By The Energy Report, on July 29th, 2011
 Oil and gas prices may go up or down, but that doesn’t bother Josh Young, portfolio manager and founder of Young Capital Management. In this exclusive interview with The Energy Report, he tells us why his key to finding potential winners in the oil and gas (O&G) business is based on finding stocks with attractive assets trading at a large discount to their intrinsic values rather than particular commodity prices. This is something Fisher Investments has been great at spotting, time after time.
The Energy Report: Since you last spoke with The Energy Report in April, the O&G markets have been pretty much sideways. What do you think is going to happen in those markets over the next 6 to 12 months?
Josh Young: My investments generally aren’t contingent on specific commodity prices. I do expect that oil will continue to trade in a range and I think that natural gas prices are below the marginal cost of production and should trend up over time. The types of things I’m looking for are really mispriced situations where it doesn’t matter quite as much whether oil is $80 or $120/barrel (bbl.). It only matters that a company is undervalued.
TER: So, basically you’re looking for bargains that are undiscovered or unrecognized by other people. Is that correct?
JY: Yes, I try to find situations where a stock is cheap enough at lower commodity prices that it would still be a good investment and where an identifiable event is likely to unlock substantial value in the near future.
TER: We see all these references to various areas and geological formations such as the Marcellus, Barnett, Bakken and Eagle Ford shales. For those readers who aren’t familiar with these areas and names, maybe you could give us a quick tutorial that could help to make references to them a little clearer?
JY: Sure. I’ll give them in the context of specific investments I’ve made, which run the gamut across some of the better known and more economic shale plays.
The Marcellus Shale is widely known as the most economic natural gas shale play and one of the most economic natural gas formations in the U.S. It ranges from West Virginia all the way up through Pennsylvania into New York. Typically, wells there are economic even at natural gas prices below $4/thousand cubic feet, making them very favorable compared to other gas shale plays.
I have exposure to the Marcellus Shale through an investment in Gastar Exploration Ltd. (NYSE:GST). Gastar is the cheapest way to play the Marcellus on a per-acre basis and has over 15,000 acres in the core of the liquids-rich portion of the play with over 83,000 total net acres in the play. The company has some well results coming out soon from the liquids-rich portion of the play that should highlight their value.
Switching over to oil shale, two of the most favored oil shale plays are the Bakken oil shale up in North Dakota, which ranges across northwestern North Dakota and eastern Montana and the Eagle Ford Shale play, which ranges across much of southern Texas.
I have exposure to the Bakken through an investment in U.S. Energy Corp. (NYSE:USEG). In the early development of the Bakken a couple of years ago, USEG financed Brigham Exploration Co. (NASDAQ:BEXP), which is now one of the largest pure Bakken play companies in the world. U.S. Energy has a fantastic position in, and is trading at a large discount to its peers in the Bakken Shale. Wells there, at current oil prices, earn anywhere from a 35% to 100% internal rate of return, depending on the specifics of the well. Wells come on with very high initial oil production that declines fairly rapidly, but the company gets paid back fairly quickly.
Similar to Gastar in the Marcellus, U.S. Energy is one of the cheapest ways to get exposure to the Bakken and they already have meaningful production and reserves. Eventually the market will discover them and the stock will trade up in line with or potentially in excess of its peers.
The Eagle Ford Shale ranges from dry gas in the south up to a wet gas play with a combination of natural gas and oil or natural gas liquids. Further north, you get pure oil production and very little gas or natural gas liquids. I have exposure to the Eagle Ford from a couple of investments. It is one of the most economic shales to drill. U.S. Energy recently announced it is drilling a few thousand net acres in partnership with Crimson Exploration Inc. (NASDAQ:CXPO). The market gives them zero value for that acreage. The company has completed one well, but hasn’t announced the results yet. It’s in a really good area right next to a Chesapeake Energy Corp. (NYSE:CHK) well that did extremely well. I expect that U.S. Energy may have some good exposure.
Some companies, like U.S. Energy, trade at a large discount to their peers. Other companies trade at an extremely rich valuation compared to their peers. One company that is comparable to a company like U.S. Energy is Aurora Oil and Gas Ltd. (TSX:AEF; ASX:AUT). Aurora has a small amount of acreage in the Eagle Ford, not much more than U.S. Energy, and less than U.S. Energy has in the Bakken and Eagle Ford combined. But Aurora trades for almost a $1.5 billion valuation. So, compare a U.S. Energy, which is getting almost no credit for its Eagle Ford and has a $120M (million) valuation, to a company like Aurora, which is getting a tremendous, almost $90,000/acre credit for its Eagle Ford acreage. It definitely gets you excited about U.S. Energy’s prospects.
Finally, any discussion of shale fields would be incomplete without mentioning the Barnett Shale. The Barnett is one of the original natural gas shale plays where the technique of drilling horizontally and using multiple-stage hydraulic fracturing was developed. I don’t currently have any investments with meaningful exposure to the Barnett. But, the Barnett is a really good example of what to expect from other plays where a lot of small companies were involved and as the play matured, were bought out or consolidated or traded up to a fairly rich valuation. Companies like Gastar and U.S. Energy could trade up to rich valuations too or potentially be taken out as their respective plays get developed.
TER: You talked in April about Equal Energy Ltd. (TSX:EQU; NYSE:EQU), which is an interesting Canadian company. Can you bring us up to date on what has developed with them since April?
JY: I still think Equal is trading at a very large discount to its peers. It hasn’t announced well results recently and there hasn’t been a lot of news flow beyond an acquisition and subsequent equity offering, so the stock has languished. There will be well results over time but there is nothing in particular coming up in the near future, at least from an operational perspective.
There is some possibility the company could spin off one or more of its assets into a royalty trust, which Chesapeake is actually in the process of doing and SandRidge Energy Inc. (NYSE:SD) successfully did with the SandRidge Royalty Trust. If Equal Energy went this route, it could potentially achieve a much higher market valuation than it currently has. In the interim, Equal could be a bit quiet for the next few months.
TER: How about some where you think there is going to be some action coming up that people can get excited about?
JY: I’ve made interesting investments recently that I’m quite excited about. The first one is a company called Gasco Energy Inc. (NYSE:GSX). The company recently completed an equity offering in which I participated. It is a natural gas company with a field in Utah’s Uinta Basin, which is more of a conventional gas field play. Despite having a small production base, the company needed money to survive for the next 18 to 24 months while it develops the new oil plays it thinks it found. I’m inclined to agree that there is oil in place and that it will be recoverable. The company currently has around a $30M market cap and $120M in debt. If Gasco discovers oil and it is of the order of magnitude that it expects, this could be a tremendous home run.
In California, Gasco developed a number of prospects and sold them to a large, undisclosed, publicly traded company that is active in California. This undisclosed partner is funding 100% of the well cost on five different exploratory wells in order to earn an 80% interest in the wells. Gasco gets to keep 20% without having to pay for the drilling. That is very exciting for a small company to be able to get exposure to some potentially 20 Mbbl. or greater prospects and not have to pay anything for it. The company expects to drill the first well in the third quarter of 2011, the second in the fourth quarter and the remaining ones in 2012. That adds a lot of upside potential from there.
Gasco’s main gas field is actually in the Uinta Basin, situated between Newfield Exploration Co.’s (NYSE:NFX) Monument Butte Field, which has been really successful as a conventional oil play, and Questar Corp. (NYSE:STR). Questar drilled an oil well in the Green River block on the trend that the Monument Butte Field produces from, immediately on the other side of Gasco’s acreage. Questar will be drilling more wells on their acreage. So, it looks like there’s an area that has been delineated by that well.
Gasco also has some old wells on that same Green River trend, drilled in the 1980s, which had been producers for a long time. Some of them are still producing a few bbl/d. It is very likely that when Gasco drills a couple of wells on the Green River trend, it will hit oil and those wells will be highly economic. The impact of having an economic oil play could produce a multiple times valuation uplift. The most I can lose is the money I invested, but I could make five or ten times my investment.
TER: That is a nice multiple for anybody. So, what else do you like?
JY: I seldom buy debt, but there is a natural gas company in which I actually own preferred stock. This preferred is convertible and it’s currently yielding 12.5% and trading around par. The common is trading only 15% away from the conversion price. It is a very undervalued natural gas stock that is out of favor called GeoMet, Inc. (NAS:GMET).
The preferred stock provides a margin of safety and pays me to wait. If the company went insolvent or if there were some sort of prolonged downturn, the preferred offers more protection than the common. Plus, it pays 12.5% annually. If natural gas prices recover, GeoMet could be worth two or three times what it is trading for now.
I have done a lot of work on GeoMet and on the field it is developing. The company had a problem in one of its fields where its wells were not producing as expected. It changed its fracking technique and it looks like it fixed the problem and could potentially be looking at substantial additional reserves, which are definitely not priced into the stock. There is a lot of operational upside in addition to potential from natural gas prices.
This has been a very illiquid situation and it was hard to build my position. But, people really want yields and this is a nice way to get this combination of yield as well as a chance for a substantial equity return.
TER: Well, it sure beats 2% to 3% in Treasuries.
JY: It does, and GeoMet has meaningful natural gas production, cash flows and reserves that backstop the value of the investment and provide some potential inflation protection and exposure to an improvement in natural gas prices. GMET is far and away my favorite debt security at the moment.
TER: Anything you like in Canada?
JY: There are a couple of other companies that I own stock in that are worth mentioning. Petro-Reef Resources Ltd. (TSX.V:PER) is one of the more promising junior oil and gas companies in Canada that U.S. investors may not have heard of. It has a conventional natural gas field where there appears to be highly prospective oil zones above and below the gas zones from which it is already producing. The July production rates are about 300 bbl. of oil plus about 700 bbl. of oil equivalent (boe) natural gas per day. Their current enterprise value is about $30M.
Using a $100,000 per flowing bbl. of oil metric, you get the natural gas production for free. Using a natural gas metric, you get their oil for very cheap. In addition to being cheap on current production, it looks like Petro-Reef is on the path to meaningful rampup by drilling additional oil wells. It has around a 20,000-acre position in an unconventional play in Canada called the Swan Hills, where it has completed a well. The company is still looking at the data and might actually lease a little more acreage before announcing results. I invested on the assumption that the Swan Hills play won’t work. But, there has been a lot of activity and positive well results in the area; it sounds like the company likes what it sees. If the play actually works, it will be a huge home run.
TER: Do you have some other ones that you would like to talk about?
JY: There is one more company that I have been involved with off and on for years and built up a position in again, relatively recently. It’s called Sonde Resources Corp. (NYSE:SOQ). It has $50M in cash, no debt and a market cap of around $200M. It is trading for around the value of its existing production. It has a lot of unconventional acreage in Canada from residual natural gas production that it is in the process of developing, with a lot of un-booked upside.
Sonde recently sold one of its assets and repatriated the cash to develop its unconventional oil acreage. It also owns a portion of a recent large oil discovery on the border of Libya and Tunisia. Prior to the problems in the Middle East, it looked like this discovery could be worth hundreds of millions of dollars to Sonde. The company said it was in active discussions with potential joint venture partners to farm out some of its interest to get carried in the development, or possibly to sell it. The possible upside is in excess of its market cap and total enterprise value right now. Development of the find is on hold but the company has continued to study and delineate it. It sounds like it is sitting on over 100 Mbbl. of oil in this one discovery. And it has a tremendous amount of additional acreage, where it will be able to explore for other prospects with similar potential. So, this could be a real game changer that isn’t reflected in the stock price. Neither is the company’s unconventional acreage. Only existing production appears to be priced in.
There is potential upside whenever the situations in Libya and Tunisia get resolved. Meanwhile, you get a great, undervalued natural gas and oil company in Canada. Sonde also has well results expected shortly from an area called the Drumheller, which could be a meaningful driver. I have a lot of respect for the Sonde’s CEO, Jack Schanck. For a number of years, he was the co-CEO of Samson Oil, a private company out of Tulsa and helped the company get into North Dakota and a number of other areas. He grew it from a smaller company to a larger, more successful company before leaving to go off on his own. He has assembled a team, some from Samson and elsewhere. I am very excited about Sonde because it has quality management and you get to actually invest at a substantial discount to net asset value.
TER: Any final thoughts on what investors should be looking at or concerned about in the coming months regarding the energy market and what could be a catalyst to make it go up or down drastically?
JY: A number of things could go wrong or could go right. From my perspective, the important thing is whether you are in a good company that is value priced like a U.S. Energy or an Equal, a Gastar or a Gasco. If the company hits oil or sells an asset, the stock is going way up and if not, the stock isn’t. A lot of really talented people out there are analyzing the macro-picture and trading oil commodities. I focus on these small, under-followed public oil and gas companies with attractive risk/reward odds.
TER: Those all sound like pretty interesting and undervalued opportunities. Thank you for taking the time to tell us about them.
JY: I appreciate it. Thank you very much.
Josh Young is an honors graduate of the University of Chicago, where he majored in economics. Before founding his own investment management partnership, he worked with Mercer Management in Chicago, after which he joined a private equity firm in Los Angeles. He also worked as a buy-side analyst and money manager in a single-family investment office with more than $1 billion under management.
By Simon Grey, on July 29th, 2011
With the doomsday clock showing that America is five days away from the Economic Apocalypse™, I can’t help but wish that Boehner finally grows a pair and stands up against any proposed increases in the federal debt ceiling. I’ve noted multiple times before how an increase in federal debt is a horrible, horrible idea, and generally unsustainable, so at this point it seems that maintaining the current debt ceiling is a good idea. And, there are several possible positive outcomes.
First, we could default on our debt. This has the valuable outcome of making it harder for the federal government to borrow money, which should help to keep the budget in check. Of course, the government may find that it would just as well use inflation to bring more into the system in the even that it can’t find lenders, but that’s a risk worth taking.
Second, we could actually balance our budget. The beauty of the hitting the debt ceiling is that it makes a balanced budget amendment largely unnecessary. (Although, it should be noted, if one is using GAAP accounting techniques, one’s budget is, by definition, balanced. Of course, the general sentiment of the balanced budget amendment is, hopefully, that revenues equal expenses, and that the government does not take on more debt.) Anyway, the point in all this is that if Boehner really wants a balanced budget, all he has to do is make sure house Republicans vote against increasing the debt ceiling. This way, he no longer has to concern himself with passing an additional piece of legislation then having it ratified by the states.
Third, Obama could ignore the law and tell the Treasury to issue more debt. This would be a violation of the law, naturally enough, and should be grounds for impeachment. I almost want to see this happen, just to see what it would look like. Of course, given our luck, the Senate would laud Obama for his bold, decisive action, so all that would happen would be an increase in executive powers, leading America closer to being ruled by a dictator.
Finally, it’s possible that the government shuts down at the behest of President Obama in the attempt to play chicken with the Republicans. I sincerely hope this is what eventually happens, but mostly because I have nothing but contempt for the federal government. In fact, I hope that the federal government not only shuts down on August second, but that it stays shut down for all eternity. There is not a single federal function that is either a) necessary or b) can’t be replicated by the state governments. As such, it is time for this behemoth to die, and to that end I say let the debt ceiling stay the same. Let’s starve the beast!
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By Christopher Briem, on July 29th, 2011
Oh man, this is bad. I mean, really bad. Like one of the worst ideas to flow out of Harrisburg in a long long time. For those who follow these things, it remains true that Pennsylvania has fared at least relatively well (or how about ‘less bad’) in the vast foreclosure crisis that hit most everywhere in the nation. There is not any one explanation for why that is, but one big factor has been that Pennsylvania was remarkably ahead of the curve (how often does that happen?) in policies aimed at foreclosure prevention. Why that is may all relate to our past economic calamities that forced us to deal with these types of things long before others.
So one of the key programs that kept Pennsylvania stable was the state’s longstanding HEMAP program, which I m just now seeing is being defunded and thus shutting down for the most part. I am not sure anyone has ever done a cost benefit analysis of any kind on the program, but this just has to be one of those programs that has a benefit far outweighing the costs. No matter what your political or philosophical bent it’s hard to see how this makes sense. In fact I think it had a sort of omni-political level of support.
It just … like…. I’m speechless. Bad. Bad. Bad.
h/t @capitol_ideas for pointing it out. I have just been distracted or I should have caught this earlier. I see the Inky had some longer coverage earlier in the month.
Ugh.
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By B.P.T., on July 29th, 2011
At 8:30 AM EDT, the advance GDP report for the second quarter of 2011 will be announced. The consensus is an increase of 1.9% in real GDP and an increase of 2.0% in the GDP price index. The real GDP estimate is the same as the final value for the first quarter of 2011, and the GDP price index estimate is also the same.
Also at 8:30 AM EDT, the Employment Cost Index for the first quarter of 2011 will be announced.
At 9:45 AM EDT, the Chicago PMI Index for July will be announced. The consensus index value is 61.1, which is the same as last month, and is still well above the break-even level at 50.
At 9:55 AM EDT, Consumer Sentiment for the second half of July will be announced. The consensus is that the index will be at 64.0, which is 0.2 points higher than the value reported in the first half of the month.
At 3:00 PM EDT, the Farm Prices report for July will be released, giving investors and economists an indication of the direction of food prices in the coming months.
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By Andrea Woroch, on July 28th, 2011
Textbook prices tend to rise at four times the rate of inflation for an average of $900 per year. It doesn’t take a college education to
figure out there are alternatives to traditional outlets, but incoming freshmen don’t always know the ropes. Here are 11 ways to save this fall — none of which include shopping at the college bookstore.
1. WAIT UNTIL AFTER YOU’VE SEEN THE SYLLABUS
Professors must submit their textbook lists far in advance of the next semester, which means they may never require you even open the book. Talk with your professor in the first few days to determine whether it’s worth shelling out cash for something that may become a paperweight.
2. RENT
Chegg.com, the Netflix of textbooks, started a trend several years ago by allowing students to rent their books. You’ll pay roughly half the purchase price and shipping is often free. Other similar dealers include BookRenter.com and CampusBookRentals.com.
3. WATCH DAILY DEALS
The aforementioned Chegg announced in late May they’d begin offering daily deals targeted at college students. Scheduled to start
in July, the program will begin with offerings from HP, Capital One, MTV, Microsoft and Dr. Pepper. Also keep an eye out for offers
tailored to students by location — possibly even your local bookstore.
4. BUY USED TEXTBOOKS
Used textbook companies have proliferated and even traditional booksellers now both buy and sell used textbooks. The selection has
greatly increased and the prices are far superior to exorbitant college bookstores. Check out Half.com, Textbooks.com and eCampus.com.
5. DOWNLOAD
Few classes require students read every page of a textbook, so why not download the necessary portion from such websites as
CourseSmart.com and Open Courseware from MIT? Project Gutenberg also has scanned in hundreds of free-domain books for use on e-readers.
6. DON’T PURCHASE THE WHOLE PACKAGE
Federal regulations no longer allow publishers to combine textbooks with add-ons, such as CD-ROMs and workbooks. Check with your professor or teaching assistant before you buy the whole bundle.
7. BUY ONLINE
If you want to physically own a new book, buying online often means free shipping and reduced prices. Grab a coupon code from
CouponSherpa.com and shop online at new textbook sellers like Amazon.com, BarnesAndNoble.com and AbeBooks.com.
8. INTERNATIONAL OR OLDER VERSIONS
Non-traditional editions are usually significantly cheaper. There may be some slight changes, but many of these tend to be cosmetic or minor and won’t greatly impact use.
9. SHARE
If you carpool, you know the advantage of splitting the cost of high-ticket expenses. Sharing is easier if you’re in the same study
group and/or see each other frequently.
10. SWAP
Some schools now hold swap meets, where students can trade their old textbooks for the ones they’ll need next year.
11. COMPARE PRICES
You wouldn’t buy a Porsche without shopping around, so do the same with textbooks. Websites such as CampusBooks.com, BigWords.com and AllBookstores.com make the process much easier.
By The Gold Report, on July 28th, 2011
 ShadowStats Editor John Williams advises legislators to stop fooling around with the country’s credit rating. Regardless of the deal reached, he predicts that the Treasury and Fed will continue to print money to meet obligations and add liquidity to the economy. In this exclusive interview with The Gold Report, he explains how that will have the effect of pushing the price of gold and other commodities even higher.
The Gold Report: Unless Congress approves and President Obama signs an increase in the $14.29 trillion debt ceiling, the U.S. Treasury is set to begin defaulting on payments starting August 2. That threat launched months of competing big deals to cut spending and/or raise taxes. To add to the pressure, in mid-July the credit rating agencies Moody’s and Standard & Poor’s threatened to downgrade the U.S. credit rating from its historic AAA status if the debt limit isn’t raised in time to avoid defaulting on interest and bond payments. That could raise interest rates for the government and trickle down to consumer mortgage loan and credit card payments. John, what kind of deal would be good enough to satisfy bond rating agencies and avoid a double-dip recession?
John Williams: First of all, the chances are nil that the government actually will default. There is some talk that if the debt ceiling were not raised by the August 2 deadline, the government could avoid default for a while by playing games with its payments—pay interest and debt first instead of paying other obligations. That could trigger a rating downgrade, if one had not occurred otherwise. Also, I don’t think global investors would view non-payment of general obligations as a plus and could engage in dumping the dollar. I think Congress will agree, however, to something by the deadline. I have no expectation, though, that the deal will be of any substance; nothing that has been proposed would improve U.S. fiscal conditions meaningfully.
A country’s credit rating is a measure of the risk of debt default. The U.S. dollar, as the world’s reserve currency, is considered the benchmark instrument for an AAA rating. That generally is considered the riskless category. It would be very unusual for rating agencies to downgrade a benchmark. Yet the credit rating agencies now are seeing risk of a U.S. default and are talking a possible downgrade of U.S. Treasuries. A downgrade would have about as much negative impact as an actual default. You don’t want to see a downgrade. You don’t want to see a default. Those actions would have all sorts of implications, very negative implications for the financial markets, particularly for the U.S. dollar. You would see heavy U.S. dollar selling and dumping of U.S. dollar-denominated assets such as Treasury bonds. You would see a spike in dollar-denominated commodity prices such as oil. Gold prices would rally sharply, as would silver, as traditional hedges against inflation.
TGR: Is printing more money really what the government is going to do to pay its debt?
JW: That is what countries that spend beyond their means usually do if they can’t raise adequate tax revenues. I can tell you that the current government cannot raise enough taxes to bring the actual deficit under control. It could tax 100% of income, take 100% of income and corporate profits, and it would still be in deficit. In terms of generally-accepted accounting principles (GAAP) that include annual increases in the unfunded liabilities on a net present value basis, the U.S. is long-term bankrupt. A true balanced budget approach would require excessive overhaul—I’m talking massive cuts in the social programs because cutting every penny of government spending except for Social Security and Medicare would still leave the country in deficit. We are spending well beyond the bounds of reason in a number of areas. The country just does not have the ability to pay for all the services it provides.
TGR: In a July 14 commentary, you said that, “In the event of an actual default or downgrade, the United States position as the elephant in the bathtub of sovereign risk likely would cause the dollar to plummet against all major currencies irrespective of any ongoing concerns related to Euro-area debt.” What would this mean for the U.S. dollar and the price of gold going forward?
JW: Already stocks are down because the markets are frustrated with the lack of a deal. The U.S. is such a large player in the world markets that if the dollar is downgraded, the impact will be felt globally. The dollar should sink against most major currencies, including the euro, and gold prices would experience a big bump up. It should be very positive for gold long term. It doesn’t mean that Central Banks aren’t going to intervene and that the Treasury or IMF are not going to try to keep gold prices down. But, over the long haul, you’ll see much higher gold prices.
TGR: What would default or downgrading mean for the dollar?
JW: If the U.S. defaults or gets downgraded, that likely will end the U.S. dollar as the global reserve currency. That’s not a viable option for the United States. People involved with getting the country to that point should be removed from office. If you are the most financially powerful country on earth, you don’t fool around with your creditworthiness.
TGR: So, if the dollar isn’t the benchmark, would it be the euro? Would it be the yen? Would it go back to a gold standard? What would happen?
JW: It would probably revert to some kind of a basket of currencies, probably including gold. The dollar would tend to suffer against the new benchmark and gold would tend to increase relative to the dollar in such a circumstance. But I can’t tell you exactly what would happen.
TGR: The new European Union plan for reducing the debt burden for Greece, Ireland and Portugal offers longer-term and low-interest loans and allows some bonds to go into temporary default. Does that set a precedent? Will it contain Europe’s debt crisis?
JW: The euro never should have been put in place. Anyone who ever thought that the Germans and the Italians could coordinate fiscal policy didn’t know the Germans and the Italians very well. The euro would have been disbanded or at least realigned by now if we weren’t in the middle of a systemic solvency crisis. The European Union will do anything to keep Greece afloat, as long as it is viewed as a threat to systemic solvency. Once the system stabilizes, I’d expect to see a breakup of the euro.
TGR: In our conversation with you last January, you talked about the difference between the true deficit and the cash-based deficit published by the government. What is the true deficit and what can be done to deal with that?
JW: The GAAP-based deficit is running around $5 trillion a year right now. That includes the numbers popularly looked at in the press and the year-to-year change in the unfunded liabilities for Social Security and Medicare adjusted for the present value of money.
To bring the true deficit into balance, there is nothing that can be done short of slashing Social Security and Medicare programs, and I see that as a political impossibility. Again, I mention the entitlement programs here, because you could eliminate every penny of government spending except for Social Security and Medicare, and the government still would be in deficit.
TGR: One of the other things that we’ve discussed with you before is quantitative easing (QE). Federal Reserve Board Chairman Ben Bernanke said there will be no more quantitative easing. In your July 8 commentary, you said the Fed will likely find the markets and banking system pressuring it into some form of QE3. What form might that take? And, how might that impact the dollar and precious metals?
JW: Well, Mr. Bernanke hemmed and hawed about the status of QE3 at his Congressional testimony earlier this month. The economy is weak enough; he will use that as an excuse. I can’t tell you exactly what the Fed is going to do. I imagine it will go back to buying Treasuries, once the debt ceiling is raised. That will cause weakness in the dollar and strength in gold. Generally, anything the Fed does to debase the dollar, which it continues to do on an ongoing and very deliberate basis, means higher gold.
TGR: So, what is your prediction for the final solution?
JW: In terms of the debt ceiling, the solution is going to be to continue raising the debt ceiling. Either that or eliminate the debt ceiling. I don’t know what can be done politically on either side there. But, the government is committed to certain obligations. It doesn’t make sense that it wouldn’t follow through and borrow the funds to pay what it has already committed to spend. As to bringing the U.S. fiscal circumstance under control at present, there simply is no political will by the president or by the aggregate sitting Congress to do so.
TGR: Isn’t it strange that instead of having this debate when they were voting about the budget and whether to spend the money, they are talking about it when it is time to pay the bill for the spending decisions already approved?
JW: No, we’re just dealing with a group of individuals in Washington who are politicians first, second and last. Most of them have very little real interest in the nation’s fiscal condition. They are looking at getting reelected and serving their special interests wherever they can. That has been evident to anyone who has watched the system in recent decades. There are some new, good people in Congress, but not enough to change things, yet. As Congress stands right now, there is no chance whatsoever of putting the U.S. fiscal house in order.
TGR: You look at a lot of numbers. We have really only talked about the debt limit. Anything else that you would like to leave us with that could impact the price of gold?
JW: Well, I think you have covered them. You are going to see ongoing weakness in the economy. The government is going to respond with more stimulus before the 2012 election, despite the so-called efforts at reducing the deficit. The Fed is going to ease liquidity more. All those actions to address the economic problems will tend to be inflationary, and that is generally positive for gold.
TGR: Thank you John.
Walter J. “John” Williams was born in 1949. He received an AB in economics, cum laude, from Dartmouth College in 1971, and was awarded a MBA from Dartmouth’s Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar. During his career as a consulting economist, John has worked with individuals as well as Fortune 500 companies. For 30 years he has been a private consulting economist and a specialist in government economic reporting. His analysis and commentary have been featured widely in the popular media both in the U.S. and globally. Mr. Williams provides insight and analysis on his website, www.shadowstats.com.
By Christopher Briem, on July 28th, 2011
Remember, the June news on jobs is relatively bleak for Pennsylvania, as it is for most other states, and even for the nation as a whole. What is up locally? Here is the net change in jobs between May and June in each of the last 21 years:
So if you look at the year over year change comparing successive Junes you get this:
By B.P.T., on July 28th, 2011
At 8:30 AM EDT, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 425,000 new jobless claims last week, which would would be 7,000 more than the previous week.
Also at 9:45 AM EDT, the weekly Bloomberg Consumer Comfort Index will be released, providing an update on Americans’ views of the U.S. economy, their personal finances and the buying climate.
At 10:00 AM EDT, the value of the pending home sales index for June will be announced.
At 10:30 AM EDT, 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 EDT, 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 EDT, 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 Gold Report, on July 27th, 2011
 As uncommon as they may be, rare earth elements are all around you—in your laptop, your cell phone and your flat-screen television. But despite their frequency in our everyday lives, investors still have a lot of false preconceptions about these 16 elements. In this exclusive interview with The Critical Metals Report, Luisa Moreno, a senior analyst with Toronto-based Jacob Securities, delves into the unique challenges rare earth miners encounter and how those can be opportunities for investors.
The Critical Metals Report: Japanese explorers discovered a massive rare earth element (REE) deposit on the floor of the Pacific Ocean earlier this month. Will this discovery impact the REE sector in any tangible way in the near term?
Luisa Moreno: Any major news like that is likely to have some impact on mining stocks. However, when news of the discovery first surfaced, the media entertained the idea as though it could be a viable and significant discovery. I don’t think it is. I tend to believe that it would be cheaper for the Japanese to invest in one of the most advanced rare earth projects outside China rather than pursuing a project 3-6 km. down on the ocean’s surface. I can’t imagine how that can be more economical relative to other ongoing projects right now.
TCMR: Mining rare-earth elements is more complex than other mining because of the need to separate the different elements from one another. Investors often receive conflicting information about REE. If you could clear up any misconceptions about REE mining, what would it be?
LM: As you mentioned, there are 16 elements. It’s important to understand that each element has different uses, target markets and prices. We can’t talk about rare earths as one product or one material. For instance, the magnet industry in North America is not very strong. It’s far stronger in Japan and Korea. Companies trying to target that market will need to go to Asia to find partners. The catalyst market is far broader in North America. Companies that want to sell cerium for catalyst applications will find a lot of potential partners in the U.S.
The other aspect is metallurgy. Most of the projects are dealing with minerals that have not been processed commercially. In that sense, they are early stage and it’s a bit like a science project. It’s important for investors to track the progress of the metallurgy. For instance, Avalon Rare Metals Inc. (TSX:AVL; NYSE.A:AVL; OTCQX:AVARF), which has complex mineralogy, delayed their feasibility study by an additional four months to improve its metallurgical process, however other companies are only in the initial phase of their metallurgical testing. Compare that to Molycorp Minerals (NYSE:MCP), which has a well-understood metallurgy and has processed rare earths for many, many years.
When mining does actually commence, investors should expect to see variations not just in grades but in actual distribution of the 16 elements. Small variations will likely be common, but there may be occasions where unanticipated changes in rare earth distribution would significantly impact revenues and even costs.
Furthermore, the price correlation between the 16 elements is not very well understood and variations in price trends are likely to affect mine economics.
TCMR: There are also deleterious elements in there, like thorium or uranium, that can make disposing of the tailings a difficult task.
LM: That’s definitely another consideration: the environmental impact. There are guidelines in place to properly dispose of uranium, thorium or any other radioactive materials that might be present in a deposit. But the consideration right now is that deposits that have a high percentage of radioactive elements will probably have to endure a more comprehensive permitting process that could cause delays. Also, the companies that deal with those radioactive elements will likely face higher operating costs associated with handling and disposal of these elements.
TCMR: If the metallurgy proves to be difficult, could that mean that some of these companies would be forced to go with a straight concentrate versus separating out the individual metals?
LM: There is not much of a concentrate market outside China right now, but if they cannot prove in the lab that it’s possible to economically separate those elements, I don’t see anybody else in the world willing to do that. These elements are not really useful as a concentrate. In some instances, they can be used in a combination, like didymium, which is a combination of neodymium and praseodymium or in combination with other elements like zirconium. The elements can be used as concentrate in some applications but it will not be economic for companies to sell all the product like that.
TCMR: Can you tell us about the applications and locations of rare earths?
LM: Rare-earth elements are used in technologies, such as computers, light-emitting diodes and cell phones. They also aid in the efficiency of alternative energy products like wind turbines and solar panels. The elements themselves can be found all over the world, but most of the manufacturing of these components is in Asia due to inexpensive labor costs and economic focus.
TCMR: In a recent report, you said that continued economic turmoil in the U.S. and Europe could lead to the withdrawal of project financings. That would likely separate the pretenders from companies with legitimate REE projects.
LM: We will likely see a difference in the market for projects that are more advanced and companies that have partners like Frontier Rare Earths Limited (TSX:FRO). Frontier announced that it could sign an agreement in the next three to five months with KORES, a Korean resource company, where the company will take 10% of the Zandkopsdrift deposit after the completion and publication of a preliminary economic assessment (PEA) and potentially 10% next year upon a positive feasibility study. That’s the sort of things that the market wants to hear—some validation from future partners that could bring financing and expertise. Avalon also said recently that it has a few memorandums of understanding with unnamed parties.
TCMR: Do you think the market would’ve preferred to see a bit more transparency from Avalon about who those new partners are?
LM: Absolutely. Memorandums of understanding are a good starting point for sure: they are agreements that potential collaborators sign to say, “We’re watching you. We want to do a little more due diligence to see the viability of your project.” But it’s different from an agreement like Frontier’s with well-defined milestones and a disclosed partner.
The market is getting much more knowledgeable about the space and locating companies that are able to differentiate themselves.
TCMR: Developing Ucore Rare Metals Inc. (TSX.V:UCU; OTCQX:UURAF) Bokan Mountain property in Alaska would require the lowest capital costs, less than $200M, of any of its peers. What should we expect from the company’s scoping study, which is due in the fourth quarter?
LM: The capital expenditure is low in relation to scale. Frontier wants to produce 20,000 tons/year. Avalon is talking about producing anywhere from 10,000–15,000 tons/year. Ucore is less than 5,000 tons, and may even start with 3,000 tons. The operation is much smaller.
The company did tell me that it is looking for technologies that will make the project cheaper, such as using chemical processing vessels made of more economic materials. Other companies, such as Lynas Corporation (ASX:LYC), seem to be using more expensive equipment and have experienced relatively higher capital costs. It appears however, that there are new processing technologies and equipment, and some companies like Ucore and Great Western Minerals (TSX.V:GWG, OTCQX: GWMGF) are investigating them.
TCMR: You have a target price of $1.09 on Ucore and it’s currently trading around $0.72. However, the company could get to that target because this project might get support from the U.S. government.
LM: The government may support them by fast-tracking the permitting and giving favorable loans. That would essentially make the government a development partner, at least in the short term.
TCMR: Why would the government do that?
LM: The government might do that because Ucore is the best known project right now on U.S. soil that may have an economic deposit with high percentage of heavy elements. Many of these elements are used in military applications. They are of great national security importance. It’s an opportunity for the government to be independent from China for these elements.
TCMR: Bokan Mountain is near a former uranium mine. Is there uranium at this property?
LM: The Ross Adam Mine, the former uranium mine, is not part of the Dotson Zone, which is Ucore’s principal economic target. According to the company, the uranium and thorium concentrations are low in that area.
TCMR: Do you think that the government would also be willing to support the Bear Lodge Project in Wyoming that Rare Element Resources Ltd. (TSX:RES; NYSE.A:REE) is working on?
LM: Rare Element would certainly benefit if the government implements policies that involve fast-track permitting. But, in the case of Ucore, the governor of Alaska is pushing a lot of these policies that are supporting the company directly. Rare Element, as well as all the rare earth companies, would also benefit if the U.S. government decided to lend at trivial rates to rare earth companies. I have a target price of $18.43 on Rare Element and it’s currently trading around $10. 26.
TCMR: Rare Element has done some metallurgical testing on Bear Lodge and had 90% recovery rates—certainly among the highest of its peers.
LM: The company’s deposit has primarily bastnaesite, which is a mineral that has been processed commercially, and ancylite—a less-known RE mineral. It has tried to use the same process as Molycorp, but reported in the NI 43-101 that it was not very successful. Rare Element came up with its own process and it seems it could end up with one of the highest recovery rates in the industry. If they are able to reproduce these results at a commercial scale, that will be great for them.
TCMR: The company has $73M in cash, which should carry it through the feasibility study that is currently underway. What are you expecting from that feasibility study?
LM: I expect it to be positive. I’ve run my own economic assessment of the project. I expect the company to have some of the lowest cash costs per kilo because of the type of deposit and the potential to have good recovery rates.
TCMR: Are there any other stories that have been overlooked in this sector?
LM: Montero Mining and Exploration Ltd. (TSX.V:MON), a small company in Africa, is progressing very well. It has a similar deposit to Molycorp’s with low percentage of heavy elements, but it is trying to fast track its project to production. It recently signed a memorandum of understanding with Korea Resources Corp. (Kores).
There are other projects in countries off our radar like Russia, India, Sri Lanka and Malaysia. We should expect to see increasing production from existing mines and new mines coming online in those regions, where some companies that are not listed could affect the market. We will probably hear more about that in the coming years.
TCMR: Isn’t Montero’s main project Wigu Hill in Tanzania?
LM: Yes. It has various grades depending on the zone. I think the average is about 5%, but in some zones it has 15%. The metallurgy has been cracked, so it doesn’t need to spend too much time on that. I believe that it could be in production within two years.
There could be other stories like that with simple deposits and simple metallurgy that come to the market fairly quickly. As long as they have offtake agreements and clients to sell those products to, I think that’s very positive for them.
TCMR: Why do you support a neodymium-equivalent measure of resources versus a percentage of total rare earth oxides, or TREO?
LM: It’s very simple. Deposits that have gold and copper often have a smaller percentage of gold grade than copper, but you do not base your analysis solely on that. The size of the resource and grades count but the price of gold versus copper is also very important in assessing the economics of the project. It’s no different for the rare earths. Some of the prices of these elements, like some of the most obscure ones like thulium, a heavy element, have historical prices above $2,000/kg. Then you have other elements like lanthanum and cerium, which are historically cheaper and two years ago had prices below $10/kg. A neodymium-equivalent approach shrinks the differences within grades and better expresses the differences in prices.
TCMR: There is a lot of potential for mergers and acquisitions in this space. Who’s going to take out whom?
LM: Consolidation has already started, in a way. Molycorp has been actively looking into vertical integration and expanding potential products. It purchased AS Silmet in Estonia and Arizona-based magnet company Santoku America.
Molycorp has relatively lower percentages of the heavy elements, like dysprosium, which is one of the most critical elements and one of the rarest. In order for Molycorp to be a leading rare earth company, it should be able to provide at least most of the critical elements. For it to be able to provide dysprosium at quantities that satisfy the market, it will have to find other deposits. That’s why I suggest that Molycorp could potentially acquire Ucore or Matamec Explorations Inc. (TSX.V:MAT) in Québec. Those two companies are smaller and cheaper, but they offer a good amount of these elements to balance their total production. I have a speculative buy rating with a target price of $1.50 on Matamec. It’s trading at around $0.40.
Rare Element Resources could definitely benefit from that as well. The company has a little higher percentage of the critical elements, but lower production. If Rare Element acquires or merges with another rare earth company with high percentage of heavies and critical elements, it can increase its total production, and at the same time have a better balance of rare earth distribution with higher amounts of the heavy rare earths.
We should see consolidation over the next 15 month, especially as companies come out with progress reports on their metallurgy and PEAs.
TCMR: Thanks.
Luisa Moreno is a senior mining and metals analyst at Jacob Securities Inc. in Toronto. She covers industry metals with a major focus on electric and energy metal companies. She has been a guest speaker on television and at international conferences. Luisa has published reports on rare earths and other critical metals and has been quoted in newspapers and industry blogs. She holds a bachelor’s and master’s in physics engineering as well as a PhD in materials and mechanics from Imperial College, London.
By Christopher Briem, on July 27th, 2011
The city of Pittsburgh is refinancing some bonds. Blah, blah. Fitch has rated the bonds that will hit the market today or tomorrow. Given low interest rates, it is the type of thing they should at least be considering so no big deal in itself. Still, Infy seems to be casting some aspersions on the deal, but is lacking specifics. I can’t tell where he is heading with his comments. Maybe we can crowdsource this and figure what has has face down. Here is the preliminary official statement for the new bonds. At least in my quick look, I don’t see anything too untoward, but the devil would be in the details. The whole issue of openness and transparency in municipal bond world is a big big deal these days and impending changes could portend a very different way of doing business. Would have a big impact locally as much as anywhere.
One thing I do see.. and it is not the biggest of shenanigans in context, but I take the public description is that this is entirely a refinancing and not a new debt issuance. I guess that is mostly true, but there is a note (page 2, pdf page  that says they are using bond proceeds to pay the fall 2011 quarterly bond payments on a series of bonds. That is effectively new debt to me, but hey, it’s marginal enough to not be worth the argument.
So if anyone sees something I am not, I am sure they will let us know. However, there is a fascinating section on the pension imbroglio in the verbiage of the POS. (no… that means Preliminary Official Statement). I was going to copy a few pages whole here, but you can read yourself. On page 19 (page 25 per the pdf numbering) is a whole section titled ‘municipal bankruptcy’ that is fascinating for its existence in itself. But it is on page 20 (page 26 of the pdf numbering) that the pension issue is discussed explicitly. Every single sentence deserves parsing from political, financial, actuarial and legal angles, but I don’t want to bore anyone. They do seem to making a gratuitous point that the transfer of city reserves into the pension fund happened before the end of 2010, but let’s not delve into the esoteric no matter how crucial it is to the big picture.
Elsewhere, all sorts of funny factoids in the ephemera. Height doesn’t matter: The US Steel building is now the 6th most valuable property in the city based on assessments and some assessment appeals I presume. Not really talked about much, but the potential impacts of the pending county reassessments may be larger for the big building owners Downtown than most anyone else.
On page A-10 (pdf page 50) is some demographic info I can’t pass up. There seems to have been a massive outbreak of Zombie-ism between 2009 and 2010.
On Page A-7 is this verbatim “The County and Judge Wettick agreed to a reassessment schedule, to be complete by January 1, 2012, which is anticipated to provide a boost in future revenue“. One, do they read the newspaper coverage of changes in the reassessment progress and two, do they read the state laws on revenue neutrality??
Page A-13… 10K city residents work for Walmart? Really? I’m not disputing it, just news to me. Lots of Walmart employees in the region for sure, but just not many Walmarts in the city proper so I am fascinated by the reverse commuting angle.
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