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  • 2013 Should Be The Turnaround Year For Uranium: David Talbot

    Source: Zig Lambo of The Energy Report (12/4/12)

    http://www.theenergyreport.com/pub/na/14809

    David Talbot After two years of uncertainty, David Talbot tells The Energy Report why he expects 2013 to be the year that the balance in the uranium energy equation finally begins its tilt toward the demand side, with 2014 marking a probable supply shortfall. Talbot discusses which uranium producers, developers and explorers he expects to benefit most from the coming market turn.

    The Energy Report: It's been just over three months since we last discussed the nuclear industry and the market prospects for companies in the uranium space. What have been the most important developments since then?

    David Talbot: There have been a number, both on the supply side and the demand side, since early August. All the catalysts appear to strengthen the long-term fundamentals of the sector, and while they haven't necessarily moved the market, we believe they ultimately will help.

    On the demand side, Paladin Energy Ltd. (PDN:TSX; PDN:ASX), on which we have a Buy rating and a $2.55 target price, signed an offtake deal with France's EDF Group to supply a total of 13.7 million pounds (13.7 Mlb) of yellowcake between 2019 and 2024. It received $200 million ($200M) up front to secure supplies, with delivery still six years away.

    In addition, the United Arab Emirates signed a $3 billion ($3B) nuclear fuel supply contract covering the first seven years of operations at the first four of its reactors. Uranium Energy Corp. (UEC:NYSE.MKT), on which we have a Buy rating and a $3.50 target price, is one of the six suppliers involved in that deal. AREVA (AREVA:EPA) also signed a contract to supply more than 66 Mlb of U3O8 to EDF from 2014 to 2075.

    Beyond the demand side, we also see the supply side tightening, with the HEU (highly enriched uranium) agreement expected to go off-line in about 13 months, removing 24 Mlb of supply.

    Current price weakness is causing cuts in production forecasts, including for Cameco Corp. (CCO:TSX; CCJ:NYSE)/not rated. It has deferred its Kintyre project and dropped long-term production guidance. BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK/not rated), has deferred its massive Olympic Dam expansion. Kazatomprom and Uranium One have canceled the Zarechnoye South project, and Uranium One announced 2014 guidance that was well below expectations. Paladin deferred its Langer Heinrich Stage 4 expansion (unless we see $85/lb uranium). Energy Fuels Inc. (EFR:TSX) closed three mines in the U.S. Southwest. If current producers can't keep projects going at current prices, we can't expect investors to pony up the capital to build newer projects, which are often more expensive, of lower grades and have higher cost than current operations.

    TER: Despite the continued positive long-term outlook for uranium demand, the price has been in a downtrend since midyear. Why is that?

    DT: We believe the recent spot price downturn has to do with excess short-term uranium supply and low discretionary demand mainly from utilities. For much of the summer, China was not buying uranium on the spot market, and many utilities were covered for 2013 requirements. Uncertainty still surrounds long-term nuclear plans for some developed nations, including Germany, France and, of course, Japan-although we do believe some of those decisions are more political than scientific. So investors weren't touching the commodity either.

    TER: Despite this recent price weakness, are you still bullish on the uranium space overall?

    DT: We are still bullish. As we have stated in a couple of recent sector updates, the uranium renaissance still appears to be moving forward. There are more reactors planned or under construction today than before the Fukushima Daiichi disaster and we don't believe that anyone will step away from nuclear energy entirely. Emerging markets are going to be the real growth story, specifically China, India and Russia. Despite the current overhang, we remain bullish and expect to see 240-260 Mlb of demand by 2020, offset by maybe 200 Mlb of combined primary and secondary supply. We expect demand to exceed supply by 2014. Without higher uranium prices to support development of new mines, a long-term supply gap does exist.

    Low prices are pushing expansions off or canceling them altogether, which is negative from a company standpoint but is actually positive from a long-term supply-demand perspective. We talked in August about the delays at Paladin, Cameco and BHP taking about 23 Mlbs off-line. We can now add Kazatomprom and Uranium One to the mix, and a number of the other projects that will have incremental impacts as well. Paladin believes the break-even price for projects is $85/lb. If Paladin is right, that deficit could widen even further, putting upward pressure on uranium prices.

    TER: What do you think will reverse the downtrend in uranium prices, and when would you expect that to occur?

    DT: Price is the only catalyst that uranium sector investors care about right now, in our opinion. The main trend reversal will likely be in spot uranium buying from China and Japan, as well as from investors. In the second half of next year we'll hopefully see some movement, as the Japanese get restart approvals. China has already resumed its purchasing in the spot market and started importing uranium again. That's helping to remove some supply overhang in the spot market.

    We cannot underestimate China's impact-it currently has 15 reactors in operation, 26 under construction and 51 planned, according to the World Nuclear Association. We estimate that China is going to need 45-50 Mlb annually by 2020. That's the same as what the U.S., the largest nuclear power generator, uses today. Japan is going to have to resolve its nuclear regulatory issues before it comes back on-line in any big way. In general, we could see a more robust spot market in 2013 as utilities cover requirements for 2014 and beyond. The market is waiting for the end of the HEU agreement, which is going to take 24-28 Mlb out of the secondary supply at the end of 2013.

    TER: Has the recent price performance of spot uranium had much effect on your evaluation models for the uranium producers?

    DT: It has. On Nov. 1 we adjusted our price assumptions downward to $49/lb for 2012 and $54/lb for 2013. We are leaving our long-term price assumption at $65/lb. Prices had previously been in the $65-70/lb range. This decrease in our short-term spot price largely impacted current or near-term producers, but made few meaningful impacts on our long-term NAV estimates for some explorers and developers.

    TER: Speaking of producers, over the past year Energy Fuels Inc. has gone from a midlevel development company to the largest conventional producer in the U.S. Do you have any thoughts on that?

    DT: We have a Buy recommendation and $0.75 target price on Energy Fuels, as it has indeed become one of the largest producers in the U.S., having bought operations from Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT). It owns the strategic White Mesa Mill, the only conventional and permitted mill operating in the U.S., which has saved the company about $150M since it doesn't have to permit and construct a mill of its own. The company has recently shifted production to lower-cost and higher-grade operations in Arizona. We expect production to drop to just over 1 Mlb next year. But the company has a lot of leverage to uranium prices, and once those pick up we expect Energy Fuels to benefit significantly.

    TER: Among the developers, which look particularly interesting at this point?

    DT: We are looking downstream these days, toward names that have catalysts down the road. As peer groups go, the developers and explorers are doing a little better than the producers.

    UEX Corp. (UEX:TSX) is still our top developer pick, with strong takeover potential. With 88 Mlb of compliant resources, its 49%-owned Shea Creek joint venture (JV) with AREVA is the third largest deposit in the Athabasca region after McArthur River and Cigar Lake. The company is currently wrapping up a $10M program though which it discovered a new high-grade zone called Kianna East, and that will likely help the JV partners get Shea Creek over the 100 Mlb mark. UEX also wholly owns the 40-Mlb Hidden Bay project, in the northeastern part of the Athabasca Basin. UEX has the right projects in the right places, surrounded by majors and ample infrastructure, including existing mills with excess capacity, and a large, high-grade asset with the potential to grow even larger. We see takeout potential here, and Cameco is a likely choice.

    TER: Where is UEX trading these days? When do you think a takeout might happen?

    DT: UEX is trading at $0.57 right now. We have a Buy rating on it and a $1.70 target price. We have seen takeovers in the range of our target prices lately. We may not see a triple if somebody goes after the company today, but I do think that if someone makes an offer, there might be competitive bids.

    TER: You mentioned Denison earlier. What is the story there?

    DT: We recently launched coverage on Denison Mines with a Buy rating and a $2 target price. Its recent transaction with Energy Fuels transformed it from a producer with uranium price risk to a leading explorer/developer with exciting assets worldwide. Its 60%-owned flagship Phoenix deposit, at Wheeler River in the Athabasca Basin, is likely the third highest-grade uranium project on the planet. The company holds a 22.5% interest in the McClean Lake project, which includes the fully permitted, licensed and highly strategic JEB mill, the only mill in the world capable of handling ultra-high-grade uranium ore like that found at Cigar Lake. Denison also holds a 25% interest in the 50-Mlb Midwest project nearby, and majority ownership and operatorship of projects in Mongolia and Zambia. Plus, the company has steady cash flow from its environmental services division and its management of Uranium Participation Corp. (U:TSX/Buy, CA$7.50 target price), a uranium holding company.

    We also like Laramide Resources Ltd. (LAM:TSX), which has outperformed most of its peers over the past year. Its flagship is the 52-Mlb Westmoreland project in Australia. Recent drilling is starting to fill a four-kilometer (4km) gap along the 7km-long trend of uranium mineralization, where higher-than-average resource grades are being returned. Just as importantly, uranium has been discovered for the first time on the east side of the Redtree Dyke, opening up significant additional potential.

    Perhaps most important for Laramide is the news from Queensland that the uranium mining ban has been overturned. Laramide has also announced that its La Sal project, in the southwest U.S., is fully permitted and could potentially be put into production next year. The project is close to Energy Fuels' White Mesa Mill, where the company hopes to orchestrate a toll milling agreement. The company also has a royalty interest in the Church Rock deposit in New Mexico. It was able to sell forward some of that royalty; the remaining royalty is valued at somewhere between $15M and $75M, depending on uranium prices. This highlights how undervalued the stock is at this point.

    TER: What is your target on Laramide, compared to where it is now?

    DT: It's $2 and right now the stock is trading at roughly $0.80. That is about a 150% lift.

    TER: That's decent upside. How about other developers?

    DT: A couple of interesting companies that have significant catalysts coming up are Ur-Energy Inc. (URE:TSX; URG:NYSE.MKT) and Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.MKT). We have a Buy rating and a $2.30 target price on Ur-Energy. The company recently received the green light from the Bureau of Land Management (BLM) on its Lost Creek project, which is now fully permitted, likely fully financed and under construction. We anticipate low-cost production to begin by the middle of next year, ultimately ramping up to 2 Mlb per year over a total mine life of eight years. The company is also working on its project pipeline after having announced definitive agreement to acquire Pathfinder Mines Corp. that would bring another 15 Mlb of historic resources into development. The Shirley Basin project would likely be the next one developed by the company. Ur-Energy would also acquire a massive database, which management is more than capable of monetizing, plus a tailings management facility that could prove a future source of cash flow through waste disposal agreements with surrounding miners, some of which are already in place.

    Big news out of Uranerz recently was the receipt of its deep disposal well permit, which essentially clears the way to production by mid-2013 via toll milling at Cameco's Smith Ranch-Highland in situ recovery plant. We believe the company can ramp up to between 300-700 Klb over the next two years. Upcoming catalysts include the installation of the first deep disposal well, expected to begin shortly, followed by a second disposal well and initial production thereafter.

    TER: How about explorers? They usually provide the most excitement if they find something investors weren't expecting.

    DT: Explorers definitely provide the most excitement. Quite a few have been finding uranium and gold, for that matter, even though the developers and producers have not fared as well.

    We recently launched on Mawson Resources Ltd. (MAW:TSX; MWSNF:OTCPK; MRY:FSE) with a speculative Buy rating and no target. This gold-uranium exploration company is focused on its 100%-owned Rompas project in Finland. It is an early-stage story with huge potential. We think that Rompas may hold multimillion-pound uranium potential and, more importantly, multimillion-ounce gold potential along its 6km strike length. We've visited almost 80 uranium projects and dozens of gold projects around the world, and we've never seen so much high-grade uranium outside of the Athabasca Basin, let alone massive uranium with significant visible gold at surface.

    This project has returned grab samples that average 4.25% U3O8 and 1,127 grams per tonne (g/t) gold. Channel samples have averaged up to 51% uranium and 22,700 g/t gold. Recent drilling has returned 617 g/t gold over 6 meters (6m), including almost 3,500 g/t gold over 1m. We expect significant results down the road.

    Environmental permitting risk still remains, as parts of Rompas lie on a Natura 2000 natural heritage preservation site. But we are encouraged by the recent receipt of 100% of legal rights to the core of the Rompas claims. Mawson is conducting environmental studies for an application to modify the claim decision that will hopefully allow full exploration on the Natura area as well, with a decision expected in 2013.

    TER: Where is that stock now?

    DT: Mawson is trading at $1.25.

    TER: Considering the exciting upside, it seems that somebody will want to enter some kind of a JV with Mawson or maybe even take the company over.

    DT: That's definitely possible. It could be a uranium company or a gold company. Some seniors are poking around Finland, including Cameco, which is planning to produce uranium in Finland.

    TER: Any others?

    DT: Another company we're looking at is Kivalliq Energy Corp. (KIV:TSX.V), which we have recommended as a Buy with a speculative risk rating and no target price. This company has been very successful with drilling and finding new zones at its Canadian sites over the past two years. It's now up to 11 new zones just outside its main high-grade resource area, with dozens of new high-grade targets. We expect another aggressive drill program to begin in 2012. A resource update is expected in the first quarter of 2013, which could potentially add about 10 Mlb to the 27 Mlb on the books already.

    Fission Energy Corp. (FIS:TSX.V; FSSIF:OTCQX) is a stock we rate as a speculative risk Buy with no target price. This company has had incredible success with its Patterson Lake South JV with Alpha Minerals Inc. (AMW:TSX.V), formerly ESO Uranium, (not rated). It has made a new high-grade discovery on the southwest side of the Athabasca Basin, with massive pitchblende that exhibits off-scale radioactivity on several holes. Fission's stock has rallied, rising 70% on this news over the last couple of weeks alone. We await initial assay results for further proof that the companies may be onto something big.

    Fission's flagship is the J Zone deposit in its 60%-owned Waterbury Lake JV, on the east side of the Athabasca Basin next door to the Roughrider deposit. This JV is with Korea Electric Power Corp (KEPCO), one of the world's largest nuclear utilities. The J Zone hosts 9 Mlb of uranium, with 7.4 Mlb classified as Indicated grading 2%. The JV has about $6M to spend before it completes its first three-year, $30M commitment. We expect this will be spent on a resource update this fall and an upcoming winter drill program.

    TER: Looking forward into 2013, what is the best strategy for making money and minimizing downside?

    DT: We almost always recommend buying a basket of juniors to mitigate risk, particularly if the stocks are small, but an investor's strategy must also depend on his or her view of where uranium prices will be in 2013. We recently divided the uranium sector into producers, developers and explorers, tracking their relationships with spot prices over the past two years. Explorers have the highest leverage to spot prices, with a 2.79 beta, followed by the developers with a 2.27 beta and finally the producers with a 0.81 beta.

    If you're bullish on uranium, invest in developers and explorers. If you're more defensive, look to the more stable producers. Investors are watching the spot market, which represents only 17% of total uranium trading so far this year, and has little to do with the actual long-term fundamentals of this sector, which are just getting stronger.

    TER: Do you think things are at a bottom, and that it is just a matter of when the turn comes and how quickly it moves?

    DT: We believe a large, rapid and more sustained rally might be deferred until the second half of 2013, when Japan gets things going again. We have seen a bit of a rebound over the last couple of weeks, with the uranium prices rising for the first time in five months. Hopefully there are brighter days ahead.

    TER: We'll all stay tuned and hope for the best. Thanks for talking with us today, David, and for all your insights.

    DT: My pleasure.

    Dundee Securities 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 PDAC, the Society of Economic Geologists and graduated with distinction from the University of Western Ontario, with an Honours B.Sc. degree in geology.

    Want to read more exclusive 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 Exclusive Interviews page.

    DISCLOSURE:
    1) Zig Lambo of The Energy Report conducted this interview. He personally and/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: Fission Energy Corp., Laramide Resources Ltd., Ur-Energy Inc., Uranerz Energy Corp. and Energy Fuels Inc. Interviews are edited for clarity.
    3) David Talbot beneficially owns, has a financial interest in or exercises investment discretion or control over, companies under coverage: Energy Fuels Inc., Mawson Resources Ltd. and Kivalliq Energy Corp.

    Dundee Securities Ltd. and its affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by companies under coverage: Energy Fuels Inc.

    Dundee Securities Ltd. and/or its affiliates, in the aggregate, own and/or exercise control and direction over greater than 10% of a class of equity securities issued by companies under coverage: None.

    Dundee Securities Ltd. has provided investment banking services to the following companies under coverage in the past 12 months: Energy Fuels Inc., Fission Energy Corp., Ur-Energy Inc. and Kivalliq Energy 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 Securities Ltd. The policy of Dundee Securities Ltd. with respect to Research reports is available on the Internet at www.dundeecapitalmarkets.com.

    The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

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  • Making A Killing In Mature Oil Basins: Josh Young

    Source: Peter Byrne of The Energy Report (11/6/12)

    http://www.theenergyreport.com/pub/na/14701

    The oil party is not over! In this interview with The Energy Report, Hedge Fund Founder Josh Young explains how to get the most returns out of a well-drilled oil field. There are plenty of excellent opportunities in mature North American basins and Young tells us why now is a good time to move in for the big kill.

    The Energy Report: Josh, what is a "mature" basin? You're famously bullish on them.

    Josh Young: Mature basins have well-known reservoirs and well-defined geologic characteristics. Hundreds or thousands of wells are already producing in such basins. North America has a range of them. My portfolio is almost entirely exposed to these mature basins.

    Some of my largest positions are in mature basins in Texas, Oklahoma and Kansas. One company is active in the Sedgwick basin with the emerging Mississippi Lime play, a horizontal redevelopment of vertical Mississippian wells, which were originally drilled over the course of decades. And another company is active in the East Texas field, which has produced for almost 100 years and is in the process of being redeveloped.

    TER: Why do you prefer the mature basins?

    JY: There is an old adage: "The best place to find oil is an oil field."

    TER: What is the risk of being a Johnny-come-lately?

    JY: Risk is always an issue, whether it's a new field or an old field. It is important to do due diligence and evaluate the risks in any investment.

    TER: How does peak oil factor into your investment strategy?

    JY: I don't think we are running out of oil anytime soon. But we have run out of cheap oil and are having more trouble growing production and replacing existing reserves. Now we have to go into shale or redevelop existing fields. This costs more money, of course, and calls for higher oil prices, but it is not the same kind of scary situation as that associated with peak oil.

    TER: Is there an indefinite amount of oil for us to be able to access in tandem with technological development?

    JY: It is not indefinite. There is obviously a limited amount, but there is more than has been predicted in certain circles. There have been Malthusian predictions of mankind's running out of various resources for hundreds of years. We typically overcome natural resource obstacles by inventing new technologies. The biggest recent technological improvements in oil production have been horizontal drilling combined with hydraulic fracturing as well as tertiary recovery from carbon dioxide and other solvents and surfactants that increase the recovery rates from existing fields, as well as deep water drilling. These methods are very expensive and are raising the marginal cost of production.

    TER: Let's talk about your stock picks in the mature basins.

    JY: Gale Force Petroleum Inc. (GFP:CVE) is focused on oil fields in East Texas. Its stock hasn't performed very well the last few months, but at the same time, its production just keeps growing. Last June, it was at 150 barrels per day (bbl/d), and as of its latest report, it is producing more than 460 bbl/d. Management has provided guidance of more than 800 bbl/d by early next year. It is growing rapidly. It trades at a low enterprise value versus production multiple and a low cash flow multiple. At some point it will get big enough to catch a bid or will trade in line with its peers.

    TER: Why is Gale Force's share price not in line with production?

    JY: It's a Canada-traded company located primarily in East Texas. Even though it has successfully grown production and deployed capital more efficiently than other, better-known growing oil companies like Kodiak Oil & Gas Corp. (KOG:NYSE.MKT), Gale Force does not have a big following or a natural shareholder base. Canadian investors aren't necessarily looking to get particular exposure to U.S. oil fields. They may be looking for other Canadian fields, or international fields beyond North America.

    The Canadian energy market, particularly the Toronto Venture Exchange, has suffered and that has led to investors and investment banks circling the wagons. There is a move toward companies paying a dividend, or companies that are very well regarded by the Canadian investment banks. Small-cap companies that the banks like get a lot of coverage and have maintained their multiples. It used to be that investors would intentionally try to find companies off the radar of the big banks, especially in Canada, because investors knew that out-of-favor companies today are the ones that will be the big winners over the next couple of years. Now, the dominant thinking in Canada is defensive. Money ends up in overvalued companies.

    But for the long-term-oriented value investor, an operationally sound company like Gale Force is going to trade up over time. Eventually, it won't matter whether people want to own it or not, because it will get bought out in the private market or repriced in the public market in line with its production and cash flow.

    TER: Can you talk more specifically about Gale Force's operations?

    JY: Gale Force made a big bet earlier this year on a field called Texas Reef, which is a multiple stacked-pay field in East Texas. According to technical experts at formerly leading companies such as XTO Energy (now Exxon Mobil Corp. [XOM:NYSE]), the Texas Reef is very similar to the Wolfberry vertical play in the Permian, with fracking and multiple stacked pays. Gale Force is in the process of proving that out.

    If Texas Reef works out similar to Wolfberry for Gale Force, it would have a significant impact on the upside potential and production growth to the company. If Gale Force drills $1 million ($1M) wells, and gets between 50 and 250 bbl/d, primarily oil, Gale Force will be able to even more rapidly ramp up production at a relatively low cost, and has hundreds of potential locations to develop.

    TER: Can you explain what a multiple stacked pay is?

    JY: Multiple stacked pay means that there are multiple geologic zones at different depths in the ground in a certain area, which each are capable of producing oil or gas. The idea with multiple stacked-pay wells is that you can choose to simultaneously produce the most productive zones. Some wells produce from one zone, and some wells produce from five zones at once. Wells in the Wolfberry play in West Texas produce somewhere between two and six zones concurrently. In the Texas Reef play there are stacked zones that are potentially productive.

    One of the things that is compelling about a multiple stacked pay is that it helps derisk a vertical well. With vertical wells in a single-zone area, you drill down, and if you miss the zone you aimed at, the well is uneconomic and you lose the money spent on drilling. But if you are drilling in a multiple stacked-pay area, let's say you miss the first zone and you miss the second zone. Then you hit the third and fourth and miss the fifth. You still have two good zones, and will probably get an economic well. If you hit all five zones, or if one of the zones happens to be particularly productive, then you end up with a highly economic well.

    TER: Gale Force is scheduled to convert to a U.S.-based royalty trust in late 2013. What are the benefits or potential drawbacks of that form of ownership?

    JY: The valuations on royalty trusts and MLPs are many times Gale Force's current valuation. On an exit-rate, EBITDA multiple, Gale Force is currently trading for less than $50,000 barrel oil equivalent per day (boe/d) for the end of 2012, versus $250,000 boe/d or higher for some royalty trusts and MLPs.

    TER: Does that make it an attractive takeover candidate?

    JY: I am surprised that a Canadian trust or a U.S. upstream MLP hasn't made an offer already. Gale Force's attractiveness and profile will increase as it grows further. There is potentially a five-times multiple uplift. If production doubles, there is potentially a 10-times valuation uplift, despite some amount of equity dilution.

    TER: Does the royalty trust system lock in the existing properties and restrict further development and expansion possibilities?

    JY: It depends on how you structure the trust. But converting to a trust is an exit strategy for Gale Force. The final valuation of the trust at conversion is the value that the shareholder walks away with from the deal. The trust's new owners buy in for the yield.

    TER: It sounds like a good idea to buy in to Gale Force before it converts.

    JY: It seems attractive to me. I own a lot of the stock. I've helped Gale Force craft the strategy, and if the market for royalty trusts holds up and if Gale Force hits its production targets, a trust conversion should pay off meaningfully, particularly from the current valuation.

    TER: What are some of the other undervalued shallow oil plays that you're watching?

    JY: I was recently appointed to the board of Lucas Energy Inc. (LEI:NYSE.MKT). I acquired almost 20% of the company in an SPV along with a business partner, and we were both appointed to the board. I can't say much about it, but it does have multiple stacked pays with Austin Chalk overlying Eagle Ford shale, and it is near extremely economic Eagle Ford wells drilled by EOG Resources Inc. (EOG:NYSE) and Marathon Oil Corp. (MRO:NYSE). And it is in a joint venture with Marathon. It also has acreage in the Woodbine play in East Texas, near Halcon Resources Corp. (HK:NASDAQ).

    TER: What juniors do you like in the Mississippi Lime?

    JY: Petro River Oil is doing a reverse merger that should close sometime soon into a company called Gravis Oil Corp. (GRAVF:OTCPK). It doesn't have a lot of production, but it has just over 100K net acres in the Mississippian. The enterprise value is roughly $20M, which is really exciting because it essentially trades for $200 per Mississippian acre, which is a fraction of the valuation of other public Mississippian-focused companies.

    There are not a lot of Mississippian wells that have been drilled recently in the area. Encana Corp. (ECA:TSX; ECA:NYSE) and Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) are very active in the area and we will soon see results. Petro-River uses a similar methodology used by SandRidge Energy Inc. (SD:NYSE) and Chesapeake Energy Corp. (CHK:NYSE) when they built their initial positions in the Mississippian. The methodology is looking at old vertical wells in the area and building lease positions near where the vertical wells indicate horizontal development would be most promising. Oil companies want to drill horizontal wells near where there are really successful vertical wells, because the really successful vertical wells indicate porosity and permeability (and oil!) in the reservoir.

    TER: These are mostly U.S.-based companies. Do energy independence and finding safe jurisdictions play a role in your investment philosophy?

    JY: Absolutely. There are a number of different costs and issues associated with being in areas where contract law isn't firmly in place and where there are lots of risks, like Venezuela. I like to deal in areas with predictable risks. Obviously, there are always some unpredictable elements in an equity investment. But, expecting that Mozambique, for example, is going to respect your contract is a big assumption. Obviously, it is not a mistake for Anadarko Petroleum Corp. (APC:NYSE) to drill for huge gas fields in East Africa. It will probably end up being worth it for it, but as a passive investor, given the types of value I'm seeing in onshore U.S. and onshore Canada, I am not sufficiently compensated to take that kind of risk.

    TER: Do you have a hedging strategy?

    JY: I hedge two ways-by shorting overvalued or potentially fraudulent enterprises, or by hedging oil prices. Gale Force is very well hedged, and Petro River is not as well hedged. For an equity investment in Petro River, I'd hedge more oil, either via puts or shorting an exchange-traded fund or with futures.

    TER: Do you have any predictions for the oil and gas sector in 2013 in terms of adjusting a portfolio to take advantage of any changes that you foresee?

    JY: When the turn happens in the equity markets, stocks like Gale Force will rise. There has been a focus since the crash in 2008-2009 on larger, more liquid companies. Smaller companies have suffered, and the stocks of a lot of companies that have newly created value are not reflecting that value. Over the long run, small-cap stocks outperform.

    Also, I think that natural gas has seen its bottom. Earlier this year, it was below $2 per thousand cubic feet (Mcf). The full-cycle replacement cost for natural gas is over $4/Mcf gas. For instance, I like larger-cap natural gas companies that have started to price in $4 or $4.50 gas, while smaller natural gas producers are still pricing in $3.50 gas or less. For instance, I like GeoMet Inc. (GMET:NASDAQ), which is priced at $3.50 or less.

    GeoMet is particularly interesting because it may be one of the most leveraged ways to get exposure to natural gas prices. It has less than $10M in market cap, versus producing tens of millions of cubic feet of natural gas per day and versus $120M in senior debt and over $40M of preferred stock. If GeoMet's properties are worth $200M on a PV-10 basis at the current natural gas strip price, that implies an equity value of four times the current market cap. And if natural gas goes slightly above the strip and trades to $4.50 in the next year, GeoMet's equity could be worth 10 times or more what it is currently trading for. Obviously leverage works both ways, but with sufficient hedges in place for the next couple of years, GeoMet will likely survive further volatility in natural gas prices and may be one of the most leveraged ways to get exposure to rising natural gas prices.

    TER: Thanks for your time, Josh.

    JY: You are welcome.

    Josh Young is the founder and portfolio manager of Young Capital Management LLC, which launched Young Capital Partners LP in 2010. He previously served as an analyst at a multibillion-dollar single-family office in Los Angeles. Prior to that, he was an investment analyst at Triton Pacific Capital Partners. He was also a corporate strategy consultant at Mercer Management Consulting and DiamondCluster. He holds a bachelor's degree in economics from the University of Chicago.

    Want to read more exclusive 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 Exclusive Interviews page.

    DISCLOSURE:
    1) Peter Byrne of The Energy Report conducted this interview. He personally and/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: Gale Force Petroleum Inc. and Royal Dutch Shell Plc.
    3) Josh Young: I personally and/or my family and/or Young Capital Management, LLC own shares of the following companies mentioned in this interview: Gale Force Petroleum Inc., Petro River Oil, GeoMet Inc. I was not paid by Streetwise Reports for participating in this story.

    Streetwise - The Energy Report is Copyright © 2012 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.

    The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

    From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles 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 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

    Nov 06 4:16 PM | Link | Comment!
  • Stop Gambling And Find Stable Profits In Energy Investment: Sid Rajeev

    Source: Zig Lambo of The Energy Report (10/30/12)

    http://www.theenergyreport.com/pub/na/14662

    Are junior resource stocks the investment equivalent of a game of blackjack? It depends on the investor as much as it does on the company. Sid Rajeev of Fundamental Research Corp. has come to expect stability from his picks. How? By using fair-value metrics and a longer-term timeline. In this exclusive interview with The Energy Report, learn how this pragmatic analyst plays a speculative market for reliable returns.

    The Energy Report: In your last interview with us, you talked about your firm's fair-value metric philosophy for evaluating which stocks look like good investment candidates. How has that worked out over the past year and a half?

    Sid Rajeev: We are strong believers in fundamentals analysis. Short-term price movements are typically controlled by speculation and a lot of hearsay. It's easier to identify good investment opportunities through fundamentals analysis, especially with a one-year minimum investment time horizon.

    TER: How does the current global economic picture influence your decision-making for resource investments into the foreseeable future?

    SR: We have seen a lot of good developments in the overall market in the past few months. First of all, the TSX Venture Index is up 10%. Moody's rating agency decided to maintain its rating on Spain. The U.S. economy continues to grow gradually. These are good developments that could result in a sentiment shift. We do see continued improvement, but it's going to be gradual. There are still a lot of extremely undervalued opportunities in this market that can provide high returns over the next 12 months.

    TER: Demand projections for China and other developing countries are shifting. How is this going to affect the fertilizer and potash markets?

    SR: Potash was trading above $800/ton in 2008. Prices then crashed to just over $300/ton in 2009. They picked up after and went above $500/t. Prices however dropped by about 10% in the past few months. Now, it's around $460-480/t. Our long-term potash price since last year has been $425/t. While many analysts and investors had to reassess their potash targets, because they were valuing those targets at extremely high potash prices, we did not have to make any significant changes. We continue to be strongly bullish on the segment in the long term, especially because the rationale is very simple. Developing economies need more and better food, and most importantly, the supply of arable land has been stable or decreasing, creating a huge need for fertilizers like potash.

    We are bullish on the commodity and even more bullish on advanced junior North American potash companies. Remember that the potash segment is an oligopoly that is currently controlled by a few major producers. India and China are big consumers and need long-term, stable supply at reasonable prices. We think that they would make a move to assure that they can control some advanced-stage potash projects, which are now trading at extremely low levels. We expect to see some kind of joint venture or merger and acquisition (M&A) activity in the advanced junior space in the next 6-12 months.

    TER: Which North American projects are looking good?

    SR: Two companies that we actually follow and like are Western Potash Corp. (WPX:TSX.V) and Passport Potash Inc. (PPI:TSX.V; PPRTF:OTCQX). Western Potash has been a Top Pick for over 12 months. It's still one of our favorites. This company is one of the very few advanced-stage projects in Saskatchewan that has yet to be acquired or form a JV. Most of the projects around it have already been acquired. The company is going to come out with a feasibility study by late November. Most of the neighboring projects that have been acquired in the past were all at post-feasibility stage. So we think the next six months is going to be extremely exciting and crucial for the company because, if the feasibility study is positive, as we expect, it should open more doors to some kind of joint venture or M&A activity.

    I think an ideal acquirer or JV partner would be a state-owned fertilizer company in India or China. One of the largest Indian fertilizer companies, Rashtriya Chemicals & Fertilizers Ltd., is looking to invest close to $1 billion in potash projects in Canada. I think they have already talked to most of the potash players in the space. A positive feasibility study could trigger some developments for Western Potash Corp.

    TER: What's the story on Passport Potash?

    SR: Passport Potash is another interesting story, but a more early-stage play. The project is in Arizona. Passport has dominant land acreage in the Holbrook basin. The company came out with an updated resource estimate last month. Its scoping study is expected in Q1/13. The main difference between Passport's project and Saskatchewan projects is that it is shallower. But size-wise, it's going to be significantly smaller. It's still early and there is still a lot of exploration going on in the region. Passport also recently signed a Letter of Intent with the Hopi Indian Tribe, which has allowed the company to include the Hopi lands in the upcoming Preliminary Economic Assessment (PEA). Passport has quite a few catalysts coming up, including a scoping study. It is also in discussions for financing, so we could see some kind of activity with this company over the next few months. It's currently trading at $0.20. Our fair value is $0.81.

    TER: How does the uranium sector look to you?

    SR: We have a long-term bullish outlook on uranium. Prices have dropped significantly over the last year to around $43-44 per pound (lb). Our long-term outlook on uranium is $70/lb. There are a few good uranium stories we cover. One of our favorites is a company called Strathmore Minerals Corp. (STM:TSX; STHJF:OTCQX). It has two advanced-stage projects in the U.S., one in New Mexico and one in Wyoming. The company recently signed a joint venture agreement with Korea Electric Power Corp. (KEPCO) to help advance its Gas Hills project. It also announced a positive PEA on its Roca Honda project.

    TER: What about coal?

    SR: Coal is another commodity we are bullish on. There is a company called Compliance Energy Corp. (CEC:TSX.V), which has five properties on Vancouver Island. It is focused on semi-soft metallurgical (met) coal. Coal comes in two types: met coal and thermal coal. Met coal has a higher value than thermal coal; prices of met coal have not dropped as much as thermal coal. Compliance Energy is now working on its environmental processing. The neighboring community has been extremely vocal against having a mine in the neighborhood, but we have not come across any major concerns. Progress is going to be slow and it is hard to predict an outcome, but we believe it is a good time for investors to get in if they want to speculate on a positive outcome on the environmental assessment. Right now, shares are at $0.09. Our last valuation in July was $0.85.

    TER: That's a pretty wide spread. Are there any other interesting possibilities or developments out there that you want to mention?

    SR: During a slowdown, investors typically look for safer assets. The junior mining segment is a highly speculative market. Within that sector, the safe assets, we believe, are the companies that are near-term producers or those that just started production with known exploration or production upside. We have been recommending such stories over the past year and most have done extremely well. The majority are in the precious metals sector.

    Names on our coverage list that have done extremely well in the last year include Anaconda Mining Inc. (ANX:TSX). Anaconda is a gold producer in Newfoundland; shares are up 56% YOY. The company has been extremely successful in ramping up production and cleaning up its balance sheet. The second one is SilverCrest Mines Inc. (SVL:TSX.V; SVLC:NYSE.MKT), which is a silver producer in Mexico with significant exploration upside. SilverCrest shares are up 56% YOY as well. The third company is Diamcor Mining Inc. (DMI:TSX.V; DMIFF:OTCQX). This has been our best performer in the past year; shares are up 269%. The company and its partner Tiffany & Co. have a diamond project in South Africa that it acquired from De Beers; commissioning and testing activities are ongoing. The last one is Banks Island Gold Ltd. (BOZ:TSX.V); shares are up 14% since we initiated coverage last month. It has two advanced projects in British Columbia.

    Just to close, remember that the junior mining market has always been a highly speculative one; it's mostly seen as a way to gamble. Here at Fundamental, we think it's easier to identify winners if you do fundamental analysis, proper due diligence, question the management team, ask them hard questions and see if the company has catalysts coming up in the next 6-12 months. If you do that, then you have a better chance of finding a winner.

    TER: Thanks for speaking with us today, Sid.

    SR: My pleasure.

    Sid Rajeev heads the research department at Fundamental Research Corp., which covers over 150 small- and micro-cap companies and 15 exempt market/private issues in industries including energy, mining, real estate and technology. He also manages the company's list of Top Picks, which have historically helped the firm finish strong in third-party analyst performance rankings. Rajeev holds a Bachelor of Technology degree from Cochin University of Science and Technology, and a Master of Business Administration from The University of British Columbia. He is a CFA Charterholder.

    Want to read more exclusive 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 Exclusive Interviews page.

    DISCLOSURE:
    1) Zig Lambo of The Energy Report conducted this interview. He personally and/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 or The Gold Report: Strathmore Minerals Corp., Passport Potash Inc. and SilverCrest Minerals Inc. Interviews are edited for clarity.
    3) Siddharth Rajeev: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Fundamental Research Corp. provides fee-based coverage on companies mentioned in this article.

    Streetwise - The Energy Report is Copyright © 2012 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.

    The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

    From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles 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 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

    Oct 30 3:12 PM | Link | Comment!
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