covid policy which Xi Jinping did not abandon until October 2022 after he secured an unprecedented third term as General Secretary of the Chinese Communist Party which runs all aspects of government (China does not pretend it is anything other than an autocracy). The 10 year rate did start to rise, achieving a spread of 2.27 points above the 3 month rate in early May. The first rate increase began in March 2022 with a 0.25 increase but in May Powell began to raise rates in 0.5 increments. In Q4 of 2022 the 3 mth rate hit parity with the 10 year yield which started to decline as the market became worried about a recession in late 2023 which to deal with would require lowering interest rates.

Then along came the Silicon Valley Bank which failed on Friday March 10 when social media helped spawned a bank run. SVB had put its customers' money into longer duration treasuries which were tracking the inflation rate trend higher while short term treasuries remained stuck in the mud. When inflation persisted, dragging up the yields of long duration treasuries, the principal value declined to reflect the higher market yields. This represented a paper loss for SVB but not a problem so long as customers did not start withdrawing their capital. But by Q1 of 2023 depositors had begun to notice the higher yields of short term money market funds. This created a problem for SVB which had to start selling its bonds to raise cash for the outflow of deposits, which ate up the shareholder's capital. Word got out into social media that there was a bank run underway and the government had to step in and take over the SVB to stop the run. The contagion spread to several other regional banks as customers began to fear that any deposits above the FDIC insured limit of $250,000 could vanish, forcing the Federal Reserve to step in with several special "guarantees" of deposits that calmed the panic.

Nevertheless, on March 23, 2023 the prime rate was increased to 8% for a full 4.75% increase from its 3.25% Covid bottom as the Federal Reserve fretted about persistent strength in the labor market. Damn those workers for pressing for higher wages after a decade of stagnation just because they can! The 3 mth treasury yield was 4.73% compared to 3.4% for 10 year treasuries. Meanwhile bank checking accounts were still yielding zero and savings deposits not much more. Ordinary people who did not have their money parked in equity, diversified or bond mutual funds neither lost nor made money in 2022 compared to their wealthier friends who had a hard time avoiding 15%-20% declines in the value of financial assets. But they were starting to wake up to the fact that interest rates were a lot higher than the banks were paying. In early May the Federal Reserve is expected to increase rates by another 0.25 which will park the federal fund rate above 5%.

The media explanations of why SVB failed helped educate the masses about how banks work and alerted them to the problem that the bank is supposed to return 100% of deposits that it will have invested in loans that may default or into other financial instruments that may go down in value so that what the bank can pay back is less than 100% of what the customers have on deposit. A bank run is a race by depositors to pull their money out before everybody else does and there is none left. Most people have watched "It's a Wonderful Life" so have a rough idea that this can happen, though in those days the problem was the illiquidity of the loans the bank made to businesses and homeowners. That the bank might have gambled customer savings on which they were paying next to nothing on riskier investments that went down was a newer concept. They also realized that the 2008 crash concept of "too big to fail" sort of had an opposite meaning of "not big enough to save" even though the Federal Reserve moved quickly to stop the contagion emanating from the SVB failure. Customers are now rethinking keeping their money in regional banks even though these banks do far more for their communities than the big banks. First Republic Bank is an example of the exodus of saver deposits. But fear of being the sucker left holding the bag at a regional bank is not what is keeping capital away from the resource juniors.

The SVB fiasco not only educated the public about how banks work, but, more importantly, it alerted the public to the fact that short term money market yields are now over 4%, more than what most banks are offering for term deposits, and by their nature are liquid. Furthermore, although inflation has retreated to 5% year over year, that is only because energy prices have retreated from the high achieved in early 2022 when Russia invaded Ukraine. OPEC+ is now conspiring to curtail supply to force oil prices higher for the summer driving season, and that could easily send inflation rates back up. Although Powell is expected to raise rates another 0.25 points in May, the general view is that rate hikes will pause and perhaps even decline later in the year. But that assumes inflation can retreat back to the 2% target level.

The China Price that exported deflation for two decades, however, is coming to an end. Russia's invasion of Ukraine and China's declaration of best friends with Russia to backstop its ambition to annex Taiwan made it official that a great power conflict is now underway between China and the United States. The China Price, which coincided with the flight of manufacturing jobs from the United States to China, created an import dependency and spawned resentment that became the basis for the rise of populism. The result has been a push to retreat from globalized trade through policies that support re-shoring and friend-shoring. At the same time the world has become serious about addressing climate change and is adopting policies to limit global temperature rise to 1.5° by 2050 by achieving net zero emissions. This term means achieving a state where the level of greenhouse gas emissions is offset by an equivalent removal of greenhouse gases from the atmosphere. It acknowledges that not only is it unlikely the world will completely avoid combusting fossil fuels, but that carbon dioxide is created by industrial processes such as making concrete. And it opens the way for the deployment of carbon capture and storage technologies.

The problem with policies that support deglobalization and an energy transition is that it requires new CapEx and likely results in a higher OpEx than was made possible by allowing everything to be made in low cost jurisdictions like China and generating energy from abundant fossil fuels. High profile people are now starting to warn that the energy transition will create higher sticky costs. The so called Inflation Reduction Act only does so in the form of averting future inflation arising from climate change related shocks. The Chips Act with its re-shoring and friend-shoring goals for supply chain capacity will also introduce higher costs that will keep inflation rates up. This is not something new, but what is new is that prominent people are starting to warn about it. At the moment these warnings are confined to the business section of newspapers or in financial publications, but it will not be long before the masses hear this message. There is the additional irony that the worker skills required to build this offset to diminished globalized trade are in short supply, which means there will be wage price pressure to get the job done. The 2% inflation target looks unrealistic in the current economic context.

Ordinary people are now reading daily in the newspaper about the rising tension between China and the United States which is officially yoked to the future of Taiwan, but increasingly understood as a great power struggle between rising China and fading America, something that resonates with the MAGA crowd which seems to like the Christian value based autocracy Putin has visited upon Russia, but not so much the atheistic autocracy Xi is imposing on China and whatever else he can pull into its orbit. Maybe I am engaging in wishful thinking, but I do think rural America is intelligent enough to know that all this cheap stuff in their beloved Walmart stores is Made in China not Russia. If the geopolitical conflict with China becomes hot and deglobalization is turned into an overnight reality, inflation will end up much higher.

These same people also think that the best way to MAGA is to force the United States to default on its obligations by refusing to raise the debt ceiling. Officially this can be averted by forcing Biden to reduce spending, but no Republican president has ever failed to increase the national debt during his term by a greater amount than accomplished by a predecessor of either party. If the debt ceiling is not raised it will indeed result in higher interest rates as the rest of the world seeks to lighten its exposure to US treasuries, rates that the Federal Reserve can only bring down through massive QE which of course in this context will be inflationary as everybody races to spend dollars before the US dollar exchange plunges. No doubt a US default will also bring down the stock market, so that for now is no place to park one's capital. The best place is in short term money market funds which at worst will yield 4%-5% over the next year, and if everything else gets very much worse, will simply roll over into ever higher yields. Who wants to put money into resource juniors in the face of all this uncertainty?

Getting the debt ceiling extortion out of the way would help the resource juniors, but how can this be accomplished in a face saving manner for both sides? Biden, who learned from Obama's bad experience with the Tea Party extortion a decade ago, has already declared the debt ceiling is not up for negotiation, and has the majority in the Senate to kill any bill the House passes. Interestingly the House bill being pushed by Kevin McCarthy has given up on its false debt reduction goals and instead is focused on reversing Biden's legislative accomplishments including everything to do with the energy transition. Part of the motivation is to cater to the anti-science nature of the Republican Party's base which dismisses climate change science as some vast make work conspiracy for scientists. This has its roots in the creationism of fundamentalism which animates much of the base. But another part is the obsession the base has with fossil fuels as the primary energy source, which derives in part from the shrillness of left-wingers who are as oblivious to the meaning of "transition" as are right wingers. It seems that the pragmatists who occupy the central part of the political spectrum have no say over anything anymore.

The problem with climate change activists is that they are absolutists who want drastic overnight changes in shifting away from greenhouse gas emitting processes that simply are not realistic. And this is a problem for Biden who has to pay attention to these regressive progressives. An interesting development is that the renewables sector is joining forces with "big oil" to push for substantial reforms in the environmental permitting process for infrastructure projects, be they transmission grids and pipelines, natural gas power plants or solar/wind installations. For some reason the mining sector has not popped up in the mix but that may be because both ends of the political spectrum are polluted by a NIMBY mentality. It is possible that the compromise which emerges from the debt ceiling problem is a bill that speeds up the permitting cycle for all raw material and energy infrastructure projects. The IEA has pointed out that the biggest obstacle to achieving climate change mitigation goals even when there is full policy support is an embedded, time consuming approval process. Consider nuclear energy. Does it really need ten years to approve a nuclear power plant installation? Do it right but do it fast needs to become the new motto for permitting.

If the Republicans want to see the energy transition fail in the United States all they need to do its stand back and watch. But is that in their interest? Do they really want to bear the blame when climate change worsens and the Mickey Mouse palace ends up under water? Tucker Carlson may treat his audience like a pack of baboons, but he knows better and so I suspect do many people caught up in a polarized reality. The world cannot wean itself from fossil fuel energy overnight. Coal may be doomed, not just because it is so dirty, but also because natural gas is such a cheaper, cleaner alternative. Oil consumption will decline in the long run because China has already made a strategic decision to switch its transportation fleet to electricity, and nobody likes the stranglehold Russia and the Middle East have on oil supply. Furthermore, the growing prospect that fusion energy is at a commercialization tipping point supports shifting to electric vehicles well before fusion is a reality.

Natural gas is a different matter because it lends itself to carbon capture and storage technology and can be burned to make electricity. Gasoline made from oil is a very convenient and efficient fuel for cars, but the CO2 emissions are impossible to capture from each tailpipe. In addition natural gas can be reformed to make hydrogen with the carbon captured and stored. Hydrogen can also be made through surplus power from renewable solar and wind energy by conducting electrolysis on water. The IEA acknowledges that lithium ion battery technology will never be good enough for long haul freight transport by land or sea. It sees hydrogen fuel cells as the future for trucking in 2030 and beyond. Trucks don't need a hydrogen fuel station at every street corner, but eventually these could become ubiquitous enough to allow passenger cars to transition from batteries to hydrogen fuel cells.

A pragmatist about climate change goals need not be hostile toward natural gas and can see it as a key part of not just the energy transition but part of the long term energy future if carbon capture and storage technology proves workable. The pragmatists within both parties could hammer out a deal which offends the extremists in both parties, but gets the support from a majority roughly split between Republican and Democrat members of Congress. The EPA has proposed new standards forcing power plants that combust fossil fuels to install carbon capture and storage technology to which there will be a knee jerk negative reaction that this is all a plan to put fossil fuel power out of business. But it really isn't because what is the point of forcing a shift away from ICE cars to EVs if the electricity mainly comes from natural gas and coal fired power plants that blow their CO2 emissions into the atmosphere?


TSXV Resource Listing Traded Value Chart

Chart showing spread between 10 year and 3 mth T-Bill

Chart showing how 10 re and 3 mth T-Bill yields relative to Prime Rate and CP Inflation Rate
Jim (0:17:26): How would the carbon capture and storage technology of FPX Nickel fit in with a US push for carbon capture at power plants?

If the EPA does create new requirements for carbon capture and storage, and it figures out how to streamline its permitting process for pipelines, energy installations and grid expansion, FPX Nickel Corp will receive a lot more attention for its 76% owned subsidiary CO2 Lock Corp whose business strategy is to acquire large rock deposits that are suitable for carbon sequestration. The market currently sees FPX Nickel as a nickel junior whose story is to demonstrate the feasibility of mining an extremely low grade nickel deposit. This is possible because the Decar project hosts ultramafic rocks in which awaruite formed, a natural stainless steel. FPX has developed a flowsheet for producing a 63% ferro-nickel concentrate that can be fed directly into stainless steel mills. But it is also conducting studies on using hydrometallurgy to convert that concentrate into nickel sulphate for the battery sector. We expect to get an update over the next month or so about whether this is viable and competitive with other methods for making nickel sulphate. If so, Decar's nickel sulphate will carry a lower carbon footprint than sulphate from other sources. There is also the bonus potential that cobalt sulphate can be made, not a lot, but nickel based lithium ion batteries seem to need ever less cobalt as battery makers seek to avoid the Congo based supply vulnerability. This seems to be what has the attention of the strategic investor who invested $12 million last year at $0.50. Either late in the Q3 or early Q4 FPX Nickel will publish a PFS which will be an important milestone because since the PEA was published in late 2020 there has been cost inflation which the market wants to see quantified. The PFS will be a major milestone in helping the market overcome its skepticism over Decar.

The CO2 Lock concept emerged from the work FPX Nickel did on the Decar tailings to see if the project can achieve carbon neutrality, a holy grail for the energy intensive mining sector. CO2 Lock has its own web site and the Corporate Presentation has a lot more information than available on the FPX web site. The awaruite bearing deposits at Decar also have a magnesium mineral called brucite which in combination with water and carbon dioxide undergoes a chemical reaction that turns it into a magnesium carbonate. This is an inert rock which permanently stores carbon. CO2 Lock has been conducting research on two main pathways for storing carbon. One, which they call in-situ, involves drilling holes into the rock and pumping CO2 through them so that the carbonate mineral forms inside the rock. This is similar to pumping CO2 into underground reservoirs but without the risk of the gas escaping later through a crack because the brucite has turned the carbon into inert rock. The other pathway FPX calls ex-situ, which involves excavating the rock and causing the chemical reaction to take place above ground. This results in a material which may have commercial usage. CO2 Lock currently spends its time between conducting optimization strategies for the carbon sequestration and developing business models for how to make this service profitable. If the EPA is successful in forcing new carbon capture requirements on existing and new power plants that burn fossil fuels, this will be an added cost for energy producers and they will be looking hard for the cheapest solution.

On Monday April 24 FPX Nickel took its CO2 Lock project from concept to physical reality by announcing that it now owns the 4,100 ha SAM property about 50 km southwest of Prince George in central British Columbia. During the 2008-2014 period FPX Nickel had looked all over British Columbia within belts of ultramafic ophiolite rocks, which are former ocean floor basalt that instead of being subducted under the continental crust ended up rafting on top of it. They only found a few areas where serpentinization created awaruite, but did find rock blocks in which brucite has formed. CO2 Lock was formed in March 2022 and last year they began to look more closely at the awaruite duds they had previously investigated. On the basis of this work they staked the SAM claim last year. The proximity to Prince George is important because Prince George is an industrial which may need to capture carbon dioxide emissions and find a place to store them.

The IEA in its 2023 Energy Technology Perspectives report sees CCS as a major part of the 2050 net zero emission goal. As mentioned earlier, it is unrealistic to switch entirely away from fossil fuels as a source of energy. CCS is not a new concept. The IEA report states that there are already 9,500 km of pipelines built specifically to transport carbon dioxide, 90% of which is in the United States. While some CO2 is delivered for use in manufacturing processes, most of it is delivered to oilfields to assist in CO2-enhanced oil recovery. The challenge is not capturing carbon dioxide at the smokestack, but storing somewhere that it stays put. When FPX Nickel recently announced a strategic alliance with JOGMEC to look for awaruite deposits around the world, it published a global map showing the location of ophiolite ultramafic rocks that have the potential to host awaruite. Most of them will not have formed a meaningful amount of awaruite in the style of Decar, but many will have formed brucite such as in the area staked near Prince George. The west and east coasts of the United States have multi thousand km belts of such rocks which are pretty much off-limits for open pit mining for metals because of the entrenched NIMBY mentality. The JOGMEC strategic alliance will end up investigating these targets just in case there is one too good not to try to develop as a nickel mine. This work, however, will have as a by-product recognizing those areas with enough brucite to become a potential carbon sequestration site. Local opposition would have to be overcome, even though it does not require a major open pit mine, but mainly because a CO2 pipeline will need to be built to deliver captured carbon dioxide for permanent storage.

If the EPA can make new carbon capture and storage rules stick, and Congress can grind out a debt ceiling increase deal based on the EPA ceasing to be a major obstacle to its own policies, the CO2 Lock strategy of FPX Nickel could become a very valuable asset when it is spun out of FPX Nickel, which would likely happen when somebody takes a serious interest in developing Decxar as a nickel mine.

FPX Nickel Corp (FPX-V)





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SAM Canada - British Columbia 1-Grassroots Mg

Comparison of Carbon Sequestration Capacity for Brucite vs Basalt

Global map for Brucite-based Carbon Capture Storage Potential

Global Brucite Sequestration Potential Relative to British Columbia

US Natural Gas Power Plants and Brucite based CSS Potential
Jim (0:27:06): Why did Verde Agritech suffer another sell-off last week?

Verde Agritech Ltd sold off on Friday April 21 when somebody noticed that an NPK director called Renato Couto Gomes had that day filed an insider report that he had sold 179,000 shares the day before. The NPK shareholder is already grumpy because of the selling insiders did last year, a good part of which the CEO Cris Veloso managed to report 3 months after the fact in a late filing. Earlier this month we were told the financial results for 2022, which were really quite good, but the market was bummed out by the lower guidance for 2023 both in terms of product volume to be sold and the price NPK will get in 2023 after potash retreated from the windfall levels of 2022. These are developments well outside Verde Agritech's control. But within its control is the ability to not only secure repeat sales of K Forte but also generate new sales. Unfortunately the glass is now half empty with worry that NPK won't meet its guidance this year. Q1 is a slow selling season but Q2-Q3 is the big window when farmers order fertilizer. When an insider suddenly dumps just under half his position the market can't be blamed for treating this as an early warning that things are not shaping up as expected. The Q1 2023 financials are due May 15 so in a couple weeks we should get an update on how things are working out for K Forte sales.

On Monday April 24 the insider issued a statement that he was forced to sell 179,000 shares as a margin call which has cleared the financial problem. It is not clear why he ended up with a debt that needed to be cleared, hopefully he wasn't borrowing against his existing position to buy more NPK stock. Apparently his financial circumstances were such that the broker had no choice but to blow out enough NPK stock to cover the debt. He still owns 250,000 shares and stated that the loan facility has been closed. This is the first time I have ever seen such an announcement. None of this means that K Forte sales are lagging or exceeding expectations; we won't know until we hear from management in mid May when it discusses the Q1 results. I am sticking with my view that Verde Agritech represents Good Absolute Speculative Value.

Verde Agritech Ltd (NPK-T)





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Cerrado Verde Brazil - Other 9-Production K
Disclosure: JK owns shares of FPX Nickel and Verde Agritech; FPX Nickel and Verde Agritech are Good Spec Value rated Favorites
 
 

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