The Energy Report: The recent announcement that Tesla
Motors Inc. (TSLA:NASDAQ) has signed an agreement to purchase lithium
from Pure
Energy Minerals Ltd. (PE:TSX.V) has created quite a bit of buzz in the
mining world. How is this different than previous agreements with Bacanora
Minerals Ltd. (BCN:TSX.V) and Rare Earth
Minerals Plc (REM:LSE)?
Jeb Handwerger: The most significant difference is that this is in
Nevada, where the Tesla gigafactory is being built. The battery and carmaker
will need large quantities of lithium at a cheap price, and sourcing it in
its backyard will be a smart move for the supply chain.
Years ago, I predicted the growth of the lithium-ion battery market and
the need for a secure domestic supply of the critical materials used to make
them. This is just the beginning. We're in the early stages of a revolution
in powering transportation and homes. This really is disruptive technology.
Annual growth in the battery space could be around 20%, which means that
demand could double every five years. These batteries make smartphones,
laptops, tablets, electric cars and even solar energy practical.
While the TSX Venture Exchange has been crushed in 2015, our positions in
junior lithium mining companies have continued to outperform in dramatic
ways. The news out of Tesla to secure supply from Pure Energy Minerals is a
huge validation for the concept of lithium in Nevada.
In July, Pure Energy released an Inferred resource estimate of 816,000
metric tons of lithium carbonate equivalent on the Clayton Valley lithium
brine project near Albemarle Corp.'s (ALB:NYSE) Silver Peak producing mine in
Nevada. Now that Tesla has validated the project—and the investors that
believed in the company—the company will be able to go to institutions and
raise capital. There is still a lot more work to be done on the development,
but Pure Energy is working with POSCO (PKX:NYSE) and Tenova Bateman to refine
the plan. Like the gigafactory, production is probably two or three years
out, and by that time, Pure Energy will probably have been bought out by a
major like Albemarle. Once management comes out with a preliminary economic
assessment (PEA) and shows the economics, this will be an irresistible
takeout target. There is still a lot of upside there.
We believe this is the early innings of a great game in this lithium-ion
battery market. This offtake agreement could affect the entire lithium space
and, hopefully, spread to other junior mining companies.
TER: What other lithium mining companies do you think should be
getting more attention in the wake of that deal?
JH: We've also followed the earlier-stage Dajin
Resources Corp. (DJI:TSX.V; DJIFF:OTCPK), which has the Alkali Lake
property and Teels Marsh property in Nevada. Both are earlier stage, but in
the same area as Pure Energy. Dajin also has the Salinas Grandes in
Argentina, but Argentina goes up and down. Nevada is always good. It is
supportive of mining and a rule of law. That's the ideal place if you're
looking to invest in mining.
A couple of years ago, I highlighted Western
Lithium USA Corp. (WLC:TSX; WLCDF:OTCQX), which had a phenomenal run in
2014, even before Tesla chose Nevada. This company was No. 1 on the OTCQX in
2014. It has the Kings Valley deposit in northern Nevada, with a plan for
production of 26,000 tonnes per year of lithium carbonate. Management raised
$5 million ($5M) from major institutions and just merged with Lithium
Americas Corp. (LAC:TSX; LHMAF:OTCQX) to create a significant lithium
company.
TER: Lithium is just one of the ingredients in making a battery.
Graphite is another. What does this deal mean for the graphite space? Are you
anticipating more offtake agreements on the graphite side as well?
JH: I am. I think it's very important to have a secure supply of
graphite since the market continues to be flooded by the Chinese. It's a
critical mineral for lithium-ion batteries. Right now, the prices are
extremely cheap because most of it is controlled by the Chinese, and the
global economy has slowed down. But in the next three to five years, I expect
more demand from the graphite sector in North America.
The key to success will be processing the graphite to meet the needs of
the battery manufacturers. That is why I like Great Lakes
Graphite Inc. (GLK:TSX.V; GLKIF:OTCPK; 8GL:FSE), which is developing a
processing facility in Ontario at the Matheson project. It has secured the
facility to process and to micronize graphite for specific industrial
applications.
I also like Graphite One Resources Inc. (GPH:TSX.V), which has a
massive deposit of large-flake, high-grade graphite in Alaska. The company is
in the midst of a $1.5M financing that will enable it to quantify the
economics of the processing operating costs, and take it closer to a PEA.
It's a potential secure supply of large-flake, high-grade graphite located in
the U.S. that would be a natural fit for Tesla's gigafactory.
TER: You also follow the uranium market. Are you more optimistic
about prices now that Japan has announced it is restarting nuclear reactors?
JH: There will be a rebound in the uranium market, possibly within
weeks. The reactor restarts in Japan will be a major turnaround for the
sector. Japan was a possible seller of uranium over the past few years. It is
going to become a buyer once again. China will soon announce major plans to
fight pollution and build out its infrastructure, which will include building
major nuclear power plants at a record pace. India is also committed to
nuclear. The uranium sector must not be ignored.
There is going to be huge growth in the Athabasca Basin, which has been
highlighted recently by the consolidation of Denison
Mines Corp.'s (DML:TSX; DNN:NYSE.MKT) high-grade Wheeler River project on
the east side of the basin with the massive Patterson Lake South (PLS)
discovery controlled by Fission Uranium Corp. (FCU:TSX). That merger is going to
create a new Denison, which is a potential blue chip company. Denison has
been around for a long time, but now it can boast the lowest cost uranium
projects in the world. When uranium prices turn around, Denison, which is
trading now at pennies, could be trading at dollars and maybe tens of
dollars.
TER: What juniors in the Athabasca could benefit from the scenario
you describe?
JH: I'm watching the Fission 3.0
Corp. (FUU:TSX.V; FSIOF:OTC) group closely. This management team is
developing a basket of exploration projects in the basin. One of the
projects, Clearwater, is partnered with a company called Canex
Energy (CVE:CSC), which is right next to PLS, and it has a drill hole
only 330 meters away that Fission drilled. It seems that the anomaly goes
right onto Canex's Clearwater property. That's one project that I'm excited
about.
TER: You highlighted the increasing M&A activity in uranium
surrounding Fission and Denison. What other activity is going on in the
uranium space?
JH: The trend of the industry is to look for low-cost production
that can make money even during periods of low uranium prices. I recently
bought Uranium
Resources Inc. (URRE:NASDAQ) as I like its recently announced merger with
Anatolia
Energy Corp. (AEK:ASX), a near-term, lower cost, in-situ recovery deposit
in Turkey. There are huge cost savings and synergies between Uranium
Resources and Anatolia, which could lead to improving fundamentals
post-merger. Turkey has a long history of mining with many major Western
producers in the metals industry. The country has eight nuclear plants under
construction, and Anatolia's Temrezli is the only advanced uranium asset with
a prefeasibility study showing uranium cash costs around $30/pound, putting
the asset in the lowest cost quartile. Uranium Resources' largest
shareholder, the Resource Capital Fund, recently announced its public support
for the merger. The cost savings, personnel and synergies of the merger are
too great to ignore. I believe the combined entity could fast-track low-cost
uranium production, as it will be listed on both the U.S. and Australian
exchanges, providing excellent visibility, liquidity and access to mine
finance institutions.
I also bought Plateau Uranium Inc. (PLU:TSX.V) after its recent share
consolidation and name change. The company is working on an updated PEA on
its large resource at the Macusani Plateau in mining-friendly Peru. With less
than 41 million shares outstanding, I believe Plateau is in a position to
possibly make impressive gains as the uranium mining market recovers.
TER: Where does oil fit into your risk assessment for the future of
energy investing?
JH: This recent crash of oil from $100+ per barrel ($100+/bbl) to
low-$40s/bbl in such a quick span has been a major crash. This crash may have
been artificially manipulated to move lower by the shorts who want to take
away market share from the U.S. and Canada. We haven't invested in oil in
years, but these crashes create huge opportunities for longer-term investors.
Oil is not going to stay at these depressed levels. The Federal Reserve
didn't raise interest rates because it knows the global economy is in bad
shape, and that could be a good thing for oil as governments around the world
start injecting liquidity into the system.
TER: How are you approaching oil mining companies as an investment?
JH: I look for companies that have a strong shareholder base, lots
of cash, no debt and are looking to get back into the oil business. They will
be able to pick up assets for pennies on the dollar. Lithium in Nevada is big
now, but a couple of years ago, these companies were trading for literally
pennies. Right now, the Athabasca Basin stocks are trading at pennies, but
two years from now, it's going to be the buzz. That's the way these markets
work.
TER: Give me an example on the oil side of a company that could
take advantage of this opportunity.
JH: One that I like because it has no debt and lots of cash and
recently made acquisitions is a small company called Jericho Oil
Corp. (JCO:TSX.V). I'm hoping that it can announce even more
acquisitions, because as time goes on, these companies get more and more
distressed. So if you have cash, you can buy these projects that other people
put millions of dollars' worth of work into. You don't even have to drill.
You just get it pretty much given to you for a song. The balance sheet and
management team are worth watching.
TER: What words of wisdom do you have for those who are curious
about the energy metals or the energy space?
JH: Don't get caught up buying when it's all over Twitter and USA
Today, and it's overbought. Look for things with good fundamentals that
are trading for pennies, and then patiently wait.
There's a huge amount of growth in whole new industries that people don't
even realize. At the turn of the century, no one thought the internal
combustion engine would ever replace the horse and buggy. But it changed the
entire 20th century. The lithium-ion battery could change how we produce and
store energy, just as the shale revolution changed the trajectory of the oil
sector. The Athabasca Basin could one day become the Saudi Arabia of the 21st
century. You have to think about the megatrends first and then invest
accordingly. And be patient. As commodity investors, realize that cycles take
time to develop. Nevertheless, it's better to be early.
Time is critical. It's the most valuable commodity of all, so don't waste
it. Live every day to the maximum, because every day is a blessing.
TER: Thank you for your thoughts.
Jeb Handwerger is an author, speaker and founder of Gold
Stock Trades. He studied engineering and mathematics at University of
Buffalo and earned a Master's degree at Nova Southeastern University. After
teaching technical analysis to professionals in South Florida for over seven
years, Handwerger began a daily newsletter, which grew to include thousands
of readers from over 40 nations. In 2014, Handwerger highlighted the two top
stocks on the Best OTCQX 50.
