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Examining
the macro-economic environment is how Jim Letourneau, publisher of the Big
Picture Speculator, likes to begin his stock-picking process. However,
his understanding goes beyond headline news to reveal surprising investment
themes with profit potential. In this exclusive interview with The Energy
Report, Letourneau talks about the hype and commodity
investment cycles and where to dig for blue-sky stocks.
The Energy Report: You publish
the Big Picture Speculator. What does that title imply?
Jim Letourneau: I believe the macro context is often more important
than the details about an individual company. I read a broad range of
material every day that helps me form my views, and
one of my best skills is putting together the big picture and connecting the
dots for audiences. A recent example of my method is my coverage of the
natural gas sector, which focused on how the abundant supply of natural gas
has led to a complete shift in the types of companies that people should be
following. Rather than natural gas producers, investors should find companies
that are consuming natural gas, like Methanex Corp. (MEOH:NASDAQ; MX:TSX;
METHANEX:SSE), Westport Innovations Inc.
(WPT:TSX) or Energy Fuels Inc. (EFR:TSX).
These companies are in great shape because their costs are significantly
lower. That's a huge big-picture shift, but people get bogged down in all of
the debates about fracking and other controversies.
The bottom line is the U.S. now has the cheapest natural gas in the world,
and that's not a horrible problem to have. When I talk to technical people,
we just look at each other and think this is a miracle. No one saw this
coming.
TER: As a geologist, how does your technical knowledge shape your
investment decisions? What do you look for in potential investment
opportunities?
JL: Technical knowledge includes pluses and minuses. In general, the
types of companies I look for are usually going to have a market cap of under
$100 million (M) and for me to get excited about them, they have to have the
potential to surmount that $1 billion (B) market cap. So there's a potential tenbagger upside in them, if everything pans out. That
potential could be in the form of a new technology backed by a critical
management team or a higher-quality mineral property. Either way, management
teams are critical for these types of things to play out.
TER: How far down in market cap do you go when considering
investments?
JL: Sometimes I go down too far, but I think $50M is better than $5M.
While you can argue that it's easier for a $5M market-cap company to go to
$50M, your odds start to dwindle. It's a matter of finding that balance
point. Obviously, it's nicer to buy a company cheap and have it grow into
something bigger, but the company is usually cheap for a reason. I don't want
to have to write about 50 companies a year that didn't quite make it. I'd
rather go up the food chain a little bit and follow ones that are going to
survive, and whose progress we can track year by year.
TER: You spoke at the Cambridge House Energy and Resource
Investment Conference in Calgary on March 30 and 31.
What subjects did you cover?
JL: My keynote talk was called "Making Money Using Commodity and
Hype Cycles." I overlayed two kinds of cycles:
The commodity cycle is a longer cycle that we've been in for over 10 years
now. Hype cycles refer to heightened public awareness of a new technology or
a particular element on the periodic table that hasn't been speculated on
yet. A recent example would be graphite. Uranium is another really good
example of a hype cycle; there was a huge amount of interest about eight
years ago and hundreds of companies were formed. Investors were making lots
of money with uranium stocks. Then it all withered away. There is still
opportunity because some of those companies are still around and advancing
their businesses.
I also did a workshop called "How to Find Billion-Dollar
Companies," where I mentioned some of the companies I like that have
market caps near $100M with the blue-sky potential to get up to the $1B
level.
TER: What do you think the potential is on a percentage-wise basis of
finding billion-dollar companies?
JL: The odds are challenging. This is more speculative and it's much
higher risk than a nice dividend-paying stock with cash flow. These companies
have lower market caps for a reason; there is either skepticism about the
technology or a lot of competition. We don't need 100 new rare earth mines,
but maybe we have 100 rare earth companies. So which companies are going to
win that race? It's a bit like horse racing; you pick your favorites. The
odds are you're not going to win on every one of them.
TER: For a company to get to a $1B market cap these days is probably
going to involve some acquisitions and consolidations, unless it really has
some amazing property or technology.
JL: That's very true. Sometimes companies just lay it out and if you
can see that it can get the sales and the trajectory, it is certainly
possible, and it does happen. It's a challenge, and that's what we're looking
for.
The other important part of the stock-picking process is the timeframe. The
commodity cycle has a long-term timeframe, whereas the hype cycles can be
pretty brief. Eventually, the market turns and the interest goes away. The
challenge for these companies, if they have something real, is to keep moving
the project forward until the next hype cycle comes around, when people get
really interested again. If you're investing in equities related to
commodities, you're speculating both in the market and on commodities.
Sometimes you can have the right commodity, but the company you pick doesn't
follow that commodity's price performance very well.
TER: Can you point to any companies you've seen in the last few years
that have turned out that way?
JL: There are a few. To be honest, the other part of this strategy is
that for every company that I talk about and like, there are probably 100
that I don't. There's a lot of screening and filtering to get rid of the ones
that don't have the potential. One company that I like right now is a biotech
that I think we're at a triple on right now called biOasis Technologies Inc. (BTI:TSX.V). It
has a protein that can cross the blood-brain barrier. Therapeutic molecules
can be conjugated to this protein, allowing it to cross the blood-brain
barrier. This can dramatically increase an existing drug's effectiveness.
That's one. We found it under $0.50, and now it's in the $1.40–1.50
range.
DNI Metals Inc. (DNI:TSX.V; DG7:FSE) has also
performed really well. While it's down now, it had gone from around $0.20 to
more than $0.60. I like it because it's pushing the frontiers a little bit.
It has a very large, black shale metal deposit in northeastern Alberta, a bit
north of the oil sands. Historically, very few geologists studied shales, but they've become more popular now because of
shale oil and gas. The Alberta Geological Survey has done numerous studies
going back to the early 1990s that mention an anomalous metal content in the
Second White Speckled Shale. The grades are really low, but the deposits are
very extensive. There are huge resources in place containing a whole cocktail
of meterials, including rare earths, nickel, iron,
vanadium, uranium, zinc, copper, cobalt and molybdenum. It's almost a
conceptual play in some ways. Although the grades are not stellar, they are a
little bit higher than we'd expect anywhere else.
So it's a resource-in-place story, but it's also a technology story because
we've seen other industries dealing with a low-grade resource that suddenly
become economic plays because of technological breakthroughs. The best
example of that is probably shale gas, where people knew for a long time that
there was gas in these shales, but nobody was
really making any money from them. New technology comes along, and suddenly
these shale deposits are worth a lot of money.
For DNI Metals, the challenge is how to get the metals out and make money
doing it. The best method to extract these metals is pointing to a technology
called bioleaching, which is being used by a company called Talvivaara Mining Co. Plc. (TALV:LSE) in Finland. That's the exciting
part that's pushing the frontiers.
TER: Are these metals pretty much disseminated throughout this whole
deposit, or are certain metals concentrated in certain areas?
JL: The metals are widely disseminated within a fairly uniform and
consistent material. That makes it similar to coal or potash mining, where
the ore bodies are tabular in shape. They may not be exciting, but at least
you know what to expect and you can plan very large operations around that.
TER: With bioleaching, is in situ recovery (ISR) an option?
JL: There may be some way to use ISR, but the bioleaching at Talvivaara involves actually digging it up, piling it
onto pads and leaching it by letting the bugs do their work and make acid.
But there may be a way to apply in-situ technology in the upper zone.
Bioleaching in heaps seems to be the approach with the most potential at the
moment.
The value of the minerals in this shale is probably $40 per ton (/t).
Extracting the metals for less than $30/t is the challenge. No one's done it
before, so there's a lot of skepticism. I think a really big mining company
would eventually take interest in this because it's the kind of project that,
if it can get up and running, has a life-of-mine potential of over 100 years.
TER: You mentioned uranium earlier. Despite Fukushima, people are
realizing that nuclear is here to stay and one of our best sources of energy
generation for the foreseeable future. Is there still life after its hype
cycle has ended?
JL: I think uranium's future is very bright and it is a critical part
of the world's energy matrix. We can't really afford to just turn it off.
There actually are a lot of benefits to using it. In terms of the actual
price of uranium, the market may not be as excited about it yet, but Russia
said it will not renew its supply agreement with the U.S. so analysts are
anticipating shortages starting in 2013, which isn't that far away.
TER: What other companies would you like to comment on?
JL: I like the uranium companies that use ISR technology. The main
plays I've been considering are either in Wyoming or Texas, where you don't
get the really high grades that you find in the Athabasca Basin. There were
hundreds of uranium explorers in the Athabasca Basin and the only one that's
really been successful for investors was Hathor
Exploration Ltd., which was recently acquired by Rio Tinto (RIO:NYSE; RIO:ASX).
With an ISR uranium project, you have a degree of certainty that a company
will actually be able to build the mine and get it into production.
There are three companies in that space that I like. Going from the smallest
market cap to the biggest, there is Ur-Energy Inc. (URE:TSX; URG:NYSE.A), in Wyoming.
It's on track to be a producer very soon with expected permitting for its
Lost Creek mine early this summer. Then it will be able to get its mine into
production probably within six months.
Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.A) is a similar
company in Wyoming. It has actually started its mine construction and is
looking to start producing 600–800 thousand pounds (Klb)
uranium/year very shortly. Both are very near-term production stories.
The last one, Uranium Energy Corp. (UEC:NYSE.A), is currently
producing in Texas. It has an inventory of projects coming online and the
company announced property acquisitions in Paraguay and Arizona earlier this
year. These are all companies with uranium resources that, once their
facilities are built, enable extremely long production runs. Typically,
they'll have a centralized uranium processing plant and all of the mines
around it will be satellite projects.
The challenge for all of these companies has been permitting. The various
U.S. government regulatory bodies didn't really have anyone qualified to
evaluate ISR projects because there haven't been any new ones developed for
decades. The absence of a competent regulatory structure has slowed down
progress on getting these mines built. These companies have typically spent a
year or two longer than they expected on the regulatory process; it's not a
reflection of any gaps in the quality of their projects.
TER: At least the regulators are willing to permit these operations,
which apparently was quite a problem for a while.
JL: That's a very good point. These are viable, useful industries with
quite good safety records and low environmental impact. Again, I like to talk
about the big picture.
TER: What sort of capital costs do these uranium ISR projects have?
JL: There's a range, but the costs are usually $20–30/lb. But
these companies are pretty comfortable that they can eke out a living at the
current uranium price, which is not going to encourage a whole bunch of new
projects to come along. They're anticipating higher longer-term prices, which
should make them quite profitable.
TER: Do you have any thoughts on the current gold market?
JL: I just tell people to look at a 12-year gold chart. Gold is
probably the best-performing investment product over that timeframe. I
personally don't think gold has that critical a role in the monetary supply,
but it is a place to preserve wealth and look for protection. This recent
consolidation pullback is probably an opportunity, but people need to
remember that bull markets don't last forever. However, gold still has legs
right now, and the trend is your friend.
TER: Looking at the "big picture," what do you suggest
people do to figure out how they should invest their money these days?
JL: Investors have to do their research and be informed. We are in
dangerous times. A lot of assets are correlated so it's hard to find safety.
Sometimes maybe the best safety is not even being in the market, which I hate
to say. I like finding good companies that are going to grow into viable
businesses. But the markets are not kind, and we've seen what can happen when
the flow of capital gets turned off. The valuations of publicly traded
companies, big and small, in all sectors, tend to drop in unison, even
precious metals prices. It's important to be mindful of the downside. I look
for upside opportunities because I'm an optimist and I assume that life will
go on.
We do have some structural issues in the financial system. If that breaks
down, you really don't want to own anything that's not tangible. That's the
strongest investment thesis for owning hard assets. That doesn't mean owning
shares in a hard asset company; that means owning the physical hard asset. If
you own a car, a house or some gold, those things will still be around no
matter what happens to the money supply and currency valuations. The monetary
system is a wild card, and that's the thing that keeps everybody nervous. We
can make informed guesses, but nobody really knows how that's going to play
out.
TER: We appreciate your time and input today.
JL: My pleasure.
Jim
Letourneau is the founder and editor of the Big
Picture Speculator and is a professional registered geologist living in
Calgary, Alberta. He has over 20 years of experience in the oil and gas
sector.
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DISCLOSURE:
1) Zig Lambo of The
Energy Report conducted this interview. He personally and/or his family
own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Energy Report or The Gold Report: DNI Metals Inc., Uranium Energy
Corp., Ur-Energy Inc., Uranerz Energy Corp. and
Energy Fuels Inc. Streetwise Reports does not accept
stock in exchange for services.
3) Jim Letourneau: I personally and/or my family own shares of the following
companies mentioned in this interview: biOasis
Technologies Inc. and DNI Metals Inc. I personally and/or my family am paid by the following companies mentioned in this
interview: I am on the Advisory Committee of DNI Metals. I was not paid by
Streetwise for participating in this story.
The Energy
Report
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