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Green's Looking Lush to Lawrence Roulston
Source: The Energy Report; interviewed by Karen Roche, Publisher 11/25/2009

http://www.theenergyreport.com/pub/na_u/1222

Wherever you look, you can see evidence of growing momentum in the green energy movement. With interest in alternatives to traditional, non-renewable sources of energy picking up steam around the globe, GreenTech Opportunities' editor and publisher Lawrence Roulston says investors in the sector may realize spectacular rewards. As he tells The Energy Report in this exclusive interview, he particularly favors enterprises on the brink of bringing breakthrough technologies to market—technologies that hold the key to making alternative energy production more economical, more efficient and more reliable.

The Energy Report: Green energy is getting considerable attention in the U.S. and Europe. Judging from what you see in your travels, how much emphasis is the rest of the world placing on green energy?

Lawrence Roulston: It varies from country to country. Europe is years ahead of the U.S. Germany, for example, has developed a world-leading solar power industry. Many countries have set firm targets for green energy production and are working diligently toward meeting them. The result has been a great deal of new economic activity.

TER: What's your perspective on green energy in some of the countries that are expected to grow?

LR: That's a very important topic because there are some misperceptions out there. Take China, for example. Anybody looking at China in particular sees it as a country that makes massive amounts of electricity by burning coal. While that is certainly the case, it's an entirely different picture looking forward. China has a target of 15% of its total energy to come from renewable sources by 2020 and there is speculation that they're going to boost that to 20%.

That is actually very significant because they're not saying 15% or 20% of the current level of production, but of their total energy production as it will be by 2020. China is one of the few places that have set firm targets to actually increase the proportion that's coming from renewable sources. They're really aiming at a moving target, because the country is growing so fast and energy production is growing so fast.

They are well under way with projects that will produce solar, wind and hydro power. Certainly they won't reduce the amount of coal they burn any time soon, but at least a portion of their growth and in fact an increasingly large proportion of their energy will come from renewable sources.

TER: What about the other BRIC (Brazil, Russia, India, and China) countries? To what extent will their growth offset green energy advances in North America and Europe?

LR: Russia has proposed a target, although it hasn't been formalized yet, of 20% renewable by 2020. A large part of that is going to come from hydroelectric. There's a lot of untapped hydro potential in Russia.

India hasn't set formal percentage targets, but they have a target of generating 25,000 megawatts of power from renewable energy over the next four years, which is a big increase from their current level. That's going to be focused on solar and wind.

Interestingly, Brazil is already the world's largest renewable energy market, with massive hydro projects already in operation and a long-established ethanol sector. In fact, 40% of Brazil's energy now comes from renewable sources and 85% of their electric power production is renewable. So they're really going to continue to focus on that ethanol and hydro sectors in the near term.

So, even the BRIC countries, which are fast growing and have a reputation of being polluters, are well ahead of the United States' plans or at least at the worst case are going to be matching U.S. targets for renewable.

TER: Who's going to lead the game in technology advances or adaptation?

LR: As I mentioned earlier, Germany has developed a world-leading solar power industry. In fact, Germany has emerged as a leader in photovoltaics, which came about directly as a result of a government policy to increase production of renewables. They developed feed-in tariffs, which gave a preferential rate to renewable energy and spurred development of the photovoltaic industry. It led Germany to become one of the world's leading experts in photovoltaic technology, and some large production and installation companies have sprung from that effort.

China also is a major player in this sector. One of the largest photovoltaic manufacturing companies is a Chinese company. Right now their biggest market is Europe, but with the initiative that's getting under way in China, it will shift more and more to the domestic market. So big initiatives put forward by the governments in some of these countries have had a massive impact on developing the technologies.

TER: Your GreenTech Opportunities newsletter covers the technological advances worldwide that will provide either operating efficiencies or renewable sources?

LR: Absolutely. We're looking around the world. A lot of good work is happening out there. When the private sector is turned loose on projects like these, it's so much more effective than governments. Provided the price incentives, industry has risen to the challenge, technology is evolving very quickly and some very exciting enhancements are being commercialized right now in the renewable energy sector.

TER: Can you discuss some of those?

LR: Natcore Technology Inc. (TSX.V:NXT) is a tremendous example of what's happening. It has a market value of next to nothing, but if its work is successful, Natcore could be responsible for a breakthrough technology that could revolutionize the whole photovoltaic industry. Natcore was founded by two very accomplished scientists with different approaches who realized that there was huge synergy in combining their technologies. They set up Natcore and took it public to finance their development work.

TER: Could you tell us a little bit about their technology?

LR: A scientist at Rice University, Dr. Andrew Barron, developed a nanotechnology-based method to create thin films of silicon. His approach uses normal temperature and pressure and gets away from the high-temperature methods used now. The advantage is greatly reduced costs of production. In discussion with Dr. Dennis Flood, a world-leading authority in solar cells—who led NASA's programs in advanced photovoltaic systems development—they realized that Dr. Barron's Liquid Phase Deposition process could be used with commercial tandem solar cells as well. Their technology breakthrough has been validated at the laboratory level, and will reduce costs greatly and improve efficiencies if it can be applied commercially. Present technology captures only a limited range of light wavelengths and therefore only about 15% of the light is converted to electricity. The technology being advanced by Natcore could convert more than 30% of the light to electricity. The doubled efficiency would come from a cell that has a lower production cost than at present.

Natcore is working with a potential partner—an established photovoltaic cell producer—to establish an arrangement whereby the Natcore technology would be employed in a full-scale manufacturing facility within months. The initial application would be for one component of a conventional photo-cell. Research is continuing toward commercialization of the tandem cell application, with a timeframe of a couple of years.

When we first presented this company in GreenTech Opportunities, it almost seemed too good to be true. Over recent weeks, more investors have recognized the credibility of the technology and the people, resulting in a doubling of the share price. The company is still cheap in relation to the potential value if its technology can indeed be applied commercially.

TER: Solar and wind energy options often get dismissed as alternatives because the energy source (sun or wind) is unpredictable. What do you have to say about this?

LR: A grid needs a balance of such intermittent producers of energy with base load and peaking sources. The real problem with wind and solar is that they cost more than gas or coal. As I've indicated, technologies are evolving so that the alternative energy costs will come down over time. The intermittent nature of the energy production factors into the cost of these alternatives, but once wind or solar energy sources are in production, they are effectively free.

GreenTech Opportunities is looking at companies—such as Natcore—that are contributing to reduced capital costs and to higher efficiencies. Solar technologies in particular have enormous scope for improvements.

TER: What role do you envision nuclear power playing in the green energy picture?

LR: If all the new reactors that under construction, planned or proposed are built, we would see about 900 reactors in production over the next couple of decades. Of course, some of the 400 currently in operation will go off-stream. The net result will be an approximate doubling of the nuclear sector by 2030.

TER: Sounds pretty considerable.

LR: Yes, but it will just about keep pace with the projected growth in total energy production. At present nuclear represents a couple of percent of the total energy production, and it will not be much more over the next couple of decades.

TER: You have followed uranium in the past. If we're looking at doubling the reactors but net just keeping pace as a percentage of overall energy production, is there an investment play there?

LR: There isn't much of a play in terms of nuclear producers, because almost all of the production comes from either government-owned entities or small parts of very large companies. On the uranium side, though, there's definitely a play. Doubling the amount of uranium required over a couple of decades—finding and developing that much new production capacity—will be a challenge for the mining industry. Our Resource Opportunities newsletter definitely follows the uranium sector for that reason.

TER: Will uranium return to 2007 levels?

LR: Probably briefly, but I wouldn't count on that as a long-term price point. Even at the current level, though, there's tremendous potential for big profits for companies in the uranium sector that find and develop new production. I think we're going to see a long-term gain from where we are now.

TER: Can you speak to some of the uranium explorers or near-term producers that you're following?

LR: One that's been in the news is Hathor Exploration Limited (TSX-V:HAT), which has made an important discovery in the Athabasca Basin of Northern Saskatchewan, where about 30% of the world's uranium is produced. That's an example of a company that's seen a big increase in its share price over the last year or so, as it's evolved through discovery to outlining a deposit. And there's still a lot of growth in the size of that deposit. The market has yet to price in the full potential of the discovery that was made.

TER: Do you consider the trend toward consolidation of smaller geothermal producers into new entities—such as Magma Energy Corp. (TSX:MXY) and Ram Power Corp. (TSX: RPG) and to some extent Ormat Technologies Inc. (NYSE: ORA)—a positive one? And do you expect more consolidators to emerge?

LR: It is absolutely a positive trend. The larger entities will have far better access to capital than would any of the small players on their own. That will enable them to take on bigger projects and in general reduce total production costs. Furthermore, larger entities will have better access to talent and be better-positioned to develop new technologies. There will be more consolidation. Magma's investment in Iceland is one example.

There is a sweet spot in any industry, when an emerging company reaches a critical size enabling it to compete with major players yet still retain an entrepreneurial culture. Magma is certainly in that space. We introduced Magma just as it went public, and it has generated good returns.

TER: So if we're looking for additional consolidation in geothermal, does the opportunity lie in investing in the juniors with an eye toward acquisition? Or is it a better bet to go with the consolidators who are bringing technology and talent to the table?

LR: The smaller players that will eventually get rolled into the bigger players will provide a good return for the shareholders of those companies, but it's a matter of picking the companies that have viable projects that will actually get rolled into the larger players.

I think you have a good balance between the speculative exploration companies on the one end of the spectrum and the major producers the other end—in companies like Magma that are already evolving as consolidators and they're going to realize increases in value as they bring in smaller players and increase their own production levels.

As I alluded to a moment ago, Magma has made a very, very big play in taking a significant position in a major geothermal producing company in Iceland. Magma's going to become one of the larger shareholders in that company, which will provide not only a lot more opportunities in Iceland but also give Magma the critical mass to move into similar situations.

TER: Should green technologies be viewed as part of an investor's speculative portfolio and, if so, what can be done to mitigate the risk inherent in speculative investments?

LR: Any company in the research and development stage is highly speculative and one of the best ways to deal with a risk in a particular company is to hold a portfolio of companies so you get some diversification.

Even in the depths of a worldwide recession, the sector is still getting a lot of attention. Government policy and public opinion are still mounting in favor of these technologies. The momentum favoring renewable energy around the world is so strong right now that it's almost impossible to imagine that momentum being reversed, but there is an important caveat.

There's no assurance that renewable energy is going to emerge as it looks like it will at this moment. There's a systemic risk that people have to be prepared to live with. While diversification reduces systemic risk, investors still have to recognize that these are definitely speculative investments.

Investors also could participate in this sector by going into the producers. For instance, companies that are developing wind farms and solar power generating facilities are less risky. The trade-off is that you won't get the big upside potential, because you're looking at more of a utility type of reward potential from the sector's producing companies.

TER: But probably more upside potential with a wind farm and solar than a traditional utility?

LR: An investor has to look very carefully at the revenue potential. A company that builds a wind farm or a big solar facility right now is counting on subsidies or feed-in tariffs or some other form of incentive to make the whole thing commercially viable. An investor has to understand how long-lasting those incentives are.

The ideal situation would be where the developer gets an incentive based on a rebate of part of their capital cost—in effect, an up-front subsidy. And then if they can bring their cost of production down, they can increase the margin over time. So just a caution that investors have to look carefully at the structure of the subsidies or whatever other incentive makes it commercially viable.

TER: What green technologies will emerge in the short-term that represent good investment opportunities?

LR: The real excitement for us is in the little companies that are developing technology enhancements. We've talked about Natcore. We also are looking a little company that has a device that can improve wind turbine efficiency by 5% to 10%.

Green energy production companies have potential for good returns, too, but as I say, bear in mind that the larger producers are effectively like utilities in that they will generate a decent—but not spectacular—return on capital.

TER: Should investors also look at technologies that reduce current consumption such as lights, refrigeration and smarter appliances versus those that provide a source of energy such as solar, wind, hydro or geothermal?

LR: Absolutely, investors should look at conservation technologies as well as resource technologies. Conservation is far more important than most people realize. The savings are immediate. Further, there is a huge shift toward popular opinion that favors companies taking positive action to reduce energy usage. Consumers want to see more social responsibility. Shareholders like the impact on profits by cutting energy bills. Government policy hasn't come anywhere near reflecting the full benefit of conservation. When you save one unit of energy, you avoid burning coal with more than three units of energy. The difference is the inefficiencies all the way through the electrical system.

TER: Can you give us any examples of companies with the emphasis on reduced usage or other means of conservation?

LR: GreenTech Opportunities introduced a little company, SmartCool Systems Inc. (TSX-V:SSC), which has come up with a way to improve the efficiency of refrigeration and air conditioning systems by up to 15%. A little add-on device that costs a couple of hundred dollars can save thousands of dollars in electricity charges.

TER: Any other examples?

LR: Carmanah Technologies Corporation (TSX:CMH) is another one. It's marketing stand-alone lighting systems that incorporate leading-edge photovoltaics with LED lighting systems. We just talked about Natcore. We are about to put out the next issue of the newsletter that introduces more companies like these.

TER: So there's clearly a lot of opportunity in the conservation, but not a lot of general marketplace discussion compared to wind, solar, etc. How does an investor begin to learn about these conservation opportunities?

LR: That's a very good question. In fact, before we started GreenTech Opportunities, we didn't really have a clear understanding of how many companies were out there. But once we got in the middle of it, we're finding a very large number of companies doing really, really good work and developing some very interesting projects. A few of them trade publicly, but a great many more are still in the private company stage. Over time, some of those private companies will become publicly traded.

TER: What do you mean by a few?

LR: Relatively few. Worldwide, we're talking perhaps tens or low hundreds, in contrast to 2,000 publicly traded companies involved in mineral exploration. But you can go to stockwatch.com, for example, and search for mineral resource companies with market value in a particular range. We haven't found anything like that in the green tech sector yet. I'm sure it will evolve. In the meantime, part of the rationale for GTO was to provide a vehicle to offer that information to investors who are interested.

I don't have a good answer as to how a typical investor finds out about these initiatives. There's no directory. There's no database or website to give you a list of all the companies in the space, so we weed through hundreds and hundreds of companies, pulling out those that are actually doing worthwhile work. I have a staff of people now working full-time rooting out these little companies and they're coming up with some great, great ones.

TER: It seems that it's a wide-open area that's going to expand and there aren't a lot of places to get information on some of these plays.

LR: I don't want to sound like I'm pumping the newsletter here, but that's exactly the reason we got into the space. We saw a very important emerging market that had no real service. There are some very good sources of information in a general way about renewable energy and certainly the major companies in the sector are well-served by a number of sources of research. But the small companies, these evolving technology companies, really, there's no good source of information on those that we've been able to identify so far, so we think we're filling an important need there.

TER: Any additional comments on energy?

LR: Just a bit of a recap. Whether it's driven by concerns over greenhouse gas emissions or by concerns about ultimately running out of oil, a huge shift is underway that will accelerate the move away from carbon-based fuels to other sources of energy and enormous profit potential for investors looking out a year or two in that sector.

A passion for the environment, a strong affinity for emerging companies and a knack for picking winners led Lawrence Roulston to assemble a team of green technology experts and launch GreenTech Opportunities publishing the premier edition in February 2009. A geologist with engineering and business training and more than 20 years of hands-on experience as an analyst and manager in the resource industry, Lawrence previously founded Resource Opportunities, a newsletter that has been providing objective commentary on the resource industry and emerging resource companies since 1998.

DISCLOSURE:
1) Karen Roche, Publisher of The Energy Report, conducted this interview. She personally and/or her family own none of the companies mentioned in this interview.
2) The following companies mentioned in the interview are sponsors of The Energy Report: None.
3) Lawrence Roulston - I personally and/or my family own shares in the following companies mentioned in this interview: Natcore, Magma, SmartCool, Carmanah, Hathor. Neither myself, nor my family receive any payments from any companies in this interview or in GreenTech Opportunities.

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.

James Passin: Betting on Beryllium
Source: The Energy Report, interviewed by Karen Roche, Publisher 11/19/2009

http://www.theenergyreport.com/pub/na_u/1214

James Passin, co-founder and manager of Firebird Global Fund and Firebird Global Fund II, in this wide-ranging, exclusive interview with The Energy Report, discusses beryllium and its energy, military and industrial applications, as well as a burgeoning beryllium-uranium mix oxide fuel technology with the "potential to revolutionize nuclear power by creating a safer and more efficient fuel." Admittedly pro-uranium, Passin mentions two uranium miners he likes, and some exciting developments in copper in Mongolia.

The Energy Report: James, last December, you commented on the low interest rates that the government had on bonds. You said you thought that would spur inflation and an increase in commodity prices. Now that we're in the last quarter of '09, how do you feel about your predictions and what do you see going forward into 2010?

James Passin: It was clear to me at the end of 2008 that we were at the beginning of a powerful and lasting recovery in commodity prices and resource stocks. I think that the structural fundamentals are in place to support further increases generally in commodity prices.

TER: This year we saw, basically, all positions and all sectors increase. What would cause just an increase in the commodity pricing going forward vs. all the other sectors?

JP: We have had a rally in all assets, but hard assets also are benefiting in particular from extraordinary loose monetary conditions. Surplus liquidity is flowing into commodity products like exchange-traded funds (ETFs) that are buying commodity futures and physical commodities, creating a feedback loop, which is driving up the price of resources. But what we thought is that this would be a great year for resource stocks based on our view that capital markets would start to reopen. Resource companies tend to be capital-hungry. So as the cost of capital comes down and as capital becomes available, resource stocks tend to outperform resource prices. At the same time, last year there was a dramatic reduction in issuance of stock by resource companies. This has resulted in a highly bullish environment for resource stocks. But we are concerned about the recent changes in the nature of market sentiment.

TER: You say you note a changing tone, generally. What's changing?

JP: It's interesting to ask how long these extraordinary loose monetary conditions will continue to exist. At what point will the Fed take the view that the financial system and the economy can withstand tighter monetary conditions? Perhaps it seems unlikely with unemployment at 10%. It is also clearly in everyone's interest to allow asset bubbles to develop to enable banks to rebuild their equity through generating profits. But any significant tightening of monetary conditions could undermine the commodity markets in the short-term. There is also a dangerous structural element to the market represented by the ETFs.

TER: What other commodities or resource areas are you following?

JP: We're very interested in strategic metals and minerals, which would include not only rare earth metals, but other metals and minerals that have critical applications in the energy, military, and industrial sectors.

TER: Can you highlight some of those just for our readers?

JP: We've been trading some of the rare earth metal stocks; for example, Avalon Rare Metals (TSX:AVL) and some of the other rare earth metal plays. It's a space we've been following for the last five years. There's been renewed investor interest in rare earth metals, but several commodities with similar fundamentals have been completely ignored by investors.

TER: What are those and why haven't they received the attention? Is the market place too small for it? Are they just not well known enough?

JP: Oddly, there has been tremendous interest towards very small markets, so I do not believe that size is the issue. We anticipate that investor interest will continue to move across the periodic table. One of our key areas of interest is beryllium. Beryllium is needed in certain parts inside nuclear reactors. It's also used in various industrial and military applications.

There's a company called IBC Advanced Alloys Corp. (TSXV:IB) that is emerging as a leader in beryllium. Firebird and Vangold Resources Ltd. (VAN:TSX.V) founded the predecessor company. One of IBC's initiatives is its joint venture with Purdue University. IBC and Purdue are developing beryllium-uranium mix oxide fuel technology, which has a potential to revolutionize nuclear power by creating a safer and more efficient fuel.

Mixed oxide fuel has the potential to solve the two major issues of nuclear fuel, one of which is the tendency of nuclear fuel rods to crack before all of the energy is extracted. The other issue addressed by beryllium is improving safety by eliminating the theoretical risk of overheating. By reducing wasted fuel, IBC could offer nuclear utilities the means of saving billions of dollars on a cumulative basis.

TER: Is there a government regulatory process that this new fuel would need to go through?

JP: Absolutely. In the United States it's governed by the Nuclear Regulatory Commission. IBC is providing the funding required to move the approval process forward. It's going to take several years to test it in a test reactor and to get the licensing and permitting. I don't anticipate that this is going to be a commercial product before four to five years.

TER: I'm going to switch over to uranium here. In the past you've been very pro- uranium. Uranium seems been put on the back burner. What's your feeling about uranium now?

JP: I'm pro uranium in the sense that I believe in its merits economically and politically and we do have some investments in uranium exploration in mining companies. But it is important to acknowledge that the uranium bubble is dead. With that said, there are some interesting companies.

TER: Are there any you can share with us?

JP: I'll mention two. Mega Uranium Ltd. (TSX:MGA) and UEX Corp. (TSX:UEX). Cameco Corp. (TSX:CCO) owns 21% of the shares of UEX and UEX is partnered with AREVA (ARVCF:OTO), the French nuclear giant, which is the world's second largest uranium producer, on its Shea Creek uranium exploration property. Shea Creek has produced spectacular high grade intersections over startling widths. My view is that UEX will most likely be taken over either by Cameco or by another nuclear industry participant.

I think that Mega Uranium looks interesting right now. The company just did a financing, which has depressed the stock. Mega's strategic partnership with Japan Australia Uranium Resources Development Co. Ltd. and ITOCHU, the Japanese syndicate, is a very promising development for the company.

TER: Any other regional international plays that you can discuss with us?

JP: Ivanhoe Mines Ltd. (NYSE:IVN, TSX:IVN) , the Canadian exploration company, finally executed an agreement with the Mongolian government with respect to the development of Oyu Tolgoi, the world's largest undeveloped copper mine. This is a massive mine that will generate $5 billion of revenue per year for over 50 years. While this is a positive development of Ivanhoe, a stock that we've been trading from the long side all year, it will be much bigger story for the Mongolian stock market.

Mongolia GDP is only about $5 billion, so Oyu Tolgoi, or OT as the mine is called, will transform the prospects for employment and per capita GDP growth. A great wall of domestic liquidity will support the local stock market, creating a new bull market which will last for decades. The local stock market currently has depressed valuation and almost zero liquidity. Mongolia has structural similarities to other emerging markets that started out with very low market capitalizations, such Vietnam or the smaller Gulf states. There are 24 mineral projects that have been deemed strategic by the Mongolian government and that represent potential sources of commodity exports. The Ivanhoe deal marks the beginning of the Mongolian mining boom and I think the most leveraged long-term way to play this mining boom is through the local stock market.

TER: How does an individual investor play the boom through the Mongolian stock market?

JP: There are no restrictions on foreign ownership of stock and the currency is freely exchangeable. It's easy to open up a fund brokerage account. The hard part is finding shares to buy because the market is very thinly traded. It's possible to get a small amount of stock from time to time, although the entire market capitalization is only $500 million and the free float is much smaller. I think that it's certainly worth taking time to do a little bit of research and look at some of the larger stocks that are listed on the Mongolian stock exchange.

TER: You mentioned there are 24 mineral projects and the big one is Ivanhoe with copper. With the recession worldwide, would we expect to see any return from anything in Mongolia for the next five years?

JP: The copper prices had a massive recovery. OT would be profitable at current copper prices. And Mongolia has other commodities, including coal, uranium, and iron ore.

TER: Thanks James. Interesting to talk with you, as always.

Describing him as "the Indiana Jones of frontier stock markets," the Financial Times praises James Passin for visiting "rough, difficult places…rather than swanning around the more comfortable nightclubs…" A graduate of St. John's College, James majored in philosophy and classical literature. He is a former editor and research director at investment newsletter Taipan. Passin co-founded and manages Firebird Global Fund and Firebird Global Fund II. James serves on the Board of Directors of National Investment Bank of Mongolia; Vangold Resources, Ltd., a company listed on the Toronto Venture Exchange; Sharyn Gol, a coal producer listed on the Mongolian Stock Exchange; and Maghreb Minerals PLC, a mineral exploration company listed on AIM. He also serves as a director of several private, venture-stage international resource companies.

DISCLOSURE:
1) Karen Roche, of The Gold Report, conducted this interview. She personally and/or her family own none of the companies mentioned in this interview.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Mega Uranium (TSX:MGA), Vangold Resources Ltd. (VAN:TSX.V)
3) James Passin - I personally and/or my family have direct or indirect exposure to the following companies mentioned in this interview: UEX Corp., Mega Uranium Ltd., IBC Advanced Alloys.

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.

Andrew Mickey Shares Insights on Up-and-Comers
Source: The Energy Report 11/12/2009

http://www.theenergyreport.com/cs/user/print/na_u/1201

Although Q1 Publishing's Founder and Chief Investment Strategist Andrew Mickey expects to see the U.S. stock market slip as much as 25% over the next 6 to 12 months, he comes to The Energy Report to share tidbits about several companies in his scopes that present low downside risk with ample upside potential. Generally beyond media noise and the glare of market spotlights, these companies are carving niches for themselves in various segments of the energy industry. For example, Andrew's list includes a junior lithium company uniquely positioned, an up-and-coming miner that "if you like lithium, you'll have to like," and one of the only ways regular investors get into the fastest growing venture capital sector.

The Energy Report: In one of your recent articles, you suggest that even if good economic news continues coming out next year, the market is likely to drop 20% to 25%. Would you go through the logic that leads you to that conclusion?

Andrew Mickey: If we look back to the way the stock market has moved over the past 20 to 30 years, it has always been valued relative to earnings. The most common valuation for the market has 15 to 20 times the 10-year average annual earnings. That smooths out the up-and-down years and brings you to a fair valuation—with the S&P 500 between 800 and 1000. Granted the stock market goes much higher and much lower than that—and can stay at an extreme for longer than most investors expect—but it always returns to its fair value.

Now that so many stocks have had a great run, the S&P is up to around 1100 and it's overvalued. The market basically has a lot of positive expectations built in. Earnings estimates are starting to rise, though all CEOs are still trying to keep expectations low. Economic expectations are rising. Expectations for everything are rising and we've learned consistently throughout the years—great expectations usually lead to great disappointments.

So as long as GDP growth is low, the market will fall right back to fair value. That's why, even with the big picture news getting better, the very real risk is that it's still insufficient to hold the S&P up at 1050, 1100, or wherever it does eventually top out at.

We may not have an outright crash because everyone is still on watch, but probably a slow, steady fall over maybe six months to a year.

TER: Are all sectors currently overpriced, or will some continue to appreciate?

AM: There will be some that will appreciate. But it won't be a case of great or greater returns like we've had. There is some great historical research done on the way stocks move. One important factor is the factors of market, sector and stock. If you break it down, basically 50% of a stock's movement is usually tied the overall market.

There's nothing you can do about the overall market, but there still is opportunity in that another 30% of that stock's move depends on the sector. And the remaining 20% can be attributed to the individual company. In other words, you can expect the initial impact across all sectors. There will, however, be the divergence between the quality and value and all the garbage that's done so well recently.

TER: How much focus should individual investors put on international investments versus North American-based investments in this environment?

AM: A lot of it depends on your time horizon. If you have five years or more, you can build a reasonable case for focusing 30% to 50% of your money in international stocks.

That's a very high concentration for any portfolio in any particular sector. If you're looking out that far, you definitely want to be in the emerging markets. In the short term, the falling dollar has been very helpful to some of the really large, high-quality U.S. companies.

TER: Another of your recent articles suggests you're pretty bullish on lithium due to the growing demand for lithium ion batteries. But why lithium rather than the battery market in general?

AM: Hybrid electric vehicles (HEVs) and electric vehicles (EVs) are going to be a big opportunity. And history provides a good precedent for how to invest in them successfully. For instance, let's compare it to the growth of computers. Everyone was getting them in the '80s and now they've become standard parts of most folks' lives. By the mid '80s, about a decade into the growth of computers, everyone knew that it was inevitable that everyone would have one in their homes and in every office around the world. But if you tried to pick a computer maker, you'd have to be right about which company to invest in and at which time. You'd have to buy Apple early, then Gateway and Dell, then Apple again. That's a lot, probably too much, to get right.

That's kind of what we're seeing with the HEVs and EVs. The producers battle it out for market share. Toyota and Honda have led the way, but there are a lot of companies catching up to them. It's anybody's guess who the winner will be. But there is one thing we do know; the market will be very competitive. And in a competitive market, maintaining market share kills profit margins and you'll see stock valuations usually follow the profit margins up or down.

Right now dozens of companies are trying to produce HEVs, EVs and the batteries to go along with them. They all have their own specific deals, so at this stage, I am not going to even try to pick the winner. The odds are so stacked against you.

But the bottom line is this growing industry will demand lithium. We know that. So we might as well just go there. It makes it all easier and cuts down the risk of trying to figure out the right company at the right time.

TER: So it doesn't really matter who wins the battery race. You just know they're going to have to use lithium.

AM: Exactly. But I know there are even competing technologies with lithium ion batteries too, such as super capacitors. They may even be better, safer and more efficient. But lithium will be the winner because the U.S. specifically is going to invest $27 billion of government money into batteries and alternative fuel for vehicles over the next few years. Maybe $10 billion or $15 billion has already been doled out. If you look where that actually goes, more than 90% of it is going to lithium ion battery research, building lithium battery factories and outright buying the batteries for the U.S. automakers.

So another technology may be better, but it has to compete against a reasonably good one that has been heavily subsidized.

Another positive for lithium is the lithium production industry is dominated by a small group of companies. It reminds me of a similar opportunity we jumped on back in 2006 when I first started researching potash. The potash is dominated by two global oligopolies. They semi-openly work together to fix prices at the highest possible level. It's kind of an obscure industry, so they get away with it. You aren't going see Congress calling "Big Potash" to testify the way oil executives are called when oil prices are up.

That's why the lithium industry can be dominated by a few large companies and continue to be for years. No one is likely to stop them.

That's basically what the lithium makers do, too. In an unofficial way they're an oligopoly. They fairly easily expand or cut capacity to match market demands. And their costs are all similar. So they don't go out battling it out for market share. They know they can all make some money as long as no one gets too aggressive.

It's not illegal or anything like that. Just look at how often the cell phone companies and rail liens lose money. They don't because they all get along. It's just how it is. The way I see it is they've been working together for maybe 20 or 30 years, this is the golden era they've all been waiting for, and the odds of one breaking from the group are very low.

TER: So where are the investment opportunities under those circumstances and with the market so tightly controlled by the leaders?

AM: There is room for small juniors as long as they can compete on price.

TER: What juniors are you following in this space?

AM: The one I like best is Lithium One, Inc. (TSX-V:LI). The company is being led by a quality management team of real developers.

For instance one of the directors is Paul Matysek, who built Energy Metals Corporation up long before uranium really got hot. He ended up selling the company to Uranium One, Inc. (TSX:UUU) during the boom for over a billion dollars. That was a massive success.

I first met him in 2006; we just crossed paths on potash at the time. To his credit, he was there a few years before me and now, he's involved in Lithium One. That's a good sign.

Also, the key difference between Lithium One and most other lithium juniors is the types of properties it owns. Many own the hard-rock lithium that has to be mined the old-fashioned way, which costs a lot more.

Lithium One has the hard-rock (in Canada), but it also has the lithium brines in South America, or salars.

That's the difference maker for me. Basically, to mine the brines you just pump this solution out of the ground and then just let it dry on drying pads. Once it's dry, you scoop up all the lithium. They're about half as cheap to operate as the hard-rock lithium mining.

So those with salars will be able to compete right alongside the big boys. So here you have a company that can produce, be competitive and actually increase shareholder value over time.

That's the kind of stuff to look for if a boom really comes. Suppose lithium demand increases about 8% per year. That's about seven times faster than oil and twice the rate of copper over the past decade. There are a lot of other factors, but it's shaping up to be a solid opportunity. But if there are supply disruptions or anything like that, it's going to turn into something great.

Finally, lithium stocks are still relatively cheap to a lot of other metals. There's still a lot of contention over future production capacity, total demand, ability to recycle it and a lot of other factors—but we're looking at the big picture. The story is great, simple and tangible for most investors, and that's a big part of it too.

TER: Is Lithium One the only producer with salars?

AM: Outside of China, which produces 37% of the world's lithium, the only other companies that have it are major ones, such as SQM (NYSE:SQM), Rockwood Holdings Inc (NYSE:ROC) and FMC Lithium Corporation (NYSE:FMC).

They produce more than 60% of the world's lithium and they're all big in South America. That's where their salars are and that's where Lithium One's salar property is as well.

TER: Is the magnesium story similar to the lithium story?

AM: Magnesium is another metal that could do really well when it comes to batteries. There are three main lithium ion types of batteries and the lithium-manganese battery has shown the biggest potential so far. So if you like lithium, there could be a big opportunity in manganese as well.

In the past, about 80% of manganese has been used in steel production, but there's this new demand for it now in batteries and there are no manganese-only miners out there.

However, our best-performing recommendation, Ventana Gold Corp. (TSX:VEN), was actually spun out of a company called Wildcat Silver Corporation (TSX-V: WS). Wildcat owns 80% of what is basically a silver/manganese deposit in Arizona. And if Wildcat has the same backers, well, it is going to be another solid winner.

Its net present value is probably about four times higher than its market cap right now. There is plenty of exploration upside left, too. And there's silver exposure, too.

TER: You're also bullish on some LNG plays. Natural gas supplies in storage and in production are at all-time highs in the U.S. and so the price is really low. What opportunities are you seeing in LNG?

AM: We know LNG is going to be a growing fuel source for the next 20 years. Everyone is building facilities. All the major oil service companies, like Schlumberger Limited (NYSE:SLB), and the smaller ones, like Chicago Bridge & Iron Company (NYSE:CBI) , have been doing a lot in LNG. They're facing backlogs of five or six years for LNG construction jobs in some cases. Australia just announced they're expanding their $20 billion facility. And Indonesia is expanding theirs, too.

We know it's coming. And as long as you can sell it into an end market for more than $2 per Mcf (million cubic feet), everything on top of that's pretty much profit.

That's why, even though we see U.S. reaching very high production, LNG is still headed toward the U.S. from all over the world right now. There's not enough natural gas demand in Asia yet, and in the LNG market, you essentially just dump it all in the U.S. if you have no other market for it.

All along the West Coast, LNG regasification facilities are set up to receive LNG. They've been running at 5% to10% of capacity for the last few years or, in some cases, aren't doing anything. They've been real loss leaders. So as long as U.S. gas prices are above $2.50 Mcf or, the LNG can and will come here all day long.

TER: With record production, record levels of storage and the world dumping LNG on the U.S.; where is the opportunity?

AM: Well, that's why I'm staying away from the natural gas producers in the U.S. Most of them have returned back to the same levels they were at in 2005, which was when the natural gas market was tight and getting tighter.

It's not 2005 in the natural gas market and there's just not going to be a huge rebound in natural gas demand. Still though, waves of LNG tankers are coming toward the U.S. as we speak. So I don't necessarily like the U.S. producers because they were paying them a $1 per Mcf just to buy reserves and then production costs on top of that. Frankly, a lot has to come together economically for natural gas demand to roar back. It's possible, but investing is about odds, and odds are against it.

TER: And it's a different story overseas.

AM: Absolutely. In Asia, companies are buying natural gas for less than 10 cents per Mcf—even cheaper in some cases. So you can buy the same amount of natural gas in Asia for 90% less than you can in the U.S.

There are more risks, but you're getting a huge head start. That puts them way ahead of the U.S. companies. Even after the costs to ship an Mcf of LNG, they're still well ahead of U.S. producers expanding into unconventional reserves when it comes to costs.

CBM Asia Development Corp. (TSX.V:TCF) (OTCBB:CBMDF)—which is in Indonesia—has anywhere from 1 to 8 trillion of cubic feet of reserves. They develop coal bed methane, which is a bit different than natural gas the way it's produced.

TER: So you see good upside potential there?

AM: I look at it like this, CBM Asia owns a gas field in Indonesia—and they pretty much own rights across the whole island of Sumatra—and if it hits, you're looking at a company that could easily be worth a few hundred million dollars as it builds provable reserves and determines the economics of them. And I think the market cap is still at less than $20 million. So, that's the type of idea we're looking for.

TER: Will CBM Asia need to rely on U.S. consumption to be able to sell all of this natural gas they're producing? Or can Asia, being an emerging economy, absorb it?

AM: Over the long run Asia will be the large natural gas consumer, and eventually most of Asia, at least in the north, will end up looking like Japan—which imports more than 90% of its natural gas because it has no real local resources. South Korea is already in the same situation as Japan, with a desperate need for LNG. Their demand will increase. Right now, they're the ones supporting the LNG market, especially the developments in Indonesia, Australia and the Middle East.

The U.S. is the safety valve, because U.S. gas prices will always be above $2 Mcf barring an outright depression, of course. They dropped below $2 temporarily, but that's the new normal, just like oil is always going to be above $30. And if you're paying 5 cents per Mcf for reserves, you can still make a lot of money in LNG.

TER: What's unique about CBM Asia that's interesting to you?

AM: Mostly the value and risk/reward at these levels. Their land package is absolutely huge; and if this coal has high permeability, which we should be learning more about in a few weeks, the upside is tremendous and downside risk is relatively low.

Also, the key with CBM Asia is that it's in an area where there already is a LNG liquefaction facility built. These facilities generally take $5 billion minimum and 5–10 years to build. So, that's where CBM Asia is kind of in the perfect spot geographically. CBM Asia can just plug right into that, and start flowing cash fairly quickly.

And beyond that, Indonesia is an up-and-coming country, young population, and I'm not really concerned about the political risk.

TER: How about Europe?

AM: That's another wild card. They're currently building LNG regasification plants in Europe to deleverage Gazprom's position as the dominant natural gas supplier to Europe.

European LNG demand is going to be very big over the next 5–10 years, too.

TER: What other trends are you're following in the energy sector?

AM: Companies going green. It's not necessarily environmental consciousness or because they buy into the global warming nonsense. The simple reason is you can charge customers more in the green space. A recent survey found that customers are willing to pay as much as 5% to 10% more for a product, just because it's green. That creates a situation where if you can green your products for an additional 2% cost, you can increase your margins, as well as use green to take market share. So, there's a huge opportunity there in green marketing.

TER: Any particular players in that space that you like?

AM: Greenscape Capital Group (TSX-V:GRN) has already had success across all kinds of different sectors. It owns a women's line of organic luxury golf clothing and some other products that are all green-focused.

They have a unique selling proposition; essentially Greenscape Capital was founded on acquiring growing companies in the green space. Basically, it's impossible for many regular investors to get into the companies at very early stages.

TER: Interesting.

AM: Greenscape has already started making acquisitions too. Greenscape recently announced a deal to acquire a company that "greens" parking garages. Again, it's not because parking garages are big polluters, it's because they can save them money. For essentially an upfront cost of $26,000, they can go into a parking garage, replace light bulbs and a few other things, and save the garage $16,000 per year. It's going to add $10,000 to your bottom line next year and $16,000 a year after that all for $26,000 upfront.

If I'm a parking garage manager or owner, the only thing I would say is, "Green or not, when can you be here?"

A company like Greenscape, which is so flexible and its focus is on green and amassing companies, it has tons of opportunities to cross sectors like that—from apparel to parking garages and into anything you can think of.

That's something that is really in demand right now and will continue to be. And Greenscape is filled with professionals who have already shown they can do it well, get necessary financing and move their business along quickly.

Best of all, with a market cap around $10 million, the market clearly doesn't get this company yet. It's not some hippie-pipe dream company that's going to make the world a better place at any cost to itself and its shareholders. It's focused purely on economics. And it's really the only way to get into the biggest growth area for venture capital investors. The market will figure it out eventually.

DISCLOSURE: Andrew Mickey
I personally and/or my family own the following companies mentioned in this interview: CBM Asia, Greenscape and Wildcat Silver.

I personally and/or my family am paid by the following companies mentioned in this interview: NONE.

Andrew Mickey is Q1 Publishing's Chief Investment Strategist. Q1 Publishing provides investors with "well-researched, level-headed, no-nonsense" business analysis and advice that claims to filter out 99.9% of the noise in the financial world to help investors "secure enduring wealth and independence in today's turbulent financial markets." Its products include subscription-only communications such as Andrew Mickey's Prudent Investing and the President's List as well as a free eletter called Prosperity Dispatch.

Andrew's investment philosophy is based on being prudent (limiting risk without surrendering upside potential), paying close attention to risk-reward relationships and evaluating a variety of asset classes. He searches relentlessly for explosive assets and businesses off the beaten track, traveling often to unearth hidden gems. Over the past few years he has visited Indonesia, the Ukraine, Papua New Guinea, Russia, Mexico, Australia, China, Thailand, Albania, Croatia, Norway and many other places. His research has been featured on CNBC, BNN, BusinessWeek and other media outlets.

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Ryan Davies Finds Hot Technology Produces Solar Power for Half the Price
Source: The Energy Report 11/05/2009

http://www.theenergyreport.com/pub/na_u/1187

A shining example of using the sun's energy to heat, cool and light the homes and businesses of a desert community in California is poised to power up next year. It's due in part to the emergence of a technology that uses refraction rather than reflection to produce solar power on a utility-size scale at half the price of photovoltaic technology. But major credit also goes to the pioneering efforts of REDCO, a privately held company, which Ryan Davies established last year to unite free-market concepts with sound environmental policy. The Energy Report caught up with Ryan in the midst of Solar Power International 2009, North America's largest B2B solar industry event. The event in Anaheim was about 250 miles from the forward-thinking community of Needles, where Ryan's company is awaiting permit approvals to build a solar thermal plant that will provide peak power to some 2,500 homes.

The Energy Report: Let's begin with a little thumbnail of REDCO—what your company is and what you do.

Ryan Davies: Sure. REDCO—the Renewable Energy Development Company—is a developer of renewable energy projects. We have a particular focus on wind and solar. We look for good pieces of land that have a strong wind and/or good solar resource and that have good proximity to transmission lines. Sometimes we do joint-venture projects, sometimes we sell projects; but, for the most part, we like to own and operate our own developments.

TER: What brought you to the solar arena? Why do you see solar as a great place for investors to be or for energy to be created?

RD: We have an abundance of sun, and our ability to harness the sun's energy and create electricity is a pretty remarkable opportunity. The primary demand for power generation or power consumption is during the peak hours of the day; it's called peak power. That's when usage of electricity is the highest and also when the cost of the electricity is the highest. So utility companies are constantly looking for ways to increase that peak supply of power.

Because it's an intermittent power source—wind, sun, etc.—solar is not the answer. But it is an important part of the answer. It doesn't provide 24-hour-a-day, 7-day-a-week power. What is unique about solar is not only is it renewable but it also provides power during the peak periods of the day, when the sun is shining, which is very valuable to utility companies.

TER: The government is encouraging utilities and individuals to use solar. Could you talk a little bit about that, particularly the cities or utilities?

RD: A number of different mandates and incentive programs are sponsored by both federal and state governments. The most common of which is called a "renewable portfolio standard"—the acronym is RPS. There is not a federal RPS at this point, but I believe about 24 or 25 states have adopted their own programs. Much of the growth in demand stems from these mandates.

With an RPS, a certain percentage of power produced must come from a renewable resource. So the utility companies have to either go out and buy green power on the open market or build their own facilities. Every state is a little bit different. In California, for example, the goal is to have 33% of power come from a renewable resource by 2020, and that initiative, that mandate, kicks in next year, starting at 10%. Then it increases by about 2.5%, 2.7% per year until it reaches that 33% mark.

TER: And aren't some consumer incentives offered as well?

RD: Yes, from an individual standpoint, there are federal and state tax incentives and benefits if you include solar in your development or if you retrofit a business or home to include solar.

TER: You're involved with two solar projects for Needles, California. Could you describe how that's working?

RD: At REDCO we really pride ourselves in being technology agnostic; in other words, as we see our opportunity as a developer is to find a good piece of land with a strong resource, find the right technology for that development, put the entitlements and financing in place, build a project and sell the power. As we did our due diligence and looked for the right solar technology, we came across International Automated Systems, Inc. (IAUS:PK) and have become quite enamored with their technology. It's very different from the conventional, traditional solar that you see in the marketplace today.

TER: How does it differ?

RD: The majority of the solar systems in the market today are photovoltaic—it's a reflective, mirror-type technology where the sun's rays hit a reflective surface and bounce off into a collector shield above it. The IAS technology is very, very different in that they've created a technology using simpler, less expensive materials. It's easier and cheaper to mass-produce. Another unique attribute is that it is a refractive technology, wherein the sun's light passes through the panels instead off of them. They collect heat, which then heats up a water source. The hot water turns into the steam that propels a turbine. The turbine spins a generator, which creates electricity.

As a result, it's quite different from conventional solar and it's much, much cheaper—quite a bit less expensive to purchase. We're in the process of building the very first commercial plant using IAS technology. All of our engineering reports and research data indicate that this technology will be significantly more efficient than PV. We're quite excited about it.

TER: Is this a patented technology that IAS has?

RD: There are a number of patents on the technology, covering various facets from proprietary panels to the bladeless steam turbine. Several different patents have been issued, and several are pending on various other aspects of the technology and process.

TER: What are some of the companies in the flat panel technology?

RD: Suntech Power Holdings Co., Ltd. (NYSE:STP), First Solar, Inc. (NASDAQ:FSLR) ‎and BrightSource Energy, Inc. are a few. A number of companies that have good technology are doing very well. But it's almost an apples-and-oranges scenario in the solar market because IAS is quite a bit different. In our estimation it's much better alternative for utility-scale use. In addition to being less expensive to build and more efficient, it has a longer life and requires less maintenance. Plus, this technology has a lot fewer restrictions. For example, the way it's constructed and developed, you can put it on various types of terrain. You don't need costly grading plans prior to construction. It's easier to permit because it has a very low impact on the environment. We see a number of advantages.

TER: You say it's less expensive. Could you give us a relative cost comparison between IAS and photovoltaic technology?

RD: When you look at costs, you have to look at the entire system—not just the solar panel but the overall development, including the turbine and all of a project's components. From a turnkey perspective, the majority of the PV technologies sell somewhere in the range of $4 to $6 per watt. That equates to about $4,000 to $6,000 per kilowatt or $4 million to $6 million per megawatt. In most cases, the IAS technology is about half the cost.

TER: Wow! And that's total cost, when you boil everything down?

RD: When you compare all aspects of the development, yes.

TER: What's the timeline on your Needles project with IAS?

RD: Phase 1 is a 5-megawatt project. We have executed a long-term Power Purchase Agreement (PPA) with the Needles Public Utilities Authority, wherein they have agreed to purchase the power we generate for 20 years. We're in the permitting stage and hope to be in construction early next year.

TER: Once you get the permit, how long will it take to complete the project and when will the city of Needles be able to start using that electricity?

RD: We're looking at construction period of about four to five months, and then maybe a month beyond that for testing before we go online. So, all in, it's a five- to six-month process from the beginning of construction to when we begin selling the power. It's a relatively short construction time.

TER: The key catalyst, then, is getting that permit

RD: That's correct. We don't have any reason to believe that the permit will not be issued. We have completed all of our studies—archeological, geotechnical, hydrology, water quality, drainage, environmental, biological. It's just a matter of working through the normal bureaucratic process. We hope to have the project completely operational sometime next year.

TER: And that would lead to your second project. Beyond having the 5-megawatt plant up and running, do any conditions or milestones need to be reached to facilitate that?

RD: No, not at all. In fact, we are working on not just one other project but several. There will be a second phase in Needles but the power purchaser is a different entity. We will begin that project shortly after the 5-megawatt project is completed. We're already working on all of the permitting for the project; we just haven't made any formal announcements yet.

TER: Assuming that the first 5-megawatts goes according to plan, what do you think this means for International Automated Systems?

RD: Once the IAS technology is proven, it will show the marketplace its potential and I anticipate that would be quite good for the company. Having the ability to introduce low-cost solar to the marketplace in an innovative way could be a real boon.

TER: A lot of other utilities would be looking at this, especially in light of the fact that government mandates may be requiring up to one-third of their power either purchased or produced green within 10 years.

RD: That's correct. And this really is a utility play. A lot of other technologies are better-suited for a shingled, residential home. IAS is not that, and from that standpoint, you're absolutely correct. I am sure the utilities are eyeballing this and are very aware of it. Obviously, their intention is to not only to buy as much solar and as much renewable as they can, but to do it as cost effectively as possible. So there's a tremendous upside for IAS if it can produce renewable energy 40% to 50% cheaper than its competition.

DISCLOSURE: Ryan Davies
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: N/A

No stranger to new technology and emerging businesses, REDCO founder and CEO Ryan Davies has accumulated executive experience from entrepreneurial, nonprofit, community and political arenas. After earning his bachelor's degree in political science and business management at Brigham Young University, he managed Envision Utah, a progressive nonprofit organization that received a number of national awards for its development of a detailed 20-year growth strategy for Utah. He also assembled and directed a diverse partnership of 120-plus business, government, religious, civic and community leaders to help develop these strategies.

Ryan was one of the founding members of Found, Inc. where he helped raise nearly $50 million in venture capital, manage business development, form strategic relationships and provide strategic direction. The company, which grew from the 1997 original founding team to a multi-site enterprise of more 150 employees with offices in Salt Lake City, San Francisco and Chicago, was sold to CRS Retail Systems for $110 million. In 2001, he established an environmental commodities brokerage firm, O2 Blue, managing strategic relationships with industry and governmental regulatory agencies and creating technology solutions for the environmental commodity marketplace, and eventually merged with Prebon Energy, one of the world's largest OTC commodity brokerage firms. During his O2 Blue days, Ryan helped develop and implement the "Olympic Cleaner and Greener" program for the 2002 Winter Olympics. The program permanently retired more than 500,000 tons per year of emissions to offset pollution from the Olympic Games—and made the 2002 Winter Olympics the cleanest games in history.

Ryan has been active with the Oquirrh Institute, a nonprofit public policy organization whose mission is to create innovative market-based solutions for technology and the environment, and is an active member of his community. Ryan was elected to the Draper City Council in 2001 and during his tenure, CNN named his community one of the top 100 places to live (2003). (Draper, population 30,000, is located in the South Mountains about 20 miles south of Salt Lake City.)

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Duane Grubert: Gas Wants a Wicked Cold Winter
Source: The Energy Report 10/29/2009

http://www.theenergyreport.com/pub/na_u/1172

With the oil-and-gas price link weaker than it's been in over a decade and with natural gas too dependent on a fierce winter to fuel demand and drive pricing up, CRT Capital Group Senior VP Duane Grubert likes oil better than gas. Consistent with that stance, he also prefers producers that are leaning more toward oil than gas. In the gas arena, he tells The Energy Report in this exclusive interview, he's sticking with players who are diversifying and tends to choose those that are involved in exploration as well as production.

Matt Badiali: Oil Opportunities
Source: The Energy Report 10/22/2009

http://www.theenergyreport.com/pub/na_u/1163

S&A Resource Report editor Matt Badiali covers a broad expanse of ideas as well as geography in this exclusive interview with The Energy Report. He discusses the immense potential of Iraqi oil, and the smaller but surer resurrection of old oil fields in Illinois. In addition to sharing views about areas within the oil industry worthy of investors' attention, he talks about the promise—and problems—associated with major oil finds that have been making the news. These discoveries may postpone peak oil by a decade or two, but they will take a long time to bring to production, too. Matt also points out how data reporting metrics (BOE) manage to hide the extent of dwindling oil production.

The Energy Report: When we interviewed you six months ago, you were talking about some new oil finds in the Tupi field off the coast of Brazil. Since then another big oil field has been identified offshore of Sub-Saharan Africa. Can you speak to these finds and what they will mean to the oil sector?

Matt Badiali: Sure. There have been several big pre-salt or sub-salt discoveries offshore South America, offshore Brazil. The ability to gather much more detailed seismic energy information is driving these new discoveries. They go out and collect seismic information, shooting sound waves through the ocean into the sediment beneath the ocean floor. The further away, the deeper it gets into the earth, the noisier it is. With the advances in computing power, they can actually filter out that noise and see deeper and deeper.

And salt created its own special problem because it attenuates the actual sound you put in; in the past, you couldn't see underneath it with seismic data. They can do it now with the algorithms they've developed and faster, stronger computers.

Having found the oil is one thing. The problem is that the ability to see the oil got ahead of the ability to develop it. This oil is going to require some of the deepest wells ever drilled and the deepest production infrastructure ever placed. Superlatives like that concern me, because the costs go up. Because it's never been done before, you can probably add a zero to the price tag when you bid out this oil pipeline. Making money on this oil will be a challenge for Petrobras (NYSE:PBR).

And as you mentioned, there is a new discovery in offshore Sub-Saharan Africa, kind of the horn of West Africa. Anadarko Petroleum Corporation (NYSE:APC) and Tullow Oil plc (LSE:TLW.L) have made a couple of really exciting discoveries there. They're exciting because they're separated by about 700 miles, stretching from Ghana on the east to Sierra Leone on the west. I think Exxon Mobil Corporation (NYSE:XOM) is competing with one of the Chinese oil companies to get a 25% stake in the Jubilee Field, which is the one south of offshore Ghana.

TER: This might move the peak oil date farther ahead.

MB: I think this is a really, really massive play. And yes, if that's the case, it pricks the peak oil balloon again for another decade or so. When you start putting the discoveries together on this one, and consider some of the work that Anadarko has put together, you're looking at 6 billion barrels conservatively.

That's very similar to the Tupi discovery. So offshore Sub-Saharan Africa could be the next offshore Brazil, in which case we have lots and lots of oil out there. We just have to figure out how to develop it.

TER: And at what price.

MB: David O'Reilly, CEO of Chevron Corporation (NYSE:CVX), came out last week saying there's going to be a shortage of oil in the next decade and he's pointing to $100-plus a barrel again. His line of reasoning is rational. For instance, Venezuela basically uses all of its oil revenues to subsidize bizarre projects such as donating heating oil to people in the United States, keeping Chavez in power. Basically, Mexico did the same thing and ran themselves right into the ground. They are on track to becoming net oil importer from one of the biggest oil exporters in the world. And Mexico has the potential of doing the same thing. We've already seen it with Indonesia, which was one of the founding members of OPEC but got kicked out because they became a net oil importer a couple of years ago.

Oil fields require sustaining capital. You have to keep drilling. You have to rehabilitate the fields. You have to spend money on them. They're not a golden goose. A lot of these countries where the sole source of GDP is oil don't do that. They spread the wealth around and that's a problem.

The other thing that you see—and you see it reflected in the mix of oil-to-gas reserves in a lot of these big companies—is that the discoveries of oil are declining and they're replacing oil production with natural gas reserves. It's very subtle because most oil companies present their data in BOE (barrels of oil equivalent), which is oil and gas combined and published in barrels. It's kind of a slick way to not tell you that they're actually finding natural gas and not oil.

So we could see more robust oil prices going forward. We hit $65–$70 a barrel in 2005, 2006, 2007, before things really got crazy, and we're right back in that same groove. This isn't out of line. I think $35 a barrel earlier this year was a market over-reaction to the catastrophe. Everybody was looking for the end of the world and when it didn't happen, things are starting to get back to normal.

TER: Are you talking about a temporary spike due to the oil-producing countries depleting reserves and we don't yet have the oil from these deepwater finds?

MB: If these countries continue to lose production, it's going to be very, very difficult to replace it. So even when you bring these massive oil discoveries online, that's going to take a long time—five, six, eight years down the road to build these pipes and put in the infrastructure they need. These are discovery stage. It takes a long time to go from discovery to 100,000 barrels a day, 300,000 barrels a day.

Part of the equation that's still in limbo is Iraq. I think they're shooting for 10 million barrels a day, and that's oil that's inexpensive to produce, is land-based, and just needs the infrastructure to be upgraded. That's going to be the real hinge on what happens to oil prices. If Iraq doesn't get its act together, we'll have to rely on offshore oil fields to take up the slack. Then the oil price is going to be very, very cyclical. If there's a storm, if there's a riot, it's going to get bad and oil prices will spike.

I won't say oil is never going to go below $100 a barrel again, but I certainly am further over in the $100 a barrel camp today than I was April of 2008 when people were saying it was going to go to $200 a barrel and I couldn't figure out why it was at even $100.

TER: In our last conversation, you were really hot on the oil services sector—partly because you expected the oil price to rise (which it has) and also because you saw the services sector trading for just about book value. You gave us a couple of recommendations, which have doubled or tripled since then. What do those oil service sector companies look like now in terms of investment opportunity?

MB: When you take gains like that, things get too expensive. We were buying those shares at fractions of book value. I think Parker Drilling Company (NYSE:PKD was trading at 30 cents on the dollar in terms of the value of its rigs. When oil is cheap, the market looks at drill rigs sitting in parking lots and assigns them basically no value at all. I wanted things to get a little better and I knew we would make money that way—and we did. But now they're trading at multiples of book value again and things could get worse.

The nice thing about the oil and gas industry is it's very cyclical, so we get these opportunities. Right now I'm less interested in the service companies. There are sectors of it that I probably should be paying more attention to right now. When we talked in April, the number of onshore rigs drilling specifically for oil went from 224 to 204. They were getting clobbered. Today that's rebounded all the way up to 309 rigs from its bottom in June. So, our timing on the investment was absolutely perfect.

Gas drilling rigs are starting to come back a little bit now, but they didn't bottom until the middle of July. They went from 800 in April to 675 rigs in July and they're back up to 721. To me that also speaks to the oil-versus-gas situation I mentioned earlier—300 rigs are out there drilling for oil and 700 are drilling for natural gas. These companies are replacing their reserves with natural gas, so there could be less oil available in the future.

TER: So if not oil services anymore, where do you see the action these days?

MB: I'm very excited about companies that have oil production that's not the cheapest production in the world, so maybe they're paying $25 or $30 a barrel to produce it. But as the oil prices go up, their earnings rise faster than lower cost producers. They have leverage to the oil price, so now I think gains will be made in those kinds of companies. These are companies that maybe produce heavy oil or tar sand.

But my favorite group of companies right now does enhanced oil recovery (EOR) or tertiary recovery. They go back into oil fields discovered around the turn of the last century, produced millions or billions of barrels of oil, and then were left for dead in the '70s or '80s or '90s when oil hit $10 or $15 a barrel.

The Lawrence Field in Illinois is a great example. It probably still has 50% or 60% of its original oil in place. They produced maybe half of it, so a little company is back there now and injecting a chemically that acts basically like Dawn liquid dish soap.

TER: Dawn?

MB: Dawn takes the grease out of your way. It's not really Dawn, but a surfactant. When they put the chemical into the reservoir, it kills the surface tension and the oil mixes with the water. They figure they're going to get 20% of the original oil out. That's hundreds of millions of barrels. And they're going to do it for $25 or $30 a barrel. If oil hits $90, they'll make a fortune. People are starting to pick up on it, but they haven't quite gotten there yet.

I like that better than, say, tar sand, because it's light, sweet crude—the real stuff. A couple of other companies that I really like are injecting CO2 into oil fields to lower the surface tension and loosen up the oil. With today's society seeing carbon dioxide as a bad actor, an oil company that's injecting carbon dioxide into its oil field to produce low-carbon oil is going to get a lot of attention. I think they will get a higher multiple for that oil, whether it's deserved or not.

TER: Who are the companies?

MB: Probably 10 companies are doing this kind of stuff. Marathon Oil Corporation (NYSE:MRO) has done a lot of this, but I haven't recommended them because it represents only a small fraction of their production. EnCana Corporation (NYSE:ECA) does this too. Marathon and EnCana are the two big guys.

TER: Which one is in Illinois?

MB: The company that's working in the Lawrence Field is Rex Energy (NASDAQ:REXX). It has absolutely exploded, though, not because of the EOR work, but because they're based in State College, Pennsylvania, right in the heart of the Marcellus Shale region and they have a partnership in the Marcellus. As soon as natural gas prices turned around, Rex exploded out of the gate.

TER: Do you have a target for Rex?

MB: No. I typically don't do targets on the upside. I let the market tell me because my experience with a lot of these smaller companies is that I would be way too conservative. I basically told people to buy it up to $8 and it's closing in on $10.

We don't know what the oil price will be when the Lawrence Field production comes on and how much money they're going to make. But at $90 a barrel, the economics of that field look much, much better than they did when I first recommended it, so that's pretty exciting.

TER: And when do they anticipate production?

MB: The first or second quarter of 2010. I think the Lawrence Field story is fantastic. And bear in mind, this is a region of the United States that's been hit particularly hard in the downturn and this oil company is putting people to work on an old oil field that was discovered in 1906.

To tie this back to Brazil, Petrobras very quietly put together a $145 million research project to inject CO2 into one of its fading onshore oil fields and it was pretty clear that they will do this to their offshore fields too, because it almost guarantees an additional 20% production. The people at Petrobras are no dummies. They want to get as much oil out of these fields as possible, so I wouldn't be surprised if they build the infrastructure for their CO2 floods on the front end rather than trying to retrofit things.

TER: You said maybe 10 companies are doing enhanced oil recovery. Can you tell us about any more of them?

MB: BreitBurn Energy Partners L.P. (NASDAQ:BBEP), I believe, is doing some EOR work in California. And Venoco, Inc. (NYSE:VQ), which—believe it or not—has oil wells in downtown Los Angeles, also does this. They have elaborate façades; you wouldn't even know you were walking by an oil well.

TER: Are you looking at any other oil plays?

MB: This is the perfect time to look at leveraged oil. Suppose a company produces oil for $30 a barrel and sells it for $40. The market says it will value the company at 10 times earnings. If this company then doubles its production or the oil price goes up by $10, it doubles its earnings. On a P/E multiple, that doubles the market cap. It usually doesn't work quite that nicely, but that's the way leverage to your commodity works.

With the higher-cost producers—EOR, heavy oil, tar sands—where their production costs are $25 or even $35 a barrel, that's a very nice increase in share price if oil goes from $80 to $90. So that's kind of what I'm looking at across the board.

TER: So do both heavy oil and tar sands provide more of that leverage?

MB: They both do. They're both high-cost production, basically. But you don't want to buy these high-cost producers in an environment where the price of the commodity could fall. That's our biggest risk. If the dollar strengthens, the price of oil will come down and these high-cost producers will fall because that leverage also works in reverse. But I think we're going to hit $90 before we hit $50; that's what I keep in mind.

TER: Other than these leveraged oil plays, what are you watching?

MB: I'm still really excited about Iraq. I think there's going to be some enormous discoveries. We recommended a company called Addax Petroleum Corporation in Iraq in May, because they had a discovery we really liked. I was really disappointed because we were only able to be in Addax for six weeks before Sinopec International Petroleum Exploration and Production Corporation (NYSE: SNP.N)bought it. But we made a 55% gain in those six weeks.

There are a couple of other oil companies in Iraq, but they trade mostly on foreign exchanges. Heritage Oil plc (LSE:HOIL; TSX:HOC) is in the process of merging with a privately held Turkish company, Genel Energy International. That's a spectacular oil company and I think they're going to make some big discoveries. But they haven't moved a blip lately because they're in the middle of a merger and the merger hit a couple of bumps.

Another company I recommended was working on a joint venture with the Iraqi government, the Iraqi State Drilling Company, to bring western drilling techniques into Iraq. Basically, Iraq has had no modern drilling since the '80s. It is the home of billion-barrel-plus fields with very, very low operating costs. If I were going to start an oil company, Matt Badiali Enterprises, I'd go to Iraq. My operating costs would be less because people still think of Iraq as a war zone, but I'd have a great chance of finding massive oil reserves. To me it's the best place for a small oil company to go to add a zero to its market cap, if it's willing to accept the political risk.

When I'm playing oil discovery, I'm looking at places where people are a little afraid to go, political risk over technical risk. That's the mistake that 90% of analysts are making with those offshore Brazil discoveries. There figure there's no political risk, that Brazil is as excited as all get-out, but the technical risk is enormous. When you make a mistake on a $4 billion oil pipeline, it's a problem. And there is political risk in Brazil that people are undervaluing.

TER: How so?

MB: Brazil has proposed to create a brand new company—a quasi state-owned, quasi public company—that will oversee all of these offshore oil fields and will take ownership in part of all fields held by foreign companies. And they're going to go to production sharing agreements (PSAs), where the foreign companies will get cash per barrel, but won't be able to book reserves. Knowing what I know about Brazil, I thought, "Man, they just legally added a whole other layer of graft to that system." This is just another way for Brazil to tax that oil discovery and to steal as much as they can.

This is a massive discovery but it's not going to be the oil industry's savior. As soon as the size of the deposits became clear, the country changed the rules. If Brazil isn't careful, it could go the same route as Venezuela and Indonesia.

TER: Could you give us a quick synopsis of your view of the geothermal market as an investment? It's been attracting a lot of attention of late.

MB: There are two very different investment theses behind some of the companies in this space. Ormat Technologies Inc. (NYSE: ORA) is a play on everybody else getting excited about geothermal. It does produce some geothermal energy, but it is more the general store for the geothermal industry.

And I think if any form of cap-and-trade passes that makes coal-generated electrical power much more expensive, Calpine Corp. (NYSE:CPN) is going to make a lot more money. I've actually visited the geysers, which is where Calpine produces a lot of its geothermal energy. They generate hundreds of megawatts and it's silent, the coolest thing in the world.

TER: It sounds as if geothermal appeals to you.

MB: It does. What really what gets me excited about geothermal is that it works. It's not solar and wind, which need subsidies; and it's not tidal energy that works well on some engineer's drawing board, but doesn't translate into the real world.

I've heard that every megawatt of wind or solar energy needs a megawatt of natural gas or some other consistent power source to back it up, because there's no way to store this energy. If you produce wind power and suddenly the wind stops blowing at peak hours, you have to be able to turn something else on and generate that electricity.

Geothermal works. It's an economic, 24-hours-a-day source of power, and it makes a lot of sense. That's why I'm glad to see these new mid-sized entrants into the geothermal space. I think it will be a race between Ram Power Corp. (TSX: RPG) and Magma Energy Corp. (TSX:MXY) to roll up the junior geothermal industry.

TER: Rick Rule and Ross Beaty. They're good friends, too.

MB: The fact that Ross (Magma's founder) got into this is very exciting, and Rick has been pounding the table on geothermal for a long time. So this is good. We're going to need every source of energy we can get. As China gobbles up more and more energy abroad and our population grows, we will need as much domestic energy production as we can. That's electricity and fuel.

I look at oil as not so much a source of electricity, but as a source of fuel for trains and boats and planes and cars, trucks. I look at natural gas, like coal, as a source of electricity.

I find it unbelievable how any carbon-producing fuel is suddenly bad. People getting angry about coal, to me, is a complete disconnect. I grew up about 50 miles from Three Mile Island. Remember all the horrors of the 1970s nuclear scares? Now we see green TV commercials with baby birds and bunnies and a nice lawn and an attractive couple who get their electricity from nuclear power. Talk about cyclical. Holy smokes.

Now coal's the bad guy. But if we're going to get rid of coal, we need more sources of electricity. That's where geothermal fits in. It's also going to spark the renaissance of natural gas, because we need a transitional fuel. If you want to get away from coal, you need something to produce electricity with and natural gas is going to be the source. You can build a natural gas plant far, far faster than you can build a new nuclear plant with far fewer regulations.

TER: That takes us into a whole other discussion. There's so much to talk about. You're in an exciting area.

MB: Oh, man, I love it. It's been spectacular and it's been fast, with opportunities flying by.

DISCLOSURE: Matt Badiali
I personally and/or my family do not own any of the companies mentioned in this interview.

I personally and/or my family am not paid by the companies mentioned in this interview.

A member of the Stansberry & Associates Investment Research team of editors, Matt Badiali produces the S&A Resource Report, a monthly investment advisory that focuses on oil, energy and mining and sectors—from the biggest resource companies in the world to small-cap junior explorers. With "the global economy still in the grip of a long-term bull market for oil, precious metals and other natural resources the likes of which the world has never seen," his company says those are the sectors in which "demand is going through the roof, and one of the best places investors can have their money over the next few years."

Matt, who's spent the last four years flying all around the world digging up the best resource investments, has more than 15 years of experience as a hydrologist, geologist and a consultant to the oil industry. He holds a master's degree in geology from Florida Atlantic University and is pursuing his PhD at the University of North Carolina. He's also a regular contributor to Growth Stock Wire, a free daily pre-market briefing on trading opportunities.

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