The Energy Report: You recently launched Katusa Research
after years of working with Doug Casey. How do you see your new company
expanding on what you achieved at Casey Research?
Marin Katusa: My time at Casey Research was fun and a great
platform to spread my wings. Doug and I are still very close. We're partners
in a hedge fund and we talk regularly. Katusa Research is going to be much
more focused on just publishing research. There will not be any upsells, and
I am not a publishing company. I run an investment fund, and my focus is
making money on investments, not selling newsletters. Everybody will be able
to get free access to all my research and thoughts on my website and monthly
newsletter, all available for free at katusaresearch.com.
I have no axe to grind with the publishing model; it's just not for me.
I've made all of my money from my investments, and the cash flow I received
from the newsletters was a very small part of my income. So, I want to focus
on the great opportunity I see currently in the resource industry. And, I
plan structuring deals that in five years are going to add a significant
impact to my funds' portfolios.
TER: What do you hope to achieve by publishing this for free that
you were not getting when you were at Casey Research?
MK: Therapy and deal flow. I've done eight flights in the last week
and visited six countries in the last 30 days. I spend a lot of time on
airplanes, so I try to optimize my time, and writing is therapeutic. I don't
pretend that I'm the best writer, but I am a fast writer, and jotting down my
thoughts helps my stock analysis and research. My output is up there with the
best of the writers in the industry. I can create spreadsheets, but when I
write it out in plain language, it helps my analysis. Moving forward, since
my research will be free, I don't have to worry about the marketing side of
the publishing business.
I am busy running one of the largest funds in the junior resource sector.
I'm an investor and speculator. That's my focus. I'm not going to be hitting
people's emails 10 times a day to tell them about the best investment theme
of their lives. If people are interested, they can come to my website. Time
will tell if my model will work.
TER: Will Katusa Research readers be notified of deal flow? How can
they participate?
MK: When I find something interesting, I pop it up on the website.
The first thing I wrote up was one of my favorite stocks and one of my
largest holdings: Newmarket Gold Inc. (NGN:TSX.V) taking over Crocodile Gold
Corp. (CRK:TSX; CROCF:OTCQX), which is supported by some real industry
heavyweights: Lukas Lundin, Ian Telfer, Doug Forster and Mike Vitton. My
research was the first published analysis about the deal, and I provided
detailed cash flow analysis, and I met with the insiders. I shared with
readers the best way to do an arbitrage with this company. On my
website, I also post big picture topics, the truth about uranium supply and
demand, the role of the Clintons and what it was like being interviewed for a
story that appeared on the front page of The New York Times.
TER: You also recently published a book called "The Colder War: How
the Global Energy Trade Slipped from America's Grasp." You
summarized how Putin has leveraged Russia's greatest assets, its energy
resources, to rebuild the Russian economy. And you noted that Putin did this
by establishing trade relationships with countries like China, Brazil and
Iran and that he did all of this outside the U.S. dollar. What's the next
battle in the Colder War?
MK: About 120 pages of the original manuscript got cut out—and it
covered the importance of China and the emerging markets. The battle of the
petrodollar will take many decades to play out, and China and the emerging
markets will be essential for the bull market in resources to get going
again. This will be the basis of my next book, along with specifically how to
position your portfolio to profit over the next decade.
A lot of people don't realize that the yuan is the second largest currency
in the world today; it overtook the euro in Q4/14. China and Russia are
already working closer together. The "stans" are rallying together
to create their own critical mass. This is a multi-decade battle with a lot
of players. Japan and Europe are in their own battle to the bottom, devaluing
their currencies to try and stimulate growth. Meanwhile, about a half a
trillion fewer U.S. dollars are pouring into the Middle East because of the
success of the U.S. shale sector and the slowing global economy.
People are chasing yield. You don't get yield in speculative growth
economies; you get rise of net asset value. When Federal Reserve Chair Janet
Yellen raises rates, that further establishes the U.S. dollar as the dominant
currency with the yuan pegged to it by default. No one knows how this will
play out. Will China's export market weaken if the currency is too strong?
Will that increase social unrest? If it devalues too much, that could
stimulate the economy, but then it will cause currency wars with other Asian
countries. We are living through an interesting flux point here, and the
petrodollar is still the main thing to watch.
TER: If we are mired in this epic battle, why do you still think
natural resources could be up in the next five years?
MK: Two words: human ingenuity. Companies are learning they have to
either adapt or die. Copper Mountain Mining Corp. (CUM:TSX) in British
Columbia built a new secondary crusher. The team at site worked hard to bring
in the best technology possible, such that it is now a "smart mine"
where many aspects of the hauling and crushing are all digitally monitored.
All of this decreases the cost of production.
Heap leaching revolutionized Nevada gold production. The industry is
getting better at metallurgy for processing all metals. We are finding new
ways to be successful.
TER: Are we getting creative at finding new uranium sources?
MK: I recently spoke at the World Nuclear Fuel Market conference in
Paris and I have visited most, if not all, of the major uranium projects in
the world, including in Eastern Europe, and for my money, the low-hanging,
easy fruit is in the Athabasca Basin in Canada and the U.S. The U.S. imports
94% of what it consumes. One in every 10 homes in America is being powered by
Russian nuclear fuel. Everyone is focused on investing in the things that
China needs. But with 99 operating reactors, 20% of U.S. baseload power is
nuclear; that makes uranium a strategic metal and, by definition, valuable.
Plus, it is a lower risk to invest in a North American uranium project where
you know the rule of law, you know your government take, you know your taxes,
you know your process and you are not going to have to compete with a major
Chinese conglomerate that doesn't care about the North American Securities
Exchange rules. I'm not saying that they're doing anything illegal. I'm just
saying it's different. If you look at my portfolio track record of which
stocks are doing really well, it's exactly those ones. That's what I'm
sticking with because it's working.
TER: What are the North American uranium mining companies that fit
that description?
MK: I was one of the first to recommend Fission
Uranium Corp. (FCU:TSX) in the fall of 2012. It was in the $0.30 range.
We made a triple on it, and then I sold it. I was wrong for selling it,
because the company has done extremely well, but you can never be wrong
taking a profit. Ross McElroy and his team there have done a fantastic job.
They discovered a world-class, high-grade project in the Athabasca Basin. It
really is one of the highest-grade projects in the world. I no longer own
shares in Fission, but have it on my watch list, as I've seen great deposits
go on sale in the past—nothing specific to Fission, but if a major market
correction happens, then I would pick up some shares again.
I've mentioned Uranium Energy Corp. (UEC:NYSE.MKT) before to you. It has
built and permitted a 2 million pound facility in the U.S., so there is no
financing risk. Instead of digging, blasting and moving and crushing rock, it
is using the equivalent of a water processing facility. What I really like is
that rather than depleting its uranium reserves in a bad market, the company
is pulling back production for now. The company also has great supporters.
One of the largest investors in China, the Warren Buffett of China, Li
Ka-shing, has become a major shareholder. George Soros has become a major
shareholder. BlackRock has become a major shareholder because it believes in
this concept of build it, but don't deplete it. I like to invest in franchise
players like Amir Adnani, the president and CEO. This company has been a
triple for the Casey subscribers and myself. It's one of my largest holdings.
I believe that it's going to go a lot higher moving forward. It's also one of
the most liquid uranium companies in the world.
Adnani is also involved in another junior company that I believe is going
to be the next high-grade project in the Athabasca Basin, Brazil
Resources Inc. (BRI:TSX.V; BRIZF:OTCQX). This company owns a major
concession in the Athabasca Basin in a joint venture with AREVA SA
(AREVA:EPA).
America has relied on Canada, Australia and the former Soviet Union for
its uranium supply, but those resources are turning toward other markets. Cameco Corp.
(CCO:TSX; CCJ:NYSE), which mines in Saskatchewan, Wyoming and Kazakhstan,
has signed a long-term offtake agreement with India. Australian companies,
which are major suppliers of uranium to the U.S., have signed long-term agreements
with the Chinese. U.S. utility operators are going to need to replace the
Russian imports. Ironically, so many market pundits say the U.S. will just
consume more Russian uranium. The U.S. changed the law so that a maximum of
25% of the domestic demand can come from Russia. Hence, in 2014, the U.S.
increased its imports from Kazakhstan by over 80%.
I’d hardly call Kazakhstan supply stable and safe. If you are a uranium
speculator, this is all music to your ears. It could take a few years to play
out, but it will play out.
TER: Is there enough uranium in North America to supply our needs,
but it just isn't built out yet?
MK: Yes, there is enough resource in the ground, but it has to be
developed and that takes a long time—at a minimum, 10 years to develop,
permit and build an operating uranium mine in the U.S. Eventually the big
money will recognize this when the geopolitical tensions rise and the colder
war heats up even more. Then they will have to pay a price to the people who
were smart enough to get in early.
TER: Has human ingenuity been too effective when it comes to the
oil and gas space? Has fracking resulted in too much supply?
MK: After a year of sub-$100 barrel ($100/bbl) oil prices, North
American rigs are drilling faster and more efficiently. Companies evolve or
die. But even in a global economy with slower growth, there is still
increasing demand for essential commodities, and where there is demand,
people will figure out how to deliver product.
A big opportunity exists in the oil and gas sector in South America. The
Cantarell Field went from 3 million barrels a day to less than 500,000
barrels a day because it didn't reinvest in the oil fields and prevent the
big production declines. This negligence was also true in the past in many
other countries and other commodities.
Eventually, there will be a turning point where the reserves are depleted.
Again, human ingenuity will solve those problems, but there will have to be
an increase in price. That is the opportunity I am positioning our funds to
take advantage of. You have to be in the right commodities, with the right
people, and you also have to have patience. The resource sector is cyclical.
But if you understand that and you invest with the right people, you will do
well.
TER: Can you give us some examples?
MK: Mexico has world-class potential, but it hasn't seen any modern
technology. Fewer than 30 horizontal wells have been drilled there. PEMEX,
the national oil company, has seen a huge decrease in production because
instead of investing profits in the company, they are used to subsidize
social programs. That is why the country opened up its oil patch to North
American drillers. Right now, Mexico is importing condensates from the U.S.
The game has changed. Ten years ago, everyone thought the U.S. would be
importing liquefied natural gas (LNG). Now, it's planning on becoming a major
exporter of LNG. So you have to adapt, evolve. And it is happening faster
than we ever could have imagined.
TER: You have made the point that not all shale formations are the
same. What are the two or three data points I should be looking at when I'm
looking at a shale oil opportunity?
MK: It's like saying all gold deposits are the same. That's absurd.
I recently wrote a piece called "Why David Einhorn is Wrong on the Big Oil Short" to
debunk some of the myths about fracking. The problem is that the production
of shale oil is so new that a lot of people just don't understand it yet.
Investors should start examining possible shale investing by determining
the type of production. The Bakken has a different type of production than
the Eagle Ford or the Montney in Canada. Take the time to understand the
formations, the depths, the infrastructure, the government take, the state
tax, the provincial tax and all the wellhead prices. The price you get in Canada
is different than the price you get in the Bakken, and it's different than
the price you're going to get in the Eagle Ford because of variances in
demand and the cost of transportation.
Once you get to the company level, then you do the financial analysis. If
you're looking for a low-risk company and you want to have exposure to the
U.S. shale sector, something like Pioneer
Natural Resources Co. (PXD:NYSE) or EOG
Resources Inc. (EOG:NYSE) is probably where you want to start.
TER: How about some names that are up and coming?
MK: The first question you have to ask yourself is "What is
your risk tolerance?" I have a very high risk tolerance. I use $55/bbl
oil as my base case for oil prices. If a company can't make money at that
price, I avoid it.
There's one exploration company that I think you can be patient with. I
think it's going to go down lower even though I love the management team. I
currently don't own any, but I'm watching it very carefully. I've been to the
project. It's a Lundin company that doesn't produce any oil, but has huge
potential, even if it is ultra-high risk potential. Africa Oil
Corp. (AOI:TSX.V) is in Kenya and it is a true contrarian play. That is
one worth watching. It's not shale oil, but it has world-class, elephant-size
deposit potential.
I also believe that you don't need to own too many companies. My three
funds only own nine positions. If you own more than 20 resource stocks, you
might have to reassess the style of investor you are, because I do this
professionally full time and I'm a bit of a workaholic and I have a hard time
keeping up with 9 or 10 companies. Be patient. Pick right. Sit tight. Never
buy your whole allocation at once. You really just need to focus on a few
companies. You don't have to be an amazing financial analyst to do really
well in stocks. Find the gurus, go to the conferences, talk to them. People
like Ross Beaty and Lukas Lundin have created billions of dollars of net
worth for investors, and they are so invested in their deals that they're
going to bend over backward to make it happen.
This is why I have partnered with Cambridge House, to bring the absolute
best resource investment conference to San Francisco and Vancouver with the
Cambridge-Katusa Resource Conferences.
How can a retail investor be successful? Don't try to figure out the
geology if you're not a geologist or an engineer. Look at the management
team. Focus on the people. A teacher, contractor, lawyer or plumber can be
just as good at analyzing people as a fund manager is. Focus on the people
running the deal; find out what price they paid to buy the stock. Then be
patient and wait for your chance. I waited five and a half years before I
bought my position in Alterra Power Corp. (AXY:TSX). I made sure I bought the
stock cheaper than Ross Beaty paid in the open market in 2014. I did the same
thing with Uranium Energy Corp. The stock got so oversold because of the
shorters in the U.S. that I was able to get stock cheaper than what Amir
Adnani paid for it. Now, I'm very bullish on both companies. Ironically, I
found out that Ross Beaty is a big shareholder of Uranium Energy Corp. Using
those simple rules, the average kindergarten teacher can have the same
success rates as one of the best fund managers in the business.
TER: Earlier you mentioned "An Easy Arbitrage Opportunity." How can the average
investor identify and jump on opportunities like the one you describe in that
article?
MK: As soon as the Newmarket Gold and Crocodile Gold deal was
announced, I jumped. I carefully evaluated the people involved. Ian Telfer,
chairman of the world's largest gold producing company, Goldcorp Inc.
(G:TSX; GG:NYSE), is one of the advisers on the deal. Mike Vitton, one of
the best bankers in the business, is an adviser. Lukas Lundin is on the board
and putting in $5 million ($5M) at the equivalent of $0.37/share of Crocodile
stock. Because Crocodile was in such bad shape, it was trading at
$0.32/share. I realized that if insiders are putting in millions of dollars,
this was a legitimate deal. I saw an opportunity to cash in at a 15%
arbitrage in three months or convert to stock at $0.36/share. This is the
easiest arbitrage I've seen in the gold patch in a while, and I'm happy to do
that all day long.
Since I knew the people involved, I called them up the moment the press
release came out, and the first meeting management had was with me in my
downtown Vancouver office.
I wrote it up, I bought millions of shares, and I clipped the 15%
arbitrage—I love it when a plan comes together.
TER: With the TSX being down 80%, will there be more of these types
of deals investors should be looking for?
MK: Yes, definitely. I see a lot of juniors consolidating. I also
expect consolidation in the oil patch and the Canadian copper producers. When
the majors start consolidating the best of the juniors and their margins
increase, then the market will look for higher-risk, higher-reward, and that
will spill over to the juniors. I still think we have a couple of years of
consolidation, during which time you can build up your positions.
I'll give you another great example—Midas Gold
Corp. (MAX:TSX). I was involved in the private round at $0.20 when nobody
even knew about it in early 2010. In the summer of 2011, it had its initial
public offering (IPO) and went over $4/share by early 2012. I exited my
position at the beginning of 2012, even though I love the company, because I
had made my profit. Management has spent over $60M drilling and advancing the
project in the last four years. Now, the company has just under $20M cash, a $60M
market cap and north of 6 million ounces of gold. But it trades under
$0.40/share. It's twice the company it was when it did its IPO, but it is
trading at a fraction of the price. Now, I've built up my position again to
where I'm in the top five shareholders of the company, because you couldn't
replace that asset for the price it is selling. It is held by major investors
like Teck Resources Ltd. (TCK:TSX; TCK:NYSE), Jeff Phillips, myself and a few
other really smart fund managers. It you look at it day to day, it will
depress you, especially if you paid over a $1/share. But I'm looking at it
three or four years down the road, and I'm happy that I could build a
position for an average price of $0.45/share. That's an example of where we
are in the market.
TER: Thank you for sharing your tips.
Marin Katusa is the author of the New York Times
bestseller, "The Colder War." Over the last decade, he has become
one of the most successful portfolio managers in the resource sector, such as
his 2009 Fund Partnership (KC50 Fund LLC), which has outperformed the
comparable index, the TSX.V by over 500% post fees. Katusa has been involved
in raising over $1 billion in financing for resource companies. He has
visited over 400 resource projects in over 100 countries. Katusa publishes
his thoughts and research at www.katusaresearch.com.
