Subscribe for 12 months with recurring billing - $199

Buy 12 months of subscription time - $199

 

Search Uranium Stocks
Uranium Price
Our RSS Feed

Uranium Updates

Enter your email address:

Follow Us on Twitter
Tuesday
Aug312010

Peasgood Preaches Patience on Geothermals

Before we dive into todays post we thought that you might like to know that on Friday, 27th August 2010, we closed another successful trade banking a profit of 79.46% on Call Options on Silver Wheaton. We cannot see such opportunities in the uranium sector just yet but no doubt they will present themselves in time. All the best, Bob.


Source: Brian Sylvester of The Energy Report 8/31/10
http://www.theenergyreport.com/cs/user/print/na/7241

Wellington West Analyst Sean Peasgood covers the geothermal, plasma gasification and "Smart Grid" subsectors of the alternative energy (AE) market. He believes there's room to make some dough in each of them but believes investors may need to be patient as these growing markets gain traction. "As these (geothermal) projects come online and are proven out, the reward to investors is going to be large," Sean says. He even reveals some names to help you earn your reward in this exclusive interview with The Energy Report.

The Energy Report: Sean, can you tell us a little about yourself and your coverage area at Wellington West?

Sean Peasgood: I've been covering the technology and clean-technology sectors with Wellington West now for about 10 months. Before this, I was with a bank-owned dealer for about four years covering the technology sectors as an associate analyst. I now cover the alternative energy space, focusing on geothermal, plasma gasification and the Smart Grid markets.

TER: Could you give us an overview of those alternative energy subsectors and their respective outlooks?

SP: Let's start with geothermal. While the stocks in this sector have been relatively weak over the last few quarters, we have a positive long-term view on the space. It takes significant capital and time for these projects to come online. I believe that early stage investors will benefit as projects generate significant free cash flow in the future. Eventually, they will look more like utilities and less like exploration companies. Investors who get in today will benefit from capital gains in the short term as projects come online and then from dividend-yielding equities in the future.

Given the baseload nature of geothermal, we believe utilities are more interested in signing attractive power purchase agreements (PPAs) than relying on more intermittent sources of renewable power, such as wind and solar.

We also cover the Smart Grid market, which is essentially the deployment of Internet protocol (IP)-based communication networks across the existing power grid. The goal is to increase efficiency, enhance control and provide visibility across the grid for utilities. The lack of infrastructure and maintenance upgrades over the last several decades, along with increasing demand for power, have reduced the reliability and quality of power not only in the U.S. but around the world. This problem is only being exacerbated as the world looks to add renewable energy sources to the grid. While some of these upgrades have already begun, we believe this deployment will take place over the next 5–10 years. This should translate into strong revenue and earnings growth for a variety of IP communications-infrastructure companies both wireless and wired.

Finally, as I stated, we cover the plasma-gasification market, which is an emerging alternative technology being used in waste-to-energy projects, as well as producing cellulosic ethanol. Plasma gasification reduces emissions and produces a synthetic gas that can be used to generate power. In cellulosic ethanol production, this synthetic gas is fermented and converted to ethanol. There are a number of projects getting underway in North America, and we're seeing interest for this technology in India and China, as well.

TER: Given the speculative nature of these alternative energy plays, what type of investor should be looking at this sector?

SP: I think investors should look to balance their traditional energy exposure by adding newer alternative energy companies to their portfolios. In many cases, these new technologies are just emerging; so, while they have more risk than more traditional energy plays, when they begin to gain traction, investors could be handsomely rewarded. That said, there are ways investors can reduce this risk exposure. For example, investing in early stage geothermal companies is, obviously, more risky than investing in some of the larger players that have a portfolio of projects and stronger balance sheets. We believe risk-averse investors should look to the larger players in the market to gain exposure to these growing markets.

Investors in the geothermal market need to have a multiyear time horizon, as development can take several years. As these companies bring projects online, I expect the share prices to continue to increase as a reflection of lower exploration and development risk. Then, as they start generating stable free cash flow, they will trade more like utilities and, eventually, provide dividends.

TER: What's the timeframe on that?

SP: Generally, projects take about three to four years to develop. Depending on who you're looking at in the space, most companies that we cover—I'm talking about Magma Energy Corp. (TSX:MXY) and Ram Power Corp. (TSX:RPG)—have a portfolio of projects that will come online over the next few years, leading to a steady increase in megawatts (MW) online. Ram, in particular, has a 32 MW project in Nicaragua that will come online in the second quarter of 2011, which will immediately provide them with an increase in their top and bottom lines. Two quarters later, they're going to bring an additional 32 MWs online, meaning the company will be generating 72 MWs in total by the end of 2011.

Companies have been developing things in sequence. So you're going to see multiple projects coming online every year, which will be positive for the stocks and help fund future growth.

TER: In looking at your research, some of the price targets in your recent reports are a bit more aggressive; but some targets you set earlier this year were rather conservative. For example, in a report on RuggedCom Inc. (TSX:RCM) dated May 28, 2010, your target price was a mere 21% above the existing price. Using that as an example, are your conservative targets more indicative of your approach or sector weakness?

SP: Generally, I try to weigh the growth opportunities with the risk factors and be as fair as possible. As far as RuggedCom is concerned, I've become more aggressive on it lately given the recent slide in the stock, the company's leading market position and the significant growth opportunity in the market. They are actually benefiting from not only Smart Grid opportunities but also from other industrial ethernet markets like transportation and infrastructure.

For the geothermal space, while we are bullish long term, investors need to understand the risks involved in these projects. There's financing risk, which has recently been improving, and political risk, as government grants can enhance the value of projects and some of the projects are in foreign jurisdictions. As projects advance and get de-risked, then I will become less conservative. But I think at this point, it's fair to provide investors with the full set of risks and that's reflected in my forecasts and price targets.

TER: You've mentioned Smart Grid a few times. Everyone has heard of the grid, but what's a Smart Grid? And why should investors look specifically at this alternative energy subsector?

SP: Essentially, the Smart Grid is the deployment of a communications backbone over the existing power grid—all the way from power generation out through transmission and distribution, and then into the home. Most of the infrastructure out there really hasn't changed in 100 years. What we have now is significantly higher demand for electricity across a decaying grid infrastructure that is becoming less reliable and efficient. The idea of the Smart Grid is to deploy a communications backbone, so utilities have full visibility across that grid.

Over the last few years, there's been a real focus on putting smart meters in homes. Smart meters provide the user with visibility and the ability to switch their habits to use more power at off-peak times and also provide the utility with information about electricity demand patterns. For example, with a smart meter, the utility can charge a little bit more for running your dishwasher during peak times and try to encourage you to run that dishwasher at night. That's the first phase.

But we believe the next phase is the more important part of the Smart Grid, where communication infrastructure is being placed in substations across the grid, so utilities have even greater visibility and control. Right now, if power goes down, the utility has no visibility and must wait until customers contact them to let them know. The Smart Grid provides the opportunity to put a communications network in place, so utilities know if they've just lost a whole block and immediately take action. This should reduce power outages, which negatively impact GDP and are becoming more frequent.

This is where RuggedCom has been focused for about seven years—putting routers and switches and IP-communications equipment into substations. Currently, in most substations, there is no infrastructure to alert utilities, which can result in a fault in the substation. But with this equipment, all of those things can be monitored in real time; and the equipment will make the appropriate adjustments with very little need for human intervention. This full communications backbone is the real solution to providing utilities with the visibility to meet growing demand, increase efficiency and reduce greenhouse gas emissions.

RuggedCom has a strong management team, backed by a number of individuals from General Electric Company (NYSE:GE). I really like this stock (we have a Strong Buy rating on it and $20.50 price target), and I think it's a good way for Canadians to play the Smart Grid. Currently, there aren't many public companies in Canada that are exposed to this space like RuggedCom. The major risk for investors is the potential for lumpy quarters, which can lead to volatility in the share price. To gain a better understanding of the business, investors should look at results on a trailing four-quarter basis, which illustrates the consistency in revenue and earnings growth over the last several years.

TER: What countries are deploying this technology at a rapid rate?

SP: There's been a lot of attention on smart meters in North America and Europe. Substation automation is happening globally; however, the upgrade process has been one or two substations at a time, rather than the mass smart-meter deployments we have seen to date. When utilities upgrade a substation, they'll upgrade all the communications equipment inside at the same time. Given utilities' risk aversion and new technology, the sales cycle for these products can be 12–18 months. To put this in context, last year the market for substation automation-communications infrastructure was roughly $150 million. If you just look at all of the substations in the world and assume that 20% of those have been upgraded, which is probably a conservative view, to upgrade the rest of the substations would be about a $4 billion opportunity.

TER: That's not an overly huge market though.

SP: That's just the substations—just one piece of the overall Smart Grid opportunity. It shows you where the market could go. I mean it's very, very small right now as utilities are really only upgrading a few substations at a time. Could it multiply significantly over time? We believe it will, but it's really going to be about how quickly these utilities adopt this technology across their footprint.

TER: You mentioned Asia earlier. In other sectors like mining, China has changed the way businesses operate. Last year, according to an alternative energy report that came out earlier this week, $34 billion was spent on solar and wind projects in China. What sort of impact is China having on the AE sector?

SP: As one of the world's fastest-growing economies, China is going to be an important part of this market for many years to come. Right now, about 90% of China's energy is from nonrenewable sources. The Chinese government wants to get that to 18% by 2020. Electricity demand there is growing significantly, so you know this is going to require significant investment. We're already starting to see that in wind and solar. We believe all of the markets we have spoken about so far should benefit from that region.

TER: What are some companies other than RuggedCom that have significant exposure to China?

SP: One would be Alter NRG Corp. (TSX:NRG; OTCQX:ANRGF), which is in the plasma-gasification market. The company just signed an agreement with Wuhan Kaidi Holding Investment Co. to develop a number of waste energy plants in China. They're going to start with a small demo plant, which is expected to be online in mid-2011. Then they're going to look to develop up to 50 additional plants in the future. Alter NRG is also in discussions with other parties in the region that want to take advantage of the waste-energy market. Currently, most waste sites are still using landfills and incinerators. These Chinese engineering companies are looking to use plasma-gasification technology to eliminate waste and generate electricity.

TER: How does that work?

SP: Plasma gasification is a thermal/chemical process that converts low-value, carbon-based feedstock into a synthetic gas (syngas), which in turn, can be used as a fuel or combusted to generate steam or electricity. Alter's plasma-gasification technology has been recognized for being very flexible, enabling it to handle a variety of feedstocks. This is important as some competitors' gasifiers require the feedstock to be treated or prepared prior to gasification, which can increase project costs.

TER: That technology sounds interesting. Did they develop it?

SP: They bought Westinghouse Plasma Corp. (NYSE:WEST) gasification technology in 2007 for US$29 million. Alter is working with a number of large players to bring projects online over the next several years. For example, Coskata Inc. is developing a large cellulosic ethanol facility that is trialing Alter's technology in their pilot facility. Alter is also working with NRG Energy, Inc. (NYSE:NRG) to retrofit coal-fired plants to use gasification and reduce emissions. While all these projects are still in the early stages, they offer large opportunities. Any one of those, if they come in, would take this company from $1M–$3M/quarter to between $30M and $90M for just one of these projects. I think it's just a matter of time before the company gets one of these large projects across the finish line, which would help prove to investors the large market opportunity for this technology.

TER: What's your target price for Alter?

SP: Given the projects are still largely in the trial phase, we have a Speculative Buy rating on the stock and a price target price of $2.50.

TER: Another statistic in that same report was that investments in geothermal power fell from $2.2 billion in 2008 to $1.5B in 2009. What accounts for that drop, and how should investors interpret that 31% decrease?

SP: I will start by saying we continue to see strong demand and development both here in North America, and all around the world in the geothermal market. There's a lot of development going on in Africa, Indonesia, the Philippines and Australia, to name a few. We continue to see new projects being explored with companies and governments promoting the development of geothermal projects.

I think the drop in 2009 was largely due to the tightening of the credit markets following the credit crisis. These projects need significant amounts of debt financing to get across the finish line. Before the credit market seized up, geothermal companies needed to have 50%–60% of the resource proven out before getting construction financing. This increased to 100% in the height of the crisis. Good news for investors and the market, in general, is that we are beginning to see the credit markets loosen up. On Ram Power's recent conference call, management indicated that one developer in California was able to get debt financing after only having 60% of the resource proven out and the terms on the paper were more attractive by 200 basis points. It's nice to see that those markets are starting to open up, because geothermal is so capital intensive that this was a barrier to development. As long as the credit markets continue to behave, then I would expect those investment numbers to reverse.

TER: What companies are you following in geothermal?

SP: We cover four companies in the space. The two large ones that we cover, Ram Power and Magma, probably get a little more attention given the larger project portfolios and strong balance sheets. The Ram Power management team has significant experience in the space and has a number of people working for them who were formerly with Ormat Technologies Inc. (NYSE:ORA). The Ram team has numerous projects that they're developing right now, which, as I said, are slated to come online in 2011. They also have a number of properties in the U.S. that they're developing and recently announced that they were going to acquire Sierra Geothermal Power Corp. (TSX.V:SRA) to add to those properties, some of which are adjacent to their Clayton Valley project.

TER: What's the status of that takeover?

SP: Management indicated that they expect the transaction to be completed in the third quarter. They also said they would come back to the market with specific details as to how capital expenditure requirements may change, and how quickly some of those projects at Sierra may advance. It's a nice acquisition for both companies because Sierra was having trouble raising the funds needed to continue development, and Ram has a much stronger balance sheet and the ability to access capital markets to develop those projects. I think the combination of the two is going to be positive.

TER: What are Ram's catalysts for growth?

SP: I think the catalyst is that Ram has done exactly what they said they were going to do. Their projects are all advancing on time and on budget. The share price has been weak recently, but really the whole sector has shown some weakness.

My view is that, as we get closer to the Nicaraguan project coming online in 2011, investors will be able to better understand the cash flow from these projects. While it's capital intensive upfront, investors who get in early are going to benefit as these projects come online. But, from an investor's perspective, getting in front of that, and then having the second project come online later that year, are two big catalysts for the company.

TER: But these geothermal projects in development are in Nicaragua. Do you consider Nicaragua a safe jurisdiction?

SP: Well, obviously, there's some political risk; but, from what I understand, the government is very supportive of the development and the country needs access to reliable power. Ram has a PPA in place and management has been operating in the region for some time. I don't see this as a major risk, but investors should always stay tuned into political issues where these geothermal projects are located (as things can change over time).

TER: What's your target on Ram?

SP: We rate Ram Power a Buy with a $4.50 price target.

TER: What are some other geothermal companies you're following?

SP: I also cover Magma Energy, which is similar to Ram in that it has a strong management team, healthy balance sheet and is also helping to consolidate the industry. Right now, the focus at Magma is what's going on in Iceland. They had a 46% stake in HS Orka—an Icelandic company that generates about 175 MWs annually. They recently made a bid to increase their stake to 98%. However, over the last few months the Icelandic government, spurred on by some high-profile people in Iceland, has become more concerned with foreign investment. They are now reviewing that acquisition by Magma. There has been some uncertainty in the stock over the last month or so given these developments. The company has stated it's going to move forward with that acquisition and recently announced they had closed an additional tranche, taking them to 84%. We continue to believe this transaction will be successful; however, investors do need to weigh this political risk.

TER: You mentioned Magma's management. That company is headed by Ross Beaty, who made a name for himself in mining and, more specifically, as chairman of Pan American Silver Corp. (TSX:PAA; NASDAQ:PAAS). Could you comment on Magma's management?

SP: Obviously, Ross is very well respected and has done a great job of creating value for investors in the mining space. I think investors expect that to continue in the geothermal space. Coming from the mining industry, the company is familiar with exploration activity, working in different regions of the world and working with different governments. I think those are all synergies as far as moving from mining into geothermal.

Ross has done well to attract talent from across the industry and now has a strong management team behind him, as well. And that's another aspect of this Iceland acquisition—he is adding significant human capital that he'll be able to leverage across other projects they are developing. The stock has been weak, but I think it offers investors an opportunity to get into a company with proven management, a very attractive basket of assets and a strong balance sheet that should allow them to develop those assets. If this Iceland ordeal can blow over, we believe the stock should recover nicely. We rate Magma a Buy and have a $2.40 price target.

TER: Do you have some final thoughts on the sector?

SP: Investors in the geothermal space are going to have to be patient while projects come online. That said, the rewards for early stage investors are likely to be higher than for those who wait until the companies are spitting out strong cash flow. At this point, a new set of income-seeking investors will likely look to take advantage of utility-like stocks that will generate stable free cash flow and are likely to produce dividends.

The other question is: Will large utilities step in and potentially buy these companies in order to meet their renewable targets? We believe that utilities are unlikely to take on exploration risk today; however, as projects come online, we believe these companies could be strong acquisition targets.

Sean Peasgood is an equity analyst at Wellington West Capital Markets, covering the clean-technology sector. Before joining Wellington West, Peasgood worked in the equity research department of a bank-owned dealer covering the technology space as an associate analyst for four years. Sean has a HS.Bc. from McMaster University and an MBA from Saint Mary's.

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


Stay on your toes and have a good one.

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

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

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

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



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

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

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

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




Thursday
Aug262010

Vikas Ranjan: Look for Sustainable Models in Cleantech



Source: Brian Sylvester of The Energy Report  8/26/10
http://www.theenergyreport.com/cs/user/print/na/7209

"Ubika" is an ancient Sanskrit word meaning growth. Ubika Research Cofounder and Managing Director Vikas Ranjan knows investors covet growth, so Ubika covers companies in sectors with tremendous growth potential. In this exclusive interview with The Energy Report, Vikas offers some strategies on how to play the cleantech sector and discusses in detail several clean-technology companies ready to flourish.

The Energy Report: Today, The Energy Report talks cleantech with Vikas Ranjan of Toronto-based Ubika Research. What does it mean to be a cleantech company?

Vikas Ranjan: Cleantech is the development of the whole range of technology that will enable humankind to basically conduct life in ways that are more eco-friendly and sustainable. It's a fairly broad term. For example, alternative-energy generation companies (i.e., wind, solar and geothermal companies) all fall into the cleantech category.

TER: Are you noticing any trends in that market segment?

VR: Yes, absolutely. A couple of years ago when you talked about cleantech, the discussion mostly centered on alternative energy with a focus on wind, solar and, to a certain extent, geothermal companies. But in the last three years or so, there's been an acknowledgment that cleantech is much more than renewable power generation. This move toward a broader classification is a really big change.

Another big change would be the growth of a whole set of companies that focus on very basic problems, for example, methods of providing clean drinking water to the vast majority of the global population, and more efficient technologies for waste management, especially in developing countries.

We are seeing a growing acceptance of clean technologies in these areas, and you can see increased participation among the governments, especially in the developed world. Governments are actively supporting this sector through various programs and some subsidies.

TER: The sector includes quite a few companies now. Is there an index that measures the performance of the cleantech sector?

VR: That's a good question. Determining what is considered a cleantech company is difficult, and I believe that makes it harder to construct an index. However, the Toronto Stock Exchange (TSX) recently launched a cleantech index. The TSX claims there are about 125 clean technology–focused companies listed on the Toronto Stock Exchange and the TSX Venture Exchange, and it selected 21 of those companies for its index.

Another broader cleantech index is the Cleantech Index (NYSE.A:CTIUS), which was launched by the Cleantech Group and the AMEX. It has 77 companies. Deustche Bank and NASDAQ OMX also recently launched an index that consists of 119 companies from around the globe.

We believe many more indexes will be launched as this sector gains attention from a range of investors.

TER: There's risk associated with investing in all companies, but when it comes to cleantech, the risk is significantly higher because these companies often do not have proven business models. Why should investors risk it?

VR: This is an excellent question and a question every investor should ask. To start, I would suggest investors think of the cleantech sector from purely an investment standpoint, excluding the ethical side, which certainly has a positive bearing from an investment point of view. From purely an investment perspective, an investor should think of cleantech as an emerging area that will inevitably go through many changes.

If you want a decent return on your portfolio, one of the things that you should do is look for emerging growth industries. There is no question that cleantech is an emerging growth industry. If you believe that premise, then it makes sense to have some exposure to cleantech. The extent of exposure will depend on each individual investor's personal situation and investment preference.

TER: Looking historically at other sectors, can you compare where the cleantech sector is at?

VR: You will remember the dot.com industry, which saw rapid growth and attracted many early-stage companies in the 1990s, but also witnessed a rapid transformation that left only a few companies with sustainable business models as winners.

We believe that cleantech will go through a similar process, and over time you will see only a select few come out on top. If we have to pick winners, we will bet on those areas that are focused on solving problems that affect the masses, not only in wealthy countries, but also in emerging and developing countries.

A quick example is the battery industry, which is a cleantech sector that attracts lots of investment. There are lots of companies producing batteries for electric cars, which is supposedly a huge growth area for cleantech companies. If you look closely, however, I would say that the jury is still out about the size of the end market. Electric cars are priced pretty high. Even the GM Volt, which will be available in 2011, will have an MRSP of $41,000, high by pricing standards for a compact car. All of these vehicles are supported by heavy government subsidies and incentives. If that market doesn't take off, what do you think will happen to the cleantech companies focused on manufacturing these electric batteries? It won't be good.

That is something investors should keep in mind. What seems "hot" today may or may not be very much in focus a couple of years down the road; whereas, if you look at areas that are focused on solving issues like water contamination or excess waste, they have more sustainability. Even companies focused on Smart Grid technology, which allows new sources of renewable energy to be supplied to mainstream power systems that distribute electricity, are good prospects. Companies with effective and commercially viable technologies in these areas will have a sustainable and large market to cater to. Those are, in our opinion, areas that will probably do well and will be sustainable in the long term.

TER: What percentage of an investor's portfolio should be in cleantech?

VR: Considering all the novelty related to the sector and a lot of unknowns, I would not recommend that investors should put more than 10%–15% of their stock portfolio in cleantech companies. But that may change over time as the sector matures. The extent of exposure also depends on each investor's personal situation and investment preferences.

TER: You mentioned battery power and power storage. What are some companies that you cover that are making progress in that sector?

VR: There are various companies in that sector, but one in particular is Exide Technologies (NASDAQ:XIDE). This is a well-established company; it makes lead acid batteries and other energy storage solutions. It had $2.6 billion in revenue last year, but the market cap is below $400 million. It is considered a worldwide leader in lead acid battery technology, so it has the technology and solid engineering resources. The company had, I think, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of close to $200 million in its last fiscal year, ending March 2010, but the market cap is pretty low.

TER: Why is that?

VR: Actually, the company had a reduction in revenue margins and profits between 2009 and 2010. That probably resulted in investor disappointment, and that must have pressured the stock. We believe the company is undergoing an organizational restructuring, which will hopefully improve cash flow, head count and working capital. If you think that the reorganizing and restructuring efforts will pay off, then it could be a good value play at these levels.

TER: One of the more established sectors in cleantech is power generation. What companies are you following in that subsector?

VR: Yeah, that is probably the most well-known cleantech sector. And it kind of broadly encompasses various areas including wind, solar, ocean wave, geothermal and what not. One of the companies that we profiled recently and like is Boralex Inc. (TSX:BLX). Its core business is the development of power stations that run on renewable energy.

What we like about this company is the asset portfolio, which is very well diversified. It has footprints in three countries—the U.S., Canada and France. It is an experienced operator with expertise in wind power and other sources of renewable energy. It owns and operates 28 power stations with a combined installed capacity of more than 400 MW of power in Canada, the U.S. and France. And it recently acquired a 23% interest in a fund called the Boralex Power Income Fund (TSX:BPT.UN). It has 10 power stations under that fund with a capacity of almost 200MW in Québec and the United States.

TER: Why did Boralex buy a stake in the Boralex Power Income Fund?

VR: The fund takes an interest in renewable energy power stations. By getting a stake, Boralex now has exposure to a better diversified portfolio, which also allows the company to become the manager of 10 power stations that are owned by this fund. This is an attempt, I believe, to diversify and get assets that have longer-term contracts. That reduces the riskiness associated with their existing assets.

TER: It sounds like it might be a somewhat less risky venture than perhaps some other companies that you cover in this sector.

VR: Yes, I would say so. As I said, it is a well-established company with experience in power generation, and it continues to diversify its asset portfolio. This is a growing company but still trades at a reasonable six times cash-flow multiple. It has a very strong balance sheet and has been able to finance its projects without significantly diluting equity, which is positive for current and future shareholders. This is a good company to look at in the power generation area.

TER: What are some other power generators that you're covering?

VR: Another interesting company we like is Ocean Power Technologies Inc. (NASDAQ:OPTT). It has a proprietary technology platform that basically harnesses ocean wave resources to generate reliable, clean electricity.

TER: How does that work?

VR: Well, they have these power buoys platform systems, which are dropped into the ocean and anchored to the seabed. The rising and falling of the waves offshore causes these buoys to move freely up and down. The resulting mechanical stroking, in technical terms, is converted into power to drive an electric generator. The generated power is transmitted offshore via underwater power cables. It's a unique approach.

Harnessing ocean waves to produce electricity has some advantages over other energy sources such as wind and solar. First of all, ocean waves are abundant and near major urban centers. And this energy source could produce large amounts of power with a lot of predictability. And obviously, it opens up a scalable source of electricity generation. If a company like OPTT can commercialize it successfully, then it could be a real winner.

TER: That sounds somewhat like a big IF. What are their hurdles at this point?

VR: I would say the hurdle is mainly related to commercialization and successfully finding the right partners. We believe the company has made some good progress. The technology is now commercial and gaining acceptance. It has formed some good partnerships and has received interest from various governments. It even recently announced some contracts. It will take some time, obviously, to make inroads, but the company has strong cash on the balance sheet to further develop this technology and invest in sales and marketing. Actually, I was surprised to learn that the company has roughly $66 million in cash on the balance sheet. The cash per share is roughly $6.50, which is more than the share price of the company. It could be an interesting value play.

TER: Indeed. Are there any other power producers that you like?

VR: Another one that we're looking at closely is called Wind Works Power Corp. (OTC:WWPW). This is a play in the wind sector, and a company that I would say is relatively unknown. It is a good example of a company that has strong investment potential. The company develops wind parks for operation or for sale to wind energy producers. The business model is to assemble a land package, secure regulatory approval, do all the work related to building infrastructure and finally enter into power purchase agreements with local utilities.

TER: Are you saying they make pre-made wind farms?

VR: Absolutely. What we like about this company is the leadership. This is a new company with old leaders, in the sense that they have significant development experience and have a proven track record with a strong wind energy background.

Now, Wind Works has a strong pipeline of wind energy projects. The pipeline is 610 megawatts (MW) strong across Europe and North America. Of this total, Wind Works will own roughly 350 MW of power. The company is only listed overseas right now, and not even on the biggest stock exchange, but I believe this will change as the company formalizes these projects. Once that happens, then I think there could be a lot of potential for investors. It recently secured contracts from the province of Ontario through the Ontario Power Authority's Feed-in Tariff Program in the very first round of project evaluation. That shows that the strength of the team and its technical experience is well recognized.

TER: What other steps are they taking to de-risk their company to encourage investment?

VR: Wind Works had to raise capital and diversify its asset portfolio, which they are doing. They're actively looking to build on their current asset portfolio, and they recently acquired a 100% interest in a fully permitted wind project in Germany. That means they will be able to generate cash flow from some of these fully operational projects and use that cash flow to feed into newer projects they acquire.

As the company gains an investor profile and becomes more established, it will have access to cheaper capital, which is a key concern for the market in terms of Wind Works' ability to execute on these projects.

TER: What are some other companies you're following, Vikas?

VR: As I mentioned earlier, the areas that we like and that we think are going to be big winners are related to water treatment and waste management.

In that respect, there are some companies that we really like. One is H2O Innovation, Inc. (TSX.V:HEO), a major player in the water treatment industry in Canada. It designs, develops and produces environmentally friendly water treatment systems, especially for wastewater and industry-processed water.

It's a very promising industry, believe me. It has huge growth potential; water is a scarce resource. If you ask me, in 20 years, chances are that there will be wars fought over water—not oil. Drinking water is going to be a scarce resource, so reusing water is critical. Water treatment technologies offered by H2O Innovation have a very promising future, as more countries develop and try to conserve water.

This is one of the fastest growing small-cap companies in Canada. It had a compounded annual growth of more than 100% in each of the last three years. It has an established client base with more than 415 installations in Canada, the U.S. and all across the world. This is a good example of a company that could do very well in the future.

Other cleantech companies we like focus on improving current fossil fuel-based technologies. A good example would be Westport Innovations Inc. (TSX:WPT). This is a company that we profiled some time back, and I think Westport has more than doubled since we profiled it. This company is developing fueling technology to reduce emissions by adapting diesel engines to use compressed natural gas (CNG) or liquefied natural gas. This is a great example of a company that is addressing a real problem, which is carbon emissions, by offering solutions based on cleaner sources of energy. The energy is still fossil based, but natural gas burns much cleaner than oil or diesel—not to mention it's much cheaper.

This is a great company: rapidly rising revenue—revenue increased by 24% in the third quarter—and lots of traction in China and India through very strategic partnerships. We like this company; this is a good one.

TER: What is the catalyst for growth with Westport?

VR: The catalyst for growth is that by using Westport's technology, you can adapt current engines and convert them into something that can use natural gas, CNG for example, instead of diesel. That opens up tremendous potential markets as fleet owners can adapt their vehicles to use CNG. In our opinion, that is a great, great benefit for Westport.

In the same space, there is a company called Hy-Drive Technologies Ltd. (TSX.V:HGS; OTCPK:HYDVF), but that's a much smaller company. Hy-Drive has developed a proprietary, patented hydrogen-generating system that increases fuel economy in commercial truck engines. Its proprietary hydrogen system also reduces diesel emissions used by these commercial vehicles.

TER: Do you perhaps have one more company you would like to talk about?

VR: I would like to talk about two. Is that alright?

TER: Sure.

VR: One is Synodon Inc. (TSX.V:SYD), a company that has a proprietary, airborne remote-sensing technology to detect leakage from oil and gas pipelines. It recently got a patent in both Europe and the U.S.

This technology is excellent; it is actually something that was part of the Canadian Space Agency. More than $53 million was spent on R&D, and the market is huge. The total market demand for Synodon's services is more than $1.6 billion.

The airborne surveys have a huge advantage over the currently deployed manual inspection method, as you could imagine.

The natural gas industry currently experiences 2 million leaks a year, causing loss of nearly 2% of its product and adding to greenhouse gas emissions. Regulatory authorities impose fines for leaks up to $1 million per incident, and government mandates require frequent inspection and reporting. Synodon services bring customer benefits such as increased revenue due to increased throughput, risk mitigation of both safety problems and regulatory fines and operational efficiencies.

TER: But I can't imagine this is the first company to have developed this.

VR: No, probably it's not, but it has a different take on this platform. Like I said, the current market is covered 80% by handheld, on-surface devices. The solution offered by Synodon is airborne and significantly increases the aerial coverage and productivity, and that leads to lower costs for the customer. That is a big advantage, and I think that they can replace a good chunk of the existing market, which consists of land-based, manual inspection type devices.

TER: You said there were two.

VR: And the other one I like is AgriMarine Inc. (TSX.V:FSH), which has developed a closed-containment system for fish farming. This is another example of how cleantech is not just about renewable energy.

This is a company that has developed a system, which is now commercial, to rear fish such as salmon and trout inside a solid wall containment unit. The system is very environmentally friendly, and mitigates direct environmental impact of aquaculture such as waste buildup and fish escapes.

TER: Fish escape?

VR: Yes, most of the fish and seafood we eat nowadays comes from farms and not from the ocean. Most traditional aquaculture is currently done using net cage technology, which is not very friendly to fish or to the environment. It has lots of issues such as waste buildup, and a lot of the time fish escape from the net cages leading to a lot of water contamination, that kind of thing. AgriMarine basically builds proprietary fish tanks; these can be as big as 5,000 cubic meters for raising salmon, trout and other fish.

The market opportunities for this technology are enormous. We don't believe that there is any other company that has successfully commercialized this closed-containment technology. AgriMarine has, and now they're producing in B.C., as well as in China, which is their main focus. The first commercial cash crop is coming in this fall. It's a tremendous opportunity for this company, and for expanding this technology through various forms such as joint ventures.

TER: So, there's some cash flow coming and some prospects for growth.

VR: The company raised more than $5 million about two months ago, so they have some capital to expand these fish farms that they are building using this technology.

TER: Are they metal cages?

VR: Earlier they were using concrete to build these fish tanks. Now these tanks are built using incredibly strong shipbuilding material, consisting of a fiberglass-reinforced plastic sheath surrounding closed-cell high-density foam. One of the advantages of this technology is that it is proprietary.

TER: It's basically a better mousetrap, but it's a fish trap.

VR: Exactly, that's a good way of saying it.

TER: What about AgriMarine's prospects for growth?

VR: I think the growth will finally come to this company a bit later than we had anticipated. But, finally, it is doing the right things and getting to the right place.

TER: Do you have some parting thoughts on cleantech?

VR: Typically people think of cleantech as renewable energy plays, but we believe it is a much broader term. Investors should look for those sectors that address issues faced by mass markets, and select companies in those areas that have sustainable, long-term business models. If investors follow this approach, we believe investors could do well in this sector.

Vikas Ranjan is a management and investment professional with over 15 years' experience in diverse areas of investment management, finance, customer analytics and investment research. Vikas is a principal of Ubika Research, a specialized research and analytics company with a wide range of small-cap clients and operations in Toronto and Vancouver. Vikas' previous experience includes various management positions in companies such as TAL Global Asset Management and Bank of Montréal. Vikas has a strong knowledge of financial markets and has researched and analyzed companies in diverse industry sectors and markets. He holds a BA in Economics (Hons.), Masters in Management Studies from the University of Mumbai, India and an MBA in Finance from McGill University. Prior to cofounding Ubika, Vikas cofounded P2P Systems Inc., a company acquired by Toronto-based technology company Microforum Inc.

Ubika Research specializes in small-cap companies where market capitalization amounts to less than $500 million and offers market insights to end investors and market participants.

Ubika Research provides access to all research reports and investment ideas through www.smallcappower.com. Users can sign up to receive free daily emails on small-cap stock picks, research and investment ideas.

SmallCapPower.com (SCP) is a leading resource for small-cap investing. As an interactive website with rich investment content and dynamic functionality, SCP brings investors and financial industry professionals together to discover and communicate with small-cap companies.

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 or The Gold Report: None.
3) Vikas Ranjan: 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.
4) Ubika Research has received fees from AgriMarine Inc. in the past to provide research coverage.
5) Synodon Inc. is a client of Small Cap Power, a division of Ubika Corp. Synodon is a featured company at www.smallcappower.com, and Ubika can receive fees and stock options for providing exposure services to Synodon.

Except for the historical information presented herein, matters discussed in this interview/document contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from any future results, performance or achievements expressed or implied by such statements. Nothing in this interview and report constitutes an offer or invitation to purchase or acquire any shares in any company or any interest therein, nor shall it form the basis of any contract entered into for the purchase or sale of shares in any company mentioned in this interview and report.

Ubika Research and www.smallcappower.com are both divisions of Ubika Corporation. They are not registered with any financial or securities regulatory authority and do not provide or claim to provide investment advice or recommendations to readers of this report. For making specific investment decisions, readers should seek their own advice. For full disclosure, please visit: www.smallcappower.com/disclosure.aspx.
Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.
Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.
Streetwise Reports LLC
P.O. Box 1099
Kenwood, CA 95452
Tel.: (707) 282-5593
Fax: (707) 282-5592
Email: jmallin@streetwisereports.com






Stay on your toes volatility will be the order of the day and have a good one.

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

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

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

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


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

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

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

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



Wednesday
Aug252010

Khan Resources Incorporated: Battles On!

Khan Res Chart 25 August 2010.JPG

As charts go, they don't come much more volatile then this one of Khan Resources. The legal battle with the Russians is set to continue with many twists and turns yet to come.

Russia is moving forward with plans to expand the role of nuclear energy. But is it resorting to strong-arm tactics to secure uranium properties in neighbouring countries?

This is a short clip from BNN who spoke to Jim Doak, chairman, Khan Resources, which is suing the Russian company ARMZ for unduly influencing Mongolia into eliminating Khan's mining and exploration licenses in the country, please click here to see it. How this situation will unravel remains to be seen but we do appreciate the efforts of Mr Doak in that he is standing up to a much bigger adversary.



Scanning the air waves a little further we came across this article on Market Watch that may be of interest to you, please click here to read the article in full.



The claim has been brought by Khan and certain of its subsidiaries, and seeks damages from ARMZ and its affiliate in the total amount of CDN$300,000,000, including equitable compensation resulting from their breach of fiduciary duties as one of Khan's joint venture partners and a shareholder of Central Asian Uranium Company, LLC ("CAUC"), general damages resulting from their unlawful interference with the plaintiffs' economic relations, general damages resulting from their deliberately causing damage to Khan's and its subsidiaries' rights, business reputation and property and aggravated, exemplary and punitive damages.

The statement of claim alleges, among other things, that the harmful conduct of ARMZ and it affiliates, namely in seeking to establish a joint venture with the Government of Mongolia over the Dornod uranium region without regard to Khan's rights and interests, impugning the legitimacy of Khan's interests in Mongolia, interfering with its economic relations with MonAtom LLC (Khan's other joint venture partner in CAUC and the Mongolian state-owned entity with which Khan sought to pursue a strategic transaction), and interfering with the competing and superior take-over bid by CNNC Overseas Uranium Holding Ltd., all with the goal of eliminating Khan's interests in Mongolia, has caused Khan, its subsidiaries and its shareholders substantial damage.

Well there we have it, for disclosure purposes we still own shares in Khan Resources and will continue to do so until this court case resolves itself.


Stay on your toes volatility will be the order of the day and have a good one.

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

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

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

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


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

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

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

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



Tuesday
Aug242010

MacMurray Whale: Find Energy Catalysts, Find Growth

Source: Brian Sylvester of The Energy Report 8/24/10
http://www.theenergyreport.com/pub/na/7174

If there were an alternative energy sector exam, Cormark Securities Analyst MacMurray Whale would ace that test. He knows the micro and macro forces at play in a truly global sector and how those forces are affecting companies seeking growth in largely uncharted waters. It's altogether uncommon knowledge but in this exclusive with The Energy Report, Whale provides a heady glimpse at some prospective alternative energy plays with tangible catalysts for growth. MacMurray likes some big-cap energy developers paying dividends and some much smaller solar plays with big upside. It's an alternative energy cheat sheet you don't need to feel guilty about.

The Energy Report: MacMurray, if the alternative energy cycle were a year, what month would we be in?

MacMurray Whale: In general, I would say about March. But I think that all of the different subsectors have different timelines.

Ten years ago, we would have been talking about fuel cells and hydrogen, and people would have said at that time that we were in the January of that business. But if you asked me about those companies today, I would say we're pretty much exactly where we were 10 years ago. From a technology-development point of view, there have been amazing developments. But from a marketability perspective, while many drivers have improved, there has been almost no improvement in the financial viability of the companies providing the technology. We're closer but, as an investor, you want to see progress in the business model. We've seen very little progress on the business models of some of the tech names in the alternative energy space.

But if you asked: "Where are we in terms of solar power?" I would say it's vastly different now. Ten years ago, a few off-grid early adopters were paying huge prices simply because they needed the power in a remote location. Now, in certain areas of the world, solar photovoltaic power systems are seeing grid parity. From a market development point of view in solar, we're in December in some parts of the world.

If you're talking about wind, you're beyond that year; it's competitive with incumbents in some places. But if you're talking transportation battery technology or natural gas transportation technology, you're probably not even in midyear yet.

TER: What are the catalysts for growth?

MW: I think there are three major ones: finance, regulation and let's call the other "technology development."

In the finance world, the world went through a balance sheet crisis that caused a recession. Now capital is more expensive and less available. We need to see a willingness for lenders to lend and allow the balance sheets to get bigger again. That's the catalyst we're waiting for.

In terms of regulation, new legislation is very important because of the nature of the incumbent technologies that are being challenged by these new technologies. In some cases, you need regulation to force adoption; in some cases, the regulation helps reduce the costs of switching to a newer, riskier technology. The Cap and Trade Bill that made its way through the House but didn't make it through the Senate would have been a huge regulatory catalyst. There was an energy portfolio standard that was also removed. That would have been a significant catalyst because it would have forced the utilities to adopt alternative energy technology.

The last one, technology development, is just all about hitting a particular cost target. You can't just have performance and cost parity with the incumbent technology. The cost and performance must be better than the incumbent technology because of the risk associated with the new technology.

TER: What's going to give financial institutions confidence in this sector?

MW: That's a good question. I think ultimately it is confidence that a particular technology is ready. What I mean by that is not necessarily that it's cheap and not necessarily that it's hugely better performing, but simply that the risk associated with its adoption is in line with the return that it is providing.

And further confidence will be built around an improving global economy. I think the U.S. is still hugely important in investor sentiment. Just the strength of the economic recovery will create more willing investors because they will be feeling more positive and they will put more money to work. And then that bullishness on the economic front will mean higher energy prices, and that will be a major driver. Although I realize that seems a bit of a circular argument.

TER: But what if an investor wants to put some money into alternative energy. What's there to get that investor excited?

MW: We've seen a big shift just in the last 6–12 months. In the power development space, the power developers that aren't cash-flow positive or the ones that are but don't have a dividend are down 25% over the last 12 months. There's a whole other group—the large caps with a yield—that are up 25%–30% over the same period, so there's been a flight to quality. Northland Power Income Fund (TSX:NPI.UN), Innergex Renewable Energy Inc. (TSX:INE) or Algonquin Power and Utilities Corp. (TSX:AQN) are companies that are primarily renewable—wind, hydro and solar—and those companies have been able to raise capital, raise debt, win contracts and build projects. And their share prices have improved.

The share prices of developer companies, such as Plutonic Power Corp. (TSX:PCC) or the really small geothermals, have really been punished, because an investor looks and says, "Well, I can get an 8% return on a Northland Power, which has projects operating with solid contracts and their projects have come in under budget."

But looking at geothermal power developers, where there is much greater upside, investors will ask about the cost to build, and see that it requires a third or half the total capital even before the resource is known. And the investor just says, "Not right now, thanks."

TER: So then how do alternative energy companies attract the money that's going into oil and gas and even mining?

MW: The power companies need to show a really big resource that is undervalued that some good management team can extract value from; whereas the technology developers have to have something proprietary and not difficult to bring to market.

We've seen some crossover on the geothermal side because it has similarities with mining. The valuation on a geothermal stock is akin to a mining company or an oil or gas exploration company, where you quantify the resource and then discount it.

In contrast, U.S. investors are a lot more used to tech investing. It's like Google Inc. (NASDAQ:GOOG) or Microsoft Corp. (NASDAQ:MSFT), you just get a hockey stick of growth and you take a multiple of earnings into the future and then discount it back.

The people running these businesses and we, as analysts, are trying to find the right investor base for a particular business model. Very rarely have I seen an investor who invests using the "hockey stick" approach who will look at, say, renewable power. However, he will look at a renewable tech play. But on the power side, the investor who does the net asset value (NAV) approach will look at the geothermal plays.

These days, it's just easier for the mining and the oil and gas guys to get their head around a resource value. Because when all is said and done, there's a hard asset to backstop valuation.

TER: In a recent Cormark report, you have some impressive target prices on several companies among the power developers. You have projected greater than 100% growth for MagIndustries Corp. (TSX:MAA), Ram Power Corp. (TSX:RPG) and U.S. Geothermal Inc. (TSX:GTH). Can you tell us about each of those companies?

MW: All these names are typically very early stage companies. MagIndustries has a massive potash project in the Republic of Congo. The resource pre-exists Mag and goes back to the 1950s. MagIndustries has spent well over $100 million developing it. It's a carnallite deposit, and they're planning to use solution mining on it. If this project gets built, it's worth at least a couple of dollars a share. However, they need to raise $1.5 billion to fund the project, and they're a tiny company. Clearly, they don't have the balance sheet to do that, so Mag is looking for a partner. We've been waiting for a Chinese developer to commit to providing that money. A couple of weeks ago, Mag management said they're going to sign a project development agreement with the Chinese sometime in late August. That got people excited again.

TER: They are going to invest $1.5 billion in the Congo?

MW: Yes, there is a lot of country risk. The challenge when you do the valuation is that there better be a lot of upside in order to take that risk. Depending on your potash price and your discount rate, you can easily expect $2 upside. You talk to someone else and he says, "Oh, no. Potash prices are going to go higher in a couple of years; this is a $4 stock." The point is the stock is worth way more than $0.20 or where it's trading now.

These things can turn on a dime, but there's a ton of development risk, and that's why we have a "spec buy" on it.

TER: And Ram Power?

MW: Ram is a geothermal power developer. It has huge potential upside because they have a lot of resources that have been identified and some that they're drilling out. Their first plant is up and running in Nicaragua, and they have power projects in Nevada and California. What sets them apart, and this is very important in power development, is their capital resources. They have a very strong balance sheet, and they're developing in areas and in ways that will allow them to meet deadlines for the investment tax credit (ITC) in the U.S. That's hugely important because that allows them to leverage their balance sheet.

When we value power developers we take the cash they have on their balance sheet and assume that it is used just for the equity position in their various projects. Whether it's U.S. Geothermal, Magma Energy Corp. (TSX:MXY) or Ram Power, you can get an idea of how much of their pipeline is funded on an equity basis. Of course, they still have to raise debt, but notably there isn't any more equity dilution to those projects given the balance sheet. That's the principle on which we're rating these stocks. We're able to say, "Forget about the power agreements they have; just look at the cash." That strategy takes them very far along in development because they can leverage that with the investment tax credit.

This approach also allows you to do a multiple; that's the market cap divided by the cash flow the company can generate from their balance sheet when it's deployed. Ram is trading at less than two times on what we call a price-to-adjusted-cash-flow, whereas a lot of the other companies are trading at 4.5, 5, or even as high as 8 times. Northland Power will have no problem funding its pipeline. It's trading at a much higher multiple, but it should because it's a lot less risky.

TER: It sounds like Ram's management has a good grasp on things if they're getting things done in time to maximize the tax credits.

MW: That's right, and that speaks to another very important point. I think this separates our coverage on this particular subsector from that of other analysts. Ultimately, geothermal development is power development; it's not mining. You need to know at the beginning what the potential economics are going to be for your project.

Getting a power agreement in place is crucial because it tells you what you're working toward in terms of project costs that would make the project financeable. If you can't finance it, you're not going to build it. The lenders have too many good projects to choose from.

TER: Does Ram have power agreements?

MW: It has a number of power agreements for the Orita Project in Southern California, and the Clayton Valley project in Nevada. They are pursuing this acquisition of Sierra Geothermal Power Corp. (TSX.V:SRA), which is very interesting because Sierra brings projects that are adjacent to Ram's properties, yet they're further advanced. It's interesting because both companies benefit. Sierra doesn't have the capital to develop and doesn't have the power agreement. Yet, it's on a timeline to reach the tax credit deadline. Ram has the power agreement and cash, but can't make the deadline.

By merging the two, not only does Ram have a project that will meet the ITC deadline, but it also has a power agreement for it. To me, that is astute project management and development that goes well beyond drilling. There is still drilling risk, but where these guys have gone the drilling risk is lower. The Salton Sea area in California is very well established, and the question is not getting heat and hot water when you drill. The question is: Are you going to get a good flow rate? Are you going to have a lot of sand in the water? But those issues can be managed financially, depending on when you get the drilling done.

There's a different experience level with management at that firm, which is why we like that company.

TER: And your growth projections for all of these companies are within 12 months?

MW: Yes, and that is because of catalysts. With MagIndustries, if the deal with the Chinese developer were not on the table, we wouldn't have that level of potential upside. With Ram, they have a lot of drilling results that are coming out in the last half of 2010 that should be real catalysts for the stock. This isn't something that should take five years; it has the potential to double quickly.

TER: What are the catalysts for U.S. Geothermal?

MW: U.S. Geothermal remains small, but they have some potential projects and expansion projects that are attractive. They've done a very good job developing what they have. They don't quite have the sort of explosive growth, if you will, that some of the other geothermals have, but I think the quality of management is very high.

A lot of investors in this space are interested in takeover candidates whose capital needs to be cheaper. I think U.S. Geothermal could be a potential takeover target.

I think the projects are being undervalued. I think in the space of a year we could see a re-rating of those projects as they continue to move through development.

TER: On Cormark's "Watch List," Acro Energy Technologies Corp. (TSX.V:ART) and NaiKun Wind Energy Group Inc. (TSX.V:NKW) were up about 20% percent in July. Tell us about those.

MW: Acro is a really interesting story in the solar space; they're one of the biggest integrators of solar systems in California. And they don't have any of the sort of principal risks typical with an alternative energy play. They're not buying and building the solar farms. They are operating at the install level, and they're bringing scale to that.

The way they explain how the business works is not unlike getting your kitchen remodeled. You have a guy going back and forth to Home Depot buying equipment at retail and all the while he's wasting time going back and forth. Acro buys equipment at wholesale, gathers the equipment and sends it to the site. The installer shows up and puts it together without wasting any time; it's an efficient business model. And they're buying electrical contractors who don't know anything about solar. They're teaching them the solar part of the game and bringing them the business.

I think they will break even this quarter, showing traction in their model. They've gone from losing money to break even very quickly and are seeing a lot of demand in California. They made some key acquisitions, all in debt, so the debt on the balance sheet is a little high, but it's a really interesting story.

TER: What's the catalyst with Acro?

MW: I think the catalyst is some kind of acquisition. I think there's enough understanding of their business model and confidence in their ability so that if they found a big enough acquisition, they could find the investors to provide funds to buy it while reconfiguring their balance sheet.

They don't need a lot of cash for their business. They have a partner they get a lot of business from, one of the founders who founded this other company called SunRun. This partner is actually the owner of the systems that sit on the customer's roofs. They're providing the capital.

TER: And Naikun?

MW: We basically put that down from formal coverage onto our Watch List because after the company's massive wind project in British Columbia didn't win a key contract, it was a challenge to value the company.

But on that Power Developer List is a company called Etrion Corporation (TSX:ETX), which is a solar power developer. They have a lot of private solar development going on in Italy. Despite everyone's concerns over debt and lending in Europe, they're actually doing quite well and getting financing. They've actually closed on agreements recently, and they have a $60 million credit line with Lundin Petroleum Corp. (OMX NASDAQ:LUPE)

TER: And that's because Lundin is also a part owner.

MW: Yes, so Etrion is actually able to develop very rapidly because they don't need to go to the market and get capital. They can draw down that line and then refinance the projects when they get close to up and running. We've learned that European banks love solar because there's a very low risk associated with the resource, but also in performance. There have just been so many megawatt-hours generated all over the world that people have confidence in these systems providing cash flow.

TER: It seems financing is a lot harder to come by for that kind of thing in America. What's the difference in the mindset between people managing European banks and people managing American banks?

MW: It's a very, very good question. We really haven't been able to figure that out. The European banks like the lack of oil exposure and the lack of natural gas exposure but I believe they're a lot more influenced by the governments to support this type of development.

TER: And in the U.S. you also have a strong oil and gas lobby that probably mitigates some of the government funding for alternative energy.

MW: I think you're right. The oil and gas industry enjoys a number of incentives; just the removal of those would change the cost of energy in favor of renewables.

TER: Are there any other companies you would like to talk about today?

MW: Earlier I talked about yield now being important in investors' minds. I think investors are going to continue to look at yield, and it will be the primary focus on the big-cap power developers. Those are going to trade at a premium. The upside is going to be limited, but investors will receive a dividend or distribution. Our top pick is Boralex Inc. (TSX:BLX). There's a catalyst there with their takeover of the Boralex Power Income Fund (TSX:BPT.UN). When those merge, that company will be trading at a much higher multiple.

Boralax is trading at less than five times the combined cash flow of the company, so there's a significant opportunity there, if that's successful. And I think they will be.

On the technology side our top pick is ATS Automation Tooling Systems Inc. (TSX:ATA). They have a solar element to their business, but it's really an industrial products company. It's like a Rockwell Automation Inc. (NYSE:ROK) in the U.S.; it's exposed to GDP growth. Again, a very low multiple with the option value associated with the spinout of its solar division.

Those two, Boralex and ATS, have real catalysts. They're bigger market cap, a bit more liquid, but they're the sort of stand-out values in the two subcategories that we cover.

TER: Do you have some parting thoughts on alternative energy?

MW: I know everybody's been excited about natural gas and natural gas vehicles and Westport Innovations Inc. (TSX:WPT), but I think that story is over. I think it's not as well managed as it should be; and there's a lot of hype around natural gas that will wane in the next 24 months. I think you're better to stick to lithium and battery technology developers and even the integrators like Azure Dynamics Corp. (TSX:AZD), rather than focusing on natural gas in the transportation space.

Solar will come back; those technologies will do better and wind is certainly solid. But if you want something that has that real sex appeal, it's still the batteries and hybrids and the technology suppliers on that front. The name to look at there is Azure. That stock has done well, and I think it will continue to do well.

TER: This has been great, MacMurray. Thanks very much.

MacMurray Whale heads the Power & Alternative Energy equity research team at Cormark Securities Inc., a leading private investment dealer/broker based in Toronto, Canada. The team covers more than 40 publicly listed power developers and technology firms, active in creating, producing and deploying renewable power and other low carbon/environmental technologies. MacMurray has 20 years' experience in technology research and development reaching back to his doctoral work on photovoltaic energy conversion at MIT and continuing through his research program as an engineering faculty member at the University of Victoria. MacMurray was the recipient of the prestigious "1967" Science and Engineering Postgraduate Scholarship for his work on microscale heat transfer.

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




Stay on your toes volatility will be the order of the day and have a good one.

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

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

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

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


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

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

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

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



Thursday
Aug192010

Saskatchewan: A Gold Mine for Uranium

Uranium Mines in Canada 20 August 2010.JPG

By Marin Katusa, Casey’s Energy Report


Mining is a risky business and accidents happen. But when your mine is the world’s largest uranium deposit, fourth largest copper deposit, and fifth largest gold deposit, an accident can cost a little bit more than the average. Something BHP Billiton found out after the shaft accident at its flagship Olympic Dam mine located 560 kilometers north of Adelaide, South Australia.

In October of last year, a breakdown of one of two haulage systems saw a loaded iron skip plummeting to the bottom of the 800-meter-deep main shaft. It caused enough damage to the inside of the shaft, and to the gears and the wheels that bring the ore to the surface, that it took nine months to repair.

So much does it actually cost when production is halted at a mine that’s clearly won the geological lottery?

BHP Billiton revealed on July 21 that annual copper production was down 11% in 2010, uranium production off by 43%, and gold production was 19% below the normal. The amount of material mined in fiscal 2010 was 5.3 million tonnes, down 9.8 million tonnes from last year.

The mine has, according to the company, returned to full production now. There is however, the small problem of contracts.
One of BHP’s largest clients is China, the country whose energy appetite just can’t get enough. The country that will be buying up to 5,000 metric tonnes of uranium this year.

The Olympic Dam mine produces 7% of the world’s uranium, production that was affected by the shutdown. While production is getting back on track today, the feeling in the BHP boardroom is one of unease.

The reason: the rise in the number of new nuclear power stations coming online in the next few years, along with all the contracts that need to be fulfilled. Expansion plans are in the works already. BHP is looking to massively increase the size of the mine and has handed in a 4,000-page environmental impact statement (EIS) draft to the Australian government.

The sticking point is, they’re going to have to go deeper, and it’s going to get a lot more expensive. The Australian government isn’t going to turn away from the opportunity to tax this goldmine either. And if the problems of additional cost aren’t enough, the rail system in Australia can’t handle moving that much ore at all times, so tack on some more delays.

Unsurprisingly, BHP is out scouting the market for some good deals on uranium. Top on their list is Saskatchewan, Canada.

Why Canada Is 45 Times Better Than the U.S.

The uranium deposits in Saskatchewan aren’t just significantly large; they’re also the highest-quality uranium known on the planet. The ore mined at MacArthur River has an average ore grade of 21% – average ore grades are given as a percentage of uranium oxide in the ore.

Just to compare, the uranium found in the U.S. is usually around 0.4 - 0.5%. That makes the Athabasca Basin uranium 45 times higher-grade.

The uranium deposit at MacArthur River can be visualized as a few school busses parked within a school football field. It might sound small, but in uranium-speak, that deposit’s big! It’s big because the grades are incredible in the Athabasca Basin. And that makes it huge financially.

Canada also ensures that the uranium it sells is used solely for electricity generation at nuclear power plants. The end use is very strictly enforced through an assortment of international non-proliferation treaties and Canadian export restrictions.
In fact, uranium on a per-tonne basis is worth more than gold if you’re in the Athabasca Basin. Given current uranium spot prices, it can fetch a staggering US$13,500 per tonne. That’s unheard of!

BHP Takes a Whole Building in Saskatoon

After meeting with many uranium executives, one can’t help but notice the large BHP building off 3rd Avenue while walking around Saskatoon. It’s not just the potash and diamonds that BHP cares about in Saskatchewan. The quantity of uranium underneath the Athabasca Basin is almost beyond reckoning. It can provide substantial wealth to the right company and the right investor.

If BHP decides to enter the uranium sector in Saskatchewan, which companies are on their short list?

That’s exactly what I was finding out while wandering the prairies.
----

If you want to know which juniors are the most likely to be taken over by uranium-hungry BHP, you’ll find out soon in Casey’s Energy Report. After Marin has done his due diligence, he’ll emerge with a few hand-picked small-cap companies that show the greatest potential to provide investors with handsome returns. Take your 3-month risk-free trial now and get in early when Marin gives the starter shot. Learn more here.







Stay on your toes volatility will be the order of the day and have a good one.

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

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

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

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


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

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

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

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



Thursday
Aug192010

Atticus Lowe: Scouting for Good Value

Source: Brian Sylvester of The Energy Report 8/19/10
http://www.theenergyreport.com/pub/na/7134

Atticus Lowe.JPG

Atticus Lowe, chief investment officer with West Coast Asset Management, is the kind of guy you would want making your investment decisions. He is coauthor of The Entrepreneurial Investor: The Art, Science and Business of Value Investing. In this exclusive interview with The Energy Report, Atticus discusses his value investing strategy. He also talks about the long-term potential of natural gas, questions shale gas production projections and offers a few names with oil exposure that he believes are not getting enough love from the markets.

The Energy Report: Atticus, on the institutional side, fund and pension managers are keeping their portfolios a little light on energy plays. What sort of event is needed to get the institutional side back to pre-2008 levels in terms of equity?

Atticus Lowe: Institutions are light on energy right now because nearly all of the independent oil and gas companies out there are leveraged to natural gas. The outlook for natural gas is pretty foggy, at least in the short term. The discovery of massive shale gas resources has been a blessing for the country and to some extent a curse for the exploration and production (E&P) industry. The implication of these shale gas discoveries is that natural gas prices are likely to remain quite elastic until demand increases.

There's so much shale gas out there that it's going to keep a cap on gas prices, albeit perhaps somewhat higher than where we are today. Credit Suisse recently averaged the cost structure of more than 40 independent producers and found the total unit cost to be $5.74 per Mcf of natural gas equivalent. Current prices are $4.25 and the 12-month strip is at $4.65, which creates a puzzling situation. Why would companies be drilling today if they can't make a return on capital, let alone break even? There are several reasons.

First off, oil prospects are scarce and most companies don't have much to drill other than natural gas prospects. Second, many companies are drilling to hold leases with the hope that natural gas prices will increase in the future and provide attractive economics for further drilling on these leases. In addition, many companies feel pressure from shareholders to spend money and increase production and cash flow. All of these issues are weighing on natural gas, and that has backed a lot of institutions away from energy.

TER: How about longer term?

AL: Long term, I fully expect domestic natural gas demand to increase, and I expect that to be a driver for gas prices and to be fantastic for the industry, our country and our economy. I don't know whether you have seen the "Pickens Plan" or if you've seen T. Boone Pickens talking on CNBC during the past couple years, but he points out that domestic natural gas is clean, it's cheap, and it's American. I expect demand for gas to increase as a result of compressed natural gas vehicles, primarily from the fleets of larger vehicles, and also from plug-in electric vehicles, which source their power through electricity, which is often generated from natural gas. Honda already makes a compressed natural gas vehicle and they are big in Europe. In that context, you're paying less than half the price for the same amount of energy from natural gas versus oil and emitting far less CO2, and you're supporting the economy while creating tax revenues and jobs.

I also expect more dirty coal-fired power plants to be replaced by natural gas-fired power plants over the long term.

TER: With institutions shying away from natural gas companies, does that create opportunities for the retail investor?

AL: I really think it does. Oil prices right now are tied closely to the economy; historically, it's been an uncorrelated asset, a hedge. But right now everyone is confident that supply and demand for oil is very tight, and long-term demand is going to significantly exceed supply. I don't know if supply and demand will converge in one year, two years or five years, but I definitely expect to see $150 oil again this decade, and I wouldn't be surprised to see oil touch $100 by next year.

The independents are being penalized for being really gas heavy right now. You're seeing the oil and gas companies scrambling to get domestic oil exposure, and that includes acquisitions. Buyers are often paying more than $100,000 per flowing barrel of oil right now and oil reserves are trading hands at more than $20 per barrel. SandRidge Energy, Inc. (NYSE:SD) recently bought one of the few publicly traded pure play oil companies out there, Arena Resources. They paid $182,000 per flowing barrel and $22 a barrel for proven reserves, two-thirds of which were undeveloped. As all that relates to retail investors, most of the big oil was had in America decades ago. There's still a lot of oil out there, but it's in small pockets that typically aren't enough to move the needle for the larger independents and the majors. But for the micro- or small-cap exploration and production (E&P) company, there is a lot of opportunity.

TER: How so?

AL: There's opportunity to create value through aggregating assets, and through discovering relatively small fields that may have been overlooked. And there is definitely opportunity to apply modern technology to established tight oil deposits that weren't commercially viable at lower historic prices. With modern technology, you can go back into a lot of known deposits and make them into economic plays. Some of these are big enough to attract the majors, such as the oil window of the Eagle Ford shale, but a lot of them are small company plays.

TER: That's certainly happening in the Permian Basin.

AL: Sure, it's happening in the Permian. It's also happening up in the Bakken Formation, and it's happening in the Niobrara Shale play. What you've seen the technology do with the shale gas plays, well, you can take that same basic technology and apply it to certain tight oil plays.

TER: Are you talking about radial drilling and that kind of thing?

AL: Primarily fracture stimulation, through either vertical or horizontal wellbores. A lot of the tight oil plays have responded well to fracture stimulations in vertical wells, and some of them are now responding well to horizontal wells. Long laterals with multi-stage fracture stimulations are having great early success in the Eagle Ford shale, the Bakken, and in the Niobrara Shale. Now, this kind of success is at the very front end of the production curve, and we don't have a lot of data yet. I don't know how the oil shale plays are going to ultimately work out, but there is already a lot of long-term evidence supporting the benefits of fracture stimulation in tight conventional reservoirs. With modern fracture stimulation technology, even conventional reservoirs that may not have great permeability can really be opened up and improve economic returns.

TER: What are some companies in those types of plays?

AL: One company that we follow— and we don't own it—is Evolution Petroleum Corporation (NYSE:EPM). Evolution has done an outstanding job leasing up older fields and bringing in development partners at fantastic terms to redevelop the assets utilizing carbon dioxide (CO2) floods. Venoco, Inc. (NYSE:VQ) had done a great job at this as well. Typically the prospect generator in this scenario can reap a large upfront cash payment while retaining an overriding royalty interest and a sizeable back-in after payout interest. Evolution and Venoco both partnered their CO2 plays with Denbury Resources Inc. (NYSE:DNR), which specializes in tertiary oil recovery using CO2. Evolution is a publicly traded micro-cap oil and gas company that appears very cheap, and insiders own a lot of the stock.

We own, through one of our own investment vehicles, a sizable stake in a small-cap company called EnerJex Resources Inc. (OTCBB:ENRJ). We own about 20% of the equity. The market cap is barely over a million dollars, but the company's got nearly 2 million barrels of oil reserves. Those reserves—based on the company's reserve report in its recently issued 10-K—have a present value of more than $20 million, which assumes a 10% discount rate back to present. The stock is trading at less than $1. Net of the company's debt, the proven reserve value based on that discounted valuation scenario exceeds $2 per share. If you apply a $100,000 per-flowing-barrel metric to the company's net production, you're in that same ballpark. Institutions aren't able to get this type of oil exposure because these companies are so small. They're not liquid enough, and they're not big enough to really move the needle for institutions. I think micro-cap oil stocks are an interesting place for retail investors to look.

EnerJex has debt, of which our firm represents a portion, and I think this must be holding the stock back, but it appears to us that the asset value exceeds the value of its debt. I know the company has been pursuing some strategic alternatives, and we're hopeful that EnerJex can bring in a few million dollars to help the company move forward and pursue its strategy, which I think is a really good one.

They're basically an aggregator of oil reserves from mom-and-pop operators out in Kansas, which as a state is a large producer of oil. Kansas produces around 30 million barrels of oil a year, and the top 15 producers in the state make up a very small percentage of the production, less than 30%. The remaining oil production from Kansas comes from around 2,000 different producers. There are just tons of tiny producers out there that probably aren't operating very efficiently and therefore aren't realizing the value of their assets.

TER: And some probably just want to sell.

AL: Oh, absolutely. Being a public company, EnerJex has the ability to use its stock as a currency, which makes great sense as long as they're making acquisitions that are accretive to shareholders.

These are some of the oil opportunities available to retail investors that I don't think most institutions even look at. There aren't many pure oil plays out there for the institutions to invest in other than the majors. There are some independents in the Gulf of Mexico that have pretty significant oil exposure, but the whole Gulf of Mexico situation is very cloudy because of the drilling moratorium and the uncertainties about future insurance costs. People are pretty leery of that and are not willing to pay what they would have paid before the BP Plc (NYSE:BP; LSE:BP) spill.

TER: Where do you think EnerJex's stock price could go?

AL: In the 10K that was just filed, the stock net of debt could increase exponentially from its current price. There's no reason they can't use the same strategy moving forward, continuing to make accretive acquisitions, and increasing shareholder value every step of the way. The only obstacle we see is the debt overhang, and we are hopeful this will be addressed in 2010. We have high hopes for EnerJex.

TER: You have a three-pronged approach to energy investing, and that involves ultimately knowing a few companies really well. As part of that approach, as you have stated in previous interviews, you put the strongest emphasis on management. But others might argue that good assets trump good management because you can always bring in good people to get the most out of existing assets, whereas even the best management can do little with poor assets. Why do you put such a strong emphasis on management over assets?

AL: It's funny you say that about good assets trumping good management. We've been guilty of making that assumption before, and some bad experiences have really led us to our emphasis on management. You can certainly bring in good people, but bad management won't necessarily bring in good people. They might not be "incentivized" to. And good assets can be ruined by bad management; bad management can take a good asset base and overleverage a company and kill it. They can allocate the cash flow poorly; bad management can do all kinds of things with good assets that destroy shareholder value. It doesn't mean that the underlying asset won't still be good, but it does mean that there is a lot more risk to making money as an investor because the company won't necessarily be creating per-share value. That's what we're intensely focused on: per-share value creation. We're not looking for a company to grow exponentially if its share count or debt grows at an even more rapid pace.

TER: But what can good management do with poor assets?

AL: We're not looking for good management with poor assets, but we would certainly consider it if the price were right. Good management can create opportunities that create future value. That is one of the first things that we look at: is the company a good steward of capital? Does management have their own skin in the game? How are they incentivized? What is their track record of allocating capital? What is their focus? We like to find people who are focused on creating per-share value and have a track record of doing so.

TER: Do you have a management ownership threshold that you think is ideal? For instance, if a manager owns 10% of a company, is that good? If they own 30%, is that too much?

AL: We like it if it's meaningful to them. If it's someone who has a giant net worth and they have hardly any skin in the game, then it's a turnoff. But if it's someone who isn't necessarily wealthy, but they've got a sizable amount of their net worth in the company, then that is more important to us than owning a specific percentage.

Another thing we pay close attention to is company culture. Our co-founder here at West Coast Asset Management is the founder of Kinko's. He really built that company into a success based on a positive company culture. We like to eat in the lunchroom when we visit a company, talk to the co-workers and get a feel for the people. Are they hungry for success or are they just there to collect a paycheck? That's an intangible that you can't quantify, but it's something that we pay attention to. Management has a lot to do with that.

TER: The other two prongs of that strategy are the assets and catalysts for growth. Please explain those.

AL: We like to find underpinning asset value that not only supports the price the stock is trading at, but also provides upside. We want to buy a stock at a discount to what we think its underlying proven reserve value is. We will look at the proven reserves, the expected cash flow from those reserves, and try to buy the company at a discount to those values.

And the third prong would be catalysts, whether that's something the company has on its plate or something that the company is able to pursue through its strategy. A catalyst might be a company sitting on a lot of undeveloped acreage that is highly prospective and not accounted for in its reserve value and share price. Or it might mean a strategy like the one EnerJex has, where the company can deploy capital opportunistically in a sweet spot: something that could provide a catalyst over the long term to increase shareholder value.

TER: In an interview you did with Oil & Gas Investor, you said: "I'm skeptical about a lot of these average type curves you see for the shale plays. We shouldn't be surprised to see the economic threshold of these plays really increase over the next five years." That seems a bit bearish.

AL: Bullish on prices, but bearish on the information that is being given to Wall Street.

TER: Are you saying these companies are lying to The Street?

AL: I personally looked into a number of these gas shale plays where management teams are holding out curves of what the production from a single well on average is expected to do over its life. If you look at the actual production of the wells they've drilled to date, the median is nowhere near the curve they're showing people. It's looking at the potential through rose-colored glasses in my opinion. The results from the wells that have been drilled often don't jive with the type of curves we're being shown. Even if they did, you're at only the very front end of the well's life in these shale plays. In some cases, we only have data for less than a year of production on some of these large horizontal shale plays. Yet projections for production are being made 20–30 years out about what the wells will be producing down the road. And those projections are being extrapolated back to present quantities of proven reserves and associated value. I think it's quite risky to assign value to reserves based on future production that is largely unknown.

TER: You coauthored a book on long-value investing titled The Entrepreneurial Investor: The Art, Science and Business of Value Investing. What are three solid value investments in the E&P space?

AL: We have a large position in Sonde Resources Corp. (NYSE:SOQ). That's a Calgary-based company that's got western Canada oil and gas production and some enormous assets offshore Trinidad. The company was recently recapitalized from the capital structure all the way up to the management team and the board of directors. The market cap right now is around $180 million. I think their western Canada assets are worth double that over the next two years, and the company has assets in Trinidad that are potentially worth multiples of the current share price. They're partners with BG Group Plc (OTCQX:BRGYY; LSE:BG) and have discovered somewhere in the neighborhood of 5 trillion cubic feet (TCFs), of which they own 25%. Trinidad is one of the largest liquefied natural gas (LNG) hubs in the world, and those are valuable gas reserves. As the company moves forward on the development plan with BG in the coming year or two, I think the company will start to realize value for those reserves. I also think that at the current share price, it's a likely acquisition target for any number of companies that have western Canada and international exposure.

Sonde is starting a very high-impact exploration project offshore Tunisia later this fall. From my understanding they will be drilling a stone's throw away from a Marathon Oil Corp. (NYSE:MRO) discovery made 10–20 years ago that tested at more than 5 thousand barrels of oil per day. Marathon abandoned this discovery for political or economic reasons when oil prices were much lower. In addition, I believe this prospect adjoins a very large structure that is defined on a 3D seismic survey where another operator, PA Resources AB (NASDAQ OMX Nordic:PAR), is already producing oil on a large scale. I think Sonde is teed up to make a very large oil discovery and prove up a very large oil reserve base in Tunisia. That's special because oil is so rare in the market right now, and the company is so small that it could have a major impact on the share price.

TER: What's your target price on Sonde?

AL: We don't have a target per se, but I think the stock will trade hands at multiples of its current price in the next three years. I don't see why the stock couldn't double within the next year if they execute as they have been.

TER: Are there others?

AL: We also have a large position in Contango Oil & Gas Co. (NYSE.A:MCF). It's primarily a shallow water, Gulf of Mexico exploration and production company. We consider the CEO, Ken Peak, to be the Warren Buffet of oil and gas. He's very shareholder friendly; he's created a $700 million company with negative equity capital into the business. He capitalized it with very little money, and he's repurchased more equity than he's raised. He also made a grand slam discovery—one of the biggest discoveries on the Gulf of Mexico shelf in the last few decades—and that really put the company on the map. He also made a few other unique investments that were quite opportunistic and turned out to be grand slams. He's not afraid to jump on an opportunity even if it isn't within the company's current business focus. He was one of the first to get into the Fayetteville Shale. He acquired a lot of acreage on the cheap, and sold it for hundreds of millions of dollars just a few years ago to Petrohawk Energy Corporation (NYSE:HK) and XTO Energy Inc., which was recently acquired by Exxon Mobil Corp. (NYSE:XOM). Also, he opportunistically purchased a limited partner (LP) interest in the Freeport LNG facility some years ago for only a couple of million dollars, and ended up selling that for $68 million just a few years later. Ken owns around 20% percent of Contango, so he's got a lot of skin in the game.

TER: What are Contango's catalysts for growth?

AL: From our perspective, the stock is trading at only about two-thirds of the value of its proven producing reserves. So, just with the existing reserves alone, you're buying at a pretty substantial discount, and you're getting the value that management can create in the future with the cash flow from Contango's underlying assets. I think that's a very valuable catalyst, although it's not something you can point to specifically. It's an intangible that we think is quite valuable.

TER: By buying Contango, you're sort of buying shares in Mr. Peak.

AL: Yes, and we're paying a discount, a substantial discount, in doing so. The company is actively repurchasing stock. It's got zero debt and more than $50 million in cash.

TER: What you're saying, too, is that they are focused on earnings per share. If they're buying back stock and they're making money, obviously their earnings per share will increase.

AL: Yes, that's true. And Peak has got two of the best prospect generators in the world on his team, and they're basically incentivized to find big prospects that have a good chance of success. The company is well capitalized to drill those prospects. This team is responsible for putting together the large discovery that the company made just a few years ago, which has really put them on the map.

TER: Do you have a target price on Contango?

AL: We think the stock is worth north of $60 per share, and I think Ken would like to sell at the right price. We're in such a depressed natural gas price market that he is being patient, and I don't think he's in any hurry to sell the company. But I think he would sell the company at the right price.

TER: With oil hovering around $80 per barrel, what are some E&P names with significant oil exposure?

AL: Well, a few that I mentioned—Evolution Petroleum, EnerJex. There are a few Gulf of Mexico companies that appear to be extremely cheap that are fairly levered to oil such as W&T Offshore Inc. (NYSE:WTI) and ATP Oil and Gas Corp. (NADAQ:ATPG).

There are some larger independents that have emerging shale-oriented plays that certainly have upside, but less certainty as to the quality of the assets. For instance, regarding this Eagle Ford shale, the oil window of the shale has become extremely active. A few companies have large exposure to that play, such as Pioneer Natural Resources Co. (NYSE:PXD) and Swift Energy Co. (NYSE:SFY). If these plays work out, as people are expecting, they could really perform well in the months ahead.

Atticus Lowe is the chief investment officer of West Coast Asset Management, Inc., a founder and principal of Montecito Venture Partners, LLC, and a director of Black Raven Energy, Inc. Atticus has been a featured speaker at the Value Investing Congress as well as the Value Investing Seminar in Molfetta, Italy. He is a CFA Charterholder and holds a Bachelor of Arts degree in Economics and Business from Westmont College in Montecito, California.

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









Stay on your toes volatility will be the order of the day and have a good one.

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

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

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

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




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

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

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

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





Tuesday
Aug172010

Yves Siegel: Management, Patience Keys to MLP Success

Source: Brian Sylvester of The Energy Report 8/17/10

Yves Siegel.JPG

Credit Suisse Analyst Yves Siegel believes master limited partnerships (MLPs) are strong investment vehicles, particularly in uncertain economic circumstances. "I don't think there are many other places where investors can put their dollars and get a nice return with very moderate risk," he explains. In this exclusive interview with The Energy Report, Yves talks about the "Big Kahuna" and a handful of other well-managed MLP names with impressive yields and sector-leading growth prospects.

The Energy Report: Yves, as of July 20, 2010, the Alerian MLP Index was up 13.7% for the year, whereas the S&P 500 was down 4.5%. What factors are allowing MLPs to vastly outperform the market right now?

Yves Siegel: I think it's pretty simple. Firstly, MLPs are viewed as good defensive investments in times of uncertainty. Secondly, MLPs provide investors with an attractive, partially tax-deferred yield. Right now, the average MLP yield is around 6.5%. Thirdly, with distributions there's the potential income growth that could average 3% –6%. The yield plus distribution growth still provides a pretty good investment value proposition. I don't think there are many other places where investors can put their dollars and get a nice return with very moderate risk.

TER: Is this an unprecedented time in terms of money pouring into MLPs?

YS: I'm not sure it's unprecedented. Back in 2007, you had a lot of inflow of capital. The difference is the money attracted to the MLP space back in 2007 was what I could call "fast money." It was more hedge fund–based than the more traditional retail investor. They were attracted to the unprecedented growth in MLP distributions. Those investors tended to have a much shorter time horizon. I think they correctly viewed MLPs as a good place to invest, but perhaps too much of a good thing is no longer a good thing.

TER: You mentioned the tax-deferred status of MLP distributions. Is Credit Suisse concerned that the combination of the U.S. federal cash crunch and the success of MLPs in this bear market could lead to further taxes?

YS: There's always a risk that someone in government will take a harder view of the MLPs. We don't see that on the near-term horizon. We would say that the MLPs are building a lot of the necessary energy infrastructure in the United States and that this is creating a lot of jobs. MLPs provide a really valuable service, and I don't think it makes a whole lot of sense to change the tax status.

TER: Kinder Morgan Energy Partners L.P. (NYSE:KMP) did a $75-million equity financing in June and Energy Transfer Partners L.P. (NYSE:ETP) raised about $437 million in a recent financing. In total, MLPs have raised $7.2 billion in equity financings so far this year. Is this normal, or is this amount of dilution cause for alarm?

YS: I'd be careful using the term "dilution." The MLP business model is such that nearly all of the cash flow—after maintenance capital—is distributed to the unit holders. In most conventional businesses, you retain a portion of your cash flow to reinvest in the business. MLPs generally do not do that because of the structure. That raises the question: How do you grow if you're distributing all your cash? The answer: You have to rely on external capital, both equity and debt. As I said earlier, MLPs are financing the infrastructure growth in the U.S. They're building the pipelines, storage assets and processing assets necessary to get the new energy supplies to market. The way they finance that growth is by issuing equity and issuing debt. It's really important to recognize that the MLP structure is very transparent. Just follow the cash. If MLPs were not able to invest that cash productively (i.e., have a return in excess of their cost of capital), they wouldn't be able to continue accessing external capital. That transparency is a plus. The mindset is: I have to be a good steward of capital from investors; otherwise I'm not going to be able to go back and ask them for more money. That rationale is incredibly important. As long as MLPs have good investment opportunities, you'll see relatively high financing requirements and a lot of equity and debt being raised.

TER: Is the $7.2 billion invested so far this year a lot higher than that over the same period last year?

YS: The pace of equity offerings has quickened this year relative to 2008 and 2009 when $6.4 billion and $6.8 billion was raised respectively in each year. This is due in part to the deferral of offerings in those years due to difficult market conditions.

TER: So, this isn't abnormal?

YS: No, it's not.

TER: You have an outperform rating on Energy Transfer Partners. Why do you have an outperform rating on them, and what does ETP plan to do with that capital?

YS: Energy Transfer is one of the companies that we can point to as building out the U.S. infrastructure. Specifically, Energy Transfer is involved in two ongoing multibillion-dollar projects to take shale play gas to market. They're building a Fayetteville pipeline that services the Fayetteville Shale and they have the Tiger Pipeline to access the Haynesville Shale.

We at Credit Suisse embrace the notion that there will be many investment opportunities around developing the shale plays in the U.S. We like Energy Transfer because we see them being able to grow the company via building these pipelines and benefit from the incremental cash flow that the pipelines will generate. We also think the management team is very good and has a very good track record of building shareholder value. Lastly, the MLP has a very nice yield—just north of 7%.

TER: Which MLPs stand to benefit most from their shale-play investments?

YS: Well, you have Boardwalk Pipeline Partners, L.P. (NYSE:BWP). They've spent some $5 billion on long-haul interstate pipelines accessing some shale plays, such as the Fayetteville and Barnett Shales. They also have some exposure to Haynesville. Energy Transfer has a couple of pipeline projects. Enterprise Products Partners, L.P. (NYSE:EPD) has multibillion-dollar investments surrounding the Eagle Ford Shale, which is a new play folks like because not only does it have a lot of natural gas, it also has a lot of associated natural gas liquids (NGLs). EPD is very well poised to benefit from that play.

The "Big Kahuna," Kinder Morgan, also has exposure to various shale plays, including the Haynesville play via their KinderHawk joint venture in Louisiana. They also have large pipeline assets in Texas that give them exposure to the Barnett Shale, and they're a partner with Energy Transfer on the Fayetteville Express Pipeline. They've also teamed up with a small MLP called Copano Energy, L.L.C. (NASDAQ:CPNO) to access the Eagle Ford Shale. Those are just a few of the MLPs that have nice exposure to the shale plays.

TER: A lot of these MLPs are quite large. Is it more encouraging that the "Big Kahuna" is making investments in the shale plays?

YS: Just from the vantage point that Rich Kinder is one of the smartest guys around. Typically, they do an excellent job of trying to identify trends and investing in those trends. Kinder Morgan being there confirms that these shale plays are real, and I think are very viable for the long term. You can make the same case for Enterprise. I mean those guys are extraordinarily bright, as is Energy Transfer's management.

TER: You mentioned that one of the things making these shale plays viable is the NGLs, which require little processing. But, in your research, you also say that the NGL prices will be somewhat lower for the next while.

YS: You have to be careful because not all shale plays are alike. Some have more NGL content than others. I think it's sort of good news and bad news. The good news is that there's a lot of natural gas around. The bad news is that, from a pricing perspective, it's still supply and demand. If there's a lot of supply and not that much demand, it does put some pressure on prices.

As we come out of this recession, we're still building demand. Consequently, natural gas prices are somewhat depressed. We know that crude oil prices are fairly attractive in the $75–$80 range. When natural gas is produced, typically it comes out of the ground wet and has to be processed. The more NGLs produced as a byproduct, the more value that accrues to the producer.

TER: A premium.

YS: Yes. NGL prices tend to track crude because they compete with crude in the petrochemical market. In an environment where natural gas prices are depressed and crude oil prices are strong, NGLs add a really nice premium. Consequently, producers are going to drill in areas that have the liquids-rich natural gas. That's what we're seeing, and that's why the Eagle Ford is such an attractive proposition for producers today.

TER: Which MLPs have a fair amount of exposure to the NGLs?

YS: About a third of Enterprise Products Partners' business is exposed to the natural gas liquids. They just reported on their second quarter earlier this week. That business was very, very strong. In our universe, that's the one company that has the most exposure. There are other companies we don't follow that also have some exposure. ONEOK Partners, L.P. (NYSE:OKS) is similar to Enterprise in that they have an integrated value chain on the NGL side. There's a host of smaller MLPs that primarily do natural gas processing. Those would include companies like DCP Midstream Partners, L.P. (NYSE:DPM), MarkWest Energy Partners, L.P. (NYSE.A:MWE) and Targa Resources Partners, L.P. (NYSE:NGLS). I would classify those companies as more "pure-play" NGL companies.

TER: Going back to your Credit Suisse MLP market overview. It said: "stock market volatility can present better buying opportunities. However, we are not market timers. We continue to add Boardwalk Pipeline Partners, Enterprise Product Partners and Plains All American Pipeline, L.P. (NYSE:PAA)." You discussed the first two earlier. Tell us why you like Plains.

YS: What's so glamorous about Plains All American? They're focused on the movement of crude oil through pipelines, and they also have large storage operations. They recently did an IPO of their natural gas-storage business—PAA Natural Gas Storage, L.P. (NYSE:PNG). I'm not enamored necessarily with the crude logistics business, but I am enamored with really strong management teams that have consistently delivered year in and year out and have a track record of providing shareholder value. Plains All American is what I'd like to characterize as my "Rip Van Winkle stock." I feel I could put my money in Plains and sort of sleep for a while, then wake up to find my investment has grown nicely and feel pretty good about it. That's the Plains All American story—really exceptional managers, great stewards of capital and just a very, very nice track record.

TER: Can you talk about Boardwalk's and Enterprise's management teams?

YS: Boardwalk has very strong pipeline management. They know what they are doing. They benefit from the assistance of Loews Corp. (NYSE:L), a holding company run by the Tisch family that owns the general partnership (GP), and that has been successful guiding the partnership. Boardwalk also has a very capable natural gas pipeline management team that calibrates risk very well.

Then you have Enterprise Products Partners, which was started by Dan Duncan, an impressive visionary in the industry. EPD is a little more of a risk taker than perhaps Boardwalk. By risk taker, I mean a bit more entrepreneurial. Duncan's built the largest MLP that has favorable investment characteristics due to its very large footprint; they are well diversified in different businesses. They have the natural gas liquids business, wherein they are the premier NGL publicly traded company. Then they have natural gas pipelines, refined petroleum products pipelines and crude pipelines. And they are very conservatively financed. It's almost unprecedented to see an MLP that has a 1.2, 1.3 coverage ratio—especially being as large as Enterprise. This is one I'd strongly consider as a core holding among the MLPs.

TER: That's quite the endorsement. Spectra Energy Partners, L.P. (NYSE:SEP), Magellan Midstream Partners, L.P. (NYSE:MMP) and Duncan Energy Partners, L.P. (NYSE:DEP) are all at the bottom of your capital-cost table. Does this position these MLPs for growth? Or does cheap money often lead to bad decisions?

YS: I would agree that cheap money often leads to bad decisions. We've just beared witness to some really bad decisions because of cheap money. As it relates to MLPs (and what I tried to articulate before) is, if MLPs cannot deliver returns in excess of their capital cost, they're going to be in trouble. Some MLPs have made bad investment decisions, and they have had to face the consequences.

As it relates to the three companies just mentioned, Duncan Energy is basically an affiliate of Enterprise Products Partners. Consequently, Duncan has the same sort of financial discipline as Enterprise. Magellan Midstream? I don't mean this in a disparaging way but, when I think of Magellan, I usually think of a company that has been very conservatively managed. But they are also prudent stewards of capital. Lastly, Spectra has demonstrated that they, too, are very prudent when it comes to investing capital.

First and foremost, we take our view of management very seriously. If we don't have a strong conviction that the management team is extremely capable, it's hard for us to have a favorable view of that company. Needless to say, we feel pretty good that the management teams of the companies we've discussed understand risk and finance; and, just as importantly, they understand their businesses.

TER: Among the energy MLPs, you have outperform ratings on Niska Gas Storage Partners, L.L.C. (NYSE: NKA), Kinder Morgan Management, L.L.C. (NYSE:KMR) and Energy Transfer Partners. But you also have an outperform rating on ETP's general partner, Energy Transfer Equity, L.P. (NYSE:ETE). Tell us about Niska, Kinder Morgan Management and ETE.

YS: Energy Transfer Equity benefits disproportionately when Energy Transfer Partners raises the distribution or issues equity to finance their growth. The general partners own something called "incentive distribution rights." The incentive distribution rights reward the GP for hitting distribution targets. Consequently, the GP can grow twice as fast as the underlying MLP. Historically, most GPs have grown faster because of those incentive distribution rights. If one is positive on the underlying MLP, it's not unreasonable to think you may also be positive on the general partner.

TER: Are you saying we're about to see substantial growth in ETE's distributions?

YS: We think ETE is positioned for a compounded annual distribution growth rate of 8.6% over the next three years. ETE owns the general partner and limited partnership units in both Energy Transfer Partners and Regency Energy Partners, L.P. (NASDAQ:RGNC). As such, ETE stands to benefit from the growth of these two MLPs.

TER: And Kinder Morgan Management?

YS: Think about Kinder Morgan as two classes of securities. One is Kinder Morgan Energy Partners (KMP), which pays their distribution in cash. The other is Kinder Morgan Management (KMR), which pays their distribution in stock. That's the major difference between KMP and KMR. The other difference is that Kinder Morgan Management is structured such that investors receive a 1099 instead of a K1. That means you can buy KMR and put it in your IRA account, and institutional investors can buy KMR because it's not generating any unrelated business-taxable income.

TER: That's why it exists.

YS: It helps with financing, too. It's an attractive alternative for institutional investors that are sensitive to investing in MLPs. In addition, it helps finance Kinder Morgan's growth because, if you buy KMR, it's almost like an automatic dividend reinvestment plan. But for whatever reason, KMR trades at a 10%–13% discount to KMP. We think KMP may be fairly valued and thus we have a neutral rating on it, whereas we think KMR is attractively valued because we see no rational reason for it to trade at such a large discount to KMP. The only real difference between KMR and KMP is that KMR pays their distribution in stock rather than cash.

TER: And Niska?

YS: Niska just did their IPO in May, and Credit Suisse participated in that offering. Niska quite simply is a play on the need for natural-gas storage both in Canada and the U.S. We like Niska because they have plans to expand storage in Canada and California and a very clean balance sheet. In essence, they have pre-financed that growth via their equity offering. We also think that other storage assets owned by private equity may very well be for sale. Niska is likely to participate in those acquisitions, and that should help them grow above and beyond the organic growth already on their drawing board. Finally, we think the management team there is very astute. They have years of experience developing and operating storage. For folks looking to participate in growing natural-gas production and the need for natural-gas storage, Niska's very capable management makes the company an interesting way to play that.

TER: Do you have any thoughts you would like to leave us with?

YS: You read that quote from our research that said: "Stock market volatility can present better buying opportunities; however, we are not market timers and will continue to add to positions." I purposely said that because I think readers should differentiate between investing and trading. I view investing in MLPs as a multiyear commitment. The underlying rationale for investing in MLPs is that you're investing in a cash-flow stream that you think is secure, stable and predictable, which may very well grow. If that's the case, one shouldn't be overly concerned about market volatility. Just stay focused on that cash-flow stream and don't obsess over the day-to-day swings in the stock price. Too many investors do that. My message is to invest in strong companies with good cash flow and visible growth.

I'm also very cognizant of the fact that MLPs have had a really strong run in 2010. They may be due for a pullback, especially if capital markets freeze up. Conversely, if the stock market takes off, then you could see folks pulling out of MLPs to invest in the next herd mentality scheme.

Yves Siegel joined the Credit Suisse Energy Research Team in June 2009 to cover the Master Limited Partnership (MLP) and Natural Gas Pipeline sectors. Immediately prior to joining Credit Suisse, Yves was a senior portfolio manager at a New York hedge fund focused on MLPs. Prior to his buy-side experience, Yves had established a leading sell-side MLP franchise, having spent over 10 years at Wachovia Securities after prior sell-side engagements at Smith Barney and Lehman Brothers. Yves has received both a BA and MBA from New York University and is a CFA charter holder.

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

DISCLOSURE:
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report or The Energy Report: Energy Transfer Partners L.P.
3) Yves Siegel: I personally and/or my family own the following companies mentioned in this interview: Kinder Morgan Energy Partners. I personally and/or my family am paid by the following companies mentioned in this interview: None.
CREDIT SUISSE SECURITIES (USA) LLC: NSH NKA DEP EPE SEP KMP KMR ETE EPD WES SXL ETP NS BWP
Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.
Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.
Streetwise Reports LLC
P.O. Box 1099
Kenwood, CA 95452
Tel.: (707) 282-5593
Fax: (707) 282-5592
Email: jmallin@streetwisereports.com







Stay on your toes these are treacherous waters 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.



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

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

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

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



Tuesday
Aug172010

OptionTrader: Your Money Back If Gold Doesn’t Trade Above $1265 in 2010!





We have said many times that we believe gold prices will make another all time high in 2010.

Now we are so confident of this that we are offering a special deal on our premium options trading service, OptionTrader, which reflects our bullishness.

If you sign up to a 12 month OptionTrader subscription before September 1st 2010, we will refund your $179 fee if gold prices do not make a new all time high in 2010.


You can sign up now by clicking the button below.

Subscribe for 12 months - $179.00



 



Thursday
Aug122010

Stan Bharti: A Few of His Favorites



Source: Karen Roche of The Energy Report 8/12/10
http://www.theenergyreport.com/pub/na/7059

Forbes & Manhattan Founder and CEO Stan Bharti, whose genius has guided dozens of junior resource companies to the pinnacle, discusses his approach in this exclusive interview with The Energy Report—and a few of his favorites. Among them is a company using a molecular-tagging technology to foil a practice that fuels terrorist activities and deprives governments of more than $100 billion in tax revenues annually.

The Energy Report: What led you to start Forbes & Manhattan, Stan? Where did you begin?

Stan Bharti: I graduated in engineering and had my Master's in Engineering from the University of London. I started my career in Africa, working in Zambia for two years as a young engineer. I came to Canada and worked for Falconbridge for about 15 years. After that I went on my own, setting up an engineering and contracting firm—BLM Inc.—that grew into a sizeable business with offices around the world, providing services primarily to the mining industry.

Then in '95 I got into public markets, starting with some of the assets BLM had acquired. I was in the public markets in the resource sector until it got into a real decline in about 2000, when we got into the tech sector—which was in an uptick—with Forbes & Manhattan. We came back to the resource sector in about 2002, when I saw that a huge bull market in resources was shaping up. Since that time we've been pretty much exclusively in resources.

TER: How does F&M define resources? Your portfolio of companies includes some in the financial sector, some agricultural, some that are traditional metals and mining.

SB: It's a broad definition. As a group, Forbes & Manhattan really operates in five broad divisions. The agricultural division really is mining resources for the agricultural industry, primarily potash and phosphate. Our oil and gas group, which is based in Calgary, has several high-impact exploration projects around the world. Third is the bulk commodities, where we've focused on coal and iron ore. The mining group includes gold and base metals. Then finally, the special metals—rare earth elements, vanadium, lithium—that really drive a unique part of the metal sector.

TER: Do you see all five of these in a bull market now?

SB: They go up and down, but they're all in a long-term bull market right now. I'm talking two, three, five years. We see potash prices, for example, going much higher. We're almost at $1,000 or $1,100 a ton. And a couple of years ago they were $600 or $700, still a good price compared to $100 or $200 a ton where they were for a long time. Same thing with iron ore. Iron ore prices are at an all-time high. But we see these bull markets as long-term trends, driven obviously by China and so forth, but more importantly just a secular trend in the evolution of mankind.

TER: What triggered this secular trend in the evolution of mankind?

SB: If you look at the last 30, 40, 50, 60 years, the economy goes between the hard assets and the financial assets. Those two sectors oscillate back and forth. The last hard assets growth period went from about the mid-'60s to 1980. We had a 15-year bull cycle and we saw the commodities all take off, all tied to inflation. The same thing's happening again. We see inflation. We believe it's going to come back because of the need to ingest dollars into the economies in the U.S. and western European countries.

Then we saw huge growth in the financial sector all the way until to 2001. That trend has now changed again, and we're back to hard assets. Whenever inflation comes back and governments spend in excess, people go to hard assets. I believe the best hard assets you can buy are commodities. They're real. They're fundamental. They're something you can touch and feel.

TER: When would you say this hard assets boom got started?

SB: I think it started in 2002. The first peak was 2007, early 2008, and then we got into a bit of a trough but I think we're in a 5- to 10-year bull cycle in hard assets.

TER: So Forbes & Manhattan is in synch with that cycle as a privately held merchant bank that essentially incubates, finances and then manages companies in the junior resource sector. But how does the F&M model differ from Pinetree Capital Ltd. (TSX:PNP) or 49 North Resources Inc. (TSX.V:FNR)?

SB: It's different in the sense that we actively manage our assets. There's a lot of leverage in junior companies. If you can get in early on, with what we call the seed stock—$0.10, $0.20, $0.30 cents—you see these seed stocks grow. Five key elements drive junior companies. One is a good asset. Second is management. Third is the ability to raise capital. Fourth is telling the story, promoting the stock. Fifth is good capital structure.

The difficulty with a lot of the junior companies is that they just don't have the management depth, the ability to raise capital to take these stocks to a level where they belong. We believe that by taking a junior company with a good asset—a good asset is key—and surrounding it with a lot of depth in terms of management, access to brainpower and capital, and working the asset over four to five years, the rewards can be phenomenal for our shareholders.

TER: You say you actively manage these assets to drive these returns. How so?

SB: We bring all the companies that we invest in into our shop. We surround them with our own lawyers, accountants, IR people, investment bankers, analysts. We have all of them in-house so that a junior company can operate like a major without the overhead of a major. We have more than 100 people in the Toronto office alone, for example—more than 25 geologists, 20 engineers, several securities lawyers, four or five investment bankers, two or three full-time analysts and accountants.

So a CEO of a junior company can access that expertise without having to really pay much for it because that expertise is available to 20 or 25 companies. So this is almost like an incubator or a venture-capital (VC) model but in the public marketplace.

Forbes & Manhattan is also different in that I am on the boards of all these companies, typically the chairman, because I want to make sure I influence their strategy and vision. I'm also typically the first investor at the seed level in these companies.

TER: It does sound a bit more like an incubator VC type of model, except that with a VC model, if you invest in 10 companies, you might expect five to be so-so, three to do pretty well and two to explode into 10-baggers.

SB: This isn't so much the case with us. It's not the VC model like on the West Coast , where of 20 companies you invest in, 10 will work—but there's always a risk. Every F&M company has the potential to be a multi-billion dollar company, but some things have to kick in. Some of the assets we have are exploration assets, for example. With an exploration asset, sometimes you drill and don't hit. We have two fabulous oil and gas assets in the Kurdistan Region in northern Iraq, with proven successful partners such as Niko Resources (TSX:NKO). The seismic acquisition and geological work look very attractive, but until we drill the assets we don't know how big the oil discoveries could be. When exploration isn't successful, there's a problem. In Kurdistan , one of our companies, Vast Exploration Inc. (TSX.V:VST), is drilling its first well and we should know results over the next several weeks.

TER: Barring dead ends in exploration, what other factors help determine an asset's success?

SB: Obviously commodity prices have to stay strong. In 2008 and 2009, commodity prices essentially collapsed. The financial markets have to be good to be able to raise capital, and again, in 2008 and 2009 a lot of the companies that were in the process of raising capital couldn't do it. And you have to be able to deliver results. So you have to go through these gyrations, but fundamentally, all the companies in our group have a good asset and in a bull market with the right environment should give good returns to shareholders.

TER: Because you cannot guarantee success, how do you suggest investors play the Forbes & Manhattan game? Should they buy a little bit of all of your companies? Are you planning on creating a fund that represents a bit of each company that they can invest in?

SB: I think individual investors should look at all the companies but pick the sector they like. If they like agricultural sector, if they like the gold sector, if they like the base metal sector or the bulk commodities and then within that sector decide what stocks they like. They can be certain that within the group, a lot of support is available to these companies financially, technically, strategically. That should give investors more comfort than buying another junior on the Toronto Venture Exchange where that support may not be available.

TER: It's curious to see that F&M, a merchant bank, has another merchant bank in its portfolio.

SB: Many people on the street, so to speak, and many funds in the financial sector find a lot of the juniors that Forbes invests in—or that I invest in personally—too small. Raising $5 million to $10 million isn't enough for big funds to come in. So we created Aberdeen International Inc. (TSX.V:AAB), and raised $100 million or so in Aberdeen. The model for Aberdeen is that any time I invest in a junior company at the seed level, Aberdeen co-invests with me. This gives investors indirect exposure to all of Forbes companies.

Aberdeen typically invests only when I'm involved with deals. It's like having a pool of capital that invests and gives a shareholder an upside on all of Forbes' companies. Interestingly about 60% of Aberdeen's portfolio right now is gold. So not only do you get exposure to gold, you get exposure to the Forbes' group of gold companies. If you're not sure you want to play Avion Gold Corp. (TSX.V:AVR; OTCQX:AVGCF) or Sulliden Gold Corp. (TSX:SUE; OTCQX:SDDDF), for instance, you're better to buy Aberdeen.

So Aberdeen is there any time I invest at the seed level. That should give the investor comfort that he's in there at the seed level, too. We just put some money into one of our coal deals through Aberdeen, too.

TER: So this is a way that I was referring to earlier that someone can play the Forbes & Manhattan. . .

SB: Yes, they could. They could, absolutely. Aberdeen is also trading at half net asset value. Its NAV—and we publish it every quarter—has been between $0.80 to $1. It's trading at about $0.40 now, so there's a lot of leverage in Aberdeen.

TER: Does Aberdeen invest in companies that are not part of the F&M group?

SB: Generally no. Sometimes a company is in trouble or needs money, but we typically only put in capital when we want the company to come into our group. So it can happen but it's rare. Generally that's not the Aberdeen model.

TER: Another company in your portfolio doesn't deal with a commodity per se, but rather security systems. Can you tell us a bit about that?

SB: You're talking about Eurocontrol Technics Inc. (TSX.V:EUO). It is a commodity company but it has a different twist, because it has a unique patent on fuel-tagging technology. The single largest source of terrorist funding in the world is through oil. About $100 billion worth of oil, perhaps more, is illegally sold or shipped or transported. This $100 billion loss is primarily to governments because governments collect taxes on oil. Whether it's terrorists or the mafia, they find ways to take oil illegally and avoid paying taxes. So through a wholly owned subsidiary called GFI (Global Fluids International), Eurocontrol has a product that was developed in Israel that molecularly tags fuel. This innovative molecular marking system detects any change in the fuel content along the pipeline from the refinery with 99% accuracy.

Imagine, for example, a gas station. The refinery can add our product, and anywhere along the supply chain, all the way to the gas stations, they can measure and sample the fuel, and they can tell whether what's being pumped at the gas station is legal or illegal fuel. This may not be a big problem in the Western countries, but it's a huge problem in Third World countries. For example, India alone estimates $10 billion to $20 billion in illegal fuel sales; gasoline sold at service stations where the government is not recovering its taxes. We know that a lot of the funding for terrorist in Iraq comes through illegal shipments of oil.

Eurocontrol is a very interesting company. Typically a government or a large private oil company will take out on a contract. Eurocontrol supplies this product and charges $0.01 for every liter of fuel tagged. We haven't been able to get the market to understand the Eurocontrol story properly, but that's beginning to change. The company is slowly expanding, with contracts now in Uganda, Tanzania, Nigeria and Romania. I think in the next two to three years, the prospects for Eurocontrol are very good.

TER: If I'm a refinery, what's in it for me to tag the fuel?

SB: Suppose one of your managers decides to do a side deal and starts selling fuel to some gas station or somebody else and as a result avoids taxes. Then the refinery could be liable for selling fuel illegally. Or if you happen to be shipping fuel on a truck and the driver stops somewhere along the way, sells half of the fuel and fills the tank with water, you supply poor fuel to a gas station. The refinery would also be liable for that. It's an attractive proposition for a refinery, for a small amount, to ensure the product that goes to the end customer is what is coming out of the refinery.

TER: Excellent. Are there other gems in this portfolio that have real compelling stories?

SB: They all do. We go through some struggles, ups and downs. But they generally all have a good asset base, good leverage. In the agricultural sector we have a private company, Brazil Potash. We raised $25 million privately. We're drilling it now. Once the drilling is completed we're going to IPO this—we hope this year or early next year. We think it'll be a huge IPO.

This is in one of the largest potash basins in the world—we estimate more than10 billion tons in this 400-kilometer-ong Amazon potash basin—and Brazil Potash owns 90% of the basin directly. This basin could rival the Saskatchewan Basin, and geological, seismic and borehole surveys all indicate scale, geological properties and age similar to the Saskatchewan basin. So it's a big, big play.

TER: Any other potash plays in the F&M portfolio?

SB: We have one public company in potash—Allana Potash Corp. (TSX.V:AAA) in Ethiopia. It's a great company. It's in the Danakil Depression, where the geology is also similar to Saskatchewan's. It's surrounded by BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF) and an Indian company, Sainik Coal Mining, and has 43-101-compliant resources of more than 100 million tons. We expect to put that into production shortly and think that Allana also will be a great takeover candidate in the next 12 to 24 months.

TER: Stan, do you have any other thoughts you'd like to leave with our readers?

SB: The only other thing I want to mention is that sometimes people who don't understand Forbes and our model say we're charging our companies too much, Stan's too involved in a lot of companies, he's spread himself too thin, he issues too many shares. We don't take any more fees than anybody else. We believe very much in a model where you have a small base fee for all the management and very big bonuses based on results. Results may be the share price going higher, making a big discovery, arranging a big financing. We believe in that model, which is really the model on which the whole financial sector works. Really, our intention is the same as everybody else's—to add shareholder value. Sometimes the market gets confused. Any time people have any questions, just call us we'll be happy to answer them.

Stan Bharti, business consultant, professional mining engineer and international financier, has amassed more than 30 years' experience in business, management, operations, public markets, finance, mergers and acquisitions—the whole nine yards. He also has amassed more than $3 billion in investment capital to help propel junior resource companies to wealth-creating heights for their stockholders. He has been instrumental in acquiring, restructuring and financing scores of promising startups as well as struggling producers, from Europe to the Americas to Australia. As Financial Commentator and Market Analyst Peter Grandich puts it, "In a business where failure is the norm, people like Stan Bharti. . .have separated themselves from the also-rans." Serving on the boards of numerous companies, both public and private and often as chairman, Stan devotes the lion's share of his time to the premier merchant bank he founded, Forbes & Manhattan, Inc., where he is president and CEO.

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

DISCLOSURE:
1) The Energy Report Publisher Karen Roche conducted this interview. She personally and/or her family owns the following companies mentioned in this interview: Dacha, Pinetree and Aberdeen.
2) The following companies mentioned in the interview are sponsors of The Gold Report or The Energy Report: Vast, Allana Potash, Sulliden, 49 North Resources, Eurocontrol Technics, Aberdeen and Avion.
3) Stan Bharti: I personally and/or my family own shares of all the companies mentioned in this interview. I personally and/or my family am paid by all the companies mentioned in this interview.
Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.
Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.
Streetwise Reports LLC
P.O. Box 1099
Kenwood, CA 95452
Tel.: (707) 282-5593
Fax: (707) 282-5592
Email: jmallin@streetwisereports.com


Stay on your toes these are treacherous waters and have a good one.

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

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

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

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



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


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

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

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

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



Wednesday
Aug112010

Expatriate Your Wallet

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



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Of course, this is the briefest of overviews of a complex topic. For specific guidance on each of the menu items listed, and pros and cons related to your own circumstances, you’ll need to seek qualified counsel.
----

With an ever-growing number of regulations and financial restrictions that gradually choke your ability to build and maintain wealth, protecting your assets by getting them out of the country should be a critical part of every investor’s strategy. We recommend you get started before it’s too late. Read more about the 5 best ways to internationalize your assets.




Stay on your toes and have a good one.

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

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

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

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





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


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

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

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

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