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  • 'Rent' The Oil Space To Blunt The Jagged Downside Of Volatility: Paradigm's Ken Lin

    Worried about a volatile oil and gas market? Paradigm Capital's Ken Lin advises waiting for quality companies to take a hit before swooping in to stock up, and then taking profits on the way up to avoid being caught in future carnage. In this interview with The Energy Report, Lin outlines eight companies with underlying strength.

    The Energy Report: Brent oil prices have been in the $60+/barrel [$60+/bbl] range for most of the last month, and West Texas Intermediate [WTI] has stayed above $50/bbl. Did oil establish a bottom? What indicators are you watching to see if the trend will continue?

    Ken Lin: We probably reached a bottom at the $45/bbl WTI level. When you look at the fundamentals, nothing really works at the $40/bbl price. It also doesn't work at $50/bbl or $60/bbl. When companies continue to lose money at the current commodity price, that points to higher commodity prices later in the year. They'll probably settle out at some point.

    TER: Are you worried about pressure from high storage levels?

    KL: We do watch storage levels, but rig counts are the main thing we are looking at right now. Companies have reduced their capex budgets quite dramatically. We've seen cuts, in some instances, of up to 50% from the previous year's levels, and companies are continuing to reduce capex programs. Inventories are only a small part of the oil price picture.

    TER: Based on that reality, what is the best way to blunt the pain during times like this?

    KL: Oil and gas investors have experienced volatile cycles over the last five years. One way to protect yourself when you see movements of 50-100% in returns in a quarter or two is to take profit off the table. That can mitigate some of the ups and downs.

    TER: Is that what you mean by "renting the space"?

    KL: Because of the volatility and the short nature of the commodity cycles today, it's very hard to maintain a buy-and-hold strategy. Because we think the volatility will continue, my preference is to "rent" the names, meaning that you layer in positions over shorter terms and take profits off the table when there are big swings.

    TER: We have been talking about oil; is the same true for gas? When will we see a bottom there?

    KL: We are a little more bearish on the natural gas side, especially for 2015. We had a very cold winter, yet we've seen no reaction in natural gas prices. Summer to fall is traditionally a seasonally weak period for natural gas. We could see an average [$2-2.50/Mcf] AECO natural gas price for the rest of 2015.

    Production of gas in North America continues to grow despite the fact that there has been no real capital allocation. There has been a stepwise change in well productivity because of technological improvements over the last five to seven years, so we now get more gas for less money even though fewer wells have been drilled. I don't think we'll see that dynamic change for the next five to 10 years. That could be the new normal. I wouldn't expect to see $10/Mcf-or even $6/Mcf-natural gas prices anytime soon in North America.

    TER: Based on the new normal, what companies are doing a good job of positioning themselves for success?

    KL: What we are looking for in a company, regardless of the commodity price movements, are a clean balance sheet with the ability to weather any commodity price environment, lower operating cost producers, and a good collection of assets, where you have control of your own infrastructure-and destiny-instead of leaving it to third parties. The lower the operating costs, the more likely a company will still be able to generate a return, even at lower natural gas or oil pricing. Companies with these three ingredients will move up with the market and enjoy some protection during tough times. They will be able to take advantage of downturns in the cycle, as compared to the competition.

    TER: Which companies have that trifecta of traits?

    KL: Companies like Raging River Exploration Inc. (OTC:RRENF) [RRX:TSX.V], TORC Oil & Gas Ltd. (OTCPK:VREYF) [TOG:TSX] and Spartan Energy Corp. (OTCPK:PTORF) [SPE:TSX] on the oil side. On the natural gas side, names that fit that would include Kelt Exploration (OTC:KELTF) [KEL:TSE], Painted Pony Petroleum Ltd. (OTCPK:PDPYF) [PPY.A:TSX.V] and Pine Cliff Energy Ltd. [PNE:TSX.V].

    TER: Raging River reported a significant increase in reserves at the end of the year. Were you happy with the company's 2014 performance?

    KL: Raging River has a defined play in the Viking area in Saskatchewan. It has a very clean balance sheet, with less than 1x debt: cash flow. It has a definable strategy of how it's going to grow, even in a lower commodity pricing environment. The company can still show growth at 20% year-over-year on the forward strip. In an environment like we have now, this is the kind of company you want to take a look at, because strong companies become stronger. Strong players are going to be able to acquire both assets and companies because they have good balance sheets. Also, the market has given them excellent cost of capital because they've been able to execute on their strategies.

    TER: Spartan just reported 2014 results. Did the company meet your expectations?

    KL: It did. Spartan is very similar to Raging River. It has a clean balance sheet and a clearly defined strategy. It has an excellent management team and is in the right area code, Saskatchewan. It has capital, which it can use to actually execute on accretive acquisitions.

    TER: Let's move to gas-weighted plays. What do you like about Painted Pony?

    KL: It is a play on liquefied natural gas. Like the other two companies, it has a clean balance sheet with cash on hand. It has been drilling very good wells at its Town area in the Montney. It has a good collection on a contiguous play.

    TER: Kelt Exploration recently made an acquisition. What attracts you to this company?

    KL: I may sound like a broken record here. Kelt is in a different area code than Painted Pony, but is also natural gas-weighted. It has a cost-of-capital advantage, a clean balance sheet and the ability to access capital markets. The company is building a massive land position and has a great management team as well.

    TER: Do either Kelt or Painted Pony have upcoming catalysts that investors should be watching for?

    KL: I think all these companies will be active on the drill bit, so we could see well-specific catalysts in their respective areas. There is going to be continued consolidation, where companies with the cost of capital and clean balance sheets will be able to execute on acquisitions-either via assets or companies-and consolidate land positions and assets.

    TER: Is that the same for TORC?

    KL: It is exactly the same for TORC, as you can see with its recent Surge Energy Inc. [SGY:TSX] acquisition. It is beefing up exposure in its core areas so it can use its balance sheet and cost of capital to bolster what it already has.

    TER: What are some other companies that the market isn't recognizing for their full value?

    KL: Legacy Oil + Gas Inc. (OTCPK:LEGPF) [LEG:TSX] is very interesting from the perspective that it has a good collection of assets in Saskatchewan and Alberta. It's been beaten up because of the perception of its higher debt level, but I think that's where investors have some opportunity. Companies with such a discounted valuation are ripe for a catalytic event that extracts the value. Right now, you're looking at potential asset sales for Legacy to help clean up its balance sheet. Hopefully, it can get a rerating once that is complete.

    Rock Energy Inc. (OTCPK:RENFF) [RE:TSX] is interesting from a valuation perspective because it has a Viking asset position. On the valuation side, it's trading at a massive discount on a cash flow basis, essentially a 1.8x 2016 enterprise value: debt-adjusted cash flow multiple. It is trading slightly below its net asset value.

    But the key is its Viking land position, where there was a recent transaction close to its acreage that sold for $115,000 per flowing barrel. There are very few sizable Viking assets left in Saskatchewan, and Rock may have one of the few large land positions left that is prospective for Viking in Saskatchewan. It may be a consolidation target down the road.

    TER: Rock is utilizing enhanced oil recovery. How much of an impact could that have?

    KL: The important thing with enhanced oil recovery is that, if it's successful, it generates very good economics, partly because of the lower royalty structure versus conventional. We're talking a difference 20-25% of royalties to 1-2%. That's a significant cost savings. If Rock is successful, it would bring on barrels for a cheaper price versus drilling new wells.

    TER: What final advice do you have for investors looking to leverage the upside of a possible oil price rebound without taking too much risk?

    KL: I'd be cautious going into this summer period. There's an old adage: "Sell in May, go away." It's very true for the oil and gas space. Given where valuations are, I do think that the market is very fairly valued at this point in time-maybe even expensive given the forward strip, and reflecting much higher commodity pricing. Even if we have a commodity price lift, I don't think that there will be a lot of alpha generation. I'm more about downsizing due to seasonality.

    I would look at summer as a time for watching the space, putting your favorite names on your radar and picking up those names on any sign of big weakness. You will probably find some bargains out there. The volatility is not over yet.

    TER: Thank you, Ken.

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

    Ken Lin has more than 15 years of experience in oil and gas equity research, quantitative risk and performance analysis, and capital markets. He is currently the lead partner of the energy practice at Paradigm Capital, a partner-owned national, institutional, investment banking boutique firm. Lin was the Thomson Reuters/Starmine top-rated oil, gas and consumable fuel earning estimator in 2012, and was third in 2011. He is also a ranked oil and gas analyst by Brendan Woods International. Prior to joining Paradigm Capital, Lin worked in the portfolio analysis and research group at Alberta Investment Management, focusing on quantitative portfolio and risk analysis. He held increasingly senior equity research positions with RBC Capital Markets, TD Newcrest, Mackie Research and Paradigm Capital. Lin is also a CFA charterholder.

    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) Ken Lin: 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 may have a banking relationship with some of the companies mentioned in this interview. 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 16 2:15 PM | Link | Comment!
  • 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.

    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) 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
    Petaluma, CA 94952

    Tel.: (707) 981-8204
    Fax: (707) 981-8998

    Email: jluther@streetwisereports.com

    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.

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