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Thursday
Oct012009

Denison Mines Corporation Down 10.22% in One Day

DNN Chart 02 Oct 09.JPG


Having put in a reasonable rally in the first half of September Denison Mines Corporation (DNN) has fallen back from $2.10 to close yesterday at $1.67, including a decrease of 10.22% in just one day.

Despite trying to rally, consolidation would appear to be the order of the day with rallies being followed by retractions. DNN has gone from $1.30 to $2.10 and almost back again in just one month. For traders this sort of volatility offers opportunities to 'play' this stock, however as a longer term investor this is underwhelming to watch a pattern of consolidation unfold. Maybe better things lie around the corner and its just a case of wait and see for now.

The spot price of uranium has drifted down to $42/lb which puts a damper on uranium stocks even thought the longer term price remains steady at $70/lb according to TradeTech.

With one or two exceptions such as Extract Resources Limited (ASX/TSX: EXT) this tiny sector would appear to be in the shadow of its glittering stable mate, gold, which is currently flirting with its all time high.

We will observe the seesaw action of some of these stocks and maybe take a swipe at the odd trading opportunity in the near future.


Denison Mines Corporation trades on the AMEX under the symbol of DNN and on the Toronto Stock Exchange as DML.

Market capitalization is $567.33 million, average volume is 1.2 million shares traded, 52 week high $3.30, 52 week low $0.54, closed yesterday at $1.67.

Got a comment – then fire it in!

Have a good one.

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Wednesday
Sep232009

A Look at Strategic Oil Reserves – Who’s Buying Oil?

Oil Platform 24 sep09.JPG

In our mail box this morning we have this article by Marin Katusa, Senior Editor, Casey’s Energy Opportunities which we hope you find interesting and informative.

As the U.S. strategic petroleum reserve (SPR) approaches capacity (721.5 million barrels filled out of a total possible 727 million, and will be filled by January 2010), the federal government will fade out of the oil-buying business. Some bearish traders believe that this factor can weigh in on prices, since most petroleum stocks in the United States are government-held rather than private. Bullish traders have also used the filling of the Chinese SPR as a reason that oil should go much higher.

The team at Casey’s Energy Opportunities believe that planned government buying or selling of crude oil for SPRs actually have very little impact in the overall market. However, an overall drawdown of worldwide inventory could put downward pressure on the price of oil. The various countries also have their particular reasons and influences in decisions to tap their reserves.

So which countries are executing preparedness plans to fill their strategic reserves with $70 oil now (as opposed to $140+)? Below are the 10 countries that consume the most oil in the world, as of 2008, the latest figures available from the BP Statistical Review of World Energy:

 
Consumption
Million Barrels/Day
U.S.
19.4
China (Including Hong Kong SAR)
8.3
Japan
4.8
India
2.8
Russian Federation
2.7
Germany
2.5
Brazil
2.4
South Korea
2.3
Canada
2.3
Saudi Arabia
2.2
 

Russia, Canada, and Saudi Arabia can leave the list, as they are net exporters of oil and thus do not actually require a strategic reserve, at least in the short term. We'll also bump Brazil, because its balance of imports is dwindling every year, and it should become an exporter before it requires a reserve. That leaves six countries to examine.

The United States

Not surprisingly, America has the largest strategic reserve in the world in an absolute sense. Its 727 million barrels are stored in four hollowed-out salt domes (and one pending) along the coastline of the Gulf of Mexico. These add up to some 62 days' worth of imports, according to government sources. The United States government currently has plans to push this to 1 billion barrels, or about 85 days' worth of imports, which would make the reserves equivalent to those of Japan and Korea.

The SPR build-up will be accomplished by expanding two of the current facilities, for an additional 113 million barrels, and (probably) building a new one in Richton, Missouri, for 160 million barrels. The Richton project has met local opposition, because it would require pumping 50 million gallons of freshwater per day from the Pascagoula River to dissolve enough salt to open up another subterranean cavern. The total cost of the program is estimated at US$3.7 billion, not including the cost to fill the reserves. Oil purchases are likely to be slow, at around 100,000 bpd (barrels per day) before 2014 and 150,000 bpd thereafter.

In a real emergency, the combined American strategic and commercial reserves (the latter held by private corporations, especially refiners) may seem unnervingly thin from the perspective of energy security. Add to that the fact that the government can release them at a rate of only 4.4 million barrels per day, or about half its imports.

Still, the 108 or so days' reserve it has between government and commercial sources are considered adequate by international standards. The United States has used this reserve twice in the past 20 years (Desert Storm and Hurricane Katrina) to combat severe demand or supply disruptions. It also has the luxury of importing more oil from Canada in an emergency.

Scenarios that could force a sustained drawdown of reserves:

Sustained hyperinflation in the United States due to actions by the Federal Reserve that causes oil-producing countries to look for better markets to sell oil.
A prolonged general embargo by OPEC on the United States, forcing America to look to traditional partners such as Canada and Mexico, though they might not have sufficient oil.
Another war, potentially in North Korea or Iran, requiring a large amount of oil input from America that it simply does not have.

A particularly active hurricane season that knocks out a large amount of production capacity in the Gulf of Mexico, and the United States releases from the SPR to help.
China

China's strategic reserves began being built in 2004, when leaders in China began to realize that the country had no adequate government-controlled reserves to combat any disruptions in the supply of oil. China is a large importer and is dependent on the same sources of foreign oil as the United States. China is even more anxious to build such a reserve, as two of its neighbors, Korea and Japan, both have large strategic reserves.

China currently has four government reserves with a total reserve potential of 272 million barrels, which translates to about 30 days' consumption. Two of the four have been confirmed full, and there are rumors that all four are and that China has taken advantage of the recent precipitous drop in the price of oil to buy up. According to Chinese government sources, however, the reserves are likely not to be completely full until 2010, and 2009 buying of oil will be at around 42 million barrels.

The government has also announced plans to increase the country's reserve from 30 to 100 days of consumption. The next stage of the development will call for an additional 170 million barrels in eight storage facilities. The locations of the facilities are as yet secret.

In an emergency, China would likely turn to Russia to buy oil, though only the naive would be surprised if Russia added a premium for the privilege.

Scenarios that could force a sustained drawdown of reserves in China:

Worldwide embargo on China due to a Chinese invasion of Taiwan.
High oil prices force Chinese industries out of business, pressuring the government to keep oil prices low domestically by selling some of the reserves to domestic companies.
North Korea asks for oil from China to support military action on the Korean Peninsula, and China ships it to them on the black market.

Russia slows or stops its exports as part of the Russian "dominance via energy" strategy, leaving Chinese pipelines trickling and Chinese industries disrupted.
Japan/South Korea

We have placed Japan and South Korea's reserves together, as the two countries have a treaty that allows them to share their strategic reserves.

Resource-poor Japan has one of the world's largest strategic oil reserves, enough for 82 days of imports. State-controlled reserves are run by the state-owned Japan Oil, Gas, and Metals National Corporation. The reserves consist of 320 million barrels in 10 different locations, which makes them second only to the United States in absolute volume. Japan's island geography means that having an emergency supply of crude oil is crucial, and the Japanese government obviously has not ignored this aspect.

South Korea is in one of the global "hotspots" in the world, right beside North Korea. As the country is under an almost constant threat of war, the government has stocked up some 76 million barrels, with capacity for an additional 40 million barrels.

Scenarios that could force a drawdown of reserves:

Just one at this time, from two possible sources: political instability in the region caused by either the Taiwan or the Korea conundrums disrupts tanker transport, perhaps even forces them to port.
India

India has a small reserve it began to build in 2004. This stockpile is sufficient for perhaps only two weeks of consumption. The country eventually wants to raise this level to 45 days, though the first phase has not even been completed yet. The projects are estimated to come online in 2012, which means it has taken eight years from planning to completion. These figures imply that India will not even have a somewhat sufficient strategic reserve until 2016, given that the expansion project was approved in 2008.

Germany

Germany has the largest reserve in Europe and is among the top in the world as well. Its government has satisfied a federal law that regulates storage be at least 90 days' worth of net imports. More than half of the storage is in Southern Germany, where large salt caverns exist. Germany is well prepared in its strategic oil reserves, and there are no glaring factors that would force a drawdown of reserves, barring a global catastrophe. Furthermore, the reserves of Germany, France, and Italy are pooled and can be used by any of the three countries in an emergency.

So How Much Do the Reserves Matter?

According to the U.S. Energy Information Administration (EIA) estimates, some 2 billion barrels are held in government-owned strategic reserves around the world. Though this seems like plenty of oil, does it really impact the spot price of oil? Collectively, the answer is yes, as this volume corresponds to 23 days' worth of global consumption. If drawn down together over a short period of time, the effect on spot price could be substantial.

For illustration's sake, suppose that countries collectively draw down their entire reserves over the period of a year. This rate would make up for 10% of the daily worldwide trade of crude oil, which could certainly impact price (imagine ConocoPhillips and ExxonMobil both going under at the same time).

Individually, however, even China and the United States have a limited impact on the spot price of oil over a single year. If the United States' inventory were drawn over an entire year, it would only make for a 4% increase in supply. Under normal buying patterns of each country's strategic reserves, the impact is even smaller. Since China's 42-million-barrel purchase is over one year, their purchase would not even make a dent in the daily trade of oil.

Thus, a concerted effort by the worldwide reserves can definitely keep prices down in the short term (within a year, two at best), but cannot make for a paradigm shift in the supply/demand model of oil or the Peak Oil argument. And from the buying side, if governments plan the filling of their strategic reserves, the impact on the spot price of oil is likely to be minimal.

Perception is a tricky horse to ride, however, as we all know. Given a worldwide panic for oil à la the 1973 oil embargo, oil prices could spike in the short term, because government reserves would likely raise purchases 10% or so in a real emergency. This effect would be short lived for the foreseeable future, though, as worldwide reserves are already reaching their limits.

In short, if everything goes according to “plan” by the governments, even filling a large reserve such as the Chinese SPR would have little impact on the price of oil. For SPRs to truly impact the spot price of oil, it would have to be a global situation, with war and embargo the two most likely scenarios. Even then, the impact would be mellowed by limitations on how quickly governments can either release or purchase the oil.


Marin Katusa is a math prodigy and the chief investment strategist of Casey Research’s Energy Division. At the age of 31, he is one of the youngest self-made multimillionaires in Canada… thanks to an algorithmic system he developed that alerts him when a company with sound fundamentals has become so undervalued that it’s a screaming buy.

For years, Marin has been advising Casey subscribers on the best energy picks, generating extraordinary returns. Learn how you, too, can profit from his “secret system” – click here to read more.

Have a good one.

For those readers who are new to this site and are interested in the nuclear power sector that is currently coming back to life, you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.

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Tuesday
Sep222009

Uranium to hit $95/lb!

Uranium chart 23 Sep09.JPG

According to RBS uranium will almost double to $95/lb by 2011. This was part of an interview with Ray Goldie, analyst, at Salman Partners who was interviewed on BNNs SqueezePlay today. Just to keep us listening the figure of $150/lb is thrown into the talk.

Its an interesting video clip if you can find the time to watch it they talk about some uranium mines taking 11 years or so to construct and a similar amount of time is required to build nuclear power plants. Since 1980 the worlds consumption of uranium has outstripped supply. The main show stopper would appear to be political will and the amount of red tape that we have to wade through to get a nuclear mine or power plant into the construction phase.

Click here to watch the video.

Have a good one.

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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.

Long term uranium price 23 sep 09.JPG
Thursday
Sep172009

Geothermal & Nuclear Energy Stars Spark Gianni Kovacevic’s Interest

Source: The Energy Report 09/17/2009
http://www.theenergyreport.com/pub/na_u/1099

"It's all about the management," says corporate development strategist and consultant Gianni Kovacevic, who has identified a single player in both geothermal and nuclear energy sectors—the "absolute leaders in the space." In this exclusive interview with The Energy Report, Gianni discusses some of the elements that make their management teams so powerful.

Gianni Kovacevic.JPG

The Energy Report: What appeals to you about the energy sector?

Gianni Kovacevic: The world cannot live without energy, thus we've seen many governments around the world dedicated to creating energy in a greener and cleaner way. We need to look at the types of industries that are going to benefit from just a general interest in doing the right thing, and significant government incentive to create this energy (i.e., geothermal, wind, and even nuclear power).

TER: The greener and cleaner people usually focus solely on alternative energy, overlooking nuclear and geothermal. You have an interest in nuclear and geothermal, though. What's brought you to that point as opposed to wind, solar, wave, ethanol?

GK: These are the best two forms of green energy because they really do work. Geothermal has never had a true leader that could take a company, assemble assets, create shareholder value, and drive this industry, offering investors a vehicle to participate from inception to final vision. In my opinion, when Ross Beaty formed Magma Energy Corp. (TSX: MXY)-which had an IPO in early July—it signaled the first time we've had a leader with a storied track record that goes back three decades who is dedicating a large part of his efforts to leave behind this legacy company.

TER: Are you suggesting that with Ross Beaty coming in that Magma Energy is on a consolidation strategy?

GK: Magma Energy is going to be an explorer, a developer, an operator and in due course I believe with strong Mr. Beaty at the helm, they will consolidate this space. My contacts around the world have been disappointed with the lack of strong management in this space but now they have a management team with all the core competencies that is absolutely 100% dedicated to make this business succeed. Is there investment interest? Absolutely. When the IPO took place and Magma raised a significant amount of capital at $1.50 a share, it was more than double over-subscribed. There is a ton of appetite for this sector, this company and this management team.

Look at Mr. Beaty's pristine track record and the amount of shareholder value that's been unlocked from his franchises—be it Pan American Silver Corp. (TSX:PAA; NASDAQ:PAAS), which he formed with one goal—to become the world's largest primary silver producer. Check! Accomplished. Or a Lumina Copper Corp. (TSX:LCC), which is the sporting equivalent to hitting four grand-slam home runs in one game. This franchise paid initial investors in excess of 5,000% in dividends and they still hold their original share. Magma Energy should be the default company in geothermal for investors if they are active in the space or to follow and consider as a core holding within the sector due to these strong assets and the strongest management team. In fact I don't believe any company that Mr. Beaty was involved with has ever failed and that goes back three decades. I'll back that jockey all day long especially when the jockey is as passionate as he is for Magma and geothermal.

TER: That's quite an endorsement.

GK: I have experience with them and can say from my discussions and meetings with them, they are absolutely committed to developing this company and developing shareholder value through fundamentals. As I said, from exploration to development to the consolidation front, all of this bodes well for shareholders.

TER: You sound more excited about Magma Energy than about geothermal in general.

GK: Geothermal is a win-win-win. I like this industry. It's good for the environment. I like the fact that it basically goes forever. With fluid going into hot rocks, coming up creating steam and electricity, it just goes in perpetuity once that circuit is installed and efficiently managed and maintained. We've seen it in Italy. It's operated for 100 years.

From an investment perspective, I like the fact that we have government incentives, which make an already very economic and very good business better and easier to finance and maintain. With all the "green" money out there development of each megawatt of power is going to be heavily supported. Investors need to fluently understand just how much government support will be offered companies like Magma. This is unprecedented and takes a lot of the financial risk onto the shoulders of others and less so to the shareholders and management. That's good.

I just see this as an incredible win-win-win situation for the citizens around the world, for the shareholders of companies such as Magma, and for local communities. Rather than have a coal-fired or other fossil fuel-fired power plant, if a community can have a geothermal plant, where's the downside in this equation? I don't see it.

TER: In addition to Magma Energy with its all-star team and multi-pronged strategic process, do any other companies in the geothermal sector interest you?

GK: There's another company, Ram Power Inc., which is going to IPO probably next month. It is led by Hezy Ram, a developer of projects. While he was with Ormat Technologies Inc. (NYSE:ORA), Mr. Ram initiated and executed the aggressive North American acquisitions of the geothermal plants that provided the base for a lot of the company's growth. So RPI is another company that eventually could have some significant interest around the world. With someone of Hezy Ram's caliber at the helm, I think RPI will be able to execute and, in the course of time, it would not surprise me to see a marriage between Ram and a company such as Magma. Who knows? I have an interest in both companies so I would endorse a marriage like that.

TER: When we started our conversation, you mentioned nuclear energy and wind in addition to geothermal under the "greener and cleaner" heading. What excites you about nuclear energy?

GK: Nuclear energy is a fantastic way to generate electricity because it works. We know that, because in America, 20% of the power comes from nuclear power and in Japan, about a third. In the ultimate demonstration of nuclear energy at work, over three-quarters of France's power comes from nuclear power plants. Even many environmentalists now acknowledge that nuclear power is better than fossil fuel power.

So we look at companies that will be able to provide this fuel for where the action's going to take place. We need to recognize where the environmentalist lobby is either limited or nonexistent (i.e., China and India), is where the projects are under construction and where the proposed projects will be built. I don't mean a few; I mean dozens of these nuclear reactors are going to be built in China and India. And where's the fuel going to come from?

We already know that a good third of the fuel that feeds the global nuclear plants right now comes from the dismantling of nuclear weapons. We also know that not every nuclear weapon will be dismantled. The nuclear plants also have contracts that expire in the next three to four years. Where will the fuel to cover this shortfall come from? New contracts? Perhaps? New supply is going to have to come on-line, but not at $50 per pound uranium.

In many places, including most of the U.S., it is so difficult to permit and develop uranium mines that when a company achieves this Holy Grail, they immediately go to the top of the list. If nothing else, if you monitor the uranium market, go through the lens of a company that's achieved this Holy Grail.

TER: And that would be?

GK: For us, there's only one name in the space: Uranium Energy Corp. (NYSE-ALT:UEC; FSE: U6Z). It operates in south Texas, and Texas is a very special jurisdiction within the uranium mining jurisdictions around the world. In Texas, as people may or may not know, they decide all permitting issues at the state level. UEC is in uranium-mining country; they have decades of experience as they have a dozen individuals that have developed and operated in South Texas for three decades. Their Goliad project is now in the final phases of comments from what are already approved draft proposals for their project permit and on September 1st they received another couple of draft permits.

TER: So their project is not yet built.

GK: Uranium Energy recently raised over $20 million. It was very well supported at this financing level and, due to the fact that they are now financed and they're going into their final comment period for their permit, they should be producing in the third quarter of next year. From a uranium mining perspective, that's as good as it gets and better yet, it should make them the very next producing operation in the U.S. and a very sought-after asset, indeed. By the way they are building new reactors in the area of the Goliad Project. Where will the fuel come from?

TER: You mentioned earlier that if you were looking at the uranium market and you were looking for the Holy Grail, it is Uranium Energy Corp. What makes it the Holy Grail as opposed to current producers?

GK: Only six projects in the United States are going through this permitting process. UEC is in the lead among them; three years ago there were only two and even now due to the fact that the others are not in Texas they have to deal with both federal and state permitting issues. Not UEC. So one can witness the significance of establishing this milestone. When you have so few projects, even worldwide, that are going through permitting to get to development, it makes UEC a very special story. If you cannot permit and develop your project, what value are your pounds in the ground?

UEC plans to start producing one million pounds a year, but the permit will allow them to produce two million pounds per year as per the amount of fluid they can move through the earth. So UEC will be quite a significant producer. And they're going to be a very low-cost producer at around $20 p/lb, otherwise very economically robust.

TER: Is that due to in situ recovery (ISR) methods?

GK: Yes. With ISR, it's around $20 a pound to get it out of the ground. They put solution through different holes into sandstone or certain host rocks. The solution seeps through this porous material, leaching the uranium into the solution. Then it's pumped back up through different holes and processed. UEC isn't reinventing the wheel with the use of ISR. A lot of uranium mines, including operations in south Texas, used it for decades before the U.S. uranium mining industry pretty much shut down when the price of uranium declined so sharply in the late 1970s and early 1980s that mining uranium became uneconomic.

Another good thing about UEC is that the management team consists of a good half dozen people who are career south Texas ISR people. They've done it before and they're simply doing it again for UEC. So, as with Magma Energy, it again all goes back to the management team. They have the people with the experience, people who have executed numerous times. The president and CEO of UEC, Mr. Amir Adnani, is someone I like to call a junior Ross Beaty. He turns over every dollar bill three times before spending it, and if one ever meets him they will be amazed at his depth of knowledge in this space and unbelievably tireless work ethic. He has assembled an all-star development team for UEC, and continues to look for opportunities to create shareholder value. As a side note there are seven Canadian analysts who cover this U.S.-listed uranium miner, a record, I think, and a huge endorsement to the validity of the project, not to mention a good way to research the details.

TER: The last greener cleaner energy source you'd mentioned is wind.

GK: Wind is a fantastic type of energy, but from a baseload perspective, it's only 30% to 40%. Wind is not constant; we all know that. I also like wind because it's extremely copper-intensive. T. Boone Pickens was planning on building the world's largest wind park in the United States. I don't believe that project's going ahead anymore, but the Chinese have taken the lead and they are building five or six significant wind parks, 10- to 20-megawatt parks. That's mind boggling. I think it's going to create a cheaper way to create wind power going forward, because any time you have this kind of development, I think people find shortcuts and economies of scale. So that's something we'll monitor very closely.

TER: Are you looking at any other clean energy sectors?

GK: I think with geothermal, nuclear and wind we've talked about the most significant clean-and-green plays. The important point to stress in how we think is to follow the leaders with decades of track record of the ultimate goal, creating recognizable shareholder value in industries that actually do work. There is no sense in succeeding in a sector that is only marginal, trendy and/or gimmicky. Both geothermal and nuclear energy generation will be around for our kids and our kid's kids. We like that and we love the fact that we are on the Magma bus from IPO to let that team deliver as they have for decades and look forward to seeing how the supply short falls will affect the uranium market and ultimately companies like our sector favorite UEC.

DISCLOSURE: Gianni Kovacevic
I personally and/or my family own the following companies mentioned in this interview: MXY and UEC. I personally and/or my family am paid by the following companies mentioned in this interview: UEC.

Gianni Kovacevic, who works in corporate development at Global Opportunities AG Zurich, Switzerland & Kovacevic Consulting, brings more than a decade of investment experience in the resource sector to the task. In addition, over the past several years he has assisted with negotiated financings well in excess of $250 million from a large pool of global investors. A widely traveled citizen of the world who cultivates and nurtures relationships everywhere his interests take him, Gianni is fluent in German, Italian, Croatian and English, and is busily mastering Russian as well. A tireless researcher and avid reader, he maintains homes in both Vancouver and Zurich.

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

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Have a good one.

For those readers who are new to this site and are interested in the nuclear power sector that is currently coming back to life, you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.

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Thursday
Sep102009

What’s Driving Lithium?

Lithium.JPG

Merrill McHenry on the "Technology" Metal
Source: The Energy Report 09/10/2009
http://www.theenergyreport.com/pub/na_u/1087

Demand for lithium is on the rise, as hybrid car batteries and portable electronic devices often require rechargeable lithium batteries. Analyst Merrill McHenry, MBA, CFA, in this email interview, gives The Energy Report readers the lowdown on automakers racing to see how many cars they can get into the market, and the importance of project economics in looking at investment opportunities. Some excerpts:

The Energy Report: Merrill, can you comment on how the recession is impacting the price of lithium?

Merrill McHenry: In 2008, lithium's (Li) growth was only slightly affected by the recession. Lithium has had compounded annual growth of 5% to 7% over the past five years, according to Patricio de Solminihac, EVP of the world's largest lithium carbonate producer, SQM (Sociedad Química y Minera de Chile S.A) (NYSE:SQM). At a conference on lithium last January, Solminihac also said 2008 demand for lithium carbonate equivalent is estimated to have been in the range of 115,000 to 118,000 tons (about 2% above 2007 levels). This is in sharp contrast to Li's 31% 2007 sales growth.

It's interesting to note that lithium actually got a big start in the Great Depression. While some may know that Coca-Cola originally contained a tiny amount of cocaine (9mg/glass until 1903), very few know that the "Up" in 7-Up, launched two weeks before the Wall Street Crash of 1929), contained lithium citrate, a mood-stabilizing drug. 7-Up was specifically marketed as a hangover cure. Long before today's "Energy Drinks," the soft drink industry had a medicinal heritage.

So, back to our present-day situation. . .keep in mind most all of the metal is traded under longer-term market contracts, typically adjusting in various degrees over time to the spot. 2009 contract Li prices were down to $2.80 to $3.00/lb (or $6,613/ton); down approximately 5% to 10% from the prior year's peaks.

Future growth estimates vary wildly—anywhere from 20- to 40-fold by 2020—driven largely by car battery demand. The USGS expects demand for lithium-ion batteries to increase 15-fold from 2006 to 2012.

Obviously, a major factor driving demand is the race among the major automakers to see who can get how many cars into the U.S. and European markets in 2010. Demand is expected to accelerate as Li-ion battery-powered Hybrid Electric Vehicles (HEV) come on-stream beginning in 2010. Production in 2011 is where we will begin to see notable market share growth vs. carbon-based vehicles. Price Link (US Geological Survey)

TER: There are concerns that China is cornering the "technology" metals sector and the implication is that China could dominate mining of these metals. Is this also a concern with lithium?

MM: Over 80% of lithium-ion batteries are manufactured in Asia. So, to me, yes, the issue of China cornering the "technology" metals sector is a significant concern. China, and for that matter, many strongly capitalist countries, are subsidizing and supporting 21st century growth industries.

In 2008 Warren Buffet invested $230m for a 10% stake in BYD, which makes hybrid cars in China. He has now made roughly $1 billion on that investment. BVD recently announced they intend to start shipping their cars to the U.S. beginning in 2010. At the beginning of the year BYD had over 10,000 Chinese engineers "from the best schools" (Forbes interview April 2009); they have another 7,000 in training for positions. They provide them shelter and dinning (helps to keep them at work), and the average wage is $190 a month ($150 in Taiwan). The company's founder Chairman Wang Chuanfu readily admits "there is no way we could do this in the U.S."

Clearly the Asians are exploiting a cost structure differential, which is a tremendous disadvantage for North American industry.

TER: What should lithium mining investors be aware of when investing in this sector?

MM: Project economics drive the "car" and the industry. While size matters, this industry has, and will continue to be, driven by project economics. Investors should realize Li is not nearly as much an exploration and discovery-oriented mineral as they may be used to. Li is considered an original "big-bang" element, thus the deposits are largely known and not obscured by geological forces. Therefore Li is a very bulk, relatively lower cost, mineral.

Because of that, the deposit economics and strategic incentives for a potential acquirer become more important parameters. Strategic incentives would include favorable sovereign risks, location, etc. In any scenario the deposit economics are essential and that requires that proper valuations need reasonable extraction costs (net of any by-product mineral credits) factored in.

Therefore, in contrast to higher unit cost minerals (i.e. gold @$950/oz), investment Net Asset Value ("NAV") calculations based on all project costs are more important. Any potential JV partner for any of the Li juniors coming out of the woodwork are going to look at the total cost of getting Li out of the ground. In essence, that means only the lowest cost, and larger scale projects are likely at first. Deposit grade may make a small deposit interesting (e.g. Canada Lithium Corp. (TSX.V:CLQ)), but you run higher risks that no one asks the partner to dance on small projects.

Also, near term, the stocks may be ahead of themselves. While a JV partner may be interested in a large deposit, I do not believe they will justify a price as rich as many of the companies currently imply. I have to run 20-year discounted cash flow models out to 30 years to try and justify some current share prices. For me I want to see some consolidation in the share prices and continuing progress in economic recovery before I would become a buyer of North American Li stocks. I do not win friends saying that, but I believe the North American Li group is just too much risk vs. reward in the short term. Maybe they can continue to be "pumped" upwards—for now. Or maybe it is because I became spoiled over much lower share prices were over the last year when I had perhaps the first Li stock coverage out on Western Lithium Corp. (TSX.V:WLC). In any event, for many companies my models and intuition say to stand back for now.

Keep in mind, industry leaders such as SQM have very low cash costs (US$1,600-1,800/t; < $1/lb). At the margin, many of the current leading projects can bring on additional capacity for small incremental costs. Most of the attractive Chile and Argentinean projects have very attractive potash mineral by-product credits that offset significant amounts (approximately one-half) of production costs. Many of the projects currently being touted do not have such advantageous mineral by-product credits.

I am working with Max Capital Markets Ltd. in Toronto, and we expect to have some new projects and relative valuation comparables that capture the great diversities among the Li juniors out in the near future.

TER: You've stated that you are concerned that "headline risks" could adversely affect the sector. Could you explain what you mean by "headline risks"?

MM: Sure. Li batteries have had significant safety concerns for years. Just this week the U.S. Airline Pilots Association called for banning the shipment of lithium from air cargo. It seems several lithium products have recently caused (fortunately) limited cargo fires. Recently the BBC reported French authorities are investigating alleged explosions in iPhones.

Quality control in battery construction has traditionally been a concern. The batteries used in hybrid and electric vehicles typically consist of 200 to 400 small cells, strung together into one powerful whole. Individual cells sometimes overcharge, emitting heat when they reach too high a voltage and pushing neighboring cells past the breaking point to set off a runaway thermal reaction. As the batteries are constantly discharging and recharging, the capability of the battery's overcharge regulation components is essential to avoid overheating. The ability of most types of lithium batteries to fully discharge very rapidly when short-circuited, leading to overheating and possible explosion, is a process called "thermal runaway." Most lithium batteries have thermal overload protection built in to prevent this, and/or their design inherently limits short-circuit currents. Internal shorts can occur due to manufacturing defects or damage to batteries that can lead to spontaneous thermal runaway.

In the last year there have been, and will continue to be, significant advances in Li battery molecular structuring, as well as new electrolyte battery additives to control thermal runaway. However, changing electrolyte additives may pose environmental and health issues and adapting improved molecular changes in Li battery substrates will take time to become mainstream. Some manufacturers may not want to pay patent royalties or the costs of manufacturing changes.

TER: There's been talk about lithium shortages, and with increasing demand, that could drive the price up. What's your thinking on that?

MM: I believe any predictions of Li shortages in the near term are hyperbole. Many of the current larger projects have incremental capacity expansion possibilities. I believe the sector is, short term, ahead of itself. My price performance theory (for the Li) group is that for any mineral without a spot market to track the sector can and will get ahead of itself as retail, cheered on by newsletter pumping, etc., causing runups in price that will have swift and sharp corrections on market weakness and investor second thoughts.

You take a mineral with no spot market and very obtuse pricing and combine that with a significant distance from here to high future volumes, significant market penetration of hybrids and higher pricing estimates and you have a scenario ripe for volatility. While rosy predictions ("new era," retail over enthusiasm, pumping, etc.) can always drive a sector further and faster than anyone thought, people would do well to remember risk is a function of time—and there is a great deal of time and uncertainty, made worse by a lack of pricing visibility, before these companies will see any potential profits.

Strong future Li pricing and aggressive demand growth assumptions are already factored in the group. The problem with predicting future demand of lithium in transportation, as a preferred method of energy storage, is that no one actually knows just how enthusiastic and sustainable the trend will be. There is already one new producer (Rincon Lithium Ltd.—Argentina Project) estimating production in 2011-2012.

While demand growth is happening and gearing up, I do not believe the market will be tight for some time. Earlier this year, a top Li industry consulting firm, TRU Group, forecast that, due to the current recession, the market would be in oversupply through 2013. TRU does not see a tight supply/demand until 2017 to 2018. And how do we know those will not be mines in Australia—close to massive Chinese consumption? In fact, China is already signing JV deals over in Australia (e.g. Galaxy Resources Ltd. (ASX:GXY)). If you are serious about wanting a likely Li producer, I would look to Australia Li companies. The capex (>$150 often) and lead times to production are onerous burdens for junior prospects to overcome. I believe very few North American juniors will make it to production in the next five years.

Keep in mind that not all bull claims are as strong as they appear. No doubt Li's outstanding rapid recycle time and power-to-weight ratio make it the choice for portable power ("electromobility") in the future—but making money with Li juniors is a lot more difficult than it seems. Much of the industry information is private and prices are under long-term contracts, so industry claims can vary all over the place. It remains to be seen whether annual hybrid electric vehicle growth will meet the consensus forecast growth of four-fold in the next four years, but given currently planned Li capacity additions, how much can the Li price rise? I am not of the sustainably strong rapid worldwide economic camp and believe that the Li bulls will inevitably have the burden of proof of tangible Li gains—beyond what is already assumed (e.g. $3.00 to $3.50).

Many bulls argue the Li price is very inelastic to total production cost (similar to uranium and a final electrical cost) and can easily have room to run. They assert the actual raw cost of the lithium in vehicle batteries is currently less than 3% as a proportion of cost. I would point out a producer is getting little money on the "raw cost" (e.g. currently $3.00/lb or less) for Li—it is as the producer steps up the purity of Li through significant refining processes where the true "cost" of Li becomes much greater. With the refinement costs of raw Li largely fixed, the actually inelasticity of the Li price is not as great as the strongest bulls may assert. Moreover, the market is well supplied in the near term and buyers can substitute suppliers as needed. In fact, buyers typically keep several supply channels open in case they need to switch. (Li typically has less bargaining power by producers than uranium does, owing to more substitute suppliers.)

TER: What are the implications for some of the juniors out there?

MM: Major projects could easily come on-stream, wiping out the near-term chances of many juniors. While the niche industry may seem "new" to many investors, it is far from "undiscovered" by the current major players. In addition to the existing major Li suppliers (SQM, FMC Technologies (NYSE:FTI), Rockwood Holdings Inc. (NYSE:ROC) /Chemetall (part of Rockwood), etc.) having significant current expansion plans there are major known resources—specifically in Bolivia—on the shelf that could wipe out many JV hopes. With its 5.5 million metric tons of reserves, Bolivia's Salar de Uyuni is recognized as the world's largest reserve, and could be used to supply the worldwide automotive industry for over 100 years. Though they will not be the easiest to extract, the Salar de Uyuni resources make Bolivia the Saudi Arabia of lithium.

So far Bolivia's government has resisted Toyota, Nissan, Sumitomo, Mitsubishi, China's BYD, France's Bollore Group, South Korea's LG Group, and all foreigners who've tried to strike a deal. While the race for carbon/petrol-based cars is well advanced, the race for dominance in electric and hybrid-based autos is just beginning. The industry has a blank slate in these early days and Japan and China are fiercely competing for the prized Salar de Hyuni resources. The right relationship with the government in La Paz will hold the key to everything. Beijing's courting of the authorities in La Paz has already included a cash donation to build a school in the town where President Morales was born and a gift of about 50 military vehicles, including two ships.

The current government wants not only to supply the batteries—they want it all—the complete industry of car-making as well. My bet is that as they see continued development elsewhere that some rationality eventually comes along to their thinking and something less than all-or-nothing results in some battery JVs. Rio Tinto is also considering bringing its Jadarite lithium-boron mine in Serbia into production in a few years.

In the interim, sizable attractive deposits may attract financing, but I expect for North American Li junior stock investors this will be much slower than the market expects. Keep in mind the alternative energy sector is littered with hopes exceeding realized growth.

Chile and Bolivia dominate current and likely future supplies. This is a major risk to the development of North American deposits. Moreover, North America does not have nearly the demand growth that China does, which China can supply from Australia.

In summary, the distance from here to the future high growth ramp up is too far to become very aggressive as to who those suppliers will be. As mentioned, current and already signed Aussie/Chinese agreements could well satisfy the next few years—so why chase the shares? Many niche sectors have gotten ahead of themselves in recent years—coal-seam gas, uranium, moly, alternative energy. While these sectors may well have secular (long-term) merits, in my opinion the risk/rewards of chasing something right after a rapid advance are too risky.

I have stated that I believed this is a short-term cycle ready to correct, and the recent correction supports that. I would look to add select long-term positions; avoiding many early-stage late entrants to the sector. In many cases, the late entrants are unlikely to have projects with sufficient scale.

TER: Can you share some companies that our readers should look at?

Sure. There area few that I like. Galaxy Resources Limited, currently a favorite of mine, recently completed a definitive feasibility study (DFS) that suggests the Mt Cattlin Lithium / Tantalum project (Ravensthorpe, Western Australia) is commercially viable, based on a processing rate of 1 million tons per annum over a 15-year mine life. The company is planning to begin developing the mine in Q3 with first concentrate production scheduled for Q3, 2010.

GXY recently signed agreements for financing of its lithium project with China's Creat Group, raising at least A$26 million for the company. In addition, Creat will provide Galaxy with 100% debt finance of approximately A$130 million for the purpose of developing both the Mt Cattlin spodumene (lithium/tantalum) and Jiangsu lithium carbonate projects.

One advantage GXY's JV has is that Creat requires no off take product and GXY is free to market its own product and thereby take advantage of any upward pressure on Lithium Carbonate prices.

Another is TNR Gold Corp. (TSX.V:TNR), a project generation company that has been around for a long time. Fortuitously they have 15 projects in Argentina, some with senior and mid-cap JV partners including Barrick Gold and Xstrata, and the Argentine experience gave them an early stage leg-up on acquiring one of the low cost brine-based salares (salt lake) in the Salta region close to a Orocobre (ORE:ASX) Li project currently undergoing a Bankable Feasibility Study as it advances towards production expected in 2012. TNR intends to spin out its Li and Rare Earths division in Q1 2010 and also has attractive copper and gold projects. As the pieces of TNR are developed and/or carved out, I expect investors to be well rewarded and as the projects are explored, and ideally, developed.

Finally, early in the year at half the current share price we recommended Canada's Western Lithium, which has a NI 43-101 resource estimate for the initial stage of development at its flagship Kings Valley, NV, property. The project total hosts a historically estimated (by Chevron Resources) 11 million tons of lithium carbonate equivalent (LCE). While I still like the project because it is one of the largest Li resources in the world (#6), after the recent share dilutions and share price rise I currently have the stock rated as a "Hold." While one could add a small position to have some Li exposure, without aggressive assumptions still far from certain I would not buy the stock unless it corrects—ideally under C$1.00.

WLC's Stage 1 project is huge, boasting an indicated resource of 48.1 million tons grading 0.27% lithium with a lithium carbonate equivalent (LCE)—688,000 tons and 42.3 million tons grading 0.27% lithium (LCE - 606,000 tons) inferred. A scoping study is planned for completion during the current quarter, which could show attractive mineral by-product credits, and the company hopes for first production in 2013. I expect it would be no sooner than late 2013 owing to the novel metallurgy of this hectorite clay-based deposit.

In the report, I believe the flow-chart processing will appear attractive for first of a kind metallurgical processes. My estimates are for production costs of $2.00 to $2.50/Lb. I believe Chevron's cost estimates were approximately $1.05 in the 1970s. The upside is that I believe there are significant by-product mineral credits not factored in either estimate that could significantly reduce. It also remains to be seen what JV and/or off take agreement terms could eventually be signed.


DISCLOSURE:
I personally and/or my family own the following companies mentioned in this interview: N/A
I personally and/or my family am paid by the following companies mentioned in this interview: None

Merrill W. McHenry, MBA, CFA, has been in the investment business for 25 years. As a portfolio manager he managed over US$1.5 billion in two U.S. mutual funds, and set up an international mining merchant bank. As an analyst he has worked both the buy and the sell sides; and currently provides research for Max Capital Markets Ltd, as well as prominent global investors. Mr. McHenry is a member of the CFA Institute, and the Toronto Society of Financial Analysts. He is owner of the domain name, and previously ran the site Uraniumanalyst.com. He can be reached at uraniumanalyst@gmail.com.

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Wednesday
Sep092009

China to Build More Nuclear Plants

Uranium Chart 09 Sep 09.JPG

Chart courtesy of u3o8.biz

Good news for uranium miners was the recent announcement that China plans to build more Nuclear Plants according to Japan Steel Works Ltd., a maker of atomic reactor parts for Areva SA and Toshiba Corp., more than doubled its forecast for China’s nuclear plant construction because of stimulus spending and environmental pressures, as reported by Bloomberg.

The country may build about 22 reactors in the five years ending 2010 and 132 units thereafter, compared with a company estimate last year for a total 60 reactors, President Ikuo Sato said in an interview. Japan Steel Works has the only plant that makes the central part of a large-size nuclear reactor’s containment vessel in a single piece, reducing radiation risk.

Just maybe the quantitative easing programmes coupled with various stimuli is having a positive effect on the energy sector and we will see some improvement in the demand for uranium.

The country has 9,100 megawatts of nuclear capacity and has approved the construction of additional reactors able to generate 25,400 megawatts, Sun Qin, then-deputy head of the National Energy Administration, said last month. China will issue a plan by the end of the year to push development of clean energy sources such as nuclear, wind, solar and hydro power.

The average time it took to build China’s first 10 nuclear reactors was 6.3 years, according to a report commissioned by the German environment ministry, which is considerably quicker than anything the west has managed to achieve to date.

Have a good one.

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Sunday
Aug302009

Extract Resources Limited Hits Ten Bucks on the ASX

EXT Chart 31 August 2009.JPG

The shares of Extract Resources Limited (ASX/TSX: EXT) hit ten bucks today following the media release regarding the confirmation of additional zones of uranium mineralization at Rossing South. As we write Extract is up $0.48 or 5.05%, on the ASX.

The highlights are as follows:

• Zone 3 - Chemical assay results confirm strong uranium mineralization, 1.2km south of the current Zone 2 resource area.

• Strongly anomalous hand held spectrometer results, 2.4km southwest of the current Zone 2 resource area.

• Abundant high grade results continue to be returned from Zone 1 and Zone 2.

• Eight holes completed so far at the Salem prospect, 10km south of Rossing South.

All have returned numerous anomalous mineralised intercepts.

Mr. Peter McIntyre, Managing Director, Extract Resources added the following comments “The rapid growth of Zones 1 and 2 is now being complimented by the potential of a third zone of mineralisation along the same Rossing South trend. The potential of the entire 15 kilometre trend is enormous, with some degree of mineralisation being encountered on every line drilled to date.”

“The Company intends to add further value to the project through ongoing exploration and resource definition drilling aimed at defining the full potential of the project. The Company is also, pushing ahead with the Rossing South Feasibility Study on Zones 1 and 2 to get the project into production in the shortest possible time frame.”

To read the news release in full please click here.


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Thursday
Aug272009

Washington Capitulates: Peak Oil Is Real

World Liquid Fuels Production 2005-2030.JPG

Just arrived a few minutes ago is this article regarding Peak Oil by Doug Hornig, Editor, Casey’s Energy Opportunities


Each year, generally in May, the Energy Information Administration publishes a less-than-eagerly-anticipated tome called the International Energy Outlook, 250+ pages of mind-numbing text, charts, graphs, and tables.

No one reads it. The mainstream media ignore it. Read More...
Thursday
Aug272009

Gissen & Berol: Investing for the New “Long Term”

Gissen.JPGBerol.JPG
Source: The Energy Report 08/27/2009
http://www.theenergyreport.com/pub/na_u/1056

Encompass Fund managers Malcolm Gissen and Marshall Berol sat down with The Energy Report to share their views on energy investing and what they believe are the strongest subsectors in the mix. While bullish on coal and natural gas, both are strong advocates of uranium, citing a "definite supply-demand imbalance." Discover new opportunities for long-term appreciation in this exclusive interview.

The Energy Report: Malcolm and Marshall, you started the Encompass Fund in June of '06 with the intent of investing in a wide array of sectors, "to minimize or avoid sharp declines in the market," as it says on your site. However, according to your stock chart, you had a fairly dramatic decline in Q4 '08 with a pretty dramatic recovery since then. Tell us a bit about what happened there.

Malcolm Gissen: What happened was that prior to and in 2008 we emphasized resource companies in our portfolio, and we believed that these companies were performing well. We had confidence in management. Many of the resource companies in the Fund’s portfolio met our expectations and continued to expand their resources, in some cases, very substantially. We were comfortable holding these positions in our portfolio and expected these stocks to outperform.

In the second half of 2008, a number of these companies experienced very sharp declines in their stock prices; we were alarmed, so we called the companies and asked if they knew what was going on. The only indication, they said, was that somebody was dumping a lot of their shares, which we, of course, could see in the market.

But it wasn't until very late in the year, when these companies spoke to and visited hedge funds, that the hedge funds would tell them that they had experienced a lot of liquidations and, as a result, were selling all of their resource company positions—and selling them as quickly as they could. In some cases, it was program trading. In other cases, they just dumped the stock. In the case of the junior mining companies, where the stock was thinly traded, it had a profound impact on stock prices when hundreds of thousands of shares or, in some cases, millions of shares, were unloaded in the marketplace, driving down the price of a number of these companies anywhere between 50% and 95%. When we saw that happen late in the year and realized the cause, as managers of the Encompass Fund, we decided we would buy more shares. We did that and that is one of the reasons the Encompass Fund has excelled this year.

Marshall Berol: There were several things we did, but when we saw what was happening with the markets in the fourth quarter of 2008 and what was happening with the companies that the Fund was invested in, we went back and reviewed each of the companies for how well we thought they could survive (i.e., a good investment going forward), and sold several of the companies we felt were weaker because of finances or the projects or the time involved in getting the projects moved along and factors of that nature. So those companies we sold at that time, and as Malcolm said, we increased our positions in some of the companies that we did own and felt were strong companies with the management, finances and projects that we felt would be worth owning going forward. Fortunately, that has worked out this year.

TER: Have you been surprised how the market has come back?

MG: I would say I have not been surprised at how well many companies in the Encompass Fund have performed this year. Marshall may not agree with this—and we don't agree on some issues—but I thought that this should happen. I felt that these companies were continuing to expand their resources. I didn't think the price of the resource was going to decline much. I felt there would continue to be demand for the resources and so I've not been surprised by the performance and, in fact, think that there's more to come. I don't think the story is over yet.

MB: Yes, we're definitely of the view that the resource investment story is not over. We're still in the early innings. There are a lot of reasons we believe that the demand for resources will continue to expand. There's the inflation aspect. A lot of aspects come into the various resources, whether it's the metals or energy that we feel have a very bright future going forward.

We're not of the camp that thinks deflation is here to stay, or that there's not going to be decent growth globally. We're in a global economy. There's just no two ways about it. While the U.S. or Europe may be slower, at this time and going forward over the next few quarters there's a lot of growth that's occurring in Asia and Latin America, and they need resources. And, to the extent that the populations are improving their quality of life, they're consumers and they want things that use resources of base metals, and they want gold. We just believe that it will continue and that there's a very bright future for resource companies.

TER: How do you decide where you're going to invest for your fund?

MB: The Encompass Fund was set up as a no load general mutual fund. It's not a hedge fund. We're an SEC-registered no-load mutual fund. It was set up to invest in companies regardless of market cap size because we don't think a fund should be limited to investing in large or small companies, or whatever. It was also set up to invest in whatever areas we believe offer good, long-term appreciation.

So, we can invest in any sectors that we think look attractive or are attractive. For the last several years—even before we started the Fund with our private client accounts—we've believed in resource companies—gold, silver, other commodities—so we were invested there. When we set up the Fund, we invested in a number of resource companies. We do have other areas we like—healthcare, particularly, and some special situations that we invest in. But when looking at it from the standpoint of the Fund, we don't want to be necessarily a resource company or a resource fund or a gold fund. We want to invest where we believe there are opportunities for long-term appreciation and that leads us to a variety of the resource sectors.

TER: Are you looking at long-term appreciation as a sector play or actually buying individual companies and holding them for long-term appreciation?

MG: I would say both. When Marshall and I got into this business, 'long term' meant 5 to 10 to 15 years. Nowadays, long term seems to mean two to four years. The definition of long term has clearly changed as investors have gotten less and less patient.

TER: Do you have real gems in the portfolio?

MB: We think they're all real gems, but some of them, from a catalyst standpoint or a near- to intermediate-term standpoint, stand out. An area that we like very much is uranium because of, again, supply and demand factors, production factors, production difficulties. There are 440 nuclear plants operating worldwide, 104 of them in the United States. There are approximately 100 or 120 that are on the drawing boards in various stages of planning or construction. Roughly 40 nuclear power plants are currently under construction worldwide. It takes uranium to operate those plants and generate the electricity that the plants are designed to generate.

Nuclear plants worldwide are currently utilizing approximately 180 million pounds of uranium; but there are only approximately 100 million pounds of new uranium being produced (mined on an annual basis). The balance over the past number of years has come from above-ground inventories or from decommissioning, primarily, of Soviet nuclear weapons. Both those sources are coming to an end. The Soviets have said that the agreements to reprocess their nuclear weapons, which are scheduled to expire in 2013, will expire then. They will not extend it. So that source of uranium is coming to an end. There's a definite supply-demand imbalance.

The United States' nuclear power expansion is slow, but it is progressing. The Obama administration is somewhat wishy-washy as to the extent to which they're going to support it or not. But the fact of the matter is the new plants or expansions are moving along in the U.S., and, more particularly, around the world in Asia, China, France, Japan and India—and it's going to require more uranium. When you talk about the recession and its effect on supply, that hasn't affected the uranium industry. Cameco Corp. (TSX:CCO), the world’s largest producer, which currently produces 20% of the uranium in the world, had a major mine that was scheduled to come into operation a couple of years ago, Cigar Lake. Cigar Lake has had major flooding problems and production from that project is now out two or three years. There are people that say it'll never come into production. So there are some production problems.

BHP Billiton Ltd. (NYSE:BHP) (ASX:BHP) (PK SHEETS:BHPLF) had a major uranium project in Australia which has been slowed down for expansion. It's to be considerably expanded and that has been slowed down for a variety of reasons, logistical and financial. One of the companies that we have in the portfolio and that we have been very positive on is a Canadian company, Uranium Energy Corp. (NYSE.A:UEC). Uranium Energy has a number of uranium projects that they acquired over the last several years in the U.S.—in Colorado, Utah, Wyoming, Texas and New Mexico. Their primary project is in Texas and it is progressing, we believe, very, very nicely toward the objective of producing uranium in Q4 '10, 12 to 15 months from now.

We have been in Uranium Energy for some period of time. We’ve added to it and it has been an outstanding performer this year, as it went from under a dollar at the end of last year to currently roughly $2.50. It has been higher. They are expected to be the next uranium-producing company in the U.S., and there's no question that there will be a market for that uranium. They may or may not sell it before they start production. They may or may not be the company that takes it into production. It is possible that somebody will come along, a uranium user, and want to buy the project and/or the company. But regardless of whether it gets bought, we feel there's a very bright future for Uranium Energy and some other companies operating in the exploration and production of uranium.

TER: Do you think there's any risk that uranium will be deemed a strategic resource by various countries inhibiting the flow of uranium into what they call the general market pricing mechanisms?

MB: I think the answer is yes, and it's not just uranium—it's a number of commodities, such as the rare earth elements in China, and China saying 'well, we're not sure we're going to continue exporting. In any event, we're not going to export as much as we have.’ We believe that's going to be the case with a number of commodities where countries that are producers are going to be restricting exports and expansion of production because they realize they have a valuable asset in the ground and they want to manage how that's monetized and for what period of time, whether it's monetized by them, their own country and their own companies, or elsewhere.

Certainly a major factor in the commodities arena these days is China and other emerging countries, but particularly the Chinese companies, many of which are state-owned and/or state-controlled, buying resources in other countries or buying portions of companies in other countries. And there's no indication that there's going to be any slowdown of that effort on China's part, or on the part of the host country to minimize the extent to which a foreign country is—whether it's China, Australia, Japan or Korea—acquiring assets. The South Koreans are interested in iron ore because they have a very, very large steel industry. The Japanese are interested in a wide variety of commodities to supply their industries. So it's a factor that's present and it's not going to go away, in our opinion.

TER: How has this potential of government intervention impacted your decision on which countries to invest in?

MB: For one thing, it's likely that prices will get higher for both the commodity and the value of the companies that are producing those commodities. A number of the companies that we talk to tell us that they've been approached by mostly Chinese and, in some cases, Japanese, both representatives of the government, as well as of companies in those countries that are interested in acquiring either the resource or the company itself. And that gets into a competitive situation, which should move prices higher.

One of the areas that we haven't talked about that we like is coal. The Chinese, as you know, are an enormous consumer of coal. They would prefer not to have to import the coal. So we looked at companies that are producing coal in China and we've invested in one just recently that we think has terrific potential, L&L International Holdings (LLFH:OB). We've invested in a coal company that's producing coal in Mongolia, about 20 miles from the Chinese border, that we also think has enormous potential. It's SouthGobi Energy Resources (TSX.V:SGQ), which is about 80% owned by Ivanhoe Mines Ltd. (TSX:IVN) (NYSE:IVN). Ivanhoe spun out SouthGobi and its coal deposits and is concentrating on copper and gold. So SouthGobi is in production, expanding production.

As Malcolm said, it operates about 20 miles from the Chinese border and they're running trucks 24/7 from the mine facility to the Chinese border, where they're loaded on rail cars to be taken into China to be utilized. We would anticipate that at some point in time there may be some business relationship activity between the 80% owner, Ivanhoe, and SouthGobi. But whether that happens or not, SouthGobi is doing extremely well, is well capitalized, well funded, is increasing their production, and we think has a very bright future as an investment.

TER: What other sectors of energy are you invested in?

MB: Well, certainly oil and gas. We invest in companies; we invest in equities. We don't do futures. We don't own the commodity itself for a variety of reasons. We're in oil companies. We, in the past, have been more heavily than we are now in the Canadian energy oil and gas trusts. There have been tax and other changes, so we have reduced our exposure to Canadian Energy Trusts, but we still have some exposure. We still think some of them are attractive. And an area that we have been investing in somewhat and will be increasing is natural gas. Natural gas prices have just been clobbered, and, again, its production has increased, and the demand has gone down.

Weather enters into it. Hurricanes enter into it. A lot of factors enter into it, but the bottom line is natural gas is selling at less than $3.25 per mcf. It's way, way off its high of $15 and way out of line with the historic relationships between natural gas pricing and oil pricing. We think because we're, at heart, value players — although value to us doesn't necessarily mean that it's some ratio of book value or some of the other metrics that you sometimes see about value players—value means it's undervalued, that there are things that are not being recognized by the market place and will result in a company stock going up in price. And we're also contrarians. There are very few people we talk to these days or that you hear on CNBC or that you read anywhere who have much good to say about natural gas. There's just a natural inclination for us to look closer at that kind of situation, which we have been doing and we have done some small investing in natural gas companies or the natural gas ETFs for the Fund. We anticipate we will be doing more of it because we think that there's a far greater likelihood that natural gas prices will go up and the stocks go up over the coming three, six, nine, twelve months than it going any lower.

TER: Are you looking just at North American natural gas or do you have a different view of international natural gas opportunities?

MG: We always look everywhere, not just necessarily North America, but we're very sensitive to the political realities of the world and prefer to be investing in safer jurisdictions. And I might be a little more cautious than Marshall in this area. We've also looked at alternative energy. We've had meetings with people who are proposing to produce energy from every agricultural resource imaginable and think that still is some distance away. It still is going to be on the edges, a small portion of energy production over the next several years. We have invested a little bit in solar and think there may be opportunities there, but we still think it's not mainstream yet. We've looked at hydro, we've looked at wind as well, but we don't think we're there yet. As Marshall has indicated, we are strong advocates of uranium and think that the American public doesn't understand the efficiencies, the improved technology, that safety improvements have been made. It's not a dangerous commodity anymore. And, also, it would provide a very considerable number of jobs in the United States and, as you know, there's substantial uranium in the United States. It would really reduce our reliance on foreign imports. So, for all these reasons, we are advocates of nuclear power.

TER: Malcolm and Marshall, this has been great. We appreciate the time you've taken with us today.

DISCLOSURE: Malcolm Gissen
I personally and/or my family own the following companies mentioned in this interview. Encompass Fund, Uranium Energy Corp., Ivanhoe Mines, SouthGobi and L&L International Holdings.
I personally and/or my family am paid by the following companies mentioned in this interview. I own a 50% interest in Brick Asset Management, the management company that the Encompass Fund pays a 1.45% management fee to manage the Fund.

DISCLOSURE: Marshall Berol
I personally and/or my family own the following companies mentioned in this interview. Encompass Fund, Uranium Energy Corp., and L&L International Holdings.
I personally and/or my family am paid by the following companies mentioned in this interview. I own a 50% interest in Brick Asset Management, the management company that the Encompass Fund pays a 1.45% management fee to manage the Fund.

Malcolm Gissen founded Malcolm H. Gissen & Associates Inc., an investment advisory services firm, in San Francisco, California in 1985. He has been a financial advisor since 1982 and he became a Certified Financial Planner in 1985. He converted his firm to a money management firm managing separate accounts in 1999. Mr. Gissen’s management experience has focused primarily on investments in publicly traded companies, especially in the resource and real estate sectors. Mr. Gissen received a B.S. degree from Case Western Reserve University in Cleveland, Ohio and a J.D. degree from the University of Wisconsin.

Marshall Berol has been engaged since 1982 as an investment manager in San Francisco, CA. Since 2000, he has been the Chief Investment Officer of Malcolm H. Gissen & Associates, Inc. In addition, for more than 15 years, Mr. Berol has owned his own investment firm, BL/SH Financial. Mr. Berol’s investment management experience has focused primarily on investments in publicly traded companies. Mr. Berol did his undergraduate work at the University of California (Berkeley) and received a J.D. degree from the University of San Francisco School of Law.

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Wednesday
Aug262009

Green Shoots or Greater Depression?



In this mornings mail bag we have this take on the current state of the economy by Bud Conrad/David Galland, Editors, The Casey Report which we hope that you enjoy.

While we aren’t contrarian for the sake of being contrary, more often than not that is the position in which we find ourselves. Today, with the media falling all over itself to paint a rosy outlook for the economy while simultaneously voicing encouragement to the new administration in its remake of the nation in previously unimaginable ways, it’s hard not to question our conviction that the worst is yet to come (read more…)