By Christopher Briem, on February 18th, 2011
So I saw the notice that some Port Authority debt was being rated and didn’t think much of it.. Of course, the way this works is that new debt ratings like that don’t normally happen spontaneously, but reflect some new debt offering or other big change. So it comes as no big surprise that the Port Authority is paying a big penalty to get out from some variable rate debt.
$39 million bucks… I wonder what it would have cost if they dealt with it earlier? No biggie.
Something I should have caught… or maybe I did? I think it is the same debt mentioned here in 2008. If it is the same debt, then the story today is far less interesting than it could have been. There is, or was, at least the theoretical possibility of foreclosure on some “T” cars somewhere woven in there. I have this image in my head of the cars being loaded onto barges for shipment down river and then shipped to Belgium or something.
I also don’t get the line about this debt becoming “unpredictable” and thus the reason they had to shell out nearly 40 mil. I think there are innumerable ways to hedge a debt instrument to make your budgeting less volatile. Makes no sense as transcribed. They basically chose to borrow in a highly risky way and chose not to hedge it in any way.
Alas… water under the bridge and I like the general theme that this was all just a problem others have gotten into. No, many many places never got into these binds. But let’s ask the rhetorical question again and ponder what other variable rate, auction rate or ’swaption’ debt is still out there looming ready to hit someone’s bottom line. Say large public agencies with big debt outstanding. Some others with letters of credit about to expire?
Bueller?
By The Energy Report, on February 18th, 2011
 BMO Capital Markets Mining Analyst Ed Sterck projects a very moderate $60/lb. uranium price in 2011, but that shouldn’t stop you from investing in the uranium space. “This is a sector that is very prone to sentiment and, at the moment, the sentiment is building toward the possibility of a price spike,” he says. He also expects to see more M&A activity in the sector, particularly among uranium juniors with reasonably priced projects. Read on to find out which companies Ed likes in this exclusive interview with The Energy Report.
The Energy Report: London, where your office is, is the financial capital of the world and uranium equities remain a large portion of your coverage universe. Could you tell us about the institutional investor appetite for uranium equities now and over the last four to six months?
Ed Sterck: Well, it’s certainly picked up. When you look back 12 months, the uranium market was pretty uninteresting for the average institutional investor. Prices had remained fairly flat until about six months ago. Since then, obviously, the spot price of uranium has picked up markedly and with that, we have seen a return of investor appetites for uranium plays. I think that’s slightly precipitated by people’s recollection of the price spike of 2006–2007, and the response that company share prices demonstrated with the price spike. I think it would be fair to say a number of the investors looking at uranium again are hoping something similar will unfold.
TER: Are you seeing an increase to the $130/lb. range as was the case in 2007?
ES: My analysis is a little more subdued than that. I actually think that uranium supplies will be adequate for the next several years, and then enter into a deficit at the end of the current decade. If you were to look at the supply and demand picture as I see it, then I would expect the price to be determined by the marginal cost of production. On that basis, I am looking for a price of $60/lb. in real terms for the next couple of years, and then a little peak at $70/lb. in 2013 and 2014 before coming back to a long-term price of $60/lb. That said, the uranium market is small and very sentiment driven. So, there’s certainly the potential for a price spike, perhaps regardless of the underlying fundamentals.
TER: You talked a little about institutional investors’ growing appetite. Is there anything different about the types of investors entering the market this time around? Have you noticed anything unusual?
ES: No. I think it’s a similar collection of people, though the generalist funds are looking at the uranium space at the moment. But I think there is a difference in the way investors are looking at each of the individual stock opportunities, certainly in terms of those companies that were exploration and development plays back in 2006–2007. Many of those companies are now in production, and I think there is more of a focus on companies producing meaningful amounts of cash flow. So, rather than just buying those stocks on the basis that the uranium price might go up, I think investors are being selective about which stocks they choose, expecting some stocks to actually have a great return for shareholders on a peak-cash flow basis.
TER: So the last run-up in uranium prices funded a number of projects, and the investors that got out of those stocks when uranium fell to below $40/lb. are coming back. But many of those projects are in production or coming into production and generating cash flow. So, those projects are far less speculative.
ES: They are probably far less speculative than they were in the past. What I was trying to angle at is that I think people were a bit less discerning about which stock they invested in back then—like anything with “uranium” in its name was worthy of investment given the price run-up. Now, investors are saying, “Okay, I expect this stock to outperform that stock on the basis that it’s going to generate meaningful cash flow, whereas the other is going to struggle to give a decent return to shareholders.”
TER: Do you think that’s directly as a result of what happened in 2008?
ES: I think you’ve raised a good point there, and I think that it probably is. Some investors did get their fingers burned last time and perhaps now they are being a little more cautious. You know, once bitten, twice shy.
TER: What are some companies that you expect to generate solid cash flow that discerning investors are taking a closer look at?
ES: Well, one of the problems is there’s a limited selection of pure-play listed producers out there—there aren’t many options. Look at the biggest companies, like Cameco Corp. (TSX:CCO; NYSE:CCJ), the share price of which has performed extremely well over the last six months or so. Cameco sells its uranium production into a contract book, so it has less exposure to the uranium price than some of the other producers. Consequently, it might make less for an investor than some of the mid-cap producers. On the other hand, given Cameco’s size and liquidity, it might be the only option for the generalist funds coming into the space. We look a bit further down the food chain, toward the mid caps that will demonstrate a great amount of growth in cash generation.
TER: What are some of those mid-cap names?
ES: One example would be Paladin Energy Ltd. (TSX:PDN; ASX:PDN). It was an exploration-development play back in 2006–2007, and it now has two mines in production. It’s running into a few difficulties but, over the next couple of years, it should have a stronger production growth profile than Cameco. So, one would suspect—coming from a small base, of course—that the relative improvement in cash flow will actually be greater than Cameco’s.
TER: You said in a recent research report that Paladin looks fully priced and is receiving a market premium for management and mergers and acquisitions (M&A) appeal. Do you see consolidation on the horizon in the uranium sector, or is that a little farther off?
ES: No, I think that will be one of the big themes this year, though I anticipate it will be the large- and mid-cap guys consuming some of the smaller companies with good projects. One recent example would be Paladin buying Aurora Energy Resources, Inc. from Fronteer Gold Inc. (TSX:FRG; NYSE.A:FRG). There are some political risks associated with that particular project, but that’s the kind of transaction I expect to occur.
In terms of the bigger companies, there might be acquisitions or a merger of equals but I think both events are unlikely. For example, I think Cameco buying Paladin is unlikely—I don’t think Cameco could afford Paladin right now. Acquisitions of mid-cap companies are more likely to come from higher up the food chain, perhaps by the power utilities, principally out of Asia, looking to secure production. We’re talking about companies like China National Nuclear Corp. (CNNC) or China Guangdong Nuclear Power Co. (CGNPC) looking at a company like Paladin and thinking, “China’s got a very ambitious nuclear growth program, which will require uranium to fuel it. Rather than buying a project and developing it ourselves, perhaps we should just go and buy current production.” I think that’s really why Paladin has M&A appeal because it’s the only one of the senior or mid caps that actually doesn’t have a significant minority shareholder or a shareholder with a potentially blocking stake.
TER: It probably wouldn’t be all that strategic for Cameco to purchase Paladin’s assets over some right in its backyard in the Athabasca Basin that belong to Denison Mines Corp. (TSX:DML; NYSE.A:DNN) or smaller companies like Hathor Exploration Ltd. (TSX.V:HAT). If Cameco wants to see tangible appreciation in its share price, could it be looking at M&A activity in the basin?
ES: My feeling is that Cameco already has a big land resource in the Athabasca. But the market gets so excited about companies like Denison and its Wheeler River project, which is starting to look really interesting. However, the market has given such a big premium to Denison for Wheeler River’s exploration potential that Cameo might balk at paying the premiums currently demanded to acquire those assets.
Conversely, although it’s not in Cameco’s “backyard,” buying assets in Africa might not increase its geopolitical risk, strangely. For example, Namibia, where Paladin’s project is located, is probably one of the most mining-friendly regimes around at the moment.
TER: You mentioned Denison is receiving a market premium for the Wheeler River project. But in a recent research report you said the premium on Denison also involves its M&A appeal. So, if it’s not Cameco, who would be looking at Denison?
ES: The other possible candidates out there include other mid-cap producers or even some of those power station organizations I mentioned. Of course, for a non-Canadian company to buy Denison, it would have to do so in conjunction with a Canadian company that would take a majority stake in the project because that is required under Canadian law.
TER: Denison recently said it would produce 1.2 million pounds (Mlb.) of uranium oxide this year. In your research, you said Denison’s particularly sensitive to uranium price rises. Is that guidance in line with what you thought it would be?
ES: I think the guidance the company gave was a little better than I had anticipated, but it’s such a small amount of production that it isn’t a really big driver of the stock. The stock value is driven by its exploration portfolio and the market’s expectation for Wheeler River rather than earnings from uranium sales.
TER: Why is Wheeler River so important to the company?
ES: Given that Denison’s current production is a relatively small component of its valuation, its exploration projects are the main value driver. If we take a step back, projects in the Athabasca Basin tend to be very small, very high-grade deposits. As a consequence of their small size, they can be very difficult to find through geological exploration. So, an awful lot of money must be spent to make those discoveries, and for most companies that work will amount to nothing.
One of the reasons that Wheeler River is interesting is because Denison has encountered high-grade uranium in a large alteration halo, but it’s also finding that the high-grade mineralization continues as the company drills farther away from the initial discovery. On top of that—and I think this is as interesting as the resource Denison has defined to date—the geological situation of the ore body is very analogous to Cameco’s McArthur River deposit, which is one of the world’s largest uranium mines. If Denison has something similar to that, it could be very appealing for the company indeed. However, the timeline to production even for a really interesting project like McArthur River is between 10 and 20 years. Even if Denison has found something really exciting, we’re still a long way from seeing any uranium production even if it determines it’s an economically viable deposit.
TER: Let’s talk more about M&A activity. Do you expect that to be geographical in nature? Or should we look for more diversification in terms of exposure to uranium in a given locale versus another?
ES: Well there are a limited number of countries in the world that have economic uranium deposits at the current uranium price. Probably what we’ll see is more people looking to acquire projects in areas that, in the past, faced political opposition to uranium mining but now are allowing mining. An example would be Western Australia where there are numerous juniors with small- to medium-sized deposits that might be available for a reasonable price. That’s one of the things we could see happening.
There’s also some interesting exploration happening in places like Mali and Botswana. We could see people looking to pick up some exploration portfolios hoping to find a new uranium-producing district. On the other hand, I’m not sure the senior companies are prepared to pay any price for assets. Historically, M&A across all commodities tends to be fairly price sensitive. If the market speculation that’s building with the current increase in the uranium price translates into large market valuations for some of these projects, then they might not be that appealing to the seniors and mid-cap producers.
TER: But you’re predicting $60–$65 uranium four years out, so it seems like the price will be fairly static.
ES: Yes, but by using my assumptions for production and sales, I can roughly calculate the implied uranium price the market is paying for uranium stocks. In most cases, it’s significantly higher than the current uranium price. We’re talking +$100/lb. for current producers and $60/lb. for exploration stocks, because the market’s expectation is that uranium prices will continue to rise. Exploration stocks imply slightly lower uranium prices because the market is discounting development risk. However, if prices stay at $60–$65/lb. in real terms for the next four years, the market tends to get bored with things staying static, and I think we would probably see a reduction in those premiums. If I was a mid-cap producer with my price outlook—and I don’t think any of them share it—I would probably choose to sit on my hands and wait to pick up assets at a cheaper price.
TER: Has there been a noteworthy increase in uranium juniors seeking financing for uranium plays, or do you think there will be?
ES: We haven’t seen a significant amount yet, but given the uranium price rise and increasing investor interest in the space, we’ll likely see a pick up in the number of juniors looking to capitalize on their higher share prices in order to raise capital.
TER: One junior, Australian-based Bannerman Resources Ltd. (TSX:BAN; ASX:BMN; NYSE:BMN), recently completed a $15 million private placement at AUD$0.50/share. That placement was oversubscribed. Is that telling us more about the demand for uranium equities or Bannerman’s prospects for further growth?
ES: I think it’s telling us more about expectations for future uranium prices than anything else. Bannerman is a company with a good management team; however, though its Etango Project is fairly analogous to Rio Tinto’s (NYSE:RIO; ASX:RIO) Rössing mine, it suffers from a lower grade. In my mind, the oversubscription is an option on high uranium prices. Investors are expecting uranium prices to continue rising; and for Bannerman, based on my estimate, there will be a threshold price at which Etango makes sense. At that point, Bannerman’s share price could reflect the improved project economics.
TER: In a recent research report, you said Bannerman basically needs $70/lb. uranium to show “appealing economic returns.” However, you also said management could accelerate development if things change. You have a Market Perform rating on Bannerman right now. What do you expect from that junior in the short to medium term?
ES: Bannerman is in the process of finishing its feasibility study. Eventually, it will announce the study’s findings to the market and how it proposes to go about developing the Etango Project. It wouldn’t surprise me, though, if Bannerman accelerates the rate at which it’s doing that work. We could get the results of that feasibility study sooner rather than later, probably around midyear.
TER: Have you visited Etango?
ES: I have, yes.
TER: What were you thoughts after your visit?
ES: From a technical perspective, it’s fundamentally low risk because the style of mineralization is similar to the Rössing mine, which has been in production since the 1970s. It’s really just the grade that’s the issue. If uranium prices continue rising to the point that grade is no longer the controlling factor, then the project could look pretty appealing.
TER: What sort of grade are we looking at?
ES: The current grade is around 220 parts per million (ppm).
TER: What would be considered high, or even average, grade?
ES: If we look at what they’re mining in the Athabasca Basin, you’ve got average grades there in the 18%–20% range. Now, compare that to Extract Resources Ltd.’s (TSX:EXT; ASX:EXT) Rössing South deposit, which it’s renamed “Husab.” That’s considered to be a highish-grade deposit for an open-pit target in Africa, and the average grade there is around 470 ppm—that’s 0.047% versus 18%–20% in the Athabasca. Although Athabasca Basin deposits are typically much higher grade than those in Southern Africa, the economic viability of the deposits can be fairly similar because you have fewer technical challenges in Southern Africa than you might have in the Athabasca Basin.
TER: The deposits in the Basin tend to be smaller, too.
ES: In terms of total contained pounds, some of Cameco’s are fairly similar but with the high grade, the deposits occupy a much smaller volume of rock. The problem is, they’re usually more than several hundred meters underground and saturated with high-pressure water. So, in order to mine them, you have to freeze the ore body by pumping a high-saline solution through the ore body at -35ºC. That adds to your costs versus an open-pit operation in Southern Africa.
TER: Could you tell us about some other uranium names that are poised to benefit from the current price environment?
ES: One of the other stocks would be Extract, which I already mentioned and which is one of my preferred stocks. Its Husab Uranium Project in Namibia is fairly analogous to Rössing South, so it should be fairly low risk. It does suffer from a relatively large amount of overburden, which has to be stripped off the deposit before it can be mined. But then it has the benefit of being a significantly higher-grade than Rössing.
TER: Do you think Rio Tinto would take a run at Extract given the Rössing deposit’s proximity to Husab?
ES: Rio Tinto already has an effective 21% stake in the company, including an indirect stake through Kalahari Minerals plc (LSE:KAH; NSX:KAH), which has roughly a 45% interest in Extract. I think if Rio Tinto were to take out Extract, it would also have to buy Kalahari. That would be quite a difficult transaction for Rio to undertake. The company tends to be very conservative in the commodity prices it uses for internal evaluation of projects and investment opportunities. If we look at the way uranium prices have behaved in the last five years, Rio Tinto may be using a moving average, which would put the uranium price down to the low- to mid-$40s. For Extract, the implied uranium price is on the order of $60/lb., which might look too expensive for Rio Tinto currently.
TER: Are there any other companies you like?
ES: The only other significant producer is Energy Resources of Australia Ltd. (ASX:ERA), which is already 65% owned by Rio Tinto. I don’t see that as being a significant takeout target. ERA’s share price has underperformed the peer group significantly over the past 12 months due to a number of production issues that necessitated the company make spot uranium purchases to cover its contracted delivery commitments. Australia is suffering from an extremely wet season, which has resulted in ERA halting production for three months—something that’s driven the stock price even lower. Although ERA is not having the easiest of times, its share price is now so low it might show some appeal on a relative-valuation basis versus the peer group. Potential positive catalysts include the wet season ending without the open pit being flooded and positive decisions on a move to underground operations.
TER: Please leave our readers with some of your thoughts on the uranium sector in 2011.
ES: As you know, I’m pretty cautious on the uranium price outlook. As I mentioned, this sector is very prone to sentiment and, at the moment, sentiment is building toward the possibility of a price spike. I’m telling my clients this is not a sector that I anticipate pulling back significantly—unless the uranium price gets too far ahead of the underlying fundamentals. It might not be a bad place to park any spare cash investors may have because they’re unlikely to lose a significant amount of money by investing in the space, given the current sentiment.
TER: Thanks for talking with us today, Ed.
Edward Sterck covers uranium, diamond and platinum group metal mining companies for BMO Capital Markets. He joined BMO in 2007, prior to which he was a mining analyst at Hargreave Hale. Before working in mining research, he spent more than four years trading government bond futures on a proprietary basis. Edward holds a bachelor of science in geology with honors from the Royal School of Mines, Imperial College London.
By B.P.T., on February 18th, 2011
At 8:00 AM EST, Federal Reserve Chairman Ben Bernanke will give a speech on global imbalances and financial stability at Banque de France Financial Stability Review in Paris.
By Rok Spruk, on February 17th, 2011
The idea of charter cities, originally promoted by Stanford economist Paul Romer, sparked a lively academic debate in the field of economic development. The idea of charter city rests on the premise of creating special reform zones within countries. The reform zone would not be governed by the prevailing system of formal and informal rules within countries. The concept of charter city would serve as an intellectual laboratory of ideas in which governments would be let to quickly adopt innovative system of rules. The purpose of charter cities is the empowerment of incentives in world’s less developed countries to develop human capital skills, hence, to increase the level of productivity and real wages that could foster the increase in the standard of living. By and large, the core idea of building a charter city means building a city of about 1000 sq. kilometers in the unoccupied land of the host country and adopting an innovative system of formal and informal rules provided by the source country. The example of charter city include selling Guantanamo to Canada and turning the little piece of Cuban land into Caribbean Hong Kong by adopting a formal system of rules and governance based on limited government, strong rule of law and free market; and turning the new territory into manufacturing hub that could serve as a source of income for workers across Caribbean islands such as Haiti. The charter city would not only provide the opportunity for testing intellectual ideas and innovations but also migrational opportunities for individuals from world’s most impoverished countries such as Haiti. The coordination of the charter city is managed by a triangle. First, the host country would provide the piece of land. Second, the source country would provide the infrastructure, human capital and ideas. And third, the guarantor country would provide the assurance that the charter would be respected by both countries.
The concept of the charter city has gained significant attention by development experts in discussing developmental malaise in world’s least developed countries in Africa. The empirical evidence on Africa’s underdevelopment is striking. It suggests a blinking interplay of corruption, institutional fragility and state failure. According to African Development Indicators, about 75 percent of firms in Cote d’Ivoire identify corruption as the major constraint in doing business. In Ethiopia, less than 2 percent of females enroll tertiary education. Moreover, the average Ethiopian female can expect only 7 years of total schooling. In Liberia, about 11 percent of married women partake a contraceptive use by any method. Hence, one third of young Liberian women, aged 15-19. In addition, 60 percent of Liberians live below $2 per day. In Mozambique and Sierra Leone, only 45 percent of young women are literate. A female at birth in Sub-Saharan Africa can expect to experience no more than 8 years of total schooling throughout her life.
The perennial question in the establishment of charter cities is whether the idea can serve as a source of good rules, promoting good governance through low-cost contract enforcement. Institutional fragility of states across world’s least developed countries is largely the economic outcome stemming from wrong development diagnostics, mismatched policy choices and a rigid structure of formal and informal institutional arrangements which resulted in a myriad of bad rules and corrupt political leadership across the specturm of world’s poorest countries. The general conclusion from the lessons of development policy is that in the last century, development policy failed to facilitate meaningful prescriptions for a permanent rise of GDP per capita. In particular, the misdiagnosis of essential development dilemma is not a consequence of technical failure in delivering concrete solutions to applied issues of economic development but a consequence of mismatched theoretical foundations which supplied wrong assumptions. Theoretical models of economic growth and development in late 1950s and early 1960s rested on the assumption on output per worker as an increasing and diminishing function of the capital per worker. Although the validity of the neoclassical growth theory remains undisputed, development policy and international aid donors failed to recognize that increasing the amount of aid does not lead to better development outcomes. In fact, the majority of Sub-Saharan countries experienced the relative decline of GDP per capita in the 20th century. In 1913, the GDP per capita of Ghana (in 1990 international dollars) represented 42 percent of the average GDP per capita of European periphery. In 2008, Ghana’s GDP per capita represented merely 8 percent of the average GDP per capita of European periphery. By the available statistics, Algeria was the second wealthiest country in Africa, only after South Africa. In 1913, Ghana was the fourth richest society in Africa, only after South Africa, Algeria and Egypt. In 2008, Ghana’s GDP per capita was ranked 20th in Africa, in the same range as Angola, Lesotho and Nigeria.
The question surrounding the emergence of the charter city is whether it can serve as a treatment to the contagious sclerosis of fragile institutional structure in failed states, marred by poor governance and the lack of law and order, causing the failure to enforce private contracts as to ensure the rule of law and provide the institutional impetus for sound governance and better formal and informal rules. A notable criticism of the institutional fragility in world’s less developed countries pertains to the capture of the state by the political elites. The political elites in world’s poorest regions have provided sufficient conditions for the capture of government and judicial system by incorporating a system of powerful informal arrangements through bloated corruption which consequently impaired investment and ultimately resulted in the expropriation of private property rights. The institutional chaos in the most failed states of the world culminated into behavioral adaption to bad rules. The sequence of harmful economic policies eventually seized upon poor development outcomes such as high rates of poverty, stagnating income per capita, low life expectancy and poor health and education indicators.
The foremost task of the charter city should facilitate the institutional decency to enforce private contracts without transaction cost barriers and ensure a robust system of the rule of law since better rules nonetheless depend on how informal institutions such as culture, habits and behavior embrace the virtues of free markets, limited government and the rule of law. Aside from the essential infrastructural arrangements, the provision of institutional conditions for living under a different set of rules does not necessarily imply sufficient prerequisites for the productivity growth that could, in the long run, transform the charter city from low-wage pool of unskilled labor into high-wage urban agglomeration. What is needed for a charter city to flourish is the acceptance of informal institutions of the liberal society such as the freedom of contract and the freedom from corruption. One should not hesitate that economic and personal liberties in world’s poorest countries are plagued by predatory rent-seeking political behavior as well as contended against the principles of adherence to formal rules. Without a sensory adherence to these principles, it would be impossible to envisage the charter city as a solution to world poverty and underdevelopment.
For a charter city to provide a clear and cohesive framework of rules, it is essential to provide the credibility and predictability of rules. In early 1950s, Hong Kong was a small island chartered by the British who established a system of credibility over centuries. Hong Kong was the only place where Chinese workers were allowed to migrate from the mainland China. The credibility of the rules, emphasizing limited government over extensive government intervention, free markets over regulated command-and-control economy and the rule of law over political discretion and interest-group politics, proved vital in Hong Kong’s steady economic growth in the 20th century. In 1950, Hong Kong’s income per capita was around GBP 2,500. By 1997, the average income per capita rose to GBP 20,000.
The idea of building charter cities to boost income per capita by innovative framework of governance is a valuable alternative to the mainstream development policy. First, setting a charter city in regions such as Sub-Saharan Africa and Latin America would encourage seasonal and permanent migration flows from areas with low population density both on domestic and international scale. David McKenzie and John Gibson examined the impact of New Zealand’s Recognized Seasonal Employer program (link), aimed at encouraging seasonal migration from Pacific islands Tonga and Vanuatu to New Zealand, benefitting employers at home. The empirical evidence and policy conclusions suggest that seasonal migration is offering a triple win since a migrant, the sending country and the receiving country benefit from participating in seasonal migration program:
“Nevertheless, there are several caveats to these conclusions. The first is that development is a long-term process, and some of the effects of the RSE may only materialize over many years of community involvement. These could include positive effects such as greater asset-building, investments and skill development if workers return for many seasons, as well as potential longer-term negative effects of continual absence of family members on family and community relations. Secondly, while the gains to households from this seasonal migration are large, they still pale in comparison to the gains from permanent international migration (McKenzie et al, 2010). A key policy issue is therefore the extent to which seasonal migration can or cannot eventually open up avenues for permanent migration. Finally, as with all evaluations, there is the question of how far the policy details and findings can be extrapolated to other settings and that it was developed drawing on lessons from experiences around the world should provide some external validity. As temporary migration programs are increasingly emphasized in policy discussions, there is likely to be plenty of scope for governments and researchers to work together in the future in assessing how well these lessons translate.”
Second, charter cities would nevertheless spur the diffusion of knowledge into the countries of poor regions in the world. In its most distinctive form, charter cities would be similar to the role of small states in the global economy. For instance, consider Mauritius. Back in 1968, when the island gained the political independence from the United Kingdom, the economic prospects of the country were undermined by rapid population growth, rachitic productivity and overdependence on sugar as the only export industry. In addition, trade policy imposed high tariffs and import quotas to protect sugar manufacturers. Since it was impossible to dismantle the barriers to trade, the government of Mauritius responded by creating a virtual special export zone. Any foreign and domestic company could enter and exit the export zone by retaining the profits earned. Companies within the export zone operated under different rules with no trade restrictions such as tariffs, import quotas, voluntary export restraints etc. Hence, the only entry requirement for locating in the special zone was that companies manufacture only for exports as not to compete with domestic markets. The special export zone proved to be a success story. Productivity and employment rates increased sharply, boosting income per capita and standard of living. In 2010, Mauritius’s GDP per capita ($15,500) is the second highest in the region, only behind Gabon ($14,600). The experience of Mauritius with the special export zone and its consequent impact on the economic prosperity of the island, suggests that institutional competition ultimately rewards the institutional structure with better economic outcomes. The entire concept of the charter city is based on encouraging the institutional competition between charter cities and politico-economic systems in poorer countries where charter cities would be most likely to settle. Low initial level of income per capita in charter cities would encourage low-wage employment with unskilled labor. The experience of countries such as Mauritius, Singapore and Hong Kong suggests that favorable institutional features at the beginning stage of development result in better economic policies, ultimately leading to stable economic growth, higher standard of living and better education and health indicators. In Mauritius, the judicial independence from political influence has been enhanced by delegating the highest court of appeal to the British Privy Council, a royal judicial committee (link), full powers of judicial authority.
Many smaller countries in the 20th century, known for good development outcomes, have adopted roughly similar institutional impetus for economic growth and development. In Africa, countries with the highest level of economic freedom and the lowest perception of corruption, such as Mauritius, Botswana and Namibia, enjoy the highest level of GDP per capita in the African continent. In spite of the abundance of natural resources, Botswana adopted market-friendly economic policies in the second half of the 20th century, conducive to private enterprise and investment. According to World Bank, it takes 152 hours to pay taxes in Botswana compared to Sub-Saharan average of 315 days. In addition, a claimant in Botswana can expect to recover 63.7 cents per $1 from an insolvent firm compared to 8.4 cents per 1$ in Angola, 16 cents per 1$ in Niger and 0 cents per 1$ in Madagascar.
And third, charter cities would vastly improve the infrastructure of the residents, choosing freely to enter and exit the city. Households in countries such as Guinea still lack the access to electricity, forcing students to do the homework under streetlights and use the car park lights to review school notes (link). Despite being one of the largest receivers of aid per capita, Guinea still suffers from the lack of widespread access to electricity. One could hardly believe that the efforts pledged by international aid donors to reduce poverty and improve the standard of living across the African continent, were not sufficient. What created the black hole, such as the above in Guinea, is the institutional structure plagued by persistent corruption, political cronyism and bad governance, creating bad rules and wrong incentives. Charter cities would ingeniously cure the widespread persistence of misrule and political misconduct since the system of rules would be defined by the founding charter of the city. Good prospects of charter cities would require free entry and exit from the city as well as transparent and honest oversight of the respect for rules by independent judicial authority, managed by a guarantor country such as the United Kingdom, U.S. or Canada. In the proposed form, a typical charter city would become a manufacturing hub. In particular, it would enable access to low labor costs and significant economies of scale to technology entrepreneurs from rich countries as well as transparent contract enforcement, law and order and the security of private property rights. On the other hand, cities would enable millions of people from poor countries to migrate to chartered cities and seek employment opportunities in an environment, safe from corruption, political restraint, violence and bad governance. Hence, charter cities would provide a necessary input to the intellectual competition of ideas in economics, law and political philosophy and elsewhere to be implemented in chartered cities.
The concept enables social scientists and development experts a real-world experiment of ideas. Hence, charter cities could provide a safe haven for prosecuted individuals in poor countries, suffering from judicial errors, physical and military violence or illicit property expropriation. The UN estimates that, over the next few decades, 3 billion people will move to cities. The inflow exerts a growing pressure on urban agglomerations. The lack of basic infrastructure and the continuity of predatory misrule could cause a rapid growth of slums in larger cities which, by and large, are the main source of infectious diseases, HIV prevalence and youth crime since the absence of access to clean water, electricity and education are the major impediment to the improvement of development outcomes in poor countries. A charter city could flourish to become an impulsive alternative to the current state of overdependence on foreign aid. However, it should be unambiguously clear that adherence to good rules and governance requires a bold and decisive change in the set of informal behavior; in which corruption, crime and nepotism are doomed to the fullest possible extent by the full enforcement of private contracts and the rule of law.
By The Gold Report, on February 17th, 2011
The Cordillera del Condor region, located on the contentious Ecuador-Peru border, has proven to be rife with precious metals and political risk. In this exclusive interview with The Gold Report, Geologist Bob Casaceli delves deep beneath the earth’s crust to explain why this dynamic region’s formation points to further discoveries in the area.
The Gold Report: Bob, it seems like everyone knows you. How did you get your start in this business?
Bob Casaceli: I first became interested in geology through mountain climbing, which was an offshoot of my ski-racing career at the University of Colorado. My ski teammates would take me to areas to learn technical rock climbing, and I would study the geology of those areas.
I was always intrigued by the Andes. In graduate school, I was very interested in the mineralogy, tectonic origins and lithochemistry of the ore deposits. I studied isotope geochemistry as a methodology of determining the origin of ore deposits and was able to get some consulting work in Mexico, Central America and throughout the Andean region. I worked with some partners who were former colleagues at the Anaconda Copper Company and formed a consulting company called Annapurna Exploration. It was a great springboard to understanding the systems of gold, copper and silver mineralization in the Andes.
TGR: Didn’t you later do some geology work with royalty company Franco-Nevada Corp. (TSX:FNV)?
BC: In the 1990s, I was president and chief operating officer of L.A. Nevada, which was the Latin American subsidiary of Franco’s sister company, Euro-Nevada Mining Corp., which is a subsidiary of Newmont Mining Corp. (NYSE:NEM). My job was to look for royalty opportunities throughout Latin America. I covered the ground quite thoroughly then and worked in every Latin American country. Later, beginning in 2008, I worked with the new Franco-Nevada U.S. Corporation as its chief geologist.
TGR: Did you ever visit Aurelian Resources Inc.’s (TSX:ARU) Fruta del Norte deposit in Ecuador?
BC: I crossed over what’s now part of the property when I was working in the area with my consulting company. We were working in the Nambija and Chinapintza Districts and covered that area when it was even more remote than it is now. I haven’t seen it since the recent development.
TGR: It’s been about two-and-a-half years since Kinross Gold Corp. (TSX:K; NYSE:KGC) paid roughly $1 billion for Aurelian and the Fruta del Norte gold deposit. Could you tell our readers about the region and why it’s highly prospective for high-grade gold deposits?
BC: The primary reason is that it sits atop the main subduction zone of the Andes. A subduction zone is where the oceanic plates from the eastern Pacific Plate are pushed underneath the South American continent and melted. Magmas are generated, which rise and melt the lower crust.
Based on the work I did with isotope geochemistry in graduate school, it appears that the majority of the metals in the melts actually come from the lower crust with a lesser contribution from the mantle. They’re incorporated by the magmas rising above the subduction zone and spending what’s called “residence time” to allow for more melting of the lower crust and further incorporation of the metals that are contained therein. The magmas come up to the surface through fractures in the upper crust and are expressed as volcanoes. They formed a range along the continental margin in the Late Jurassic period about 150 million years ago in the area of Fruta del Norte. The continental margin was evolving from what’s called an “island arc,” where volcanoes are separated into distinct islands and later compressed to form the continental mass we see now—the high Andes, lower coastal ranges and the coast itself.
The magmas, or molten rocks, form the volcanoes—usually stratovolcanoes—for the most part, which are the tall, cone-shaped volcanoes. Subsequent to the formation of the stratovolcanoes, there is time for gases and waters to mix with metals, which partition off into a fluid phase. That fluid phase is the source of the metal deposits. A subduction zone that’s active for many millions of years has a lot of time to generate metal-rich hydrothermal deposits. They deposit upon and enrich each other. That’s the main reason there are many deposits along the South American Cordillera mountain ranges.
There are cross-structures that create open spaces and better intersections that are more permeable. There is oblique subduction, which occurs when a subduction slab doesn’t meet the continental margin at 90 degrees, but rather meets it at an angle and creates what’s called “strike-slip faulting” as a result. That strike-slip faulting causes the rocks to move horizontally past each other and jump in their movement. When they jump, they create these small areas of extension within the jump—or jog—and that creates the open space. Any time there’s open space created above a magmatic source, such as a subduction zone, it facilitates the creation of ore deposits at the surface along the open spaces.
TGR: The biggest gold deposit found to date in that area is Fruta del Norte, which is close to 14 million ounces (Moz.) of high-grade gold. That was the biggest story in the mining industry for years. Something like that would usually spawn a staking rush, but that didn’t happen. Why?
BC: Political reasons, but that’s my bias. The president of Ecuador, Rafael Correa Delgado, has said he is dedicated to nationalizing certain industries, including the mining industry. The reality is that Correa is of the political persuasion that minerals are a part of the realm of the state, but more than just simply through royalty ownership or payments. He has made statements that he would consider nationalizing oil, gas and mining. That definitely put fear into exploration companies and kept many out.
TGR: What role do the indigenous tribes play in keeping development at bay?
BC: Aboriginal people are concerned about the exploitation of their ancestral lands. That’s certainly true in the Amazonas region of northern and northeastern Peru, which borders Fruta del Norte. This movement has been exacerbated by support from Venezuelan President Hugo Chavez and his supporters. I believe that it’s become a more difficult situation because of Hugo Chavez’s financial support, but I have no direct evidence of that—I’ve only heard rumors. The movement has received other support; for example, a leader of the aboriginal movement in Peru was given protection in an embassy in Nicaragua to avoid his capture.
TGR: It’s taken a little while, but some companies are coming to the Fruta del Norte area and exploring again, especially on the Peruvian side of the border with Ecuador. Could you tell us about some of those companies and what they’re doing?
BC: The largest, most obvious one is Newmont Mining Corp., which has been active in that area. However, I believe the company that’s had the best success is Dorato Resources Inc. (TSX.V:DRI; Fkft:DO5). It owns options on claims that are directly on the border, about 25 kilometers to the south of Fruta del Norte and directly across from Chinapintza and Santa Barbara, which are known areas of excellent gold mineralization.
TGR: Dorato has a few targets it’s working on. One of the more promising ones is the Lucero target, where some drilling intersected copper/gold mineralization, including roughly 30 meters averaging 2.85 grams per ton (g/t) gold and 0.37% copper. Could that be a copper-gold porphyry deposit?
BC: I think it is; it has all the earmarks of a copper-gold porphyry deposit from the chemistry that’s exhibited by the mineralogy and alteration at the surface and in the drill holes.
TGR: Those types of deposits are favorable because they could be of interest to major gold and copper producers. Given the political issues in the area, this would have to be a substantial target in order for companies to be willing to get it off the ground.
BC: True, but Dorato’s properties are on the Peruvian side of the border. It’s right on the border, but it’s still Peru. I’ve worked there for many years and have a high regard for the Peruvian people and their support of mining. It is a mining-mentality nation, though there have been some inconsistencies over the years. Recently, legislation was proposed to double the royalties from a 1%–3% range to a 2%–6% range, as well as to put up to a 10% gross sales revenue royalty on gold and 5% on copper.
Nevertheless, Peru is firmly a mining country. I’ve seen many properties develop there. Newmont has made great profits on its mining efforts in northern Peru. The country is a more secure investment than Ecuador. I’m very skeptical of Correa’s administration.
There are, however, other discoveries on the Ecuadorian side, such as the former Corriente Resources Inc.’s Mirador copper-gold porphyry deposit [now owned by Tongling Nonferrous Metals Group Holdings Co. Ltd. (SZSE:000630)] and Dynasty Metals & Mining Inc.’s (TSX:DMM) Jerusalem deposit.
TGR: Do you think Dorato’s Lucero target has the potential to reach the size of Exeter Resource Corp.’s (TSX:XRC; NYSE.A:XRA; Fkft:EXB) Caspiche copper-gold porphyry project in Chile?
BC: Caspiche is a very special area. I had the opportunity to work on the property in the very early days—well before Exeter got there. I’ve followed the work that Yale Simpson has done as executive chairman of Exeter. The company has done a great job. That’s a huge system in a belt of other very large systems. Lucero is the same type of deposit, but I don’t see anything yet that clearly makes Lucero the magnitude of Caspiche. Nevertheless, I have little doubt in my mind that it will be a mine. I don’t know yet if it has the potential to be the size of Caspiche, because that would be tens of millions of ounces of gold.
TGR: You did some due diligence on these projects on behalf of Franco-Nevada, which now has a royalty on the property that’s being optioned by Dorato. How long ago was that and what exactly did you do?
BC: The first deal was a private placement investment in 2008 with an option to purchase a royalty in the future, which hasn’t yet been exercised. In 2009, a second private placement investment expanded the area over which Franco-Nevada’s royalty option would apply. I worked on the second royalty option deal.
TGR: Was Franco-Nevada more interested in Taricori, Lucero or both?
BC: It was initially interested in Taricori because the hope was that it would fit a Fruta del Norte model. It doesn’t, exactly. Fruta del Norte is an intermediate-sulfidation epithermal deposit of Late Jurassic age and Taricori is considerably younger and formed in a sub-epithermal environment.
TGR: It’s in the pull apart basin, correct?
BC: Yes, but the pull apart basin is a complex basin. I believe it was originally part of a back-arc continental rift or extension zone graben formed by upwelled magma. The oblique nature of the subduction slab to the coast created left-lateral strike-slip movement on the north-south structures, which I believe were originally extensional structures that formed from magmas that created the core of the Andes. Pre-existing northwest-southeast crosscutting structures then were pulled apart by the strike-slip movement. It’s a complex mechanism to create open space, but that’s one of the critical things necessary for developing these ore deposits. It’s what created Fruta del Norte.
Lucero, Taricori and Cobrecon, another Dorato property, are on the same regional feature. In Fruta del Norte’s case, it happened in the Late Jurassic. However, in the case of the Dorato properties, it appears that the mineralization is of Late Cretaceous or Tertiary age, possibly some 40–65 million years old. It’s also not truly epithermal, as it is formed at deeper sub-epithermal zones with somewhat higher temperatures in the mesothermal range, more like a porphyry-type system.
It’s still unclear whether these are going to be as big as some of the porphyry gold deposits in Chile, but the Dorato properties still host sizeable deposits that will likely prove very valuable. The grades are excellent, there’s a bit more sulfides, copper and molybdenum involved than in the system in Fruta del Norte, but gold is there, as well.
TGR: What’s the next step for Dorato?
BC: The company has a lot of work ahead developing these large porphyry-style systems and precious metal-zoned deposits. Dorato has discovered three excellent centers of mineralization. There are also other geophysical anomalies that remain to be tested. The company should get some excellent hits in the lower part of the true porphyry system, which is most likely centered beneath Lucero. It has a lot of drilling left to do and a lot of groundwork, but there is a lot of encouragement.
TGR: Do you foresee Ecuador becoming more mining-friendly in the future?
BC: It can and likely will. There are political cycles. Ecuador is endowed with a lot of mineral wealth. It’s a marvelous place to explore and develop mines under the right political circumstances. Eventually, such circumstances will come about. Rafael Correa is no idiot. He allowed the government to give enough assurance to Kinross to make purchases and develop mines. He will allow certain levels of development.
However, the real development of Ecuador and the ultimate realization of its mineral wealth will only come under a different philosophy, one similar to those in Chile and Peru. Companies need encouragement because these are rugged areas—jungle that is difficult to traverse and explore, and there aren’t many roads. Companies need mining laws that will encourage them to take the difficult steps to explore the area. I think that will come, and it will probably be driven by economic necessity.
TGR: Bob, thanks for your in-depth explanations.
Robert J. Casaceli holds a master’s degree in geology from Oregon State University and a bachelor’s in geology from the University of Colorado. His mining career spans 36 years and has involved every facet of mineral exploration for precious metals, base metals and uranium. He is currently president and CEO of Creso Exploration Inc. (TSX.V:CXT; OTCQX:CRXEF). Until recently, he served as chief geologist for Franco-Nevada Corp., the world’s most-respected royalty acquisition company. He has also been president and chief executive of a TSX-listed resource company for more than 12 years and has been involved in the design, funding and implementation of numerous reconnaissance, advanced-stage exploration projects and prospect/mine evaluations in some 50 countries. He was previously president and COO of L.A. Nevada, a subsidiary of Euro-Nevada Mining Corp., for two years. His primary function was the identification and acquisition of royalty interests from mining properties located throughout Latin America and elsewhere in the world. Casaceli has published numerous technical and scientific papers. His technical skills are enhanced by his extensive experience in negotiating mining deals, structuring legal agreements and establishing companies in many countries.
By B.P.T., on February 17th, 2011
By B.P.T., on February 17th, 2011
At 8:30 AM EST, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 410,000 new jobless claims last week, which would would be 27,000 more than the unexpectedly low number released last week.
Also at 8:30 AM EST, the Consumer Price Index report for January will be released. The consensus is that CPI increased by 0.3% last month, with a 0.1% increase in CPI when food and energy are removed.
At 10:00 AM EST, Federal Reserve Chairman Ben Bernanke will testify before Senate Banking Committee on Dodd-Frank reforms, with SEC Chair Mary Schapiro, FDIC Chair Sheila Bair, and CFTC Chair Gary Gensler.
Also at 10:00 AM EST, the Leading Indicators report for January will be released. The consensus is that this index increased by 0.2% last month, which would be the sixth month of improvement in a row.
Also at 10:00 AM EST, the Philadelphia Fed Survey report for February will be released. The consensus is that the index will be at 22, which would be an increase of 2.7 points from the previous month.
At 10:30 AM EST, the weekly Energy Information Administration Natural Gas Report will be released, giving an update on natural gas inventories in the United States.
At 4:30 PM EST, the Federal Reserve will release its Money Supply report, showing the amount of liquidity available in the U.S. economy.
Also at 4:30 PM EST, the Federal Reserve will release its Balance Sheet report, showing the amount of liquidity the Fed has injected into the economy by adding or removing reserves.
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By The Energy Report, on February 16th, 2011
In 2010, some of the best-performing companies in the E&P space transitioned to a heavier focus on oil, which has been strong, and away from natural gas where prices are weak. That trend is likely to continue this year, according to Rodman & Renshaw Senior Analysts Jeff Hayden and Chad Mabry who remain bullish, even though they’re not betting on sustained prices above $100/Bbl. In this exclusive interview with The Energy Report, Jeff and Chad bring some growth and value ideas into sharp focus.
The Energy Report: Your oil price forecast for 2011 is $92.50 per barrel; for 2012, you have it averaging about $90 and $85 thereafter. We’re almost there, so where’s the growth in equities going to come from?
Jeff Hayden: Well, I don’t think stocks are discounting prices at these levels yet; and right now, I think they have room for appreciation. If you look at our numbers, we’ve got a fair amount of upside still to our target prices—and that’s with only an $85 oil price factored in. If commodity prices just hold at $90, we think the group will move higher as the stocks begin to discount $90/barrel. Right now, we don’t think that’s the case.
TER: You recently trimmed your 2011 gas price forecast to $4.30/Mcf (thousand cubic feet) from $4.50/Mcf. If demand is low, why does production continue at the current pace?
JH: You hear the term “shale revolution” thrown around a bunch, but that’s really what it was. With the onset of shales, the U.S. went from a period of expected production declines where we were going to need large amounts of liquid natural gas (LNG) imports to meet our demand—to where we’re actually growing production at a pretty nice clip. Production has been outpacing demand; so, we’re in an oversupplied situation.
TER: Given that, can gas production be profitable?
JH: Yes, I think gas production can definitely be profitable. Eventually, supply and demand will balance out and some normalcy will return to the market. E&P companies are price takers; so, in a typical cycle, when prices fall, the industry cuts back on spending. This causes supply to drop and prices to recover. And when prices get high enough, activity ramps back up, causing the cycle to start over.
However, there are a few things that are keeping the market oversupplied in the near term, including drilling to hold acreage, drilling with other people’s money—thanks to the numerous JV (joint venture) deals in recent years—and strong hedge books. Once we get through these issues, people likely will start looking at the underlying economics and say, “Why are we drilling all these wells into a bad gas tape again?” So, I think you’ll see the rig count come down. You’ll see supply fall and gas prices move up.
While we do think gas prices will move up over time, we don’t really see gas prices spiking to levels seen in the past. We don’t expect gas prices to reach significantly into the double digits for any extended period of time going forward because, frankly, we have just found too much potential supply that can come on if gas prices get north of $6/Mcf.
TER: Generally speaking, are these low gas prices discounted into the equities yet?
JH: Actually, looking at current gas prices around $4.50 on the NYMEX, I would actually argue that natural gas stocks are discounting a higher long-term price than $4.50.
TER: So, gas stocks are not value plays at this time?
JH: I think if you look at the natural gas stocks right now, it’s tough to call them value plays when they’re discounting higher prices than the current strip.
TER: Long term, you think gas prices will go higher. Are you able to put a timeline on that?
JH: Not with any confidence; but I would say that before some normalcy really starts coming back to the gas price market, you need to get through this HBP (held-by-production) cycle and get these hedge books to roll off. So, we think it’ll be 2013 at least before gas prices start to get back toward our long-term gas price forecast of $6 again.
TER: What is your favorite play right now, Jeff or Chad?
JH: You know our favorite stock for a while has been GeoResources Inc. (NASDAQ:GEOI). We think it has a good management team and assets. It’s built up a nice position in two of the more-interesting oily plays right now—the Bakken and Eagle Ford. The company has accumulated roughly 46,000 net acres in the Bakken, and it’s got another 21,000 net acres in the Eagle Ford. GeoResources has been involved in the Bakken for a while as a non-operator with some very good operators, such as Slawson Exploration (private). It just recently kicked off its own operating program in that play and had nice results from its first well, so we expect an active drilling program going forward. The company recently announced an increase in its capex budget to accelerate development, so that should translate into nice production growth numbers. We’re looking for production growth of about 15% in 2011 and roughly 30% in 2012.
TER: Ok, another one that you like?
JH: Another one we like here is Triangle Petroleum Corporation (TSX.V:TPO; NYSE.A:TPLM). Again, we’re sticking with the oily theme because we like oil better than gas. One of the things we really like about Triangle is that, relative to its market cap, it is one of the most leveraged companies to the Bakken. Right now, Triangle has about 15,000 net acres and is looking to push that to 25,000–30,000 net acres by the end of the year. If it’s able to do that, I think there could be significant upside from current levels. You’ve got a stock here that is currently around $7; if it can tack on another 10,000–15,000 acres at attractive prices, I think this stock could get into the teens.
TER: The first thing I noticed about Triangle was its low market cap of $187 million. You could move that stock with some demand for the shares. The $30 million allocated for the development of the Bakken acreage this year sounds like a large investment. Does that have to pay off for the company?
JH: Well, its announced capex budget is actually about $72 million, and $30 million of that is just for acquiring additional leasehold. That’s how it’s going to grow to that 25,000–30,000 net acres. The company has another $42 million for drilling capex. This is a sizeable capital allocation for the company’s size, which is why TPLM went out and made sure it had the financing in place in order to fund this program. As for whether it has to pay off, the simple answer is, yes—if it wants more funding. But with the predictability of the Bakken play, we think that’s the likely scenario.
TER: How about another stock that you like?
Chad Mabry: Sure. Just to talk about one of my names that we recently moved over to our top picks in our preview piece is RAM Energy Resources (NASDAQ:RAME). It’s a value name, and it’s a stock that really hasn’t participated in the recent rally. One of the things it’s been doing over the past few months is addressing its high leverage situation. The company has divested a number of non-core assets, and these were pieces of the portfolio that were more gas weighted. They were non-operating assets for which the stock really wasn’t getting much credit. It was able to use proceeds from those divestitures to pay down some of its debt load and, in so doing, high grade its asset base by increasing its oil weighting. RAME’s trading at a 2011 EV/EBITDA of 5x–6x. One of the intriguing potential catalysts in the near term is a shallow oil-exploration play at its Osage Concession. It’s a Mississippian play in northern Oklahoma that the company’s been pursuing for the past year or so now. It really is just at the first stages of having some initial results, which could really get the stock moving here.
TER: Chad, you said it’s a value play, and indeed it has trailed its peers over the past 52 weeks.
CM: To retrace some of the steps over the past 52 weeks, the stock has seen a fair amount of volatility. The company did announce it was pursuing strategic alternatives, and it got a little ahead of itself for a while as investors priced in a takeover last year. That didn’t transpire, and it corrected a bit.
TER: Ok, another company?
CM: Just staying on the value theme here, another name we like is Energy Partners, Ltd. (NYSE:EPL). One of the exciting things about the company is that it recently underwent a restructuring of its balance sheet and finished 2010 without any debt on the books. It has been addressing a lot of plugging and abandonment (P&A) liability issues, and it has been high grading its asset base, reprocessing seismic, etc. The company recently announced a $200 million acquisition from Anglo-Suisse Offshore Partners, LLC, a private company, on the Gulf of Mexico shelf. These assets are right in EPL’s wheelhouse on the central shelf. They’re very oily and spin off considerable cash flows.
TER: The stock has almost doubled over the past year but, obviously, you believe there’s upside left to it.
CM: We do. Talk about a value name—it’s trading at about ~3x 2011 EV/EBITDA. So, we do think it’s a cheap-looking name here. It’s doing the right things to outperform in the near term.
TER: Is there another company either of you can mention?
JH: Rosetta Resources Inc. (NASDAQ:ROSE) is an interesting name due to the leverage it offers to the Alberta Basin Bakken play. We think it’s got two nice positions—the Eagle Ford Shale, where it’s primarily in the liquids window, and the Alberta Basin Bakken play (not to be confused with the standard Williston Basin Bakken play you hear about). The Alberta Basin Bakken is actually over to the west in Montana. In the Eagle Ford Shale, ROSE has about 65,000 net acres, which are really the driving force behind its near-term production growth and where it’s allocating the lion’s share of capex this year. That should generate some very nice production growth in 2011, as well as in 2012. But I think most investors are looking at what’s going on with the Alberta Basin Bakken as far as really giving the stock the next big move. While I do still believe there’s some upside in the stock based on getting a little bit more credit from the Eagle Ford, the big upside for Rosetta will be the Alberta Basin Bakken, where it has 300,000 net acres, give or take, in the play.
A number of other exploration and production (E&P) companies are there, including Newfield Exploration Company (NYSE:NFX), Crescent Point Energy Corp. (TSX:CPG), Murphy Oil Corp. (NYSE:MUR) and we’ve even heard Royal Dutch Shell Plc (NYSE:RDS.A; NYSE:RDS.B) is in the play—trying to figure out if the Alberta Basin Bakken works. Maybe $4–$5/share of value for the play is currently discounted in Rosetta’s stock price; but, if this works, it has the potential to be worth billions of dollars to Rosetta. It’s not unrealistic to think that the stock could double if the Alberta Basin Bakken really works. And if it doesn’t work, you don’t really have a ton of downside.
TER: When can we get data on the Alberta Basin Bakken?
JH: People are actively testing it right now. Crescent Point has drilled some wells north of the border. Newfield has a drilling program going on in Montana, as well as Rosetta. We don’t follow Newfield, so I can’t say I’m totally up to date on what it’s saying but I think it’s been telling people it’ll be maybe Q2 or Q3 before any results come out from its initial test program. I wouldn’t expect any results from Rosetta until probably Q4. So, it’s not imminent. It will probably be in the back half of this year before we really start hearing hard data points on what people are seeing based on test programs in the play.
TER: Recently, you put out a note on Gastar Exploration Ltd. (NYSE:GST), saying that, for the sake of your model, you were giving no value to the Eagle Ford. Were you being prudently cautious, or do you feel that it can’t match the results another operator achieved south of Gastar’s position?
JH: Well, I think the reason we’re not currently giving Gastar any credit for that is because we’re just being cautious. Gastar is in a different area than the main Eagle Ford play, it’s more in the Woodbine/Eagle Ford area. A private company just south of Gastar has put up some very interesting-looking results based on what we’ve been able to get our hands on, but that doesn’t necessarily mean Gastar’s acreage will work. It has drilled a test well, and we’re waiting on results. So, in general, we try to be cautious regarding how much credit we give companies for a new play or new area of a play until they’ve actually got some results for us. It’s not that we don’t think it’s going to work on Gastar’s acreage. We’re just being very conservative.
TER: Ok, thank you.
JH: Thank you.
Jeff Hayden’s current coverage list: AREX, BPZ, CRZO, CXPO, EXXI, GST, GEOI, GPOR, MHR, NEP, REXX, ROSE, RRC, SWN, TPLM and VYOG.
Chad Mabry’s current coverage list: EPL, GMXR and RAME (all Market Outperform).
Jeffrey Hayden, CFA, is a managing director and senior oil & gas analyst. Prior to joining Rodman & Renshaw in July 2008, he was a senior analyst at Pritchard Capital Partners where he followed the E&P industry. He also previously held sell-side positions at Banc of America Securities and Pickering Energy Partners, as well as buy-side positions at Fischer-Seitz Capital Partners and JP Morgan Fleming Asset Management. Jeff earned a BBA with honors in finance from the University of Notre Dame.
Chad Mabry is a vice president and senior oil & gas analyst. Prior to joining Rodman & Renshaw in July 2008, he was an associate analyst at Pritchard Capital Partners where he followed the E&P industry. He began his career at PricewaterhouseCoopers in Houston and has more than eight years experience in the oil and gas industry. Chad earned a BA in philosophy and an MA in accounting from the University of Texas at Austin.
By Christopher Briem, on February 16th, 2011
Circa 1916 I should mention. Though it does read much like the advertisement from our friend Mr. McKelvey. I saw some other ad similar to that recently, but forgot to grab it to make a copy.
Radium, by the way, was selling for $70,000 per gram at one time around then. That’s nominal, so work it out. Some say radium was first produced commercially here in Pittsburgh. That $70K price dropped by $50K one day when someone found radium in the Belgian Congo. I think that would be considered a bad day on the market.
Back to the present, it’s not too hard to find folks pitching Marcellus Shale for various forms of investment. Looks like ebay is a forum for the pitch. Nothing new in that ad, we’ve caught these before, but this one is a bit more interesting. If you read that ad, it clearly says “no surface rights” and the location is in New York state, though the seller is in Pennsylvania. The ad never mention that New York has a pretty complete moratorium on Marcellus Shale drilling. It does add the nice map of the Marcellus field though. As best I can tell, this property is near the edge of the field as marked on that map. I originally thought it was a joke since the ebay ad starts with “Gasland!”, but I take they never saw the documentary.
I am sure someone knows better than me, but I am pretty sure there is leasing activity in New York State, but I bet a lot of the payments are contingent upon NY state changing the law to allow the development to proceed. So that ad I am guessing is someone trying to make money selling their rights and actually get cash now… Assuming someone realizes that, by definition a speculative play.
By B.P.T., on February 16th, 2011
The Mortgage Bankers’ Association purchase index was released at 7:00 AM EST, and there was a week to week decrease of 5.9% in the Purchase Index and a week to week decrease of 11.4% in the Refinance Index.
At 8:30 AM EST, the Housing Starts report for January will be released. The consensus is that construction on 540,000 new homes were started last month, which would be an increase of 11,000 from the previous month.
Also at 8:30 AM EDT, the Producer Price Index for January will be released. The consensus is that the index increased 0.7% over last month, and increased 0.2% when food and energy are excluded.
At 9:15 AM EST, the Industrial Production report for January will be released. The consensus is that there will be an increase 0f 0.5% in production and an increase of 0.3% in industrial capacity utilization.
At 10:30 AM EST, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in the United States.
At 2:00 PM EST, the FOMC Meeting Minutes will be released, which will provide insight into how the Federal Reserve board governors and bank presidents view the economy.
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