Energy & Commodities

Mike Breard: Buy Small for Deep Profits

With Oil dropping sharply the last few days these stocks are on sale. It happened as Josef Schacter forecasted at Money Talks World Outlook Conference, and his expectation that further weakness can be expected some of the companies described below have likely been on sale the past few days.  For longer term investors, Hedging Strategies are also worth understanding as explained in an article today which explains the strategy in HEDGING A SHORT CRUDE POSITION: 2 STOCKS TO CONSIDER. Given the analyst Mike Beard below is advising smaller Oil & Gas companies that have excellent prospects, the Hedging Strategy explained in the article leaves open the upside for big profit on the higher potential juniors as well as a strategy to reduce some of that Junior stock risk in the stocks described below – Editor Money Talks

Mike Breard: Buy Small for Deep Profits

The Street’s eyes may be on North Dakota, but Mike Breard also keeps an expert eye focused on smaller oil and gas companies drilling elsewhere. In this interview with The Energy Report, the Hodges Capital analyst discusses several companies drilling excellent wells in Texas, Oklahoma and the Gulf of Mexico. Breard, a veteran oil and gas analyst, knows the first names of some of the sharpest managers in the industry. Stick with the winning teams, he advises, even when they change firms.

Screen Shot 2014-03-13 at 7.04.11 AMThe Energy Report: How do you choose the energy names in your coverage list?

Mike Breard: I look for managers with great track records. For example, I attended the annual meeting ofMatador Resources Co. (MTDR:NYSE), and there were 150 people there. Normally, only maybe 20 people attend the annual meetings of the junior energy companies, but these folks had been investing with the current managers of Matador in private deals for 30 years. They were so eager to get in on the newest venture of these guys that Matador stock has tripled during the past year.

TER: What is driving Matador’s success?

MB: Attention to detail. Matador does not control the most acreage in a play; they want the best acreage. The company studies an area for quite a while before deciding what leases to go after. Then, it does all kinds of additional technical studies on the leasehold before drilling—such as microspectrometry, which is taking pictures of the cores under a strong microscope to identify channels that will allow the oil to flow. It is drilling now in the Eagle Ford and the Delaware Basin portion of the Permian Basin.

Frankly, I do not care for small firms that invest in a dozen different plays all over the country—stretching their assets and manpower too thin. I prefer companies that stay in two or three regions and concentrate on developing the assets on hand.

TER: How is Matador stock doing?

MB: It was under $8.00 last March then hit a high of $24.25 in late November. When the price of oil dropped, the stock went down to $16. Recently it was over $25 and it could go a lot higher as people get used to thinking about oil staying in the high-$90s/low $100s. Matador has a lot of gas in the core area of the Haynesville. As gas prices rise, Matador could drill some profitable wells there too.

TER: How important are factors like debt:equity ratios and other types of metrics when you decide whether or not to invest in a junior energy firm?

MB: In the last few years, those metrics have not been as important. Large investors are just throwing money at the oil business. A company will announce a $500M debt offering and two days later, they sell $750MM. Money is the easiest thing to get in the energy industry right now. Of course, I do look closely at the debt situation, and I want a firm to have enough liquidity to drill wells and make acquisitions. But there are different ways of doing this. Take Comstock Resources Inc. (CRK:NYSE), for instance: it has not sold any new stock in years. It treats its shares as a precious commodity, while some companies do a stock or bond offering every year or two.

TER: Why is money so free right now?

MB: Cash is nearly worthless in terms of getting a return. Investors are seeing the large profits flowing from the Bakken, the Eagle Ford, the Permian, etc. Investors want in on that seemingly easy money. Energy is a growth industry.

TER: What are the top oil and gas plays in the U.S. for 2014?

MB: The Permian Basin is the hottest area right now. Drillers have been active here since the Santa Rita No. 1 well began producing in 1923, and numerous formations are productive. The Bakken, the Eagle Ford, the Marcellus, the Wattenberg, the Mississippi Lime, etc. are all good areas. More drilling is being done in the Utica and the Tuscaloosa Marine Shale, and these areas could blossom in 2014—2015.

One issue to consider, however, is that in some of the older plays, the core areas have been identified and firms are exploring the fringe portions. Now, as far as Wall Street is concerned, the older regions do not have much glamour left. Some hedge funds are insisting on a minimum leasehold of 100,000 acres and 1,000-barrel-a-day (bbl/d) wells or they are not interested. Size is not the only factor though. The reality of it is that if a firm drills a well for $0.5M and produces 50 bbl/d, the well can pay out in a few months, and the rest is pure profit. Those types of small, profitable operations are running well below the radar on The Street—which can make them good buys.

The oil stocks can be volatile, not based on what they are actually doing, but based upon the perceived price of oil and Wall Street’s cyclical fears. In November, many on Wall Street became convinced that the price of oil was going to fall to maybe $60/bbl. Oil stocks dropped substantially—even though the price of oil did not plummet. Now, many of these Wall Street seers are thinking “Oil is $100! We missed out; it is time to start buying!”

TER: What other firms do you like in the junior space?

MB: EPL Oil & Gas Inc. (EPL: NYSE) is now being managed by Gary Hannah, who has been in the business for 30 years. EPL was formerly called Energy Partners Ltd. Gary studied its assets, took over the company and paid off the notes in 2009. He is working in the shallow waters offshore in the Gulf. EPL made a big acquisition several years ago. It spent $15 million ($15M) the first year on technical studies, and $150M the next year on drilling and tripled the reserves. This is its business model. EPL is in the giant shallow water fields that were discovered 40 years ago, when we did not have the advanced seismic technology to properly assess the true potential. Now, EPL is finding all kinds of smaller reserves around these old fields and there is plenty of infrastructure in place. Zones between 12,000 and 20,000 feet have rarely been drilled. EPL has begun a $45M Full Azimuth Nodal seismic program to better understand the deeper water formations.

TER: Is there a lack of competition in the shallow basin area?

MB: There is a lack of interest. People are putting their money into the shale areas onshore and are shying away from the shallow waters. But the Gulf has ample production facilities and pipelines in place, and it really does not cost that much more to drill a shallow water well than it does to drill a Bakken well.

EPL is conducting studies and making acquisitions in this space. In 2012, EPL bought Hilcorp assets for $550M. They spent 2013 studying the prospect and will spend over $100M this year to explore and develop.

TER: How is the EPL share price performing?

MB: EPL’s high was about $43 last fall. When energy stocks generally declined, it dropped down. Then there was a storm in the Gulf that shut down some high producing wells. When EPL tried to bring them back on, it did not get production back as high as it was, which was disappointing. The stock fell to around $25 and has recently been back up over $30.

TER: What other juniors are you focused on?

MB: Comstock Resources Inc. was a big gas producer in the Haynesville when that region was hot. When the gas price fell, Comstock went looking for oil on property that it already owned in the Eagle Ford. It also bought property in the Permian Basin. But when it came time to drill the development wells, gas was at $2 per thousand cubic feet ($2/Mcf). Comstock realized that it could not afford to develop both properties. It sold the Permian Basin properties for $824M, which was a $231M profit in about a year. Then it paid down debt, started to buy back stock and began to pay a dividend, which is very rare for a small producer. The yield is now 2.5%.

Comstock then put $100M into exploring the East Texas Eagle Ford, primarily in Burleson County. It plans to drill 10 wells there this year on 21,000 net acres. It also bought 51,000 net acres in the Tuscaloosa Marine Shale, where the wells cost quite a bit more to drill. Comstock management plans to drill a couple of wells there in 2014, but it is waiting to follow the lead of nearby producers before stepping up drilling in 2015.

TER: Do you buy all these types of stocks on a short-term basis or are you a long-term holder?

MB: We have held some stocks for four or five years. It depends on how they perform. If a stock doubles in a week, we may sell it. If something bad happens, we may also sell it. But, generally, we’re looking for the longer-term plays.

TER: What other picks do you have for us today?

MB: Torchlight Energy Resources Inc. (TRCH:NASDAQ) is a small company with a property in the Eagle Ford that provides cash flow. It plans to sell that asset, if it can get a high enough price, because it is going more into the Hunton play in Central Oklahoma with a private operator, Husky Ventures Inc. Husky has drilled 35—40 wells in the Hunton after spending a lot of money on technical work to find the right spots to drill and has been very successful. Torchlight has four areas of mutual interest with Husky. Torchlight has two other properties in Kansas, where it can drill low-cost, low-risk oil wells. Torchlight is currently drilling in one Kansas play with Ring Energy Inc. (REI:NYSE).

Not too many people have heard of Ring, but it is run by the same managers that built Arena Resources and sold it to SandRidge Energy (SD: NYSE) for $1.6 billion ($1.6B). Arena drilled 850 shallow, low-cost wells with high rates of return in the Central Basin Platform of the Permian Basin. Ring is drilling the same type of wells in the Central Basin, but it also got into a similar shallow oil play in Kasnas. These wells will cost around $0.65M to drill and the payout can come in less than a year.

TER: How is Torchlight financing these activities?

MB: It sold $7M in equity recently. It is also looking at a mezzanine financing package or a line of credit. It has already set aside $6M to gain a half-interest in the Ring Energy play in Kansas and has put up its share for at least two more months of drilling with Husky.

TER: Do you have an interest in international energy sectors?

MB: We buy blue chips, including BP Plc (BP:NYSE; BP:LSE) and Exxon Mobil Corp. (XOM:NYSE). They pay decent dividends.

TER: Do you have any interests in the alternative energy sector?

MB: I have all I can handle with following conventional energy. I have, however, talked with managers at wind turbine companies. They have gas generators on the side to supply electricity when the wind dies down. Ironically, the alternative energy sector has created additional demand for natural gas.

TER: Do you have any other companies that you want to talk about today?

MB: Helmerich & Payne Inc. (HP:NYSE) is a drilling company that was the first to build modern AC rigs that they called FlexRigs. These are not like the old mechanical rigs with the dirty, dangerous drilling floor. In a computerized FlexRig, the operator sits high up in an air-conditioned cockpit guiding the drill bit while looking at computer screens that tell him the weight on the bit, how fast it is turning, etc.

A decade ago, the company’s competitors laughed, claiming that no one was going to pay extra for such a fancy rig. Now, HP has half the AC rig market share. The rigs are super efficient and made for pad drilling. The footage rate has increased by 10% in each of the last two years. While an average rig may drill a well in 30 days, an HP rig can drill it in 18–20. It charges more per day, but it is cheaper per well because the wells are drilled faster.

The company can build its rigs for $1–2M less than the competition and can charge 15% more. This provides a superior profit margin. It has been building two new rigs per month, and is going to three per month in April. And it is well-managed. The Helmerich family has been running the company since it was started in 1920. Hans Helmerich has just stepped down as CEO but he will still chair the board.

TER: Is the stock cheap?

MB: HP stock has been hitting all-time highs lately, and it has raised its dividend quite a bit. It is yielding 2.5%. It has the potential to go higher. Building three new rigs a month should add around $0.90/share on an annual basis.

In general, offshore drilling stocks have been way oversold, and they will likely be good performers later this year.

TER: Thank you very much for your time, Mike.

MB: Cheers.

Mike Breard graduated from Rice University in 1963 and got an MBA from Stanford in 1965. His first job was with Standard & Poor’s in New York. He later worked with Goodbody and Walston in NYC before moving back to Dallas. He worked for several brokerage houses in Dallas, including Eppler, Guerin & Turner and Schneider, Bernet & Hickman, as an energy analyst and institutional salesman before joining Hodges Capital in 1997.

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DISCLOSURE: 
1) Peter Byrne conducted this interview for The Energy Report and provides services to The Energy Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: Torchlight Energy Resources Inc.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Torchlight Energy Resources. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Mike Breard: I or my family own shares of the following companies mentioned in this interview: CKR, EPL, HP, MTDR, TRCH 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: BP, CKR, HP, MTDR, TRCH, XOM. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent. 
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

 

 

HEDGING A SHORT CRUDE POSITION: 2 STOCKS TO CONSIDER

Oil collapsed from $7 from $105 – $98 in the last 7 trading days. Josef Schachter sounded the alarm on Oil decling at this year’s Outlook Conference. The price breakdown over the last few days has shown he was right. Moreover Josef thought it can go a lot lower too. With Josef’s 35 years of experience in oil and gas investment management for Institutional firms, I keep an eye out for articles that fit his scenario. This one by OilPrice.com fits the bill for someone wanting to play a decline in Oil in a more conservative manner. – Editor Money Talks

Hedging A Short Crude Position: 2 Stocks To Consider

Screen Shot 2014-03-12 at 11.38.57 PMHedging is a concept too often misunderstood, or worse, badly executed. To many investors and traders, a hedge simply consists of a trade that directly opposes their main position. They may be long a portfolio of stocks, and then buy puts on an index, for example. To my mind this isn’t hedging, it’s just effectively cutting your position size. You could achieve the same thing by just selling some of your stocks. A good hedge is one that gives some degree of protection against an adverse move in your position, but still has a chance…

Continue reading this article »

Investor-Friendly Mining Projects Around the World

Rather than shoot for the stars, Paul Adams of DJ Carmichael argues that junior miners should focus on more modest projects best suited to maximizing shareholder value. This means projects with reasonable capex, good grades and short turnaround times. In this interview with The Mining Report, Adams suggests gold, copper, iron ore and rare earths projects that can weather the complete commodities cycle, as well as a fascinating gold-silver outlier in Peru.

Screen Shot 2014-03-11 at 5.46.42 PMThe Mining Report: After over two years of gloom, we’re seeing renewed optimism regarding mining equities in North America. Is there similar optimism in Australia?

Paul Adams: There is, but the change in sentiment is pretty much in its infancy down here. We recently undertook some analysis of the returns from the various subindices in the market. The small resources index here in Australia is at about +4.3% for 2014 compared to a -8% return for December. The recent surge in the gold price has certainly helped lift the mood.Newcrest Mining Ltd. (NM:TSX; NCM:ASX), our largest-cap gold stock, has risen about 63% since its recent lows in December.

The materials sector in Australia is tied closely to sentiment on Chinese growth, and headwinds there tend to have major repercussions. Both BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) and Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) have had really strong starts, but they’re pulling back a little now as the price of iron ore landed in China has dropped about $10. But those two companies have such a heavy weighting on the materials index that it’s really difficult to get a full picture of what’s going on.

TMR: With regard to China, how much growth do you foresee?

PA: Five years ago, China’s GDP growth was around 12%. Obviously, as the size of the Chinese economy increases, they can’t continue growing at that speed. We expect growth in the 6.5–7.5% range for the next year or two.

TMR: What’s your 2014 outlook for precious and industrial metals prices?

PA: We think the current gold price is about right, plus/minus $100 per oz ($100/oz). Wobbles in the emerging markets have prompted gold’s recent move up into the $1,300/oz range. We’re seeing gold coming back as an alternative investment, a bit of a safe haven.

We’re relatively bullish on platinum and palladium given conditions in Southern Africa.

TMR: What about silver?

PA: I don’t see a major diversion from the current gold/silver ratio.

TMR: How about industrial and critical metals?

PA: The consensus data for the industrial metals generally looks positive for 2014 and into 2015. Obviously, we want to see what effect the Indonesian ban on raw exports will have. That’s very important to nickel prices.

Zinc and lead should be reasonably well supported. There is very muted mine supply growth. As the global economy improves, there are going to be some increases in industrial demand for those particular metals. There’s softness in the copper market. With the consensus price probably falling below $7,000/ton, inventories are growing. These data are conflicting, however, and copper has a history of staying up longer than many had anticipated.

TMR: You’ve said that juniors should choose appropriately sized projects in order to have the best chance of generating shareholder wealth. Could you expand on that?

PA: In a post-global-financial-crisis and post-metals-boom world, we’re seeing a lot of companies with large projects that can’t get financed. Investors today want to see projects that can weather the complete commodities price cycle. Our view is that we would rather see a good management team take on a Tier 2 or Tier 3 project in a good jurisdiction with a reasonable capex and a reasonable timeframe, rather than a Tier 1 project they ultimately won’t be able to develop without joint ventures.

TMR: With regard to timeframe, how long is too long?

PA: A project that looks like it’s going to take much longer than four to five years to get into production is probably a little bit too far out.

TMR: What’s the danger zone for capex?

PA: It depends on the economics of the individual project, but I think a capex north of about $600–700 million ($600–700M) is pretty high. The sweet spot for small companies is somewhere up to $200–250M.

TMR: Is it difficult for mining companies to keep expectations modest? Isn’t there a natural tendency to shoot for the stars?

PA: With many mining companies, management has come from majors such as BHP, Rio Tinto orFreeport-McMoRan Copper & Gold Inc. (FCX:NYSE). They’re used to dealing with big projects and big budgets. There’s a degree of relearning when you’re in a small company; you have to be quick, nimble and you must count the pennies. There is a tendency to shoot for the stars, with the belief that maybe you’ll settle for the moon. But the statistics tell us this isn’t likely to happen.

We look for teams that have a measured approach to development because smaller projects are easier to develop without overly diluting shareholders in the process. Some management teams forget about that. They’re so intent on making a huge discovery that they forget about the shareholders along the way.

TMR: Which jurisdictions do you like best now?

PA: Certain parts of South America offer good opportunities. We particularly like Chile. The other emerging jurisdiction for Australian Stock Exchange (ASX)-listed companies is the United States. Nevada would certainly be front and center, then Arizona, then parts of Utah and Wyoming.

TMR: Chile is politically and socially stable, but concerns have been raised about infrastructure, in particular, deficiencies of water and electricity. What do you think of this?

PA: We’ve been to Chile three or four times over the past three years, and water and electricity are major issues. For instance, Barrick Gold Corp.’s (ABX:TSX; ABX:NYSE) Pascua Lama capex has blown up. To get water to the high Andes, it must be pumped from the coast. And if you’re not close to existing infrastructure, power costs are a major hurdle.

TMR: What companies do you like in Chile?

PA: We’ve followed Hot Chili Ltd. (HCH:ASX) for quite a long time now. We like the way management went about targeting its copper projects. Back in 2009, there really wasn’t much of a junior presence in Chile. Two or three companies dominated most of the belts, in particular, Corporación Nacional del Cobre (CODELCO). Hot Chili didn’t go into the country looking to see what was on offer. It went there with certain criteria in mind. It then sought areas that fulfilled that criteria and found, negotiated and acquired three projects very quietly.

Hot Chili chose projects in the iron-oxide-copper-gold (IOCG) belt. The advantage there over the high Andes projects is stark. They’re low altitude, close to the coast and close to infrastructure, so development hurdles will be lower.

TMR: Hot Chili did over 100,000 meters (100Km) of drilling at Productora last year. How productive was it?

PA: Productora has increased in size quite dramatically. If you have a footprint several kilometers long, that requires quite a bit of drilling to get it up to reserve status. The company wants to move its current resource, now mostly in the Inferred category, into the Measured and Indicated categories. And its delineation drilling at Productora has enabled it to do just that.

In addition, Hot Chili made several new discoveries through the application of some very clever geochemistry. That opened up a second front for exploration to keep expanding the resource base and that required further drilling over and above the delineation drilling.

TMR: When can we expect a reserve announcement from Productora?

PA: Very soon. Toward the end of Q1/14.

TMR: The estimates that I’ve seen for Productora’s capex are in the $600–650M range. How will Hot Chili raise that capital?

PA: That’s a good question, and I have to note that a capex of this size is pushing our envelope with respect to what we think is appropriate for a small company. But Hot Chili is in a favorable position. The relationship between the company and its major partner in the project, Compañía de Acero del Pacífico (CAP), Chile’s largest iron ore producer, is extremely important.

I think we shall see an infrastructure agreement between Hot Chili and Compañía de Acero del Pacífico, which will bring access to port and rail and access to an infrastructure corridor to bring seawater to Productora. An agreement would facilitate capex certainty and perhaps reduce the capex slightly. Of course, it is no secret that there are other majors interested in this project.

TMR: Lundin Mining Corp. (LUN:TSX) owns more than 8% of Hot Chili. How significant is that?

PA: Lundin has been very active in Chile and has a strategy to expand its presence there. Will it be part of Productora at the end of the day? We’ll have to wait and see, but we wouldn’t be surprised.

TMR: What do you make of Hot Chili’s second project, the Frontera copper-gold project?

PA: Like Productora, Frontera is surrounded by Compañía de Acero properties. It has quite a lot of potential to become a project that would feed into this infrastructure hub idea Hot Chili is trying to generate. It’s a porphyry deposit, larger than Productora but lower grade. But, again, its geographical location gives it certain advantages.

TMR: What’s your rating and target price for Hot Chili?

PA: We rate it a Buy with a target price of $0.99. We think that 2014 is going to be a critical year for the company. We expect that the ownership of Productora will become somewhat more certain.

TMR: Which ASX iron ore project do you like?

PA: Amex Resources Ltd. (AXZ:ASX). It has the Mba Delta Ironsand project in Fiji. Initial capex is about $125M, and in December it secured a $100M debt-financing facility. In January, it entered into a $100M construction and procurement agreement. The project has, in fact, started. We like this because operating costs are less than $30/ton for its product. Mine life stands currently at 20 years, and there is a lot of opportunity to push that out to 45 years.

The Fijian government wants the delta dredged because it will reduce the risk of flooding to the surrounding area. So it’s a win-win, really: increasing employment and government revenue, as well as improving the environment. Mba is a really good example of a long-life, cash-producing asset with 100% ownership. This is what we mean when we talk about an appropriately sized project.

TMR: From this side of the world, Fiji is not a name one normally associates with the mining industry.

PA: Recent political events in Fiji have raised concern, but don’t forget, Fiji has a very long mining history. Most famous is the Emperor gold mine, which operated for decades. Placer Dome, before it got taken over by Barrick, had a big copper exploration project called Namosi.

TMR: What’s your rating and target price for Amex?

PA: We rate it a Speculative Buy with a target price of $2.15.

TMR: Let’s talk about critical minerals projects.

PA: One manganese project we liked the look of a couple years ago was Spitfire Resources Ltd. (SPI:ASX) South Woodie Woodie project in the Pilbara district in Western Australia. The company was looking to follow up on its initial exploration success at Contact and Contact North. Numerous lookalike geophysical targets were generated through 2012 and 2013. These were drilled last year, and manganese was discovered.

Management decided subsequently that the exploration necessary to fully assess its numerous opportunities would result in an uncertain outcome, and potentially very dilutionary to shareholders. So the company elected to try and find a partner.

TMR: What’s your rating and target price for Spitfire?

PA: Because of pending negotiations on South Woodie Woodie, we rate it a Hold.

TMR: How about rare earth elements (REEs)?

PA: Considering the activities of Lynas Corp. (LYC:ASX) and Molycorp Inc. (MCP:NYSE), we believe pricing in the light rare earth elements (LREEs) is going to be soft going forward. So we decided that our interest is only in projects dominated by heavy rare earth elements (HREEs). There are only three or four of those on the ASX.

We’ve elected to look at Northern Minerals Ltd. (NTU:ASX), which has the Browns Range HREE project in Western Australia. Northern has recently announced a massive increase to its resource base, which is now close to 50,000 tons (50 Kt) contained total rare earth oxides (TREO). That’s from a resource of 6.5 million tons (6.5 Mt) at about 0.75%, of which the Wolverine project is the flagship. A Wolverine feasibility study is scheduled for completion in late 2014.

The key to all REE developments is definitely metallurgy. Northern Minerals is blessed with one of the simplest mineral assemblages, dominated by xenotime. So here we have a company with 100% ownership, a fraction of the capex common to its peers and a very reasonable potential timeframe to production.

TMR: I’ve been told that REE projects that require huge production to become profitable are dubious because of the scarcity of end users. How does Northern stack up in this respect?

PA: The important thing here is the distribution of metals. Molycorp, for instance, does have to move very large amounts of material because the pricing for the lights is relatively soft. They can’t produce a lot of HREEs without producing a lot more LREEs. That’s the catch-22. But if you have a small, high-grade project like Northern’s that is dominated by HREEs, then you get a pricing advantage, and overproduction is not a problem.

TMR: What’s your rating and price target for Northern Minerals?

PA: We rate it a Speculative Buy, but don’t currently have a price target. We are awaiting results from their pilot project. So far, however, TREO recoveries are looking extremely good.

TMR: Are there any ASX-listed gold producers that have caught your interest?

PA: We look to low-cost gold producers that, again, can withstand the commodity price cycle. In 2006, for example, we took an early position in Medusa Mining Ltd. (MLL:TSX.V; MML:ASX; MML:LSE). Medusa had a high-grade, vein-style system in the Philippines, and its valuation exceeded $1 billion ($1B). Some of the personnel who were involved in Medusa moved to Kingsrose Mining Ltd. (KRM:ASK), which is exploiting a similar, high-grade, narrow-vein deposit in Sumatra in Indonesia called Way Linggo. Its costs after silver credits are going to be somewhere in the region of $300–400/oz, similar to Medusa’s.

TMR: Kingsrose trades now at $0.35. That’s rather modest considering its outstanding production cost, no?

PA: You’re right. Kingsrose currently has a market cap of about $116M. It has made a number of alterations to its milling circuit. It also had a tough year in 2013 following the death of a miner. However, after going through the necessary administrative hurdles, the company now anticipates full approval to recommence its production. We believe that when production begins again, likely in March or April, it will ramp up to its 40 Koz target relatively quickly.

TMR: What’s your rating and target price for Kingsrose?

PA: We rate it a Speculative Buy with a target price of $0.60.

TMR: How about ASX-listed gold projects in Brazil?

PA: We had followed Cleveland Mining Co. Ltd. (CDG:ASX) and its Premier gold mine. We liked its team, but we’ve also seen that Brazil has been very hard for ASX-listed gold producers. I think most of the problems there are geological because the gold tends to be very nuggety and discontinuous in some of these high-grade veins. We want to see Cleveland get a little bit further down the track before we feel comfortable reinitiating coverage.

Orinoco Gold Ltd. (OGX:ASX) has the Cascavel project in Brazil. We’re waiting for some further confirmation on its continuity of mineralization. It’s very hard to get a grade determination in some of these projects because of the nuggety nature of the gold.

TMR: Any other ASX companies you’d like to mention?

PA: One that has caught our eye is Inca Minerals Ltd. (ICG:ASX). It has the Chanape project in Peru. Several midtier and major mining houses are now requesting site visits and signing confidentiality agreements. So that gives you an indication that there is something going on there. Initial exploration was centered on gold- and silver-rich breccia pipes that outcrop on surface. More than 90 have been identified.

Our view is that these breccia pipes coalesce at depth to some degree, but a hole drilled from surface came up with a 108m interval at 2 grams per tonne (2 g/t) gold and 41 g/t silver. The last three holes drilled have targeted the deeper porphyry parts of the system. Through some really good geochemistry and some geophysics, Inca has determined the vectoring on the central parts of the system. So the indications are that it is getting closer. Hole 11 intersected a 460m-long intersection of porphyry and hydrothermal breccias with the most amount of visible metal seen so far. That tells you they are on the right track. Technical comparisons have been made to the Toromocho project, located 30Km away.

TMR: Whose project is that?

PA: Chinalco (Aluminum Corporation of China Limited) (ACH:NYSE). That’s a 2.15 billion ton (2.15 Bt) project bought for $750M and currently in construction. Inca is not saying that it has another Toromocho. What it is saying is that it has geological characteristics that display a similar complexity and similar alteration to Toromocho: near-surface, epithermal breccia-style mineralization that overlie a porphyry system.

Inca is ticking boxes with respect to the technical aspects of the project, and that’s what has piqued the interest of the majors that now want to have a look. Chanape does not fit our thesis of small companies choosing small projects, but there are always exceptions to the rule. It’s early days yet, but this could be quite exciting.

TMR: You don’t cover Inca Minerals yet?

PA: Not yet. We’ve written a couple of short notes on it. We’re extremely interested to see where their latest hole comes in with respect to grade. If results are similar to the first, we’ll be looking at this company a lot more seriously.

TMR: Paul, thank you for your time and your insights.

Paul Adams is a geologist and head of research at DJ Carmichael. He has 16 years of experience in the mining industry, in Australia and elsewhere, and was previously chief geologist and evaluations manager at Placer Dome’s Granny Smith mine. He is a member of the Australian Institute of Mining and Metallurgy and has a Graduate Diploma in Applied Finance and Investment from the Financial Services Institute of Australasia.

 

Playing a Bearish Iron Ore Market With Mining Options

If you are interested in taking a little risk in your portfolio, seasoned trader Andrew Wilkinson lays out a few opportunities in this bear market opportunity – Money Talks

iStock 000013137293XSmall-resize-380x300-1Playing a bearish iron ore market with mining options

According to The Steel Index, the sliding price of iron ore has delivered a bear market — technically speaking, with its price sliding 8.3% to commence the week. A decline of 20% from a recent peak is good enough to match the criteria for a bear market and the poor weekend trade report from China has given rise to growing concerns that the economy is grinding to a halt. Lower iron ore prices have the potential to translate badly for related company earnings. And as US stocks slip on Monday, option traders are populating several related companies. 

Shares in AK Steel Holding Corp. (Ticker: AKS) have suffered least and are down by 1.4% to $6.23. Options implied volatility is higher by 9% to 62.9%. However, this name has the highest put-to-call ratio on the day with almost 16 bearish puts in action for every bullish call. Almost half of the entire day’s 23,400 options contracts were earlier traded across put options expiring in June at the $6.00 strike. The 10,300 contracts traded at the strike compares to open interest of only 1,180 contracts.

The largest price decline amongst this group belongs to Walter Energy Inc. (Ticker: WLT) whose shares slid by 8.7% to $9.53. Options implied volatility jumped 11% to 86.9% while options trading ran-up to 34,000 contracts. There are only 347,000 open contracts on the entire stock.

The name with the largest volume of open interest is Vale SA (Ticker: VALE) where volatility jumped 7.3% to 36.9%. Its shares slid by 3.4% to $12.62 as option trading registered an early afternoon tally of 30,200. The put-to-call ratio of 0.86 indicates close symmetry in the overall pattern of trading. This week’s call options expiring Friday at the 13.5 strike were sold down to 3-cents, while on the bear side the March 28 expiration $12.5 puts were most actively traded. Also popular amongst traders Monday are the $17.0 strike calls for June expiration where 5,000 contracts have traded at around 7-cents per contract.

Both Freeport McMoRan (Ticker: FCX), whose share price is down 3.3% to $31.14, and United States Steel Corp. (Ticker: X), where shares are lower by 2.4% to $24.24 have experienced a double-digit increase in options implied volatility as well as strong trading interest. Freeport volume of 43,000 compares to established positions totaling 755,000 while US Steel has comparable metrics with 22,000 options in action where the open interest tally is 466,000 contracts.

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ABOUT THE AUTHOR Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

How to Play the Surging Uranium Bull

GraphEngine.ashxBack in November we took a close look at the uranium market.

That’s because the end of a 20-year milestone agreement was fast approaching…

From 1993 to 2013, the Megatons to Megawatts program saw highly enriched uranium from 20,000 Russian warheads converted into nuclear fuel, supplying American utilities.

At the time I highlighted a uranium investment that could profit from this opportunity, and it’s just begun to tap into its upside…

Now we’re seeing more bullish developments that point to even bigger gains…

A Major Global Buyer Is Heading Back into the Market

In the wake of Japan’s Fukushima disaster, my colleague, Bill Patalon – the Executive Editor of Private Briefing – asked me how I thought the shortfall from offline nuclear power would be compensated.

I told him to expect Japanese liquefied natural gas (LNG) imports to be boosted; it was the most logical option to quickly make up the country’s sudden energy shortfall.

And that’s exactly what happened. But I knew it would only be temporary.

Since then Japan’s witnessed a huge upsurge for LNG, setting a new import record again in 2013. As a group, Japan, South Korea, Taiwan, and China buy 70% of global LNG, occasionally paying up to five times North American prices.

Japan’s already doubled its annual LNG spending, eating into exporters’ input costs and countering Prime Minister Shinzō Abe’s hopes to boost exports through a devalued yen.

So the Japanese are desperately looking for ways to diversify their energy mix…

Before the Fukushima disaster, Japan derived 30% of its electricity from nuclear. Today that has dropped to exactly zero.

So it’s not surprising that Abe’s successful 2012 election included a pro-nuclear energy policy.

Lately, some suggested that Japan may shy away from nuclear power due to ongoing protests. But, it looks like that’s not going to be the case after all.

There’s been a recent string of newsbites that have bolstered the pro-nuclear position.

In mid-February Tokyo elected a pro-nuclear governor, Yōichi Masuzoe, reinforcing Abe’s position.

Then late last month, the Japanese government released a draft of its final energy policy plan. In it they confirmed that, for the next two decades, nuclear would remain a key base-load source of power. The plan calls for the restart of shuttered reactors, and may even lead to the building of new ones.

But Japan’s not the only place where nuclear is likely to come back into the fore.

When the nuclear disaster hit Japan in 2011, a number of nations decided to scale back their nuclear programs. Germany was one of the most prominent, deciding to completely phase out nuclear by 2022.

They unrealistically had pinned their hopes on renewables, which have pushed electricity costs to the second-highest in the EU.

Energy security is a big deal in Western Europe, and it’s about to get even bigger.

This Crisis Will Add to Demand… and Opportunity

Thanks to Russia/Ukraine tensions, it would be an understatement to say Western Europe is sleeping a little more uneasily these days. No wonder.

Europe relies on Russia for 40% of its natural gas, half of which flows through Ukraine. And Europe’s four largest economies are especially vulnerable, relying heavily on Russian gas: Germany at 36%, France at 15%, Italy at 27%, and the UK at 25%. They pay double the price levels we do in North America.

I don’t think it will take too long before practicality sets in, and Europeans come around to Japan’s view of nuclear power. In fact, Germany already imports significant quantities of its electricity from France – which generates it from nuclear power.

Through all of this, uranium prices have remained low. But that may be changing… very soon.

As I said back in November, the rest of the world is forging ahead with nuclear power regardless of perceived hurdles. There are 71 new reactors under construction, and 173 are on order or in planning stages.

Any oversupply of uranium from the shutdown of Japanese reactors is being worked through, and mine supply is getting thinner by the day.

Paladin Energy Ltd. (TSE: PDN) recently announced it would suspend its 3 million pounds/year U3O8 KM mine in Malawi, Africa. This news comes on the heels of a number of other suspensions, cancellations, or delays by producers like Areva SA (EPA: AREVA),Energy Resources of Australia Ltd. (ASX: ERA), and Russia’s AtomRedMetZoloto.

Complicating matters, Russia looks set to establish a commanding position not only in natural gas, but in the nuclear space as well.

South Africa has just inked a deal with Russian state-owned nuclear power companyRosatom. Under the agreement, Rosatom will build eight new reactors and supply the nuclear fuel needed. That will boost South African nuclear power capacity from 1.8 gigawatts to 11.4 gigawatts by 2029.

But Rosatom has been aggressively making similar deals with other nations, including Turkey, Finland, the UK, and yes… even Ukraine.

All this swelling demand for nuclear fuel is going to manifest itself in the form of higher uranium prices. It has to.

Soros Nearly Doubled His Bet on Uranium… in OneQuarter

Anyone who bought Uranium Participation Corp. (TSE: U) when I highlighted it back in November is sitting on a tidy 8% gain already.

In the last two months, other encouraging signs have materialized signaling that the uranium bull is back.

Uranium Participation Corp. recently raised $50 million to buy more physical uranium in the market. Clearly, they see the current spot price around $35 as temporarily depressed and certain to rise, especially given that it costs upward of $80/lb. to mine the stuff.

Another uranium play that’s showing promising action of late is Cameco Corp. (NYSE: CCJ), the largest publicly traded uranium producer on the planet.

On the day following Japan’s recent national energy policy announcement, CCJ moved up 8.2%. The next day, Cameco climbed another 4.7%. Since the news, the stock is up a total 17% in just two weeks. And George Soros now owns $55.4 million of Cameco stock after boosting his holdings by 42% last quarter.

My approach for Real Asset Returns readers is to identify global trends before they gain mainstream recognition. That trigger allows us to position ourselves for maximum gains as these trends play out.

The uranium bears are exhausted. Market forces are beginning to take effect as the cure for low prices is low prices.

After nearly three years of correction and consolidation, uranium has all the hallmarks of a sector poised to break out.

And I expect the plays I’ve highlighted above to profit handsomely as uranium begins to head much higher…

 

About Peter Krauth

Peter Krauth is a former portfolio adviser and a 20-year veteran of the resource market – with special expertise in energy, metals, and mining stocks. Peter uses the close contacts and connections he amassed over the years to exploit the moneymaking potential of every kind of commodity.

He’s the Resource Specialist for Money Map Press and has contributed some of our most widely read and highly regarded investing articles to Money Morning. As editor of Real Asset Returns, he travels around the world to dig up the latest and greatest profit opportunity, whether it’s in gold, silver, oil, coal, potash, chromium, or even water. 

Peter holds an MBA from McGill University and is headquartered in resource-rich Canada.