You don't have to be a geologist or a workaholic fund manager to spot deals in the natural resources space-although it helps if you know a good one. Focus on the people behind the company, find out if they have skin in the game, and wait until you can get in at a lower price than their price. Then be patient. In this interview with The Energy Report, Marin Katusa, founder of Katusa Research, shares some of the names in the uranium and oil and gas space that could add up to future profit for any investor.
The Energy Report: Are we getting creative at finding new uranium sources?
MK: I recently spoke at the World Nuclear Fuel Market conference in Paris and I have visited most, if not all, of the major uranium projects in the world, including in Eastern Europe, and for my money, the low-hanging, easy fruit is in the Athabasca Basin in Canada and the U.S. The U.S. imports 94% of what it consumes. One in every 10 homes in America is being powered by Russian nuclear fuel. Everyone is focused on investing in the things that China needs. But with 99 operating reactors, 20% of U.S. baseload power is nuclear; that makes uranium a strategic metal and, by definition, valuable. Plus, it is a lower risk to invest in a North American uranium project where you know the rule of law, you know your government take, you know your taxes, you know your process and you are not going to have to compete with a major Chinese conglomerate that doesn't care about the North American Securities Exchange rules. I'm not saying that they're doing anything illegal. I'm just saying it's different. If you look at my portfolio track record of which stocks are doing really well, it's exactly those ones. That's what I'm sticking with because it's working.
TER: What are the North American uranium mining companies that fit that description?
MK: I've mentioned Uranium Energy Corp. (NYSEMKT:UEC) before to you. It has built and permitted a 2 million pound facility in the U.S., so there is no financing risk. Instead of digging, blasting and moving and crushing rock, it is using the equivalent of a water processing facility. What I really like is that rather than depleting its uranium reserves in a bad market, the company is pulling back production for now. The company also has great supporters. One of the largest investors in China, the Warren Buffett of China, Li Ka-shing, has become a major shareholder. George Soros has become a major shareholder. BlackRock has become a major shareholder because it believes in this concept of build it, but don't deplete it. I like to invest in franchise players like Amir Adnani, the president and CEO. This company has been a triple for the Casey subscribers and myself. It's one of my largest holdings. I believe that it's going to go a lot higher moving forward. It's also one of the most liquid uranium companies in the world.
America has relied on Canada, Australia and the former Soviet Union for its uranium supply, but those resources are turning toward other markets. Cameco Corp. (NYSE:CCJ), which mines in Saskatchewan, Wyoming and Kazakhstan, has signed a long-term offtake agreement with India. Australian companies, which are major suppliers of uranium to the U.S., have signed long-term agreements with the Chinese. U.S. utility operators are going to need to replace the Russian imports. Ironically, so many market pundits say the U.S. will just consume more Russian uranium. The U.S. changed the law so that a maximum of 25% of the domestic demand can come from Russia. Hence, in 2014, the U.S. increased its imports from Kazakhstan by over 80%.
I'd hardly call Kazakhstan supply stable and safe. If you are a uranium speculator, this is all music to your ears. It could take a few years to play out, but it will play out.
TER: Is there enough uranium in North America to supply our needs, but it just isn't built out yet?
MK: Yes, there is enough resource in the ground, but it has to be developed and that takes a long time-at a minimum, 10 years to develop, permit and build an operating uranium mine in the U.S. Eventually the big money will recognize this when the geopolitical tensions rise and the colder war heats up even more. Then they will have to pay a price to the people who were smart enough to get in early.
TER: Has human ingenuity been too effective when it comes to the oil and gas space? Has fracking resulted in too much supply?
MK: After a year of sub-$100 barrel [$100/bbl] oil prices, North American rigs are drilling faster and more efficiently. Companies evolve or die. But even in a global economy with slower growth, there is still increasing demand for essential commodities, and where there is demand, people will figure out how to deliver product.
A big opportunity exists in the oil and gas sector in South America. The Cantarell Field went from 3 million barrels a day to less than 500,000 barrels a day because it didn't reinvest in the oil fields and prevent the big production declines. This negligence was also true in the past in many other countries and other commodities.
Eventually, there will be a turning point where the reserves are depleted. Again, human ingenuity will solve those problems, but there will have to be an increase in price. That is the opportunity I am positioning our funds to take advantage of. You have to be in the right commodities, with the right people, and you also have to have patience. The resource sector is cyclical. But if you understand that and you invest with the right people, you will do well.
TER: Can you give us some examples?
MK: Mexico has world-class potential, but it hasn't seen any modern technology. Fewer than 30 horizontal wells have been drilled there. PEMEX, the national oil company, has seen a huge decrease in production because instead of investing profits in the company, they are used to subsidize social programs. That is why the country opened up its oil patch to North American drillers. Right now, Mexico is importing condensates from the U.S. The game has changed. Ten years ago, everyone thought the U.S. would be importing liquefied natural gas [LNG]. Now, it's planning on becoming a major exporter of LNG. So you have to adapt, evolve. And it is happening faster than we ever could have imagined.
TER: You have made the point that not all shale formations are the same. What are the two or three data points I should be looking at when I'm looking at a shale oil opportunity?
MK: It's like saying all gold deposits are the same. That's absurd. I recently wrote a piece called "Why David Einhorn is Wrong on the Big Oil Short" to debunk some of the myths about fracking. The problem is that the production of shale oil is so new that a lot of people just don't understand it yet.
Investors should start examining possible shale investing by determining the type of production. The Bakken has a different type of production than the Eagle Ford or the Montney in Canada. Take the time to understand the formations, the depths, the infrastructure, the government take, the state tax, the provincial tax and all the wellhead prices. The price you get in Canada is different than the price you get in the Bakken, and it's different than the price you're going to get in the Eagle Ford because of variances in demand and the cost of transportation.
Once you get to the company level, then you do the financial analysis. If you're looking for a low-risk company and you want to have exposure to the U.S. shale sector, something like Pioneer Natural Resources Co. (NYSE:PXD) or EOG Resources Inc. (NYSE:EOG) is probably where you want to start.
TER: How about some names that are up and coming?
MK: The first question you have to ask yourself is "What is your risk tolerance?" I have a very high risk tolerance. I use $55/bbl oil as my base case for oil prices. If a company can't make money at that price, I avoid it.
There's one exploration company that I think you can be patient with. I think it's going to go down lower even though I love the management team. I currently don't own any, but I'm watching it very carefully. I've been to the project. It's a Lundin company that doesn't produce any oil, but has huge potential, even if it is ultra-high risk potential. Africa Oil Corp. (OTCPK:AOIFF) [AOI:TSX.V] is in Kenya and it is a true contrarian play. That is one worth watching. It's not shale oil, but it has world-class, elephant-size deposit potential.
I also believe that you don't need to own too many companies. My three funds only own nine positions. If you own more than 20 resource stocks, you might have to reassess the style of investor you are, because I do this professionally full time and I'm a bit of a workaholic and I have a hard time keeping up with 9 or 10 companies. Be patient. Pick right. Sit tight. Never buy your whole allocation at once. You really just need to focus on a few companies. You don't have to be an amazing financial analyst to do really well in stocks. Find the gurus, go to the conferences, talk to them. People like Ross Beaty and Lukas Lundin have created billions of dollars of net worth for investors, and they are so invested in their deals that they're going to bend over backward to make it happen.
This is why I have partnered with Cambridge House, to bring the absolute best resource investment conference to San Francisco and Vancouver with the Cambridge-Katusa Resource Conferences.
How can a retail investor be successful? Don't try to figure out the geology if you're not a geologist or an engineer. Look at the management team. Focus on the people. A teacher, contractor, lawyer or plumber can be just as good at analyzing people as a fund manager is. Focus on the people running the deal; find out what price they paid to buy the stock. Then be patient and wait for your chance.
TER: With the TSX being down 80%, will there be more of these types of deals investors should be looking for?
MK: Yes, definitely. I see a lot of juniors consolidating. I also expect consolidation in the oil patch and the Canadian copper producers. When the majors start consolidating the best of the juniors and their margins increase, then the market will look for higher-risk, higher-reward, and that will spill over to the juniors. I still think we have a couple of years of consolidation, during which time you can build up your positions.
TER: Thank you for sharing your tips.
This interview was conducted by Karen Roche of The Energy Report.
Marin Katusa is the author of the New York Times bestseller, "The Colder War." Over the last decade, he has become one of the most successful portfolio managers in the resource sector, such as his 2009 Fund Partnership [KC50 Fund LLC], which has outperformed the comparable index, the TSX.V by over 500% post fees. Katusa has been involved in raising over $1 billion in financing for resource companies. He has visited over 400 resource projects in over 100 countries. Katusa publishes his thoughts and research at www.katusaresearch.com.
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3) Marin Katusa: I own, or my family owns, shares of the following companies mentioned in this interview: Uranium Energy Corp. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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