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Wednesday
Aug112010

Expatriate Your Wallet

By Terry Coxon, contributing author of Casey Research’s ‘Going Global’ Special Report



If everything you own is held in your own name in your own country, then you are not merely exposed, you are vulnerable absolutely, to whatever decisions the government might make about how you should behave and who gets the wealth you’ve earned. Tomorrow's new government measure, which might land out of the blue, could be a law that affects everyone, or it could be a rule devised to deal with people like you. Or, it could be an administrative action aimed at you alone. In any case, with all your assets at home, you'd find out how the lobster feels when his trap is being hauled out of the water. Nothing he can do about it.

The only way to protect yourself against the risk of being boiled in a government pot is to keep some of your assets in another country. Depending on how you go about it, the specific benefits you might achieve are:
 
Protection from currency exchange controls
Protection from the confiscation of precious metals
A lower profile as a lawsuit target
Income tax planning advantages
Estate planning advantages
Easier access to investments in other countries
A measure of financial privacy
Practical readiness to move additional assets quickly
Psychological readiness to think and act internationally when you need to

There are many ways to go about getting those benefits. None is right for everyone, and they all come with some element of cost or inconvenience. Here’s the main menu.

Small bank account. A small account at a foreign bank gives you a ready and private landing spot if you ever decide you want to move a large amount of money in a hurry. If you're a U.S. person, the account is non-reportable, so long as the balance (together with any other foreign financial accounts you own) never reaches $10,000.

Large bank account. A large account at a foreign bank also provides a landing spot for anything you want to send later. If foreign exchange controls are ever imposed, the new rules may require you to repatriate the money – or they may not. Depending on the specifics of the new rules, your account may be grandfathered. In that case, the overseas funds would enable you to travel outside your own country while others are forced to stay at home.

A foreign bank account also slows things down if you’re ever under attack. It’s safe from an instant seizure by functionaries of your own government or by the unassisted order of a court in your own country.

The disadvantage of a large bank account vs. a small bank account is the loss of privacy. If you’re a U.S. person, you are required to report your foreign financial accounts if their aggregate value reaches $10,000.

Physical gold. Gold stored in a safe deposit box in a foreign bank is not a foreign financial account, nor is physical gold in segregated storage with a non-bank safe-keeping facility. So a U.S. person can store an unlimited amount of metal that way without triggering any reporting requirements. Avoiding a need for annual reporting is a plus, but don’t rely too heavily on the privacy you get with a safe deposit box, since the steps the gold takes to get there may create records of their own.

Foreign variable deferred annuity. As with an annuity issued by a U.S. insurance company, a variable annuity issued by a foreign company is tax-deferred for a U.S. investor until he withdraws the earnings. The annuity can be invested in major currencies or in portfolios of international stocks and bonds. If the annuity is big enough (a minimum of $1 million or more, depending on the insurance company), it can be invested in real estate, a private business, or just about anything else.

It’s only conjecture, but if foreign exchange controls are imposed, they are unlikely to disturb any foreign annuity that’s already in place, which is a big plus for an annuity vs. a foreign bank account.

A foreign variable deferred annuity isn’t private for a U.S. investor. When you buy one, you generally must file an excise tax return and pay a 1% tax, and you must report the annuity as a foreign financial account.

Swiss immediate lifetime annuity. A Swiss annuity that begins paying you an annual income when you buy it isn’t a foreign financial account, which may save you a reporting burden. And under a tax treaty with the U.S., Swiss annuities are exempt from the 1% excise tax. There’s nothing private about it, however, since part of each annual payment you receive will be taxable income.

You can make it difficult for a creditor (such as someone who won a lawsuit against you) to get his hands on a Swiss immediate lifetime annuity by electing not to have the option to cash it in. A forced assignment to a creditor generally would not be valid under Swiss law.

Offshore mutual funds. The array of mutual funds available internationally is even broader and more varied than what’s available in the U.S. And, like a foreign bank account, your share account with an offshore fund is safe from a lightning seizure by your own government. But for a U.S. investor, an investment in a foreign mutual fund comes with certain tax disadvantages. They are tolerable if you handle the investment properly or truly ugly if you don’t. And your shareholder account would be a foreign financial account and so would be reportable.

Offshore LLC. You can use a limited liability company formed outside your home country as an international holding company. It, not you personally, would buy and hold the overseas investments you want.

An offshore LLC can be designed to be very unfriendly to your potential future lawsuit creditors, even more so than an LLC formed in the U.S. An additional plus is that while many banks, mutual funds, insurance companies, and other financial institutions shun business from individual Americans, many of the shunners will welcome business from a non-U.S. LLC even if it is American-owned.

An offshore LLC owned by a single U.S. person (or by husband and wife) can elect to be treated as a disregarded entity for U.S. income tax purposes, which makes it absolutely income-tax neutral. Or it can elect to be treated as a partnership, which makes it almost income-tax neutral. The LLC also can be used for estate-planning in the same way as a U.S. LLC.

By the ratio of benefits to cost and complexity, an offshore LLC rates especially high. But it does not eliminate your reporting burden. If the LLC owns a large foreign bank account, you will be required to report it. And there will be annual reports for you to file about the LLC itself.

Foreign real estate. A direct investment in foreign real estate is free of any special U.S. tax or reporting rules. It’s just like buying a farm in Kansas. It would also present added difficulties for a lawsuit creditor looking for ways to collect. And it is unlikely that any regime of foreign exchange controls would touch existing foreign real estate investments.

Foreign real estate can also pay you a psychological dividend. Knowing you have a place to go to, should you ever want or need to go, provides a sense of security. That apartment in Buenos Aires or the acreage in New Zealand means you’ll never be a lobster.

Foreign real estate partnership. By investing in a private foreign partnership or LLC that owns foreign real estate, you can achieve all the advantages of a direct investment. In addition, you increase your protection against foreign exchange controls and lawsuit creditors because there is no ready resale market for your partnership interest.

International IRA. An IRA or a solo 401(k) is permitted to own anything other than life insurance and so-called “collectibles.” Anything.

Some IRAs and solo 401(k) plans own a domestic limited liability company and use it as a vehicle to buy and hold other investments. Such an LLC can own an offshore LLC that does the real investing. As with your direct ownership of an offshore LLC, this does nothing to reduce your reporting duties; in fact, it adds to them.

The advantage of such an arrangement is that it allows you to internationalize your retirement plan. Anything international you might do with your personal investments, you can do with your IRA’s investments. And it’s the ideal structure if you want to invest in offshore mutual funds. The IRA short-circuits the special tax rules that apply to investments in offshore funds, and the offshore LLC’s shareholder account application is likely to get a warmer reception from the fund than would your own American hand knocking on the door.

Private international investment contract. Depending on your circumstances, it may be possible to structure an investment contract between you and an international financial institution that is tax-deferred, non-reportable, and protected from future exchange controls or prohibitions on owning gold. This is custom work, so, of course, it’s only practical for large chunks of capital.

International asset protection trust. A properly structured international asset protection trust provides the maximum level of protection from anything that happens in your own country. It does so by leaving you with a measure of influence, but not control, over the trustee. The trustee is outside of your home country and thus is not subject to its laws. And you don't possess the authority to compel the trustee to invest or distribute the trust fund in any particular way. Thus there is no direct means for your own government to impose any regime of exchange controls or investment restrictions on the trust fund.

An international asset protection trust is far and away the most powerful of all financial planning devices. Handled properly, it is virtually impenetrable to future creditors and is especially helpful in estate planning. It is also the most complex device and hence the one most likely to be handled ineptly. And of all the tools mentioned in this article, it comes with the heaviest reporting burden if it is funded by a U.S. person.

Of course, this is the briefest of overviews of a complex topic. For specific guidance on each of the menu items listed, and pros and cons related to your own circumstances, you’ll need to seek qualified counsel.
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With an ever-growing number of regulations and financial restrictions that gradually choke your ability to build and maintain wealth, protecting your assets by getting them out of the country should be a critical part of every investor’s strategy. We recommend you get started before it’s too late. Read more about the 5 best ways to internationalize your assets.




Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09.

On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.





Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


Silver-prices.net have been rather fortunate to close both the $15.00 and the $16.00 options trade on Silver Wheaton Corporation, with both returning a little over 100% profit.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.



Thursday
Aug052010

China Is Winning the Energy Race

US 06 August 2010.jpg

By Marin Katusa, Casey’s Energy Opportunities



Stop the presses. The United States is no longer the world’s biggest consumer of energy.

After topping the energy consumption charts for more than a century, the U.S. has been left behind as China leapfrogged past. According to the International Energy Association’s (IEA) latest report, China burned its way through 2,252 million tonnes of oil equivalent last year – about 4% more than the U.S.

(The oil-equivalent measure is a bundle of all forms of energy consumed, including crude, coal, nuclear, natural gas, and renewable resources.)

That’s an astonishing turnaround, according to IEA chief economist Fatih Birol, who noted that as recently as 2000, the U.S. consumed twice as much energy as China.
 
Energy Consumption Trends of China and the United States 1965 – 2009
 
Source BP Statistical Review of World Energy, 2010.JPG


Source: BP Statistical Review of World Energy, 2010
It’s no longer 1973, when President Nixon could declare that our status as top energy consumer was “good. That means we are the richest, strongest people in the world.” Today, bragging about winning the energy-eating competition doesn’t gain you any brownie points. Which is probably why Chinese authorities were quick to reject the IEA data as “unreliable,” choosing instead to focus on their intention to sink about 5 trillion RMB (about US$750 billion) into renewable energy projects.

Despite the denials, a new age in the history of energy has begun, and the implications are enormous. China may not want to accept the honors, but the reality is that it’s now the most important player on energy’s demand side.

According to the IEA report, China will be investing more than $4 trillion over the next 20 years to ensure there are no power or fuel shortages, and that there is enough energy to keep feeding its economy. Thus the ever-increasing number of ships steaming out from Canadian and Australian ports: all are bound for Beijing, all loaded with precious energy supplies.

Whether it’s coal, gas, uranium, or oil, China’s import numbers are only heading one way – up. Here’s a brief overview.

Coal:

The wealth of Western nations was built on the back of coal, and China plans to be no different.

King Coal, cheap and plentiful in China, accounts for 70% of all energy consumed. Most of that goes to meet the burgeoning demand for power, and with US$30 billion just invested into improving the national electrical grid, we’re not going to see coal taking a backseat anytime soon.

China also needs metallurgical (coking) coal for producing steel – the backbone of an economy. As the construction boom continues, corporations will be crying out for it. But with no higher-grade reserves of its own, China is buying up whatever is in the market, sending coal prices skywards.

Oil 06 August 2010.jpg

Oil:

Beijing continues its relentless courting of oil-rich countries across the globe. Its national oil companies (NOCs) offer debt forgiveness, development packages, infrastructure improvements, and, yes, bribes, in exchange for secure oil contracts, especially in Africa. The net overseas production from the three Chinese NOCs for 2010 will be a record-breaking 1 million barrels a day... that’s enough to fuel all of Australia!

Not content with just acquiring oil assets outright, Chinese NOCs are also tying up partnerships with other oil companies. In fact, the three Chinese NOCs accounted for nearly 20% of all global deal values in the first quarter of 2010.

Nor has China ignored North America. It’s heavily invested in the oil sands of northern Canada. This huge reserve is likely to become the most important source of U.S. oil, and China is making sure its finger is very firmly in the pie.

The U.S. still remains the number one consumer of crude. But over the past three years, China has accounted for at least a third of world demand growth in crude. And with a projected 45% increase in demand in the next five years, Chinese NOCs won’t be hitting the brakes anytime soon.

Gas:

China is throwing itself onto the clean and green bandwagon as well. And the cleaner-burning alternative to oil is its cousin, liquefied natural gas (LNG).

Expectations are for a hike of almost 50% in Chinese demand for LNG by 2020. This year alone, China is expected to boost its LNG imports by about 65%, from 5.5 million tonnes in 2009.

No surprise that China is wedging its foot very firmly into the vast gas reserves of Kazakhstan, Uzbekistan, and Tajikistan. A 1,100-mile-long pipeline has just been completed to link Chinese factories and power plants to Central Asia.
Unconventional gas deposits – like shale gas – will also have a role to play. The country’s shale gas reserves are estimated to be about 26 trillion cubic meters.

As China wakes up to the potential of this energy source, it’s also waking up to the fact that the technology to unlock it is in North America. So planes full of well-heeled Chinese investors are heading on over to woo North American producers.
If you’re a small-capitalization firm, with the potential to lower costs and risks, improve project returns and tap opportunities that are otherwise beyond reach, you’re in demand.

Uranium:

Nuclear power is coming to China in a big way. The country is set to purchase up to 5,000 metric tonnes of uranium this year – more than twice what it needs.

But consider that by the year 2020, China will have at least 60 nuclear reactors up and humming across the country, throwing off 85 gigawatts of output and demanding 20,000 tonnes of fuel per year. That’s nearly 40% of the 50,572 tonnes mined globally in 2009.
Now the hoarding makes more sense.

The result: After a three-year lull, uranium prices are spiking up. Analysts at RBC Capital Markets have predicted a 32% spike in prices for next year – for a uranium company, this is Christmas come early. And while the bull market of 2006 saw at least 27 new uranium mines opening up across the world, it’s not going to be enough. Yellowcake is back, and it’ll be glowing red this time around.

China might not wish to be called the world’s biggest energy consumer, but it’s a fact, and its edge will continue to grow. The process of explosive economic development is like feeding teenagers – they’re never full. And while China continues on this tear to eat up the world’s coal, oil, uranium, and gas, there are some great opportunities unfolding.

Which producers are favorites to supply China?

Which companies are most attractive to Chinese investors, and to the NOCs?

When will uranium prices jump by 200% again?

----

We’ve put a lot of effort into charting China’s moves on the energy game board, and things are getting exciting. If you’re an investor, this is the perfect time to boost your portfolio with some carefully chosen stocks that will make the trend your friend. Try Casey’s Energy Opportunities for only $39 a year – and with our 3-month money-back guarantee. Read more here.




Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09.

On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.



Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


Silver-prices.net have been rather fortunate to close both the $15.00 and the $16.00 options trade on Silver Wheaton Corporation, with both returning a little over 100% profit.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.



Tuesday
Aug032010

Keith Schaefer: Stick with Wet Gas, Heavy Oil Plays

Source: Brian Sylvester of The Energy Report  08/03/2010
http://www.theenergyreport.com/cs/user/print/na/6974

Keith Schaefer.JPG

Oil and Gas Investments Bulletin Editor and Publisher Keith Schaefer specializes in Canadian oil and gas plays. Despite the languishing gas price, he sees opportunities in some hedged Canadian gas companies and unhedged "wet-gas" producers. If you're not into gas, Keith is big on oil. In this exclusive interview with The Energy Report, Keith will tell you how radial drilling is creating opportunities in heavy oil, too.

The Energy Report: Keith, when The Energy Report talked with you in December, you said that a gas price below $5 would be "hell." Well, welcome to hell. Gas is hovering around $4.50 right now. Where's the bottom?

Keith Schaefer: It has been a very tough year for gas producers. Since January, the gas price has been on a straight downhill slide, with very few bumps up along the way. It has been hell, particularly for the juniors that are unhedged. These companies are creating no value for their shareholders. Their cash flow is anemic.

Where is the bottom? I think there's a good chance we're going to find that out in the next month or so, because gas traditionally bottoms in August. Last year, it bottomed around $2.50, $2.75 per MCF. Then in September, it started to take a big jump back up to $5. These stocks had a huge run along with that. It's almost funny, because none of these companies were really making money at $5, but the fact that they were losing a little bit less made the market very happy, and that took the stocks for a big run.

TER: At the same time, a lot of producers are hedged. Most of them are right around the $6 mark.

KS: Many of the seniors are hedged at $6. The forward curve has allowed them to do that. Good for them and their shareholders, because it looks like we could be in for a multi-year low gas price if these U.S. shale plays hold up.

TER: What's your view on the gas price through the end of this year and the end of 2011?

KS: I think this year we're going to get a little bit higher, but not much. Right now gas in the States is running around $4.50. In Canada, it's running at about a dollar less. These shale gas plays in the U.S. are doing a superb job at increasing production. Unless there's a dramatic increase in demand or a significant falloff from production, we're going to be staying right around here; maybe a little bit higher, but not much.

TER: And that's through the end of 2011 as well?

KS: The end of 2011 could be very interesting, just because many of these shale gas plays are relatively new. Right now companies stake a bunch of land and they have to drill the land to hold it. Once they've drilled a certain amount of holes, that land is theirs. When that happens, I expect these companies to stop drilling. That should actually be quite positive for the gas price. Companies are being forced to drill to keep their land when the market says they shouldn't.

TER: Are there companies that, despite the low gas prices, continue to perform?

KS: Oh, yes. You're seeing several companies do better than expected, for a couple of reasons. Some have been smart enough to hedge, which has benefited their balance sheet and their cash flow. Bellatrix Exploration Ltd. (TSX:BXE) is at the top of that list, and it's in our Oil and Gas Investment Bulletin Portfolio. They've hedged 50% of their gas at close to $7, so their cash flow has been fantastic this year. A second reason Bellatrix is doing better than expected is that they have a large land position in a burgeoning oil play in Alberta known as the Cardium. That stock has outperformed its peers this year, and in my mind, it will continue to. Another company that's done really well is Angle Energy Inc. (TSX:NGL), a wet-gas producer. Wet gas gets about twice the amount of money as dry gas.

TER: Is this what's known as natural gas liquids in the U.S.?

KS: Yes, liquid-rich gas. Angle has a huge growth curve in front of them. They're not hedged. If you're looking to play gas, that's a good one, because from their wet gas, they have downside protection with good cash flow, at current gas prices. They also have huge exposure to the upside if gas moves.

TER: Are we seeing companies with assets that have a high percentage of natural gas liquids getting higher valuations?

KS: Absolutely. Companies are getting higher valuations because of their higher wet gas percentages. Not across the board, but most of them are, companies like Angle and some of the other high wet-gas producers, which are mostly in the Deep Basin area of Alberta, right outside the foothills. And up in the Montney shale play, as well, they're getting higher liquids contents. They're getting 10, 20, 30, 40 barrels of wet gas per million cubic feet of dry gas, which could basically double the economics.

TER: Wow. Do you have some specific names with exposure to those plays besides Angle?

KS: Orleans Energy Ltd. (TSX:OEX) has a good wet gas count. Cinch Energy Corp. (TSX:CNH) has a wet gas count. Vero Energy Inc. (TSX:VRO). . .

TER: All right, what about Vero?

KS: I love Vero. I think it's a great company. The stock trades very, very well for how few shares—only 30 million—are out. Vero has one of the top management teams in the business, Doug Bartole and his vice president of exploration, Kevin Yakiwchuk. They have a great property in the Edson area of Alberta. They've shown great discipline in producing when the gas price is good and shutting down production when it's not. They've managed their finances very well. Vero keeps a high debt ratio, which means they don't have to issue many shares because they're generating most of their growth by using debt. They've got this new Cardium oil play, which has over 90 net sections. That's a lot of oil that they can bring onstream, very profitable oil.

TER: Are they in production right now?

KS: They're producing 8,000–8,500 barrels a day.

TER: Are there any other gas companies that you're excited about? You cover Peyto Energy Trust (TSX:PEY-U; OTC:PEYUF). Tell us about that one.

KS: Peyto is the lowest-cost producer in Canada. Their suite of properties is best of breed. Management has done a fantastic job. Over the last 10 years, that stock went from $1 to $45. I actually owned that stock when it was $1 a share, back in 1998. Now, of course, after the crash, everything's changed; but they continue to have the lowest- cost production, and a great growth profile. If you were only going to buy one gas company to get some exposure to a potentially rising gas price, Peyto—being the lowest-cost producer—would be it.

TER: A recent report on the U.S. shale plays by Credit Suisse talked about some of the gas shale plays with the best internal rates of return (IRR). The Marcellus was ranked second, with a 42% IRR. What are some companies with significant exposure to the Marcellus?

KS: One of the best companies that I like for exposure to the Marcellus shale play is actually an energy services company that does a lot of the drilling work and mud work for the producers in that area. It's called Canadian Energy Services and Technology Corp. (TSX:CEU). They've been able to make huge inroads into the Marcellus by selling their products to the drillers and producers there. Their mud allows drillers to complete a well in the Marcellus about 10 days sooner than normal. That dramatically reduces costs, which is one of the reasons the Marcellus is turning into a much more profitable play. On the producer's side, I think one of the safest plays in the Marcellus is a company called Epsilon Energy Ltd. (TSX:EPS). They have a deal with Chesapeake Energy Corp. (NYSE:CHK), the second largest gas producer in the United States. Between cash payments and work commitments, they've paid Epsilon about $200 million to get access to Epsilon's Marcellus ground in Pennsylvania. Epsilon basically has a free ride. In one sense it doesn't really matter what gas prices do, because Chesapeake is paying the freight. I love companies like that.

TER: I think we'll switch over to oil. Oil remains just below $80 a barrel. Do you think that's a psychological barrier? Does oil need to get past $80 to have a run?

KS: No, not at all. Oil doesn't need to run. I'm happy to see oil trade here for the next five years, because there are lots of companies that make fantastic profits at $75 oil. Technology is lowering costs in the oil patch. With the new horizontal drilling technology and multi-stage fracking, all kinds of new plays are opening up. Literally. Just yesterday, a new play opened up in Canada that no one had really paid much attention to. One of the independent consultants estimated that there are over 6 billion barrels of oil just in that one formation in Alberta in B.C. So all over the place you're seeing new basins, new formations being opened up with all this new technology, and it's relatively low-cost oil, not compared to the Saudis per se, but by the standards everywhere else in the world, it's very profitable oil at these prices. The oil price does not need to go any higher.

TER: Do you see it staying in that range for the next couple of years?

KS: That's a question that only history is going to be able to tell us. But I would suggest that, with the decline in demand in the U.S. and Western Europe being offset by the rise of China and India, we're going to see a fairly stable oil price for a while.

TER: You were talking just a few seconds ago about technology opening up some new plays. At the same time, fracking is not all that new. Multi-stage fracking has been around for a while. and horizontal drilling has been around for a while. What are new technologies in oil and gas exploration that we haven't heard about?

KS: There are new ones coming up all the time. But let's just go back to fracking and horizontal drilling for a second. Although those technologies have been around for 40, almost 50, years, it was just 10 or 12 years ago that the technologies got perfected enough so that they could start producing oil and gas out of rock. That was the Barnett shale.

What you've seen here now is that many new plays around Canada and the U.S., where the technology was developed, have become newly commercial. Even though they're old technologies, they're still opening up many, many new plays all around the world—the European shale gas plays, the African shale gas, and that's just scratching the surface. We're going to see huge growth in Europe and Africa shale gas over the next 20 years. You're right, they are old technologies, but they're being used in new basins for the first time and that's creating big value for shareholders.

One of the new technologies that I'm really intrigued by is radial drilling, which is used in heavy oil basins. I believe this is a technology developed by Halliburton Co. (NYSE:HAL). Little jets are sent into the very porous heavy oil formations and are able to create wormholes 100 meters out into the formation, to get oil to flow back to the well. Before this technology was being used, you could only get about 3 to 5 meters outside of the wellbore. It's a huge increase in potential production and reserve creation.

TER: And that's making some of these old basins profitable again?

KS: Yes. What's happening is that the old basins that have been worked over now have a new lease on life. I would say that heavy oil formations haven't really been used or exploited that much. The world's been very focused on getting the light oil out. But over the last dozen years, much more time has been spent focusing on the heavy oil. They're continually finding ways to improve the technology and lower the cost.

TER: What are the big differences between heavy oil and light oil?

KS: Light oil is easy to process, and doesn't need much work to get into the form that would go into your car. Heavy oil has heavy products in it like metals; it's the basic component of asphalt. We have to spend a lot of money to remove the asphalt, rocks, and bits of metal to make heavy oil into various types of fuel. Heavy oil doesn't go into your car; it will go into heating products or diesel, or products where it doesn't need to be refined quite as much.

TER: It's more expensive to process, but are there still some companies that you like that are big into heavy oil and are profitable. Could you tell us about some of those?

KS: Yes. That's a great point. What's happening here is that many of the U.S. refineries, particularly those down in the Gulf of Mexico, are geared toward heavy oil. You just can't change your refinery at the flick of a switch and say, "Alright, today we're going to do light oil. Tomorrow we're going to do heavy oil." When you're a heavy oil refinery, that's the type of feedstock you need.

The two biggest sources of heavy oil, Mexico and Venezuela, are in steep decline—Mexico for geological reasons, Venezuela for political reasons. That means that the heavy oil from Canada is in hot demand in U.S. refineries. There's a new pipeline being proposed to take oil from Canada down to the U.S. refineries. Many heavy oil producers that are used to getting only 50%–60% of the regular oil price for their products, because it costs so much more to process them, are now getting 85%–90% of the regular oil price. Over the last two or three years, there has been a huge increase in the heavy oil price. What they called a "heavy oil discount" has gotten much smaller. And the heavy oil in Canada is very shallow, so it does not cost much to produce. Wells only cost $300,000–$700,000, versus $3 million–$5 million for a deep light oil well. So when your costs are low and the price of your product has gone up a great deal, that's a recipe for profits.

TER: Tell us about some of those companies that are profiting from this trend in heavy oil.

KS: Well, one of my favorites is a company called Emerge Oil and Gas Inc. (TSX:EME), which has lots of heavy oil in Alberta and in Saskatchewan. They have done a great job securing large land packages that have highly prospective oil leases. Emerge has been able to deliver good production growth and will continue to do so over at least the next two years.

TER: Any others?

KS: Another one that I like is a company called Rock Energy Inc. (TSX:RE). CEO Al Bey knows how to secure land positions, and he has a very good cost-control system in place. Some of their properties are able to deliver profits of three to seven times the money that Rock puts into them. For every dollar that they put into the search for the oil, they're able to return $3–$7 to the shareholders. That's a fantastic "recycle ratio."

TER: What other things has management done?

KS: They just brought on John Van De Pol as President and CFO. John's been involved in a couple of winners in the past, has a lot of experience and does it right. He's very methodical. For a shareholder, he's exactly the type of guy who gives you a lot of confidence.

TER: What are Rock's prospects for growth?

KS: They still have a large undeveloped land package, with a drilling inventory of at least two to three years ahead of them. They'll be able to continue to grow production quite strongly. Rock is also one of the pioneers in using this new radial drilling technology. They're finding that the amount of oil they can get out of each of their land sections is increasing quite dramatically, and that's been a big, big bonus.

TER: Are there any other companies you like in the heavy oil space?

KS: Not too many. Rock and Emerge are two of the best. Another one is BlackPearl Resources Inc. (TSX:PXX), which has a strong growth profile. Their growth is actually going to come in chunks. Unlike Emerge and Rock, which are able to drill a lot of small wells, BlackPearl has slightly larger assets that take more time and more capital to develop. Their growth is going to come more in steps and stages, as opposed to the steady growth that Rock and Emerge will have. But it's a well-respected team, and the market loves BlackPearl.

TER: How so?

KS: They trade at a much higher valuation, for example, than Emerge does. Its market cap relative to its production is very high. With almost 300 million shares issued, the company is worth almost $1 billion. For the level of production that it has right now, BlackPearl is a relatively expensive stock.

TER: Yesterday, BP (NYSE:BP; LSE:BP) sold most of its Canadian assets to Apache Corp. (NYSE:APA). Will that create any opportunities in Canada?

KS: I think it's too early to say. But let's consider Apache the general contractor in a construction job. They are going to cherry-pick the assets that they really want and sell off the smaller assets that they don't want. You're going to see a filtering-down of these assets to smaller companies over the next year. That should create a pretty big opportunity for the right team that's able to get a good land position.

TER: What could it do for Apache?

KS: Apache has been spending a lot of money up here, which is interesting. They're one of the largest gas producers in Canada. They bought the controlling interest in the LNG (Liquefied Natural Gas) terminal being built at Kitimat, British Columbia. That gas will go to Asia, where the price is much better. This is one of the strategic things Apache has been able to do: basically, set themselves up as huge land and major infrastructure owners to send gas overseas, where it gets a much better price.

If Apache had to send this gas down to the U.S., it would not be very profitable, because it's way up near the Yukon border. And with Marcellus production coming on-stream, that's really cutting out a lot of Canadian gas into the States. But if they can keep that gas producing and send it over to Asia, via the LNG terminal on Canada's west coast, that could be a huge profit center for Apache.

TER: Are there parting thoughts you want to leave us with?

KS: Many natural gas companies are trying to rebrand themselves now as wet-gas companies, to try to get higher valuations. We're going to see a lot of that type of talk over the next six months. But I don't see any sustained pick-up in the gas price for a year. Having said that, as soon as we get a sign that some of these U.S. shale plays are going to fizzle quicker than expected, that situation could change very, very quickly.

Also, we have a special offer exclusively for Energy Report readers—we're offering a free Oil & Gas Investments Bulletin report, which includes an exclusive stock pick, one which I believe has lots of room for growth—despite it having already doubled for my subscribers. As well, we're offering your readers a 30% discount on current subscription rates for a limited time only. For more information on this special offer, please visit our website at: www.oilandgas-investments.com/special-offer/. Our returns have done very, very well this year and with the annual subscription there is a 60-day money back guarantee.

Keith Schaefer of the Oil & Gas Investments Bulletin writes on oil and natural gas markets. His newsletter outlines which TSX-listed energy companies have the ability to grow, and bring shareholders prosperity. He has a degree in journalism and has worked for several dailies in Canada, but has spent the last 15 years assisting public resource companies in raising exploration and expansion capital.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

DISCLOSURE:
1) Brian Sylvester, of The Energy Report, conducted this interview. He personally and/or his family own none of the companies mentioned in this interview.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Rock Energy.
3) Keith Schaefer—I personally and/or my family own the following companies mentioned in this interview: Rock Energy, Angle Energy, Bellatrix Energy, Vero Energy, Orleans Energy, Cinch Energy, Canadian Energy Services, Emerge Energy, BlackPearl Resources. I personally and/or my family am paid by the following companies mentioned in this interview: None.
Streetwise - The Gold Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
The GOLD Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
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Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.
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Stay on your toes and have a good one.

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Thursday
Jul292010

Gabriel Hammond: New MLP Options

Source: Brian Sylvester for The Energy Report  07/29/2010
http://www.theenergyreport.com/cs/user/print/na/6942

Gabriel Hammond.jpg

SteelPath Fund Advisors Founder Gabriel Hammond recently launched three Master Limited Partnership (MLP) mutual funds. They are the first open-ended funds in the MLP space, but will certainly not be the last. Gabriel explains the appeal of the new funds and gives us some of his firm's favorite MLP names in this exclusive interview with The Energy Report.

The Energy Report: You recently launched three MLP mutual funds. When an investor places money in these funds, he or she is basically investing in energy infrastructure. Your firm is the only one to offer open-ended funds such as these. Tell us why you decided to launch them.

Gabriel Hammond: For years, investors have been searching for a liquid, transparent investment product that allows them to gain exposure to energy infrastructure through the MLP asset class. Particularly throughout the volatility in 2008–2009, whether you were a registered investment advisor or an institutional investor such as a pension fund, you probably spent a significant amount of research time working on this asset class in order to better understand it. Out of that effort has come a significant understanding that MLPs should really be part of any diversified asset allocation strategy. In other words, they're a permanent part of someone's portfolio and have tremendous diversification benefits, not to mention their 7% plus yield and their annualized 18% total returns over the last decade.

People want to invest in the MLP asset class, but they haven't been able to find the right product to access them. Investing directly in MLPs demands dealing with K-1 tax forms, and while many investors and institutions do have the systems in place or the accounting help to be able to do that, for most, receiving 20 to 40 K-1s from a diversified portfolio, as well as possibly having to file taxes in 30 to 40 states, is not something that they are prepared to do. Also for tax-exempt accounts, whether they are personal IRAs or multi-billion pensions, unrelated business taxable income (UBTI) considerations are a concern for direct holders.

TER: But you can get exposure through closed-end funds and MLP exchange-traded notes (ETNs).

GH: There are a variety of closed-end MLPs funds and ETNs, but each has drawbacks.

On the closed-end fund side, you have very high ongoing management and administrative fees and substantial underwriting discounts. Throughout their history, those products have consistently failed to outperform the benchmark—investors would have done far better investing on their own in an index.

ETNs require the investor to take on credit exposure to the issuing firm. Many institutional investors are limited as to the amount of credit risk they can take on from any one firm—maybe 2% of any one institution's credit. Let's use JP Morgan credit exposure as an example. An institutional investor may very well want a 5% or 10% allocation to MLPs, but they can't do that completely through J.P. Morgan's exchange-traded note, because they can't take such a significant single credit exposure as part of their mandate. They are a terrific product in many ways, but can't fit all of an institution's needs.

We've been looking to develop a product that allows these different types of investors to access MLPs with liquidity and transparency, using a single 1099 tax form. Another significant benefit of an open-ended fund is that the underlying MLPs trade upwards of $600 million a day. If you're looking at the liquidity of a closed-end fund that trades 150,000 shares a day (only $3 million a day for a $20 stock), it could take an institutional investor three months to exit. Or, they'd have to pay a significant discount if they want to trade a block, say, 5%–7%. In many ways, it's not a true institutional choice.

TER: Is that key for an institutional investor?

GH: Absolutely. Mutual funds are traditionally thought of as a retail product. But this open-ended fund structure allows those investors to take part in a much greater pool of liquidity to access the space. Mutual funds always trade at net asset value. Investors always know that they can enter and exit an mutual fund, which I think is very important to the institutional investor.

TER: Why haven't we seen open-ended MLP funds before?

GH: I think there's been confusion about the structure of a registered investment company versus an entity making a tax election as a regulated investment company (RIC). With the Securities and Exchange Commission, being an open-ended fund means you're an N-1A filer; that is how you register under the 1940 Act, and that is your structure. On the other hand, choosing to be taxed as a RIC is a tax selection made with the IRS. In other words, when your administrative assistant goes to irs.gov to create your Tax ID Number (TIN), there are a number of choices: partnership, limited liability company, corporation and RIC. Most mutual funds, for obvious reasons, have chosen RIC, which unfortunately, along with tax-free benefits, has a 25% limit on investments in MLPs. Obviously, we want to be able to provide pure play exposure, so we have elected to check the corporate box.

People have typically thought of a RIC as a structure. Whether you're an attorney or the CEO of an investment management company, most people seem to have confused the two; they hadn't really thought of a RIC as simply a tax selection, as opposed to a structure. Our fund is a registered investment company under the 1940 Act; we make all the usual filings. There's no difference between us and any other plain vanilla mutual fund.

TER: And your company, SteelPath, has a lengthy history in MLPs.

GH: Our affiliate, which exclusively advises MLP separately managed accounts, has a six-year performance history that substantially outperforms the benchmark index, and whose reporting has been Global Investment Performance Standards (GIPS) verified. In March 2010, our firm, SteelPath, spun out from a company called Alerian MLP Index (NYSE:AMZ). That's the company that created the very first MLP index, the Alerian MLP Index (NYSE:AMZ) and the very first MLP exchange-traded product based on an MLP Index. There's a history of innovation. We spent a lot of time with our attorneys developing this structure. If you called one of our direct MLP competitors before we announced this product and asked, "Why didn't you offer an MLP mutual fund?" they would have said, "Oh, you can't do an MLP mutual fund. Everybody knows that you can't roll more than 25% of MLPs into a RIC." But we were able to put a tremendous amount of time and money into effective research to understand the structure.

TER: Do you think your model will be copied?

GH: Absolutely. We've already had a competitor copy our structure and re-file an N-1A with the SEC. We're less focused on that sort of direct MLP manager competition, however. If these funds are as successful as we think they can be, we fully expect much larger competition—your Fidelities, American Centuries, Putnams. This will probably mark the beginning of a sea change in terms of the institutional ownership of the asset class over the next five years.

TER: What are the key differences between open-ended and closed-ended funds?

GH: The closed-end funds are affectionately known as "roach motels," because you check in, but you never check out. The reason that's such a well-known joke in the wealth management space is that these companies, once they do their offerings, hold on to that capital. You can't say, "Listen, I'd either like my money back or the underlying securities." It's permanent capital. Whether or not you like that investment, or whether or not the management is doing well, your only option is to trade your shares on the secondary market. That could mean trading at very steep discounts to their net asset value.

TER: So why would anybody be in a closed-end fund?

GH: The reasons that closed-end funds exist is that they purportedly offer access to an asset class you can't traditionally have access to. For example, Nuveen Investments Inc. might say, we're going to buy 2,000 different municipal bond issues. That's something that an ordinary investor couldn't do because he just doesn't have the access. Typically, because of the liquidity of what they're investing in, maybe it's a 30-year municipal bond portfolio, the closed-end fund says, "Listen, we really need your capital for the next 30 years."

With the addition of exchange-traded notes, mutual funds—and there's also an ETF filing out there—we think that that logic is going to disappear in the MLP equities space. If SteelPath were to consider launching a closed-end fund in the energy infrastructure sector, it would be very different from the model that our competitors have, both structurally and in terms of its portfolio holdings. We would only do something in the closed-end-fund space if we truly believed the permanence of the capital was warranted by the investment strategy, and we could provide value or access to a segment of the market that investors cannot reach today.

TER: Please tell us about the three different funds and briefly describe each.

GH: The Select 40 Fund provides broad-based exposure to the MLP asset class. No company will be more than a 5% position in that fund. This really is, again, an access product, with an 85 basis point expense ratio.

The Income Fund is unique. It has a monthly dividend, with a 100-plus basis point yield premium to the other two funds. For instance, if the other two funds yield 6.8%, the Income Fund yields 7.8%, paid on a monthly basis. Whether you're an individual who wants to receive the monthly checks, or a pension fund looking to offset its liabilities, we think that's a unique feature of this particular fund. It's really focused on the income side, as opposed to growth.

The third fund is the Alpha Fund, which allows us to take advantage of the inefficiencies of the MLP asset class. This fund has a long-term investment horizon, in terms of seeking those MLP names we believe will have the greatest capital appreciation—whether through revaluation or superior distribution growth. Typically we're going to have less than 20% turnover, but it will be closer to 10% on an annual basis. We're very much private equity investors in terms of how we think about investing in the space.

TER: What are the advantages of being in MLP mutual funds like the ones you're offering, versus being directly vested in MLPs and getting the distributions?

GH: The big difference is the tax form that you will receive. By investing in MLPs directly, as I mentioned, you end up with a K-1 and you will owe state taxes in every state where that company operates. If the MLP owns a pipeline that operates in 20-plus states, you will need to file 20-plus state tax forms. With the mutual fund, you're going to receive a single 1099 for your entire portfolio.

Also, if you're a tax-exempt institution, direct ownership creates UBTI. If you hold MLPs through our funds, you're not subject to UBTI, so that's one reason we think tax-exempts will likely gravitate toward the structure.

TER: And exposure to the rapid growth of GPs?

GH: Our funds can, and do, hold MLP GPs. You can receive that exposure through ownership in the fund.

TER: So you have basically simplified investing in MLPs.

GH: Yes. The result is simplified tax reporting. Essentially, the elimination of any UBTI means you can hold MLPs in an IRA or 401(k) account, pension fund, endowment, or other tax-deferred account. It allows you to replace 20 K-1s with a single form 1099.

TER: And the minimum investment is $3,000?

GH: Yes. We believe that MLPs should be an allocation in every diversified portfolio, and want to ensure that investors of all sizes can allocate to this asset class.

TER: As you mentioned earlier, investment-grade MLPs have had 10 straight years of 18% annualized growth. Do you think the MLP bull run is close to ending, or is there a lot left in the tank?

GH: It's not just the investment grade. It's actually the broader market index, the Alerian MLP Index. The AMZ is similar to the S&P 500; it's market cap weighted, float adjusted. That index has risen 18%, throwing in the kitchen sink of any company that's ever had an initial public offering as an MLP.

Where are we in the return cycle? We're in the bottom of the third inning right now, in terms of where this investment thesis is. You've had very strong returns over the past decade, but you have to look at the factors that have driven those returns and think about the sustainability. The big differentiator there is that MLPs have grown their distributions at nearly 9% a year for the past 10 years, whereas other asset classes like big utilities are under 2%. That is a significant disparity.

The three pieces that have led to that strong performance make up the organic growth profile. First, increasing energy demand means more throughput in these pipelines. Second, you've got investment growth in these companies and regional franchise monopolies. As they continue to grow, so does your return on those investments. Third, there's a tremendous acquisition story here; you're seeing the potential for $10 billion in acquisitions a year.

To give it perspective, more than $200 billion worth of new energy infrastructure needs to be built in the next decade. There's nearly $300 billion worth of existing energy infrastructure in corporate form that can be sold into the MLP structure. When you look at the past decade and the factors that have contributed to that growth, all three legs of the stool are still in place.

TER: But can you realistically expect those kinds of returns to continue?

GH: Do we expect 18% returns over the next decade? No. I think growth is going to be more modest. We've got a variety of perspectives on broader economic growth at our firm. I'm personally more pessimistic in terms of the trajectory of the U.S. economy and overall I would say we're probably significantly more cautious than the rest of the market. That being said, we feel extremely confident in MLPs relative to the market. That's not to say MLPs can't go down, but we believe that if the broader market falls, MLPs will experience less of that downward volatility. We would be looking at 4%–5 % distribution growth, relative to the 8.0%–8.5% that we've experienced. But coupled with the current 7% yield, you're looking at total returns in the low teens. We think the market will do 6%–7%, at best. Bonds and utilities will probably have similar performance.

TER: But MLPs are particularly sensitive to global credit markets. That subject seems to be coming to the fore in Europe, and probably in the United States, too. Could that inhibit the growth prospects that you're talking about?

GH: There's no question that access to capital is critical to these companies. Although they're not required to in the same way REITS are, MLPs do pay out the majority of their cash flows. And whereas REIT dividends go up and down with the state of the economy and lease rates, MLPs are very conservative about their dividend policies. Boards of directors are only going to increase distributions if they can perpetually sustain them. If you look at the past 10 years, infrastructure MLPs have, on the whole, increased their distributions each and every year. That's extremely important.

TER: And that includes 2008?

GH: Yes, but there's no question that access to capital is extremely critical. To finance these large, organic-growth opportunities MLPs need to access capital markets. Typically, new acquisitions are financed on a 50/50 debt-to-equity basis. So every $1 billion worth of additional projects is going to require $500 million in debt capital and $500 million in equity capital.

But I want to take you back to November 2002. There was a significant credit spread blowout. Enron, Williams (NYSE:WMB), and El Paso Corporation (NYSE:EP) were all suffering, but it was a terrific time for MLPs to be buying assets. Their share prices did suffer in the short term when they purchased those assets; however, the MLPs made such critical purchases on such a cheap basis, it spurred an unprecedented period of growth from 2003 to 2005.

You saw something similar in 2008, but more in terms of organic investment opportunities. Did that hurt MLPs' current share prices, and short-term issuance costs? Sure. But the spreads that they're earning on these investments has significantly exceeded their cost of capital.

TER: Now we're going to go talk about actual MLPs. What are your top three holdings?

GH: They're different in all the funds, but I can tell you two of our long-standing holdings are Inergy L.P. (NYSE:NRGY) and Holly Energy Partners, L.P. (NYSE:HEP).

TER: Tell us about Holly.

GH: Holly is an interstate refined petroleum products transportation company. Holly owns and operates interstate refined petroleum products pipelines—gasoline, jet fuel, heating oil and diesel. The parent company, Holly Corporation (NYSE:HOC), is also publicly traded. It's a terrific refining company, and has some of the highest Nelson complexity refineries in the United States. Their refiners can process a very wide batch of crudes, everything from sweet crude to sour West Texas crude to the heavy crudes from Canada.

Before the heavy sour to light differentials got big in 2006 and 2007, and people started talking about heavying up their refineries, HOC showed tremendous foresight and soured up way ahead of that trend. So they have a very strong parent company with tremendous demographic territories: Arizona, West Texas, New Mexico. We think there's a very significant growth profile there, and they'll continue doing their best organically to support the growth of their parent. Certainly we're very excited about that name. We think the market tends to undervalue Holly simply because it's not one of the larger companies in the space. But it's got one of the lower business-risk profiles, and we're very confident in the management team.

TER: What about Inergy?

GH: Inergy is in a unique position in natural gas storage in the Northeast. They're just outside New York City, and have a tremendous position, in that storage is in very short supply around New York City. As you know, gas prices can be very volatile in the winter. You've got the head-and-shoulders pattern, and those prices increase in the winter. Creating that storage is what allows utilities and the end consumer to mitigate price volatility in the winter.

Inergy's customers enter into long-term contracts with the company, and then fills its storage facilities during the summer so that utilities can draw down on that during the winter months. This is very much a critical piece of the energy value chain. Inergy has these terrific storage opportunities, plus the land and the structure that allow them to continue to grow. We think Inergy is one of the more exciting opportunities to put capital in the ground.

TER: The Energy Report has talked with a few MLP experts in recent weeks, and the same names keep coming up. What are some growth stories that people probably haven't heard about?

GH: Global Partners, L.P. (NYSE:GLP) is probably a company that people are less familiar with. It was a family-owned business for decades, and went public in 2005. It's still very closely held by the family, which also owns the general partner. Global Partners owns heating oil, diesel and gasoline terminals in the Northeast. At Boston Harbor, where there isn't any more physical land available, they're terrifically positioned with their terminals, plus they've got tremendous expertise.

I think one of the reasons the company has been ignored is that it has a modestly different business model than some of the other MLPs. It earns margin by taking title to the commodities that go through its terminals, and that has a little more volatility. As a result, it has been more difficult for analysts to model and really get their arms around this. Global Partners trades very cheaply relative to the asset class. They've just announced a $200 million acquisition of some of Exxon Mobil Corporation's (NYSE:XOM) terminals and gas stations. We think that's a potentially significant catalyst for additional growth. Global Partners is certainly a name that, in our view, has been ignored.

TER: Are there other MLPs that are taking advantage of the selloff from companies like ConocoPhillips (NYSE:COP) and Exxon?

GH: Just two days ago, Magellan Midstream Partners, L.P. (NYSE:MMP) announced a $289 million acquisition from BP (NYSE:BP; LSE:BP). I would also put MMP up there among our favorite names.

The majors don't get any credit on their valuation for these types of assets. The oil majors' shareholders simply don't reward them for what is viewed as a cost center, if not totally ignored. A major can sell the assets to an MLP that specializes in operating a specific type of asset, with a specific customer base, in a certain area. In turn, the MLP can deliver more value from that asset more efficiently than BP. Meanwhile, BP, Conoco or Exxon can redeploy that cash into projects that the shareholders will truly reward them for. It's really a win-win situation for all parties.

TER: Maybe just one other off-the-radar name before we go.

GH: I would say one of the more recent initial public offerings, Niska Gas Storage Partners LLC (NYSE:NKA). It's a natural gas storage operation that just went public in the last month and has a terrific private equity sponsor, Carlyle Riverstone. NKA has a very strong management team and a lot of organic growth opportunities.

The name slipped, though, after the IPO. Quite frankly, the sponsors pushed the investment banks too hard. A lot of times when you've got a big client like that, they'll push really hard on pricing. They got a little aggressive, and that created a buying opportunity for us. In fact, we knew that was going to happen because we'd seen it happen before in the space with that type of asset. So we did not participate on the offering itself, and actually waited for the fall and then took a position in NKA. The company essentially has salt dome storage caverns on the natural gas side. Here's how those work: you drill into a depleted natural gas reservoir and pump the gas back in for storage. By drilling deeper, they've actually got the ability to create significant additional storage at minimal cost. A lot of organic growth will occur in that name.

TER: This has been great, Gabriel. Thanks for your time.

Gabriel Hammond is a portfolio manager at SteelPath Fund Advisors and has been a portfolio manager and member of the Investment Committee of its affiliate, SteelPath Capital Management, since 2004. Prior to this, Gabriel covered the broader energy and power sector at Goldman, Sachs & Co., in the firm's Equity Research Division. Specializing in the Master Limited Partnership midstream energy space, Gabriel advised Goldman Sachs, & Co. Asset Management with portfolio allocation, short-term trading, and tax-advantaged specialty applications. In addition, he marketed nearly 30 public MLP offerings while at Goldman Sachs.

Hammond also sits on the Board of Directors of the National Association of Publicly Traded Partnerships (NAPTP). He graduated from Johns Hopkins University, with Honors in Economics.

For a list of MLPs, check out The Energy Report's new MLP Directory.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

DISCLOSURE:
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report or The Gold Report: None.
3) Gabriel Hammond: I personally and/or my family own shares of the following companies mentioned in this interview: None. I do own shares of the SteelPath mutual funds mentioned in the interview. I personally and/or my family am paid by the following companies mentioned in this interview: None.
Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
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Fax: (707) 282-5592
Email: jmallin@streetwisereports.com



Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09.

On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.



Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


Silver-prices.net have been rather fortunate to close both the $15.00 and the $16.00 options trade on Silver Wheaton Corporation, with both returning a little over 100% profit.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.




Wednesday
Jul282010

Is the Future of U.S. Oil Really Secure?

Kazakh flag.jpg

By Marin Katusa, Chief Energy Strategist, Casey Energy Report



Two words that any oil company dreads to hear are “export duty.” Especially if the word “increases” or “introduced” is floating around there too.

So when Kazakhstan introduced an oil export duty to meet shortfalls in the national budget, the mood wasn’t exactly jovial.

On July 13, the Kazakh government brought back the tax that had been abolished during the financial crisis. A US$20 tariff will be levied on every ton of crude oil exported from the Central Asian nation. The hope: collect some US$406 million in additional revenue by the end of the year.

The energy-rich, former Soviet republic has some of the largest oil and gas reserves in the Caspian Sea basin, producing 1.43 million barrels per day (bbl/day) in 2008. And as the giant Tengiz and Karachaganak fields are developed further, an additional 1.5 million bbl/day will be coming off the production line.

With the country holding 3% of the world’s proven oil reserves and the majority of its Caspian Sea holdings still unexploited, it’s no wonder oil companies – both major and minor – are flocking to it like moths to a flame.

Of course, this new tax has everyone from Chevron and ENI, whose long-standing agreements have been unilaterally revised in effect, to the small-scale producers in an uproar. The move has been dubbed as the latest example of resource nationalism in Kazakhstan, analysts say, and the feeling is that the country seems to be taking its cue from Mother Russia.

There’s worry, too, that this is only the beginning of the end. There’s no guarantee to say that the tax will not rise as more and more oil begins to flow out of the country. And the thriving uranium industry might be next to get heavy taxes slapped onto it.

Bringing it back to an American context, the question of energy security rears its head yet again. Oil from Kazakhstan flows through two pipelines: one winds through Russia, the other through China. Not exactly the two countries you’d want controlling the taps of your oil supply.

Today’s realities – be they economic or security-related – mean that the natural shopping ground for U.S. oil are the Canadian oil sands in Alberta. According to the EIA (U.S Energy Information Administration), Canada remained the largest exporter of oil in April, exporting 2.486 million barrels per day to the U.S. The majority of these barrels come from the Canadian oil sands.

While protestors may get up their flags and launch advertising campaigns, technological breakthroughs mean the environmental impact from oil sands is far less than before. Canadian laws also protect the environment, ensuring that all disturbed land is returned to a productive state. Carbon revenue, too, is reinvested into clean energy research, paving the way to the future.

As we wait on alternative energy sources to take center stage in world energy plays, the truth remains that oil and gas must power our lives. And for the United States, Canadian oil sands mean a secure and most of all, reliable, source of energy.

With Canada looking ready to pick up the slack from the Gulf, it’s worth knowing which companies operating in the Great White North are worth adding to your portfolio. These are the ones that combine the latest technology with good site locations and excellent cash flow. Their inclusion will benefit any portfolio and rake in some promising returns.
----
Whether it’s Canadian oil sands, uranium, or viable green energies, Marin Katusa and his team make it their mission to find the best of the best junior energy companies for maximum profit potential. Read more about Marin and the new European “Cold War” that promises investors enormous opportunity.

Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09.

On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.



Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


Silver-prices.net have been rather fortunate to close both the $15.00 and the $16.00 options trade on Silver Wheaton Corporation, with both returning a little over 100% profit.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.




Tuesday
Jul272010

Rick Rule’s Enthusiastic on Energy

Rick Rule and Sam Kirtley in Auckland recently.jpg
Rick Rule and Sam Kirtley in Auckland recently

Source: Barbara Templeton of The Energy Report 7/27/10
http://www.theenergyreport.com/cs/user/print/na/6916

Global Resource Investments Founder and CEO Rick Rule, who expects the secular bull market in commodities to run another 10 years, also expects it to be a wild ride at times. Given the psychological capacity to absorb dizzying drops and the financial capacity to take advantage of them, investors can avail themselves of spectacular opportunities during some market downturns. As he discusses in this Energy Report exclusive, based on a recent webcast, Rick is particularly keen on some of out-of-favor segments of the energy sector that he loves so dearly.

Who Gets Stiffed?

Bill Bonner's Daily Reckoning recently observed that Greece as a society made promises—to workers who were paid more than they produced, to pensioners and others in the entitlements class who were promised more than they could deliver, to savers who loaned Greece more money than it could pay back. Who should get stiffed? Bill's answer was all of them.

Citing that article, Rick Rule says, "We face the same conundrum in the United States"—and the same dismal prospects. "We have lived beyond our means for many, many years. People who don't produce as much utility as they take out by way of wages and salaries need to adjust their living standards. We have made promises that we cannot keep with regard to Medicare, Medicaid and Social Security. It's as simple as that. Those who loaned money to various entities, individuals, corporations, governments are going to be stiffed either via a default or by inflation."

Stash Some Cash

When people ask Rick about the U.S. dollar relative to other currencies, he falls back on what he calls an old truism: "It's probably the worst currency in the world with the exception of all the others." He sees the USD as a "deeply troubled but deeply liquid market" that "may fare less badly than the rest," with its purchasing power falling 5% or 6% per annum against deeper declines in other currencies. The bad news about that dwindling purchasing power, though, is that people will have to maintain high cash balances to survive ongoing "turbulence and incredible volatility in global debt and equity markets."

Rick figures that we can probably count on major equity markets to rise and/or fall by 25% in any given year going forward, "and the speculative markets will exaggerate those moves." With volatility a given, "you absolutely, positively have to use it."

Naturally, no one knows when these periods of volatility will occur, so we have to be prepared. Investors who are fortunate and are prudent enough to set aside significant cash savings in anticipation of volatility earn next to nothing on cash on deposit. Still, Rick recommends maintaining larger cash balances than you otherwise would despite the fact that your savings are losing purchasing power at the same time as they're collecting scant interest. As he sees it, holding big wads of cash and exposing yourself to 5% declines in real purchasing power beats losing 20%, 30% or 40% in conventional debt and equity markets. "Painful but true," he quips.

"But when very aggressive down moves and market crashes take place, remember to step in and buy. It's not because the cash is valuable relative to the equities in your portfolio," Rick says, "but because the cash will give you the opportunity to take advantage of periodic sales as they occur."

Capital and Courage

As a case in point, Rick looks back to what happened, particularly in small-cap equity markets, in late '07 and '08. He hunted for and found about 20 stocks selling at less than 50% of working capital, "where you got the management teams and the assets for free." With its Exploration Capital Partners 2008 portfolio, Global Resource Investments stepped into those stocks "very aggressively in a down market and profited mightily when the stocks responded upwards." Maybe there was more money to be made "had we been less cautious about the nature of stocks we chose," he adds, "but we speculated only in stocks selling at substantial discounts to free working capital." In any case, "having the courage to step into the markets and having the capital available to do so—when our competitors had neither courage nor capital—stood us in extremely good stead." So Rick's core rule for individual investors, too, would be to have capacity available: capacity in capital and courage alike.

Sensible Speculations

And when you buy, what do you buy? Rick has a number of suggestions, which include:
Pay attention to buying things that must appreciate over time.
Buy "when" situations, not "if" situations.
In addition to having liquidity yourself, buy into companies that have liquidity. If you are buying into an enterprise that will have to raise money in the next 6 or 12 months to continue its business plan, understand that the capital markets may absolutely snap shut.
Speculate sensibly. It is true that there are 10-fold gains to be made on occasion buying into the gamiest of all possible speculations, but the capital markets experience is such that you should forego the outsize returns that may occur in the riskiest speculations in favor of very nice returns on more sensible speculations. The market is trying to make you more speculative right now, which is a consequence he thinks needs to make you less speculative.
But where to speculate?

Commodities in Context

Despite the condition of the broad economy, we are in an important secular bull market in resources. This bull market came at the heels of the secular bear market, as they always do. The 18-year bear market from 1982 through 2000 "took out all kinds of investor interest and all kinds of productive capacity," Rick explains, and the constricted investment in natural resources eroded the supply side of the equation. As Rick points out, the large deposits that we as a society depend on—uranium, petroleum, copper and so on—were discovered and developed from the 1950s through the 1970s. But deposits are finite; every barrel you draw from an oil well or pound of ore you dig from a mine takes the resource closer to depletion. Because "you don't stand at the top of a mine pouring in fertilizer and water and expect the mine to grow more copper," those old deposits have grown old and passed their prime. Though the bull market has brought in new investment, from his vantage point we've not yet done a good enough job of replacing or replenishing the deposits that we've been busy exhausting.

Even as supply stagnated or even shrank, demand continued and continues to grow. Every year, more of us occupy the planet. In fits and starts over the last 20 years, populations in Communist countries, emerging markets and developing nations have begun enjoying measures of economic and political freedom that is expanding the middle class and elevating living standards. That phenomenon, in turn, fuels ever-increasing demand for commodities. Rick cites the BRIC countries—Brazil, Russia, India, China—are good, classic examples. Increasing economic activity and increasing economic concentration around the world form a sort of virtuous cycle that is also driving the demand for energy. "My favorite sector is energy," he states. "The supplies will not be able to grow as fast as the demand." Actually, 20 years out he thinks the "supply" we'll be looking at will be processes rather than products: "energy efficiency and conservation, places we're really not looking at now at all."

But for the time being, let's bring it back to commodities. "At the bottom of the demographic and economic pyramid, as the poorest people get more money, they buy more stuff. Most of us here have too much stuff already. We may want more, but we tend to spend a lot on services. There isn't much stuff in an iPod; the value-add is service. You pay $1 for songs for your iPod; none of those songs contains copper or oil. But if you're on the bottom of the economic ladder in Nigeria or Sri Lanka or India or Indonesia and start making more money, instead of walking you might buy a motor scooter that's made of stuff and consumes oil. You may build a cinder block home to replace your Visqueen and patch shanty. You may buy a refrigerator and an air conditioner. What adds utility to poor people as they get more money are things that are made of stuff. There is a boom in stuff in the emerging markets."

Much Ado about a Mini Market

Does that boom in stuff in so many parts of the world bode well for the rare earths sector? Hardly likely, in Rick's view. In fact, he considers one of the biggest-buzz stories of the last couple of years a "sociological curiosity."

He acknowledges that there will be increasing demand for technology-based rare earths, such as those used to make batteries for iPods and electric cars. And he calls it a "stupid decision" that the Chinese have made to constrain rare earths exports. "The truth is, however that the rare earth market currently enjoys about $2 billion a year in gross sales." Rick says. "Of that, 40% or 50% accrue to parastatals in China. Another 30% accrue to very large integrated mining companies that produce rare earths as a byproduct to other metals productions."

That all adds up to "perhaps 20% of the sales going to companies theoretically in the rare earth sector. If you assume that 20% of $2 billion in sales—or $400 million—generates a 20% margin, Rick says, you're talking about infinitesimal free cash flow. "It is truly a classic bubble, brought about by good promotion of a sexy story. That doesn't mean that people who know how to trade investor psychology can't make money trading rare earth stocks. It just means that there isn't any particular economic basis to the trade."

Ugly Cyclical Declines

The rare earths story aside, we find ourselves in a situation where constrained supply of commodities as a function of nearly 20 years of sparse investment meets unconstrained demand. "That means real raw material prices are going to go higher," Rick says. While he looks forward to another decade in this secular bull market in resources, he's counting on it to be a bumpy ride. "If you aren't prepared for the volatility that you're going to experience—financially in terms of your liquidity and psychologically in terms of your ability to deal with 30% or 40% price declines in your portfolio in one quarter—you'll get shaken out of the best market you'll ever experience."

From where he stands, Rick says there's no doubt that "we will see some ugly cyclical declines." Nor is there any question that "absolutely incredible opportunities are ahead of us." He reiterates his guidance: "Use this situation to your benefit by having the courage and the capital available to take advantage of the situation when the people competing with you in the markets have neither."

Volatility ≠ Risk

"Understand that volatility is not the same as risk," Rick says. "It isn't a catastrophe if a company with $100 million in market cap that's in reality worth $150 million experiences a drop to $50 million in market cap. It's an opportunity. Pay attention to the underlying value of the assets, and use that underlying value to put the price of the stock into context. It's absolutely critical if you're going to maintain yourself in these markets that you pay attention to that liquidity."

As he sees it, whether cyclical downturns affect investors unduly is not a function of the market but of the investor. "Cyclical downturns are periodic sales; that's not a bad thing." If you understand the companies you're investing in and confine yourself to viable companies, downturns will be opportunities. "They will certainly test your character," he quips, "but you are going to experience them so get ready for them and in fact welcome them."

If you are the type of investor who considers volatility itself a risk, Rick has three words of advice: "Get out now." But if you appreciate sales, understand that you have to buy companies based on value, not on price. And he thinks this is a pretty good time to be able to find those $100 million market cap companies that should be worth $150 million. "As a consequence of the deterioration in markets that we've already seen, some values are starting to appear," he says. "If you own one of these companies and expect its prospects to improve over time, don't worry that the market marks it down in a period of volatility." If you have the psychological fortitude and financial wherewithal to take advantage of it, and if you like the idea of periodic half-off sales in a secular bull market, the volatility on the horizon will bring "unparalleled opportunities." And, he says, "I think you're going to see opportunities across the board in resources."

Liquidity, Liquidity, Liquidity

In real estate, they say it's location, location, location. In resources, Rick also has three words of advice to remember: liquidity, liquidity and liquidity. "These are capital-intensive cyclical businesses. Without capital they have no businesses. The companies that you invest in relative to their needs have to have liquidity."

He reiterates his earlier point that investors themselves need ample liquidity, because "absolutely without a doubt you will experience volatility in your portfolios of up to 30% or 40% a year." Without liquidity, you won't be able to take advantage of the "unforeseen black swans" that swoop in—"brutal cyclical declines in the context of that secular bull market (that) knock markets off precipices."

Ground-Floor Opportunities

Investors always want to know how to get in at the ground floor. Those who speculate in juniors need to pay particular attention to cash-rich shells, Rick advises. In these cases, the company's market cap may be at a substantial discount to the free working capital and treasury. "These are ground-floor opportunities," he states. "Cash at a discount always attracts management, always attracts assets. This is not to say that all of these situations work out, but the risk-reward parameter associated with this type of speculation is unparalleled in any other form of exploration."

It's not as if the bargains are everywhere at the moment. For instance, Rick finds the micro-cap precious metals stocks overpriced at this time "because the market has driven up the bad ones with the good ones." However, the picture will start to change when one of those cyclical downturns hits. "It will flush down the good ones with the bad ones," Rick says. "Be ready to take advantage and you will be able to snap up spectacular bargains."

Cash Includes Bullion, ETFs

Rick will be the first to say that portfolio diversification for the average investor—if there is such a creature—is not exactly up his alley. "My whole portfolio is in my business and in things I understand," he says. Besides, he doesn't believe in a one-size-fits-all approach to investing. But with the caveat that he claims no expertise in what you might call "traditional asset allocation," if pressed he'll go out on a limb to say, "I would suspect that an intelligent passive investor at present needs to overweight cash—35% or 40% in cash and as much as 25% of the cash part in either physical gold or silver bullion or ETFs." Beyond that, "I do suggest investors overweight the raw materials portion of their portfolios to the rest of the portfolio because I think we're probably into a multi-year bull market in raw materials."

Stock Picking

If you think the gold price is going to go up, Rick says, buy gold. That's "the best way to participate." As for equities, if you think a company has some competitive advantage, some facet that will cause the company to do well, buy stock in that company, irrespective of what it produces. Most of the time Global buys and recommends a stock, he says that the decision is based on organic growth or "some type of internal event, something that would make the share price respond even in a bad market." The decision is not based on "any sense of what the market may or may not do to that stock in the next 12 months."

Resource Stocks vis-à-vis Stocks Overall

Rick says that he expects the resource stocks to correlate very well with the overall market in the very near term but will diverge in the longer term. He quotes Warren Buffett as "famously saying that markets are 'voting machines' in the very short term and 'weighing machines' in the long term." In other words, emotions move the markets in the short term; in the long term, value becomes the driver.

When stocks fall, all stocks fall but recoveries are uneven. In Rick's view, the recoveries inevitably occur where value is present; where value is absent, so is recovery. But in a dramatic selloff, he adds, the selling decision is not always the investor's to make. "Margin clerks don't care about an investor's asset allocation style. When they are selling stocks to meet margin calls, they sell the things that have bids." He says that the same thing happens in opened-ended mutual funds, when fund managers with $1 billion in assets get calls for redemptions, they sell what they can, not necessarily what the client wants to sell. In fact, "your best stuff, your more liquid stuff, has to be sold at the same time or even before the junk gets sold because there are bids." For these reasons, he expects resource stocks to correlate very well to the overall market in a cyclical decline. "I would also expect the better resource stocks to recover," he reiterates, adding, "That's not something I can say for all stocks."

A Lesson on Steroids

Rick is quick to remind investors that in the vehicles his company really made a reputation with—such as the Exploration Capital Partners 2000 series—most of the big returns came from less than 10% of the positions. "The portfolio performance occurs in a fairly small number of names," he explains. It's the "nature of speculation, sadly, that most positions make only a little bit of money or lose some."

Almost without fail, he recalls clearly, the Exploration Capital Partners portfolio stocks that made 20- or 30-fold gains had handed in 30% or 40% losses before they went higher. In an "extravagant example" to illustrate the point, he talks about a stock Global bought in intervals at $0.10, $0.12 and then $0.015. "An 85% decline before the stock ran up to $10;" Rick says, "a really instructive lesson—a lesson on steroids." But, he adds, "It's important that people understand that value is more important than price and that volatility is an opportunity rather than a risk."

Long or Short? A Matter of Math

As a rule, Rick doesn't short stocks. His reasoning is a simple matter of math. "If I short a stock, the most I can make is 100% while my losses are theoretically incalculable," he says. "In a long portfolio the odds are completely reversed. The most I can lose is 100% (which unfortunately I've done on a couple of occasions) but the amount of money I can make is almost unlimited (and mercifully I've enjoyed a couple of those too). I like the math on the long side way better than the math on the short side."

The Taxman Cometh

Rick also has a take on tax matters that investors might find helpful. The Bush administration's tax cuts will be allowed to expire, he says, but he anticipates that the Obama administration will probably find other ways to "raise revenue." With that in mind, he says, "Investors who have very large embedded gains in some historic positions may want to take those gains this year. If you really like the company, you may want to sell and re-buy after 31 days—the opposite of taking tax losses."

In addition, as a consequence of less favorable capital gains legislation, Rick says, "Equities markets, at least in the U.S., will become somewhat less buoyant than they have been. I think these tax changes will have a profound effect on the venture capital industry and a lot of equity trading."

Furthermore, he sees the U.S. tax structure becoming more "progressive" as time goes on. The "more productive" taxpayers—the rich, as Washington might call them—"will be increasingly victimized." Recalling Willie Sutton's supposed reply when a reporter once asked him why he robbed banks—"because that's where the money is"—Rick notes that already 5% of U.S. taxpayers pay almost 70% of the income and capital gains taxes that the federal government collects. "That's going to continue," he adds, "and that's not the way you engender a recovery." Among the reasons his overall economic outlook is so "muted," he says, is that government's share of GDP will continue to grow partially as a function of taxation.

Energized by Energy

Speaking of taxation takes us into some of Rick's favorite territory: energy.

Rightly or wrongly, the "coal is bad" mantra is likely to play itself out either in cap-and-trade legislation or some sort of carbon tax system. Earlier this year, Rick said that one of the easiest themes to play for the next five years would be around large coal-fired utilities taking over well-run alternative energy entities with large development pipelines.

Why? In part, he said, it's "because they want to control the carbon offsets from alternative energy against their coal operations without having to buy those carbon offsets in the market." In that context he mentioned geothermals in particular. "I think ultimately we will see all of the North American geothermal entities taken over either by international power generators or by American coal-fired generators."

If pushed to pick one speculative sector, Rick responds in a heartbeat. "Geothermal," he says. "I personally—not surprisingly—would pick the most out-of-favor sector. The one where the factors are most positively aligned. We don't know when all of the factors will come to play and give us a bull market, but it's a 'when' question rather than an 'if' question. Mercifully for me, nobody else gives a damn about geothermal energy."

Here's Rick's energy hierarchy: "I am particularly attracted to the energy complex, all of it. I look at alternative energy as particularly attractive. I look at geothermal as the most attractive of the alternative energies. I'm increasingly attracted to the uranium sector. I like conventional oil and gas. I like unconventional oil and gas."

Uranium: The Sequel

The story associated with geothermal energy reminds Rick of the story that was associated with uranium in 2000 when nobody cared about the uranium stocks. "The whole story was absolutely, positively true in 2000 when nobody cared," Rick says. "The whole story was equally true in 2006 when everybody cared so much that the price of the stocks got absolutely disconnected from the industry reality. The story is true again. We're coming into a discovery cycle in uranium; value is being added in some of these companies. I expect spectacular speculative opportunities in uranium. This does not mean go out and buy uranium stocks willy-nilly. At the top of the market, 500 companies pretended to be exploring for uranium—probably 10 of them viable. But the market is taking down the prices of the 10 that are good with the 490 frauds. This sets up a really nice opportunity over the next two years.

Ironically, the investing public's outlook with regards to uranium stocks continues to deteriorate as the situation improves for uranium, but as Rick puts it, "This is setting up what I think could be spectacular buying opportunities in the next 12 to 18 months."

Rick, who cut his resource sector teeth in the oil and gas industry, also sees a lot of opportunities in shale plays. He explains why, with a bit of geology and engineering background to set the stage. "The popular shale horizons are referred to in soft rock geology class as 'kitchens,'" he begins. "These are organic-rich sediments where pressure and temperature turns trapped carbon into hydrocarbon. They generate high total organic content and lots of oil and gas, but these horizons are generally not porous and are impermeable, so the oil and gas don't flow easily within the rock and hence aren't so easy to extract."

This isn't news. Geologists and producers have known these things for a long time. "We've drilled through these sections and seen oil and/or gas on logs, and occasionally seen flashes of gas in flares," Rick says. "But the sections don't produce because of very poor reservoir properties."

Technological Revolution

Technological advances have changed the picture, revolutionizing conventional onshore oil and gas production, particularly in the U.S. "What's making these shale plays economic now is a conjunction of three technologies developed over the last 20 years," Rick says. "One is seismic reprocessing. We have learned how seismic data flows back and learned how to process it so that we can look at shale sections and find those that are naturally fractured—which increases porosity and permeability. We have even learned to differentiate the fracture fairways, the direction of the fractures so that we can exploit them better. In the case of natural gas, with bright spot—amplitude versus offset seismic technology—we have even learned to be reasonably accurate about the material—water or gas?—that fills the cracks in fractures. We have thus been able to orient exploration toward sections in these shales that are more rather than less economic."

Other key developments have taken place in horizontal drilling and measurement well drilling technologies. "When I came up in the oil and gas business," Rick recalls, "we penetrated shale sections vertically. A section may be 1,000 miles wide but maybe 10 or 12 meters thick. If you penetrate it vertically, you may open up 30 or 40 feet to possible exploitation with a wellbore. With directional drilling, entering these shale sections horizontally, you're able to stay in the section for 3,500 feet, opening up and exposing much more of the shale section to the wellbore."

And then there's multi-stage fracturing. Again, Rick recalls his early days in the industry. "You would open up maybe 10 meters of the section and give it an enormous fracture. You pumped in water and sand at very high rates and manufacture a reservoir with the porosity and permeability that nature didn't provide." Nowadays, rather than one massive fracture over 10 or 12 meters, you create as many as 30 smaller fractures over a much larger horizontal extent in the reservoir. "This opens up much more of the horizon to produce and minimizes the risk of damaging the section from an enormous concentrated fracture," Rick observes. "In effect, you take deposits of oil and gas that are constrained in terms of their ability to produce because they have poor reservoirs and manufacturing a reservoir inside the horizon and making it easier to produce."

These processes have "absolutely revolutionized conventional oil and gas production in North America," he says, running through a litany of conventional gas shales that have become famous—the Marcellus, the Fayetteville, the Haynesville, the Barnett in the U.S., and in Canada the Montney and increasingly the Utica. In the oil shales, he references the famous Bakken in North Dakota, the Viking in Saskatchewan and now the Cardium in Alberta.

As a result of these developments, Rick now sees "numerous opportunities in shale," but understanding the nature of those opportunities requires a paradigm shift in the way you look at onshore exploration production activities. Because the chance is very high of drilling a well that at least penetrates a section with oil and gas in it, exploration risk is now low—but other risks remain. "Can you manufacture a reservoir in a rock that will allow you to recover the oil and gas that you know is in the rock?" Rick asks. And if you overcome that engineering risk, "On an ongoing basis, how do you accommodate the upfront capital costs in shale, which are high relative to the energy pricing?"

In particular, with U.S. natural gas, Rick expects gas prices to be a function of shale production. The shale producers are reasonably certain about how much reserves they can discover for every dollar expended, and also within some frame of reference how much physical reserve they will be able to produce per dollar expended. With very liquid futures markets in natural gas, when producers can earn a 20% or 30% real margin—better yet, a 50% margin—on E&P activities you'll see a lot of activity.

Rick Rule, founder and CEO of Global Resource Investments, began his career in the securities business in 1974, and has been principally involved in natural resource security investments ever since. He is a leading American retail broker specializing in mining, energy, water utilities, forest products and agriculture. Rick's company has built a national reputation for its specialist expertise in taking advantage of global opportunities in the oil and gas, mining, alternative energy, agriculture, forestry, and water industries. This article is based on his Global Resource Investments webcast, Friday, July 16.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page

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From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.
Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.
Streetwise Reports LLC
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Kenwood, CA 95452
Tel.: (707) 282-5593
Fax: (707) 282-5592
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Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09.

On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.



Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


Silver-prices.net have been rather fortunate to close both the $15.00 and the $16.00 options trade on Silver Wheaton Corporation, with both returning a little over 100% profit.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.

Thursday
Jul222010

Mickey Fulp: Solving the Uranium Price Puzzle

Source: Barbara Templeton and Karen Roche of The Energy Report 7/22/10
http://www.theenergyreport.com/cs/user/print/na/6871

Mickey Fulp

Apparently flouting the law of supply and demand and mystifying experts and analysts alike, depressed uranium prices present some excellent bargain-hunting opportunities for investors, according to Mercenary Geologist Mickey Fulp. In this exclusive interview with The Energy Report, Mickey shares some thoughts about his favorite players in the uranium space. He's also keeping an eye on natural gas stocks.

The Energy Report: When we talked in April, Mickey, you said that the only sector you thought was absolutely undervalued as a whole was uranium, and that it had been beaten up a lot since mid-2007. You felt uranium prices should have started to rebound beginning in 2009, but they haven't done so yet. What's keeping prices down? Should we see a rebound soon?

MF: There has been a little encouragement in the fact that the spot price was up $1 over the last couple of weeks of June, but trading at $41.75 on the spot market is still very low compared to the uranium boom run up. Although it's a minor part of the entire market for uranium, the spot market very much influences the price of uranium stocks.

TER: Will uranium ever return to the 2007 peak?

MF: That was an anomaly, so not in the foreseeable future. Hedge funds basically came in and bought up a bunch of uranium. The crash started earlier for uranium, but all those exorbitant commodity prices in '07 and '08 were due to hedge fund buying.

TER: If we take out that anomaly, where would you say uranium's price stands today?

MF: I think we're still relatively low, in the fact that the cost of production is going up. All the new mines coming on will have higher costs of production than the established mines. We'll need higher uranium prices in the mid to long term to make these mines profitable.

TER: But nuclear facilities are being built, coming online in China and Europe and the United States. Why isn't the additional demand pushing uranium prices up?

MF: Your guess is as good as mine. The long-term contract market for uranium is very opaque. The spot market is a little more transparent. Spot market prices are basically set by whatever trades happened last week or last month, when buyers and sellers sat across the table from one another and negotiated a price. Why the spot price has barely moved puzzles most people in the business and most analysts, because we do see this increased demand and we don't know where the uranium will come from.

There are a couple of wildcards out there though. The U.S. Department of Energy has something on the order of 158 million pounds stockpiled. The price is probably suppressed right now, too, because the Russians still supply a significant amount of uranium through the "Megatons to Megawatts" deal, which ends in three years. Mining currently supplies two-thirds of the world's demand. Secondary sources, the heavy to light enrichment process and stockpiles, have supplied the rest. Most analysts say that certainly within three to five years demand will exceed total supply from these sources. Therefore, it appears the price has to go up. What's the timing of the price going up? ¿Quién sabe?

Demand is exceeding mine supply right now. Obviously, there has been enough uranium to keep power plants going. One thing that's become apparent in the last few months is that utilities and governments, consumers of uranium, are carrying something on the order of 18 months' average forward supply. Historically, that supply stockpile has been more like three years. That difference may represent supply tightness.

I wish I had better answers. I think everybody in this business is grasping for straws as to why prices are still relatively depressed, especially in terms of cost of mine production.

TER: At the close of the G20 Summit in Toronto last month, India and Canada signed a nuclear agreement supposedly paving the way for Canadian firms to export controlled nuclear materials, equipment and technology to India. What does this portend for the sector in North America?

MF: I wouldn't put a lot of stock in the importance of that agreement. We've seen the U.S. and seven other countries already sign deals like this with India. India's building 12 nuclear reactors in the next decade, and because they are not a large uranium producer, they need a uranium supply. That's probably one of the motivating factors. India is one of three countries that never signed the Nuclear Nonproliferation Treaty, the others being China and Pakistan. So for a long while, they were blacklisted.

Both the Climate Conference in Copenhagen and this G20 Summit in Toronto dealt somewhat with world movement to reduce the amount of heavy-enriched uranium (i.e., uranium that could be made into bombs) and convert that to low-enriched uranium. There have been myriad such agreements between countries over the last two years, all in response to the idea that we need to get the bomb-capable uranium into secure facilities to downgrade for use in power plants.

Something that I think would perhaps be more important is the fact that Cameco Corp. (NYSE:CCJ; TSX:CCO) has just signed a contract to sell 23 million pounds of uranium to China over the next decade. China has an aggressive goal of increasing nuclear capacity for electricity generation from about nine gigawatts (GW) to as much as 160 GW by 2030. So what we're seeing now is that yellowcake, or low-enriched uranium, will cross international boundaries freely. Of course this will not be the case with rogue nations such as North Korea, Iran and other places where the civilized world would not be certain about that uranium being used for peaceful purposes.

TER: If non-peaceful nations got the uranium, they would still have to enrich it to make weapons?

MF: Right. And they need the facilities to be able to do that. It's fairly apparent that North Korea and Iran have those capabilities. Low-enriched uranium is something on the order of 3% to 4% U-235, whereas high-enriched uranium—the bomb-making stuff—is more like 85% U-235. So there’s considerable upgrading to achieve weapons-grade uranium and it's an iterative process to get those high concentrations. Conversely, it’s also a laborious process to downgrade weapons-grade uranium to concentrations suitable for power plant fuel.

TER: As with the Megatons to Megawatts program.

MF: Exactly. You take high-enriched uranium, bomb-capable uranium, and downgrade the enrichment factor 25–30 times.

TER: That's why it's lasting so long in terms of being part of the supply.

MF: Right.

TER: So we now have international demand and capability to ship uranium internationally. We've got the supply chain now 18 months out as opposed to three years. We've got the Russian program starting to wind down. What are some good investments for people who agree with you in that this is an undervalued sector?

MF: Well, my favorite company for a long time has been uranium developer Strathmore Minerals Corp. (TSX.V:STM; OTC.PK SHEETS:STHJF). I call them a development generator. They have two flagship properties in the Grants Mineral Belt of New Mexico and the Gas Hills of Wyoming. They are a development generator because they're in the process of monetizing all their non-core assets, including seven other development projects in the Western U.S.

I see some sort of unitization in the Grants Mineral Belt in the mid-term future. There are half a dozen major deposits in the Grants Mineral Belt, which is the largest uranium province in the United States. Ownership of all of those deposits is divided among multiple owners. Strathmore, Uranium Resources, Inc. (OTCBB:URIX), Neutron Energy and Rio Grande Resources—two private companies—are the major players. All of them except Rio Grande own bits and pieces of everybody else's deposit. At some point I expect to see deals made where one company controls a particular asset and another company controls another asset. So I think we're going to see some movement toward unitization in the Grants Mineral Belt. That would be very positive for Strathmore. It's already happening in South Texas.

TER: Any other plays in the uranium space that you like?

MF: Sure. I like Hathor Exploration Ltd. (TSX.V:HAT). Hathor keeps getting bigger. The exploration potential in the northeastern Athabasca Basin continues to grow. Fission Energy Corp. (TSX.V:FIS) has a discovery along the same east-west structural corridor. They will expand that. Both Hathor and Fission Energy will start drilling soon.

Another play on the Midwest trend and joint ventured with Hathor is Forum Uranium Corp.'s (TSX.V:FDC) Henday project. I've been accumulating that stock on weakness and it's been pretty weak so I continue to accumulate it at lower and lower prices. It'll be next March before we can expect drill results from a winter time drilling program. That's a bit of a longer-term play.

Another company maybe worth looking at would be Uranium Energy Corp., (NYSE.A:UEC), which is moving toward new production in South Texas in the fourth quarter this year. All these companies are pretty beaten up right now in terms of share price.

TER: Speaking about South Texas takes us pretty close to the Gulf of Mexico and a very serious situation. What's your take on the future of deepwater offshore drilling?

MF: With something on the order of 25% of our domestic oil production coming from the Gulf of Mexico, it is very important to the U.S. economy. Among the ramifications, I think we're going to see increased regulation, permitting delays and environmental lawsuits. All of this means less drilling for both production and exploration, which means we'll have less oil and more dependence on the Middle East. It's also going to mean an increasing move to onshore oil. It's a very sad situation.

TER: Do you expect a greater focus on alternative energies as another possible outcome?

MF: I think that's likely.

TER: How might that play out and which players stand to benefit?

MF: Uranium first and foremost. I certainly think the rare earth elements (REE) sector will benefit because these are so-called green metals. They are necessary for alternative energies; for example, wind turbines need a lot of neodymium. Hybrid cars require lanthanum, neodymium, dysprosium, terbium and europium. So an increase in the green-and-clean energy technologies will benefit the REE sector.

TER: You've called the REE sector one of your favorites. Do you still feel that way?

MF: I do, but as we've seen lately, it's very dependent on the health of the world economy. I have several core positions in the REE sector that I hold for the long term.

TER: Who do you like, and why?

MF: Avalon Rare Metals Inc. (TSX:AVL; OTCQX:AVARF) just put out the first economic study of any junior in the sector, a prefeasibility study. The market reacted negatively because of high capex and relatively low internal rate of return (IRR). I spent a long time talking with CEO Don Bubar about it. There are lots of low-cost tweaks available in the mining, processing and marketing at Thor Lake. For instance, a 1% increase in metallurgical recovery results in a 1% increase in IRR. After talking with Don, I was very pleased and had somewhat of a different idea about what this prefeasibility study means. This is a mine-to-market sector, and those of us who cover it have been saying from the get-go that offtake contracts will be paramount. Western world consumers of rare earth elements are very worried about mid-term supplies, and are now positioning themselves for product for the next three to five years. I think that's all behind the scenes, but I expect some movement in this regard in the short term.

TGR: So you're seeing production in the short term?

MF: Not production, that's four to five years away, but commitment to product flow from mines. Consumers will line themselves up and make sure they have a secure source. They're concerned about where their raw materials will come from.

TER: If consumers are lining up to buy, why, then, would the IRR cause a decrease in share price?

MF: The market doesn't understand that. The market looks at a very large capex and a 12% IRR and says it's a marginally economic deposit. It may be, but the Western world requires rare earths—and they'll have to come from somewhere other than China.

TER: What companies do you see lined up to take advantage of these offtake agreements?

MF: Avalon will be first in North America. Quest Rare Minerals Ltd. (TSX.V:QRM) is one of my favorites. They are trading somewhere around 50% of their yearly highs, just initiating a 15,000-meter drill program, with four rigs at their flagship Strange Lake heavy REE project. They'll delineate the west half of the deposit, drill the east half—which has never been drilled—and their metallurgical results probably will come out in early August.

I particularly like Rare Element Resources Ltd. (TSX.V:RES), with their Bear Lodge light REE project. Their new resource estimate is 50% larger than before and they're drilling now. They're also drilling on the adjacent Sundance Gold project and will follow that with a resource estimate. I can speculate that eventually this will be a two-for-one; there will be a gold company spinout.

My other favorite is Tasman Metals Ltd. (TSX.V:TSM), a European REE play. Since we last talked, they've raised $3 million, completed a drilling program with positive results at their Norra Kärr project in Sweden and acquired the Bastnäs project. That's particularly interesting, because Bastnäs is where rare earths were first discovered in the early 1800s. The mineral bastnäsite is named for this locale. Tasman also has acquired an advanced deposit in Finland (Korsnäs), and I think you'll be seeing a pipeline of additional projects coming in the door. This play is especially important because the European Union has stated they want to become more self-sufficient in critical and strategic metals, and Tasman is well positioned for that.

Dacha Capital Inc. (TSX.V:DAC; OTCQX:DCHAF) has an interesting business model. It's a rare earth element ETF.

TER: Can you describe Dacha Capital's approach?

MF: Their corporate strategy is to buy REE metals, alloys and oxides in China and take them out of China; presently, they're storing in Singapore and South Korea. They can monetize that various ways with the net asset value of the stock. With the increasing REE prices we've been seeing, Dacha Capital's stock price will go up; and, if things go up very rapidly, they can always sell these stores to consumers.

TER: So to the extent that it brings alternative energies more front and center, rare earths may benefit from the Gulf disaster. Any other sectors?

MF: Yes. I also think it will benefit the natural gas industry because that's much cleaner than other hydrocarbon products. The U.S. is the world's largest gas producer now. Gas is cheap and relatively clean; but gas storage is still high. The oil-to-gas price ratio right now is way out of whack, approaching 15, with historical ratios somewhere around 6. So in relation to oil, gas is quite cheap.

TER: What about solar?

MF: I don't particularly like the wind or solar sectors because they still require government subsidies to be economic. I don't like private industry depending on elected government to generate cash flow.

TER: And geothermal?

MF: Especially in the junior resource sector, I look at geothermal as too long term and the junior plays too risky. The payback schedules for geothermal electrical generating plants is okay for monopolistic utilities, but I just really don't get it for a junior that has a limited lifespan. In my opinion geothermal is best suited for local space-heating needs where the geothermal fields exist.

TER: OK, any other energy sectors that you follow?

MF: I follow natural gas. As a contrarian, I like to find things that no one else is looking at right now, are off people's radar screens or are not the flavor of the year. So uranium and natural gas have piqued my interest lately.

TER: Is it a good time to buy natural gas stocks?

MF: I'm watching right now. I haven't waded into this sector yet. I would say that if you do, you want to buy the best and strongest companies with good balance sheets and the ability to generate cash flow and not exceed their revolving credit lines. It's a bit of a different philosophy because all oil and gas companies carry debt whereas juniors in the metals sectors generally don't carry debt.

TER: What's keeping you from jumping into the market at this time?

MF: I think it's a little early. I'd like to see some more positive indications that gas prices are going to be relatively strong and that demand is going to increase in the mid to long term. I think it will because it's cheaper and cleaner than burning coal or burning gasoline or diesel in your car.

TER: What cues are you looking for to make your move?

MF: I generally listen to other analysts, take it all in and try to make my own decisions.

TER: Is that time drawing close?

MF: I'm not sure. If it were getting close, I would be going into the natural gas sector right now. I'm still on the sidelines watching.

TER: Mickey, you are a big proponent of investors doing their due diligence. For those new to investing in energy, what conferences, books, seminars or newsletters would you recommend to them?

MF: There are numerous investment conferences every year, and I personally speak at about 10 or 12 of them. They're held in various large cities—Vancouver, Toronto, Calgary, Chicago, Phoenix, New York City, New Orleans, San Francisco. I encourage investors to go to these; most of them are free to the investing public. At the upcoming San Francisco show (Hard Assets Conference, November 21–22), some educational workshops will be free and some will have small fees.

TER: You'll be there?

MF: Yes. I will be presenting my educational workshop called "Geology for Lay Investors." Probably the most difficult thing for lay investors to get a handle on is the geology of these junior resource companies' projects. We geologists tend to speak our own language; we understand the jargon, but it's probably puzzling to the investing public with no background in the science. In an hour-long seminar, and however long I stay for questions—which tends to be quite a while—I try to boil it down into the basics of geology. Geology is a science, but the best geologists are artists. So through these educational seminars, my mentoring of investors and a book I'm writing on resource investing for the lay investor. . .

TER: When is that coming out?

MF: I keep saying a year, but it keeps getting put off as I keep adding more chapters, kind of like most juniors' Gantt charts. I'm chipping away at it but then I get busy with other things. I'm writing it chapter by chapter, so it's a work in progress.

TER: Any final thoughts you'd like to share today, Mickey?

MF: Yeah, I've got two. "There ain't no cure for the summertime blues" except that. . ."Time is on my side, yes it is."

TER: You ought to set that to music.

MF: I think that's already been done.

The Mercenary Geologist, Michael S. "Mickey" Fulp is a Certified Professional Geologist with a bachelor's degree in Earth Sciences with honors from the University of Tulsa (1975), and a master's degree in Geology from the University of New Mexico (1982). He has more than 30 years' experience as an exploration geologist searching for economic deposits of base and precious metals and other resources. Mickey has worked for junior explorers, major mining companies, private firms and investors as a consulting economic geologist for the past 22 years, specializing in geological mapping, property evaluation and business development. Respected throughout the mining and exploration community due to his ongoing work as an analyst, newsletter writer and speaker, Mickey can be reached at Contact@MercenaryGeologist.com.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

DISCLOSURE:
1) The Energy Report Publisher Karen Roche and Barbara Templeton conducted this interview. They personally and/or their families own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report or The Gold Report: Strathmore, Dacha, Rare Element and Avalon.
3) Mickey Fulp: I personally own shares of the following companies mentioned in this interview: Fission Energy, Forum Uranium, Hathor, Strathmore Minerals, Avalon, Quest, Rare Element Resources and Tasman. I personally am paid by the following companies mentioned in this interview: Avalon, Quest, Strathmore and Tasman are sponsors of my website.
Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.
Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.
Streetwise Reports LLC
P.O. Box 1099
Kenwood, CA 95452
Tel.: (707) 282-5593
Fax: (707) 282-5592
Email: jmallin@streetwisereports.com

Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09.

On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.



Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


Silver-prices.net have been rather fortunate to close both the $15.00 and the $16.00 options trade on Silver Wheaton Corporation, with both returning a little over 100% profit.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.


Tuesday
Jul202010

Geordie Mark: Glowing Reviews for Uranium Plays

Geordie Mark.jpg


Source: Brian Sylvester of The Energy Report 7/20/10
http://www.theenergyreport.com/cs/user/print/na/6850

You don't hear a lot of talk about uranium these days. It's just not as sexy as gold or silver. But with a host of reactors slated for construction, the sector is rife with opportunities. Haywood Securities Analyst Geordie Mark visits numerous uranium projects each year, researching plays at all levels. In this exclusive interview with The Energy Report, Geordie tells us why he's given "sector outperform" ratings to no less than 11 companies. It could be the most comprehensive global roundup of uranium plays anywhere.

The Energy Report: The spot price for uranium was $40.75 a pound on June 21, when the long-term price for uranium was $58—a spread of $17.25, or 42%. What's poised to support a 42% price increase?

Geordie Mark: The spot price actually moved up to $41.75 that night, the first move to the upside in quite a number of months. It's a positive response to demand coming onstream. The long-term contract market is very different from the spot market; and, historically, it's significantly bigger in terms of the volumes that are traded. We're seeing the spot price moving to meet those contract prices going forward. We also think there's a backdrop of significant demand increase due to a delay in the development-stage projects resulting from financial crisis issues and general market conditions.

TER: How far out do you see the spot price and the futures price meeting?

GM: We're looking at a marriage maybe even by the end of 2011, with a spot price of $65 and a long-term move out to $70. We certainly expect to narrow the current gap by that point.

TER: And you said part of that is due to the number of projects coming onstream?

GM: That's right. A few development-stage companies will go into production but, certainly compared to 2007, there have been delays due to equity raising. The number of new projects going forward has been stymied when those projects needed significant capex for development.

TER: At the same time we have a number of new reactors being built.

GM: That's true. Over the last two years, we've seen some significant growth in the number of reactors going into construction. I think something like a 58% increase in the number of reactors are on the planning board; that's a very good size in terms of a steady increase in future demand.

TER: Given the number of reactors being built or scheduled, why haven't uranium stocks performed better of late?

GM: There's a relationship between share prices and general market conditions. Over the last two years, both spot and long-term prices have come off somewhat in response to global financial conditions. I believe spot has come down from about $59 and long-term prices from $80. Company valuations are quite closely linked to commodity prices, so you're basically seeing the relationship to a softening in the commodity price over that two-year period.

TER: So with demand slated to rise significantly, we should see a corresponding rise in share prices of uranium miners and explorers?

GM: That's our target forecast for our covered companies and where we see the commodity price going in response to increasing demand. I think the interesting thing is that increasing demand not only corresponds to the number of new reactors coming onstream but also policies echoing out of Europe regarding extending the life of existing reactor fleets. You're seeing a number of different avenues in which nearer-term demand could increase, which only adds to the longer-term demand of new reactors. There are incremental policy changes toward nuclear power, too, certainly across Europe and coming across through North America. Obviously it's happening in Asia, with China and South Korea furnishing fairly large reactor-unit increases for their countries.

TER: Some of the most promising uranium projects are in Australia. Although the country is considering a new tax on miners, the Mineral Resources Rent Tax (MRRT), a recent change in leadership in the governing party could be a favorable development. Could you update us on the political climate in Australia as it pertains to the uranium players there?

GM: Well, Australia is interesting. It has the world's largest accumulated known uranium resources and the largest uranium deposit—Olympic Dam. At the moment, Australia's federal government allows uranium mining, and other regulations basically filter down state by state. Western Australia is now open to uranium mining. South Australia has an active uranium mining history, as does the Northern Territory. The more recent super-tax proposal, which the Labour Party put forward, created an uncertainty in terms of the value of both current and future mining projects. Julia Gillard, the new Prime Minister, has made motions toward the industry in terms of coming forward and talking about possible modifications to the mining taxation rules. For the time being, it's hard telling how ultimately this will break down.

TER: Your research talks about some sector outperformers among the conventional explorers. You've mentioned Energy Fuels Inc. (TSX:EFR), Mega Uranium Ltd. (TSX:MGA) and Strateco Resources Inc. (TSX.V:RSC). Please update us on those companies.

GM: They provide investors with exposure to uranium in different jurisdictions. For example, Mega has the Lake Maitland project in Western Australia, which is opening up for uranium mining and where a significant proportion of Mega's assets are located. The company has good partners in a Japanese consortium, which owns about 35% of the asset at Lake Maitland. Mega provides people with exposure to a near-term uranium producer that has a significant support base in terms of these partners. I think that's one of the more favorable new projects in Australia. We anticipate production maybe in 2013. It would be a lower-cost producer, probably in the high $20s in terms of USD per pound of production.

TER: How much would Mega produce annually at Lake Maitland?

GM: We're looking at about 1.65 million pounds; it's small-scale production. It's basically a thin layer at surface that doesn't require conventional mining. It's unconsolidated mud effectively, so 1.65 million pounds a year for the life of the project.

TER: Does Mega have any other projects in Australia?

GM: Lake Maitland is their primary project. Their second main asset in Australia is Ben Lomond, up in far northern Queensland, just outside the city of Townsville. It's a modest-grade deposit; it's got potential. They've got a bunch of other exploration plays around the world, particularly in Canada.

TER: What's your target price on Mega?

GM: $0.80.

TER: Before we go further, could you give us an overview of cash costs—low, medium and high—in terms of uranium production?

GM: Sure. Certainly low cash costs now would be below around $25 a pound. Medium would be upper $20s and $30s. High costs are $40s and above.

TER: Okay. What can you tell us about Strateco?

GM: Matoush is a very nice deposit in Québec; very handsome grades, close to 0.6% U3O8. It has a resource of about 20 million pounds of uranium U3O8—small, but higher grade. Our interpretation is that Matoush is the most advanced project for a development-stage company in Canada. Strateco has a big program going at the moment —another 60,000 meters of drilling this year to look for extensions of mineralization, and another 60,000 meters planned for 2011. The orebody is still open. Guy Hébert, the president and CEO, is also working out permitting. We're looking at permits for the project to start underground development for bulk sampling.

TER: How long would it take for them to get the assay results from that bulk sample?

GM: We're looking at a couple of years, probably 2012. They have to develop the underground workings first. The main thing in the interim is the underground development itself, and also the exploration drilling they're doing. It takes time. That's why we think Strateco is ahead of its peers in terms of submitting proposals to the Canadian Nuclear Safety Commission (CNSC) for licensing and permitting approval. Canada is highly regulated, which is a good thing. It's mandated, and these things take time.

TER: Alright, what about the others?

GM: Energy Fuels, that's a uranium-, vanadium-oriented company in Utah and western Colorado. We like them because of the duality of the commodities. In addition to uranium, they have the vanadium, which is an integral component in steel manufacturing. That gives them a bit of a boost. Energy Fuels would be a moderate to higher-cost producer and shares many similarities with Denison Mines Corp. (TSX:DML; NYSE.A:DNN) and its mining and processing operations in the United States.

TER: What are some of their assets?

GM: They have the Piñon Ridge Mill project, permits for which are under review. That process should be complete by early next year. They have a couple of mines that are fully permitted and will be underground mining on the Colorado Plateau. Energy Fuels has the potential to go into production at their Whirlwind Mine, but they don't have a mill there yet.

TER: A recent edition of Haywood Securities' Uranium Weekly gives sector outperform ratings to Paladin Energy Ltd. (ASX:PDN; TSX:PDN) and Denison. What upsides do you see there?

GM: I favor Paladin simply because they have two conventional open-pit mines in Africa where they're ramping up production. There's one in Namibia, which is the world's fourth largest uranium-producing country. The new mine that they commissioned last year in Malawi is Kayelekera. Paladin's a conventional player with production costs of around $30 a pound; it's a Tier-2 producer at the moment and is looking to expand from there. The company also has development plans in Australia and elsewhere in Africa. They've done quite well—they've proven themselves to be the new player in terms of conventional mining and milling in the uranium sector.

TER: Are they approaching Cameco Corp. (NYSE:CCJ; TSX:CCO) status?

GM: No, not yet. Cameco is fairly substantial, quite diverse; but Paladin is a Tier 2. There are not many Tier 2 producers out there; they include Uranium One Inc. (TSX:UUU), Paladin and Denison in that fold.

TER: Tell us about Denison.

GM: Denison is basically a North American uranium producer and also produces vanadium from its Utah operations. It's a higher-cost producer, and certainly the leveraged play in the space. Denison has basically reconstituted itself over the last year and a half in terms of raising equity to minimize long-term debt. They've also brought in KEPCO as a partner—Korea Electric Power Company (NYSE:KEP). Basically, Denison is slowly ramping up its production in the U.S. They've cut down a few of the higher-cost producing mines to be more prudent in their mining and producing operations. For example, they have a partnership with AREVA (PAR:CEI) at the McClean Lake facility in Canada, which is probably going on care and maintenance in July.

TER: Why is that?

GM: AREVA operates that, so it's largely their decision. . .probably looking toward future prices to see when it comes back onstream. Denison also produces vanadium, and they have a very exciting discovery in the Athabasca Basin—the Phoenix Zone in the Wheeler River joint venture. Phoenix has had some outstanding drill results over the last year. They're aiming to get a resource estimate out on that by the end of 2010. Quite an exceptional discovery, I think.

TER: In that same issue of Uranium Weekly, you talk about some in-situ miners. Among your sector outperformers are Uranium Energy Corp. (NYSE.A:UEC), Ur-Energy (NYSE:URG; TSX:URE) and Uranerz Energy Corporation (TSX:URZ; NYSE.A:URZ). Tell us about those.

GM: Uranium Energy, Ur-Energy and Uranerz are all in the U.S., all looking at in-situ uranium recovery—so no physical mining, all sandstone-hosted. We see near-term production out of all three of the companies. That's this year for Uranium Energy, probably next year for Ur-Energy and late 2011, early 2012 for Uranerz.

TER: This year for Uranium Energy?

GM: Yes. We're looking at Uranium Energy entering production in October from their Hobson plant and mining from their well fields at Palangana—both in Texas; so, with this timeline, it will effectively be the world's next uranium producing company. It's quite an exciting development for the space and the company. They have another project, Goliad, which could potentially add to their production and should get its final permitting by the end of this year. We like Uranium Energy's lower-cost production base. They're not large but their cash costs are probably around $22, so quite good there. Production scale potentially 1M–2M pounds annually.

TER: Has the share price moved in anticipation of production?

GM: No, not as yet.

TER: Given that its pending production profile hasn't been taken into account, might it be a good buying opportunity?

GM: We certainly like them. Our target there is $3.90. They're trading at around $2.40, so we think that offers a good opportunity. They have a number of catalysts going forward and a big exploration plan around their existing resources. They will update their resource estimate in September; production in October. We're looking at getting a second well field project 'Goliad' permitted by the end of the year. A third project called, Seager-Salvo, could have an initial resource estimate by year-end, as well.

TER: What about Ur-Energy?

GM: Ur-Energy and Uranerz are good peer companies. They're both in Wyoming, and both submitted applications to go into mining around the end of 2007, beginning of 2008. We're looking at production next year for Ur-Energy and early 2012 for Uranerz. Let's go through Ur-Energy. They've got a very good cash position and have the Lost Creek and Lost Soldier deposits. They've been operating from Lost Creek first—they're looking at development there. We're looking at the Nuclear Regulatory Commission (NRC) ultimately providing final permits and licenses to go into production in the second half of this year. It's the same for Uranerz. We're looking at probably starting to build at the end of this year, beginning of next year. Lower-cost producer, small scale.

TER: Let's go back to what's happening in Africa. Haywood's research would seem to agree that Africa has a number of promising uranium explorers and developers. Could you talk about some of the juniors Haywood thinks are poised for significant share appreciation?

GM: Africa is blossoming as a region for uranium discovery. Mantra Resources Ltd. (TSX:MRL; ASX:MRU) and Extract Resources Ltd. (TSX:EXT; ASX:EXT) have made some genuine new discoveries there over the last year or two. I think the best thing about Africa is the probability of making discoveries that are more easily exploitable in terms of being at or near surface, so they're amenable to open-pit mining. Mantra has an exceptional deposit, the Mkuju River Project in Tanzania. I think the company published its first resource estimate at the beginning of last year. . .more than doubled it within a year and still has the potential to increase that resource. They're looking at production in the second half of 2012. That's a very quick timeline to production. They're still looking at increasing the capacity from their plant and milling operation. We're looking at a modest cash cost of about $25 a pound. Mantra has a lot of positives going forward.

Extract made an outstanding discovery at Rossing South in Namibia. This is 6 km. south of the existing Rossing Mine that Rio Tinto Ltd. (LSE:RIO; NYSE:TP; ASX:RIO) operates. They have close to 300 million pounds of defined resources, which they identified in rapid time. Their resources are significantly higher grade than the existing Rossing operation and they're looking at expanding on that. It's a world-class discovery, a fact that their share price has reflected over the last 18 months.

TER: That's great. Any others?

GM: Bannerman Resources Ltd. (TSX:BAN; ASX:BMN) has done a lot of work in terms of defining the Etango deposit, which has about 160+ million pounds of uranium. It's tens of kilometers away from Extract's Rossing South. They're all very close together, and all alaskite-hosted. That means the mining and processing techniques are well known and understood given the long history of mining at the Rossing Mine.

The Etango deposit is defined over 6 km. of strike length. It crops out—it's at surface and shallow. Bannerman doesn't have the grade that Extract has, so they're a more leveraged play in the space; but we still like Bannerman in terms of a large strategic resource. We're looking at cost of production in the high $30s or maybe $40 a pound.

The big thing there is that they should get their ultimate mining license over the next few months, so they'll be one of only three operations to have licenses to go into production. The big players are looking for resources with potential for large-scale production in areas that allow uranium mining. And that's where Bannerman, Extract and Mantra all come out quite well.

TER: Thank you, Geordie, for updating us on all of these exciting developments.

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.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.
DISCLOSURE:
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Mega Uranium.
3) Geordie Mark: I personally and/or my family own shares of the following companies mentioned in this interview: Paladin Energy. I personally and/or my family am paid by the following companies mentioned in this interview: None.
4) As of the end of the month immediately preceding this publication either Haywood Securities, Inc., its officers or directors beneficially owned 1% or more of Mantra Resources.
5) Haywood Securities Inc. or an Affiliate has managed or co-managed or participated as selling group in a public offering of Extract Resources, Mantra Resources, Mega Uranium and Uranerz Energy in the past 12 months.
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The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
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Have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09.

On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.



Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


Silver-prices.net have been rather fortunate to close both the $15.00 and the $16.00 options trade on Silver Wheaton Corporation, with both returning a little over 100% profit.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

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Monday
Jul192010

China Stockpiling Uranium

Uranium Chart 20 July 2010.jpg

We missed this article earlier but fortunately one of our sharp eyed readers sent us a heads up, its about China stockpiling uranium while the uranium prices remain at current low levels. “We could start to see fairly substantial price increases in the spot market later this year.”


China is buying unprecedented amounts of uranium, signaling that prices are poised to rebound after three years of declines.

The nation may purchase about 5,000 metric tons this year, more than twice as much as it consumes, building stockpiles for new reactors, according to Thomas Neff, a physicist and uranium- industry analyst at the Massachusetts Institute of Technology in Cambridge. Prices will jump by about 32 percent next year, the most since 2006, RBC Capital Markets said.

India and China are leading the biggest atomic expansion since the decade after the 1970s oil crisis to cut pollution and power economies growing more than twice as fast as Europe and North America. The boom, combined with slowing supply growth, may benefit Cameco Corp., a co-owner of the world’s largest uranium mine, and Areva SA, the largest builder of reactors.
“China’s demand is insatiable,” said Dave Dai, an analyst at the Daiwa Institute of Research in Hong Kong. “They will have to take almost whatever is available.”

Uranium will climb to an average $55 a pound next year as demand erodes supplies, according to Adam Schatzker, a metals analyst at RBC in Toronto. Max Layton, at Macquarie Bank Ltd. in London, forecasts it will climb to $56.25 next year and $60 in five years.

Uranium for immediate delivery was at $41.75 a pound on July 5, according to the Ux Consulting Co. weekly price assessment. Spot trades of uranium oxide totaled 20.9 million pounds this year, about $873 million in today’s prices, Roswell, Georgia-based Ux Consulting said.

Price Slump

Uranium has tumbled 69 percent since peaking at $136 a pound in July 2007 as companies boosted production, according to the firm’s data. At least 27 mines in nine countries began operating in the past 10 years, adding as much as 65 million pounds a year to global output, according to Saskatoon, Saskatchewan-based Cameco, part owner of McArthur River mine in Canada, the world’s largest deposit of high-grade uranium. Six mines are scheduled to start in 2010.

“The uranium bull market of 2006 and 2007 stimulated the development of new supply, but we do not think it is enough,” Schatzker wrote in a report. “The prevailing uranium price is too low to stimulate sufficient supply to cover future reactor requirements.”

The cost of mining one pound of uranium is about $31, up from $26 in 2007, according to Edward Sterck, an analyst at BMO Capital Markets in London.
‘Stockpiling Like Crazy’

China’s demand for uranium may rise to 20,000 tons a year by 2020, more than a third of the 50,572 tons mined globally last year, as it boosts output to 85 gigawatts, nine times its current capacity, according to the World Nuclear Association. The nation agreed on June 24 to buy more than 10,000 tons over 10 years from Cameco.

India’s needs will grow 10-fold to 8,000 tons as it quadruples capacity to 20 gigawatts, according to Jagdeep Ghai, finance director at state-owned Nuclear Power Corp.

“They are essentially stockpiling in anticipation of new reactor build,” Neff, who is an independent director of GoviEx Uranium Inc., a privately held exploration company with interests in Niger, said in a July 6 telephone interview. “They are stockpiling like crazy.”

China plans at least 60 new reactors by 2020, Xu Yuming, executive director of the China Nuclear Energy Association, said in Beijing on July 6. The average 1,000-megawatt reactor costs about $3 billion, according to the World Nuclear Association. Loading a new reactor requires about 400 tons of uranium to start, Neff said.

Areva, Cameco, Paladin

China’s economy may grow 10.1 percent this year, while India’s expands 8.6 percent, according to analysts’ forecasts compiled by Bloomberg. U.S. gross domestic product will increase 3.1 percent and Europe’s will grow 1.1 percent.

Companies that build reactors may be among the biggest beneficiaries. Areva’s shares have tumbled 53 percent in the past three years. Miners including Cameco, whose stock has fallen 60 percent since then, Paladin Energy Ltd., which has lost 63 percent, and Darwin-based Energy Resources of Australia Ltd., which is down 25 percent, may also benefit.

Cameco advanced 4.9 percent in Toronto. Energy Resources jumped 3.4 percent in Sydney, while Perth, Australia-based Paladin gained 2.2 percent. Areva slid 1.9 percent in Paris.
“Longer-term it does look as though there’s going to be a shortfall of uranium and ERA and Paladin should benefit from higher prices if that plays out,” said Lyndon Fagan, a Royal Bank of Scotland Group Plc analyst in Sydney.

Cutting Pollution

Chinese Premier Wen Jiabao aims to cut pollution by reducing energy consumption 20 percent in the five years through 2010. The country pumped 6.5 billion tons of carbon dioxide into the atmosphere last year, U.S. Department of Energy data show, more than any other nation. Atomic plants produce virtually no greenhouse gases, though spent fuel remains radioactive for thousands of years and requires re-processing and storage.

China National Nuclear Corp., the nation’s first operator of reactors, said on June 28 it’s exploring for the fuel in Niger, Namibia, Zimbabwe and Mongolia.

“We’re just beginning to see the initial stages of China going abroad to buy stakes in uranium mines, but this is a trend we’re going to see more and more in the future,” said Stephen Kidd, head of strategy and research at the World Nuclear Association in London.

Growing uranium use may create a shortfall by the second half of this decade because not enough new production is planned, according to Friedel Aul, director of fuel services at Nukem Gmbh, an Alzenau, Germany-based uranium trader and broker.

Slowing Production

“Current production is based on mines that have been in operation for a long, long time,” he said. “With startup costs, certainly to bring a mine on line today is much more expensive than it was 10, 15 years ago.”

Production growth, including supplies recycled from Russian warheads under an agreement ending in 2013, may slow to 4.8 percent this year and 3.4 percent in 2011, according to RBC. It increased almost 12 percent last year.

The last time this many reactors were planned was in the 1980s, after the 1973 and 1979 oil shocks prompted the Organization of Petroleum Exporting Countries to boost prices for crude. By 2015, a new reactor may start every five days, compared with an average of one every 17 days during the 1980s, according to the World Nuclear Association.

‘Speculative Interest

Commissioning new plants is a “game-changer” for uranium, said Mark Pervan, head of commodity research at Australia and New Zealand Banking Group Ltd. in Melbourne. Though many won’t come on line for as long as two years, “speculative interest” may drive prices to the “$60 to $80 range pretty quickly.”

Prices may recover as demand improves, said Dustin Garrow, a Denver-based executive general manager of marketing for Paladin, the world’s ninth-largest uranium producer.

“We see demand picking up noticeably and it is not just the Chinese, there are other utility consumers that are now showing interest,” Garrow said in a July 6 interview. “We could start to see fairly substantial price increases in the spot market later this year.”


So just maybe there is some light at the end of this tunnel.

Have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09.

On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.



Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


Silver-prices.net have been rather fortunate to close both the $15.00 and the $16.00 options trade on Silver Wheaton Corporation, with both returning a little over 100% profit.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.


Monday
Jul192010

Blackouts Predicted for the UK

Nuclear Power Plant 19 July 2010.jpg



BRITAIN faces years of blackouts and soaring electricity bills because of the drive toward green power, a leading energy expert warned last night, according to an article in todays Daily Express.

A growing obsession with global warming and “renewable” sources threatens the stability of our supply.

Derek Birkett, a former Grid Control Engineer who has a lifetime’s experience in electricity supply throughout Britain, warned that the cost of the crisis could match that of the recent banking collapse


And he claimed that renewable energy expectations were now nothing more than “dangerous illusions” which would hit  consumers hard in the pocket.

“We are going to pay a very heavy price for the fact there has been a catalogue of neglect by the former Government which has focused on renewable energy sources,” Mr Birkett said.

We need a mix of sources and this takes time. Renewables have the problem of being intermittent, particularly wind, and we need more back-up capacity. By having all our sources in one basket we are risking disruption.

There is a lot of over-enthusiasm by governments to push global warming, which makes me very suspicious.” Less than five per cent of our energy comes from renewable sources but the “disproportionate” cost of implementing green technology runs into many millions of pounds, he said.

In a new book, When Will the Lights Go Out, published this month, Mr Birkett claims things will only get worse. He said the “lavish incentives” being offered to developers of green energy are being passed on to customers as the UK struggles to meet EU directives on carbon emissions.

He also warned that a growing reliance on renewable energy is creating widespread uncertainty in the electricity supply chain.

With many nuclear power stations and coal plants ending their lives and being taken out of service we “can’t rule out” people being left without power. The real problem is the cost of making sure this does not happen, and Britain’s lights “do not go out”, he warned.

The country is going to have to make a choice whether to go along with green ideas of renewable generation or go back to coal and nuclear power.”

This guy is right we hope that he gets a little more air time.


Have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09.

On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.



Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


Silver-prices.net have been rather fortunate to close both the $15.00 and the $16.00 options trade on Silver Wheaton Corporation, with both returning a little over 100% profit.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.