By The Energy Report, on August 12th, 2011
 The Williston Basin is a hot area of exploration and production that oil and gas analyst Jason Wangler follows from his SunTrust Robinson Humphrey office in Houston. In this exclusive interview with The Energy Report, he shares his thoughts on the near-term prospects for oil and gas demand and prices, and tells us about several attractively priced names with good upside potential from current levels.
The Energy Report: Thanks for joining us today, Mr. Wangler. You and your associate, Neal Dingmann of SunTrust Robinson Humphrey, follow quite a number of energy stocks as well as the oil and gas markets in general. Oil prices have been relatively stable over the last few months with oil in the $90-$100/barrel (bbl.) range, and gas in the $4.20-$4.80/thousand cubic feet (Mcf) range. What are your expectations for the oil and gas markets in the next 6 to 12 months?
Jason Wangler: I think we’re really going to see a lot more of the same trading ranges. In the last couple of years, the economy, especially in the United States, has been building back from the terrible situation of late 2008 and early 2009. In 2009 and 2010, we were growing slowly and getting back to a level that was making more sense. But now that we’ve gotten a little more than halfway through 2011, there are still a lot of issues here in the United States. The debt ceiling and budget crisis and the general concerns with the economy not growing as fast as people expected have all had their effects.
We see the Brent crude prices $15 to $20 ahead of where the West Texas intermediate (WTI) oil prices are here in the States because there is excess supply in the U.S. right now and not as much expected demand for that oil. If you look at gas, it’s very much the same way, not only in the U.S. but worldwide. The other countries around the world would love to have the amount of natural gas that we have. The U.S. is blessed with the riches of natural gas from its shale plays. So you’re probably going to see gas stay in the $4-$5/Mcf range and, I think, probably below $4.50/Mcf for the most part, until we have either a demand or supply change that’s very dramatic. That would probably have to come from the demand side either in exporting natural gas or additional uses, whether it be for vehicles or heating more homes or something of that nature.
TER: It’s interesting how the whole gas situation has turned around because there was all this talk a few years ago about building ports to import liquefied natural gas (LNG) and now we’re talking about exporting LNG.
JW: It is amazing. The “shale revolution” has really changed the dynamic for a fuel that was very hard to come by but can’t be easily transported. You have to build these very large, expensive ship-loading facilities. Some people looked at the market in the U.S at the time and wanted to build import facilities because we would need them and we’ve leaned on Canada and Mexico for quite a few years to supply us with natural gas. Now we have so much at $4/Mcf, we wish those countries would need some of ours. Exporting LNG could start to balance out how much oil we have to import.
TER: Looking at your coverage list, some of the stocks are under $0.50 with market caps under $20 million (M), and others are big institutional favorites that trade above $100 with market caps over $50 billion (B). How do you decide which companies you want to follow?
JW: My colleague Neal Dingmann and I look for names and stories that interest us. We look at the management teams as well as where the assets are located and actually break our coverage down based on specific basins. I cover the Williston Basin in North Dakota and everything west. He covers Eagle Ford in Texas and everything east. And then we try to cover a group of names in each basin in different life cycles of each play. It could be one that’s just a very early entrant, which may have a $100M market cap, such as a Voyager Oil & Gas Inc. (NYSE.A:VOG) in the Williston, up to somebody who’s in the $10B+ range, such as a Continental Resources Inc. (NYSE:CLR) or a Whiting Petroleum Corporation (NYSE:WLL).
TER: You seem to be quite hot on the Williston Basin. Tell us why you like it so much.
JW: It’s one of the most economic and best resources that we have, not only in the U.S., but, really, in the world. There’s lots of running room and we’re very early into the play with lots of acreage still to be drilled. We could be up there for 50 or more years drilling very, very strong wells and putting lots of oil into U.S. tanks. The Eagle Ford and the Utica in Ohio have interesting and up-and-coming plays, but the Williston really has been shown to be as economic as any other, if not the best. It’s always nice to be in an asset that has the best type of results.
TER: A lot of these Williston stocks that you’ve recommended in the last few months have had some respectable moves. Is there still some good upside available there?
JW: I think there still is. The winter was colder than usual in North Dakota and Montana. After the winter season they had floods, which caused a lot of problems throughout the Midwest in general, starting up in North Dakota and Montana.
So, there were a lot of problems with shut-ins. They couldn’t work at the same pace they typically had been able to so production numbers were not as high as expected. Wells were not coming in on the expected timeframe. So, some of these stocks took a significant hit. The weather has been good since the beginning of June. Now we’re really starting to see some very impressive rates. Going through the second quarter earnings season, when we start hearing these names report, I think people are going to understand why they’re going to be a little bit lower than we originally expected entering the year.
Today, a month or two since the weather improved, we are able to say that this is a resource that makes sense. And as long as the weather works, we can really start churning out some very impressive numbers. So, I look for the Williston names to really have some impressive growth rates, not only for the full year, but, mostly based on just the second half of this year, because the weather has finally started to cooperate.
TER: Can you tell us about some small-cap names you particularly like at this point?
JW: One of them is a very early stage play in the Williston called Kodiak Oil & Gas Corp. (NYSE.A:KOG). The company has about 100,000 net acres at this point and is really starting to turn on a lot of wells. It should actually be able to start talking more and more about some very impressive production growth rates, not only for this year but next year. In the next couple of quarters, Kodiak could double production in only one quarter because it is able to bring on three, four or five wells. It currently has a couple of rigs running and will be moving to five rigs by the end of this year. Next year, 2012, we should see explosive growth much as we saw from Brigham Exploration Company (NASDAQ:BEXP) a few years ago. So, I look at Kodiak as an earlier stage play in the Williston with a very nice acreage position and cash on the books. When the additional rigs start running, it’s just a matter of focusing on operations and getting the oil out of the ground.
One other one is GeoResources Inc. (NASDAQ:GEOI). It’s a very interesting small company with a strong management team and a great balance sheet. The company has been around for quite some time and has been able to put together nice positions in both the Williston and the Eagle Ford. It’s just starting to drill now on those positions as the operator. It has a couple of wells in the Bakken that weren’t as great as maybe some other results. But, I think you will see some better results coming out of there as the company comes to understand the resource. Then down in the Eagle Ford, GeoResources just reported some very impressive results a few weeks ago coming out of the Gonzalez County area, a little bit further north than most people thought the Eagle Ford to be. It has some good partners and I think you’ll continue to see it be able to add rigs and really start moving that production level much higher.
TER: What else do you like?
JW: Another one that makes a lot of sense to me is Gulfport Energy Corp. (NASDAQ:GPOR). The company is in the Utica Shale as well as a lot of other places. Utica has become a play that everyone’s really curious about and Chesapeake Energy Corporation (NYSE:CHK) is really the only other one that’s talked about Utica very frequently. According to Chesapeake, Utica has the potential to be better than the Eagle Ford. It will be very interesting to see as we start getting some results out of that Ohio area. Gulfport is also drilling wells in south Louisiana and in the Permian Basin of Texas, and in the Niobrara in the Rockies. It also has some oil sands in Canada. Gulfport has a lot of different very strong assets predominantly focused on oil. And it’s been able to keep the production moving forward. So, I think that the good asset base will continue to turn into better and better cash flows moving forward.
TER: Any other low-priced ones you like?
JW: One other one I like is Abraxas Petroleum Corp. (NASDAQ:AXAS). It’s a smaller name with a position in almost every interesting play that’s not only already being produced in the U.S, but also a few others that are emerging as well. The company is in the Bakken area, the Eagle Ford and the Niobrara. It’s also in a couple of other plays including a small one called the Alberta Basin in Montana that’s becoming more and more exciting as Newfield Exploration Company (NYSE:NFX) and Rosetta Resources Inc. (NASDAQ:ROSE) start to do a little more work there. Abraxas is really a very good company getting out there early and picking up some acreage. Now it’s focusing on drilling that acreage, getting the production to the market and then growing its cash flows. But it’s one that I think is very interesting from an asset standpoint. With a stock price under $5, this is one you could really look at as a nice entry point into quite a few different interesting plays.
TER: You also cover Venoco Inc. (NYSE:VQ). Do you have any thoughts on it?
JW: Venoco is an interesting story but the company has had a tough year so far. It’s in the Monterey Shale in California. It and Occidental Petroleum Corp. (NYSE:OXY), are really the only two companies that are in that play in size, at least that we hear about on a regular basis. It’s taken the company a little bit longer than I think it would have hoped for. Tim Marquez is a smart guy and he’s been the CEO for quite some time. But the play has just really not come along quite as quickly as it had expected. Venoco has got some solid assets and solid production but the stock’s really gotten hit pretty hard over the past six months or so.
A lot of people are banking on this Monterey Shale becoming a very interesting and substantial shale play, and it just hasn’t done that yet. I think ultimately it will work, whether it’s Venoco or somebody else out there. I think Venoco has a great position. But, like a lot of other things, it just takes a little bit more time than we or even the company would like to see and so we’ve seen the stock come down. But it’s starting to get a lot more interesting down here in the sub-$12 range. I think it’ll start looking a little better as production ramps up and Venoco gets a little further up the learning curve on the Monterey Shale.
TER: So, generally, what are your expectations for the coming months that people ought to be aware of, concerned about or hopeful for, as far as investing in oil and gas stocks?
JW: The last few quarters really have all been very strong for the entire industry. Oil prices have been very healthy but gas prices not necessarily as much. The biggest questions have really been the macro situation. Is the economy going to grow? Is there going to be a situation like we had a few years ago where oil just absolutely fell off of a cliff? If it can stay in a range bound area, it will be much easier to make smart decisions on a company-to-company basis regarding who you really like and why you like them, as opposed to the whole industry having to come down.
I think that the industry right now is still severely undervalued, probably closer to the $70–$75/bbl. range for these stock prices versus oil trading in the $80-95/bbl. range. That’s because there’s a fear that the economy is going to pull down the market and oil and the stocks are just going to have to come down because higher oil prices have taken a toll on potential growth.
But the $90/bbl.+ range is a fair range. I think it makes sense as far as the world economy and I think that there’s still enough room for the country to grow, in terms of GDP and everything else, to keep these stocks moving and to keep oil prices where they should be. So, I think there’s a lot of room for these stocks to move. I would just continue to watch what the economy and oil prices do because those are going to be your two big drivers as, right now, these companies are making a lot of money at this $90-$95/bbl. range.
TER: So, to sum up, as far as you’re concerned, there’s more upside at this point than there is downside.
JW: Yes, I think so. For the companies, there’s a lot of upside and not as much downside. The assets they should be able to find with these shale plays are very repeatable. They are capital intensive but as long as the companies can maintain a good balance sheet, you’re safe there. At this point you’re in a price area where you really need to pick one or two that you want to get into and get comfortable with their management teams. The biggest overriding factor at this point is going to be what oil prices do. And what drives that is what the economies, not only here but across the world, are going to do. That’s the thing I think is going to be the most important factor.
And, like you said about the upside, I think one other thing that’s interesting and that could be one of those big upside drivers is that there’s going to be a lot more consolidation. Many of these smaller names will get picked up by larger names that have a lot of cash and want to find a way to grow their production and cash flows further. They need to go out to these new emerging plays in order to do that. So, I think you’re going to see continued consolidation in the market, which I think again, would be very positive for investors who go into these smaller to mid-cap names that may be taken out by the larger names at a nice premium.
TER: That sounds like a pretty optimistic picture for people who are willing to take a shot at some of these promising deals.
JW: Absolutely.
TER: We appreciate your taking the time to talk to us this afternoon and all the good information you’ve given us, Jason.
JW: Thank you.
Jason Wangler has over five years of equity research experience focused on the exploration and production (E&P) and oilfield services (OFS) sectors of the energy space. Jason previously worked at Wunderlich Securities Inc. and Dahlman Rose & Company before moving to SunTrust Robinson Humphrey. He also previously worked at Netherland, Sewell & Associates, Inc. as a Petroleum Analyst. He received his master’s in business administration from the University of Houston, where he was also named the 2007 Finance Student of the Year. He received his bachelor of science degree in business administration with a focus on finance from the University of Nevada, where he was named the 2003 Silver Scholar award winner for the College of Business Administration. In 2010, he was highlighted as a “Best on the Street” analyst by the Wall Street Journal and has been a guest on CNBC.
By The Energy Report, on July 27th, 2011
 Self-professed contrarian and 321Energy Founder Bob Moriarty expects energy and food prices to follow oil on an upward trajectory, fueling more and more turmoil, unrest and violence around the planet, including the Western world. Read on for more insights in this exclusive interview with The Energy Report.
The Energy Report: The markets don’t appear to have slowed for the typical summer doldrums this year. Instead, they seem to be returning to their pre-May highs, testing the 200-day moving averages. What do you think of this rally?
Bob Moriarty: So many factors affect it that it’s really difficult to figure out exactly what the market’s saying. I suspect that much of this rally stems from a belief in QE3 (quantitative easing), and that’s not a particularly good sign.
TER: Didn’t Fed Chair Ben Bernanke indicate in testimony to Congress that QE3 isn’t on the table at this point?
BM: Well, that was on an even day. On even days, he says, “No QE3.” On odd days he says, “Yes, QE3.” The government’s gone crazy. The market is schizoid because it has no idea what will happen. He said some things that would absolutely lead you to believe that QE3 is going to happen, and he’s said other things that indicate it is not going to occur.
It’s not only the U.S. government; it’s the Greeks, the EU (European Union), the Spanish, the Portuguese, the Japanese, the English—everybody’s painted themselves into a corner, and we no longer have good alternatives. We only have bad ones.
TER: With only bad alternatives, why wouldn’t the market reflect that negativity?
BM: That’s what I don’t understand. I think the market’s going to fall out of bed shortly because QE1 and QE2 didn’t add anything to employment. They cost an enormous amount of money and didn’t accomplish anything. So while I believe it would be pretty stupid to do QE3, the fact of the matter is that Bernanke’s totally run out of options that make any sense.
TER: Another thing that doesn’t seem to make sense is that the price of oil has generally been lower than it was six months ago. The last time we spoke about energy you indicated your belief that peak oil happened a few years back. Why then aren’t we seeing higher oil prices?
BM: As for peak oil, it’s no longer a theory; it’s an absolute. We’ve passed peak oil. When oil hit $146/barrel (bbl.) back in 2008, that was based purely on speculation. It wasn’t based on real demand; it was the flavor of the day. At $90 and $100/bbl., oil is pretty expensive. Even though the world is in a depression—and people are starting to recognize that it is a depression—we’ve got pretty expensive oil, and it’s going to continue to go up.
TER: Some argue that oil prices will be mitigated by the fact that as people have to pay more for gas at the pump, they drive less. Plus, we now see the U.S. trying to spark an international effort to release barrels of crude reserves. Would such a release have an effect or would it just be a Band-Aid?
BM: It’s strictly a short-term Band-Aid based on Obama trying to win votes for 2012.
TER: In the peak oil context, then, if oil starts going up, will we see a corresponding decrease in demand?
BM: It means that for the next 20 years the price of energy and food will go up on a continual basis. It’s very dangerous because everything that’s going on in the Middle East is a function of the price of fuel.
TER: How will the toppling of governments during the Arab Spring affect food and energy prices?
BM: In the first place, there is no quid pro quo. One is an analog for the other. The cost of corn and wheat caused the revolutions, but the revolutions aren’t going to affect the price of corn and wheat. It works one way, but not the other way.
TER: Can’t we reduce the rate of increase in food prices by increasing production?
BM: Of course. You can be much more efficient in producing food if you use fertilizer. You get more bang for the buck. But then the increases in energy and food prices will translate into a direct increase in the price of potash.
TER: Potash has been increasing over the last couple of years. Where’s the top?
BM: Well, the earth has seven billion people to feed.
TER: Are you implying that using potash will make food available in places where people are now going hungry?
BM: Here’s what people need to understand. If the price of oil doubles overnight, you can drive less. But what if the price of food doubles overnight? Eat half as much? That will be the source of much turmoil for the next 15 years. We need to match what we’re capable of producing to the number of mouths we have to feed.
TER: Over the years, you’ve always said that eventually it will be food that has people rioting in the streets. That scenario has now started to unfold.
BM: People must have wondered whether I was in touch with reality, but everything that’s happening in the Middle East, and indeed in Europe, is related. The riots in Spain, Greece, England, Italy—those riots are coming to the United States. You’re seeing flash mobs start up now and I think the government’s hiding a lot of the fighting.
TER: You’ve been investing in potash for a couple of years. What prompted you to pick potash as opposed to another form of food production innovation?
BM: There are other areas of food production to invest in and certainly water would be one of them. But I happen to know some good potash companies and I just can’t see how potash could be anything but a really good investment.
One of the best—and it’s a company I’ve been invested in for three years—is Passport Potash Inc. (TSX.V:PPI, OTCQX:PPRTF). It was at $0.10 for the longest time due to some substantial management issues. Those were corrected, and the stock shot up to $1.86. It’s dropped back down to the $0.55–$0.66 range now, which is healthy, and it’s a pretty good investment. Passport Potash has a giant basin out in Arizona, and will be producing potash for years to come.
TER: Given that the U.S. is pretty well-endowed with food, how much higher can it go?
BM: It doesn’t make any difference if the U.S. is endowed with food or not, lots of countries aren’t, and it’s easy enough to ship potash to the growing areas. But it’s interesting that you mention the U.S., because the U.S. always had a tremendous competitive advantage over the rest of the world due to its high percentage of arable land. Ironically however, the U.S. is now actually a net importer of food due to screwed-up government policies.
TER: When did we become a net importer of food?
BM: In the last two or three years.
TER: A recent feature about new immigration laws in some of the states was focusing on the fact that Georgia’s losing immigrant farm workers and can’t replace them. The commentator asked why there’s a farm-worker problem with 10% unemployment in Georgia. They said because “the U.S. people won’t take these jobs.” He summarized that food production, and the jobs that go with it, will go overseas because Americans won’t work in the fields.
BM: That’s true, and U.S. people who are unemployed need to rethink their attitudes. We have 44 million people on food stamps, and at some point, the government isn’t going to be able to feed everybody. We need to reset our goals and start understanding where we are. One of the best things we could do is eliminate the ethanol subsidy. It’s caused revolutions all over the world, and eventually it will destroy the United States. It’s totally stupid, totally insane. It takes 81,000 calories of energy to produce 75,000 calories of ethanol, yet we’re still subsidizing corn.
TER: With the U.S. now a net importer of food and the chances of more food production moving offshore, does it make sense to be looking at potash production overseas as well?
BM: You’re trying to connect things that don’t have a connection. The United States and Canada are among the main potash producers in the world, and everywhere you raise crops for food, you need to increase efficiency. The price of food being where it is now, you can afford potash. The demand will continue to go up, and whether we use it domestically or export it is relatively meaningless.
TER: But isn’t it true that Brazil is trying to produce food and potash operations located there, and thus these operations would have a distinctive advantage?
BM: Yes and no. Verde Potash (TSX.V:NPK) has high-grade deposits there as well as government support. But the big issue in Brazil is the cost of transportation. It’s very expensive, and probably cheaper to dig potash in Arizona and ship it to Brazil than to ship it within Brazil. Brazil lacks infrastructure. Therefore, even though we’ve seen amazing gains in its soybean production, trying to get potash from one place to another is very difficult.
TER: Another commodity you’ve been interested in is uranium. Since the Japanese tragedy, a number of countries have said—or at least implied—that they’re going to reduce their reliance on nuclear energy. How much of an impact would that have on the uranium price?
BM: As far as the disaster in Japan goes, it’s like an iceberg with 90% of the problem below the surface where we don’t see it. I think it’s a lot more serious than anybody wants to admit, and that we’ll end up with tens of millions of people dying of radiation-caused problems. Consequently, I think nuclear is dead for 50 years.
We do need nuclear energy, but at the same time we need safe nuclear energy. With Fukushima, every bad thing that could happen happened, and every bad decision that a country could make was made. When people in Vancouver and Seattle start dying left and right from radiation poisoning, we’ll certainly reevaluate how we feel about nuclear.
TER: So you expect more backlash?
BM: We haven’t seen anything yet. People on the West Coast of the United States inhaled 30 particles of radioactivity a day for two or three months, and one particle can cause lung cancer down the road. It may be shocking how many people ultimately die as a result of that disaster, but it’s going to be 10 or 15 years before we figure it out. I think it’s a disaster of a magnitude that’s never before occurred in history.
TER: Perhaps due in part to the renewed focus on alternative energies in the wake of that disaster, the rare earth sector has commanded quite a bit of attention this past year. Is this sector one that appeals to you?
BM: No. I think it’s a very dangerous place to invest, and a lot of people stand to lose a lot of money. Jim Dines came out two years ago with the glowing recommendation for the rare earth elements and created a monster. While I have a world of respect for Jim Dines—the guy is absolutely brilliant—he’s brought $50 billion worth of investment into a $5 billion industry. While it’s true that China has a stranglehold on rare earths, it’s also true that supply-and-demand does work, and at some point, if the price goes high enough, it will suck the metals out of the ground.
I am a contrarian, and you’re never going to find me believing what everyone else believes. Too many people believe rare earths is a slam-dunk, and every slam-dunk investment I’ve seen in 65 years has been a loser.
Bob Moriarty’s 321energy.com covers oil, natural gas, gasoline, coal, solar, wind and nuclear energy. It’s his second site on the internet; convinced that gold and silver were at their bottoms and wanting to give others a foundation for investing in resource stocks, he and his wife, Barb, launched 321gold.com almost 10 years ago. Both sites feature articles, editorial opinions, pricing figures and updates on the current events affecting both sectors. Before his Internet career, Bob was a Marine F-4B pilot O 1C/G forward air controller with more than 820 missions in Vietnam. A captain at age 22, he was the youngest naval aviator in Vietnam and one of the war’s most highly decorated. He holds 14 international aviation records, and once flew an airplane through the Eiffel Tower’s pillars “just for fun.”
By The Gold Report, on June 23rd, 2011
 Mercenary Geologist Mickey Fulp has adopted a new prospector-generator model portfolio with an emphasis on good people. In this exclusive interview with The Gold Report, he outlines the impact global volatility could have on junior mining companies.
The Gold Report: Is there a danger of food shortages starving emerging economies and putting an end to the secular commodity bull market? In your March 21 Musing newsletter, you tracked the commodities market back to 1955, illustrating the worldwide food inflation problem crushing poor countries. You have also written about the important role of these same emerging economies in pushing the eighth year in a commodity bull market. So I have to ask, could food shortages choke growing commodity demand?
Mickey Fulp: I think yes. I am less concerned about food inflation now that oil is down to less than $95 a barrel than I was when it was $115. It eases the pain a bit. But, we saw in the early part of the year two Middle Eastern countries with oppressive regimes fall. In Tunisia, a government that reigned for 23 years was taken down because of food riots. In Egypt, the catalyst for the government’s fall was food inflation. It is my opinion that if unrest were to spread to eastern Asia where a lot of the commodity demand growth is located, that could create another economic crisis and a collapse in the secular bull market for commodities—similar to what happened from mid-2007 to early-2009 when a U.S. banking crisis spread worldwide, bringing the global economic system to the verge of collapse.
TGR: Didn’t all commodities drop during that collapse, even gold at least for a short time?
MF: Absolutely. It went down to $680/oz.
TGR: I don’t even think the U.S. dollar did that well. Everyone just pulled in. So, if we see a shortage of food in eastern Asia, would that instill a growth slowdown and thus inhibit commodities? Or would precious metals begin to soar?
MF: I think precious metals would shine. Let’s use an analogy. In November of 2008, the gold price collapsed. It went down to $680/oz. and it hit a double bottom before it started rising. An amazing thing is that in the early part of 2009 gold and the dollar index increased at the same time. That’s quite unusual. The reason for that, in my opinion, was a run to what were perceived as safe havens. In the scenario we’re talking about right now, I would be very bullish on gold. That won’t preclude a selloff like we saw in the early fourth quarter of 2008, but to be safe, I will always want to have 10% of my net wealth in gold.
TGR: Wasn’t some of that 2008 decrease in gold due to massive deleveraging as people were forced to cash out to pay their calls?
MF: Yes and the reverse of that is happening now. The hedge funds and speculators pouring cash into gold paired with quantitative easing is a big reason for the run-up in the price of gold in the last year. We’re printing more and more fiat currency. So, if a crash were to happen again, the hedge funds will pile out of the commodities, take profits and sit on the sidelines for a while. If stocks start to collapse and margin calls come, people will liquidate whatever is . . .
TGR:. . .liquid.
MF: Yes, and that could be the precious metals again. But, the long-term purchasing power of gold is going to remain the same. So, overall we would expect gold to do quite well in an economic crisis.
TGR: You mentioned QE2 and hedge funds. Quantitative easing usually increases the price of gold while hedge funds depend on numerous other variables.
MF: Right. Hedge funds rush to the next big thing. That’s what we saw in early May when we experienced an across-the-board commodities correction. It didn’t last very long and it was not very deep, but hedge funds en masse ran out of commodities. Now, for the most part, commodities have stabilized. In the meantime, the junior resource sector continues to slowly progress to the downside.
TGR: That is my next question. You say the hedge funds will go to the next big opportunity. Since the junior precious metals market has underperformed compared to the gold price, do you see any probability that hedge funds will go into the junior market in the expectation of an equity catch up?
MF: That’s an interesting thought. Certainly, the junior sector looks downtrodden right now. There is always low liquidity during the summer doldrums. Toronto brokers summer in their cottages on the lake; Vancouver’s sharks go to the mountains; Europeans take leave for six weeks; and everybody in New York City is in the Hamptons. The Toronto Venture Index valuation lost 30% since closing above 2,400 on February 28. A post-Prospectors & Developers Association Conference pro selloff started in March, then we had “sell in May and go away.” Now we have a couple of months of summer doldrums looming. We generally see a seasonal uptick after everyone comes back to work in the first part of September. That is the time of year when we would expect higher volumes that could lead to higher junior valuations.
TGR: We started this conversation with agricultural intrigue. In the U.S., we’ve had an amazing amount of flooding, slicing into crop forecasts. As we move through the summer, do you expect more interest in “flight to safety” vehicles like gold for wealth preservation?
MF: Maybe. But here’s another argument to that scenario. We are approaching the seasonal low for gold. In most years, precious metals dip in July and August. For me, this is one of the annual opportunities for buying gold. I’ll get it for a better price than I will once the wedding, holiday and festival seasons start in the early fall in India and continue into China and the Muslim world. Low season’s coming up.
TGR: When you analyze companies, you review share structure, people and flagship projects. As you look at the juniors, are there some downtrodden companies that possess that unique combination of features that merit acquiring during the summer?
MF: I recently moved out of two gold companies because they experienced healthy run-ups and decided to move on to something else. That moved me out of the precious metals sector and more into the prospect-generator model. I cover Almaden Minerals Ltd. (TSX:AMM; NYSE:AAU), Avrupa Minerals (TSX.V.AVU), and Estrella Gold Corp. (TSX.V:EST) and am going to add another prospect generator soon. I have also added one new startup gold company called Brazil Resources Inc. (TSX.V:BRI). It’s the same team that was successful with Uranium Energy Corp (NYSE.A:UEC).
TGR: But this is a gold play?
MF: Yes. The company’s goal is to build a mid-tier gold mining company in Brazil in the near to midterm. I wrote about it in a recent Musing on my web site. It’s available free to all email subscribers and it’s an easy process to sign up and gain access.
TGR: Mickey, you have done quite a bit of geology in Peru and Chile in your career. How does Brazil play in terms of geological wealth compared to Peru and Chile?
MF: The geology is very permissive and it has a phenomenal gold budget. In my opinion, Brazil has been underexplored because it’s mostly in the Amazon with little outcrop and infrastructure; only about 15 juniors have active projects in Brazil and no major discoveries have occurred so we don’t see as much competition there. Additionally, Brazil is fairly bureaucratic, making business startup difficult. I like the people involved in Brazil Resources because they have run a successful startup before, I have a positive working relationship with them, and I respect them. I think they will be successful. I also like the relative lack of competition in Brazil paired with a tight share structure in the company.
TGR: Earlier, you said that on a macro-level you’re moving your portfolio out of gold plays and into prospect-generator models. What is it about this type of company that intrigues you?
MF: Prospect generators spend someone else’s money to advance projects. That means the company can avoid share dilution and preserve capital. The key is to find good prospects and good partners. It is an especially effective model in unsettled and down times in the market.
TGR: So, it is unsettled times that made you focus on the prospect-generator model?
MF: Not necessarily. I have been in prospect generators for at least two years now. I’ve just moved out of some pure precious metal plays because they had very good run-ups so I took profits. Part of it is I need to be stimulated. I will move into and out of stocks and pick new things because I like to generate ideas and make speculative money work for me and my subscribers. So, when a company has a two- or three-time run-up and I don’t see another double in the next year, then I take that money off the table and move it into another stock. If I pick a stock at $0.25 and it goes to $0.50, that’s a two-bagger. The chances of it going to $2 and another two-bagger is a lot less than if I go find another $0.25 company and play it to go to $0.50. It’s a matter of the power of two, of doubling your money. So, if you don’t think something has potential to double from where it is right now and you already have your double, then take that money off the table and go find another cheaper one.
TGR: In the prospect-generator model, you’re talking about spending someone else’s money to avoid dilution. But, it ultimately does need some good projects. You have often talked about a missing generation of geologists. In fact, in one of your Musings you talked about the importance of mentors. In a prospect-generator model, how important are the company geologists?
MF: They are of paramount importance. A prospect-generator model works only if the company has a cadre of excellent, field-savvy geologists with particular expertise in an area, a commodity or a deposit type. So, the geologist’s skill set is the first and foremost key to making a prospect generator work.
TGR: Tell me about the geologists and management at the three companies you mentioned earlier, Almaden, Estrella and Avrupa.
MF: Sure. Most of the time in these companies, the geologists and the management are one and the same. Almaden Minerals is run by geological engineer and Chairman Duane Poliquin. He founded the company in 1986 and it has been very successful. Almaden’s recent discovery is high grade and looks like it could be a district-wide gold-silver play in eastern Mexico. His son, Morgan, is now the company president. They are both good geologist prospectors and they’re the brains behind the outfit. Almaden really is a family-run organization. It is AMEX listed, has only 56M shares out and over $25M in working capital.
Estrella Gold is a fairly new company run by geologist-CEO Keith Laskowski who was responsible for Eurasian Minerals Inc.’s (TSX.V:EMX) success in Haiti. He is working in Peru, where the country is becoming more left-leaning in the wake of the election of a former military man. Economic and social policies no doubt will swing left in the country. However, Peru is a great destination for major mineral deposits. And Estrella Gold has the right set of investors behind it, with a low number of shares. It’s also a bit beaten up right now because of the political uncertainty. Avrupa Minerals is a relatively new prospect generator, less than a year old. It holds base metal plays in Kosovo and Portugal. The company announced recent success in vending four projects in Portugal, including a tungsten-gold play with potential. The company focus is on the Iberian Pyrite Belt and it just signed a joint venture agreement for three strategically-located properties with Antofagasta plc (LSE:ANTO).
TGR: Who are the geos there?
MF: The geologist-CEO is Paul Kuhn, a man I’ve known for 25 years. He’s spent a significant part of his career in eastern to southern Europe and western Asia—Avrupa Minerals’ focus areas. The company has a very competent staff in Portugal and I expect continued success there.
TGR: So, if we are looking at summer doldrums for the next several months and Rick Rule advises becoming accustomed to volatility, what is your favored investment strategy in the short term?
MF: I have a “wait and see” attitude right now. I’ve been buying some uranium stocks on weakness. As a contrarian, I like to buy when other people are exiting. There will be other buying opportunities in the near term, but I’m not sure if this is the time to do it. I suggest finding some good, fundamentally strong companies that you like, that you think will be healthy for the long term and can survive a downturn, and put in some low bids—stink bids. If they get filled so be it. And, if they don’t, oh well, they didn’t get to the level that you thought was a good risk-reward price. Don’t sell on emotion or panic. Develop a core speculating philosophy and stick with it. Modify it as market conditions require, but stick with what your basic investing philosophy demands.
TGR: Mickey, I appreciate your time.
Michael S. “Mickey” Fulp is author of The Mercenary Geologist. He is a certified professional geologist with a B.Sc. in earth sciences with honors from the University of Tulsa and M.Sc. in geology from the University of New Mexico. Mickey has more than 30 years experience as an exploration geologist searching for economic deposits of base and precious metals, industrial minerals, coal, uranium, oil and gas and water in North and South America, Europe and Asia. Mickey has worked for junior explorers, major mining companies, private companies and investors as a consulting economic geologist for the past 24 years, specializing in geological mapping, property evaluation and business development.
By Doug Gentry, on April 13th, 2011
As of February 2011, the Consumer Price Index has gone up 2.1 percent in the preceding 12 months. Core inflation (All items excluding Food and Energy) went up just 1.1%. Inflation is certainly not beating at the door. On the other hand, global food commodity prices have been rising suddenly as have oil prices. In class we talk about how the All Items CPI is important, but that the Core CPI is a better measure of broad-based changes in prices.
The modest inflation measures will change in the future. We almost certainly should expect prices to rise more rapidly. We just don’t know when, or for how long.
 Aggregate Demand and Aggregate Supply This blog post by economist Tim Duy has a very thorough and clear explanation of some of the forces gathering on the inflationary front. He presents this as a way to help understand the decisions and debate within the Federal Open Market Committee (FOMC) in the months to come. Though clear, his explanation requires an understanding of aggregate demand and aggregate supply curves. So, for my students, mark this post and come back to it once we’ve covered those subjects.
For any reader, here are the summary conclusions that Duy reaches:
We can track the path of the prices and output and explore the positions of Fed officials within a fairly simple framework. That framework suggests that the economy will experience a temporary period of accelerating inflation as it returns to potential (we should be so lucky, quite frankly). There doesn’t seem to be much debate at what speed this will occur; Fed officials appear comfortable with growth expectations around 3.7% this year. What does seem to be an issue of debate is the size of the unemployment gap. If we are close to the natural rate of output, excess monetary stimulus is close to triggering the fabled wage-price spiral. If far away, there is plenty of excess capacity and thus no need to tighten quickly. Indeed, tightening policy too soon would only entrench disinflationary expectations. Fed officials appear to be splitting along these two basic views of the world, with one side seeing recent price increases as consistent with their inflationary nightmares. I tend toward the other, which I also think will be the dominate view at the FOMC.
And here is my translation:
- The Fed expects economic growth to continue, and even at a somewhat faster pace.
- Our regular models suggest that this continued growth will put upward pressure on prices.
- One big unknown is whether there is a lot of unused capacity in our economy – particularly among workers.
- If there are a lot of workers who can be put back into production, without much training, we have plenty of unused capacity which will soften inflation.
- If those workers who are still unemployed have the wrong skills or geographic location, our unused capacity is smaller.
- As we use up our capacity and get closer to full economic production, we get closer to the danger of a wage-price spiral that would cause inflation to increase significantly.
- Some members of the FOMC fear we are close to capacity and that any more moves to stimulate the economy will trigger that wage-price spiral.
- Other members of the FOMC are less worried about inflation and instead fear that a cutback in stimulus efforts will stall the recover.
- Duy predicts that the inflation hawks (the first group) will be outvoted by those worried about recovery.
For my students – this is a bit more complicated than we handle in a Principles class, but a good way to test your understanding of aggregate demand and aggregate supply.
By Ajay Shah, on August 5th, 2010
Milan Kumar Biswas, General Manager of Keggfarms Pvt. Ltd. knows something about inflation. In a note addressed to his customers, stuffed in a box of eggs, he announced an increase in the unit price of his eggs.
P = (1+markup) MC. To justify the change in P, of course not due to his own greed (the “markup”), Mr. Kumar blames various “exogenous” factors for the price increase, all bunched in what economists call “marginal cost”. He tells us about the components of his marginal cost:
- Input costs for feed: read food grains and other food items.
- Man-power: read wages.
- Packaging and transportation costs: read a mixture of wages, services and fuel prices.
This points to something more than just food inflation. Mr Kumar, just like our RBI Governor, seems to suggest that price pressures are indeed quite generalised.
On 1), we knew about food inflation from the the WPI and the CPI. What is novel is the information on the pass-through to processed food items from unprocessed ones. It is a clear example of the cascading effects of input costs into prices downstream from the production chain.
On 2), unfortunately we have no direct and timely statistical evidence about wages in India. Hence, we, alongside our Central Bank, are left grasping for evidence from anecdotal and piecemeal information. If true, it would be indeed bad news. A input cost increase passed onto wages, i.e. the famous “second round effects”. This puts us into something like that classic story of mishandled inflation, the oil shock of the 1970s.
On 3), we unfortunately have no clue what are the developments in services prices. Hopefully CSO will soon release a new CPI so we can start seeing some of this.
Last, but not the least, can we also trust Mr. Kumar that he will not raise his markup in a period of ongoing recovery of demand? Economists have long disagreed on this question. See the seminal papers by Rotemberg and Woodford, and, more recently, Ramey and Nekarda.
By Ajay Shah, on December 21st, 2009
There is a lot of concern about inflation. Most of it is based on perusing the following numbers of the year-on-year changes in price indexes:
|
Jul |
Aug |
Sep |
Oct |
| CPI (IW) |
11.9 |
11.7 |
11.6 |
11.5 |
| WPI |
-0.7 |
-0.2 |
0.5 |
1.3 |
| WPI Food |
13.3 |
14.0 |
15.7 |
13.4 |
| WPI fruits,vegs |
15.5 |
12.0 |
24.6 |
11.1 |
True inflation in India is somewhere between the CPI-IW (which overstates the importance of food) and the WPI (which overstates the importance of tradeables and thus the exchange rate). YOY CPI changes are stubbornly above 10\%, and the yoy WPI inflation seems to have risen in each of the above three changes.
However, the year-on-year growth is the summation of the changes of the last 12 months. To get a sense of what is going on in the recent period, and to not be confused by ancient information, it is essential to look at month-on-month changes. This requires seasonal adjustment.
At http://www.mayin.org/cycle.in, we have a program of regular release of this data, which includes month-on-month changes expressed as `seasonally adjusted annualised rates’ (SAAR). This shows:
|
Jul |
Aug |
Sep |
Oct |
| CPI (IW) |
40.8 |
10.2 |
10.8 |
8.1 |
| WPI |
9.7 |
10.6 |
5.7 |
4.5 |
| WPI Food |
52.8 |
14.7 |
7.7 |
13.4 |
| WPI fruits,vegs |
39.6 |
-23.7 |
-3.6 |
33.2 |
This shows a rather different picture. We have food inflation, particularly with fruits and vegetables, given that we’ve just had a bad monsoon. But the overall WPI Food inflation contained one big jump in July and has slowed down after that.
The CPI(IW) gives a lot of weight to food. Hence, it showed a big value in July. After that, it has reported softer values.
The WPI itself was showing values around 10% in July and August, but gave values near 5% in September and October.
This, then, seems to be a relatively benign inflationary environment to me, particularly from the viewpoint of monetary policy. Monetary policy should not take interest in food prices in connection with a monsoon failure, because the time horizon over which monetary policy acts is long – perhaps between 9 and 18 months. By this time, conditions in WPI Food will have been reshaped by many new harvests.
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By Rok Spruk, on November 11th, 2009
David O. Meltzer and Zhuo Chen explored the relationship between minimum wage rate in the U.S and body weight (link):
“Growing consumption of increasingly less expensive food, and especially “fast food”, has been cited as a potential cause of increasing rate of obesity in the United States over the past several decades. Because the real minimum wage in the United States has declined by as much as half over 1968-2007 and because minimum wage labor is a major contributor to the cost of food away from home we hypothesized that changes in the minimum wage would be associated with changes in bodyweight over this period. To examine this, we use data from the Behavioral Risk Factor Surveillance System from 1984-2006 to test whether variation in the real minimum wage was associated with changes in body mass index (BMI). We also examine whether this association varied by gender, education and income, and used quantile regression to test whether the association varied over the BMI distribution. We also estimate the fraction of the increase in BMI since 1970 attributable to minimum wage declines. We find that a $1 decrease in the real minimum wage was associated with a 0.06 increase in BMI. This relationship was significant across gender and income groups and largest among the highest percentiles of the BMI distribution. Real minimum wage decreases can explain 10% of the change in BMI since 1970. We conclude that the declining real minimum wage rates has contributed to the increasing rate of overweight and obesity in the United States. Studies to clarify the mechanism by which minimum wages may affect obesity might help determine appropriate policy responses.”
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By Ajay Shah, on August 19th, 2009
The progress of the 2009 monsoon seems to be 29% below normal. This may be adversely affecting food prices. In the latest available data, inflation based on CPI-IW has surged back to values near 10%. (This is the three-month moving average of the rate of change of seasonally adjusted CPI-IW).
Ila Patnaik has an article in Indian Express analysing the implications of this situation for monetary policy.
India really needs an `inflation report‘ institution.
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