Mining & Marijuana | Ellis Martin & Dudley Baker Interview

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Published on Apr 30, 2015 Although Dudley Baker of http://www.marijuanaspeculator.com has never smoked cannabis in his life, he’s not shy about investing in this burgeoning sector with regard to stocks. He’s done well over the years with resource stocks and after following over 250 marijuana related public companies, he’s come up with his Baker’s Dozen cadre of potential investment opportunities. Ellis and Dudley light it up with toke talk in this expose on investing in a very volatile and uncharted arena of companies engaged in the business of bringing smoke to the markets without the mirrors. From Dudley: “The Bakers’ Dozen” is our top 13 stock selections in this space. Currently we have added 7 companies and will complete the task in the next week or so. JOIN US NOW.     … Continue reading

Three Upstream MLPs with the Discipline to Succeed in the Coming Recovery: RBC Analyst John Ragozzino

The Energy Report: John, oil and gas prices have rallied a bit recently. Have we established a bottom? John Ragozzino: Yes. In our recently published Global Energy Research “Commodity Price Revisions” report, we are calling for a meaningful V-shaped recovery beginning in the back half of 2015 and into 2016. This is not significantly different from our prior forecasts, as we adjusted our price forecasts to $54 per barrel ($54/bbl) from $53/bbl in 2015, and from $77/bbl to $74/bbl in 2016. Our thesis on crude oil is largely predicated upon a deceleration of non-OPEC supply growth, as we’ve seen the U.S. onshore rig count drop by more than half over the last five or six months. Additionally, we are seeing a growing inventory of uncompleted unconventional wells, as operators defer completions to an environment of better pricing and higher returns. When you combine these two factors with a global demand … Continue reading

Duncan Hughes: The Weak Aussie Dollar Means Strong Aussie Miners

The Gold Report: Where do you see the price of gold going this year? Duncan Hughes: Gold should remain fairly flat, probably around US$1,225 per ounce (US$1,225/oz), due to the strength of the U.S. dollar. In U.S. dollar terms, gold has underperformed, but when valued in other currencies, gold has actually performed pretty well. TGR: How about nickel and copper? DH: Current spot prices just don’t look sustainable to us. The price of nickel is depressed now because there are 400,000 tons stockpiled in the London Metal Exchange (LME), and the global market is about 2 million tons (2 Mt). The expected increase in the price of nickel following Indonesia’s ban on the export of unprocessed ore has been delayed because of ore coming from the Philippines. But this substitute ore is a lower-quality product, and stockpiles will eventually fall in China. So the supply crunch that was forecast for … Continue reading

Ryan Castilloux’s State of the REE Market Address

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The Mining Report: This year we’ve seen a modest rally for specific rare earth elements (REEs), namely terbium, dysprosium, praseodymium and neodymium. Has this bolstered the near-term outlook for rare earth exploration and development projects outside of China?

Ryan Castilloux: It has. The recently announced supply agreement between Molycorp Inc. (MCP:NYSE) and Siemens AG (SI:NYSE) is a reflection of how the outlook is improving. The rally we saw earlier this year is an indication that markets for certain rare earth elements are becoming increasingly tight. Without a boost in global production to meet growing global demand, we will see continued strength behind magnetic rare earth prices and several others.

Namibia Rare Earths Inc.’s Lofdal has relatively low preproduction capital requirements.

Until a few weeks ago the Chinese FOB price of terbium oxide was up nearly 50% year-to-date and dysprosium oxide and neodymium oxide were up about 30%. Prices for these oxides have since given up some of their gains as a result of slow buying ahead of China’s upcoming export tariff changes, but I expect the prices of these rare earths will resume their upward momentum once buying resumes midyear. Exasperating the future supply/demand imbalance of certain rare earths is China’s continued effort to suppress unregulated rare earth production, particularly in China’s heavy rare earth-rich southern provinces, which will result in declining global production of terbium, dysprosium, yttrium and other heavy rare earths if new sources of supply don’t come onstream.

TMR: Do you think this will spur much investor interest?

RC: The rally in the early part of 2015 pushed a lot of marginal projects into the economically attractive category, but with the volatility that we’ve seen in recent years we need to see prices not only rise, but maintain a level that will restore investor confidence. We’re not likely to see investors flood back into the market in the near term. We need to see sustained support at these prices, perhaps even a rise moving forward.

TMR: With sparse amounts of investment capital entering the REE space, how are these tiny companies creating value?

RC: In many cases there’s been a shift from creating external value through things like exploration drilling, defining larger resources and identifying high-grade zones, which are generally capital intensive activities, to creating greater project value internally through improved flow sheets, innovative processing methods and other means that boost margins at relatively low costs.

TMR: What are three or four projects that continue to advance despite a stagnant market?

RC: As many as 20 projects continue to make tangible headway despite the tough economic conditions of recent years. Among those that have recently issued major announcements are Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.MKT; TASXF:OTCPK; T61:FSE), Northern Minerals Ltd. (NTU:ASX), Greenland Minerals & Energy Ltd. (GGG:ASX) and Namibia Rare Earths Inc. (NRE:TSX; NMREF:OTCQX).

TMR: Let’s start with Tasman.

RC: In January Tasman announced results of a prefeasibility study for its Norra Kärr project in Sweden. That study proposed a 20-year initial mine life, producing around 5,000 tonnes of rare earth oxides yearly, including more than 200 tonnes of dysprosium oxide. These rare earths will be contained in a mixed REE concentrate product that Tasman will look to have toll separated by a third party. The initial capital required for Norra Kärr development is under $400 million ($400M), which is a plus considering Norra Kärr’s relative richness in heavy rare earth elements (HREEs) versus lights. What’s also a plus is the project’s proximity to existing infrastructure, Solvay’s processing facility in La Rochelle, France, and European end users, particularly in Germany.

TMR: How has Tasman factored in the cost of that third-party processor and are there any negotiations underway with a particular party?

RC: Tasman is undoubtedly talking with several potential processors and it is likely looking close to home, which would be Solvay’s La Rochelle facility. As for toll separation costs, typically companies take the anticipated revenue from REE production and deduct from that revenue the anticipated toll-processing costs. Essentially, they’re skimming toll-processing costs off of future revenue. That allows a company to keep on-paper operating costs looking better. Tasman, however, has taken the responsible approach and incorporated its toll-processing costs into its cash cost structure in its prefeasibility study. Tasman is recognizing that toll processing is a cost it is incurring on its value chain from ore to final product, but other companies generally ignore that. On paper, Tasman’s cash costs versus similar projects are seemingly higher, but when you look at those fine details you see that it all comes out in the wash.

TMR: Does Siemens’ deal with Molycorp preclude a deal with Tasman or any other emerging rare earth recovery (REO) producers?

RC: Not necessarily. The Siemens/Molycorp 10-year deal announcement didn’t discuss any specific numbers for offtake tonnage. It’s my understanding that Siemens had a previous deal with Lynas Corp. (LYC:ASX) that is still alive. It could just be that Siemens is looking to diversify its supply sources.

TMR: Tell us about Northern Minerals.

RC: Northern Minerals has also been plowing ahead with its Browns Range HREE project in Australia. In October 2014 it announced an increased mineral resource, as well as encouraging prefeasibility study results, and then announced a further mineral resource increase in February 2015. A month later the company announced an increased ore reserve for the Browns Range project and simultaneously announced the results of a definitive feasibility study. That’s an unprecedented advance for the REE industry. Northern Minerals also signed a AU$49.5M partnership in February with Jien Mining, the Australian subsidiary of Jilin Jien Nickel Industry Co. Ltd. The funding will help move the project to production. Like Tasman’s Norra Kärr, the Browns Range project also has an initial capital requirement under $400M, with the aim of producing over 200 tonnes of dysprosium oxide annually.

TMR: Browns Range is situated in Western Australia and a steady stream of ships containing raw materials like coal and iron ore travel from Australia to China. Does its location give it a significant advantage over others?

RC: The location helps but its richness in valuable heavy rare earths, namely dysprosium, has had the project in the sights of Chinese investors for some time now. A major shareholder in Northern Minerals is Australia Conglin Investment Group, which has deep roots in China’s resource and steelmaking industries. And the partnership with Jien Mining is giving Northern Minerals the funds to bankroll the project from definitive feasibility study to bankable feasibility study and engineering and construction. Browns Range has moved at record pace compared with any other REE project in the last 20 years. Lynas took about 15 years to go from acquiring a project to developing it into production. Northern Minerals has cut that by almost 10 years.

TMR: What about Greenland Minerals and Energy?

RC: Greenland Minerals and Energy’s Kvanefjeld project is on the southern tip of Greenland. The project’s future was hit with uncertainty in late 2014 when the Greenland government collapsed, but the newly elected government leadership has reaffirmed its commitment to mining. In February the company announced an updated mineral resource for Kvanefjeld and in March announced the purchase of an outstanding 2% net profit royalty on the project from the previous owner. And in April it announced the signing of a second memorandum of understanding with NFC, its Chinese processing partner. The company should announce the results of a feasibility study on the Kvanefjeld project in the coming weeks. I expect the feasibility study to come with a smaller, staged-growth production plan that aligns future output volumes from Kvanefjeld with NFC’s processing capacity in China. As a result, I also expect to see costs reduced from the initial Kvanefjeld development plan, which aimed to separate REE oxides in-house.

TMR: And Namibia Rare Earths?

RC: Lofdal is located in Namibia and Namibia Rare Earths announced the results of a preliminary economic assessment (PEA) on Lofdal in late 2014. It proposes an initial 7.3 year mine life producing approximately 1,500 tonnes of REE oxides per year, of which 94% will be HREE oxides—an extremely high proportion of heavy rare earth content. The PEA proposes production of a mixed REE concentrate in Namibia and further toll separation by a third party overseas, which eliminates a lot of technical risk for the project. It also has a low initial capital requirement, under $150M. Like the Tasman example cited earlier, Namibia Rare Earths also incorporated a toll-separation cost into its cash cost structure for the Lofdal PEA, which is a transparent and responsible practice.

TMR: Does the concentration of heavy rare earths at Lofdal provide Namibia with an advantage over some of its peers in attracting investment capital?

RC: It certainly helps, but having the right mix of rare earths in the project basket, whether it is HREEs or light REEs, is only important if they can be produced at the right price. Other factors in favor of HREE projects, like Lofdal and Browns Range and Norra Kärr, are the relatively low preproduction capital requirements, which in most cases can likely be funded by one or two major investors. You don’t need a baker’s dozen of different companies with investment capital; you can cover the bill with one or two.

TMR: Could the project be fast tracked to production given that it’s in Namibia?

RC: It can likely be fast tracked given that it’s located in mining-friendly Namibia and the preproduction capital requirements to develop the project are relatively low. But there are no risk-free projects in the rare earth industry. The future balance of the yttrium market, of which Lofdal is heavily endowed, hinges largely on China’s continued ability to reduce illegal production in the nation’s south going forward. Ongoing consolidation of China’s rare earth industry will help enable that reduction but over the long term the proof will be in the pudding.

TMR: A number of companies are touting new methods for processing and separating REEs. Can you separate the pretenders from the true innovators?

RC: In my opinion there are no pretenders but a limited number of innovators. A lot of the new methods and processing innovations are coming from third-party expertise. Technical consultants who have applied innovative processing methods in other metal industries are finding that these methods may be amenable to REE extraction and separation. For example, in March Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX) announced that through the use of molecular recognition technology (MRT) the company had recovered and separated 15 REE carbonates of 99% purity or greater from feed stock from its Bokan Mountain project in Alaska. MRT technology is used in metal processing operations globally, generally for platinum group and other high-value metals. Ucore’s lab-scale results suggest that it may also be amenable to commercial processing and separation of REEs.

In March, Orbite Aluminae Inc. (ORT:TSX; EORBF:OTXQX) received U.S. patents for its proprietary red mud processing. The Orbite process uses red mud waste generated from aluminum refining as a feedstock from which it extracts and separates REEs, rare metals, alumina, magnesium oxide, titanium dioxide and other economically significant metals and oxides. Orbite proposed using a very similar process in its 2012 PEA of its Grande-Vallée project in Québec. The process it proposed at that time included a bolt-on solvent extraction circuit for extracting and separating rare earths and rare metals.

Québec junior GéoMégA Resources Inc. (GMA:TSX.V), in cooperation with FFE Service of Germany, conducted lab-scale tests using free flow electrophoresis technology. The tests suggested, at least at lab-scale, that REEs can be separated simultaneously from one another—rather than sequentially—in a single step and can be done to a high-purity level without costly solvents and significant amounts of energy. The company did a lot of additional optimization work in 2014, including testing with a commercially sourced REE concentrate. In early 2015 it announced that it would begin bench-scale production of REE concentrates from its Montviel project in Québec in order to prove out the recovery rates on its own material. In March 2015 the company spun out its separation rights and lab equipment into a company called Innord Inc., which I think is a smart move as it allows strategic partners to invest in specific activities under the GéoMégA umbrella.

In late 2014, Rare Element Resources Ltd. (RES:TSX; REE:NYSE.MKT) produced a thorium-free mixed REE oxide at 99.999% purity from its Bear Lodge project in Wyoming. The company employed a patent-pending selective separation and solvent extraction process that enables full extraction of thorium and around 85% of cerium in a single step. That significantly reduces the amount of material that needs to be treated in subsequent steps, while boosting the relative value of the remaining REE oxides contained in the Bear Lodge basket.

In February, Texas Rare Earth Resources Corp. (TRER:OTCQX), owner of the Round Top REE and uranium project in Texas, signed a letter of intent with K-TECHnologies Inc. to form a joint venture that will develop and market K-TECH’s Continuous Ion Exchange (CIX) and Continuous Ion Chromatography (CIC) technologies for the extraction separation of rare earth elements. CIX and CIC have been used in other metal industries for decades and appear to hold promise for the REE industry, too.

Finally, DNI Metals Inc. (DNI:TSX.V; DG7:FSE) is looking to heap leach REE oxides, as well as a suite of other metals and products, from its Buckton project in Alberta. In a 2014 PEA on Buckton, DNI proposed a large-scale bioleaching setup with subsequent separation and refinement to produce rare earth oxides, uranium oxides, zinc, copper, nickel, cobalt and 280 tonnes of scandium oxide per annum—a staggering amount. The Buckton PEA came with relatively high capital and operating costs but I think there’s great potential to scale down the project and pursue a more investor-attractive staged growth plan like that proposed by Texas Rare Element Resources for its Round Top project.

TMR: You recently visited Innovation Metals Corp.’s lab-scale REE processing/separation plant near Toronto. Tell us about what is happening there.

RC: It was impressive. Innovation Metals is participating in a REE supply chain development program, which is being led by Technology Metals Research and funded by the U.S. Army Research Laboratory, a division of the U.S. Department of Defense. Technology Metals Research is operating a 120-stage, lab-scale rare earth pilot plant that’s using solvent extraction to liberate and separate rare earth elements with a major focus on separation of individual heavy rare earth oxides. The 24/7 facility processes REE mineral concentrate feedstock sourced from the commercial market. The goal is to bolster North American expertise and knowledge of REE processing, specifically the separation of heavy rare earth elements of which China has a near 100% monopoly. We don’t hear much about the results of the ongoing work in the press because it’s not a commercial venture, but it’s genuinely impressive in scale and scope. The amount of tacit knowledge the team has amassed through hands-on experimentation is amazing.

TMR: What happens next?

RC: I can’t comment on behalf of those involved in the project, but I see two likely outcomes. First, the results from this initial stage will determine and inform what the next steps will be toward the project’s goal of bolstering North American expertise and knowledge around REE processing and extraction. That part of the equation is funded by the U.S. Army Research Laboratory. Another outcome of this research will be the advancement of Innovation Metals’ development plans for a toll-separation facility in Bécancour, Québec. This facility would serve the array of emerging producers in North America or abroad that don’t want the risk and added capital expense of developing and operating their own separation facility.

TMR: Would Innovation Metals’ plant be the only REE toll-separation facility in North America?

RC: It would, although some industry followers have suggested that if Molycorp doesn’t opt for its phase 2 expansion to 40,000 tonnes per annum via production from its Mountain Pass ores, it could still build-out its processing capacity to toll-separate for emerging producers in North America, whether for Avalon Rare Metals Inc.’s (AVL:TSX; AVL:NYSE; AVARF:OTCQX) Nechalacho or for another company. That’s a plausible scenario, but not one that will unfold immediately.

TMR: Does Molycorp have the facilities to separate HREEs?

RC: Perhaps not at Mountain Pass but through some of its subsidiaries, such as at Silmet in Estonia and Jiangyin in China, it has capacity to separate HREE oxides.

TMR: Many of these companies have seen their share prices drop to pennies. Are companies closing the doors and waiting it out? Are they selling assets? What is happening in this space behind the scenes?

RC: It’s fair to say that a large number of REE juniors have placed projects on hold until conditions improve. In many cases they’ve turned their attention to other projects in their portfolios or are simply hiding under their desks until markets turn. About 60% of the 55 REE projects that we cover have been shelved, in some cases leaving cashless and projectless zombie owners with little left but a ticker symbol. There are also a number of REE projects that are quietly up for sale. As I mentioned, a good 15 to 20 projects continue to forge ahead.

TMR: Parting thoughts?

RC: What we’ve seen in late 2014 and so far in early 2015 are indications that markets for certain REEs—neodymium, praseodymium, terbium, dysprosium, the ones generally used heavily in permanent magnets—are becoming increasingly tight. The supply–demand fundamentals are falling into imbalance and are only surviving based on preexisting stockpiles. That’s what has buoyed prices and that’s what’s sending end users into partnerships with the likes of Molycorp and others. Rare earths prices have again soured in the last month, but as soon as the uncertainty surrounding Chinese export tariffs goes away, we’ll start to see more positive momentum behind REE prices and more positive market sentiment toward REE companies.

TMR: Thank you for your insights, Ryan.

Ryan Castilloux is the founder of Adamas Intelligence, an independent research and advisory firm that provides strategic advice and ongoing intelligence on critical metals and minerals sectors. He helps investors, financiers, end users and other stakeholders track emerging trends and identify new business opportunities in the critical metals and minerals sectors. Castilloux is a geologist with a background in mining and exploration and has a Master of Business Administration in finance from the Rotterdam School of Management, Erasmus University. Subscribe for free updates from Adamas Intelligence at www.adamasintel.com.

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DISCLOSURE:
1) Brian Sylvester 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: Namibia Rare Earths Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Ryan Castilloux: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

( Companies Mentioned: DNI:TSX.V; DG7:FSE,
GMA:TSX.V,
GGG:ASX,

NRE:TSX; NMREF:OTCQX,
NTU:ASX,
ORT:TSX; EORBF:OTXQX,
RES:TSX; REE:NYSE.MKT,
TSM:TSX.V; TAS:NYSE.MKT; TASXF:OTCPK; T61:FSE,
TRER:OTCQX,
UCU:TSX.V; UURAF:OTCQX,
)

Ryan Castilloux’s State of the REE Market Address

The Mining Report: This year we’ve seen a modest rally for specific rare earth elements (REEs), namely terbium, dysprosium, praseodymium and neodymium. Has this bolstered the near-term outlook for rare earth exploration and development projects outside of China? Ryan Castilloux: It has. The recently announced supply agreement between Molycorp Inc. (MCP:NYSE) and Siemens AG (SI:NYSE) is a reflection of how the outlook is improving. The rally we saw earlier this year is an indication that markets for certain rare earth elements are becoming increasingly tight. Without a boost in global production to meet growing global demand, we will see continued strength behind magnetic rare earth prices and several others. “Namibia Rare Earths Inc.’s Lofdal has relatively low preproduction capital requirements.“ Until a few weeks ago the Chinese FOB price of terbium oxide was up nearly 50% year-to-date and dysprosium oxide and neodymium oxide were up about 30%. Prices for these … Continue reading

Picking Undervalued Gold Equities Akin to Picking Strawberries: Randall Abramson

The Gold Report: A 10-year U.S. bond yields 2% currently. How is that changing the market?

Randall Abramson: We typically view the markets and our investment process through top-down and bottom-up lenses. Our top-down tools are telling us that all systems are “go,” and that there are no immediate hurdles ahead. This low-growth environment has allowed the broader markets to remain in a bull phase for longer than is typical. In fact, we’ve not had even a market correction of 10% or so for way longer than normal.

TGR: The World Gold Council (WGC) reports that central banks bought 477.2 tons of gold in 2014, which was nearly a 50-year high. What do you make of central banks buying gold at peak Cold War-era levels?

RA: Gold does not have a built-in return. When interest rates are higher, everybody is less apt to hold gold because there’s too much of an opportunity cost. When interest rates are negative, as they are in some countries today, you’d probably rather own gold than lose money on bonds.

St Andrews Goldfields Ltd. is the largest landholder in northern Ontario’s Timmins mining camp.

Central banks are perhaps trying to spur inflation by buying gold, or they could be less interested at these elevated U.S. dollar prices to hold dollars in their reserves, or they could be concerned about the U.S.’s balance sheet. All of those are factors. But the key driver is that there are places like China, which is flush with cash and willing to hold more gold. China always takes a long-term approach to the way it manages things. It may even be making a run at the U.S. dollar for reserve currency status and holding more gold in its coffers will help.

TGR: The WGC report also said gold demand jumped 6% in Q4/14 to 987.5 tons but was down 4% year-over-year. Does that bolster your spirits as a gold investor?

RA: The 2014 growth rates were a bit deceiving because the 2013 numbers were out of sight, driven by huge investment demand in both India and China. And at the same time, India put curbs in place to limit gold buying, which probably slowed down demand growth for gold last year. In the overall picture gold demand has been growing nicely over time, while the supply has more or less flatlined. Now that the price of gold is around $1,200/ounce ($1,200/oz) and close to the all-in sustaining cost of production, our take is that about half of the global gold producers would not make a profit below $1,150/oz. That should support the price at that level. And given that the marginal cost of production for gold is around $1,400/oz, we believe that we will see $1,300–1,400/oz gold in the not-so-distant future.

TGR: Pick one: long gold or short gold?

RA: Long. The world’s central banks are, in aggregate, accommodative, some of them highly accommodative, in terms of quantitative easing. We think that they will ultimately win the day, and this disinflationary period that we’ve lived through for years will transition into a reflationary period. The key indicator of that so far is that the gold price, while it’s near a recent low in U.S. dollars, looks terrific on the charts in just about every other currency.

TGR: Trapeze positions itself as value investors, stock pickers. Are we in a stock picker’s market for gold equities?

RA: That’s a great question. You can go through periods where the overall sector is a better bet than finding a specific stock, especially from a risk-reward perspective. For instance, when the market bottomed in 2009, using a net to capture a bunch of stocks might have been better than a mere handful of particular stocks because the whole market was trading near $0.50 on the dollar. You didn’t want to miss out on the market reverting to fair value.

The gold equities market is in a similar phase. You would have been better off as a stock picker over the last couple of years to avoid highly levered or high-cost producers. Those companies witnessed unprecedented declines in their stock prices. But now that we’re sitting with gold stocks versus bullion at the lowest level in 75 years and the price:book value (P:BV) of the overall senior golds in the sector trading at about one times P:BV, it seems to be a period where casting a wide net may make more sense. And that’s an interesting comment coming from a bottom-up value investor like me.

TGR: Everyone obviously has their own methods of picking everything from fresh fruit to baked goods. Tell us about your process for picking equities, especially precious metals equities, in this market.

RA: You pick baked goods based on what you like to eat. Some people like éclairs. Some people like cookies. But we pick our fruit differently. Most of us like strawberries but not all strawberries are the same. If a strawberry looks terrific other than a tiny blemish, that’s no problem. You can cut out the blemish and enjoy the rest. But if that piece of fruit turns out to be rotten, the entire strawberry is for the birds. That’s similar to how one should look at stocks on a bottom-up basis. Is the stock price below fair market value because there’s a little blemish and the market is over-reacting? Or is it a sign that the stock is rotten to the core? That’s what we do as value investors.

TGR: As you suggested, the large-cap gold space has been beaten up and pushed down the stairs. Where are you finding value?

RA: Our favorite in the space is Goldcorp Inc. (G:TSX; GG:NYSE) because it is one of the lowest-cost producers, has years of significant growth ahead, has a solid balance sheet, and trades at a reasonable valuation below its net asset value (NAV). We think we’re getting a margin of safety, not just from the price to our appraised value but within the underlying aspects of the business, the fundamentals.

TGR: What are the near-term catalysts for Goldcorp?

RA: The reserves should lift nicely this year and projects not in the official pipeline yet could come to the fore with the potential to add millions of ounces. But the key catalyst is the price of gold itself because Goldcorp needs to make, like all others, a higher operating profit per ounce for the market to get excited. Part of that should come from a decline in the U.S. dollar; however, the U.S. dollar continues to show remarkable strength. To have this kind of move in a currency, especially in the world’s reserve currency, in such a short period, is not normal.

TGR: Most of our readers follow small-cap precious metals equities. Please give us an overview of that sector.

RA: It’s been beaten up as badly as the large-cap sector. The large caps are trading at about book value, and the small caps are valued similarly. About 2,000 companies are listed on the TSX Venture Exchange and about two-thirds of those are resource equities, mostly gold and oil and gas stocks. The Venture started in 2001 and the index is now below the level at which it started. It’s essentially at the same level it was at the market bottom at the end of 2008. There is a treasure trove of potential investments there.

The problem is that a lot of companies need capital and the gold business is complex—there are geological issues, engineering issues, commodity price fluctuations and other moving parts. When the sector is out of favor, it’s very difficult for some companies to attract capital. It’s the ultimate value trap. Having said that, there are companies out there without debt, with cash on their balance sheets and that ultimately can control their own destiny.

TGR: What are some equities that Trapeze Asset Management believes are in control of their destiny?

RA: Our two favorites at the moment are St Andrew Goldfields Ltd. (SAS:TSX) and Dynacor Gold Mines Inc. (DNG:TSX). St Andrew is the largest landholder in northern Ontario’s Timmins mining camp. It’s in a good jurisdiction. The company has production of just shy of 100,000 oz (100 Koz), if you annualize its Q1/15 numbers. It has been in the penalty box for over a year because in 2013 St Andrew produced 100 Koz, but in 2014 it took its guidance down to 75–85 Koz, only to reach about 91 Koz gold for the year. The company has had something like 14 consecutive quarters of positive cash flow, but because there is little coverage on the company and only a few hundred thousand shares are traded each day, the company has been underfollowed and largely ignored. Meanwhile all-in sustaining costs should remain below $1,000/oz, and guidance for 2016, with the Taylor mine coming on, is 125-135 Koz—that’s meaningful for an orphaned company.

TGR: How is the Canadian dollar changing the company’s fortunes?

RA: The Canadian dollar has fallen heavily against the U.S. dollar and the Canadian dollar price of gold is about CA$1,440/oz. That should give a material advantage to most Canada-based producers that collect revenue in U.S. dollars but with costs in Canadian dollars.

St Andrew should do well into next year as it ramps up production at its Taylor mine, which is already delivering ounces in pre-production, but should reach commercial production later this year. At 130 Koz of production, St Andrew should generate more than CA$65 million (CA$65M) in earnings before interest, taxes, depreciation and amortization (EBITDA). St Andrew is trading at one times enterprise value/EBITDA (EV/EBITDA), net of its approximately CA$25M net cash balance, based on CA$65M of EBITDA. I wanted to see how that compared to other stocks in North America, so we screened all the stocks in North America that have enterprise values over $50M. It was No. 3 on the list out of about 1,500 companies. This year St Andrew should generate CA$15M of free cash flow, as it competes its spending on Taylor, and next year in excess of CA$30M. It’s trading for about 2.5x free cash flow, net of cash on hand. Trading at around CA$0.29/share, this is an extraordinarily cheap stock.

TGR: What will be the impact of St Andrew’s toll-milling business?

RA: The toll milling business is small. It is conducting toll milling for a couple of companies, which allows it to help fill the mill, but it’s a minor part of its business.

TGR: At its current share price, it’s almost impossible for St Andrew to be the consolidator in the Timmins Camp. Do you see it becoming a target at CA$0.28/share?

RA: It’s likely there are players who would like to consolidate the camp because it is big and fragmented. St Andrew has a lot of land, though, so it could spend many years drilling off the 120 kilometers (75 miles) it has along the Porcupine Destor Fault. Like any other company out there, if the market isn’t prepared to pay a fair value for a company, often someone else comes along and buys it.

TGR: Tell us about Dynacor.

RA: Dynacor, unlike St Andrew, is predominantly a toll-milling company, which hopes to have production of its own one day. It operates in Peru, though its head office is in Canada. The company has about US$15M cash, no debt and only about 36M shares outstanding—a considerable amount of cash per share considering it’s trading around CA$2.10. Almost one-quarter of its market value is in cash.

The company has had solid earnings for years. Its recent quarter was somewhat masked by a few items, one of which was the 4% withholding tax on repatriation of funds from Peru; Dynacor took several quarters of earnings and brought them back to its bank in Canada in one quarter. Nevertheless, the operating profits held in beautifully, and I point that out because even though gold came off, Dynacor is still making healthy profits. The company makes a certain price per ounce as it collects high-grade ore from the various miners that don’t have their own mills in the regions where it operates. The icing on the cake is that it was just approved for a new, more efficient mill.

Dynacor’s management believes that once the new mill is built, it will be able to operate both mills, taking its earnings power closer to CA$0.50/share, up from just shy of CA$0.30/share from the middle of this year since it will be boosting throughput with a recently approved expansion at its existing mill. If you merely put a 10 times multiple on the fully expanded earnings power, it’s much more than double the current share price.

TGR: You mentioned production. How far out is that?

RA: Dynacor is spending about CA$2M per year to explore the Tumipampa gold-silver project in Peru, and the results there have been staggering—as much as 111 grams per ton (111 g/t) on some intercepts. Even if the grade ultimately came in at 15 g/t, Dynacor should have a viable mine—its drilling to date has averaged over 20 g/t. The company will continue drilling Tumipampa over the next year or so and then will likely make an application for a permit to begin mining, perhaps in two or three years. We should be getting an NI-43-101-compliant resource estimate by the end of 2015. It should be above 1 million ounces.

TGR: Other juniors like Inca One Resources Corp. (IO:TSX.V) have entered the toll-milling business. Do they pose a threat?

RA: Peru went through a process called formalization where it forced companies to be compliant with two things: the way they milled ore and remitted taxes. A lot of companies either couldn’t do it or had been in the business for so long, doing it other ways, that they refused to. That allowed Dynacor to pick up more business and others to come in and scoop up some business as well. The bigger mills have survived, while some of the smaller mills have gone. So even though there looks to be more entrants because we hear about them listing on Canadian exchanges, the reality is there are fewer market participants and some serious barriers to entry.

TGR: Do you have targets on St Andrew and Dynacor?

RA: Today’s gold price and a little bit of an inflationary lift to gold over the next few years give St Andrew a NAV above CA$0.60 today—potential future value is even higher as the company increases its reserves, which jumped 25% last year. Most gold companies normally trade above their NAVs. And St Andrew is the cheapest in its universe based on EV/oz, EV/EBITDA and EV/free cash flow.

Dynacor, using a 10 multiple on, say, run rate earnings per share of at least CA$0.40, in a year or so should be about $4, plus whatever Tumipampa is worth, which could be significant—there’s an amazing chart in its most recent presentation showing all of the landholders around Tumipampa; it’s a who’s who of majors.

TGR: What’s your best guess as to when the bear market for gold bullion will end?

RA: Gold in every other major currency except the U.S. dollar is clearly out of a bear market because it’s up significantly. Gold in U.S. dollar terms, while it’s barely off of its bottom, has already triggered a buy signal in our proprietary Ratio of Adjusted Capital work. Since 1990 we’ve seen that buy signal happen 14 times with an average gain of about 25% from its trough. Only once did it decline.

TGR: Could that just be a bear market rally?

RA: It’s possible, but it’s unlikely because you have to liken gold to any other commodity, like pork bellies, and look at the commodity fundamentals. While the gold supply is flatlining and demand is growing, at current levels gold is far below the marginal cost of production. Gold is sitting at the average cost of production, but commodities typically sit, on average, at 40% above the average all-in cost of production. The gold price has to normalize to the upside. What’s inhibiting gold isn’t necessarily disinflation, it’s the U.S. dollar and that could continue given that interest rate differentials still favor the U.S. over other regions. If you’re a pension investor, you’ve been earning 2% on your U.S. Treasuries versus next to nothing, or even negative yields, on your European bonds, and worse, the euro has plummeted versus the dollar. But that could all turn on a dime.

TGR: If you start to see more evidence that your theory holds water, will you increase your weighting in gold equities?

RA: Yes. There are other names like Randgold Resources Ltd. (GOLD:NASDAQ; RRS:LSE) and Newmont Mining Corp. (NEM:NYSE) that we’ve been in and out of over the last couple of years.

TGR: Any parting thoughts?

RA: It’s interesting that I just conducted interviews with The Gold Report and The Energy Report because as you look around the world, it’s very difficult, more than any other time that I’ve seen, to find value. When you’re in a bear market, value abounds, and when you’re in a bull market, you can still typically find pockets of value. Yet it’s difficult to find undervalued stocks today. But the two groups that keep coming up on our screens, from all over the world, on a bottom-up basis, are energy and gold stocks. Now, if we could just get commodity prices to cooperate.

TGR: Thank you for your insights, Randall.

Randall Abramson, CFA, is CEO and portfolio manager of Trapeze Asset Management Inc., a firm he cofounded in 1999 shortly after founding its affiliate broker dealer, Trapeze Capital Corp. Abramson was named one of Canada’s “Stock Market Superstars” in Bob Thompson’s Stock Market Superstars: Secrets of Canada’s Top Stock Pickers (Insomniac Press, 2008). Trapeze’s separately managed accounts are long/short or long only, and have either an all-cap orientation or large cap-only mandate via the company’s Global Insight model. Abramson graduated with a bachelor’s degree in commerce from the University of Toronto in 1989, and his career has spanned investment banking, investment analysis and portfolio management.

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DISCLOSURE:
1) Brian Sylvester 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: St Andrew Goldfields Ltd. Goldcorp Inc. is not associated with Streetwise Reports. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Randall Abramson: I own, or my family owns, shares of the following companies mentioned in this interview: St Andrews Goldfields Ltd. and Dynacor Gold Mines Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: my father, Herbert Abramson, is chairman of St Andrews Goldfields. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

( Companies Mentioned: DNG:TSX,
G:TSX; GG:NYSE,
NEM:NYSE,
GOLD:NASDAQ; RRS:LSE,
SAS:TSX,
)

The Three Principles that Guide Randall Abramson’s Oil & Gas Investment Strategy

The Energy Report: In a recent research report, you looked at the macroeconomic picture through the lens of value investing. You call the macro view “complex” and “historically unusual.” In the context of certain uncertainty, could you please provide us with three principles that guide your investment decisions in today’s market? Randall Abramson: The reality of the day is that we have historically low interest rates and a number of crosscurrents moving through the economy. At Trapeze Asset Management we’ve developed tools, some of which we have systematized since the big downturn in 2008–2009, to cope with periods like this. We use our valuation model from a bottom-up perspective to tell us where the individual bargains are, and from a top-down perspective to tell us, in general, whether the markets or sectors are overvalued, undervalued or fairly valued. Today, our work tells us that the market has been hugging fair … Continue reading

What Björn Paffrath Is Advising to Institutional and High Net-Worth Investors

The Gold Report: Please briefly provide us with a “State of the Metal” address for gold as summer approaches. Björn Paffrath: We still could have difficult times over the next months before another bull market starts. The latest rally didn’t really unfold the way we were hoping. We had a great January and everybody was optimistic again, but then a strong dollar and booming equity markets brought gold further down. We still are in a bear market, in our opinion, and if the market goes up we would see it as a bear market rally. We don’t expect gold shooting through the roof at least until 2016, because there are things you can’t just ignore. “There are certainly great exploration companies out there, like Integra Gold Corp.“ The U.S. dollar remains strong because half of the world has debt in U.S. dollars. Then there is the obvious seasonality in gold … Continue reading

How to Make Money in Renewable Energy: NBF’s Rupert Merer

Chart 1

The Mining Report: Where is the renewable energy space headed in terms of profitability?

Rupert Merer: Most renewable power companies have long-term production contracts that provide a relatively low-risk return on invested capital. This is a capital-intensive industry with a lot of invested debt and equity capital. There is excellent visibility on cash flow and revenues—as long as 40 years out in the case of small hydro contracts. The duration of small wind and solar contracts is 15–20 years.

Mason Graphite Inc.’s Lac Guéret deposit is the best in the world.

With steady cash flow, the renewables sector can provide dividends of more than 5% for income seekers, typically with good visibility on future dividend growth. As solar and wind power have seen rapidly declining costs over the last few years, they have also seen very high growth. We think that this growth will continue and there should be an increasing number of investment opportunities.

TMR: What are “sustainability investors”?

RM: There are a few funds in Canada, the U.S., and the United Kingdom that invest only in renewable power assets. Some of these fund managers believe that there is an inherent risk with fossil fuel investments. Of course, if governments start to tax carbon at a higher rate or introduce cap and trade, then that could be a limiting factor for using fossil fuels to generate electricity.

Investors in the energy sustainability space typically look for a ratio of more than 50% clean energy in the stocks in their portfolios. Clean energy includes renewables and power plants that use natural gas, provided that the plants are high-efficiency co-generation plants or combined cycle plants.

TMR: How does a renewable energy project secure a long-term contract?

RM: That depends on the jurisdiction. The Canadian power market is regulated at the provincial level. Ontario is the most populated province in the country and it has been the most aggressive at developing renewable power over the last decade. In the past, the government has offered fixed price contracts, or “Feed in Tariffs,” for renewable power at a price that would provide an attractive economic incentive for developers. However, generally, in Ontario or in other provinces, firms will bid on, say, delivering 200 megawatts (200 MW) of wind power, under a competitive request for proposal. The contract will typically go to the lowest price bid from a viable entity.

In the U.S., contracts are often arranged between developers and utilities or businesses in the private sector. Projects have typically also included financial partners that have purchased tax credits from the developer.

TMR: Given that wind and solar intermittently generate pulses of energy into the grid, has the grid developed the capability to access renewable energy when it is live, while compensating for it when the generator goes temporarily fallow?

RM: The easiest way to compensate for intermittency is to increase transmission capability.

If the local area has more wind or solar power than it can use, it can send it to a neighboring region. Another way to manage intermittency is to decrease the use of power on the grid when there is a deficit of renewable energy. For example, operators can shut off air conditioning loads when there is a deficit of power. As the amount of renewable power grows, we will need to find better ways to store power.

Today, the best way to manage volatility in electricity supply is the regulation of hydropower production. With our hydro capability, Canada is a giant battery for the U.S! British Columbia controls about 13 gigawatts (13 GW) of hydro. It actively trades power back and forth with California. In Quebec, more than 30 GW of hydro leverages a storage capability that can trade power with the Eastern Seaboard. Manitoba trades 10 or 13 GW with the Midwest. This works for Canada today, but it may not be enough in the future.

Chart 2

TMR: Electrical storage is an issue for the renewable energy sector. What are the advancements in battery and other storage technologies?

RM: The majority of dedicated electrical storage in North America is in pumped hydro. The use of compressed air storage and reliance on batteries is increasing. But the lithium-ion battery technology has only advanced incrementally during the last few decades. The cost of manufacturing batteries has dropped with higher demand for battery use in electronics and electric vehicles. Today, batteries are still relatively expensive, but there is a push to increase the amount of storage on the grid, which could increase the demand for batteries.

Last year, there were 35 gigawatt hours (35 GWh) of lithium ion batteries produced globally. Now, Tesla Motors Inc. (TSLA:NASDAQ) is slated to produce 35 GWh by 2020 at its Gigafactory. We have seen similar goals for 2020 announced by BYD Company Ltd. (BYDDF:OTCBB), which is the electric car company backed by Warren Buffett. LG Chem Ltd. (051910:KRX) and Foxconn Technology Group are also adding battery capacity. We think that the total production of lithium-ion batteries could increase by a factor of four or five by 2020. Ultimately, we could see dedicated battery storage of electricity on the grid or the use of the batteries in electric cars to manage grid power.

Hydrogen technology and flywheels also continue to develop and should also play a very important role in grid management in the future.

Chart 3

TMR: What is the role of graphite in battery production?

RM: There is 10 times more graphite than lithium in a lithium-ion battery; it’s an important part of the makeup of the electrodes. Typically, batteries employ a mixture of synthetic and natural graphite, but the synthetic material is relatively expensive at up to $6,000/ton. On the other hand, natural graphite is mined and processed for between $400 and $500/ton.

Graphite prices have been relatively soft for the last couple of years, but the high growth in battery markets should drive an increase in the demand for graphite.

Chart 4

TMR: What will be the effect of the demand factor on the price of graphite?

RM: One can argue that the price will rise because the demand is going to grow, but there are a fair number of deposits that are out there that are feasible at the current price. If the average price was to move up from roughly $1,100–1,200/ton today to $1,500–1,600/ton, a number of deposits could come on line. As with the history of most commodities, the graphite price will remain relatively stable in the long run. It can be volatile in the short term, but I do not assess that it will take a big increase in the price of graphite to increase the supply.

TMR: Do the existing graphite mines have the capacity to absorb the projected demand or is meeting that demand going to require exploration?

RM: Most graphite—roughly 500,000 metric tons per year—comes out of China. But in the short term, we believe that there will be a contraction of supply coming from China. The Chinese government is clamping down on polluting mines, and there are news reports suggesting that the quality of the Chinese graphite is degrading as the miners strip the good deposits. Battery-grade material needs to be high purity. We see opportunities for graphite mines outside of China, provided that they can access very good quality graphite.

Graphite is not like other commodity businesses. A customer cannot just go onto a commodity board and pick up the desired product. Graphite customers have very specific technical needs for their products, and they look for producers who can meet those requirements.

We track Mason Graphite Inc. (LLG:TSX.V; MGPHF:OTCQX), which has the lowest capital and operating costs of any graphite mine that we have seen. Mason Graphite has an experienced management team and has financial backers that could provide some of the equity and debt capital for building out Mason’s production facility.

Chart 5

TMR: Is a firm like Mason Graphite going to be competing with Chinese firms or other firms around the world?

RM: When we model Mason Graphite, we assume that it will sell graphite into the global commodity markets. However, the company will focus on meeting the needs of specific customers. It will build a facility to process graphite within a range of purity attributes and flake size distribution attributes. It will meet very specific customer goals in the very high-purity markets for batteries or electronics.

The number one strength of Mason Graphite is its executive team. Its CEO, Benoit Gascon, has spent the majority of his career building graphite operations, specifically the Timcal deposit in Quebec that was bought by Imerys (NK:PA). Benoit went on to run Imerys’ graphite operations. He’s a world-class expert.

In our view, Mason Graphite’s Lac Guéret deposit is the best in the world. It is located in a low-cost area in Quebec, a safe, mining friendly, low-risk jurisdiction. If Mason’s deposit has any negatives, it is that, as the Street points out, Mason’s average flake size is smaller than a lot of the other deposits that are looking to be developed. We took a hard look at the flake size distribution and at the various prices for graphite depending on flake size, and Mason’s deposit is very economical. The Lac Guéret deposit seems to have a short payback period—not only in the current market but, also if graphite prices go down. And, naturally, the economics for every deposit look better as the prices go up.

Chart 6

Chart 7

TMR: Is Mason highly leveraged to debt or does it have enough cash on hand to go forward?

RM: The company does not have enough cash to finish building the mine and processing facility at this point, but it has enough cash to complete its permitting and its feasibility studies to get to the point of construction. Mason will then find the debt financing and revenue stream to build the mine and the processing facility.

TMR: At what point in the development process does it become attractive to invest in Mason?

RM: We have a Buy rating on the stock now and we typically look out 12 months on our investment recommendations. The company will be more attractive when the bankable feasibility study is completed in the next four months. The feasibility study should confirm the low operating cost and low capital cost of the deposit and underpin the economic feasibility of the project. It already has financing from a couple of institutions in Quebec—Sodémex, which is a division of the Caisse de dépôt, a big pension fund, and Resource Quebec, which is part of Investissement Québec, a government-backed fund. We believe that with those two organizations behind it and an attractive bankable feasibility study, Mason Graphite will find the capital partners it needs to push forward.

TMR: Mason Graphite is currently trading around $0.55/share. What is your target price?

RM: Our target is $1.20/share. To get there, we use a 14% discount rate on a discounted cash flow analysis. Once the bankable feasibility study is completed and Mason finds funding, the facility will be derisked, with the discount rate dropping to 9% or less. And of course the target price would move up from that point.

TMR: Returning to wind, do you have any picks in that space?

RM: We cover wind farms in Canada, the U.S. and Europe. Wind companies have very good visibility on future revenue to amortize debt and also to pay a healthy dividend to shareholders. Our top pick of the companies that are highly exposed to wind is Boralex Inc. (BLX:TSX). We believe that Boralex is trading at a 10% discount rate today, versus most of its largest peers at about 8% or less. The company has very good visibility on a compound annual growth rate of greater than 20% for its cash flows available for distribution, between 2014 and the end of 2017.

TMR: Boralex is leveraged across a broad spectrum of renewables—wind, water, solar and thermal, correct?

RM: That’s correct, although 75% of its production comes from wind.

TMR: Is the technology for wind farms improving? What are the main goals for wind technology going forward?

RM: Yes, the performance on wind turbines is constantly improving. Wind turbines are larger and cheaper than a decade ago. Whereas the first generation of turbines were 50–100 kilowatts, they are now more than 2 MW. And there are big improvements in turbine blade aerodynamics, which allow for 30% increased production from a single wind turbine. Ongoing technological improvements in turbine design mean that wind farms are efficient in relatively low wind speed environments, and that opens up the number of places where wind power can function competitively. The cost of wind power has dropped across the board. Wind farms are being built that deliver product priced at $0.06/kilowatt hour or less, which is very competitive with power generation from any other source.

TMR: Are industrial users saying, “We’re going to build a big turbine and when the wind is not blowing, we’ll tap into the grid?”

RM: That is a growing trend, but a wind turbine-powered factory could end up paying more for the grid portion of its electricity. When users start to cut out the utilities, they will incur higher standby charges. I expect that industrial users will want to be completely self-generating in order to cut costs. That brings us back to batteries, of course.

TMR: Is there anybody else in wind that you like?

RM: We have a Buy rating and a $33/share target price for Pattern Energy Group Inc. (NASDAQ: PEGI), which is trading around $30/share. The company pays a healthy dividend of 4.7%. It has recently announced acquisitions. The company has increased its guidance on cash flow available for distribution based upon a 12–15%/year growth factor. Since Pattern Energy went public late in 2013, it has been increasing its dividend by 2% per quarter. That could grow to 3% per quarter. Investors will reward Pattern with a higher share price, and that 4.7% dividend will likely increase. There are some larger yield companies in the U.S., but we think that the valuation on Pattern and its growth profile make it quite attractive.

TMR: Will companies like Pattern and Boralex be acquisition targets, or should investors expect them to grow on their own?

RM: In theory, they are acquisition targets of the larger yield-companies, because they do trade at attractive valuations. Boralex is certainly a very attractive takeover target. Pattern Energy is a little bit larger and harder to acquire, but it, too, could be a takeover target. We would not own these stocks for that reason, though, but we would look at them for their attractive dividends, and the growth potential on the dividends.

TMR: Thanks for your time, Rupert.

Rupert Merer is a sustainability and clean tech research analyst and managing director at National Bank Financial (NBF). He joined NBF in 2006 after working in private industry, bringing more than 20 years of experience in this sector to his research analysis. Prior to joining NBF, Merer worked for a Canadian gas utility, where he was manager of energy technology. Merer also worked in the hydrogen technology industry in technical, financial, marketing and corporate functions. He began his career as a combustion engineer, working on gas turbine technologies. Merer was ranked No. 1 Alternative Energy analyst by Brendan Wood International in 2013 and for five of the last seven years. Merer has a BSc in engineering physics, an MBA from Queen’s University and an MASc in mechanical engineering from the University of Toronto. He is a registered Professional Engineer (ON) and holds a Chartered Financial Analyst (CFA) designation.

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Want to read more Mining Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Mining Report homepage.

DISCLOSURE:
1) Peter Byrne 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 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 Streetwise Reports: Mason Graphite Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Rupert Merer: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Mason Graphite Inc. and Boralex Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

( Companies Mentioned: BLX:TSX,
LLG:TSX.V; MGPHF:OTCQX,
PEGI:NASDAQ,
)

How to Make Money in Renewable Energy: NBF’s Rupert Merer

Chart 1

The Mining Report: Where is the renewable energy space headed in terms of profitability?

Rupert Merer: Most renewable power companies have long-term production contracts that provide a relatively low-risk return on invested capital. This is a capital-intensive industry with a lot of invested debt and equity capital. There is excellent visibility on cash flow and revenues—as long as 40 years out in the case of small hydro contracts. The duration of small wind and solar contracts is 15–20 years.

Mason Graphite Inc.’s Lac Guéret deposit is the best in the world.

With steady cash flow, the renewables sector can provide dividends of more than 5% for income seekers, typically with good visibility on future dividend growth. As solar and wind power have seen rapidly declining costs over the last few years, they have also seen very high growth. We think that this growth will continue and there should be an increasing number of investment opportunities.

TMR: What are “sustainability investors”?

RM: There are a few funds in Canada, the U.S., and the United Kingdom that invest only in renewable power assets. Some of these fund managers believe that there is an inherent risk with fossil fuel investments. Of course, if governments start to tax carbon at a higher rate or introduce cap and trade, then that could be a limiting factor for using fossil fuels to generate electricity.

Investors in the energy sustainability space typically look for a ratio of more than 50% clean energy in the stocks in their portfolios. Clean energy includes renewables and power plants that use natural gas, provided that the plants are high-efficiency co-generation plants or combined cycle plants.

TMR: How does a renewable energy project secure a long-term contract?

RM: That depends on the jurisdiction. The Canadian power market is regulated at the provincial level. Ontario is the most populated province in the country and it has been the most aggressive at developing renewable power over the last decade. In the past, the government has offered fixed price contracts, or “Feed in Tariffs,” for renewable power at a price that would provide an attractive economic incentive for developers. However, generally, in Ontario or in other provinces, firms will bid on, say, delivering 200 megawatts (200 MW) of wind power, under a competitive request for proposal. The contract will typically go to the lowest price bid from a viable entity.

In the U.S., contracts are often arranged between developers and utilities or businesses in the private sector. Projects have typically also included financial partners that have purchased tax credits from the developer.

TMR: Given that wind and solar intermittently generate pulses of energy into the grid, has the grid developed the capability to access renewable energy when it is live, while compensating for it when the generator goes temporarily fallow?

RM: The easiest way to compensate for intermittency is to increase transmission capability.

If the local area has more wind or solar power than it can use, it can send it to a neighboring region. Another way to manage intermittency is to decrease the use of power on the grid when there is a deficit of renewable energy. For example, operators can shut off air conditioning loads when there is a deficit of power. As the amount of renewable power grows, we will need to find better ways to store power.

Today, the best way to manage volatility in electricity supply is the regulation of hydropower production. With our hydro capability, Canada is a giant battery for the U.S! British Columbia controls about 13 gigawatts (13 GW) of hydro. It actively trades power back and forth with California. In Quebec, more than 30 GW of hydro leverages a storage capability that can trade power with the Eastern Seaboard. Manitoba trades 10 or 13 GW with the Midwest. This works for Canada today, but it may not be enough in the future.

Chart 2

TMR: Electrical storage is an issue for the renewable energy sector. What are the advancements in battery and other storage technologies?

RM: The majority of dedicated electrical storage in North America is in pumped hydro. The use of compressed air storage and reliance on batteries is increasing. But the lithium-ion battery technology has only advanced incrementally during the last few decades. The cost of manufacturing batteries has dropped with higher demand for battery use in electronics and electric vehicles. Today, batteries are still relatively expensive, but there is a push to increase the amount of storage on the grid, which could increase the demand for batteries.

Last year, there were 35 gigawatt hours (35 GWh) of lithium ion batteries produced globally. Now, Tesla Motors Inc. (TSLA:NASDAQ) is slated to produce 35 GWh by 2020 at its Gigafactory. We have seen similar goals for 2020 announced by BYD Company Ltd. (BYDDF:OTCBB), which is the electric car company backed by Warren Buffett. LG Chem Ltd. (051910:KRX) and Foxconn Technology Group are also adding battery capacity. We think that the total production of lithium-ion batteries could increase by a factor of four or five by 2020. Ultimately, we could see dedicated battery storage of electricity on the grid or the use of the batteries in electric cars to manage grid power.

Hydrogen technology and flywheels also continue to develop and should also play a very important role in grid management in the future.

Chart 3

TMR: What is the role of graphite in battery production?

RM: There is 10 times more graphite than lithium in a lithium-ion battery; it’s an important part of the makeup of the electrodes. Typically, batteries employ a mixture of synthetic and natural graphite, but the synthetic material is relatively expensive at up to $6,000/ton. On the other hand, natural graphite is mined and processed for between $400 and $500/ton.

Graphite prices have been relatively soft for the last couple of years, but the high growth in battery markets should drive an increase in the demand for graphite.

Chart 4

TMR: What will be the effect of the demand factor on the price of graphite?

RM: One can argue that the price will rise because the demand is going to grow, but there are a fair number of deposits that are out there that are feasible at the current price. If the average price was to move up from roughly $1,100–1,200/ton today to $1,500–1,600/ton, a number of deposits could come on line. As with the history of most commodities, the graphite price will remain relatively stable in the long run. It can be volatile in the short term, but I do not assess that it will take a big increase in the price of graphite to increase the supply.

TMR: Do the existing graphite mines have the capacity to absorb the projected demand or is meeting that demand going to require exploration?

RM: Most graphite—roughly 500,000 metric tons per year—comes out of China. But in the short term, we believe that there will be a contraction of supply coming from China. The Chinese government is clamping down on polluting mines, and there are news reports suggesting that the quality of the Chinese graphite is degrading as the miners strip the good deposits. Battery-grade material needs to be high purity. We see opportunities for graphite mines outside of China, provided that they can access very good quality graphite.

Graphite is not like other commodity businesses. A customer cannot just go onto a commodity board and pick up the desired product. Graphite customers have very specific technical needs for their products, and they look for producers who can meet those requirements.

We track Mason Graphite Inc. (LLG:TSX.V; MGPHF:OTCQX), which has the lowest capital and operating costs of any graphite mine that we have seen. Mason Graphite has an experienced management team and has financial backers that could provide some of the equity and debt capital for building out Mason’s production facility.

Chart 5

TMR: Is a firm like Mason Graphite going to be competing with Chinese firms or other firms around the world?

RM: When we model Mason Graphite, we assume that it will sell graphite into the global commodity markets. However, the company will focus on meeting the needs of specific customers. It will build a facility to process graphite within a range of purity attributes and flake size distribution attributes. It will meet very specific customer goals in the very high-purity markets for batteries or electronics.

The number one strength of Mason Graphite is its executive team. Its CEO, Benoit Gascon, has spent the majority of his career building graphite operations, specifically the Timcal deposit in Quebec that was bought by Imerys (NK:PA). Benoit went on to run Imerys’ graphite operations. He’s a world-class expert.

In our view, Mason Graphite’s Lac Guéret deposit is the best in the world. It is located in a low-cost area in Quebec, a safe, mining friendly, low-risk jurisdiction. If Mason’s deposit has any negatives, it is that, as the Street points out, Mason’s average flake size is smaller than a lot of the other deposits that are looking to be developed. We took a hard look at the flake size distribution and at the various prices for graphite depending on flake size, and Mason’s deposit is very economical. The Lac Guéret deposit seems to have a short payback period—not only in the current market but, also if graphite prices go down. And, naturally, the economics for every deposit look better as the prices go up.

Chart 6

Chart 7

TMR: Is Mason highly leveraged to debt or does it have enough cash on hand to go forward?

RM: The company does not have enough cash to finish building the mine and processing facility at this point, but it has enough cash to complete its permitting and its feasibility studies to get to the point of construction. Mason will then find the debt financing and revenue stream to build the mine and the processing facility.

TMR: At what point in the development process does it become attractive to invest in Mason?

RM: We have a Buy rating on the stock now and we typically look out 12 months on our investment recommendations. The company will be more attractive when the bankable feasibility study is completed in the next four months. The feasibility study should confirm the low operating cost and low capital cost of the deposit and underpin the economic feasibility of the project. It already has financing from a couple of institutions in Quebec—Sodémex, which is a division of the Caisse de dépôt, a big pension fund, and Resource Quebec, which is part of Investissement Québec, a government-backed fund. We believe that with those two organizations behind it and an attractive bankable feasibility study, Mason Graphite will find the capital partners it needs to push forward.

TMR: Mason Graphite is currently trading around $0.55/share. What is your target price?

RM: Our target is $1.20/share. To get there, we use a 14% discount rate on a discounted cash flow analysis. Once the bankable feasibility study is completed and Mason finds funding, the facility will be derisked, with the discount rate dropping to 9% or less. And of course the target price would move up from that point.

TMR: Returning to wind, do you have any picks in that space?

RM: We cover wind farms in Canada, the U.S. and Europe. Wind companies have very good visibility on future revenue to amortize debt and also to pay a healthy dividend to shareholders. Our top pick of the companies that are highly exposed to wind is Boralex Inc. (BLX:TSX). We believe that Boralex is trading at a 10% discount rate today, versus most of its largest peers at about 8% or less. The company has very good visibility on a compound annual growth rate of greater than 20% for its cash flows available for distribution, between 2014 and the end of 2017.

TMR: Boralex is leveraged across a broad spectrum of renewables—wind, water, solar and thermal, correct?

RM: That’s correct, although 75% of its production comes from wind.

TMR: Is the technology for wind farms improving? What are the main goals for wind technology going forward?

RM: Yes, the performance on wind turbines is constantly improving. Wind turbines are larger and cheaper than a decade ago. Whereas the first generation of turbines were 50–100 kilowatts, they are now more than 2 MW. And there are big improvements in turbine blade aerodynamics, which allow for 30% increased production from a single wind turbine. Ongoing technological improvements in turbine design mean that wind farms are efficient in relatively low wind speed environments, and that opens up the number of places where wind power can function competitively. The cost of wind power has dropped across the board. Wind farms are being built that deliver product priced at $0.06/kilowatt hour or less, which is very competitive with power generation from any other source.

TMR: Are industrial users saying, “We’re going to build a big turbine and when the wind is not blowing, we’ll tap into the grid?”

RM: That is a growing trend, but a wind turbine-powered factory could end up paying more for the grid portion of its electricity. When users start to cut out the utilities, they will incur higher standby charges. I expect that industrial users will want to be completely self-generating in order to cut costs. That brings us back to batteries, of course.

TMR: Is there anybody else in wind that you like?

RM: We have a Buy rating and a $33/share target price for Pattern Energy Group Inc. (NASDAQ: PEGI), which is trading around $30/share. The company pays a healthy dividend of 4.7%. It has recently announced acquisitions. The company has increased its guidance on cash flow available for distribution based upon a 12–15%/year growth factor. Since Pattern Energy went public late in 2013, it has been increasing its dividend by 2% per quarter. That could grow to 3% per quarter. Investors will reward Pattern with a higher share price, and that 4.7% dividend will likely increase. There are some larger yield companies in the U.S., but we think that the valuation on Pattern and its growth profile make it quite attractive.

TMR: Will companies like Pattern and Boralex be acquisition targets, or should investors expect them to grow on their own?

RM: In theory, they are acquisition targets of the larger yield-companies, because they do trade at attractive valuations. Boralex is certainly a very attractive takeover target. Pattern Energy is a little bit larger and harder to acquire, but it, too, could be a takeover target. We would not own these stocks for that reason, though, but we would look at them for their attractive dividends, and the growth potential on the dividends.

TMR: Thanks for your time, Rupert.

Rupert Merer is a sustainability and clean tech research analyst and managing director at National Bank Financial (NBF). He joined NBF in 2006 after working in private industry, bringing more than 20 years of experience in this sector to his research analysis. Prior to joining NBF, Merer worked for a Canadian gas utility, where he was manager of energy technology. Merer also worked in the hydrogen technology industry in technical, financial, marketing and corporate functions. He began his career as a combustion engineer, working on gas turbine technologies. Merer was ranked No. 1 Alternative Energy analyst by Brendan Wood International in 2013 and for five of the last seven years. Merer has a BSc in engineering physics, an MBA from Queen’s University and an MASc in mechanical engineering from the University of Toronto. He is a registered Professional Engineer (ON) and holds a Chartered Financial Analyst (CFA) designation.

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DISCLOSURE:
1) Peter Byrne 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 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 Streetwise Reports: Mason Graphite Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Rupert Merer: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Mason Graphite Inc. and Boralex Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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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