Seeking Alpha

The Energy Report's  Instablog

The Energy Report
Send Message
The Energy Report features leading investment coverage of fossil, nuclear, renewable and alternative energies. A Streetwise Reports publication. www.TheEnergyReport.com
My company:
The Energy Report
My blog:
The Energy Report
My book:
The Energy Report Newsletter
View The Energy Report's Instablogs on:
  • Matt Badiali's Methods For Investing In 'Cowboyistan'

    The best way to make money from the shale oil boom in Cowboyistan-the Bakken, Permian Basin and Eagle Ford shales located in North Dakota and Texas-may be the service providers. Master limited partnerships building pipelines to ship oil from newly cracked shale, and companies producing frack sand, will be hot stock prospects as the price of oil inches up. In this interview with The Energy Report, S&A Resource Report editor Matt Badiali shares the names he is researching in both the pipeline and fracking equipment and materials spaces.

    The Energy Report: When we talked last October, you predicted that low oil and gas prices would fuel an economic resurgence in the U.S. and impact everything from politics to job creation. Is the economy living up to its potential?

    Matt Badiali: I think so. Companies moving here and building new factories are citing low energy costs. The average family is saving $1,200-2,500 per year, which is a pretty big savings. But they don't seem to be spending, so it hasn't impacted the overall economy as much as I thought it would. On a bigger scale, low energy prices beat low-cost wages and low-cost materials: In today's economy, low energy costs will bring the economy to you.

    TER: It has had an uneven effect on jobs, however, particularly in oil-producing areas. You recently wrote that Saudi Arabia is playing chicken with oil prices. What impact is the continued flow of oil into the market from the Middle East having on companies in places like the Eagle Ford?

    MB: It's having massive impacts, particularly in the Eagle Ford and the Permian Basin. Harold Hamm, CEO of Continental Resources Inc. [CLR:NYSE], calls the three big shale plays-the Bakken in North Dakota, Permian Basin in West Texas and Eagle Ford in southeast Texas-Cowboyistan.

    This extended period of lower oil prices is causing companies to become more efficient. They're not drilling willy-nilly. In fact, 60% of the rigs, some 1,000 of them, aren't working right now, and as many as 60% of wells that are being drilled are not being completed-about 4,000 of them. The expensive part of shale wells is cracking the rocks, cleaning the well bore and plumbing it. That's called completion. It's actually inexpensive to drill the well right now. When the price goes up, a lot of inventory is primed and just has to be fracked to start flowing.

    However, there is a lot of oil that won't be drilled at all at the current price. The experimental shales are where the going is tough. The Tuscaloosa Marine Shale in Louisiana is dead, and will probably be dead for a while. Some of the peripheral shales in Colorado and Canada aren't going to work with oil at $60/bbl. Russian, Nigerian and Venezuelan oil cost far more than $60/bbl to produce.

    Saudi Arabia continues to produce lots of oil in order to put marginal producers out of business. Saudi Arabia has a sovereign wealth fund worth more than half a trillion dollars; it can continue producing at $60/bbl oil for a long time.

    TER: How long can the U.S. frackers keep this up?

    MB: It depends on the company. If you're making a profit, you can keep it up indefinitely. If you're not making a profit, you're in trouble.

    We're seeing mergers and divestitures, particularly when it comes to companies that took on massive debt. Take Magnum Hunter Resources Corp. [MHR:NYSE.MKT], for example. The $316 million market cap company has over $950 million in debt. It isn't making any money right now. It recently announced the sale of a major asset-the Eureka Hunter Pipeline in the Marcellus and Utica shales.

    I think there will be more of that, both in the shale and the Canadian tar sands. Companies are being forced to get leaner. The current lack of investment in development will have a global impact down the road. All Saudi Arabia did was maintain market share and refuse to cut production. Maintaining oil production was important to the Kingdom, particularly in the battle with Russia for Chinese market share. However, there will be fewer new sources of oil down the road. . .which could lead to higher prices.

    TER: From both a short-term and long-term investment approach, what oil and gas explorers and producers are doing well and can survive?

    MB: Right now, I am waiting. I'm not buying producers today. I need to see which companies are doing well at lower oil prices. We just completed the first quarter, where hedging probably didn't play a role in the bottom lines of producers. I am waiting to see the results.

    I do like companies that supply fracking equipment and material. I think there is an opportunity now to buy assets that are going to be useful forever at very low prices. For instance, I like the frack sand producers. Engineers have discovered that more sand per well is more economical. I was just at the Energy Information Administration [EIA] conference and heard that, in the Permian Basin alone, from 2012 to 2014, the average initial production rate rose from 400 barrels a day [400 bpd] to 800 bpd. In two years, engineers doubled the volume of oil produced, mostly through changing the way they were fracking rocks, and a big part of that change was the volume of sand added. Now, instead of 500,000 pounds, companies are using 2 million pounds of sand per well, and producing a lot more oil. They are, in a sense, trading the sand cost for better oil production. That is an easy trade to make.

    Companies like Hi-Crush Partners L.P. (NYSE:HCLP) and U.S. Silica Holdings Inc. (NYSE:SLCA) are the beneficiaries of this new demand. We bought these stocks in May, and they have been down a bit, but I'm happy to buy these companies at these prices because fracking is here to stay. It is the technology that's going to drive U.S. oil production in the future. Good, clean, Wisconsin sand is going to continue to be valuable even though share prices are a fraction of what they were six months ago.

    TER: Both of these companies jumped up last summer and then went right back down again. Was that an anomaly?

    MB: The move was from May to August, and it was the result of the news coming out about how much sand was being used. There were dedicated rail trains, 30 cars a day, carrying nothing but sand. The demand for sand was enormous.

    TER: What will make that price jump back up again? What is the catalyst?

    MB: Remember the 4,000 wells being drilled today aren't being fracked? They will be. When they are, the sand demand is going to skyrocket. Once oil hits $70-80/bbl, there is going to be a massive demand for fracking equipment and sand. For people looking for oblique investments in the oil industry, sand companies offer the best opportunity right now.

    TER: You recently wrote about the challenges of moving all the new production that fracking is making possible. Are we any closer to a solution for getting oil from Canada to U.S. refineries or to consumers in Asia?

    MB: Yes. The problems we've had moving Canadian oil have been solved or are in the process of being solved. The last leg of a main artery that brings Canadian crude straight to Houston is almost complete. Run by pipeline companies Enterprise Products Partners L.P. (NYSE:EPD) and Enbridge Inc. (NYSE:ENB), the new route runs from Alberta, Canada, to Houston, Texas.

    TER: Are there still opportunities to invest in infrastructure solutions-master limited partnerships [MLPs], in particular?

    MB: Yes. MLPs have also gotten pretty beaten up of late. There are companies that I like in the space. We bought TC Pipelines L.P. (NYSE:TCP), the MLP that TransCanada Corp. [TRP:TSX] owns, specifically for that reason. It pays a nice dividend. We've held it for eight months now. Our return is basically flat. Share prices eased lower, but we've been collecting dividends.

    I think Plains All American Pipeline L.P. (NYSE:PAA) is a great deal right now. This is another oil and gas infrastructure pipeline MLP. It's come down about 30% since its peak in September. For investors looking for a dividend from a pipeline company, I like this a lot. It pays about 6% today. One of the reasons Plains All American is down is one of its pipes in California burst, resulting in a pretty big oil spill. That's the kind of news that's going to go away fairly quickly, but it propelled the shares down, and the shares might be an opportunity for investors today.

    Some of the MLPs have gone up in price. We looked at Scorpio Tankers Inc. (NYSE:STNG) as one of the potentials. It's up about 40% over the last eight months. This is an attractive company.

    TER: You're going to be speaking at the Sprott/Stansberry Vancouver Natural Resource Symposium at the end of July. What is one thing that natural resource investors need to understand about where we are in the energy investing cycle, and how to preserve or even grow their wealth?

    MB: Bear markets in commodities are opportunities. You have to think against the grain in the natural resource sector. You have to put in the hard work to investigate the sector on the way down and then buy stocks when things start to perk up again.

    In the oil and gas space, we're in the investigations mode. We're looking at companies that we'd like to buy and are high-grading our list. We're looking for companies with low debt and fair to decent operating margins at low oil prices. Those are the ones we're going to buy. But we're not going to buy them until we see an uptrend. Oil has had a small uptrend. It has bounced off its bottom. We are getting a lot closer today to buying these companies than we were even a month ago.

    TER: Thanks for speaking with us, Matt.

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

    Matt Badiali is the editor of the S&A Resource Report, a monthly investment advisory that focuses on natural resources, including silver, uranium, copper, natural gas, oil, water and gold. He is a regular contributor to Growth Stock Wire, a free premarket briefing on the day's most profitable trading opportunities. Badiali has experience as a hydrologist, geologist and consultant to the oil industry. He holds a master's degree in geology from Florida Atlantic University.

    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.

    Top of Form

    Bottom of Form

    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 employee. She owns, or her 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) Matt Badiali: 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

    Jul 07 3:07 PM | Link | Comment!
  • Marin Katusa: Tricks Anybody Can Use To Out-Invest The Top Fund Managers

    You don't have to be a geologist or a workaholic fund manager to spot deals in the natural resources space-although it helps if you know a good one. Focus on the people behind the company, find out if they have skin in the game, and wait until you can get in at a lower price than their price. Then be patient. In this interview with The Energy Report, Marin Katusa, founder of Katusa Research, shares some of the names in the uranium and oil and gas space that could add up to future profit for any investor.

    The Energy Report: Are we getting creative at finding new uranium sources?

    MK: I recently spoke at the World Nuclear Fuel Market conference in Paris and I have visited most, if not all, of the major uranium projects in the world, including in Eastern Europe, and for my money, the low-hanging, easy fruit is in the Athabasca Basin in Canada and the U.S. The U.S. imports 94% of what it consumes. One in every 10 homes in America is being powered by Russian nuclear fuel. Everyone is focused on investing in the things that China needs. But with 99 operating reactors, 20% of U.S. baseload power is nuclear; that makes uranium a strategic metal and, by definition, valuable. Plus, it is a lower risk to invest in a North American uranium project where you know the rule of law, you know your government take, you know your taxes, you know your process and you are not going to have to compete with a major Chinese conglomerate that doesn't care about the North American Securities Exchange rules. I'm not saying that they're doing anything illegal. I'm just saying it's different. If you look at my portfolio track record of which stocks are doing really well, it's exactly those ones. That's what I'm sticking with because it's working.

    TER: What are the North American uranium mining companies that fit that description?

    MK: I've mentioned Uranium Energy Corp. (NYSEMKT:UEC) before to you. It has built and permitted a 2 million pound facility in the U.S., so there is no financing risk. Instead of digging, blasting and moving and crushing rock, it is using the equivalent of a water processing facility. What I really like is that rather than depleting its uranium reserves in a bad market, the company is pulling back production for now. The company also has great supporters. One of the largest investors in China, the Warren Buffett of China, Li Ka-shing, has become a major shareholder. George Soros has become a major shareholder. BlackRock has become a major shareholder because it believes in this concept of build it, but don't deplete it. I like to invest in franchise players like Amir Adnani, the president and CEO. This company has been a triple for the Casey subscribers and myself. It's one of my largest holdings. I believe that it's going to go a lot higher moving forward. It's also one of the most liquid uranium companies in the world.

    America has relied on Canada, Australia and the former Soviet Union for its uranium supply, but those resources are turning toward other markets. Cameco Corp. (NYSE:CCJ), which mines in Saskatchewan, Wyoming and Kazakhstan, has signed a long-term offtake agreement with India. Australian companies, which are major suppliers of uranium to the U.S., have signed long-term agreements with the Chinese. U.S. utility operators are going to need to replace the Russian imports. Ironically, so many market pundits say the U.S. will just consume more Russian uranium. The U.S. changed the law so that a maximum of 25% of the domestic demand can come from Russia. Hence, in 2014, the U.S. increased its imports from Kazakhstan by over 80%.

    I'd hardly call Kazakhstan supply stable and safe. If you are a uranium speculator, this is all music to your ears. It could take a few years to play out, but it will play out.

    TER: Is there enough uranium in North America to supply our needs, but it just isn't built out yet?

    MK: Yes, there is enough resource in the ground, but it has to be developed and that takes a long time-at a minimum, 10 years to develop, permit and build an operating uranium mine in the U.S. Eventually the big money will recognize this when the geopolitical tensions rise and the colder war heats up even more. Then they will have to pay a price to the people who were smart enough to get in early.

    TER: Has human ingenuity been too effective when it comes to the oil and gas space? Has fracking resulted in too much supply?

    MK: After a year of sub-$100 barrel [$100/bbl] oil prices, North American rigs are drilling faster and more efficiently. Companies evolve or die. But even in a global economy with slower growth, there is still increasing demand for essential commodities, and where there is demand, people will figure out how to deliver product.

    A big opportunity exists in the oil and gas sector in South America. The Cantarell Field went from 3 million barrels a day to less than 500,000 barrels a day because it didn't reinvest in the oil fields and prevent the big production declines. This negligence was also true in the past in many other countries and other commodities.

    Eventually, there will be a turning point where the reserves are depleted. Again, human ingenuity will solve those problems, but there will have to be an increase in price. That is the opportunity I am positioning our funds to take advantage of. You have to be in the right commodities, with the right people, and you also have to have patience. The resource sector is cyclical. But if you understand that and you invest with the right people, you will do well.

    TER: Can you give us some examples?

    MK: Mexico has world-class potential, but it hasn't seen any modern technology. Fewer than 30 horizontal wells have been drilled there. PEMEX, the national oil company, has seen a huge decrease in production because instead of investing profits in the company, they are used to subsidize social programs. That is why the country opened up its oil patch to North American drillers. Right now, Mexico is importing condensates from the U.S. The game has changed. Ten years ago, everyone thought the U.S. would be importing liquefied natural gas [LNG]. Now, it's planning on becoming a major exporter of LNG. So you have to adapt, evolve. And it is happening faster than we ever could have imagined.

    TER: You have made the point that not all shale formations are the same. What are the two or three data points I should be looking at when I'm looking at a shale oil opportunity?

    MK: It's like saying all gold deposits are the same. That's absurd. I recently wrote a piece called "Why David Einhorn is Wrong on the Big Oil Short" to debunk some of the myths about fracking. The problem is that the production of shale oil is so new that a lot of people just don't understand it yet.

    Investors should start examining possible shale investing by determining the type of production. The Bakken has a different type of production than the Eagle Ford or the Montney in Canada. Take the time to understand the formations, the depths, the infrastructure, the government take, the state tax, the provincial tax and all the wellhead prices. The price you get in Canada is different than the price you get in the Bakken, and it's different than the price you're going to get in the Eagle Ford because of variances in demand and the cost of transportation.

    Once you get to the company level, then you do the financial analysis. If you're looking for a low-risk company and you want to have exposure to the U.S. shale sector, something like Pioneer Natural Resources Co. (PXD) or EOG Resources Inc. (NYSE:EOG) is probably where you want to start.

    TER: How about some names that are up and coming?

    MK: The first question you have to ask yourself is "What is your risk tolerance?" I have a very high risk tolerance. I use $55/bbl oil as my base case for oil prices. If a company can't make money at that price, I avoid it.

    There's one exploration company that I think you can be patient with. I think it's going to go down lower even though I love the management team. I currently don't own any, but I'm watching it very carefully. I've been to the project. It's a Lundin company that doesn't produce any oil, but has huge potential, even if it is ultra-high risk potential. Africa Oil Corp. (OTCPK:AOIFF) [AOI:TSX.V] is in Kenya and it is a true contrarian play. That is one worth watching. It's not shale oil, but it has world-class, elephant-size deposit potential.

    I also believe that you don't need to own too many companies. My three funds only own nine positions. If you own more than 20 resource stocks, you might have to reassess the style of investor you are, because I do this professionally full time and I'm a bit of a workaholic and I have a hard time keeping up with 9 or 10 companies. Be patient. Pick right. Sit tight. Never buy your whole allocation at once. You really just need to focus on a few companies. You don't have to be an amazing financial analyst to do really well in stocks. Find the gurus, go to the conferences, talk to them. People like Ross Beaty and Lukas Lundin have created billions of dollars of net worth for investors, and they are so invested in their deals that they're going to bend over backward to make it happen.

    This is why I have partnered with Cambridge House, to bring the absolute best resource investment conference to San Francisco and Vancouver with the Cambridge-Katusa Resource Conferences.

    How can a retail investor be successful? Don't try to figure out the geology if you're not a geologist or an engineer. Look at the management team. Focus on the people. A teacher, contractor, lawyer or plumber can be just as good at analyzing people as a fund manager is. Focus on the people running the deal; find out what price they paid to buy the stock. Then be patient and wait for your chance.

    TER: With the TSX being down 80%, will there be more of these types of deals investors should be looking for?

    MK: Yes, definitely. I see a lot of juniors consolidating. I also expect consolidation in the oil patch and the Canadian copper producers. When the majors start consolidating the best of the juniors and their margins increase, then the market will look for higher-risk, higher-reward, and that will spill over to the juniors. I still think we have a couple of years of consolidation, during which time you can build up your positions.

    TER: Thank you for sharing your tips.

    This interview was conducted by Karen Roche of The Energy Report can be read in its entirety here.

    Marin Katusa is the author of the New York Times bestseller, "The Colder War." Over the last decade, he has become one of the most successful portfolio managers in the resource sector, such as his 2009 Fund Partnership [KC50 Fund LLC], which has outperformed the comparable index, the TSX.V by over 500% post fees. Katusa has been involved in raising over $1 billion in financing for resource companies. He has visited over 400 resource projects in over 100 countries. Katusa publishes his thoughts and research at www.katusaresearch.com.

    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.

    DISCLOSURE:
    1) Karen Roche 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 owner. She owns, or her 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. Goldcorp Inc. is not affiliated with Streetwise Reports. 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) Marin Katusa: I own, or my family owns, shares of the following companies mentioned in this interview: Uranium Energy Corp. 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 30 3:14 PM | Link | Comment!
  • VSA Capital's Paul Renken Follows The Flow Of Risk Capital Into The Battery Space

    Paul Renken, mining analyst with London-based VSA Capital, says risk capital is being invested ahead of actual consumer demand in the high-technology battery/electric vehicle sector, and believes the "if-you-build-it-they-will-come" mentality pervading the space is an investment wave of the future. In this interview with The Energy Report, Renken offers insight into what he wants in battery materials equity plays, as well as in uranium and fertilizer plays, all of which are primed to power energy portfolios.

    The Energy Report: The FTSE AIM All-Share Index recently crossed the 100-day moving average to the upside. How are you interpreting that signal?

    Paul Renken: That move happened in early April, and means the market is moving upward for micro-cap natural resources stocks here in London. About two weeks after, the FTSE AIM All-Share Oil & Gas Index also moved above its 100-day moving average. Right now, we're looking at a gain of about 29% since the lows were set in early February. Things are looking quite favorable in the micro-cap space.

    TER: Why is this happening now?

    PR: It appears that some of the policy and taxation changes that have taken place in the last 12 months here in Europe-and the United Kingdom [U.K.] specifically-are creating extra liquidity in the smallest end of the market. Investors-particularly private investors and people with pension money to invest-are actually getting more favorable treatment by putting mining stocks into their portfolios. That's all good news.

    TER: As someone who's taking and exiting positions in different micro-cap names, what are you seeking at this stage?

    PR: When companies release good news, share prices are once again moving up. That means investors are looking for news catalysts in these micro-cap stocks. Investors should be able to take a position sometime in advance for what is anticipated to be good news, whether that's drilling results, permit approvals or a change in management. That's how we're positioning.

    The interesting thing is that the activity here in the London market is not commodity-price driven. Even if the commodity price over the last six months hasn't done any favors for the sector or a stock in particular, it doesn't seem to matter.

    TER: That said, many basic materials commodities are seeing steady, if not rapid, price increases. Which ones specifically?

    PR: We are focused on battery materials such as lithium, both the carbonate and hydroxide. The quote prices are back to where they were on a per ton basis in 2007, which was the previous price peak. Other basic materials include things like rare earths and graphite.

    TER: London-based Benchmark Mineral Intelligence reports that as many as five battery manufacturing "megafactories" will be built over the next five years. Of course, Tesla Motors Inc.'s [TSLA:NASDAQ] Gigafactory is coming to Nevada in 2020. Benchmark says four similar factories are being built in China, and those factories would bring the world's production capacity to 122 gigawatts [122 gW], up from 35 gW today. How should investors see that news?

    PR: Investment in these battery manufacturing facilities means people are putting a significant amount of money into the forward-thinking picture that sees batteries as critical components in a range of manufactured products, namely cars and high-technology devices. Tesla, for instance, has made announcements about its upcoming series of automobiles as well as what it calls the Powerwall, for home-based power management. The megafactories in China are being built because the Chinese government is getting serious about reducing vehicle pollution by encouraging consumers to choose electric vehicles. It is a wave of the future-it's where the risk capital is flowing, so I suspect we should pay close attention to that.

    TER: Are you surprised by the number of factories being built?

    PR: I'm not surprised. There's actually another factory in Europe that wouldn't be in the megafactory category but has expansion plans to become one. That adds up to six.

    The really interesting thing is the amount of money being invested ahead of actual consumer demand. It means that risk capital is going into the manufacturing end of the business. It's more or less an "if-you-build-it-they-will-come" mentality in the battery/electric vehicle sector.

    TER: Four of these megafactories are in China. Does China have sufficient raw materials to feed its domestic factories, or will it have to look at importing raw materials?

    PR: Our research says the Chinese will have the raw materials because they have already been making equity investments at the project or company level in the upstream end of the lithium market, namely some early-stage players with lithium-bearing deposits.

    Also, if the growth in battery usage-particularly in large-scale batteries for things like electric vehicles, but also in the stationary storage market for storing power from alternative energy sources-scales up according to projections, then essentially all the known lithium deposits in the world will have to be put into production just to feed that market. In other words, the demand for lithium in 10 years' time will have at least doubled. All the current lithium projects will be needed at some point.

    TER: What are some things you look for in a lithium producer or developer?

    PR: We're looking for three things in particular when we are reviewing either a deposit or a company.

    First, we look at the size and grade of the resource. It's all well and good to have a lithium deposit, but if it's not scalable the story is not going to garner much institutional interest.

    Second, we look for the kind of capital intensity a deposit requires to reach production. We like two scenarios: We like a large, low-grade deposit with a fairly straightforward production plan, such that it will last for decades and have an appropriate return on its significant initial capital investment. We also like a smaller-scale operation, like an underground mine, which is less capital intensive and easier to finance to get into production.

    Third, we ask where the deposit fits in relation to a potential market. Who ultimately will be the lithium offtaker? Are there battery plants or original equipment manufacturers inside several hundred kilometers of the deposit, such that it will have a logistical price advantage over sources of lithium from far-flung countries?

    TER: Tell us about some lithium names that VSA Capital follows.

    PR: VSA is working on an initial public offering [IPO] for a private company called European Lithium Ltd. The company is raising £5 million [£5M] to bring the Wolfsberg lithium project, a hard-rock spodumene [lithium-bearing feldspar] deposit in Austria, into production. The £5M will help complete a prefeasibility study on a deposit that was discovered more than 30 years ago and that has been test-mined underground.

    Until recently, lithium prices were insufficient to mine lithium profitably at Wolfsberg. The idea is to get it into production sometime around 2018, and to ultimately produce about 12,000 tons [12 Kt] of lithium carbonate-equivalent annually. Given that Austria is quite close to several European battery manufacturers, as well as European automakers, it should have a logistical advantage over other suppliers. European Lithium is the first mining IPO in London to be offered to the retail markets through a crowdfunding web portal, too. You can actually participate as a retail investor through PrimaryBid.com on this IPO.

    TER: What's your view on crowdfunding mining equities?

    PR: Crowdfunding is catching on nicely here in Europe, but what's even more important is that the U.S. Securities and Exchange Commission [SEC] has implemented a rule under Regulation A-Plus that essentially gives seed-capital funding by retail investors preeminence at the national level over state-regulated securities rules. This new SEC ruling means it's a lot easier to fund earlier-stage companies of all kinds. It suggests that the marketplace is opening to the retail investor taking more responsibility for early-stage risk.

    TER: What are some other lithium names?

    PR: A company that trades rather heavily here is Bacanora Minerals Ltd. (OTC:BCRMF) [BCN:TSX.V]. Bacanora has the Magdalena borate project and the Sonora lithium project. Both are in Mexico. Sonora is a lithium clay deposit and is similar to the prolific lithium clays in China. The key points are that the Sonora deposit is quite big, and Mexico is home to a significant automobile industry. As Sonora comes along, Bacanora should end up with a major automobile industry partner.

    TER: Orocobre Ltd. (OTCPK:OROCF) [ORL:TSX; ORE:ASX] produces from a brine deposit. How do production costs with brine deposits typically fare versus hard-rock lithium deposits?

    PR: There are several companies producing from brine deposits-Albemarle Corp. [ALB:NYSE] and FMC Lithium Corp. [FMC:NYSE], which has the Silver Peak deposit south of Tesla's Gigafactory in Nevada. It has been producing for a couple of decades.

    Brine lithium mines can compete in this space. The concerns with brine projects include capital intensity and weather. If you get abnormal amounts of rainfall, it can slow down the lithium recovery rate because you're counting on evaporation to concentrate your brine. Chile, Argentina and Bolivia all share that same group of high Andean lake brines, which are essentially restricted basins surrounded by early-stage volcanic rocks. That's the geologic setting that these brines form in.

    TER: With the commissioning of the Olaroz plant, is there a chance Orocobre could get rerated?

    PR: Much rerating could take place if the company can meet or exceed its ramp-up rate, and if lithium demand accelerates in the near term.

    TER: Let's turn to uranium. At the recent Cantor Fitzgerald 2nd Annual Global Uranium Conference, a Cameco Corp. [CCO:TSX; CCJ:NYSE] spokesperson said that the company expected the market to expand at 4% a year to about 230 million pounds [230 Mlb] of uranium oxide by 2024. That's up from about 140 Mlb currently. What do you make of those projections?

    PR: I doubt the uranium market could sustain a 4% growth rate over the next 15 years or so. It's not pointed out that last year China, though it had all this nuclear construction underway, invested more money into alternative energy-solar and wind-than it did in nuclear. That is not going to change. Yes, there will be growth in uranium demand, but I doubt that it will be 4%. I would say that demand should grow at 2-3% out to 2030.

    TER: Japan plans to get about 22% of its power needs from nuclear energy by 2030, and China has 23 reactors under construction. Are those two factors enough to move the needle on uranium prices?

    PR: Yes, because of the lack of investment in new uranium supply, at least at current spot prices, which have fluctuated over the last six months between $34-39/pound [$34-39/lb]. On a long-term contract, the price is probably $15 over that price, or about $50/lb. That's not enough to bring new supply into the marketplace, unless a company has a rare high-grade deposit that is simple to mine. As such, just to fulfill the uranium needs of those 23 Chinese and reactivated Japanese reactors, there is going to have to be an increase in mine production. Prior to 2013 we were relying on supply from the decommissioning of nuclear warheads, but that has ended.

    TER: Different sources report that there is a pending 15% supply gap in the near term. Does that sound accurate?

    PR: Yes, we are seeing similar kinds of numbers. But that near-term number is relying a lot on how quickly the Japanese get their idled reactors back up and running. It's taken a lot longer than any of us had hoped. The only other realistic energy option is liquefied natural gas, and it is awfully expensive to import. It amounts to billions every year.

    TER: What's your outlook for uranium in the near and medium term?

    PR: In the near term we're going to have slow appreciation in the spot price and slow appreciation in the contracted long-term price. We've been looking forward to getting a more sustainable spot price in the upper $30/lb range. Any kind of announcement from wherever a nuclear plant is being commissioned, whether it's China, Japan, India or Saudi Arabia, will be supported because that means those utilities will be in the market looking to secure their long-term fuel needs.

    TER: What do you look for in uranium equities?

    PR: Any company that can show a grade, either for an underground or open-pit operation, in the top 25% of global average grade is going to be on our list.

    TER: Does the market need $40-45/lb uranium for that to happen? What is the catalyst?

    PR: It depends on whether the price moves first or whether we start to see an increase in demand to tie up long-term material. The uranium price currently moves based on week-to-week trading activity, but if we start seeing 12-15 utilities as bidders per week, versus four to six bidders in any one week, put in orders for long-term uranium, that's a change in the demand outlook for a longer-term uranium supply. That's when things will start getting interesting.

    TER: Cameco Corp. had a bevy of underground water problems at its Cigar Lake uranium mine in Saskatchewan. Could the same happen with Patterson Lake/Triple R?

    PR: There's zero potential for that. The mineralization is so shallow at Triple R and so amenable to mining that the company doesn't have to prevent water from flowing into the workings by unconventional means. What is unknown is exactly how much depth potential exists on Fission's ground. It has only tested to about 250-300m in depth. When you get down to that kind of depth, that's when you start getting into water control issues in the Athabasca.

    TER: Let's move on. The price of fertilizer has risen steadily for 12 months or so. Do you expect that trend to continue?

    PR: Over the last year or so, the price of fertilizer is up about 10%. It has essentially been able to put small incremental increases in and hold them-both in the potash and phosphate spaces. That suggests that the issues that we had in 2013 with the break-up of state-owned Belaruskali and Uralkali [URKA:RTS; URKA:MCX; URKA:LSE], which really punished market pricing, are behind us. Now, the pricing negotiations with India and China are based mostly on supply and demand dynamics as opposed to market share dynamics. We're looking at a potash price now of about $306/ton and a rock phosphate price of around $115/ton.

    TER: At the moment, fertilizer seems to be a largely oversupplied market. Can investors make money in this space in the near term?

    PR: Yes, if they are selective and pick out those situations that have clear marketing and production advantages over existing producers. Morocco dominates the rock phosphate market on an international trade basis, but it produces rock phosphate as opposed to the more enriched sulfur phosphate. The country is now attempting to produce enriched products so that it's not selling away raw-rock enrichment price advantage in the fertilizer market. But it will take time to adjust.

    In the potash market the big players are PotashCorp. [POT:TSX; POT:NYSE] in Saskatchewan, and Belaruskali and Uralkali in the Russian states. Israel Chemicals Ltd. (NYSE:ICL) has spent the year positioning itself for the future by joint venturing with U.S.-based Albemarle to manufacture the latest fire retardants and then making a bid for Allana Potash Corp. [AAA:TSX; ALLRF:OTCQX]. Israel Chemicals needed to get potash supply that was going to be at the very best end of the price curve. Allana's Danakil potash project in the Danakil Depression in East Africa should be the lowest-cost place to produce potash over the next 20 years.

    TER: Do you have some parting thoughts on the batteries materials market?

    PR: There are essentially six different mineral commodities that are involved in the battery market, and only one or two of those are traded on the London Metals Exchange. There is a glaring lack of transparency. We cannot get spot quotes on a second-by-second basis to determine what these materials are worth, which is called price discovery in the trade. These materials are bought and sold through arranged contracts between producer and consumer, usually by traders or original equipment manufacturers [OEMs], to secure supply.

    As it stands, offtake partners enter the space on a project-by-project basis. But over time that will change, as the storage battery industry grows and helps the alternative energy space become more cost-competitive per kilowatt-hour. The key thing to watch in the nearer term, we believe, is the month-by-month manufacturing rate in China, because China has both the political and environmental imperative to make alternative energy commercially viable. We're watching the speed of that rather closely.

    As far as VSA is concerned, we think battery component materials are going to be the most interesting space for the rest of 2015, and perhaps beyond.

    TER: Thank you for your insights, Paul.

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

    Paul Renken has a broad range of experience in various aspects of the mining and minerals business. He began his career as a geologist for Canadian junior resource companies in the western United States. Owning a stake in a private consulting firm as vice president of exploration, Renken searched for various base metals, precious metals and industrial minerals. In the U.K., he worked in the equity market media outlets of Digital look and Hemscott before joining VSA as mining analyst in 2006.

    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) Brian Sylvester 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) Paul Renken: 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: European Lithium Ltd. 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 23 3:03 PM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

  • " $INPCF is off to a great start using canola as the underlying crop"-Spencer Churchill. Read More:http://ow.ly/QccGs
    3 days ago
  • "Higher biodiesel production and RIN prices support an improving outlook for $REGI"-Craig Irwin. Read More: http://ow.ly/PBH1v
    Jul 14, 2015
  • "The real upside in $POEFF's story in the near term is exploration drilling in Indonesia"-Bill Newman. Read More: http://ow.ly/PBGLf
    Jul 14, 2015
More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.