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  • Uranium Got You Down? Better Days Are Ahead: Cantor Fitzgerald Canada's Rob Chang

    Uranium's price has been low and stagnant for years, but that's going to change, says Rob Chang of Cantor Fitzgerald Canada. Chang foresees volatility as the 2020 uranium deficit draws closer and demand for the limited stockpile drives the price up. In this interview with The Energy Report, the analyst points out that investors can find bargains throughout the space, and describes a handful of companies he considers particularly interesting.

    The Energy Report: The uranium spot price balloon has lost air again and is back down in the mid-$30/pound [mid-$30/lb] range. It was stalled there for months last year. What pushed the spot price up in the first place? Why is it falling now?

    Rob Chang: The uranium spot market is generally pretty thin, and any number of transactions on either the buy or sell side could push it in any direction. What's moved it higher recently could be the news of Japanese reactor restarts happening this summer. A couple of reactors are set to restart in the next few months or so, and we believe that helped push the price along a little bit.

    But the spot price really depends on near-term utility demand. I think that's the key point here. In terms of utility demand, according to the numbers that we've seen, globally about 15-20% of uranium requirements for 2016 onward are still uncovered. Between now and the end of 2016, there needs to be some buying, either in the spot market or through some other means, to cover those requirements. We saw a bit of a lift because of that need, but certainly there hasn't been a big rush back toward buying uranium ex-spot yet.

    TER: I've heard repeatedly that the deficit is going to occur in 2019 or 2020. Why aren't the mining companies moving ahead to address the deficit they know is coming?

    RC: Right now, there is no incentive. For them to spend the money to do the exploration or to develop a uranium project, they need to have a price that justifies the capital that's required to get that going. Based on what I've seen, that magic number is probably in the $80/lb range for a meaningful amount of supply to come online. Currently, we're sitting in the mid-$30s/lb. To justify any project, a company would need a return of, let's say, at least 20%, but likely much, much higher. At a $35/lb, why would anyone spend the money to develop a project? That's where we're stuck.

    Everyone knows that prices need to move higher for additional supply to come, but utilities, seeing excess inventory in the market, have been sitting back and only buying what they need when they need it. At some point this will come to a head, and prices will need to move simply because utilities will need to buy and the spot market is thin. At that point there will be a big scramble to see who can put on production quickly enough to satisfy the demand. It will be very interesting, and it's the primary reason why I believe there's going to be a violent price increase.

    TER: Is the long-term price following the same trajectory?

    RC: We believe it will. Currently, it has not. It's been pretty static. However, as activity in the spot market picks up, we expect to see term prices move higher as well.

    TER: Japan Atomic Power Co. [JAPCO; private] and Tokyo Electric Power Co. [9501:OSE; TKECF:OTCPK]; TEPCO] both have reported selling some of their uranium stockpiles. Is that going to further deflate the price?

    RC: I think that might be the reason we saw a step back in uranium prices recently. JAPCO's sale was earlier, and TEPCO's was more recent. However, I think the latter's news is a bit overblown.

    TEPCO stated that it was going to reduce its inventories from current levels [17,570 tonnes of uranium/tU] to pre-Fukushima levels [16,805 tU]. The 765 tU difference translates into just under 2 million pounds of uranium [2 Mlb]. This figure is the potential amount of new material that may be available in the spot market, and while it is a decent amount, I would argue that it will not notably weigh on the market. A larger, 19,317 tU figure that was mentioned likely includes uranium deliveries scheduled for this year under long-term contracts. TEPCO has likely been returning this contracted material to producers for a while post-Fukushima, as evidenced by the fact that TEPCO's inventories only marginally increased from pre-Fukushima levels, yet the company has not canceled any contracts and has not consumed any uranium via operating reactors in years.

    So TEPCO likely is not doing anything new, but instead a news agency happened to find a report within TEPCO that described this process and made it public. My belief is that TEPCO was always planning on reselling the material, as it usually does. If you look at it, a 2 Mlb increase in inventory doesn't quite make sense for a company that was getting deliveries each year for several reactors that require more than that amount to operate annually, if they are running.

    TER: This sale might suggest that Japanese utilities are cutting back on their purchases. How would that affect the uranium space?

    RC: Japanese utilities generally have throttled back on taking deliveries of their purchases. There have been very few, if any, outright cancellations, as far as I've heard, over the past few years since Fukushima. The companies know they don't need to take it all in, so some have been returning uranium to the producers and having the producers resell it in the market. That's why we've seen price weakness for the last three years; the producers have material that was earmarked for Japan that has come back, and they sell it through other means.

    TER: The Nuclear Regulation Authority just approved restart for Japan's reactors. What will that do to the uranium price?

    RC: The approval wasn't for the entire fleet. It would be great if it were. It's actually on a case-by-case basis. The recent restart approval news was for two Sendai reactors, but the agency has also given partial approval to the Takahama reactors, and to Ikata 3 as well. So restarts are moving along.

    The key will be seeing some reactors actually turn on. That's going to be the first domino to fall, and we expect many dominoes to follow. But the first one is the hardest to get over the line. Once we see that, we think restarts would occur on a much more frequent basis.

    TER: What effect do you expect on the uranium price from that?

    RC: It's funny. On a supply-and-demand basis, it really wouldn't move the price too much because, as I said, Japan has a lot of inventory already. It's not as if the restart of just two reactors-or four or even six-is going to significantly impact the overall market.

    What it does do, however, is bring back a lot more investor attention. There are some out there who still are skeptical that Japan will turn on any reactors. I believe they're wrong, but we need to see the reactors turned on before that can be proved. Seeing that Japan is actually going to start consuming uranium, rather than just deferring it or stockpiling it, is certainly a positive in that the global inventory won't just keep on growing and we'll start to see some usage out of Japan.

    As we know, the spot market is really just between producers, utilities and a few market players. There isn't much investor speculation, so it's not as if a restart will cause more buying unless we start seeing investors step into the market and buy, like we saw in uranium's heyday during the mid-2000s.

    TER: How will the price slump affect the companies you cover?

    RC: What we're seeing now is a slight step back in some of the uranium equities that moved higher earlier this year because of the expectation of restarts and an improving supply-and-demand picture. What I do think, though, is that the downside is limited. Uranium prices really don't have much downside from here, in my opinion, simply because there isn't a large amount of supply coming out of nowhere, which was the catalyst for prices to move down before. Now, when I speak to producers and utilities alike, many expect prices to stay the same and, long term, to move a lot higher. I think the volatility is going to be on the upside.

    TER: Would you consider any of the companies that you cover bargains or deadwood?

    RC: Actually, given the way the whole sector has been beaten up, I think the entire space is a bargain. Some companies, depending on an investor's appetite, are more appealing. But across the board, the uranium companies that I cover are still excellent values at the price points that they're currently trading at.

    TER: What companies are you particularly interested in right now?

    RC: Cameco Corp. (NYSE:CCJ) is our No. 1 conversation piece, primarily because of its status in the space. It is the only uranium company that's publicly traded with a market cap over $1 billion. It dominates the Athabasca Basin, is low cost, and is ramping up its Cigar Lake mine. It recently declared commercial production, which is certainly positive. Cameco does have its tax issue, but I think we'll be a few years down the road before that issue starts to crystallize either positively or negatively. Either way, uranium prices would be higher by then and would justify an increase in the Cameco stock price.

    TER: Cameco Corp. scored a coup with its long-term sale to India. Is China another possible market?

    RC: China could certainly be a possible market. I'm not sure if Cameco currently has any agreements with the Chinese, because it doesn't specifically itemize whom it has deals with. But it certainly is potentially a great area to sell to, given that China is the No. 1 growth country with respect to nuclear.

    But the deal with India certainly is a feather in Cameco's cap because India is the second-fastest-growing nuclear builder in the world.

    I think the key takeaway here is the fact that countries such as India have identified Canada as the preferred place to source their uranium from. That speaks to definitely Cameco, because Cameco is the only producer in the area, but it also speaks to the quality of the projects in Canada, and to the excellent operational ability of companies-Cameco, in particular, but potentially other companies in the area. Of course, there's also the good jurisdiction in Canada, which means that the supply agreement will be safe. If I were to expand on this, China has recently noted that it is looking to still acquire more assets, and it has identified Canada, along with Kazakhstan and Australia, as key countries for its acquisitions.

    TER: Interesting. Are any other of your companies selling to India and China?

    RC: Not that I'm aware of. There are very few producers to begin with. Cameco is the primary one that I deal with that would sell outside of North America.

    TER: Are there other companies you'd like to mention?

    RC: Another company that makes a lot of sense is Uranium Participation Corp. (OTCPK:URPTF) [U:TSX]. We like that name primarily because it's undervalued. It currently trades at a 5-9% discount to its net asset value [NAV]. The fact that the company is currently trading below its NAV makes it a good value for anyone who expects or believes uranium prices will move higher.

    You also have the benefit of not being exposed to company-specific risks or even country-specific risks, and that's certainly positive. For anyone who is worried about a potential mine issue, they won't have that problem with Uranium Participation. In fact, whenever there is any issue with anyone's mine, Uranium Participation would move higher simply because there's potentially less supply coming out. The value of uranium should move higher in those situations.

    Uranium Energy Corp. (NYSEMKT:UEC) is another interesting story. It's an in-situ recovery producer located in Texas, and it has an excellent management team, with company president and CEO Amir Adnani appearing quite prevalently in the media talking about the uranium secctor. He is a very good champion for the space. He gets good visibility.

    On top of that, Uranium Energy has the benefit of being the only entirely unhedged producer. With the expectation of uranium prices moving higher, Uranium Energy will be arguably the best positioned to fully capitalize on and realize the increases in uranium prices, because companies such as Cameco-and pretty much everyone else-have contracts. These contracts are helping companies out right now because they are higher than current spot pricing. But when prices do go up, they will eventually rise above these contract prices. Companies like Uranium Energy, which are entirely unhedged, will really stand to benefit then.

    TER: How should investors approach the uranium space going forward?

    RC: The way I look at it generally is in terms of upside versus downside. From what I see in the uranium market, there is limited downside. I do not see a catalyst that would push prices significantly downward, say into the $20/lb range. But I see many opportunities for uranium to move higher. Uranium moved significantly down before because Japanese utilities were sending material back into the market, and that material had to be resold. On top of that, some uranium companies were in slightly distressed situations and were selling uranium because they needed to raise capital to maintain operations. Right now, we're not seeing that as much.

    On the flip side, we're seeing 15-20% uncovered requirements beginning in 2016, and we're seeing uncovered requirements continuing to grow as the years go out from 2017 and onward. We need to see some uranium buying to shore those requirements up at the very least.

    On top of that, based on our forecasts for uranium production and global reactor growth, including reactor shutdowns, there is an unavoidable supply deficit in 2020, no matter what happens. Layer on the fact that, because of the low uranium price environment, there has been very little exploration and there are only a handful of identified large-scale projects in the world.

    And there will be increasing demand from countries such as India and China. Even if all the uranium projects around the world were put on a path to production as quickly as possible, you're looking at 2023-2025 before those projects get online. But the deficit kicks into gear in 2020.

    These are pretty compelling reasons for uranium prices to move higher sometime within the next year or two. On top of that, for more event-driven investors, there is the fact that the Japanese Sendai reactors are expected to turn on in the next couple of months-the operator is hoping for July, we're thinking it's probably August/September. It'll be a front-page news item when those reactors turn on. There will be a big rush into the space on that news. We think the time is right for uranium investing because we see the volatility on the upside rather than on the downside. We expect a violent increase in the price of uranium in the near future.

    TER: Rob, thank you very much for your comments.

    This interview was conducted by Tom Armistead of The Energy Report and can be read in its entirety here.

    Cantor Fitzgerald Canada's Senior Analyst and Head of Metals and Mining Rob Chang has covered the metals and mining space for over eight years for the sellside and the buyside. Prior to Cantor, Chang served on the equity research teams at Versant Partners, Octagon Capital and BMO Capital Markets. His buyside experience includes managing $3 billion in assets as a director of research/portfolio manager at Middlefield Capital, where his primary resource portfolio outperformed its direct peer and benchmark by over 28% and 18%, respectively. He was also on a five-person multistrategy hedge fund team, where he specialized in equity and derivative investments. He completed his master's degree in business administration at the University of Toronto's Rotman School of Management.

    Want to read more 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 Interviews page.

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    DISCLOSURE:
    1) Tom Armistead conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, and The Life Sciences Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Rob Chang: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Energy Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (NYSE:I) only in whole (and always including this disclaimer), but (ii) never in part.

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

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

    Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
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    Jun 09 2:14 PM | Link | Comment!
  • How To Ride The Lithium Battery Boom: JGL Partners' Jonathan Lee

    Tesla's Gigafactory and Powerwall, plus other proposed battery plants and uses, are sparking a surge in demand for lithium, says Jonathan Lee of JGL Partners. Lee tells The Energy Report that he expects double-digit compound annual growth rates over the next few years as battery prices continue to fall and demand rises. The lithium space is small and entrenched, but the widening gap between supply and demand is prying an opening for new entrants, which Lee believes provide the best investment opportunities in the sector.

    The Energy Report: Jonathan, what is the condition of the lithium space today?

    Jonathan Lee: The lithium space today is an oligopoly; there are only four major mines owned by four companies. Over the past three years, the space has actually consolidated with the largest mine, Greenbushes, owned by two companies through a joint venture agreement. From that perspective, price increases have occurred over the past three years, just because of the concentration of the mine operators.

    TER: What are the greatest challenges for the space?

    JL: The hardest challenge is that lithium is not really a mining sector investment; it's a specialty chemicals investment. A lot of the products that lithium miners or producers sell are specialty chemicals, and there is somewhat of a competitive moat around these products because many are specialized to the customer. Lithium is not a commoditized product. The incumbents have both the premier assets globally in terms of low-cost operation, and also a knowledge base of who the customers are, what they're looking for and what specifications they require. Those are some of the challenges faced by any new entrant to the space. From the investor perspective, there are limited opportunities for pure play lithium exposure since three of the four existing producers are part of larger conglomerates with other business lines, Sichuan Tianqi Lithium Industries Ltd. [002466:SHE] being the exception.

    TER: What are the greatest opportunities here?

    JL: While the premier assets are taken or being almost fully utilized, demand is outstripping supply. The compound annual growth rate [CAGR] for demand is over 10%, while the supply expansion from Chile is limited in the near term because of permitting and lifetime production quotas. Another factor limiting supply is the fact that FMC Lithium Corp. [FMC:NYSE] continues to have technical problems expanding its production in Argentina. Expansion potential in the short term is limited, while demand is still growing at double digits. There is a dislocation, and that creates the biggest opportunity today.

    TER: Do the lithium producers have either the investment ability or the resources to scale up to meet the demand?

    JL: That's a good question. Their resources and reserves are substantial enough for them to expand. However, there have been some limiting factors in Chile. Sociedad Química y Minera de Chile S.A. [SQM:NYSE; SQM-B:SSX; SQM-A:SSX] has been dealing with issues on the political front, as well as its lifetime production quotas, which could be reached as early as 2021. Production expansion would pull forward that quota data without negotiating an extension of the production permit. So the company has halted on its expansion plans.

    Albemarle Corp. [ALB:NYSE] has experienced delays in its expansion goals in Chile as well. FMC has dealt with supply issues and production in Argentina over the past four years. When you look at the whole scheme, the one producer that expanded capacity has been the Greenbushes mine in Australia, which is a joint venture between Sichuan Tianqi Lithium Industries and Albemarle. It has been supplying the additional demand over the past three years. Additionally, the lithium coming out of the Greenbushes has had annual price increases over that same time.

    TER: How is the lithium market responding to the construction of the Tesla Motors Inc. (NASDAQ:TSLA) Gigafactory and Powerwall?

    JL: Tesla's developments are positive because they are an additional source of demand for Tesla's lithium products. The announcement of the Powerwall gives us confidence that, at $350 per kilowatt hour [$350/kWh] demand will be there. Lithium production at the Gigafactory will now have two avenues to be sold into; the electric vehicle market or the Powerwall energy storage units. This gives us greater confidence that capacity utilization will be full once the Gigafactory does get up into full production in 2017.

    At $350/kWh, the price will bring in the economic buyer in certain areas, as opposed to just the fashionable buyer. By that I mean it actually brings in customers who could buy Powerwalls because it makes economic sense. This customer set is a much larger consumer base.

    TER: Are you anticipating a surge in demand for lithium as a result of this?

    JL: Yes. If you look at what the Gigafactory will be by 2020, I believe it will have a 50-megawatt-hour [50MWh] capacity, and that will require roughly 40 million tons [40 Mt] of lithium carbonate equivalent. That's 20% of today's global lithium demand. This is just one of many battery plants being built today. There will definitely be a surge in lithium demand. That's why I'm pretty confident that double-digit CAGRs are on the pathway for the next three to five years.

    TER: Besides this surge, what other developments are having an impact on lithium today?

    JL: The other development is that lithium's use in the glass and ceramics business, and in the construction business, has been growing at a gross domestic product [GDP] growth rate. With some applications, lithium is a better additive relative to sodium- and potassium-based greases and lubricants. We are seeing a switch over to lithium because of the better performance. But the real growth over the next 10 years is going to be demand from lithium-ion batteries.

    TER: Is the cost of manufacturing those batteries rising or falling?

    JL: It is definitely falling, and quickly. The fact that Tesla is going to sell at $350/kWh, with the potential of the cost going down to $200/kWh, is a huge and dramatic decrease from five years ago. Some companies were producing batteries at anywhere from $800-1,000/kWh a few years ago. This huge decline in manufacturing costs for batteries has correlated with the decline in the cost of the batteries on a dollar-per-kilowatt-hour basis, which then, in turn, allows for more economic applications.

    TER: What does the falling cost of manufacturing mean for the lithium producers?

    JL: When we think about lower battery costs, and lower battery prices, we get into more applications for the batteries. Once you get more applications that are economical, you see the huge amount of energy storage potential. The use of lithium-ion batteries becomes more prevalent. That increases demand for lithium and is obviously beneficial for lithium producers.

    TER: Where are the most promising lithium deposits? What companies are mining them?

    JL: There are three major deposits globally, where the vast majority of lithium is mined today. One is in Chile, at the Salar de Atacama, where SQM and Albemarle produce lithium. The second is Salar del Hombre Muerto in northwest Argentina, in the Lithium Triangle, and FMC produces there. The third resource is the Greenbushes mine in western Australia. Albemarle and Tianqi have a joint venture there, where they produce lithium concentrate, a precursor to lithium chemicals.

    TER: What are your thoughts on some of the near-term producers?

    JL: The existing producers have the premier assets, and have consolidated over the past three years on a very high EBITDA [earnings before interest, taxes, depreciation and amortization] multiple relative to other specialty chemicals business. We've seen that consolidation, but there continues to be no pure way of playing the lithium theme inside the current producers.

    But some other companies have started production and built mines. Orocobre Ltd. (OTCPK:OROCF) [ORL:TSX; ORE:ASX] has built a mine in Argentina, and is commissioning its plant now. RB Energy Inc. [RBI:TSX], formerly known as Canada Lithium, has built a mine in Québec and is going through a restructuring and bankruptcy process. It will come out of bankruptcy with a clean balance sheet, which may enable the company to get back up and running. Those two major mines have been built over the past five years.

    TER: What's the significance of the Olaroz project for Orocobre?

    JL: The opening of the Olaroz project has been a huge construction success. It is behind schedule, but recently produced its first batches of lithium carbonate. It will be interesting to see how it goes forward in terms of ramping up to the 17,500 tons per annum nameplate capacity, which is planned to be achieved by the end of 2015.

    TER: Is the project meeting goals?

    JL: Orocobre has had some delays in the ramp-up phase. It will be interesting to see how it progresses over the next six months. As of Dec. 31, 2014, the joint venture that holds the Olaroz lithium project, which Orocobre owns 72.7% of, had AU$247 million [$AU247M] in long-term borrowings and AU$43M in current liabilities. On a corporate level, AU$55M was raised, so it will also be interesting to see whether Orocobre can meet production and cost goals to service its loans and borrowings over the next 12 to 18 months. If the company can ramp up production quickly, that would alleviate some of the potential short-term pressures with respect to the project loan obligations.

    TER: Overall, how are you advising investors to proceed in lithium right now?

    JL: It's very difficult to gain exposure through any of the existing specialty producers of lithium. For example, with FMC, lithium is a very small portion of its business. Albemarle's lithium operation is a very small portion of its business. For the asset in Greenbushes, Tianqi Lithium is listed on the Shenzhen Stock Exchange, and for U.S.-based investors, sometimes it's difficult to invest on the Chinese exchanges.

    The only way to get exposure to the lithium space going forward, and the only investable ideas, are really with the emerging miners, whether they be miners that have failed and restarted, like RB Energy with the Québec Lithium mine, or new producers that are in the process of getting project financing. I believe that's where you have to invest to gain exposure on the lithium side.

    TER: Jonathan, thank you very much for your thoughts.

    This interview was conducted by Tom Armistead of The Energy Report and can be read in its entirety here.

    Jonathan Lee is the president of JGL Partners LLC, a consulting firm based in New York that consults to investment firms and corporate clients.

    Want to read more 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 Interviews page.

    Bottom of Form

    DISCLOSURE:
    1) Tom Armistead conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Jonathan Lee: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Energy Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (NYSE:I) only in whole (and always including this disclaimer), but (ii) never in part.

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

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

    Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8204
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    Jun 02 2:13 PM | Link | Comment!
  • U.S. Global's Brian Hicks Shares His Summer Plans For Creating The Ultimate Resource Fund

    You may want to rethink those tickets to Hawaii, and instead spend the summer basking in the opportunities developing in three different sectors of the oil market. In this interview with The Energy Report, U.S. Global Resources Fund Manager Brian Hicks shares the names of the juniors that could benefit from the current volatility. Plus, he reveals the dramatic shift he made in the fund this year that allows him to get paid to wait for the market to catch fire.

    The Energy Report: Summer means driving season, which is good news for oil and gas prices. U.S. Global Investors recently published an article that says Americans are driving and flying more than ever. Will energy investors who "sell in May and go away" kick themselves later, when they look at the stock charts for their favorite companies?

    Brian Hicks: The summer driving season is a supportive time for crude oil. Refineries are at very high utilization levels, ramping up production of gasoline, and that creates extra demand for crude oil. We have begun to see inventories come down, which creates physical demand in the marketplace and helps offset high domestic inventories. This is a seasonally strong period for oil, which should alleviate the storage overhang heading into the summer months.

    TER: Oil has been above $60/barrel [$60/bbl] recently. Do you believe we've hit a bottom in oil prices? What can we expect going forward if history is a guide?

    BH: I think we have hit a bottom. Clearly, oil prices below $50/bbl are not sustainable. We simply can't replace global production at that price. It is way below the marginal cost of production, which we think on a long-term basis is somewhere around $75/bbl. Even at $60/bbl, we have more upside to go to reach an equilibrium price. We have come up a ways since the lows set earlier this year. Perhaps we are entering a holding pattern before the next leg up in the back half of the year. But who knows? We are starting to see production growth decline and inventory levels receding, so we could see prices maintain these levels, or get even stronger, if declines accelerate into the summer.

    TER: What are rig counts telling you?

    BH: Rig counts coming down over 50% bodes very well for the price of crude oil. The resetting of global crude oil prices resulted in less drilling, particularly in the U.S. That's why we are starting to see a production response.

    From a historical standpoint, this is the point in the cycle when you want to look at energy stocks. We believe we are in a trough, and heading into 2016 we are going to need to see the rig count come back up-certainly not to the peaks that we had previously, but higher than current levels. As we see production growth decline and demand pick up, inventory levels are going to head down further.

    TER: Are you buying and selling based on Q1/15 results, or are you looking out at Q2/15 or Q3/15 expectations and beyond?

    BH: We're trying to look forward. Obviously, some useful data can be gleaned from current financials, but we're trying to look ahead of the noise and over the horizon to see where oil prices will settle out and the prices that energy stocks are discounting in their valuations. We feel good that energy stocks have found a bottom and have started to come up. We think there is more upside as we get closer to 2016.

    TER: How are you protecting the fund from volatility?

    BH: We are a diversified, long-only mutual fund, so it's not a core strategy for us to short crude oil or energy stocks. But we do try to mitigate volatility through diversification. That means holding companies across the market cap spectrum, in different geographies and with different commodity exposure, to derive a portfolio that is not highly correlated.

    TER: I understand you started investing in some larger caps this year. What prompted that?

    BH: As part of that diversification, and because there was heightened volatility coming into the year, we were trying to find value in stocks that paid a dividend and offered lower volatility.

    In a new energy cycle, the stocks that typically move first out of the trough are the larger caps. We made investments in some major integrated oil stocks, some of which were paying dividend yields as high as 6%, which really helped buffer the portfolio from excess volatility. We were able to pick up some income in the meantime. Historically, when you can buy large companies with high dividend yields, that's a signal of the value to be had.

    One of the companies we added to the portfolio is Royal Dutch Shell Plc (NYSE:RDS.A). When we purchased the stock, it was yielding over a 6% dividend, and the acquisition of BG Group Plc [BRGYY:OTCQX; BG:LSE] was a nice bonus. We're very encouraged by that acquisition. We feel it strategically places the company very well. BG Group puts Shell in regions of the world that look interesting from a growth standpoint, namely in Brazil and Australia. We feel like that's going to be a good platform for Shell, and for a company of its size, to get more growth.

    TER: Are you expecting more merger and acquisition [M&A] activity as we move through this phase of the cycle?

    BH: I think we are going to see the cream rise to the top, and companies that have high quality assets or are strapped with excess debt will become targets. In many cases, at this time in the cycle, you can buy oil reserves in the ground for less than the price of drilling for new reserves. Many market upswings begin with an M&A cycle, similar to the late '90s, when Exxon's $80 billion acquisition of Mobil Oil marked a bottom in the energy cycle.

    We recently saw Noble Energy Inc. (NYSE:NBL) buy Rosetta Resources Inc. [ROSE:NASDAQ]. That gives Noble exposure to new, prolific oil and gas basins of the Eagle Ford Shale and the Permian Basin. I think this is a trend that will continue, as companies look to reduce costs and for strategic bargains. I think we'll see more M&A activity into the summer-perhaps a takeout of a larger independent by a major oil company-which would highlight the long-term value embedded in energy shares at this point in the cycle.

    TER: Your fund's sweet spot has always been the juniors. Are you finding bargains in the junior space? What are you adding to the portfolio right now?

    BH: That has been our core historically. The junior names that look interesting to us are those that, despite cutting capex, are still managing to grow through the drill bit. Other names look attractive simply because their assets are burdened by debt or undercapitalized. On the whole, we're seeing very attractive valuations on a full-cycle basis, which make us quite optimistic.

    TER: Can you name some of the companies that you're optimistic about?

    BH: They are primarily in Canada. The first name is Legacy Oil + Gas Inc. (OTCPK:LEGPF) [LEG:TSX]. This company has significant value. It's not a name that most folks are looking at because it has excessive debt on the balance sheet and is actively trying to manage that debt and still grow production. But it has high-quality oil assets, and a lot of operational and financial leverage to the price of crude oil.

    We think, on a sum-of-the-parts basis, Legacy looks very interesting at current prices. If you look at the proven reserves in the ground and you discount them over the reserve life, and then net out the value of long-term debt, the stock could double from current levels based on a normal full-cycle oil price.

    In addition, it looks as though there are some large institutional shareholders that are trying to unlock more immediate value by breaking up the company, divesting assets or perhaps even replacing management. That could offer additional catalysts.

    TER: Is there another company that reported Q1/15 results you like?

    BH: We're always intrigued by companies that are able to grow through the drill bit with low capex spending. One name we like is RMP Energy Inc. (OTCPK:OEXFF) [RMP:TSX], also in Canada. It has very interesting oil assets and plans to grow production 10-15% this year despite a capital cutback. At current oil prices, the company should be generating some free cash flow, which could be used to lower its debt, although its balance sheet is relatively strong. There are a lot of options for the company and we expect to hear further good news on improved well completion techniques that could unlock further value. We also are encouraged by the robust wells being drilled at its Ante Creek project. When we come out of this low period, it's this type of company that will thrive. It's a company that can increase shareholder value above and beyond just an increase in crude oil prices.

    TER: What will it take for the market to recognize the potential and rerate RMP?

    BH: I think execution is the main thing. The company recently issued a production report that showed it is on the right track. In fact, the estimates seemed fairly conservative given where RMP is producing right now. It is experimenting with some new completion techniques that look like they're enhancing the productivity of the new wells. We think there is positive operational and drilling momentum for the company. It looks as though production estimates are more than achievable. Companies that execute are the names that should outperform.

    TER: How about a dividend-paying Canadian explorer and producer?

    BH: We have been involved in royalty trust companies for some time. It's a model that works well with the right kind of company. Whitecap Resources Inc. (OTC:SPGYF) [WCP:TSX.V] is a bellwether name with high-quality assets and a strong management team. It recently made an acquisition, which further increases its overall growth profile. It pays a dividend of around 5%, so you get paid to own this name as oil prices begin to recover. This is another company that has historically executed on its drilling plan and should continue to offer value for shareholders.

    TER: How, specifically, would Whitecap's acquisition of Beaumont Energy Inc. help to create value?

    BH: This is a textbook acquisition for Whitecap. It is going in when there are difficult times and making an acquisition in a core area in West-Central Saskatchewan. It gives the company upside via some basic water flood developments, helps enhance its overall core area as well as its growth profile, and helps offset declines.

    This type of acquisition is probably something we'll continue to see with Whitecap Resources, especially since the company has the financial firepower to look for strategic opportunities. This is the time in the cycle when Whitecap can enhance its overall platform and increase its production on a per share basis, while others in the industry are starved for capital. It's an opportune time for shareholders in Whitecap Resources to create some value, and in the meantime there is an attractive dividend yield.

    TER: We have talked before about opportunities in service companies. Are you still finding that they are profitable in this environment? Are there some that really stand out to you?

    BH: Some investors would think it's a little early to look at service stocks. We would probably agree when it comes to fracking companies and some of the other service providers, but we think it may be an interesting time to look at drilling companies. We are starting to see market share being overtaken by higher-quality, higher-horsepower rigs that can drill multiple wells per pad, as well as rigs that can move much more quickly to different drilling locations. Their drilling days are shorter, which creates a tremendous amount of efficiency and lowers costs for operators. These are the kinds of drilling rigs that operators are looking for, especially in a low commodity price environment.

    Patterson-UTI Energy Inc. (NASDAQ:PTEN) is starting to garner market share in this space. We think over the next 12-24 months, this market share will continue to grow. The utilization of higher-end rigs should be well over 90%-maybe even sold out in this particular category over the next 24 months-which implies higher day rates for these higher spec rigs. The three or four companies with this capability should do well and should be buffered by any weakness in the oil services space. Then, as oil prices begin to recover and move back up, operators will increase their capital budgets, and they're going to want these premium rigs. The companies we're looking at, such as Patterson, should thrive.

    TER: What advice do you have for investors looking to take advantage of opportunities over the summer without getting burned?

    BH: Investors need to focus on the long term. I know it's difficult to think that way when we're bombarded with negative short-term data points. But current crude oil prices are not sustainable at these levels. We cannot replace global production. Demand continues to grow outside of the developed markets in the emerging world. That does not appear to be changing. If we do not see a higher oil price, we're not going to be able to offset the global decline rate in current production or meet future demand.

    We believe that we are in the early innings of a recovery in this energy cycle. The companies that are able to withstand the volatility are going to do quite well, and get bigger. There's a tremendous amount of opportunity in the energy space right now. We're very encouraged. It's not to say that we couldn't see more volatility, but I would look at that volatility as an opportunity to add to positions because, over the long run, we will see higher commodity prices and higher share prices within the energy patch.

    TER: Thank you for sharing your insights. Have a great summer.

    This interview was conducted by JT Long of The Energy Report and can be read in its entirety here.

    Brian Hicks joined U.S. Global Investors Inc. in 2004 as a co-manager of the company's Global Resources Fund [PSPFX]. He is responsible for portfolio allocation, stock selection and research coverage for the energy and basic materials sectors. Prior to joining U.S. Global Investors, Hicks was an associate oil and gas analyst for A.G. Edwards Inc. He also worked previously as an institutional equity/options trader and liaison to the foreign equity desk at Charles Schwab & Co., and at Invesco Funds Group as an industry research and product development analyst. Hicks holds a master's degree in finance and a bachelor's degree in business administration from the University of Colorado.

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    DISCLOSURE:
    1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an independent contractor. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
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