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Friday
Apr302010

Gissen and Berol: Uranium Demand Outstrips Supply

Source: Tim McLaughlin and Karen Roche of The Energy Report 4/29/10
http://www.theenergyreport.com/pub/na/6188

Encompass Fund founders Malcolm Gissen and Marshall Berol see the demand for uranium continuing to increase in the coming years, meaning an increase in uranium prices. As more nuclear power plants come online around the world, the need for more uranium will increase. In this exclusive interview with The Energy Report, Malcolm and Marshall talk about the uranium companies they think provide good opportunities for investors, as well as opportunities in other energy sectors.

The Energy Report: First of all, congratulations on the Encompass Fund's returns of 137% last year. Morningstar ranked your Fund very highly in 2009.

Marshall Berol: In their database of over 16,000 funds, Encompass Fund was number five for 2009 and we were number one in the World Stock Fund category.

Malcolm Gissen: For the three-year period, the Encompass Fund ranked in the top 1% in the World Stock Fund category. The fund is about three-and-a-half years old.

TER: What did you see in the investment landscape last year that others apparently missed?

MG: I think it's a combination of things. We continued to emphasize resource companies and some healthcare companies, the sectors that we felt would perform well. The companies that we liked in those sectors did even better than the sector as a whole. For example, last year gold was up 24%. The gold companies that we liked, and also the silver companies for that matter, mostly doubled and tripled in value in 2009.

Early in 2009, Marshall and I discussed the fact that a number of these resource companies had been battered in 2008. We felt that they were performing well. They should not have declined in 2008 and they offered an even better opportunity. We had the courage of our convictions to add to our positions and to initiate new positions in some companies in these sectors. Our investors were well rewarded for our doing that.

TER: What do you think the difference was between 2008 and 2009?

MG: In 2008, a lot of hedge funds and other institutional investors had made money, as we had in prior years, by investing in resource companies, especially in the junior mining companies. We were pretty heavily invested in those areas in 2008. When the hedge funds and other institutional investors experienced significant redemptions and had to come up with cash to pay their outgoing investors, the first thing they sold tended to be the companies in which they had large gains. In many cases it was the resource companies that were sold.

In the case of the junior mining companies, those companies' stocks are thinly traded. So when these institutional vendors started simply dumping billions of shares of a thinly-traded stock in the market, a lot of the junior mining companies fell 50% to 95% in value during the second half of 2008. Marshall and I started calling these companies saying, "We don't understand. You just discovered 5 million more ounces of gold and your stock is down 15% or 20% in two days. This makes no sense."

The companies told us they didn't know what was going on, but somebody was clearly selling a lot of shares. It wasn't until about October that these companies were in the East visiting with a number of the East Coast hedge funds, and learned that many institutions had simply dumped their stock in the marketplace. That had a very negative impact on these junior mining companies. It certainly hurt the Encompass Fund.

MB: At that time, it was not only the redemptions that the hedge funds were getting. The hedge funds were getting margin calls. Individual investors were getting margin calls. Individual investors and the professional investors were very nervous. They were shell shocked as the second half of 2008 and the beginning of 2009 wore on. There was tremendous amount of liquidation.

One of the larger gold companies such as a Newmont Mining Corp. (NYSE:NEM) or a Barrick (NYSE:ABX;TSX:ABX) could absorb these liquidations and not decline that much. However, the junior companies could not and they declined precipitously, as Malcolm has said. They went down 50% to 90%. That really hurt the Encompass Fund's performance in 2008, the only year in which the Fund suffered negative performance.

We went back and looked through the portfolio. We went through the companies we owned and assessed what the attributes were, pro and con, of those companies. We looked at their finances, their management, and their projects. Then we decided to eliminate a few of the companies that we felt weren't as strong, weren't as solid. We added to existing positions in companies that we felt were solid and the prices were mismatched to what the company represented. Then when the markets started to recover in March of 2009, a number of these companies went on to perform spectacularly for the balance of 2009 and into 2010. That's certainly contributes to the excellent performance of the fund, and what we think will continue to contribute to a positive performance going forward. Of course as we all know, and as the SEC requires us to say, past performance is no guarantee of future results.

Having said that, it is important to look at where a company has been and is and to try and determine where you think it's going to go as a company and as a stock investment in the future.

TER: Malcolm, you had an interview with TheStreet.com last year and you were quoted as saying, "Uranium is supposed to be the hottest commodity." It's about six months from when you made that comment. Uranium has gone down. Where do you expect it to return to, do you expect it to return to being a hot commodity?

MG: I don't like the concept of the "hot commodity" because that's not how we invest. The demand for uranium currently outstrips supply, in terms of the amount of uranium that is mined and the demand for it. I think the imbalance will continue. In fact, our analysis projects that this supply-demand imbalance will become more severe because there are several dozen nuclear power plants either being constructed or in the planning stage right now. Over the next five years, a number of them will come online, and they will start to demand uranium. The sources of uranium around the world are not ample. So there's going to be a need for more uranium within the next five years. Where you have an imbalance between supply and demand and the supply is not meeting demand, we know that prices will rise. So I believe that within the next few years we're going to see considerably higher uranium prices.

TER: In your interview with TheStreet.com, you commented that Uranium Energy Corp. (NYSE.A:UEC) in particular had a good chance to become America's top producer of uranium. Is that still a top pick for you?

MG: Yes. In November and December, 2008 we made very significant additions to our previous investment in UEC at under $.33 per share. The stock is now trading above $3. UEC is likely to become the next American producer of uranium. Their facilities in Texas have gotten the permits necessary for them to get into production before the end of the year. It's anticipated that will happen. Last year they bought a facility where they can process the uranium. So we believe that it's likely before the end of the year that they will become a producer. We like the company's management and the experience they have in getting into production at reasonable costs. The stock more than tripled last year. It was the largest position in our mutual fund until recently and is one of the largest positions in our separate accounts. We continue to think it will do very well over the next two years.

MB: It has been the largest individual position in the fund for some time. It's an example of where the equities don't necessarily track the commodity price on the upside or the downside.

As Malcolm mentioned, over the past year to 15 months, Uranium Energy Corporation stock has more than tripled, while the price of the uranium commodity has declined somewhat in the spot market. It's certainly the type of situation that your readers are familiar with. Gold, or silver, or stocks, for example, can move higher and quicker than the commodities or vice versa.

We feel that over the longer term, the stocks of the junior companies in particular will give you more advantageous exposure to those industries and those commodities than investing in the commodity itself.

TER: With UEC, their price has been increasing significantly while prices in uranium have declined. To what do you attribute their success?

MG: Investors are looking ahead and realizing that this company has a very bright future. They're expanding their resource. They're getting into production. They have terrific management. They have a good number of very experienced people who have gotten other uranium mines into production and they're well positioned. They have other resources besides the Texas resources. People are looking for what's likely to happen to UEC over the next few years.

MB: They also made a very advantageous acquisition in the second half of 2009. It provided them a fully permitted plant that's ready to operate, as well as additional projects. The market has recognized that and the stock price has gone up.

TER: From an investment standpoint, how do you compare major uranium companies such as Cameco Corp. (NYSE:CCJ;TSX:CCO) and BHP Billiton Ltd. (NYSE.A:BHP;ASX:BHP;LSE:BLT) to the junior producers or explorers?

MG: Well, with the juniors, and particularly with the exploration companies, there's a lot more risk. You don't know whether the exploration will be successful. You don't know when they're going to get into production. You don't know if they're capable of raising the funds they need to continue exploring or to get into production. With a Cameco, it is producing and is in fact the world's largest producer of uranium with the world's largest uranium mine. They have very nice facilities. They've run into problems, of course. You get a sense of comfort in knowing that the company is already in production and realizing significant cash flow, they have very experienced management, and they are the dominant company in this industry.

TER: Is there more upside potential to the junior companies?

MB: From a price appreciation standpoint, yes. It's that way regardless of whether you're looking at uranium, gold, silver, copper, moly or whatever. There is more potential reward in a junior company. There is more risk in a junior company. If you look back at a Cameco and what it has done pricewise over the last year, or two or three years, versus a Uranium Energy Corp., or another midsize or smaller company, I'm reasonably confident that most of these smaller companies have outperformed. It would be the same in gold with Exeter Resource Corp. (NYSE.A:XRA;TSX:XRC; Fkft:EXB), which is not in production and won't be for some period of time; versus a Barrick or a Newmont or a Kinross Gold Corp. (TSX:K;NYSE:KGC). It's the same thing with a Freeport McMoRan Copper and Gold Inc. (NYSE:FCX), which is in copper and gold versus a junior gold company or a junior copper company.

Like with the pharmaceutical industry, a major drug company such as a Merck (NYSE:MRK) or a Lilly (NYSE:LLY) or a Pfizer (NYSE:PFE) is not going to have the stock price movement that a smaller research and development biotech company has on the upside, nor would they go down as much. That's where the reward is with a junior company and is the reason why we generally prefer investing in junior companies, rather than larger mining companies.

TER: In addition to UEC, are there some other uranium companies that you think are good investment opportunities?

MB: There are. We're invested in a company that is involved in both uranium and gold. That's Fronteer Development Group Inc. (NYSE.A:FRG;TSX:FRG) which has some significant gold projects. They're exploring and drilling in Nevada. Also, it has a very significant uranium deposit in Labrador. There is activity going on in the uranium component of the company but it's been somewhat slowed down because the local government declared a moratorium on mining going into production. They have not declared a moratorium on drilling and exploration. So Fronteer has continued with that, but for a while, it certainly had a negative effect on the company's stock.

A company that we have been in before, but we're not currently in, is Paladin Energy Ltd. (ASX:PDN;TSX:PDN), which is in production of uranium in Namibia and soon in Malawi in Africa. We continue to review the company and its progress. It's had some operational difficulties and we haven't gotten comfortable enough to reinvest in it, but it's a uranium producer that we certainly are keeping an eye on.

BHP is an excellent company. We do not own it in the fund. We do own it in individual client accounts. BHP is a very broad-based commodities company. They produce a wide variety of commodities that they mine worldwide, not the least of which is uranium.

TER: Marshall, I know that you've looked at alternative energy opportunities, but as of last year you felt that the sector was still some distance away. What's your perspective now on that?

MB: Our general perspective is that it hasn't changed in that context. From an investment standpoint, there are certainly companies that are making progress in expanding their operations in alternative energy, primarily solar and wind.

In the fund, we have a small position in a Chinese company, JA Solar Holdings Co., Ltd. (NASDAQ:JASO), which manufactures components for solar systems. But it's a difficult space because of the amount of competition. As production manufacturing has increased, prices have come down due to competition, and it's been difficult for the companies to make a good amount of profits. We continue to look at the solar industry and various aspects of the solar industry, but it's just not a compelling investment situation for us.

It's the same with wind energy. There are some companies that are involved in the manufacture of wind turbines or the operation of them. For the most part they're smaller companies. If they're not smaller companies it's just a small part of a large company such as General Electric (NYSE:GE). You have a whole set of other factors involved as to whether you want to be invested there or not. We continue to look at it.

We look at geothermal, which is an interesting industry and interesting business. There are a number of companies involved in it. However, it has been difficult technologically, and from a capital structure standpoint to develop some of these companies, and to have the confidence in them that we like to have before investing in them. But we certainly continue to look at them.

Hydroelectric is not so much thought of as alternative energy, but it certainly is. The Encompass Fund is invested in Calpine Corp. (NYSE:CPN), which is primarily known for producing electricity with natural gas. It is also the largest hydroelectric producer in the United States with the Geysers Project in Sonoma County, California and some other projects. Again there is not a lot of opportunity on a standalone basis to invest in hydroelectric operations.

TER: How about in the conventional energy space?

MB: We continue to be positive on coal exploration and production. We own several companies in the Encompass Fund that are involved in coal. Peabody Energy Corp. (NYSE:BTU), a very large, well-known company, is in the fund.

The fund also has investments in three smaller companies, each of which have some unique characteristics. One is L&L Energy (NASDAQ:LLEN). It's a U.S. company that has acquired coal mining and processing and washing operations in China. L&L has been doing acquisitions and consolidations, and has grown extremely successfully, from a company standpoint and from a stock results standpoint. The stock has had a substantial increase in price over the past year and has produced a five-times return for the Encompass Fund in 10 months. We're not necessarily convinced that now is the time to be investing in it, but on the other hand we haven't sold any shares. It has a very good business plan of acquiring newer coal companies in China and consolidating them. They're bringing western safety and western environmental practices and procedures to the coal industry in China and it's working very well.

Another substantial position in the Encompass Fund is SouthGobi Energy Resources Ltd. (TSX:SGQ). SouthGobi is a Canadian company that is operating in Mongolia. It is currently mining coal in Mongolia, 20 miles from the Chinese border. It is operating 24/7. It loads trucks around the clock at the mine, trucking the coal 20 miles to a railhead on the Chinese border. The coal is then utilized by Chinese companies. SouthGobi has done very well. It continues to do well. It received a major investment earlier this year by one of the Chinese sovereign wealth funds. It's a company that has done very well and we believe will continue to do very well.

A fourth company that the fund owns in the coal industry is Western Coal Corp. (TSX:WTN), which is a company that's operating coal mines in Canada. So we think there continues to be a major future for coal. It certainly has environmental issues. It has safety issues, as unfortunately we've seen both in China and the United States recently. Chinese electricity production is 70% coal-generated. U.S. electricity production is 50% coal-generated. We don't see any significant change in that for a good long period of time to come. Coal is going to be used and needed.

TER: Marshall, in our last interview, you pointed out that natural gas was way off its high of $15, and out of line with the historic relationship between natural gas and oil pricing. You felt it was undervalued at that point, and noted that "very few people have much good to say about natural gas and that causes us to look closer at that kind of situation." Have you found any natural gas investment opportunities after further scrutiny?

MB: I would say that those comments that you quoted are still the case, probably each of those in spades. The spread between oil, let's say at $85 a barrel, and gas say at $4 per MCF is over 20-to-1. Energy content of a barrel or oil and an mcf of natural gas is a six-to-one ratio. Historically it's been maybe a 10-to-1 ratio from a stock market standpoint and it's currently 20-to-1. Currently there are probably even fewer people that have anything positive to say about natural gas than was the case when we last spoke. This creates opportunities, but we have been very cautious about taking advantage of any of them because we just haven't seen any indication that gas prices have hit a bottom.

As value investors, which we are at heart, we're also contrarians. But it's often said that value investors can be too early and that is the case. We continue to have discussions among ourselves here in the firm as to whether it's timely or not. The bottom line conclusion we come to is it's still too early. We don't know when that will change. We're confident that it will change. We just don't know what the timing is. Natural gas is in oversupply. The technology that has led to horizontal drilling has led to the development of shale properties and an increased production of natural gas. Natural gas production has far exceeded what the analysts or the companies expected. It's far exceeded the demand and therefore natural gas prices are extremely low. It's still early, in our view, to be investing in natural gas situations.

Having said that, ExxonMobil (NYSE:XOM) and others are investing in natural gas situations by virtue of buying companies or buying into some of the large natural gas producers in this country. They feel it's timely. Whether it's timely or not we'll be seeing over the coming months and years.

TER: Marshall and Malcolm, you have been very generous with your time today and we really appreciate it.

Malcolm Gissen founded Malcolm H. Gissen & Associates Inc., an investment advisory services firm, in 1985. He has been an investment advisor since 1985 and has managed separate accounts since 1999. Mr. Gissen's management experience has focused primarily on investments in publicly traded companies, including real estate investment trusts. Mr. Gissen received a B.S. degree from Case Western Reserve University and a J.D. degree from the University of Wisconsin. Marshall Berol has been engaged since 1982 as an investment manager in San Francisco, CA. Since 2000, he has been the Chief Investment Officer of Malcolm H. Gissen & Associates, Inc. In addition, for more than 15 years, Mr. Berol has owned his own investment firm, BL/SH Financial. Mr. Berol's investment management experience has focused primarily on investments in publicly traded companies. Mr. Berol did his undergraduate work at the University of California (Berkeley) and received a J.D. degree from the University of San Francisco School of Law. He was in the private practice of law in San Francisco before entering investment management.

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 Energy Report or The Gold Report: Exeter Resources Inc.
3) Marshal Berol: I personally and/or my family own shares of the following companies mentioned in this interview: Encompass Fund, Exeter Resource Corp., Freeport McMoran, Uranium Energy Corp., Fronteer Development, Calpine, L&L Energy. I personally and/or my family are paid by the following companies: None.
Malcolm Gissen: I personally and/or my family own shares of the following companies mentioned in this interview: Encompass Fund, Exeter Resource Corp., Freeport McMoran, Uranium Energy Corp. Fronteer Development, Calpine, South Gobi and L&L Energy. 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.
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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.

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Thursday
Apr292010

Mickey Fulp: Bullish on Uranium and Rare Earths

Mickey Fulp.jpg


Source: Karen Roche of The Energy Report 4/29/10
http://www.theenergyreport.com/pub/na/6186

Mercenary Geologist, Mickey Fulp feels that much of the uranium production in the world is under the auspices of regimes or countries that are unstable or unfriendly to the West, leaving supplies vulnerable. He prefers "companies operating in Wyoming, New Mexico and the Athabasca Basin because that's where the majority of uranium has been produced in the past and will be in the future." In this exclusive interview with The Energy Report, learn why his eyes are on uranium right now and why the unique niche rare earth market is heating up and still at early stages, providing potential investment upside.

The Energy Report: Mickey, do you see undervalued sectors that make you think, "Boy, the market just hasn't gotten this yet?"

Mickey Fulp: The only sector that I think is absolutely undervalued right now as a whole is uranium. It certainly has been beaten up since mid-2007.

TER: Are things improving, in your opinion?

MF: Absolutely not. Although I first started saying in January of '09 that the uranium sector was down and I expected uranium prices to rebound, they haven't done that. However, as opposed to last year, there is a lot of analyst consensus now that the uranium sector is undervalued. I've been bullish on uranium for quite a while based on supply/demand fundamentals and that bullishness still exists. So, from a contrarian point of view, I would say that most uranium stocks are undervalued right now and present buying opportunities.

TER: Some interesting agreements have been made surrounding the Washington Nuclear Security Summit regarding enriched uranium, specifically the agreement between the United States and Russia to disarm one-third of their nuclear arsenal. Ukraine has also agreed to dispose of their highly enriched uranium stockpile. Will these developments have a continued impact on uranium prices?

MF: I think that is unclear as of now. These highly enriched uranium agreements could certainly supplement supply but weapons-grade material has to be converted into low-enriched uranium for use in nuclear reactors. Highly enriched uranium used for nuclear weapons is about 85% U-235. The typical light-water reactor uses light enriched uranium that's typically 3% to 4% U-235. This could certainly overhang the market. The spot price is $42. Long-term is about $58. I don't think it's likely we will see major increases or decreases in these prices in the short to mid-term.

Certainly all the new mines coming onstream have increasing costs of production. There are very few new mines proposed or in development that are going to make money at a $40 spot price, but between 80% to 85% of the uranium yellowcake market is sold on long-term contracts. That's somewhere around $60 right now. The other thing to note is that fuel is only 10% of the cost of producing electricity in a nuclear power plant, which is very minor. We see sovereign nations, companies and utilities as some of the biggest buyers of uranium and often those sovereign entities are not concerned with the price.

In the uranium sector, supply security is the important thing. We do know that demand is increasing significantly year after year. Mine production is about two-thirds of the world's use. There are 59 new reactors in construction which will need initial startup feed. Utility companies that produce power through nuclear power plants historically have signed supply agreements for about three years. Those secure supplies right now are averaging about a year and a half. Based on that, I'm very bullish on the demand for uranium.

What we have to take into account is the geopolitical situation of uranium production. Forty-six percent of 2009 production came from countries that are not stable or very friendly to the western world. Most uranium is consumed by the West, especially the United States, which consumes about 30% of world production on a yearly basis, around 55 million pounds. Yet we produced less than four million pounds last year. So where does our uranium supply come from?

For the last few years, a significant amount has come from the Russian Megatons to Megawatts program; high-enriched uranium being reduced to low-enriched uranium. However, the number-one producer of uranium last year was the country of Kazakhstan, which is arguably one of the most corrupt regimes on the face of the planet. There were internal corruption issues in Kazakhstan last year with the government showing indications of increasing nationalization of its uranium industry. Nevertheless, production continued to increase significantly. The number-five mine producer last year was Russia, followed by Niger, which had a coup in February. There is every reason to think that a significant economic reason for the coup was that over 70% of Niger's exports are uranium. It supplies France with 40% of its uranium. The number-seven producer in the world is the country of Uzbekistan. Investing in the "Stans" is a huge geopolitical risk and has been since the Soviet Union dissolved in the early '90s.

TER: But is it an increased risk because they won't sell to the West, or because they may not produce uranium because of political and economic turmoil?

MF: I think it's combination of both. Kazakhstan has increased its uranium production astronomically just over the last three or four years. It has replaced Canada as the world's largest producer. Whether or not it can sustain that production remains debatable. As the shallow, easy-to-get, in-situ uranium is produced and depleted, it gets more difficult to go deeper and deeper. Not many people are aware of the fact that in-situ recovery uranium operations have very steep decline curves. In other words, you get the easily extractable uranium out first and then you have a continuing decay of production as the field matures. That happens very quickly. So in Kazakhstan, not only do you have geopolitical risk, but there's also the economic risk that they can't maintain their production. Certainly in Niger, I think it's strictly geopolitical risk. There are two big mines that produce there. AREVA (PAR:CEI) is the partner. There is a third huge mine coming onstream that will produce on the order of 11 million pounds a year, which would be about 7% of world production.

TER: Considering supply and demand and geopolitical issues, which of these undervalued uranium companies represents good future potential?

MF: I concentrate strictly in North America and I invest in companies that operate in past producing and/or currently producing districts. In the U.S., I like companies operating in Wyoming and New Mexico because that's where the majority of uranium has been produced in the past and where current resources are likely to be developed. My favorite company is Strathmore Minerals Corp. (TSX.V:STM;OTC.PK SHEETS:STHJF). They are in a bankable feasibility study at Roca Honda, New Mexico, which is arguably the best undeveloped underground uranium deposit in the United States. They are proceeding with mine permitting at Roca Honda and in the Gas Hills of Wyoming, where they have the commanding land position for conventional open pit uranium development. In addition they have another eight development projects. They had 10 a few months ago and they've monetized two of those.

The company has every intention of monetizing its other development properties in New Mexico and Wyoming. Strathmore has $29 million of working capital and is absolutely the most undervalued uranium developer on any North American exchange. With a market capitalization around $60 million, $29 million working capital and 125 million pounds of uranium resources, I think Strathmore is a no-brainer at $.70.

Another company I like is Hathor Exploration Ltd. (TSX.V:HAT). Hathor has had recent exploration success in their winter drilling program at Roughrider and Roughrider East in the northeastern Athabasca Basin. Their resources have grown significantly. Exploration potential continues to expand around the current plays. They have a couple of other projects that are very interesting as well, including the Russell Lake project next to Denison's Wheeler River discovery in the southeastern part of the Athabasca Basin. There is also a project called Henday, a joint venture with Forum Uranium Corp. (TSX.V:FDC) about 10 kilometers north of the Roughrider discovery. The drilling they did this winter was very encouraging, encountering strong clay alteration. They'll be drilling there again this summer. It's a company that I've been buying on weakness.

I pick away at these stocks on weakness. Although I may cover 8 or 10 companies at any one time, I'm probably invested in 15 to 25. The ones I publicly talk about are those that probably have the best chances of success. I consider my investment profile to be of much higher risk than most people are willing to take or should take as lay investors. With those that I talk about, I may be accumulating on weakness because they are longer-term plays for me and I see possibilities that they will build successful mines, ultimately sell out to other companies, or enter into strategic alliances. The bottom line is that over the mid- to longer-term they should reward shareholders.

TER: Are you still bullish on rare earth elements (REEs)? Do you still see potential upside or has the market priced that in?

MF: I'm still bullish on rare earths. I've said more than once recently that this is a very early stage of a bubble supported by the U.S. government. Policies are being implemented by the government with a bill in Congress likely establishing a rare earth element stockpile. There is increasing demand for these metals that are completely controlled mine-to-market by China. There is an awareness and a mine-to-market philosophy developing in the U.S. I continue to be bullish on the sector as a whole and think it's still very early on.

I've used an analogy in the past of a nine-inning baseball game. I think we're somewhere at the bottom of the second or the top of the third in the rare earth element bubble. So there are still opportunities in the sector. Many of these companies have taken off with valuations that have increased anywhere between two to over 50 fold over the course of a year, but I see additional upside.

Over the last two weeks or so there has been a significant market correction of most of the rare earth element players. This is very much a junior exploration sector play within a niche or specialty metals market. The sector has not attracted major mining companies. If you look at the recent market correction, and if you look at the charts, these junior companies are building strong charts. When they build strong charts like that you can see additional upside. So once again, I may go in and buy on weakness. I want to caution your readers: I was in very early in this play so my cost basis is much lower than current valuations. As you know, we all talk our own books and that's what I'm doing here. But I see potentially higher valuations in the offing.

TER: How many years do you think this nine-inning game will last, to use your analogy? Are we looking at a decade of upside potential in the rare earths, or one-to-two?

MF: I would say somewhere in between. For U.S. and Canadian producers to come online and for the mine-to-market capability to be developed in this sector, we are looking at about five-plus years. The big player in the U.S. is no doubt going to be privately-owned Molycorp, because at one time they had the world's largest mine. They still have the world's second-largest deposit. It should be back in production sometime in 2011 or 2012. Molycorp will be producing significant amounts of rare earths again and trying to develop downstream processing along with new technologies and products for end-users. Demand is increasing from phosphor and lighting, high-tech electronics, hybrid cars, and wind turbine energy. These metals are also crucial to national defense and security. I think there will be a significant time period before this bubble is ends, unless there is another world economic meltdown.

TER: Can Molycorp satisfy the mine-to-market needs of a country like the U.S.?

MF: I think that Molycorp will start up Mountain Pass soon. They're currently producing about 3,000 tons of rare earths a year from stockpiles. In a global market that produced 125,000-130,000 tons in the last year, it's currently a relatively small producer. The mine is projected to produce about 20,000 tons per year once it's fully operational. But we see year-over-year world growth in demand projected at 10% a year. Molycorp will not be able to supply all the needs of the United States. Furthermore, it's a light rare earth deposit. The heavy rare earths, although not a significant part of the total world tonnage, are very much a significant part in terms of value because they're very high-priced as well as being relatively rare. I personally see room in the sector in North America for additional light rare earth and heavy rare earth element mines. I picked companies that I consider to have the best prospects for

TER: Can you share those with us?

MF: I cover Avalon Rare Metals Inc. (TSX: AVL;OTCQX:AVARF), which had a new resource come out in the last couple of months and very good news on the metallurgical end. They are now proceeding to a pilot plant test and cost benefit analysis on the metallurgical process. We can expect a prefeasibility study in the next six to eight weeks on their Thor Lake deposit.

Another company I am bullish on is Rare Element Resources Ltd. (TSX.V:RES). They recently completed a big financing and have a working capital of about $12.5 million. A new resource estimate is expected soon and based on the drilling that they did last summer and fall, I would expect a significant increase in tonnage and also dollar value per ton. The drill results indicated strong values in neodymium, which is in very high demand in the magnet sector. The deposit is going to have a relatively high dollar value in the light rare earth sector. A prefeasibility study is expected in June. The other interesting note about Rare Element Resources is that it's really a two-for-one. There's a gold play adjacent to the rare earth element play in a joint venture with Newmont Mining Corp. (NYSE:NEM) and I think that Newmont will bow out within the next couple of months. So Rare Element will own 100% of the gold project and I expect a new round of drilling and then a significant 43-101 resource.

The other company I cover is Quest Rare Minerals, Ltd. (TSX.V:QRM) (formerly Quest Uranium Corp. (TSX.V:QUC), which recently announced a 43-101 qualified inferred resource, basically a geological mineral inventory, from their initial drill program late last summer and fall. They have a potentially huge resource at Strange Lake in far northeastern Quebec. Less than one-half is drilled where they know it occurs from mapping and sampling and it's completely open in all directions and at depth. All their shallow drill holes ended in mineralization.. They'll be back drilling in June and we expect the resource to grow significantly. It's a heavy rare earth element deposit.

TER: Is Quest diversifying beyond their uranium deposits and focusing on rare earths?

MF: Well, it was once a uranium-focused company. Quest was a spinout from Freewest Resources Canada Inc., which you may remember sold out to Cliffs Natural Resources (NYSE:CLF) for their chromite deposit a few months ago. Their uranium and rare earth element projects were spun out as Quest previously, and long before the REE sector started to heat up last year. Quest changed exploration emphasis to its rare earth element plays and it's paid off handsomely. A year ago it was a $.04 or $.05 stock. It's undergone a market correction in the last few days and is currently trading at about $3.25, off from a high of $4.18. It's in the process of changing its name to Quest Rare Minerals to reflect its role as a rare earth explorer. The uranium plays Quest had were not compelling to someone like me who likes to pick uranium companies in established districts of the Athabasca Basin or the western U.S.

TER: How can investors make unique plays in the rare earths sector?

MF: There are a few options. A company which I'm fond of and in which I've participated in private placements is Tasman Metals (TSX.V:TSM). It's run by a couple of really good Australian geologists that I met in Peru in the late ‘90s. They are focused on creating Scandinavian rare earth element plays and have acquired several advanced rare earth deposits in Finland, Sweden and Norway. They have announced initial drill results from Norra Karr and final results from winter drilling will be coming out soon. They've recently acquired the Bastnes deposit where rare earth elements were originally discovered in the early 1800s. We may see a number of additional acquisitions in Scandinavia. This gives investors a way to get a European REE play through the Toronto Venture Exchange. The European Union certainly will have demand for rare earth elements and this could be the company that supplies that demand.

Then there are a couple of other ways to play REEs. NEO Material Technologies (TSX:NEM) is a company which is a magnet powder, rare earth element alloy, and specialty metal producer in Toronto. It generates positive cash flow and could be a mine-to-market player or perhaps an acquisition target for someone (and I'm purely speculating here) like Molycorp, because they have current downstream product capabilities.

TER: How large is their project and when you say it's alloy what does that mean?

MF: They are a producer of rare earth element and rare metal alloys. An alloy is a combination of two or more metals. They're a downstream company with no exploration or mine projects. Perhaps they would be looking for an off-take agreement with someone who will become a miner. Perhaps they will become a takeover target of a larger company such as Molycorp, which needs to build downstream capabilities; or Lynas Corp. (AUS:LYC) of Australia which may want a presence in North America. These are pure speculations but NEO Material is a cash flow producing company on the downstream side of the rare earth element supply chain.

A company that gives you another way to play REEs is Dacha Capital Inc. (TSX.V:DAC; OTCQX:DCHAF).They intend to establish a rare earth element ETF, where they warehouse REE metals and compounds and buy and sell them. The company is fronted by Stan Bharti and his group and has increased its market cap by about 50% over the last month or so.

TER: What do you see in the green alternative energy space with uranium?

MF: I see uranium as a proven green technology which is established, economic, and expanding. Now certainly the solar and wind industries will contribute to the green energy agenda that governments are propagating to reduce carbon emissions. However, I do not follow any companies in the solar and wind arenas and there is a logical reason for that. Uranium has a long history of production and profitability. The kilowatt-hour unit cost from a uranium power plant is much cheaper than natural gas- or coal-powered plants. The solar and wind sectors are not economic without direct government subsidies. I am reluctant to invest in entrepreneurial, venture capital companies that depend on government subsidies and the current whims of elected government officials.

TER: Anything else you'd like to advise our readers?

MF: It's incumbent to do your own due diligence, because you and you alone are responsible for your investment decisions. Careful and diligent research will allow the lay investor to make better speculations in the high risk junior resource sector.

TER: Mickey, we appreciate your spending some time with us today.

The Mercenary Geologist, Michael S. "Mickey" Fulp is a Certified Professional Geologist with a bachelor's degree in Earth Sciences with honors from the University of Tulsa (1975), and a master's degree in Geology from the University of New Mexico (1982). He has over 30 years' experience as an exploration geologist searching for economic deposits of base and precious metals and other resources. Mickey has worked for junior explorers, major mining companies, private firms and investors as a consulting economic geologist for the past 22 years, specializing in geological mapping, property evaluation and business development. Respected throughout the mining and exploration community due to his ongoing work as an analyst, writer and speaker, Mickey launched MercenaryGeologist.com in late April 2008 and can be reached at Contact@MercenaryGeologist.com.

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

DISCLOSURE:
1) Karen Roche 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: Avalon Rare Metals, Strathmore Minerals, Rare Element Resources.
3) Mickey Fulp: I personally and/or my family own shares of the following companies mentioned in this interview: Strathmore Minerals, Hathor Exploration, Forum Uranium, Avalon Rare Metals, Rare Element Resources, Quest Uranium, Tasman Metals, Neo-Material Technologies, Dacha Capital. I personally and/or my family are paid by the following companies: Strathmore Minerals, Avalon Rare Metals, and Quest Uranium are paying sponsors of my website. I have done consulting work for Strathmore Minerals.

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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.

Today we sold our Call Options in Silver Wheaton Corporation, June $15.00 series, for a profit of 106%, however, we cant find such opportunities in the uranium space at the moment, but they will come.

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.

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.
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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.

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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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