By Christopher Briem, on July 8th, 2011
Let’s see. News from New York City is that their municipal pension funds are doing pretty well and were up over 20% over the last year. I wonder how that compares to the City of Pittsburgh’s investment return? Oh, nevermind. Does not seem to be a question anyone cares about.
Actually, not to be completely dismal on all of this. Pittsburgh’s pension system is rapidly approaching a transversality condition no doubt, but some also like to describe the state’s far larger pension systems as being equally at the precipice. Others just write off the city’s pension problems as just par for the course these days when it just isn’t comparable to even the worse off pension funds elsewhere. There actually has been a lot of work on public pension funding out of the University of Chicago of late. Seems to me that if I were a Harrisburg apparachniki, I would find some less than horrible news in this graphic via the NYT based on the work of Professor Rauh. Pennsylvania is actually classified on the positive side of a notional benchmark of 80% pension funding.
Then again there is the City of Pittsburgh, which if we look sideways, use old data, conjecture some less than liquid assets and otherwise suspend disbelief we are likely closer to 20% than 80%.
Speaking of unasked pension questions.. I have seen no public update to this kerfuffle between the state and the city. Just asking…
By The Energy Report, on July 8th, 2011
Judging from fund flows into some of the Master Limited Partnerships (MLPs) he tracks, investors apparently agree with Stephen Maresca, Morgan Stanley’s MLP expert, that the midstream sector of the oil and gas industry has gone mainstream. As Stephen tells The Energy Report in this exclusive interview, investors want exposure to the income, yield and total return that the MLPs provide, and they’re finding growing revenues and growing free cash flow per share in operators with good management teams, strong balance sheets and assets in growing supply areas that are connected to good market sources for demand. “It’s a good time to be involved in midstream plays,” he says.
The Energy Report: Two surprising discoveries of Marcellus gushers in northeastern Pennsylvania made the news last week, and they certainly highlight the possibilities of that formation. How significant is this from your point view?
Stephen Maresca: Although we don’t yet have much detail on these particular gushers, we’ve been up in the Marcellus and I think the significance of the play is real. It could be a game-changer for gas in North America. It has the potential to become 10%-15% of the total gas supply in the U.S.—obviously a material amount. It could be one of the biggest gas fields we’ve ever had, period. So it’s extremely significant in terms of energy independence, fueling electricity generation from gas-powered plants and filling our energy needs.
The northeast is densely populated, so it’s closer to markets with a lot of people and typically a lot of electricity demand. That makes the Marcellus, in general, extremely significant; it’s certainly no longer a speculative play.
TER: These two discoveries are said to have potential for 30 million cubic feet per day of production. Would that put further price pressure on gas?
SM: Sure it could, if it proves to be true or proves to sustain itself at that level of production. I don’t think it will materially increase what we know is there in terms of supply in the Marcellus, the Haynesville and other basins, but it would add to a situation that already has us fully supplied with gas. I don’t know that it would add significant pressure initially to natural gas prices, but one of the reasons gas prices have been relatively subdued is the fact that we have a lot of supply.
TER: You’ve written about an outsized premium of Master Limited Partnership (MLP) in comparison to C-Corp companies. What are you currently telling your clients about C-Corps versus MLPs?
SM: I think part of the premium is warranted. At one point the MLPs were trading at a valuation premium on EBITDA (earnings before interest, taxes, depreciation and amortization) multiple basis of 60% to C-Corps that had similar assets. Part of that premium is due to the tax advantages of MLPs. They don’t pay entity-level taxation. I think another part of the premium is due to investor desire for cash-flow or dividend-paying entities—MLPs are paying a pretty significant dividend yield right now relative to the C-Corps.
In addition, fund flows into MLPs have been pretty strong. I think it’s still growing as an asset class. These fund flows come from different areas of the investing community—long-only mutual funds, dedicated closed-end funds, pension allocations and municipality allocations. That type of money flow is outpacing the supply of MLP stocks, so you’ve seen MLP prices go up just because money that wants an allocation to the sector is coming in.
Right now we’re telling clients that the premium has pulled back a bit; it’s still there but maybe a little below 55%. Some of the C-Corps are a bit more attractive than the MLPs because they have exposure to the same assets that the MLPs do, a little bit cheaper valuation and they’ll still experience the growth in the asset cash flows that the MLPs will. As a result, some of the C-Corps are giving investors a better entry point.
Some of these C-Corps also have interests in the MLPs. They own the general partner or they own some of the MLP stock. That, too, can make them a better entry point into playing the MLP market. Williams Partners, L.P. (NYSE:WPZ), El Paso Pipeline Partners, L.P. (NYSE:EPB) and Targa Resources Partners, L.P. (NYSE:NGLS) are just a few examples.
TER: This is a function of fund flows, of investable dollars as you’ve just mentioned. But do you also see this as a typical market cycle where investors tend to overshoot at times?
SM: I think it’s more of a secular trend than a market cycle. I think the MLP asset class is evolving. It’s growing. It’s expanding. It’s reaching into different pools of capital, a lot of which is permanent. So, I don’t think this is a cycle where people are shifting money in and then will shift money out at some point. A lot of the money that’s come in has a longer term view on the sector, whether that view is three years or five years. They want exposure to energy infrastructure and they want exposure to the income, yield and total return that the MLPs provide. So I think it’s more of an evolution than a cycle.
TER: Over time, whether in a C-Corp or MLP, do investors expect total returns based partly on share price appreciation? Or do they eventually settle for income?
SM: They want both share price appreciation and income. This is a total return sector, and the nice, healthy upfront yield relative to other sectors gets investors to look at it. In the Morgan Stanley coverage universe, the MLP yield is about 6.5%. You can relate that to corporate bonds, which are at 6% or below with the 10-year yield in the low 3% area. Other stocks are yielding 3% or 4%, so MLPs look good. It’s not a static yield either, but a distribution that typically grows every year. I think investors are looking not for just the yield but also for the growth and then share price appreciation and total return.
TER: Is there any regulatory risk looming that threatens the tax structure of MLPs?
SM: There’s nothing specific afoot in Congress to target MLP taxation, although the headline risk is there and it’s real.
There’s a very low probability that ultimately MLPs would get taxed, given their importance to the energy landscape and the fact that rates of return are already regulated by The Federal Regulatory Commission. So, I think it’s a low risk that anything happens, but we’ll continue to monitor it.
What is being talked about, although we’ve seen nothing tangible in writing yet, is a reworking of the overall tax code to make it simpler. That could include partnership taxation, which wouldn’t be specific to MLPs, but also a lot of other pass-through entities, including real estate investment trusts (REITs) and other types of pass-through partnerships. So, that’s what’s being discussed, with everything on the table given the state of the U.S. deficit.
TER: A chart included in an industry report that you and your colleagues did a couple of weeks ago showed that from the beginning of 2009 to the end of May 2011, the ratio between crude oil and natural gas prices shot up from 5:1 to 20:1 in only 18 months. The ratio makes it look as if natural gas could be a tremendous bargain right now for consumers and may be an arbitrage investment opportunity. Other than demand destruction of gasoline at the pump, why aren’t we using more natural gas?
SM: I think we’re beginning to use more of it, but it takes a while to shift. We can’t all of a sudden make cars and airplanes run on natural gas. We’ve been dependent on oil for a while and it’s hard to change the demand picture that quickly.
The other issue has been a supply situation. Global economic growth—in China and India, for example—has driven a lot of the increase in oil prices. In addition, we’ve seen constraint in terms of oil supply—the ability to get oil—with countries that have oil undergoing their own geopolitical issues.
On the gas side, it’s more of a U.S. commodity. The supply has actually ballooned, considering how much potential supply has been identified, and how much technology and shale gas findings have contributed to the supply picture.
Again, we don’t predict or specifically target an oil-to-gas price ratio, but I don’t think we’ll go back to that 5:1 ratio any time soon. We expect the ratio to remain elevated above its historical level of 10:1. Right now we’re at 20:1.
TER: How are you advising investors to play energy?
SM: We think the midstream space is a great risk/reward opportunity. In Morgan Stanley’s midstream coverage universe, we look for companies that have good management teams, strong balance sheets, and assets in growing supply areas that are connected to good market sources for demand.
We typically want growth; we think the growth companies will do better over time. On the MLP side, we look at names such as El Paso Pipeline, which I mentioned earlier. We anticipate significant cash flow per share growth from EPB—on the order of 15%–20% for the next two years at least, given asset purchases from its parent, El Paso Corp. (NYSE:EP).
I’d also mentioned Williams, a larger-cap MLP that we like. We think it will benefit from midstream development in the Marcellus region and also in the U.S. mid-continent region. Williams also will benefit from increased liquids production and liquids handling needs—processing, gathering and capacity increases.
A third one in this space that we’ve been advocating, and will continue to do so, is Energy Transfer Equity, L.P. (NYSE:ETE). This is a general partner stock and has an interest in two separate MLPs—Energy Transfer Partners, L.P. (NYSE:ETP) and Regency Energy Partners, L.P. (NASDAQ:RGNC). We think ETE will benefit from significant capital spent at both of those entities, a combined total exceeding $2B that will flow up to ETE. We’re looking at probably upward of 10% cash flow per share growth each year for the next couple of years.
SM: How about C-Corps?
SM: That would be El Paso, Williams and Targa’s parent companies.
TER: Is liquidity a concern with El Paso?
SM: I don’t think so. For the parent company, the balance sheet has improved significantly over the past 18 months, as they’ve used asset sale proceeds to begin to pay down debt. They’ve increased their EBITDA levels since new pipelines have been put into service.
The El Paso MLP, EPB, I think has a very good balance sheet. We see it less than 3.5 times debt:EBITDA. That’s a very good number given the strength in the cash flows of those assets, which are long-term contracted natural gas pipelines.
So, no, we don’t see liquidity as a concern for either of the El Paso stocks.
TER: Very good. Are you by any chance advising investors to lighten up on oil?
SM: That’s a question for our commodity research team, but in the MLP space we’re advising clients to invest in companies with growing revenues and growing free cash flow per share. Most of what these companies are building isn’t tied to commodity prices, but rather tied to volumes and long-term contracts that provide a fee revenue service to them.
So we’ve not looked at our ratings in commodity terms. These are diverse companies with exposure to both oil and gas infrastructure assets. It’s not as if one company is just an oil company and one company is just a gas company.
TER: Do you have any more thoughts you want to share?
SM: I look toward a good future of capital investment over at least the next three to five years in the midstream sector—and the MLPs specifically—given supplies in different regions that need the proper infrastructure of pipelines, storage, gathering and processing assets to bring that supply to market to be used.
So I think it’s a good time to be involved in the midstream sector. MLPs offer a good way to play it from a yield and total return standpoint, given the dividend growth. On the basis of their relative valuations, some of the C-Corps can be even better ways to play it. They get the benefit of the cash-flow growth and the asset upside, but they put up less capital. They’re somewhat cheaper valued stocks right now but still have good growth and good total return potential as well.
TER: Thank you so much, Stephen.
By B.P.T., on July 8th, 2011
The Monster Employment Index for June was released today, and the index moved up 3 points to a value of 146, which is 3.5% higher than last June’s value.
At 8:30 AM EDT, the Employment Situation report for June will be announced, and the consensus for non-farm payrolls is an increase of 105,000 jobs compared to a gain of 54,000 in the previous month, the consensus for private payrolls is an increase of 125,000 jobs compared to a gain of 83,000 in the previous month, the consensus for the unemployment rate is that it will decrease 0.1 % to 9.0%, the consensus average hourly earnings rate is expected to increase 0.2%, and the consensus for the average workweek is 34.4 hours.
At 10:00 AM EDT, the Wholesale Trade report will be released for May, showing inventory levels for wholesalers in the United States.
At 3:00 PM EDT, the Consumer Credit report for May will be released. The consensus estimate is that there will be an increase of $4.0 billion in the consumer credit available from April to May, after an increase of $6.4 billion last month.
By Thomas Knapp, on July 7th, 2011
This is intended as a brief response to Tibor R. Machan’s latest piece:
It has always been my view that corporations are groups of people united for various purposes, often to benefit from a business venture guided by competent management. Initially I worried little about the legal details, nor even about the legal history. A bunch of people incorporate or form a company to achieve certain perfectly acceptable, even admirable goals. Sometimes this can be done via a partnership, sometimes by incorporating, sometimes for profit, sometimes not.
Then I started to get involved in political philosophy and found that there is a whole lot of hostility toward these outfits, mainly from Leftists but also from some so called left-libertarians. I am not sure why from the latter.
First, let’s narrow this down to corporations specifically (as opposed to other types of partnerships).
The corporation as such is not just a large partnership — a joint stock company, or something of the sort.
Rather, the corporation is a creature of the state from beginning (its claim to legitimacy is based on state charter) to end (it receives “artificial personhood” and “limited liability” by state edict).
These state-bestowed privileges result in state-imposed injury on others. For example, a person injured by someone acting on behalf of a corporation is limited as to the damages he can seek to recover.
These state-bestowed privileges also distort the market by making the corporation artificially competitive/profitable. The single proprietor or partners in a non-corporate business must either carry liability insurance that corporate owners get automatically from the state (in the form of that “limited liability”), or else run a perpetual risk of personal financial ruin that corporate “shareholders” don’t run. This raises their costs, and therefore their prices, but not the corporation’s.
The corporation’s artificially inflated profits produce additional distorting ripples in the market. Corporations grow faster than they could in a free market because they have more capital to invest in that growth. And the bigger they get, the more effectively they lobby government for additional privileges, subsidies and “protections.”
It’s a snowball effect that starts with that one little thing — “here’s a corporate charter — you aren’t bound by the same rules as other market actors, the state will protect you from risk.”
Corporations are not pure market actors. They are part-market, part-state actors. The “market” part is privatized profits. The “state” part is socialized risk. Aside from the obvious prima facie unfairness of that kind of setup, it has consequences. Negative consequences. Sort of like Gresham’s Law — bad business drives out good.
By The Gold Report, on July 7th, 2011
 Uncertainty will certainly push gold prices higher. In this exclusive interview with The Gold Report, Mike Niehuser, founder of Beacon Rock Research, LLC, is bullish on gold and well-managed producers, advanced development and exploration companies. He shares his top eight picks and advice on easing into an investment instead of buying all at once.
The Gold Report: What is your perspective on the price of gold and your forecast for 2011?
Mike Niehuser: Based on gold’s recent price history, it looks like we were a little conservative. Our forecast for 2011 included the price of gold ranging from $1,300/oz. to $1,500/oz. with the potential in the wake of a catalyst to go over $1,600/oz. by year-end.
TGR: With gold prices at record levels, do you attribute weakness in mining stocks to seasonal weakness or is the market forecasting lower gold prices in the near to midterm?
MN: The accuracy of the forecast is not as important as providing a more or less arbitrary gauge for assessing the buoyancy of mining stock prices against the primary metal underlying these companies’ assets. Considering sustained gold prices and softening mining stock prices, we can draw a number of conclusions: One, that gold prices are ahead of themselves and ready for a seasonal correction, or two, markets are signaling lower prices, implying that higher metal prices may not materialize in later years when projects accelerate production. On the contrary, we remain confident in our earlier forecast and see few forces mobilizing to take gold prices lower in the mid to long term.
TGR: Why are you bullish on gold prices?
MN: In normal times, if there is such a thing, we might see a seasonal correction in the spring or following a period of excitement, much like we recently saw with silver approaching record levels a couple months ago. I find it interesting that gold has long since moved through record levels of the late 1970s but has yet to produce a price chart like silver peaking just a couple months ago. Gold prices have been remarkably resilient and appear to be setting a new normal. Considering the excitement for gold at half the price just a couple years ago, and gold stabilizing at record levels, it is somewhat amazing that investors seem almost indifferent.
TGR: What do you credit for breaking seasonal patterns?
MN: We are living in historically uncertain times. A populist uprising against the banks has not taken place in Europe, as banks appear more willing to restructure debts and kick the can down the road, rather than discipline member countries’ loose financial behavior. China appears to be facing both inflation and limits to growth, a new concept for them in recent history, and it’s unclear how they will deal with a discontented population if they increase interest rates. It would appear that the strategy here in the states is to manage interest rates and inflation, at least as they are measured globally, but high commodity prices, high rates of long-term unemployed and anemic growth expose the limits of monetary policy and increasing regulations. In all three instances, government intervention is likely to increase misallocation of resources that will lead to a more extreme correction.
TGR: Are higher gold prices inevitable?
MN: Not necessarily, despite loose monetary policy. With weak demand for credit and investment, and QE2 ending, in the near term we see interest rates declining and unemployment increasing. An uncertain regulatory and tax environment may reduce the velocity of money leading to lower gold and commodity prices in the near term. But the only tool at the Federal Reserve’s disposal, the only one that they appear to understand, is loose monetary policy. It is hard to see how they can back away from a QE3 with indifference toward deficit reduction and the willingness of the Chinese to continue to buy Treasury bonds.
TGR: So you see modest increases in gold prices until inflation becomes a concern?
MN: Yes, as long as low-cost imports from China, financed by Treasury purchases, continue to roll in, deflation rather than inflation remains a concern. Lower growth or production in the United States is eventually inflationary without free trade or allowing wages to fall. “Money illusion” temporarily placates the masses, but only temporarily. In the meantime, should legislators cap the debt or foreign investors require higher rates on Treasuries, the blindfolds will drop from their eyes. Systematic risk and moral hazard have gone global and we are all now “Too Big To Fail.” Gold prices measure the progress of political and market economies. Sustained higher gold prices suggest global failure to maintain confidence or to protect the essential element of currency to be a store of value. The direction of gold prices appears inevitable so it is only a matter of time and severity.
TGR: If gold prices are, on average, ahead of your forecast and in your opinion moving higher, what accounts for the recent softness in demand or prices of mining stocks?
MN: Good question, the easy answer is uncertainty. Not only do we have excessive government intervention, but the world almost daily appears more unstable. Pollsters used to ask people if they felt less secure after 9-11. Now the question is do people feel more secure after Bin Laden’s death? Democracies are inherently unstable. In the nuclear age, lessons may be final. Whether in the Middle East or in the United States, it is not the outcome, but an uncertain journey that increases the risk premium component of interest rates. This clearly decreases the present value of future cash flows. While this may push stock prices down, at some point they bottom and reach equilibrium, and investors may expect abnormally high returns for risk taking. Investors buying in early 2009—deep value investors and true contrarians that held through the spring of 2011—have been richly rewarded. It is starting to feel a lot like the fall of 2008.
TGR: What do you mean?
MN: In the second half of 2008, it seemed like fundamentals didn’t matter. Management teams that executed on guidance for developing projects or production seemed to be punished for any news. Following silver peaking in April, most mining companies have taken a significant haircut. This appears to be from a lack of demand or buying, rather than fundamentals or investors liquidating positions. This has created a similar buying opportunity, not as extreme as 2008, but possibly quite significant. Should gold prices strengthen through the end of the year, lower stock prices should increase the demand for industry consolidation, acquisitions, stock repurchases or value investors. Major mining companies or the Chinese wanting to secure pipelines of production may set off a rally in 2011.
TGR: What are you recommending investors consider when analyzing a company’s prospects?
MN: We believe markets should eventually recognize value and investors should focus on companies with potential to build value that may be recognized. This would include competent management and a balance sheet sufficient to execute on its strategy. Should metal prices provide for positive margins—and $1,500/oz. gold is arguably sufficient for projects to be economic—advancing projects up the value curve should lead to higher stock prices. Because the market may favor production or exploration, we look for companies with near-, mid-, and long-term upside. We believe this may provide the greatest opportunity for companies to gain recognition and secure and retain a shareholder base—in other words, build market capitalization. This characterization of near- to long-term upside fits the full range of producers, advanced development and exploration companies.
TGR: What companies fit this profile?
MN: Minefinders Corp. (TSX:MFL; NYSE:MFN) provides a good example of a producer that has rewarded patient investors by moving into production of gold and silver in Mexico. The company has capable management and has consistently improved the balance sheet by creating additional opportunities. This includes planning to build a mill at their Dolores project, which will increase recoveries and expand the resource, leading to production growth in the near to midterm. The company is also moving closer to a decision on constructing a low-cost La Bolsa gold project and exploring La Virginia. The company is progressing down the path of building near-, mid- and long-term value.
We also were on Brigus Gold Corp.’s (TSX:BRD; NYSE.A:BRD) analyst day visiting their Black Fox gold mine and mill near Timmins, Ontario. Management has succeeded in eliminating the hedge book and reducing debt. Brigus has about $29M in cash and expects to produce over 73 Koz. of gold in 2011 at about $625/oz. As the company ramps up underground outputs with higher grades, production is expected to increase to over a 100 Koz. in 2012 and costs should drop. In addition to this scheduled upside in the near term, the area is known for deep underground gold mining. Brigus has had great exploration success near surface down the trend in the Contact and 147 Zone. Together, this indicates good potential to increase production and the life of the mine. Improving prospects in the near and midterm should lead to Brigus achieving an entirely new investment profile.
While on the subject of producing mines, I would like to mention one interesting deep value company, Kent Exploration Inc. (TSX.V:KEX; OTCPK:KXPLF), which is putting into production its Flagstaff barite mine north of Spokane, Washington. Barite is used as a weighting agent for drill mud. This is important for preventing blow outs like in the Gulf of Mexico. It is really a simple crushing operation of high-grade barite for operations in Canada. The company anticipates cash flow of over $2M/year. Cash generated from this operation should be deployed in advancing the Alexander River gold project in Reefton, New Zealand. This project has a potential historic resource of over .5 Moz. gold. Kent plans to upgrade and expand the resource, which may provide feed for depleting mines in the area. Here again, we see near-term value and mid-term upside. Cash flow reduces dilution typical of exploration companies, and the resource in New Zealand appears to have little recognition in the market.
TGR: What advanced development companies fit your profile?
MN: Geologix Explorations Inc. (TSX:GIX) is rapidly advancing its gold-copper project in Mexico. The company has established a 3.8 Moz. gold equivalent resource supporting an 18-year mine life and has $20M in the bank. It has seven drill rigs turning, which are likely to lead to upgrading the resource classification, if not resource size and grade. It will take about $8.5M to bring the project to prefeasibility in the spring of 2012, and feasibility by year-end. In addition to this near-term upside and expansion of the existing resource, the company has only explored 15 square km. of a 172 square km. land package. It appears to us that they are well positioned to locate additional low-cost gold oxides at surface, which should lead to higher production in the mid to long term. If investors believe in copper along with gold, the substantial amount of news flow coming out over the next 12 months should increase the visibility of the company.
We also think Inter-Citic Minerals Inc. (TSX:ICI) fits this growth profile. The company is advancing its 3.4 Moz. Dachang gold project in Western China to feasibility in late 2011. China has been in the news a lot lately, but Inter-Citic appears to have strong backing from two significant Chinese investors and is well aligned with the largest gold producer in China. Inter-Citic has a long history of development in China, and a manageable political risk. We see good likelihood that the Dachang project will advance to feasibility with low operating and capital costs. There is a good opportunity the company will establish a central operation that could scale with discoveries and other potential mines on their 279 square km. land package. Inter-Citic plans to complete at least 15,000m of exploration drilling, again combining near-, mid- and long-term upside.
TGR: Lastly, what exploration companies do you see having both near- and long-term upside?
MN: These are typically companies with historic or modest resources or with large land positions. Kiska Metals Corp.’s (TSX.V:KSK) Whistler project is about 150 km. northwest of Anchorage, Alaska. Kiska has established a copper-gold resource of over 5 Moz. gold equivalent at its Whistler target and has about $20M in the bank. This could be the first of several copper-gold porphyries discovered on its large 527 square km. land position. We think Kiska is well underway to doubling the resource, is well into a 35,000m drill program, and is approaching the project as if it was a major mining company. The company continues to organize the camp for ongoing exploration, and we suspect that by the end of the day it will be competing with other large gold deposits in Alaska and British Columbia.
Antioquia Gold Inc. (TSX.V:AGD) also is pursuing a rather large land position in Colombia like an experienced mine builder rather than a junior explorer. Antioquia controls over 37,000 hectares in Colombia, but the focus has been on Cisneros, which is about 5,600 hectares. Antioquia has methodically explored Cisneros with mapping soil samples and geophysical surveying that has led to ongoing drill success. The company has also taken on a strategic investor with extensive gold mining experience in similar host rock in Peru. Altogether, Antioquia should enjoy near-term exploration success at Cisneros, as well as other targets over the wider Cisneros project. Over the long term, Antioquia will work to establish strategic partnerships over the balance of its properties.
We also recently visited Revolution Resources Corp.’s (TSX:RV; OTCQX:RVRCF) project in the Champion Hills Trend in the Carolina Slate Belt near Greensboro, North Carolina. Revolution is exploring in an area of the U.S. that is known for the first gold rush, first silver mine and the primary producer of lead for munitions in the Civil War. The project follows the success of Romarco Minerals Inc.’s (TSX:R) 4.2 Moz. Haile gold project in South Carolina. Revolution’s land position of 7,500 acres is second only to Romarco with 9,700 acres. Revolution’s land position is also on private land with similar host rock. The area is economically depressed and is surprisingly welcome to mine development. While relatively early, it appears that Revolution is well positioned to repeat Romarco’s experience, now about a $1B market cap, and may become an integral part of Romarco’s growth strategy.
TGR: Thanks for sharing your insights with us, Mike.
Mike Niehuser is the founder of Beacon Rock Research, LLC, which produces research for an institutional audience and focuses in part on precious, base and industrial metals, oil and gas and alternative energy. Previously a vice president and senior equity analyst with the Robins Group, he also worked as an equity analyst with The RedChip Review. He holds a B.S. in finance from the University of Oregon.
By Ajay Shah, on July 7th, 2011
The frontiers of Nifty.
Next steps on the SEBI story: An interview with U. K. Sinha, by Puja Mehra and Rajiv Bhuva, in Business Today. Mobis Philipose in the Mint. Uproar over I-T raids on SEBI members, in Business Today. In probing SEBI board members, go by CVC rule: Abraham,
by Sunny Verma, in the Financial Express. Sebi may stick to its guns in MCX-SX case by N. Sundaresha Subramanian in the Business Standard. Sebi’s Abraham emerges front-runner for FMC top job by Ashish Rukhaiyar & Sanjeeb Mukherjee in the Business
Standard. An editorial in the Business Standard. Sunil Jain on the problem of recruiting a UTI Chairman, in the Financial Express. SEBI looks to amend law to protect officials from investigative agencies by Reena Zachariah, in the Economic Times. SEBI seems to have not backed away in the high court on MCX-SX.
Static on the FM channel by Puja Mehra, in Business Today.
That seventies feeling by Pratap Bhanu Mehta, in the Indian Express.
Shubhashis Gangopadhyay in the Business Standard on land acquisition.
We should be learning from these Afghans!
A difficult patch in the Indian IPO market.
Saurabh Kumar in the Mint on the extent to which IPOs from certain investment bankers are more exciting for investors than
others.
Demystifying Swiss banking by Priti Patnaik, in the Financial Express.
Imagine there’s no central bank.
Steven Levy has a great story of how Google built Plus, in Wired magazine. And, PC World magazine on where and why Google
Plus is better.
Sebastian Mallaby in Foreign Affairs on how emerging markets should play the appointment problem of the IMF MD.
By B.P.T., on July 7th, 2011
The monthly Chain Store Sales report will be released today. This report on sales in chain stores gives a look at the health of stores that make up about 10% of all retail sales.
At 8:15 AM EDT, the ADP Employment Report will be released. Investors will be watching this number to get advance notice on the state of the job market in advance of the government’s report on Friday.
At 8:30 AM EDT, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 420 ,000 new jobless claims last week, which would would be 8,000 less 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 10:30 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 11:00 AM EDT, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil 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 Thomas Knapp, on July 6th, 2011
The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. — 14th Amendment
Not only do I question its validity, I deny its validity, at least insofar as it implies any claim that the word “public” obligates me in any way.
At no point have I authorized the Congress of the United States to borrow money in my name or on my behalf; nor have I at any time co-signed said loans, guaranteed said loans, or agreed to repay any portion of said loans.
If the (occasionally rotating/shifting) group of 537 persons composing the US House of Representatives, the US Senate, the Vice President of the United States and the President of the United States want to repay the debts they’ve incurred, hey, that’s just peachy (as long as they do so from their personal wealth, rather than through some kind of program of organized theft).
If they want to default on it instead, that’s between them and their creditors.
Maybe they can negotiate some kind of settlement.
That, however, is up to them. If Harry Reid, John Boehner et. al borrowed more than they can repay, poor them. If their creditors were naive or too optimistically avaricious in their speculations, tough shit. Not my problem.
This is my nth notice to both groups that I’m neither party to, nor do I consent to become party to, the matter (note to those who believe that I have no choice in the matter: Check your premises).
By The Energy Report, on July 6th, 2011
 Recently back from a trip to the Middle East, Casey Research Energy Division Chief Investment Strategist Marin Katusa shares some of his best energy investment opportunities. In this exclusive interview with The Energy Report, he explains why this is a good time to pick up uranium and geothermal stocks.
The Energy Report: As the Chief Investment Strategist for the Energy Division of Casey Research, you follow the whole range of energy segments and investments for your company. There have been quite a few changes on both the political and economic fronts since you spoke with The Energy Report last November. Can you bring us up to date on opportunities in your coverage area—petroleum, natural gas, uranium and geothermal?
Marin Katusa: When looking at the energy sector, one must start with petroleum, as that alone is a very large sector. Brent Crude is currently trading at a premium to WTI (West Texas Intermediate), mainly because of a political instability premium based on what’s happening in the Middle East. Speculators have propped up the prices because of the amount of demand required from Europe, which comes from the Middle East. The WTI price has lagged as the differentials increased since February because of the Middle East turmoil.
That said, in the last three weeks you’ve seen a significant pullback on the petroleum sector market-wide, in the spot price of the oil and equities in both big caps and the juniors. The main reasons are the weak economy and the U.S. Energy Information Administration report stating, “$100+ per barrel (bbl.) oil is just too much of a burden in this fragile economy.” That brings out the speculators, which comprises a 20%-25% premium in petroleum. Another reason for a big drop in the price of oil is that the United States is leading an international effort to release 60 million barrels (MMbbl.) of crude reserves to world markets.
TER: Natural gas is a little different story, isn’t it?
MK: Natural gas is a very localized market. If you look at North America, because of the success of the unconventional technologies, mainly shale fracking, the companies are a victim of their own success. Because these unconventional explorers have been so successful in finding unconventional sources of gas, there is a glut of gas. But that, too, shall pass as the cure for low prices is low prices. It’s just going to take some time—more time than most investors are willing to wait. We wrote a report a couple of years ago called, “The Hidden U.S. Supply of Gas.” It shined a light on the thousands of uncompleted wells that are drilled, but not completed and could be tapped into the pipeline structure in 72 hours if they were viable. You’re going to see sideways gas for the next 6-12 months in North America, and over the next 3 months you could see petroleum sideways to down.
TER: How about uranium in light of Fukushima?
MK: The uranium sector had a big fall, obviously, since the Fukushima disaster. Ironically, mainly by fluke, about 2.5 weeks before Fukushima, in our newsletter and on TV, we came out with a “take profits” opinion on the uranium sector mainly because we went very bullish on it eight months before. I think when this whole cloud has settled down, you’re going to see some really interesting buying opportunities in a few very select uranium companies.
The uranium companies you want to stick with are the lowest cost producers with no debt and explorers with tangible, real deposits that are very high-grade in areas of developed infrastructure (a pro-uranium mining culture helps) with defined resources within the NI 43-101 standard that look like take-out targets. You want to stay away from the early stage exploration projects in areas that lack infrastructure. The smart money is staying away from those types of projects. In my opinion, those projects are going to go sideways to down because explorers will always need to raise money to explore.
It’s a fact that the U.S. is the largest consumer of uranium, but the country only produces about 8% of that domestically. It purchases the rest. So there’s still plenty of existing demand. The uranium story isn’t dead, but an investor has to be much more careful in choosing investments. I’d also stay away from thorium. It’s shocking how many emails I get about thorium. We’ve written about all the reasons to stay away from thorium quite a bit in our Casey Energy Report.
Back to uranium, you’ve got Germany, where Chancellor Angela Merkel just said, “We’re going away from nuclear power” and the Japanese are saying the same. But you’ve got the RISC countries—Russia, India, South Korea, and China—and they’re going nowhere. They’re going to stick with the uranium demand that they have, and it will increase (they will be building nuclear plants fueled with uranium, not thorium).
TER: And what about geothermal?
MK: Now, the geothermals have taken a significant hit back, even though the current PPAs (power purchase agreements) provide significant profits. The actual public companies have taken a big fall following the Ram Power Corp. (TSX:RPG) disaster where they missed their wells and had cost overruns. Geothermal is currently a contrarian investment opportunity where these geothermal companies are trading at a fraction of what they were a year ago. I just wrote an article called “The Valley of Darkness” comparing the current geothermal sector to the copper sector in late 2008.
TER: So you think oil prices will be sideways in the next year because the market can’t sustain these kinds of prices. Is that correct?
MK: If the Arab Spring does shift—and the key here is whether Saudi Arabia falls—you will see $150-$200/bbl. oil overnight. If something were to happen to the flow from the massive Ghawar oil field in Saudi Arabia, that would result in the single largest increase in oil prices the world has ever seen. Otherwise, oil is sideways to down. My point is that we really are on the edge of chaos. Saudi Arabia is very important to keeping oil below $150/bbl.
TER: You mentioned the possibility of opening up fracked natural gas wells. Is that going to go crazy any time soon?
MK: A moratorium exists on a lot of new shale gas wells due to concerns about water supplies. We did a report a few years ago where we talked about how an unconventional well uses between 2 and 5 million gallons of water, of that you get back roughly half. The Marcellus Shale, the Utica Shale, the Paris Basin—all of these basins have moratoriums on them because some people are worried about polluting the water table. The fracking occurs many thousands of meters below the water table so I think it is a misplaced fear, but you’re dealing with politicians and NGO groups, so you aren’t really dealing with facts or science. If these groups are successful, further moratoriums could be imposed, but it would be a crying shame if these moratoriums extended into the Haynesville Shale in Louisiana or the Eagle Ford Shale in Texas. I don’t suspect we will see this happen, but if it did, you would see a significant pop in the price of domestic natural gas.
TER: Going to nuclear now, despite the Fukushima disaster, nuclear power is here to stay. How much effect is the current controversy over nuclear safety going to have on new plant development currently in the works?
MK: Global demand will be affected by countries such as Germany and Japan. They still have existing plants; remember they’re going to be operating until 2022, in the case of Germany. A lot of this is political lip service; they’re giving the people what they want to hear now. What are the Germans going to replace that production with?
TER: Well, maybe they think they can do it with solar?
MK: I don’t think so. They’re importing nuclear energy across the border from France. So, this is just political lip service. The politicians just want to stay in power long enough to get their juicy pensions. They don’t care about—or even if they did care, they aren’t able to find—real solutions, that is why they are politicians. I believe that before 2022 rolls around, the Germans will rethink their nuclear position. But remember, you have more than 20 nuclear plants being built in China; you’ve got South Korea, Russia and India looking to develop. So let’s just imagine that Germany and Japan do close down, whatever they shut down is going to be replaced by growth in other countries.
TER: Who will benefit from continued demand for uranium? Which uranium stocks do you think are going to continue to be attractive under the current scenarios?
MK: Let’s start with Uranium Energy Corp (NYSE.A:UEC), one of the lowest cost producers in the world. It has been a big win for our subscribers a few times, and it is a new producer led by Amir Adnani, who is in our “Ten bagger” club—a club for companies that delivered 1000+% gains for our subscribers.
I also like Denison Mines Corp. (TSX:DML; NYSE.A:DNN) a lot. It has production in the U.S. and access to a mill in the Athabasca Basin, which hosts one of the highest grade uranium projects on the planet. They made a major discovery at their Phoenix deposit—a very, very high-grade deposit. So, that’s a blend of low-cost production and high-grade deposits. We have a lot of technical research on both of these companies on our website at www.caseyresearch.com , as we’ve been to their projects, and our subscribers have done well on both of these companies.
If you want a higher risk story, we like Hathor Exploration Ltd. (TSX.V:HAT). We have had that in our portfolio for many years and they’ve made a great discovery of a high-grade deposit. So those are the three that we have in our Casey Energy Report that we follow.
TER: Any new developments with those companies?
MK: Uranium Energy Corp. has hit the numbers that they gave the public regarding production costs and are actually lower than originally stated—less than $18/lb. The company is growing production to 1 Mlb. annually. It’s very important to know that yes, the spot price of uranium has taken a big hit, but the spot market price is still north of $50/lb., and the long term price trades north of $70/lb. The netback—the differential between what the selling price and the production costs—are still very impressive profits.
TER: Any other juniors you think have merit at this point?
MK: In our Energy Confidential, we really like Fission Energy Corp. (TSX.V:FIS; OTCQX:FSSIF), which is adjacent to the Hathor deposit. The play there is that we believe that Hathor will buy out Fission so that they can have a large consolidated resource. At that point, we think Hathor will have over 60 Mlb. of very high-grade uranium. From there we believe the play would be that Denison will buy out the combined Hathor and Fission company.
The ultimate end game in the Athabasca Basin, we believe, would involve BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF). There’s good potential that they want access into the Athabasca Basin, and the only way that they can do that would be through access to a mill. It’s very difficult to get the permits to build a mill in the Athabasca Basin. Either it buys out Cameco Corp. (TSX:CCO; NYSE:CCJ), which is not going to happen; or the big French uranium company AREVA (PAR:CEI), sells an interest, which is not going to happen; or it buys Denison Mines, which owns a percentage of an operating mill.
So the key to the play there for the juniors like Hathor and Fission is to be bought out by a larger company. That’s why we like Fission, it has good management that discovered a very good project.
TER: The geothermal sector is obviously quite a bit smaller than the other energy sectors, but people are taking another look there also. There seems to be a lot of potential out there, but it’s not so easy to capitalize on it. What’s going on with the companies that you follow there?
MK: In our Energy Opportunities Newsletter, we follow Ormat Technologies Inc. (NYSE:ORA), the world’s largest, pure-play geothermal company. If you want lower risk, you probably want to stick with Ormat. If you’ve got an appetite for a higher risk junior, we think Alterra Power Corp. (TSX:AXY), which is Ross Beaty’s deal, is a good play. It’s the old Magma Energy merged with Plutonic Power Corp. Alterra just received $70M+ cash from the sale of a portion of their Iceland asset. They’re very sound; they make money. It’s one of the few junior companies that can stay afloat because it actually makes money. It has a sustaining business and Ross Beaty has done a great job building that. Don’t ever count out Ross Beaty, the guy is a legend. In time, he will build AXY into a winner. Investors have to be patient; the geothermal sector right now isn’t the place for fast money.
Ram Power seems to be fixing itself up here. It fell on its knees when founder and President Hezy Ram left after missing targets and cost overruns. The company has restructured the management, refinanced it and so far the results look promising. It still has to build up its San Jacinto plant and the geysers seem to be going on track. So, time will tell with Ram. It’s been very disappointing, but so far, it seems like they’re headed in the right direction.
Nevada Geothermal Power Inc. (TSX.V:NGP; OTCBB:NGLPF) has built the largest geothermal plant in the U.S. in the last decade. The company just bought out some Iceland assets in California. The geysers and the joint venture with Ormat on the Crump Geyser property in Oregon is moving as expected. So, all of these companies are doing the right things now, except the market is not reflecting it because no one really cares about it. It’s the unloved energy sector. The companies are cheap, but their time will come. We don’t know when it will happen, but because it is such a small sector, there are only a handful of companies, so when it does get attention these stocks are going to trade up multiples from where they are today.
TER: Years ago I visited the Geysers geothermal production facilities northeast of San Francisco. Who owns that now?
MK: I believe you are talking about the facilities about 100m northeast of San Francisco that are owned by Calpine Corp. (NYSE:CPN). The geysers are the largest group of geothermal plants in the world and Calpine has some good assets and production, but geothermal production is a very small percentage of Calpine’s overall electricity production. Their main electricity plants are natural gas. It’s a very large company; they’ve done very well, and they’ve got a good portfolio of geothermal assets.
TER: So, that’s not a clean geothermal play by any means.
MK: No, and that’s why we’ve avoided Calpine. If you want exposure to the geothermal sector, that’s not the one you want to be in.
TER: Are there any other companies you would like to bring up at this point that you think our readers should be looking at?
MK: I think in general you want to stick with management teams that are proven; they’ve done it before; they’re heavily invested in the companies themselves and they have a focus factor. One of my favorite companies right now is a company called East West Petroleum Corp. (TSX.V:EW). The company just signed a massive deal in Romania with a large energy company called NIS, which is more than half owned by the Russian gas company Gazprom. NIS is going to drill 12 wells on their unconventional gas assets in Romania, which is over US$50M worth of exploration on EW 100%-owned assets over the next 24 months. The company also signed a deal in India with three of the four largest Indian energy companies and has a deal in the Middle East with one of the largest independent oil producers, Kuwait Energy Corp. You want to stick with a company whose management team can attract a major company and use the major company’s money to develop the assets that they own. It’s kind of like the joint venture model in mining, the OPM, where you use other people’s money. East West is a company we really like, and own a lot of shares.
Another one we really like is Niko Resources Ltd. (TSX:NKO). It’s a much larger company, but we believe in the next 12-18 months they’re going to have a lot of news coming out on their drill programs. In this market, it’s time to pick your favorite stocks and be patient; put in your stink bids and see if you get a hit. Unfortunately, the company has recently gotten itself into some trouble that will cost it about CASD$10M-CAD$12M in fines. That’s very disappointing, but the assets sure look good.
TER: Yes, it’s summertime and nobody cares about the market.
MK: It’s also the time to be accumulating your favorite stocks on sale. Buy on fear; sell on greed.
TER: Do you have any other thoughts you would like to leave with our readers?
MK: I think the reality of the sector is, regardless of what happens with the equities in the near term, if you’re patient, the solid companies will grow their assets and either produce higher cash flows or get bought out by a major who needs to replace reserves. So, just because the market right now has a lot of negative sentiment, we look at this as a buying opportunity to pick up more shares of your favorite companies. They’re on sale right now. Fortune favors the bold. Just make sure you do your homework and control your emotions. Don’t let the fluctuations in the stock price take a toll in your personal life. Don’t invest more than you can afford to lose. Juniors stocks are risky, but if invested in the right management teams, the risk is definitely worth the potential rewards.
TER: That’s certainly true. Thanks for taking time out of your busy schedule to talk with us today. We appreciate your thoughts and input and hopefully our readers will also find them useful.
MK: Thanks for the opportunity.
Investment Analyst Marin Katusa is the senior editor of Casey’s Energy Report, Casey’s Energy Opportunities and Casey’s Energy Confidential. He left a successful teaching career to pursue what has proven an equally successful—and far more lucrative—career analyzing and investing in junior resource companies. With a stock pick record of 19 winners in a row—a 100% success rate last year—Marin’s insightful research has made his subscribers a great deal of money. Using his advanced mathematical skills, he created a diagnostic resource market tool that analyzes and compares hundreds of investment variables. Through his own investments and his work with the Casey team, Marin has established a network of relationships with many of the key players in the junior resource sector in Vancouver. In addition, he is a member of the Vancouver Angel Forum, where he and his colleagues evaluate early seed investment opportunities. Marin also manages a portfolio of international real estate projects.
By Ajay Shah, on July 6th, 2011
Imagine a world with two countries. If one country has a current account surplus, the other must have an equal and opposite current account deficit. More generally, the sum of the current account balance, of all countries, is zero.
But what about the world’s balance of payments? Many economists assume these must also sum to zero. For example, one often hears the claim that if one country is running a balance of payments surplus then others must be running deficits. Another argument often heard is that the RMB cannot become a reserve currency until China stops running a balance of payments surplus, because otherwise other central banks will not be able to acquire RMB assets.
This is wrong. In fact, if the right conditions come together, every country of the world can simultaneously run a balance of payments surplus.
Once a country starts trading on the currency market, the identity between the current account and the financial account breaks down. As an example, China runs a surplus on both the current and capital accounts. (That’s how it is piling up so much reserves). Thus, when even one country in the world is trading on its own currency market, it is no longer the case that the balance of payments of the world have to add up to zero.
Does the accumulation of reserves by one country imply a loss of reserves by another? Consider the following two country example. Let’s say the two countries are the US and China, and lets assume that the RMB and dollar are both reserve currencies. Let’s say that the currencies are pegged at 1:1, so it doesn’t matter if you are talking about RMB or dollars. And let’s say that trade is balanced, so we can ignore it.
The US government now sells a 100 bond to the PBOC. And the Chinese government sells a 100 bond to the Fed. This yields a balance of payments surplus of 100 in both countries. Reserves went up by 100 in both countries. In both countries the economy (outside the central bank) has imported 100 in capital by selling bonds. So, the financial account in each country shows an inflow of 100, creating a surplus of 100.
What is going on? In this example, the central banks are inflating reserves by exchanging assets — I buy your government’s bond and you buy mine. But we call this a balance of payments surplus (in both countries) because we draw an arbitrary line, above which we record the government part of the transaction (inflow of fx from the bond sale) and below which we show the offsetting central bank transaction (outward investment). Since the assets are accumulating to the central bank in each case, we say that both nations are running BOP surpluses.
When countries do this, all countries can run a balance of payments surplus at the same time. Admittedly, this will be difficult for countries running current account deficits and facing capital outflows. But it is, technically, possible. That’s why, say, China has been able to build up $3 trillion in reserves without any major country losing reserves at all.
 
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