By The Energy Report, on September 23rd, 2011
 The Western world’s skittishness, skepticism and staunch opposition when in comes to nuclear energy won’t stand in the way of its production elsewhere in the world. It will be full steam ahead in China, India and other developing nations, says Casey Research Chairman Doug Casey, and the Western world is tiny in comparison. In fact, “I’d say uranium is a great place to be for at least the next generation,” he tells us in this Energy Report exclusive. With ever-advancing technology enabling economic recovery in places where it previously wasn’t possible, he’s also optimistic about natural gas and oil.
The Energy Report: Next month, at the sold-out Casey Research/Sprott Inc. “When Money Dies” summit in Phoenix, you’re on tap for a presentation entitled “The Greater Depression Is Now.” Your colleague, Marin Katusa, is on the roster too, talking about “Making Money in Energy.” Marin recently told us there’s a buying opportunity for uranium companies. Given Fukushima’s repercussions in terms of the nuclear energy industry, are you bullish on uranium?
Doug Casey: Absolutely. It’s unquestionably the safest, cheapest and cleanest form of mass power generation. That’s not to say that there aren’t problems, as the Fukushima incident made clear. As much of a disaster as that was—a combination of earthquake, tsunami and radiation leakage—so far it’s just been a big industrial disaster. I daresay that if government hadn’t been so involved in nuclear power these last 50 or 60 years, the technology would have been much further along. Nuclear power would be much safer, cheaper and cleaner than it is today. We might, for instance, be using thorium, which appears to be better than uranium in many ways. We would almost certainly have much smaller, cheaper, and robust reactors.
So, yes, I’m a huge uranium bull. If you want mass power, you need nuclear power. And today that means uranium. I’d say uranium is a great place to be for at least the next generation.
TER: But considering the fact that governments remain involved and people are even more squeamish about nuclear power post-Fukushima, won’t we see a stall in nuclear power and development?
DC: That’s possible. But, the hysteria is mainly going to affect the Western world. China and India recognize they have no alternative to nuclear power. As you know, the growth is in China, India and other emerging economies; it’s where the most of the world’s people live. The Western world is small by comparison, and getting smaller. These other places will continue full steam ahead with nuclear.
TER: Porter Stansberry, whom you know well, recently told us to expect the U.S. to become a net exporter of natural gas in the not-too-distant future. Do you see that as well?
DC: Quite likely. Let’s talk about peak oil first, though. I think that the Hubbert peak theory is accurate, and for good geological reasons—but understand that peak oil doesn’t mean we’re running out of oil. Rather, it means that we’re running out of easily available, cheap light sweet oil. And we are.
However, technology is always improving, enabling economic recovery of oil and natural gas in places where it previously wasn’t possible. Horizontal drilling and the fracking process have opened up gigantic reserves of gas, scores of trillion of cubic feet in some basins in the U.S. So, yes the U.S. could become a huge exporter of natural gas. It’s entirely possible. It could happen in other regions of the world as well, but probably not with gas at its current prices.
The gas is available, but because it’s very underpriced relative to other forms of energy, it probably won’t be produced until the price doubles or even triples from where it is now. That would bring it more into historical alignment with oil prices, which I expect will themselves go higher as well.
TER: How is it that the oil prices have remained relatively high and gas is still so low? Given the differential of the two price points, why aren’t we seeing a conversion from oil-dependent cars, for instance, to natural gas?
DC: Oil has much a greater density of energy than natural gas, and a much more convenient energy-based fuel, so of course we’ve all gravitated toward it. It’s not really feasible for aircraft, for instance, to be able to run on natural gas, so they’ll continue to use oil-based derivatives. In addition, gas is much harder to transport than oil. So it’s tended to be a local market, whereas oil is international.
But since most all the easy, cheap oil’s been found—mostly in the 60s and 70s—and those old oilfields are going into decline, gas is probably the next thing. Gas has some advantages as well. For one thing, it burns cleaner. Remember that these fuels, these petrochemicals, basically contain just hydrogen, oxygen and carbon. As technology advances, we should be able to manipulate these very simple and well-understood molecules and put them into a form we want. We’ll be able to do it ourselves in various ways as nanotechnology, for instance, develops further in the future. Then maybe we won’t have to rely on nature doing it for us over billions of years.
TER: Despite criticism of the effects of government involvement—stifling nuclear energy advancement over the years, as you mentioned earlier, or printing money to paper over enormous amounts of debt, as you’ve pointed out in other interviews—you’ve indicated that improving technology is a countervailing trend that actually will increase the standard of living.
DC: Exactly. There are more scientists and engineers alive today than have lived in all previous history put together; that’s a huge cause for optimism. Technology is very likely to solve many, many problems—as long as the scientists and the free market are allowed to develop these things, and as long as there’s capital available to manufacture the tools they need to do so.
TER: What are you hoping attendees come away with from next month’s summit?
DC: People come to these conferences is to get ideas about intelligent places to put their capital. Today those places are harder to find than has ever been the case before in my lifetime. With the dollar’s imminent demise, staying in cash is also very dangerous. There are very few bargains to be found in the world of investment today. Stocks today are quite overpriced by almost any parameter. Bonds will implode; that’s especially serious because they’re a much bigger market than shares. Property prices are still headed down. So people are looking for answers, and I think we have some.
Beyond answers along those lines, we also host these summits to discuss some investment principles so that our attendees don’t have to rely on us for answers. They’ll be equipped to deal with these things on their own.
TER: What are some things that investors can do to protect themselves?
DC: It’s very hard to be an investor in today’s world, because an investor is someone who allocates capital in a way to create new wealth. Inflation, taxation and regulation make investing very problematic—and all three are becoming much more severe. That said, it’s late in the day but not too late to buy gold, silver and some other commodities. Productive assets of several types are good to own. Of course, the easiest way to buy most productive assets is through the shares of publicly traded companies, but since the stock market is overvalued in my opinion, that’s not the best option right now.
In addition to trying to build personal holdings of gold, and to a lesser degree silver, I think people should learn to be speculators. That’s not to be confused with gamblers, who rely on random chance. Speculators position themselves to take advantage of politically caused distortions in the marketplace, and we’ll be seeing lots of those. In a true free market society, you’d see very few speculators because there’d be very few such distortions. But compounding regulations, taxes and currency inflations are likely to keep markets very volatile. Good speculators will position themselves to both capitalize on inflating bubbles, and identify bubbles that already have been blown to their maximum and are about to pop.
Increasing government involvement in the economy is going to literally force people to become speculators.
TER: What bubbles might speculators look to exploit?
DC: As I mentioned earlier, most forms of real estate in the U.S. are problematic because the U.S. bubble hasn’t completely deflated yet, and real estate bubbles are just starting to deflate in places such as Australia and Canada. Probably the world’s biggest real estate bubble is in China. It’s relatively hard to short real estate, of course. But shorting banks there might work well. . .
Bonds are another story. I’d say bonds are the short sale of the century. They’re going to be destroyed. Bonds pose a triple threat to capital:
- Interest rates are artificially low, and as interest rates rise—which they must—bonds will fall.
- The currencies that bonds are denominated in, let’s say dollars, will depreciate radically.
- The credit risk presented by many issuers—certainly including governments—very high.
On the long side, mining stocks are very cheap relative to the price of gold right now. There’s an excellent chance of a bubble being ignited in gold mining stocks, especially the small ones; in fact, I’d put my finger on that as likely being the easiest way to make a killing—although there’s plenty of risk.
TER: How about technology? Do you see a bubble forming there?
DC: You have a point, but I’m not sure you can talk about technology stocks as a whole; technology is too variegated, too vast a field. I must say, however, that I’ve always been a huge fan of nanotech—that is an area that will change the nature of life itself. The market will see that, and so it’s a definite candidate for a mania. With gold stocks, however, you can jump into a discrete universe.
TER: Any others?
DC: Just talking about the things that seem most obvious to me, like gold. . .well, oil isn’t cheap, but a lot of oil stocks are. Natural gas, as we said, impresses me as being cheap relative to other commodities. A favorite of mine is cattle—the downside is de minimus and the upside is huge.
TER: Well, Doug, thank you so much for your time and this preview of your October event. I imagine you look forward to it for many reasons, including the fact that it’s sometimes nice to be with other intelligent people who want to broaden their horizons.
DC: It is. It’s nice to spend time with others who see things the way you do, and with whom you have some philosophical principles in common. The people who come to our conferences share what I believe to be a sound view of the world. They’re not statists; they’re not collectivists; they’re not misguided, ignorant or wrong-headed. They’re an enjoyable company.
Doug Casey, chairman of Casey Research, LLC, is the international investor personified. He’s spent substantial time in over 175 different countries so far in his lifetime, residing in 12 of them. And Doug’s the one who 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, his Strategic Investing: How to Profit from the Coming Inflationary Depression broke records for the largest advance ever paid for a financial book. Doug 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 various websites, publications and subscribers.
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 Energy Report, on June 29th, 2011
 Uranium and potash prices seem to be inversely correlated lately: As potash prices reach their highest levels, uranium prices have suffered. But Richard (Rick) Mills, host of Ahead of the Herd online and editor of the Ahead of the Herd newsletter, believes the prospects for both industries are bright. In this exclusive interview with The Energy Report, Rick explains why the U.S.’ commitment to nuclear power and even biofuels is helping to propel both markets.
The Energy Report: German Chancellor Angela Merkel recently decided to shut down the country’s nuclear reactors that began operating prior to 1980. Germany will ultimately disband its nuclear energy program in favor of gas and wind power following the fallout from Japan’s nuclear disaster in March. Meanwhile, Japan is also attempting to lessen its dependency on nuclear power. How has that disaster permanently changed the uranium market?
Rick Mills: It’s a short-term hiccup and it’s probably presenting us with one of the greatest buying opportunities for carefully selected uranium stocks that a retail investor can get. The global nuclear renaissance that was underway in early 2010 was happening for specific reasons: concerns about climate change, reducing carbon footprints, energy security and the rising cost of fossil fuels. And then the disaster hit. It gave pause to the renaissance, but none of these reasons have gone away.
Germany’s kneejerk reaction shut seven of its nuclear reactors. They won’t be opened again. Its other reactors will also be completely mothballed by 2022. But the thing is that in 2002 Germany’s center-left coalition enacted a law to phase-out nuclear power. Last autumn, Merkel’s center-right coalition government decided to extend the lifetimes of the country’s 17 reactors by an average of 12 years. That decision was based on a judgment that Germany could not meet its power demand using only natural energy sources, such as wind and solar. The country doesn’t have abundant natural gas reserves. So, I find it pretty ironic what’s happening over there. I think Germany may suffer when it finds it can’t maintain its manufacturing competitiveness. Germany is now burning more coal, and already buying more nuclear power-generated electricity from France and the Czechs, who use the old Soviet-style reactors.
TER: There’s a lot of talk right now about thorium replacing uranium as the fuel in nuclear reactors. These reactors could use thorium, which is much more stable than uranium, and roughly performs the same function. Do you think that thorium will ultimately replace uranium?
RM: Ultimately, but we’re 35 to 40 years away from incorporating that technology. Uranium’s got a long way to run. I believe thorium will be the answer one day, but not for several decades at least.
TER: What about the U.S.? It has some reactors slated to come onstream over the next 5 to 10 years. Do you think that the U.S. is going to follow suit with Germany?
RM: The U.S. is going to ramp up its nuclear power. On April 21, the U.S. Nuclear Regulatory Commission renewed the operating license for the U.S.’s largest atomic plant, the Palo Verde nuclear generating station in Arizona, for 20 years. The U.S. Department of Energy just dedicated a new research facility on May 3. The U.S. is accelerating the advancement of nuclear reactor technology. It’s studying the performance of light water reactors and developing highly sophisticated modeling that will help accelerate upgrades at existing nuclear plants.
That doesn’t sound like the U.S. is in any way, shape or form going to cut back. As a matter of fact, U.S. Secretary of Energy Steven Chu just said nuclear energy is the nation’s largest source of carbon-free power and it is an important part of the U.S. energy mix moving forward.
Uranium supplies are going to get very tight. There’s going to be fierce competition for available material in both the spot and long-term markets. Investors should be looking at uranium-focused juniors with money in the treasury. We’re being set up for the perfect storm in uranium.
TER: Since the disaster at the Fukushima plant in Japan, the spot price for uranium has fallen to about $50/lb. from around $73/lb. in early March. Many junior uranium miners and explorers have seen their share prices fall dramatically since then, too. What are some companies that you think offer a lot of value as a result?
RM: Uranerz Energy Corp. (TSX:URZ; NYSE.A:URZ) is one of the best uranium companies out there. The management is top-notch. These guys wrote the book on in-situ leach mining.
Uranerz is going to be included in the Russell 3000 Index again. If you want to see something interesting, pull up a chart from June 2009 when it was included on the Russell the last time. Funds that track that index have to include these new additions. We’re talking about an awful lot of money. It’s going to be interesting to see what happens to Uranerz’ share price as this becomes common knowledge.
Uranerz is waiting for its final permit to start well field construction and build its production facility. Currently, the company has $45M in the treasury; that’s $0.60 a share. Costs to get into production are estimated to be $35M, so the company has some money for contingencies. I expect Uranerz to be in production in 12 to 15 months. Currently, two drill rigs are performing exploration drilling. Uranerz has identified over 483 kilometers (km.) of alteration-reduction trends on its project areas which cover 38,000 hectares. Uranerz has explored only 15% of the identified trends. One drill is doing delineation drilling for the construction of the well fields.
TER: We’re talking about the Powder River Basin Project in Wyoming?
RM: That’s right. The Nichols Ranch project is expected to produce a maximum of 2 Mlb. of yellowcake annually. Initially, the project is targeting 600,000 to 800,000 lb. per year. The company has long-term offtake agreements signed for a portion of production with two major U.S.-based nuclear operators, including Exelon Corp. (NYSE:EXC). The U.S. produces 27% of the world’s nuclear power from 104 nuclear reactors—these reactors use 50–55 Mlb. of uranium a year but the U.S. only produces 4 Mlb.
Uranerz is a company that has its act together and is definitely sitting at a sweet spot for investors. While there’s a little bit of blood in the streets right now concerning uranium, people should be looking at this sector.
TER: That production could be coming on-stream right about the time when uranium prices could be rebounding.
RM: The spot market is definitely going to tighten up before then and people are going to be looking for long-term contracts. This setback, if anything, makes the market stronger. Prices will eventually move higher.
TER: Potash has somewhat of an inverse relationship to uranium prices. Earlier this month, corn futures reached an all-time high, which ultimately means higher food prices for all of us. It also means there’s a greater need for fertilizer and that bodes well for junior mining companies looking for potash. Do you believe that potash prices will remain as high as they are now?
RM: Yes I do and going higher. Food and how we grow it are going to be dominant investment themes for decades to come. Our population increases geometrically. Our food supply can only increase arithmetically. We’ve got major problems in addition to our growing population. One of the biggest threats we are facing is the loss of arable land that was used for food production. Land is being used for biofuels, topsoil is being eroded away and the agricultural land base is being paved over. We’re destroying our freshwater aquifers. But world population growth and three billion people climbing the protein ladder are the elephants in the dining room. Tonight, 220,000 new mouths will need to be fed at the dinner table.
TER: How does potash mining differ from gold or copper mining?
RM: Unlike other resource plays, potash does not have a cycle. Demand is always going to be there, which makes potash an excellent play in a long-term agricultural commodities bull market. Potash markets are never disrupted by political interference. Food shortages will always trigger social and political instability, such as the riots in the Middle East and Africa. All governments fear a hungry populous.
Companies like Agrium Inc. (NYSE:AGU) and PotashCorp (TSX:POT; NYSE:POT) have very solid bottom lines, but they are mature companies. Investors should start moving down the value chain to junior companies with big potash resources that are going to create value for their shareholders.
TER: What companies fit that bill right now?
RM: We’ve been following three companies on Ahead of the Herd for quite some time now.
Verde Potash (TSX.V:NPK), formerly Amazon Potash, is putting together a fairly large project in Brazil. By the time it finishes, I wouldn’t be surprised if it had enough potash to supply the Brazilian market, the largest potash market in the world, for 30 years.
The company also has phosphate at the Apatita Project and should have a resource calculation out by the end of the third quarter. It is also planning drilling on five other targets bordering their thermal potash product, the Cerro Verde. Recent news suggests they will have a limestone resource as well. This is a company that is definitely in the right area at the right time with the right resources.
The thing about this company that most people don’t realize is that if the potash price is $430/t in Saskatchewan, Canada, it would take $100/t to reach a port in Brazil. Then it would take another $100/t to get it to a blending facility near farmers. The price that Verde’s competing against is not $430—it’s $630—they are already close to that blending facility. According to the last test the company did on its product, thermal potash is about 17% to 19% more effective than KCI, or typical potash.
TER: Verde’s chairman, Peter Gundy, was an executive with PotashCorp. He certainly has some significant background in the potash mining business. He also has the right connections to get the money necessary to bring this company forward.
RM: Absolutely true, and let’s not forget to mention the tremendous efforts of President and CEO Cristiano Veloso, who has done an amazing job pulling it all together, and VP of Corporate Development Jed Richardson, who has been there from day one. Also the government of the Brazilian state of Minas Gerais has signed a memorandum of understanding regarding support for potential financing.
TER: What’s the next name you’re following on Ahead of the Herd?
RM: Western PotashCorp (TSX.V:WPX) has done really well for its shareholders and we were early into this one as well. It’s adjacent to BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF) and Agrium’s exploration permits, and within 13 km. of PotashCorp’s Rocanville facility. The company has 34 Mts. of indicated potash with 245 Mts. of inferred.
Pat Varas and his team have done an exceptional job advancing this project so quickly. The company is doing a prefeasibility study to be completed in the fall, and is planning to start on its feasibility study in August. That’s an amazing amount of engineering going into the project right now. WPX has a memorandum of understanding signed with the city of Regina for water. It’s doing environmental studies and community visits.
Western’s land acquisition program has now successfully secured over 2,550 acres at the company’s preferred plant site location. Securing the plant site location is an important aspect of the ongoing feasibility process as the environmental and regulatory approval processes and project schedules are dependent on it.
TER: Is it a takeover target given its proximity to PotashCorp?
RM: It could be. One of the majors might want to take it and put it on the shelf; the Chinese or Indians have to be interested. I think that’s very possible.
TER: Is there a point where juniors get on the radar screen of larger companies and wake up the sleeping giants like BHP Billiton?
RM: Definitely. I think the major players, the BHPs of the world, are probably looking for at least a prefeasibility study. They want to see solid numbers—capital expenditures and costs of production, net present values and internal rates of return that actually have solid studies behind them. None of these majors have a history of moving too quickly. They’re trudging behemoths that do things at their own pace and need surety in a deal.
TER: There was one more potash company you wanted to talk about. What was that one?
RM: Encanto PotashCorp (TSX.V: EPO) in Saskatchewan, Canada. What makes this one interesting is that they are collaborating with several First Nations groups to develop projects on their lands.
TER: In fact, Encanto was developed with that in mind, right? It was developed with the idea that it would work with First Nations to develop these resources.
RM: Absolutely. The first project Encanto started was developing an 80-to-100-year resource on the Muskowekwan’s land. The goal is to develop a producing mine as quickly as possible. EPO’s upcoming preliminary economic assessment (PEA) remains on schedule to be released in the first half of August. The PEA is designed to determine the most economical method for potash extraction and will make a recommendation on a solution or conventional mining operation.
It hasn’t had the success in the market that Verde and Western have seen because the necessary reserve vote on continuing with development of the project hasn’t happened yet and that creates uncertainty. The vote will happen in the fall; it’s scheduled for late September.
TER: The whole operation hinges on that vote?
RM: Yes. Newly elected Chief Bellerose ran on a pro-potash forum. The majority of candidates also ran on a pro-potash forum, as did all eight successful councilors. I firmly believe it’s going to be passed. But there seems to be some hesitation in the market over it.
TER: If the vote does go through as expected, we could we see a bump in the share price. It’s at $0.23 right now.
RM: The band has approximately 1,050 eligible voters, many of whom don’t live on the home reserve. For the vote to be considered a legal vote, at least 51% of eligible voters must cast a vote. For the vote to be successful, at least 51% of those voting must cast in favor. If a sufficient number of voters don’t participate in the first vote then the vote is considered a failure; a second vote will be held on the home reserve 35 days after the first vote. For the second vote to be successful, a simple majority is required from those who vote. In an effort to ensure that all band members are fully aware of the benefits offered through the partnership with Encanto, Bellerose is holding open sessions in Regina, Calgary, Winnipeg, Saskatoon and Edmonton.
There are really two drivers for the stock: the vote and getting the Home Reserve Lands, which will double the land acreage (and potentially the resource). It’s been a long haul, but I believe that this is going to be a successful company and we’re going to see it move forward.
TER: What are some things that investors should keep in mind when investing in potash companies?
RM: It’s a long-term investable trend and with surging prices for agricultural commodities, farmers are looking to boost crop yields, opening the door for fertilizer makers to raise prices. There might be temporary weaknesses, but everybody has to eat and there are 220,000 more of us at the dinner table every night. So there are compelling reasons to be looking at these companies. Also, these are not cheap mines to build. The companies need management teams capable of going out there attracting the interest from the institutions and raising the money necessary (all three companies I mentioned do). Their neighborhood is also important. Who’s in the neighborhood? Could a company be a takeover target?
TER: Thanks, Rick.
Richard is host of www.Aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 300 websites, including: The Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell, Uranium Miner, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FNArena, Uraniumseek, and Financial Sense.
By The Energy Report, on May 4th, 2011
 Japan’s nuclear catastrophe sent shock waves through the uranium market, but in this exclusive interview with The Energy Report, Haywood Securities Analyst Geordie Mark explains why the disaster in Japan isn’t the end for uranium miners.
The Energy Report: Geordie, take us through what it was like on March 11 once you learned that Japan’s nuclear reactors had suffered severe damage in an earthquake and subsequent tsunami.
Geordie Mark: We were all taken aback by the scale of the natural disaster, of which the significance of the event only really translated over the weekend as more data started to become available. The shock of the event hit the markets the next week with uranium stocks taking a significant beating.
TER: Was it more significant than the downturn in late 2008?
GM: Definitely. The results over the entire week were far sharper and more emotion driven than based on tangible knowledge of the events, which are still slowly coming to light. We still don’t know everything that has happened at the reactors. We probably won’t for quite a while. Those tangible effects are still going to come out. The market reacted emotionally and moved out of the sector in a big way. In terms of magnitude and timeframe, we believe that it was greater than what we saw in 2008.
TER: Did you have to revise a number of your research reports on uranium companies you cover immediately?
GM: We were waiting to find out more information before we reached a more-definitive conclusion about how the events would affect the sector on a short- and long-term basis. We certainly needed more information. Since then, we have revised some of our expectations and our supply/demand scenarios.
TER: Will the impact of Japan’s nuclear problems continue to lower uranium prices? Or will the upward price trend that started in the second half of 2010 continue once the market suffers some memory loss?
GM: That’s a good question. I think this sector will continue to go forward still. There are a number of reactors under construction today—62 or more. That represents appreciable growth, about 15%.
We’ve lost some demand, particularly from Japan and certainly from the reactors in Germany that were shut down in response to the accident in Japan. That loss in near-term demand is somewhat offset of by the loss of production out of the Rio Tinto’s (NYSE:RIO; ASX:RIO) Ranger Mine (69% Rio Tinto) in Australia and some shortfalls from of the company’s Rössing Mine in Namibia. That leads us to believe that there’s pricing protection based on supply/demand fundamentals.
TER: So far this year, the long-term price for uranium is up about 11%. When you talked to The Energy Report in October 2010, you said you expected some price pressure in uranium in 2012 and 2013. Has that outlook changed?
GM: No, that’s an area that is still very much in play. Those are very large drivers. We expect to see a number of reactors remain offline in Japan, but the pricing pressure is still there. The supply/demand scenario is largely the same. We’ve lost some demand on the short end of the curve, but we also lost some production. We probably will lose a little expected future supply from the advanced exploration-stage companies that we thought might go into production after 2013. I think there may be project development delays now due to greater regulatory oversight in response to the events in Japan. However, it’s still very much the same equation that we saw 10 months ago.
TER: Does that mean that you’re going to increase the discount rate on some of those juniors?
GM: I think we’ll leave them as they are. The discount rate in the juniors still builds in a certain amount of risk depending on the development and permitting stage of the individual projects. Modification of expected production timelines and dilution expectations in our valuation account for more protracted periods of stakeholder interaction, project scrutiny and regulatory oversight.
TER: The Ranger Mine is being shut down due to fear that severe rainfall could push radioactive water over the edge of a tailings dam and into a World Heritage site in Australia’s Northern Territory. Do you see this as a first step that could lead to a push for nationwide ban on uranium mining in Australia?
GM: Activist groups have already called for bans on uranium mining. It is too early to say what the response will be.
TER: Do you have an update on what is happening at the Ranger Mine now?
GM: It extended its shutdown period to the end of July.
TER: Do you have any Buy ratings on juniors with projects in Australia?
GM: Sure we do. We cover Mega Uranium Ltd. (TSX:MGA), which has a project in Lake Maitland. It’s in the advanced permitting-application phase. It’s attempting to win a mine permit for production around 2013 or so. This would be a small-scale mine at about 1.65 million pounds (Mlb.) per year. Mega has an $0.80 price target.
TER: What would the company’s costs be per pound?
GM: We expect that cash costs would be somewhere in the mid-$20/lb. range.
TER: What sort of uranium price would Mega need to have a profitable operation?
GM: If long-term prices hold where they are—just north of $70/lb.—it would make an attractive proposition.
TER: Hathor Exploration Ltd. (TSX.V:HAT), which is a junior operating in Saskatchewan’s Athabasca Basin, has launched a bid to acquire Terra Ventures Inc. (TSX.V:TAS). If the deal goes through, Hathor would realize full ownership of the Roughrider deposit. Is Hathor’s bid to acquire Terra a sign that more consolidation is on the way?
GM: It’s a strategic move. Given market sentiment about the sector and the lows we have seen, we could see more opportunities to consolidate further for companies that have good assets or strategic asset portfolios.
TER: Ok. What are some companies you believe could be targets in a consolidation phase?
GM: In the U.S., in-situ recovery (ISR) companies, such as Uranium Energy Corp (NYSE.A:UEC), Uranerz Energy Corp. (TSX:URZ; NYSE.A:URZ), and Ur-Energy Inc. (NYSE.A:URG; TSX:URE) are all either in production or in advanced stages of permitting. They could be attractive takeout targets for broader-scale consolidation within the ISR space.
Strateco Resources Inc. (TSX:RSC) potentially could be a good acquisition for a high-grade uranium resource over 20 Mlb. Extract Resources Ltd. (TSX:EXT; ASX:EXT) and Bannerman Resources Ltd. (TSX:BAN; ASX:BMN) also represent potential targets for consolidation of strategic asset ownership—this point is particularly poignant for Extract Resources given the recent dialogue between Kalahari Minerals plc (LSE:KAH; NSX:KAH)—Extract’s largest shareholder and China’s state-owned China Guangdong Nuclear Power Holding Corporation (CGNPC).
TER: Let’s look at some of those companies a bit more closely. In a recent research report on Uranium Energy, you said you expect operating cash flow per share to jump from $0.03 in 2011 to $0.35 in 2012 and $0.70 in 2013. What’s going to propel that growth?
GM: The company started production late last year and has a great growth portfolio. It is the newest uranium producer and probably will hold that mantel for another year or more. The growth really relates to Texas operations. The Palangana ISR project is growing. The Goliad satellite ISR facility is expected to come on stream late this year or early next year. That really gives the company a good growth portfolio.
TER: It’s in a pretty safe jurisdiction as well.
GM: Yes, It’s in Texas, which is an Agreement State that streamlines licensing. The company already has a fully permitted plant. Its first project, Palangana, is fully permitted and in production. Goliad has a draft permit and is awaiting the final permit perhaps as soon as July. Political risk seems to be lower there.
TER: What are your estimated operating expenses?
GM: We say that the company’s future expected cash costs are about $26/lb. We play it conservative and will review once we see sustained output growth. Our target price is $6.30.
TER: Let’s talk about Uranerz, which is developing a project in Wyoming.
GM: Uranerz could win Nuclear Regulatory Commission (NRC) licensing approval for the Nichols Ranch ISR Uranium Project by early next quarter. The company is well cashed up; it has around $49 million in the bank. If it can start development by midyear, it could be in production within about 12 months. Cash costs are expected to settle somewhere in the mid- to low-$30/lb. range. We see Uranerz as the world’s next uranium producer. Our target price on Uranerz is $6.10.
TER: Ur-Energy is developing the Lost Creek project in Wyoming. How robust could it be?
GM: Ur-Energy’s projects in Great Divide Basin, Lost Creek and Lost Soldier are a little bit behind in the permitting progress compared to Uranerz. The company potentially could receive Wyoming Department of Environmental Quality permits and NRC license as early as the second half of this year and, as such, it could come into production in late 2012. Ur-Energy has a very strong technical team and an advanced development-stage asset. We have a price target of $2.
TER: Are there any other operating mines in Wyoming right now?
GM: Uranium One Inc. (TSX:UUU) is expected to be commissioning Christensen Ranch this year and Cameco Corp. (TSX:CCO; NYSE:CCJ) already has a production presence in the state.
TER: This is an established district, probably the most-established uranium district in the U.S. right now, isn’t it?
GM: The state has more than 50 years of continuous uranium-production history and, by virtue of this, is placed as an established uranium-producing region.
TER: Strateco is developing the Matoush uranium project in Québec, which is a somewhat high-grade project. Why might that be a takeover target?
GM: Strateco has a handsome resource of just more than 20 Mlb. U308. The grade is just under 0.6% uranium and it’s in Québec. It has good neighbors in Cameco and AREVA (PAR:CEI). The resource has demonstrable upside potential along a long strike length and at depth. It has all the marks for growth potential. It also is a long way through permitting for its bulk-sampling underground development. We think the company could be close to winning a permit to go forward. The Matoush project is probably one of the most advanced development-stage projects held outside Cameco, Denison Mines Corp. (TSX:DML; NYSE.A:DNN) and Areva in Canada. We have a price target of $1.45.
TER: What’s the earliest it could be in production?
GM: Probably 2014 or 2015.
TER: What is the regulatory regime like in Québec? That tends to be a pretty favorable jurisdiction for mining gold and base metals. Does the same hold true for uranium mining?
GM: That remains to be tested fully. Québec has a very rich mining history, and international mining surveys place the province high in the rankings.
TER: Are there any other companies that have a takeover target on them?
GM: Extract Resources is an obvious entity out there with the China Guangdong Nuclear Power Group (CGNPC) in dialogue with the largest shareholder in Extract Resources, which is Kalahari Minerals. It’s the only asset in the uranium space that I deem to be world class and in the hands of the development-/exploration-stage company.
TER: Bannerman Resources is right in that neighborhood, too, albeit with a bit lower grade, isn’t it?
GM: That’s very true. Bannerman’s Etango project is very sensitive to the uranium price, and the company’s share price has certainly reacted that way in relation to changes in the underlying spot price. The heap-leaching potential looks very good; the tests are very reasonable. Bannerman’s Etango project is anticipated to deliver uranium at higher cash costs of around $40. However, given that this development-stage project has the potential for significant production of between 5 Mlb. and 7 Mlb., I don’t think the company can be ignored.
TER: What is your forecast for prices through the end of 2011 and into early 2012?
GM: There is room for pricing strength going forward. We forecast the price to be $67.50 for uranium spot and about $75 for uranium long term. We still see most of the action coming around 2013 to 2014. There is good fundamental support for the commodity price.
TER: Should investors get into this play now and ride it out until 2013 or 2014?
GM: Value plays do exist for those who have mid-term investment time horizons, as well as short-term time horizons as company valuations are driven around catalysts relating to production growth, permitting progress, resource expansion and discovery. We expect that a number of companies in the uranium sector will enjoy the aforementioned catalysts over the next year or so.
TER: We really appreciate you taking the time for this.
Dr. Geordie Mark, a research analyst with Haywood Securities, focuses on uranium companies involved in exploration, development and production. He joined Haywood from the junior exploration sector, where he was vice president of exploration for Cash Minerals, which concentrated on uranium and iron oxide-copper-gold targets across Canada. Prior to joining the exploration industry, Mark lectured in economic geology at Monash University, Australia and served as an industry consultant. He completed his Ph.D. in geology in 1998 at James Cook University’s Economic Geology Research Unit in Australia, specializing in aqueous geochemistry and igneous petrology applied to ore-forming systems.
By The Energy Report, on April 29th, 2011
Worldwide hysteria and the fear factor notwithstanding, Casey Research Chairman Doug Casey still considers nuclear power “by far the safest, cheapest and cleanest form of mass power generation.” Sharing his views in this Energy Report exclusive on the eve of a sold-out Casey Research Summit in Boca Raton, Florida, Doug says power generated from wind, sun, the tides and other alternative sources are “very nice special applications but don’t work economically unless they’re subsidized.”
The Energy Report: You have traveled the world extensively, studying the geopolitical forces that shape the economy on a day-to-day basis. In the past, you’ve been quite enthusiastic about uranium because of the need for nuclear power. Has the situation in Japan altered your view?
Doug Casey: No. What’s happened in Japan is most unfortunate, but it hasn’t altered my view at all. People are referring to it as a Class 7 Chernobyl disaster. Perhaps 20,000 people, or more, have died because of the earthquake and subsequent tsunami in Japan. Not one death, so far, has been attributed to that nuclear power plant.
What happened at that plant was not anticipated, and the reactor shouldn’t have melted down. Still, I have long said that nuclear power is by far the safest, cheapest and cleanest form of mass power generation. That is absolutely as true now as it was before the Fukushima disaster.
Around the world, coal is the source of the vast majority of power, and it kills directly, through air pollution and fly ash, thousands of people per year and many thousands more per year through coal mine disasters. Most of the mining deaths in the world—many thousands each year—occur in coal mines. No one ever talks about that. Nor do people seem to recall that when a large hydroelectric dam gives way it kills thousands of people. The debate on nuclear is intellectually dishonest.
TER: But mass psychology includes a nuclear fear factor.
DC: That’s true, because the average person is absolutely ignorant of science. Ask a kid in the city where milk comes from, and he says it comes from a carton out of Safeway. He doesn’t know it comes from cows and what’s involved in raising cattle. It’s the same with power. They think it’s like magic. But if you want to turn the lights on, if you want your refrigerators to run, you’ve got to generate the power, and you’re not going to do it from wind and solar. Those are very nice applications, but they don’t work economically unless they’re subsidized.
I have high hopes that these things will get better in the future, along with tidal and geothermal power. But now, and for the next generation, only coal and nuclear make any sense for mass power generation. Of course, if the government hadn’t been involved in nuclear for all these many years, we might be using thorium—which appears to have many advantages—instead of uranium. We’d certainly be far more advanced with uranium reactors using different technologies. The Fukushima plant design was almost 50 years old and the plant itself was 40 years old; that’s the equivalent of driving a 1957 Chevy today for your primary transportation. This is what happens when you have heavy regulation that makes capital costs so high that you can’t put in new technologies. Is nuclear power potentially dangerous? Of course. Everything is. But it’s a question of alternatives. I’m afraid hysteria has overwhelmed reason here.
TER: But how can we get over that? Can uranium really increase in value if the entire world is reassessing nuclear facilities?
DC: Reassessing in favor of what? Sure, they’re going to build more coal plants because India and China and the whole world needs more power. But aside from coal, what are they going to do?
TER: How about liquefied natural gas (LNG)? Some suggest that LNG will be a viable alternative in Japan, at least temporarily.
DC: LNG is fine except that it suffers from the NIMBY (not in my back yard) syndrome too. First, you have to get the gas; there’s plenty of gas, but nobody wants it recovered using current fracking techniques. Then you have to compress it and deliver it in a highly compressed form. Nobody wants an LNG tanker around, because if it explodes, it’ll literally blow up a city. That happened in Cleveland in the 1940s. Hundreds of people died and it took out half a square mile of Cleveland. So it’s not without risk.
A new hysteria is developing since we found shale gas, with absolutely vast quantities available using new technologies of horizontal drilling and fracking. But there are dangers of damaging the water table, so everybody will say, “You can’t go for shale gas here because it can potentially ruin our water”—and maybe they’re right, at least in some instances. Everybody wants power but nobody wants to do what it takes to generate the power. I don’t know how all of this is going to end, but probably badly because the world is so politicized.
TER: Shifting focus a bit, Doug, earlier this month, in a piece entitled “Keeping Capital in a Depression,” you wrote about agriculture as a viable option, and your summit agenda includes an “Investing in Agriculture” presentation by Steve Yuzpe, CFO at Sprott Resource Corp. Could you tell us a bit about your views on agriculture going forward?
DC: The prices of most grains, especially wheat, corn and soybeans, have doubled in the last year. You can make a good case that agriculture is a good place to be for the long term. I’m quite involved in the cattle business in Argentina and I think cattle actually will go much higher for a lot of fundamental reasons. Agricultural land all over the world has gone up hugely in the last few years. But that’s the problem, because if you want to make money, you have to buy cheap. Almost no assets are actually cheap anymore because so many trillions of dollars are floating around. I try to look at all the markets, everywhere. There are very few bargains.
TER: A recent article you wrote suggested that you’re not crazy about commodity foods such as wheat, soy or corn because they’re so subject to political interference and—as you put it—”they’re not as important as foods for wealthy people, which is the profitable sector in the market.” What do you mean by subject to political interference? And what are foods for wealthy people?
DC: Two different questions and they’re both good. As for political interference, Argentina is an excellent example because Americans are only a few years behind the Argentineans in learning how to destroy an economy. In agriculture, a government can use export controls—subsidizing some things and taxing others—to manipulate the market. Wheat, soy, corn and other grains are common targets. These are commodities for feeding masses of people, grown by the millions of tons. I find boutique areas of the market much more interesting—and less regulated.
TER: For example?
DC: Apples, peaches, blueberries, or, for that matter, cattle. The rich people in the world are getting richer, mostly because of politically-caused distortions. But the middle classes are growing by tens of millions of people per year in China. They don’t want to just eat bread and cheap soybean-based foods. Rich people like to eat meat, so it makes sense to me that it’s a better place to be. Plus, ranchers haven’t made money raising cattle for decades—most do it just because they’re ranchers, and can’t break a bad habit. Cattle herds worldwide have been in liquidation for a long time. I believe that’s going to change, and cattle prices are going way up.
Another problem mass commodity producers face is that every year farmers can plant huge new crops, adding volatility to the market. But cattle take years to mature. So the supply is more predictable, and constrained.
TER: In the world of the Greater Depression that you foresee, to what extent is the production of foods for wealthy people—the fruits and the meat—sustainable? Wouldn’t these markets also crash?
DC: In a depression the standard of living goes down. That’s the definition of a depression. But it will go down less for rich people than for poor people. So in relative terms, I think rich people’s foods will be higher-priced. I don’t think they’re going to go down as much and they’re likely to go up more. Think about caviar. The number of sturgeon will go down and the number of people who want to eat fish eggs will go up. In fact, if I could buy long-term contracts on caviar and good eating fish, I’d do it.
Regardless of what happens in the U.S. and Europe, both of which are in a lot of trouble, the Indians and the Chinese are coming up rapidly in the world. Scores of millions of people a year in both of those countries are joining the middle class. After they have money, nobody wants to eat high-fructose-based corn products. They want to eat rich people’s food too.
TER: In terms of the mass commodities, you pointed out that at any point farmers can simply plant more grain. But aren’t there issues in terms of the amount of arable land available, appropriate water sources and machinery and so forth that inhibit or limit that ability to just plant more? If we have this ability to just plant everywhere, why are potash and fertilizers going up so much? Doesn’t that indicate we’re trying to get more out of the same places?
DC: That’s absolutely true. There are counterarguments to everything I’ve said and I’m well aware of them. For instance, when it comes to these grains, they’re all gigantic monocultures. Whenever you have a gigantic monoculture that goes for many, many miles in every direction, like in the grain-growing areas of the world, you’re looking at a potential disaster because a bug—whether it be a microbe or an insect—could devastate all of it at once. When plantings were much more variegated, you couldn’t have a wholesale disaster wipe out the whole crop.
Another thing to consider is that while the fertilizers increase yields on the one hand, on the other hand, fertilizers as well as the various biocides are very destructive of soils. They kill good microbes and earthworms and things like that. And, of course, in many growing areas they pump water up from the water table. That’s generally a non-renewable resource because it takes thousands of years to recharge those water tables. That’s another potential disaster.
At some point you could find the grains going through the roof for those various reasons. But in the meantime, as people plant grains, for instance, here in Argentina cattle are being kicked off good land because it’s being planted with grains. The cattle have to go on junkier and junkier lands that are less productive. All of these things are pushing against each other in the markets. So, having said all that, I prefer the ends of the market that are generally looked upon as being rich people’s foods.
TER: Aside from holding precious metals and finding agricultural niches such as you’ve described, how does someone with any wealth preserve it during this tumultuous period you anticipate?
DC: You must be geographically and politically diversified. That’s critical. It’s hard to find a politically stable place, but at least you can find a politically isolated place that’s unlikely to be overrun in a war, or become a police state. The average person lives his whole life in the country where he was born, and whatever happens in that country happens to him. He’s planted there and stays there, acting like a vegetable, which isn’t a very intelligent approach to survival. So I recommend, first of all, political and geographical diversification.
TER: When it comes to geographically allocating your capital, you’ve founded a development in Argentina called La Estancia de Cafayate, a remote “lifestyle community” near the Andes—apparently now home to more than 150 people from a couple of dozen countries. But you know a lot of other places, too. How do you view Argentina now in comparison to other countries that are thriving? Thailand’s economy is healthy, expanding more than 7.5% last year. And of course everybody talks about China’s economic growth. Do you consider those politically stable places? Or would you focus more on South America?
DC: I’m a huge fan of the Orient. I’ve lived in Thailand, and thought seriously about going back for the years to come. But as much as I love it, it’s the antithesis of Argentina—not just geographically, but culturally it’s exactly opposite as well. If you’re of Caucasian background, it’s fine to live in the Orient, which I’ve done for years, but you’re never going to really be part of society there, and you probably won’t learn the language either. Tonal languages are tough. All things considered, I’d say South America is the best place to be. It’s experiencing a boom right now because of agricultural prices.
There are a lot of places you can go in South America—15 countries. Argentina is just the one that culturally suits me. Of course, the government has been idiotic almost all the time since Perón, but it bothers you less than most governments in the world do. As far as Estancia is concerned, it’s without question the best community in the world to live in, at any price—even 10 times the price. It has far more in the way of amenities and facilities and climate. And most important, the people buying there are the kind of people I want to hang around. So it’s a good place to be.
TER: Another good place to be, this weekend at any rate, is your summit in Boca Raton. Participants can look forward to hearing from some remarkable people, with something on the order of 35 of them on your agenda. What do you expect to be the major takeaway from this summit?
DC: What we’re facing now is something of absolutely historic importance, the biggest thing that’s gone on in the world since the industrial revolution. Many things will be completely overturned in the years to come. What’s happening now in the Arab world with all of these corrupt kleptocracies being challenged and overthrown is just beginning. We haven’t heard the end of this in any of these countries—Egypt, Tunisia, Syria, Algeria. Saudi Arabia will be the big one, of course. Everything’s going to be overturned. And all these stooges that the U.S. government has been supporting for years could very well lose their heads.
So this is a very big deal that we’re facing here in the next 10 years. It’s going to be the most tumultuous decade for hundreds of years, bigger than what happened in the 1930s and 1940s. Hold on to your hats. You’re in for a wild ride.
Doug Casey, chairman of Casey Research, LLC, is the international investor personified. He’s spent substantial time in over 175 different countries so far in his lifetime, residing in 12 of them. And Doug’s the one who 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, his Strategic Investing: How to Profit from the Coming Inflationary Depression broke records for the largest advance ever paid for a financial book. Doug 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 the topic of numerous features 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 various websites, publications and subscribers.
By Christopher Briem, on March 7th, 2011
Because of the NYTimes article last week there is heightened new interest across Pennsylvania over radiation in the fracking water being used in Marcellus Shale development. Just saying that we mentioned the whole radiation in shale issue here just over a year ago. So clearly some folks are not surprised by this. So why is this news all of a sudden? Someone was not thinking ahead.
Which isn’t to say I have any insight into the scale of this as an issue. If anything I am geology challenged, but it should highlight the real problem of radon in Pennsylvania. I still wonder a bit when someone will float the idea of mining for uranium in Pennsylvania… or potentially even refining the shale itself for uranium.
But my old post was just pulling something from blogger AtomicRod who in addition to talking about all things nuclear has brought up what may be the real underlying debate over the impact of shale gas development worldwide. We are the nexus of the biggest energy cage fight that is emerging. Some have framed the debate over the future of energy in the US as between nuclear and natural gas. The future will not be absolutely one or the other, but clearly there is a lot of marginal investment that may go toward one or the other dependng how the economics of the two energy sources evolve. Before the escalation of shale gas development, nuclear was beginning to reawaken as we all know from Westinghouse’s expansion locally. Is the development of Marcellus Shale, and other shale gasses, putting that at risk in the future?
In related news:
Hey look, economics still works and the low price of natural gas is impacting development - Dow Jones yesterday: US Natural Gas Rig Count Falls To 1-Year Low – Baker Hughes
This literally just popped up. From Arkansas: 2 firms to suspend earthquake zone injection wells I do wonder if the MSC folks have a PR already prepared just in case one of those occasional Pennsylvania earthquakes occurs… The header would be “Not our fault!”.
And I was on the turnpike yesterday and noticed a pro-coal billboard that I had never seen before. It was kind of remarkable.. It said something like “Wind dies. Sun sets. You need reliable, affordable, clean-coal electricity.“ Like really? Now the sun setting is cause for concern? That or I should go start the portable generator every time the wind peters out?
I sense that ad it really a reflection of some angst in the vast PA coal industry over shale gas. It may be an even bigger food fight impacting shale gas in the future actually. In terms of net job creation, if natural gas does grow as some say it will, what does it say for the future of the coal economy in Pennylvania?
By The Energy Report, on February 11th, 2011
 Kevin Bambrough founded Sprott Resource Corp. in 2007 to take advantage of a future in which he believes trust in paper currencies will diminish. The idea is to invest in natural resources, including precious metals, energy and agriculture, which represent tangible value from which investors will benefit as necessities become more precious. Unlike closed- or open-end mutual funds, the business is a corporation that can buy private equity to ultimately sell, spin out or even take an active investor approach through majority ownership in publicly traded companies. The company also looks for distressed deals. In this exclusive interview with The Energy Report, Kevin and Sprott COO Paul Dimitriadis share their investment philosophy and ideas on how to protect wealth.
The Energy Report: Kevin or Paul, Sprott Resource Corp. (TSX:SCP) bought $74 million of physical gold in 2008 and 2009, which is held in vaults at Scotiabank. How much is that holding worth today?
Paul Dimitriadis: It’s worth roughly $105 million, I believe.
TER: It sounds like you’re still bullish on gold. Do you think of it as a hedge, a store of value, insurance against catastrophe or all of the above? What is your investment theory here?
Kevin Bambrough: I believe that it’s all of the above; but, more so, it’s that I place no value in paper money. Fiat currency is worth exactly zero. Right now, we’re in a unique time in history in which the populace, as a whole, perceives currency to have value; so, therefore, it does. But I believe that faith is going to continue to dwindle. Ultimately, investments like gold are a much better store of value.
TER: Do you believe that Sprott’s stock price will typically underperform its internal rate of return (IRR) until there is some catalyst that causes dramatic inflation or something similar?
KB: In terms of market volatility, I think the market will overvalue our assets at times. Other times, it will have a very negative view and undervalue our assets. The greatest example is to look at the history of Sprott Resource Corp. When we first started the company, we had basically $1.50 per share in cash—that was it. But sometimes the market traded us above $3/share, so we were trading at 2x cash—having done absolutely nothing.
Then, after making significant gains and during the pessimism of late 2008 and early 2009, the stock traded down to about half cash. We had $3.55 in cash and gold per share and we traded down to the $1.80 range, which made no sense. Our goal is not really to trade in line with our asset value at any given point, but rather to be given some value for management’s ability to source transactions, create companies and take them public, which we have already done repeatedly. SCP should get a premium value for our ability to involve the right people, including investors and directors, and marry business plans with high-quality assets so our companies outperform their peer group.
KB: Paul, did you want to add to that?
PD: In the oil and gas (O&G) sector, people have no trouble trading companies above their net asset value (NAV) due to their strong management teams. Investors are willing to pay a premium for that. Our hope is that, over time, they’ll also be willing to pay a premium for our stock.
KB: With that in mind, we want to make sure we maintain at least a reasonable valuation relative to our assets. Management has committed and demonstrated that we will buy back our stock when it trades at what we believe is an unreasonable discount to the market. So, that really helps to mitigate the risk. We’re very aware of the fact that closed-end type vehicles typically trade at a discount because what they do could be replicated fairly easily. You can look at the contents of a mutual fund or a closed-end fund and say, “Well, I could go buy those stocks.” But the difference here is that we create businesses in unique sectors with unique opportunities well ahead of when they’re properly valued.
TER: Give me an example of that.
KB: We’ve gotten some significant gains that have come from what initially appear to be very minor investments or very little capital being committed. For example, Stonegate Agricom Ltd. (TSX:ST). In that case, we started with an option agreement totaling $53,000 that turned into a mark-to-market gain of nearly $100 million over a couple of years. And we have made much larger investments, buying things like PBS Coals Limited (LSE:SVST) or Orion Oil & Gas Corporation (TSX:OIP) that were very cheap relative to the public market comparables.
TER: You wanted to get into the fertilizer business with Stonegate because it’s a play on agriculture (Ag), a sector on which you’re bullish. But doesn’t a mining operation add risk to what you already believe is a relatively safe way of playing agriculture?
KB: Let me first say I agree that resource exploration has got to be one of the riskiest sectors in which to be involved. Typically, the odds are insurmountable but Stonegate is not a grassroots exploration. Both of Stonegate’s properties had proven historical merit; and our agreement was structured in very low-risk terms, which would minimize any material damage to our assets or the NAV of our company. We approached the transaction, got involved and advanced the asset to the point of going public.
We started with a small investment of $53,000, which was an option agreement that we rolled into a private company, and we ended up with 80% of that company. We were in a very, very comfortable position as far as the money that we had to put in. Stonegate went public with a $50 million offering and, post-IPO, we retained about 54% of the company. We put $12 million into that IPO, which basically gave us a claim on 54% of $50M through our shareholdings. So, there was very little risk.
TER: You’ve said you’re bullish on uranium. Could you tell me your investment thesis there?
KB: The investment thesis on uranium really stems first from the fact that I’m a believer in peak oil. The major oil discoveries were made in the 1960s and 1970s, and the world’s major oil fields on most continents have already peaked in terms of production. Now, the discoveries are getting smaller and those that get headlines from time to time are really irrelevant compared to the scale of global consumption. We still get something like 50% of our energy from oil. That statistic—and the fact that the U.S. is a massive importer of oil and runs a substantial trade deficit—has led me to the view that energy prices in the U.S. will go up dramatically. Also, in looking at the cost of coal production, we don’t properly account for the environmental costs. I don’t think we’ve begun to come close to accounting for greenhouse gases or general pollution.
So, I think nuclear fuel and nuclear power will grow out of necessity. There’s really no other choice than to see significantly higher uranium prices to spur production to meet what I believe is going to be burgeoning demand. In the U.S. in particular, where 90% of uranium is imported, I believe that it’ll become an issue of national security that the government will get behind; it’ll advocate increasing production in order to protect our energy security.
TER: How are you playing uranium?
KB: We own approximately 20% of the Coles Hill uranium project in Virginia mostly through a private company, of which Virginia Energy Resources Inc. (TSX.V:VAE) owns roughly 30%.
TER: The stock is up more than 300% over the past six months. Back in mid-October, the company announced an NI 43-101 preliminary assessment that stated the net present value (NPV) of the Coles Hill uranium project was more than $400M. Do you see more upside to this stock?
KB: Well, if you look back on that study, you’ll see that with higher-priced uranium, the NPV rises dramatically. That’s what we’ve seen recently, as the price of uranium has moved up. And I think you need to see uranium in the $75/lb. area on a sustained basis to encourage supply. Then I think the NPV will be in the $600 million area. But I don’t think that study really optimizes uranium’s value because, if you were to increase production rates, you would potentially get a higher NPV; and I think that ultimately is what should happen. The reason it’s still trading at such a discount to that NPV is purely due to the lack of a uranium mining law in the state of Virginia. We’re hopeful that, eventually, it will be resolved in a positive way so the project can go forward.
TER: Sticking with your peak-oil view, you mentioned Orion Oil & Gas a moment ago. Tell me about that.
PD: We completed the transaction in September of 2009. It was a private company that had been distressed. The banks were closing in on some of its lines. The company was looking for recapitalization. We co-invested with Gary Guidry, who, as CEO of Tanganyika Oil Company Ltd., sold his company to Chinese refiner Sinopec Shanghai Petrochemical Company Ltd. (NYSE:SHI) for CAD$2.2 billion. We purchased 80% interest in Orion for $107 million with a mixture of cash and stock; the total purchase price of the deal was $130 million. We just announced that Orion had released updated reserve numbers demonstrating an NPV of $440M on a 10% pre-tax basis—an increase of $106M over the prior year and a 34% increase in reserves from the prior year. Those results stem principally from the large capital program that was put in place this year. The assets are 50% oil and natural gas liquids (NGLs) and 50% natural gas.
TER: You invested $107M. How much have you made on this?
KB: Mark-to-market, it’s more than double today.
TER: Orion is 50% gas weighted. Kevin, you’ve said cheap gas is a myth.
KB: Gas is cheap today, obviously; I think it’s very cheap. But I think it’s too cheap compared to the level at which it should be trading. I believe the average gas company is engaging in production despite the fact that it can’t make money at current prices; and, ultimately, we may find that reserves are overstated and companies can’t produce at these prices.
TER: Then why produce gas?
PD: They’re doing it for a variety of reasons. First, they have commitments on leases that they must maintain, so they are forced into drilling those properties even though it may not be economic. Secondly, we’ve seen some alternative forms of financing emerge in the form of joint ventures (JVs) and other creative-financing techniques that are enabling these companies to continue their drilling programs. But I think, slowly, you’ll start to see the switch to more liquids-rich deposits by some of these producers. In order to sustain the production needed to meet demand, we’re going to need higher prices than those currently in the market.
TER: What are you doing in private equity?
KB: We have two entities that are the hardest to value but potentially the most exciting assets. Right now, very little value is being given to them in the Resource Corp. share price but, eventually, their value could be very large. These are the One Earth companies—One Earth Oil & Gas Inc. and One Earth Farms Corp., both of which are private. One Earth Farms is something we started working on in 2007. It’s taken a few years to get there, but we’re very pleased that it’ll be the largest farm in Canada and one of the largest farms in North America in 2011. It’s also positioned to be one of the largest farms in the world in the coming years.
One Earth Farms has synergistic cattle and grain operations. Its real goal is to change the typical farming model, wherein the average farmer buys retail and sells wholesale. By that, I mean he buys his equipment, fertilizer, etc., from a local dealer or store, and then sells his crop as a commodity at harvest time based on wholesale prices. With the size and scale we’ve already attained, we’ve established that we can buy wholesale. And now we’re working on the model that can allow us to capture some of the retail margin by partnering with food processors or retail outlets. It’s almost impossible to find good investments in the Ag sector, and there are very few corporate farms in which to invest around the world. We’re building one that, hopefully, will provide inflation protection, as well as food security for potential investors and partners.
By the way, One Earth Farms is, in our minds, the only way you can invest in Canadian farming in a large way. That’s because it is in partnership with the First Nations groups of Canada, which are federally regulated and permitted to allow public companies and foreigners to lease land. Typically, non-First Nations lands in Manitoba and Saskatchewan are restricted under provincial law from public company ownership or leasing or foreign participation.
TER: How will you exit this company in the end?
KB: I think that One Earth Farms is a company that ultimately will be highly valued and coveted by three different types of investors. First, large pension funds might find it very desirable for the inflation protection it could provide pension fund holders. Also, I think that the sovereign wealth funds and the Ag ministries of the world that are trying to get food security for their nations would find this to be very strategic. Lastly, we feel it would be valued by ordinary institutional and retail investors if it were publicly listed.
KB: Paul, would you touch on One Earth Oil & Gas?
PD: The One Earth Oil & Gas concept is related to that of One Earth Farms in that it’s in partnership with First Nations of Canada. On One Earth Farms’ management team, we have former Grand Chief of Saskatchewan Blaine Favel. He was instrumental in creating One Earth Farms. Through his relationships and knowledge of the First Nations sector, we’ve been able to sign agreements with a number of First Nations with the hope of developing some of the O&G prospects on their lands that have thus far remained undeveloped for a variety of reasons. We’ve managed to tie up a significant amount of acreage to date, both in Canada and in Montana. This year, we’re in the process of drilling some of those prospects and further defining some of their resources, and then we’ll bring on production through various plays.
KB: Just to clarify, when Paul says a “significant land package,” we’re talking about more than 300,000 acres and growing. We’re optimistic that we’re going to increase our optioned acreage. This is a very, very significant land package, which, in my mind, gives us an eventual opportunity to have real upside to oil and gas prices as we prove up the plays.
PD: Again, we’ve invested only about $10 million to date in this business. It’s another example of us starting a business for a very small amount of capital that could potentially be worth significant sums of money. The risk/reward, in my opinion, is exceptional.
TER: Kevin, you don’t have much faith in paper currencies. Do you foresee a time when people will be holding gold, silver or other metals in bank vaults and writing checks based on their value, or using a debit card based on the value of the resources they are holding?
KB: I think that we’re going to come up with different monetary instruments that are reflective of precious metal or other holdings. Sooner or later, I envision we’ll have a currency that may be reflective of a basket of commodities that we may trade in units tied to something tangible. Ultimately I think we could have an energy-based currency.
TER: I enjoyed meeting you both. Thank you.
KB: Thank you.
Kevin Bambrough founded Sprott Resource Corp. in September 2007. He is a seasoned financial executive with more than a decade of investment industry experience and is a recognized leader in the commodity investing space. Since 2009, he also has served as president of Sprott Inc., one of Canada’s leading asset managers, which has more than $8 billion in assets under management. Between 2003 and 2009, he held a number of positions with Sprott Asset Management, including market strategist, a role in which he devoted a significant portion of his time to examining global economic activity, geopolitics and commodity markets in order to identify new trends and investment opportunities for Sprott Asset Management’s team of portfolio managers.
Paul Dimitriadis is chief operating officer, general counsel and corporate secretary for Sprott Resource Corp., a position he has held since 2008. He evaluates and structures transactions; coordinates and conducts due diligence; and is involved in the oversight of the operating subsidiaries. He serves on the board of directors of Orion Oil & Gas Corporation, Waseca Energy Inc. and Stonegate Agricom Ltd. Prior to joining Sprott, he practiced law at Blake, Cassels & Graydon LLP. Mr. Dimitriadis holds an LLB from the University of British Columbia and a BA from Concordia University. He is a member of the Law Society of Upper Canada.
By The Energy Report, on February 11th, 2011
Philip Williams, Pinetree Capital’s VP of business development, says the spot price for uranium will likely explode above $100/lb. in 2011, much as it did in 2007 when it topped at $137. The good news, Philip says, is that even when uranium comes off its high, it will likely only fall to around $80. It’s around $73 now. If Philip’s right, we’re on the cusp of another round of uranium market madness. And you will want to read this Energy Report exclusive for some of Pinetree’s favorite uranium and lithium plays.
The Energy Report: In January, Macquarie Research said it expects the uranium spot price to reach $75/lb. in the first half of 2011 with the main driver being China’s growing energy demands. Where does Pinetree Capital Ltd. (TSX:PNP) see uranium trading at in 2011 relative to Macquarie’s forecast?
Philip Williams: We continue to be very bullish on the price of uranium. It’s had a very good run of late and we see that continuing for many of the same reasons that Macquarie does. I think for the early part of the year $75 is a good number, but it could surpass that substantially by year-end. By then, we think that the price will be at the $100 level and maybe even higher. We’ve got China doing quite a lot of stockpiling, especially on the spot market. We see the producers as being overcommitted right now. We also think that financial-speculator activity will come back to the market. All those events will culminate in a much higher price.
TER: The last time we saw a similar price spike in uranium was in 2007, when prices for yellowcake rose above $130 per pound. After that, prices dropped off dramatically. If these financial speculators are just looking for short-term money and getting out again, could we see a similar price drop?
PW: I think there are two things to think about. In 2006–2007, the uranium price was driven up mostly by financial speculators and I think they’re coming back into the market. When the run-up in the price was on, in some cases, a very small amount of uranium actually changed hands. With China’s recent uranium stockpiling, we’ve seen quite a lot of material go through the market at these prices. I think we’ll probably get a spike similar to the last one and it could be even higher, and then it will pull back. But I think we’re going to have a much higher base price this time than we did last time. After 2007, the price came back to about $40. I think it’s going to be substantially higher; it could be a price that falls back into the $80–$100 range.
TER: You mentioned China is stockpiling uranium, and China National Nuclear Corp. just received governmental approval to work on four new reactors. The European Commission just published a 10-year strategy plan that encourages development of nuclear energy as a means of clean energy. Japan’s Kyushu Electric Power Co., Inc. (TKY:9508.T) has submitted plans to build a third reactor at the country’s Sendai Plant, and India just brought a new reactor online. Where is North America in this global nuclear buildout?
PW: In a word North America is lagging. When it comes to nuclear, the U.S. is the largest generator of nuclear power with 30% of worldwide nuclear generation; but a reactor hasn’t been built in the U.S. in decades. While there are quite a few on the drawing board, only a handful is expected to come online by 2018. The real growth here is in the developing countries that you mentioned, China, India, etc.
TER: What’s largely responsible for the U.S.’ lagging nuclear growth?
PW: I think government policy is improving toward new nuclear energy but cost is still a big issue. Some of the numbers Macquarie recently published listed the cost of a new reactor built in China at about $2 billion versus $7 billion in the U.S.—that’s a huge factor. And natural gas-powered plants compete against new nuclear reactors. I think there’s still a lot of public opinion against new reactors being built. There are 104 reactors in the U.S. right now, so adding four is a very small growth rate compared to what’s happening in China and India. The U.S. was very successful on its first nuclear energy buildout but has since lost a lot of that technical knowhow, especially when it comes to building new reactors. Now, the U.S. is climbing back up that curve.
TER: Late last summer and into the fall, we watched big uranium producers like Cameco Corp. (TSX:CCO; NYSE:CCJ) and BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF) dip into the uranium market to meet their supply contracts because it was cheaper to buy uranium on the open market than bring on more production. What minimum price level is necessary for new uranium producers to be profitable?
PW: I expect the spot price will get to around $85 soon, and I think everything that’s in—or very close to—production will be profitable at that level. Lots of groups out there have done cost-curve analysis for future production that suggests we need a much higher number. It’s hard to give just one specific number but I think it’s at least $80/lb. It could even be higher depending on cost inflation. The next generation of uranium projects are lower-grade, more technically challenging and farther from infrastructure and major markets than most of the current mines. So, these new projects require a significantly higher uranium price to make them profitable. You need a higher incentive just to get them into production.
TER: But just a few months ago, we had $40 uranium. What’s going to sustain the uranium price at $80?
PW: You need to distinguish between the spot price and the term price. The spot price tends to be a lot more volatile. That price was $40 but the term price was above that at the time. Now, the term price is below the spot price. But it’s that long-term price that applies to new projects because a lot of these projects will forward sell their production into that price.
Fundamental supply and demand issues are ultimately going to sustain the price. Going back to that Macquarie report you quoted, we’re seeing a lot of strategic buyers like utilities from Asia and other places buying projects outright. At some point, it’s going to be very difficult to get production at any price because it will be all tied up. The end users will be integrated in such a way that they’re already contracted for any material produced. When you get into that type of environment, the price can be as high as it needs to be.
TER: But JP Morgan was far less bullish on the short-term price for uranium. It predicted uranium prices in the neighborhood of $60–$65 in 2011. Why is one big bank so much more bullish than the other?
PW: I think the difference, which Macquarie discusses in its report, is that they missed the China stockpiling. Again, you’re talking about what’s happening today between buyers and sellers that need material today—not what people are looking for in the future. When China comes in and buys close to 3,000 tons of uranium oxide in December alone, that really impacts the spot market. Because the spot market represents just a fraction of the total uranium required in any given year, it is subject to much more swings in price than the term price.
TER: How large is that fraction?
PW: I think it’s 20%–30%. Last year and the year before were particularly active years on the spot market. That’s what gives us the confidence that this move on the spot market is real and can be sustained because of the volumes that are trading on the spot market. The spot price is much more transparent; the term price is far less so. It’s a referenced price that’s provided by the pricing groups, but it’s not as transparent as the spot price in terms of where it might actually be on any given day. It could be higher; but until an actual contract transacts that meets those specific criteria, it doesn’t actually change.
TER: What’s the term price right now?
PW: About $73.
TER: As of Sept. 30, 2010, Pinetree Capital had 55 different investments in uranium. That accounted for 18% of your holdings. I dare say that that’s even greater now based on stock-price appreciation since then. Either way, that’s a sizeable bet on uranium. Could you tell us about your investment thesis and why you own so many positions in so many different plays?
PW: That September number also includes coal. We have one very significant coal position that represented a large portion of that amount and that’s Cline Mining Corp. (TSX:CMK). Cline has done great since the end of September and we think there’s a lot of potential there. As you pointed out, there have been some tremendous performances by the uranium stocks since September. We’ve always been big fans of this space.
We saw the long-term picture early on, or our Chairman and CEO Sheldon Inwentash did. This is a very simple macro argument—the world needs more electricity, especially clean power, and nuclear is in the best position to provide that. With that in mind, we wanted to have a big exposure to the uranium space, especially after the price pullback from $138 to $40. There were junior explorers and developers whose stock prices went so low that their value was basically being discounted to almost nothing. At that point, we decided to take a very proactive position in the space and rebuild the portfolio. We sold quite a few of our uranium names at the peak in 2007. We made a strategic decision to return early to the space and identified a number of juniors that were well positioned. I think our thesis has proven correct to this point.
TER: What are some of your more promising uranium holdings?
PW: We have a number of names. We focus mostly on the junior and the development-stage companies. We like names that have great assets but have been mispriced in the market and good management teams that can see those assets forward. Some of companies we are most bullish on would be names like Mega Uranium Ltd. (TSX:MGA), a long-held holding. It’s an Australia-focused uranium developer, and Australia has the most uranium of any country in the world. There are some mines in production now. A change in politics and philosophy in the country called for even more uranium mines. Mega’s Lake Maitland Project could be the very first, or possibly second, new mine to be developed. It’s in the feasibility study stage and soon the company will have some detailed information about the economics of that project.
TER: And it has a Japanese partner at Lake Maitland Project, correct?
PW: Yes, Mega has a very strong partner in the Japanese group JAURD (the Japan Australia Uranium Resources Development Co. Ltd.). And shortly it will be in a position to capitalize on the increasing price and shortage of advanced-stage uranium projects and companies. We’re excited about that one.
One of our names that’s had a tremendous amount of success in the last few months and really has just started to get a following is a company called Rockgate Capital Corp. (TSX:RGT). It has a growing resource in Mali, West Africa. We’ve seen a number of African names build and be taken over, including Mantra Resources Ltd. (TSX:MRU), which was taken over by Russia’s AtomRedMetzoloto (ARMZ) Uranium Holding Co., a Russian uranium miner that is wholly owned by Atomenergoprom OAO—a subsidiary of Rosatom and an extension of Uranium One Inc. (TSX:UUU) for a very attractive premium to the price that Rockgate’s trading at now. We’re starting to see monies that were invested in Mantra start to shift over to Rockgate as the company grows its resource. Rockgate’s recent financing puts the company in a very strong position to expand its resource and move its project ahead through economic studies.
One of the geographic regions we focus on that a lot of people have not is in South America. One of our key positions there is a company called U3O8 Corp. (TSX.V:UWE). U308 has projects in Guyana, Colombia and Argentina. This year, U308 is slated to expand its NI 43-101 resources at all of those projects by almost tenfold. We think there’s a lot of upside as other investors start to see South America the way we saw it two years ago—as the next frontier for uranium development.
One company in the U.S. is Energy Fuels, Inc. (TSX:EFR). We’ve been around that story for quite some time. What we saw last year was a very strong management team moving toward a new license to permit and build a mill in the U.S.—something that hasn’t been done for a long, long time. It paid off when the company successfully got that approval earlier this year. We think Energy Fuels is well ahead of the pack in terms of conventional uranium mining in the U.S. In the U.S., there’s a scarcity of uranium supply. We see Energy Fuels as a consolidator in the space. It’s just in a tremendous position to capitalize on what we think is a very strategic place to be in the U.S.
TER: And there’s some vanadium in the mix there on the Colorado Plateau.
PW: Yes, these Colorado Plateau projects, and even those in Utah contain certain ratios of vanadium to uranium. So, you get a nice kick from the vanadium byproduct, even though they’re still fundamentally uranium projects. Energy Fuels is well positioned to deliver new production and the first new mill permitted in the U.S.
Another one that we’re quite keen on right now is a company called Mawson Resources Ltd. (TSX:MAW; OTCPK:MWSNF; Fkft:MRY). This is in an interesting story because it’s much like Energy Fuels, but it’s actually uranium and gold. I would say almost freakishly high-grade gold and uranium. The company acquired a portfolio of projects in Finland from AREVA (PAR:CEI) last year. In prospecting at one of the projects, the company found probably the highest-grade gold and uranium anyone has ever seen on surface—over 20,000 grams per ton (g/t) gold in some places and more than 40% uranium in some places. It’s very early stage exploration at that project, but the company’s been able to delineate a 6 km. strike length to the trend at over 200 meters in width. These high-grade showings are pervasive across the trend and it’s never been drilled. It’s a new discovery with very limited work; but when you see those kinds of results on surface, it’s very, very encouraging.
TER: Does that mean Mawson is putting some of its other projects next door in Sweden aside for the moment?
PW: To a certain extent, yes. There’ll be some money spent on those projects but the bulk of the funds will be directed toward the Rompas Project, the high-grade uranium/gold project in Finland. Why? It’s the results. Mawson is waiting to get the final permits for a drill program that could commence as early as February. There’s just a lot of blue sky in that story and a lot to be learned about what could be there.
TER: Let’s move away from uranium, toward another clean energy commodity that’s getting a lot of play—lithium. Increasingly, lithium is being used in batteries to power electric vehicles (EVs). Those were nickel-metal hydride batteries just a few years ago, but now they’re mostly lithium-ion batteries. Lithium is also finding its way into some other new technologies. Judging by the number of investments that you have in lithium plays, Pinetree is betting heavily in its investment potential. Why did you get into lithium?
PW: A couple of years ago, we saw the potential in this space in terms of electric cars. Our analysis showed that even though some other battery types would fit into the mix, lithium would ultimately be the dominant player. There are a very small number of players that dominate on the production side; in fact, there’s a lot of room for juniors to come in and acquire projects—brine, hard rock or clay projects. You can acquire projects for relatively low costs and add a significant amount of value through exploration and development. We saw that as a great opportunity to make some very strong returns.
TER: Does Pinetree show a preference for brine versus hard rock lithium plays?
PW: We have in the past but we don’t like to make general statements about one type of project versus another. We really look at the individual investment opportunity. In some cases, the hard rock assets might be so mispriced that you could make a much better return even if you took a stance ideologically that the brines were going to be the better projects overall. For example, we’ve been quite positive on Canada Lithium Corp. (TSX:CLQ; OTCQX:CLQMF) even though we’ve spent most of our time focusing on the brines and names like Lithium Americas Corp. (TSX:LAC), Orocobre Limited (TSX:ORL; ASX:ORE) and others in South America. But really we try to find those mispriced or misunderstood assets where management has the wherewithal to move ahead, add value and realize the right price in the market.
TER: Yes, but some of those brine lithium deposits have potassium in the mix. If your processing circuit is developed properly, you could get potash as well as lithium.
PW: Absolutely. There’s tremendous opportunity in those kinds of plays.
TER: What are some that Pinetree is rather bullish on?
PW: Lithium Americas is at the top of our list. We’ve been involved in that story from the very early days, and it’s just blossomed into a tremendous story. It’s one of the largest brine deposits on the planet. The company’s made tremendous strides on the technical side, as well as understanding the economics. We’re going to see two major studies published this year with a prefeasibility study first, and then a feasibility study by year-end. The story has come together in a very short amount of time, but we see tremendous upside.
TER: And Lithium Americas’ Salar de Cauchari lithium project is not far from one owned by another company you mentioned, Orocobre.
PW: In fact, Cauchari and Orocobre’s Olaroz project are abutting each other.
TER: Given the proximity to each other, did Pinetree make its investment in Lithium Americas with an eye toward potential consolidation?
PW: In general, we always look for assets that we think will ultimately be consolidated or could be the consolidators. We certainly see that as something that should happen in that particular region. We’re not sure whether Lithium Americas will be the consolidator or not, but the company has tremendous partners and could easily go it alone. As I said, it’s one of the largest brine resources on the planet; so, it’s not a requirement but it’s certainly an exit that’s possible for LAC.
TER: Are you vested in Orocobre, too?
PW: We’re not a disclosed holder of Orocobre.
TER: Could you leave us with thoughts on how these clean technologies are influencing the mining sector and some of the opportunities they are creating?
PW: One area that we didn’t touch on is rare earth elements, which are used in a lot of cleantech applications. We also have quite a few investments in that area. We believe there will be strong opportunities in the cleantech space over the next few years for many reasons. China is dominating rare earths production, and finding supply outside of China is an absolute must for companies that want to be in those cleantech spaces. We’re tremendously bullish on rare earths, at least for the next year or two. Clean energy is certainly one reason we’re in the uranium space. When you stack up nuclear versus coal-generated power, uranium is a hands-down winner. We see more and more people getting behind nuclear energy, and it’s a great place to be vested.
TER: Thank you for talking with us today, Philip.
Philip Williams joined Pinetree Capital in January 2009 and was appointed to the position of resources analyst. Philip brings almost 10 years of financial market experience to the company. Prior to joining Pinetree, he spent five years working for several institutional brokerage firms in the equity research department. Most recently, he was a uranium analyst focused on companies with advanced development projects in Australia, the United States and Namibia.
|
|
Most Popular Posts