The Mining Report: You cover oil and gas companies
in North America, Latin America and Europe. Which are benefiting from the
current instability in oil and gas pricing, and how are they benefiting?
Etienne Moshevich: Not only are investments in the
oil and gas sector made more risky by the instability in the oil price, but
loans for developing countries become a lot tougher to obtain and are
sometimes severely reduced. As the price of oil increases, it threatens
oil-importing nations, which must continue to pay interest on their debt. As
the price of oil decreases, it makes it harder for oil-exporting nations,
like Mexico, to continue their interest payments. Savvy investors look for
every opportunity to decrease their risk, therefore as oil prices fluctuate,
many look to stable jurisdictions like Canada and the U.S., as North American
oil explorers and producers don't have the same worries as explorers and
producers in countries with riskier credit ratings.
TMR: Argentina acts the bad boy of
international finance. How does it manage to continue to attract foreign
investment?
EM: The market seems to be overlooking
a massive opportunity in Argentina. Argentina's Vaca Muerta could be the
biggest shale play in the world, and some of the biggest oil companies are
flocking to the area to get a piece of the action.
According to a Reuters article by John Kemp published on July
21, 2014, "Argentina is thought to have more shale oil than the United
States�which could potentially push it
into the ranks of the world's biggest oil producers. Nearly all this shale
oil and gas is contained in the Vaca Muerta and Los Molles shale formations.
The Neuquen basin, therefore, ranks as one of the most highly prospective
shale plays in the world and one of the most likely to be developed outside
North America."
Majors are paying as much
as $11,000/acre for a piece of the play; if the majors aren't afraid of being
expropriated, neither should investors. The Reuters article even addresses
the issue of political risk: "Argentina's history of political and
economic instability, serial debt defaults, devaluations, and expropriations
of foreign property. . .make[s] outside investors wary. But the prize is
enormous, too big for international oil companies to ignore, and the
country's politicians, from the president downwards, show a strong awareness
of the need for foreign capital and expertise to develop what could be a
transformational national asset."
The only expropriation in
Argentina happened to its state-owned oil company YPF. . .no one else. That
was an isolated incident, which shouldn't deter investors.
TMR: Can you talk about the benefits
for a smaller company entering the oil sector in Argentina? What is the
upside?
EM: For example, Madalena Energy Inc. (MVN:TSX.V;
MDLNF:OTCPK)
acquired Gran Tierra
Energy Inc.'s (GTE:TSX; GTE:NYSE.MKT) Argentina business unit, which was very
accretive for shareholders, as it provides Madalena with a solid foundation
and sizeable footprint in arguably one of the biggest shale plays in the
world. Post-acquisition, the company has a large portfolio of opportunities
across 14 concessions, with multiple horizontal development plays, an
extensive exploration portfolio on high-impact conventional exploration
assets and a multibillion-barrel asset base for unconventional shale and
tight sand plays.
If we look at the
acquisition based on fundamentals, Madalena got the asset at a huge discount.
The company paid just $9.67 per barrel of oil equivalent for Proved and
Probable reserves, or just $19,000 ($19K) per flowing barrel of production,
which is extremely cheap compared to transactions with similar production
levels. With this acquisition Madalena triples its production, and could
dramatically increase its cash flow in 2014 and 2015 respectively.
TMR: Has Jagercor Energy Corp. (EM:CNSX;
JAMTF:OTC)
succeeded in finding and financing a Argentinean good asset yet?
EM: Jagercor has not found an asset
yet, but is working diligently to close on one shortly. When I decided to
invest in Jagercor, I took a chance on the management team. The company is
led by an incredible operator in Edgardo Russo, a former YPF operator who was
responsible for the Loma La Lata production area. The company also has Matias
Bullrich, a very experienced capital markets executive, who comes to Jagercor
from two outstanding New York investment powerhouses, Morgan Stanley and SAC
Capital. His capital-market savvy and contacts are second to none.
TMR: What companies in the Canadian oil
patch look most promising to you? What do you like about them?
EM: High North Resources Ltd.
(HN:TSX.V) has
been prudent in using the $16 million ($16M) net it has raised to date, plus
organic cash flow, to get five Montney Formation oil wells on-stream, and to
derisk the play over the 20 contiguous sections on which it currently has a
working interest of 100%. Based on direct offset competitor activity, these
20 sections could be developed fully, with a total of 160 Montney
horizontals. Based on this, 97% of the derisked well locations remain
undeveloped, leaving room for a large amount of growth and/or a potential
takeover.
TMR: What do you expect for High North
in the next year or so?
EM: Additional production from two new
wells and installation of permanent facilities will result in increased
revenues, from double to triple the current well count.
TMR: Is there another North American company
that has caught your eye?
EM: Jericho Oil Corp. (JCO:TSX.V) is a low-cost oil
developer, probably the lowest cost oil developer I've seen, which means its
well costs are less than $100K per well. Costs are actually even less than
that, because in its presentation the company states it completes
producer-injector pairs at $62K all-in-cost. And even with consistent and
constant well completions per week, Jericho has ample cash reserves from its
completed $6.55M financing to acquire more land.
What does this mean for
the investor? The company states it has 3,100 acres and optimized spacing of
2.5 acres, which totals 1,240 drillable opportunities. If we are conservative�let's assume half of those are really
drillable�that leads us to 620
opportunities. Historically, each one of Jericho's wells, on average, does 1�2 barrels commercial production per day, and
when waterflood activates, you're roughly looking at 2x that commercial rate.
Is there upside to this number? Absolutely.
Most investors look at
this company and get trapped into thinking each of its wells produces 1 barrel
a day (1 bbl/d), but I assume this would be the base case. The upside and
value in this company is the probability that many of these wells will not
just be 1 bbl/d, they could be 1.2, 1.5, or 2 bbl/d. . .and when waterflood
activates, these small differences make a huge impact.
"The market seems to be overlooking a massive
opportunity in Argentina."
The two contiguous
properties that Jericho recently added to its portfolio in eastern Kansas,
called EKan-3, total 414 acres and did not require a significant cash outlay.
Additionally, Jericho acquired production on its properties, and that
production has increased since the company started bringing new wells online
in its recently completed phase 1 development drilling program. EKan-3 is in
a particular channel that has been a prolific oil-producing reservoir, with
over 5 million barrels of cumulative production. The potential upside for
shareholders is that Jericho now has more drillable acreage to increase its
production and cash flow, as well as to provide important geological
knowledge to help define the field and increase its reserves, all of which
should add value.
TMR: Canada's Athabasca Basin, which
has the highest-grade uranium in the world, is generally described as the
most prolific uranium source. Yet the price of uranium keeps sliding to
historic lows, and is now at $28.25 per pound ($28.25/lb). At what price do
the economics no longer work?
EM: It would be at a price below
$20/lb. Cameco Corp.
(CCO:TSX; CCJ:NYSE)
reports a cash cost to produce at McArthur River at $20/lb, and at Cigar
Lake, it is officially reported at $18.60/lb. But with production no longer
being a two-phase process, some estimate the costs as closer to $14/lb to
process milled ore. That is the pure economics, however. The reality is
different. In May of this year Cameco chose to put its Millennium Project on
hold for the foreseeable future.
Due to the incredibly
rich grade of uranium in many of the Athabasca Basin's deposits, companies
can still mine those deposits economically, even when the price of the
commodity is at the lows seen recently. It is one of the only places in the
world where you can mine uranium and still make a profit at a spot price less
than $30/lb. In fact, even at $20/lb, a number of the basin deposits and
mines would still turn a profit.
To put it in perspective,
a tonne of ore with a grade of 5% U3O8 has a value of over $3,000 at the
current spot price for uranium (some mines in the basin have average grades
over 15%). The gold equivalent grade would be over 70 grams per ton (70 g/t)
at the current spot price for gold. The quality of Athabasca Basin uranium
deposits makes them highly attractive exploration targets for junior miners,
as it offers some downside protection from a deteriorating spot price.
TMR: What do the companies you cover in
the basin bring to the market that makes them attractive?
EM: There are three key points to note
for Lakeland
Resources Inc. (LK:TSX.V). First off is the management. Lakeland, over the past year and a
half, has put together a strong team that is well versed in the uranium
space; namely with experience in the Athabasca Basin. This includes the
geological team (Dahrouge Geological Consulting Ltd.), the company's
directors and its advisory board as well. Second is the quality of the
properties Lakeland has assembled. Most, if not all, of its properties come
with extensive historic exploration to draw from, some with known conductors
and some with drill-ready targets. Third, Lakeland has a good share
structure, and with a financing completed earlier this year, the company is
in a good position to advance its projects.
Skyharbour Resources Ltd.
(SYH:TSX.V)
continues to distinguish itself from other uranium exploration companies with
projects focused in the Athabasca Basin. The company holds interest in one of
the largest land packages in the basin, consisting of more than 390,000
hectares over eight properties. This includes one of the most dominant land
positions strategically located in all directions around Fission Uranium Corp.'s
(FCU:TSX.V)
Patterson Lake South high-grade uranium discovery, as well as NexGen Energy Ltd.'s (NXE:TSX.V) recent discovery at Rook 1, on
the southwestern flank of the basin.
Skyharbour is employing a
unique strategy to execute its plan of making the next discovery in this
region without substantial equity dilution to shareholders. It is utilizing a
syndicate model, with three other companies, to fund a $6M exploration
program over two years, of which Skyharbour only has to pay $1M. The
syndicate structure benefits Skyharbour with other value-add synergies,
including leveraging a combined geological team with more than 200 years of
experience in the basin, including Skyharbour's own head geologist, Rick
Kusmirski, who has more than 40 years of experience in the basin with Cameco
and JNR Resources Inc. (JNN:TSX.V;
JNRRF:OTCPK).
"Savvy investors look for every opportunity to
decrease their risk, therefore as oil prices fluctuate, many look to stable
jurisdictions like Canada and the U.S."
Furthermore, Skyharbour
recently entered into an agreement to acquire 100% of the highly prospective
Way Lake and Yurchison Lake uranium projects from Denison Mines Corp. (DML:TSX;
DNN:NYSE.MKT) at
a very attractive valuation. The Way Lake property boasts a shallow,
NI-43-101-compliant Inferred mineral resource totaling 7 million pounds (7
Mlb) U3O8 and 5.3 Mlb thorium, which is open along strike and at depth. The
company also holds a 60% interest in the Mann Lake uranium project southwest
of the McArthur River Mine, and adjacent to ground where Cameco and
International Enexco Ltd. (acquired by Denison) recently made a high-grade
uranium discovery.
Skyharbour offers
investors multiple value drivers and robust discovery potential with its strong
portfolio of projects around the basin. The company is undervalued relative
to its peer group, and is well structured, with 57M shares outstanding and
insiders owning more than 20% of those.
Declan Resources Inc. (LAN:TSX.V) has secured an impressive
strategic land position in Canada's Athabasca Basin of over 340,000 acres.
This includes drill-ready properties that have benefited from significant
exploration activities.
The latest exploration
program at Gibbons Creek revealed extremely promising values from RadonEx,
with a peak of 9.93 picocuries/square meter/second�believed to be one of the highest RadonEx
values recorded to date for the Athabasca Basin�along with surface radioactive boulders up to 4.28% U308. Both are
impressive key indicators of uranium deposits, and will be used in
conjunction with an abundance of historical data to pinpoint mineralization.
Proven management is led
by David Miller, Declan's president and CEO. Miller, the former CEO of
Strathmore Minerals Corp., which sold to Energy Fuels Inc. (EFR:TSX;
EFRFF:OTCQX; UUUU:NYSE.MKT) in 2013, is a well known senior figure in the uranium market. Miller
has previously worked for AREVA SA (AREVA:EPA), and consulted extensively for
the International Atomic Energy Commission. Dr. Hikmet Akin, a geologist and
Ph.D. in engineering, is alongside. Dr. Akin was CEO of the original Uranerz
Exploration and Mining Ltd., which was the third largest uranium producer in
the world before being bought by Cameco. The combination of developed
properties and strong leadership makes Declan a highly attractive uranium
investment.
TMR: Are there other prospects in the
mining sector that you'd like to discuss?
EM: Source Exploration Corp.
(SOP:TSX.V) is a
great company to be following right now. The company is led by a very
successful and experienced management team that had a big win in 2012, with
the sale of Goldbrook Ventures to a large Chinese group, Jilin Jien Nickel
Industry Co. Ltd.
One of the things I love
about the 2012 deal is the fact that David Baker, now Source's executive
chairman, accumulated his position in the market. After selling Goldbrook, he
was looking for another deal to sink his teeth into. When he came across
Source, he loved it so much that he took a position in the market,
restructured the board, put his own money into the treasury and took control.
Baker brings a tremendous following both on the retail and institutional
side, which will look to support him every step of the way.
The project itself looks
to have great potential as well. Drill results of 2.7 g/t gold over 97 meters
(97m), and 1.6 g/t gold over 114m were promising, and caught the attention of
some large investors in the industry. Mexico has traditionally been a hot
area to explore, with the likes of Torex Gold Resources Inc.
(TXG:TSX)
creeping past a $1.1 billion valuation and building a viable deposit. Source
is hoping to follow in Torex's footsteps. The company expects more drill
results, so investors should stay tuned. Even in a time when junior gold
stories are lagging, Source could potentially bring substantial returns to
its shareholders.
TMR: Can you leave our readers with a
piece of advice for how to navigate the turbulent waters of the energy
investing space?
EM: You need to invest in sound
fundamentals, and even better management teams with successful track records.
I have seen great projects not get the valuation they deserve due to poor
management. Great management teams work wonders with average projects, and
build great value for shareholders. Management needs to have skin in the
game, and be aligned with shareholders to assure that it doesn't take
unnecessary risks.
Look for companies
investing in proven areas with the necessary capital behind them. The last
thing we want to see are companies going back to the market to raise
additional cash with each well they drill. Companies with proven teams and
substantial funds behind them will give any investor the best chance of
increasing the value of their investments.
TMR: Thank you for your time.
Etienne
Moshevich
is the editor of Alphastox.com. Moshevich is also the president of
Transcend Resource Group, an investor relations company based in Vancouver,
B.C., and specializing in exposing undervalued companies to the marketplace.
With a degree in economics, Moshevich has helped finance many successful
mining, oil and gas, technology and biotech companies over the years, many of
which have rewarded shareholders with substantial returns.
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DISCLOSURE: 1) Tom
Armistead conducted this interview for Streetwise Reports LLC, publisher of The
Gold Report, The Energy Report, The Life Sciences Report and The
Mining Report, and provides services to Streetwise Reports as an
independent contractor. He owns, or his family owns, shares of the following
companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of
Streetwise Reports: Energy Fuels Inc., Fission Uranium Corp., Madalena Energy
Inc. Lakeland Resources Inc. is affiliated with Zimtu Capital Corp, a sponsor
of Streetwise Reports. Streetwise Reports does not accept stock in exchange
for its services.
3) Etienne Moshevich: I own, or my family owns, shares of the following
companies mentioned in this interview: High North Resources Ltd., Madalena
Energy Inc., Jagercor Energy Corp., Skyharbour Resources Inc., Source
Exploration Corp. and Declan Resources Inc. My company has a financial
relationship with the following companies mentioned in this interview: I am
the sole owner of Transcend Resource Group. Transcend Resource Group has been
paid a consulting fee for conducting independent reviews of Jericho Oil Corp,
Lakeland Resources Inc. and Madalena Energy Inc. High North Resources Ltd. is
a client of Transcend Resource Group and has paid a fee for consulting
services. Transcend Resource Group is a shareholder in Declan Resources Inc.,
Skyharbour Resources Inc. and Source Exploration Corp. Jagercor Energy Corp
is a client of Transcend Resource Group. 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.
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