GOLD GOLD GOLD !!! An Inside look at the benefits of gold mining w/ David Tice Principal Moran Tice Capital Management

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Ryan Morfin:

Welcome to Non Beta Alpha. I’m Ryan Morfin. On today’s episode, we have David Tice, one of the founders of Moran Tice Capital Management, talking to us about gold and the gold miners. This is Non Beta Alpha.

Ryan Morfin:

So David, you have historically been a short seller, but today you’re pretty bullish on gold and gold miners. I’d love to talk to you about that transition from going short to long, and what’s driving your renewed interest in gold.

David Tice:

So, I am still a believer in the short side. I think that the market’s dramatically overvalued here, but I tell you, fighting the fed is very, very difficult, and I ran the Prudent Bear Fund between 1996 to 2008, and lost money four straight years, between ’96 to ’99, and did lose some money in 2003 and 2004. It’s tough to make money when we have such an accommodated Federal Reserve and accommodate fiscal policy like we have now.

David Tice:

Inside Prudent Bear, I actually included gold stocks for about six of those eight years, towards the end of 2008. It actually saved my rates of return, really optimized the portfolio when you have such an aggressive Federal Reserve, and you have a period where gold’s going up and gold stocks are going up, it makes all the sense in the world, and frankly, I prefer being long gold stocks today than I prefer being short stocks.

Ryan Morfin:

The physical delivery of gold, some investors actually put bullion or buy bullion. They buy those coins. They look for other ways to hold gold. But your approach, you’re looking at actually investing in the producers of gold. Maybe you could talk a little bit about what’s happening in both of those markets.

David Tice:

Let’s go through that slowly. I’m still a believer in bouillon. I believe in gold and silver, and I think that frankly, gold is money. Frankly, silver is incredibly better valued relative to gold over thousands of years of history. However, when you’re looking at precious metals equity, we call them PMEs. These are mining companies that explore, develop and produce gold and silver. These companies are selling at dramatically low prices relative to bouillon. Frankly, there is an operating leverage component to owning these mining companies. So, if gold goes up, we think this is likely 10 or 15% a year over the next five years. If that happens, then the precious metals equities are likely to go up 30% compound per year. That’s because of the operating leverage that you have.

David Tice:

Recently we were at about $1,500 for the price of gold. It’s gone to $1,900. That’s up 400 bucks. In percentage terms, that’s 400 over 1500, so that’s about 23% or so. But, you look at what the margin has done, the margin, if your operating cost is $1,300, then you went from $200 profit margin at $1,500. $1,900 minus $1,300, $600 in profit margin, so you tripled it. Therefore that’s why these mining companies go up so far and so fast. That’s why there’s simply a different way to play it. I would not argue for your RIA audience to not hold bullion, I just feel like it’s another arrow in your quiver.

Ryan Morfin:

Before we go on to the PMEs, which is really the focus of what you guys are investing in in this new vehicle, what is the best way for somebody who doesn’t know a ton about buying bullion, how do you get into that? And what’s the best way to do it? And what do you have to be careful of?

David Tice:

Really, you just need to buy from an ethical, reliable dealer. You can do it from either owning bars or coins. There are some great companies out there that have been around for a long time. VanEck is one. I don’t have some of these names committed to memory tonight, and I’m not really affiliated with any of them, but there are some great suppliers where you can buy either bullion or coins. You can also buy in more of a paper vehicle, Sprott. I’m a big fan of Eric Sprott. They have some ETF trusts, where you are actually owning physical silver or gold in trust, and you can be absolutely sure that it’s dollar for dollar, your investment is owning that percentage amount of physical gold and silver. I really like those vehicles. You can actually have the gold or silver shipped to you with 24 hour notice. If you decide to go to the Cayman’s and you actually want to own the silver bullion or gold bullion, you can have it shipped to you. So, I really like those products. VanEck and Axel Merckx. Axel Merckx is another friend of mine. They have a product which is also a gold trust that does a really fine job.

Ryan Morfin:

Got it. So, as we go back to the precious metal equities, when you guys are looking through your different investment screens, what are you looking for in that segment? What stands out to you? Besides the fact that there’s additional margin on the table because of spot prices?

David Tice:

There is several different categories in the PME space. There are senior mining companies, which are the bigger companies that are producing more than a million ounces a year. There are junior producers, which are companies that are producing gold and silver right now. And then there are also developers, which means these companies that have a resource that’s been defined, where there is what’s called a 43101 resource that has been accredited by a third party engineering firm, oftentimes backed up by a 300-400 page report where they’ve determined a net present value of the future cash flow from this resource, and they measure what the valuation of that net present value is, and then compare that to the market cap of the company. And then you look at what kind of price they’re going for.

David Tice:

Those companies require a little bit more processing, and that you have to do permitting, you have to building a mine, you might have to drill out a couple more holes, but you essentially have a resource that’s in place. And then there are explorers.

David Tice:

In our RIA, where we do individual managed accounts and we also have a fund, we invest about two thirds in mining companies that are producers, but that are juniors. These are producers that are not producing half a million ounces a year, these are smaller companies, and the values are much more attractive in those smaller players.

Ryan Morfin:

Got it. Do you think there’s some M&A coming or forthcoming. Are the seniors going to have to buy growth? Is that part of the play?

David Tice:

Yeah. That’s a great point, Ryan. Because it’s very similar to the oil and gas industry, where the more entrepreneurial companies are the smaller companies that hand out more stock options, they’re more aggressive. The senior companies tend to be companies that are producing right now. Their mines might be in decline, therefore they don’t have as much exploration and development going on, and therefore they still have shareholders that are aggressively asking for growth. Therefore, these companies are looking around and it’s like, “How can we get some growth?” Most often, the way they get it is they go to a more entrepreneurial company that has a development project or has a producer that’s selling at a cheaper price, and they can go out and buy that, and it’s immediately equated to EPS. Therefore, the bigger companies are, 90% of them, in having production be flat or in decline.

David Tice:

Therefore, in order to keep their shareholders happy, they need to go out and buy. Therefore, these junior companies end up being targets.

Ryan Morfin:

How have these junior producers, and how has this segment of the industry, how has it performed over time, during different volatile periods, like say going back to the great depression, or in the ’70s? What has been the historical context of performance in the sector?

David Tice:

Okay, so really the junior mining companies perform like the seniors and like the whole PME sector, however with more volatility. So, you look at just the way it is with NASDAQ stocks relative to S&P stocks. I mean, there is more volatility in those companies. But, there have been great booms in the PME sector. If you look at the 1930s, the 1970s and the 2000s. Those were great periods where rates of return were 500% to 1,200%. We believe that this period right now in the 2020s, going forward to perhaps 2025 2028, is going to be a similar period to the 30s, the 70s and the 2000s. Therefore it’s likely to be 500% to 1,000%.

David Tice:

You look at what the Federal Reserve is doing right now, you look at the lack of fiscal discipline, even with the Republican and the Democratic party, we can see … we’ve seen this movie before, when there’s no fiscal and monetary discipline, gold does very, very well. And then when bullion does well, the precious metals equities do even better.

David Tice:

Now, the great set up for this Ryan, is from 2011 to 2016, there was a significant decline in precious metals equities. The price of gold went down from nearly $2,000 to $1,200 or so. Mining companies were down for about five years. These companies got decimated. It wiped out investment banking. It wiped out the gold hedge funds. It wiped out the mining company mutual funds, etc. It destroyed especially some of these junior companies where they are selling at fractions of where they were back in 2011. Some of these companies still have great assets, and now that the price of gold has gone up, then a number of these projects are now profitable and in fact, if you look at our particular portfolio, you look at the consensus earnings estimates for 2021, our portfolio of producers is selling at 7.8 times those 2021 earnings. That’s really unbelievable, and we’ve hardly ever seen that in past cycles, that you actually have mining companies selling for single digit PE multiples of gap earnings.

Ryan Morfin:

Well, that does sound pretty attractive entry point relative to say, I don’t know, the tech sector, which is trading at insane multiples today. In these periods where we’ve seen gold at $2,000 and then come back down, now we’re back up to these high water marks, what about modern monetary theory, MMT they call it, how is that distorting or pivoting the market for future growth past these high water mark levels?

David Tice:

You mentioned MMT, and you and I had a discussion yesterday, and we’re both very opposed to it. It’s kind of like there’s people thinking there’s a free lunch. There’s no such thing as a free lunch. You can’t necessarily just give money to people and just print money. Essentially that’s, if you look back over history, monetary history, and you look at past civilizations over thousands of years, we’ve seen this movie before. What’s happened is, leaders of these civilizations, they always want to provide a growing standard of living for their constituents. That could be in the days of the Greeks, and the days of the Romans, and the days of the Confederacy for the United States. So, this has always happened. What happens is, these political leaders will resort to some kind of policies to be able to provide a free lunch to their constituents. Because they want to stay in office. They want to remain with their perks, etc.

David Tice:

That’s what’s happened. Essentially over thousands of years, what oftentimes happens, is currencies end up being debased. You go to museums around the world, you can find currencies from the Romans, from the Greeks, etc. It used to be that they would have a certain component of precious metals to their metal currencies, but then what happens when standard of living starts to go down and too much debt is taken on, then these leaders end up debasing the currencies and they take out some precious metals out of those coinage. That’s been done dozens of times. Modern monetary theory is somewhat akin to what we’ve seen with quantitative easing. We’ve seen QE three, QE four. We’ve seen the Fed increase the size of its balance sheet from $1 trillion to coming up on $7 trillion, so essentially these are all moves, but what MMT is, is saying that we don’t need any discipline at all. Just send some money out. Send some transfer payments out to individuals to let people sit on their couch. We don’t even have to borrow, we’re just going to print it.

David Tice:

Well, that’s going to end very, very badly and it will end in a significant decline in the US dollar. It will end in a dramatic increase in the price of gold.

Ryan Morfin:

I guess the, it used to be a million dollar question, and then it turned into a billion dollar question, and in today’s world, it’s the multi trillion dollar question. How much runway do you think the Fed has, as they keep pumping trillions into the economy? When does solvency get called into question, and the dollar starts to just break apart?

David Tice:

There’s a strong difference of opinion among really smart guys. I mean Ray Dahlia, who is known to be probably the most famous current investment manager and one of the richest. He’s written a series of articles and has written a couple of books. You can listen to him on YouTube. He is saying that the dollar’s role as global reserve currency is going to end. There are foreign adversaries that are ticked off at our utilization, our lack of discipline utilizing the dollar as the world’s reserve currency.

David Tice:

Now, we still have taxing authority, which allows people to have some confidence in the dollar. We still have aircraft carriers. We still have the biggest military, etc. And a lot of this is very, very complicated and there’s very, very smart people, but there’s a lot of dollar bears. I happen to be a dollar bear. I don’t think it necessarily has to happen in the next 18 months, because of those other factors that I mentioned. There’s this expression people use, saying that we’re the least dirty shirt in the clothes hamper. We look pretty good relative to the Euro and the Yen and the Renminbi. Therefore, I don’t necessarily think the dollar is going to crash, but the dollar has not acted that well this year, and if you look over thousands of years of history, global reserve currencies do not last forever. They end up lasting … the dollar is relatively long too. But the dollar doesn’t have to end. The dollar could still be the second least dirty shirt in the hamper, but it’s not going to be as strong as gold. Gold is money. Therefore, gold is going to do well. We think in any kind of currency system, gold and silver will play a stronger role.

Ryan Morfin:

And it goes to question then, if the dollar is going to become a second place reserve currency, then is it going to be the Chinese currency? Is it going to be digital currencies like Bitcoin, some of those new digital assets? Or is it going to be back to good old gold and hard metals?

David Tice:

There’s a lot of discussion about will there be a gold standard again. I think there won’t necessarily be a new gold standard. I mean, there’s been a lot of discussion that there should be a monetary reset, that there should be a new Brighton Woods, there should be a new Plaza accord. What’s interesting is now we’re having gold backed monetary systems being discussed by China and various other countries. I think there is going to be some kind of gold backing, and I think there will be some kind of digital currency. Ronald Powell, who is the CEO and co-founder of Real Vision TV, he has talked a lot just even recently, he was a relatively late newcomer to getting on the cryptocurrency bandwagon, but he believes all the recent attention to national systems of digital currency being backed by gold could lead to a more embracing of Bitcoin. Therefore, inside our fund, we’re actually a believer that we should have some representation in your portfolio of Bitcoin.

Ryan Morfin:

And is it Bitcoin? Or some of these other coins? What about Bitcoin is better than other coins?

David Tice:

I can’t say I’m a Ph.D. student in the Bitcoin land. And certainly there are … Bitcoin is by far the most established. There are reasons that Bitcoin could be the longer term play. Certainly [inaudible 00:22:56] has some great advantage functionally over Bitcoin, but I think just the play of Bitcoin makes a lot of sense. I don’t think you could go wrong with that one. You might be able to make a little bit more money if you picked the right cryptocurrency over Bitcoin, and that might be a place for a part of your portfolio.

Ryan Morfin:

At what point should Americans get worried that US Treasuries perhaps are going to not be the, what we’ll call the reserve standard, and gold is starting to outweigh? Are you seeing that trend in other central banks? Are they starting to accumulate, and are they honest and transparent about how much they’re accumulating and holding?

David Tice:

Well, the Chinese have not been very transparent about their ownership of gold. They typically don’t even release, but every three or four years, how much gold they own. We know that there’s been a lot of misrepresentation about economic indicators throughout China, and I do believe that China owns a lot more gold. Now, if you look at central banks have bought a lot more gold over the last five to ten years, and they’re holding of US Treasuries has been diminished. Frankly, when the 30 year yields 1.7%, and the 10 year is yielding about 75 basis points, you look at the 40/60 traditional portfolio holdings of institutions and you’re picking up that kind of yield from your treasury bonds? I mean, frankly we think it’s a flawed asset class. We think that one thing about holding gold, gold has typically done well in periods of zero interest rates or negative interest rates.

David Tice:

So, if you can hold a bond and earn 5%, then you might want to hold that bond rather than holding gold that doesn’t yield anything at all. But, if you’re in a money market fund that’s yielding practically nothing, why shouldn’t you own some gold? Frankly, if you as an individual has a bunch of cash and you’re earing 15 basis points in your money market fund, why not own some gold that you know is going to have some value that’s probably going to increase, and it’s not costing you much by not being in that cash interest earning vehicle?

Ryan Morfin:

Yeah, I think anybody who watches this show, I’m sure agrees that the 60/40 model is definitely dead in a low interest rate environment. What happens though to gold if interest rates go negative in the US and if they go negative globally?

David Tice:

I think gold does even better, because then if you have the decision that you have $100,000 in your bank account and you earn negative 1%, you’re going to get $99,000. And then you can hold the gold and you know you’re going to own a certain number of ounces of gold. Why wouldn’t that make you even more convinced to own gold that yields nothing versus this negative interest earning vehicle?

Ryan Morfin:

And from some of the smarter, we’ll call, investment managers out there, asset allocators, what is the current, I’ll call it, sophisticated market approach in terms of asset allocation for gold right now, and where do you think it goes over time? Is it 1%? Is it 10%? Is it 30%? What’s the right percentage of a portfolio?

David Tice:

Okay. Each individual needs to make that decision. There’s been a … The finance books, a lot of time, I’ve talked about 5% to 10%. Jeff Gundlach, who manages more bond money than anybody, was on recently in an interview, was talking about how he is not repulsed by 25% holdings of gold. And it depends on when you look at bonds, and the fact that 40% of portfolios have been in bonds where Jim Grant calls those return free risk. Why not be more than 10% in gold?

David Tice:

Frankly, when you look at the cash that you own, and the fact that if you need to get your cash out of the bank, and that there could be a financial crisis and the bank might not even let you have that cash, and the fact that in March, when I ended up going to my bank and the market was crashing, they were telling me to come back next Thursday and, “No, you can’t have any more than $20,000.”

David Tice:

Remember that a checking account at your bank is truly a liability of the bank, is what you own when you own a checking account. I think people need to look at gold a little bit differently. But I tell you, if you’re even a 10% owner of gold, you’re going to be a lot better off than most other people that have zero. If you look at holdings of gold and gold stocks for a traditional US investors today, it’s about .3% of their holdings. The three decade average has been 1.5%, so that’s up about six fold or so.

David Tice:

During booms and typically we will eventually get to a mania, that level could get to 5%. However, the really smart people are likely to have a lot more if they are forward thinking, etc. So, that’s just something that you have to analyze monetary history, do your homework, listen to shows like this, and make up your own mind.

Ryan Morfin:

Well, that’s interesting. That’s the US numbers you’re talking about. What different parts of the world attract more gold? China? India? Switzerland? Who is hoarding all the gold today after we left the gold standard?

David Tice:

Well, the Chinese have gone to their public, I’d say five to eight years ago, and actually did promote billboards telling their consumers to go out and buy gold. We know the Indians have always bought gold. We know the Russians have bought a lot of gold. Asians have generally bought gold and silver. Our central bank in the US does have a high percentage of gold in Fort Knox, if we can believe that those numbers are still there, even though we have not audited our gold reserves for more than 50 years. There’s been a lot of pressure from certain members of Congress to audit our reserves, and that’s never taken place.

Ryan Morfin:

What could possibly be the excuse not to give that kind of transparency?

David Tice:

Beats me. I mean, does government make sense some times? I mean, it’s like Rand Paul, who ran for president, has talked about this for a long time.

Ryan Morfin:

That seems like that’s a no brainer. Hopefully we’ll be pleasantly surprised and not the other way around. I wanted to also ask you, you have a passion project as well, where you talk a little bit about the vulnerabilities of the US electrical grid infrastructure. Do you mind sharing some of your thoughts on what that project is about and why you’re doing it?

David Tice:

No. I’d be glad to. Thanks for asking. This is a project trying to alert the American people about the vulnerability of our power grid. We have a website and a documentary that’s coming in early 2021. The name of the documentary is Grid Down, No Second Chance. Our website is GridDownDoc.com. We believe that there is, if we all believe that our nation’s leaders were very unprepared for COVID-19, however if the power grid potentially went down for three months to nine months to potentially a year and a half, can you imagine the suffering and death that we might experience? Because during COVID-19, we ended up having our Uber Eats and our Amazon, and we had trucks getting to the grocery store, etc. But, if the grid happened to go down on a nationwide basis, it would create hardship and death and destitution like we’ve never seen.

David Tice:

It sounds like a science fiction movie, but frankly, there have been Congressional studies and science and a number of scientific studies have said that between 75% and 90% of Americans could die in a grid down scenario. Now, the reason I started this project, or I actually picked it up from another patriotic lady that had started the film is, this is very fixable. Frankly, there are solutions to be able to harden the power grid, and there have been bills passed by Congress, that Donald Trump is behind, trying to protect our power grid. However, frankly it’s been held up by bureaucracy and by deep state and by public utility lobbyists, etc. frankly, there needs to be more of a movement, almost like a contract with America that Newt Gingrich started 40 years ago, or a Tea Party movement.

David Tice:

Frankly, we have the ability to have eight letters written to your US Congressmen and your two US Senators, your two State Legislators, your FEMA emergency director, chairman of your state utility commission, and your General for your National Guard, to say, “Let’s get behind this. Let’s fix this. There’s no reason that we can’t get this done.” The whole project could be completed for about $100 billion frankly. So, when we’re throwing around trillions of dollars, and the risk frankly is higher than one might think, because there’s a couple of different risks. One, it could come from an adversary, such as the Chinese or North Korean, Iranian, or a Russian. It could also come from a geomagnetic storm.

David Tice:

We have seen, and NASA has talked about this, that there is a probability of 12% per decade, of there being a dramatic geomagnetic storm, very similar to what happened in 1860, for what was called the Carrington Event. It could fry the electronics in our transformers and essentially knock out our power grid for as long as over a year. So, if you go to the internet, if you go to our website, you can read about this. I’d love people to kind of get behind it and inform people. We can fix this.

Ryan Morfin:

That was the solar storm, right? That hit in the 1860s? Yeah, and the electromagnetic pulse is basically a nuclear bomb being detonated in the atmosphere and shocking the ground right? And all the electronics on it?

David Tice:

Exactly. And in fact, we know that is in the playbook of our adversaries. And in fact, some of our adversary top leaders have mentioned that in various threats and various articles in the past. Iran has talked about that, and therefore yes, people say, “Well, the chances are small, this will never happen,” but you’re only talking about some crazy people inside a room of the PLA, or inside the Iranian National Guard, and they decide that they can pull this off, and it can create unbelievable pain and suffering for us, and it is so defensible, frankly.

David Tice:

If we would have had enough PPE and masks at the beginning of this outbreak, think how much better off we would have been. We know we can’t count on government to provide the defense mechanisms. It really requires the American people to demand better government.

Ryan Morfin:

Well, in a year where the murder hornets have invaded, we should be thinking about the two or three sigma events that could happen, because it is definitely an unusual period for us. This is the second season of our show, and we do, at the end of every episode, we ask six questions. They’re all yes or no. Whatever your gut reaction is to the question, more as a survey if you will, for our guests. I’m going to just ask you the first question and then we’ll go from there. If you want to add any context, feel free.

Ryan Morfin:

If there was a COVID vaccine available today, would you take it?

David Tice:

No. And I’d like to add one side bar. There is actually a product out there that is a natural homeopathic product that has gone through FDA trials that I’m going to take, and it’s called … You can go to the website MyOleander.com. There has been a couple segments on EconomicWarRoom.com, and a fellow Patriot, Kevin Freeman is a good friend of mine. I believe that this particular product … This product has actually been shown to Donald Trump, they are fighting for FDA approval. Ben Carson, the esteemed brain surgeon, is a backer of this. It’s still under the radar screen, but I’m going to take that rather than taking a vaccine.

Ryan Morfin:

Who wins the election on November 3rd?

David Tice:

[inaudible 00:39:22].

Ryan Morfin:

Fantastic. What type of economic recovery are we in, if at all? What’s the shape of it?

David Tice:

I think this is more of a W, if you look at the fact that we were down dramatically in Q1 and Q2. Q3 is likely to be up 30%, but I think we’re seeing flattening of the recovery, and frankly we ended up having so much stimulus in April. I’m also a big fan of David Rosenberg, who just started his own firm. $6.6 trillion sitting on the couch money came into the system, which essentially doubled the negative outcome from the loss of wages and salaries and income. About half of that money has been spent, and about half of it has been saved. But, unless we see more reinforcement of that, and that is probably coming soon.

David Tice:

But again, it is not creating productivity. You look at the New Deal, you look at the money that we spent under Roosevelt for the New Deal. We ended up building bridges and highways, which created productivity, which would stimulate the economy later. In this case, we have just provided sit on the couch money, where people can pay for their Netflix bill and pay for their electric bill. It’s not really creating new productivity enhancing stimulus. Therefore, we think there’s going to be significant declines ahead.

Ryan Morfin:

Yeah. There’s never been an infrastructure bill passed unfortunately. That’s definitely needed today. That is an interesting way to put it, the sit on your couch money. The next question is, is there anything that you achieved this summer that you’re particularly proud of while we’ve been in lockdown?

David Tice:

I’d say spending more time with my 97 year old mom. I’d say that.

Ryan Morfin:

That’s fantastic. Are there any silver linings that you see in the economy for 2021 in the US?

David Tice:

Yes. I think that the fact that we have determined that people don’t need to live in the cities, and people can work from Lake Tahoe and people can work from Connecticut and come into New York City once a week, is going to be overall beneficial with great internet and with great Zoom conferencing, etc. People can be productive and spend more time with their families. Real estate values will be more dispersed, and frankly, if there is a hugely negative cataclysmically scenario like an EMP or a cyber attack, being more geographically dispersed is to our benefit.

Ryan Morfin:

And the last question is, is there anything that you’re reading, watching or listening to that is just helping to shape your thinking going forward?

David Tice:

I’d say YouTube provides great content, and your show and what you’ve done. I’ve gone through your 100 episodes as far as you’re talking to really smart people, and having a host like you that’s plugged into this way of thinking. People can magnify their consumption of information by listening to smart hosts that are picking the smartest people out there and then having great questions to ask. I’d say there is so much value there. We’re all blessed to be in this environment today where if you want to learn something, Ronald Powell just had an hour and a half segment on how to be a macro investor, as an example. There’s all kind of ways you can get smarter.

Ryan Morfin:

Fantastic. Well David, I appreciate you coming on the show. I learned a lot and definitely very intrigued about some of this new asset class breaking that 60/40 model. It’s not really a new asset class is it? It’s probably one of the oldest we’ve had. It’s just coming back into vogue. So, thank you so much, and we hope to have you back on the show in the future.

David Tice:

Yeah. It was a pleasure to be with you, and good luck to all your audience out there. They’ve got a big job as an RIA to try to navigate these waters for their investors. So, best of luck to all of them.

Ryan Morfin:

Thank you so much. Have a great day.

Ryan Morfin:

Thanks for watching Non Beta Alpha, and before we go, please remember to like and subscribe on Apple Podcasts and our YouTube channel. This is Non Beta Alpha, and now you know.

 

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Ryan MorfinPini, Welcome to the show. Thank you for coming on today.

Pini AlthausThank you for having me, Ryan. Good to be here.

Ryan Morfin: So you're an investor and a miner in rare earth minerals. Can you share with our listener base, what are rare earth minerals? Why are they important and why is there a geopolitical race going on globally?

Pini AlthausYeah, I mean, rare earths are an extremely ubiquitous part of all advanced manufacturing or technology manufacturing today's day and age. Several years ago, I had not heard too much about rare earths myself. I was not that familiar with it and being involved in this sector, in this company, for the past few years has given me an education of course. And I mean, I was sad to hear that 50% of all imports into the United States contain are earth elements and it runs the gamut from consumer electronic devices that we use every day. Our cell phones, our laptops, most communication devices, medical equipment. So there's a tie with COVID, which we can touch on at your discretion. Electric vehicles, defense equipment. So pretty much anything or everything high tech today has a rare earth element or critical minerals contained within them.

Ryan MorfinAnd what are some of the names of some of the more important rare earth? I know there's lithium for batteries, but what else is considered in this category, critical?

Pini Althaus: Yeah, so lithium is a separate category to battery material. The rare earths are 17 rare earths. The four, let's call it, key rare earths that we're focused on at our company, the four rare earths that go into the permanent magnets. And these are the magnets that are found, there are a number of them in your back of your cell phone or an iPad. But if you look at an F35 striker jet, you've got about a ton of rare earth magnets in those. And we've got two heavy rare earths and two light rare earths is part of the permanent magnets. You've got dysprosium, ytterbium are the heavies, and then you've got neodymium, praseodymium as the two light rare earths. So those would be key rare earths that are the focus.

Ryan MorfinAnd you use these in, I guess, in military applications as well, but historically, where has the United States sourced the rare earth for supply chain?

Pini AlthausYeah. And that's the shocking part. We've been securing those materials from China. So China controls the rare earth sector and has done so for the past 30 years or so. And it was a significant misstep on the part of the United States, allowing China to have this control. And actually this wasn't a question of China coming in and doing anything nefarious as far as stealing IP or anything. The US government made a conscious decision about 30 years ago to allow China to come to the United States and acquire the processing capabilities for rare earths. So just as part of some background, you've got the rare earth materials containing various mining projects, but once you extract them, you have to then process them and they go through certain phases before they get to the magnet phase. And China, the thought process was let China do the mining, let China do the processing.

Pini AlthausWe don't need to do that here. And we'll buy the materials from China cheaply and the premier of China at the time, Deng Xiaoping made the comment, he said, "The Middle East has oil. China has rare earths." And unfortunately we weren't smart enough to understand what he was saying. And the Chinese understood that the future of manufacturing is going to revolve around control of the rare earth and critical mineral supply chain. So if you think about it today, Ryan, we cannot build... Forget about consumer electronics and medical equipment. We cannot build the equipment that the US Pentagon or the US armed forces require, whether it's F35 fighter jet, Tomahawk cruise missile, communications equipment, without going to China and obtaining those materials. And it's obvious to all that this should be extremely alarming. We've seen China use this as a weapon, if you will, as far as how it interacts with other countries back in 2010, when there was a dispute between China and Japan on the East China Sea.

Pini AlthausSo China cut off rare earth exports from Japan for 40 days. Japan obviously being a significant user of rare earth elements for their high-tech manufacturing sector, that was stopped after 40 days. But in fact, it was President Obama that first made the United States aware of this, formed a division within the Department of Defense to handle this issue, but not much has happened. And we continue to be relying on China for these materials. And what has been made about trade war with China and whether the trade war is really the impetus for China withholding rare earth exports. And that is a huge misnomer. Whilst China had been talking or implying that they would cut off rare earth exports, the truth of the matter is that China, under it's made in China, 2025 mandate, its belt and road initiatives and others. And you seem to control the critical minerals and rare earth supply chain so that it can continue its dominance as a manufacturer or a global supplier of these materials and finished products.

Pini Althaus: It's the backbone of its economy. And in fact, China has become a net importer of rare earths from different countries like Miramar and others. So with that, they are decreasing the exports to countries like the United States, Japan and others.

Ryan Morfin: And was it ever a risk that the Chinese were going to turn off the exports of rare earth to the US during the trade war? How close were we to that? And was that ever some saber rattling that went down during trade negotiations?

Pini AlthausYeah, I think it was saber rattling. I think it would be paramount to an act of war. I can't say with any authority that that would not happen, but it would be probably, aside from war itself, it would be one of the most significant acts of war cutting the United States off from the ability to procure rare earths. But that being said, I mean, if you look at, as an analogy, the oil and gas sector and the reliance of the United States had for many, many years on OPEC countries to supply us with the oil. And we had embargoes and we had price manipulation by OPEC. This is far more significant given the ubiquity of where these rare earths go. And yes, we're always under the threat that China can cut off exports under the guise of a trade war or for any other nefarious reasons.

Pini AlthausBut I think even more importantly, to just as the natural run of the course of things with regards to their business and their desire to maintain themselves as the global leader in manufacturing and exporting of goods, China is in a position now where it actually requires these materials for their own domestic consumption and can legitimately cut off rare earth exports by stating that they need it for manufacturing and that would actually be somewhat correct. So we're in an extremely dangerous position here with this reliance on China. And it wouldn't just be China. If it was another country, it would be similar issues, not to the same extent, but reliance on one country for these materials is dangerous.

Ryan Morfin: And it's been mentioned in the past that in 2010, China flooded the market to really kill all the competitors in the rare earth mining industry. Where was the World Trade Organization during this period? And how did that play out and how does that set the chess board for China to run the tables?

Pini Althaus:

Yeah. So the WTO stepped in when China cut off rare earth exports from Japan, I think it lasted for about 40 days because the US and Japan protested the WTO, and they stepped in and China resumed exports. While I'm not an expert on these trade matters, one thing that I am aware of is that one of the reasons why China had to resume the export of rare earths was it did not legitimately need all the rare earths for domestic consumption. So therefore it was a nefarious act, if you will, to cut off rare earth exports. Now that has changed, which means China have to cut off rare earth exports today, they have a legitimate case to say that they require these materials. There's a shortage of these materials and they require them for their own domestic purposes. It is the backbone of their economy and there's very little we could do about this today, which is why it's becoming an even more urgent issue.

Ryan Morfin:

And the US government started stockpiling some of these after that incident. Can you talk a little bit about what DOD and DOE has done to start making sure that there's not a critical supply shortage going forward, and is it enough?

Pini Althaus:

Yeah, again, there is a national defense stock pile, and there are materials still that the United States needs to procure in order to shore up its stockpile. There are magnets, the finished magnet products as well, the United States government needs to stockpile. Again, there's a limited amount that the United States government has. It requires approval from Congress, whether it's in the NDAA or other approvals from Congress, to allocate monies for the national defense stock pile of these materials. That being said, there's no endless supply of these materials. And unfortunately, the apparatus, the way it's set up right now with the US government, it's going to continue to require having a secure supply chain of those materials for many, many years to come. So it's not a question of stockpiling for 10 or 20 years, and then this complacency and saying, we'll kick the can down the road. But keep in mind as well, Ryan, that US government accounts for low single digits of overall rare earth imports into the United States.

Pini Althaus:

We're talking about defense contractors, we're talking about the manufacturing sector. The direct impact this has on the economy, jobs, the automotive sector, and others is significant. So it's not just limited to the United States government. If you look at over the past couple of weeks, the sanctions that China have put on Raytheon, Boeing, Lockheed, et cetera. I mean, the question is where are they going to get those materials? And if we go beyond that, you need rare earths for the 5G network. Now that Huawei has been banned from installing the network, not only in the US but other countries, we have to have the ability to get a secure supply of these materials as well. Which currently, again, trying to control the hundred percent. So it runs across the board, both for government, defense and manufacturing in this country.

Ryan Morfin:

Well, and so help me paint a picture for our audience. Does China have all the mines for rare earth, or they're the only ones who started mining it? Or are their mines globally dispersed and nobody's been doing the actual infrastructure to do the mining?

Pini Althaus:

Yeah. So finding rare earth projects or rare earth elements is not the difficult part. It's finding them in significant quantities that makes a project economically viable. And part of that consideration are the environmental rigors that companies in the West have to adhere to. And China, even by their own admission, have had a complete disregard for mining these materials and even for processing these materials. And in fact, just the last week or so, the BBC did an expose on this, 60 Minutes has done an expose on this. But the Chinese have not denied this and have talked about cleaning up their act, but it has an effect on the bottom line for what the costs of mining and processing are if you have no environmental standards to adhere to. So China have exploited those rare earth projects they have, primarily in inner Mongolia, and have brought a number of projects online and quite quickly, and in a significant way, with a complete disregard for the environment.

Pini Althaus:

So it was seen as an environmental no-no in the West for many years. Now, what's happened over the past few years is you're starting to see rare earth projects in different parts of the world sprout up. You've got the Mountain World project in Australia owned by Linus, which is a producer of Nd and Pr, neodymium and praseodymium. So two of the light rare earths. They may have some heavy rare earths coming online at some point in time. And you've got Arafura, which is another company in Australia that we're working with to assist them with their processing so they don't have to send the materials to China for processing. But really these are a drop in the bucket for what the requirements are for the United States. And certainly what the requirements are for allied countries, the EU, et cetera. So there is a race, if you will, worldwide to start bringing projects online. The Chinese are very active in trying to secure assets outside of China.

Pini Althaus:

So in Africa. They have ownership of a project in Greenland. So there is somewhat of a race. The Australian government has stepped in and has started limiting the ability for China to own, or have ownership in, or off takes for the Australian rare earth projects. And that's part of the strategic Alliance between Australia and the US. Canada, similar thing as well. There are a number of projects that are looking to come alive, but these projects are, for the most part, will take many, many years to come online. We have to expedite the process. We have to assist with a [inaudible 00:14:41] supply chain and the domestic rare earth sector, because previously investors have been scared off by things like China flooding the market, which is not a possibility at this point in time, given that China can't actually afford to flood the market. They are already very heavily subsidizing their mine to magnet supply chain there.

Pini Althaus:

This is more now a case of being able to get production from non-Chinese sources so that the United States and allies have a viable, secure supply chain of these materials. And it's a concern worldwide. We speak to governments all over the world, and we're all facing the same issue. Some more than others, especially countries like Japan, that don't have their own rare earth projects there and are reliant on Australia where they've made some investments there. And in the United States, they've made an investment recently in Africa. So there is this race, if you will. And I think we've got a five-year window here to at least stand up a few projects worldwide. Otherwise we've lost this race and we will be dependent on China for many, many years to come. And Ryan, it's a bit of a hypocrisy. If you look at it where you've got materials going through clean, green energy applications, like electric vehicles, wind turbines, et cetera.

Pini Althaus:

That we're sourcing these materials from China, where they've, again by their own admission, has been complete environmental devastation to water bodies around these mines and processing facilities, to the communities. People have been getting sick around these projects yet we're putting these materials into our electric vehicles or wind turbines. It makes no sense at all. And people are starting to wake up to this. And that's why the sector is starting to see a lot of support come out of Congress and bi-partisan support. And in fact, it's one of the only bi-partisan issues right now in Washington. And it's good to see that some things decided to move in the right direction.

Ryan Morfin:

And is there a special process? You talk about the expense, is it really difficult to mine these? You have to go through a special chemical process to extract and clean and purify. Is it a lot harder than, say, gold or silver or some of the other, we'll call, more traditional elements?

Pini Althaus:

Yeah. It's all about the processing to some extent. So if you look at MP Materials in California, which used to be Molycorp before they went through their bankruptcy. They are a miner of Cerium and Lanthanum, which are two of the light rare earths, the lower valued light rare earths. Given that they do not currently have processing technology, they are sending those materials to China for processing where China is tariffing those heavily. Linus is also, they're doing their processing work in Malaysia and elsewhere. So it's really about the processing at this stage. One of the things that we've done, after we put out our PDA last year with our upgraded resource, which now includes a significant amount of lithium. We make a decision that, based on the test work that we had done around our processing methodology, that we were not going to send our materials to China. That it's paramount for us to do this work in the United States and in a collaborative effort as well.

Pini Althaus:

We've been asked by some of our investors, "Well, why would you be looking to help other projects with their processing?" And the answer is simple. There's no one project or one company that's going to put China out of business or make a dent, or somehow be able to take care of the overall demand worldwide for rare earths and critical minerals. And it's very important for us to have processing capability in the West. So that was the impetus for us opening up our own rare earth and critical minerals processing facility earlier this year, which we did in Wheatridge, Colorado. And in fact, we've made some significant progress on the method that we're using for this. And we're starting to collaborate with Australian companies, Canadian companies. We're currently talking to a group over in Europe as well, because this has to be a collaborative effort.

Ryan Morfin:

How does Europe solve for these problems? Do they have this better under control than the US?

Pini Althaus:

No, they're in a far worse position than we are. The EU commission recently put out a report, I think, a couple of months ago that the requirement for rare earths is going to increase tenfold within a short period of time. Lithium 18 times. They don't really have rare earth projects. Again, there are the Greenland projects, which people have heard in the news recently. Those need to further development work so they don't have rare earth projects ready to come online there. There are a couple of lithium projects that are spread around Europe, but for the most part, Europe is in an even more precarious position. If you look at Germany with the auto manufacturers, you look at the big companies like ThyssenKrupp and others, all these countries and companies are looking for alternatives to China, because we've already seen in the news about China withholding or reducing exports of some of these rare earths that are required for these industries.

Ryan Morfin:

And you mentioned earlier the regulatory posture of the US makes it difficult to mine. Is it becoming a more bi-partisan issue that we need to maybe relax some regulation around the mining exercise, to incentivize private sector to come in and start producing this? Or is the Republican party versus the Democratic party on two separate pages of music?

Pini Althaus:

Yeah. Good question, Ryan. I mean traditionally the Republican party is obviously being more pro-mining and in favor of less regulation when it comes to these things. With regards to our project, we're on Texas state land. So we don't trigger federal environmental permitting at this point in time. And obviously Texas being Texas, a mining state and oil and gas state, things are a lot easier in Texas than they are on projects on federal land where the Bureau of Land Management controls the environmental process around that. But the thing is here, and I don't want to step into what other companies are doing, et cetera, but we do need to be reasonable about allowing projects to come online if they're adhering to environmental standards that are acceptable worldwide. And what we do know, is that China is destroying the environment and cities and water bodies around their mines and processing facilities.

Pini Althaus:

We have standards here in the United States, and I think what we need to do is make it easier for companies to mine, while at the same time protecting the environment. And there are ways to do that. And we're definitely seeing buy-in from Congress, from both sides, with regards to looking how we can stand up a secure supply chain. And, obviously under the Obama administration, they had very strict regulations when it comes to mining. And that's changed under the Trump administration. Hopefully what we start to see is some normal middle ground that'll allow other projects to come online.

Ryan Morfin:

And typically in these rare earth mines, is it amalgamation of different minerals that are all consolidated together and you have to separate them out? Or do you ever find pure play, Europium, I can't even pronounce some of these. Gadolinium, Cerium. I mean, are they all mixed together and you've got to filter and sift them through, or are they pure play mines?

Pini Althaus:

No, they're generally they have a mix. So they're polymetallic projects. They have a number of different materials. Some projects, you more to what we call the light rare earths like MP in California or Linus in Australia. Our project is actually on the opposite end of the spectrum. We have a very high concentration of heavy rare earths. That being said, we do have to go through a process of separating these materials. But the case of our project where we've got 30 materials. We're not going to produce 30 materials. We're not going to market 30 materials. So what we're doing is we're focusing on the key materials that are marketable, that we need for permanent magnets, lithium as well, and working on the separation and the optimization of those materials in particular. But we're all faced with the same processing challenges and that is something that can't be set.

Pini Althaus:

There's no easy way to do this. There are different technologies that have been used in different parts of the world. So predominantly there's a process called solvent extraction, but it's big, it's bulky, it's not benign. It's a bespoke solution for one particular project. So it doesn't work for feedstock from other projects. What we've done is we're using a processing technology that's actually been around since the 1940s. It was part of the Manhattan Project. It's called continuous ion exchange. In fact, the Chinese use it to increase the purities from 99.99 to four nines, five nines, and even six nines. So for some applications you require higher purity levels. It's a far easier processing method to scale up and to take feedstock from other projects. In fact, we've demonstrated for the Department of Energy that we can take coal waste from Pennsylvania and do high purity separation of rare earths using our processing methods. So it's not a step that can be skipped unless one needs to send it to China for processing, which is not going to help us with our objectives here.

Ryan Morfin:

How many other, we'll call it, going concerns on any other businesses that are doing this, that are trying to, I guess, start the development of these mines. Are you guys one of a few or are you one of many? And is it an international or just a US game? Who's leading the charge at going after this?

Pini Althaus:

Yeah, well, I'd say the Australians are leading it outside of China right now. You've got some really good projects in Australia. Again, more skewed toward the light rare earths. There's one more heavy rare earth project in Australia, which is not yet producing. The United States, you've got MP Materials, you've got Ucore in Alaska, you've got the Bear Lodge project in Wyoming, which is also another light rare earth project. So as far as a heavy rare earth project that looks like it will come online in the near term, that would be our project. In Canada there are a couple of projects there as well, and again, more skewed toward the light rare earths. But we really need to get as many of these projects online as possible. Because again, I don't see it as competition. We all have a problem doing supply agreements or offtake agreements for our materials.

Pini Althaus:

In fact, one of the things that we're going to have to consider is looking at potentially scaling up our production, based on the demand that we're already starting to see. And I think other companies would find that as well. So it's all about the economics of the project. You have projects that were economically viable back in 2012 or rare earth prices with 35% or so higher than they are today, and are not necessarily viable today. So that's the challenge as well, economically viable projects. And we've got to get as many of them online as possible. It takes many, many years. I mean, our project has had over $70 million put into it to get to where we are today, and we're close to getting to the production scenario. It all revolves around processing at this point in time.

Pini Althaus:

We'd be very happy to see another couple of projects come online, because this is extremely important for national security and for the economy as well. I mean, if you think about it, Ryan, if you've got a billion dollars of rare earth materials, that translates into a trillion dollars or I should say trillions of dollars of finished product. So you've got a magnet in your phone there that's worth a couple of dollars and the cell phone's a thousand dollars. And electric vehicles and defense applications even more.

Ryan Morfin:

Yeah, everyone has one of these iPhones now, and there's tremendous amounts of rare earth on the circuit boards here. And I think people take it for granted that that supply chain is not secure right now. So one question for you, there's talk of this maybe medium term to longterm, but there's talk about mining in space. Do you think that's a feasible option in the longterm, medium term? What are your thoughts on that?

Pini Althaus:

No, that's just ridiculous. I mean, we're trying to find ways to make mining on earth economically viable. I think the cost of going up to space would be more than what our capex will be bringing our entire project into production. I mean, we've got about a 350 to $400 million capex to bring 130 year mine life into production. I'm not an aerospace expert, but I think sending a rocket, building a rocket ship and sending it up, I think maybe on the fuel alone, you could bring a couple of projects into production. So unless we have a fortunate situation or an asteroid lands on earth, and fortunate if it lands somewhere where we don't care, I don't see how that happens. And if it's big enough, it's a problem as well. It's nonsense. And even, options aside of the deep sea mining for rare earths, I mean, you've got all sorts of environmental issues around that as well. I think we need to look at projects that we can bring online, that can be done so in an economic way, that can be done so in an environmentally responsible way.

Pini Althaus:

I mean, one of the things that we've done at our project is we've got in excess of 60% of the materials that have come out around top, will have a clean green energy applicability to them. So we're using the benign processing method. We're going to be using renewable energy on site. In fact, we will likely be putting a solar farm on site as well. We've talked to a couple of companies that have approached us about that, and we'll be a net producer of power for the surrounding area. So there are ways to do it which don't affect the environment. Obviously if there's a project that's situated on a sensitive area, that's a unique situation for that specific project. We've seen it with the Pebble project, which is not a rare earth project. The Pebble project in Alaska where their environmental concerns is we've been recognized by both Republicans and Democrats, but we have to be reasonable about the projects that don't have environmental concerns.

Ryan Morfin:

So Pini, in season two, we ask all of our guests a series of six questions. They're usually, yes, no questions, but trying to take a survey of our conversations. And if you want to add a little context to the yes or no, feel free, but here goes the first question. If there was a COVID vaccine available today, would you take it?

Pini Althaus:

Yes.

Ryan Morfin:

Who do you think is going to win the election?

Pini Althaus:

Which election?

Ryan Morfin:

The US election.

Pini Althaus:

Well, I think it looks like Joe Biden's going to win it, but I think what happens, if we go past January six from my understanding is that the house will vote on it and it's one vote per state. But I don't know if I see it getting there at this point in time. I really don't have a crystal ball.

Ryan Morfin:

Third question. What type of economic recovery are we in? What type of shape is it taking? A V-shape, W, U, L?

Pini Althaus:

Yeah, I think 2021 is going to be challenging. I think we've been, and rightly so. I mean, we've had no choice as of almost every other country. We've been printing money for the past year because of COVID. And I think we've got to brace ourselves that, at some point in time, the chickens come home to roost. It was a necessary step. People needed it on an individual level. Businesses needed it as well, but I think we've got to do whatever we can to stimulate the economy, give people confidence to go out and work again, employ people. So I think we've got to watch ourselves, especially in 2021. And I have some concerns, but long-term, I think the approach in the United States is a healthy one.

Ryan Morfin:

During lockdown this summer and quarantine, was there anything in particular that you accomplished that you're particularly proud of?

Pini Althaus:

Yeah. A great amount of family time, which, if you would've asked me a few years ago if I could sit at home and be at home for six months, I would have told you absolutely not. I wouldn't be able to do it for six days, but it has... I'm sure it's done this with a lot of families as well. It's brought families together. We had a baby actually last year on Thanksgiving. So I was doing a lot of travel at the time and thought I wouldn't get to see my daughter in her first year or couple of years too often. And being home with her every day is actually been just the most amazing experience. So thankful at least for some silver lining in COVID.

Ryan Morfin:

Are there any silver linings that you see in the economy going into 2021?

Pini Althaus:

Yeah, I think we've gone through an absolute beating and it looks like we've got the ability to come out of it. And I think that's a testament to how strong the economy was built up in the years preceding COVID. So overall I remain an optimist. I mean, we are a country built on opportunity and going out and making it happen. And we're not a socialist country sitting and waiting for people to send us paychecks or wealth distribution or anything like that. I think the American dream still lives on. I think if you go out and you're willing to work and put your head to it and heart in it, I think we do have the ability to climb out of it. So if we look at what the economy is doing over the past few weeks, it looks like it's starting to rebound. And to me, that's assuring because it could go completely one way as well.

Ryan Morfin:

And the last question is, is there anything that you're watching, or listening to, or reading today that has been impactful on your thinking that you'd like to share with our audience?

Pini Althaus:

Yeah, that's a good question. I think it's been more personal stories. The news, I sort of take that in context or with more than a grain of salt. In some cases stay off the news channels for a number of days at a time, it became quite repetitive. But I think on the personal side, talking to friends, my family's all back home in Australia, they've just come out of 110 day lockdown, which we can't relate to that. It's been very trying on them and seeing the fortitude that they've had to come out of that and stay intact. I think the mental health issues that will come out of COVID are going to have a far longer effect than the economic issues. I think we're going to have to focus on mental health issues in this country for a long time to come.

Pini Althaus:

The impact on kids has been significant with regards to lockdown or remote schooling, et cetera. But to see people come through it. I think it's a testament to people in general and to the country and other countries as well, to see got that fortitude and survival instinct to try to get through whatever adversity we can. So hearing the personal stories, the challenges that people have gone through, I think it's made me a lot more aware of things that I have to be thankful for and where we can help out other people as well. I think we have to be united going forward because there are things...

Pini Althaus:

I think one of the things that COVID has shown us is we can get into this complacency and life goes on and we go one day to the next. And all of a sudden we get hit by something that affects everybody equally. I mean, COVID, whilst there were groups of people, whether it was the elderly or people with underlying health conditions, that got hit the worst. I mean, we all got hit in some form or another. So really, this should be something that unites us, not divides us.

Ryan Morfin:

Well, Pini, I appreciate you coming on today to talk to us a little bit about the supply chain crimp on rare earth and we'll definitely keep an eye on it and would love to have you back in the future.

Pini Althaus:

Thank you, Ryan. Thanks for having me.

Ryan Morfin:

Absolutely. Thank you. Bye-bye. Thanks for watching Non-Beta Alpha. And before we go, please remember to like, and subscribe on Apple podcasts and our YouTube channel. This is Non-Beta Alpha, and now you know.

 

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