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Victor Goncalves: Fundamental Shifts on the Horizon for Energy
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 Equities and Economics Report writer Victor Gonçalves, in this exclusive interview with The Energy Report, talks with us about what he thinks "being green" means for energy. It's more than having a smaller carbon footprint, and more about using energy efficiently. He's enthusiastic about the prospects for rare earths, saying they are going to be a "huge phenomenon."
The Energy Report: Victor, your Green Money Report website focuses on the fundamental shift in the use of energy. I'm interested in your impressions of what's happened recently at the global climate conferences, specifically Stockholm, and if you think the world will ever come to some type of climate treaty in the next decade.
Victor Goncalves: It's going to be a tug of war. A lot of the controversy that's coming out now with respect to climate change is a question of, is it actually a product of human behavior, or is what's happening normal in a multi-billion or a multi-million-year cycle? Even with the controversy, the fact is we are polluting our own environment and I think something's got to be done about that. Based on that, yes, I think we will come to some sort of agreement and probably in the next ten years.
TER: What will be the driving factor? If you look at countries like China and India, they're in a huge growth pattern. This is one of their big sticking points. They need cheap energy. What's going to motivate them to come to the table?
VG: At the end of the day, they need to see that there's going to be a positive impact for going green. Going green is going to have to make more economic sense than staying dirty, effectively. There are a few ways you can do that. You can just say, okay, India and China, either clean up or we'll get our goods elsewhere. That's a little hard to do, but if it came down to doing something like that, I'm sure that would nudge them in the right way. I think the other factor, and more importantly, is the fact that just the price of green is going down.
The price of solar power has gone down a ton. The price of wind energy has gone down something like 60% in the past two decades, so we are in a pattern where the price of these energies is going down. Now the other issue which I'd like to bring up, is something that I've been trying to focus on a bit more in the newsletter. When "green" is talked about it's been in the context of creating energy in a greener fashion. I think that's a fair synopsis of what most people are trying to see green as. But we forget to look at green also as "let's use less" or "let's take the energy we do create and use it more efficiently." For example, thermal power that is used to create electricity is very inefficient. Probably 20% to 30% of the energy created through coal burning or uranium burning will actually convert into energy that comes out at out power outlets. That is, I think, a massive issue.
TER: So you're not looking at energy per se, but looking at technology or process changes.
VG: We're looking at both, to be quite fair. For example, with the amount of coal-fired power plants going up in China or India, it would be nice to see fewer of them built. But they're probably not going to tear down the coal-fired power plants that are up now and say "let's spend all this money to do something else." What we probably can do is make the ones that exist operate at a much higher efficiency. And instead of building new ones, let's build something greener. So I think it'll be a dual process just because tearing down existing plants that have 20 or 30 year life probably isn't going to happen.
TER: You mentioned earlier we were talking about the price of green going down. You specifically mentioned solar and the prices coming way, way down. What's causing that? Are there actually improvements in technology of the batteries or is it just merely because the government's subsidizing?
VG: Government subsidy does not make the cost of energy go down. It causes the end user cost to go down, but it's still costing X amount of dollars; it's just subsidized. The actual true costs have been coming down a lot and that's of key interest to me. Yes, there are subsidies and so on that are making it very affordable, but the true cost has been coming down a lot, too. Solar panels have been becoming thinner and thinner, able to retain more electricity, and they've been using more things such as lithium, rare earths. They've been using all these types of rare metals that can capture and store the energy better or retain it, instead of the sunlight bouncing right off. All these different types of metals are being used to really increase the efficiency. I think we've just really scratched the surface on this based on what can happen. I think solar will be incredibly viable and we're in the process of doing that. That's, again, the situation of not necessarily creating more, but taking the square footage of solar panels and making it more efficient.
TER: Let's move on to rare earths, which have been getting a lot of buzz at the various mining conferences. What's your viewpoint on them and the investment opportunities they represent?
VG: Rare earth elements and rare earth metals, in general, are going to be a huge phenomenon. It's like in '07 when we had a uranium boom and uranium went from $8 to $136.
What it comes down to is these rare earths are needed for so many things. For example, hybrid cars are really the driver for rare earths' increase in price. But not just hybrid cars. You've got tantalum and niobium being used in a lot of other things and these rare earths are going to be in huge demand.
I don't think we've gotten ahead of ourselves with the demand or with the price of these rare earths. We don't have enough to supply the markets fast enough. That's partially what's causing the price to move up. There's also supply constraint out of China. China controls 95% of the rare earths and says, okay, we'll just keep them for ourselves, thanks. You've got to fight for the rest of the 5% of them out there. So that's obviously causing major upswing in the price of rare earths. That has been the main driver. But that coupled with a shift in how we do things — we're going to see a ton more hybrid vehicles go on the road over the next couple of years and each one of them is going to require 50 pounds of rare earths. That's going to add up.
TER: Jack Lifton, who speaks at conferences about the rare earths, asserts that it's really a rush to production. When the next two or three companies actually get to production, the amount they produce will probably satisfy demand for decades to come.
VG: Yes, it is a race to production. Like with uranium, for example, there's plenty of uranium out there for the market. It's just whoever does it first will obviously satisfy a lot of the market and I think that's quite the possibility for rare earths.
The best part for an investor is that it's not going to happen today or tomorrow or next year. We've got a little bit of time. We've got some idea as to which companies have been in the space for a long time and have had more lead time to develop a project and get to the stage where they're working the economics of it. Those are the companies I'm really interested in. Obviously, there's a lot of brand-new companies coming out of the gate who will represent an excellent investment opportunity because of the sizzle in the market, but I would have to hear something incredibly compelling from a very small junior to sway myself from some of the larger companies.
TER: Are there other sources of energy or energy phasing alternatives that you can discuss?
VG: There's lots we can discuss, but primarily I've been sticking to those just as an area where I've been comfortable with. Geothermal is obviously something that's done well and going to continue to do well. I still think the major geothermal phase is yet to come because we've seen a bit of a bump in it a while back and it's taken the back burner again. I think we're probably due for something. Exactly when, I can't really say, but I think the geothermal phase is going to start seeing some appreciation. Some companies such as Western Geothermal and Nevada Geothermal are probably going to see some appreciation based on that.
TER: We appreciate your time, once again, Victor. This has been very interesting.
A proud and avowed Keynesian, Victor Gonçalves developed a strong background in economics at the University of Winnipeg, where he served as a Professor's Assistant as well as earning his degree. His Equities and Economics Report has been accurately picking winners and calling market direction. In 2007, for instance, he correctly predicted the Dow Jones topping 14,000 points and pegged uranium reaching $136 per pound and many more. In addition to EER, Victor also produces the Green Dollar Report, as well as writes for a number of print and electronic publications including CIM Magazine (Canadian Institute of Mining), Western Standard, Barron's and Kitco. He also has been featured on BNN, Mining Industry TV and at numerous industry events and conferences.
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