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Ask Li Guang about the prospects for his business and a self-assured grin creeps across the young executive's face. It's a smile that means trouble for Canada's nickel-mining capital of Sudbury, Ont., more than 11,000 kilometres away from Mr. Li's office in eastern China.

"Our production has quite a lot of advantages compared to refined nickel," says the budding metals titan, who is all of 30 years old and dressed in a short-sleeve dress shirt and black jeans. "Now, in China, many other enterprises are going to enter this market. Gradually they will take over a lot of the share of refined nickel."

Mr. Li and his company, Jiangsu Mingzhu, are among the many Chinese manufacturers churning out a revolutionary product known as nickel pig iron or NPI. Despite its prosaic name, the alloy has set the global nickel industry on its ear by providing a low-cost alternative to the refined nickel that has typically been used to make stainless steel. Cheap NPI threatens to squelch demand for the refined metal, which is produced in places like Sudbury, as well as in Russia and Australia.

In less than five years, NPI has reshaped the world nickel industry, marking a new stage in China's capitalist evolution. Since it opened itself to trade in the late 1970s, the Asian nation has become famous for two things -lowering the price of manufactured products with its cheap labour costs, and driving up the price of commodities with its aggressive demand. Now it is altering the fundamentals of a vital industrial sector with a homespun innovation.

NPI, a material produced in low-tech Chinese factories, already accounts for as much as 10 per cent of the world's $21-billion-a-year nickel market, more than all the nickel that can be produced annually in Sudbury. Some analysts expect China's NPI producers to double their output this year.

The booming supply of the new product hits hard at traditional nickel miners. Until recently, the world's largest mining firms believed that surging Chinese demand for the metal would last for decades. As a result, fevered takeover battles erupted in 2006 and 2007 for Canada's two nickel giants, Inco and Falconbridge.

But the days of $24 (U.S.) a pound nickel, last witnessed in 2007, are unlikely to ever return. The average Chinese producer of NPI can now be profitable at nickel prices of about $8.50 a pound - just about exactly where prices stand right now. If nickel prices were to surge, China's NPI producers could quickly flood the market with their lower-cost alternative.

"It does put a cap on world nickel prices. If not in practical terms, at least in psychological terms," concedes David Constable, vice-president of investor relations at Quadra FNX Mining Ltd., a Canadian company that began as a Sudbury nickel producer but has diversified its production to focus primarily on copper.

BHP Billiton Ltd., the world's largest mining firm, has already turned bearish on nickel and sold some of its mines. The emergence of NPI was a key factor in the decision, analysts say. They expect the Chinese product's impact to only get larger with time, as more producers enter the fray.

In a worst-case scenario, NPI could usurp all of China's demand for traditional nickel, reducing the global market for the metal and creating a nightmare for firms that paid top dollar for nickel assets at the height of the market. Among the firms that invested heavily were Vale SA, the Brazilian iron ore giant that paid $19.4-billion in 2006 to win control of Inco's Sudbury operations, and Xstrata PLC, the Anglo-Swiss metals conglomerate that scooped up Falconbridge and its Sudbury nickel assets at a price that valued the company at more than $22-billion. (Both Vale and Xstrata declined comment for this story.) Vale's nickel production in Sudbury and Voisey's Bay, Newfoundland, has been crippled for nearly a year by a bitter strike over workers' wages and benefits. If and when production resumes, the company's commitment to exploration and expansion in Canada will have to be made with the threat of NPI looming large.

How did a low-profile collection of Chinese manufacturers upset the plans of the world's mining giants? It's a story about ingenuity born out of necessity. It's also a story about China's emerging entrepreneurial class and its growing impact on the global economy.

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LEMHI COUNTY, Idaho -- Lemhi County and the mining industry have been almost synonymous for the better part of a century.

However, with recent findings of key mineral, cobalt in the hills near Salmon, that history looks to be continuing.

Formation Capital, Inc., a company started and based in Salmon, has been working hard over the past decade to build a facility to mine the cobalt, as part of the Idaho Cobalt Project.

The facility will primarily mine cobalt, the only mine of its kind in the entire United States.

"The U.S. consumes about sixty percent of the world's cobalt, yet we produce none of it, so the benefits are endless," said Preston Rufe, Environmental Manager for Formation Capital.

Rufe and other project officials believe the endeavor will be a huge boost to the area's economy.

Officials say the project will eventually bring more than 150 jobs to the area, 30 of which will come as a result of the mine's upcoming construction.

The project has even brought native Salmonites back home for rare job opportunities.

"I had to go out and get my education elsewhere, and find a job outside Salmon as well because there weren't any jobs here," said Annette McFarland, a project engineer with Formation Capital.

McFarland says she's happy to be home.

"It's just been an absolute blessing to have this opportunity to be back home and working in something I love," said McFarland.

Other employees agree.

"Everywhere I go, somebody asks me when the mine is going to open," said George King, project geologist, "people want this, local businesses want it, and it's a good thing that there's light at the end of the tunnel."

Cobalt is normally mined overseas in Africa and other locations outside North America.

The metal also has many practical uses.

"Cobalt is a huge component of our renewable and sustainable energies, from batteries to solar elements, to powering turbines for wind generation, and low and behold it's right here in Salmon, Idaho, a beautiful place to live," said Rufe.

The cobalt was discovered back in 1997 in a remote location about 45 miles southwest of Salmon.

Since then, Formation Capital has been conducting studies of the area, drawing up plans, and more recently clearing out space to build the mine.

For now, much of the expensive equipment used for the mine sits in two different locations in Salmon. Most of the materials are found in a remote warehouse which will one day serve as a bus depot for workers to be transported up to the mine site. The rest of the materials can be found in a remote field just outside downtown.

"Right now we're storing the materials, so when the weather clears up, we can get them up to the site and start phase two of construction," said Rufe.

Once the site is suitable for construction, Formation Capital expects to go into full-scale building mode, and hopefully have the mine ready for work by August 2011.

So far, Formation Capital has invested $50 million in the project.

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In this exclusive interview with The Energy Report, Gordon Monk of Performance Capital Advisers discusses the worldwide movement toward green sources for energy production. Gordon explains how cobalt and lithium are linked to solar and wind power. He also talks about why he prefers primary producers of cobalt to those that obtain cobalt as a byproduct of other operations.

The Energy Report: Gordon, your focus these days is on moving from conventional energy to green energy. What particular sectors of green energy are you focused on?

Gordon Monk: There are a number of sectors that I'm interested in. There's been a tremendous move of capital to wind in recent years. Certainly solar is another area that's also gaining a lot of attention. One of the areas that I'm focused on right now would be hybrid electric vehicles, specifically the batteries containing cobalt.

TER: There have been some failures with batteries containing cobalt. Some reports indicate there is a small possibility of those batteries catching fire. Do you have some information that you could share with us on this topic?

GM: As I understand it, the problems associated with those batteries had to do with overheating. The chemistry was such that the batteries would release a small amount of oxygen, which then creates the chance of possible combustion. There's been a lot of technology focused on the problem. Modern batteries now are equipped with microchips that control the discharge conditions of batteries. There have also been additives to the batteries which have more or less solved the problem. With the problems being solved, the benefits of using those batteries far outweigh the negatives of the past.

TER: Do you see cobalt continuing to be used in these types of batteries?

GM: Oh, absolutely. A report by J.P. Morgan suggests that the current output of around 740,000 units is going to increase to 12.9 million by 2020. So I think that in itself is a pretty strong indication that cobalt is here to stay.

TER: You mentioned that wind and solar are really starting to gain some momentum. Are there some public companies that you're following in these areas?

GM: There's NaiKun Wind Energy Group Inc. (TSX.V:NKW) and Western Wind Energy (TSX.V:WND). Western Wind is already operating. They have a large wind farm in California. NaiKun is sort of in the development stage. They're looking at building a massive wind farm in the Hecate Strait in the waters off the coast of British Columbia. They're going through their approval process at this point. So those are two interesting ones that I've been following.

TER: What do you find interesting about them? Their potential?

GM: Yes, it falls into the whole movement to green. In recent years there's just a tremendous focus on the environment and the environmental problems associated with conventional energy. I can speak to oil and gas and coal, the usual culprits. I find solar and wind fascinating because they solve a lot of the problems associated with greenhouse gas emissions. The capital flows that are going into these areas suggest to me that they are here to stay. I think there are tremendous opportunities in the space.

TER: How is cobalt connected to solar and wind technologies?

GM: Cobalt plays a role in renewable solar panel technology and wind generation. Cobalt is also used as a super alloy in wind turbines.

TER: So you see increased demand for cobalt because of wind and solar technologies, in addition to batteries?

GM: Yes, because of the batteries and because of the green movement in general. Cobalt is not just found in batteries and that's something that's key. I think a lot people misunderstand that. Batteries currently account for around 26% of the market for cobalt. Super alloys, which include turbine blades and heat-resistant steel, account for another 23% to 25% of the market. It's underappreciated about what it can do.

TER: Are there any cobalt companies that you find interesting?

GM: I can comment to two primary cobalt producers. One of them is Formation Metals Inc. (TSX:FCO). The other one is Puget Ventures Inc. (TSX.V:PVS). I like them both for similar reasons. They both are socio-politically-operated in friendly areas. Puget is in Canada. Formation Metals has large projects in the States. When you look at where cobalt comes from nowadays, the majority of it comes from the Congo. Only about 15% comes from primary cobalt producers. So I think there's tremendous opportunity and I think there's going to be, not pressure, but perhaps incentive for investment in primary cobalt producers such as Puget and Formation.

TER: Are you inferring with your comments on Congo-based producers that investments in more mining-friendly countries will increase the value of these two particular companies?

GM: Well, yes, if you take a look at the relative size. These two companies, if you put them side by side, are very small as compared to some of the other operations out there. Having these operations in friendly territories is a bonus. Both of these operations are very small as compared to the companies operating in, let's call them, less-friendly geopolitical areas. What that presents to me is an opportunity in each of these companies for growth. Again, referencing that J.P. Morgan article, there's going to be just a tremendous demand that's going to be more and more important. What we need to see is more cobalt being produced in friendly areas. So that's why when I speak of those two companies I think there's tremendous potential.

You don't want to be operating or producing in an area that's prone to political unrest. You have a situation where such a large percentage of production occurs in one area that historically has had political problems. So if all of a sudden there's a problem, you have a worst-case scenario where 30% of production goes away. You've got yourself an issue.

TER: So it's diversification, in essence.

GM: That's exactly right.

TER: Cobalt is generally thought of as a byproduct of other operations. Is that correct?

GM: Yes, that's right. Cobalt comes as a byproduct from copper, as well as nickel, historically. As I said, only 15% of world production comes from pure cobalt. I'd like to see more, just because it won't be a slave to other metals in terms of output. So if we can have more primary cobalt producers, things are going to be a lot better from a stability standpoint.

TER: So Formation and Puget, in addition to being in friendly jurisdictions, also could be the low-cost provider.

GM: That's right.

TER: If the demand for cobalt continues to go up, do you see companies starting to produce cobalt exclusively?

GM: Yes and no. I think that's why the opportunity really lies with the primary cobalt producers. That could happen, but when you start taking a look at the percentages of cobalt that are coming out as a byproduct, I don't really see any scenario where they'd necessarily switch to extracting just to get the cobalt. I think the opportunities again lay with the primaries.

TER: Looking at green technology, what sort of timeframe do you see before things really start to get active?

GM: I think the argument can be made that things are already starting to get active in the area. You're starting to see orders in the billions of dollars for units for these hybrid electric vehicles, HEVs. So I think we're just getting started in terms of the space right now. It's a movement. This green movement is unstoppable at this point with all of the focus on the environmental issues.

I should also like to point out that I'm one of those who believe that cobalt has a relationship to the price of oil. We've seen oil moving up in recent times. That's an influence on cobalt and on these hybrid electric vehicles. That influence is from a substitution standpoint. That's only going to increase awareness and I think increase demand for substitutes.

TER: With the increasing amount of focus on the green technologies, what's the long-term impact going to be on conventional energy sources?

GM: That's a good question. I think conventional is here for a while. It's just so ingrained in the economies of the world. These movements to green, while they are tiny as compared to consumption, the movements themselves are significant enough where these kinds of metals---cobalt, lithium---they can't be ignored. Because when you start putting these on a chart, when you look at the demand perspective, it looks like a hockey stick. The demand is just going to be tremendous. It's going to take a long time to replace conventional, if ever. As long as this green movement is going on, and people start caring about the environment, there's going to be tremendous up pressure.

TER: Is that going to increase as governments start instituting more restrictions on conventional sources?

GM: I think so. It's not necessarily restrictions on conventional, but rather requirements on hybrid. There have been a number of initiatives in recent times where carbon emissions have to be cut by "x," or total energy production needs to come from green sources. So it's not like they're saying you have to stop. What they're saying is more that it is going to have to come from these other areas. So, yes, to a certain extent legislative action will play a role.

TER: Where does the investment opportunity lie for green technologies? Are these companies actually doing a lot of development, or is it that they're purchased by larger companies?

GM: You know that's a very interesting question. If I was a large multinational producer, if I was a Chevron, I'd be looking at replacing my traditional revenue models. If you've got the opportunity to do that by acquiring profitable companies in the green tech space I'd absolutely do that. You're going to see a lot of these companies start off as fledging green producers of energy, and then be acquired by the larger companies as a way of those bigger companies augmenting traditional revenue models. So absolutely there's going to be lots of pick-ups.

TER: Are you seeing any opportunities in natural gas? Some people are saying that there simply isn't enough supply, while others insist there's really going to be an opportunity going forward.

GM: I'm one of those at this point that agree with the supply issues that you've mentioned. There's been technology, like horizontal fracking, which basically makes available a tremendous amount of natural gas from historical traditional sources. So it's going to take a while for the supply to clear out. That's sort of the short-term view. I think the long-term view is it's a cleaner source. We're going to continue to need power. I look at China as essentially going through the industrial revolution right now, and just barely scraping the surface of what total consumption ultimately will be there. So I don't think you can really discount any source certainly in the long run.

TER: Do you consider natural gas a green technology, or more of a conventional energy source?

GM: I look at it more as conventional. Just by virtue of it still being a fossil fuel.

TER: The LME recently issued its first warrants for cobalt. How do you think it's going to impact cobalt in general?

GM: I'm glad they did that to cobalt and to moly as well. It's going to be great for the companies to basically price hedge. You're able to lock in the price that you sell cobalt for. It smoothes the peaks and valleys of price fluctuations. It adds a level of transparency as well to the metal. Certainly from a tracking standpoint it's a whole lot easier to find it. It's a leveler. It's a hedger. I think it's a great development for cobalt.

TER: Lithium and cobalt are linked, of course, because of lithium-cobalt batteries. Lithium has been the hot story in the energy markets. Do you see cobalt creating the same kind of buzz?

GM: Yes. I think it's a matter of awareness. Absolutely lithium has had just a tremendous amount of buzz. There was a while there, when I was a broker, that you'd be seeing little lithium companies spreading up all over the place. The second they had a press release that there was lithium you'd see the price spike. I think that the same potential exists for cobalt, but you know, again, it's just about awareness. I don't think people understand how important cobalt is in HEVs, as well as the other uses, such as the super alloys that I mentioned. I think the awareness is going to catch up, and therein lays the opportunity.

TER: Are there any other energy sectors that you're keeping an eye on?

GM: Oil and gas is certainly an area that I've had some experience in. I think it's interesting that we're creeping up again in the price. We'll see if that backs off.

TER: Do you see oil at some point going much higher than it is right now, or getting to the $100 per barrel point again?

GM: It's funny how you start hearing those comments as it starts creeping up to $100. I don't know. I think it's due for probably a correction to the downside. I have trouble seeing why it is where it is right now.

TER: China is growing massively in their industrial revolution and requesting a lot of solar investments. What are some interesting plays for investors?

GM: The China question is interesting to me from an investor standpoint. A lot of the investments you see going on in China involve a lot of private companies being formed, private companies raising money in the solar space. Obviously investors can't participate in that. Again, it's almost a cobalt story because these technologies also require large amounts of batteries, and by extension, cobalt. So it's difficult perhaps to play it directly, but again it comes back to cobalt.

TER: Critics complain that a lot of these green technologies, such as solar and wind energy, are only surviving because of government subsidies. Do you agree with that? What happens if those government subsidies are removed?

GM: Well, it's a technology question, isn't it? It's taken government subsidies to get them to where they are right now, and subsidies are also driving technologies to make them more efficient, which then brings the cost down. It's a profitability paradigm. We've already seen tremendous developments in alternative energies, which are now almost as cost effective when you compare them against the price of, let's say, oil. We're going to get to a point where these things are profitable on their own, if they aren't already. Aside from that there's this global movement towards green. People want to stop killing the planet, to put it bluntly. So I think all of these technologies that I referenced are here to stay.

TER: Gordon, we appreciate your input.

Gordon Monk has been involved in finance in a variety of positions, most recently as founder and principal of a boutique merchant/investment bank, Performance Capital Advisors in Vancouver. Performance Capital specializes in buy-side and sell-side transactions as well as the facilitation of international investment in Canada. Prior to this role, Gordon Monk was a licensed Investment Advisor (Canada & the U.S.) with one of Canada's leading full-service investment houses where he focused on equity financings. Additionally, his experience includes operations management, debt syndication, private financings and start-up efforts. He has extensive buy-side and sell-side contacts, which has allowed him to be successful with numerous, multijurisdictional fundraising efforts. He has also taught university business in areas of finance, start-ups and investment management.

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