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Friday
Jan282011

Australian Floods Cause Drought in the Coal Market

coal 29 Jan 2011.JPG


By Marin Katusa, Casey’s Energy Report

The most important metallurgical coal basin in the world is underwater. Open pits have become lakes, stockpiles are soaked, and rail lines are submerged and in places destroyed. Damage is estimated at $5 to $6 billion.

Australia accounts for almost two-thirds of global coking coal production. Much of it comes from Queensland, where an area the size of France and Germany combined is underwater. That includes the Bowen Basin coal region, which produces almost a third of the world’s coking coal. The Bowen Basin was hit with 350 mm of rain in December, against an average of 102 mm.

Floods are now receding from the Bowen, giving some miners an opportunity to ship from existing stockpiles. Other mines are still inaccessible, and several rail lines are still submerged or damaged. And since open pits are still flooded and will take weeks to drain, shipping from stockpiles only postpones the inevitable: a reduction in met coal supply. Analysts think a recovery to pre-flood coal production levels will take at least three months.

At least six major global coal miners have declared force majeure, which means they can miss contractual shipments because of circumstances out of their control. The list includes Anglo American, Aquila Resources, BHP Billiton, Macarthur Coal, Rio Tinto, Vale, and Xstrata. Mines responsible for between 100 and 140 million tons of annual coking coal production are now under force majeure, representing as much as 40% of global supply.

And it’s probably not over yet. Australia’s Bureau of Meteorology predicts both eastern New South Wales and southeastern Queensland have a 60% to 70% chance of receiving higher-than-average rainfalls between January and March 2011.

What does it mean for coal prices and coal equities?

First, coal is not traded daily, like copper or gold. Coking coal prices are set in quarterly negotiations between steelmakers and coal miners; contracts for the first quarter of 2011 were mostly settled before the floods, at an average of $225 per ton (already the second highest level ever). So prices have not changed yet, but there is lots of talk about where they will go next. Analyst predictions for the second quarter range from $250 to $350 per ton.

Coking coal producers not affected by the floods are already reflecting the increase, and that will likely continue. Teck Resources, for example, climbed from below $59 to almost $63 in the last days of December, before slipping with the markets. Western Coal and Grande Cache Coal also made gains. The longer-term impact will of course depend on how long it takes for Australia’s mines to return to normal operations, but in general the situation supports Casey’s bullish stance on coking coal: there is not a lot of supply, and demand is constant, if not rising, so prices can only trend up.

Casey’s support for coking coal has already generated big returns on at least one recommendation. Some ten months ago, I was on Business News Network (BNN) talking about met coal and recommended Cline Mining at just over $1. Those who traded on that advice are now looking at a 300%+ gain, as Cline is currently trading at more than $4, in less than four months. And Casey’s Energy Report recently added a new metallurgical near-term coal producer to its portfolio.

As for thermal coal, prices seem poised to edge up slightly because of the floods but, unlike metallurgical coal, there is plenty of thermal coal to go around. The situation has disrupted just 8% of global thermal supply. So while the floods may be causing a pop in thermal coal equities, the increase is unsustainable. There are thermal coal deposits all over the world, and many countries produce enough to meet most of their energy needs. China’s thermal coal stockpiles remain very healthy, for example, and it is the second-largest importer of thermal coal in the world. The top importer is Japan, but even it only imports some 113 million tonnes annually and relies on coal for less than 30% of its electricity needs.

As such, the pop in thermal coal equities is not going to last. Hence, investors should use the lift as an opportunity to reduce their positions.

The floods are also a reminder of the extremes of Australian weather – a prolonged drought in Queensland ended just two weeks before the torrential rains began. And while the rains pound Queensland and New South Wales, which cover the eastern third of the country, searing temperatures have residents of neighboring South Australia and Victoria on alert for bushfires. That is simply a reminder that Australia’s weather can often impact the country’s all-important met coal mines.

[No one is more knowledgeable in the volatile energy market than Marin Katusa and his team. That’s how subscribers could rake in an exceptional 818% gain on Uranium Energy (UEC) in only 24 months. Subscribe today and get Casey’s Energy Report for 30% off the regular price – plus one year of Casey’s Extraordinary Technology FREE. Find out more here.]





............................................................................

Over in the options trading pit we have just closed 3 more winning trades, so we now have 62 winners out of 64 trades, or a 96.87% success rate.


If you have any questions regarding these trades please address them through their site where they will be handled quickly and I hope efficiently.


sk chart Jan 2011.JPG


The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today, before we decide to cap membership.

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.


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
Jan272011

Marshall Auerback: Decoding Energy Investment

Uran Chart 28 Jan 2011.JPG

Source: Brian Sylvester of The Energy Report  01/27/201
http://www.theenergyreport.com/cs/user/print/na/8433

Pinetree Capital's Marshall Auerback sees a number of supply/demand imbalances in the energy space, particularly in uranium. "We like uranium because it's both a supply and demand story," he says, believing the price could "easily double" over the next few years. But yellowcake won't be alone in its ascent up the energy hierarchy. As developing nations begin to realize a standard of living more akin to the West, opportunities could arise in other areas across the energy spectrum. In this Energy Report exclusive, Marshall decodes the energy enigma, making a strong case for U308, oil and gas E&Ps and even natural gas.

The Energy Report: Shares in Pinetree Capital have had a good run in the last six months, going from about $1 per share in July 2010 to about $3.38 now. What's largely responsible for that remarkable run?

Marshall Auerback: A number of things. I think Pinetree has been an undervalued stock for a long time based on its net asset value. But we had very adverse financial conditions in 2008, particularly adverse for small-cap companies, which comprise most of our portfolio. Even though we started to see an improvement in the credit markets in 2009, they really didn't start to loosen up until last year for the smaller companies. Your risk in holding these small caps is not so much market risk as liquidity risk. A number of these companies had cash on their balance sheets but they were clearly capital-constrained because they were dependent on ongoing capital injections to develop these assets.

In 2010, the capital markets began to re-engage and that made it easier for some of these companies to access funding. In turn, they were able to develop their assets, which helped improve their share prices. But it took a while. The markets were basically trendless until about September of last year, then all of a sudden you have this big move in the commodity space. Clearly, that's Pinetree's sweet spot.

TER: Your stated objective is to "invest ahead of the crowd by anticipating emerging trends and macro changes in consumption and translate that knowledge to successful investments in small- and micro-cap companies." What macro changes are taking place in the energy market, and more specifically in the uranium market?

MA: People have discussed peak oil for a long time. It's been controversial. Some people say you can always find oil at a given price. We don't disagree with that but the main thesis behind peak oil is that mother nature has only given us so much oil. The low-hanging fruit has largely been picked. It's getting increasingly difficult to extract oil from conventional sources. If you look at each successive economic crisis and the price of oil during each one, we have continued to bottom at increasingly higher prices. Even in the worst conditions we had in 2008 and 2009, the oil price bottomed at about $36 a barrel and it didn't stay there for long. It was driven by a collapse in demand.

The other problem in energy, in all commodities really, was a complete collapse in trade financing. So, we had both a financing shock and a demand shock, which caused this collapse in commodities. But as trade financing began to normalize and these emerging economies began to normalize, there was a big increase in demand. Along with that you've got very significant shortages in supply. The BP Plc. (NYSE:BP; LSE:BP) oil-spill disaster that occurred in the Gulf of Mexico is a symptom of the supply problem. We wouldn't be drilling for oil three miles below the surface of the ocean if it were easier to get oil from more conventional sources. To me that's symptomatic of a fact that you have to look for the oil in increasingly expensive places, which means increasingly expensive oil.

TER: How is expensive oil influencing the uranium market?

MA: Clearly, as the oil price has continued to appreciate people have started to look at alternative fuels. For a while the sexy ones were wind and solar, but there's very low power densities in those types of energy generation. Wind is intermittent. Obviously, solar is not a great resource to use in cold-climate countries like Canada or Russia. Natural gas is an important transitional fuel, but there's also uranium.

To me, a seminal moment in the uranium market occurred about five years ago when James Lovelock, a leading environmentalist who used to be the head of Greenpeace, said that uranium has to be a major part of our response to global warming. Before that, uranium was seen as part of the problem, not part of the solution. Clearly, the nuclear waste issue hasn't gone away but we treat the stuff a lot more effectively than we used to. The waste problem relative to the millions of tons of coil that get belched out into the atmosphere is fairly minimal.

I think the reason we like uranium is because it's both a supply and demand story. On the demand side, a number of nuclear reactors are under construction. Haywood Securities Analyst Geordie Mark says there's been a 61% increase in the last couple of years. There's also been a 54% increase in the number of reactors planned and a 45% increase in those proposed. These new plants alone will eat up 32,900 tons of nuclear fuel annually—that's almost half the demand from this year's 443 commercial reactors. We've got a very good story there, and then you have the supply side. The current price is around $68 and that's still too low to support a lot of new investment. You need much higher prices to invest in large-scale, development-stage projects.

As it is now, the uranium industry is having a hard time boosting production. There have been shortfalls from large mines, such as Energy Resources of Australia Ltd.'s (ASX:ERA) Ranger Mine and BHP Billiton Ltd.'s (NYSE:BHP; OTCPK:BHPLF) Olympic Dam Mine in Australia. Of course, Cameco Corp. (TSX:CCO; NYSE:CCJ) had water problems related to reaching production at its proposed Cigar Lake uranium mine. Those are other problems.

TER: Do you think we will see another surge in uranium prices like that in 2005?

MA: Generally, I find that these moves in the commodity cycle take two phases. The first is the "fantasy" phase where you get recognition that a real supply/demand deficiency is developing. A lot of speculative moves are made and the stocks start to go up, but then they crash because it hasn't yet been validated by actions in the real world. But this speculation moved ahead of reality. Typically, what happens is that you get a wash out, and then 18 months to two years later people come back and say, "This thing is for real." We saw that happen in gold. There was a big move in gold in 2003 and 2004, but the gold price didn't move up a huge amount. So, the market went dead for a couple of years. I think uranium would've had some interest in 2009, but obviously everything was superseded by the Lehman Brothers meltdown and the financial crash. So, it's taken a bit longer, but I think the supply/demand outlook I've sketched here is still very much in existence. Now we're starting to see an increasing amount of pricing pressure developing on uranium, which I think will help reignite interest in the sector.

TER: What's your forecast for the price of uranium?

MA: The price could easily double over the next three or four years, and it could even go much higher. A number of these projects in places like Kazakhstan and Namibia don't even begin to make money until the price gets closer to $80 or $90 per pound.

A lot of the demand will be driven by the pace at which these nuclear reactors are built. The problem here is that we've often got political delays. I don't think nuclear construction in the U.S. will come for another four or five years because with natural gas prices being as low as they are there's no urgency to move into nuclear. However, in other countries where natural gas prices are much higher, I think we'll likely see accelerated development. Certainly, in countries like South Africa, we're already seeing brownouts. China is definitely going to move ahead very rapidly, as is India—that's going to be the big source of demand. It's just a matter of how quickly these countries start to build reactors. It may be a case where, occasionally, perception races a bit ahead of reality; but the underlying reality is that uranium has the soundest supply/demand features of almost any commodity out there right now.

TER: As of Sept. 30, 2010, Pinetree had 55 separate investments in uranium plays. That accounted for 18% of your asset mix. With this expected price appreciation, do you want to keep your uranium exposure at around 20% or are you going to increase that?

MA: I think it really depends on the opportunities; we're focused on a number of ventures. Again, you have to weigh the existing investments against the increased political risks as you move into some of these funkier countries in central Asia. You've always got to measure it against that. I think 20% is a fairly substantial bet, and I suspect that's even higher now due to share price appreciation. But if it's become a hot sector, we may start to look in an area that's become less loved.

TER: You mentioned "funkier countries" in central Asia. Do you mean Kazakhstan?

MA: I have a view that it's always tough investing in any country that ends with "stan." Basically, I'm saying you have to be much more aware of that risk. Increasingly, we're seeing examples of resource nationalism. And that's not just in the emerging world, it's in places like Canada. There were very significant resource-nationalism reasons for the Canadian government's disapproval of BHP's acquisition of PotashCorp (NYSE:POT; TSX:POT). I happen to think that was the right decision because I believe it's much more valuable as a standalone asset. Increasing resource nationalism means you've got to be careful. You don't want to develop something, and then find out the local government is taking 50% or more of it. I think that we have to make political risk assessments as part of our investment judgments going forward.

TER: What are some of your biggest success stories when it comes to picking uranium stocks?

MA: Mega Uranium Ltd. (TSX:MGA) is a classic example. It started to appreciate at $0.10 and got to $9 at its peak. That's probably one of the best examples. A couple of other examples would be Rockgate Capital Corp. (TSX:RGT), which has gone from under $1 to $2.70 recently. It's a uranium explorer and developer in West Africa.

Rockgate's main project is the 100%-owned Falea Uranium/Silver deposit located in southwest Mali. It was initially discovered in the late 1970s by Cogema, now AREVA (PAR:CEI). Rockgate has expanded Falea substantially with 45,000 meters of diamond drilling now completed in more than 175 holes. This work identified a new zone of uranium and high-grade silver; and on May 15, 2009, Rockgate released the first independent NI 43-101 resource calculation for the Falea project reporting a total uncapped resource of 20,252,000 pounds of uranium and 31,600,000 ounces of silver.

Another company is U3O8 Corp. (TSX.V:UWE), which has gone from a $0.35 to a $1.03 stock. It acquired some projects in South America Mega Uranium last year. In Colombia, it acquired Berlin Project—a 38 Mlb. historic uranium resource at 0.13% U3O8—a high-value, multi-element opportunity with the presence of uranium, phosphate, vanadium, molybdenum, yttrium, rhenium and silver grades.

In Argentina, U308 Corp. has sizeable land holdings near the country's largest known uranium deposits. The surficial uranium target at the company's Laguna Salada Project there appears amenable to low-cost mining, and it's working to complete an NI 43-101 uranium resource estimate on that project.

Additionally, U308 Corp. holds prospective lands in Guyana—in the Roraima Basin, which is similar to Canada's Athabasca Basin in size, composition and basement characteristics. Its Kurupung Batholith Project has an NI 43-101 resource of 5.8 Mlb. at an average grade of 0.10% U3O8 (Indicated) and 1.3 Mlb. at an average grade of 0.09% U3O8 (Inferred). A pipeline of uranium-bearing structures will help grow the current resource at Kurupung, which is geologically similar to sizeable albitite-hosted deposits around the world.

Khan Resources Inc. (TSX:KRI) and Summit Resources Ltd. (ASX:SMM) would represent a few of our other big successes.

TER: What are some other promising uranium juniors Pinetree has in its stable?

MA: We like Mawson Resources Ltd. (TSX:MAW; OTCPK:MWSNF; Fkft:MRY), which has metal and energy interests in Finland, Peru and Sweden. The stock recently went from $0.75 to $1.99. And not long ago, the company increased its landholding at the Rompas Gold Uranium Project in Finland by 40%. Mawson has a strong cash position and a very prospective deposit. Highlights from recent channel samples included 0.95m at 1,424 g/t Au and 1.3% U308 and 2.05m at 191.3 g/t Au and 0.44% U308.

We also like Energy Fuels, Inc. (TSX:EFR), which is consolidating uranium mining in western Colorado's Uravan Mineral Belt and eastern Utah, U.S.

TER: Let's move on to oil. Global oil consumption has rebounded from the early 2009 lows and now exceeds pre-financial crisis levels. The usage gap between developed markets and their emerging-market counterparts has shrunk from 12 million barrels per day (Mbpd) three years ago to just 4 Mbpd. The International Energy Agency (IEA) forecasts global energy demand will rise to 82.2 Mbpd in 2011 up from 86.9 Mbpd this year—that's almost 500 billion barrels annually. Where's that oil going to come from?

MA: It's a good question. Ultimately, I think that's what keeps the bid on the price. You have these situations wherein you've got massive increases in demand and you just don't have the available supply, so you're going to see much higher prices. Milton Friedman once said the best cure for higher prices is higher prices because that's how you solve the problem. I think we'll see increasing price pressures. The possibility of a conflict developing or resource wars is rising. I think countries that are in the sweet spot are countries like Canada, which has very substantial energy reserves.

TER: Since it peaked in the 1970s, conventional oil production in Canada and the United States has been declining. Recently, the application of horizontal drilling and hydraulic fracturing to tight oil basins—or, as one oil pundit put it, "a replay of the shale gas movie with different actors"—is bringing a growing amount of light oil to market. Perhaps the best example is the North Dakota Bakken where oil production went from virtually zero a few years ago to about 250,000 bpd now. Are these new dense rock plays putting an end to the notion of peak oil, or is it too soon to declare that?

MA: It's too soon to declare that. First of all, two things are going on there. We need these kinds of projects just to sustain the levels of demand going forward, but I don't think they are a panacea to the problem of peak oil. It's more accurate to look at them as the response to substantially higher oil prices from conventional sources. And some of the supply gains from the non-conventional sources are temporary. In the case of these Barnett shale-type developments, for example, you get very significant early production gains but the asset gets exhausted much more rapidly because the technology accelerates depletion rates. Working these tight basins may provide a short-term fix but it doesn't actually solve the problem of peak oil. In fact, I would say it validates the whole thesis. If there was an easier way to find oil, no one would have considered it worthwhile to look at these areas.

TER: What are some of your noteworthy oil holdings?

MA: Brownstone Energy Inc.'s (TSX.V:BWN) stock has gone from a low of $0.27 to a high of $1.16; it's currently trading around $0.75. The company's main focus remains on its Colombian and offshore Israel projects.

In Colombia, the Canaguay # 1 well on the Canaguaro Block in the Llanos Basin produced oil at rates in excess of 3,900 bpd. BWN has 25% working interest and long-term production tests are expected to take place in February.

The offshore Israel project is a joint venture with Adira Energy Ltd. (TSX.V:ADL; OTCBB:ADENF). The Noble Energy, Inc. (NYSE:NBL)/Delek Drilling LP (TASX:DEDR.L) Tamar discoveries are within 60 km. of Brownstone's Gabriella and Yitzhak Blocks. Completion of Adira's 3D high-resolution seismic programs are expected in January 2011; so far, the results look very promising.

Donnybrook Energy Inc. (TSX:DEI) is an emerging Canadian oil and natural gas explorer and producer we like. It's focused on Montney, Bluesky Wilrich and Fahler formations in the Deep Basin, West Central Alberta. The company now owns working interests in 46 gross sections (30 net sections) of Montney petroleum and natural gas rights in its core area of the Alberta Deep Basin.

Primary Petroleum (TSX.V:PIE) has focused a majority of its resources in the acquisition of prospective oil and gas acreage in Montana. It is engaged in exploration and development activities in Montana and Alberta and owns a significant land position in the Alberta Basin Bakken Fairway in Western Montana and in the NW area of the Williston Basin in Eastern Montana. The company holds 100% interest in all of its landholdings in Montana and has been increasing those landholdings.

Centric Energy Corp. (TSX.V:CTE) is another one we like. It is an oil and gas explorer with interests in Kenya and Mali, with a particularly promising land position in Kenya. The Kenyan government recently approved the Block 10BA farmout to Tullow Oil plc (LSE:TLW). The Block is in the northwestern part of Kenya, located in the eastern part of the Tertiary-age East African Rift system and is considered analogous to the Albertine rift in Uganda, where an estimated 1 billion barrels of reserves have been proved to date and contains another 1.5 billion barrels of prospective resources. The Lake Albert Blocks are operated by Tullow Oil, and 35 out of 36 of the exploration wells drilled have been successful.

TER: Most people are staying away from gas plays right now. Are you saying that Pinetree is heading in that direction?

MA: There's a very strong secular case to be made for natural gas in the sense that it's a "green" fuel and will be instrumental in helping governments achieve their objectives to reduce carbon emissions. That said, a lot of the so-called gas plays are actually existing byproducts of oil extraction, so there is less price sensitivity to natural gas prices per se. And the new technologies in place have substantially increased extraction techniques, whilst reducing cost. So our focus can't be on companies on the basis of higher prices, but rather on good, low-cost producers with ample reserves. Those companies can make money at these depressed prices, which are likely to stay low for the foreseeable future.

TER: Do you have some closing remarks on the energy sector on a macro level?

MA: I think what Pinetree Chairman and CEO Sheldon Inwentash says is correct. At the end of the day, you're dealing with a structural phenomenon where you've got 2.5 billion people in India and China and other emerging areas of the world who are rapidly trying to get wealthy like we did using the same sort of growth model. But because these people are at an earlier stage of economic development, the intensity of their commodity usage is much higher. With that in mind, we tend to believe that there's a structural bull market in any number of commodity classes. Pinetree has effectively constructed a business plan on that thesis. Now, are we likely to see significant corrections in the future? Of course. These things don't go up in a straight line. You could have vicious 30%–40% falls. We have to learn to live with that volatility. We employ responsible risk-management techniques and do a lot of due diligence and technical work to get the high-quality assets and get them early.

TER: Thank you for talking with us today, Marshall.

As Pinetree Capital's corporate spokesperson, Marshall Auerback is a member of Pinetree's board of directors and has some 28 years of global experience in financial markets worldwide. He plays a key role in the formulation and articulation of Pinetree's investment strategy. Currently, Marshall is a senior fellow at the Roosevelt Institute, a research associate for the Levy Institute and a fellow for the Economists for Peace and Security. He previously served as an advisor to a number of fund-management organizations, such as PIMCO, the world's largest bond fund management group, RAB Capital and David W. Tice & Associates. He graduated magna cum laude from Queen's University in 1981 and received a law degree from Corpus Christi College at Oxford University in 1983.

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 shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Mega Uranium, Mawson Resources, Energy Fuels and Primary Petroleum.
3) Marshall Auerback: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. See Pinetree Capital's disclosure policy.
Streetwise - The Energy Report is Copyright © 2011 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.
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Email: jmallin@streetwisereports.com

..............................................................................

Over in the options trading pit we have just closed 3 more winning trades, so we now have 62 winners out of 64 trades, or a 96.87% success rate.


If you have any questions regarding these trades please address them through their site where they will be handled quickly and I hope efficiently.


sk chart Jan 2011.JPG


The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today, before we decide to cap membership.

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.


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
Jan262011

Why Europe Should Pay Attention to Algeria

Algeria Flag 27 Jan 2011


By Marin Katusa, Chief Energy Strategist, Casey Research

Tunisia’s uprising has democracy watchers wondering if the instability will spill over into neighboring North African countries, but really that instability is already there. In the first week of the year, Algeria experienced violent protests after the government hiked prices for staple foods like milk, sugar, oil, and flour. Some 800 people were injured in several days of rioting, prompting President Abdelaziz Bouteflika to cut costs on some foods and lower import duties on others. The rioters went home, but odds are they will return to the streets when prices rise again.

Those rioters are not just angry about high food prices. Unemployment in Algeria is officially at 11%, but estimates from outside of the government run much higher, along the lines of 25%. Inflation keeps creeping up, and the country’s impoverished population, who has very little freedom, has grown distrustful of the government. A massive boycott rendered the results of the last presidential election, where Bouteflika won with 92% of the vote, almost meaningless.

But Algeria is not poor – an OPEC member, it is the ninth largest crude oil producer in the world. More importantly for this conversation, Algeria is the world’s sixth largest natural gas producer, pumping out just over 3 trillion cubic feet (Tcf) of natural gas in 2008. At the beginning of 2010, the country’s proven natural gas reserves stood at 159 Tcf, the tenth largest in the world, and notably, Algeria exports some 3.6 billion cubic feet (Bcf) of natural gas each day to Europe.

On top of the natural gas flowing to Europe through pipes, Algeria has become a key supplier of liquefied natural gas, or LNG. In 2008, Algeria exported 711 Bcf of LNG, and 90% of it went to Europe.

Europe is growing increasingly reliant on LNG – for two reasons. First, Europe does not like relying on Russia for natural gas because that gas has to come through Ukrainian pipelines. Three times in the last five years, there have been major supply disruptions due to allegations that the Ukrainians were siphoning off gas. The most serious disruption came in January 2009, when 18 European countries reported major drops or complete gas cut-offs.

Second, Europe’s energy needs continue to rise, but many European governments have committed to reducing greenhouse gas emissions. Since natural gas is low-carbon and clean-burning, it has become a key part of Europe’s future energy strategy.

The EU has a “four corridors” plan for its natural gas needs: it will draw from Norway, a reliable supplier; Russia, through those Ukrainian pipelines; North Africa, primarily Algeria; and Central Asia and the Middle East, through Turkey. It would be a great plan, if only it were closer to reality. The Turkish route relies on the long-planned Nabucco pipeline, which is making very slow progress towards construction. And Norway’s reserves are dwindling. Up steps Algeria in importance.

Algeria already supplies 20% of Europe’s natural gas and more than 30% of the EU’s LNG imports. And in November, European LNG import volumes set a new record high – Europe imported a staggering 302 Bcf of LNG, shattering the old record (set only in September) by 52 Bcf. The United Kingdom, facing its coldest winter in years, alone accounted for 73 Bcf. Whether the average Brit, Spaniard, or Italian realizes it, they rely on Algeria.

And along with high unemployment, high food prices, and little freedom, Algeria’s citizens are justifiably angry that their country’s resource wealth is not making things better for the average person. If Algeria’s rioters return, spurred on by their Tunisian neighbors or by their own government’s inadequacy, and overthrow Mr. Bouteflika in favor of an anti-European government, gas prices could take a serious jump. And LNG is transported by ships, not pipelines, so if Europe is not willing to pay those higher prices, the ships will simply sail to other countries that will.

This is no certain thing – no one knows if Algeria will follow in Tunisia’s footsteps, especially if the current confusion in Tunisia evolves into prolonged chaos. And Algerians know how important oil and gas revenues are for their country – even during Algeria’s bloody civil war in the 1990s, during which some 160,000 people died, oil and gas exports were not affected.

[Marin Katusa, our chief energy strategist, and his team make sure to keep a close eye on the global energy markets. Thanks to this vigilance, they continuously find new, overlooked opportunities… like unconventional oil and gas exploration in the Middle East, or a little-known “green” energy that is poised to strike it rich. Subscribe today and get Casey’s Energy Report for $300 less – plus one full year of Casey’s International Speculator FREE. More here.]


...............................................................................

Over in the options trading pit we have just closed 3 more winning trades, so we now have 62 winners out of 64 trades, or a 96.87% success rate.


If you have any questions regarding these trades please address them through their site where they will be handled quickly and I hope efficiently.


sk chart Jan 2011.JPG


The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today, before we decide to cap membership.

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.


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
Jan252011

This Time, Uranium Demand Is for Real

Source: George Mack of The Energy Report  01/25/2011
http://www.theenergyreport.com/cs/user/print/na/8405

Mining Analyst David Talbot of Toronto, Ontario-based Dundee Securities, sees demand for uranium rising far into the future. He points to the extraordinary buildout of infrastructure in India, Russia and especially China, where the number of reactors currently under construction could triple the number already in use, and where growth could increase 14- to 15-fold a decade from now. Dave shares his extensive knowledge and field experience with The Energy Report and leaves readers with a few interesting ideas that present tremendous potential for growth.

The Energy Report: Your list of buy ratings wouldn't be this broad if you weren't still bullish on the spot price of uranium. Are you bullish? If so, what factors are causing you to be?

David Talbot: Yes, I am bullish on the spot price of uranium. I think it's all about demand this time. I believe that in the past, investors were essentially focused on supply disruptions as the driver for uranium prices. This time around, I think the demand fundamentals are strong and people are paying attention to that. If you take a look at the trendlines of the number of reactors that are in operation and that are being planned, built and proposed, this continues to rise month after month without exception. If you look at China, India and Russia alone, these three countries account for about 50% of the reactor build. China currently has 13 reactors in operation, which is about 2% of their electrical production capacity. But it has 27 reactors that are under construction, 50 in the planning stages, and it has plans to grow that number to about 188 reactors by 2020, which would represent about 7% of its electrical production capacity. This could essentially increase the country's uranium use from its current annual 8 million pounds (Mlb.) to about 45–50 Mlb., which is roughly equal to what the U.S. uses today.

But the story doesn't really stop there. Russia's goal appears to be nuclear power domination, and the country is essentially signing high-level trade agreements with foreign governments. Russia also went after Uranium One Inc. (TSX:UUU). Also, countries like Japan and Korea are building out their nuclear power efforts. So, we believe this access to supply is going to become a real concern for many and that uranium prices are likely to continue to rise. I'm assuming $65/lb. U308 price for 2011, $70/lb. next year, $75/lb. for 2013, $67/lb. in 2014 and $65/lb. thereafter.

TER: Uranium bounced along a $40/lb. baseline for a long time, and during this last six months we've seen an amazing increase in price. Have you seen such a spike before?

DT: I would have to say that the increase in 2006–2007 was probably a larger spike. At that time, the uranium price essentially jumped from $40 to $136 within a year's time. Then, everybody was looking at the spot price. Well, in 2007 spot trading was only about 20 Mlb., or only 8% of the total volume of uranium trades. This time around I think it's a little different. The spot market is much, much bigger—about 50 million pounds, which represents about one-third of the entire market.

TER: Do you believe this is a more sustainable rise than we've seen in the past?

DT: Absolutely. I think it's more sustainable. Last time around, a lot of that speculation also hinged on some of the supply side disruptions—namely Cigar Lake and Ranger. So, this time, not only is there a larger, more robust spot market, it's really the demand that's driving price increases—not supply disruptions.

TER: How does the economy affect the uranium industry? We're in recovery now, but what would happen if we had a double dip?

DT: First of all, the nuclear renaissance really didn't take a break during the credit crisis of 2008 or the economic weakness since. As mentioned before, the trendline showing the number of reactors in operation, and being built, planned and proposed continues to rise month after month without exception. Utilities are notorious for their long-term outlook and, ultimately, another recession probably wouldn't impede their outlook or their uranium requirements.

TER: Do you believe some companies in your coverage universe are more sensitive to economic conditions? And what would those be?

DT: Yes, with an expanding economy I think generalist demand for equities would likely pick up. They often look for new areas to invest their money. We saw this inflow of new money move into the sector quite significantly last November after 52 million pounds worth of the China-AREVA (PAR:CEI) long-term contracts were announced. Generalist investors often manage larger funds and have greater volumes of cash to place; out of necessity, they're drawn to the large-cap, more liquid names like Uranium Participation Corp. (TSX:U), Cameco Corp. (TSX:CCO; NYSE:CCJ), Paladin Energy Ltd. (TSX:PDN; ASX:PDN) or Uranium One. So, I would say the large-cap stories would be the first ones that would benefit. But typically we all see that trickle-down effect—the smaller stocks, the developers, the explorers also tend to benefit.

TER: What if we were in an economic decline? What companies might suffer from that?

DT: In a declining market, I think the smaller, illiquid names would tend to decline a little more. A lot of those companies are dependent on equity financings to sustain their exploration programs or development programs.

TER: Please compare investment opportunities within the developers versus the explorers.

DT: Developers typically have a certain level of drilling, probably a resource and perhaps at least a scoping-study level report on the project. There may be some visibility as far as the ultimate size of the project the company might be working with, and quite often management teams are bolstered with experience and depth. This provides a certain level of comfort for investors, and they may be willing to give up some stock performance for a lower level of risk or assurance of future cash flow, you know, the necessity that a mine will be built. But with the exploration stocks, some of these variables aren't so clear.

TER: Why don't you put target prices on exploration stocks?

DT: I think what it comes down to is that you don't actually have a resource estimate. You definitely don't have a scoping-study level report on the project and, ultimately, you don't know how big that project is going to be. So, for instance, if you were to value one of those early stage projects by throwing an arbitrary target price on it, it may not do justice to the company. I think you really need to wait until you get a bit more information and data before you can start actually running a proper discounted cash flow (DCF) model or even a simple pounds-in-the-ground model.

TER: China has announced that it has the capability to reprocess spent fuel. How does this bode for uranium demand and price?

DT: We believe this news should have no effect on the current supply/demand situation. I don't necessarily subscribe to this recent hype in the media but if this technology is real, its implementation is unlikely for another 10–15 years or more. Fast breeder reactors have been on the drawing board for years, but they're probably not going to be implemented on a commercial scale until perhaps the 2020s or 2030s. Furthermore, fuel reprocessing is not really a new technology. It's currently being used, mainly in Japan, the UK, France and Russia. The resulting mixed oxide (MOX) fuels, which essentially are blends of natural and reprocessed uranium that contain more than one type of oxide of fissile material, account for about 3% of world nuclear supply right now. So, China's announcements that it has the potential to stretch this uranium by 60-fold are not necessarily believable.

TER: You had some companies that you wanted to talk about?

DT: There are three stocks at the top of the list—Rockgate Capital Corp. (TSX:RGT), Hathor Exploration Ltd. (TSX.V:HAT) and UEX Corp. (TSX:UEX). First of all, Rockgate Capital is one of the darlings of the sector, but we are restricted on the stock at this time. Its main project is the Falea project in (Republic of) Mali in western Africa. It now hosts 27.8 Mlb. of U308 and 40.6 million ounces (Moz.) silver following its recent resource estimate update. The uranium-silver combination isn't that common today, but it has the potential to improve economics of the potential operation here. We saw a large improvement in the average grades of both uranium and silver, and we're looking forward to seeing a scoping study later this quarter.

TER: By the way, congratulations on that. It was $0.72 when you initiated; that's more than a 200% return.

DT: Thank you.

TER: Is there another that you want to mention?

DT: We've got a buy on Hathor Exploration with a $4.50 target price. Its project lies about 4 km. from AREVA's and Denison Mines Corp. (TSX:DML; NYSE.A:DNN) 50 Mlb. Midwest Project in the Athabasca Basin of Saskatchewan. We're really impressed with what this team accomplished last year. Exploration is showing a very robust mineralized system, and the company's been able to increase the Roughrider resource to about 28 Mlb. with a U308 grade of 2.88%. But it's also expanded the high-grade zone by almost 24 Mlb., grading 11.7% in the core of the deposit. Now, as good as this sounds, we think the best might be yet to come. To the east, the company's discovered another deposit it's calling Roughrider East.

TER: Has winter drilling begun?

DT: It has just begun. I know Hathor has also started drilling the Henday Project about 10 km. to the north. One issue with the Roughrider project is that it is under water, so the company has to build up the ice sufficiently in order to start putting the rigs out on the ice. That ice-building process was just completed and it's something that would've started in December or late November.

TER: You've got a very healthy implied return of more than 90% on this stock. When Hathor gets the first read on this property between Roughrider and Roughrider East, will that be the catalyst?

DT: Absolutely. I think Roughrider East is going to be the real driving force here. If you do a back-of-the-envelope calculation on Roughrider East and add it to the Roughrider project, you can almost envision 50 Mlb. or more from that project alone.

TER: Another company?

DT: Yes: UEX Corporation. This is a stock that's been resurrected over the last six months. We've got a buy and a $2.80 target price on it. The company has two main projects in, again, the prolific Athabasca Basin. It's got a 49% interest in the world-class Shea Creek Deposit to the west. It also has 100% interest in the Hidden Bay Project to the east. Shea Creek is a joint venture (JV) with AREVA and already hosts 88 Mlb. With subsequent drilling, we wouldn't be surprised if it's already surpassed the century mark. There are pockets of mineralization that host about 20% U308, particularly at the unconformity.

TER: Is Shea Creek the catalyst for UEX now?

DT: You know, as much as that is a world-class project, it is deep and it's going to be relatively expensive to explore and develop. I think it's going to take quite a long time; so, the catalyst in the near term will be Shea Creek drill results because this stock tends to trade or perform on exploration results. But from the corporate standpoint, the catalyst is going to be what happens in the east end. Is Hidden Bay going to be acquired, or will the company be acquired for its Hidden Bay asset, which lies on Cameco's doorstep?

TER: You've got a 50% upside potential from here if it meets your target price. That would be a very nice pop. It's up 71-1/2% over the past 52 weeks. Were there any other companies that you wanted to discuss?

DT: Sure. There are a few stories out there that I'm talking with my clients about quite a bit. Ur-Energy Inc. (NYSE.A:URG; TSX:URE) is one of those. We've got a buy on the stock and a $3.25 target price. This company has two fairly large in-situ recovery (ISR)-amenable projects in Lost Creek and Lost Soldier in Wyoming. What it's proposing is an ISR plant capable of processing about 2 Mlb. of uranium production per year. Capital and operating costs are expected to be low. The management and technical teams are quite experienced and company staff has extensive depth in ISR operating experience.

TER: So, do you think Ur-Energy might have all of its permits before midyear?

DT: We can only hope. I don't like forecasting when governments are going to act. The company still needs its final Wyoming Department of Environmental Quality (WDEQ) license from the state, but it currently has a draft license from WDEQ.

TER: What has driven Ur-Energy stock up 228% over the past 52 weeks and 150% in the past three months?

DT: First of all, strong performance in the sector. I think there's near-term production potential and the receipt of the draft NRC license was important, as well. I really think this being a U.S.-listed stock and a U.S.-based stock also has helped with strong U.S. retail interest. But it's not the only company benefiting from some of those issues. Uranerz Energy Corporation (TSX:URZ; NYSE.A:URZ) has done exactly the same thing, and we've got a buy and a $4.25 target price on it. Hopefully, this company's permitting process is coming to a close as well. It plans to build an ISR plant in Wyoming and ramp up to about 1.6 Mlb. uranium starting in early 2012. Again, capital and operating costs are expected to be low. Uranerz is very successful at exploration.

TER: Uranerz has $36 million in cash now. It's just completed financing. Is it set?

DT: I think it's set for now. With that said, this is a company that continues to explore. Ur-Energy has two big 43-101-complaint resource deposits, but Uranerz is a little more hand-to-mouth when it comes to its resource build.

TER: Uranerz has performed nearly as well as Ur-Energy. What will be the next catalyst to move Uranerz?

DT: Again, we are waiting for the final NRC license to permit here. So, that's going to be the big one. Once the company gets that, they should be off to the races.

TER: Do you have another company you'd like to mention?

DT: I just want to make sure I put my two cents in on Fission Energy Corp. (TSX.V:FIS). We've got a buy rating with a venture risk on it, and no target price.

TER: Fission is up an amazing 343% over the past year, and you still have a buy rating on it?

DT: About a year ago, Fission discovered a deposit just west of Hathor's Roughrider deposit on its Waterbury Lake JV with Korea Electric Power Corporation (KEPCO) (NYSE:KEP), which is a Korean nuclear utility that's in bed with the junior exploration company. Drilling is in the early stages, but the second-best hole to date is 15-1/2% U308 over 5.5 meters. So far, the zone measures roughly 120 meters long by 50 meters wide and we think it's likely to grow further.

TER: Do you have another company?

DT: Maybe one final one. CanAlaska Uranium Ltd. (TSX.V:CVV; Fkft:DH7; OTCBB:CVVUF) is a watch list stock at Dundee. This is another one of those small grassroots explorations plays in the Athabasca Basin, perhaps looking to become the next Fission. What we're really looking for here is the next discovery.

TER: The company has a market cap of $26 million. I'm wondering if that may have scared some investors away.

DT: Certainly. It's one of those risk/reward issues. Big funds typically cannot play in some of these smaller stocks because when they try to buy, the stock price takes off, or they're just not liquid enough to get out. Liquidity has been a chief concern since the credit crunch of 2008. But there are people out there who like this early stage project.

TER: I've enjoyed talking with you today, Dave. Thank you very much for your time.

DT: Those were great questions. Thank you very much.

Dundee Securities Senior Mining Analyst David Talbot worked for nine years as a geologist in the gold exploration industry in Northern Ontario. His field experience included three years with Placer Dome and six years managing projects for Franco-Nevada Corp. and its successor, Newmont Capital. David joined Dundee's research department in May 2003 and in the summer of 2007, he took over the role of analyzing the fast-growing uranium sector. David is a member of the Prospectors and Developers Association of Canada, the Society of Economic Geologists and graduated with distinction from the University of Western Ontario, with an Honours B.Sc. degree in geology.

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) George Mack of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Ur-Energy, Uranerz, Fission and CanAlaska.
3) David Talbot: I personally and/or my family own shares of the following companies mentioned in this interview: CanAlaska Uranium Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: None.
4) David Talbot beneficially owns, has a financial interest in, or exercises investment discretion or control over the following companies mentioned in this interview: CanAlaska Uranium Ltd. David Talbot has visited certain material operations of the following issuer(s): Uranium One Inc., Rockgate Capital Corp., Paladin Energy Ltd., Hathor Exploration Ltd., UEX Corp., Ur-Energy Inc., Uranerz Energy Corp. and Fission Energy Corp. David Talbot and/or Dundee Securities Corporation has been partially reimbursed for expenses by the following issuer(s) for travel to material operations of the issuer(s): Uranium One Inc., Rockgate Capital Corp., Paladin Energy Ltd., Hathor Exploration Ltd., UEX Corp., Ur-Energy Inc., Uranerz Energy Corp. and Fission Energy Corp. Dundee Securities Corporation has provided investment banking services to Rockgate Capital Corp., Hathor Exploration Ltd., UEX Corp. and Fission Energy Corp. in the past 12 months. Dundee Securities Corporation and/or its affiliates, in the aggregate, own and/or exercise control and direction over greater than 10% of a class of equity securities issued by Rockgate Capital Corp. Dundee Securities Corporation and its affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by CanAlaska Uranium Ltd. Garth MacRae, a director of DundeeWealth Inc. and Dundee Corp. and member of the Board of Governors of Goodman & Company, Investment Counsel Ltd., is a director of Uranium Participation Corp.
Streetwise - The Energy Report is Copyright © 2011 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.
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...............................................................................

Over in the options trading pit we have just closed 3 more winning trades, so we now have 62 winners out of 64 trades, or a 96.87% success rate.


If you have any questions regarding these trades please address them through their site where they will be handled quickly and I hope efficiently.


sk chart Jan 2011.JPG


The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today, before we decide to cap membership.

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.


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.

Sunday
Jan232011

Fission Energy Corporation Up 19.28% on Friday

FIS Chart 24 January 2011.JPG



As we can see from the above chart Fission Energy Corp (TSX-FIS.V) has been making steady progress over last six months or so with the stock price doubling to close at $0.99 on Friday. The RSI is reflecting this jump in the stock price but the MACD and STO are rising from low levels so we could see some more progress from this point.

Fission Energy is a Canadian based uranium exploration company that has made an exciting new high grade uranium discovery at its Waterbury Lake Property in the eastern portion of Saskatchewan's Athabasca Basin: Home of the richest uranium deposits in the world. Additional exploration properties are held in the Athabasca Basin, Quebec and Peru. The company has just announced a non-brokered private placement financing of up to CDN$5 Million in Units at a price of CDN$.80 per Unit. Each Unit will consist of one common share plus one-half of one common share purchase warrant, with each whole purchase warrant exercisable to purchase a common share at a price of CDN$1.00. These funds will be utilized to drill and develop the Waterbury Lake Uranium Project, a 50%-50% Limited Partnership with the KEPCO Consortium.

So they do appear to be fairly active at the moment in terms of getting things done, could be worth adding to your watch list to see how they go.

FIS Map 24 Jan 2011.JPG

Fission Energy Corporation has a market capitalization of $69.73 million, a 52 week low of $0.17 and a high of $1.20 with 70.43 million shares outstanding.
................................................................................

Over in the options trading pit we have just closed 3 more winning trades, so we now have 62 winners out of 64 trades, or a 96.87% success rate.


If you have any questions regarding these trades please address them through their site where they will be handled quickly and I hope efficiently.


sk chart Jan 2011.JPG


The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today, before we decide to cap membership.

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.


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.

Sunday
Jan232011

As Gold Falters, SK OptionTrader Banks Profits of 13%, 17% and 13%

Despite gold and silver undergoing a sizeable sell off in that past few weeks, our premium options trading service SK OptionTrader has just closed three trades and banked profits of 13%, 17% and 13% on each.

This brings our total number of closed trades to 64, with 62 of those being closed at a profit. Our average return per trade including losses is 42.40%, with our model portfolio being up 135.97% since inception, or an annualised return of 86.45% assuming profits are not reinvested.

SK OptionTrader Acc Profits 220111

With the reinvestment of profits $10,000 invested in accordance with SK OptionTrader signals and our model portfolio would now be worth $31,604.82.

On December 7th 2010 we sold out of all our GLD call option positions.

By mid December 2010, having taken huge profits on call options during the prior few months, (You can see some updates here: SK OptionTrader closes 5 trades for average profit of 94%, Yet More Profits Banked For SK OptionTrader and How have SK OptionTrade Recommendations faired after our Sell Signals) we decided that gold gains would be limited over the Christmas and New Year holiday period.

On the 12th December 2010 we wrote to our subscribers saying:

“... we are wary that we are entering the holiday season soon and trading will likely be thin, with big players not returning to the market until January. A large component of options trading is not only getting the direction of the underlying correct, but also the correctly timing when the move will happen. This is due to the decay of the time premium (Theta) that one is exposed to when purchasing an option... We are however in favor of taking out some bullish credit spread positions, where we would be short Theta, and holding them for a month or so. This allows us to benefit from an upwards or sideways move in gold over the coming weeks, with our position hopefully gaining value each day as the time premium decays, since we are of course short Theta. We are looking at taking these bullish credit spread positions in GLD January-2011 puts with strikes in the $129-$126...”


We then signalled for our subscribers to take a bullish vertical credit spread position on the 13th December, and to take two more on the 16th December. The following summaries how these trades played out:

Bullish Credit Spread - 13th December 2010
Sold GLD Jan 22 '11 $128 Puts for $0.68 and Bought GLD Jan 22 '11 $127 Puts at $0.55.
Both expired worthless on 22nd January 2011
13% Profit in 40 days

Bullish Credit Spread - 16th December 2010
Sold GLD Jan 22 '11 $128 Put @ $0.92 and Bought GLD Jan 22 '11 $127 Put @ $0.75.
Both expired worthless on 22nd January 2011
17% Profit in 37 days

Bullish Credit Spread - 16th December 2010
Sold GLD Jan 22 '11 $127 Put @ $0.73 and Bought GLD Jan 22 '11 $126 Put @ $0.60.
Both expired worthless on 22nd January 2011
13% Profit in 37 days

Essentially what these trades boiled down to is receiving a modest premium if GLD was above $128 on January 22nd, equivalent to a gold price of roughly $1315.

Since we were correct in our prediction, we gained $0.13, $0.17 and $0.13 for every dollar risked in each of the trades, profits of 13%, 17% and 13%.

If our view was incorrect, our losses were limited at $1.00 for every $1.00 risked in the trade, i.e. our losses were limited. So if GLD had been at $125 upon expiration we would have lost our $1.00, but if it was a $100 or $75 then we would have still only lost $1.00.

The reason we liked this type of trade at the time was that we had the view that gold was either going to go sideways, upwards or slightly down, but it would not fall dramatically. Usually such an ambiguous and unsure view cannot be profitable in trading stocks or futures, however with options trades they can be structured to reward the investor for such a view, as they rewarded us and our subscribers who decided to put on similar trades.

Options are one of the few instruments that can be used when one has a non-directional view. Whilst we would all love to be able to pick which way gold or another asset is going to go, the reality is that often we may not have a strong view, if any at all.

If you would like to add this type of versatility to your trading then we recommend that you consider options trading. There are many misconceptions that all options trading involves unlimited risk, but in fact although some positions do expose the holder to unlimited risks, if trades are structured in the right way one can limit the risk in any trade.

At SK OptionTrader we only recommend limited risk strategies, always telling our subscribers the maximum downside in a worst case scenario.

If this sounds like something you are interest in then feel free to check out our full trading record or contact us if you have any questions.

Alternatively you can subscribe below, for just $199 per 6 months or $349 for a year.

Subscribe for 6 months - $499

 

Subscribe for 12 months - $799

 

Tuesday
Jan182011

John Edwards: Looking at MLPs for the Long Term

Source: Brian Sylvester of The Energy Report  01/18/2011
http://www.theenergyreport.com/cs/user/print/na/8350

Master Limited Partnerships (MLPs) have lagged behind the broader market so far this year and their performance could be tempered until the second half, according to John Edwards, a senior MLP analyst with Morgan Keegan. In this exclusive interview with The Energy Report, Edwards explains why yield spreads aren't driving his conservative forecast.

The Energy Report: In 2010, the Alerian MLP Index (NYSE:AMZ) was up almost 36% and the equal-weighted Cushing MLP Premier Fund (NYSE:CSHAX, CSHCX, CSHZX) was up almost 42%. However, your outlook for 2011 is forecasting returns in the 10% range. What's underpinning your conservative forecast?

John Edwards: A couple of things. Primarily, one of the things we look at is what the yield spreads are on master limited partnerships relative to the 10-year U.S. Treasury. In the past, we've found that is a pretty good predictor of what's likely to happen in the next 12 months. Given the 10-year U.S. Treasury, where the MLP sector is trading at and our outlook for distribution growth, we're targeting a sector yield in the range of 6% to 6.75%, with our bias toward lower end of that yield range. We have a wider yield range than we would have normally because of the macro risks we're facing in the world, particularly sovereign credits, so we're trying to be a little bit more conservative with our expectations going forward.

TER: The yield spreads between MLPs and the 10-year U.S. Treasury is at 290 basis points right now, or 2.9%. That's well below the five-year average of 355 basis points. Why is the gap narrowing? Is that something MLP investors should fear or just keep an eye on?

JE: Yields on MLPs have come down quite sharply during the past two years. Recently, the yield on the 10-year U.S. Treasury has actually come up a little bit. It's not really something we're overly worried about because the yield spread between the MLP sector and the 10-year U.S. Treasury is most commonly between 200 and 249 basis points. It actually occurred more than 700 times when we looked at roughly 3,000 data points over a 14-year history.

We forecast that returns over the next 12 months will be about 10% at that spread. In fact, if we look at the spreads that account for roughly 75% of all the data points, that would be between 150 and 350 basis points. Returns in the following 12 months when we're in those ranges are between 10% and 13.5%. The spreads are nothing to be concerned about. We're well within the most commonly occurring spreads historically.

There is also plenty of "buffer," if you will. If yield spreads dropped below 150 basis points, for example, that's something we would need to keep an eye on. Obviously, we have quite a large buffer at this point. We think our return expectations are reasonable in light of that.

TER: MLPs have lagged behind the broader market since December. You attribute that to investors developing a greater appetite for risk. A competitor recently downgraded Magellan Midstream Partners, L.P. (NYSE:MMP) and Regency Energy Partners, L.P. (NASDAQ:RGNC) because MLPs are lagging the broader market. How long should we expect that trend to last?

JE: We did see that a competitor downgraded some of the names that they cover. But the whole thesis behind MLPs is that they are a defensively oriented sector. They are designed to provide investors with predictable returns over the long term. They're an income-oriented instrument. They're tied to assets that are typically contracted for the long term. They provide lots of stability and predictability and have some growth characteristics.

With that backdrop, you would expect MLPs to generally outperform in bear markets and to lag in bull markets. Remember, in bull markets there tends to be rising incomes, rising appetite for risk and rising confidence in economic performance. MLPs are the type of asset that is designed to provide a certain predictable type of income whether the economy is in an expansion mode or in a contraction mode.

MLPs have been lagging the broader market slightly during the past two quarters. The equal-weighted Cushing MLP Index was slightly beat by the broader market in the third quarter and also slightly lagged in the fourth quarter. On the macro front, the Federal Reserve has stepped up their commitment to the economy through an additional round of quantitative easing. Pretty much the whole market was down through the first half. The performance that the broader market was able to achieve for the full year occurred in the second half and most of that occurred in the last month in the year.

Quite frankly, we think equity investors are riding the tailwinds of quantitative easing and their comfort level has increased due to the Republicans taking control of the House. It provides a framework where businesses are more comfortable making capital commitments and hiring. That will contribute to better economic growth because investors and businesses are going to have greater policy predictability coming out of Washington.

TER: One of the larger MLPs, Plains All American Pipeline, L.P. (NYSE:PAA), just bought SG Resources Mississippi, which has a large natural gas storage facility in that state, for $750 million. Can you tell us about that deal and why it's meaningful for Plains All American?

JE: Plains All American is increasing their commitment to the natural gas storage business with that transaction. The company already made some moves to increase its commitment to natural gas storage and this is one more move along those lines. It did pay a relatively high multiple for those assets since Plains is positioning for the long term in the natural gas business. The company is financing the acquisition with units in Plains Natural Gas, which is another MLP that Plains All American controls. The company is also using a loan from Plains to PAA Natural Gas Storage, L.P. (NYSE:PNG).

The bottom line is we ended up raising our cash-flow estimates slightly on Plains. We raised our EBITDA outlook slightly. But we maintained our distribution-growth outlook at approximately 3%–4% over the longer term. We view this acquisition as a way for Plains to position themselves for the long term in the natural gas storage industry.

We think Plains All American, which is rated "market perform," is a core holding because it is involved in crude oil storage and transportation terminals, as well as natural gas storage. Investors will pay a little bit of a premium because it's high-quality management. The company has below-average distribution growth. We still believe the company will achieve 9%–10% total returns during the next year. It's definitely a "sleep at night" type of MLP.

TER: Their storage facility has a lot of room for expansion. It could apparently get up to 70 billion cubic feet (bcf.) Is that in the high range for these kinds of facilities?

JE: The facility has working natural gas capacity of 17 bcf. It's been permitted for 40 bcf. It can potentially be expanded up to 70 bcf. Yes, it's a pretty good size facility. No doubt about that.

TER: Gas processors were second only to MLP general partners in 2010 in total returns, according to your Jan. 4 Industry Notes. Gas processors averaged 63% total returns compared to coal and natural resources, which ranks third at about 41%. Why do gas processors do so well?

JE: Natural gas processors did extremely well. There are a lot of tailwinds that are in play in that market. From a commodity standpoint, natural gas processors benefit when oil prices relative to natural gas prices are high. The reason for that is natural gas liquids prices, which tend to be more tied to oil, have a very good profit margin in processing and associated fractionation of the liquids into the components.

A second factor is that there's real growth in natural gas shale plays that have a heavy concentration of liquids. There have been greater volumes. A lot of natural gas companies have been able to announce additional projects to take advantage of that since the producers need the gas processed and the liquids need a place to be transported to and fractionated.

TER: What are some gas processors that you believe could do well this year?

JE: We recently upgraded Mark West Energy Partners L.P. (NYSE:MWE). We think it has a very strong outlook. The company is investing a large percentage of its capital budget in the Marcellus Shale play. It's building out natural gas processing facilities, as well as fractionation facilities and adding some pipelines along the way. We think the company is going to do very well. We believe it will begin raising its distribution in 2011 as well.

TER: Your top picks for 2011 include El Paso Pipeline Partners, L.P. (NYSE:EPB) and Crosstex Energy, L.P. (NASDAQ:XTEX). Tell us about those companies and why they have such a rosy outlook.

JE: The main thesis here is that we view the MLP sector as fairly valued. We think investors will do better by going with those MLPs that are poised to grow faster. In our view, the companies with the fastest growth are going to be Energy Transfer Equity, L.P. (NYSE:ETE), El Paso Pipeline and Crosstex Energy.

El Paso Pipeline is a classic dropdown story. Its parent, El Paso Corporation (NYSE:EP), has about $12 billion of pipeline that it eventually would like to drop down into El Paso Pipeline. The company is motivated to do that because it wants to get investment-grade ready itself. We think there's a very visible source of growth opportunities for El Paso Pipeline.

We believe Energy Transfer Equity's underlying MLP, Energy Transfer Partners, L.P. (NYSE:ETP), will begin growing distribution in 2011. That would translate to low double-digit growth for Energy Transfer Equity since it's the general partner to ETP and will benefit because of the incentive distribution rights that go with that position.

ETP is one of the highest yielding investment-grade names out there. We think it will restart distribution growth this year. So, there could be a little bit of a re-pricing going on in that play. Albeit, it does face some headwinds given that it's not going to be able to take advantage of basis going forward like it did in the past.

Crosstex is more of a turnaround story. It just resumed distributions in the third quarter. We expect them to grow distributions at about a penny per unit, per quarter through 2011. That translates to about 15%. We also think it's undervalued when you look at it from an enterprise-value-to-EBITDA perspective relative to its gathering and processing peers.

TER: It's not an investment-grade name, however.

JE: It's not an investment-grade name, but we're still looking at probably 15% distribution growth. It's something that trades at a significantly lower enterprise value EBITDA multiple to its peers. It's trading in the sevens and its peers are trading at around 11. We think there's considerable latitude here for upside revaluation for Crosstex.

TER: Tell us about some investment-grade names that should remain solid if not lights-out performers in 2011.

JE: We don't envision any lights-out performers in 2011. As you know from our last interview, the easy money was made in 2009 and 2010. But there are investment-grade names that we think are very solid, including Enterprise Products Partners, L.P. (NYSE:EPD). The main thesis there is it has a solid position in the Eagle Ford Shale play. Plus, it has a huge backlog of investment opportunities for organic growth projects in the neighborhood of $7 billion over the next three years. We think it has very visible growth opportunities for some time. A lot of that opportunity is already priced in, but nonetheless, we view them as a core holding for MLP investors.

We also really like Magellan Midstream. We realize one of our competitors downgraded them today; however, we view them as a mid-single-digit distribution grower at about 6%. It has a rock-solid balance sheet. We think it's an airtight distribution story. We forecast about 11%–12% total returns for several years because of the distribution coverage. It will be able to get some growth out of some of its more recent transactions.

We also like Enbridge Energy Partners, L.P. (NYSE:EEP/EEQ). The company is targeting about 5% distribution growth. We think it's a low-risk platform. It's tied to oil transportation. The company has gotten a little more visible in terms of putting their goals and objectives out there. We think that's going to help that story going forward.

TER: Is there any overhang left from the pipeline leak incident last year?

JE: We actually upgraded the stock on that incident. There was a huge overreaction. It just so happened that the leak at that time occurred in the middle of the BP Plc (NYSE:BP; LSE:BP) fiasco in the Gulf of Mexico, so there was a huge selloff. At the time, it took off about $700 million of market value on an event that the company had considerable insurance for. The deductible was something like $40 million. The company has recaptured most of that. We believe that it will provide pretty predictable returns going forward. It has very modest risk and relatively low commodity risk. We like that story.

On the small-cap side, we like Genesis Energy, L.P. (NYSE.A:GEL) and we like Regency Energy Partners.

TER: Can you give us some parting thoughts on the MLP sector in 2011?

JE: The bottom line is that we are dealing with a sector that's fairly valued at this point. We like investors to focus on growth stories in the MLP sector. We think that means those stories where there's a high degree of visibility. We also think that the general partners are a good place to be in general.

We believe that the gas processors are a good place to be this year. Albeit, we don't view them as core holdings due to their commodity price risk. There have been excellent tailwinds in that subsector of the market. The gas processors could do quite well this year, but investors have to be a little bit more selective due to the higher level of risk. Overall, we think the outlook is good. We probably might lag a bit in the first half, but we think a defensive orientation headed in 2012 is going to be a good place to be.

TER: Thanks for sharing your insights, John.

John D. Edwards, CFA, joined Morgan Keegan in October 2006 as a vice president, covering energy infrastructure master limited partnerships. Prior to joining Morgan Keegan, Edwards was a managing partner of Vektor Investment Group, LLC, where he consulted on energy infrastructure projects and real estate development. Edwards also worked with Deutsche Bank Securities as a vice president and senior analyst covering natural gas pipelines and as an associate analyst covering automotive suppliers. Edwards began his career in the energy industry with Edison International where he worked in regulatory finance, M&A, project finance, and business development. He received his BA from Occidental College in Los Angeles, Calif., and an MBA from California State University, Fullerton. He is also a member of the Financial Analysts Society of Houston.

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 shares of the following companies mentioned in this interview: None.
2.) The following companies mentioned in the interview are sponsors of The Energy Report: Enbridge Energy Partners.
3.) John Edwards: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.

As of the date of this report, Morgan Keegan & Co., Inc. makes a market in CPNO, NRGY, RGNC and XTEX.

Morgan Keegan & Co., Inc. has received compensation for investment banking services from EEP, ETP, GEL, PAA and RGNC in the past 12 months.

Morgan Keegan & Co., Inc. expects to receive or intends to seek compensation for investment banking services from ETE, ETP, GEL, PAA, RGNC and XTEX in the next 3 months.

Morgan Keegan & Co., Inc. managed or co-managed a public offering for EEP, ETP, GEL, PAA and RGNC in the past 12 months.
Streetwise - The Energy Report is Copyright © 2011 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.
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Over in the options trading pit, we now have 59 winners out of 61 trades, or a 96.72% success rate. If you have any questions regarding these trades please address them through their site where they will be handled quickly and I hope efficiently.


sk chart 10 Dec 2010.JPG

The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today, before we decide to cap membership.

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.


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.

Saturday
Jan152011

Forgotten Treasure: Unconventional Oil in the Middle East

Forgotten Treasure: Unconventional Oil in the Middle East
by Marin Katusa, Casey’s Energy Report

As the conventional and cheap oil and gas start to dry up in the Middle East… a bigger, even better opportunity seeks to replace it.

For many who aren’t familiar with the region, the Middle East comes across as an updated version of Lawrence’s Arabia, only with lots of oil. But this mosaic of cultures isn’t made up of only Arabs or Muslims, and most Middle East countries are neither awash with heavily armed, rather excitable citizenry… nor with black gold, which is what we’re interested in. Twenty-three countries comprise the Arab League, but only Saudi Arabia, Iraq, Kuwait, the United Arab Emirates (UAE), and Iran are major oil producers.

No matter; with the exception of Kurdistan in northern Iraq, none of the oil heavies are currently open to us investors anyway. We’re digging for other finds, with three basic criteria. We’re looking for countries in the Middle East that:
 
Have potential for unconventional production, such as oil shales
Have incentive to develop it, and
Are either net importers of oil or soon will be.

Why? In short, conventional production is in decline, but demand for oil isn’t. That means the state-owned oil companies and large companies operating in the region either need to find new fields and basins or apply new technology to get more out of established ones. Or both, of course. Nowhere is this reality more critical than in the Middle East, the world’s most important oil region, where oil production is the lifeblood of governments.

Our analysis, gleaned from data and on-the-ground experience alike, points to investment opportunities in new, unconventional technology and resources. Exploration costs will likely be lower, as companies aren’t starting from scratch. And in what we see as early days in the national drives for energy security, it makes sense to look close around your own turf.

We believe that blue-sky potential lurks in companies operating in the Middle East with expertise in unconventional production, access to good source rock, and management that can marry the two.

The Proving Grounds

It’s still early in the game, which can mean both good (high returns) and bad (high uncertainty) for investors. We believe the potential upside of unconventional development in the Middle East is just too big to ignore, however. So what we’ve done, is track down and lay out the most likely go-to countries for those explorers with the right stuff.

The following chart will narrow further the countries that meet the three criteria we outlined above. That is, who’s “in the red” when it comes to oil?
 
 
We see here that six countries currently rely on imports for their crude oil: Egypt, Cyprus, Lebanon, Jordan, Israel, Turkey.


In addition, two countries appear on their way to becoming net importers of oil: Syria and Yemen.

Egypt

Outlook: The oil and gas industry are an essential sector in Egypt's economy, and the country’s reserves convey its potential to become a significant producer. In 2009, Egypt produced 678,300 of barrels of oil per day, while consuming 683,000 barrels per day. Egypt has traditionally been a net producer, but production peaked in 1993 and has been in decline. Combine that with its increase in domestic consumption, and Egypt is now a net oil importer.

Consequently, the Egyptian government has reversed its previously much harsher fiscal regimes and now actively encourages the exploration of domestic oil, which has resulted in an industry dominated by foreign players. 

Natural gas, on the other hand, has tripled in production in recent years due to some major discoveries. Thus Egypt is a net producer here, and more important in the broad picture, a source for European natural gas. European countries are usually eager to decrease their reliance on Gazprom, the state-controlled gas giant from Russia.

Egypt has a developed network of pipelines to export its natural gas to Southern European and eastern Mediterranean countries. It also sends liquefied natural gas (LNG) to Europe, Asia, and the Americas. 

However, as natural gas represents over 80% of Egypt's source of electricity, the government has slowed plans for export expansion to ensure all domestic demands will be met before any further moves.

Cyprus

Outlook: Cyprus has no oil or gas production currently, and so must import all it needs. However, an oil deposit has been found recently in the seabed between Cyprus and Egypt. An oil licensing round took place in 2007, when 11 blocks were offered to potential investors.

This first round took place against a backdrop of opposition from the Turkish government. As a result of this territorial dispute, companies chose not to bid, and as of now, only Noble Corporation has a production-sharing agreement (PSA) with the Cyprian government.

In May 2010, Cyprus announced it was close to commencing a second oil licensing round for several offshore blocks. It’s again under Turkish protest. Turkey has even warned Lebanon and Egypt against working out a deal with Cyprus for oil exploration.

Lebanon

Outlook: Lebanon also has neither oil or gas production at this time. However, Cyprus has signed lineation agreements with Lebanon and Egypt to exploit large hydrocarbon reserves that cross borders offshore, as we mentioned above, and hope to begin exploration by 2012.

And according to Lebanon’s parliament speaker, Nabih Berri, gas reserves found off the coast of Israel are located in Lebanon's territorial waters as well. These fields, however, may run into developmental difficulties as Israel and Lebanon to this day still dispute their maritime borders, leaving large fields such as Leviathan and Tamar in a state of limbo.

Jordan

Outlook: Large corporations have been eyeing the unconventional potential in Jordan for quite some time, but were put off due to both political as well as economic reasons. However, with advancements in oil shale technology and a gradual shift towards liberalization by the Jordanian government, which has long been envious of the hydrocarbon wealth of its neighbors, Jordan’s government has established plans to liberate the oil market in the next five years. If that happens, it will be a first for investors since 1958. Under the National Energy Strategy’s initial phase, four companies will be offered 25% of the kingdom's reserves. The remaining 75% will remain under the control of the state-owned Petroleum Refinery Company (JPRC) until full liberalization.

This development will pave the way to exploit Jordan’s oil shale resources. Oil shale deposits underlie more than 60% of the Kingdom of Jordan and have enormous potential. The World Energy Council estimates Jordan's oil shale reserves at approximately 40 to 60 billion tons, making it the second richest state after Canada in rock oil reserves.

Furthermore, the oil shale quality is very high compared with the oil shale in the United States. Jordan has recently signed a deal with Shell Oil to extract oil shale in the central part of the country. First commercial quantities are expected by 2020, with an estimated amount of 50,000 barrels of oil per day.

Modest natural gas reserves were discovered in 1987, and the Risha field near the Iraq border produces approximately 30 million cubic feet of gas per day. However, production is pretty flat and looks to stay that way. That means imports.

Israel

Outlook: Israel relies on importing resources to meet the majority of its energy needs. It boasts no major reserves, and thus oil production is minimal. However, as we said above, Israel has found substantial natural gas reserves located in Mediterranean deep water. This discovery has prompted increased exploration off Israel's coastline, not to mention increased territorial disputes.

The U.S. Geological Survey reports that Israel's offshore reserves could hold 122 trillion cubic feet of recoverable gas. That makes it one of the world's richest deposits.

As a result of this discovery, Lebanon has rushed through approval of a law that outlines the guidelines of surveying, exploring, and producing of gas. The legislation also calls for a sovereign wealth fund to manage the potential revenues.

Nevertheless, Lebanon is still three to four years behind the Israelis, as it still must secure investors, select bidders, and begin exploration work. Israel is already well on its way.

Turkey

Outlook: Although Turkey has both oil and natural gas reserves, the country is a net importer for both resources. It may become energy independent as new oil and natural gas reserves have been discovered off the coast of the Black Sea, Eastern Thrace, the Gulf of Iskenderun, and in the regions near the borders of Syria and Iraq.

Due to its location, Turkey is vital in energy transportation between major oil-producing areas, in the Middle East and the Caspian Sea, and consumer markets in Europe. In 2009, the pipeline network in Turkey covered over 3,636 kilometers for crude oil and 10,630 kilometers for natural gas.

One of the pipelines, the Baku-Tbilisi-Ceyhan, is the second largest oil pipeline in the world. It’s responsible for delivering crude oil from the Caspian Sea to the port of Ceyhan on Turkey's coast. From Ceyhan, the crude oil is distributed to oil tankers, which will further transport it to the world's markets.

Another pipeline, Nabucco, is in the planning stages. It is expected to provide European markets with natural gas from the Caspian Sea basin.

Syria

Outlook: Compared with some of its neighbors, Syria's oil and gas production is fairly unassuming. On the other hand, Syria is the only significant producing country in the Eastern Mediterranean region. Oil production had declined, then flattened out for several years before new fields were discovered. They’re expected to bump up future production.

Syria's known oil reserves are located mainly near the Iraq border and along the Euphrates River, while some smaller fields are located in the central part of the country. Upstream production is controlled by the state-owned Syrian Petroleum Company (SPC). The main foreign consortium which is currently producing is Al-Furate Petroleum, a joint venture made up of SOC (50%), Shell Oil (32%), and a collection of other companies.

Contracts have been awarded to Shell, in 2008, and TOTAL, earlier this year, for exploration at greater depths in existing oil fields in the Euphrates and central areas. Offshore exploration came up dry in 2007, but recently there’s been renewed interest. The SPC has commenced plans to issue tenders for the offshore blocks in the future.

Syria is also strategically important as a transit hub and will provide a larger role with the ongoing plans for pipeline network expansions in the area.

As for gas, new fields are expected to ensure that Syria's domestic demands are met after several years of decline in production. About 35% of natural gas production is reinjected into oilfields for enhanced oil recovery techniques, with the remainder going mostly to generate electricity and for domestic use. By the end of 2010, Syria expects to double its natural gas production.

Yemen

Outlook: Like Egypt, Yemen is a strategic hub for oil shipping. More than 3.7 million barrels of oil pass daily through shipping lanes off its coast. The alternative is a very costly trip around the southern tip of Africa, so governments and oil companies are anxious to avoid any disruptions.

Hydrocarbons currently account for approximately 25% of Yemen's GDP and over 70% of government revenues. Accordingly, the government is actively seeking to increase foreign capital in this sector.

Barring significant change, however, its harsh fiscal regime is strangling exploration. Yemen is currently a net producer of oil, but it won’t be for much longer at this rate. Production is currently limited to two major sedimentary basins, but another 10 basins are believed to hold oil reserves.

A number of companies are interested in the area of Yemen’s border with Saudi Arabia, though activity has been very limited due to a combination of limited infrastructure and continued security concerns. An initial licensing round in 2007 for offshore exploration also stirred interest, but the rise of Somali pirate activity in the Gulf of Aden has more or less put the kibosh on that. A fourth round of bidding was postponed in August 2009 because of the pirates and the exorbitant insurance rates that companies would need to pay to operate in the region.

Up until 2009, all natural gas produced was reinjected to provide enhanced oil recovery. Natural gas export only became viable when a milestone agreement was signed in 2005 with Korea Gas Corp. Yemen also signed an agreement Swiss GDF Suez Company and TOTAL. All three contracts run for 20 years.

Yemen's first liquefied natural gas (LNG) plant, located on the port of Balhaf on the Gulf of Aden, went online in October 2009. Yemen has the ability to export over 200 million cubic feet of LNG per year, and much of the future investment into Yemen is expected to be used in the natural gas infrastructure.

What It All Means

So the question is, what do we have and, more importantly, how can we make money?

When investing in the Middle East, there’s evaluating infrastructure, fiscal policies, and, perhaps most important of all, Middle East politics.

Much of the Middle East is well developed, particularly around urban centers. But many places where a company would be looking for unconventional oil are a ways off the beaten track, and that means additional infrastructure. A prominent example is Kurdistan, where billions of dollars’ worth of infrastructure upgrades are needed to turn the region into prolific oil-producing center. A junior company alone could not possibly have the connections to build such infrastructure. Countries such as Yemen and Oman have similar stumbling blocks to investment and development. The Catch-22 is that these places are precisely where the remaining “elephant deposits” could be hiding.

Behind the scenes in the Middle East is always politics, much of it nuanced and layered by generations of history and family ties.

It takes a management team that has been in the arena before and knows the intricacies of the particular area of interest. A good security detail may be a must in some places as well.

Lastly, the fiscal systems in the Middle East are relatively tough compared with the rest of the world, and in some countries, such as Saudi Arabia, there are very few, if any, opportunities for foreign companies to even come in and share the wealth.

Countries with the highest petroleum shortfalls tend to have the lowest government take. But that’s relative. Any company that operates in the area needs to remember the Middle East holds the dubious record of the highest number of “two-stars” (80-90% government take) and “one-stars” (90%+ government take) in the world, leaving contractors with very little with which to recuperate their costs and justify their investments. Southern Iraq and Kuwait can even reach 95%+.

Who’s Got It

Nevertheless, opportunities are definitely available for those looking for them. Some are conventional, but the big upside that we see in the Middle East is in its unconventional potential. Reconnaissance and seismic data for the region are readily available due to decades of exploration in the area, saving companies millions, if not billions of dollars that would have been needed to do the same work. There are also a good number of pipelines here that, where geography and geology meet, can convey a premium to any unconventional oil production. As several countries begin to look for the oil shale opportunities, the unconventional story has the potential to be the biggest boom in the energy market in decades.

[Month after month, Marin and his energy team analyze the global energy markets to find the best small-cap companies that provide vast upside potential. And with oil prices shooting up again, returns could easily match – or even surpass – the 400% and 818% gains subscribers made within the past year. Try Casey’s Energy Report now for 3 months with full money-back guarantee… details here.]






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Over in the options trading pit, we now have 59 winners out of 61 trades, or a 96.72% success rate. If you have any questions regarding these trades please address them through their site where they will be handled quickly and I hope efficiently.


sk chart 10 Dec 2010.JPG

The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today, before we decide to cap membership.

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.


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.


Friday
Jan142011

Mark Lackey: Bright Future for Uranium?

HYPERLINK "http://www.addthis.com/bookmark.php?v=250&pub=xa-4b26e4054a784caa" Source: Brian Sylvester of HYPERLINK "http://www.theenergyreport.com" The Energy Report  1/13/2011

HYPERLINK "http://www.theenergyreport.com/cs/user/print/na/8302" http://www.theenergyreport.com/cs/user/print/na/8302

Mark Lackey, with Toronto-based financial services company Pope & Co., admits he's in the minority. He believes the Street is too optimistic about production in Saskatchewan and Kazakhstan heading off a uranium shortage. In this exclusive interview with The Energy Report, Mark explains why he believes Cigar Lake won't save the day and why uranium could hit $100 a pound.

The Energy Report: Last summer, big uranium players like HYPERLINK "http://www.theenergyreport.com/pub/co/173" \t "_blank" Cameco Corp. (TSX:CCO; NYSE:CCJ) and HYPERLINK "http://www.theenergyreport.com/pub/co/172" \t "_blank" BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF) bought uranium off the spot market because it was cheaper than boosting production. It's estimated that those two companies bought as much as a quarter of the supply that was out there to meet their supply contracts. Are we seeing ripple effects in the uranium market now?

Mark Lackey: When those two big players were buying in the spot market, it signaled that the price was too low because they would have boosted production if that had been cheaper. But then those purchases started to move the price and China and South Korean started coming into the market to do some deals. Then, of course, there were other issues with HYPERLINK "http://www.theenergyreport.com/pub/co/171" \t "_blank" AREVA (PAR:CEI) trying to ensure that it could get deals. Everyone was looking for uranium at the same time; consequently, the price moved $22/lb. in about three months. Earlier this week it was at $62.50.

TER: Roughly 15% of the world's electricity comes from nuclear power; 60 more nuclear power plants are being built and another 152 are on the drawing board. On the supply side, the Australians—at least those in the Northern Territories—have rejected a proposed uranium mine there, and some African jurisdictions are becoming quite dangerous. These factors seem to be signaling an impending, dramatic rise in the uranium price. Should we expect an even greater increase than what we've seen in the last couple of months?

ML: We're forecasting $65–$70 this year and probably $75 next year. A big difference could come in 2013 due to some of the issues you pointed out. There are some real potential supply constraints. Russia has said it's not going to export any more of the high-quality uranium from its weapons in 2013 when that agreement runs out. The consensus forecast for 2013 on the Street is still $75.

A lot of people think, "Well, Kazakhstan will continue to rapidly increase production." We don't tend to agree with that. Some people believe we'll saved by Cigar Lake—the high-grade uranium mine in Northern Saskatchewan owned by Cameco (50%), AREVA (37%), Idemitsu Kosan Co. (8%) and HYPERLINK "http://www.theenergyreport.com/pub/co/3370" \t "_blank" Tokyo Electric Power Company (OSX:9501, OTCPK:TEPCO) (5%)—but we don't know if that's going to be up and running in 2013 for sure. Our view, and admittedly it's a minority view, is that the price could easily spike above $100 in 2013 and go somewhat higher in the next few years until supply can catch up. That could take until 2015 or 2016 at least, and it may be longer due to the growth in demand. But the real argument is on the supply side, and some people are just too optimistic about where that new supply is going to come from.

TER: Cigar Lake has had all kinds of underground water issues, which delayed production time after time. As you mentioned, it's scheduled to come online in 2013. Why don't you think that's a realistic deadline?

ML: Those problems have been extremely difficult to handle. It wouldn't surprise a lot of people, including us, if that date was pushed back a year or two. If that's the case, the uranium price has a good chance of spiking because there will be a shortfall in the market.

Only 2% of the costs of running a nuclear plant are the feedstock. I'm not saying utilities will pay any price but, clearly, they don't get as concerned about price as they do about supply. Obviously, you can't run your plant if you don't have the supply.

TER: The big expenses are the fixed costs like labor, infrastructure and capital.

ML: One of the things that caused Ontario Hydro some problems was when it built a plant in the late '70s and all of a sudden, there were 20% interest rates. The cost of capital caused some significant problems because that was the biggest cost by far. If it had been fuel costs, there wouldn't have been anywhere near those cost overruns, but the problem became financing it with those kinds of interest rates.

TER: I've heard Cameco is having trouble finding enough people to make this all work. There aren't enough people qualified in these areas to be moving at the pace the company would like. Have you heard that?

ML: We've heard some rumors. But I must admit, that is a problem in mining in general—not just at Cameco. For more than 20 years, few people went to schools of geology when the mining sector was dormant. Trying to find the number of people Cameco would like has been an issue and there's a lot of competition. Mind you, Cameco will be able to pay and get some pretty good people relative to other companies; nevertheless, there is a lot of competition out there.

TER: What makes you sit up and take note when you start looking into a uranium explorer and its particular projects?

ML: The very first thing I look for is a stable political jurisdiction wherein a company can get mining permits to go forward. I don't want to go to places where they're going to pull permits, there could be protests or the government is not very stable. Those problems do exist in many of the uranium mining jurisdictions. A jurisdiction needs a pro-uranium view. Even within the U.S., some states are much more pro-uranium than are others.

The project, land position, management, proximity to major players—those all come into play. A lot of what we like is in the Athabasca Basin, Wyoming and New Mexico because those have been the best-producing areas for uranium and have major players in all three of those jurisdictions. Less work has been done in places like Nunavut, Canada; however, some work was done there in the past and I think that's one of the reasons we like that area so well.

TER: The major player there is HYPERLINK "http://www.theenergyreport.com/pub/co/1036" \t "_blank" Kivalliq Energy Corp. (TSX.V:KIV). What are your thoughts on Kivalliq?

ML: If you go back to the '70s, a lot of mom-and-pop mining was done in Nunavut. A number of small companies were trying to find a small amount of uranium. The problem was a lot of these companies had trouble obtaining financing because none of them was going to be big enough to interest the institutions. The one thing that Kivalliq did was to develop the company over time and get the biggest land position in Nunavut. In fact, in Lac Cinquante, it has a grade that is the best deposit outside the Athabasca Basin. The company has done a lot of work to build a pretty solid operation, has a very experienced management team and has raised some money. The government is pro-uranium and First Nations is solidly behind the project.

Kivalliq's going to go forward and do a lot more drilling this year. It has an estimate of 22 million pounds (22 Mlb.), but that's not NI 43-101-compliant because the drilling was done 25 years ago. The company will have an NI 43-101 completed on its Lac Cinquante property in the first quarter of this year. Kivalliq had a lot of foresight to acquire all this property, which totals 225,000 acres. Now, with what we think is going to be a major uranium bull market, Kivalliq is sitting in the driver's seat.

TER: Lumina Capital Limited Partnership just did a $5 million private placement with Kivalliq, so there are some other people on the Street who agree with you. What are some other micro caps that you're bullish on or think have some potential?

ML: I like HYPERLINK "http://www.theenergyreport.com/pub/co/187" \t "_blank" Strathmore Minerals Corp. (TSX:STM; OTCPK:STHJF), a Wyoming- and New Mexico-based explorer. It has an indicated resource of 46 Mlb. U308 and an inferred resource of 26 Mlb. U308. Those are some big numbers for a junior company. A lot of people ask why its stock price hasn't reacted as well as that of HYPERLINK "http://www.theenergyreport.com/pub/co/525" \t "_blank" Ur-Energy Inc. (NYSE.A:URG; TSX:URE), which is also in Wyoming. URG doesn't have nearly as much uranium, but it's going to be in production this year. The market gave the stock a much bigger boost because it knew that the company is going to produce this year, whereas Strathmore is going to be producing in late 2014 or 2015. It's a longer-term investment. But if I'm right about the uranium price going way up, and Strathmore starts some significant production just after the price spikes, I think it's the one that the market will pick up on. Strathmore looks like it could be a significant winner for a patient, long-term investor.

TER: Given its price is somewhat low relative to its resource, could Strathmore be a takeover target?

ML: I've looked at about 60 uranium companies. Quite frankly, if I had to pick one that jumps out as a potential takeover candidate, it would be Strathmore. It's especially appealing if the acquirer didn't need the production right away. Look at the reserves it has and it's in mining-friendly jurisdictions.

TER: It has an interesting management team from the perspective that it has both the geological expertise and experience of the Street selling its story and getting investors to buy it.

ML: I would completely agree with that. That's probably why it's one of the companies that really jumps out at me. It's got very experienced, well-known management and it's got a great opportunity over the next few years.

TER: What are some other highlights in the uranium space?

ML: HYPERLINK "http://www.theenergyreport.com/pub/co/1733" \t "_blank" CanAlaska Uranium Ltd. (TSX.V:CVV) has one of the largest land positions in the Athabasca Basin, which is the preeminent area in the world for uranium. It's certainly been the most potent supply area, and there are very high-grade deposits in Athabasca and some of the largest mines in the world. CanAlaska has 20 exploration projects, most of which have joint-venture agreements. CanAlaska should be doing a lot more drilling on some of the prospects along with its JV partners this year. Again, this could easily be another potential takeover candidate; but it has to go further in terms of its drilling before somebody's going acquire it.

TER: Does its proximity to other players in the Basin make that easier, too?

ML: Absolutely. Cameco, AREVA and HYPERLINK "http://www.theenergyreport.com/pub/co/168" \t "_blank" Denison Mines Corp. (TSX:DML; NYSE.A:DNN) all have properties right there. They know the area quite well and easily could be looking at the company as it reaches a more advanced state, has an NI 43-101 and has proven a resource.

TER: Let's talk about another one of your specialties—coal. You're bullish on metallurgical coal and believe it could reach $300 a ton next year. That forecast is helped by the flooding in Australia. Can you give us an overview of what we can expect from the coal market in 2011?

ML: Flooding has been an issue, but that's going to be a short-term phenomena. The flooding will end and they'll get the mines back and operating. However, Australia's port facilities are at full capacity, so getting new production out of the country is extremely difficult. It would take at least a couple of years to build some new port facilities. Some are under construction, but Australian coal is pretty much maxed out. With demand rising as quickly as it is, coal is going to have to come from some other areas.

The steel industry is doing very well in South Korea, Japan, China and India; and we do see some improvement in Europe and North America, as well. There are even port-facility issues in the U.S., so there are some limitations these days with such bottlenecks that will add to a higher price. Not only will that impact metallurgical coal but also thermal prices are being quoted nearly as high as $130 a ton now.

TER: What are some junior coal players with anthracite or metallurgical coal plays that could see some value creation in the next few months?

ML: HYPERLINK "http://www.theaureport.com/pub/co/1414" \t "_blank" Fortune Minerals Limited (TSX:FT) has quite a significant play in northwestern British Columbia that is largely metallurgical coal. It has 231 million tons (Mt.) indicated and measured—one of the largest undeveloped deposits in the world. One of the places that doesn't have problems with port facilities is Canada, especially in Prince Rupert, which is what Fortune would use given its physical location. That's a really big advantage. It has deepwater shipping ports there all year round and there's some railway expansion. The infrastructure issue there is not a problem. It's high-quality coal and the size of the reserve is significant as opposed to a number of smaller coal companies that have very limited reserves and production. From an investor viewpoint, you're not going to look at companies with limited upside.

TER: Any other small players like that that you're following?

ML: HYPERLINK "http://www.theaureport.com/pub/co/1091" \t "_blank" Lysander Minerals Corp. (TSX.V:LYM) has a near-term production property in the Ukraine. We took a long, hard look at the Ukraine and recognized it has improved considerably in the last 5–10 years—the gross domestic product is better; there are rising incomes. The thing that caught our eye about Lysander was John Conlon, who runs the company. He came to us a few years back with HYPERLINK "http://www.theenergyreport.com/pub/co/2285" \t "_blank" Western Coal Corp. (TSX:WTN) when it was a $0.30 stock. It's now trading at $12.71. It was one of the best performers on the Toronto Stock Exchange during the last three years.

Lysander has some significant numbers. It is taking over the Verticalnaya mine and is reopening it on a significant basis. We think production will be up to 3 Mt. in the next few years. About 25% of that will go to the steel plants and the other 75% will go to the power plants. Currently, 16 million tons are proven and the total resource is about 76 Mt. Those are good numbers for a small company. All the coal will be sold in the Ukraine, so the shipping savings are great. There's such a large demand that the country has been importing coal—from Russia—for its power plants. If we have a company like Lysander producing in the local market, the shipping costs will be next to nothing. So, the netbacks are going to be a lot better than the Canadian companies that must ship to China.

TER: I guess the biggest risk for Lysander is its jurisdiction.

ML: In all the work that we've done looking at more than 100 countries, we've come to the view that Eastern Europe has improved significantly. We looked at the Ukraine long and hard because this is a great project, but I want to make sure I feel comfortable in the country. It passed our tests; we feel comfortable in the Ukraine; I am not going to suggest that it's Alberta, but I do think that it's a fairly stable place. Frankly, there are some coal opportunities in Africa and even South America that I am not quite as enthralled with as compared to the Ukraine. From a political viewpoint, we thought it was fairly good compared to some of the other opportunities we were looking at.

TER: That's great. Some parting comments on mineable energy commodities?

ML: One of the reasons we're so positive on both uranium and coal is where the world markets are going for both of these commodities. They both have some different issues. Obviously, it's hard to get permits for uranium and there are countries, like Australia, where there's a significant anti-nuclear view. There are a lot of problems with some of the uranium-producing countries in Africa. So, we're kind of sticking to North America; and I think there's going to be some significant opportunities, given the uranium supply/demand balance.

Coal is being driven by significant demand growth coming out of Asia for both metallurgical and thermal, as well as limited global opportunities to find all of this coal and actually ship it. Both uranium and coal have very good outlooks during the next five years.

TER: Thanks, Mark.

Mark Lackey, currently the investment strategist at HYPERLINK "http://www.popecompany.com/" \t "_blank" Pope & Company Limited, has 30 years of experience in energy (oil and gas; hydro), mining, central and corporate banking and investment research and strategy. He worked at the Bank of Canada where he was responsible for the production of U.S. economic forecasting, briefing Governor Gerald Bouey on U.S. economic developments on a weekly basis. Mr. Lackey was a senior manager of commodities at the Bank of Montreal where he helped to determine whether or not the bank would loan money to companies in the commodity space. He spent 10 years in the oil industry with Gulf Canada, Chevron Canada and Petro Canada where his main responsibility was developing corporate plans. This involved forecasting oil and natural gas prices, oil and natural gas demand, oil and natural gas supply, downstream products and their competitive position versus other oil companies. During his tenure at Trans Canada Pipelines and Ontario Hydro, Mr. Lackey helped develop corporate plans while also working closely with each company's pension funds.

In the investment community, Mr. Lackey was director of research at Brawley Cathers and the investment strategist at both Blackmont Capital and Hampton Securities. He is a regular guest on BNN, having made more than 200 appearances in the last 10 years (more than 40 of which were in 2010). On his most recent appearance, Mark discussed his new role at Pope & Company and branded Pope as an up-and-coming institutional resource boutique dealer.

Want to read more exclusive Energy Report interviews like this? HYPERLINK "http://www.theenergyreport.com/cs/user/print/htdocs/38" \t "_blank" 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 HYPERLINK "http://www.theenergyreport.com/pub/htdocs/exclusive.html" \t "_blank" Expert Insights page.

DISCLOSURE:
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Strathmore and Ur-Energy.
3) Mark Lackey: I personally and/or my family own shares of the following companies mentioned in this interview: Lysander Minerals. I personally and/or my family am paid by the following companies mentioned in this interview: None.
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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.
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sk chart 10 Dec 2010.JPG

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Tuesday
Jan112011

Edward Guinness: A Portfolio Approach to Alternative Energy

Source: Brian Sylvester of The Energy Report  01/11/2011
http://www.theenergyreport.com/cs/user/print/na/8281

Edward Guinness.JPG


Edward Guinness, comanager of the Guinness Atkinson Alternative Energy Fund, says countries will use a portfolio mix of resources to meet their power needs. Investors in the alternative energy sector are advised to take the same approach to investing in the sector. In this exclusive interview with The Energy Report, Edward tackles the skepticism about climate change, cost, volatility and liquidity and offers advice for skittish first-time investors in the sector.

The Energy Report: When we spoke with you in September 2010, you said the Alternative Energy Fund had been through a rough ride but, given the low valuations of the stocks in the fund, you were excited about the next 18 months. Are things headed in the direction you expected? What's your outlook now?

Edward Guinness: Since September, we have seen a strong run followed by a pullback. The move up was particularly pronounced for the solar names, demonstrating well the upside potential from the solar sector. Valuations remain low and with earnings estimates increasing, the multiples on which stocks trade are declining further. Our outlook now is as positive as it was in September, with the added plus that we're beginning to see a move up in conventional energy prices. This is a positive for the alternative energy space. In our opinion, the oil price has moved toward the top of the trading range and there is a chance it will move up through US$100 again. That will be supportive of the alternative energy sector.

Separately, in the U.S., the natural gas price had been weak for much of 2010; but the price has bounced off its lows and we expect it to make further gains in 2011. Again, this is supportive of the stocks in the alternative energy sector.

TER: What's your pitch to investors who may be skeptical of alt energy?

EG: The important thing to remember when investing in alternative energy is that there are a number of key drivers. The three drivers, as we see them, are: rising energy prices, energy security and climate change. People who have doubts about the sector seem, first, to be skeptical about climate change and second to believe alternative energy is too expensive to work. So far, no one seems to worry that energy security isn't a valid driver.

The problem with climate change is that because it has such a long-term effect, it is going to be easy for doubt in the likely scale and impact of climate change to develop. As a result, political support for it is sentiment-driven. Public and political support for climate change policies remains strong, though the recent resurgence of the Republicans in the U.S. gives us some concern. At the international level, we haven't yet seen any major progress beyond Kyoto. Copenhagen was a disappointment but with Cancun, we're starting to see some international cooperation. The broad scientific consensus remains that climate change is not only happening but will have a negative impact on global quality of life and, therefore, should be addressed.

Another concern of skeptics is that alternative energy is too expensive. Today, however, a number of technologies are competitive on a cost basis—and even those that aren't today are seeing dramatic reductions in cost. Geothermal, hydro or onshore wind can all generate electricity at prices that are broadly competitive with fossil fuel power stations. New coal and natural-gas power plants now cost considerably more than they have, historically; those likely will become even more expensive as regulatory requirements increase and construction costs advance ahead of inflation. Solar has fallen dramatically in price over the last three years and is now at a new price point wherein solar costs are the same as retail electricity costs in a growing number of markets. Eventually, it will be the retail price that is the benchmark for solar because solar can be generated at the point of demand. Other technologies like tidal and wave energy are still in their infancy and don't form a part of our portfolio today.

Another concern often voiced relates to the intermittency of alternative energy. As wind turbines can generate electricity only when there is enough wind and solar panels work only when the sun shines, many critics dismiss them as a source of electricity. However, you need to look at the alternative energy technologies as part of a portfolio of electricity sources. If wind is 25% of the capacity in a region or country, the grid can be adapted to provide reliable on-demand power. It is only if wind or other intermittent sources of electricity become a majority of the electricity supply, and if no energy storage is developed, it is not a viable part of the solution. With wind representing a very small part of world electricity generation today, there is room for considerably more growth from here until we meet those technical constraints. In determining the form of the eventual portfolio, each country will be able to maximize whatever resources they have—one standard global solution isn't likely.

The skeptics about peak oil claim that we will always continue to discover new sources of oil and gas (O&G) and, therefore, shouldn't worry about dwindling reserves. We've seen peak oil production in the U.S. and a number of other countries. No large fields have been discovered in the last 10 years that compare with the major OPEC fields. Our view is that the world will be able to keep increasing production in the near term, but that will lead to increasing prices. Ultimately, we will see peak production—though that could be extended as higher O&G prices make more marginal reserves viable. But whatever happens, we think that rising fossil fuel prices are highly likely.

TER: You were bullish on solar power when a lot of analysts and fund managers were shedding their solar holdings or steering clear of them altogether. Even now, about half the weighting of the Guinness Atkinson Alternative Energy Fund is in solar companies. Why do you remain bullish on solar?

EG: First, I think in the next five years solar will have highest potential growth of any of the alternative energy sectors. Second, the valuations in the sector are incredibly compelling. We're able to buy low-cost Asian solar panel manufacturers at single-digit earnings multiples, which we think is incredibly attractive. It's a tricky area for very short-term investors to get their heads around because the sector has declining ASPs but rising volumes. It's a bit like the semiconductor industry. You have to look at it as a question of whether volume increases outweigh price reductions and whether or not the manufacturers will be able to maintain their margins. However, we've seen a big fall in price over the last three years. We're still seeing the demand response; and with recovering global economies, there is significant potential for volume increases without the same levels of price reduction required.

Volume increases over the next five years will significantly outpace price reductions. And the progress companies are making on the cost side and the broad availability of the raw material—silicon—mean margins can be maintained. In a funny way, the industry has become a bit of a victim of its own success. The fact that the solar sector had a bumper year in 2010—going from 7 Gigawatts (GW) to about 14 GW in a year—means investors are now more concerned about governments reducing subsidies more than expected. From our perspective, it doesn't make sense that valuations should be so punished when the strong growth is so far ahead of expectations.

TER: Some people who say it takes a very large amount of space to generate a relatively small amount of electricity. What do you say to those who believe there are more cost-effective, space-efficient ways to generate power?

EG: I don't think the space argument is that important to the market. It might be relevant in rooftop electricity generation. Today, however, enough electricity can be generated from the space available on an average house to power that house; so you're not constrained by space available. Utility-scale solar installations offer the potential to use very marginal land, particularly in hot dry arid areas, where space doesn't form the constraint and the most important aspect for developers is total cost of generating the electricity. In the long run, as in Germany, the market is likely to be much more rooftop-based as this provides the benefits of distributed generation above and beyond the non-fossil fuel electricity.

The third area that has been reasonably successful to date is commercial rooftop installation. For example, big box retailers in the U.S. are putting panels on their rooftops—space that is entirely underutilized now. Again, for these types of development, the solar panels are providing incremental returns and space is not the main constraint.

TER: And the future of this industry is in rooftop cells?

EG: I think in the long run, yes. In the short run, I think there's going to be strong growth in utility installations in the U.S. and, possibly, China; that's how a lot of markets get kick-started. But in the long run, I think rooftops will be the mainstay of the market. They have the benefit of electricity being generated at a point of demand, so you cut out huge amounts of costs.

TER: A number of your fund's top-10 holdings have changed since September. You've added Itron, Inc. (NASDAQ:ITRI), SunPower Corp. (NASDAQ:SPWRA/SPWRB), LDK Solar Co. Ltd. (NYSE:LDK), LSB Industries, Inc. (NYSE:LXU), Clipper Windpower, Inc. and Iberdrola Renovables SA (MSX:IBR). Why such a dramatic change in just one quarter? Also, what do these companies bring to your fund that some previous companies like JA Solar Holdings Co. Ltd. (NASDAQ:JASO) and Phoenix Solar AG (Fkft:PS4) did not?

EG: We run the fund by having 30 equally weighted holdings that we rebalance. Looking at changes in the top 10 is more of an indication of how our latest rebalance went and the short-term performance of those stocks, rather than demonstrating actual changes made to the portfolio. I think the most significant change we made to the portfolio was acquiring Itron, which is in the smart grid-technology space. The company makes meters and meter-reading systems. It's beginning to pick up some largish utility contracts.

TER: What are some catalysts for growth there?

EG: The main catalysts for growth are the contracts utilities are awarding to Itron. The drivers for the contracts are mandates from regulators and the utilities' own efforts. We're seeing a big push for utilities to implement smart-metering technology across their entire customer base.

TER: Can you talk about some of the companies that are now in your top 10 that weren't there before?

EG: If you look at the stocks that are there now, LDK Solar has had a very strong run. It's one of the leading Chinese wafer-manufacturing companies that's moved into polysilicon manufacturing. With a leading market share and a low cost base, the company is very well positioned, and it trades on a valuation that reflects historic concerns that the company was overburdened with debt.

LSB Industries is a very interesting company. It is one of two efficiency plays we have in the portfolio; the other is WaterFurnace Renewable Energy, Inc. (TSX:WFI). Both manufacture ground-source heat pumps, which I think will be a very attractive area when the U.S. housing market picks up.

TER: What are ground-source heat pumps?

EG: A ground-source heat pump takes the heat from underneath your garden or from a nearby source of water; by using compression, it provides heating or cooling for buildings. This uses the same heat cycle as a refrigerator. When we "do the math," it's the most cost-effective way to reduce the energy use of newly built housing. Today there is a reasonably small market for ground-source heat pumps in the U.S., though it has held up reasonably well even through this downturn. We think when you start to see new-build housing return to a normal level, there will be a disproportional demand for ground-source heat pumps as new buildings are designed much more often with energy in mind.

TER: Any other newcomers to the top 10?

EG: Clipper Windpower has been in the portfolio a little longer. It did well in the last quarter as Clipper was acquired by United Technologies Corp. (NYSE:UTX), which had previously acquired a 50% interest in Clipper and has now acquired the remaining 50%.

TER: You must've done pretty well on that.

EG: I'd love to say it was a big win, but it's an example of the type of company that has been particularly caught out in the downturn and the acquisition was at a very low price. Clipper's original management founded the wind turbine manufacturer Zond, which was acquired by GE and now forms the core of GE's wind turbine business. It was doing pretty well but had some quality problems and had to recall some of its blades. When we saw much lower demand in the wind turbine market, Clipper really struggled to pick up new orders. The actual product was good, but the market became considerably softer.

We're a little saddened that United Technologies is taking the stock over at such a low price, but we've spoken with Clipper management very regularly in the last six months. Our message to management was that if they were going to sell, they should only sell if they weren't going to bring in new orders before the end of 2010. Clearly, that was the case and the company took the offer from UTC. If it'd been able to deliver new orders by the end of the year, I think it would've been at a much higher price.

TER: You talked about rooftop panels being the future of solar power. A big component of SunPower's business is rooftop panels. What's your investment thesis with that company?

EG: SunPower is well positioned—it's got product differentiation and the most efficient solar modules on the market today. The company also has very good project pipelines in the U.S., which is one of the key markets over the next five years. At the same time, SunPower is trading at what I consider incredibly low multiples. It's one of two U.S.-based solar companies. It does its manufacturing in Asia, so the company is able to be cost competitive while having the advantage of access to what we foresee as an important market in the U.S.

TER: So, about a third of your fund is U.S.-based companies?

EG: Yes. We also have around 18% of the portfolio in China-domiciled companies. If you look through all of our solar holdings, almost all of the manufacturing plays now have manufacturing facilities in Asia. Being cost competitive is the most important attribute in the solar industry, ahead of technological advantage. And to be cost competitive, you need to be in Asia.

TER: Why are you invested in LDK?

EG: LDK was on a lot of investors' worry list; it was reasonably highly leveraged. Going into 2008, LDK had committed to a very expensive new polysilicon plant. One of the reasons we think it's attractive is that the financing for all of the China-domiciled companies is backed by the Chinese government. Second, LDK has successfully restructured the holdings of its polysilicon plant to free up additional capital. Third, the company has been very effective at growing sales. Being a cost leader, LDK was one of the big winners in 2010, in terms of market share. It has such big scale that for someone to come in and be competitive now would now be quite challenging.

TER: Alternative energy is still a nascent sector. You have certainly experienced the dramatic ups and downs that come with investing in the sector. What advice would you give those looking to invest in alt energy now?

EG: First, I think you have to look at the volatility. This will continue to be a volatile sector. Now is a reasonably good time in the cycle to consider buying alternative energy, as you're not buying at a time when sentiment is positive toward the sector. And you're not buying at a point when valuations are factoring in the potential growth. Second, consider this as a long-term hold. With the sort of volatility in the sector, buying and selling is quite difficult. As a long-term hold, I think this is a very attractive place to buy the fund.

That said, in the medium term, we do expect the volatility to decrease a little. The end market for alternative technologies is moving away from being led by one or two countries. In five years, we expect there will be much more of a balance. Therefore, you're less exposed to policy changes in the largest countries. That should produce more of a portfolio effect for the revenues of international manufacturing stocks like the wind turbine and solar module manufacturers.

TER: Is there enough liquidity in alternative energy?

EG: Absolutely, we are asked that question often. We have about 55% of the portfolio in companies with more than a US$1 billion market cap. In our experience, liquidity is not a major concern when trading the fund. There are 150–200 companies with more than a US$1 billion market cap in the sector.

And to get back to your question about advice for new investors, my final point would be that we expect to see more of a move away from reliance on government subsidies. That may sound crazy, but you are within a year or two of solar in Germany being at the same price as retail electricity. Once you start moving below retail solar prices, you can think about it in terms of unsubsidized economics.

TER: To follow up on that, with the belt tightening in Germany and the broad cuts in your country, do you expect subsidies to be cut to solar infrastructure? And is that going to hurt in the short term?

EG: That is an important issue. There is major uncertainty over what's going to happen in Germany in response to the fast growth of the market there. However, it's important to remember that the solar subsidies are not paid for by the government. They're paid for by electricity consumers as an incremental levy on their electricity bill; so the cost is not directly borne by the state. Germany's support of solar over the last 10 years is the reason the industry got to its present scale, both in installations and manufacturing. It will not want to destroy the industry and expertise that has built up. I think the German government is more long sighted than people give it credit.

If Germany was to pull the rug out from under the industry, you could have a situation like that in Spain. The Spanish government put in place an attractive subsidy regime about four years ago that was much more successful than it could ever have imagined. In response, the government slashed the subsidies and killed Spain's domestic solar industry. Today, solar installation activity is at a low level in Spain. I think the German government will want to avoid that.

TER: Edward, thank you very much for talking with us today.

Edward Guinness joined Guinness Asset Management in 2006. Mr. Guinness is comanager of the Guinness Atkinson Alternative Energy Fund. Prior to Guinness Atkinson, Mr. Guinness worked for HSBC in corporate finance beginning in 1998, and then in 2003 joined Tiedemann Investment Group, New York, in merger arbitrage. Mr. Guinness graduated from Magdalene College, University of Cambridge, with a Master's degree in engineering and management studies in 1998.

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DISCLOSURE:
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
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3) Edward Guinness: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.
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