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  • Bob Moriarty: $80 Oil Is The New Normal Minimum

    Saudi Arabia has nothing to do with falling prices at the pump, argues Bob Moriarty. He sees falling demand as the culprit, driven by economic slowdown in China, Europe and the U.S. In this interview with The Energy Report, Moriarty explains why increased consumer spending won't solve our problems, and discusses why he's still a fan of North American energy stocks-even though he hates shale oil.

    The Energy Report: Bob, thanks for joining us again. In your recent interview with The Gold Report, you discussed U.S. involvement in the Middle East and how it could contribute to a financial crash. Today, oil is in the low eighties. A lot of focus is on Saudi Arabia and the fact that the country is not pulling back on its production. Is this a price war to squeeze out the North American shale oil plays?

    Bob Moriarty: No, that's not the case. The price of oil is going down because demand is going down. China is slowing down, and that's reflected in the price of platinum, silver, copper, iron and coal. It's perfectly natural for the price of oil to go down as well. I don't attribute falling prices to any malignant behavior on the part of Saudi Arabia. I'll tell you-Saudi Arabia doesn't give a damn about shale oil because shale oil is not economic. Anybody who can do basic math understands that. Everybody in the oil business is saying the math doesn't work. The majors are bailing out on shale as fast as they can. The wells are deep, expensive and last 2-3 years before depletion.

    TER: So, U.S. energy independence. . .

    BM: It's absolute rubbish. We are never going to have energy independence. We have much more coal than we have oil. Coal's been a disaster. Coal mines have been shutting down for the past several years.

    TER: Has new infrastructure or technology, like fracking or horizontal drilling, brought down the cost of extracting oil?

    BM: Exactly the opposite-it's increased the cost. It used to cost $30 per barrel [$30/bbl] to extract oil using conventional methods. Now it costs $80/bbl. No one is making money in fracking, not in North Dakota, Montana or Wyoming. They're all losing money because the cost of production has gone way up. Nobody talks about peak oil anymore, but peak oil is absolutely real. Below an oil price of $80/bbl, no one can afford to produce.

    TER: Yet you're still a giant fan of energy stocks. What value do you see in the energy sector?

    BM: I'm a giant fan of energy, food and water. The one thing we know is that cheap oil is over. The cost of energy is going to go up. The big opportunity in the next 15 years is going to be energy in any form. Food and water are analogs of energy.

    TER: Are there specific energy stocks that are more interesting to you?

    BM: Yeah, the ones that are well run, well financed and well managed.

    TER: Can you give us some of your favorites?

    BM: When I write about an energy stock, it's because I know the management. I met the people at Torchlight Energy Resources Inc. (OTCQB:TRCH) when I was out in L.A. at a conference a few months ago. They're raising money, and the company is going to have a lot of money when the cost of projects and the cost of drilling come down. Torchlight is drilling in Texas and Oklahoma.

    TER: Is the money being raised for drilling programs? The company recently bought a property in Texas.

    BM: I'd like to see Torchlight increase its acreage and do drilling. It's a very favorable time because things have slowed in the patch. I actually like corrections. Everybody else wants to buy stuff at new highs. I'm not a big fan of that.

    Another company I follow is Pan Orient Energy Corp. (OTCPK:POEFF) [POE:TSX.V]. That company is kind of a tripleheader. It has projects in Thailand, Indonesia and Canada. All Pan Orient has to do is succeed in any of them. The stock seems pretty cheap to me now.

    TER: You said that stock prices for most energy stocks have gone down, but you don't see them decreasing much further. Is that true for shale energy companies?

    BM: A lot of guys in shale are literally going to go out of business. I will make it crystal clear: I am not a shale fan. The idea that shale is the salvation of the United States, that we're going to be the net energy producer and that we're going to start exporting oil and natural gas-it's bullpucky. Anybody who knows energy knows it's bullpucky. It ain't gonna happen.

    We can expect oil from shale, but it's going to cost more money. I think that somewhere in the $75-80/bbl is the bottom for oil prices, but a lot of people are going to be hurt at that price. You want to look for companies that are well managed, with conventional oil in safe jurisdictions.

    TER: A counterargument could be that consumer spending could go up, because people are paying less for gas and have more disposable income. Do you buy into that theory?

    BM: Well, yeah. I mean, the natural way of economics is that over time, the cost of the things we consume should actually go down. Deflation is not a bad thing. Deflation is a good thing. If you look at the price of computers now compared to the price of computers 20 years ago, we get far more computer today at a fraction of the price. That's the way economies are supposed to work. Cheap oil hurts energy companies, but consumers obviously are better off.

    TER: Would an uptick in consumer spending then trigger a downturn in energy demand growth in China, the U.S. or Europe?

    BM: China has been on an orgy of inefficient spending for the last five to 10 years. There are millions of housing units in China that can't be sold. China needs a cleansing of its economy to restart natural growth. If China takes the same approach as the United States and Japan, and allows the government to micromanage, then that could turn into a full-blown depression. Governments never fix anything. Governments only screw stuff up. The idea that government is the solution to anything is a really flawed logic. We need the government to stay out of the economy as much as possible.

    TER: If we're seeing decreases in energy costs and increases in consumer spending, what's going to trigger the crash you discussed in your last interview?

    BM: We're not seeing an increase in consumer spending. We're seeing more efficient consumer spending. If you were spending $100 for a tank of gas and now it's $80, you don't necessarily go and spend that $20 difference. Hopefully you save it. Economies grow through saving, not through consumption. We created this idea that you could somehow consume your way to prosperity. Think about it for a minute. How are you better off by consuming? You're better off if you save.

    There is nothing sacred about economies growing. We need economies that spend money wisely and economies that are based on savings rather than consumption. Growing economies are not necessarily a good thing.

    TER: Anything else you want to mention in terms of trends and energy?

    BM: I think we are experiencing a natural correction, primarily due to slowdowns in Europe and China, and it's perfectly natural for the price of energy to go down. I think $80/bbl oil is probably the new normal minimum.

    TER: Thank you for joining us Bob.

    BM: My pleasure.

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

    Bob and Barb Moriarty brought 321gold.com to the Internet over 10 years ago. They later added 321energy.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, Moriarty was a Marine F-4B and O-1 pilot with more than 820 missions in Vietnam. He holds 14 international aviation records.

    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 Streetwise Interviews page.

    DISCLOSURE:
    1) Karen Roche conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Torchlight Energy Resources Inc., Pan Orient Energy Corp. 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) Bob Moriarty: 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: Torchlight Energy Resources Inc., Pan Orient Energy Corp. 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 (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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    Nov 06 3:33 PM | Link | Comment!
  • Colin Healey: Suppressed Uranium Price Shouldn't Keep Hedged Producers And Promising Explorers Down

    Near-term oversupply is suppressing uranium prices but there are signs of upside movement, says Colin Healey, research analyst with Haywood Securities. In this interview with The Mining Report, he notes that non-discretionary buying in the uranium spot market returned in Q3/14 after a lengthy absence and that the 71 reactors being built around the world should support Haywood's long-term $75/lb uranium forecast. Healey also discusses companies suited to perform in the current market and beyond.

    The Mining Report: The spot price for uranium stayed below $30 per pound [$30/lb] in May through late July. Since then the price popped up above $36/lb before settling at around $35/lb. Is that the near-term floor?

    Colin Healey: It's a difficult call. Two things give us hope that we may see support at current levels. We saw the return of non-discretionary buying to the spot market in Q3/14 after an absence of three consecutive quarters-something we haven't seen since 2005. We look for non-discretionary buying to thin the market of available material and underpin support for uranium prices at current levels. The return of non-discretionary buying is important.

    We also look for greater activity in the term market where an increase in contracting activity should also increase the competition for material in the spot market. We expect a sustainable rally in the spot market to coincide with progressive increases in the term price over the next 24 months. As of this week we saw no new interest in the term market, but much of that is traded off-market. We're watching closely for anything that might move the term price. We saw the UxC Consulting Co. [UxC] weekly spot price come up $0.85 to $36.50/lb, which adds some confidence.

    TMR: Are there signs that non-discretionary buying will continue?

    CH: It's difficult to get transparent data on that. In the most recent quarter we saw the first return of non-discretionary buying as a small component of the total volume in the spot market. If that materializes into a trend, then we might have some evidence that it is returning in a meaningful way.

    TMR: Why didn't the end of Russia's "Megatons to Megawatts" create greater price strength in the uranium space in 2014? And what's responsible for the overhang on uranium prices now?

    CH: As a major source of secondary uranium supply, the loss of the Megatons to Megawatts program was a significant event. It shifted the balance in total supply in favor of primary sources-although any impact will be tempered in the near term by the fact that the market remains oversupplied. The program was structured with a defined timeline and as such its end was not a shock. There's a form of replacement agreement in place between the United States Enrichment Corp. [USEC] and Techsnabexport [TENEX], the commercial subsidiary of Russia's Ministry of Atomic Energy, for delivery of enriched uranium to the U.S. with the U.S. delivering natural uranium in return, which covers about half the deliveries received under the Megatons to Megawatts program. That agreement appears to include an option to double the initial volume at the option of the USEC. The agreement is effectively a separative work unit [SWU] purchase contract where USEC is paying for enrichment services embedded in the Low Enriched Uranium [LEU] product TENEX is supplying.

    The good news is that this structure should mean that utilities are more reliant on primary uranium production than before and that should be ultimately bullish for uranium prices. Nevertheless, the market has been oversupplied for several years. Total supply in 2013 was about 207 million pounds [207 Mlb] versus demand of around 172 Mlb, reflecting a surplus of about 35 Mlb. In 2014, we estimate a surplus of 20 Mlb, which contributes to an overhang in prices.

    TMR: Haywood forecasts the 2015 spot price at $39.50/lb, but in 2016 that jumps to $53/lb. What are the catalysts that are going to push the price 34% higher?

    CH: We're looking for progressive growth in long-term and spot prices based on a more normalized demand-supply relationship. Prices remain low as the market continues to be oversupplied, and as a result, as much as 30% of current primary supply is thought to be uneconomic at current spot prices. Driving our appreciating forecast are the 71 reactors currently under construction globally, coupled with a rationalization on the production side, whereby benchmark uranium prices will begin to move toward the marginal cost of production, which itself will shift with eventual production atrophy.

    The global reactor construction pipeline is important. New reactor fuel loadings require about three times more uranium than the average annual burn of the same reactor, so there's an increase in demand when a fixed pipeline of new reactors comes on-line. We also believe that a return to nuclear power in Japan will help the situation. We're looking for between two and six units to be restarted in 2015. Our price forecast is underpinned by an assumption of tight demand-supply balance in uranium markets by 2017 with the price coming up to a point that rationalizes the majority of current production, plus provides an incentive for new mines.

    TMR: Your average price for 2016 is $65/lb. How much of that is based on more reactors restarting in Japan?

    CH: The return of Japan to nuclear power isn't as significant as the construction pipeline. It's more of a sentiment indicator, which we believe could move uranium stocks. We believe that Japan has significant uranium inventory, which should support consumption during the restarts. It's really the pipeline of reactors under construction that is underpinning the majority of our bullishness on the uranium price.

    Furthermore, we believe the term market will respond alongside the spot market to the catalysts I mentioned. The term market is a better gauge of the overall condition of the sector. In 2013, reported term market volumes were very low at just over 20 Mlb, versus 191 Mlb in 2012, and over 100 Mlb in 2011. We've seen a bit of a recovery in volume in 2014 at almost 70 Mlb. We expect term market volume to pick up steadily in the coming months as uncovered utility requirements grow. We expect 2015 to be even busier.

    TMR: Despite a price run-up in August, most uranium equities, especially the producers, did not follow the spot price higher. How do you explain that?

    CH: The resource sector has had a rough ride over the last two months with the TSX Venture Index down more than 20% since the end of August. Most uranium equities were not spared. Recent positive uranium spot price movements have failed to reverse the negative trend in the equities and, in the near term, equities will respond to macro news, such as in Japan where 19 of 26 assembly members recently voted in favor of nuclear reactor restarts. Another positive vote of the Prefectural Assembly, expected later this week, could mean reactor restarts in Japan in the first half of 2015. We are seeing reports in the press that only 8 of the 49 members of the Assembly oppose restarts.

    TMR: Do you have any insight into the investor mindset on the commodity?

    CH: We're looking beyond the spot market to the term market for material consecutive movements month-over-month to gauge the sector. A movement in long-term price indicators, say $3-4/lb, in consecutive months would reflect the beginning of a meaningful return to the term market by utilities. We believe that would wake up the broad market to the equities.

    For the producers, there are few tradable pure-play uranium producers, some of which have limited gearing to spot market prices, such as Cameco Corp. (NYSE:CCJ), where term contracts represent a majority of sales.

    TMR: Research reports from Haywood suggest that near-term producers and select explorers are the uranium equities most likely to perform. Is that your view?

    CH: We certainly saw the biggest response from the near-term producers and developers during the rally in uranium equities from late November 2013 to mid-March 2014. We would expect that group to lead the pack in the next rally as well. This group is preproduction and is not selling and depleting their resources into a weak market. In that regard their cash flows tend to be linked to their development budgets, and their general and administrative expenses, making their cash flow more predictable. They offer historic correlation to uranium price movement without the direct cash flow exposure to the uranium price that we get with the current producers.

    TMR: Let's move to the producers. Tell us about some compelling narratives in that space.

    CH: We cover Energy Fuels Inc. (OTC:UUUU) with a Buy rating; it is a conventional uranium producer in the U.S. We also follow Uranium Energy Corp. (NYSEMKT:UEC), which we currently have a Hold rating on.

    TMR: You mentioned Uranium Energy Corp. What's happening there?

    CH: Uranium Energy has a hub-and-spoke strategy with the Hobson ISR processing plant at the center of that hub. Its flagship project-the Goliad project in South Texas-is not in production. The Palangana well fields that were in production are now more or less on care and maintenance. We don't have a lot of operational data on those assets, but they seemed to be underperforming before they were taken offline due to low uranium prices. We're waiting on a Goliad construction update from Uranium Energy before we make any further decisions about the company. We have a $1.70 target and a Hold rating on Uranium Energy.

    TMR: What about Energy Fuels?

    CH: Energy Fuels' current strategy is to leverage its strong contracting book. The company is not expected to produce from processing of conventional ore at its White Mesa mill in 2015, rather it will sell into its favorably priced contract book from inventory. It will decide to produce more uranium once it believes there is price support well above current levels. We like the company because of that contract book and because it's in the position to respond to recovering uranium prices and make that production decision, yet still generate revenue from sales during 2015.

    TMR: It's essentially 100% hedged. What are your thoughts on that strategy?

    CH: You could interpret it as 100% hedged, but I wouldn't because it has the ability to produce and sell additional material into current prices, offering potential gearing to uranium price when justified. Energy Fuels decided to sell into its contracts because those contracts are priced in excess of current market prices. Its planned sales are all contract, which is by definition hedged, but the company can turn on the production switch and generate sales at the prevailing uranium price, though it would probably take six to nine months to ramp up production from mines; stockpiled ore could be processed sooner. We have a $12.50 target on Energy Fuels and a Buy rating.

    TMR: Few, if any, uranium producers have outperformed the TSX Composite Index so far in 2014. Do you expect a similar story in 2015?

    CH: It's a difficult call in the near term as uranium prices have proven very tricky to forecast and the short list of producers have diverse production methods, scales and capital structures. Our commodity price forecast for the next three years calls for a significant appreciation, as we highlighted. If our uranium price forecast proves to be accurate over the next few years, I would expect uranium producers to outperform the Composite, at least in terms of nominal returns and not attempting to compare the risk-adjusted returns of the TSX Composite Index.

    TMR: Thank you for talking with us, Colin.

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

    Colin Healey joined Haywood in 2008 as a mining associate focusing on the uranium, iron ore and coal sectors. Immediately prior to his arrival at Haywood, Healey worked at a major Canadian bank as an analyst structuring debt financing across a wide variety of industries. Prior to joining the finance industry seven years ago, he worked for eight years as quality manager in an ISO 17025-accredited laboratory that performed extensive assay and analysis work for major mining and precious metals refining companies. He holds a Master of Business Administration from the Schulich School of Business at York University, majoring in finance and investments, as well as a Bachelor of Commerce degree majoring in computer information systems and a technical diploma in mechanical engineering.

    Want to read more Mining Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit our Mining Report home page.

    DISCLOSURE:
    1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining 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) Colin Healey: 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: Energy Fuels Inc. and Uranium Energy Corp. 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.
    3) The following companies mentioned in the interview are sponsors of Streetwise Reports: Energy Fuels Inc. 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.
    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 Mining 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 Mining Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
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    Nov 04 3:19 PM | Link | Comment!
  • The Tao Of Investing In The Renewable Energy Market: Practice Patience, Not Panic, Says JinMing Liu

    With the market bucking like a rodeo bull, investors should hang on and sit tight, JinMing Liu advises, especially with the high-beta cleantech and renewable energy industries he covers. In this interview with The Energy Report, the senior vice president and director of research at Ardour Capital Investments explains how the recent market correction affects both the cleantech and waste-management companies in his portfolio. His advice throughout: Be patient.

    The Energy Report: JinMing, the first half of October was a bloodbath on Wall Street, and resulted in the stock market's worst performance of 2014. How did the selloff affect the companies you cover?

    JinMing Liu: Renewable energy, or cleantech stocks, have very high beta, so what happened in the past weeks had an even bigger impact on them. On the general market level, this correction could be very healthy. We need to wait to see how the cleantech and renewable markets develop, because they could go quickly either way. I suggest investors be patient.

    TER: So investors should sit tight to let the market settle down some?

    JL: They should have patience, because cleantech stocks, in general, have a higher risk profile. Cleantech and renewable energy companies are a newer industry, and the risks associated with them are higher than with more mature, bigger companies.

    TER: Is that true of the waste-handling stocks as well?

    JL: That is a different space. The waste-handling industry has different subsectors. Municipal solid waste is relatively mature. There are also industrial waste and food-processing waste subsectors, which have different risk profiles.

    In the municipal solid waste market, companies like Covanta Holding Corp. (NYSE:CVA) have relatively mature operating models and, generally, very high cash flow. On the other side, industrial waste handling and food-processing waste handling have two different sets of factors affecting them. For food-processing waste, the final products are sensitive to commodity prices, which can affect the stocks of companies like Darling Ingredients Inc. (NYSE:DAR), which I cover. Because of what happened recently with the uncertainty surrounding the Renewable Fuel Standard compliance requirement and sanctions against Russia, expectations for the global consumption of agricultural products have been adjusted. As a result, prices for Darling's products are under pressure. That led to some pressure on the stock.

    The industrial waste segment is very fragmented. Many smaller companies are trying to get in, but the competition is relatively high.

    We are also looking at technological improvements in the waste industry. Some technologies are relatively mature, such as landfill operations, traditional waste-to-energy solutions, burning trash to generate electricity, or the rendering process for agricultural waste. These are mature technologies. Companies either bury, burn or cook food waste to make the final products. But given the increases in different commodity prices, including crude oil, and in landfill prices because of finite space available for landfills, different types of technologies are called for.

    For example, some companies are trying to use municipal solid waste to produce biofuels. Another crossover company, called Strategic Environmental & Energy Resources Inc. (OTCQB:SENR), is using a combination of pyrolysis and plasma technology to reduce the volume of the waste from different industries, including oil refineries and medical waste. These are the areas in which we expect to see potential significant progress in the near future.

    The U.S. generates a lot of waste each year. The waste disposal industry is worth about $50-60 billion per year in the U.S. The traditional waste-handling companies like Covanta have relatively stable business models. Their growth will come from incremental market growth. We may see better opportunities in the future in technologies that help us improve waste-handling and processing.

    TER: The waste industry is driven, in many respects, by regulations. What environmental regulations are generating the greatest business opportunities today?

    JL: The most promising opportunity right now is in energy efficiency through reduced waste. There are quite a few mandates out there. In 2012, the Obama administration put out an executive order requiring energy efficiency at industrial facilities. On the state level, last year California put out a mandate for utilities to install 1.3 gigawatts [1.3 GW] of grid-connected energy storage capacity by the end of 2020. Those areas are driven by regulation, and we'll see a lot of very good business opportunities.

    TER: Has any other state done anything as specific as California?

    JL: Many grid storage projects are ongoing. The U.S. Department of Energy has an active database documenting these, whether they're under construction, in operation or just proposed energy storage facilities. These projects are happening across the country. Whether other states have mandates, I'm not sure.

    One of the important reasons utilities install energy storage capacity is to push off big investments in infrastructure. As you know, this country has very old power infrastructure. That's why I believe new technologies in alternative distributed power generation and energy efficiency and storage will help us work with the aging power infrastructure and move to more sustainable development.

    TER: President Obama has implemented several regulations regarding environmental improvements. Do you think his executive action, bypassing Congress to implement the regulations, will survive the political opposition?

    JL: Yes. First of all, I don't foresee any problem in executive orders being carried out, because I don't think they are that politically sensitive. For example, the Obama mandate for improvement in the Corporate Average Fuel Economy standards for vehicles got support from all the major automakers. Second, the government should have the determination to carry out a specific executive order, meaning putting in place effective measures of enforcement. We think there is a good chance that the U.S. Environmental Protection Agency will reduce CO2 emissions from power plants, for example. On this end, we don't expect significant impact on waste-to-energy facilities, since they mostly use renewable municipal waste.

    TER: Renewable fuels must compete with well-established fuels, so the question of grid parity, or renewables' ability to compete, comes up. Municipal solid waste as energy, for example, has struggled in this country. How effectively can renewable fuel compete today?

    JL: This question has to be answered for the different types of fuels. Ethanol currently competes very efficiently against traditional fossil fuels like gasoline, because we as a country have built a large production capacity for ethanol and our farming/agriculture sector can support such a huge capacity.

    On the other hand, for a similar biofuel, biodiesel, it is very hard to compete without state volume mandates and subsidies.

    Municipal solid waste is a tricky fuel. You can burn it to generate electricity, but municipal solid waste, as a fuel, depends on the tipping fee-the fee charged to municipalities by waste-processing facilities to break even. Revenue from sales of electricity generated is the upside for profitability.

    TER: Does Covanta use any special combustion technologies?

    JL: Covanta uses more traditional technology; its technology is at least 20 years old. There are other emerging technologies for waste-to-energy, like plasma. Air Products & Chemicals Inc. (NYSE:APD), a large company, is building facilities using plasma technology in the United Kingdom. Strategic Environmental, as I mentioned earlier, uses plasma technology in combination with pyrolysis technology to reduce volume or to get rid of some specialty waste.

    Processing waste with plasma is an interesting approach. If members of the public hear that a waste-to-energy facility will be built, they most likely will not support it. But if they hear that a plasma gasification power-generation facility is planned for their neighborhood, they may support it. That is how powerful newer technology might be for the waste-to-energy sector.

    TER: What other companies do you cover in waste management?

    JL: Darling Ingredients, which recently changed its name from Darling International, handles agricultural and food waste. Darling has grown very big through acquisitions. Its stock recently was under a lot of pressure simply because, as a food-waste processing company, its final products are sensitive to agriculture commodity prices. When the corn price is at $3-$4/bushel and the soybean price around $9/bushel, pressure is on Darling's stock. But in the long term, I believe that Darling is a good stock.

    TER: How are you rating your waste-handling companies these days?

    JL: Right now I have a Hold rating on most of my waste-handling companies because the valuations of most of these companies were very high and I expect some correction. I don't want to use the word "bubble," but the valuations stopped me from being positive on these stocks. As I've said, the stock market was due for a correction because the valuations of most stocks are very high, and many of the environmental waste-handling companies are trading even higher because they have higher beta.

    TER: Energy storage also encompasses a wide variety of technologies and applications. Which applications and technologies offer investors the greatest returns and growth?

    JL: In the long term, there will be many competing energy-storage technologies, like the ultracapacitor from Maxwell Technologies Inc. (NASDAQ:MXWL) and lithium batteries from many companies.

    When we talk about energy storage, it can be discussed in terms of two applications-power applications versus energy applications. Power applications refer to a high power output for a relatively short period of time. Energy applications refer to discharge of electricity for longer periods of time near the system's nominal power rating. Ultracapacitors are very good for the first type of application. They can offer a burst of energy to propel a large bus to a certain speed. Other energy-storage applications need longer output periods with more stable energy flow.

    A lot of competing technologies will be on the market in the near future, but among them, lithium batteries have the most promising growth profile for the very simple reason that lithium batteries offer very high energy density. For many applications, we need small but powerful energy sources.

    Lithium batteries are also available in different shapes, which are important for the development of applications. For example, in a cellphone we want a battery that's as compact as possible but has a lot of power, whereas in home energy storage devices, many large format lithium batteries can be used, in a cabinet of the size of a refrigerator. Form factor is another important benefit of lithium batteries.

    In the next five to 10 years, we'll see very strong demand-driven growth from electric vehicles, smartphones, tablets, power tools and gadgets we can't imagine. That's why I prefer the technology.

    TER: Do companies providing energy storage options, such as Highpower International Inc. (NASDAQ:HPJ), Maxwell and Polypore International Inc. (NYSE:PPO), work throughout the range of applications, from cellphones to megawatt-size grid energy storage, or do they focus on specific sectors?

    JL: Maxwell Technologies offers the ultracapacitor, which is for specific vehicular and renewable energy applications. Highpower International is a lithium battery company. Its batteries range from units that can be used in very tiny gadgets, such as a smart watch, to grid-connected energy storage devices. Polypore International is an important supplier for the manufacturing of lithium batteries. It offers a specialty product called the separator-basically a piece of membrane to separate positive and negative electrodes inside a battery. That membrane is very important for the performance and safety of lithium batteries. As you may have heard, lithium batteries may explode if things go wrong.

    TER: The Tesla Motors Inc. (NASDAQ:TSLA) gigafactory won't be online for several more years, but when it comes online, what effect do you expect it to have on battery prices?

    JL: Lithium battery price has been on a downward path for a long time, and I believe the lithium battery price will continue to decrease regardless of when the Tesla gigafactory comes online.

    In the past few years, the demand for lithium batteries has been growing at an annual rate of about 26%. Tesla's gigafactory wants to build about 30 gigawatt-hours of batteries, which is almost identical to 2013's global lithium battery production capacity. If this industry continues to grow at 26% each year, in less than three years, we'll see lithium production, in terms of volume, double. Within five years, that number could triple or quadruple. I don't believe Tesla's gigafactory will have an impact on the pricing. The expansion of other companies' production capacity would satisfy the demand for other areas and applications. Tesla's gigafactory most likely will satisfy its own electric vehicle production.

    TER: Finally, the International Monetary Fund has cut its forecast for global growth. It says the Eurozone could slip into recession, and the stock valuations may be "frothy." How should investors conduct their business in this climate for the next six months?

    JL: I agree with the notion that we are looking at a bubble. In this kind of environment, it's smart to invest in companies that are less volatile-in more defensive stocks. For example, Covanta Holdings pays dividends and generates stable cash flow each year. That's a defensive stock I can suggest.

    TER: Thank you, JinMing. I appreciate your time.

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

    JinMing Liu is senior vice president and director of research with Ardour Capital Investments LLC, which focuses on energy technology, alternative energy and power, and clean and renewable technologies. He has been with Ardour Capital for seven years.

    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 recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

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