A Melman Minute — February 7, 2011

One of the advantages of the extensive traveling which has become part of my personal career is the opportunity to compare national histories, economic backgrounds and other factors which relate to metals, mining and general levels of prosperity and opportunity.

Few countries have had as 'secluded' an informational background, particularly in relation to mining enterprises and geological knowledge, over the past several decades as the land-locked South American country of Paraguay. During our visit over the past several days, as part of a tour of uranium mining exploration carried on by Cue Resources (see "company reports" section), we were able to discuss Paraguayan history and present trends with Cue's company lawyer and with a representative from the Vice-Ministry of Mines and Energy in Paraguay.

Little appears to have changed during the period 1989 until 2008 until finally a new government was formed under incoming President Fernando Lugo which provided a breath of fresh air for Paraguay and for mining ventures in the country.

The impression we received was that Paraguay was now "open for business" and would actively promote their promising geological formations which reportedly are quite similar to those of mineral-rich southwest Africa, since historic geologic explorations assume that eastern South America and Western Africa were once connected into one body eons ago.

One of the most important projects under consideration in Paraguay is the proposed new aluminum smelter advanced by mining giant, Rio Tinto. The total cost of the smelter is now estimated at approximately $3.5 billion with construction planned to begin in 2014 and production at the rate of 670,000 tonnes per year scheduled to start in 2016. The project is large enough to provide major stimulation for the economy which, according to a Reuters estimate, is already growing at the rate of 9% per year.

One of the factors which makes the project possible is Paraguay's two important rivers, the Parana and the Paraguay, both of which provide present and potential hydroelectric sources and which also allow for deep-water shipping to Atlantic Ocean ports in Uruguay and Argentina.

From our point of view, one of the most important factors is that Paraguay, like many other nations, is recognizing the reality that mining can be a powerful contributor of new wealth to a nation, that it can provide valuable training to native populations and can be a powerful factor moving toward improving the lives of the citizenry.

Despite past hardships, the city of Asuncion itself, with an area population of well over one million inhabitants, is moving rapidly into the modern era and is an exciting, vibrant city to visit filled with abundant (air-conditioned!) shopping malls, office towers, scenery and historic monuments and buildings, and is well worth a visit simply on its own merits.

During our absence, the world news background was dominated by events in Egypt revolving around demands for the ouster of President Mubarak and an end to his 30-year reign. However, we must admit that it is difficult for us to see the future direction of ultimate change and whether the activities of the mobs will truly advance Egypt in terms of prosperity, freedom and increased openness with the rest of the world. The situation remains in flux with few reliable conclusions possible at this time.

Three charts, each with potentially significant impact, are worth reviewing at this time.

Securities markets are continuing to advance despite the existence of severe problems such as minimal job creation, massive deficits and so forth. It is as if markets are fulfilling one of the oldest adages of investment analysis, that is "climbing a wall of worry", which is generally regarded as a positive predictor.

There is one peculiarity we would note. Please observe that the last six or seven weeks of trading have been contained within a remarkably narrow rising channel, much tighter than the one which took place earlier in the advance. Frankly, such narrow trading channels make us suspicious - without any valid proof, we might add - that artificial forces divorced from normal trading activity are at work.

We will attempt to describe such forces, if they indeed exist, in coming weeks.

Action in the copper market would appear to confirm the generally positive outlook suggested by the Dow Industrials Average gains. Copper has just broken above the $4.60 level and stands at the highest price in recorded history in terms of U.S. Dollar quotations. This would suggest to us that demand for copper remains strong while new supplies are not entering the markets in sufficient quantities to meet those demands.

However, there is one "flaw in the ointment" relating to both of these charts. Both presumably indicate that positive economic growth will accelerate into the future, but, as we suggested in our brief "Melman Minute" of this past Friday, interest rates are beginning to rise sharply. Last Friday we published the TYX chart which indicates increases in actual rates for 30-year bonds. This morning, we take another look, but this time from the point of view of collapsing quotes on existing bonds.

As can be readily observed, the chart on the March 2011 contract of 30year US Treasury Bonds has fallen through support near 119 and appears ready to approach important new support around 115. Should "long bonds" fall through that level, the implications for housing, long-term auto financing, equipment financing and other interest rate sensitive business activities could turn negative.

Therefore, it appears that negative implications relating to interest rate moves are moving contra to positive implications in securities and copper market activities. Whenever we have such evident "non-confirmations" it would seem reasonable to conclude that some heightened level of investment caution would appear to be advisable.

As of 8:40 AM PST this morning, securities markets in both Canada and the USA continue to advance with the Dow Industrials ahead by about 90 points and Canada's TSX Index has gained just over 60. Precious metals are moving moderately higher with gold, silver, platinum and palladium all presently on the "plus side" and base metals continue to advance with copper, nickel, aluminum, lead and zinc all up on the trading session and, not surprisingly, metal share indexes are also advancing. In other markets, the U.S. Dollar is stronger this morning; bond contract futures continue their decline and crude oil is off slightly to just under $89.00 per barrel.

All quotes US$ unless otherwise noted.

Next "Melman Minute" scheduled for Wednesday, February 9, 2011.

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