I heard the same thing about Cheniere, that they sold the liquefied gas forward at a fixed price. But I do not really understand how they buy their gas. Specifically, did they purchase gas at a fixed price as well as sell it at a fixed price? If not, they could be in a tough position if their purchase price of gas goes up, while their sale price of LNG remains fixed, while their operational costs remain fixed or increase over time.
As an investor, it is prudent to distinguish between investing in natural gas, versus investing in companies that produce, distribute, or search for natural gas. Unfortunately the author has not carefully distinguished exactly what is being invested in when pursuing one or more of the alternatives recommended in this article.
For example, the author correctly points out that Cheniere Energy is a major player in the potential export of liquefied natural gas. The author notes "Cheniere stands to benefit from the significantly higher prices of natural gas overseas." It is far from obvious that this statement is correct.
As has been pointed out numerous times on SA and other sources, the mere fact that natural gas trades at a higher price overseas than it does in the United States does not automatically mean it is possible to earn a profit by exporting "cheap" US natural gas to an "expensive" country. The key to unlocking the apparent arbitrage opportunity is in the critical details, which includes the initial cost to prepare the facilities for export, the operational costs to manage the export, and the cost of hedging or purchasing futures associated with the project.
There have been several recent articles on SA that have concluded that export of natural gas is expensive due to the high costs of liquefaction, transport, insurance, and hedging, and there may be little or no profit in the venture. I have not personally analyzed Cheniere's project to determine if they make economic sense, and what risks they may entail, but perhaps the author can enlighten us as to what his economic basis is for believing that Cheniere will be able to earn a profit from their venture. No doubt the analysis is complex, but if one is going to recommend a stock for purchase based on the claim that high overseas gas prices will lead to profit, it would seem reasonable to present at least a skeleton analysis of costs, risks, and income stream to justify the claim.
The author also claims that use of natural gas a surface fuel will lead to higher prices, which would presumably be good for the drilling and distribution sector. This is certainly not a new claim, but perhaps the author can comment on why he believes this is the case. After all, natural gas engines have been around for 50 years or more, and they still own a tiny fraction of the market worldwide. Why is that? And what is likely to change in the near future that would justify the claim that consumption by mobile natural gas engines will have a significant effect on prices any time soon.
Potash Economics And An Undervalued American Junior Potash Play [View article]
This is an interesting article on a company I have been following for several years. There are a few unfortunate misunderstandings embedded in the article that in my opinion skew the author's outlook.
1. "The supply for potash is projected to increase by 7.1% from 2011-2015, while demand is up 3.1% over the same period." This is a difficult to understand statement. Potash "supply" needs to be very carefully defined. There are vast quantities of potash that are potentially profitably mined. Does the author mean by "supply" the actual quantity of potash that will be mined and made available for consumption in a given year? As the author has pointed out, the potash mining companies have a great deal of leverage in the market, and typically adjust their output to match consumption, in an effort to maintain the price per lb of potash. I question whether the major potash suppliers would allow the supply to drastically overrun the consumption, as this would certainly drive the price down significantly.
2. " Farmers have been turning to lower-cost alternatives like urea and phosphate over potash." I have never seen this claim anywhere else. Urea is a source of nitrogen, whereas potash is a source of potassium, and nitrogen is NOT a substitute for potassium in the growth cycle of plants. Phosphate refers to the PO4 ion, which is a source of phosphorus, NOT potassium, and is not claimed to be a substitute for potassium in any article I have ever seen. In fact, I have read half a dozen articles, including one on the POT website, claiming that there is NO known substitute for potassium. Perhaps the author would like to comment on why he believes that urea and phosphate are being substituted for potash.
I believe it is far more likely that farmers may elect to use less potash than is required for optimum yield based on an inability to afford to purchase the required potash for optimum yield. This would be based on an economic calculation, specifically how much can I save by forgoing some potash application, and how much will it cost me in terms of reduced yield. This has nothing to do with substitution of urea or phosphate, which remain necessary nutrients for certain crops (crops that fix their own nitrogen typically do not require urea supplement).
3. "Although concerns of an oversupply glut loom, potash is still a finite resource." This is certainly a true statement, but I don't see what relevance this has to the central thesis of the article. There is absolutely no shortage of potentially minable potash looming any time in the next hundred years, so from an investment timetable standpoint the fact that there is a finite amount of potash on earth is almost certainly unrelated to the current and future price of potash over the next 20 years. The price of potash will be driven by the economics of farming, which will drive the amount of potash consumed per year, and the ability of the potash industry to control the amount of potash they mine each year.
Uranium's Dirty Little Secret - Investors Take Note [View article]
It is certainly true that uranium mines, like most metal operations, takes a long time to plan, construct, and operate. Some copper mines have been in operation for over 50 years, which speaks to the size of the deposit and the relatively slow pace of extraction.
I have not studied the specifics of individual mines, where they are in the cycle of development, and how they would respond to a price change in uranium. There is a very nice article from the World Nuclear Association here http://bit.ly/10u2qop that discusses major uranium deposits, issues associated with their development, and prospects for locating new, large scale deposits worldwide.
From this article, and other similar analyses, I think it is fair to conclude that there is absolutely no current shortage of exploitable uranium deposits, and no foreseeable shortage within the next 50 years, even assuming no further viable deposits are discovered (which is extremely unlikely). So the fact that it might take 20 years to explore, develop and begin operations on a new uranium mine is unlikely in my opinion to cause a short term rise in uranium prices.
Certainly if there were a setback in a major project such as Cigar Lake, that could impact worldwide prices, as it would shift production to lower quality deposits, at higher cost of production, and would likely lead to an increase in price. If major Canadian and Australian project continue on track, there does not appear to be any other major prospect on the horizon that would push uranium prices substantially higher. My forecast is flat to slowly rising uranium prices for the next 5-10 years, which is why I recommend only major producers such as Cameco, which has the technical skills, capital, and clientele to develop major sources of uranium.
Uranium's Dirty Little Secret - Investors Take Note [View article]
Damsel, what is the story you think should be told? That failure to anticipate the size of the tsunami that struck the plant led to a 20-20 catastrophic oversight in the placement of the diesel generators and their fuel source? That failure to anticipate the possibility of loss of external power and diesel backup led to poor design in the location of the spent fuel pools?
Fukushima was of course a totally preventable accident, had the designers anticipated the specific event that doomed the reactors. But then again, so are most disasters, from the Titanic to Chernobyl to the Gulf oil spill, most catastrophes have in common the failure on the part of the responsible party to anticipate the specific set of circumstances that lead to the disaster. The interesting remaining questions is how many reactors, how many chemical plants, how many anything, are subject to catastrophic failure because the designers, owners and operators have failed to anticipate a specific chain of events that can lead to disaster. And what, if anything, should be done about the vulnerabilities.
Yields Of 5.3%-23.2%: How Investors Can Turn Gold Into Even More Gold [View article]
The concept of selling covered calls for a variety of investment alternatives has been discussed repeatedly on SA. Claiming that you can get returns of 5-23 percent is misleading at best. As has been pointed out many times in various articles, the flaw in selling covered calls as an investment is that you lose money when the price of the investment decreases by more than the value of your call, and you gain less than you would have by merely holding the investment when the price rises above the strike price of the option.
Selling covered calls only works well in a slowly rising market when you sell slightly out of the money calls. The technique does not work well in a volatile market where the true volatility of the underlying asset is greater than the implied volatility, which may well be the case today for gold.
Uranium's Dirty Little Secret - Investors Take Note [View article]
Thorium based reactors have been around for over 40 years. The fact that there are no longer any commercial plants producing power from thorium should be evidence that thorium technology is neither simple nor inevitable. For a good discussion about options for use of thorium in nuclear power, see http://bit.ly/12cij4w
A careful read of the article should convince the reader that use of thorium is an interesting idea, but there is no evidence at this time that the thorium cycle will replace uranium as the dominant nuclear fuel any time soon. Certainly not in an investment time frame.
Uranium's Dirty Little Secret - Investors Take Note [View article]
Chernobyl was not a deliberate sabotage act, unlike the United States Army SL-1 nuclear reactor accident in 1961, resulting in three immediate fatalities, which is believed to have been deliberate sabotage. The Chernobyl accident was a result of catastrophic judgement error on the part of the operators, however not thought to have been deliberate. Three Mile Island was also a result of operator error in the face of differing instrument readings, but is not believed to have been deliberate sabotage.
Just because there were no immediate fatalities in the case of Fukushima or Three Mile Island does not mean these were not catastrophies. Each resulted in the loss of billions of dollars of equipment, making these a financial catastrophe to the owners. Each resulted in enormous cleanup costs, in the case of Fukushima the costs will extend over at least 25 years and will likely be in the many billions of dollars. In the case of Chernobyl, a large area surrounding the plant was evacuated, and remains unoccupied to this day, resulting in large costs associated with writedowns of property, in one case an entire city. Cleanup costs for Chernobyl have not been computed to the best of my knowledge, but would certainly be in the billions of dollars if exhumation of the plant and interment of the remains is contemplated.
My belief is that the cost of catastrophe (financial as well as human injury) needs to be included when performing a levelized cost of energy analysis for any type of power plant. I also believe that the cost of subsidies should be included when computing the cost of power. And the cost to decommission the plant when its useful life is over should also be included.
The actual methods to compute these costs are far from simple, and require a number of subjective judgements which make it difficult to compare one analyst's results to another. It happens that I am doing levelized cost of energy studies for the Army Corps of Engineers at this time, so I have seen the effect that differing assumptions have on levelized cost of power analyses. Perhaps the SA community would be interested in recent work I have been doing comparing natural gas, wind turbine, and solar power levelized costs. In the end, it may be entirely reasonable to base an investment decision on which method of power production produces the lowest total cost for power, much as fundamental analysts like to argue that the stock price of a company will eventually reach the value of the discounted future earnings.
Uranium's Dirty Little Secret - Investors Take Note [View article]
The author's breathless enthusiasm for the future of uranium is overwhelming, like watching a reality TV show about the next singing start. Couple of minor details cloud the issue.
Media bashing of uranium is nothing new, it happened after Chernobyl (remember Chernobyl, another "once in a milennium event", and it happened after Three Mile Island (perhaps the third "once in a milennium event" of the last 25 years. I think it is unlikely that energy policy on a country by country basis is driven by the media, but of course if you think CNN controls the Japanese decision on whether to restart their reactors, you will want to base your investment decisions on the nightly newscast rather than fundamentals of the energy sector.
I think it is very instructive to look at the fundamental cost of generating power via nuclear energy as opposed to an alternative such as solar, wind, natural gas turbine, or coal. The question of the levelized cost of energy (cost per kwh) is very complex, as it requires a discounted cash flow analysis involving cost to permit, construct, commission, operate and decommission a plant, and requires evaluation of subsidies and future cost of fuel. Very smart people can differ radically on the actual cost to produce power using a variety of methods, and of course the relative attractiveness of one method over another varies by country, since construction costs, operation costs, and fuel costs vary dramatically from place to place.
I note that the author spends no time in his article discussing the cost structure of nuclear versus other power generation methods. I believe that relative economics are more likely to drive the future of the nuclear industry as opposed to media perception of relative risk.
The United States currently operates a fleet of 105 active power generating nuclear reactors. The United States may construct and commission perhaps 10 or 15 more reactors over the next decade, based on current plans for additional units. We may decommission 5 to 10 reactors over the same period (Crystal River was the most recently decommissioned reactor). The primary reason for the very slow growth of new reactors in the United States is the relatively slow growth in electric power demand in the U.S., and the attractive economics of gas fired power versus nuclear (much lower initial cost to construct, and lower operating costs, overcome higher fuel costs).
I have no idea if Japan is going to restart their reactors, but of course the loss of 50 or so operational reactors had a significant effect on worldwide consumption of nuclear fuel. Similarly, I don't know if Germany is going to press ahead with the replacement of nuclear power with alternative energy. I suggest that the decision will likely be based on economics rather than media concerns, but of course the author may have inside knowledge of German politics that I lack.
My prediction for the future of nuclear power is quite different than the author's enthusiasm. I believe that there will be slow growth at best on the consumption side over the next 20 years. On the supply side, it should be noted that uranium is a common mineral in the earth's crust, and there are numerous moderate grade deposits which would be worth developing if the price of uranium rose to say $100/lb. So I sell little chance that uranium will get over $100/lb in the next 20 years, unless there is a disaster at several operational mines that causes a sudden loss of capacity.
I believe the author is correct in that $40/lb uranium is so low that it will depress the appetite of major mining companies to undertake billion dollar mine expansion programs. This will put a floor under current pricing, much like gold dropping to under $1000/ounce would effectively eliminate construction of any new gold mines. My sense is that some of the less well capitalized uranium mining companies will either go bankrupt, or will sell their properties to well capitalized majors like Cameco at low prices. This will be good for Cameco over the long term, as there will be further consolidation of the industry, affording Cameco and other strong players additional pricing leverage.
Conclusion: I would not touch a junior uranium miner at this point, unless you want to short the stock. Large companies with strong management and good, operating mines like Cameco are likely to do just fine over the next 20 years, but if you are looking for a quick profit, I would find another sector.
Full disclosure, I own neither KO nor gold in any form. That said, let me point out that gold has been considered valuable for thousands of years. Presumably it had value originally because it was easily worked, it did not tarnish, and it has a nice color. To the best of my knowledge, Coca Cola products are less than 200 years old, unless of course the can of Coke I saw in one of those cheesy ancient pyramids of Egypt shows was from the ninth century BC...
I am willing to guess that 200 hundred years from now, there is a greater likelihood that gold will have value than a can of Coke. Although in full disclosure, I happen to drink Coke, so perhaps if I woke up after a 200 year snooze, and there was a can of Coke next to a gold bar, I might think that the Coke was more valuable than the gold.
In any case, there are many "investments" that pay no dividends, earn no profits, and are difficult to understand their source of value. Consider such diverse "investments" as baseball cards, fine art, classic cars, ancient pottery, an original copy of the Declaration of Independence. You get the picture, gold is simply one item among thousands of possible collectibles, albeit gold has a longer history of value than most of the others. By the way, some of the alternative investments (a Stradivarius violin, for example) have appreciated in value more than most stocks. And you can play a Strad...
"The main drivers of natural gas consumption are construction spending and industrial production."
I don't follow this statement at all. The main uses of natural gas in the United States are for heating, generation of electricity, and industrial use, particularly in the manufacture of plastics and fertilizer. Construction spending has essentially no immediate influence on natural gas consumption, since virtually no natural gas is consumed during construction.
A complete breakdown of US consumption of natural gas can be found here http://1.usa.gov/ZvqFVT
The table clearly shows that the largest single use for natural gas is electric power generation (about 40%), followed by industrial use (30%) and residential heating (18%). From this, it is evident that the single largest driver of natural gas consumption is the weather (cold weather drives consumption for heating, hot weather drives consumption for electric power generation). Industrial consumption of natural gas is largely related to industrial output, which is tied to economic conditions. Construction spending has effectively no short term influence on natural gas consumption, and is only loosely tied to long term consumption.
NovaCopper: An Extremely Rare Opportunity With Minimal Risk [View article]
The boundless enthusiasm of the author is breathtaking. However, a brief digression into reality might be in order. If you actually bother to read the PEA, you will discover some important facts.
First off, the mine is hundreds of miles from the nearest road access point. The cost to build a 300km road suitable for transporting equipment to the mine, and ore from the mine, is in the hundreds of millions of dollars, in theory to be paid for by the State of Alaska. The cost of the road (a public private partnership) will in theory be paid by the mining company (which will certainly not be NovaCopper, as they are an exploration company only) out of proceeds from the sale of copper ore. The prospect that Alaska is going to shell out $300 million for a road to an unbuilt mine with no permits in hand is certainly a risk, and considering that this project is close to several national parks and wildlife areas, a huge risk in my opinion.
The mine has of course not been designed yet, as clearly stated in the PEA. Costs to develop this mine are at best speculative, as noted in the PEA, so there is absolutely no way at this time that anyone can make any kind of credible claim as to the potential profitability of this project, regardless of the cost per pound of copper in the future.
This project is certainly many years away from production, it would likely take 5 years just to get the permits based on other copper projects in Alaska. Clearly NovaCopper would like to bring the project along a little further, then sell the project to a senior mining company with the capital and experience to develop it. When or if this ever happens is pure speculation at this point. With the current softness in the copper market, and other copper deposits potentially more attractive due to being further advanced, or closer to roads and electric grid, this project may never get off the ground.
I AM NOT saying this mine will never happen, and I certainly have no idea whether NovaCopper is a value play at this point, but the author's opening statement that this "is an exceptionally timely, high-impact long" seems totally unsupported by any verifiable facts. What is so timely about this project? Full exploration has not been completed, no permits are in hand, no deal is in place to build a road, the Environmental Impact Statement has not been started. So what is the rush to purchase? They have a high grade copper deposit in the middle of the Brooks Range, that much is true, but there is little to indicate that a major is going to buy their project any time soon. Unless the author has insider information, I don't understand the urgency to purchase now.
Low Potash Prices Not A Concern For Potash Corp. [View article]
Perhaps the author can discuss the all in cost of mining potash for POT, and how the author believes this cost is likely to change over the short and long run. There has been a lot of discussion on SA and elsewhere about the difficulty understanding true cost of production for mining companies, whether it is gold or potash that is being mined.
CSX: A Railroad Story That Keeps Moving And Improving [View article]
This article focuses exclusively on technical and financial indicators, with no discussion about fundamental issues facing this railroad. For example, there is no discussion about the mix of product this railroad carries, and how that mix will influence future revenue and profitability. In particular, CSX carries a lot of coal, how does the author think the reduction in coal traffic will impact CSX?
Also, CSX has no track west of the Mississippi. A recent plus for many railroads is the ability to carry petroleum, particularly in areas with limited pipeline capacity (North Dakota, Montana). CSX operates in the Marcellus shale area, how does the author think their future traffic mix will be influenced by the ability to carry petroleum?
Quoting historical PE ratios has little relevance without a fundamental understanding of the drivers of revenue and profit, and unfortunately there is nothing in this article that discusses the fundamental business model of CSX.
The Oil Choke Collar Loosens: Natural Gas [View article]
The actual comparison in cost between natural gas and gasoline/diesel is far more complex than suggested by this and other SA articles. On a pure BTU/$ basis, the ratio is about 7:1. This is derived as follows. Diesel fuel has a BTU density of about 140,000 BTU per gallon. At $4 per gallon, this represents 35,000 BTU per dollar.
Natural gas has a BTU content of about 1000 BTU per cubic foot. At a price of about $4 per thousand cubic feet, natural gas cost about $4 per million BTU, or 250,000 BTU per dollar, which is about 7 times less expensive than diesel fuel. Of course this ratio depends on the relative cost of diesel fuel versus natural gas, which varies from country to country, and varies substantially depending on whether you are paying at Henry Hub, wholesale, or retail price.
The actual comparison is much more complex, since a natural gas engine has a different cost than a diesel engine, and requires either a liquid natural gas tank (needs a refrigerator) or a compressed gas tank (requires a compressor to produce compressed gas). The actual cost of operation requires a careful comparison of the two options, which involves initial cost of equipment, longevity considerations, maintenance costs, fuel costs, and length of time to fuel up. If the decision were reached strictly based on BTU per dollar, everyone would be running their vehicle on natural gas. The fact that this is not happening suggests that there is far more to this discussion than simple arithmetic.
Buy Natural Gas On The Dip [View article]
Buy Natural Gas On The Dip [View article]
For example, the author correctly points out that Cheniere Energy is a major player in the potential export of liquefied natural gas. The author notes "Cheniere stands to benefit from the significantly higher prices of natural gas overseas." It is far from obvious that this statement is correct.
As has been pointed out numerous times on SA and other sources, the mere fact that natural gas trades at a higher price overseas than it does in the United States does not automatically mean it is possible to earn a profit by exporting "cheap" US natural gas to an "expensive" country. The key to unlocking the apparent arbitrage opportunity is in the critical details, which includes the initial cost to prepare the facilities for export, the operational costs to manage the export, and the cost of hedging or purchasing futures associated with the project.
There have been several recent articles on SA that have concluded that export of natural gas is expensive due to the high costs of liquefaction, transport, insurance, and hedging, and there may be little or no profit in the venture. I have not personally analyzed Cheniere's project to determine if they make economic sense, and what risks they may entail, but perhaps the author can enlighten us as to what his economic basis is for believing that Cheniere will be able to earn a profit from their venture. No doubt the analysis is complex, but if one is going to recommend a stock for purchase based on the claim that high overseas gas prices will lead to profit, it would seem reasonable to present at least a skeleton analysis of costs, risks, and income stream to justify the claim.
The author also claims that use of natural gas a surface fuel will lead to higher prices, which would presumably be good for the drilling and distribution sector. This is certainly not a new claim, but perhaps the author can comment on why he believes this is the case. After all, natural gas engines have been around for 50 years or more, and they still own a tiny fraction of the market worldwide. Why is that? And what is likely to change in the near future that would justify the claim that consumption by mobile natural gas engines will have a significant effect on prices any time soon.
Potash Economics And An Undervalued American Junior Potash Play [View article]
1. "The supply for potash is projected to increase by 7.1% from 2011-2015, while demand is up 3.1% over the same period." This is a difficult to understand statement. Potash "supply" needs to be very carefully defined. There are vast quantities of potash that are potentially profitably mined. Does the author mean by "supply" the actual quantity of potash that will be mined and made available for consumption in a given year? As the author has pointed out, the potash mining companies have a great deal of leverage in the market, and typically adjust their output to match consumption, in an effort to maintain the price per lb of potash. I question whether the major potash suppliers would allow the supply to drastically overrun the consumption, as this would certainly drive the price down significantly.
2. " Farmers have been turning to lower-cost alternatives like urea and phosphate over potash." I have never seen this claim anywhere else. Urea is a source of nitrogen, whereas potash is a source of potassium, and nitrogen is NOT a substitute for potassium in the growth cycle of plants. Phosphate refers to the PO4 ion, which is a source of phosphorus, NOT potassium, and is not claimed to be a substitute for potassium in any article I have ever seen. In fact, I have read half a dozen articles, including one on the POT website, claiming that there is NO known substitute for potassium. Perhaps the author would like to comment on why he believes that urea and phosphate are being substituted for potash.
I believe it is far more likely that farmers may elect to use less potash than is required for optimum yield based on an inability to afford to purchase the required potash for optimum yield. This would be based on an economic calculation, specifically how much can I save by forgoing some potash application, and how much will it cost me in terms of reduced yield. This has nothing to do with substitution of urea or phosphate, which remain necessary nutrients for certain crops (crops that fix their own nitrogen typically do not require urea supplement).
3. "Although concerns of an oversupply glut loom, potash is still a finite resource." This is certainly a true statement, but I don't see what relevance this has to the central thesis of the article. There is absolutely no shortage of potentially minable potash looming any time in the next hundred years, so from an investment timetable standpoint the fact that there is a finite amount of potash on earth is almost certainly unrelated to the current and future price of potash over the next 20 years. The price of potash will be driven by the economics of farming, which will drive the amount of potash consumed per year, and the ability of the potash industry to control the amount of potash they mine each year.
Uranium's Dirty Little Secret - Investors Take Note [View article]
I have not studied the specifics of individual mines, where they are in the cycle of development, and how they would respond to a price change in uranium. There is a very nice article from the World Nuclear Association here http://bit.ly/10u2qop
that discusses major uranium deposits, issues associated with their development, and prospects for locating new, large scale deposits worldwide.
From this article, and other similar analyses, I think it is fair to conclude that there is absolutely no current shortage of exploitable uranium deposits, and no foreseeable shortage within the next 50 years, even assuming no further viable deposits are discovered (which is extremely unlikely). So the fact that it might take 20 years to explore, develop and begin operations on a new uranium mine is unlikely in my opinion to cause a short term rise in uranium prices.
Certainly if there were a setback in a major project such as Cigar Lake, that could impact worldwide prices, as it would shift production to lower quality deposits, at higher cost of production, and would likely lead to an increase in price. If major Canadian and Australian project continue on track, there does not appear to be any other major prospect on the horizon that would push uranium prices substantially higher. My forecast is flat to slowly rising uranium prices for the next 5-10 years, which is why I recommend only major producers such as Cameco, which has the technical skills, capital, and clientele to develop major sources of uranium.
Uranium's Dirty Little Secret - Investors Take Note [View article]
Fukushima was of course a totally preventable accident, had the designers anticipated the specific event that doomed the reactors. But then again, so are most disasters, from the Titanic to Chernobyl to the Gulf oil spill, most catastrophes have in common the failure on the part of the responsible party to anticipate the specific set of circumstances that lead to the disaster. The interesting remaining questions is how many reactors, how many chemical plants, how many anything, are subject to catastrophic failure because the designers, owners and operators have failed to anticipate a specific chain of events that can lead to disaster. And what, if anything, should be done about the vulnerabilities.
Yields Of 5.3%-23.2%: How Investors Can Turn Gold Into Even More Gold [View article]
Selling covered calls only works well in a slowly rising market when you sell slightly out of the money calls. The technique does not work well in a volatile market where the true volatility of the underlying asset is greater than the implied volatility, which may well be the case today for gold.
Uranium's Dirty Little Secret - Investors Take Note [View article]
A careful read of the article should convince the reader that use of thorium is an interesting idea, but there is no evidence at this time that the thorium cycle will replace uranium as the dominant nuclear fuel any time soon. Certainly not in an investment time frame.
Uranium's Dirty Little Secret - Investors Take Note [View article]
Just because there were no immediate fatalities in the case of Fukushima or Three Mile Island does not mean these were not catastrophies. Each resulted in the loss of billions of dollars of equipment, making these a financial catastrophe to the owners. Each resulted in enormous cleanup costs, in the case of Fukushima the costs will extend over at least 25 years and will likely be in the many billions of dollars. In the case of Chernobyl, a large area surrounding the plant was evacuated, and remains unoccupied to this day, resulting in large costs associated with writedowns of property, in one case an entire city. Cleanup costs for Chernobyl have not been computed to the best of my knowledge, but would certainly be in the billions of dollars if exhumation of the plant and interment of the remains is contemplated.
My belief is that the cost of catastrophe (financial as well as human injury) needs to be included when performing a levelized cost of energy analysis for any type of power plant. I also believe that the cost of subsidies should be included when computing the cost of power. And the cost to decommission the plant when its useful life is over should also be included.
The actual methods to compute these costs are far from simple, and require a number of subjective judgements which make it difficult to compare one analyst's results to another. It happens that I am doing levelized cost of energy studies for the Army Corps of Engineers at this time, so I have seen the effect that differing assumptions have on levelized cost of power analyses. Perhaps the SA community would be interested in recent work I have been doing comparing natural gas, wind turbine, and solar power levelized costs. In the end, it may be entirely reasonable to base an investment decision on which method of power production produces the lowest total cost for power, much as fundamental analysts like to argue that the stock price of a company will eventually reach the value of the discounted future earnings.
Uranium's Dirty Little Secret - Investors Take Note [View article]
Media bashing of uranium is nothing new, it happened after Chernobyl (remember Chernobyl, another "once in a milennium event", and it happened after Three Mile Island (perhaps the third "once in a milennium event" of the last 25 years. I think it is unlikely that energy policy on a country by country basis is driven by the media, but of course if you think CNN controls the Japanese decision on whether to restart their reactors, you will want to base your investment decisions on the nightly newscast rather than fundamentals of the energy sector.
I think it is very instructive to look at the fundamental cost of generating power via nuclear energy as opposed to an alternative such as solar, wind, natural gas turbine, or coal. The question of the levelized cost of energy (cost per kwh) is very complex, as it requires a discounted cash flow analysis involving cost to permit, construct, commission, operate and decommission a plant, and requires evaluation of subsidies and future cost of fuel. Very smart people can differ radically on the actual cost to produce power using a variety of methods, and of course the relative attractiveness of one method over another varies by country, since construction costs, operation costs, and fuel costs vary dramatically from place to place.
I note that the author spends no time in his article discussing the cost structure of nuclear versus other power generation methods. I believe that relative economics are more likely to drive the future of the nuclear industry as opposed to media perception of relative risk.
The United States currently operates a fleet of 105 active power generating nuclear reactors. The United States may construct and commission perhaps 10 or 15 more reactors over the next decade, based on current plans for additional units. We may decommission 5 to 10 reactors over the same period (Crystal River was the most recently decommissioned reactor). The primary reason for the very slow growth of new reactors in the United States is the relatively slow growth in electric power demand in the U.S., and the attractive economics of gas fired power versus nuclear (much lower initial cost to construct, and lower operating costs, overcome higher fuel costs).
I have no idea if Japan is going to restart their reactors, but of course the loss of 50 or so operational reactors had a significant effect on worldwide consumption of nuclear fuel. Similarly, I don't know if Germany is going to press ahead with the replacement of nuclear power with alternative energy. I suggest that the decision will likely be based on economics rather than media concerns, but of course the author may have inside knowledge of German politics that I lack.
My prediction for the future of nuclear power is quite different than the author's enthusiasm. I believe that there will be slow growth at best on the consumption side over the next 20 years. On the supply side, it should be noted that uranium is a common mineral in the earth's crust, and there are numerous moderate grade deposits which would be worth developing if the price of uranium rose to say $100/lb. So I sell little chance that uranium will get over $100/lb in the next 20 years, unless there is a disaster at several operational mines that causes a sudden loss of capacity.
I believe the author is correct in that $40/lb uranium is so low that it will depress the appetite of major mining companies to undertake billion dollar mine expansion programs. This will put a floor under current pricing, much like gold dropping to under $1000/ounce would effectively eliminate construction of any new gold mines. My sense is that some of the less well capitalized uranium mining companies will either go bankrupt, or will sell their properties to well capitalized majors like Cameco at low prices. This will be good for Cameco over the long term, as there will be further consolidation of the industry, affording Cameco and other strong players additional pricing leverage.
Conclusion: I would not touch a junior uranium miner at this point, unless you want to short the stock. Large companies with strong management and good, operating mines like Cameco are likely to do just fine over the next 20 years, but if you are looking for a quick profit, I would find another sector.
Gold Vs. Coca-Cola [View article]
I am willing to guess that 200 hundred years from now, there is a greater likelihood that gold will have value than a can of Coke. Although in full disclosure, I happen to drink Coke, so perhaps if I woke up after a 200 year snooze, and there was a can of Coke next to a gold bar, I might think that the Coke was more valuable than the gold.
In any case, there are many "investments" that pay no dividends, earn no profits, and are difficult to understand their source of value. Consider such diverse "investments" as baseball cards, fine art, classic cars, ancient pottery, an original copy of the Declaration of Independence. You get the picture, gold is simply one item among thousands of possible collectibles, albeit gold has a longer history of value than most of the others. By the way, some of the alternative investments (a Stradivarius violin, for example) have appreciated in value more than most stocks. And you can play a Strad...
Why You Should Cover Natural Gas [View article]
I don't follow this statement at all. The main uses of natural gas in the United States are for heating, generation of electricity, and industrial use, particularly in the manufacture of plastics and fertilizer. Construction spending has essentially no immediate influence on natural gas consumption, since virtually no natural gas is consumed during construction.
A complete breakdown of US consumption of natural gas can be found here http://1.usa.gov/ZvqFVT
The table clearly shows that the largest single use for natural gas is electric power generation (about 40%), followed by industrial use (30%) and residential heating (18%). From this, it is evident that the single largest driver of natural gas consumption is the weather (cold weather drives consumption for heating, hot weather drives consumption for electric power generation). Industrial consumption of natural gas is largely related to industrial output, which is tied to economic conditions. Construction spending has effectively no short term influence on natural gas consumption, and is only loosely tied to long term consumption.
NovaCopper: An Extremely Rare Opportunity With Minimal Risk [View article]
First off, the mine is hundreds of miles from the nearest road access point. The cost to build a 300km road suitable for transporting equipment to the mine, and ore from the mine, is in the hundreds of millions of dollars, in theory to be paid for by the State of Alaska. The cost of the road (a public private partnership) will in theory be paid by the mining company (which will certainly not be NovaCopper, as they are an exploration company only) out of proceeds from the sale of copper ore. The prospect that Alaska is going to shell out $300 million for a road to an unbuilt mine with no permits in hand is certainly a risk, and considering that this project is close to several national parks and wildlife areas, a huge risk in my opinion.
The mine has of course not been designed yet, as clearly stated in the PEA. Costs to develop this mine are at best speculative, as noted in the PEA, so there is absolutely no way at this time that anyone can make any kind of credible claim as to the potential profitability of this project, regardless of the cost per pound of copper in the future.
This project is certainly many years away from production, it would likely take 5 years just to get the permits based on other copper projects in Alaska. Clearly NovaCopper would like to bring the project along a little further, then sell the project to a senior mining company with the capital and experience to develop it. When or if this ever happens is pure speculation at this point. With the current softness in the copper market, and other copper deposits potentially more attractive due to being further advanced, or closer to roads and electric grid, this project may never get off the ground.
I AM NOT saying this mine will never happen, and I certainly have no idea whether NovaCopper is a value play at this point, but the author's opening statement that this "is an exceptionally timely, high-impact long" seems totally unsupported by any verifiable facts. What is so timely about this project? Full exploration has not been completed, no permits are in hand, no deal is in place to build a road, the Environmental Impact Statement has not been started. So what is the rush to purchase? They have a high grade copper deposit in the middle of the Brooks Range, that much is true, but there is little to indicate that a major is going to buy their project any time soon. Unless the author has insider information, I don't understand the urgency to purchase now.
Low Potash Prices Not A Concern For Potash Corp. [View article]
CSX: A Railroad Story That Keeps Moving And Improving [View article]
Also, CSX has no track west of the Mississippi. A recent plus for many railroads is the ability to carry petroleum, particularly in areas with limited pipeline capacity (North Dakota, Montana). CSX operates in the Marcellus shale area, how does the author think their future traffic mix will be influenced by the ability to carry petroleum?
Quoting historical PE ratios has little relevance without a fundamental understanding of the drivers of revenue and profit, and unfortunately there is nothing in this article that discusses the fundamental business model of CSX.
The Oil Choke Collar Loosens: Natural Gas [View article]
Natural gas has a BTU content of about 1000 BTU per cubic foot. At a price of about $4 per thousand cubic feet, natural gas cost about $4 per million BTU, or 250,000 BTU per dollar, which is about 7 times less expensive than diesel fuel. Of course this ratio depends on the relative cost of diesel fuel versus natural gas, which varies from country to country, and varies substantially depending on whether you are paying at Henry Hub, wholesale, or retail price.
The actual comparison is much more complex, since a natural gas engine has a different cost than a diesel engine, and requires either a liquid natural gas tank (needs a refrigerator) or a compressed gas tank (requires a compressor to produce compressed gas). The actual cost of operation requires a careful comparison of the two options, which involves initial cost of equipment, longevity considerations, maintenance costs, fuel costs, and length of time to fuel up. If the decision were reached strictly based on BTU per dollar, everyone would be running their vehicle on natural gas. The fact that this is not happening suggests that there is far more to this discussion than simple arithmetic.