So I am really missing something here. Why is there not someone out there noticing a big no brainer opportunity and investing themselves in the infrastructure needed to sell shale gas to local utilities?
See Trib today: Equitable’s plan to use more local gas is challenged
There is a deeper story embedded in all of that. What does this really say about the ability of drilled shale gas in Pennsylvania to make it to market? The story is pretty much saying somebody thinks there is a market failure occurring: Gas being developed that can’t even make it to the most local of markets without a regulated subsidy to make it happen. “To market, to market……” as the saying goes.
Speaking of markets doing as they ought to. PG points out the plunging price of ethane: Drillers rattled as ethane, propane prices plunge. Funny how that works. Big new supply. Lower prices. If I read the news correctly the big new supply of ‘wet’ gas in nearby Ohio is only beginning to flow so this trend will continue yes?
To keep sight of the big picture. It’s all about the storage capacity of natural gas in the US. There are pundits for every position, but a compilation of a lot of the relevant stats are here. It really all comes down to the winter weather. Gas producers may rejoice that the Farmers Almanac at least says the eastern US will be colder this winter compared to last.
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Oil prices are starting to creep back up while gas, coal and uranium are poised for moves this fall, according to Mark Lackey, long-time energy analyst now representing resource companies with CHF Investor Relations. In this exclusive interview with The Energy Report, Lackey shares his current insights on energy markets and talks about a number of companies he thinks are sleepers, ready to move quickly when the energy commodities take off.
: Bri-Chem Corp. – Cameco Corp. – Cline Mining Corp. – Colonial Coal International Corp. – Corsa Coal Corp. – Fission Energy Corp.
– Forum Uranium Corp. – Greenfields Petroleum Corp. – Primeline Energy Holdings Inc. – Rio Tinto Plc – Strathmore Minerals Corp.
The Energy Report: Since your last interview, you’ve made a jump from the research side of the business to the investor relations (IR) side. How has the view changed?
Mark Lackey: When I worked in the brokerage industry, I relied on IR people to bring me clients and stories, updates on companies I was following or promising companies of which I was never aware. There are over 3,000 companies listed on the TSX and TSX Venture exchanges and you can’t know all the stories, so analysts often need introductions. Here at CHF, I’m involved in taking clients, largely in the resource sector, to meet with research and corporate finance people and brokers as well as retail and institutional investors. We also help with companies’ press releases, presentations and even market-making.
But regardless of whether I’m doing research or IR, it’s still a function of whether you believe in commodity cycles and how certain sectors, companies, locations and managements will benefit and profit.
TER: Talking to other brokerage firms and people in the investment business, what’s the general mood at this point?
ML: In the small- and mid-cap market, the mood has been mixed. Some people are negative about the commodities sector in the short run, and some even think the whole commodity cycle is over. Others are more neutral. Then you have a smaller group of people who tend to support my view and are much more positive in the very short run.
TER: How does this affect your view of the oil and gas markets?
ML: I’m actually quite positive. After getting down below $80/barrel (bbl), West Texas Intermediate (WTI) is now back up over $96/bbl. The Brent price is at $115/bbl. Recent inventory numbers, particularly in the U.S., are down, so there’s no overhang in the near term. Demand has hung in reasonably well, considering all the European problems, and there’s still decent demand coming from the emerging markets. WTI will likely trade between $100/bbl and $105/bbl next year, with Brent between $115/bbl and $120/bbl.
Natural gas has been somewhat weaker, but it bounced off the $2/thousand cubic feet (Mcf) price a few months ago up to the $2.85–3/Mcf range in North America. With more industrial demand coming back, particularly in the auto sector, and stronger demand from electric utilities, gas should move back up closer to $3.25–3.30/Mcf in the next year. By way of comparison, prices in Europe can be anywhere from $4–8/Mcf, and in China they’re as high as $15/Mcf.
TER: What interesting oil and gas situations have you recently come across that deserve some investor attention?
ML: The first company I’d like to talk about is Greenfields Petroleum Corp. (GNF:TSX.V), which has production in Azerbaijan, a country that used to produce about 70% of the old Soviet Union’s oil and gas. Azerbaijan probably has the best history and the best understanding of oil and natural gas relative to most of the other countries in that area. Another advantage there is getting the Brent price for oil.
Azerbaijan still has some pretty good land positions available that would be more difficult to get in North America these days. Greenfields has gone back into some of the previously developed areas and is doing more delineation work, rather than wildcat exploration. It also has some greenfields projects. It’s going to get some pretty good returns given the prices over there for both natural gas and oil. I think you’ll see growing production from this company over the next few years in an area where there’s potential to see some real improvement in cash flow. The stock has had pretty nice moves off its lows. With higher expected oil prices in the next year, we would anticipate that the share price should move higher.
TER: Is Azerbaijan stable?
ML: Yes. Azerbaijan has had an oil and gas industry for over 50 years and recognizes that this is its biggest source of income. It understands the oil and gas industry and this is a relatively good place to do business compared to all the potential places that you could look for oil in the world.
TER: Who else is on your radar?
ML: We like Primeline Energy Holdings Inc. (PEH:TSX.V) and its prospects in the South China Sea. Its partner is the China National Offshore Oil Co. (CNOOC), which is a huge company. Primeline just put out an updated resource report and should be producing by the middle of next year. With the extremely high natural gas prices in China, the company should have good cash flows and earnings within the next year or two, as well as some pretty good capital appreciation potential.
The stock started to gain momentum after the company filed its Overall Development Plan for the Lishui gas project in June and it’s now pushing its 52-week high of $0.60. We think it offers investors a really attractive opportunity over the next few years.
TER: Oil services have been getting some positive press lately. Are you following any companies in that sector?
ML: The oil services side is often overlooked by investors. But drilling activity and rising prices create rising demand for oil services. We represent Bri-Chem Corp. (BRY:TSX), which is a North American wholesale distributor of oil and gas drilling fluids and piping products to the energy business. Bri-Chem is well integrated in the oil and gas service industry and expanded from Canada to the U.S. last year. It has earnings and cash flow and it is one that investors should be looking at.
Up until a couple of years ago, U.S. production had been on the decline for 40 years. But in the last few years, production has increased with improved technology accessing unconventional hydrocarbons, particularly in the shale formations. This has been a boon for many of the oil service companies like Bri-Chem, which is likely to grow its cash flow and earnings even more over the next few years. It’s trading around $2.65 and provides a pretty good opportunity for capital appreciation at these levels.
TER: Let’s talk about the uranium market. Prices have been fairly flat and they’ve shown a little weakness in the past month. What do you think is happening there?
ML: Uranium was $70/pound (lb) back in March 2011 and then drifted down after the Fukushima incident. Japan took steps to close all 56 of its reactors and the Germans have taken out about seven or eight. There are about 445 operating worldwide.
The price has been sitting around the $50–$51/lb range for a number of months and recently has gone down to $49/lb on the short-term market. The lower demand in the short run is the reason for the $20 hit. The Japanese have probably gone through three-quarters of their reactors, testing them to make sure they can withstand certain high-strength earthquakes. They are also putting up larger retaining walls and doing other things to prevent future problems from flooding. Our guess is that at least half of those reactors will be back in operation in the next six months and maybe as many as 75–80% of them within the next year, period. Nuclear power accounts for 15% of Japan’s needs. Japan’s economy really can’t function without some nuclear power in order to meet demand; its manufacturing sector requires an ongoing, inexpensive, stable power supply.
There are 60 other reactors around the world under construction and about another 240 planned over the next 5–10 years. Another factor is that next year, the phaseout of the Russian exports to the U.S. of highly enriched uranium from its nuclear warheads will end. Thus, demand is coming back and some supply is constrained, which should cause prices to move up in the next couple of years.
TER: What stocks do you like in the uranium industry at this point?
ML: We have followed Strathmore Minerals Corp. (STM:TSX; STHJF:OTCQX) for a while. It has large positions in both New Mexico and Wyoming, which has produced 90% of past U.S. uranium production. In 1980, the U.S. was the biggest producer of uranium in the world. Today it only produces about 4 million pounds (Mlb) a year, making up about 8% of its needs. Strathmore is sitting on large reserves and has the potential to be a significant producer down the road. It expects to be producing in 2016 out of Wyoming and in 2017 out of New Mexico. The stock price has probably been hurt by the weaker uranium price and the fact that it is three years from production. We expect uranium prices to rise to $65/lb by the end of next year and to $75/lb by the end of 2014. This could be a perfect storm for Strathmore, and the market will start to recognize this stock. I think you’ll see quite a bit of capital appreciation over the next two to four years.
TER: What else are you looking at in the uranium sector?
ML: We like Fission Energy Corp. (FIS:TSX.V; FSSIF:OTCQX). It recently took over another uranium company, Pitchstone, which had some very good properties, also in the Athabasca Basin of Saskatchewan. What makes Fission very attractive is its proximity to Hathor, which was taken over by Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) last year in a battle with Cameco Corp. (CCO:TSX; CCJ:NYSE), the world’s largest uranium company. It’s obvious that Rio Tinto wants to get bigger in North America and Cameco would also be interested in making acquisitions.
One of the potential takeover candidates would have to be Fission. It does need to do more drilling and prove up its resource over time. But, it’s well positioned, has the money and is certainly in the right address near some of the biggest and highest-grade uranium mines in the world. It has good management and the company is well funded. We think this is a stock that people should also be looking to invest in. As this company moves forward and proves up more reserves, it will become a much more likely takeover candidate, perhaps in the next couple of years.
The other company that I like in this sector is Forum Uranium Corp. (FDC:TSX.V), which is really more of a microcap company, of which I only follow maybe three or four. My interest in Forum is based on its very good project location in the Athabasca Basin and its very experienced management team. Its partner is Rio Tinto, which just took over Hathor and wants to expand in the area. Other than maybe Cameco, you couldn’t ask for a better partner. It’s done some drilling and needs to do more to move this stock to a point where somebody would consider taking it over. For a micro-cap uranium play, Forum is a good one to look at considering its project and its partner.
TER: The other part of the energy market is thermal and metallurgical coal used in steel production. What have those two markets been doing?
ML: We tend to follow more of the met coal market. The weakness in the natural gas price, particularly in the U.S., has hurt thermal coal producers, especially in Appalachia, where there are somewhat higher costs. We think the thermal coal market will see some recovery over the next couple of years because it’s not just the U.S. that uses thermal coal. Far more thermal coal is used in China than in the U.S.
The high-cost producers have been affected the most as thermal prices have been hit as much as 20–30% in the last three to four months. That’s made a difference to the bottom lines and investment analysts’ view of that sector.
The same thing has happened in the met coal market. Because Chinese steel prices, particularly in China, have gone down 20% in the last three months, iron ore has gone down 20%, putting downward pressure on the met coal price because the biggest steel market in the world is China.
On the Australian market, the price has gone from $225/ton (t) down to $175/t. We think that this is probably the bottom of the market for steel, iron ore and met coal because construction activity usually picks up dramatically in China in October, November and December. We expect that all three areas will see recovery moving into the fall and through next year.
Weakness in the met coal market has affected the prices of all the companies we’re going to talk about. I’d rather be buying when the met coal price is $175/t than when it was $225/t three months ago or when it was $300/t at one point last year. Now you can buy these companies at much lower prices and probably get much better value for your money.
TER: Let’s talk about some of the companies you like.
ML: The first one I like is Corsa Coal Corp. (CSO:TSX), based in Ontario with production largely in Pennsylvania and some in Maryland. It’s largely metallurgical, and a little bit thermal. Corsa has very high-quality coal that can be blended because of its low sulfur and ash levels. It’s well-located in Pennsylvania near the major U.S. steel industry, which is still the third-largest producer in the world.
If you’re one of the somewhat bigger neighboring producers in Pennsylvania whose quality of met coal is not as good, I think Corsa could be a good acquisition target. It expects to have some significant increases in production in the next two to three years. With the met price getting back up to the $225/t range over the next year or two, it should have some pretty good cash flow and potential earnings over that time.
The stock’s trading right now at $0.17/share. I don’t follow that many microcaps but Corsa is certainly one of the few I do and like.
TER: How about some other ones?
ML: Another one we follow is Cline Mining Corp. (CMK:TSX), a Toronto-based company with a significant met coal operation in Colorado that was about to start production within the last month. The decline in the price of met coal caused the company to postpone start-up and lay off people for 60 days. As a new producer, it could have been difficult to sell any of its coal. I think management did the wise thing by waiting to see if the market will come back in the fall and not build up too much inventory in a weak market.
Of course, this disappointed the market and it hit the stock price fairly hard. Cline has very good-quality coal with significant reserves and could be a pretty significant producer within the next two to three years, selling some in the U.S. and shipping some through Texas all the way over to China. With the expansion of the Panama Canal in 2014, bigger ships can go to China and a company like Cline would probably sell most of its coal abroad in the future.
TER: What other companies do you like?
ML: Colonial Coal International Corp. (CAD:TSX.V) is a western Canadian met coal company in the Peace River area in Alberta. It’s in a good met coal-producing area with infrastructure, rail, experienced labor and decent power prices. Colonial is working on developing two very high-quality met coal properties, suitable for coking, with large reserves. There have been a number of takeovers in this area in the last year. And, looking at valuations, this company could certainly be trading at a much higher level if somebody was targeting them. If I had to pick someone in the met coal business in western Canada right now, Colonial would be my most likely acquisition target. Comparing it to the value of some of the other companies out there, its stock price should be considerably higher than where it’s trading right now, at around $0.76/share.
TER: To wrap things up, give us your general thoughts on where you think things are headed and how the average man on the street should be looking at these energy investments.
ML: If you believe we’re in a long-term commodities cycle, as we do here at CHF, then this is probably one of the best points to enter these markets.
We think oil is going higher, while some of the natural gas prices in the world are already extremely high. Coal and uranium markets appear near the bottom and we expect to see higher prices over the next two to three years.
In short, we think this is actually one of the better buying opportunities we’ve seen in the last decade for small and mid-cap companies in these sectors, and select micro-caps with sound fundamentals.
TER: Thanks for talking with us today. There are certainly lots of good opportunities out there.
Mark Lackey, executive vice president of CHF Investor Relations (Cavalcanti Hume Funfer Inc.), has 30 years of experience in the energy, mining, banking and investment research sectors. At CHF, Lackey involves himself with business development, client positioning, staff team coaching and education, market analysis and special projects to benefit client companies. He has worked as chief investment strategist at Pope & Company Ltd. and at the Bank of Canada, where he was responsible for U.S. economic forecasting. He was a senior manager of commodities at the Bank of Montreal. He also spent 10 years in the oil industry with Gulf Canada, Chevron Canada and Petro Canada.
At 9:45 AM Eastern time, the Chicago PMI Index for August will be announced. The consensus index value is 53.0, which is 0.7 points lower than last month, but is still above the break-even level of 50.
At 9:55 AM Eastern time, Consumer Sentiment for the second half of August will be announced. The consensus is that the index will be at 73.5, which is 0.1 points lower than the value reported in the first half of the month.
At 10:00 AM Eastern time, the Factory Orders report for July will be released. The consensus is that there was an increase of 2.0% in orders from the previous month.
Also at 10:00 AM Eastern time, Federal Reserve Chairman Ben Bernanke will make remarks at the Federal Reserve Bank of Kansas City Economic Symposium.
At 3:00 PM Eastern time, the Farm Prices report for August will be released, giving investors and economists an indication of the direction of food prices in the coming months.
David Morgan, editor of The Morgan Report, expects gold to top $1,800/oz and silver to top $40/oz by the end of the year and both to take off from there. In this exclusive interview with The Gold Report, Morgan shares the logic behind his predictions and identifies several companies set to benefit from the end of the precious metal doldrums.
The Gold Report: What’s your current outlook on metals, the economy and the general market indexes?
David Morgan: My outlook is bullish on the metals both short and long term. I think that the bottom is in for the mining equities as well as for the metals themselves. More and more people will realize that there’s really no way out of this debt-based monetary system, whether it is about the U.S. reserve currency, the Eurozone or anywhere else on the planet that uses a fiat currency. There’s a problem here and it can’t be resolved. We’re going to see more pressures to the commodity sector in general, particularly the precious metals.
TGR: In mid-May you called the bottom in the mining shares and the bullion. What leads you to make such bold calls and maintain a high degree of accuracy?
DM: I use my own indicators that come from a lot of experience. A couple of other things also keyed me. One was that the sentiment was so bad that it was screaming we are “at the bottom.” Another was that there were a few days where the volume was very, very high and there was no real buying pressure. It was short covering. Short covering at a bottom is a good indicator that the smart money or the professional money is moving out of the market. In other words, they shorted for a very long time. They made their money, they’re getting out and are covering their positions.
“My outlook is bullish on the metals both short and long term.”
All these factors led me to decide to stick my neck out, which is part of the job I do, and say that this looked like a bottom to me. My experience of over 30 years in this business tells me that it usually takes about three months to confirm a bottom. I’m pretty convinced that I did get the bottom; now it’s just wait and see another month or so if I’m correct on the metals themselves.
TGR: What prices are you predicting for silver and gold?
DM: I’m looking for silver to be above $35/oz and perhaps as high as $40/oz by the end of the year. I think we could see gold at about $1,800/oz by the end of the year. We still have four months ahead of us this year and with the fix that the global economy is in, a lot of people are going to come back into what they call the fear trade, and that will lift the metals. Once gold reaches a couple of upward resistance lines, you’ll see a lot of momentum players come to the market as well for a quick trade.
TGR: Last year you were predicting $75/oz silver. What’s changed since then?
DM: What’s changed is the deflationary scare that I also talked about. It just happened to go a lot longer. I changed my mind partway through. That’s one reason why you would subscribe to something like The Morgan Report, especially if you really want the most up-to-date thinking. Basically, we saw a big push from Quantitative Easing 2, where silver went from $26/oz to $48/oz. A lot of people thought it would keep going. I called that top at that time and thought that after it ebbed and flowed we might be able to build a base quicker than we have.
“I’m looking for silver to be above $35/oz and perhaps as high as $40/oz by the end of the year.”
Once I was able to determine that the base building would take a lot longer than I originally thought, I changed my view and said we’re going to look at probably $35–40/oz by the end of the year, not $60–75/oz. Will we ever see $75/oz silver? Absolutely. I’ve always predicted that we would see $100/oz silver as a minimum. I still think that’s low but we haven’t been there yet. So, you have to first get to $60/oz and $75/oz silver before you get to $100/oz. I’m still looking for the top to be out probably three to four years from now.
TGR: What do you see going forward into the new year? Any particular price targets for silver, gold and the white metals?
DM: I’ll be a little more conservative than I was at the beginning of this year. I think in 2013, we’ll see silver above the nominal high of $48/oz. As for gold, for 2013 I believe we’ll take out the $1,900+/oz level that gold has already achieved. I’m looking for new nominal highs in both metals in 2013. I think we’ll get far beyond that but I don’t want to put a number on it at this time. I’ve wiped enough egg off of my face this year.
TGR: Taking a macro view, what do you see in the general/physical economy from a monetary point of view?
DM: The physical economies are not doing that well in much of the world. A lot of misallocation of capital has taken place. China is a good example; it has tons of real estate that can’t be rented. The prices are too high.
Food stocks, generally speaking, are in some cases lower than they’ve been for quite some time. Energy, food and water are crucial globally and there hasn’t been enough capital movement into those essential elements. A lot of nation states are looking at what they have in the ground or are growing on the ground and are coveting their own natural resources. In the book “Resource Wars,” Michael Klare outlines the scenario of nation states going to war to either take resources that they need or defend resources that they already have. I’m not predicting war but we already see increased competition for resources.
On the financial side, the political class in every country is doing everything that they can to make this a fuzzy, mysterious problem that they’ll blame on anybody but themselves. And, of course, they’re the main culprits because they have so much control over the money supply.
So, I see the physical economy dwindling, resource wars in our future and the political class pretending as if nothing’s really wrong. Everything is going to be happy tomorrow but tomorrow never gets here.
TGR: On to the mining side. Given the upheaval we’ve seen in Argentina, Peru and most recently in Guatemala, what do you consider the most mining friendly countries?
DM: Currently, I would say Canada. We just did a piece by David Smith in The Morgan Report about the overlooked silver mining ability of Canada and mines in general. The United States still is a good place, especially if you’re a foreign investor. We have a lot of recommendations in Mexico, but I never want to have too much in any one geopolitical area. Some of the Scandinavian countries would be fine. In Africa, you have to pick and choose based on what part of Africa it is. There are resources in Africa but they’re being developed as brand new. We really don’t know how well they’ll work out because there’s not much empirical evidence yet. South Africa is a mess and getting worse. I’ve stayed away from South Africa during this bull market even though I was very heavily invested there during the first bull market in the 1970s to early 1980s. There are some exceptions, but the risk is very great.
“Investors should cut their losers and let their winners run because if investors have one stock that’s going to make 100 new highs over a 10-year timeframe, that’s the one you want to keep all the way up.”
There is a report put out by the Fraser Institute that gives its take on the most politically stable countries for mining. I don’t agree with it completely, but it’s a good start. This is an art form and not something that is scientifically derived. Investors want to be careful about the geopolitical jurisdiction because no one can call them all perfectly. Investors should not put all their eggs in one basket when you’re in the resource sector. Either have some top-tier companies, such as Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) or Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ), that have assets all around the world or, if for investors picking their own stocks, use a service like ours to make sure that the investments are spread out geopolitically.
TGR: SilverCrest Mines Inc. (SVL:TSX.V; SVLC:NYSE MKT) has pretty much said it is going ahead with the aggressive expansion program over the next year and a half or so and double its metals production. What are your thoughts on this?
DM: I’ve always liked SilverCrest. This is one that we’ve had on the list for a long time. The market usually does what it’s supposed to but not always in the timeframe one would like. SilverCrest is undervalued. I believe that it is going to be a good winner for anyone who is in the stock. Doubling a mine’s production, even though it’s a small one, is quite a difficult thing to do. I’ve met with the management in Vancouver several times over the last few years. We’ve also had site visits. I like what SilverCrest is doing. I like the management; they’re very serious and know what the margins are. They know where to narrow the costs so the margins will increase.
TGR: Are there any more companies you like either in Mexico or in one of the other jurisdictions?
DM: There are two companies that I would like to mention and almost have to mention them together because both have been good to me investment-wise. First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) is great. CEO Keith Neumeyer has done a heck of a job with the company. Its stock suffered—to our benefit—because he kept giving production targets that he missed. I suggested to him, and I don’t know if he listened to me, that he underestimate production and when the company exceeds it, the market will pay attention. The market finally caught fire and it’s been a good stock.
I’d also say Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE) has a great team. Some consider the company to be fairly promotional, but you’ve got to promote your product and your company. Endeavour has basically done everything it has said it would.
Both of these companies are in high growth states and I like that. So, even though they’ve moved considerably from when they first were on the list at The Morgan Report, if you’re a conservative investor and the stocks are undervalued now, which I believe both are, you can still buy these stocks.
TGR: For the more conservative investor, are there any larger-cap companies you like?
DM: There are two that I want to talk about. Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) is pretty conservative. It has compounded about 20% a year. It’s run by some of the smartest people in the business and the company has a ton of cash. Franco-Nevada knows how to inject cash into certain projects so it gets a royalty stream and upside on top of the royalty stream. It’s now listed on the New York Stock Exchange.
The other one that’s been in the doldrums fairly recently and is coming out of them is Silver Wheaton. This company really knows what it is doing. It is buying streams of silver from companies all over the world. The contracts are fair to both sides in most cases. It’s really hard to be a company that knows ahead of time what the costs are for the silver going in, what Silver Wheaton pays and what the cash flow is coming out, based on the current silver price. So, you can actually do your own modeling. Investors are buying silver in the ground pretty cheap with Silver Wheaton. I like that model a great deal. I think it has a lot of merit to the upside.
TGR: Any companies in the U.S. that you would like to mention?
DM: Gold Standard Ventures Corp. (GSV:TSX.V; GDVXF:OTCQX) is one; it’s in the Carlin Trend. The people who run it are very, very knowledgeable. It’s a speculative situation—a high-risk/high-reward situation.
TGR: Any catalysts that you see coming up?
DM: Well, Gold Standard just put out some news and the market misunderstood it and the stock actually got punished for it. But on large projects, which this one has the potential to be, people don’t really understand drill results. When you have a disseminated project or an open-pit situation, it’s a far different model than a high-grade, hard-rock, narrow-vein mining situation. Grade is king. I almost always prefer hard-rock mining. But, some of these bigger projects are so robust, and with the mining techniques that we have now, they can make a lot of money. So, it’s right next to one of Newmont Mining Corp. (NEM:NYSE) mines. It could be a buyout. If you want a North American speculative play—everything else I’ve talked about is fairly conservative—you could throw Gold Standard Ventures out there.
The management is very savvy; CEO Jonathan Awde is young but he’s smart and he knows whom to hire. His geologist is one old codger and he knows what he’s doing. He’s been in that area practically his whole life. One of the richest guys in Canada has got a big bet on this company. So, there are a lot of things going for it that I like. I’m going to put a bet on this company, but, again, it is speculative, so I’m not going to risk a lot.
TGR: What is the best investing advice you have ever received?
DM: It sounds trite because it’s said and people don’t do it, but cut your losses and let your winners run.
TGR: It’s hard to do.
DM: But that’s one of the best because if you’re able to sell, you are doing the opposite of what most people do—most people sell their winners and hold their losers. No, investors should cut their losers and let their winners run because if investors have one stock that’s going to make 100 new highs over a 10-year timeframe, that’s the one you want to keep all the way up.
TGR: I think that’s great advice. Thank you for taking the time to talk to us.
David Morgan (www.Silver-Investor.com) is a widely recognized analyst in the precious metals industry; he consults for hedge funds, high net-worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, the author of “Get the Skinny on Silver Investing” and a featured speaker at investment conferences in North America, Europe and Asia.
So the WSJ has an article today out of some research out of New York City on the value of being located near a park: Parks Elevate Office Rents – h/t @otiswhite for catching that.
So just a shout out to a former student who looked at something similar here and quantified the $$ impact on residential land values resulting from the Nine Mile Run Redevelopment. In the most recent PEQ if you didn’t read it (starting on bottom of page 1): Brownfield, Greenfield: A Hedonic Estimation of the Remediation and Redevelopmentof the Slag Heap at Nine Mile Run
What is a great book topic someday would be to try and measure how the value gradient for being located near a river in the region has changed over the last couple decades.
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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 8:30 AM Eastern time, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 370,000 new jobless claims last week, which would would be 2,000 less than the previous week.
Also at 8:30 AM Eastern time, the monthly Personal Income and Outlays report for July will be released. The consensus for Personal Income is an increase of 0.3% over the previous month and the consensus Consumer Spending index change is an increase of 0.4%.
At 9:45 AM Eastern time, 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 Eastern time, 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 Eastern time, the Kansas City Fed Manufacturing Index for August will be released. The consensus is that the index will be at 5, which would be the same as the previous month.
At 4:30 PM Eastern time, 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 Eastern time, 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.
So the stats out today say the region’s unemployment rate is up 3/10ths of a percent. I wonder a bit. While all data out there has issues, I don’t like poking at methodology too much since it lends itself for folks coming to doubt the data. You just need to understand the strengths and weaknesses of virtually all data you look at other than maybe the spot temperature outside as reported. I guess we can trust that for the most part… or maybe not?
Still, I don’t quite believe it. There is an unspoken truth that what we know of the monthly metro-area unemployment rate is less than what you might infer given all the news coverage of that one factoid. There is no time for the full seminar one could have on the subject, but the labor force data you see monthy is from the Local Area Unemployment Statistics (LAUS) program.
Read just one snippet from the LAUS methodology. Skip down to the section subtitled “Estimates for substate labor market areas” and skip the first paragraph which wil not apply to us. The whole think will explain certain issues, but in particular read this paragraph on counting the number of folks unemployed:
The second category, “new entrants and reentrants into the labor force,” cannot be estimated directly from UI statistics, because unemployment for these persons is not immediately preceded by the period of employment required to receive UI benefits. In addition, there is no uniform source of new entrants and reentrants data for States available at the LMA level; the only existing source available is from the CPS at the State level. Separate estimates for new entrants and for reentrants are derived from econometric models based on current and historical state entrants data from the CPS. These model estimates are then allocated to all Labor Market Areas (LMAs) based on the age population distribution of each LMA. For new entrants, the area’s proportion of 16-19 years population group to the State total of 16-19 years old population is used, and for reentrants, the handbook area’s proportion of 20 years and older population to the State total of 20 years and older population is used (emphasis added)
That paragraph and a few earlier parts get into this big issue that what is going on in the metro area is pretty much presumed to be the same as is happening across the entire state. It is never true, especially for Pennsylvania. It is not a flaw, you do what you have to do given the limited data, but at times like this it is important to understand the methodology.
(and mostly for frequent commenter BrianTH here) This also is why the reported labor force data for the City of Pittsburgh proper is worth taking with a grain of salt. The methodology for reporting municipal area labor force data is in the following section of the methodology. If the metro area data has issues, those extrapolations (warranted or not) become ever more acute in the small areas with labor force data being reported on. I mean, the state actually reports a change in unemployment rate each month for Ross Township. Rest assured neither they nor any of us have any meaningful idea what happened in Ross Township last month, up or down to any precision worth reporting on.
Where would there be uncertainty in the unemployment rate? Most folks believe the unemployment rate is counted by just adding up folks getting $$ benefits from the state and dividing. Not true. All the folks looking for work are counted as unemployed including those who either ran out of benefits or lets say you don’t qualify for benefits at all because you are just entering, or reentering the labor force. We can count the folks getting benefits, but the number on others being counted as unemployed have to come from other data sources which if you read the methodology you will see are often extrapolated from state patterns. Actual benefits-receiving unemployed are well less than half the total ‘unemployed’ in Pennsylvania, so it really matters how you add count them all. If you really dig into it, go look up the new (initial) unemployment claims in Pennsylvania for the week ended July 28. I see a number that is the lowest it has been in just about 4 years. Yet the state’s unemployment rate is moving up at a decent clip.
So what does that all mean? Probably the harder number of what is happening in the metro area economy each month is the non-farms jobs number coming from the Current Employer Survey (CES) which has no major extrapolation problem. Sample error in that, but not such a big assumption that what is happening locally mirros the state. What does the CES say these days? Pretty much we are pushing to new employment highs here.
Still.. what is odd in the data just out is what it says about the region’s labor force. If the labor force really went up by 7,700 over the month then we are well into record territory for the size of the region’s labor force. It is really odd when you consider most would say it is one of those quasi rules that labor force participation should go down if the unemployment rate is shooting up… yet the opposite would nominally appear to be the case in Pittsburgh. Of course it is not the case. I will repeat that labor force participation rates move much more glacially than most assume when trying to explain these monthly shifts in the numbers..
To put a point on the labor force story (or lack of story as it were) take a look at the updated graph of where we are going…
Curious trend there over last couple of years for the region… a trend which is even more surprising when you consider it is not really supported by any trend in local demographics. I went into the longer parse on that last month when we reached a new all-time labor force peak for the region.
So if you read any of that above. My personal take is one of two things is happening.. or one of two things almost have to be happening. Either the non-benefits receiving unemployed count is being overestimated for the region because it is an extrapolation from state data, which would make the unemployment rate look higher than it really is… or…. there really is a sizable flow of new workers moving into the region. Each would make the headline today a bit different. If I am wrong and the common wisdom is right that the whole answer here is that the labor force participation rate just in Pittsburgh is shooting up?? Then that is a big story unto itself since someone would have to explain why Pittsburgh of all places is going against national trends, but also against the pattern almost always true that the unemployment rate and the labor force participation are negatively correlated.
and when I say that more people are moving here, I of course mean in terms of net migration. So it could be that fewer are leaving. That may be the nexus of all of this. Since we are such a prodigious producer of college graduates, and given the semi-anemic state of the economy in a lot of regions folks.. the trends may all be reflecting a larger number of recent grads unable to find work elsewhere and are remaining in place here. That would all be quite consistent with this recent surge in the region’s unemployment rate coming right as the school year ended. If true then Border Guard Bob was successful in the end. Of course he had to tank the national economy to make it happen. Who knew he went to work for AIG after he was fired here?
It is a deal with the devil: Governments churn out more and more cash for the promise of continued prosperity. But the day of reckoning is near, according to Doug Casey, chairman of Casey Research and an expert on crisis investing. As the epic battle between inflation and deflation continues, Casey discusses his predictions for the new world market in this exclusive interview with The Gold Report.
The Gold Report: There will be a Casey Research Summit on “Navigating the Politicized Economy” in Carlsbad, Calif., in September. The thesis behind the summit is that governments have made a Faustian bargain, a pact with the devil, that saves the empire with overspending, but drives it to the brink of collapse by creating fiat currencies. Doug, where in that story is the economy currently?
Doug Casey: It’s extremely late in the day. Since World War II, and especially since 1971 when the link between the dollar and gold was broken, governments around the world have accepted the Keynesian theory of economics, which boils down to a belief that printing money can stimulate the economy and create prosperity. The result has been to create huge amounts of individual and government debt. It’s become insupportable. All it has done is purchase a few extra years of artificial prosperity, and we’re heading deeper into a very real depression as a result.
“We have been consuming more than we have been producing and living above our means.”
Let me define the word depression. It’s a period of time when most peoples’ standard of living declines significantly. It can also be defined as a time when distortions and misallocations of capital—things usually caused by government intervention—are liquidated.
We have been consuming more than we have been producing and living above our means. This has been made possible by 1) borrowing against projected future revenues and 2) using the savings of other people. The whole thing is going to fall apart. A new monetary system of some type is going to have to necessarily rise from the ashes. That’s a major theme in the conference that’s coming up.
TGR: Will more quantitative easing (QE) give us another couple years of artificial prosperity?
DC: Most unlikely. We’re at the end of the story, not the beginning. More QE—I hate to call it that because it’s really just printing money. I hate euphemisms, words that are intended to make something sound better than it really is. Euphemisms, like exaggerations, are the realm of politicians and comedians. Anyway, the next round of money printing is going to result in radical and rapid retail price rises. There is no prosperity possible from this, rather the opposite.
TGR: Last time we spoke, you said that we are entering into a depression greater than in 1933. Can you describe how it might be different?
DC: What we experienced in the 1930s was a deflationary depression where billions of dollars were wiped out with a stock market collapse, bond defaults and bank failures. Inflationary money that was created since the formation of the Federal Reserve in 1913 was wiped out. Prices went down. This depression will be different because governments have much more power. They’ll try to keep uneconomic operations from collapse, they’ll prop them up, as we saw with Fannie Mae and General Motors. They’ll create more money to keep the dead men walking. They won’t allow the defaults of money market instruments. They will make efforts to maintain the dollar mark on money market funds. They’ll attempt to keep building the pyramid higher. It’s foolish, indeed idiotic. But that’s what they’ll do.
TGR: Which they’ve been doing by printing money. The first rounds of money printing have gone into the banking system, but the banking system has not allowed it to trickle back out into bank loans. Does that open the possibility of deflation if money is not moving out into the general economy?
DC: That’s right. The government created trillions in currency to bail out the banks. The banks have taken it in to shore up their balance sheets, but they haven’t lent it out because they’re afraid to lend and many people are afraid to borrow. That currency is basically in Treasury securities at this point. Although money has been created, it’s not circulating.
“I believe that governments have the power to create enough new currency to keep prices from going down.”
At some point, it’s going to move out. One consequence of this is that interest rates have been artificially suppressed so that retail inflation is running much higher than interest rates are compensating for it. At some point, rather than sitting on hundreds of billions of dollars that are going to be inflated from under them, the banks are going to do something with that money. It will go out into the economy. Retail prices will start rising.
TGR: Do we need to see another round of money printing to put us over the brink into a collapse? Or will it happen even if they don’t print more, because it’s currently sitting in the banks?
DC: They actually don’t have to create more money. It’s just a question of whether the banks start lending it and people start borrowing it. Another possibility is that the foreigners holding about $7 trillion outside the U.S. get panicked and start dumping them. I don’t see any way around much higher levels of inflation unless, of course, we have a catastrophic deflation, which we almost had with the real estate collapse.
TGR: How much will Europe play into this? It seems its governments are, at least according to the popular press, more exposed to bankruptcy than the U.S. government.
DC: Europe is a full cycle ahead of the U.S. Its governments and its banks are both bankrupt. It’s a couple of drunks standing on the street corner holding each other up at this point. Europe is in much worse shape than the U.S. It’s highly regulated, highly taxed and much more socially unstable.
Europe is going to be the epicenter of the coming storm. Japan is waiting in the wings, as is China. This is going to be a worldwide phenomenon. Of course, the U.S. will be in it, too. We’re going to see this all over the world.
TGR: If Europe finally does go over the brink, where it’s been headed for more than a year, would that also cause inflation in the U.S. or would you expect to get catastrophic deflation?
DC: This is an argument that’s been going on for at least 40 years. How is this all going to end: catastrophic deflation or runaway inflation? The issue is still in doubt, although I definitely lean toward the inflationary scenario. But will it start in Europe? How will it start? These things only become obvious after they happen.
TGR: When you say “lean,” are you pretty convinced it’s going to be inflationary?
DC: I think it’s going to be inflationary; in the 1930s, it was a deflationary collapse. Governments are vastly more powerful and much more involved in the economy now than they were then. I believe that they have the power to create enough new currency to keep prices from going down. Somehow, moronically, they’ve conflated higher prices with prosperity.
“Investors need to look for real, productive wealth and consistent growth.”
If we had a completely free market economy, prices would constantly be dropping. That’s a good thing, because as prices constantly drop, it means money becomes more valuable. That induces people to save money. When people save, it means that they are producing more than they are consuming—that’s a good thing. The way governments have it structured today, however, prices are always going up. That discourages people from saving because their money is constantly worth less, which encourages them to borrow. Inflation induces people to try to consume more than they produce, which is unsustainable over the long run.
TGR: You are saying that if the current value of your money is higher than the future value, that encourages borrowing.
DC: Exactly. I don’t see any possible happy ending to this. We’re approaching the hour of reckoning.
TGR: You have said that the titanic forces of inflation and deflation are fighting an epic battle that leads to extreme market volatility. But I am looking out there this summer and thinking it’s pretty calm. It seems like a very slow recovery. Gold is settling around $1,600/ounce. The S&P 500 index is testing the 1,400 mark. Is this just a pause in the epic battle?
DC: Nothing goes straight up or straight down. I just took a cross-country car trip from Florida, up the East Coast to New York, and then out to Colorado. It was actually rather shocking that many times I had trouble getting a motel room—even in the middle of nowhere. The restaurants were full. The highways were full of cars. It looked more like a boom than a depression. At the same time, our real unemployment, figured the way they used to figure it in the early 1980s, is about 16–20%. People are living off their credit cards. I believe it’s the same in Europe.
TGR: It seems as if we haven’t had much market volatility other than the technical glitch at Knight Capital this month. Do you expect market volatility to come back into play?
DC: On the one hand, some people are going to go into the stock market when inflation reasserts itself because at least it represents real value. They can invest in companies that actually produce things and have real assets. On the other hand, the stock market itself by any historic parameter is overvalued right now in terms of dividend yields, price-to-book value and price-to-earnings ratio.
I have no interest in being in the broad stock market. I feel very confident that the bond market, especially, is going to be very volatile. That’s the one place where it seems that there’s a real bubble, and it’s one of the biggest bubbles in history. It’s the worst possible place for capital right now. It’s a triple threat—higher interest rates, default risk, and currency risk.
Even reading the popular press, you can see investors in a desperate reach for yield. They’re only getting a fraction of a percent in their bank accounts. So, to get some income, they are buying all kinds of bonds, even those of low quality, just to get 2, 3, 4 or 5% in yield. The bond market is trading at insane levels as a result of the government having driven interest rates down close to zero in a vain effort to stimulate the economy.
The bond market is much bigger than the stock market. When interest rates start heading up, trillions in bond values will be wiped out, in addition to causing a lot of corporate bankruptcies—that’s why deflation isn’t completely out of the question. In addition, higher rates could really further devastate the real estate market, which has been making a mild recovery. And, of course, higher interest rates are the enemy of high stock prices.
TGR: One of the keynote speakers at the upcoming summit is Thomas Barnett, author of “The Pentagon’s New Map: War and Peace in the Twenty-First Century.” He’s going to be talking about geopolitics today and tomorrow. From your viewpoint, in today’s age of nationalism and conflicts among nations, is it important for investors to know about geopolitics in order to pick junior mining stocks?
DC: Most certainly. Very few investors are putting any money into the junior mining stocks right now, which tells me that it’s a good time to start looking at them. However, investors need to have a grip on geopolitics in order to intelligently assess which companies to buy. There are 200 nation states in the world and they all have different policies. Investors have to avoid putting money into a location where a company will never be able to develop a mine even if it’s lucky enough to find an economic deposit.
TGR: You developed the concept of the “8 Ps” for stock evaluation. Typically, you say that the people are the No. 1 thing that you look at. Is politics starting to move up in importance as a determining factor?
DC: People are still the most important because good people who are running a company will choose an intelligent jurisdiction to develop. It’s also a question of whether the world at large is becoming more stable or less stable. I think it’s becoming less stable, because all the governments in the Western world are really bankrupt and are, therefore, going to be looking for more tax revenue. Mining companies are going to be in its sights because mining companies can’t move their assets; they are the easiest thing in the world to tax. The good news is that makes mining stocks very volatile, and sometimes extremely cheap. Volatility can be your best friend.
But economically, as things get tougher in the Western world, that will hurt the developing world, too, because it depends on marketing its raw materials. If the Western world is using fewer raw materials, it’s going to put pressure on those developing countries.
TGR: Doug, you’re talking a lot about geopolitical unrest. The world is becoming less stable. In 2010, I heard a lot of discussion about gold going into a mania stage, specifically for many of the reasons we’re talking about now. As we approach 2013, will we run into that discussion of gold mania again?
DC: It’s not likely to happen until we reach much higher levels of inflation and we have something approaching financial chaos—but that’s exactly where we’re headed, and soon. The mania is likely to be fear-driven much more than greed-driven. Gold is still in the climbing-the-wall-of-worry stage. Mania is still in the future. It’s going to happen. I feel confident of that. There’s going to be a rush to gold.
TGR: One of the people you like to quote quite often is Richard Russell. There’s a specific quote I’ve heard you say a couple of times: “In a depression, everybody loses. The winner is the guy who loses the least.” In order to be that guy who loses the least, is it a viable strategy to stay out of the markets?
DC: It’s almost impossible to stay out of the markets because almost everybody has a pension program, an investment retirement account or something of that nature. You have to put the assets of that pension into something—the stock market, the bond market or cash. Most people own real estate or their home. If the real estate market gets hurt, you get hurt there. If you have wealth, what are you going to do with it? It’s not a good option to put $100 bills under your bed. Even then, you’re in the market for currency. That’s one of the biggest problems with inflation: It forces people to direct their attention to gambling in the markets, as opposed to productive business.
There has been way too much concentration on the financial markets over the last 50 years. This is shown by the fact that roughly 22% of the U.S. economy is in financial services, which is basically just moving money around. The financial services business doesn’t weave, spin or sew; it doesn’t produce anything. In a sound economy, the financial services sector would be tiny, just big enough to facilitate transactions. It wouldn’t be the mammoth that it is today. It seems as if everybody is in the business of moving money around, but the money they’re moving around is just paper currency. It’s quite non-productive.
TGR: They are producing new financial instruments. In a way, financial services companies are coming up with alternative methods to build wealth.
DC: I question that. Financial services don’t actually build wealth. Real wealth is created by the production of new technologies, food, metal or products. Financial services serve a purpose, of course, but it isn’t a real wealth creator. Today the sector is more of a moving-paper fantasy.
Even what I do, which is advising people on where to allocate their wealth, has always made me feel a little bit sheepish because I’m not actually building a bridge or creating a new engine or technology. I’m just telling people how to move things around. If the economy were sound, 90% of the people in my line of work would be doing something else. A speculator, basically, is someone who capitalizes on politically caused distortions in the market. If we had a sound economy, the government wouldn’t be causing these distortions—and it would be much harder to be a speculator.
Anyway, the whole financial sector is bloated. By the time the bottom hits, the last thing that people are going to want to hear about is the stock market, the bond market or where to put their money. They’re not going to want to read financial newsletters because they’re going to be so sick at the very thought of those things. People won’t ask how the markets are doing; they won’t even care if they exist. They’re going to get back to the basics. That is the foundation for the next boom. But that time is a good many years in the future.
TGR: But you are still in the business of helping investors move around assets. What would you say to investors now on how they can protect or grow their wealth through the next phase of volatility?
DC: First, it’s very hard to be an investor in a highly politicized environment. Investors need to look for real, productive wealth and consistent growth. Speculators, on the other hand, try to capitalize on the chaos that is caused by the myriad of destructive government regulations, taxes, and, of course, currency inflation. That’s why I look at all markets, in all countries. But right now there are very few bargains. At some point, for instance, real estate is going to be of interest again. Not right now because governments everywhere are going to raise taxes on it.
TGR: Would you put things like technology, pharmaceuticals and healthcare in the category of real wealth?
DC: Very definitely. That’s why we have a technology letter. I’ve always been kind of a boy scientist; technology interests me from an intellectual, as well as a financial, point of view. Technology is the real mainspring of human progress. No question about that.
The problem with the medical industry is that it’s being nationalized. It’s very hard to do anything with the U.S. Food and Drug Administration (FDA) as it is. It costs $1 billion to develop a new drug today. Developing medical devices can be almost as expensive. Even if something is approved by the FDA, if something goes wrong, count on being sued by the plaintiff bar. It’s a very high-risk business, which is a pity. Living longer and better physically is one of the most important things there is; medical businesses should be encouraged, not pilloried. I’ve always said that the FDA kills more people every year than the Defense Department does in the typical decade. But Boobus americanus still thinks it’s protecting him… (Editor’s note: Read more about investing in The Life Sciences Report.)
TGR: Are there other areas for real or productive wealth?
DC: I read science magazines all the time. There are more scientists and engineers alive today than in all the history of the world put together. Hopefully, with the continued blossoming of India and China—where students are generally going into science and engineering as opposed to things like gender studies, political science and English literature, which students idiotically are doing in the West—there will be even more scientists and engineers 20 years from now.
What areas are they going into? Nanotechnology, microbiology, robotics—these things will blossom the way computers have over the last few decades. The problem when it comes to investing in them is that they’re increasingly highly specialized. Investors need at least a sound layman’s knowledge in order to know if they’re barking up the right tree or not, and that’s hard. There’s just not enough time in the day to gain enough expertise for this type of thing. Of course, that’s the value of magazines and newsletters. The editors condense information for readers to give them an intelligent layman’s opinion.
TGR: Now we’re back to the importance of people. You do have to have some sense of the person who is doing that analysis for you. It needs to be someone who’s credible.
DC: Absolutely. That’s the advantage of having a newsletter over a magazine. In a magazine, you don’t always know what’s going into the sausage that that writer of an article is making. When you’re dealing with a newsletter, you can get to know the editor, what he’s thinking, how expert he really is and what is his psychology. You can learn if you can trust his opinion. Although I read both magazines and newsletters, newsletters are much more valuable.
TGR: To bring this full circle, I would imagine attending conferences where you meet these newsletter writers or analysts face to face is also beneficial.
DC: Yes, it gives you a smorgasbord of views. It’s helpful in assessing the validity of the views to be able to assess the personality of the writer and have a better understanding of whether his views are actually credible. And it’s a great opportunity to ask questions.
TGR: Doug, you’ve given us quite a bit of your time. I greatly appreciate it.
Read Doug Casey’s thoughts on the energy sector in The Energy Report exclusive, “Doug Casey Uncovers the Real Price of Peak Oil.”
Even if you can’t attend the “Navigating the Politicized Economy Summit,” you can still benefit from the information the 28 experts have to impart in the Audio Collection. Right now you can save $100 when you pre-order the 20+ hours of audio.
Doug Casey, chairman of Casey Research LLC, is the international investor personified. He’s spent substantial time in more than 175 different countries so far in his lifetime, residing in 12 of them. And Casey literally wrote the book on crisis investing. In fact, he’s done it twice. After “The International Man: The Complete Guidebook to the World’s Last Frontiers” in 1976, he came out with “Crisis Investing: Opportunities and Profits in the Coming Great Depression” in 1979. His sequel to this groundbreaking book, which anticipated the collapse of the savings-and-loan industry and rewarded readers who followed his recommendations with spectacular returns, came in 1993, with “Crisis Investing for the Rest of the Nineties.” In between, Casey’s “Strategic Investing: How to Profit from the Coming Inflationary Depression” broke records for the largest advance ever paid for a financial book.
Casey has appeared on NBC News, CNN and National Public Radio. He’s been a guest of David Letterman, Larry King, Merv Griffin, Charlie Rose, Phil Donahue, Regis Philbin and Maury Povich. He’s been featured in periodicals such as Time, Forbes, People, US, Barron’s and the Washington Post—not to mention countless articles he’s written for his own websites, publications and subscribers. Casey Research currently produces 11 publications on a variety of investment sectors and maintains two websites.
The Mortgage Bankers’ Association purchase index will be released at 7:00 AM Eastern time, providing an update on the quantity of new mortgages and refinancings closed in the last week.
At 8:30 AM Eastern time, the preliminary GDP report for the second quarter of 2012 will be announced. The consensus is an increase of 1.7% in real GDP and an increase of 1.6% in the GDP price index. The real GDP estimate is 0.2% higher than the advance value for the second quarter of 2012, and the GDP price index is the same.
Also at 8:30 AM Eastern time, the monthly Corporate Profits report from the Bureau of Economic Analysis will be released.
At 10:00 AM Eastern time, the pending home sales index for July will be announced. The consensus is that the index increased 1.0% last month.
At 10:30 AM Eastern time, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in the United States.
Analyst David Sadowski of Raymond James sees a lot on the horizon for uranium: a supply shortfall, escalating Asian demand and seasonality, to name just a few. As a former geologist-turned sellside analyst, Sadowski’s conviction in uranium’s bullish future is rock solid, and he urges investors to get exposure now, as prices in this sector can climb quickly once they’re set in motion. In this exclusive interview with The Energy Report, Sadowski shares his favorite names that are set to deliver megawatt-size returns to investors.
The Energy Report: David, how does your background as a geologist help you to see value and growth potential in mining companies?
David Sadowski: Defining ounces or pounds is not an easy business. If it was, there would certainly be far more economic deposits out there and metal prices would be a lot lower. Luck is involved, but most companies use systematic evaluations like geological surveys, drilling and other data to take a lot of the guesswork out of finding the next discovery. The ability to interpret these data is equally important, and it allows an analyst to make an independent determination on the growth potential of a project rather than just relying on what management is saying. In this way, I feel like having an understanding of how economic ore deposits form is essential to developing a meaningful forward-looking opinion, particularly on early-stage prospects. In my view that’s one of the most important tools for the successful analyst.
TER: You’re also clearly comfortable speaking with engineers and geologists at these companies.
DS: Yes, quite right. That’s a very important element to my role. You have to be able to speak the same language and understand what they’re doing on the ground, and that helps the analyst determine whether or not the company is headed in the right direction. It’s a key skill to have.
TER: I was also very curious about your transition to finance as a sellside analyst. You once had a responsibility to the companies for which you worked, but now your stakeholders are institutional and retail investors. What mental shifts did you have to make?
“We’re definitely bullish on the outlook for uranium.”
DS: As an exploration geologist, one is really focused on the rocks, sometimes even at the microscopic level, and that’s a much different scope of focus than that of a mining analyst. The financial and operational outlook for the company and its share price must always be on the analyst’s mind, and we’re not looking at companies in isolation, as a geologist might do. If you’re in the business of projecting where the commodity price is going, as I am for uranium, the scope of analysis is global and extends from government policy right down to whether we think a specific ore zone will be amenable to heap leach, for example. As you mentioned, first and foremost I look out for the interest of investors rather than the mining companies, and this responsibility demands even higher levels of objectivity, precision and rigor. It’s a constant challenge and that makes it an exciting and fulfilling role.
TER: Speaking of forecasts, uranium has dipped below the $50/lb level. I’m not sure, but I think these round numbers represent psychological support and resistance levels. What minimum price level must be sustained for small or near-term producers to maintain adequate margins?
DS: Well, if we look at existing operations, the majority of them would be losing money by selling their material at $40/lb. But there are a few exceptions, some of which are quite large producers, like Cameco Corp.’s (CCO:TSX; CCJ:NYSE) McArthur River or BHP Billiton Ltd.’s (BHP:NYSE; BHPLF:OTCPK) Olympic Dam. By our estimates, the only two potential projects that are likely to work in the $40/lb range of average realized price would likely be Cigar Lake and the expansion at Olympic Dam, but these are definitely major outliers. Cigar Lake is the second-highest grading deposit in the world, and it’s located in an excellent jurisdiction in northern Saskatchewan with significant existing infrastructure nearby. Meanwhile, Olympic Dam only works at that price because its uranium production is a byproduct of much more significant gold and copper output. When we look at the majority of additional projects needed to fill the looming supply gap, we think they need prices north of $70/lb to go forward. This is one of the key reasons why we feel the sub-$50/lb prices are unsustainable.
TER: What is your case for rising demand for uranium?
DS: We’re definitely bullish on the outlook for uranium. Although prices have softened in recent months, we have a very strong conviction that this trend is soon to reverse and investors should be exposed to uranium today. Beyond the high incentive prices for new supply that we just touched on, there are three primary reasons for our view. The first one is compelling supply/demand fundamentals. Next, there is the seasonality of uranium prices. And, most importantly, there are industry catalysts. Shall we take a look at each one?
TER: Please, go right ahead.
DS: After the Fukushima Daiichi accident last year, the nuclear industry has done some soul searching and decided to take a slower, more cautious pace in the construction of new reactors globally. But what many people don’t realize is that according to World Nuclear Association (WNA) data, there are nine more reactors in the planned and proposed category today than there were before the accident. Demand for nuclear power has remained resilient with ramping electricity requirements around the world, volatility in fossil fuel prices, energy supply security concerns and a global preference for carbon-neutral sources. The majority of this demand is from Asia. In fact, we estimate 82% of new capacity through 2020 will be built in only four countries—China, India, Russia and South Korea. Part of the reason for that is that state-owned utilities don’t face the same problems associated with other regions, like high upfront construction costs, widespread antinuclear public sentiment and lengthy regulatory timelines. So, this continued growth should support commensurate levels of demand for uranium for decades to come.
“Demand for nuclear power has remained resilient with ramping electricity requirements around the world, volatility in fossil fuel prices, energy supply security concerns and a global preference for carbon-neutral sources.”
All of this demand begs the question, where is this uranium going to come from? Well, we don’t think supply is going to be able to keep up. Due to recent soft prices, many major projects have been delayed or shelved, like BHP’s Olympic Dam expansion, which I mentioned earlier, and Cameco’s Kintyre project, AREVA’s (AREVA:EPA) Trekkopje project and the stage 4 expansion at Paladin Energy Ltd.’s (PDN:TSX; PDN:ASX) Langer Heinrich mine. Even the world’s largest producer, Kazakhstan, may slow its pace of production growth. And, further complicating this issue is dwindling secondary supplies, like surplus government stockpiles, which in recent years have contributed 50 million pounds (Mlb)/year. But, that number is expected to halve over the next few years. We are projecting a three-year supply shortfall starting in 2014, and that certainly paints a very rosy supply/demand picture for investors.
Seasonality also favors uranium exposure today. Over the last 10 years, uranium spot prices have dropped on average $4/lb during the third quarter (Q3) but have rebounded by at least that amount in Q4, which is the strongest quarter of the year. This is often correlated with the annual WNA symposium, where many market participants sit down and hammer out new supply agreements. This year’s conference is going to be held September 12–14 in London.
Last but not least, there are several near-term catalysts that we think will start the price upswing. In Japan, all but two reactors are now offline, and there’s significant uncertainty and government debate about how many will eventually restart. As the world’s third-largest nuclear fleet, it has obvious implications for future uranium demand. For a variety of economic, political and environmental reasons, we think Japan will restart most of its reactors by 2017 with the first batch of reactors likely starting early in 2013. As more units start to return to service, it will provide additional confidence that the nuclear utilities in Japan are unlikely to dump their inventories into the market, which should support prices in the near-term.
Meanwhile in China, the government paused construction approvals for new reactors immediately after last year’s Fukushima accident. But with these safety reviews now successfully completed, they’re poised to start re-permitting new projects, and this should undoubtedly support increased uranium contracting. Let’s not forget that China will be far-and-away the largest source of nuclear demand growth for the foreseeable future. We expect a six-fold increase in installed nuclear capacity by the end of this decade.
The final major catalyst is the expiry of the Russian Highly Enriched Uranium (HEU) agreement to down-blend material from nuclear warheads into reactor fuel. This agreement has supplied the Western World for two decades but is due to conclude at the end of 2013. The Russians have repeatedly stated they’re not interested in extending this agreement, and we expect this to remove about 24 Mlbs/year or 13% from the global supply. That’s equivalent to shutting down the world’s largest mine, McArthur River, as well as all six operating mines in the U.S. That’s a massive impact. So, for these reasons we think prices are poised to turn here. We forecast prices to average above $60/lb in 2013 and north of $70/lb in 2014 and 2015 before settling to $70/lb in the long-term.
TER: These catalysts are spread out over the next 18 months, which is not a long time. Stock markets generally look ahead. So, why are prices lagging as they are?
DS: That’s a good question. I think what we’re seeing is a significant amount of uncertainty in the marketplace surrounding the availability of some material and who is going to be a near-term buyer. The purchasing side is largely comprised of nuclear utilities, which are usually very conservative and cautious. Based on our experience, they tend not to make rash moves and prefer to wait until all information is available before jumping into new sales contracts. For instance, they would rather have certainty on whether utilities in Japan and Germany are going to be selling any of their inventories before they start buying. This has led to very low volumes in recent months.
However, we’re already starting to see contracting activity pick up with major long-term deals signed by Paladin and one with the United Arab Emirates, both this month. And the WNA meetings are now only a few weeks away. This mounting activity could be just what the market needs for the metal price to shift to higher and more sustainable levels. And recent history shows that when the price moves, it can move really quickly as we saw in 2007, mid-2009 and late-2010 when the weekly uranium spot price jumped in increments of $5–10/lb.
TER: Could these current low prices force juniors to sell themselves to the larger companies, the producers?
DS: Well, we certainly expect further consolidation in the space. This industry is pretty much divided into the haves and have-nots. On one side we have state-owned utilities in countries like China and Korea, which essentially have zero cost of capital and the stated intention to build their exposure to uranium production. We also have large producers, like Cameco and Uranium One Inc. (UUU:TSX), that are cashed up and looking to grow. But, meanwhile many have-not companies have been under significant pressure in this current low uranium price environment with weak balance sheets and share prices. They could be looking to either sell assets or be taken over completely. Last year we saw Hathor get acquired by Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK). Extract Resources was bought by the Chinese nuclear utility, China Guangdong Nuclear Power Corp. (CGNPC). And, Mantra Resources was just purchased by Russia’s ARMZ Uranium Holding Co. These major deals could just be the start of another major trend of M&A in our view.
TER: I’m surprised that those acquisitions you just mentioned haven’t been a bullish signal to the market.
DS: We definitely think that they’re a bullish signal. It means that the larger companies are willing to lay out capital and put it at risk to build their future pipelines, which is a sign to us that they have confidence in where the uranium price is going and that they want to have higher production in the future to take advantage of those higher prices.
TER: David, everything you have said sounds to me like you believe that we are now in a legitimate value market in uranium equities. Is that the way you feel?
DS: Yes, definitely.
TER: What are your best ideas that you’re telling investors about?
DS: We prefer higher-quality, lower-risk names with minimal capital requirements. One of those is Cameco. It’s the world’s largest publicly listed uranium producer. Its market cap is over $8 billion (B). So that makes it very acceptable for many investors who have certain constraints and mandates to get exposure to the uranium space. It’s historically been the go-to name in the space. This company features strong production growth and a very low production cost. And it’s got a critical milestone coming up with the startup of its massive 50%-owned Cigar Lake project, which is due to come on-stream in late 2013. When fully ramped up, Cigar Lake is going to be the second-largest mine in the world. Cameco also has a very healthy balance sheet with access to about $4B in capital, and we wouldn’t be surprised if it puts that money to work by making an acquisition in the next 6–12 months.
TER: You have a $28 target price on Cameco, which does not represent huge upside gain from current levels. Is this what you think of as a safer, more conservative play?
DS: Yes, certainly. It reduces your risk via diversification into the other parts of the fuel cycle, such as conversion, refining and electricity generation, while you’re still getting some serious exposure to the uranium space. Even if we don’t project a really big return to our target, we think it’s a safe play and we recommend it. There’s less volatility in this one.
TER: What’s your next idea?
DS: The next one in terms of lower-risk names we’d recommend is Uranium Participation Corp. (U:TSX). Our target is $8, but we’ve got a Strong Buy on it because we think this is a great low-risk way to get into the space. It’s the world’s only physical uranium fund, and it’s designed to give investors pure-play exposure to the uranium price without any of the associated exploration, development or mining risks. The fund usually trades at slight premium to its net asset value (NAV), but currently it’s about 13% below NAV. We think it’s trading at a great entry point right now. Its current share price implies a uranium price of about $44/lb. If you’re like us and you think spot prices are unlikely to descend to those levels, then Uranium Participation offers good value today. If you’re an investor looking for more leverage, it may not be the one for you. But, I think if you’re going to buy a basket of equities this is one that you may want to include.
TER: What about investors who are willing to take on a bit more risk for greater returns?
DS: If you want more leveraged exposure to a potential spot-price rebound, we would consider a couple of other companies. The first one is Ur-Energy Inc. (URE:TSX; URG:NYSE.A), and we’ve got a $1.80 target and a Strong Buy rating on this one as well. It’s got an excellent flagship project called Lost Creek in mining-friendly Wyoming. We see production starting up there in the second half of next year. The project’s got low capital and operating costs and it’s scalable as well. Despite a somewhat small 1 Mlb/yr mine plan, the design of the backend of the Lost Creek plant should accommodate about 2 Mlb/year of uranium. It should be able to incorporate other satellite deposits, such as those acquired from Uranium One earlier this year as well as from Areva last month. Ur-Energy is also a catalyst story. It’s got only one final mine permit required before construction can start, and we have strong conviction that final approvals from the Bureau of Land Management (BLM) will come in by the end of September, particularly following release of the Final Environmental Impact Statement (EIS) last week—a major milestone. Currently Ur-Energy’s valuation is very attractive, trading at the lowest price/NAV (0.5x) of any of our covered equities, and we think receipt of that approval from the BLM could help close the gap towards developer valuations.
TER: Over the past four weeks it’s up 34%. I’m guessing that the near-term expectation of this BLM permit is the reason for this stock’s very high relative strength.
DS: I think so. I think we’re trending towards that date, and it’s become very important because this company has faced a little bit of difficulty over the last few years with some of its permitting timelines. It has missed a few targets, and that has really hurt the share price. And, yes, when this permit comes in we think it should be a great catalyst for the stock to re-rate towards developer valuations.
TER: Would you mention another name?
DS: Uranium One is another one of these stocks with a bit higher risk profile, but we think this risk is justified, and that is demonstrated by our higher target price. We are rating it Outperform with a $3.60 target. It’s got an excellent suite of low-cost in situ leach mines in Kazakhstan. It’s the world’s fourth-largest producer, and it’s also one of the fastest-growing producers out there as well. We modeled over 15 Mlb of production in 2015, up from only 10.7 Mlbs in 2011. Uranium One has the highest exposure to spot prices than any other company in our coverage universe, so it’s a great way to play this space if you’re a strong believer in uranium prices going upwards. Uranium One is 52% owned by ARMZ Uranium Holding Co., a strong partner, and that’s allowed it to access the Russian ruble bond market, which has been a boon for the company. It’s at a great entry point at current levels, with a 0.7x current price/NAV.
TER: David, Uranium One has a $2.3B market cap, and because of that there are a lot of mutual funds that could buy this stock. But it strikes me that its market value is a quarter the size of Cameco. Mutual funds could get some very significant upside from Uranium One.
DS: That’s a really good point to make. There are very few universally investable uranium equities. And by that I mean that there are very few publicly listed uranium equities in Canada, for example, that exceed that $1B market-cap threshold. Cameco is the biggest one at over $8B in market cap, and then you’ve got Uranium One, and Paladin Energy. And, beyond that there are very few places that you can put your money if you’re the type of investor that’s got the specific size and liquidity constraints or mandates, like you said, as a mutual fund. Those are pretty much the top three go-to places if you want uranium exposure.
TER: Is there one more you could mention? You have a Market Perform rating on Denison Mines Corp. (DML:TSX; DNN:NYSE.A). I’m interested in hearing about it because the company is once again an explorer.
DS: Denison Mines has a great management group lead by Ron Hochstein, and it has a 60%-interest in an excellent exploration project called Wheeler River, which is one of the best discoveries that we’ve seen in about a decade, perhaps trailing only Hathor’s Roughrider. It’s also one of the highest-grading uranium deposits that has ever been discovered. We think that the project could nearly double its resources at depth, along strike and on regional targets, and so we model 70 Mlbs at 12% target resources at Wheeler River. Denison also has a 22.5% ownership of the state-of-the-art JEB mill, which is one of only four active conventional uranium mills in North America. It’s unique in that it can process high-grade ores without having to downblend. That’s a strong competitive advantage. For those reasons, we think Denison is a good takeout target. Cameco and Rio Tinto’s faceoff for Hathor last year was probably their first battle in a larger war for the prime assets in the basin, and Denison has two of them. That said, we are cautious on the name today given limited visibility to production at its minority-held Canadian projects and in Mongolia and Zambia, as well as potential financing risk next year. We have a Market Perform rating and $1.80 target on the company.
TER: I have enjoyed meeting you very much, David.
DS: Thanks for having me George. It was a pleasure to speak with you as well.
David Sadowski has been a member of Raymond James’ mining team since June 2008, and now covers the uranium and junior precious metal spaces as a research analyst. Prior to joining the firm, David worked as a geologist in Central and Northern B.C. with multiple Vancouver-based junior exploration companies, focused on base and precious metals. David holds a Bachelor of Science in Geological Sciences from the University of British Columbia.