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Paul Renken, mining analyst with London-based VSA Capital, spends much of his time researching small and micro-cap resource equities and the commodities central to their business models so we don't have to. In this interview with The Gold Report, Renken suggests some of his favorite graphite and rare earth names, as well as a handful of gold equity picks.

The Gold Report: Do you see gold trading range-bound through the remainder of this year?

Paul Renken: Unfortunately, yes. We recently had to downgrade our outlook both on gold and silver for the year. We're looking at an average price of $1,225 per ounce ($1,225/oz) gold in 2015. We were always convinced that gold wasn't going to test below $1,100/oz and we're still convinced. By the same token, we're not seeing the overall macroeconomic growth rates that would cause more risk-averse interest in precious metals.

TGR: What are some small, lesser-known gold companies that you're following?

PR: We've been following Eagle Hill Exploration Corp. (EAG:TSX.V) for quite some time. It's a stock that Dundee Capital Markets President and CEO Ned Goodman had taken a significant position in a couple of years ago. I always liked the geology of the Windfall Lake deposit. I could essentially see that the grade was going to be there and that the feature containing the gold mineralization had not been sufficiently drilled. Further drilling now indicates that Windfall has significant size at significant grade.

The share price, however, was eroding, much to the detriment of shareholders who believed in the story, but now it's involved in the roll-up of several different companies that Goodman has significant positions in. The marketplace for Toronto Stock Exchange junior gold stocks is such that consolidation is essentially an imperative for a number of companies in order to get development capital.

TGR: Any others in the micro-cap space?

PR: I like Serabi Gold Plc (SBI:TSX; SRB:AIM). The company's primary interest is the Palito gold mine in the Tapajos region of northern Brazil. I like that stock because it is expanding its production capacity on a higher-grade satellite project nearby to its Palito underground mine named Sao Chico. It will soon have two producing underground mines near each other and it is increasing its mill capacity to take advantage of that. We can soon expect some positive news from Serabi.

TGR: How about other gold companies that you mentioned the last time you talked withThe Gold Report?

PR: There is Hummingbird Resources Plc (HUM:AIM), which picked up Gold Fields Ltd.'s (GFI:NYSE) non-core Yanfolila gold project in Mali. Yanfolila was just not large enough for Gold Fields to take forward but it is a decent-sized deposit for a company the size of Hummingbird. And the company has made Yanfolila its first priority and plans to bring it into production as soon as possible. It also has Dugbe gold project in Liberia. The investment community, at least on this side of the pond, had some success backing Aureus Mining Inc. (AUE:TSX; AUE:LSE), which just put its New Liberty gold mine into commercial production in Liberia. A lot of people are now shifting into Hummingbird with the idea that Hummingbird might be the next one.

TGR: Changing the subject, a major component in batteries, which are on investors' radar due to Tesla Motors Inc.'s (TSLA:NASDAQ) Nevada-based Gigafactory, is graphite, especially large-flake graphite. China also has major battery manufacturing facilities in the works. Is there a shortage of large-flake graphite in China?

PR: Yes and no. There is a shortage of what you would call the "premium" material. But, no, there isn't an overall shortage of flake graphite. The graphite market is still about 90% dominated by the finer flake or amorphous-size material, which goes into the refractory market and not the battery market, which takes the coarser flake material. In fact, a number of producers are grinding larger flake material into finer sizes because that's what 90% of the offtake market demands. Unfortunately, because of the softening Chinese economy, large-flake prices are down about 30% in the last nine months, whereas the prices for finer sizes are only down about 15%.

TGR: Do you see China becoming a net importer of graphite?

PR: I see China importing specific grades of graphite. Most of the mines there have worked through the easy material and now, due to new regulatory requirements and higher production costs, it is difficult to find certain grades and qualities of graphite.

TGR: What do you look for in a graphite company?

PR: I want two things. First, I want to know whether a particular company has a clear vision of the target market for its product and supply. The impurities in a particular graphite deposit will limit the end users. If you have a natural, high concentration in elemental graphite, as in some of the vein deposits in Sri Lanka, you have a ready-made market regardless of the flake size. On the other hand, you may have a large deposit with a lot of embedded silica or other waste material, which could make the graphite costly to upgrade.

Second, I want a company that can bring its contained carbon grade up into the high 90% range, where it would fetch premium pricing. Once graphite falls below 90% carbon, you end up with low concentrate pricing due to impurities. That makes a huge difference in the production margins.

TGR: Which graphite companies have a clear vision of the market they're looking to supply?

PR: We follow a couple of names. Flinders Resources Ltd. (FDR:TSX.V) brought an old graphite deposit in Sweden back into production. Its marketplace, at least for now, is in the refractory market, which requires the finer-size grades of graphite.

We also follow a company on the Australian Securities Exchange called Talga Resources Ltd. (TLG:ASX). Talga's Vittangi deposit is also in Scandinavia. It's a near-surface deposit with grades of over 16% graphite, which is three to four times the average grade of other deposits around the world. It's only exceeded by a couple of vein graphite deposits in Sri Lanka. It has a natural grade advantage, and should be able to compete on a coarse-flake graphite basis with anyone in Europe.

TGR: Any others?

PR: Syrah Resources Ltd. (SYR:ASX) comes to mind. We follow Syrah, but not because the deposit is particularly interesting in terms of geology or grade. The bottom line is that its Balama graphite and vanadium deposit in Mozambique is so large it could essentially produce all the graphite needed in the world for the next 100 years, according to any reasonable outlook.

TGR: Is Balama meeting expectations?

PR: Syrah is taking a measured approach because if it produces as much as it possibly could, it would flood the market. All of these graphite producers and their deposits are unique in metallurgy, and in what it takes to get to the grades that offtakers want. There can't be a cookie-cutter approach from one deposit to the next; each has to be carefully engineered.

TGR: Do you have at least one more?

PR: StratMin Global Resources Plc (STGR:AIM), a small-scale producer in Madagascar, is listed on the London AIM Exchange. That's an interesting situation because the company has boosted its concentrates up to 94% purity, which is close to premium-pricing grade. Its position in Madagascar should provide some cost advantage in delivering carbon to refractory or battery businesses to either South Africa or India. We watch StratMin pretty closely.

TGR: Do companies like Syrah and StratMin have a certain advantage given that it is not that difficult for them to ship product to China from southern Africa?

PR: The graphite market is small enough that the logistical distance isn't so much of an issue as the quality of graphite produced at individual operations. If there is more than adequate supply, like there is now, then whoever gives you the best quality at the best price gets your order, and everybody else has to wait. When there is a shortage, compromises can be made in terms of concentrate grade or how far you have to ship.

TGR: Rare earths elements (REEs) are used in all sorts of modern technology. Are you starting to see the global impact of China's recent policy changes for domestic REE producers?

PR: In one of the most recent policy changes, the Chinese government has moved to comply with the World Trade Organization determination that its prior method of controlling supply in and out of China was improper. China still allocates a certain amount of REE production to each domestic producer, but it has imposed a series of taxation measures for exports, which is essentially what other countries do. That makes the availability and cost of Chinese REEs more transparent, and it becomes about who has the best margins producing REEs and can afford the export taxes.

REE prices are weak due to oversupply, mostly as a result of the economic slowdown in China. In time, just like in the graphite market, that will work itself out, because the Chinese REE producers have to meet regulatory and environmental standards and that means some will go out of business. If the Chinese government can gain greater control of illegally exported REEs, then we should see an improvement in prices, particularly in what are considered the heavy rare earth elements (HREEs).

TGR: You said there was an oversupply of REEs. Does that pertain to all of them?

PR: Some REEs are in a supply-demand balance, such that their prices are holding firm. The rest are in oversupply—particularly the light rare earth elements (LREEs), including cerium. REE deposits are going to produce excess amounts of cerium in almost every situation. Cerium is still used, particularly as a polishing compound for optical glass, but its supply greatly exceeds demand.

But that creates opportunity for manufacturers, because firms will come up with new uses for a material when they know that for the next two decades or so it's going to be a relatively low-cost raw material.

TGR: What are three things you look for in an REE company?

PR: With REEs, just like graphite, it depends on how complex the recovery process is; how difficult it is to get the REEs separated into individual elements. Historically, REEs were in monazites. Then, in China in recent years, REE-bearing clays became the primary source.

Now, there is focus not only on REE clays, but also on REE-bearing apatite. Mkango Resources Ltd.'s (MKA:TSX.V) Songwe Hill rare earth project in Malawi has its REEs contained in an REE-bearing apatite. Apatite is a phosphate mineral that's been recovered for decades, so the metallurgy is well known and processing it is simple.

With REEs, it's not necessarily about the overall grade. A deposit's mineralogy and metallurgy are the most important components. For example, Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.MKT; TASXF:OTCPK; T61:FSE) is developing the Norra Kärr REE deposit in Sweden, which has a relatively low grade at just under 0.5%. But for whatever geological reason, Norra Kärr is skewed toward the HREEs, the valuable ones that go into magnets. It's a significant deposit.

TGR: What other companies are you following?

PR: We also follow Commerce Resources Corp. (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX), which is developing its Ashram REE deposit in far northern Québec. That deposit is quite large, but we need to know how companies are going to overcome the logistics of being a distance from established infrastructure.

TGR: Any progress on that?

PR: The Québec provincial and federal government's investment in Plan Nord will see a new road built closer to Commerce Resources' Ashram deposit, but the site is even farther north than the road. It will be interesting to see, as Plan Nord proceeds, how it will change the overall flow of materials moving into the northern part of Québec. As that improves, so too will the logistical possibilities for Commerce getting Ashram into production.

TGR: Do you have some parting thoughts?

PR: Mining has been such a poor investment for institutions over the last three or four years. But by the same token, it looks like the London market has turned. It's leading the other markets like the Toronto Stock Exchange and the Australia Securities Exchange in that regard.

TGR: Thank you for talking with us today, Paul.

Paul Renken has a broad range of experience in various aspects of the mining and minerals business. He began his career as a geologist for Canadian junior resource companies in the Western United States. Owning a stake in a private consulting firm as vice president of exploration, Renken searched for various base metals, precious metals and industrial minerals. In the UK, he worked in the equity market media outlets of Digitallook and Hemscott before joining VSA as mining analyst in 2006.