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  • Uranium Supply Disruptions Spell Opportunity For Investors: David Talbot

    Source: Tom Armistead of The Energy Report (2/20/14)

    http://www.theenergyreport.com/pub/na/uranium-supply-disruptions-spell-opportunity-for-investors-david-talbot

    David TalbotA supply crisis is looming in the uranium industry, and today's uranium price, stagnant at an eight-year low, will shoot up quickly when restarts of Japanese nuclear power plants bring back demand with a vengeance, David Talbot tells The Energy Report. Talbot, a geologist and senior mining analyst at Dundee Capital Markets, is excited about the potential of Canada's Athabasca Basin, the world's most prolific uranium source. But beyond the pounds in the ground, he sees money to be made in undervalued companies.

    The Energy Report: David, welcome. Let's start with the big picture: What is the general outlook for uranium in 2014?

    David Talbot: Thank you, Tom. The long-term outlook on the uranium market remains the same at US$65/pound ($65/lb) U3O8. I think a new reality in the near term has set in. The uranium price has dropped significantly and now appears stable at levels not seen for almost eight years. We believe much of this has to do with the lagging Japanese restarts, cash-strapped sellers impacting the market and probably most important, near-term demand is lacking. We do expect uranium prices to rise, and relatively quickly when they do, but for right now, uranium prices will remain leveraged to the news of the Japanese reactor restarts and a return to term contracting by utilities.

    "Energy Fuels Inc. is one of our favorite stocks in a low uranium price environment."

    This thesis underpins our $42/lb price estimate for the year, with prices to about $48/lb by Q4/14. When restarts might occur remains the million-dollar question, perhaps starting mid-2014, but the indicators out of Japan are that the government is committed to bringing its nuclear fleet back online now as the 17th and 18th reactors have applied for their restarts. We've had ongoing reviews. They were expected to take about three to six months, and now we're in month eight. So when they start isn't quite certain, but they are moving in the right direction. Their return should actually coincide with the return in contracting, almost completely absent last year as massive uranium requirements loom. We're seeing about 180 million pounds (180 Mlb) due, expected by the 2016-2018 period.

    TER: What are the major influences in the uranium market today?

    DT: Supply remains a wild card and probably the most important factor, hence the focus of our recent comprehensive sector report. Mines are currently being taken offline, deferred or cancelled altogether. But long-term fundamentals underpin our belief that a uranium supply deficit starting in 2016 will likely increase by 2020, at which time we think we'll see a deficit of about 16 Mlb. So we remain adamant that uranium supply is threatened by current uranium prices, regardless of the difficulties of the mining industry and challenges in permitting. This continues to set the stage for the supply crisis, particularly in light of dwindling secondary supplies as the Highly-Enriched Uranium (HEU) Purchase Agreement has come to a close, taking 24 Mlb/year with it.

    The other part of the story is timing. We anticipate Japanese restarts to be the catalyst to kick-start uranium buying and contracting, but the lack of deals in 2013 resulted in the elevated uranium requirements that utilities have mentioned. This means that once the pendulum shifts back, it will shift quickly, and prices will probably rise at quite a torrid pace.

    TER: Do you expect that 16-Mlb deficit in 2020 to draw more explorers and producers to the industry, or just to create more opportunity for the current players?

    DT: Once the 16-Mlb deficit comes closer, we would expect development for some projects to perhaps expedite on the back of stronger uranium prices. But most of the new supply we see over the next few years is from existing producers, mainly expansion of existing projects, Ranger 3 Deeps, for example, or Cigar Lake. We do model some marginal players coming on-line, like Toro Resources Corp.'s (TRK:TSX.V) Wiluna project, or perhaps with some of Energy Fuels Inc.'s (EFR:TSX; EFRFF:OTCQX; UUUU:NYSE.MKT) conventional assets in the U.S. But that's a relatively small amount of production and certainly not enough to close the gap. We do think that uranium prices are going to be what's required to incentivize investors. Certainly, there will be a new set of explorers set up as exploration funding comes in. Just look at the explosion of junior exploration companies around the Patterson Lake South discovery. So should uranium prices rise, we would expect investment in the sector and exploration spending to increase.

    TER: What was the mood at the NEI Nuclear Fuel Supply Forum in Washington, D.C., in January?

    DT: Remember that the Nuclear Energy Institute is an American association that promotes nuclear power to Congress, the White House, state policy forums and the general public. So its message is typically well scripted and relatively even-keeled, and delivered nonpromotionally. I think that feelings were mixed. There were a few uranium-sector participants. In late January, the sector was flying high, so sentiment was generally positive. This was also after the Uranium Participation Corp. (U:TSX)financing, which more than suggests that investors will be coming into the sector shortly as Uranium Participation is mandated to spend about 85% of its raise on purchasing uranium. So at that time, the stocks were doing quite well, and the fundamentals of supply and demand are generally unquestioned by that group of people.

    "Newer companies like Uranerz Energy Corp. look exciting to us."

    Richard Myers discussed the U.S. nuclear program. He's vice president of policy development at NEI. His message was similar to the one he provided last year at the World Nuclear Association Symposium in London. He started by saying U.S. nuclear power plants are operating well at about 90% of their capacity factor.

    Right now in the U.S., they are currently shutting five reactors. These are typically older, smaller, single units that are mostly at risk but, also, larger, multi-unit sites are struggling under current regulations. Essentially, electricity prices are being suppressed by state mandates and federal subsidies. So price signals right now are inadequate to support existing power plants and investment in new capacity. He suggested that all electricity should not be treated the same. Nuclear has some very important attributes that are not being monetized. It's baseload; it provides grid stability, price stability, clean-air compliance, technical and fuel diversity and a huge tax base. So failure to address the importance of nuclear as baseload electricity will compromise reliability, introduce price volatility and frustrate efforts to decrease carbon emissions. This, of course, could have a negative impact on the U.S. uranium requirements, currently in the 45-50-Mlb range.

    TER: Dundee Capital Markets was expecting 87 Mlb new production from 22 uranium operations between 2007 and 2013, but only 17.8 Mlb materialized. What happened there?

    DT: I think this is the trend in the industry. You'll see these plans to develop uranium projects and, ultimately, a fraction of that effort ever materializes. Many of those mines that we expected to come on-line in 2007 never started. In one or two instances, there were technical issues. The timing of that report also coincided with the global financial crisis in 2008, so that was certainly one of the main factors. Capital dried up. But in general, development is becoming much more expensive, with timelines for projects ranging up to 15 years or more between discovery and production. That's because of several challenges that face the uranium space. You have increasing environmental and regulatory constraints. Public perception has darkened post-Fukushima. Significant community consultation is now required, and stringent radiological and groundwater controls are being put in place. Detailed tailings management plans are required, and comprehensive decommissioning strategies with upfront financial commitments are now commonplace.

    TER: You mentioned the high costs of development. What role does the Canadian Non-Resident Ownership Policy play in that?

    DT: That policy states that a foreign company cannot own 50% of a uranium project. This hasn't concerned me too much in the past. It is just a policy. We have seen some companies get around that policy, not necessarily grandfathered but just moving toward the expectation that that policy will not be there when they need to go and get their licenses. For example, you have AREVA (AREVA:EPA) moving forward its Kiggavik development project in Nunavut Territory. You have Paladin Energy Ltd. (PDN:TSX; PDN:ASX) moving forward its big project in Labrador called Michelin, formerly an asset of Aurora Energy Resources Inc. More recently, we've seen Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) come in and take out Hathor Exploration Ltd. for its Roughrider deposit. So there are foreign companies that are acting in Canada. They're acting as if this policy will be overturned and, certainly, the Saskatchewan government would like to have it overturned.

    TER: Is the uranium market heading for a wave of mergers and acquisitions (M&A) to achieve efficiencies of scale and maybe increase production capability in a low-price market?

    DT: We do expect further consolidation. Financing is more difficult than ever. Project timelines are lengthy and costly. With some companies unable to secure supplies to advance projects, we expect further delays and/or corporate insolvencies. What often happens is the predator comes in and takes out its prey at pennies on the dollar relative to its underlying net asset value (NAV).

    Many certainly look at Cameco (CCO:TSX; CCJ:NYSE) as the top predator. With about 1 billion pounds (1 Blb) in resources and reserves, it says it doesn't need more pounds in the ground, but bolting on production makes a lot of sense to us. Cameco has long said it seeks more production growth in the U.S., and while some of that's happening through organic growth, newer companies like Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.MKT) and Ur-Energy Inc. (URE:TSX; URG:NYSE.MKT) look exciting to us. You also can't count out Denison Mines Corp.'s (DML:TSX; DNN:NYSE.MKT) Phoenix project in the Athabasca Basin. Cameco is a partner there, but that's the world's third highest-grade project at 16% U3O8. There are about 60 Mlb there right now. Plus, Denison has interest in the McClean Lake mill, and I know Cameco would probably be interested in having a feed at the mill that is processing its own Cigar Lake ore.

    TER: Energy Fuels is trading around CA$9.50 now, but your target is CA$17. Why is this company so undervalued?

    DT: I think part of it has to do with the general downdraft in equities, but Energy Fuels, in particular, did have a few events leading into 2014 that put some pressure on the stock. That included a selloff after a four-month hold on its June 2013 private placement. Strathmore shareholders were selling post-deal, post-acquisition of Strathmore. There was also pressure after its 50:1 rollback, as expected. Another part of this could be just the general unfamiliarity with this name. This is a company that has a number of small-scale operations with different incentive price levels, all feeding into the White Mesa mill. So production is often not year-round, but happens in runs or batches. This combines with alternate feed material runs.

    TER: What are Energy Fuels' strengths and its weaknesses?

    DT: I think Energy Fuels has several strengths that make it one of our top picks. It is one of our favorite stocks in a low uranium price environment, as the company is effectively 100% hedged at around $60/lb uranium. But we also like it for its significant leverage to rising uranium prices, given its ability to easily turn on its brownfield projects at minimal cost. Primary standby mines-Pandora, Beaver, Daneros-all have potential to produce between 200-500 thousand pounds (200-500 Klb)/year. Canyon could add another 500 Klb/year once it's developed. So its White Mesa mill has a license capacity of 2,000 tons per day and can produce about 8 Mlb/year. Costs have also come down about 18% quarter over quarter to $32/lb.

    But there are some risks, of course, with small, higher-cost conventional mines. The production profile hinges on milling and trucking costs. So with about 50% of our valuation dedicated to these projects and then 50% delegated to greenfield projects, development risks must also be taken into account. Those include permitting, financing, economics, timelines and so on.

    TER: What is the significance of the Patterson Lake South discovery for Fission Uranium Corp. (FCU:TSX.V)?

    DT: We believe the Patterson Lake South discovery is very significant, probably the largest since Hathor's Roughrider discovery, and we all know what happened with that one. It sold for $680 million ($680 M) to Rio Tinto. At that time, it wasn't much bigger than where we think Patterson Lake South is now. So we do have a Buy on Fission as a result of its Patterson Lake South project. It's shallow, high grade, thick; it has all the hallmarks of a great project. Not only that, but it's also located in the Athabasca Basin, which hosts a supportive government, excellent infrastructure, capacity at existing mills and a solid permitting framework.

    "Fission Uranium Corp.'s PLS has all the hallmarks of a great project."

    At Patterson Lake South right now, all six zones lie at or near the surface, and they are only drill limited at this point; they're not cut off. We anticipate that several of these zones will probably tie together, creating a much larger, single deposit. It's still in the early stages of delineation. Aggressive drilling is underway in preparation for an initial resource. We speculate we might see that early next year. Right now, we estimate about 43 Mlb grading 2% uranium. The grade goes up significantly if we use a higher cutoff grade, but the pounds in the ground aren't impacted that much. So right now, it's looking like a great, high-grade uranium deposit.

    TER: Does that make Fission Uranium a likely takeout target?

    DT: We've always felt that Fission is a potential takeover target. Given its grades and shallow depth, Patterson Lake South has potential to become an economic deposit, capable of supporting not only construction of a mill. But, also, perhaps even more attractive is that this near-surface deposit may require relatively smaller upfront capital and could provide feed to an existing mill and be run at irregular intervals, essentially delivering high-value material over great distances when it's necessary. So we believe that Patterson Lake South and Fission, for that matter, make sense as a target for anybody that wants to set up shop in what is the underexplored western side of the Athabasca Basin.

    TER: You changed your rating on UEX Corp. (UEX:TSX) very quickly. Why?

    "UEX Corp.'s new CEO, Roger Lemaitre, brings new depth to this company."

    DT: We did an about-face on UEX not long after reducing our target and recommending it as a Neutral due to unexpected news of a slowdown and competition from fresh discoveries, like Patterson Lake South. But we now rate UEX as a Buy with an $8 target price. While we didn't change our discounted cash flow model, the new CEO, Roger Lemaitre, brings depth to this company that it hasn't seen before. With his vast industry experience as Cameco's exploration director and the fact that UEX has almost $9M in cash, I think he's going to turn the company's attention to new discoveries and potential M&A activity. His familiarity with Cameco is certainly an asset. But I think we still need to see some execution here by UEX to leverage its attributable 85 Mlb in resource plus its past exploration success into something new and accretive for shareholders. Meanwhile, Shea Creek is open in multiple directions. It does have a current resource of about 96 Mlb. As UEX decides to take its direction, I think it will remain focused on the Athabasca Basin. I think it will likely seek synergistic projects.

    TER: Are you excited about any other uranium companies?

    DT: There are two others. Ur-Energy-we have a Buy on this one. It has a $2.20 target price. Ur-Energy is our top pick in the sector right now. This is a U.S.-based, Wyoming-based, in-situ recovery producer. It officially entered production last year. Early indications are the well fields are performing exceptionally well. It produced 135 Klb last year. We expect about 1 Mlb this year, 1.2 Mlb next. Flow rates and front end are operating above expectations. The back end elution and precipitation circuits are performing as designed. Notably, head grades have been significantly above expectation, leading to less header houses and volumes that are required, pointing to lower costs. Right now, the company sells about 40% of its production forward at about $60/lb between 2014 and 2016, so it makes Ur-Energy less sensitive to spot price fluctuations than some of its peers. It's actually getting prices much, much higher than spot. It was in the $63/lb range for last quarter. Shirley Basin is another project it just purchased. That could be up next. It could come online by 2017, ramping up to 1 Mlb/year within a couple years there. Ur-Energy trades at a discount to its producer peers.

    Another company here: We recently initiated full coverage on NexGen Energy Ltd. (NXE:TSX.V). We're recommending it as a Buy, no target price. The company has two high-quality assets in the right locations. Rook I is adjacent to Fission Uranium's Patterson Lake South discovery. NexGen could potentially have the best claims in the area aside from Fission itself. The second project is the Radio property. That's located on the Roughrider Midwest trend on the eastern side of the Athabasca Basin. That project is within 10 kilometers of 150 Mlb of uranium resources. First drilling at Rook I tested three conductors that lie directly east of Fission's Patterson Lake South discovery in the Athabasca. With 12 holes, it hit the right graphitic basement rocks, shallow structures and modest alteration, and elevated uranium mineralization was confirmed in three holes and somewhat significant in one of those. Follow-up drilling has made a potential uranium discovery (pending assays) that is not only a game-changer for NexGen, but for the western side of the Athabasca Basin. What's more impressive is that it was the first hole drilled into Target C, now called Arrow, that hit.

    Further drilling is required and NexGen has suggested that it will commit more resources to follow up. The Radio project is essentially on hold with earn-in commitments delayed, allowing the company to focus on the Rook project. NexGen has experienced management and quite a deep technical team, including ex-Hathor and Rio Tinto geologists who really know the region.

    TER: Do you have any parting thoughts to share on the uranium market generally?

    DT: I think it all hinges on supply. Demand is relatively consistent. It's predictable, Japan restarts notwithstanding. But I believe it's the strengthening fundamentals based on supply that really drive this. Mines are closing. We've seen Zarechnoye close, La Sal, Beaver, Pandora, Daneros. Projects are being deferred, big projects including Olympic Dam, Trekkopje, Imouraren, Cameco's Double U, plus no more Kazakhstan production. The HEU agreement is gone, and we're getting unexpected disruptions, such as Ranger, Rossing, Cigar Lake and assets in Niger. So I think investors should focus on that. When uranium prices come back, I think they're going to come back quite quickly, not because Japan is going to come back seeking supply but because the other 90% of the world hasn't been buying like it should.

    TER: Thanks for sharing your thoughts.

    Dundee Capital Markets, V.P. and Senior Mining Analyst David Talbot worked for nine years as a geologist in the gold exploration industry in Northern Ontario. David joined Dundee's research department in May 2003, and in the summer of 2007 he took over the role of analyzing the fast-growing uranium sector. David is a member of the Prospectors & Developers Association of Canada, the Society of Economic Geologists and graduated with distinction from the University of Western Ontario, with an Honors Bachelor of Science degree in geology.

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    DISCLOSURE:
    1) Tom Armistead conducted this interview for The Energy Report and provides services to The Energy Report as an independent contractor. He 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 The Energy Report: Energy Fuels Inc., Fission Uranium Corp., UEX Corp., Uranerz Energy Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
    3) David Talbot beneficially owns, has a financial interest in, or exercises investment discretion or control over, companies mentioned in this interview: Fission Uranium Corp. Dundee Capital Markets and its affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by, mentioned in this interview: Energy Fuels Inc. Dundee Capital Markets has provided investment banking services to companies mentioned in this interview in the past 12 months: Energy Fuels Inc., Uranerz Energy Corp., Denison Mines Corp. and Fission Uranium Corp. All disclosures and disclaimers are available on the Internet at www.dundeecapitalmarkets.com. Please refer to formal published research reports for all disclosures and disclaimers pertaining to companies under coverage and Dundee Capital Markets. The policy of Dundee Capital Markets with respect to Research reports is available on the Internet at www.dundeecapitalmarkets.com. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. 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.
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    Feb 20 6:23 PM | Link | Comment!
  • Food, Water And Fuel Are Necessary To Life And Investors: Bob Moriarty

    Source: Karen Roche of The Energy Report (2/13/14)

    http://www.theenergyreport.com/pub/na/food-water-and-fuel-are-necessary-to-life-and-investors-bob-moriarty

    Bob MoriartyLikening central banks to "your crackhead cousin" running loose with your American Express platinum card, Bob Moriarty sees serious economic threats in the future. This leads the owner of 321energy to look at resources like food, water and energy for protection and profit. He tells The Energy Report where energy opportunities exist, and why Chinese demand for everything will set prices in the future.

    The Energy Report: In your Gold Report interviewlast fall, you said that the two biggest reasons for the erosion of the middle class are peoples' inability to save money due to low interest rates or low wages, and higher taxes, especially the hidden taxes we end up paying.

    Bob Moriarty: Yes. I think there are 37 taxes on a loaf of bread. Taxes have increased dramatically over the last 20 years, including what are called the "unclaimed taxes."

    In an article James Gruber wrote on peak oil last month, he made the point that debt is actually a future call on energy. Under the General Agreement on Tariffs and Trade, when you owe money, you've already spent the energy. He argues that the economy is an energy system, not a monetary system. He's absolutely correct, in my view.

    "The enormous increase in wealth we've seen worldwide over the last 150 years has stopped."

    The enormous increase in wealth we've seen worldwide over the last 150 years has stopped. There will be no more growth. From a mathematical point of view, you cannot increase growth. Energy consumption per capita has to go down, and that means wealth goes down. All the debt we've accumulated is a noose around the neck of society.

    TER: Gruber also wrote, "Deflation is winning the battle over inflation." His argument is that excessive debt has to be deleveraged and in that deleveraging process, asset values will plummet. Central banks are doing whatever it takes to create inflation in an environment where deflation is really the underlying tide. What do you have to say about that?

    BM: Deflation is actually good for society. As consumers, we know this. Think about what you paid for a computer 20 years ago. Today, computers are much, much cheaper. That's deflation, and that's a good thing.

    But for central banks working under a fractional reserve system, deflation is a ticking time bomb. They can't cope with it.

    With $694 trillion ($694T) in derivatives outstanding, I'm hard pressed to see how you can have inflation over the long term, because you have to get rid of debt. The only way that will happen is for it to blow sky high. What we're seeing in Argentina, Egypt, the Ukraine, Venezuela, Thailand and Turkey is all related to the global debt level.

    TER: One of Gruber's scenarios, citing the example of 2008, is global deflationary shock in which all asset prices fall hard. As they begin to fall, the central banks will print even more money. Quantitative easing (QE) on a grander scale will put us at the risk of not inflation, but hyperinflation.

    BM: I believe that's true. Late last month, Fed Chair Janet Yellen announced $10 billion of QE tapering, as promised. Eventually, the risk is that the Fed will decide to increase QE to respond to a deflation scare. When that happens, the system will blow sky high. The Fed painted itself into a corner and can't get out.

    We need to get rid of the debt, of the $694T in derivatives. Every government has to recognize there are limits to how much money it can spend.

    All of this goes back to central banks. The Bank of England, the world's oldest continuously operating central bank, was formed in 1594 as a way for kings to finance their wars. Central banks make it possible for governments to spend unlimited amounts of money. It's like you giving your Platinum American Express card to your crackhead cousin.

    TER: How do investors prepare for the moment when the piper gets paid? How do they plan for hyperinflation, inflation, deflation?

    BM: I can make a very convincing argument for deflation and very convincing arguments for inflation or hyperinflation. I'm not sure which will happen.

    People should be extremely conservative. Looking at investments as a way to make money is foolish right now. I consider gold, silver, rhodium, platinum and palladium as insurance policies against total financial chaos. I would put money into resources, and I would expand resources to include food, fuel and water. Resources will have some value when other assets have none.

    TER: Let's talk more about your expanded definition of resources: fuel, food and water. How do you define fuel?

    BM: Fuel is everything from coal to nuclear energy. I am very bullish on all forms of fuel, except nuclear energy. I am biased against nuclear energy. The industry doesn't have nuclear power under control. Nuclear disasters like Fukushima have the potential to be extinction events. I would only be in favor of nuclear power if the industry gets safety under control.

    Tim Morgan's book, Life After Growth?, presents a brilliant way of looking at energy and monetary systems in a new way. He makes a very convincing argument that everyone's standard of living is going to decrease over the next 10 years. He predicts socioeconomic crises for the next 10 years, one after another. There have been half a dozen brushfires in Africa alone-Somalia, Mali, Libya, Kenya. Everybody acts like they're different brushfires, but they're all the same thing; they're all connected.

    TER: Your definition of fuel is broad, but the energy sector seems to be focused on oil. Is that the total sum of the sector? And how do you play oil producers versus explorers?

    BM: The U.S. is almost at the point where it's self-sustaining in terms of energy because of the Bakken. But the Bakken field has become an economic disaster. We put $1.6T into exploration, and we're not going to get $1.6T out of it.

    Morgan's book makes a very good point: In 1914, if it cost you the equivalent of 1 barrel (1 bbl) oil to drill a well, you got 100 bbl out of it. If you drill a well today, it costs you 1 bbl to drill it, and you get 20 bbl oil out of it. In the Bakken, you put 1 bbl oil into it, and you get 5 bbl out of it. That simply will not work from an economic point of view.

    Natural gas has doubled in the last year. In the new normal, the oil price is $90-100/bbl. Any form of oil is worth looking at: producers, explorers and refiners.

    Solar and wind power also play a role, although I see them as 3% of the solution, at best.

    TER: I recently interviewed Porter Stansberry, who expands his energy investment viewpoint to include drilling, liquefied natural gas (LNG) plants, pipelines, infrastructure, even tankers. Is your view that broad?

    BM: He's absolutely correct. There are enormous amounts of natural gas in Indonesia, both in coal bed methane (CBM) and conventional natural gas. But you have to liquefy it before shipping. You need LNG plants, shipping facilities and ports.

    TER: What are some opportunities related to food as a resource?

    BM: When the food crisis comes, all fertilizers will double, triple or quadruple in real dollar terms. We have to get more food out of the ground in the future, and we need fertilizer to do that.

    "Arianne Phosphate Inc. is a stock that could go up seven to tenfold, based on today's prices."

    Arianne Phosphate Inc. (DAN:TSX.V; DRRSF:OTCBB; JE9N:FSE) in Canada has the largest, undeveloped phosphate project in the world. Its market cap is 5% of net present value (NPV). In this space, takeovers are generally done at 35-50% of NPV. This is a stock that could go up seven to tenfold, based on today's prices.

    TER: It seems to me that agriculture in North America is maximized in terms of using fertilizers. Are you saying that when the food crisis occurs, even North America will need to use more fertilizer than today?

    BM: Everybody will. Besides, phosphate can be moved easily by ship. A lot of land in South America, Russia and Eastern Europe is underutilized for agriculture. I would look very closely at any potash or any phosphate.

    TER: Arianne Phosphate has a number of warrants due Feb. 1. Are the warrants affecting the stock price?

    BM: I just wrote an article on that. At that time, the stock was $1.26. The warrants are at $1.24. Management was hoping it could get the price up. I added about 1.5 million (1.5M) shares in the last week or 10 days. I suspect the company will get about $5M in cash from the warrants. When those warrants expire, I see the stock going back to its recent highs of $1.68-1.70.

    TER: Back to oil and gas and natural gas. Which companies in those sectors interest you?

    BM: Marauder Resources East Coast Inc. (MES:TSX.V) is a total crapshoot. It's on the north island of New Zealand, where it is surrounded by TAG Oil Ltd. (TAO:TSX.V). Marauder is letting TAG carry the burden. TAG has drilled a well, and while the company has been very quiet about the results, they appear to be exceptional. Marauder has a $5M market cap. It will either go to $0 or to $500M. Only time will tell.

    TER: What timeframe would you put on that $0 to $500M scenario?

    BM: Over the next year or two.

    TER: Any others?

    BM: There's a company in Indonesia called CBM Asia Development Corp. (TCF:TSX.V) that I've covered many times. The company has outlined 1 trillion cubic feet (1 Tcf) of coal bed methane. Unfortunately, every time the company raised money, its brain-dead president spent 150% of what it took in. Finally, it blew up in his face and he was fired. The last placement was done at $0.18, and then $0.10. Now, it has a $0.04 stock, and it's all due to really exceptionally poor management. This is an asset that somebody will make a lot of money on. I just don't think it will be CBM Asia.

    TER: Is CBM Asia a takeover target?

    BM: I think someone is going to steal CBM Asia. The total market cap is $7M, and the company recently lost a lawsuit that will cost it $1.4M.

    TER: Indonesia, New Zealand and Texas also have nice shale deposits. Tell us more about opportunities in those locations.

    "Torchlight Energy Resources Inc. is a $5 stock that could easily go to $10 or $15."

    BM: Torchlight Energy Resources Inc. (TRCH:NASDAQ) has a bunch of projects in Texas. It plans to drill 90 exploitation wells this year. It has a ton of money in the bank and will be cash flow positive in September 2014. This is a $5 stock that could easily go to $10 or $15.

    TER: How long can Torchlight exploit its 90 wells?

    BM: They're relatively shallow wells, and they're long-life wells. Conventional wells range anywhere from 2-100 years. The payoff is probably 20:1.

    Shale has about a 40% decline in the first year, so they are 1.5-2-year wells; you have to make your money right away.

    Pan Orient Energy Corp. (POE:TSX.V) is a company that has protected itself by being in three totally different environments-Canada, Thailand and Indonesia. It's all conventional, heavy oil in Thailand and Canada.

    TER: If a worldwide recession occurs, I can see North America continuing as a consumer market for oil, but will Thailand and Indonesia continue to consume?

    BM: When I went to Papua New Guinea in December 2013, we flew from Port Moresby to Misima Island. From the plane we saw 17 ships. Those going north were carrying coal to China and coming back south empty. Our field of view was probably 50 miles. If you extrapolate that to cover the 2,000-3,000 mile leg from Australia to China, there are probably 200, 300 or 400 coal ships doing nothing but taking coal to China from Australia.

    In the U.S., we consume 33 bbl oil per person per year. In China, they use 2 bbl oil per person per year. If we decrease our use to 20-25 bbl per person, it will make a dramatic change in our standard of living. But the Chinese are going to go from 2 to 5 or 10 bbl per person. The Chinese are going to demand energy regardless of their economic situation.

    TER: But China is one of the world's largest coal producers. To what extent is oil part of the energy mix there?

    BM: The Chinese are voracious consumers of energy in all forms, including oil. That's good for New Zealand shale oil and gas. It's good for CBM and conventional gas from Indonesia. It's good for coal from Australia and Indonesia. The Chinese actually control pricing for all commodities. This is true of everything from coal to gold.

    TER: Why do you say all commodities? China is not yet the world's largest consumer.

    BM: It doesn't have to be. Do you understand the concept of a swing producer?

    TER: No, please explain it.

    BM: A swing producer in any commodity has control of its price structure. It can make money at $15/ton or at $5/ton. When it wants to expand the market, it charges $15/ton, allowing everybody to come in underneath its umbrella. When it wants to put people out of business, it charges $5/ton. If a competitor can't produce at less than that, it goes out of business.

    Less well known is the swing consumer. The Chinese are the swing consumers of everything in the world. If the Chinese had not consumed record amounts of gold in 2013, gold would be $800/oz, not $1,250/oz. Chinese demand for everything sets the price.

    TER: So Pan Orient is well positioned in two hotbeds of oil consumption in the Chinese South Seas area and in North America. What is the lifespan on its wells?

    "Pan Orient Energy Corp. has protected itself by being in three totally different environments-Canada, Thailand and Indonesia."

    BM: Pan Orient has an extremely expansive program this year. It will announce new partners on its fields in Indonesia. It is advancing its deal in the North American oil sands. It will be financing more drilling in Thailand.

    Pan Orient is going to remake itself in the next two years. In the oil business, a $100M company is tiny company; the equivalent of a $2-3M gold company. Decent-sized oil companies are worth $1-2B. I think Pan Orient is an easy tenbagger.

    TER: Any other suggestions for investment in the broader resource definition you gave us-food, energy and water?

    BM: There are obvious investments in food, but I hope to see more work in the next 10 years on water and agriculture. Food, energy and water are, today, where gold was in the summer of 2001. All of them will increase more than anything else that I know of, including gold and silver, which are more fully priced even today. No matter what happens to the stock market, food, energy and water are going to be a lot more valuable in the future.

    TER: Bob, thank you for your time and your insights.

    Bob and Barb Moriarty brought 321gold.com to the Internet over 10 years ago. They later added321energy.com to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy. Both sites feature articles, editorial opinions, pricing figures and updates on current events affecting both sectors. Previously, Bob was a Marine F-4B and O-1 pilot with more than 820 missions in Vietnam. He holds 14 international aviation records.

    Read what other experts are saying about:

    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 The Energy Report and provides services to The Energy Report as an employee. She or her family own shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of The Energy Report: Pan Orient Energy Corp., Torchlight Energy Resources Inc. and Arianne Phosphate Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
    3) Bob Moriarty: I or my family own shares of the following companies mentioned in this interview: Marauder Resources East Coast Inc. and CBM Asia Development 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: Marauder Resources East Coast Inc. and Arianne Phosphate Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. 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 and may make purchases and/or sales of those securities in the open market or otherwise.

    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 (i) only in whole (and always including this disclaimer), but (ii) never in part.

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

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

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

    101 Second St., Suite 110
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    Feb 13 3:45 PM | Link | Comment!
  • Fight China's Smog With Ethanol, Says Chen Lin

    Source: Peter Byrne of The Energy Report (2/6/14)

    http://www.theenergyreport.com/pub/na/fight-chinas-smog-with-ethanol-says-chen-lin

    Chen LinIn decades past, we have seen that any commodity China really wants goes through the roof. We saw it in copper. We saw it in oil. We saw it in liquefied natural gas. If China starts mandating a 5% blend of ethanol to gasoline, ethanol should trade on par with gasoline. So says Chen Lin, author of the widely read newsletter What is Chen Buying? What is Chen Selling? But there's more to the story: because China produces no ethanol, U.S. ethanol producers could be looking at a massive new market, not to mention a spike in profit margins. In this interview with The Energy Report, Chen discloses his favorite ethanol picks, as well as some compelling fracking names.

    The Energy Report: In your newsletter, What Is Chen Buying/Selling?, you make the argument that China is a potentially important market for ethanol. Why is that?

    Chen Lin: On my visit to China last summer, I experienced the air pollution problem firsthand. The No. 1 concern of the Chinese people is the huge blanket of smog covering major parts of China. How would you like to breathe smog every day? The good news is that because ethanol contains oxygen, it can significantly reduce smog from car emissions. In the U.S., it is very common to blend 10% ethanol into gasoline to reduce pollution.

    In the U.S., ethanol is priced much cheaper than gasoline. In the futures market, gasoline is trading at $2.80, while ethanol is at $1.80. These prices change every day, but right now, that is a spread of $1. The truth of the matter is that it is much cheaper to run cars on ethanol than gasoline.

    But there is a shortage of ethanol in China, and only a few places sell blended gasoline. There is great potential for China to massively import ethanol from the U.S. in order to reduce pollution and cheapen motorists' gasoline.

    TER: Does China have the potential to produce its own ethanol?

    CL: China is a food importer. China imports corn; it imports soy beans. Inside China, food costs are much higher than in the U.S. It is not at all economic to use corn in China to make ethanol.

    TER: How can junior firms developing ethanol resources benefit from the increased use in ethanol in China and around the globe?

    CL: Corn is the main cost for the junior ethanol producers. And the corn price is at a historical low, thanks to the huge harvest last year. We know that corn runs in multiyear cycles. Inventories build up. As a result of this large supply, ethanol producers' margins are at historical highs. If China's imports pick up, the ethanol price will go even higher. In conclusion, the margin for ethanol producers will be very high for at least a year or two. China is a big wild card. If China starts to import a large quantity of ethanol, we could see a multiyear bull market.

    TER: Do you think the government would put any barriers on the import of ethanol, or would it encourage it?

    CL: The main concern of the Chinese government and the Chinese people is pollution-not the gross domestic product. Smog sickness overrides almost anything. In November of last year, for the first time in many years, China started to import a significant amount of ethanol from the U.S. This could be the start of a trend of ever-increasing imports of U.S. ethanol.

    TER: Are the engines of cars that are used on Chinese roads less efficient in terms of pollution than engines used in the U.S.?

    CL: General Motors Co. (GM:NYSE) is one of the largest car producers in China, so the engines are quite similar to ours. We can fuel our engines with 10% ethanol. Brazil uses a 25% ethanol blend. China has basically no ethanol in its gasoline. The whole point of ethanol is to reduce pollution. I do not see any barriers ramping up the use of ethanol: I see a potentially dramatic increase in ethanol exports from the U.S. to China.

    TER: If and when ethanol markets increase in China, how will that impact the refining industry for that product?

    CL: Some gasoline refineries in the U.S. are also ethanol producers-such as Valero Energy Corp. (VLO:NYSE). Valero just reported huge earnings and a huge profit jump in its ethanol product line for Q4/13. Now may be the time for the larger ethanol producers to buy up the junior ethanol companies at low prices.

    TER: Do you have any picks for us in the ethanol realm?

    CL: I have been buying Pacific Ethanol Inc. (PEIX:NASDAQ). This company just came back from bankruptcy. It is trading at a very small fraction of what it was trading at a few years ago. It is based on the West Coast, which means that it benefits from West Coast ethanol prices being $0.40-0.60 higher than in the Midwest, thanks to the shortage of the railcars used to transport ethanol. Pacific Ethanol has a 160 million gallons ( 160Mgal)/year capacity right now. It may increase that capacity to 200 Mgal/year when it opens its fourth plant, which is likely to occur this year. Pacific Ethanol is the absolute cheapest ethanol company. And its stock is only $6-7 so it is trading 1x below its operating income.

    Another company I own is Green Plains Renewable Energy Inc. (GPRE:NASDAQ). Similar to Valero, it has about a 1 Bgal/year ethanol production capacity. It is much bigger, which makes it an excellent takeover target for any refiner that wishes to get into the ethanol business.

    TER: If Chinese demand increases, how will that affect these two companies?

    CL: There is an abundance of ethanol in the U.S., and it's very effective in reducing car pollution. In decades past, we have seen that any commodity China really wants goes through the roof. We saw it in copper. We saw it in oil. We saw it in liquefied natural gas. If China starts mandating a 5% blend of ethanol to gasoline, then ethanol could easily trade on par with gasoline.

    India imported a large quantity of ethanol in November. What if many countries start to follow Brazil and blend 25% ethanol into the gasoline? That's the future. If this trend is confirmed, ethanol will boom for years to come.

    TER: Let's talk about fracking in North America, which you view as a profit-laden industry. Do you have any picks in that space?

    CL: Fracking can help the U.S. reach energy independence in a few years. However, fracking is a very capital-intensive business. Investors looking at juniors need to be very careful about picking the right company because they can be beset with dilutions and issued shares. It is tough to own the company and suddenly find your shares diluted.

    "Royal Dutch Shell Plc'spartner, Terrace Energy, is a very attractive takeover target for Shell."

    One of the fracking stocks that I particularly like isTerrace Energy (CVE:TZR). It just finished a capital raise, so it is cashed up. It controls a huge acreage at Eagle Ford. Its partner is Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE). 2014 is a very important for year for Terrace, as it is clearly an attractive takeover target for Shell. For one thing, Terrace is experimenting with different fracking methods to make these wells profitable, something Shell didn't do on its own. The initial data are very promising. If the trend continues, Terrace will be an easy takeover target for Shell.

    TER: How is Terrace improving the fracking technology?

    CL: The company is fracking one of the largest virgin lands in the Eagle Ford acreage with propane gas. So far, the results have been extremely encouraging.

    TER: Does that mean that it pumps propane into the fracture instead of water and chemicals?

    CL: Exactly. It pumps propane. It's a new technology.

    TER: Let's not forget about more traditional oil and gas exploration and development ventures. I know that you cover a number of juniors, including Mart Resources Inc. (MMT:TSX.V), which has had some issues with its pipeline in Nigeria.

    "2014 will be a very important year for Mart Resources Inc."

    CL: Mart's existing pipeline can only ship less than half its capacity, and it loses 30% of that, which is far too high a loss ratio. 2014 will be a very important year for Mart. It is planning to build a new-reduced flow loss-pipeline that can more than double its exportable capacity. When that happens, there will be a huge jump for Mart's stock, a windfall cash flow, and potentially an increased dividend. It already pays a 17%/year dividend, so look for a double-digit dividend or even greater. We have been collecting the dividend now, while waiting for Mart to complete the new pipeline.

    TER: Does Mart have partners?

    CL: Yes, it has two Nigerian companies as its partners, which is good. You want local companies to be your face in Nigeria.

    TER: Do you have any other oil and gas picks?

    CL: When I examine my own successes and failures in stock picking during the past many years, it seems to me that making money in energy stocks is more and more difficult. A few years back, I was focusing on following cash flow when other energy investors were listening to the "big picture" talk from the management sector. That focus made me very successful, because I could find very solid stocks like Mart when it was $0.15. Now, everyone is starting to focus on cash flow. Investors learn quickly. But the point is that to make good money and hit home runs, investors need to look ahead of the crowds.

    "To make good money, investors need to look ahead of the crowds. And that is why I have been buying Pan Orient Energy Corp."

    And that is why I have been buying Pan Orient Energy Corp. (POE:TSX.V). The beauty of Pan Orient is that the stock is completely ignored by the market. 2014 will be the most important year in the company's history. Its operating field in Thailand is producing a little over 1 thousand barrels per day. Management left Canada to relocate to Thailand in order to reduce costs. The back story is that during the financial crisis of 2008-2009, Pan Orient accumulated a few important properties spread out in Canada, Thailand and Indonesia. This year is the year for exploring all three of these properties. The company has high-impact wells in each country. If any of the plays has success, the stock will go double digit, instead of trading at $1-something today. There has been a very strong insider purchase of the company in the past few months. Plus, its existing cash and cash flow more than justifies its current stock price. All this upside is being ignored by the market, which is a situation I really like.

    TER: What is the political situation like for foreign companies that relocate to Thailand, like Pan Orient?

    CL: The Pan Orient stock has weakened a little bit because of political unrest in Thailand. But Thailand is importing oil and even the protestors still need gasoline to drive their cars! During the bloody military coup that happened a few years ago, there was absolutely no interruption of the oil production in Thailand. Looking beyond the recent unrest in Thailand, I see a great buying opportunity. For one thing, Pan Orient's management is willing to do whatever it takes to get the job done. I applaud these managers for relocating to Thailand to focus on the production and exploration in-country. And when I talked to the CEO recently, he jokingly said the protests made commuting less crowded.

    TER: In your portfolio, what kind of ratios do you use to allocate investments between ethanol stocks, oil and gas, and other energy stocks?

    CL: I own a very large basket of oil and gas stocks, with a much heavier weighting than my ethanol picks. However, the ethanol story is just getting started. If there is a jump in ethanol exports to China and/or India during in the next months, or China starts to mandate 5% ethanol blended into gasoline, there will be an explosion of new opportunities for the ethanol juniors. Then I can confidently declare that the long-term bull market for ethanol is arriving. China has a bigger automobile market than the U.S. A 5% ethanol blend will take almost half the ethanol the U.S. produces. That will provide a tremendous gain for ethanol producers.

    TER: Many thanks for your time, Chen.

    CL: Until next time, Peter.

    Chen Lin writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling?, published and distributed by Taylor Hard Money Advisors Inc. While a doctoral candidate in aeronautical engineering at Princeton, Chen found his investment strategies were so profitable that he put his Ph.D. on the back burner. He employs a value-oriented approach and often demonstrates excellent market timing due to his exceptional technical analysis.

    Read what other experts are saying about:

    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) Peter Byrne conducted this interview for The Energy Report and provides services to The Energy Reportas an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of The Energy Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
    3) Chen Lin: I or my family own shares of the following companies mentioned in this interview: Pacific Ethanol Inc. and call options, Green Plains Renewable Energy Inc. and call options, Mart Resources Inc., Pan Orient Energy Corp. and Terrace Energy. 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 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 and may make purchases and/or sales of those securities in the open market or otherwise.

    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 (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

    Feb 07 1:04 PM | Link | Comment!
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