Radioactively Hot Uranium Stocks:

A supply crisis is looming in the uranium industry, and today’s uranium price, stagnant at an eight-year low, will shoot up quickly when restarts of Japanese nuclear power plants bring back demand with a vengeance, David Talbot tells The Energy Report. Talbot, a geologist and senior mining analyst at Dundee Capital Markets, is excited about the potential of Canada’s Athabasca Basin, the world’s most prolific uranium source. But beyond the pounds in the ground, he sees money to be made in undervalued companies.

The Energy Report: David, welcome. Let’s start with the big picture: What is the general outlook for uranium in 2014?

David Talbot: Thank you, Tom. The long-term outlook on the uranium market remains the same at US$65/pound ($65/lb) U3O8. I think a new reality in the near term has set in. The uranium price has dropped significantly and now appears stable at levels not seen for almost eight years. We believe much of this has to do with the lagging Japanese restarts, cash-strapped sellers impacting the market and probably most important, near-term demand is lacking. We do expect uranium prices to rise, and relatively quickly when they do, but for right now, uranium prices will remain leveraged to the news of the Japanese reactor restarts and a return to term contracting by utilities.

This thesis underpins our $42/lb price estimate for the year, with prices to about $48/lb by Q4/14. When restarts might occur remains the million-dollar question, perhaps starting mid-2014, but the indicators out of Japan are that the government is committed to bringing its nuclear fleet back online now as the 17th and 18th reactors have applied for their restarts. We’ve had ongoing reviews. They were expected to take about three to six months, and now we’re in month eight. So when they start isn’t quite certain, but they are moving in the right direction. Their return should actually coincide with the return in contracting, almost completely absent last year as massive uranium requirements loom. We’re seeing about 180 million pounds (180 Mlb) due, expected by the 2016–2018 period.

TER: What are the major influences in the uranium market today?

DT: Supply remains a wild card and probably the most important factor, hence the focus of our recent comprehensive sector report. Mines are currently being taken offline, deferred or cancelled altogether. But long-term fundamentals underpin our belief that a uranium supply deficit starting in 2016 will likely increase by 2020, at which time we think we’ll see a deficit of about 16 Mlb. So we remain adamant that uranium supply is threatened by current uranium prices, regardless of the difficulties of the mining industry and challenges in permitting. This continues to set the stage for the supply crisis, particularly in light of dwindling secondary supplies as the Highly-Enriched Uranium (HEU) Purchase Agreement has come to a close, taking 24 Mlb/year with it.

The other part of the story is timing. We anticipate Japanese restarts to be the catalyst to kick-start uranium buying and contracting, but the lack of deals in 2013 resulted in the elevated uranium requirements that utilities have mentioned. This means that once the pendulum shifts back, it will shift quickly, and prices will probably rise at quite a torrid pace.

TER: Do you expect that 16-Mlb deficit in 2020 to draw more explorers and producers to the industry, or just to create more opportunity for the current players?

DT: Once the 16-Mlb deficit comes closer, we would expect development for some projects to perhaps expedite on the back of stronger uranium prices. But most of the new supply we see over the next few years is from existing producers, mainly expansion of existing projects, Ranger 3 Deeps, for example, or Cigar Lake. We do model some marginal players coming on-line, like Toro Resources Corp.’s (TRK:TSX.V) Wiluna project, or perhaps with some of Energy Fuels Inc.’s (EFR:TSX; EFRFF:OTCQX; UUUU:NYSE.MKT) conventional assets in the U.S. But that’s a relatively small amount of production and certainly not enough to close the gap. We do think that uranium prices are going to be what’s required to incentivize investors. Certainly, there will be a new set of explorers set up as exploration funding comes in. Just look at the explosion of junior exploration companies around the Patterson Lake South discovery. So should uranium prices rise, we would expect investment in the sector and exploration spending to increase.

TER: What was the mood at the NEI Nuclear Fuel Supply Forum in Washington, D.C., in January?

DT: Remember that the Nuclear Energy Institute is an American association that promotes nuclear power to Congress, the White House, state policy forums and the general public. So its message is typically well scripted and relatively even-keeled, and delivered nonpromotionally. I think that feelings were mixed. There were a few uranium-sector participants. In late January, the sector was flying high, so sentiment was generally positive. This was also after the Uranium Participation Corp. (U:TSX) financing, which more than suggests that investors will be coming into the sector shortly as Uranium Participation is mandated to spend about 85% of its raise on purchasing uranium. So at that time, the stocks were doing quite well, and the fundamentals of supply and demand are generally unquestioned by that group of people.

Richard Myers discussed the U.S. nuclear program. He’s vice president of policy development at NEI. His message was similar to the one he provided last year at the World Nuclear Association Symposium in London. He started by saying U.S. nuclear power plants are operating well at about 90% of their capacity factor.

Right now in the U.S., they are currently shutting five reactors. These are typically older, smaller, single units that are mostly at risk but, also, larger, multi-unit sites are struggling under current regulations. Essentially, electricity prices are being suppressed by state mandates and federal subsidies. So price signals right now are inadequate to support existing power plants and investment in new capacity. He suggested that all electricity should not be treated the same. Nuclear has some very important attributes that are not being monetized. It’s baseload; it provides grid stability, price stability, clean-air compliance, technical and fuel diversity and a huge tax base. So failure to address the importance of nuclear as baseload electricity will compromise reliability, introduce price volatility and frustrate efforts to decrease carbon emissions. This, of course, could have a negative impact on the U.S. uranium requirements, currently in the 45–50-Mlb range.

TER: Dundee Capital Markets was expecting 87 Mlb new production from 22 uranium operations between 2007 and 2013, but only 17.8 Mlb materialized. What happened there?

DT: I think this is the trend in the industry. You’ll see these plans to develop uranium projects and, ultimately, a fraction of that effort ever materializes. Many of those mines that we expected to come on-line in 2007 never started. In one or two instances, there were technical issues. The timing of that report also coincided with the global financial crisis in 2008, so that was certainly one of the main factors. Capital dried up. But in general, development is becoming much more expensive, with timelines for projects ranging up to 15 years or more between discovery and production. That’s because of several challenges that face the uranium space. You have increasing environmental and regulatory constraints. Public perception has darkened post-Fukushima. Significant community consultation is now required, and stringent radiological and groundwater controls are being put in place. Detailed tailings management plans are required, and comprehensive decommissioning strategies with upfront financial commitments are now commonplace.

TER: You mentioned the high costs of development. What role does the Canadian Non-Resident Ownership Policy play in that?

DT: That policy states that a foreign company cannot own 50% of a uranium project. This hasn’t concerned me too much in the past. It is just a policy. We have seen some companies get around that policy, not necessarily grandfathered but just moving toward the expectation that that policy will not be there when they need to go and get their licenses. For example, you have AREVA (AREVA:EPA) moving forward its Kiggavik development project in Nunavut Territory. You have Paladin Energy Ltd. (PDN:TSX; PDN:ASX) moving forward its big project in Labrador called Michelin, formerly an asset of Aurora Energy Resources Inc. More recently, we’ve seen Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) come in and take out Hathor Exploration Ltd. for its Roughrider deposit. So there are foreign companies that are acting in Canada. They’re acting as if this policy will be overturned and, certainly, the Saskatchewan government would like to have it overturned.

TER: Is the uranium market heading for a wave of mergers and acquisitions (M&A) to achieve efficiencies of scale and maybe increase production capability in a low-price market?

DT: We do expect further consolidation. Financing is more difficult than ever. Project timelines are lengthy and costly. With some companies unable to secure supplies to advance projects, we expect further delays and/or corporate insolvencies. What often happens is the predator comes in and takes out its prey at pennies on the dollar relative to its underlying net asset value (NAV).

Many certainly look at Cameco (CCO:TSX; CCJ:NYSE) as the top predator. With about 1 billion pounds (1 Blb) in resources and reserves, it says it doesn’t need more pounds in the ground, but bolting on production makes a lot of sense to us. Cameco has long said it seeks more production growth in the U.S., and while some of that’s happening through organic growth, newer companies like Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.MKT) and Ur-Energy Inc. (URE:TSX; URG:NYSE.MKT) look exciting to us. You also can’t count out Denison Mines Corp.’s (DML:TSX; DNN:NYSE.MKT) Phoenix project in the Athabasca Basin. Cameco is a partner there, but that’s the world’s third highest-grade project at 16% U3O8. There are about 60 Mlb there right now. Plus, Denison has interest in the McClean Lake mill, and I know Cameco would probably be interested in having a feed at the mill that is processing its own Cigar Lake ore.

TER: Energy Fuels is trading around CA$9.50 now, but your target is CA$17. Why is this company so undervalued?

DT: I think part of it has to do with the general downdraft in equities, but Energy Fuels, in particular, did have a few events leading into 2014 that put some pressure on the stock. That included a selloff after a four-month hold on its June 2013 private placement. Strathmore shareholders were selling post-deal, post-acquisition of Strathmore. There was also pressure after its 50:1 rollback, as expected. Another part of this could be just the general unfamiliarity with this name. This is a company that has a number of small-scale operations with different incentive price levels, all feeding into the White Mesa mill. So production is often not year-round, but happens in runs or batches. This combines with alternate feed material runs.

TER: What are Energy Fuels’ strengths and its weaknesses?

DT: I think Energy Fuels has several strengths that make it one of our top picks. It is one of our favorite stocks in a low uranium price environment, as the company is effectively 100% hedged at around $60/lb uranium. But we also like it for its significant leverage to rising uranium prices, given its ability to easily turn on its brownfield projects at minimal cost. Primary standby mines—Pandora, Beaver, Daneros—all have potential to produce between 200–500 thousand pounds (200–500 Klb)/year. Canyon could add another 500 Klb/year once it’s developed. So its White Mesa mill has a license capacity of 2,000 tons per day and can produce about 8 Mlb/year. Costs have also come down about 18% quarter over quarter to $32/lb.

But there are some risks, of course, with small, higher-cost conventional mines. The production profile hinges on milling and trucking costs. So with about 50% of our valuation dedicated to these projects and then 50% delegated to greenfield projects, development risks must also be taken into account. Those include permitting, financing, economics, timelines and so on.

TER: What is the significance of the Patterson Lake South discovery for Fission Uranium Corp. (FCU:TSX.V)?

DT: We believe the Patterson Lake South discovery is very significant, probably the largest since Hathor’s Roughrider discovery, and we all know what happened with that one. It sold for $680 million ($680 M) to Rio Tinto. At that time, it wasn’t much bigger than where we think Patterson Lake South is now. So we do have a Buy on Fission as a result of its Patterson Lake South project. It’s shallow, high grade, thick; it has all the hallmarks of a great project. Not only that, but it’s also located in the Athabasca Basin, which hosts a supportive government, excellent infrastructure, capacity at existing mills and a solid permitting framework.

At Patterson Lake South right now, all six zones lie at or near the surface, and they are only drill limited at this point; they’re not cut off. We anticipate that several of these zones will probably tie together, creating a much larger, single deposit. It’s still in the early stages of delineation. Aggressive drilling is underway in preparation for an initial resource. We speculate we might see that early next year. Right now, we estimate about 43 Mlb grading 2% uranium. The grade goes up significantly if we use a higher cutoff grade, but the pounds in the ground aren’t impacted that much. So right now, it’s looking like a great, high-grade uranium deposit.

TER: Does that make Fission Uranium a likely takeout target?

DT: We’ve always felt that Fission is a potential takeover target. Given its grades and shallow depth, Patterson Lake South has potential to become an economic deposit, capable of supporting not only construction of a mill. But, also, perhaps even more attractive is that this near-surface deposit may require relatively smaller upfront capital and could provide feed to an existing mill and be run at irregular intervals, essentially delivering high-value material over great distances when it’s necessary. So we believe that Patterson Lake South and Fission, for that matter, make sense as a target for anybody that wants to set up shop in what is the underexplored western side of the Athabasca Basin.

TER: You changed your rating on UEX Corp. (UEX:TSX) very quickly. Why?

DT: We did an about-face on UEX not long after reducing our target and recommending it as a Neutral due to unexpected news of a slowdown and competition from fresh discoveries, like Patterson Lake South. But we now rate UEX as a Buy with an $8 target price. While we didn’t change our discounted cash flow model, the new CEO, Roger Lemaitre, brings depth to this company that it hasn’t seen before. With his vast industry experience as Cameco’s exploration director and the fact that UEX has almost $9M in cash, I think he’s going to turn the company’s attention to new discoveries and potential M&A activity. His familiarity with Cameco is certainly an asset. But I think we still need to see some execution here by UEX to leverage its attributable 85 Mlb in resource plus its past exploration success into something new and accretive for shareholders. Meanwhile, Shea Creek is open in multiple directions. It does have a current resource of about 96 Mlb. As UEX decides to take its direction, I think it will remain focused on the Athabasca Basin. I think it will likely seek synergistic projects.

TER: Are you excited about any other uranium companies?

DT: There are two others. Ur-Energy—we have a Buy on this one. It has a $2.20 target price. Ur-Energy is our top pick in the sector right now. This is a U.S.-based, Wyoming-based, in-situ recovery producer. It officially entered production last year. Early indications are the well fields are performing exceptionally well. It produced 135 Klb last year. We expect about 1 Mlb this year, 1.2 Mlb next. Flow rates and front end are operating above expectations. The back end elution and precipitation circuits are performing as designed. Notably, head grades have been significantly above expectation, leading to less header houses and volumes that are required, pointing to lower costs. Right now, the company sells about 40% of its production forward at about $60/lb between 2014 and 2016, so it makes Ur-Energy less sensitive to spot price fluctuations than some of its peers. It’s actually getting prices much, much higher than spot. It was in the $63/lb range for last quarter. Shirley Basin is another project it just purchased. That could be up next. It could come online by 2017, ramping up to 1 Mlb/year within a couple years there. Ur-Energy trades at a discount to its producer peers.

Another company here: We recently initiated full coverage on NexGen Energy Ltd. (NXE:TSX.V). We’re recommending it as a Buy, no target price. The company has two high-quality assets in the right locations. Rook I is adjacent to Fission Uranium’s Patterson Lake South discovery. NexGen could potentially have the best claims in the area aside from Fission itself. The second project is the Radio property. That’s located on the Roughrider Midwest trend on the eastern side of the Athabasca Basin. That project is within 10 kilometers of 150 Mlb of uranium resources. First drilling at Rook I tested three conductors that lie directly east of Fission’s Patterson Lake South discovery in the Athabasca. With 12 holes, it hit the right graphitic basement rocks, shallow structures and modest alteration, and elevated uranium mineralization was confirmed in three holes and somewhat significant in one of those. Follow-up drilling has made a potential uranium discovery (pending assays) that is not only a game-changer for NexGen, but for the western side of the Athabasca Basin. What’s more impressive is that it was the first hole drilled into Target C, now called Arrow, that hit.

Further drilling is required and NexGen has suggested that it will commit more resources to follow up. The Radio project is essentially on hold with earn-in commitments delayed, allowing the company to focus on the Rook project. NexGen has experienced management and quite a deep technical team, including ex-Hathor and Rio Tinto geologists who really know the region.

TER: Do you have any parting thoughts to share on the uranium market generally?

DT: I think it all hinges on supply. Demand is relatively consistent. It’s predictable, Japan restarts notwithstanding. But I believe it’s the strengthening fundamentals based on supply that really drive this. Mines are closing. We’ve seen Zarechnoye close, La Sal, Beaver, Pandora, Daneros. Projects are being deferred, big projects including Olympic Dam, Trekkopje, Imouraren, Cameco’s Double U, plus no more Kazakhstan production. The HEU agreement is gone, and we’re getting unexpected disruptions, such as Ranger, Rossing, Cigar Lake and assets in Niger. So I think investors should focus on that. When uranium prices come back, I think they’re going to come back quite quickly, not because Japan is going to come back seeking supply but because the other 90% of the world hasn’t been buying like it should.

TER: Thanks for sharing your thoughts.

Dundee Capital Markets, V.P. and Senior Mining Analyst David Talbot worked for nine years as a geologist in the gold exploration industry in Northern Ontario. David joined Dundee’s research department in May 2003, and in the summer of 2007 he took over the role of analyzing the fast-growing uranium sector. David is a member of the Prospectors & Developers Association of Canada, the Society of Economic Geologists and graduated with distinction from the University of Western Ontario, with an Honors Bachelor of Science degree in geology.

Read what other experts are saying about:

• Energy Fuels Inc.
• Fission Uranium Corp.
• UEX Corp.
• Uranerz Energy Corp.

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• Top Ten Stocks for a Uranium Price Rebound: David Talbot
• Food, Water and Fuel Are Necessary to Life and Investors: Bob Moriarty
• Joe Mazumdar: Seven Gold and Uranium Juniors with Near-Term Growth You Can’t Ignore

Jim Rogers: “Be Very Worried’ And Buy Agriculture”

“There’s going to be a huge shift in American society, American culture, in the places where one is going to get rich. The stock brokers are going to be driving taxis. The smart ones will learn to drive tractors so they can work for the smart farmers. The farmers are going to be driving Lamborghinis.”

Did you know that the U.S. state that produces the most vegetables is going through the worst drought it has ever experienced and that the size of the total U.S. cattle herd is now the smallest that it has been since 1951?  Just the other day, a CBS News article boldly declared that “food prices soar as incomes stand still“, but the truth is that this is only just the beginning.  If the drought that has been devastating farmers and ranchers out west continues, we are going to see prices for meat,fruits and vegetables soar into the stratosphere.  Already, the federal government has declared portions of 11 states to be “disaster areas”, and California farmers are going to leave half a million acres sitting idle this year because of the extremely dry conditions.  Sadly, experts are telling us that things are probably going to get worse before they get better (if they ever do).  As you will read about below, one expert recently told National Geographic that throughout history it has been quite common for that region of North America to experience severe droughts that last for decades.  In fact, one drought actually lasted for about 200 years.  So there is the possibility that the drought that has begun in the state of California may not end during your entire lifetime.

This drought has gotten so bad that it is starting to get national attention.  Barack Obama visited the Fresno region on Friday, and he declared that “this is going to be a very challenging situation this year, and frankly, the trend lines are such where it’s going to be a challenging situation for some time to come.”

According to NBC News, businesses across the region are shutting down, large numbers of workers are leaving to search for other work, and things are already so bad that it “calls to mind the Dust Bowl of the 1930s“…

“In the state’s Central Valley — where nearly 40 percent of all jobs are tied to agriculture production and related processing — the pain has already trickled down. Businesses across a wide swath of the region have shuttered, casting countless workers adrift in a downturn that calls to mind the Dust Bowl of the 1930s.”

If you will recall, there have been warnings that Dust Bowl conditions were going to return to the western half of the country for quite some time.

Now the mainstream media is finally starting to catch up.

And of course these extremely dry conditions are going to severely affect food prices.  The following are 15 reasons why your food bill is going to start soaring…

#1 2013 was the driest year on record for the state of California, and 2014 has been exceptionally dry so far as well.

#2 According to the U.S. Drought Monitor, 91.6 percent of the entire state of California is experiencing “severe to exceptional drought” even as you read this article.

#3 According to CNBC, it is being projected that California farmers are going to let half a million acres of farmland sit idle this year because of the crippling drought.

#4 Celeste Cantu, the general manager for the Santa Ana Watershed Project Authority, says that this drought could have a “cataclysmic” impact on food prices…

Given that California is one of the largest agricultural regions in the world, the effects of any drought, never mind one that could last for centuries, are huge. About 80 percent of California’s freshwater supply is used for agriculture. The cost of fruits and vegetablescould soar, says Cantu. “There will be cataclysmic impacts.”

#5 Mike Wade, the executive director of the California Farm Water Coalition, recently explained which crops he believes will be hit the hardest…

Hardest hit would be such annual row crops as tomatoes, broccoli, lettuce, cantaloupes, garlic, peppers and corn. Wade said consumers can also expect higher prices and reduced selection at grocery stores, particularly for products such as almonds, raisins, walnuts and olives.

#6 As I discussed in a previous article, the rest of the nation is extremely dependent on the fruits and vegetables grown in California.  Just consider the following statistics regarding what percentage of our produce is grown in the state…

–99 percent of the artichokes

–44 percent of asparagus

–two-thirds of carrots

–half of bell peppers

–89 percent of cauliflower

–94 percent of broccoli

–95 percent of celery

–90 percent of the leaf lettuce

–83 percent of Romaine lettuce

–83 percent of fresh spinach

–a third of the fresh tomatoes

–86 percent of lemons

–90 percent of avocados

–84 percent of peaches

–88 percent of fresh strawberries

–97 percent of fresh plums

#7 Of course it isn’t just agriculture which will be affected by this drought.  Just consider this chilling statement by Tim Quinn, the executive director of the Association of California Water Agencies…

“There are places in California that if we don’t do something about it, tens of thousands of people could turn on their water faucets and nothing would come out.”

#8 The Sierra Nevada snowpack is only about 15 percent of what it normally is.  As the New York Times recently explained, this is going to be absolutely devastating for Californians when the warmer months arrive…

“There are places in California that if we don’t do something about it, tens of thousands of people could turn on their water faucets and nothing would come out.”

#8 The Sierra Nevada snowpack is only about 15 percent of what it normally is.  As the New York Times recently explained, this is going to be absolutely devastating for Californians when the warmer months arrive…

….read page 2 HERE

Payback time? Fallback plan? Money in the bank? What would you ask the CEO of a company you were considering investing in? In advance of the Prospectors and Developers Association of Canada convention in March, newsletter writers Keith Schaefer, Eric Coffin and Lawrence Roulston are bringing 15 energy and mining companies together for a “meet the management” Subscriber Investment Summit in Toronto. In this interview with The Mining Report, the experts share their sometimes surprising responses to the state of the industry.

Questions Top Stock Pickers Keith Schaefer, Eric Coffin and Lawrence Roulston Ask Company Presidents.

The Mining Report: Keith, in a recent e-mail to your subscribers, you mentioned that one of the secrets to successful investing is meeting the management. Would each of you share some of the questions you ask company heads to determine if they can be successful?

Keith Schaefer: I am very focused on paybacks. When a company drills a well, I want to know how long it takes for that well to pay for itself. In the larger oil sector, anything that has less than a two-year payback is good, but in the junior sector, where I play, payback needs to be no more than 15 months.

You could ask for the net back, or profit per barrel, or the net present value (NPV) or the production rate. But that doesn’t matter as much as the payback—how fast you get that money back so you can drill another well. That is, by far, No. 1. The information that goes into that answer encompasses the answers to many other questions.

The other big questions are how much money the company has and how big a deadline it has. How much liquidity does the company have before management has to raise money again? Those would be questions I would ask management out of the gate.

TMR: Do the secondary questions inform the first question? If a company is well funded is the payback time as important?

KS: Regardless, I want to see a 12–15 month payback. If management tells me it has a two-year payback, and it’s a really small company, that just doesn’t work. If the payback is right, I’ll ask how much the wells cost, and how much money is in the bank, because I can do some pretty simple math to figure out the next time the company will need to raise money. But if a company doesn’t have a 15-month payback and is really small, I don’t care to hear anything else about them.

TMR: Eric, what do you want to know?

Eric Coffin: Life is not so simple at Hard Rock Co., unfortunately. Obviously, how much money a company has is very important. It tells us how fast that company will need to go back to market.

But I need to know the background of management, and what kind of projects the management team has been involved with. I like to see that team members have had hands-on exploring experience. Some guys are very good at running exploration projects successfully, and others not so much.

I also want to hear about the target, the geological model, the upside if this works out and the fallback position if it doesn’t. Most of the time, the fallback position is either secondary projects and/or cash in the bank, so the company can go look for something else. You need to get an idea of the scale potential. If a company has a $20 million ($20M) capex and is drilling for 200–300,000 ounces (200–300 Koz) gold equivalent, there’s just not a lot of upside there. I want to see that, if management is successful, there’s a significant amount of upside. Explaining the target gives me some comfort that management knows what it is doing.

TMR: When it comes to a fallback position, do you like to see companies with multiple projects in the pipeline, or would you rather see them focused on just one project?

EC: I like to see other projects in the pipeline. There is some truth to the idea that you can try to do too many things at once. If I see a company that constantly switches over to whatever is hot that week, I basically just ignore it. I like to see that company management has a concept and a philosophy, like “We look for copper-gold porphyries,” or “We’re focused on epithermal gold projects.” I like to see other properties advancing to drill target stage while the main property actually is being drilled. That gives shareholders a stronger fallback position, because exploration isn’t going to work out on most projects. That’s just the math.

On the other hand, I like to see that a company has two or three projects it can fall back on, not 15 or 20, with management running around in circles. But if a company is focused on just one property, and if I really like the targets, I’m not going to be afraid of the company. I just know it comes with a bigger downside if the drilling doesn’t work out. You have to understand that going in. If that’s the case, the target has to be that much bigger.

TMR: Lawrence, what do you ask to determine whether a company will be successful?

Lawrence Roulston: Beyond all the basic questions about the financial situation, the project and management’s background, which are all important, I need to know whether management has the drive and determination to overcome the endless obstacles on the road to success. You can only get that sense if you talk to the people behind the company; spend a bit of time and get to know them.

Unfortunately, this industry has evolved away from old-style compensation, where members of management had low salaries and big stock positions, thereby aligning their interests with shareholders. We’ve moved way too far toward big salaries. There are a lot of people out there who are more interested in protecting their salaries than in adding shareholder value. Those intangible, subjective measures are critical to determining if a company will be successful.

TMR: What do you want to see in a CEO’s background? Would you rather see someone from finance/business, or a geologist?

LR: Mining requires some very specialized skills. A person also needs to be an entrepreneur. If someone has had a big success in the past, that can be a plus, but it’s also really exciting to find the young guys who are going to be the stars of next year. Both business and geology are important. A good company needs a well-rounded team that can cover all the bases.

TMR: The three of you are putting together a Subscriber Investment Summit the day before the Prospectors and Developers Association of Canada (PDAC) convention in March. You have picked a number of companies to present at the summit, and be available to talk to investors. The three of you will be there talking to investors and companies as well. Can each of you tell me why you picked the companies you did, and about the catalysts that make these companies worthwhile for investors?

KS: A company called rdx Technologies Corp. (RDX:TSX.V) has a novel way of treating wastewater. In addition to purifying the water so it can go back into the ground, the company extracts every little bit of energy from that water. That means any kind of oil, animal or plant residue. The company has the ability to shake that residue out, chemically separate it and create fuel. So rdx gets paid to take in the wastewater, and it gets paid to sell the fuel. So far, the company has two operations up and running.

This process is new and looks to be very cheap. Management has a very aggressive growth program, so the proof is going to be in the pudding on this one very quickly. The company has a very exciting story that they’re going to test within the next two quarters.

Madalena Energy Inc. (MVN:TSX.V; MDLNF:OTCPK) is a very simple producer story. It has a big land position in Argentina, a country that might scare a lot of people. But the reality is that big oil is spending big money in Argentina to buy up a lot of land. If you apply the transaction metrics that are going on in the country to Madalena’s land block, the stock is a triple from here. That’s exciting. I wanted to make sure management can tell investors that story.

TMR: Madalena is operating on the Vaca Muerta shale. How does that shale compare to the Bakken?

KS: So far, it’s the only play on earth that could be more oil-charged than the Bakken. Everyone is familiar with fracking. Usually companies will do 20 fracks in a well. In the Bakken, you might get 10 barrels (10 bbl) per frack. In the Vaca Muerta, explorers are seeing as many as 50 bbl per frack. It is very highly oil-charged. If it weren’t for the politics in Argentina, the stocks of all the companies in the region would be dramatically higher than they are now.

TMR: What other companies will be at the Subscriber Investment Summit?

KS: Petroforte International Ltd. (PFI:TSX.V) is a very lucky shot for retail investors, simply because one of the top operating teams in Calgary is recapitalizing the company with retail money at a very low valuation. That never happens anymore in Calgary. Usually these companies stay private for a long time and don’t come public until they are at about $10 per share. These guys recapitalized at about a nickel per share. Basically, Petroforte is a startup growing very fast at a cheap rate. I made it my largest position because those opportunities rarely come along.

TMR: Another one?

KS: Manitok Energy Inc. (MEI:TSX) is a conventional oil play with a lot of gas. Now that gas prices are starting to move up, the company has been given a huge bonus. Manitok has a lot of leverage because even at very low gas prices, its wells were paying out in 8 to 10 months. It still has very low valuation despite the fast payback, so it is something that investors should know about.

TMR: Does it also have an advantage because it has a conventional well and doesn’t have to deal with the depletion rates that some of the fracking wells have had?

KS: That’s right. You are looking at very low depletion rates compared to fracked wells. A tight shale well could decline 65% in year one; these guys are closer to 40%. It makes a big difference in how many times you can pay the well back over the course of the life of the well. It is a big advantage.

TMR: What other companies will be at the Summit?

KS: Entrec Corp. (ENT:TSX.V) is a call on oil sands development and liquid natural gas (LNG) development. The company is holding its own doing oil sands work, but if the government in British Columbia gets its fiscal framework set for LNG, Entrec owns the largest crane company in northwest British Columbia, and would be a huge beneficiary. I think the company would be a top stock for a pop once LNG gets going.

Iona Energy Inc. (INA:TSX.V) was the largest junior oil growth story in the world last year. The company went from 1,500 to 7,500 barrels per day—all beautiful, light, high-profitability oil. Sadly, the market didn’t end up caring too much. But in 2014, as the production profiles of these wells become consistent, the market is going to reward Iona. Basically, the company is trading at 1x cash flow. When you buy stock at 1x cash flow, you are going to make money.

TMR: This is in the North Sea. Will the company have an advantage because of higher European prices?

KS: Certainly, working in the North Sea gives you exposure to international pricing, which is $10 per barrel ($10/bbl) higher than in North America. The asset that Iona drilled last year pays out in a year. When a well pays out in a year, and you’re trading at 1x cash flow, you are going to make money.

TMR: How about a couple more?

KS: High North Resources Ltd. (HN:TSX.V) is a startup that’s just finding its legs. It has the Montney asset, which pays back in about a year. All the production around Montney is paying out in a year, and there’s a lot of it. There is good well control.

High North is pretty much a no-brainer. It has the next three years of low-risk to no-risk drilling in the Montney oil play, where there are lots of services and high profitability. It is set. It’s done. It will just plunk down holes like clockwork for the next few years, then watch the cash register ring.

Lastly, Enterprise Group Inc. (E:TSX.V) has done a fantastic job of buying highly specialized, niche companies that have higher-than-average profit margins. When you do a rollup play like this—an aggressive mergers and acquisitions (M&A) strategy—what makes the stock go up is being able to drive organic growth out of it. This company has been able to do that better than any I’ve seen. It has surprised to the upside, achieving revenue jumps quarter after quarter. Not just revenue jumps, but real positive cash flow.

I’m quite impressed with what the Enterprise team has been doing. The feedback the company is getting in the market suggests that cash flow is going to triple this year, which indicates the stock should be $2. It’s currently trading at about $1. We will see what happens this year, but I like what the team is doing.

TMR: It’s a very diversified company. Is there one area that will drive growth going forward?

KS: Yes. Enterprise has a bit of an odd product to those outside the industry—the Hydro-Vac, a water-jet cutter. Super high-pressure water is used to cut the ground to find oil pipes and electrical wires, without cutting the infrastructure itself. It is mucky work, but it’s incredibly profitable. The company has plenty of demand from customers if it can get enough product.

TMR: Eric, you have a couple of companies you’ve invited?

EC: Barisan Gold Corp. (BG:TSX.V) is a fairly straightforward story. This is a straight-up drill play. The company is drilling a porphyry discovery called Upper Tengkereng in Sumatra, Indonesia. I’m not a huge fan of the country. I made that fairly plain when I started following Barisan, but the company put out a couple of good-looking drill holes, the best of which was basically 900 meters (900m) of 0.4 grams per ton (0.4 g/t) gold and 0.25% copper, which is pretty damn good as porphyry holes go. The area has the potential to generate the kind of holes that can give you 100–200% jumps in one shot. The last hole was also a good one, though not as good as the one quoted above. Assays for the bottom third of this hole are still to come—but it’s the next couple of holes I’m focused on. These holes will be drilled to the east, back in the area that generated the 900m intercept. I’m hoping to see another long, high-grade intercept. The stock trades at $0.20/share, which leaves plenty of upside. The area being drilled now, on the eastern side of this project, is not governed by the forestry ministry, which is tough to deal with in Indonesia.

TMR: When do you expect the next drill results?

EC: These are 1,000m holes, so they take some time to turn around. The bottom third of the last hole should be out in the next week or two. The next hole should be just about done, so I hope to see those results in early to mid-March. If the stock gets a little bit of a jump, the company may finance so it can add a second rig. That would help results come faster. The target is not going away. It’s the real deal. It’s just a matter of how big it is, how high of grade it is.

TMR: Another company or two?

EC: I have followed Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT) for years. I was pounding the table on this one pretty hard late last year, because it seemed like it was getting sold down with all the other gold stocks, even though Nevsun’s Bisha mine in Eritrea was switching to copper production.

Bisha is a high-grade volcanogenic sulfide deposit. And the mine is very unusual in that it has gone from being a gold producer to being a copper producer; the company has gone below the supergene gold mineralization in the same deposit. It is different levels of weathering and oxidation. Nevsun is now into the supergene copper. It will be mining that for the next three or four years. The gold and copper are both very high grade. After that, Bisha will become a zinc mine, also very high grade. This thing generates tons of money.

Nevsun has had a good run in the last three to four months. Its stock has more or less doubled, up to about $4 now. But I expect Nevsun to produce 200 million pounds copper this year, with some gold added in. I would think its cash costs are going to come in below $1. It already has about $1.50/share in cash. It is generating tons of cash flow. It is paying a dividend. I think there’s room for that dividend to be increased from $0.14 this year.

The other thing that’s always possible is a move on the M&A side, because the company has the cash to buy up assets. I know management has been looking around for a couple of years. Part of the problem is that its own project is so good that management just doesn’t run across many assets that look better. Nevsun is a solid base metal stock that I like quite a bit.

Sunridge Gold Corp. (SGC:TSX.V) is an earlier-stage company in Eritrea. It just put out an updated feasibility study, and finished negotiations with the government mining company on a deal to sell its 30% of the Asmara project property. Working with the government is something you have to do in Eritrea, so getting that deal announced was important for the company. The feasibility study looks quite good. I think it’s financeable, but Sunridge is also a very distinct takeover target. I know companies are sniffing around because the company would be a nice, long-term, low-cost, base metal producer, and there aren’t as many of those around as you might think. They are in demand by larger companies.

TMR: It does look like a lot of investors got interested in the last couple of weeks. Lawrence, is there still upside in Sunridge? Do you feel the same way about the company?

LR: There is huge upside potential in this company. It’s trading at about 10% of the NPV of the project, based on the feasibility numbers and even taking into account the partner interest. Typical retail investors are nervous about the country. But Nevsun demonstrates that Eritrea is actually a good place to be: Projects are good, things work and you can make a lot of money. While Nevsun could take on Sunridge as an acquisition, I think it would like to be diversified into another country. But it still proves Sunridge has upside potential.

TMR: Eric, do you want to continue with another company?

EC: Columbus Gold Corp. (CGT:TSX.V) has a 5.5 million ounce (5.5 Moz) deposit in French Guiana called Paul Isnard. It struck a joint venture deal with Nord Gold N.V. (NORD:LSE) late last year. I don’t think the market completely understood how strong that deal was. Nord can earn 50.01% of Paul Isnard by spending at least $30M and producing a bankable feasibility study within three years. It’s important to understand that is not “or”—it’s “and.” Nord has to spend the money and do the bankable feasibility. And there are other payments involved, depending on the Indicated resource at the end. The bottom line is, given the size and type of that resource, I think Nord will be very lucky if it gets the bankable feasibility by spending only $30M. I think it’s quite possible to spend more than that.

On top of that, Columbus has a large set of properties in Nevada. A couple of the guys on the company’s board are old hands from Nevada, with several discoveries to their credit. The deal with Nord frees up some $8M to work on the Nevada projects. Lots of news should be coming soon.

TMR: Lawrence, will you have questions for the Columbus management team when you see them at the conference?

LR: The big question will be: “What exactly are the plans in Nevada?” I know the company is planning to drill three or four projects over the course of the year, with its own money and through joint venture partners. As Eric said, it’s got a very strong deal with Nord Gold. The joint venture puts Columbus in a very strong position to see the project through the feasibility study without having to commit any further money.

TMR: Before Eric goes on with a couple more, do you want to talk about a company that you invited?

LR: Graphite One Resources Inc. (GPH:TSX.V) has a big graphite project in Alaska. It’s probably the only large, high-grade graphite deposit in the U.S., which gives the company a really strong strategic position. There is a lot of concern about security of supply for graphite. Graphite One is in the best position to satisfy the U.S. domestic graphite supply situation.

The project is seen by some as being low grade, but that’s an average grade taken across the entire large deposit. Zones within that deposit have significantly higher grades; the company could easily compete with some of the higher-grade deposits by mining just part of the overall deposit, and it would still have size to be viable. The deposit is in a fairly remote area in Alaska, but it’s near tidewater, and that’s really important logistically. The company can get the big equipment and supplies it needs, and ship the product out by water.

Graphite One is really strengthening its management team. Jim Currie joined the team a couple of months ago. He’s a mining engineer with an impressive background. Beginning in February, Bob Cross joined the board. Bob also has an impressive background. He’s presently chairman of B2Gold Corp. (BTG:NYSE; BTO:TSX; B2G:NSX), a $2 billion company. These guys bring a lot of experience, but they also provide an important endorsement for the project and the company. It is still fairly early stage but looking very positive in that the company has a big program planned over the course of this year. With that, I’ll turn it back to Eric.

EC: I’ll move on to SilverCrest Mines Inc. (SVL:TSX.V; SVLC:NYSE.MKT), a company I’ve followed since inception. I trust its management team more than any other. The company made a great discovery at Santa Elena in Mexico and put it into production on time, under budget. SilverCrest is now in the midst of expanding that mine. The company produces silver at a cost of about $8.50 per ounce, which is one of the lowest production costs in the industry. It will have about a 50% increase in production this year and next year. It has very good cash flow and good profits coming.

Company management just picked up the project next to Santa Elena. It’s a very early-stage project, but it seems to be a Santa Elena lookalike. The company has another project—a large multimetal property called La Joya, with a silver equivalent resource of 200 Moz. I expect to see a preliminary economic assessment to prefeasibility come out this year.

This is a practical, seasoned management group that has put things in production before. It’s a company I’m extremely comfortable with.

TMR: How about one more company?

EC: I cover a company called Reservoir Minerals Inc. (RMC:TSX.V), which, along with its joint venture (JV) partner, Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE), made a pretty amazing high-sulphidation copper-gold discovery in Serbia. They put out a resource estimate of 65 million tons (65 Mt) of 2.6% copper and 1.5 g/t gold. It’s a really impressive discovery.

Mundoro Capital Inc. (MUN:TSX.V) happens to have concessions surrounding the Reservoir JV project and at the east side of the Bor mine complex, a well-known mining camp. The Tethyan mineral belt stretches through Serbia, into Bulgaria and down through Turkey, through the Caucasus. That belt has generated a lot of very big, impressive deposits. I started following Mundoro because I liked its set of projects and that geology. The company was early stage, and still is. It will get to the drill stage in the next couple of months. Mundoro has lots of room to find new stuff.

The Chinese state mining company recently “won” a project Mundoro had been working on in that country, but gave the company about $13M as a door prize. That means the stock is trading at $0.05/share less than its per-share cash value. So you’re paying nothing for the exploration potential. It is a very tight deal, with only 40M shares out. The chairman and one of the directors own about 10% of the company. Mundoro has a lot of room to move if it makes a real discovery.

TMR: This goes back to what we talked about in the beginning, which is a diversified pipeline. Mundoro is also in southeastern Europe and Mexico. Is one area more exciting to you than the others?

EC: I think the Serbian projects are the most interesting. The company is ready to drill on two targets in Q2/14. The area has infrastructure, and is very mining-friendly. The project in Bulgaria looks quite interesting, too, although it hasn’t put a lot of data out about it.

TMR: The Summit—where all of these companies are going to be in one place for investors to talk to—is being held in conjunction with PDAC. What are you hoping to hear at the conference? What trends will you be sharing with attendees?

LR: The mood is definitely picking up in the resource industry. We had a terrible couple of years, but interest is coming back. Most retail investors are shell-shocked. But the “smart” money—the veteran investors—are coming into the market now. The better-quality companies are already starting to move up on a fairly consistent basis.

Beyond that, there is a huge amount of money waiting in the wings. Part of that is U.S. private equity. These investors recognize the tremendous value to be found in the industry. We haven’t seen a lot of deals announced yet, but they’re looking at things. I think we’re going to see a lot of money from that sector coming into the resource space over the next few months, which will contribute to what’s already beginning to be an upturn for the industry. PDAC is a tremendous event. There are people from all over the world coming together in one place. Conferences are a very important venue, where investors can get face-to-face with the management teams.

TMR: Eric, are you looking forward to the same upbeat spirit?

EC: Yes. I am calling for 30%+ gains on the Venture this year. That sounds like a lot, but it is a speculative index. I pointed out to readers that for those gains to happen, all we really need is 10% of the companies on the Venture to do very well and carry the can for everybody. Another 20% will do reasonably well, and get financed along with the top 10%. Half of the companies will probably do nothing and, hopefully, a bunch of them will disappear. I’m quite happy to see some of the also-rans not around anymore.

Gold has reacted quite well to good news and bad news. The Chinese are strong in the market still. It looks like gold has put in a fairly important double bottom, and I think the Venture index has as well. I expect things to be a lot more optimistic. PDAC will be a chance to find out if management groups are building their own momentum. It’s tough to stay on track when you’ve gone through three terrible years. But the management groups that have been able to hold things together and raise money are the ones that will come out of the starting gate fast.

TMR: Keith, is it the same story in energy?

KS: No, it’s almost the opposite. I’ve been warning my subscribers that energy might be going into a trough. There is a lot of fear that ongoing production increases are going to cripple commodity prices, which would not be pleasant. I tried to a pick a group of companies that either have the teams or the assets—or both—that can make it through any bottoming that we might see in the cycle later this year.

TMR: Thank you all for your time. See you at the Subscriber Investment Summit.

Readers of The Mining Report can sign up for a complimentary ticket to the Subscriber Investment Summit 2014 for a limited time only. Register here.

Keith Schaefer is editor and publisher of the Oil & Gas Investments Bulletin, which finds, researches and profiles growing oil and gas companies that Schaefer buys himself, so Bulletin subscribers know he has his own money on the line. He identifies oil and gas companies that have high or potentially high growth rates and that are covered by several research analysts. He has a degree in journalism and has worked for several Canadian dailies but has spent over 15 years assisting public resource companies in raising exploration and expansion capital.

Eric Coffin is the editor of the HRA (Hard Rock Analyst) family of publications. Responsible for the “financial analysis” side of HRA, Coffin has a degree in corporate and investment finance. He has extensive experience in merger and acquisitions and small-company financing and promotion. For many years, he tracked the financial performance and funding of all exchange-listed Canadian mining companies and has helped with the formation of several successful exploration ventures. Coffin was one of the first analysts to point out the disastrous effects of gold hedging and gold loan-capital financing in 1997. He also predicted the start of the current secular bull market in commodities based on the movement of the U.S. dollar in 2001 and the acceleration of growth in Asia and India. Coffin can be reached at hra@publishers-mgmt.com or the website.

Lawrence Roulston is an expert in the identification and evaluation of exploration and development companies in the mining industry. He is a geologist, with engineering and business training, and more than 20 years of experience in the resource industry. He has generated an impressive track record for Resource Opportunities, a subscriber-supported investment newsletter. Roulston has launched an investment fund, the Metallica Development Fund, to take advantage of severely over-sold positions in high quality resource companies. The focus of the fund is on companies with production and/or advanced-stage exploration and development projects—companies with potential for near-term recovery in value that also have potential for longer-term growth.

Read what other experts are saying about:

• Columbus Gold Corp.
• Enterprise Group Inc.
• Madalena Energy Inc.

Differing fundamental views are pulling crude oil in different directions while it sits at fresh highs.

Trading position (short-term): In our opinion no positions are justified from the risk/reward perspective.

On Wednesday, crude oil rose on better than expected economic data from China and climbed to its highest level since late October. Despite an increase to a fresh monthly high, light crude reversed after the EIA data showed that crude inventories rose more than expected. In this way, crude oil lost 0.11%, but closed the day above $100 per barrel.

Yesterday’s data showed that China’s trade surplus widened to $31.86 billion last month from $25.6 billion in December, beating expectations for a $23.65 billion surplus. Additionally, Chinese exports climbed 10.6% from a year earlier, beating expectations for a 2% increase and following a 4.3% gain in December. Imports rose 10%, compared to forecasts for a 3% increase. Please note that according to preliminary customs data, Chinese imports of crude oil hit an all-time monthly high in January (China imported 28.16 million metric tons of crude oil, equivalent to 6.66 million barrels a day, which is 12% above the year-ago level.).

Despite this positive data, which encouraged the buyers to push the price higher, crude oil reversed and gave up earlier gains after the U.S. Energy Information Administration showed in its weekly report that U.S. crude oil inventories rose by 3.3 million barrels in the week ended Feb. 7 compared to expectations for an increase of 2.7 million barrels (it was the fourth weekly gain for domestic crude supplies).

Having discussed the above, let’s move on to the technical changes in crude oil (charts courtesy of http://stockcharts.com).

On the above chart, we see that crude oil broke above the December peak and hit a fresh monthly high of $101.38. Although this was a strong bullish signal, we didn’t see further improvement and light crude reversed before reaching its upside target (the 50% Fibonacci retracement level). An invalidation of the breakout was a bearish signal, which encouraged sellers to act and resulted in a drop to the lower border of a small rising wedge (marked in red on the above chart). With this downswing, light crude also approached the upper border of the rising trend channel (marked with blue). 

From this perspective, we should consider two scenarios once again. On one hand, if this support zone encourages oil bulls to act, we may see another attempt to move higher. However, taking into account the fact that yesterday’s drop materialized on relative large volume (which confirms the strength of the sellers) and combining it with an invalidation of the breakout above the December high and the current position of the indicators, it seems that we will likely see further deterioration in the coming day (or days). Additionally, if the price drops below the lower border of a small rising wedge, we will see an invalidation of the breakout above the upper border of the rising trend channel, which will be a bearish signal. If this is the case, the downside target will be the lower border of the rising trend channel (currently around $97.50). Please note that the CCI and Stochastic Oscillator are overbought, which suggests that a correction is just around the corner.

Having discussed the current situation in light crude, let’s take a look at WTI Crude Oil (the CFD).

Quoting our last Oil Trading Alert:

(…) WTI Crude Oil almost touched the December high (which is still reinforced by a bearish engulfing candlestick pattern)(…) if the CFD breaks above this important resistance level, we will likely see further increases and the first upside target will be the 50% Fibonacci retracement level around $101.70.

As you see on the above chart, WTI Crude Oil broke above the December high, but the buyers didn’t manage to push the CFD to its upside target, which was a first bearish sign. In the following hours, the price also dropped below the previously-broken resistance level and declined to the upper border of the rising trend channel (which actually looks like a rising wedge from this perspective). Earlier today, we saw further deterioration as the CFD declined below this important support line. If oil bulls manage to invalidate this breakdown, we may see an upswing to yesterday’s high. However, if they fail and WTI Crude Oil closes the day below the upper border of the rising trend channel (rising wedge), it will be a strong bearish signal that will likely trigger further deterioration. At this point it’s worth noting that the Stochastic Oscillator and CCI generated sell signals, which is a bearish signal that may encourages sellers to act.

Summing up, although crude oil hit a fresh monthly high, it quickly reversed and erased earlier gains. As mentioned earlier, an invalidation of the breakout is a bearish signal (especially when we take into account the fact that yesterday’s drop materialized on relative large volume and the current position of the indicators), which will likely trigger further deterioration in the coming day (or days). On top of that, the current situation in the CFD (sell signals generated by the CCI and Stochastic Oscillator) supports oil bears. So, if light crude drops below the lower border of a small rising wedge, we will see an invalidation of the breakout above the upper border of the rising trend channel and probably a bigger pullback (if this is the case, the downside target will be the lower border of the rising trend channel, currently slightly above $97). Connecting the dots, all the above suggests that a correction is just around the corner.

Very short-term outlook: mixed
Short-term outlook: bullish
MT outlook: bullish
LT outlook: mixed

Trading position (short-term): In our opinion, as long as there is no an invalidation of the breakout above the upper line of the rising trend channel, the situation will not be bearish enough to justify opening short positions. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

ABOUT THE AUTHOR

Nadia Simmons

Nadia is a private investor and trader, dealing in stocks, currencies, and commodities. Using her background in technical analysis, she spends countless hours identifying market trends, major support and resistance zones, breakouts and failures. In her writing, she presents complex ideas with clarity that enables you to easily understand market changes, and profit on them.

You can read Nadia’s analyses at SunshineProfits.com where she publishes her articles on gold and crude oil trading.