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Tuesday
Apr202010

Shale by the Pail: Europe Shakes Its Fist at Russian Hegemony

Reliance on Gazprom as a Percentage of Consumption 1.jpg




By Marin Katusa, Senior Market Strategist, Casey’s Energy Report



The latest buzzword on investors’ lips is shale, and it’s everywhere. Shale gas production is rapidly growing, and the domino effect of unconventional gas development on the global energy market is staggering.

North America has already seen the stampede of companies staking their territories and is now in the next phase: consolidation. However, buying into the American industry giants now, where even a major strike creates only a blip in share price, is like catching a ship that’s left the harbor.

But at Casey Research, we wouldn’t advise you to despair just yet, because the next big opportunity is just over the horizon. Coming up next – the basins of Europe.

The new techniques in drilling and well completion have transformed this formerly unprofitable source into a gold mine. Add that to the success that shale gas has enjoyed in North America, and you see why shale gas is creating a stir and intrigue throughout Europe.

Possibilities for shale gas production in Europe are endless – the American Association for Petroleum Geologists estimate a total resource of 510 trillion cubic feet (enough to power 27 European countries for over 30 years) of unconventional gas for Western Europe alone – and the rewards for investors in the right place could be huge.

In addition, unlike the United States, where major gas companies started snatching up land and smaller companies as shale gas became more popular, Europe’s shale market is still in its infancy. This puts the junior and smaller companies on the same playing field as the biggest players.

If commercial amounts of gas are found on a junior company’s land, it’s not inconceivable that its share price will multiply by ten. At the very least.

Taking on the Bear

But the main attraction of shale gas in Europe, and what gives it government support across the board, is the increasing urge to break the stranglehold of the Russian gas giant Gazprom. Almost all of Europe is heavily dependent on the state-controlled Gazprom for the majority of their gas supply. Gazprom’s tap-twisting of Ukraine’s prices, through which flows almost 80% of Europe’s gas, has made it clear that Russia has a big stick and it is not afraid to use it.
       

With the installation of a pro-Moscow president in Kiev, Europe’s interest in a non-Russian source of gas has escalated, and should a U.S.-style shale phenomenon turn up in Europe, the energy landscape could drastically change.

Knowing Your Enemy: The Other Side of the Story

That is not to say that there aren’t any challenges facing the companies. The lack of equipment in Europe – 20 fracturing sets vs. 2,000 in North America – is a major obstacle and at millions of dollars each, companies aren’t exactly falling over fracturing sets.

Then there is the chance that the rush for land will lead to overstaking of territories, with more than one company claiming a piece of land. This will invariably lead to quarrels, even legal battles, which would delay exploration and create a mess for companies and shareholders alike. And after all this, no two shale basins are the same, and techniques that work on one may not translate to the other.

So companies looking for shale gas in Europe in largely unexplored regions face significant risks – the initial production rate, its sustainability, and costs of the well are all unknowns... and that’s precisely what makes it so exciting.

What Would You Do With a 670% Return?

Shale gas is the hot topic in Europe today, and we knew this would happen back in 2007. Our subscribers bought one 25-cent stock, then sold it at $1.80, netting a quick gain of almost 700%.

With the huge potential just waiting to be explored, investors need to have their ears on the ground to know about the “me too” companies, the ones that will hit the payload. For now, the watchwords are “oil shale in new markets.”

Casey’s Energy Report has its finger on the pulse of the world’s most exciting energy plays… and its readers are the first to know which companies have the equipment, the management, the property and the expertise needed to make the big returns in oil shale.

At Casey Research, we know the sector better than others, and we know who is strong and who is weak. Don’t miss out on the incredible opportunities that await investors in oil shale – subscribe to Casey’s Energy Report today with a generous three-month, no-risk, money-back guarantee. Details here.



As a suggestion for those who do want leverage to the precious metals bull, the gold and silver funds together with the careful application of options trades could be a possible solution for you. This way we are exposed to any movement in gold prices which in turn is magnified by the effect of the option. Do remember that loses are also magnified in the same way so its not a strategy for the faint hearted. On the other hand the quality stocks are not performing as anticipated and a non-producing junior stock is a shot in the dark, however, its your money and its your call.

Got a comment then please add it to this article, all opinions are welcome and appreciated.


If you would like to get a bit more bang out of your buck, then check out our Options Trading Service please click here.

For the analysis of a recent options trade that we have just closed please click this link.


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.

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

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







Friday
Apr162010

Michael Berry: Uranium—Part of the Energy Solution

Michael Berry.jpg




Source: Tim McLaughlin and Karen Roche of The Energy Report 4/15/10
http://www.theenergyreport.com/pub/na/6085



President Obama has called for the development of more nuclear reactors in the coming decades. Discovery Investing pioneer Dr. Michael Berry says for that plan to work, uranium has to be part of the solution. In this exclusive interview with The Energy Report, Michael talks about the need for more uranium mining in the United States. He also explains why right now an investment in energy metals is a safer bet than investing in industrial metals.

The Energy Report: Last December, you thought inflation was still 18 to 24 months in the future. Is that still your thinking?

Michael Berry: It depends who you talk to. We don't have any visible inflation in this economy right now. If anything, there's still de-leveraging. There's excess capacity out there. We're not moving down the unemployment scale very much. We still have 9.7% unemployment, even after a lot of government intervention in the labor markets. Right now inflation is hard for me to see. We're still that magical 18 to 24 months away, or maybe even more, from inflation.

Certainly if interest rates move up we could have that, but there's still a lot of excess capacity. There's a lot of debt. The Obama administration and the Bush administration really didn't deal very well with the excess debt. They just kind of rolled it over and pushed it out. Europe seems to be following suit in Greece today.

I'm an optimist. If you're an optimist in this market, you believe inflation is coming. If you're a pessimist in this market, you believe that we're going to be in a painful deflation for some time to come. I'm an optimist, so I think within the next couple of years, we'll get some inflation.

TER: With inflation somewhere on the horizon and a continued period of recession in the meantime, part of the strategy is to be defensive. In a world where we have inflation, but we also have pressure in the U.S. strategic metals, would you consider uranium a safe investment area?

MB: Today, any energy metal is a safer investment than an industrial metal. We're going to need uranium because the world, if not the U.S., is going nuclear. We're probably going to need thorium eventually. In some sense, uranium is very cheap now and we have a lot of it in the U.S. and Canada. Resource nationalism is spreading around the world.

If you look at the rare earths (REE), I think the same thing applies. We have to have rare earth elements because they're integral in many strategic applications and we don't have much REE resource in the U.S. We don't have a lot in Canada. Quest Uranium Corp. (TSX.V:QUC) is one rare earth company in Quebec and Avalon Rare Metals Inc. (TSX:AVL;OTCQX:AVARF) is another interesting one, with its Thor Lake deposit. Some of these energy and strategic resources are going to be more resistant to downturns. Copper is trading for $3.50 a pound and it seems to want to stay there. I'm a little nervous about copper. If we do have a major downturn, you could see the industrial metals, as opposed to the strategic or energy metals turn down.

I'd like to make one other point. Up until 2007, we had this theory of decoupling as it relates to China. Then everybody pooh-poohed it and said, oh no, China isn't decoupling. China may well be a bubble, too. There may be a significant downturn in China. However, I think decoupling is going to come from the emerging markets. The emerging markets are where growth will emanate because we are witnessing a quality of life increase there that you aren't going to have here and in Europe. Probably not in Canada either. Decoupling, in this case, will be the generator of demand for these metals, which is going to be stimulated from sources other than the U.S. and the OECD countries.

TER: But going with that decoupling theory, if we're seeing expansion, then wouldn't the industrial metals also continue up?

MB: Yes. Except that in the short run, we may see excess capacity in places like China. I don't think you're going to see it in India. You may see a bubble that bursts in China. There is excess capacity. On the other hand, China is a state-run economy and so they can do things that democracies cannot do. My long-term view is that there will be decoupling and that the emerging countries of the world, not just China, but India, Brazil, Argentina and others will eventually lead us out of this global recession. That is the significance of this sort of "decoupling." Emerging countries will take the lead and they'll outgrow us consistently over time because people in those areas need infrastructure. They want a better lifestyle and all the things that we've become accustomed to in the West since the end of the Second World War.

TER: With what you just said in mind, are there any companies that you're excited about in this sector?

MB: There are a couple of companies that I think probably bear near-term attention. One is called Salares Lithium Inc. (TSX.V:LIT). I know many believe that lithium is the hottest, the latest and the greatest resource fad. There's a lot of attention on lithium-ion batteries. Salares has perhaps the best set of brine lakes in Chile. They have seven of them in Chile; five are 100% owned. The stock is just so strong. It keeps moving. They have run geophysics over the two largest salars and can see brine that goes so deep they cannot see the bottom. They will be drilling for grade very soon. Oil people tend to understand lithium brines. There's a strong institutional backing of the stock. Todd Hilditch is the CEO and he's a very fine young executive who's making his mark in the mining industry.

Another company that I really like is Goldbrook Ventures (TSX.V:GBK). In far northern Quebec, nickel is key to the new clean energy economy. There are only a handful of nickel sulphides trends worldwide. Goldbrook owns about 47% of the entire Raglan trend, which is a developing, world-class sulphide-nickel-copper-cobalt PGE deposit. Xstrata and Anglo are other big participants in the Raglan. The Chinese nickel company Jilin Jien came in and is financing Goldbrook to production on their resources there at a 75/25 carry to production. Jilin Jien is the second largest nickel producer in China. Jilin also bought out Canadian Royalties and Goldbrook has a 25% equity interest in that company, also on the Raglan. That resource of 21 million tons, 43-101, and is worth at least $2 to $3 a share to Goldbrook, at low cycle metal prices, in my opinion.

Goldbrook Ventures' shares are now selling for $.30 a share. I really like the company. It may be unknown to most people, but this Raglan nickel belt is going to become another Thompson belt. It's going to be another Sudbury. For any sulphide nickel aficionados this belt and GBK, in particular, is one to watch.

On the rare earth side is Avalon, which owns Thor Lake in the NWT. Thor Lake is a huge rare earth deposit of 69 million tons. Avalon is moving that along with a planned pre-feasibility study in 2010. The key is that it contains both light and heavy rare earths. It's interesting that most of these rare earth resources are either in Canada, China or Russia. Unfortunately, for the most part they're not in the U.S.

Stans Energy Corp. (TSX.V:RUU) has a high-grade deposit in the country of Kyrgyzstan. I'm violating my principles because I always said I'm going to stay in Canada, the U.S. and Mexico. However, I'm starting to range to places like Colombia, Guyana and Kyrgyzstan because that's where some of these great deposits are located. The current situation in that country not withstanding, these types of assets are "company-makers."

TER: There are lots of different types of rare earths. There are the heavy and the light. How do you compare Stans Energy to Avalon?

MB: The heavy rare earth elements, compared to the light REEs, are rare indeed. Some of the "heavies" are Europium, Terbium, Dysprosium and Yttrium, used in magnets, superconductors, ceramic and lasers. The companies probably compare favorably, actually. The heavy rare earth elements are sought after and sell for hundreds of dollars per kilogram. Avalon's Thor Lake is a great property. This deposit has all kinds of metals in it. It has beryllium. It has thorium. It has both light and heavy rare earths and it has a lot of them. They have a great deposit and now they're going to have to figure out how they're going to process it.

At the same time, the Stans Energy deposit in Kyrgyzstan has a Soviet era production plant called Kutessay II in place there.

This plant produced 80% of the Soviet Union's REEs till 1991 and it is about 50% heavy rare earths. They have lots of experience with metallurgy here as well and excellent infrastructure.

Kutessay is not running now. The Soviets open pit mined this during the Soviet Union's heyday. They have some dysprosium and some of the heavies as well. They have a good, solid base of heavy rare earth elements there also.

I'd have to say I'd rather be in Canada, but I also like the Stans Energy deposit and plant very much, too, in Kyrgyzstan. Both projects will be developed. The other thing that is interesting is that it's pretty much Canadians that make this mining game go. These companies are Canadian companies headquartered either in Vancouver or Toronto. Avalon and Stans Energy are both Toronto companies. The world is getting smaller for us all, and we must begin to look far afield. Canadians seem to be well received.

TER: When we were chatting before the interview, you mentioned that the rare earths are worrying Washington. Can you explain that?

MB: I do quite a bit of work with The Western Caucus, which is a group of congressmen from the Western states, mostly Republicans. The U.S. defense strategic stockpile of metals has been basically sold down. This country is more or less dependent on either what we produce internally or what we can import.

For example, we import 31% of the copper we need in this country. With rare earth metals, we have very few mines and they're mostly light rare earth elements. China controls about 97% of that market. These are very important metals for strategic applications. Things like weapons, magnets for motors, superconductors and so on.

This issue of declining strategic resources has come to the attention of congressmen like Bishop from Utah, Forbes from Virginia and others. Anytime China has an advantage, Washington becomes concerned. You can say the same thing about molybdenum and tungsten—other metals that China basically has a grip on.

Washington's holding hearings on these issues. It's had a lot of hearings on them. I'm not sure exactly what they're going to do, but most of the opportunity right now in Washington is to teach congressmen about our metal dependencies, our mining inefficiencies and domestic mining development in this country. I spend a lot of time doing that. Right now you can get everybody's attention in Washington if you talk rare earth elements because they know we don't really have much of a resource in that area.

TER: As far as uranium goes, are there any companies in that sector that you're looking at?

MB: There is an American company called Uranium Energy Corp. (NYSE:UEC). UEC will be doing uranium mining in Texas. The state of Texas is a little more mining friendly. It'll be an in situ mining operation.

The uranium issue boils down to the following. Our president has said he wants to build up to 100 more reactors over the next several decades. We import 90% of our uranium from countries like Canada and Russia. Yet, as a country, we have the fourth largest domestic resource of uranium in the world. This should be an American industry. Those are jobs. There are a lot issues that are in play here in terms of the uranium industry itself.

However, the Obama administration is going to be attempting, and will probably be successful, removing a lot of lands from mining opportunities. One of the areas they'll likely try to remove is the Arizona Strip north of the Grand Canyon. The Grand Canyon is rich with uranium and uranium pipes. These are cylindrical pipes that are high-grade, about 0.65% U3O8. Between 1980 and 1990, six mines on the Arizona Strip produced 19 million pounds with no pollution and no deaths. One pound of uranium makes 10 small fuel pellets. Each fuel pellet replaces the energy content of 1 ton of coal. The Obama Interior Department placed 1 million acres, 2765 million pounds of uranium off-limits for exploration in July 2009.

TER: How difficult is it to get the uranium out of the ground in areas such as the Grand Canyon?

MB: It's not very difficult. These pipes are north of the canyon and above the water table. They're very small, very compact. The surface footprint is 20 to 25 acres. Usually a couple of million pounds each, plus or minus and they can be mined in two years and reclaimed quickly. They were mined and reclaimed in the 1980s very successfully with no known environmental damage. This is 10 to 15 miles north of the Grand Canyon. So you can't see them from the south rim. There are hundreds and hundreds of these uranium pipes out there. Denison Mines Corp. (TSX:DML; NYSE.A:DNN) is mining a pipe called Arizona 1 and it has, I think, two other pipes. Quaterra has made three uranium discoveries up there using a new more powerful and less invasive geophysical technique.

The mining on these pipes is very straightforward. It's underground, so there's no open pit. There's no scar on the landscape. If you raft down the Grand Canyon, you can actually see pipes in the walls of the canyon where they've been naturally eroded down. People have said, well, mining companies are going to contaminate the groundwater. In fact we've never seen any uranium contamination or radioactivity in the water of the Colorado River at all. It's a pretty big issue and it means jobs. Both the governor of Arizona and the governor of Utah want see these natural resources developed in an environmentally responsible way. There's no reason why we can't do that.

If we're going to have clean energy, if we're going to have move forward and move away from carbon-based energy sources, nuclear energy has to be part of our solution. If nuclear energy has to be part of our solution, at least for the next several decades, domestic uranium has to be part of the solution. We have it. We have more uranium than most other countries domestically. Why would we again run up a deficit, pay somebody to become dependent on uranium as we've done with oil? We don't need to.

TER: Thank you for your time.

Dr. Michael Berry has lived in the U.S. for 36 years but raised in Canada. A math major at the University of Waterloo in Ontario, he earned an MBA at the University of Connecticut and obtained a PhD specializing in quantitative analysis and investment finance from Arizona State University. He has specialized in the study of behavioral strategies for investing and has been published in a number of academic and practitioner journals. His definitive work on earnings surprise, with David Dreman, was published in the Financial Analysts Journal. While he was a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia (1982-1990), Michael spent considerable time with some world-renowned geologists on the Carlin Trend. While a professor, he published a case book, Managing Investments: A Case Approach.

Michael also held the Wheat First Endowed Chair at James Madison University in Virginia, and managed small-and mid-cap value portfolios for Milwaukee-based Heartland Advisors and Chicago-based Kemper Scudder. His Morning Notes publication, distributed worldwide, provides analyses of emerging geopolitical, technological and economic trends, as well as identifying opportunities for the Discovery Investing strategy he developed. Read Dr. Berry's testimony presented to a subcommittee of the Natural Resource Committee, United States House of Representatives (4/8/10).
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) Tim McLaughlin 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 Gold Report or The Energy Report: Avalon, Salares Lithium.
3) Michael Berry: I personally and/or my family own shares of the following companies mentioned in this interview: Salares Lithium, Quaterra Resources. I personally and/or my family are paid by the following companies. 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
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Email: jmallin@streetwisereports.com


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Wednesday
Apr142010

Uranium Update 14 April 2010

Uranium Spot Price 14 April 2010.jpg



The spot price for uranium has been below what some companies say they need in order to advance their mining projects. Will the price rise in the months and years ahead? And, what are the opportunities for retail investors? BNN finds out with Geordie Mark, research analyst, Haywood Securities.

Canada is now the second largest producer of uranium, with Kazakhstan well and truly holding onto the top spot. For Cameco fans he also mentions Cigar Lake as reaching its maximum output in 2017 and the start of production being projected as 2013.

By his calculations there are 500 reactors in either in the construction phase or on the drawing board which led to their long term outlook for the price of uranium as $75/lb, even though the spot price at the moment is $41/lb.

On the subject of uranium stocks he covers Paladin and the relatively a new story Mantra Resources.

Mantra Resources.jpg

Worth a watch, just click here.


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Tuesday
Apr132010

Going Nuclear: Obama’s Green Machine Is Ready to Go

Henry Hub Natural Gas Spot price.jpg


By Marin Katusa , Senior Market Strategist, Casey’s Energy Opportunities

Over the Easter weekend, seven nuclear reactors throughout the United States stopped operations, and natural gas prices skyrocketed by over 20%. And this was when most of the country was enjoying mild weather and businesses were shut for the long weekend.

Now traders are out in force looking for the cheapest possible power ahead of rising demand, and the power markets are heading one way: up.

No Homer Simpsons Allowed Here!

It is unfortunate that nuclear power plants are still linked in our minds to the Three Mile Island and Chernobyl disasters. While these were some truly horrific events, we’re failing to realize one very important fact: we’ve learnt from our mistakes. The next generation of nuclear plants are better designed and more safety measures have been put into place than what was there in the plants from the 1960s and 1970s. There is always some operational risk, but that is present in every power plant, be it coal, natural gas, geothermal, or nuclear.

Currently, the United States houses roughly 24% of the world’s nuclear reactors, and they account for about 20% of the power generated in the country. That’s one in every five homes being powered by nuclear energy. This number is a lot higher for some states, with New Jersey getting almost more than 50% of its power from nuclear energy. With renewed interest in nuclear power in the U.S. and President Obama guaranteeing loans for two new reactors this February, it’s pretty clear that the nuclear share in the energy pie is set to increase.


Electricity Generation in the United States, 14 April 2010.jpg


It’s Clean, It’s Green, It’s the New Obama Nuclear Machine

Though they vary in design, nuclear reactors operate on the same basic principle: the energy released by nuclear fission heats water to produce steam, which turns the turbines that generate electricity. The silver lining: no fossil fuels are burnt at any stage, so almost no greenhouse gases are produced. They are, however, expensive to build and it can take years.

But once in operation, fuel costs are very low, which translates to low maintenance costs, and each plant can easily operate for up to 60 years. Running at around 90% capacity, nuclear power plants are workhorses that shut down only once every 18 months for refueling and maintenance.

The fact that they emit almost no greenhouse gases also makes nuclear power plants safe from the threat of potential emissions caps. Once these are introduced, and they are certainly going to be introduced, the costs of producing electricity at coal and natural gas-fired plants will noticeably escalate. In fact, the high energy yield of nuclear fuels, the carbon dioxide emitted during the mining, enriching, fabrication, and transportation of uranium is very small compared to the carbon dioxide emitted by fossil fuels.

Do You Like a 1,500% Return on Your Stocks? Our Subscribers Do.

The push to restart the uranium mining industry started up in 2001 and by 2006, America’s yellowcake production had increased by 70%. The Casey Research team was out scouting the market, and we knew which junior uranium mining company was going to explode. On our recommendation, our subscribers saw their stocks that they bought at under US$0.25 shoot up to over US$4 per share in less than a year.

Today, America’s nuclear industry is ready to expand again and has all the political and economic support necessary to do so. Consuming almost 30% of the world’s uranium, America’s uranium mining industry is looking to jump start itself again and at Casey Research, we know all the inside details. Click here for your free trial today and find out who will win the prize and who will miss out.

So there we have it, a positive take on uranium going forward, all we need now is bags of patience.



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Wednesday
Apr072010

Coal: The Contrarian’s Investment

Electricity Generation in the United States 08 April 2010.JPG


By Joe Hung, Editor, Casey’s Energy Report

Imagine the price of gold jumping to $1,500 overnight... what would that do to the price of junior mining companies? That’s what just happened to the price of coal – it jumped 38% in one day!

Coal is dirty, it’s dusty, and it sends environmentalists into a tizzy. It’s also the most rapidly growing fuel source in the world, it’s broadly distributed with almost 70 countries having economically recoverable resources, and the energy found in it still exceeds that in all other fossil fuels combined.

Whether you love it or hate it, coal will be playing the most important role in global energy supply over the next 50 years – and it is the focused investor who stands to profit from this.

As far as energy prices go, coal has historically been lower and less volatile than oil and gas. For developing nations, this makes coal a first pick as an energy source, and combined with considerable deposits, it is simply the cheapest and most convenient thing around. This isn’t to say it’s not important for the rest of the world: in the United States, almost 50% of all electricity generated and 90% of the steel production is fired by coal.

The King’s Coal – Better Than Gold?

Where it gets really interesting is when we look at the demand for thermal coal (coal used to generate electricity) from the emerging Asian markets. With looser environmental concerns, the emissions cap threat that is dogging producers in the United States and, to a lesser extent, Canada, is not quite as real here.

India is seeing rising demand even as coal resources shrink, while China consumes almost half of the world’s production of coal each year. With a rapidly expanding industrial sector that needs constant fueling, and cleaner alternatives still too expensive, China and India are out shopping... and undeveloped coal resources from Mozambique to Canada are the hot items. Which makes the companies holding on to these assets prime targets for takeovers and joint ventures.

Adding the sparkle to this rather lucrative picture is that the European and South American companies that were dependent on Asian coal exports are now looking towards North America for exports.

Coal Consumption in China by Sector.JPG


Then there is metallurgical coal. Known more widely as coking coal, it is essential in refining iron ore and the production of steel, and carries none of the environmental stigma that comes with thermal coal. Nor is it as abundant as thermal coal – only a relatively narrow range of coal rank and compositions make good coking coals – and thus demands a much higher price. Any industrialized nation has a high demand for steel, and with housing booms and rapid infrastructure development, Japan, China, India, and Korea (to name a few countries) are desperate seeking to fuel their growing appetite.

Dirty Your Hands for a Clean Profit

With the demand for thermal and coking coals becoming red-hot in the strong Asian markets, the team at Casey’s Energy Report knows coal is the invisible bull market.

In 2009, China’s total coal imports tripled, reaching 125 million tonnes, and last month it signed yet another multi-billion coal supply contract. India’s growing negative coal balance saw a record-breaking 80 million tonnes of coal imported last year – and that number is set to rise for 2010. The global energy market is set, and the profits are there for the taking.

The Casey Research Energy Team has been watching this sector for over two years now, and our subscribers have benefitted from a 38% spike in the price of coal in a single day. We know which junior companies combine excellent cash flow with knowledgeable management teams to use an investor’s money best to advance projects. As a subscriber to Casey’s Energy Report, you will receive expert advice on how to play a truly undervalued energy sector... and win. Click here for more.



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Sunday
Apr042010

The most immediate and extreme threat to global security - Obama

Global Security.JPG

Years after a six-month deadline passed, dozens of nations, including uranium producers, remain potential weak links in the global defense against nuclear terrorism, ignoring a U.N. mandate on laws and controls to foil this ultimate threat.

Niger, a major uranium exporter, and the Democratic Republic of the Congo, the source of the uranium for the first atomic bomb, are among the states falling short in complying with Security Council Resolution 1540, a key tool in efforts to block nuclear proliferation.

Uncontrolled freelance mining in the Congo has long worried international authorities that the raw material for a bomb might fall into the wrong hands.

U.S. President Barack Obama, who calls nuclear terrorism "the most immediate and extreme threat to global security," hosts a summit on nuclear security April 12-13 in Washington, where implementation of Resolution 1540 will be high on the agenda.

Twenty-nine nations have failed to report they have taken action on nuclear security as required by the 2004 resolution. Among the more than 160 governments that have reported, the information supplied is often sketchy.

Resolution 1540, which set a reporting deadline of October 2004, "imposes strict reporting requirements on states, but few have fully met them," the International Commission on Nonproliferation and Nuclear Disarmament, a prestigious study group, concluded in its final report last December.

Mexican U.N. Ambassador Claude Heller, chairman of the U.N. committee monitoring 1540's implementation, said he plans a series of meetings with noncompliant states to urge cooperation, and he sees Obama's summit as a chance to "send a strong message" about the U.N. mandate's importance.

"It is a legally binding regime that was adopted by the Security Council," Heller told The Associated Press. "It is not up to governments to say yes we will report or not."

Resolution 1540, promoted by the U.S. in the aftermath of the 9/11 terror attacks and the 2004 uncovering of the Pakistan-based A.Q. Khan nuclear smuggling network, is the only global legal instrument designed to disrupt links between terrorists and nuclear technology. Unlike treaties, applicable only to states that ratify them, this U.N. mandate obligated all nations.

It required governments to "adopt and enforce appropriate effective laws which prohibit any non-State actor," such as terrorists, from making or possessing nuclear, chemical or biological weapons, their delivery systems or related material. Governments must establish "effective" border and export controls and physical protection for sensitive materials and sites.

An AP review of filings found vast differences in national reporting.

Control and regulation of so many nations located in such diverse areas of the globe looks like a tall order to us, the need for cash will determine just who gets what, in our very humble opinion.

To read this article in full please click this link.


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Friday
Apr022010

Hot Rocks and Hot Investments… But Don’t Get Burned!

Geothermal.JPG



By Dr. Marc Bustin, Ph.D., FRSC, Casey Research Energy Team

The geothermal industry has been taking one step forward and two steps back over the last year. On the forward side are grants and interest-free loans aplenty, particularly from governments wanting to jump on the green-energy bandwagon. Pushing back is not only some tough geology with deep, dry-rock drilling projects, but also the public fear of earthquakes along with other environmental issues.

Overall, what we’re seeing is a reality check for geothermal energy. It still leads the pack among the alternative energies as a sustainable source of base-load energy with no storage requirements. However, making the leap from tapping natural reservoirs to actually creating them, as EGS (enhanced geothermal systems) projects are trying to do, is proving harder than a lot of people have thought.

There is definitely a potential of earthquakes occurring in geothermal areas – case in point: the tremors at the Geox project in Landau, Germany. That was neither the first nor last time that these rumblings and geothermal projects have happened in the same neighborhood; after all, areas where hot rocks occur relatively near the surface also tend to be areas prone to earthquakes. The EGS process of fracturing rock layers via hydraulic pressure, necessary to inject and heat the water before pumping it back up, can also trigger seismic shifts in underground rocks.

On December 10, 2009, the Swiss government permanently shut down a geothermal project near Basel that was suspended in 2006 following a series of minor earthquakes. The Basel project was touted as the first commercial hot fractured dry-rock (aka EGS) geothermal project. The next day, AltaRock Energy told the U.S. Department of Energy it was abandoning its project at The Geysers in Northern California, an attempt to expand an existing conventional geothermal project via EGS.

AltaRock’s project at The Geysers was supposed to be the flagship of the Obama administration’s push for clean energy, enjoying the backing in millions of not only federal (read: taxpayer) dollars but also the likes of Google.org and other private investors.

AltaRock appears to have found that the deep drilling of EGS projects requires more than a government check and the tweaks to conventional techniques that some geothermal enthusiasts have suggested. In this case, the start-up company reportedly reached no more than 4,400 feet of its planned depth of 12,000 feet (3,700 meters) before a tricky layer of fibrous rock called serpentinized peridotite caused the holes to collapse.

More evidence that EGS drill programs are for neither the faint of heart nor the thin of wallet comes from Australia. Geodynamics, the only Australian company to reach “proof of concept” with EGS, has experienced a major delay at its Cooper Basin project in South Australia. The company’s goal of a 50-megawatt plant by 2012 was recently set back some two years due to the corrosion and failure of the project’s well casing.

Additional challenges in geothermal development are market access and the long stretch from drill rig to humming turbine. For example, MidAmerican Energy abandoned its Salton Sea project in California mainly due to lack of transmission resources and hence access to market.

In Canada, the Meager Mountain geothermal project north of Vancouver is the poster child for longevity in development. The area was recognized as a possible geothermal site in the mid-1970s, with both test and deep holes drilled for the next 30 years. These days Ram Power continues to pursue the prospect, but it appears the project is currently in stasis.

Quite a list. So what does it all mean for the future of geothermal energy, and particularly for us considering investment in it?

It’s still true that EGS has the potential to unlock previously inaccessible layers of hot rocks and make steam with them – lots of it. However, large uncertainties that hover around several aspects of deep hot rock geothermal projects make it difficult to quantify the risk in exploring and developing them, including degree of alteration and competency of the rocks at depth and chemistry of the geothermal fluids. Hand in hand with technical uncertainties come investment uncertainties.

Then couple those risks with high capital costs, environmental hurdles, and long lead times, and you have some stiff challenges for micro- and small-cap companies with limited technical expertise. The super-green appeal, energy potential, government grants, and possible carbon credits make geothermal energy attractive to companies anyway… but this just adds to investor uncertainty. Not only can the government taketh away what it may give, but you also have the usual “me-too” amateurs muddling the field.

In the past, we at Casey’s Energy Opportunity have reviewed a number of excellent companies pursuing geothermal projects. We still consider the upside potential high and will continue to pursue investment opportunities in the geothermal sector.

However, in response to an infusion of government grants (and many more to come) and venture capital, many companies have rebranded themselves as geothermal developers. A good portion of these companies lack the technical expertise or financial depth to be successful, even with the government carrying part of the financing. Seeing through them requires a sharp investment eye.

There’s some hope on the horizon. The Canadian Geothermal Energy Association released in January the Canadian Geothermal Code for Public Reporting. Standardized reporting should help investors evaluate geothermal companies.

Meanwhile, on the technical front are several challenges in EGS to work out. In addition to learning how to drill that deep, and to drill that deep despite any unfriendly layers of rock in between, there’s dealing with hot corrosive fluids. Precipitation of minerals in the system as water cools is another problem to solve. EGS projects are sending home some tough lessons that unlocking this considerable geothermal potential requires new technologies, not just extensions of established ones.

To sum it all up, the future of geothermal energy is still sound, and the sector is in the process of sorting wheat from chaff – both in techniques and in the companies using them. More than ever, good assets, technical expertise, and solid financials are the watchwords for geothermal.
Dr. Marc Bustin is an award-winning professor of petroleum and coal geology and one of the leading experts on unconventional oil and gas in the industry. As he says, geothermal resources are still a big contender among the “green energies,” but caution and due diligence are a vital part of investing in that sector. Find out how to profit from geothermal stocks with sound fundamentals and great potential… learn more by clicking here.




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Thursday
Apr012010

John Licata: The Case for Natural Gas

John Licata.JPG


Source: Tim McLaughlin and Karen Roche of The Energy Report 4/1/10
http://www.theenergyreport.com/pub/na/5978

Many analysts say that there still isn't enough demand for natural gas to make it a smart investment opportunity. John Licata, chief investment strategist at Blue Phoenix Inc., disagrees. In this exclusive interview with The Energy Report, John explains why he thinks that by year-end natural gas could be the place for investors to be.

The Energy Report: Recent housing data caused an uptick in the oil and commodities sectors. You mentioned on CNBC, though, that you didn't think that was an optimistic sign the economy is rebounding. Why do you feel that way?

John Licata: I think it's unrealistic to put so much credence in that data only because we had consecutive months of obscene weather here in the Northeast and across much of the United States that would probably cause a lot of that data to be skewed. So, I really don't think looking at one month's worth of data is a reason to get too enthusiastic, considering that the next couple of months will probably be a much better barometer of the pulse of the housing market.

If you look at the unemployment number, I think if that doesn't start to improve over the next couple of months, I can't see many people allocating more money toward gasoline and the like if they can be saving their money to put food on the table.

TER: What would you see as an optimistic level as far as unemployment goes?

JL: Where we are right now is a place nobody wants to be, but I think if we could somehow get back down to below 9%, that would start to give people much more confidence that this recovery is taking hold. That's potentially something we could see later on in Q3 or perhaps in Q4. I still think we're not out of the woods completely with this recession, even though some economic data has suggested that we are. Unless we get jobs back into the fold I really don't think that this turnaround can be considered complete.

TER: In our interview with you a year ago, oil was around $40 a barrel. You predicted at that time that oil would trade above $65 by the end of 2009. That turned out, of course, to be true. Oil is now trading in the $80-a-barrel range. Do you think we're going to see crude continuing to trade in that range or maybe go higher through the summer?

JL: I think short term, we're pretty much range-bound from $78 to $82. I think the inability to take out the January highs was definitely a short-term bearish trend, but as you can see in recent sessions, we've been trying to rally. Most traders are starting to look back at the foreign exchange, and where the U.S. dollar is trading. Today the euro is actually stronger versus the U.S. dollar and that's causing some short covering. But to get it to break out of the next range I really think that eighty-three-and-a-half needs to be taken out and held. I have an $87-per-barrel target on it for this year. I think that's pretty realistic, considering I'm anticipating, as I mentioned earlier related to unemployment, a Q3 and Q4 rally in the economy.

TER: What about weather factors? Last year was relatively mild in terms of hurricanes. Do you see the upcoming hurricane season having any impact?

JL: If you look at various weather sources, like Colorado State University or even AccuWeather, they're starting to release early forecasts for more than four named hurricanes to hit on shore. We only saw one in 2009, thankfully, but I think the fear factor is something that can come back and drive prices up. It's definitely something that's in the back of traders' minds. It only takes one threat of a storm to cause short coverings. So if we do get a storm of magnitude coming close to the Gulf of Mexico, that could be a cause of concern.

TER: Typically we start seeing prices at the pump go up as we get closer to Memorial Day. Can we expect the summer driving season to have an impact again this year?

JL: I think you're starting to see that already. There hasn't been a refinery built in the United States since 1976 and there has been much refined capacity taken offline in recent months because it has been uneconomical for the refiners to produce gasoline.

Right now you can see that the price of gasoline is trading around $2.25 wholesale. It just stands the reason that retail prices typically trade about a dollar higher on average than wholesale. I think that we could perhaps see $4 a gallon being challenged again this summer.

TER: Speaking of refineries, what's your take on the refining sector?

JL: I think that this is a sector that has been beaten down so badly because most people thought that the economies of scale were far greater than the outlook for demand. Many of the companies, whether it's Valero Energy Corp. (NYSE:VLO) or ConocoPhillips (NYSE:COP), Sunoco Inc (NYSE:SUN) or Tesoro Corporation (NYSE:TSO), are taking output offline because of margin weakness. I think that this is actually happening at a time when demand is about to go higher, in my opinion.

You cannot bring refining capacity back online like you flip a light switch. It takes weeks for these refineries to come back into full production.

My view is that crack spreads, which are the margins that these refiners live by, are going to continue to rally as we head into the summer months. We've actually already seen from the gasoline-side; crack spreads have nearly doubled in the past month, which makes the space as a whole much more attractive.

I think that the U.S. government would do an injustice to the American consumer if they decide after the November elections to increase the CO2 emission standards at a time when many of these refiners have been cutting back their capital expenditures just to meet their daily flow of cash. If they are told now that they have to increase cleaner fuels and that they have to pay more to do so, I think even more production is going to have to come offline.

Ultimately that can also be a catalyst for crude oil prices to rally and I think that gasoline prices will be much higher than where they are right now. I think that heating oil prices heading into the back months of the year can be drastically higher from where they are right now. So I think that these emissions rules that so far have temporarily been on hold are perhaps going to be in the forefront again after the November congressional election. If that becomes front page news, I think that these refining companies know full well that they actually hold the ball because they could just keep shutting off the taps and produce less and less while the consumer pays more and more.

TER: What's the investor opportunity here?

JL: I think the refining companies themselves are very attractive. Many of these companies are being valued at such low prices in terms of refining capacity. There's been consolidation in the industry over the last couple of years with companies like Holly Corporation (NYSE:HOC) acquiring assets from Sunoco at what I thought were fire sale prices.

I think that companies that are going to emerge from this as the real winners are the ones that see a brighter future and those that can actually adapt to cleaner standards such as diesel. Holly Corp. is one of those companies I believe is positioned very well to do so.

Only 5% of the automobiles in the United States can run on diesel fuel whereas 55% of cars in Europe run on diesel fuel. So in my opinion, if the American government mandates these refineries to produce that cleaner fuel you have to be positioned as an investor to look at companies that are already making moves ahead of time. Holly Corp. is that company in my opinion.

TER: Are there any others?

JL: Alon U.S.A. Energy (NYSE:ALJ) is interesting. They produce asphalt, which has higher margins than many fuels, and they are preparing for what could be the dieselization of America. They are also making moves just like Holly is in improving their refineries. They've actually just made moves to acquire a refinery in California from Flying J in a bankruptcy deal. Companies like Tesoro, which actually benefits from higher margins on the West Coast, could be another one to watch.

TER: If gas prices do approach $4 a gallon, how much of an impact would that have on a possible economic recovery?

JL: Obviously, that can strain the economy recovering. In 2008, $4 a gallon was pretty much the limit of consumer demand. That's the point when substitutes come into play. That's when you saw the emergence of more hybrid cars or people taking more public transportation or walking or biking to work. So $4 seems to be the level where consumers say, "Hey, you know what, let's go take a different mode of transportation."

TER: There's been a lot of action in the natural gas market lately. Some analysts, though, are saying that there's not much money to be made in natural gas right now because of an oversupply. You've been a fan of natural gas in the past. Do you agree with those analysts or do you see this as a good place for investors to be as we go forward?

JL: I'm still very enthusiastic about natural gas prices. While short term, we can still perhaps go down a little bit further, I think if you're looking at the year in general, we possibly could see north of $5.50 by the end of the year.

I think what some people aren't looking at is the fact that natural gas is actually trading at or below some prices of coal. I think there could be some switchovers and natural gas can actually challenge coal as the top source for electricity. With that being said, if that does happen, I think that can take away some of that excess supply that we've seen in the past year that has been straining the price of natural gas.

We mentioned earlier about hurricane season and 14% of natural gas is actually in the Gulf of Mexico. Warmer weather is another factor that can be supportive of natural gas prices.

I think that the rig count offered out by Baker Hughes (NYSE:BHI) is very telling in the fact that a year ago at this time we had about 800 rigs in the marketplace. Today we have around 940 rigs. I think what that was about was many E&P companies were looking for the United States economy to recover a lot quicker than it did. I think they were anticipating a recovery that has been slow to develop. With that said, I think that companies are going to start to maybe cut back on the number of rigs because they see where prices are right now. For many of them it's very uneconomical to keep these rigs functional. Chesapeake Energy (NYSE:CHK) just said in a March presentation that they could perhaps take 20 rigs off the marketplace if natural gas prices were below $5 and here we are right now below $4. So I think if more rigs come out of the marketplace that could be very supportive.

I think some people believe that the United States gets a lot of natural gas from Canada. While this is true, that number has actually been dwindling over the last couple of months. I do believe that the total number of rigs in Canada just last month was about 500. I think today it's actually less than 250. So to have such a substantial cut from a primary source is something I think most people should start to pay attention to.

I think another argument was that liquefied natural gas was something that we could use as an alternative and we can get plenty of it from overseas. Well, that number has actually been falling as well, and I think it's important to remember that in Russia they've had a lot of price issues with Eastern Europe and I think that those problems still exist. I think that if liquefied natural gas had to go anywhere—if there was any continued unrest in Russia and Eastern Europe—I think that those cargos would go to Europe. They would not come to American shores. So collectively, I think this is all constructive for natural gas prices. Like I mentioned earlier, I think that overhang of supplies is something that can quickly change.

In 2003, we actually had massive supplies of natural gas, yet prices doubled within a year. Historically, natural gas prices trade about 12 times lower than the price of crude oil. Today we're at 21 times lower. I think that traders have in the back of their minds that natural gas prices— although they could go down a little bit further from current levels— for year-end, natural gas might be the place to be.

TER: Are you bullish on natural gas in North America or internationally?

JL: I'm bullish on North American natural gas.

TER: When you're looking at companies in the natural gas market, what are the things that make them an attractive investment?

JL: What I look at when I look at the companies is the locations of their acreage. Are they producers? Do they have the technology needed to get the gas out of the ground? What are some of the marginal costs related to their projects? Do they have the necessary rigs to put into the ground? What are their probable proven reserves?

Economies of scale are better in certain areas of this country than others. I'm a firm believer that the Granite Wash area in the Texas Panhandle is a very attractive area to be involved in. Just because it's cheaper than say, the Haynesville area, to put technology to work to get gas out of the ground.

I'm for companies that are drilling in areas that have known seismic data that they can rely on and they don't have to have such high expenses as some other companies do in various regions.

TER: Are you focusing primarily on exploration companies or are there any plays with producing companies?

JL: The natural gas area is very interesting because there are thousands of smaller players out there. These players don't have the capital behind them like some of the large players do. Because of prices trading where they are right now, many companies that maybe six months ago, even 12 months ago, would not consider themselves an acquisition target will perhaps put a "for sale" sign on their front lawn and entertain being acquired.

I think the ExxonMobil (NYSE:XOM) acquisition of XTO Energy (NYSE:XTO) was a big shock to the industry. I think there's going to be much more consolidation in the space and some of these smaller "mom and pop" plays could be ripe for takeover just for that reason.

TER: So when you're looking at the opportunities in the junior sector, are you looking mostly for acquisition or are you looking for potential producing/producible acreage?

JL: In today's marketplace I don't think you can look at just one of those aspects without thinking about the other. When you look at companies you obviously want to see what they have in the ground and is it economical for them to take it out of the ground. Some of these companies might be fantastic plays in their own right, but it can take them years upon years to get that gas out of the ground. Obviously, if they considered a joint venture that might be the way to go as well. We heard Anadarko Petroleum (NYSE:APC) and Chesapeake both made comments recently that they are more hip to look at more joint ventures to accelerate projects. So I think if the "big boys" are considering that, then I think that these smaller companies will consider that as well.

TER: Do you have any specific companies that excite you?

JL: Forest Oil Corporation (NYSE:FST) is a company that does excite me. I like the fact that management is keen on operating in the Granite Wash area in the Texas Panhandle. I believe the economics behind that area are very intriguing. It's a name that seems to be consistently in the media in a positive way. It just seems like a name that, in my opinion, could be an acquisition target because of the attractiveness of where they're located. I do think that where you're located has a lot to do with acquisition takeover strategy these days.

TER: Are there any other natural gas companies that you're excited about?

JL: I like Devon Energy (NYSE:DVN). I think the fact that they were able to sell off the offshore assets to BP as quickly as they did is very appealing. So now they can concentrate on onshore assets. I think they did get a fair price for their assets as well. I think that some of the domestic rig players are going to be very interesting ways to play a natural gas rally, whether we're talking about neighbors or even a smaller company like a Parker Drilling (NYSE:PKD). I think they're going to be companies to watch.

I'm not very enthusiastic about Chesapeake, to be honest. I think that the debt they have is a concern to me. I'm afraid they're going to give away too much of their projects to joint ventures. Those were areas of strength for them, whereas now I think it's an area of defense for them.

Just looking at some other names, I still like EOG Resources (NYSE:EOG). EOG is a name that has been solid for many years. It's interesting that it's a company that primarily has focused on natural gas, but it seems they're looking for a more balanced portfolio. A few years back around 75% of their assets were natural gas. They're actually looking at more of a 50/50 breakdown of gas to liquids by 2010.

So I think this goes back to what we said earlier about how Exxon kind of shook up the game a little bit by acquiring XTO. I think that what that might actually foster is for companies that are predominantly in one area such as natural gas to look at a more balanced portfolio and add more oil-related assets to their portfolios. I think to just be in the natural gas game is not the right thing to do anymore. I think that balance is something that investors will look for in the future and that strategic management is going to be rewarded by shareholders.

TER: Thank you for your time.

To receive a complimentary report on natural gas from John Licata/Blue Phoenix, visit www.bluephoenixinc.com.

John J. Licata is chief commodity strategist at Blue Phoenix, Inc., an energy/metals independent research and consulting firm based in New York City. He has appeared regularly in the media (CNBC, Bloomberg TV/Radio, Business News Network, Barron's, etc.) over the years for his insights/forecasts in the commodity spectrum.

After studying economics and graduating from Saint Peter's College (where he received the Wall Street Journal Award for economic excellence), Licata set his sights on Wall Street. During his more than 14-year career, John has held both trading and research positions on the NYMEX, Dow Jones, Smith Barney and Brokerage America. Early in 2005, he founded Blue Phoenix, based in New York City. John is presently in the EMBA program at New York University's Stern School of Business. You can follow John on Twitter and LinkedIn.

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) Tim McLaughlin 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) None of the companies mentioned in the interview are sponsors of The Energy Report or The Gold Report.
3) John Licata: 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: None.

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Tuesday
Mar302010

Uranium Draws Interest From China

Wall Street Journal Logo.JPG

The Wall Street Journal carried this article on uranium that focuses on China's future requirements and which uranium stocks may benefit from it, a number of Aussie stocks get a mention.

MELBOURNE, Australia—Surging Chinese demand for uranium looks set to drive a fresh wave of Chinese investment in Australia-listed miners as nuclear power generators seek supply for dozens of planned reactors.

Chinese state-owned enterprises have been active in Australia's mining sector for years, largely focusing on iron ore and coal used in steelmaking.

Now, with an unprecedented nuclear reactor project under way, China is turning its sights to Australian yellowcake stocks. Many miners see the country as a cheap funding source, and analysts expect deals to flow this year.


China Guangdong Nuclear Power Holdings Corp.'s purchase last year of a controlling stake in Energy Metals Ltd., for $83.6 million Australian dollars, highlighted both China's interest and the Australian government's willingness to approve Chinese investment in uranium projects.

China currently has 11 nuclear reactors in operation with 20 under construction. Another 36 are on the drawing board, and there are proposals for another 157 plants.

Nuclear-power-generation capacity in China is set to increase sixfold by 2020 to 60 gigawatts with a further increase of up to 160 gigawatts expected by 2030, according to the World Nuclear Association.

China is already ramping up uranium imports, recognizing that domestic supplies are insufficient to meet its needs.

In January, China shipped in around 3,337 metric tons of uranium, with 57% coming from Kazakhstan and smaller volumes from Russia, Namibia and Uzbekistan. Import volumes were up more than 10 times year-to-year.

Comments from Chinese executives suggest this may be the tip of the iceberg. Guangdong Nuclear Power's annual uranium needs will jump to 10,000 tons in 2020 from 2,000 tons in 2009, Zhou Zhenxing, chairman of the company's uranium-supply unit, said in November.

No surprise then that Australian uranium miners, some of which have projects in resource-rich Africa and Canada, have received informal approaches from Chinese entities.

"Certainly last year everybody had been speaking to the Chinese—there were lots of conversations, and there's still a lot of interest," said John Wilson, an analyst at Resource Capital Research.

China isn't the only Asian buyer vying for new sources of uranium—Japan, India and South Korea are also keen to lock in supply. But China's access to cheap capital gives it a competitive advantage.

Mr. Wilson believes the Chinese focus more on securing supply rather than price, and this means they are willing to pay for companies which have defined a resource or are producing.
Analysts say Australia's biggest independent producer, Paladin Energy Ltd., ticks many boxes. It has expanded annual output at its Langer Heinrich mine in Namibia to 3.7 million pounds of uranium, while ramping up its Kayelekera mine in Malawi to 3.3 million pounds a year.

With uranium resources of more than 335 million pounds, Perth-based Paladin wouldn't come cheap. Its market capitalization is $2.8 billion Australian dollars, and buyers would likely need to pay a premium.

Chinese buyers are likely among those looking at Extract Resources Ltd., which has resources of nearly 300 million pounds and is focused on developing the Rossing South discovery in Namibia.

But Extract's cluttered share register means a full takeover looks unlikely, unless the Chinese can reach an agreement with Rio Tinto Ltd., which has a 15% stake and an adjacent mine.
BBY Ltd. analyst Gavin van der Wath said there are few uranium resources on Australian soil not controlled by major miners, but there are many Australian-listed companies with projects overseas, which offer access to future production.

Bannerman Resources Ltd., A-Cap Resources Ltd. and Berkeley Resources Ltd. are junior miners with projects that would be of interest, he said.

This article was written by Alec Wilson





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Thursday
Mar252010

Jon Hykawy: Lithium Heats Up as Demand Increases

Jon Hykawy.JPG
Source: Interviewed by Ellis Martin, of The Energy Report 3/25/10
http://www.theenergyreport.com/pub/na/5914

Lithium is hot, hot, HOT—according to Byron Capital Markets Lithium Analyst, Jon Hykawy, who foresees continuing demand growth as technology is perfected and consumer demand increases globally. The Energy Report recently caught up with Jon to learn more about the range of factors currently supporting both the lithium and vanadium markets, as well as some exciting lithium-producing prospects.

The Energy Report: Jon, you're a very strong proponent of lithium and from what you've told us previously you believe it's hot. How hot is it?

Jon Hykawy: Hot and getting hotter. What we've seen recently is a number of deals coming to market looking for financing and those deals are getting done. We're currently in the midst of one Toronto IPO. It's an Australian-listed company called Orocobre Ltd. (AU:ORE). The company just put out press releases suggesting that they're going out and raising $22 million, to be exact. There's a rumor that we're going to see their direct neighbor on the salar in Argentina come to market soon with their IPO. We've seen a number of offtake and partnering agreements being signed including the Toyota Tsusho (OTCBB:TYHOF.PK) agreement with Orocobre. The interest in the sector has never been greater.

TER: How are these deals getting financed so easily compared to other rare earth deals?

JH: I think part of it is we're seeing so much media attention paid to electric vehicles. I was actually just at the Geneva Motor Show. That particular event was actually being referred to by people in Geneva as the "electric car show." I went in at the behest of my company president to take pictures some of the new hybrids and electric vehicles that are available. I realized about 10 minutes in that I was going to have to ration the number of flashes I was expending from my cell phone camera because I was going to run out of battery. Every major dealer of motor vehicles in the world was represented there and each of them had new hybrids and/or new pure electric vehicles.

TER: Is the lithium ion battery going to be sustainable over the next two years with potential new technologies coming into the market?

JH: Absolutely. The new technologies that are potentially coming to market are largely new iterations of lithium ion batteries with new chemistries in the cathodes and new materials being used for anodes. You can improve lithium batteries considerably from here. Keep in mind this is a technology that's only really been under development since the mid '80s and commercially since about the late '90s. This is a technology that has a long way to go.

TER: You mentioned in one of your research reports that you're recommending that investors consider a basket of lithium companies. A lot of these are development companies from what I understand. Are they long-term plays?

JH: They are. Well some of them are longer-term than others. There's really no way to play lithium directly out of the existing producers with the possible exception of Talison Lithium (currently a private company) coming to market; should they come back for the IPO and should that succeed. Talison, in the minds of most investors, I believe, is not going to play a major part in the battery industry. What you're looking for is lithium development companies that can play that role producing inexpensive battery grade lithium. That largely consists of brine and clay producers. That's the basket that we're referring to. It's companies similar to the ones we have under coverage like Western Lithium Corp (TSX.V:WLC), Rodinia Minerals Inc (TSX.V:RM) and Salares Lithium Inc. (TSX.V:LIT).

TER: Explain the difference between brine and clay producers, if you don't mind.

JH: With regard to brine producers; lithium is commonly produced today by pumping salty water out of dry salt lakes in South America. This has historically continued to be the least expensive way to produce lithium. The lithium is in the brine in the form of lithium chloride salt. What you do to simplify it dramatically is you basically evaporate the water leaving behind the lithium in the brine and then treating it to produce a chemically tractable form. The clay producers are a different story. Western Lithium is one of those companies with an extremely large deposit of a lithium-bearing clay in Nevada, actually near the northern border with Oregon. They have the ability to produce, according to their scoping study, relatively inexpensive lithium. It should be very clean lithium which also brings the cost down for producing that ultra pure battery grade. We're very positive on that possibility and we have a couple of other brine companies that we believe have relatively low cost and can find their way into the market as well.

TER: You stated earlier that brine-based lithium supplies are active and cannot be produced too quickly, referencing evaporation. If the supply is there, won't it come down to companies that can bring it to market quickly in the long run as far as share value is concerned?

JH: It has to get to market relatively quickly and relatively inexpensively. With any commodity industry, your biggest issue is maintaining control of your costs. You must make sure that when the inevitable price decreases do hit the market, you are not one of the companies that fail as a result. Our basic approach at Byron has been to build a model for what we believe the pure variable cost for production out of a specific deposit is and then look to find the lowest cost potential producers.

TER: Is the potential nationalization of lithium in Bolivia and Chile where Salares is going to potentially affect the price of lithium?

JH: Actually it's not even potential anymore. Bolivia has announced that they're going to be creating a national lithium company whose mandate I believe is to go out and develop Salar de Uyuni as a source. The media hype over the last year has been that Bolivia is the pending Saudi Arabia of lithium. That Salar de Uyuni is the greatest deposit in the world. I'm afraid that is going to be much more problematic than most people think. Our original lithium report indicated that one of the major cost drivers is the amount of magnesium dissolved in the brine along with lithium. The higher the level of the magnesium, the more expensive it is to produce the lithium and Uyuni is an absolutely marvelous source of magnesium. You're going to have a significant problem developing that economically.

We don't have any shortage of lithium. What we have is a shortage of inexpensive lithium and that's going to come back to bite the Bolivian company. I just don't see how they're going to be able to develop Uyuni at present price points. As far as Chile is concerned, there's been one senator that's proposed nationalizing the industry. The government has just changed recently to a more central right government as opposed to the left-leaning party that was in power previously. I think you're going to see a much more pro-business and pro-mining stance taken by the government there. I don't think nationalization is in the cards.

TER: When you're looking at a company like Salares in Chile and comparing them with Western Lithium in Nevada, would you as an investor take position in both?

JH: There are different risks associated with each. No one has yet produced commercial quantities of lithium from clay in Nevada or anywhere else for that matter. You have to balance the technology risk. We believe it's relatively minimal because the processing of clay for lithium looks very much like the processing of hematite or magnetite ores for vanadium. That's a process that's been conducted commercially for decades now. Balancing the two, I think you're probably better off finding a basket of collectively low cost potential producers. Fifteen percent of world production comes from FMC Lithium Corporation (NYSE:FMC) at a place in Argentina called Salar del Hombre Muerto. That is expensive lithium and it's not an inexpensive place to produce from. It's significantly more expensive than Atacama. It leaves a fair bit of room for others to come in and try to take up some of that 15% market share.

TER: That helps drive the market, does it not?

JH: It absolutely does. It's not only growth in the market overall which we see being significant over the next few years; it's the potential to displace some of the expensive supply that's in the market place today.

TER: How many companies are in the lithium basket?

JH: We have three names under coverage and they are Canadian-listed companies. We haven't touched companies like Orocobre which has signed an off-take agreement with Toyota Tsusho. This will provide Toyota Tsusho with the ability to buy up to 25% of their first project. That's a significant endorsement making Orocobre a pretty strong company in the space. Beyond Rodinia Minerals, Salares Lithium and Western Lithium, which we like and have under coverage, another Canadian-listed name that is an obvious candidate would be Lithium One Inc (TSX.V:LI). We don't have a recommendation on it at this point but people can look it up. What they'll find is that Lithium One is sharing Salar del Hombre Muerto with FMC. When you have a company producing 15% of the world's lithium just down the road, it's a pretty good indication that you know you might have a commercially viable project on your hands as well. Literally they are right across the salar from one another, so this is not a proximity play. This is a direct neighbor on the same producing salar. That's good in some ways having that proximity. It's bad in other ways in that they are sharing the same water.

TER: Cobalt is a more prominent component of the lithium-ion battery. Is there a basket of cobalt companies we should be looking at?

JH: I'm going to have to say definitively no and there's a good reason for it. You're right. In current lithium ion batteries cobalt is a significant component. I know a number of institutional clients that have been approached and told that you have to own cobalt and lots of it because there will be huge demands on this as electric cars roll out. But we're also all familiar with what we've seen on YouTube and television regarding battery failure. The fact is that very occasionally these batteries do explode, and at the very least burst into flames. That's actually a function specifically of the cobalt that's in these less than modern lithium-ion batteries.

The cathode material that's in the battery you have in your laptop computer actually contains a material called lithium cobalt oxide. It has the unfortunate property that at the same temperature that it reaches when it's operating and/or being charged it can start to give off oxygen gas. That liberation of oxygen gas is exothermic. That means that the battery heats up even more. So you get into this vicious spiral where the battery heats up and even more so it gives off more oxygen. Before you know it, the battery is very hot and the pressure's built up inside the cell. What's supposed to protect that battery is a small device called a thermistor. That senses the temperature in the battery and if necessary either cuts off charging or cuts off function of the battery entirely until it cools down. Sometimes the thermistors don't work. When the thermistors and other safety systems fail, the battery bursts open and you have a hot battery exposed to oxygen and everything catches fire. The auto manufacturers decided a long time ago that they would not risk the small likelihood or probability of one of these battery cells catching fire. So they've come up with a number of battery chemistries for the cathode that don't include cobalt. This would include the lithium manganese oxide that's intended to be used in the Chevy Volt. It would also include a number of the lithium polymer designs that the Japanese are working on as well as the lithium iron phosphate that A123 Batteries out of the United States has. The lithium vanadium phosphate that BYD Company Ltd. (OTCBB:BYDDF) in China is researching is also relevant. All of these chemistries are inherently safe. None of them have that same potential of popping the battery and causing a fire that lithium cobalt oxide does and none of them contain cobalt.

TER: Isn't that devastating news for cobalt companies?

JH: I don't believe so. Cobalt companies by and large trade on the strength of the use of cobalt in various steel alloys. Steel is still a very high growth area with demand coming in out of China and other developing regions. If they're trying to trade on the potential of huge uses of cobalt in automotive batteries, I would say they're out of luck. You will probably see a pullback in the use of cobalt even in devices like cellular telephones and PCs with time. The analysis we've done indicates that on a raw material basis, because of the price of cobalt, other materials higher in phosphates, vanadium phosphates, magnesium dioxides which combine with lithium are significantly cheaper than cobalt oxide.

TER: What is vanadium exactly?

JH: Vanadium is a metal that has some very interesting electrical as well as physical properties. One of the odd things it does is it dissolves in iron and steel creating an alloy. At relatively low levels it can produce extremely strong construction steels. It's used to significantly strengthen and bring up the quality of steels at a very reasonable price point. But at 4% or 5% alloy in steel, vanadium actually makes it strong enough to become high speed tool steels. So these would be the cutting bits in milling machines and that kind of thing. There's not really another material that can do that. People are probably familiar with molybdenum as a steel alloying agent. You run out of the capacity to dissolve molybdenum in the steel long before you reach the strength point that you can achieve with even small levels of vanadium. Niobium is another material you can substitute but it's only about one-third as effective. Therefore, it usually trades about one-third the price of vanadium in the market. More than eighty percent of it goes into steel use like this but we believe there are significant other uses building.

One of those uses is lithium vanadium phosphate cathodes in lithium-ion batteries. There's been a significant amount of research in the last couple of years on which cathode materials make the best potential lithium battery. What you want in a lithium battery is a battery that produces relatively high voltage because voltage equates somewhat directly to power out of a battery. But you also want to produce a battery that has significant energy content. It can hold more per charge than the standard lithium cobalt oxide battery that's out there. Fortunately vanadium phosphate satisfies both criteria. It has a higher voltage—around 4.7 volts or 4.8 volts—compared to about the 3.7 that the standard battery produces today. It also has about 22% more energy content. If you factor that into a car, what you would get is a battery that is inherently safe. It can likely recharge faster because it won't matter if you heat it up a little bit more. It will accelerate and have the capability of accelerating faster because it can produce more power. It will take you 20% to 22% further down the road per charge all at a lower price than a lithium cobalt oxide battery. So we're fairly excited about that and the potential for these batteries to roll down into smaller electronics like laptop computers where operating life is important. The other place where we see it being important is in the manufacture of grid storage technologies like vanadium redox batteries. These redox batteries are very, very large scale storage systems. They last from years to decades before they fail. They can store megawatt-hours worth of energy which is grid level storage and can produce megawatt levels of power. They are not small batteries by any means and are about the size of the building that would contain a big-box store. They can do some very interesting things in terms of backing up intermittent or less reliable forms of alternative energy generation during winter months.

TER: With all the variations of uses for vanadium would you expect it to see a basket of vanadium companies?

JH: Well we think the potential is certainly there. One of the things that you have to be aware of is that the battery side of the business hasn't hit yet. You don't know with technology. It may or may not work out. We believe it will. We built that into our projects but even the basis of increasing steel demand you need more junior vanadium companies. You need more vanadium in the world.

TER: Do you see that happening anytime in the near future?

JH: We do. One company that we have under coverage is Largo Resources Ltd (TSX.V:LGO). They have an excellent deposit in Brazil outside a small town called Maracas. It's in fact the highest grade deposit that we've seen. It's not the largest resource that we've seen, but the important thing is getting it out of the ground economically. They have what we believe is one of the lower cost potential vanadium projects in the world. Their likely cost for production is around $13 per kilogram. Vanadium has never gone below about $20 per kilogram in selling price. In the last economic downturn that we've just come out of, a large number of vanadium producers shut their doors because vanadium had dropped to around $30. This company could've easily weathered that and taken a significant market share away from others. They'll be in production we believe relatively soon and are in the process of finalizing project financing for the Maracas project.

TER: Do you see the demand for this metal increasing since its only use is in steel at this point?

JH: No doubt about it. You're getting significantly higher demands out of China on the basis of Chinese growth alone simply because the Chinese are mandating better and better grades of construction. So your choices in construction are: use twice as much conventional steel at a much higher cost or use vanadium dope steels. Use significantly less steel build buildings that are just as strong but have more workable room inside of them that you can actually lease to people. It comes down to a much easier choice. Stronger grades of vanadium dope steels are used and that's the best choice for any sort of construction today.

TER: Are there any supply issues related to this metal?

JH: Sadly there are and that's been an unfortunate aspect that may well contribute to curtailing its use in batteries. We've seen the price of vanadium over the last two years fluctuate between currents level of $25 or $30 and as high as $80 or $85 per kilogram. You can't have a material that you're using in significant quantities in a battery vary by that kind of amount and expect to build a business off of it. I can give you some concrete numbers in that regard. If you look at something like the Nissan Leaf and the battery that would go into driving a Leaf, that's a 24 kilowatt hour battery. This is very significant capacity in terms of energy storage. It would use roughly 20 to 25 kilograms worth of lithium carbonate equivalent. Lithium carbonate today sells for about $5,000 a ton. So you're looking at about $100 to about $125 worth of raw lithium going into that battery. The battery will sell for $10,000, a fairly insignificant amount. Were that battery to be constructed using lithium vanadium phosphate chemistry, it would contain several thousand dollars worth of vanadium. If it were to suddenly triple in price it might go from $2,000 worth of vanadium to $6,000 or $7,000 worth of vanadium. Suddenly the manufacturer of that battery doesn't see any margin on any sale. In fact they might be selling those batteries at a loss. No one's going to risk a long-term contract on those batteries. If there's no long-term contract the automotive manufacturers certainly aren't going to use it. What you need to really satisfy the requirement for stable pricing is additional supplies in the market.

TER: Are there potential projects out there where we'll find more vanadium or is it just truly a supply issue in the world?

JH: I know of four listed companies in Toronto. As well as Largo, there's a Chinese play called Sino Vanadium (TSX.V:SVX) as well as Energizer Resources (OTCBB:URST;FWB:YES) (formerly Uranium Star) that has a project in Madagascar. There is also a company called Apella Resources Inc (TSX.V:APA;FWB:NWN). There are absolutely projects, but here again it's a matter of finding economic deposits. They're tougher to come by in the vanadium space than many because it is a relatively scarce material.

TER: This has been very informative. Thank you for your time.

Toronto-based Jon Hykawy, who earned his PhD in physics (University of Manitoba, 1991) and an MBA (Queen's University, 1997), spent four years in capital markets as a clean technologies/alternative energy analyst before being named lithium analyst at Byron Capital Markets in August. Jon began his career in the investment industry in 2000, originally working as a technology analyst concentrating on the lithium space. Jon has become a valuable resource on everything about the light, silver-white metal—from supply and demand to exploration and production. He has extensive experience in the solar, wind and battery industries, conducting significant research in the areas of rechargeable batteries, from alkaline to lithium-ion to flow batteries.

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DISCLOSURE:
1) Ellis Martin of The Energy Report conducted this interview. He personally and/or her family own shared 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: Western Lithium Corp., Salares Lithium Inc.
3) Jon Hykawy does not own any of the stocks mentioned in this article, nor does he receive compensation from any of the companies mentioned.

Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
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