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Sunday
Jan092011

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Thursday
Jan062011

Jon Hykawy: High on Lithium

Source: Brian Sylvester of The Energy Report  01/06/2011
http://www.theenergyreport.com/pub/na/8249

Jon Hykawy.JPG

With oil prices edging closer to $100 per barrel, the chatter about electric cars is again on the rise. Jon Hykawy, head of global research with Toronto-based Byron Capital Markets, thinks the time is nigh for the mass adoption of electric cars, all of which will need specialty metals like lithium. But where is that lithium going to come from? In this exclusive interview with The Energy Report, Jon handicaps most of the players in the lithium space and highlights a few that could be takeover targets.

The Energy Report: Jon, tell us why lithium is generating a lot of excitement right now.

Jon Hykawy: It's a case of the general public starting to understand what the electric car might be able to do. As electric cars start to penetrate global markets, that will save the consumer a considerable amount of money, and help develop power infrastructure in the United States, a country now spending $300 billion a year on foreign oil. The electric car will also have a significantly positive effect on the environment—no matter how the electricity is generated. Obviously, lithium batteries will play a critical role because you need a fair bit of lithium per vehicle that is going to be built. I think people are starting to understand that there's going to be a tremendous pull on lithium. That's really what's driving the excitement.

TER: Lithium is not like gold or copper, two of the most commonly mined metals. If someone is investing in lithium companies, what are some lithium basics that investors should know?

JH: Lithium mining is largely dependent on chemistry. The costs really scale with the individual deposit and with the individual chemistry of the brine, if it's a brine deposit.

The first rule of thumb is that lithium is an industrial chemical. There is a defined demand for it. Nobody makes jewelry out of lithium. There's not an insatiable demand for the stuff. You want to find the companies that can produce lithium inexpensively. Frankly, that tends to limit you to looking at brine deposits. You can look at hard rock deposits to the extent that you can look at a company like Talison Lithium Ltd. (TSX:TLH), based in Australia. Talison's ore grade is very, very high. It's really a bit of a mutant in the hard rock space. As a result, there are very few other hard rock projects that we think have any hope of doing anything in the market over the longer term. We tend to tell people to look either at brine deposits or possibly at the clay deposits because some of the clay projects out there, especially Western Lithium USA Corp.'s (TSX.V:WLC;PK:WLCDF) King's Valley lithium project in Nevada, have a shot at coming in at a relatively low cost. And cost is key; on the brine side, you really want what you want in every deposit—high grade. You want a high level of lithium in the brine. In Chile, off of the Atacama Desert, you're going to see grades of 2,000 parts per million (ppm) of lithium. That's at the top of the range. Anything over 800 ppm is a very, very strong deposit. But you also need low levels of contaminants like magnesium and sulfates. If you find all of those things, then you have a reasonable deposit. You just need to couple that with great management and good financing and you have yourself a mine.

TER: Who are the major lithium players at this stage?

JH: At this point, there are four major producers. They've been the four major producers for a significant period of time. Three of them produce from brine deposits in South America. Those are Sociedad Quimica y Minera de Chile SA (NYSE:SQM; SN:SQM), which is the Chilean national mining and chemical company; FMC Lithium (NYSE:FMC), which is part of FMC Corporation; and Chemetall, which is part of Rockwood Holdings, Inc (NYSE:ROC). And, as I mentioned earlier, Talison Lithium. Talison really dominates the market for lithium that's used to manufacture glass and ceramics. But they also sell a fair bit of their lithium to companies in China that produce battery-grade lithium.

TER: And most of it comes from the Greenbushes Lithium Operation in Western Australia, and, as you said, that's a hard rock deposit.

JH: Yes, they produce a mineral called spodumene. The theoretical limit on lithium concentration in spodumene is about 8% lithium. They can produce something that is as close to 8% as it matters.

TER: What's the life expectancy of that operation?

JH: Longer than you or I are going to care. They have a high-grade core of about 4% lithium that probably can last through the next 20 to 40 years. It's a very rich, long-life mine. That's one of the reasons there are no other major hard rock suppliers because the primary market for that material is glass and ceramics. When you have something that's as inexpensive to produce as the spodumene from that high-quality deposit, it's very, very difficult for anybody else to get into that game.

TER: But what about the lithium Talison produces that is used in batteries?

JH: They sell that same spodumene concentrate that contains lithium and other companies in China turn it into battery-grade material, but it's more expensive than producing it from brine.

TER: You talked a little bit about lithium-ion batteries and, in particular, those being used in cars. There was a press release published in early December about Japan's Sanyo doubling its plant production capacity for lithium-ion batteries. Sanyo has contracts to supply Volkswagen and Suzuki. The company says that the market for lithium over the next 10 years will average $6 billion a year. It's worth about $4 billion now. Do we have enough lithium to meet that demand?

JH: Well, first about the figures that you quoted. Lithium batteries are not used in electric vehicles today. The batteries in the Honda Insight or the Toyota Prius, today, are all nickel-metal-hydride batteries. In terms of automotive use, the use of lithium battery is completely greenfield; it's starting essentially from zero. As far as whether we have enough lithium, if you look at a vehicle like the Nissan LEAF, it uses about 4 kilograms (kg.) of lithium metal or about 21 kg. of lithium-carbonate equivalent. We usually quote the amount of lithium shipped in the world as lithium-carbonate equivalent because it's a nice, benign chemical. Last year, the demand for lithium was about 100,000 tons. You can see that one vehicle using 20 kg. of lithium-carbonate equivalent is not going to stretch lithium demand until millions of vehicles are produced each year.

TER: But at the same time, we're seeing a major increase in the price of lithium per ton. It's around $6,500 per ton right now.

JH: I think that's rather high. Lately, the price of industrial-grade lithium has been around $5,000 a ton. And the battery-grade material has been selling for something like $5,600 or $5,700. The historical high prices do run up to $6,500 per ton, though.

TER: But the price for lithium is not set like copper or nickel prices on the London Metals Exchange. Lithium prices are determined by buyers and sellers working out agreements with each other. How is that dynamic influencing junior explorers with lithium projects?

JH: Unfortunately, it's a more complex question than that. But the critical point at this stage is that none of the four key lithium suppliers want to grant offtake agreements to automotive manufacturers. As far as these suppliers are concerned, there's plenty of lithium on the market and the automotive manufacturers should be happy to go out and buy their lithium through negotiated contracts, just like everyone else.

But you can't ask an automotive manufacturer to depend on the fact that they're going to get 50 or 100 tons of lithium on a given day. Maybe there's only $60,000 or $70,000 worth of lithium coming, but if they miss that shipment they could literally cease production to the tune of tens to hundreds of millions of dollars' worth of vehicles. So carmakers will not depend on a spot contract. They need offtake agreements; they need something that's carved in stone.

To that end, what's been happening lately is that a lot of these automotive manufacturers are doing direct offtake agreements with the junior lithium miners. They're actually going out and tying up supply by buying it directly from the juniors.

TER: What are some examples of those?

JH: Well, there's been a few high-profile ones. For example, one of the better-known names in the junior lithium space is Orocobre Limited (TSX:ORL; ASX:ORE). They signed an offtake agreement and development program with Toyota Tsusho. So Orocobre's program seems to be advancing reasonably well. We expect that sometime in the first quarter of 2011 we're going to hear about the finalization of that agreement and an equity injection by Toyota into Orocobre's Salar de Olaroz lithium project in Argentina.

Another company that has signed two separate agreements is Lithium Americas Corp. (TSX:LAC). They have lithium supply agreements with both Magna International Inc. (NYSE:MGA; TSX:MG) and Mitsubishi Corporation (OTCPK:MSBSHY). Lithium Americas' Salar de Cauchari lithium project is just up the road from Orocobre's lithium project in Argentina.

Another Argentine group that signed something recently is Lithium One Inc. (TSX.V:LI). They share the salar that FMC produces lithium from, Salar del Hombre Muerto, in the Argentine desert. That salar produces about 15% of the world's lithium through FMC. Lithium One's agreement is with the Koreans, via Korea Resources (KORES), to supply a number of potential buyers with lithium. There are certainly some frontrunners in this space.

TER: What is it about these deposits in Chile, Argentina and Bolivia that make them so prospective for lithium?

JH: There are a couple of things that are important. One is that the portion of the world that we're talking about—the desert in South America—has been uplifted. Millions of years ago there were small, relatively salty lakes there due to their proximity to the ocean. Those lakes were eventually lifted into the mountains and set on the leeward side so the evaporation rates have been very high. As a result, nature has done a lot of the work.

The salty brine that was left behind is just below the surface where it's protected from further evaporation. It has a high enough concentration of lithium to make it worthwhile to process. But it also has a low enough concentration of contaminants that those materials don't negatively impact the cost of the lithium. That has made the South American desert one of the least expensive places in the world from which to source lithium.

There are other places in the world where this same sort of thing has happened. It's happened in Tibet. It's happened in portions of China. It's happened in a few other places but in most of those places the lithium concentration is low and the concentration of some contaminants, like magnesium, is relatively high. That, unfortunately, has made those deposits uneconomic to mine at this point.

TER: You mentioned Lithium Americas. It owns the Salar de Cauchari lithium-potassium property in Argentina, where pilot-scale processing is underway. You have a speculative buy rating on Lithium Americas with a target price of $2.50. It's trading around $1.90 now. What sort of catalyst is going to bring it up to that level?

JH: What really matters at this point is that Lithium Americas produces a definitive feasibility study that points out the flow sheet that they're going to use to produce lithium. It's a bit of an interesting deposit. They have a reasonably good concentration of lithium but they also have a relatively high abundance of sulfate, one of those contaminant ions. If you had nothing but sulfate, you'd have a bit of a problem and it would be an expense. But they also have a fair bit of potassium in their brine. Potassium and sulfate together are potash. If you could get the chemistry correct and put the right flow sheet together, Lithium Americas could be a relatively inexpensive producer of lithium, as well as a relatively inexpensive producer of fertilizer. The two of them together would make a very interesting revenue stream. You sometimes see those dual revenue streams from some of the major producers, like SQM in Chile.

TER: Has Lithium Americas done studies to determine if they can get the chemistry right?

JH: In theory it's workable. They've worked on it on a pilot-scale basis. What it really comes down to now is finding what the cost is going to be and that's where the feasibility study comes in.

TER: When should that be published?

JH: We're hoping we're going to see something from Lithium Americas relatively early in the New Year. That will give us some comfort.

TER: Well, we'll look forward to that. You also mentioned Lithium One. What's unique about its Sal de Vida Brine Project in Argentina?

JH: Well, one of the geologists who works on the deposit in Argentina had a very good statement about it. We were discussing the deposit's chemistry when he just smiled and said: "God was very good to Lithium One." They have a relatively high abundance of lithium. They have very low magnesium levels. And the sulfate levels are well matched to the two of those. They really have no other contaminants to worry about. It looks a lot like the brine that FMC deals with on the other half of the salar. It's a very good brine. In terms of chemistry, there's very little you could ask for other than even higher levels of lithium. But as far as it goes, Sal de Vida is one of the more straightforward projects that you're going to come across.

TER: You mentioned Western Lithium, too. The company has a clay deposit, the King's Valley lithium project in northern Nevada. Have you been to that project?

JH: I have, yes.

TER: What were some of your thoughts after seeing it firsthand?

JH: Firstly, King's Valley probably contains a never-ending stream of lithium. There are two things that distinguish it. The first is it's in the United States, so the political risk is minimal. The second thing is that there are five lenticular deposits of hectorite clay that effectively contain an inexhaustible supply of lithium. And through the publication of Western Lithium's preliminary feasibility study, the company has shown it can produce battery-grade lithium, or what certainly looks like battery-grade lithium, at a very reasonable cost. The cost outlined in its study would make Western Lithium one of the least expensive producers of battery-grade lithium in the world. That is interesting to us.

The process that Western Lithium is using to recover the lithium looks a lot like the mundane processing of an industrial material like vanadium. While it looks a little like that, it's never been done on a commercial scale. That's still a risk that investors need to keep in mind. This is a novel method for producing lithium. While you can get game-changing results out of novel approaches, you can also get some serious negative surprises once in a while.

TER: What about some other companies with projects that are similar to Western Lithium but perhaps a little further away from production?

JH: There is one. We know this company reasonably well and have visited all their sites. Rodinia Lithium Inc.'s (TSX.V:RM; OTCQX:RDNAF) Salar de Diablillos lithium brine project in Argentina looks like a good one to us. Again, it's one of those deposits that's been blessed by reasonably good chemistry. They've got relatively high levels of lithium. Good magnesium levels. Good sulfate levels. It should be a relatively tractable project. It's not a huge project, but in the larger scheme of things you don't need to be huge. You just need to target the right markets and find some buyers who want to buy the stuff.

TER: With most of these deposits being found in the same part of the world, are we going to see some takeovers?

JH: We've already seen a few. For instance, we've seen Talison take over Salares Lithium and its properties in Chile. The idea of a hard rock player owning brines is an attractive one to me. I like the synergies that come with the two approaches in terms of being able to guarantee delivery to automotive customers, for example. With brine, for example, lithium production is dependent on the weather, so guaranteed delivery can become an issue. Production of lithium from hard rock or clay is nearly certain and independent of the weather. Put the two together, and you can have guaranteed delivery with potentially very low costs.

We're likely to see more takeovers. Lithium Americas' Salar de Cauchari and Orocobre's Salar de Olaroz in Argentina are really side by side. There's a tremendous amount of potential synergy between what Orocobre is doing and what Lithium Americas is doing. You may well see some activity there. If not an outright merger of the two companies, you could certainly see some cooperation on the processing of lithium. That would make an awful lot of sense. Frankly, none of the properties in Argentina are really all that far away from one another, so some sort of regional processing facilities would make sense there, too.

TER: Do you have some parting thoughts on lithium?

JH: As I said earlier, people need to bear in mind that lithium really is an industrial chemical. There is a defined demand for it. The companies that are going to succeed in the lithium space are going to be the ones that put together the right marketing agreements and produce it at a reasonably low price. If you manage to pull those things together, lithium mining is highly lucrative. Nature has done most of the work and the margins in the space can be 50% or more. You don't often see that in the production of an industrial material like lithium.

TER: Thanks, Jon; interesting as always.

Jon Hykawy is currently with the research team at Byron Capital Markets, with a specialized focus in the lithium and clean technology/alternative energy industries. Jon holds both a PhD in physics and an MBA from Queen's University and has been working in capital markets as a clean technologies/alternative energy analyst for the last four years. He began his career in the investment industry in 2000, originally working as a technology analyst. His current area of focus is the lithium sector, ranging from availability and production to lithium battery technology. He has extensive experience in the solar, wind, and battery industries, conducting significant research in the areas of rechargeable batteries, ranging from rechargeable alkaline to lithium-ion to flow batteries. Jon is also fluent in Spanish and Ukrainian.

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

DISCLOSURE:
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Talison, Western Lithium USA, Lithium Americas, Lithium One and Rodinia.
3) Jon Hykawy: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.

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Over in the options trading pit, we now have 59 winners out of 61 trades, or a 96.72% success rate and we have 3 open positions which have reached their targets or thereabouts and will be closed shortly, taking www.skoptionstrading.com back into a 100% cash position. If you have any questions regarding these trades please address them through their site where they will be handled quickly and I hope efficiently.


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Tuesday
Jan042011

Richard Kang: ETFs Are Active Investors’ Weapon of Choice

Source: Brian Sylvester of The Energy Report   01/04/2011
http://www.theenergyreport.com/pub/na/8233

Richard Kang.JPG

Exchange traded funds (ETFs) have been around for almost 20 years but small boutique firms are finding new ways to slice them up and repackage them for investors who are taking an active approach to their investment funds, not simply buying and holding them. Richard Kang, CIO and director of research for New York-based Emerging Global Advisors, specializes in ETFs and says liquidity and more choices are responsible for record amounts of cash flowing into ETFs. In this Energy Report exclusive, Richard talks about his funds and some reasons niche ETFs are changing the investment landscape.

The Energy Report: Richard, your firm offers a number of ETFs as investment vehicles. Your ETFs are branded under the brand name EGShares. Please tell us about your philosophy for going the emerging-markets ETF route.

Richard Kang: Clearly, the emerging markets theme is very hot right now, especially for those investors who have traditionally focused on the U.S. and developed world. Many investment vehicles focused on developed markets offer little yield. Returns are as volatile as they could be anywhere; for example, the S&P 500 has gone down 50% twice in the last 10 years—once when the dot.com bubble burst and the other because of the global financial crisis in 2008. All markets are related to one another. Whether you go to Japan or Europe, what's the benefit? So for many reasons emerging markets are hot. The problem with emerging markets is the practicality of investing—they're often non-transparent and illiquid. You can't short them even if you want to. Sometimes they're hard to access, like India for example, and they're expensive to access when you consider trading costs, fund fees and other considerations. For these reasons and others, ETFs have become the weapon of choice.

TER: Please explain the term "weapon of choice" in that context.

RK: Investors seeking higher returns would like to have some kind of active component in emerging or frontier markets but they believe that this category is relatively inefficient, as opposed to U.S. equity markets, which are relatively efficient. Thousands of analysts study Coca-Cola or General Motors, so those prices are pretty much where they should be. There are far fewer analysts in emerging markets but investors want to access those markets and think there's a great opportunity to churn out some added return by taking an active management approach. But stock picking is difficult for maybe 90% of investors who don't spend time in India or China. That's where an ETF makes sense. It's an underlying passive strategy with an index, but it's also a tool to actively manage one's risk exposure. India versus China, energy versus industrials or utilities—those are active decisions. For many investors, an ETF is their weapon of choice for that—plus the pragmatic aspects of ETFs that deal with the issues of cost, diversification, liquidity, transparency, shorting, etc. mentioned earlier.

TER: Why not an emerging markets mutual fund?

RK: A mutual fund company would tell you: "Please don't trade our fund because it hurts us. Administratively, it adds costs to us and to you, the investor." Not just that but the regulators have said the same thing. The market timing of mutual funds was a scandal several years back. In any case, everybody's saying "Don't do it. You should buy and hold the mutual fund," and rightly so in both cases. An ETF provider, like us, says: "Please trade these. They're supposed to be traded; that's why we build them and place them on the New York Stock Exchange." Investors around the world go to the NYSE for one reason only—liquidity. If I go to a billionaire in Dubai and say, "I can build this fund for you on the Dubai Exchange," they'll say, "Please don't do that. We have U.S. dollars and we need the liquidity of the New York Stock Exchange." That's why investors go there. Further, with more volatile asset categories like emerging market equities, many investors would rather shorten their holding period. That's the reason ETFs are traded, not simply just bought and held.

TER: Of particular interest to us are your energy and mining ETFs: EG Shares Dow Jones Emerging Markets Energy Titans Index Fund (NYSE:EEO)) and EG Shares Dow Jones Emerging Markets Metals & Mining Index Fund (NYSE:EMT). Why did you choose passive ETFs versus actively managed ETFs?

RK: The ETF industry, which started in the early 1990s, was built out of underlying index or passive strategies. Today, I would say close to 99.99% of ETF assets around the world employ passive strategies. I'd be surprised if it was even 0.01% in active strategies, in terms of total global ETF assets. Then, we look at the very large funds. They are the most vanilla of passive strategies like the SPDR S&P 500 ETF (NYSE:SPY), which tracks the S&P 500. For us, a passive strategy was pretty much a no brainer. We were coming out of the worst financial crisis since The Great Depression when we launched these funds. If we were going to put a product out there, it had better be something that we believe is palatable to most investors. Investors want the liquidity they can't find in emerging markets. We knew we had to provide that with a portfolio of, let's say, 30 stocks. A concern was that if we tried for a more diversified portfolio of 100 energy or mining stocks maybe those in the bottom quarter or even half might not be that liquid. The 2008 financial crisis was one of liquidity as much as anything else was, so we needed to ensure that we were pretty basic in what we did.

TER: Your first ETFs focused on specific sectors within emerging markets versus a range of sectors. What specific sectors are you focusing on now?

RK: When we first launched our company, we started with the energy fund and the metals and mining fund. We felt the commodity play was strong coming out of the bottoms of March 2009; but we were not certain how strong the recovery was going to be. Clearly, the recovery wasn't that strong; therefore, it has taken a while for oil and other commodity prices to come back.

Our latest fund focuses on emerging market consumers, another sector that we're big on. In September 2010, we launched our EG Shares Dow Jones Emerging Markets Financials Titans Fund (NYSE:EFN). So, we have various sectors that we're bullish on; but to diversify our product lineup, we also moved to more thematic funds focused on country-specific infrastructure (specifically infrastructure funds focused on China, Brazil and India, respectively). We also have a small-cap India fund, EG Shares INDXX India Small Cap Index Fund (NYSE:SCIN), which focuses on India consumers. But we are still very keen on the idea of a sector approach to emerging markets—not just a country approach.

TER: How often are the Dow Jones indexes updated, in terms of holdings?

RK: For the Dow Jones indexes and the sector funds that track them, the names are rebalanced once a year in June. But we rebalance the weights quarterly. Now those rules aren't necessarily firm. Some rules are imposed on top of them; for example, a company could be reclassified to a new sector based on how its revenues are derived, as an emerging market from developed market or a list of other possibilities.

TER: Most of the companies that your energy ETF is tracking are large oil companies with some gas exposure. You don't have any control over what you're investing in, per se. How do you determine how you set up these ETFs?

RK: Good question, and there are several answers. First, we are not the active investor. We provide the ETF as a tool for active investors. That's a very important concept with the ETF space. You won't find any ETF provider saying they're bullish on the S&P 500 or we have a short view on oil or long view on gold. It's not what we do; we provide the tool so investors can make that call.

In the case of this energy fund, it's clear. We find these companies in emerging markets, not developed markets. When we consider the index from Dow Jones, it's Dow Jones' index but we have to be mindful that there are certain portfolio management rules that regulators impose for diversification or tax purposes. So we might have to work with them to bend the index construction rules a bit; for example, let's say we built an oil fund and it was 80% Russia. Frankly, it wouldn't be easy to justify because investors would say, "I should just buy a Russia fund." And that has happened before. In Canada at one point Nortel was two-thirds of the index. People said, "I think we should cap this index," and that's exactly what they did. That's a very good example of what many index providers do for ETFs. They say we have to cap certain things so you don't have too much weight in a particular sub-industry or country.

TER: Are you saying that forming these indexes with Dow Jones is a collaborative approach?

RK: Not in the past but today, especially with more niche indices, it is. In essence, it prebuilt these indexes; they are kind of off the shelf. There is always this push and pull between the index provider and the ETF provider. At the end of the day, the ETF provider is going to build a fund that tracks this index; but, frankly, its success is dependent on the ability to justify the fund. You can always sell the fund if it makes sense in portfolio management terms.

If it's too overweighted in a particular country or subsector, investors are going to think that's not good. Let's say, for example, we came out with a consumer fund that consisted of a bunch of emerging market car companies. As much as that may be the case based on the rules, it would not be very diversified. You want something else to diversify the fund—not just durables. So when you talk with an index provider, you have to have that discussion beforehand. Afterward, you cannot change the index so simply. It's very hard to tell investors, "Oh, we're going to change the rules."

TER: What about the allocations between large companies and highly prospective small companies? How do you ensure some of those small companies with significant growth prospects get in the indexes?

RK: That's a very good question. For us, our sector fund has an underlying index of 30 names regardless if it's the energy, financials or metals fund. Why do we do that? Because we want to make sure we're providing investors access to the most liquid names. They are, by definition, the largest names but large often means more liquidity. If I said I'm building a gadget fund that contained Apple, RIM and Nokia, there would be no fear of buying or selling shares. If I really wanted to dump these names, or dump this ETF, it wouldn't be a problem because there's going to be liquidity to sell these. Now, let's say I built a speculative gadget fund with unknown providers in Taiwan or Korea. You might not be able to get out of that fund because if you're selling, others may also be selling out of these relatively smaller names. That's a real problem. We have the top 30 names by size and assured liquidity so, if investors needed to, they could get out.

TER: How is Dow Jones determining that?

RK: It's pretty standard regardless of the index provider. Any index provider looks at not only market cap or free float-adjusted market cap to see what's available based on size, but there are also various metrics used to determine the availability of shares if you have to buy or sell. For example, average daily trading volume is a very basic one. You can look at the previous 30 days or previous 3 months and say, on average, how many shares were trading at that point in time or on a particular day?

TER: Why do you believe in investing in emerging markets by sector versus taking a country-by-country approach?

RK: We don't have analysts picking one stock over the other. We don't make those calls, but others do. We believe, for example, many who make a call in the emerging markets will have a bearish or bullish view on India versus China. But others have more of a sector view. Most investment banks or research houses are divided by sectors, like airline analysts or retail analysts. I don't think you will find a Canada analyst or a Mexico analyst as easily.

Let's look at the Russian market. Many investors think Russia is all about oil, but that's not necessarily the case. If you're buying a Russia fund, you're buying less than 50% oil. You're also buying metals, consumers and industrials. You're buying other things but you're also putting all your eggs in one basket in terms of Vladimir Putin and the political risk in Russia. So, if you're in Russia due to your willingness to accept energy-related risk, perhaps you might be interested in our emerging markets energy fund. It's heavily exposed to Russia. As of September 30, 2010, it was roughly 29% Russia; but it also has names from China, Thailand, India, Brazil, South Africa and others to make it a little more diversified than if it were all in Russia.

TER: Most of the large holdings in this fund are in the so-called BRIC countries: Brazil, Russia, India and China. You just talked about Russia and Russian oil titan OAO LUKOIL Oil Company (OTCPK:LUKOF) is a large holding. What are some others?

RK: Let me first state that the most common method used in indexing many sector funds is based on market capitalization. In other words, the larger the company, the greater proportional weight you'll have in the index the fund is tracking. It's just the nature of the beast. As of today, the BRIC nations have the larger companies. You won't find the larger emerging market names coming out of Poland or Indonesia; they're coming from these four nations.

One is Reliance Industries Limited (BSE:RIL; LSE:RIGD), which is a very big position in our fund and a gigantic play in India. India is where you're going to find a lot of future growth, so much growth the country has high inflation and it's been ratcheting up interest rates there despite having a hot stock market during this recent period of monetary tightening. The investment thesis is that the Indian consumer and public sector will need massive amounts of energy for infrastructure and consumerism. It's the same story in Brazil. Petrobras (NYSE:PBR) was associated with the largest IPO in history this year due to the fact that investors understand there's this big deepwater oil find off the coast of Brazil that Petrobras needs to access.

The theme is very common. Huge multinationals like Exxon Mobil Corp. (NYSE:XOM) and Chevron Corporation (NYSE:CVX) are going to the emerging markets to get hard-to-access oil. It can't all be in safe countries, such as Canada with its oil sands. That's why the emerging market energy fund is significantly focused on oil in emerging markets because they have the supply, and the demand is kind of a no-brainer.

Another one of our holdings is China's China National Offshore Oil Corp. (HK:883), also called CNOOC, which trades in Hong Kong—a very liquid market. Gazprom (LSE:OGZD; Fkft:GAZ; RTS/MICEX:GAZP; OTC:OGZPY), PetroChina Company Ltd. (NYSE:PTR; HK:857)—these are all huge names; we're talking Exxon kind of names. What's important to understand is that you can get out as long as the portfolio manager of the ETF is able to sell the underlying shares. That means each one of the underlying positions in the fund must be super liquid. That's the reason that we have 30 names.

TER: The EG Shares Dow Jones Emerging Markets Energy ETF has averaged just under 20% since it launched in May 2009. Year to date it's at 14.1%. Are those kinds of returns enough to keep your investors happy?

RK: That question is very appropriate for mutual fund investors because they buy and hold. But only some ETF investors buy and hold because they like the cheap cost of ETFs. Some are very short term because they like the liquidity and the ease of trading. And nobody is telling them not to trade ETFs.

For those ETF investors who are long-term oriented, I'm hoping that they're ok with those returns. It's been a tough market. Oil hasn't gone up to $100 a barrel, which I think many would've guessed after such a bad recession. What concerns us most is the short-term investor; have they been able to pick up those strong bull markets and avoid any strong corrections? Have we done our job in terms of tracking the underlying index? I think that's how we best keep our investors happy.

TER: During your time as a blogger under the banner Beta Brief in 2008, you talked about ETFs being the next wave. What's next for ETFs and those sorts of beta instruments? Please give us some parting thoughts on where you see the market heading.

RK: The ETF industry is growing. It's been around since the early 1990s, but so much of the money in the industry is concentrated in very vanilla names that are liquid—very cheap but also very well understood. One exception is the SPDR Gold Trust (ETF) (NYSE:GLD), which is universally known but not a typical stock index as it tracks gold bullion prices.

I think the evolution of the ETF industry will continue with greater understanding that some of these markets are relatively exotic but that the liquidity is still there. As long as I can buy or sell the underlying positions easily, we're all good in terms of liquidity.

Now the question is: What other markets are investors going to be looking for in the future? I think they're going to look for greater returns out of a frontier market. They'll look at how they can replicate something like a hedge fund; and they'll start looking at these new, actively managed ETFs that try to mimic a mutual fund. Can those be as liquid as the vanilla strategies out there in the indexing space? I think this is the future evolution of the ETF space and we'll see if that causes investors to dump their mutual funds in even greater amounts than they have in past years. If they move over to the ETF space, will they then want to move a little bit beyond indexing to something that is more like a mutual fund, which is a little bit of active management? I'm guessing that might be the case but we haven't seen it yet. We'll see.

Richard Kang has served as Emerging Global Advisors' CIO and director of research since September 2008. He began his career in 1995 at Guardian Timing Services, a Toronto-based hedge fund. In 2001, Richard was hired to build and manage the investment management subsidiary for Affinity Financial Group, a private wealth management firm. In late 2002, Richard cofounded Meridian Global Investors, an investment counseling firm managing globally diversified portfolios that include both traditional and alternative asset classes primarily through the use of passive instruments. By the summer of 2003, Richard was retained by a Toronto-based startup fund of hedge funds, Quadrexx Asset Management, for two years to oversee its operations as CIO. Richard consulted for various asset allocators as well as fund managers in the areas of hedge funds and ETFs at the end of 2006. From fall 2007 to fall 2008, he helped start up and was the first CIO of ETFx Indexes LLC, a boutique index provider focused on alternative investments.

A frequent speaker on a broad array of topics ranging from instrument types (ETFs, hedge funds and derivatives), portfolio management, as well as risk measurement/management, Richard has been quoted in a number of publications including The Wall Street Journal, Reuters, Investor's Business Daily, SmartMoney, CBS MarketWatch and BusinessWeek. In addition to business television appearances and writing articles for various industry publications and journals, Richard has served as a chairman, moderator, panelist and advisory board member at numerous industry conferences in the U.S., Canada and Europe, as well as more recently in the Mideast and Far East Asian regions. Richard C. Kang is a registered representative of ALPS Distributors, Inc.

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

DISCLOSURE:
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: None.
3) Richard Kang: 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 - The Energy Report is Copyright © 2011 by Streetwise Reports LLC. All rights are reserved.
Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

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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Over in the options trading pit, we now have 59 winners out of 61 trades, or a 96.72% success rate and we have 3 open positions which have reached their targets or thereabouts and will be closed shortly, taking www.skoptionstrading.com back into a 100% cash position. If you have any questions regarding these trades please address them through their site where they will be handled quickly and I hope efficiently.


sk chart 10 Dec 2010.JPG

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

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

Stay on your toes and have a good one.

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


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

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

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.
Monday
Jan032011

Crosshair Exploration and Mining Corporation Unaware of any Material Change

CXX Chart 03 Jan 2011.JPG

December 22, 2010 Crosshair Exploration & Mining Corporation wishes to confirm that Crosshair's management is unaware of any material change in Crosshair's operations that would account for the recent increase in market activity.

So there we have it straight from the horses mouth.


As we can see from the above chart there has been a 1:4 reverse split in December 2010 which attracted some attention to Crosshair, although the reasons for such a split can be for practical, manageable reasons as there were around 130 million shares issued prior to the split. There has also been an increase in the volume of shares traded since the split which is interesting.

However, we have no other knowledge than what is already out there so for us its a case of wait and see. If any of our readers can through some light on the situation then it would be appreciated as we are just cranking up for 2011 and as yet are not in full swing.


Crosshair currently trades on the Toronto Stock Exchange as CXX and the NYSE Amex as CXZ.

Crosshair’s market capitalization is $81.84 million with 32,87 million shares outstanding, the 52-week high is $2.80 and the 52-week low is $0.10 and is trading at $2.49 as we write.



Over in the options trading pit, we now have 59 winners out of 61 trades, or a 96.72% success rate and we have 3 open positions which have reached their targets or thereabouts and will be closed shortly, taking www.skoptionstrading.com back into a 100% cash position. If you have any questions regarding these trades please address them through their site where they will be handled quickly and I hope efficiently.


sk chart 10 Dec 2010.JPG

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

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

Stay on your toes and have a good one.

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


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

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

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.
Sunday
Dec262010

Uranium Is Still a Growth Industry

Alka Singh.JPG
Alka Singh:

Source: George Mack and Karen Roche of The Energy Report   12/21/2010
http://www.theenergyreport.com/cs/user/print/na/8161

Rodman & Renshaw Senior Analyst Alka Singh follows the entire mining sector, including uranium. Though just a year ago the uranium sector was considered stalled and possibly moribund, she finds undervalued stocks for her clientele that includes both small and large institutional investors. In this exclusive interview with The Energy Report, Alka generously shares some names for growth that investors might consider to take advantage of burgeoning energy demand that will surely include nuclear power plants all over the world.

The Energy Report: What is your general investment theory on the uranium industry? Uranium has had a very nice run up since the middle of 2010, and that was significant. Can you make a case for more price appreciation in uranium?

Alka Singh: At Rodman, I cover all of the mining sectors—precious and base metals, as well as uranium. For the last two years, and particularly for the last 12 months, I've been telling investors to take profits from some of the gold equities that have run up 300%–400% and put those profits into uranium equities. People had been very skeptical in the beginning of 2010. Uranium prices remained at the $41–$42 level for very long; investors thought that the sector was likely dead. Why invest in uranium stocks when they were already getting crazy returns on gold and other precious metals? Then suddenly, about two to three months ago, the price of uranium started coming back. The uranium price went up from $42 to $62.50, where the uranium spot price is today. Obviously, uranium prices had to play catch-up and they did for a few reasons.

Supply and demand for the medium and long term was always very positive for uranium prices, but I think the depreciating U.S. dollar also played a role. Most commodities—gold, silver, copper, lead, zinc and, to some extent, even coal—ratcheted up on the tanking USD while uranium prices did nothing. Uranium had to play catch-up, and that's what drove the price up.

Together with the supply/demand fundamentals, the uranium price rose to $62.50 and I don't think uranium price appreciation or uranium equities are done quite yet. If you look at the last cycle that began in 2005, the uranium price rose sharply to about $139/lb. in 2007 before coming back down. The difference back then, I think, was that a lot of speculation fueled uranium's price rise.

This time around, something different is going on. The Highly Enriched Uranium (HEU) Purchase Agreement accord to convert 500 metric tons of HEU to low-enriched uranium (LEU) with Russia is supposed to expire in 2013. Russia has already told the U.S. that it will not renew it. As you know, 65% of the global uranium supply comes from HEU. This will have a dramatic effect, and people have now started pricing that in. So, that is my bullish case for uranium.

Additionally, China has started buying. Recently, China announced a deal with AREVA (PAR:CEI) and then another one with Cameco Corp. (TSX:CCO; NYSE:CCJ). So, it's still trying to get uranium to fuel the country's nuclear power reactors. I think China will be home to the more than 40 nuclear power reactors over the next 10–15 years. So, that's driving the uranium price.

Then there's India, which also has signed a few agreements. One of the deals was with France to get help in setting up new nuclear power plants. So, from the demand perspective, uranium demand will continue to drive the price of uranium in the future.

TER: Alka, as the U.S. begins to decommission some of its nuclear warheads and does something like the HEU agreement internally, is there a possibility to produce uranium stockpiles in and for the U.S.?

Alka Singh: Well, that's another very good question. I don't think that the U.S. has said anything publicly about what they want to do. But if you look at what the U.S. has done in the past, it has sold some of its stockpiles. But they didn't want to have an impact on the uranium's market prices, and whenever prices were too high they tried to sell some. Whenever the prices were too low, they actually did not sell any. So, I think it's more that they tried to stabilize the price rather than do any sort of market manipulation with the price. But I don't think U.S. is going to start decommissioning these warheads and putting the uranium out into the market. At least in the near term I don't think that's happening.

TER: Can uranium get back to the 2007 levels of $135–$139? Do you believe that's possible?

Alka Singh: That is possible. As we all know, commodity cycles always go to one side or the other, and when they're going higher you see them overshoot. When you see them going down, it's the same. When uranium prices were at $40, there were very few companies that were actually profitable at that level. You saw that Denison Mines Corp. (TSX:DML; NYSE.A:DNN) had to put their projects in Mongolia and Zambia on hold because they required a uranium price of $60 just to break even. So, a $40 uranium price was probably OK for the Russians who are just blending down the HEU into LEU. When I was at Merrill Lynch, before joining Rodman, I used to cover Cameco, which has a pretty low cost of production. At that time they were producing uranium from McArthur River at $17–$18 a pound, which was pretty cheap. But not everybody has these same sorts of projects with such low costs.

So, some of the mines in Kazakhstan, Mongolia and Zambia that were at a feasibility stage at that time had production costs of about $45–$50, and then if you add in the capital-expenditure (capex), they needed a $65– $70 uranium price to break even. It all depends on the circumstances. If demand keeps growing as it is right now and you see oil prices going up back to the $140– $150 level, you will see uranium prices go back to $135– $138/lb.

TER: As you said, we've had a very steep rise, to over $62 today. Is there any chance that we're in a short-term or intermediate-term bubble?

Alka Singh: I really don't think so, especially since the utilities have just started coming into the market. They had been sitting on the sidelines for two years. They probably had enough inventories for 2009 and 2010, and so they did not actually participate in the spot market at all for the long term. But now we are seeing the utilities coming back.

In fact, right now is actually the slow season. December is holiday time, and I don't think a lot of deals are getting signed. If you saw the recent UX Consulting report, you would see that most of the deals were only done on the spot. There were no term deals done this week. So I think things will start picking up early next year when utilities start coming back to the market to get more security and supply for the next five to eight years. They typically do between three- and eight-year contracts. When I was at Merrill, we did this report where we looked at uranium prices for the last 20 years, and between February and May we saw the largest increase in uranium prices. So, if utilities again come to the market between February and May of 2011, you could see another leg up. I wouldn't call it a spike because that's coming from real demand. I'll call it a seasonal increase in demand and an increase in uranium prices.

TER: Alka, it sounds like you do not believe that uranium is a mature industry but rather still a growth industry.

Alka Singh: No, I really don't think that uranium is a mature industry at all. If you look at the cost of electricity generation comparing nuclear to gas, nuclear to coal or nuclear to hydro, you will see that nuclear is the second cheapest source of energy after coal. But with coal you have other problems with environmental concerns. So, the only other alternative is nuclear. Most of the hydroelectric projects in the world have already been built, so it would be very difficult to double hydroelectric generation. It's just not doable. But with nuclear, you can do it, although it's more expensive.

Nuclear power plants are very, very expensive. Permitting is a big risk and very time consuming. Nuclear is the only way you can get more electricity generation at a low cost and be stable enough to provide base load power. I don't think that wind power or any other green power generation is actually suitable for base load. Wind power is great when the wind is blowing and you actually generate electricity. But when there's no wind, the windmills themselves actually draw electricity from the grid. So, that's not good for base load. For base load you need hydroelectric, coal, gas and nuclear—that's it. And with nuclear being the second cheapest, you have to go nuclear.

TER: Now that you've established this growth hypothesis, what catalyst should investors anticipate going forward for uranium equities?

AS: Well, I cover three uranium names. I cover Uranium One Inc. (TSX:UUU), Uranium Energy Corp (NYSE.A:UEC) and Ur-Energy Inc. (NYSE.A:URG; TSX:URE) in the U.S. My two favorite names right now would be UEC and URG just because there are really a lot of short-term catalysts that can keep these equities going higher.

URG has a few permits that they are waiting on, but the key one is the Nuclear Regulatory Commission (NRC) permit. If they don't get it next week then it has to be in early January. They need that one, but after that they have to get another permit from Wyoming Department of Environmental Quality (WDEQ) and then another one from the Bureau of Land Management (BLM), which is the last permit that they need. So, every time the company gets a permit that would be a catalyst for the stock to go higher.

UEC just got their permit for the Goliad project, which we had anticipated, but there had been a lot of negative news on Goliad such that the company might not have been able to get their permits. But they did. So now they're waiting for radioactive material license (RML) from the Texas Commission of Environmental Quality (TCEQ), which they'll probably get by January to start construction at the Goliad project.

So, these are the two companies with a lot of catalysts happening in the near future. I really think these are the two companies in which investors should definitely be long on in order to take advantage of this rally in uranium prices. That's especially true because both of these companies are new producers (UEC just started production at their Hobson plant and URG will commence production in early 2012) and will be producing uranium through the in situ recovery (ISR) facility, which is much cheaper than conventional mining.

TER: What about additional expansion with UEC?

AS: In 2011, UEC will probably be producing close to a million pounds (Mlbs.) of uranium. In 2012, I think they're going to go up to 2 Mlbs. with no additional capex required because the Hobson facility is actually built for 2 Mlbs. They can actually take the Hobson processing facility up to 2.5–3 Mlbs. if they really wanted to by adding an additional dryer for another million dollars. All they need to do is find more uranium in the ground. So, I don't think the Hobson plant is a bottleneck. The bottleneck would be getting Goliad and Palangana projects up to 2.5–3 Mlbs. a year in total.

TER: How long will it take to get the Goliad Project up to that level of production?

AS: If they get their permits in January, they will start building the satellite project at Goliad, which will probably take three to four months to get up and running.

TER: You said you were very positive on Uranium Energy as well.

AS: Yes, I am. There are four permits required, and hopefully they will get the first one in early January. The last permit will be from the BLM, which they expect to get in the second quarter of 2011. Once they get that permit they'll take six months to build the project, and then they'll be in production in early 2012. So those are the catalysts—four permits over the next six months, then they'll announce construction, and then they'll announce production startup in early 2012. That's the kind of timeline that we are talking about right now for URG. So as you can see, URG has more short-term catalysts than UEC just because UEC is already permitted.

TER: Do both UEC and URG have the ability to expand with new leases and potentially M&A?

AS: Yes, they do. You're absolutely right there for both of these companies. URG has two projects, Lost Creek and Lost Soldier. Just between those two, they can actually get up to 2–2.5 Mlbs. of uranium production per year. UEC can also get up to that 2–2.5 Mlbs. level with Palangana and Goliad, and they also have other leases they are looking at in Texas. URG is looking at some leases in Wyoming, and they have other projects as well, but we are not giving any value to them right now. Even with what they have, URG can get up to my target price of $3. For UEC, my target price is $6.50, which it has recently exceeded and then went down to $5. Those are my target prices which don't even include any additional leases or any increase in production from the 2 Mlbs. level for either company.

TER: Will UEC and URG need additional financing to proceed with these projects?

AS: UEC already has $36 million in the bank, thanks to the last financing that they did about a month ago. These guys did the financing at $3.40 and three weeks later the stock was at $7.70. Obviously UEC's new shareholders have done very well as have the old shareholders. I don't think they need any more money.

In the case of URG, I think they have enough money ($37.7 million in cash) to build their project and start production in 2012. Then maybe later on they'll need more money if they are looking at other lease acquisitions or acquisitions elsewhere for other ISR projects. But I don't see any new needs for cash in the very near future for either of them.

TER: What commodity price level must uranium maintain for these companies (UEC and URG) to grow like you expect?

AS: That's a very good question because for some companies $40 uranium was just not working. But both UEC and URG are ISR projects, which are lower cost compared to the other traditional underground mining projects. So, they would both have been profitable even at $40 uranium. So, UEC has a cash cost of about $13/lb. This is just a cash cost, and they spent about $28 million on their Hobson project. So, not including the capex, they would've been very, very profitable even at $40 spot price uranium. URG's cash costs are slightly higher. Their cash costs would be in the $23/lb. range. But they would still be profitable even at $40 uranium when long-term uranium prices are much higher than that. Even when spot prices were at $40 where URG could be profitable, the long-term price of uranium was at $62.

TER: Going back to Uranium One. You obviously don't feel quite as positively about it as you do UEC and URG.

AS: That is true. But I like Uranium One. The only thing I think the other two companies have that Uranium One doesn't have is a lot of short-term catalysts. But for Uranium One, I think they had the last catalyst last week when they announced the special cash dividend. I don't see any short-term catalysts for the company.

TER: If an investor is taking a longer-term viewpoint over several years, does Uranium One have potential upside like UEC and URG?

AS: Uranium One had a very bad experience with their Dominion Project with the decline in uranium prices. The company will always be leveraged to uranium prices. If you see spot uranium prices going to $70, $80, $90 and you see long-term uranium prices also following, you could easily see Uranium One back at $6. Back in 2007 it used to be a $16 stock when uranium prices were at $139. Then it went down to $1. Now it has started coming back.

I still like it for the long-term exposure because there are not that many pure uranium producers in the world. There's Uranium One, Cameco Corp., UEC, URG and there are number of other companies that I don't cover where you can actually get quite good exposure as well. Of course, the lowest risk would be Uranium One and Cameco because they are already in production. UEC is now in production also, but Uranium One would be the safest.

TER: Let me go back to URG for one moment. The stock was up 214% over the past 52 weeks. Do you feel like there's day trading activity here that could make this stock subject to sharp declines?

AS: Well, that's another good question. These uranium stocks have been very liquid for the last three to four months. So, obviously, there's definitely been day trading activity going on. But as long as it's not enough to disrupt the prices, it's always healthy because it gives you a lot of liquidity.

TER: We appreciate the views on uranium. Thank you.

AS: No problem. Thank you.

Alka Singh is a managing director and senior metals & mining analyst at Rodman and Renshaw. Prior to joining Rodman, Ms. Singh was a Merrill Lynch VP covering Canada's metals & mining sector for two years. Before Merrill, she worked as an associate analyst covering gold and base metal companies at Orion Securities. Ms. Singh holds an MBA from Schulich School of Business, York University in Toronto, Canada, and a Bachelor of Science in geology from the University of Delhi in India.

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

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


Over in the options trading pit, we now have 59 winners out of 61 trades, or a 96.72% success rate and have opened 3 new positions.


sk chart 10 Dec 2010.JPG

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

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

Stay on your toes and have a good one.

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


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

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

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.
Friday
Dec172010

Rebalancing Act for Your Portfolio

Casey 17 Dec 2010.JPG

By David Galland, Managing Director, Casey Research

Has the latest pullback in precious metals and related stocks given you a sickening feeling in the pit of your stomach?

If so, then consider rebalancing – because that sinking feeling is a good signal that you are probably overinvested in the sector. I’ll have more on that topic in a moment, but first to the question of where to invest, if not in precious metals and resource stocks? That is a question we get quite often.

For the time being, as least for those without international obligations, the carrying cost of cash is very low. Thus you can reduce your near-term risks, albeit at the cost of forgoing upside. If at one end of your portfolio “barbell” you have a 20% to 33% allocation to precious metals, having the same sort of allocation to cash on the other end of the barbell brings overall risk down while giving you the liquidity to act as additional opportunities arise.

As for the “middle,” consider building a portfolio diversified between undervalued food and energy stocks (constant needs) and high-potential tech stocks.

I include the latter because tech is one of the few remaining sectors where U.S. companies still have an edge. Secondly, the infusion of money from QE2, QE3, and so on will almost certainly have a positive effect on the broader U.S. stock market. While not a direct correlation to the situation today, as you can see in the chart just below, Japan’s predecessor experiment in quantitative easing clearly produced a dead-cat bounce in that country’s stock market. As you can also see, almost immediately after pulling the plug on the QE, the stock market fell back to depressed, pre-QE levels.
 
 

 
 The importance of this information is two-fold:

1. It suggests that as long as the government keeps a heavy foot on the money-printing pedals, the U.S. stock market should, if nothing else, maintain. While we will almost certainly see a lot of volatility and perhaps sector-specific crashes – for instance financials, once the scale of the toxic loans becomes more visible – the broader market should be able to avoid a crash. Of course, once the plug is ultimately pulled on the Fed’s monetary madness, as it inevitably will be, then watch out below. But based on Bernanke’s latest comments, that appears anything but imminent.

2. With the risks of a broad market meltdown greatly diminished, investors – large and small – will be less afraid of piling into specific sectors that they feel have significant upside. That will feed into a bubble in the mining shares and drive up other sectors, including tech stocks. The world loves the latest and greatest, and the stories of the big tech winners are just so damn juicy that they regularly make news in all the right ways.

I recommend this because we continue to receive a large volume of emails from readers sitting on big profits in the precious metals and related stocks. They love what the stocks have done to their portfolios, but the size of their gains leave them nervous about a big correction, or worse. Offsetting those concerns is the clear upside in the sector (at least clear to us) – gains yet to come as currency regime change unfolds and the fiat currencies are eventually replaced with something far more tangible.

The precious metals stocks are going to have a particularly wild ride in the months and years ahead. While the overarching trend will be akin to a moon shot, there will be any number of heart-stopping corrections along the way. And looking at the current price action, we may be on the verge of one now.

Depending on your personal investment style, there are a couple of simple approaches you might want to take to that end of the barbell you have dedicated to the precious metals.

1. Trade the markets. Buy on our recommendations, but sell on big surges – for instance, of the sort we have seen of late. Wait for the next correction to reload and do it all over again. Of course, this gives rise to the possibility of missing a really, really big move. Which brings up…
2. Know what you own, and hang in there… at least until a hard exit target is met. I personally have owned several holdings for years. Not because I view them as heirlooms, but because they keep surmounting each successive hurdle on the way to production or, more likely, a buyout. During corrections, as often as not, I just buy more.
3. Use trailing stops. Because these stocks are very volatile, though, you are probably going to want to be fairly generous in where you set your stops… 15%, 20%? Otherwise, you could get knocked out at the wrong time, for the wrong reason, and miss the quick bounce. Also, it’s important to remember that the juniors are especially thinly traded. That’s important, because if your trailing stop is hit, your shares will be sold “at the market”… in other words, for whatever someone is willing to actually pay for them. Thus, on a really bad day, your stop limit could be triggered… but your stocks find no bid and plummet, eventually changing hands far below your limit. 

(If you work with a good broker, rather than putting your order into the system to be blindly sold at the market if your stop is hit, they’ll agree to keep it “on the desk.” Which means that if your trailing stop is hit, they’ll actively begin trying to work your stock into the market for the best possible price, as opposed to blindly dumping the entire position at the bid, wherever that might be.)
4. Sell puts. If there is a stock you like and would like to own more of, consider selling puts – which contractually obliges you to buy a certain stock at a certain price, if it hits that price. In exchange, you receive a commission. As long as the stock is moving up, sideways, or even a bit down, you are off the hook, having earned a nice commission for your guarantee. On the other hand, if the stock falls to the point that it gets put to you, then you’ll be forced to buy it, but at a cheaper price than the current market – with your net cost lowered further by the commission you received. Again, however, in a freefall, you could be forced to buy more of a stock at a price that is well over the then-current market.

Those are just the broad strokes, and there are of course additional strategies you can use to mitigate risk while continuing to seek the explosive upside of the sector. But, again, I have to say that no matter what strategies you deploy, the only way to keep a cool head in the face of potentially extreme volatility will be to invest only with money you can afford to lose at least half of. Overinvesting in the sector will make you far more prone to panic and bad decision making.

And if you have enough of an allocation to the precious metals and enough cash, then you can look for other sectors with big upside and with a downside risk that can (mostly) be managed with thorough due diligence and in-depth industry knowledge.
----
[For a very limited time, you can now get the best of both worlds: unparalleled investment advice on small-cap energy stocks and cutting-edge tech companies… all in one, low-price holiday package. Subscribe to Casey’s Energy Report today and save $300 off the retail price… plus receive Casey’s Extraordinary Technology FREE for one year! For details, click here.]

…...................................................................................................


Over in the options trading pit, we now have 59 winners out of 61 trades, or a 96.72% success rate.


sk chart 10 Dec 2010.JPG


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

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


Stay on your toes and have a good one.

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



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

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

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.
Thursday
Dec162010

Steve Palmer: Go Long on Oil Equities



Source: Brian Sylvester of The Energy Report  12/16/2010
http://www.theenergyreport.com/cs/user/print/na/8127


Uranium gets just one mention in this article and thats about it, but unfortuneately there are no follow up questions.

AlphaNorth Asset Management President and CEO Steve Palmer believes further economic growth in China and the ongoing economic recovery in the U.S. will send oil prices over $100 a barrel in the first half of 2011. But he picks his oil equities knowing the oil price will play only a small role in determining any share-price appreciation. For him, it's about getting in early on companies with reasonable prospects for massive gains. In this exclusive interview with The Energy Report, Steve shares three of his favorite oily names with outsized potential.

The Energy Report: Briefly tell us about AlphaNorth Asset Management.

Steve Palmer: AlphaNorth Asset Management manages the AlphaNorth Partners Fund, which is a long-biased, small cap-focused hedge fund that just finished its third year in business. In 2010, we launched our first flow-through offering—the AlphaNorth 2010 Flow-Through Limited Partnership.

TER: Are there many flow-through funds like that out there, or are you carving out a niche for yourselves?

SP: We're carving out a bit of a niche for ourselves, in terms of performance. There are dozens of flow-through funds.

TER: How is that fund performing to date?

SP: Extremely well. The net asset value (NAV) per unit was $16.42 at the end of November. The initial NAV was $10. We had two closings—one in March, one in April. We do not pay premiums for the flow-through shares, as flow-through funds usually pay a premium, and we actually averaged a discount. Our lawyers have advised me not to talk about returns because the AlphaNorth 2010 Flow-Through Limited Partnership has not been around for at least a year. I guess people have to figure out the difference between $16.42 and $10 on their own.

TER: You invest mostly in Canadian companies listed on the TSX or the TSX Venture Exchange, both of which witnessed big gains in early December. A week later, however, profit taking was dampening some of that enthusiasm. Do you believe taking profits is the correct approach currently, and are you doing the same?

SP: No, quite the opposite. I've been quite confident that December will be a strong month. In my recent commentaries, I've noted that December is typically the strongest month of the year for Canadian small caps. If you look at the BMO Small Cap Total Return Weighted Index over the last 25 years, on only one occasion was it down in December.

TER: To a certain extent, you believe in market timing and the seasonality of the markets. You firmly believe the markets usually slow down in the summer and pick up again in the winter, at least here in Canada when the registered retirement savings plan (RRSP) cash flows in. Could you comment on that and your approach to timing market seasonality?

SP: I'm definitely aware of seasonality, but that's just one factor I consider when making investment decisions. When May comes around, for example, I'm not going to sell everything in the portfolio and go 100% cash. However, I'll be much more cautious at that point.

TER: Are you buying now?

SP: I've been fully vested since August, so I'm taking profits on some positions. I'm always buying and selling, taking profits on some and reinvesting in others with a better risk/reward balance. I intend to maintain a higher-than-average long position going into the new year.

TER: In a recent research report, you said cash is flowing out of equity mutual funds and into bond funds but you expect the situation to reverse. What's going on there and how is that phenomenon showing up in the market?

SP: Cash has been going out of equity mutual funds consistently for over a year. It's been piling into bond funds. I think investors are still focused on capital preservation as opposed to trying to earn an investment return. Investors are still very cautious. They lost a lot of money in the equity markets in the 2008 meltdown. A lot of people remember it quite vividly and are scared to put money back into equities.

TER: Is that creating some buying opportunities for you?

SP: Yes, it is. Ultimately, as the equity markets continue to do well, those people are going to come back. I'm starting to see that. I don't consider it much of a return when you can invest money and get only about 2%–3% for an entire year. There's a lot of risk in that. If you're a long-term investor, it makes no sense.

TER: I agree; 30-year Canadian bonds are selling at about 3.5% right now. That won't even keep pace with inflation.

SP: If inflation goes up, there will be a huge loss on those. Not a lot of people realize that you can lose money on a bond.

TER: You said investor reluctance is presenting some buying opportunities. Where are you finding value right now?

SP: Well, there's no particular trend. Recently, I've been focused on oil and uranium.

TER: About half of your equity positions are in resource-based companies. You said the other half is in technology and similar plays. How much of that 50% is in gold, oil and gas (O&G) and base metals?

SP: Due to some pretty strong performers in the resource space, that weighting is closer to two-thirds resources now. I will be reducing that over the coming months; but of those two-thirds, about 40% would be in energy, 20% base metals, 20% precious metals and 20% rare earth elements (REEs).

TER: You've said you're short on COMEX Gold. Are you long on oil?

SP: I'm long on a lot of junior oil equities but not on the commodity itself.

TER: Where do you see the oil price as long as five years out? Are we getting over $100?

SP: I think so; I think it will be over $100 in the first half of next year.

TER: What do you base that on?

SP: Continued strength in the markets and the economy and the fact that most forecasts are much lower.

TER: Do you believe now is a good time to buy junior oil companies?

SP: I believe so, but I like to buy companies that are not dependent on the oil price. I like to buy companies with attractive odds for discovering something big. I try to take the commodity aspect out of it because the hardest part is to predict where commodity prices will go. I focus more on the company's specific prospects, but it's always good to have the commodity working in your favor.

TER: Where are you with gas? Are you buying small O&G companies because they may be undervalued right now?

SP: No, I haven't yet. The key there is timing. At this point, what will turn the gas price around in a meaningful way is not apparent. Buying small-cap natural gas companies hasn't been a focus; but, at some point, opportunity will be there.

TER: Tell us about some O&G companies that have performed well for your fund.

SP: One company that has performed very well for us is Primary Petroleum (TSX.V:PIE)—a land play that's developing in Montana. We bought it at $0.08 and it's trading at around $0.84 now. One of the most attractive formations that companies are going after now is the Bakken. And the Bakken has been identified in Alberta. The theory is that it extends south into Montana.

Over the last several months, large companies have done a lot more work in that area and seem to be having some success in proving that theory. Primary was very early to assemble a large position there in Montana. Companies like Rosetta Resources Inc. (NASDAQ:ROSE) and Newfield Exploration Company (NYSE:NFX) have acquired significant land positions in Montana not far north of Primary's land. They've been drilling wells and one of the wells is in production now. They're in the process of acquiring more land, so the evidence continues to build that Primary's land could be very valuable.

TER: Primary has not yet tested its land but neighboring land is coming on at high production levels. Is that correct?

SP: We don't yet know the production capabilities. What neighboring companies are achieving has all been very secretive up to this point; but actions are telling the story. They're acquiring more land and expanding their drill programs. They wouldn't be doing that if they weren't getting good results from the initial wells.

TER: Has that theory led you to increase your position in Primary?

SP: Initially, I bought in at $0.08 in a private placement. It wasn't as much as I would have liked, so I began buying it aggressively in the market at $0.10–$0.15. I bought stock all the way up to $0.60.

TER: And you're just holding it now. I guess that means you believe there could still be some appreciation ahead.

SP: Yes. If it's proven that the Bakken extends onto Primary's property, the company is worth several dollars a share. That's the minimum.

TER: Steve, what are some other oil and gas companies that excite you?

SP: Canadian Overseas Petroleum Ltd. (TSX.V:XOP). I'm excited about that one; it's one we purchased in a recent private placement.

TER: Tell us about the company's projects.

SP: Canadian Overseas raised $130 million when it was valued at only $12 million, pre-financing. Its projects are all in the North Sea, where companies have been operating for decades. So, it's all a very well-known process—no different from western Canada, really. XOP will begin drilling those projects in March. The management team has a good track record of finding oil in the area; it has drilled five exploration wells before, four of which were successful. The P50 number for recoverable oil on its prospects is more than 100 million barrels (Mbbls.).

TER: Please explain to our readers what P50 means.

SP: The 'P' stands for probable and '50' represents the odds percentage. So, for Canadian Overseas, it means there is a 50% probability that 100 Mbbls. are there. If the company were to find 100 million barrels, it would be worth more than $1 billion. Right now, it has a market value of roughly $180M.

TER: What are the risks?

SP: XOP could be unsuccessful in its drill programs and/or the oil price could decline making its projects less economic.

TER: Are there any other oil plays you like?

SP: There's Simba Energy Inc. (TSX.V:SMB), which is a very early stage company that's assembled some land that's highly prospective for oil on Africa's west coast. Oil seeps all over the land, indicating that oil is there somewhere. A couple of major oil companies are drilling very nearby offshore.

TER: What's Simba trading at right now?

SP: It's trading at $0.08 a share; I got in at roughly the same level. Currently, the market cap is around $7 million.

TER: What will be the next catalyst there?

SP: The company is working to attain a production-sharing agreement from the government to drill on its property. That should come sooner than later but it's very hard to predict with African governments, particularly those where Simba is operating—Mali, Liberia and Ghana. It may get done, but it may never come—that's why it's a $7 million company.

TER: You must like either the thesis or the management?

SP: The thesis makes sense. Another company with a similar business plan is Centric Energy Corp. (TSX.V:CTE), which was pursuing oil in Africa also. Africa Oil Corp. (TSX.V:AOI) offered to buy Centric for $60 million on November 29.

TER: Do you have some parting thoughts on the O&G sector currently? What investors can expect over the next five or six months?

SP: Well, my market call on oil is that it will trend higher over the next five to six months. Gas is much more uncertain, so I don't particularly have a view on gas at this time. But the risk to the oil price is Asian growth rates.

TER: And to a certain extent a continued recovery in the U.S.

SP: A continued recovery, yes; but obviously it's going to be a slow recovery.

TER: How do you recommend people play oil and gas?

SP: Find good companies and get in at good valuations or through our fund. A lot of people don't have time or the expertise to identify the best prospects in the energy space.

TER: But the minimum investment in your fund is $150,000, right?

SP: I can waive that amount, and I have been accepting lesser amounts.

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

SP: You're welcome.

Steven Palmer, with 15 years of experience in the investment industry, has been the president, CEO and a director of AlphaNorth Asset Management (AlphaNorth) since founding the firm in the fall of 2007. The company currently manages a long-biased, small-cap hedge fund. Prior to founding AlphaNorth, Mr. Palmer was employed at one of the world's largest financial institutions as VP of Canadian equities, where he managed assets of approximately $350 million. He managed a small-cap pooled fund from its inception in August 1998 to August 2007, achieving returns that Morningstar Canada ranked #1 in performance (35.8% over nine years versus 10.0% for S&P/TSX Composite Index and 13.0% for the BMO Weighted Small Cap Total Return Index) over the same period. Mr. Palmer also managed a large-cap fund that ranked in the first quartile of performance for years 1–5 and 10 at the time of his departure in August 2007. Prior to this, he worked as a portfolio manager at a high net-worth investment boutique. Starting his career as a research associate in January 1995, Mr. Palmer quickly progressed to research analyst. He has a BA in economics from the University of Western Ontario and is a CFA.

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

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

........................................................................
Over in the options trading pit, we now have 59 winners out of 61 trades, or a 96.72% success rate.


sk chart 10 Dec 2010.JPG


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

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


Stay on your toes and have a good one.

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



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

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

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.
Tuesday
Dec142010

Kirk Wilson: The Alberta Bakken Trend

Source: Brian Sylvester of The Energy Report  12/14/2010
http://www.theenergyreport.com/cs/user/print/na/8102

kirk-wilson.JPG

The run on land in the expanding Alberta Bakken Formation play has given a leg up to the exploration and production (E&P) companies that got in early. In this exclusive interview with The Energy Report, Senior Analyst Kirk Wilson of Calgary-based Clarus Securities details the best and the brightest prospects seeking light oil in the western Bakken.

The Energy Report: Kirk, please tell us what you typically cover in the oil and gas (O&G) sector.

Kirk Wilson: I focus on high-growth, undervalued junior and intermediate O&G names—domestically and internationally. The majority of the companies I follow are based in Canada, but all companies that I follow are listed in Canada. They typically have a market cap range from $25 million to $2 billion.

TER: What issues or trends are driving Canadian E&P companies?

KW: There are a couple of trends and issues that investors need to be wary of when looking at Canadian names. One is the ability to secure land on a reasonable basis. Junior and intermediate companies need to get into plays early to get a large enough land position before prices increase dramatically. We've seen it happen in all the main oil resource plays; if a company is not in early with a low-cost basis on land acquisitions, it gets more difficult to be able to put together a meaningful land position.

The economics are another issue. With about 75% of the Western Canadian Sedimentary Basin being natural gas-charged, finding oil plays that deliver much higher netbacks is getting more difficult. There just aren't as many of them out there. Most juniors have been weighted towards natural gas. However, with the challenge in gas prices, it makes growth very difficult for companies that are focused on that commodity because companies don't have the cash flow to reinvest. The economics of plays are very important as well, as investors must recognize the capital that is required to participate in some of these oil-resource plays.

TER: One trend that has been under the radar until recently is the light oil play in the Alberta Basin Bakken that extends from Montana into Alberta and Saskatchewan. What's going on there?

KW: The industry is trying to find new places to exploit large oil resources. The Bakken in Saskatchewan, and even into North Dakota, has existed for decades, but it was not economically producible. Horizontal drilling, multi-frack applications and higher oil prices have made the Bakken a very economic play.

Companies have applied that technology to other known resources, such as the Cardium play at Pembina, the Viking Formation, and the Shaunavon formation in southwest Saskatchewan. Using that technology, the industry is trying to find new exploration plays. The Alberta Bakken, which stretches from Alberta into Montana, is one of these new exploration plays. I categorize it as exploration because there's been a minimal amount of drilling, so a minimal amount of data. It's still very early days.

There are a lot of analogies and similarities between the Alberta Bakken and the Williston Basin that allow companies to put it on their radar screen. It's about 4,500 to 6,000 feet deep in Alberta and into Montana. It's light oil believed to be 35 to 42 degree American Petroleum Institute (API).

The Alberta Bakken is a good term but it can involve other formations like the Exshaw, Three Forks and Torquay. It may not be precisely in the Bakken, but it's in the same geologic age. Oil prices are now pretty consistently above $65; so, with proven technology and the ability to gain a meaningful land position, companies are now exploring and making this a new play that hasn't really been talked about in the past.

TER: Tell us a little bit more about the drilling economics of heavy oil versus light oil.

KW: A key consideration when comparing heavy oil and light oil is the viscosity. Light oil flows more easily than heavy oil, which means production rates are generally higher. That obviously helps the economics because there is a larger percentage of oil produced early in the life cycle of the well.

Then there are the light oil/heavy oil differentials. A company will receive—and this is a moving figure based on many variables—$10 to $15 per barrel less for heavy oil than for light oil.

Investors should also consider royalty rates. In Saskatchewan and Alberta, there are advantageous royalty rates compared to south of the U.S. border. That advantage comes from royalty incentives and royalty holidays. For instance, companies operating in the Blackfeet Nation in Montana pay ~30% royalties across the board. In Saskatchewan, the first 37,500 barrels incur 2.5% royalties if they're drilled on Crown land. In Alberta, 5% royalties are paid for 50,000 to 60,000 barrels of initial production.

TER: That's a remarkable difference.

KW: It really can be huge. Drilling and completion costs to get a well on-stream in the Viewfield area of Saskatchewan, where it's a little shallower, could be $1.7 million. The deeper plays down in North Dakota could be as high as $6.5 million per well. Alberta and Montana generally cost around $4 million per well.

The amount of developed infrastructure in those regions also plays into the economics of a play. The more developed infrastructure, as in Saskatchewan, the lower the full-cycle costs. Some areas have no infrastructure at all.

TER: The cost of doing business is lower in Saskatchewan and Alberta than North Dakota and Montana?

KW: Yes, but one must consider that production rates in North Dakota are sometimes multiples of those in Saskatchewan. While the costs are higher, the overall net-present values can also be higher in North Dakota depending on how much oil is going to be recovered and how quickly it is going to be recovered.

There are offsetting measures, but I would say Saskatchewan is probably the most developed, with North Dakota pretty close behind.

TER: What are some companies with exposure to the Bakken in Montana, Alberta and Saskatchewan?

KW: In North Dakota, there is Arsenal Energy Inc. (TSX:AEI), NuLoch Resources Inc. (TSX.V:NLR) and TriOil Resources Ltd. (TSX.V:TOL).

In Montana, there is Primary Petroleum (TSX.V:PIE), Rosetta Resources Inc. (NASDAQ:ROSE), Newfield Exploration Company (NYSE:NFX) and Anschutz Exploration Corp.

In Alberta, companies targeting the Alberta Basin Bakken include Crescent Point Energy Corp. (TSX:CPG), which has perhaps the largest land position. There is also Murphy Oil Corp. (NYSE:MUR), Royal Dutch Shell Plc (NYSE:RDS.A) and PetroBakken Energy Ltd. (TSX:PBN). On the smaller side, DeeThree Exploration Ltd. (TSX.V:DTX), Bowood Energy Inc. (TSX:BWD) and Argosy Energy Inc. (TSX:GSY) are three juniors that are playing that space.

TER: That's quite a list.

KW: In Saskatchewan, that list can be longer. Crescent Point and Petrobakken are the two big dogs there. In addition, there's Legacy Oil & Gas Inc. (TSX:LEG); Spartan Exploration Ltd. (TSX:SPE) has a big land position for its size; and Painted Pony Petroleum Ltd. (TSX.V:PPY.A) is active in the area. Then there are the trusts: ARC Energy Trust (TSX:AET.UN), NAL Oil & Gas Trust (TSX:NAE) and Advantage Oil and Gas Ltd. (NYSE:AAV; TSX:AAV).

TER: Could you delve a little deeper into some of those companies?

KW: Primary Petroleum has 190,000 net acres in Montana on two land blocks. Its western Montana land position is 170,000 acres and eastern Montana is 20,000 acres. And the company is still adding land. The company certainly has a very interesting and highly appealing land base perspective for those formations.

Right now, investors are watching offsetting activity by some larger companies. Just north of Primary, on the Blackfeet Nation, wells are being drilled by Rosetta, Newfield and Anschutz. Rosetta has drilled a number of wells already, and plans to get to eight wells this year. Obviously, drilling will continue into the New Year. Newfield also planned for an eight-well program this year. At least one of those wells is horizontal and is producing right now, which is a very interesting data point.

Data is being very closely held, but we do have verbal confirmation from Rosetta that the formation is over-pressured and oil-saturated. The company estimates that there are 13–15 million barrels of oil in place per section. To put that into context, in the Viewfield area of Saskatchewan, which is shallower and not as highly pressured, there are generally 4–5 million barrels of oil in place per section. So, the Alberta Bakken could contain up to triple the amount of oil in place. The key will be recovery and production rates. However, we've seen a lot of encouraging data so far.

Alberta is a little farther away from Primary Petroleum's lands, but some drilling has taken place and there are a couple of wells producing just across the border.

Primary's stock was recently trading in the $0.65 range. A risk evaluation of their resource indicates a $5 potential value. We don't have a lot of hard data and there are a lot of assumptions being made in that analysis, but if the play turns out to be analogous to the Saskatchewan play, there is a case to be made for at least $5 per share potential value for Primary.

TER: Acquiring land can be an issue. Primary's management must have gotten in on this pretty early to purchase 170,000 continuous acres in western Montana.

KW: It's a large land position, which is a notable achievement for Primary as it can be very difficult to put together this size of land base—it can take several years sometimes.

TER: What are some other companies?

KW: North of the border, DeeThree Exploration signed a joint venture with Encana Corporation (TSX:ECA; NYSE:ECA) for shallow gas several years ago. By good fortune they have a land base in southern Alberta, east of Lethbridge. DeeThree estimates at least 100 of its sections will be prospective for the Alberta Basin Bakken. In fact, any day now, the company is going to start drilling its first Bakken well. It's planning to drill two this year and follow up with at least four in the first quarter of next year. The company is in very close proximity to a couple of wells that have been drilled by other industry participants, such as Crescent Point. DeeThree has potential value of $2.90 per share if only one of every 10 sections are prospective for Alberta Basin Bakken. If they have 100 sections that are prospective, it could be nearly $30 per share of potential value for the company. That is a large upside for DeeThree. It needs to prove the play exists on its land, as does every company that's associated with the Alberta Basin Bakken.

TER: They need to create some faith. Some companies are shifting from gas to oil exploration. Where are they finding exploration success?

KW: The names that we follow are not necessarily shifting. Those companies had a predetermined goal to be involved in oil resource plays.

However, where some of the shifting is occurring is into the halo of the Pembina Cardium Formation where many junior companies are active. Names that we cover in that area include Daylight Energy Ltd. (TSX:DAY), Crew Energy Inc. (TSX:CR), Spartan Exploration and TriOil Resources.

To a certain extent, this is also occurring in the Bakken outside of Viewfield in southeast Saskatchewan. The companies we follow there are Spartan Exploration, TriOil Resources and Arsenal and NuLoch Resources down south in North Dakota. There are some companies that are chasing the Pekisko Formation, but it's not as widespread. Crew Energy in southern Alberta and Second Wave Petroleum Inc. (TSX.V:SCS) at Judy Creek are notable names.

Novus Energy Inc. (TSX.V:NVS) is a name we follow that's playing the Viking Formation in Saskatchewan.

TER: Novus is drilling in the Viking and the wells are coming on pretty strong?

KW: The company has drilled and has production history on at least 16 horizontal wells. There is a good statistical history of what to expect from a Viking well, between Novus and other industry players like Penn West Energy Trust (NYSE:PWE). Penn West is the big dog in the Viking play.

That information allows investors to take a fairly confident statistical view of what a company is going to get in the Viking. To be successful, to grow and to show value, a company needs a fairly large land base. Novus has definitely been a consolidator of land. The company has taken its land base from around 20 sections to 105 sections in just the last year. The play is also developed to the point that well intensity is going to be higher than it was before. This is recognized by Sproule Associates, which is the main reserve evaluator in the area. Companies previously believed that they needed three or four wells per section, but now it's understood that they need at least eight wells per section.

On that basis, Novus has an inventory of 560 drilling locations. That could grow if a higher number of wells are required. This statistic provides a lot of clarity about where production can go for this company. In the summer, Novus was producing around 700 barrels of oil equivalent (BOE) a day. It's now over 1,400 BOE a day. The company has doubled production and is on its way to 2,000 BOE a day by the end of this year.

TER: That is still a pretty small number.

KW: Pretty small, but growing. For the most part they are delivering on the growth that they forecast. Novus has done a very good job of building its land base, and is now getting some good well results.

TER: Continued well results are the catalyst for further growth?

KW: Yes, and delivering on consistent production, which comes from being able to meet expected results on a statistical basis.

TER: Let's dig deeper into some other companies that you like.

KW: Spartan Exploration is a junior that is showing a lot of growth this year. It was at about 400 BOE a day in the beginning of the year. Now it's up to about 1,800 BOE a day. The company's guidance indicates that it will be at 3,000 BOE a day by the end of next year. Spartan is focused on Cardium oil in the near term and has had very good drilling results there so far. This area will be the main driver of achieving 3,000 BOE a day.

However, it's the Bakken that may be the real upside catalyst for Spartan. It has 68 net sections in southeast Saskatchewan. The company has done minimal drilling on that land at this point. It is letting others de-risk its lands by drilling nearby or right offsetting. If it's proven that the Bakken Formation exists in an economically recoverable way, then Spartan has a very large land base relative to its size in southeast Saskatchewan. The potential from that area, which can be more than $8 per share on a risked basis, is getting very little consideration, if any, in their current share price.

TER: What about Second Wave's land base?

KW: Second Wave has a large land base at Judy Creek in northwest Alberta, where it is chasing the Pekisko Formation. It has 144 perspective sections of land, or a well inventory of 600 or more. The company has identified about 1.3 billion barrels of original oil in place on its lands. Second Wave is pretty much the only company playing the Pekisko at Judy Creek, which means the company doesn't have the same advantage as other companies by having competitors drilling wells and furthering technology. Second Wave is doing it pretty much on its own. Even so, the company has taken production up to 2,000 BOE a day from around 1,200 to 1,400 BOE a day earlier this year. It should be 2,800 BOE a day by the end of this year. That's 50% growth rate since the summer. There will be a lot more confidence once investors become comfortable that the company can get consistent production and recovery rates from these wells. The risk parameters associated with Second Wave will lessen, and the share price should respond.

TER: We've discussed some Canadian and U.S. projects. What are some interesting plays outside those borders?

KW: Gran Tierra Energy Inc. (NYSE:GTE; TSX:GTE) is a very interesting one. It's a relatively low-risk stock. It will basically have a flat production profile from their Costayaco Field in Colombia for the next two years. That should give it a lot of cash flow. Judging by current oil prices, Gran Tierra could be looking at cash flow in the range of $450 million. It also has about $200 million of working capital. That's a lot of capital to deploy, and the company recently started ramping up its exploration. It has had some success at Moqueta and is more actively exploring in southern Colombia. This month, Gran Tierra will drill its first exploration well in Peru. That's more high-risk, high-impact exploration. However, the company is targeting a play that could be as large as 1 billion barrels. It's got a lot of interesting exploration potential from those plays.

Another interesting play is in Namibia.

TER: West Africa is known mainly for their diamonds.

KW: True. Namibia is really not known at all for oil. What's very interesting is that Brazil and Africa have a historical relationship. UNX Energy Corp. (TSX.V:UNX) is very closely associated with the Brazilian company HRT (BM&FBOVESPA: HRT), which is an expert on the South Atlantic Margins. The company can show a lot of similarities to offshore Brazil, which has a number of multi-billion barrel discoveries.

TER: Like the Tupi oil field.

KW: HRT believes the west coast of Africa has similar geology to the east coast of Brazil. UNX has eight blocks of interest around a previous discovery called Kudu. On just one of those blocks, the company has a resource estimate of 2.3 billion recoverable barrels.

There are several catalysts for UNX. It is that it's getting ready to shoot a 3D seismic survey in the first quarter of next year. Also, the company hopes to get additional resource estimates on some of its other blocks, and sign up a joint venture partner to come in and drill. UNX wants to be carried for the drilling costs as offshore drilling is very expensive.

There are very few places in the world where you can find the potential for multi-billion barrel oil discoveries. There's a shorter list still of countries that have stable, democratic governments. This is one of those opportunities.

TER: Right.

KW: Epsilon Energy Ltd. (TSX:EPS) is another company that I want to discuss. It's focused in the Marcellus play in Pennsylvania with joint venture partners Chesapeake Energy Corp. (NYSE:CHK) and Statoil ASA (NYSE:STO; OSE:STL). Epsilon is being carried for the first $190 million of capital costs on the Marcellus play. Production from the joint venture should go from very little up to between 30–45 million cubic feet per day by the end of next year, and it could go higher. It's difficult to say at this point as well results in the area keep getting better.

Epsilon's lands are in Susquehanna County, Pennsylvania. Many publications say that this is the best, or one of the two best, counties for the Marcellus play. Cabot Oil & Gas Corp. (NYSE:COG) drilled three wells there and was producing in excess of 47 million cubic feet per day.

Epsilon is really a no-capital-risk play, counting on the expertise of two of the biggest and most technically advanced companies out there being able to deliver results in the Marcellus. Epsilon is very undervalued, in my opinion.

TER: Well, it is gas.

KW: It is gas, but on an economic basis, the Marcellus is perhaps one of the top two natural gas plays in North America.

TER: Do you have some parting thoughts for us?

KW: Investors need to be stock pickers. Oil is a stable commodity, but nothing's perfect and certain in this world. I would not necessarily look for a rising tide across the board from rising commodity prices. So, it's important that investors be stock pickers.

TER: Thanks, Kirk.

Kirk Wilson, CFA, is managing director and oil and gas analyst at Clarus Securities. He has over 14 years of equity research experience at Canadian investment banks, and over nine years of oil and gas industry experience with both domestic and international operations. Kirk has a B.Comm. from the University of Calgary.

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

DISCLOSURE:
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Novus, Primary and Royal Dutch.
3) Kirk Wilson: ): I personally and/or my family own shares of the following companies mentioned in this interview: Spartan Exploration. I personally and/or my family am paid by the following companies mentioned in this interview: None.
Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
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Best Wishes for Christmas and the New Year

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Team,

We Wish you all a Sparkling Christmas and a Golden New Year. Have a really good break and come back full of beans and ready for action as 2011 will be volatile and hopefully exciting in the uranium stocks sector.

We are spending the week before Christmas and Christmas at a lakeside retreat, where along with a few friends we will have all of the team under one roof, which is not easy to do these days. We wont be doing any blogging over that period, but we are allowing one whole lap top to accompany us and we will keep an eye on things just in case.

We haven’t forgotten about The Accumulator and we may just make a move tomorrow, if you do decide to follow us in, then please only use a tiny, tiny amount of your funds as this is meant to be a 'fun' thing, thanks.

Merry Christmas and a Happy New Year to you all.
Monday
Dec132010

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