By The Energy Report, on November 16th, 2011
 From fossil fuels to fission, growing global demand for power generation offers investment opportunities. Thermal coal is heating up and the uranium junior mining sector is set for development and a wave of consolidation. Geordie Mark, mining analyst with Haywood Securities in Vancouver, shares his thoughts in this exclusive Energy Report interview.
The Energy Report: There have been recent takeovers in the coal sector, including the $1 billion (B) takeover of Grande Cache Coal by a Chinese and Japanese business combination. What should investors take away from that deal?
Geordie Mark: Investors need to be aware that metallurgical coal is intimately related to the steel market. Our expectations for growth in the steel market drive our expectations for growth in metallurgical coal. It is a positive sign that the market sees the value of such a strategic commodity. We’ve seen a lot of activity this year in the space, highlighted by the $4B takeover of Riversdale by Rio Tinto (RIO:NYSE; RIO, ASX) primarily for Riversdale’s metallurgical coal asset base in Mozambique.
TER: Chinese imports of metallurgical coal have grown along with China’s steel sector. Do you see this trend slowing in the near term?
GM: With steel demand increasing, we expect China to have an ever-increasing footprint in terms of metallurgical coal consumption. Long-term, there is still big potential for metallurgical coal, although we may see a plateau in pricing in the near term. China is also the largest producer of metallurgical coal, producing more than 500 million tons (Mt) in 2010, but we are expecting continued importation of the commodity in China, as well as Japan, India and South Korea.
TER: Which juniors with advanced coal projects are likely to see some interest from potential suitors on the heels of the Grande Cache deal?
GM: The first that comes to mind is Xinergy Ltd. (XRG:TSX), a company that produces thermal coal, but which recently acquired two metallurgical coal projects. One already produces high-voltage metallurgical coal and Xinergy aims to bring the other into production next year.
Another name is Corsa Coal Corp. (CSO:TSX), which is in production at its own metallurgical coal projects, both surface and underground, in the U.S.
TER: What about Coalspur Mines Ltd. (CPT:TSX; CPL:ASX)?
GM: To put Coalspur in context, it helps to talk about thermal coal. The company’s Vista Coal Project is a strategic asset as there is still underlying, increasing demand for seaborne thermal coal, especially in Asia.
TER: This is coal that is used primarily in power plants, is that right?
GM: Yes, its predominant use is to provide base-load for electricity generation. Coal remains the largest form of base-load power in the U.S. Almost 80% of power in China comes from thermal coal; Japan and India are also very big thermal coal consumers, and importers.
We see Coalspur being able to introduce itself into the thermal coal space through its Vista Project in Alberta, Canada. Coalspur just tied up a contract through the Ridley Terminals in Prince Rupert for up to 8.5 million tons per annum in export volume starting in 2015. Furthermore, the company also signed a memorandum of understanding with CN Rail to co-ordinate coal transport to Prince Rupert starting 2015. The project is right next to the railroad, so it is ideally positioned to add high-quality thermal coal into the seaborne market over the next few years. The large scale of this project, with such high-quality product, and advanced stage of negotiation for infrastructure support, is unparalleled in Canada. We expect Coalspur to make big inroads over the next few years. We have a 12-month target of $2.80 on Coalspur, and it is trading around $1.80.
TER: There is a lot of negative news about the pollution that coal-burning power plants produce. Are you saying that, despite the headlines, the thermal coal market isn’t going away any time soon?
GM: That is definitely what the projections tell us. The International Energy Agency predicts increases in thermal energy consumption over the next 20–25 years. I don’t see thermal coal—the largest form of base-load power across most economies—going away anytime soon as most of tomorrow’s growth is expected to emanate from the Advancing Economies.
TER: Do you have confidence in Coalspur’s management?
GM: Absolutely. The management team has built and run mines in the coal space in various jurisdictions. I am very comfortable with what they will be able to achieve.
TER: The last 12 months have not been kind to uranium companies, especially juniors. Year-over-year, the share price for Denison Mines Corp. (DML:TSX; DNN:NYSE.A), a mid-tier uranium producer, fell 36.5%; Uranium One Inc. (UUU:TSX) dropped 46.2%, and Paladin Energy Ltd. (PDN:TSX; PDN:ASX), a uranium project developer, lost 63.7%. Over the same time period, the TSX Composite Index slipped a mere 4.4%. How do you pitch uranium equities to retail and institutional investors at this point?
GM: The equities have taken a very big hit over the last year, despite the uranium spot price being around where it was a year ago. This equity market artifact is more related to sentiment, I think.
We still see uranium very much as a strategic commodity, even following the nuclear accident in Fukushima. This view is supported by the acquisition and offer activity in the sector in 2011. The sector’s growth outlook looks solid, driven by expected demand increases in China, Russia, South Korea and petroleum-producing nations such as the United Arab Emirates and Saudi Arabia.
TER: The Australian Bureau of Agriculture and Resource Economy estimates that roughly 107 thousand tons (Kt) uranium will be needed to meet demand in 2016. That is about 20 Kt more than the 86 Kt yellowcake expected to be consumed this year. Is an extra 20 Kt a year enough to drive up the share prices of uranium juniors?
GM: I think we need some other catalysts. We need to remove the negativity sentiment toward this sector. For example, we need to see new reactors being built. We need to see a timeframe for non-operating reactors, say those in Japan, to be put back online. Investors need to see more usage of existing reactors and new growth coming into play.
We’re starting to see new demand. A couple of new reactor proposals got the go-ahead in China recently, with construction for the reactors expected to start next year. Progress is starting to be made, albeit on an incremental basis.
The strategic nature of uranium is highlighted by recent interest shown by Cameco Corp. (CCO:TSX; CCJ:NYSE), the world’s largest uranium-only producer, and Rio Tinto in Hathor Exploration Ltd.’s (HAT:TSX.V) Roughrider asset. Rio Tinto’s involvement in the space is very interesting because that company deals with a range of commodities, and it allocates capital across geography and across sectors. By taking an interest in North American assets, Rio Tinto is increasing its stance in uranium.
TER: As I understand it, Cameco came in with what Hathor considered a low-ball bid. Then Rio countered. Has Cameco countered yet?
GM: Cameco has upped the ante and offered an increased bid of $4.50 per share. Cameco has more operational synergy in the region than Rio Tinto, given Cameco’s infrastructure and expertise in the Athabasca Basin. Ultimately, Cameco could provide a greater offer for Hathor than Rio and still maintain similar future margins on the operation.
TER: Does the bidding war for Hathor tell us that the major uranium producers place a premium on jurisdiction?
GM: Yes, but we also have to be cognizant of the inherent quality of the asset. For Rio and Cameco, it’s about where they see the equity markets valuing assets today versus the long-term outlook. It’s a combination of being comfortable in the jurisdiction and in the sector’s value.
TER: Do you expect takeover offers for more juniors with significant high-grade resources in safe jurisdictions, like Canada and the U.S., in the year ahead?
GM: The other situation that has investors’ attention is the potential bid for Kalahari Minerals plc (KAH:LSE; KAH:NSX) and Extract Resources Ltd.’s (EXT:TSX; EXT:ASX) Husab uranium resource in Namibia. Extract Resources is the world’s third-largest uranium company, based effectively on the valuation of the Husab uranium project, which has more than 500 million pounds (Mlb) uranium.
Right now, Kalahari Minerals, the largest shareholder in Extract, is in negotiations with state-owned China Guangdong Nuclear Power Corp. where a potential all-cash offer of £2.4355 per share is potentially on the table for Kalahari.
TER: Another significant project in Namibia is Bannerman Resources Ltd.’s (BAN:TSX; BMN:ASX) Etango uranium project. China’s Sichuan Hanlong Group made highly conditional proposal to acquire Bannerman, but Bannerman recently announced it must do further due diligence before committing to the financing. Is this an indication that Bannerman needs to continue to derisk Etango or that Hanlong simply wants Etango at a steep discount?
GM: Hanlong’s proposal was at quite a low enterprise value per pound rating, much less than $1/lb. That was already a fairly substantial discount to other acquisition metrics in the space. For instance, Hathor and Mantra Resources Ltd. (MRU:TSX) were north of $9/lb. Bannerman’s management and board were talking to many parties subsequent to Hanlong’s proposal. Bannerman’s board considered it to be a low offer for the company. Time will tell.
TER: Do you think Bannerman will find another bidder?
GM: There is a lot of interest out there in the sector for advanced projects, but I think that there needs to be a resolution with the potential take out of Kalahari, and by extension Extract Resources, before focus may move to Bannerman.
TER: Moving back to North America, are there projects here that you expect to generate takeover interest in 2012?
GM: I think people will wait and see how the dust settles for Hathor Exploration, but consolidation is probably the name of the game in the space for the time being. We’ve seen that in the in situ recovery space in North America. There is synergy between Uranium Energy Corp (UEC:NYSE.A), Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.A) and Ur-Energy Inc. (NYSE.A:URG; TSX:URE). Uranium Energy Corp is in production now. Uranerz Energy is in the construction phases, and Ur-Energy awaits a final permit prior to commencement of construction. Then there is the potential merger of Energy Fuels Inc. (EFR:TSX) and Titan Uranium Inc. (TUE:TSX), announced at the end of October.
TER: What did you make of that deal?
GM: I felt it was a positive move for Energy Fuels, in that it gives the company access to a broader resource base, particularly in the uranium mining state of Wyoming. Energy Fuels has potential access to future production through its planned Piñon Ridge uranium-vanadium mill. The Sheep Mountain uranium project in Wyoming is a moderate-sized, defined resource of more than 30 Mlb uranium, and Titan’s management team has a clear objective of progressing the project through permitting and development over the next several years.
TER: What more can you tell us about Uranerz? Do you think it is undervalued?
GM: Uranerz is fully permitted for construction for Nichols Ranch and its Hank satellite facility. Both are on time and on budget. The company has a rich history of developing similar projects—six times in the U.S. There is a lot of confidence that Uranerz can do this. Production is expected to commence in Q312. That timing would make Uranerz the world’s next uranium producer.
The company is being derisked through the construction phase; moving into next-producer status will be very positive for the company.
TER: Uranium Energy Corp is up and running in Texas, where it is working on a second in situ operation there. Given that the company is recovering significant amounts of uranium, is there a likelihood Uranium Energy could see a bid?
GM: You typically see bids coming in after significant milestones and de-risking have occurred. If a bid were to come in, I think it would be after UEC has permitted, built and started production on its second main project, Goliad. There will be a wait-and-see period in terms of external acquisitions.
TER: Why is Uranium Energy Corp a good buy?
GM: First off, UEC is in production. Second, it has a very clear plan for developing its portfolio of assets to increase its corporate production rate. Goliad is at the mature state of permitting and is expected to enter the construction in H112. The company also has the Salvo Project, which could be Uranium Energy Corp’s third project to come into production in a couple of years. The company has a clear strategy to increase production from an existing plant that is already built, permitted and operating.
TER: Until the last few years, few uranium projects have been developed into producing mines outside of Kazakhstan. Other than the price of uranium, why is that?
GM: The lack of new project development is a combination of the long lead times typically required to mature projects through permitting and construction, as well as fluctuating commodity prices and access to project financing. Lack of project development appears to be also an artifact of sector focus. In the last 10 years, a lot of money was spent on brownfields projects that were marginal in earlier periods of exploration, and less focus was placed on greenfields projects. Greenfields discoveries have the potential to add low cost output to the future production project, but discovery and resource definition can take time. I think that it is interesting to observe that despite market sentiment, acquisitions are still on the table in the sector, and these are focused on the few new discoveries (e.g., Mkuju River Project, Husab Uranium Project and Roughrider Project) made over the last several years.
TER: One new discovery is Strateco Resources Inc.’s (RSC:TSX) Matoush Deposit in Central Québec. Do you think that will ever become a mine?
GM: Matoush certainly has potential with just over 20 Mlb U3O8, at grades and close to 0.6% uranium. Because it is in Canada, the permitting process is known, although it takes time to go through and meet all the requirements. The company is in the permitting phase now.
TER: Geordie, thank you for your time and your insights.
Dr. Geordie Mark, a research analyst with Haywood Securities, focuses principally on iron ore, coal and uranium companies involved in exploration, development and production. He joined Haywood Securities from the junior exploration sector, where he served in an executive role concentrating on exploration across Canada. Immediately prior to joining the exploration industry full-time, Dr. Mark lectured in economic geology in Australia and served as an industry consultant. He completed his doctorate 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 October 20th, 2011
 Steve Palmer, chief executive of Toronto investment firm AlphaNorth Asset Management, scans the market for inefficiencies. And it pays off in the long term. While comparable market benchmarks are down as much as 46%, his small-cap fund has returned nearly 200% since its launch in 2007. In this exclusive interview with The Energy Report, Palmer explains why his long-term vision makes him a continued believer in oil and uranium.
The Energy Report: About 30% of the AlphaNorth Partners Fund, which consists mostly of Canadian securities, was invested in tech stocks, with similar percentages in metals and energy the last time we spoke in May. What’s the asset mix now?
Steve Palmer: Technology stocks comprise about 32%, metals 26% and energy 27%.
TER: Although the fund was down about 6.5% in August, it is up 23% for the year through August. It was down about 15% in September, but it’s still positive on the year. What edge does AlphaNorth have that allows you to make gains in an economic climate that’s as negative as this one?
SP: It’s very difficult to make money when markets drop more than 10% in a month. We don’t pretend to be able to make money in those kinds of months like we experienced recently and in the fall of 2008. However, since inception of the fund in December 2007, the fund has returned approximately 190% despite declines in the Canadian indices.
The Canadian indices that I use as benchmarks are both negative. The S&P/TSX Venture Index, which is the closest benchmark to what we do, is down 46% over that timeframe and the S&P/TSE Composite is down 5%. Despite the poor markets, we’re still able to generate substantial returns over a long-term timeframe.
TER: What is your primary strategy for generating profits?
SP: Good stock picking. We’ve had some good calls on specific stocks. We’ve been able to sell them at the right time. We use technical analysis to help do that. We do some hedging in the Partners Fund at certain times when we think the market is vulnerable to a correction. That has helped cushion the downside and contribute to positive returns when the short positions work out.
TER: In the coming quarters, do you see yourself leaning more towards one of those sectors that you mentioned earlier, perhaps at the expense of another?
SP: No, not particularly. Given the correction, all of those sectors have been beaten down pretty good. There are a lot of bargains across the board now.
TER: Let’s take a closer look at the energy portion of the AlphaNorth Partners Fund. What’s the mix in terms of oil and gas, uranium, renewable and coal?
SP: It’s mainly oil-focused. Coal would be the next most significant component and then iron ore and uranium.
TER: Uranium’s off the radar for many investors given the events resulting from the tsunami in Japan earlier this year. Are you still a believer in uranium?
SP: Yes, I’m still a believer. Long term, the supply/demand should result in higher prices. China’s still moving forward with building many new nuclear plants. There’s a huge demand for power in many parts of the world. Uranium is, in many cases, the most practical way to add power. It’s unfortunate what happened in Japan. It’s created a negative investor sentiment in the short term, but the fundamentals are expected to be strong over the long term.
TER: Many uranium projects being developed need $50 uranium just to break even. The spot price for uranium is just above that now. Do you believe Chinese demand alone can bring uranium prices up enough to make smaller development projects sustainable?
SP: Chinese demand will account for probably more than half of total new demand over the next 10 or 20 years. We’ve been working through stockpiles from nuclear weapons, but that’s pretty much depleted now. We do need new supply, but there are not many new uranium projects coming on.
TER: China’s Sichuan Hanlong Group is in takeover talks with Bannerman Resources Ltd. (BAN:TSX; BMN:ASX), which owns two uranium development projects in Namibia. Uranium titan Cameco Corp. (CCO:TSX; CCJ:NYSE) is in the midst of a hostile bid for Hathor Exploration Ltd. (HAT:TSX.V), which has a high-grade uranium project in the Athabasca Basin. These are clearly cases of larger companies preying on smaller uranium companies beset by low share prices. Could it be time to take positions in uranium companies with near-term development projects?
SP: It just demonstrates that larger companies need to increase production and economic uranium deposits are very difficult to find. They are more difficult to find than many other commodities. The good projects are going to be in high demand.
TER: What are some uranium stories in the fund?
SP: Athabasca Uranium Inc. (UAX:TSX.V; ATURF:OTCQX) is one.
TER: It’s not all that far from Hathor. It’s about to begin a drilling program in the next few weeks. What are you expecting from that?
SP: I’m not expecting anything, but I’m hoping for good results. It’s in the right neighborhood and there’s obviously a lot of high-grade uranium and some very profitable mines close by. The company has a very small valuation; they have reasonable odds of success. I’m just hoping that the drills are kind.
TER: Do you have any holdings in Australia?
SP: We have a stake in Mega Uranium Ltd. (MGA:TSX) in one of our other funds.
TER: What do you like about that story?
SP: It’s cheap. It has defined deposit in Australia, which is a good jurisdiction. It’s not just a one-project company.
TER: Some of those projects are in locations that need some political will in order to begin mining. Do you see that happening?
SP: Yes. I think there’s a decent chance that it will change. You need some political will in many areas for uranium. It’s not something that people typically welcome. The permitting process can be quite long regardless of where you are.
TER: What are some oil and gas stories that are undervalued right now?
SP: Canadian Overseas Petroleum Ltd. (XOP:TSX.V) has assets in the North Sea, which is a good jurisdiction. Management has drilled wells there before and been quite successful. They have multiple locations to drill. It has lots of cash to complete the job. If you risked their drill targets, you still get a net asset value (NAV) over $1 a share. It’s currently trading at $0.32.
I just saw some research yesterday from an analyst that has a risked NAV of $1.20. Assuming all of their drilling is successful, the potential NAV would be roughly $3.50. That’s unlikely to occur because they are not going to be 100% successful. The end result will be somewhere in between those two numbers.
TER: Is there another intriguing name?
SP: Primary Petroleum Corp. (PIE:TSX.V) is very cheap and it has a lot of potential. Primary is an emerging play in Montana for the Bakken. It’s a shale play that extends into Montana from Alberta. Several larger U.S. companies seem to be having some good success there. Rosetta Resources Inc. (ROSE:NASDAQ) and Newfield Exploration Corp. (NFX:NYSE) have been having a lot of success drilling in Montana. Primary has about 300,000 acres, which is quite large for a small company. It also recently signed a letter of intent with a U.S. major to farm in on the majority of their acreage where the partner will fund the exploration. Primary will have no requirement to spend any of its cash and it will benefit from the expertise and experience of its partner.
TER: What’s your outlook for the energy sector?
SP: Energy is one of the commodities I favor. It’s a resource that’s gone once you use it, so you constantly have to keep finding more. The demand continues to grow.
TER: Thanks.
Steven Palmer, CFA, serves as president, CEO and a director of AlphaNorth Asset Management since founding the firm in 2007. AlphaNorth currently manages a long-biased, small-cap hedge fund. As VP of Canadian equities at one of the world’s largest financial institutions, he managed assets of approximately $350M. He also previously managed a small-cap pooled fund, achieving returns ranked #1 by Morningstar Canada. He has a BA in economics from the University of Western Ontario.
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 August 3rd, 2011
Because of ongoing nuclear power development in China, Africa and the Middle East, uranium prices could bounce back to pre-Fukushima levels of $70/lb. in 2012, says Geordie Mark, a research analyst at Haywood Securities. Instead of waiting for prices to rebound, some mining companies are moving ahead with regulatory and construction projects to drive value. In this exclusive interview with The Energy Report, Mark points to the ones that could be poised to pay off for investors when the market turns.
The Energy Report: Investors have focused on how the Japanese earthquake and the tsunami that shut down the nuclear plant in Fukushima might influence the demand for nuclear fuel going forward. Clearly, this has been the elephant in the room. But, I wonder about the other shoe that dropped on May 30 when Germany formally announced plans to abandon nuclear energy completely within 11 years. That includes the immediate closure of seven plants. Switzerland and Italy may follow suit. Will this have a watershed effect on any other major economic powers?
Geordie Mark: Changing political sentiment toward nuclear power in advanced economies like Germany, Switzerland and Italy will have a tangible effect on uranium demand in the next 10 years. However, we really don’t see it affecting the main growth picture in advancing economies of China and India. We’re also looking for growth out of South Korea, Russia and other new entrants, probably the United Arab Emirates (UAE) and Saudi Arabia. These growing countries are looking to diversify their energy base.
TER: How big are the growing nuclear power users in Africa, UAE and Southwest Asia compared to China?
GM: I don’t see these areas being equal drivers. Nuclear power is a significant part of China’s growth strategy. That is evidenced by the government’s target of 40 gigawatts of electric capacity by 2015. That represents some significant, real growth. China has a number of reactors under construction now, well ahead of the rest of the world. The other nations you mentioned certainly play a potential growth role about 5-10 years out. For nearer-term suppliers, the bigger demand sinks are those countries that either have a significant number of reactors under construction or plan to in the next three to five years.
TER: Recently, uranium was selling for around $51/lb. and trending down. Is the price finding support?
GM: We are in the slow, summer siesta period with fewer volumes being transacted on the spot market. The average for the year is about $61/lb. We see support at or around the low-$50/lb. range this time of year. We certainly are looking for strength in the commodity price coming into Q4 as purchasers look for discretionary demand for 2012, and for any contract shortfalls to come into the market around that time.
TER: What is the breakeven price for a pound of uranium for small producers compared to the bigger producers?
GM: We are still looking at some of the producers having expected cash costs in the low $30/lb. range on average. That would be Paladin Energy Ltd. (TSX:PDN; ASX:PDN). Denison Mines Corp. (TSX:DML; NYSE.A:DNN) is probably looking at the $50/lb. range. It is a marginal producer leveraged to the uranium price. The new entrants for in-situ recovery (ISR) uranium production out of the U.S. are Uranium Energy Corp (NYSE.A:UEC) and, potentially next year, Uranerz Energy Corp. (TSX:URZ; NYSE.A:URZ). They are coming in around the mid-$20/lb. to low $30/lb. price range. So, we are still looking at many of those companies being able to continue to operate under those conditions. But, certainly, we don’t see the current price being a stimulus for the development of large-scale projects that involve significant capital investment.
TER: You forecast that by Q4 of this year, you would see some strength. What is your forecast for uranium now?
GM: For this year, we are looking for an average of around $60/lb. So, we see some strengthening in price from where it is today. Next year, we are looking at $70/lb. and our long-term projection is $75/lb.
TER: So, you see uranium production and pricing getting back to what it was.
GM: Yes. We see a slow recovery coming back up to what we were starting to see at the end of last year, but this is expected to take some time as the market progressively crystallizes a picture for tomorrow’s supply-demand equation. The main uncertainty will be around what happens in Japan with the reactor operations, and whether additional countries join Germany in walking away from nuclear power.
TER: Could some of the undamaged reactors possibly come back online anytime soon?
GM: We have currently written those reactors off along with expectations for other reactor units to be constructed at that site, and within Japan.
TER: What about the regulatory picture? I know that it’s different for each jurisdiction. But, what does it look like now, particularly on the mining side?
GM: We see enhanced project regulation and oversight on mining operations going forward. This will most likely result in more protracted permitting and more stringent requirements for mining projects and processing plants. We also expect that stakeholders will be more engaged during the permitting processes. All of these factors likely will culminate into greater review periods. For that reason, we have delayed our commissioning dates for a number of the larger development-stage projects undertaking project permitting and licensing. Concurrently, the events in Japan and the political shakeout across various European nations have led to softening the front end of our demand curve. These two factors have led to an overall smaller supply-demand picture for the next several years, when China’s growth plans will have an even greater impact on the sector’s size.
TER: Do you see institutional investors dipping their toes back into uranium mining companies? Is this a good time to reenter the market through equities?
GM: Well, we are seeing some interest from institutional investors looking at low-equity valuations out there. They are largely looking at large-cap producers such as Cameco Corp. (TSX:CCO; NYSE:CCJ) and other larger producers. Investors currently participating in the markets are those who believe in the long-term viability of the sector and have had that view for some time. Investors waiting on the sidelines comprise a significant proportion of the investor base and are fundamentally uncertain about the sector’s trajectory post March 11.
In terms of investment, we have certainly seen lowering in equity valuations on simplistic enterprise value (EV)/lb. metrics as well as forward cashflow and EBITDA (earnings before interest, taxes, depreciation and amortization) multiples. Equities across the board have obviously taken a hit with earlier-stage companies commonly taking the brunt of the negative sentiment.
TER: When it comes to producers, are investors looking for special situations, discovery stories, near-term producers, mergers and acquisitions or turnaround stories? Are there any special themes?
GM: I think investors are looking for value within the sector. That can be translated as a company either witnessing good production growth potential, or nearing production having mitigated risk by receiving relevant permits and licenses. It could also be a company that has shown significant potential for resource growth. So, there is still investment potential. There is still interest in the sector, but investors are far more selective.
TER: It looks like over the last six months, the unweighted basket of uranium stocks has lost nearly half its market cap. Has this affected its ability to raise funds for capital expenditures? And, if so, are there some good acquisition targets in the pile?
GM: Absolutely. I would like to take a step back to say that I think a number of company boards in the sector were cognizant of the 2008 financial crisis and the requirements to have significant working capital to keep their main projects going. Given that backdrop, many companies raised cash in late 2010 and early 2011 to keep projects progressing and to maintain other objectives, e.g., continue with permitting, maintain resource definition programs and undertake exploration. So, many companies have a good position to keep going. That being said, post-March 11 there has been a tangible lessening in the ability of companies in the sector to raise capital for exploration and large-scale development projects. Low stock prices have led to companies cutting back on work programs to better maintain working capital positions, and to minimize any potential future dilution.
The bottom line is that we are still looking for value. We are looking for acquisition targets. We still see that the uranium sector is very much a strategic commodity. There are still strategic acquisitions in the space for large, exploitable resources in uranium mining-friendly jurisdictions. One company in this category is Bannerman Resources Ltd. (TSX:BAN; ASX:BMN), which recently had a proposed cash offer of just over AUD$0.60 by Hanlong Mining Investment because it holds a significant asset in Namibia. We also saw earlier this year Kalahari-Minerals (LSE:KAH), the major shareholder of Extract Resources (TSX:EXT, ASX:EXT), engage in potential acquisition discussions with China’s Guangdong Nuclear Power Corporation. So, we still see that large-scale resources represent strategic assets independent of where equity prices stand. Given the low equity valuations, these types of assets are even more prone to sovereign interests and other parties trying to lock up supply.
TER: You clearly don’t believe $0.61 is going to fly, do you? Your target price is better than 100% implied return on Bannerman.
GM: We have a $0.90 target on the company based on our future commodity price expectations. Our view was that the proposal was opportunistically timed. We think the Etango project in Namibia represents one of the few projects out there that could be in production within four or so years. A number of other parties could seek an interest with Bannerman or engage in a joint venture for exposure to production. We still see more value than the offer that Hanlong put out.
TER: Hanlong probably wanted to see if the market would bid on the company.
GM: Obviously, Hanlong wanted to engage with Bannerman on potential acquisition. We understand that Bannerman will continue dialogue with Hanlong over the next period. But this period is not exclusive so the company can still discuss other options with other third-party interests.
TER: A ridiculously low bid, wouldn’t you think? I believe you calculated that the bid valued the Etango project at about $0.85/lb. U308.
GM: That’s correct, our estimates placed the bid with an implied EV/lb. metric of significantly less than $1/lb. U3O8. Compare that to the recent acquisition of Mantra Resources Ltd., which was based on implied EV/lb. somewhere near $9.
TER: Any other ideas that you might have for investors?
GM: Sure. We see Uranium Energy Corporation as an exciting story out of Texas. We are looking at the company’s continued production expansion as a big catalyst. We see the world’s next new uranium producer as Uranerz Energy in Wyoming. The company just received its NRC (Nuclear Regulatory Commission) source materials license for Nichols Ranch, which we believe is now under construction. We see catalysts for Ur-Energy Inc. (NYSE.A:URG; TSX:URE) in permitting advancements, which we expect it to achieve throughout this half of the year for the Lost Creek Project in Wyoming. We are also looking at other catalysts for resource growth and/or exploration discovery. These companies include Mawson Resources Ltd. (TSX:MAW; OTCPK:MWSNF; Fkft:MRY), which has a very intriguing system in Finland, called Rompas. It seems to be a unique uranium-gold system. That company is doing some new, fundamental exploration at the moment. Also, Kivalliq Energy Corp. (TSX.V:KIV) has the Lac Cinquante Deposit that recently had a maiden resource defined of just over 14 Mlb. U3O8 at a grade 0.79%. There is a big drilling program being undertaken on the project area this year. This will test for resource expansion and exploration discovery. Meanwhile, Rockgate Capital Corp. (TSX:RGT) has the Falea Project in Mali where the company has already defined a significant uranium-silver resource base. The company is aiming to increase that resource base throughout the year. This goes to show that some companies are attempting to add value to their asset base independent of where the uranium price is today, thereby attempting to differentiate themselves from their peers.
TER: You had a target price of $0.70 on Energy Fuels Inc. (TSX:EFR), representing almost a double. What is the growth driver there?
GM: I think the growth driver for Energy Fuels ultimately relates to resolution of current litigation. The company is permitted for its Piñon Ridge mill. The main thing there would be for it to lock up an agreement to enter construction for the Piñon Ridge mill and start rehabilitating the Energy Queen Mine in Utah.
TER: You have a $0.65 target price on Mega Uranium Ltd. (TSX:MGA). That represents approximately a 76% implied return from here. What about the growth driver there?
GM: I think the main growth driver for the company correlates to the Lake Maitland Project in Western Australia and potential for resource growth in the short term. Mega Uranium also has potential for value addition through other projects in Australia. However, in the near term, we are looking at additional work in Lake Maitland and incremental permitting progress over the next few years. We see that project as one of the few potential projects in Australia that can enter production over the nearer term.
TER: Geordie, you mentioned the materials license approval for the Nichols Ranch ISR project that Uranerz recently received. That obviously derisked the project, but do you attach any other significance to this as far as the general regulatory scale?
GM: Well, Uranerz obviously took a very big step by entering the construction phase after the issuance of the NRC license. For the sector, it’s not the first new materials license that the NRC has given recently. It did grant Uranium One’s Moore Ranch Project a materials license last year. This project is also in Wyoming. Continued licensing shows that while it takes some time to go through the permitting process, if you have the right project and take the right steps, you can incrementally progress through permitting and licensing. So, I think it means effectively that the doors are most definitively still open, but I do not think that Uranerz’s NRC license is a panacea for all projects. In our opinion, the most likely company to step through that process next is Ur-Energy.
Dr. Geordie Mark, a research analyst with Haywood Securities, focuses principally on uranium companies involved in exploration, development and production. He joined Haywood Securities 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. Immediately prior to joining the exploration industry full-time, Dr. 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 July 20th, 2011
 Marshall Berol and Craig Valdes are concentrating their focus on resource stocks in their Encompass Fund portfolio. In this exclusive interview with The Energy Report, they share their current thinking regarding the energy sector and give us the names of some stocks that are attractively priced now and that could do well as global energy demand grows. They remain very positive on the prospects for nuclear and see oil demand growing.
The Energy Report: Your Encompass Fund has had some pretty spectacular returns over the past three years. How have you been able to do this and what are your selection criteria?
Marshall Berol: Malcolm Gissen and I started Encompass Fund five years ago. We’ve been very ably assisted by Craig Valdes and Kevin Puil. Our concept was to invest globally in any market cap size company, utilizing both a top-down and bottom-up approach. That results in us looking at sectors we find to be attractive going forward, and then selecting companies within that segment that could experience long-term capital appreciation, which is the objective of the Encompass Fund. We also look at individual companies regardless of industry, where we like the company’s fundamentals.
We have liked resource companies for the past decade. When we started Encompass Fund in 2006, we had already been invested on behalf of individual private client accounts in various sectors of the resources industries, including energy, primarily oil and gas. We have continued to be invested in those industries because they have had some excellent growth and we expect that to continue in the future. So, that’s what led to the Encompass Fund performing very well in the last several years.
The end of 2008 is very painful to recall, as I’m sure it is for all of your readers. But, in late 2008 and the beginning of 2009, we eliminated some companies in the portfolio that we didn’t feel were as strong as some of the others and added to the companies that we thought were particularly strong, but suffering from the general stock market problems. That led to a 137% gain for Encompass Fund in 2009 and a further 60% gain in 2010. For the trailing one-year and three-year periods, Encompass Fund ranks as the top International Mutual Fund, according to Morningstar.
TER: In reviewing your portfolio, nine of the 10 largest holdings are resource companies. Is that the approach you’ll likely be following in the future?
MB: At this point, the outlook is bright for resource companies, including precious and base metals as well as oil, natural gas, coal and uranium. At some point in the future, one or more of these sectors will be less attractive for investment opportunities and we’ll adjust accordingly.
TER: What is your current thinking on where the various energy areas are headed now, in light of the changes since our last interview here in May 2010?
Craig Valdes: We like natural gas as a commodity and as an energy supply. But, because of advanced technologies such as “fracking” and horizontal drilling, you’ve seen an abundance of supply. And so, we might not be as positive on the direction of the price, meaning that it’s probably going to stay in the $4 to $5 Mcf. (thousand cubic feet) range in the near-term. But, as an energy component, we strongly believe that over the longer-term our energy policies will lean more toward natural gas.
Oil has backed off from its recent highs, but the oil price is really a function of how well the global economy is doing. As long as we have an environment with even slow to expanded growth in emerging economies, there’s going to be a continued demand for energy. So, we like oil for the near and long term.
TER: Do you expect any sort of a stabilized price range for oil, or are we going to see big moves up and down?
CV: I think that has a lot to do with energy policy. It also has to do with global growth and the emerging growth economies. We believe that prices on the low end may trade somewhere in the $70-$80/barrel (bbl.) range and at the high end it could be as much as $100-$120/bbl. I think oil stays in a reasonable trading range over the near-term and the next couple of years. The only thing that could easily change that are the Saudis and the Middle East geopolitics, which could affect pricing and supply. We believe that pricing is not going to change that much over the next couple of years.
MB: Certainly, geopolitical issues will have a large bearing in the short-term. We take a nine- to 12-month view in any of these industries. Short-term you get a lot more volatility. For example, when it was announced they were going to release 60 Mbbl. of oil from strategic reserves around the world, including 30 Mbbl. from the U.S. strategic reserve, the WTI oil price went down about 10% from around $100-$90/bbl. Now it’s back up to near $100/bbl. So, in the short-term it had some affect. In the long term it doesn’t. Overall demand continues and overall supplies are basically tight. Some particular situations could lead to a larger decline or, more likely, a larger spike.
TER: Can you tell us about some oil and gas situations you particularly like at this time?
MB: One company that is a major holding in Encompass Fund and has been for some time, is a smaller low-priced stock, GeoPetro Resources Company (NYSE.A:GPR). GeoPetro has five different projects, any one of which could be a real company maker. We have participated in private placements with the company, as well as buying the stock in the open market. The company has an operating natural gas plant and some natural gas wells in Texas. It has a very interesting project in the San Joaquin Basin area in south-central California. It sold a couple of large land positions it held in Alaska to Linc Energy Ltd. (ASX: LNC; OTCQX: LNCGY) of Australia and retained an attractive royalty interest. It is also one-third partner in a project in Canada with PetroBakken Energy Ltd. (TSX:PBN). That is less likely to be acted upon in the near future, but it’s got some very good promise.
GeoPetro has a minority interest in a project in Indonesia with the majority interest held by Chinese companies. The Chinese are actively doing seismic work and plan on drilling later this year. Any one of those projects with drilling success could be extremely beneficial for the company’s stock. GeoPetro has contracted to sell some excess equipment this September that will bring in more than $9M. That would be used to increase production from the Madisonville, Texas, wells and improve the natural gas processing. Those improvements should take the company to at least a positive cash-flow situation, which would be very attractive also. It’s a low-priced stock and there aren’t hundreds of millions of shares outstanding, as you sometimes see.
TER: What else do you like?
CV: We’re very bullish on the San Joaquin Basin in south-central California. NiMin Energy Corp. (TSX:NNN) is in the San Joaquin Basin. There are some big players down there like Occidental Petroleum Corp. (NYSE:OXY) with its huge find in 2009. NiMin is just a stone’s-throw away from some of that production. It’s heavy oil and NiMin has an enhanced oil recovery process called CMD, (Combustion Miscible Drive) on which they have applied for a patent. The company creates steam using a kind of soapy oxygen and injects this into the well reservoir. That heats up the heavy oil and it comes to the surface at a faster rate. The first well they demonstrated this on was producing about 30 bpd (barrels per day) of oil. Now it’s up to about 250 bpd. NiMin has identified a number of heavy oil opportunities in old existing wells in the U.S., which they can pursue. The company has a nice land package in the San Joaquin Basin (Santa Margarita Reservoir) and it is going to drill two additional wells in the second half of this year. Secondly, it may joint venture this enhanced oil recovery process with some larger oil companies. We think that’s a great opportunity, which only enhances the company’s other primary exploration and production focus in Wyoming.
Another company we like that has a large land package in the San Joaquin area is called Zodiac Exploration Inc. (TSX.V:ZEX). It is actually targeting light oil in the Kings County region, and drilling very deep wells. It just started drilling a horizontal well and we look for some updates on that in the next few weeks. When the company finished its first vertical test well to 14,000 feet a few months ago, it found between 500 and 1,000 feet of actual pay in about four different zones. We think Zodiac has a great opportunity long term in the Southern California oil sector.
MB: One of the things we look at in junior companies is the management, because it’s extremely important that management has been in the industry for a number of years and has achieved past successes. That’s the case with Zodiac, NiMin and GeoPetro. These smaller companies will often seek out a larger joint venture industry partner or partners with technical expertise, knowledge and the ability to handle financials. Then the junior will have an ongoing interest in any of the production that comes out of that well and any succeeding wells.
TER: A lot of oil and gas exploration is going on in South America these days. We don’t hear that much about it, but there have been some big finds down there. Can you bring us up to date on what’s going on?
CV: Obviously the interest has been spurred by the big find by Petrobras in Brazil (NYSE:PBR) in the last year or two. There’s oil and gas all over South America but we’ve focused on companies in Colombia because of the way it is regulated, much like the way the U.S. and Canadian governments operate. So, many of your Canadian and U.S. operators have gone to Colombia. We presently own three oil and gas companies in Colombia. One is actually a mid-tier company, Gran Tierra Energy Inc. (NYSE:GTE; TSX:GTE). It’s a larger company with current production of approximately 18,000 barrels of oil equivalent per day. One of the smaller exploration companies in our portfolio is PetroDorado Energy Ltd. (TSX.V:PDQ). PetroDorado, has working interests in a number of different blocks in Columbia and Peru. It has a 30% working interest in one block called CPO-5 that it would like to increase, but its partners are reluctant to sell any additional interest based on the recent seismic work completed. The company is going to be drilling that later this year. We’re looking for excellent results from this exploration region.
Another company that we like in the area is a service company called Estrella International Energy Services (TSX.V:EEN) working in Colombia, Peru and Argentina. Management was working for Schlumberger Ltd. (NYSE:SLB) and left a few years ago and formed Estrella. It’s a full-service oil and gas service company consolidating a fragmented industry in South America. Obviously the exploration companies and producing companies are looking for teams that have expertise and these guys have a great reputation. We think there’s a great opportunity just on the service side for Estrella. The company has demonstrated over the last couple of years that it is able to bid and win good contracts with top-tier companies, including some of the large ones such as Pacific Rubiales Energy Corp. (TSX:PRE; BVC:PREC), Petrobras (NYSE:PBR) and Canacol Energy Ltd. (TSX:CNE). That’s another company that we like on a long-term basis.
MB: Colombia has come a long way in the past decade. There is a lot of growth there and a lot of industry. A number of mining projects and energy-consuming industries are located there. With increased stability in the region, there has been far more activity. We think it has led to some significant oil and gas discoveries and a bright future for some companies.
TER: Moving on to uranium; it’s seen some turbulence since Fukushima. What are your thoughts on that market?
MB: There has been a lot of turbulence. But, long term we’re very bullish on uranium and the companies that are exploring for and producing uranium. Approximately 440 nuclear energy plants operate today around the world. Maybe half a dozen will be taken out of operation in Japan and another half dozen in Germany in the near future. The overwhelming majority of the 440 plants are continuing to operate.
As many as 50 new nuclear energy plants are still being built around the world. South Korea, France, Slovakia and even the United States, have said they intend to continue on the road to increased nuclear energy. There will be increased safety precautions. New designs have been developed for reactors over the last several decades and put in place subsequent to the reactors that were built at Fukushima. Nuclear energy provides 15% to 20% of the world’s growing electricity needs.
While 180 million pounds (Mlb.) of uranium is currently being used around the world to fuel nuclear energy plants, only about 110 Mlb. to 120 Mlb. is currently being produced. The balances come from inventories above ground and from the deactivation of the Soviet Nuclear Arms Agreement. This agreement ends in 2013 and Russia has stated it does not intend to renew it. So, somewhere between 25 Mlb. and 30 Mlb./year will need to be replaced. We think it’s going to cause an increase in the price of uranium in the years to come. The companies that are either producing it or exploring for it and will be producing it are very attractive and we remain very bullish.
Solar and wind are fine, but it’s a minuscule output now and probably for many years to come. Geothermal and hydro are also fine, but they’re extremely limited in production and location. Other difficulties emerge with increasing electricity generation from oil or gas or coal. So, nuclear energy plants have a definite long-term positive outlook.
It’s strange, but in the investment business, people don’t want to buy things that are on sale. The uranium companies are currently on sale. We were in uranium companies prior to Fukushima. We have increased some of those holdings and added new ones. People should pay attention to the uranium industry and what’s actually going on in the nuclear energy industry, rather than merely drawing conclusions from headlines.
TER: Can you tell us about some of the ones you like that are in your portfolio?
MB: One of the top holdings for some time has been Uranium Energy Corp (NYSE.A:UEC). The company’s primary projects are in South Texas. It started production in November 2010 using in-situ recovery (ISR). It’s a far less costly and far more environmentally friendly method than either open pit mining or underground mining. Uranium Energy Corp also has other projects they are bringing into production in South Texas. The company recently made an acquisition of a very large land package in Paraguay. It also owns additional exploration properties in Arizona, Colorado, Utah and Wyoming. It just recently signed its first long-term contract to sell some production.
Another current producer we find attractive is an Australian company, Paladin Energy Ltd. (TSX:PDN; ASX:PDN) with projects in Australia, Malawi and Namibia. It also acquired a project in Labrador and Newfoundland that looks very attractive.
A company that is near production is Ur-Energy Inc. (NYSE.A:URG; TSX:URE), which has some advanced projects in Wyoming and should be in production within the next year.
Tournigan Energy Ltd. (TSX.V:TVC, FSE:TGP), which is in Slovakia, is an interesting situation. More than 50% of Slovakia’s energy is generated from the four nuclear energy reactors currently operating in that country. The country is currently building two additional reactors. Tournigan is in advanced stages of exploration and prefeasibility on its Kuriskova project in Slovakia, which will be able to provide uranium for all the European Union countries.
A company we think is attractive and is earlier stage, is Crosshair Exploration & Mining Corp. (TSX:CXX). It has uranium projects in Wyoming, Labrador and Newfoundland along with some other commodities. Currently, the major uranium producer in the world is Cameco Corp. (TSX:CCO; NYSE:CCJ). BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF) and Rio Tinto (NYSE:RIO; ASX:RIO) are major multi-metal and multi-commodity miners that are also involved in uranium production.
TER: Do you have any thoughts on coal?
MB: We think coal is also attractive. While it has some environmental and safety problems depending on where the coal is being mined, 50% of the electricity in the United States comes from coal. It’s a higher percentage in China. That’s not going to change dramatically for quite some time. We are invested in several coal companies, one of which is operating in Mongolia, 20 miles from the Chinese border. Every bit of coal that is being produced by SouthGobi Energy Resources Ltd. (TSX:SGQ) in Mongolia is being purchased and used in China. SouthGobi has been in production for several years and is increasing production every year. We think it’s a very attractive company and very attractively priced because the price is down, for whatever reasons.
A large quality coal company is Peabody Energy Corp. (NYSE:BTU). We have holdings in Forbes Coal (TSX:FMC), which is in production in South Africa, and in L&L Energy Inc. (NASDAQ:LLEN). L&L is a U.S. company that has acquired several coal mines and coal washing projects in China and is producing and selling coal in China. We think coal is a very attractive industry now and going forward.
TER: Do you follow the potash industry? What are your thoughts there?
MB: We do and we like it because the growth of the population and economies in the emerging markets means that more people have more money and can afford, and want, better food. There’s a tremendous ongoing need for potash and the other types of fertilizers.
Over the years we’ve been in and out of PotashCorp (TSX:POT; NYSE:POT). While we are not traders, sometimes the price of a company gets bid up and we believe it’s time to either sell some or all of a position depending on valuation. That has been the case with PotashCorp.
The Mosaic Company (NYSE:MOS) is another very attractive large fertilizer company. A smaller one that we have invested in is Verde Potash (TSX.V:NPK), which is developing a large potash project in Brazil. There is enough demand from Brazilian agricultural industries that the company will probably sell the majority of its production in Brazil.
Passport Potash Inc. (TSX.V:PPI, OTCQX:PPRTF) is an early stage company with a very large land package in Arizona that likely will be brought into production. Another smaller company is Western Potash Corp. (TSX.V:WPX), which is using the ISR process in Canada’s Athabasca region.
TER: Can you to summarize your overall view of where the energy industry is going?
MB: As should be apparent, we are positive on the energy industry and the various components of it. Oil, coal and uranium are very attractive and there are a number of companies in those industries that we believe will do well. The Encompass Fund is focused on the long term and not day-to-day trading. When you look at the long-term factors involved in supply and demand for the various segments of the energy industry, they are very positive. Natural gas is in a somewhat different situation, but as evidenced by BHP’s proposed $12.1B acquisition of Petrohawk, natural gas is also valuable.
TER: We greatly appreciate your time today.
MB: We appreciate it. We’ve enjoyed it. And, if your readers are interested in more information about the Encompass Fund, we would refer them to the website, www.encompassfund.com. The ticker is ENCPX.
CV: Thank you.
Marshall Berol has been involved since 1982 as an investment manager in San Francisco, CA. He and Malcolm Gissen co-founded and co-manage the Encompass Fund, a no-load mutual fund. Also since 2000, he has been the chief investment officer of Malcolm H. Gissen & Associates, Inc. Mr. Berol did his undergraduate work at the University of California (Berkeley) and received a JD degree from the University of San Francisco School of Law.
Craig Valdes has been an investment manager in the San Francisco Bay Area since 1982. Since 2006, he has been the director of research and trading at Malcolm H. Gissen & Associates Inc. He previously was a partner and portfolio manager at Genesis Capital Management and Hutchinson Richardson Investment Management in San Francisco, CA.
By The Energy Report, on July 6th, 2011
 Recently back from a trip to the Middle East, Casey Research Energy Division Chief Investment Strategist Marin Katusa shares some of his best energy investment opportunities. In this exclusive interview with The Energy Report, he explains why this is a good time to pick up uranium and geothermal stocks.
The Energy Report: As the Chief Investment Strategist for the Energy Division of Casey Research, you follow the whole range of energy segments and investments for your company. There have been quite a few changes on both the political and economic fronts since you spoke with The Energy Report last November. Can you bring us up to date on opportunities in your coverage area—petroleum, natural gas, uranium and geothermal?
Marin Katusa: When looking at the energy sector, one must start with petroleum, as that alone is a very large sector. Brent Crude is currently trading at a premium to WTI (West Texas Intermediate), mainly because of a political instability premium based on what’s happening in the Middle East. Speculators have propped up the prices because of the amount of demand required from Europe, which comes from the Middle East. The WTI price has lagged as the differentials increased since February because of the Middle East turmoil.
That said, in the last three weeks you’ve seen a significant pullback on the petroleum sector market-wide, in the spot price of the oil and equities in both big caps and the juniors. The main reasons are the weak economy and the U.S. Energy Information Administration report stating, “$100+ per barrel (bbl.) oil is just too much of a burden in this fragile economy.” That brings out the speculators, which comprises a 20%-25% premium in petroleum. Another reason for a big drop in the price of oil is that the United States is leading an international effort to release 60 million barrels (MMbbl.) of crude reserves to world markets.
TER: Natural gas is a little different story, isn’t it?
MK: Natural gas is a very localized market. If you look at North America, because of the success of the unconventional technologies, mainly shale fracking, the companies are a victim of their own success. Because these unconventional explorers have been so successful in finding unconventional sources of gas, there is a glut of gas. But that, too, shall pass as the cure for low prices is low prices. It’s just going to take some time—more time than most investors are willing to wait. We wrote a report a couple of years ago called, “The Hidden U.S. Supply of Gas.” It shined a light on the thousands of uncompleted wells that are drilled, but not completed and could be tapped into the pipeline structure in 72 hours if they were viable. You’re going to see sideways gas for the next 6-12 months in North America, and over the next 3 months you could see petroleum sideways to down.
TER: How about uranium in light of Fukushima?
MK: The uranium sector had a big fall, obviously, since the Fukushima disaster. Ironically, mainly by fluke, about 2.5 weeks before Fukushima, in our newsletter and on TV, we came out with a “take profits” opinion on the uranium sector mainly because we went very bullish on it eight months before. I think when this whole cloud has settled down, you’re going to see some really interesting buying opportunities in a few very select uranium companies.
The uranium companies you want to stick with are the lowest cost producers with no debt and explorers with tangible, real deposits that are very high-grade in areas of developed infrastructure (a pro-uranium mining culture helps) with defined resources within the NI 43-101 standard that look like take-out targets. You want to stay away from the early stage exploration projects in areas that lack infrastructure. The smart money is staying away from those types of projects. In my opinion, those projects are going to go sideways to down because explorers will always need to raise money to explore.
It’s a fact that the U.S. is the largest consumer of uranium, but the country only produces about 8% of that domestically. It purchases the rest. So there’s still plenty of existing demand. The uranium story isn’t dead, but an investor has to be much more careful in choosing investments. I’d also stay away from thorium. It’s shocking how many emails I get about thorium. We’ve written about all the reasons to stay away from thorium quite a bit in our Casey Energy Report.
Back to uranium, you’ve got Germany, where Chancellor Angela Merkel just said, “We’re going away from nuclear power” and the Japanese are saying the same. But you’ve got the RISC countries—Russia, India, South Korea, and China—and they’re going nowhere. They’re going to stick with the uranium demand that they have, and it will increase (they will be building nuclear plants fueled with uranium, not thorium).
TER: And what about geothermal?
MK: Now, the geothermals have taken a significant hit back, even though the current PPAs (power purchase agreements) provide significant profits. The actual public companies have taken a big fall following the Ram Power Corp. (TSX:RPG) disaster where they missed their wells and had cost overruns. Geothermal is currently a contrarian investment opportunity where these geothermal companies are trading at a fraction of what they were a year ago. I just wrote an article called “The Valley of Darkness” comparing the current geothermal sector to the copper sector in late 2008.
TER: So you think oil prices will be sideways in the next year because the market can’t sustain these kinds of prices. Is that correct?
MK: If the Arab Spring does shift—and the key here is whether Saudi Arabia falls—you will see $150-$200/bbl. oil overnight. If something were to happen to the flow from the massive Ghawar oil field in Saudi Arabia, that would result in the single largest increase in oil prices the world has ever seen. Otherwise, oil is sideways to down. My point is that we really are on the edge of chaos. Saudi Arabia is very important to keeping oil below $150/bbl.
TER: You mentioned the possibility of opening up fracked natural gas wells. Is that going to go crazy any time soon?
MK: A moratorium exists on a lot of new shale gas wells due to concerns about water supplies. We did a report a few years ago where we talked about how an unconventional well uses between 2 and 5 million gallons of water, of that you get back roughly half. The Marcellus Shale, the Utica Shale, the Paris Basin—all of these basins have moratoriums on them because some people are worried about polluting the water table. The fracking occurs many thousands of meters below the water table so I think it is a misplaced fear, but you’re dealing with politicians and NGO groups, so you aren’t really dealing with facts or science. If these groups are successful, further moratoriums could be imposed, but it would be a crying shame if these moratoriums extended into the Haynesville Shale in Louisiana or the Eagle Ford Shale in Texas. I don’t suspect we will see this happen, but if it did, you would see a significant pop in the price of domestic natural gas.
TER: Going to nuclear now, despite the Fukushima disaster, nuclear power is here to stay. How much effect is the current controversy over nuclear safety going to have on new plant development currently in the works?
MK: Global demand will be affected by countries such as Germany and Japan. They still have existing plants; remember they’re going to be operating until 2022, in the case of Germany. A lot of this is political lip service; they’re giving the people what they want to hear now. What are the Germans going to replace that production with?
TER: Well, maybe they think they can do it with solar?
MK: I don’t think so. They’re importing nuclear energy across the border from France. So, this is just political lip service. The politicians just want to stay in power long enough to get their juicy pensions. They don’t care about—or even if they did care, they aren’t able to find—real solutions, that is why they are politicians. I believe that before 2022 rolls around, the Germans will rethink their nuclear position. But remember, you have more than 20 nuclear plants being built in China; you’ve got South Korea, Russia and India looking to develop. So let’s just imagine that Germany and Japan do close down, whatever they shut down is going to be replaced by growth in other countries.
TER: Who will benefit from continued demand for uranium? Which uranium stocks do you think are going to continue to be attractive under the current scenarios?
MK: Let’s start with Uranium Energy Corp (NYSE.A:UEC), one of the lowest cost producers in the world. It has been a big win for our subscribers a few times, and it is a new producer led by Amir Adnani, who is in our “Ten bagger” club—a club for companies that delivered 1000+% gains for our subscribers.
I also like Denison Mines Corp. (TSX:DML; NYSE.A:DNN) a lot. It has production in the U.S. and access to a mill in the Athabasca Basin, which hosts one of the highest grade uranium projects on the planet. They made a major discovery at their Phoenix deposit—a very, very high-grade deposit. So, that’s a blend of low-cost production and high-grade deposits. We have a lot of technical research on both of these companies on our website at www.caseyresearch.com , as we’ve been to their projects, and our subscribers have done well on both of these companies.
If you want a higher risk story, we like Hathor Exploration Ltd. (TSX.V:HAT). We have had that in our portfolio for many years and they’ve made a great discovery of a high-grade deposit. So those are the three that we have in our Casey Energy Report that we follow.
TER: Any new developments with those companies?
MK: Uranium Energy Corp. has hit the numbers that they gave the public regarding production costs and are actually lower than originally stated—less than $18/lb. The company is growing production to 1 Mlb. annually. It’s very important to know that yes, the spot price of uranium has taken a big hit, but the spot market price is still north of $50/lb., and the long term price trades north of $70/lb. The netback—the differential between what the selling price and the production costs—are still very impressive profits.
TER: Any other juniors you think have merit at this point?
MK: In our Energy Confidential, we really like Fission Energy Corp. (TSX.V:FIS; OTCQX:FSSIF), which is adjacent to the Hathor deposit. The play there is that we believe that Hathor will buy out Fission so that they can have a large consolidated resource. At that point, we think Hathor will have over 60 Mlb. of very high-grade uranium. From there we believe the play would be that Denison will buy out the combined Hathor and Fission company.
The ultimate end game in the Athabasca Basin, we believe, would involve BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF). There’s good potential that they want access into the Athabasca Basin, and the only way that they can do that would be through access to a mill. It’s very difficult to get the permits to build a mill in the Athabasca Basin. Either it buys out Cameco Corp. (TSX:CCO; NYSE:CCJ), which is not going to happen; or the big French uranium company AREVA (PAR:CEI), sells an interest, which is not going to happen; or it buys Denison Mines, which owns a percentage of an operating mill.
So the key to the play there for the juniors like Hathor and Fission is to be bought out by a larger company. That’s why we like Fission, it has good management that discovered a very good project.
TER: The geothermal sector is obviously quite a bit smaller than the other energy sectors, but people are taking another look there also. There seems to be a lot of potential out there, but it’s not so easy to capitalize on it. What’s going on with the companies that you follow there?
MK: In our Energy Opportunities Newsletter, we follow Ormat Technologies Inc. (NYSE:ORA), the world’s largest, pure-play geothermal company. If you want lower risk, you probably want to stick with Ormat. If you’ve got an appetite for a higher risk junior, we think Alterra Power Corp. (TSX:AXY), which is Ross Beaty’s deal, is a good play. It’s the old Magma Energy merged with Plutonic Power Corp. Alterra just received $70M+ cash from the sale of a portion of their Iceland asset. They’re very sound; they make money. It’s one of the few junior companies that can stay afloat because it actually makes money. It has a sustaining business and Ross Beaty has done a great job building that. Don’t ever count out Ross Beaty, the guy is a legend. In time, he will build AXY into a winner. Investors have to be patient; the geothermal sector right now isn’t the place for fast money.
Ram Power seems to be fixing itself up here. It fell on its knees when founder and President Hezy Ram left after missing targets and cost overruns. The company has restructured the management, refinanced it and so far the results look promising. It still has to build up its San Jacinto plant and the geysers seem to be going on track. So, time will tell with Ram. It’s been very disappointing, but so far, it seems like they’re headed in the right direction.
Nevada Geothermal Power Inc. (TSX.V:NGP; OTCBB:NGLPF) has built the largest geothermal plant in the U.S. in the last decade. The company just bought out some Iceland assets in California. The geysers and the joint venture with Ormat on the Crump Geyser property in Oregon is moving as expected. So, all of these companies are doing the right things now, except the market is not reflecting it because no one really cares about it. It’s the unloved energy sector. The companies are cheap, but their time will come. We don’t know when it will happen, but because it is such a small sector, there are only a handful of companies, so when it does get attention these stocks are going to trade up multiples from where they are today.
TER: Years ago I visited the Geysers geothermal production facilities northeast of San Francisco. Who owns that now?
MK: I believe you are talking about the facilities about 100m northeast of San Francisco that are owned by Calpine Corp. (NYSE:CPN). The geysers are the largest group of geothermal plants in the world and Calpine has some good assets and production, but geothermal production is a very small percentage of Calpine’s overall electricity production. Their main electricity plants are natural gas. It’s a very large company; they’ve done very well, and they’ve got a good portfolio of geothermal assets.
TER: So, that’s not a clean geothermal play by any means.
MK: No, and that’s why we’ve avoided Calpine. If you want exposure to the geothermal sector, that’s not the one you want to be in.
TER: Are there any other companies you would like to bring up at this point that you think our readers should be looking at?
MK: I think in general you want to stick with management teams that are proven; they’ve done it before; they’re heavily invested in the companies themselves and they have a focus factor. One of my favorite companies right now is a company called East West Petroleum Corp. (TSX.V:EW). The company just signed a massive deal in Romania with a large energy company called NIS, which is more than half owned by the Russian gas company Gazprom. NIS is going to drill 12 wells on their unconventional gas assets in Romania, which is over US$50M worth of exploration on EW 100%-owned assets over the next 24 months. The company also signed a deal in India with three of the four largest Indian energy companies and has a deal in the Middle East with one of the largest independent oil producers, Kuwait Energy Corp. You want to stick with a company whose management team can attract a major company and use the major company’s money to develop the assets that they own. It’s kind of like the joint venture model in mining, the OPM, where you use other people’s money. East West is a company we really like, and own a lot of shares.
Another one we really like is Niko Resources Ltd. (TSX:NKO). It’s a much larger company, but we believe in the next 12-18 months they’re going to have a lot of news coming out on their drill programs. In this market, it’s time to pick your favorite stocks and be patient; put in your stink bids and see if you get a hit. Unfortunately, the company has recently gotten itself into some trouble that will cost it about CASD$10M-CAD$12M in fines. That’s very disappointing, but the assets sure look good.
TER: Yes, it’s summertime and nobody cares about the market.
MK: It’s also the time to be accumulating your favorite stocks on sale. Buy on fear; sell on greed.
TER: Do you have any other thoughts you would like to leave with our readers?
MK: I think the reality of the sector is, regardless of what happens with the equities in the near term, if you’re patient, the solid companies will grow their assets and either produce higher cash flows or get bought out by a major who needs to replace reserves. So, just because the market right now has a lot of negative sentiment, we look at this as a buying opportunity to pick up more shares of your favorite companies. They’re on sale right now. Fortune favors the bold. Just make sure you do your homework and control your emotions. Don’t let the fluctuations in the stock price take a toll in your personal life. Don’t invest more than you can afford to lose. Juniors stocks are risky, but if invested in the right management teams, the risk is definitely worth the potential rewards.
TER: That’s certainly true. Thanks for taking time out of your busy schedule to talk with us today. We appreciate your thoughts and input and hopefully our readers will also find them useful.
MK: Thanks for the opportunity.
Investment Analyst Marin Katusa is the senior editor of Casey’s Energy Report, Casey’s Energy Opportunities and Casey’s Energy Confidential. He left a successful teaching career to pursue what has proven an equally successful—and far more lucrative—career analyzing and investing in junior resource companies. With a stock pick record of 19 winners in a row—a 100% success rate last year—Marin’s insightful research has made his subscribers a great deal of money. Using his advanced mathematical skills, he created a diagnostic resource market tool that analyzes and compares hundreds of investment variables. Through his own investments and his work with the Casey team, Marin has established a network of relationships with many of the key players in the junior resource sector in Vancouver. In addition, he is a member of the Vancouver Angel Forum, where he and his colleagues evaluate early seed investment opportunities. Marin also manages a portfolio of international real estate projects.
By The Energy Report, on May 27th, 2011
 Siddharth “Sid” Rajeev isn’t a miner. But in his search for value, Sid, head of research for Fundamental Research Corp. in Vancouver, digs deep into the world of small- and micro-cap stocks to find undiscovered gems. In this exclusive interview with The Energy Report, Sid drills down on some relatively unknown resource stocks he has uncovered.
The Energy Report: Sid, you’re an electrical engineer by training. How did you end up the head of research at your boutique investment bank?
Sid Rajeev: I initially worked for an engineering firm for a few years. I developed a strong interest in finance and investment analysis in those years, so I decided to pursue an MBA degree. Soon after I got my degree, I joined Fundamental Research and it’s my sixth year here. At Fundamental, we have a team of analysts, including financial analysts and geologists. We cover about 150 companies, three-quarters of which are in the natural resource sector. The rest are from agriculture, technology, aerospace and other industries.
TER: Instead of putting target prices on stocks, your firm uses a fair-value metric. Does that imply perfect pricing, a theoretical point at which there’s no upside or downside?
SR: Fair value, basically, is the intrinsic value of a stock on a particular day, which is calculated based on the stock’s fundamentals. And you’re right, essentially, it’s the point at which there’s no upside or downside.
TER: When shares reach fair value, do you recommend them as momentum plays?
SR: No, our valuation methodology is always based on fundamentals—we will not give a buy recommendation on a stock if its share price is higher than its intrinsic value. We tend to evaluate or review our valuations on a particular company every three to four months—sooner if some significant news develops.
TER: With a fundamental theory, you recommend taking money off the table when a company achieves fair value and seeking fair value in another company’s shares.
SR: Exactly.
TER: What are you trying to achieve for your clientele through your general investment theory?
SR: Our main goal at Fundamental is to bring out those underexposed small- to mid-cap companies that no one really follows—those are the companies most likely to be undervalued. Our geologists look at the technical aspects. They work in conjunction with our financial analysts to come up with the intrinsic value and a recommendation.
TER: Are you generally bullish on commodities right now and, if so, which ones?
SR: Our favorite now is uranium. We’ve been bullish on uranium for the past couple of years. Yes, the incident in Japan caused uranium to take a huge hit, along with the companies that follow or track uranium, but we believe the fundamentals of uranium are still intact. It’s still one of the cheapest and cleanest sources of power out there. Particularly when fossil fuels are at extremely high prices, we need sources like uranium going forward. Having said that, I don’t think we are going to see any spike but rather a slow and gradual recovery in uranium prices and, therefore, we believe uranium is very attractive for investors with a longer time horizon (at least 12 months).
TER: Where should investors be deploying capital?
SR: Our three top picks are Western Potash Corp. (TSX.V:WPX), Compliance Energy Corp. (TSX.V:CEC), a coal company, and Strathmore Minerals Corp. (TSX:STM; OTCQX:STHJF), a uranium company.
Western Potash is an advanced-stage exploration company with potash in Saskatchewan. We think it’s a good acquisition target.
We picked up Strathmore Minerals when it was at $0.57. It traded as high as $1.60 but, after the disaster in Japan, the stock dropped significantly and now is sitting at about $0.62. We believe uranium companies with quality assets, like Strathmore, should do well going forward.
Compliance Energy recently announced a positive feasibility study, and it should go into production in the next 24–36 months. It has a quality management team, strong cash and investments—especially its significant position in Copper Mountain Mining Corp. (TSX:CUM).
TER: Great. Any others?
SR: Rock Tech Lithium Inc. (TSX.V:RCK; OTCPK:RCKTF; Fkft:RJIA) is a very interesting company under our coverage. Its main focus is on the Georgia Lake lithium project in the Thunder Bay Mining District in Ontario. That project has a historic resource of 9.8 million tons (Mt.) at 1.18% lithium oxide. We like this company particularly because it is expected to complete several milestones in the next 6–12 months. Number one, Rock Tech is expecting to convert its historic resource to an NI 43-101-compliant resource in the next month or so. Second, the company is awaiting metallurgical test results on a 1-ton bulk sample, which will determine the recovery rates for different separation methods and also evaluate the potential to produce battery-quality lithium carbonate. Third, in addition to Georgia Lake, the company also plans to advance its recently acquired projects in Quebec, which are located close to some well-known lithium projects.
The Kapiwak project (James Bay area in Northern Quebec) is located close to a new discovery and the Lacorne project (Val d’Or) is close to a near-term producer (18–24 months). We expect this stock to move closer to our fair value estimate of $0.55 per share if these developments turn out to be positive. The current share price is $0.25.
TER: The main driver here is the growing popularity of electric cars?
SR: Exactly. We think lithium is attractive for use in electronic devices and vehicle batteries because lithium is the lightest metal in the periodic table. Lithium has the highest specific heat of any solid element. Lithium batteries also hold a charge for a long time and could be utilized to store energy from alternate sources, such as wind and solar, as the electricity production from these sources is variable.
TER: What else can we look forward to from Fundamental Research?
SR: Another company that is worth tracking is Mesa Exploration (TSX.V:MSA). It’s exploring for lithium, potash and uranium in Utah and Arizona. All the projects are in proven mining districts with accessibility and infrastructure. The company recently released an NI 43-101 technical report for its flagship Green Energy Lithium Project in Utah, where drilling is expected to begin this spring once the permits are received. Mesa also has a joint venture (JV) partnership with Passport Potash Inc. (TSX.V:PPI, OTCQX:PPRTF) on its Holbrook Basin Potash Project.
We recently picked Plains Creek Phosphate Corp. (TSX.V:PCP) and will be initiating coverage on the company shortly. It has an advanced-stage phosphate project in Guinea-Bissau in West Africa. A bankable feasibility study is expected in Q411. The company has already received a production license, and production is expected to commence in 2013. Our recommendation and rating on the company should follow in the next few weeks.
TER: Do you believe a phosphate company can grow due to the success in potash, and that it might be time for phosphate to catch up?
SR: Exactly, phosphate has the same drivers as potash. The main idea behind phosphate and potash is increasing demand for food, increasing population and diet improvement in developing economies. Also, meat consumption in developing countries is expected to significantly increase in the future, which would drive up demand for grains to be used as livestock feed. All this requires fertilizers, and that’s where potash and phosphate come in.
TER: Got it. I’ve enjoyed meeting you very much Sid. Thank you for your time today.
At Fundamental Research Corp., Sid Rajeev heads the research department, which covers over 150 small- and micro-cap companies and 15 exempt market/private issues from a broad array of industries including energy, mining, real estate and technology. He also manages the FRC list of Top Picks, which are the stocks under coverage that he has the highest conviction level about. These picks have historically helped the firm finish strong in various third party analyst performance rankings.
Sid holds a bachelor of technology degree in electronics engineering from Cochin University of Science & Technology and an MBA in finance from the University of British Columbia. He is a CFA Charterholder and has completed studies in exploration and prospecting at the British Columbia Institute of Technology.
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 The Energy Report, on April 4th, 2011
 The peripatetic Mercenary Geologist Mickey Fulp explains that even if all under-construction and planned nuclear facilities are suspended, not enough uranium is being mined currently to supply ongoing demand. In this exclusive interview with The Energy Report, Mickey reveals a number of companies poised to benefit from this long-term fundamental upside.
The Energy Report: What impact will the damage to the Fukushima nuclear facility in Japan have on the spot price and/or market valuations for uranium companies?
Mickey Fulp: Currently, it is unknown what the fallout (pun intended) from this nuclear incident will be both economically and geopolitically. At the very minimum, Japan has lost a significant portion of the energy output from one facility. Eleven nuclear reactors out of the country’s 55 are shut down currently and at least two will never produce electricity again. That energy capacity will need to be replaced by other electrical sources.
Globally, this is the third nuclear plant incident in more than 30 years. The first was Three Mile Island. While nothing of real consequence happened, it did change the perception of nuclear safety. The second incident was Chernobyl where the reactor melted down, resulting in serious environmental and health impacts. That reactor was an obsolete and inadequate design with no containment vessel and was never used in the West. Although Japan’s Fukushima plant was using some older technology and we still don’t know what the full damage will be, it will not be anything near the Chernobyl disaster.
Anti-nuclear organizations will be emboldened by this situation while pro-nuclear concerns likely will remain so. Looking forward, who knows what the impact will be? Will we see some older reactors come offline? Probably, however, most countries can’t afford to shut them down because electrical demand will not decrease. Will we see some reactors in the process of construction stop construction? Perhaps. Will we see nuclear facilities that are planned but not yet started be delayed or waylaid? That seems likely.
TER: If reactors under construction or planned are postponed or abandoned, how much will that impact the demand for uranium? Could we see a uranium price crash?
MF: It wouldn’t surprise me if we saw a drop in the spot uranium price and stocks. I don’t think it will diminish much uranium demand in the short or midterm, because the fundamentals haven’t really changed. There is still a shortage of uranium. We haven’t mined enough uranium for 25 years and our current mine supply deficit is 30% of total yearly demand. We’ve been operating on depleting private and sovereign stockpiles and the conversion of Russian warheads to nuclear fuel rods. The Russian program ends in 2013 and stockpiles are getting depleted to low levels. So, even if all the reactors under construction, planned and proposed, are scuttled, we’d still need more uranium for the reactors that are online currently than we are presently mining.
TER: Do you see any scenario in which the Japan incident will impact uranium prices significantly?
MF: We saw spot prices crater to a low of $49/lb. on March 16 before recovering to $60/lb. on March 21. There will be a price impact but, as for significant damage to the nuclear energy industry, it is way too early to tell. Frankly, I do not know. I do know that current reactors need to replenish stockpiles of uranium periodically and that we don’t mine enough at this time. Demand, most likely, will still be there over the short, mid and long term.
TER: Will other energy commodities increase due to this nuclear scare? Specifically, I was thinking about natural gas, which is in abundance and really cheap.
MF: We have a mixed bag of energy prices now and lots of volatility. As the uranium stocks sold off, solar, wind and natural gas stocks took off briefly before reality set in. Solar cannot provide baseload electricity because of night and wind cannot because it does not blow constantly at the same velocity 24 hours a day, 7 days a week for 365 days a year. We don’t have the natural gas transportation, storage and filling infrastructure to convert electrical plants or vehicles quickly.
Coal has been the real winner in 2011 with supply disruptions causing rapid rises in price, but it is our dirtiest form of energy and a major pollutant worldwide. Oil prices are high at over $100 a barrel and major volatility is likely to continue due to Middle East turmoil. We also have the ecofascists who preach “clean and green,” but then launch lawsuits to stop solar plants in the Mojave Desert and offshore wind farms on the East Coast. What do the NIMBYs (not in my backyard) want, all of us to just freeze in the dark?
In my opinion, we desperately need a viable domestic uranium industry as we strive to reach energy independence in the U.S. I trust that the American people and its politicians and policymakers will continue to ensure that all forms of energy, including nuclear power, play a part in this mix.
TER: You have written that your two favorite uranium companies are Strathmore Minerals Corp. (TSX:STM; OTCQX:STHJF) and Mawson Resources Ltd. (TSX:MAW; OTCPK:MWSNF; Fkft:MRY). Let’s talk about them. In your December Musing, “The Mercenary Geologist’s Uranium Review Q410,” you felt that Strathmore Minerals was the most-undervalued uranium developer listed on the North American exchange. You wrote, “Rest assured, given the current time and price that I am not selling.” The stock chart shows it’s been jumping around a bit since December. Can you give us an update?
MF: Strathmore is continuing to work toward a feasibility study at Roca Honda in New Mexico and a mine permit application in Gas Hills, Wyoming. The company likely will monetize some of its other seven non-core development assets in the next 12 months. I still expect the consolidation of uranium developers in New Mexico within the next year or two. A private European investment fund divested of its Strathmore holdings in early 2011, and that depressed the stock price. It took a while for the company to chew through this, and then it went as low as $0.63 in the four-day selling frenzy after the Fukushima incident. STM has recovered nicely in recent trading sessions and is now trading at about $0.75.
TER: You mentioned that your other favorite company in the uranium sector is Mawson Resources. You alerted readers about Mawson on November 17 and those who acted on your alert got more than a double in four days from $1 to over $2. What’s in store for Mawson in 2011?
MF: Mawson had a phenomenally quick double based on project news, my BNN appearance, a Mercenary Musing alert and the San Francisco Hard Assets show that allowed the company to show off its wares. After the initial run-up to $2.68 and profit taking that took it back to about $2, it ranged between $1.75 and $2.25 before dropping to $1.16 in the aftermath of the Japan disaster. Mawson recently announced final 2010 surface sample results from the Rompas project in northern Finland. The results are impressive, with bonanza-grade gold and uranium values. The stock moved when the company received permits for shallow drilling and is once again in the $2.10 range. Rompas could be a major new discovery or perhaps just a curious surface anomaly; more likely, it will be something in between. Now, we will wait for results from the drilling and what the old truth tool will tell.
TER: Do you have any new ideas in uranium space?
MF: Of course, I am always looking for beaten-up stocks that have strong fundamentals and solid underlying value. My recent favorite is Uranium Energy Corp (NYSE.A:UEC), a new in-situ recovery (ISR) uranium producer in South Texas. Although still early on, its first quarter of production came in with cash costs of $18/lb. Given uranium’s current spot price of $60, it looks like a potential winner to me. It is the one stock I am accumulating on sector weakness for long-term investment and anticipate a plan to grow this junior producer into something bigger in the near future.
TER: In your last Mercenary Musing, which is available to your free email subscribers, you wrote, “Putting in stink bids and patiently accumulating as the market rises and falls is always a legitimate strategy.” In general, what constitutes a “stink” bid—20% from the recent price, 25% off the price?
MF: To me, a stink bid is a bid lower than the stock’s normal or recent range that implies a lack of interest, a market correction, some sort of selloff, a dormant period with no news or, perhaps, breaking below the 50- or 200-day moving average. Rest assured, I am now closely watching the uranium space for contrarian opportunities.
Michael S. “Mickey” Fulp is the author of The Mercenary Geologist. He is a certified professional geologist with a B.Sc. in earth sciences with honors from the University of Tulsa and M.Sc. in geology from the University of New Mexico. Mickey has more than 30 years experience as an exploration geologist searching for economic deposits of base and precious metals, industrial minerals, coal, uranium, oil and gas and water in North and South America, Europe and Asia. Mickey has worked for junior explorers, major mining companies, private companies and investors as a consulting economic geologist for the past 23 years, specializing in geological mapping, property evaluation and business development.
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