Investors Don't Count Out Old King Coal Yet
Commodities / Coal Feb 26, 2010 - 01:26 AM GMT
Siddharth Rajeev, vice president of research for Fundamental Research Corp., talks about several of the bright spots he sees on the economic horizon in this exclusive interview with The Energy Report. Sid anticipates: recovery in 2010, with rising interest rates by the end of the year. . .longer-term growth in demand for uranium, which this year's commodity corrections somehow managed to overlook. . .continuing strength for rare earth metals as applications expand in electronics and alternative energy. . .even new faces on the coal front. Despite the push toward clean energy, Sid says coal won't go away anytime soon. One of the cheapest sources of fossil fuels in abundant supply, he says that coal is "tough to replace."
The Energy Report: What do you see for the U.S. economy this year, Sid?
Siddharth Rajeev: We see the economic recovery continuing and increasing investor confidence along with it. We saw that the U.S. GDP grew at 5.7% in Q4, which was the fastest in the last six years and in Q3 posted growth of 2.2%. Therefore, we are definitely seeing very positive signs in the U.S. Yes, inflationary pressures are looming, but we expect the Fed to start increasing interest rates in the second half.
TER: So you're among those who see shoots of recovery and are projecting sufficient positive growth within the U.S. in 2010 to prompt the Fed to start to increase rates.
SR: Yes, because once we see economic growth in the U.S., there's no reason the Fed should not increase rates, especially because of inflationary pressures. We believe the increase in interest rates would be able to limit the inflation rates in the next two years.
TER: You're on the opposite side of what we've been hearing about a recovery in 2010. A lot of people are speculating that with the massive debt the U.S. government faces already—plus the potential for additional stimulus and the cost of radical healthcare changes—the U.S. will not go into recovery this year and possibly not even in 2011. Considering that projection is almost the exact opposite of yours, what are you seeing that they're missing?
SR: The main thing is that the U.S. dollar is still extremely weak compared to other currencies, which would benefit their exports. We believe the combination of a weak U.S. dollar and the stimulus package would result in an economic recovery in the U.S.
TER: What are some of the sectors that you think will perform well in this environment?
SR: One of the sectors that we have a very positive outlook on right now is uranium. We've not really seen any increase in uranium prices, even though all the other metals performed really well in the past few months. It seems like investors have totally ignored this commodity versus all the other commodities, which have responded well to economic recovery. All the money that's being put into infrastructure growth has helped the base metals, but uranium prices have not really responded to the positive news in terms of demand that we've seen over the last six months to one year.
TER: How do you see uranium demand as you look ahead?
SR: Basically, there have been no significant changes on the supply side with uranium, but we have seen very positive news on the demand side, especially long-term demand. Most governments worldwide are realizing the importance of cleaner energy. Obama really stresses nuclear energy. In the long term, maybe two years out, we believe the demand for uranium will be very strong. I think we will see uranium companies probably doing well in the next 12 to 24 months, and uranium prices are something to watch.
TER: Are you looking at any uranium companies in particular?
SR: We recently released a report on Fission Energy Corp. (TSX.V:FIS). We think that's one of our best uranium companies. When we initiated coverage in January 2010, they were at 18 cents. Now I think they are at close to $1.10.
TER: What makes Fission Energy more appealing than other uranium companies you've evaluated?
SR: Their primary focus now is the Waterbury Lake joint venture project with a Korea Consortium led by Korea Electric Power Corporation (NYSE:KEP)—in the Athabasca Basin in Saskatchewan. We have seen some extremely positive preliminary results from that project so far.
A related company to Fission that we do not currently cover but have on our radar screens is Strathmore Minerals (TSX.V:STM), which actually spun off Fission. Strathmore has advanced-stage uranium projects in the Gas Hills Uranium District in Wyoming and the Grants Mineral District in New Mexico. What is interesting about Strathmore is their Roca Honda project is the largest proposed uranium mine in the U.S. in over 30 years. We think that given Obama's recognition of uranium, this U.S.-based project will be a fairly prominent project in the coming years.
TER: What other companies do you like in the uranium space?
SR: Uracan Resources Ltd. (TSX.V:URC) is on our watch list in the uranium sector. They are exploring for and have inferred NI 43-101 resources of 40.7 million pounds of near-surface bulk tonnage uranium. Their 2009 resource estimate will be released later in Q1. Their deposit is similar to deposits in Namibia; however, they are exploring in Quebec—one of the best places for mining. The company will be launching its winter drilling program in the next two weeks.
Terra Ventures (TSX.V:TAS), a company under coverage since 2007, has a 10% full production carried interest in Hathor's Midwest Northeast property. We believe that the Roughrider discovery on this property is one of the most promising uranium discoveries in recent times. Another significant asset in the Terra portfolio is its ownership of 7.5 million Novus Gold Corp. (TSX.V:NOV) common shares. Novus' REN gold property was subjected to drilling by Cominco and others in the 1970s and 1980s.
TER: One of the darlings of 2009 was all those rare earth metals. Are you following those and, if so, what's your view of that sector?
SR: We also have a positive outlook on rare earth metals, especially because more than 95% of the production comes from China. As you know, over the past year or two, China has increased restrictions on export quotas and raised export tax rates. So they are definitely trying to preserve their resources, and because the supply is concentrated in China, we believe global supply will be affected. On the demand side, rare earth metals are now being increasingly used in electronics and alternative energy. These factors will drive demand for rare earths.
TER: What companies do you like in the rare earth area?
SR: One company that we have on our watch list though we do not cover it is Channel Resources (TSX.V:CHU). While technically not a rare earth, their Fox Creek Lithium/Potash Brine Project has a historical resource estimate of 2.7 million tons of Lithium Carbonate Equivalent (LCE). Spot prices for LCE are about US$6,500 per ton.
Salares Lithium Inc. (TSX-V: LIT) is currently on our watch list as it has one of the largest brine lake concession packages in Chile, which is the world's largest lithium producer. They have five brine lakes clustered within 155 kilometers, of which they control 100% of the interest with their Chilean partner.
Another company on our watch list is Medallion Resources Ltd. (TSX.V:MDL), which has optioned a 65% interest in a joint venture to conduct exploration on the Eden Lake REE property in Western Manitoba. Eden Lake is a recent discovery and, due to the size, high-grade assays, multiple-mineralization styles and local infrastructure, it is one of the 10 most promising REE prospects in North America. Dr. Bill Bird, the Medallion CEO, is a former president of Rare Element Resources Ltd. and is well regarded for his knowledge of the REE industry.
Rare Element Resources Ltd. (RES: TSX.V) is now headed by Don Ranta. The company has recently completed drilling to expand their deposit (currently 9.8 million tons at 4.07% TREO released last April) with a few infill holes on their Bull Hill Southwest zone on the Bear Lodge rare earth prospect in Wyoming. They released part of the results and are working on releasing an updated resource estimate by the end of this quarter—and they hope to double the size of the oxide resource.
TER: Are there other plays in clean energy?
SR: Uranium has the most potential on the clean energy side. But then definitely we have a positive outlook on alternate energy, clean energy.
TER: Anything else you have to report on the energy side?
SR: One of our top picks is Compliance Energy Corporation (TSX.V:CEC) . They're developing their Raven Coal Project on Vancouver Island. The project has 39 million tons measured and indicated and 59 million tons inferred resources.
The company can produce either metallurgical or thermal coal from the Raven material. Metallurgical coal is more valuable than thermal. The company's partners, ITOCHU Corp. and LG International, provide a significant source of financial assistance. If everything goes according to plan, they can commence construction in 2011 and, hopefully, production in 2012.
TER: Will there be enough ongoing demand for coal past 2012 to keep this company viable?
SR: Yes, because even though there is a move toward cleaner energy, it's tough to replace coal. That's because coal accounts for 40% of the global electricity supply, and is still the cheapest and most abundant fossil fuel. We believe that most of the additional demand for energy in China and India will be met by coal, therefore we do not see any decline in the importance of coal in the global energy market at least in the next decade.
TER: You say Compliance Energy does both metallurgical and thermal coal?
SR: Yes, the resource can be developed as a metallurgical or thermal coal. We did an NPV analysis for both scenarios and found that metallurgical coal has better economics than thermal in this case.
TER: Which other coal companies do you follow at this time?
SR: We have been watching Goldsource Mines Inc. (TSX.V:GXS) closely for some time now as the company's principal Scott Drever is the CEO of SilverCrest Mines Inc. (TSX.V:SVL), a company under coverage by Fundamental Research. GXS is developing Saskatchewan's newest coal resource discovery, and its work to date has outlined more than 170 million tons of good quality thermal coal in all NI 43-101 categories. The infrastructure is excellent with the border property being located near to major highways, railway and power. Some of the key aspects of the project are the quality of the coal, the open-pit mineability of the deposits and the comparability to coal mined in the Powder River Basin. GXS is currently finishing a drill program this winter to increase the resources and will be doing a Preliminary Economic Assessment in the next few months.
Westcore Energy Ltd. (TSX.V:WTR) is a coal company on our watch list as 49 North Resources Inc. (TSX.V:FNR), headed by Tom MacNeill, recently acquired additional shares, which brings their total ownership up to 20%. FNR has recently come to our attention due to their success with the purchase agreement of Athabasca Potash Inc. (TSX.V:API) by BHP Billiton Ltd. (NYSE/ASX:BHP, PKSHEETS:BHPLF). We are monitoring both WTR and FNR and believe both companies warrant attention from the market. WTR also recently announced positive drilling results from a target that intersected a 7.12-meter thick carbonaceous zone starting at 47.45 meters below surface on its property.
TER: It's always educational chatting with you, Sid. We love hearing about those very interesting projects you seem to find in the beginning of their uptrend, and appreciate your sharing the information with us.
Fundamental Research Corp. VP Siddharth Rajeev oversees FRC's research department as well as covering a broad array of companies, primarily in the energy, mining and technology sectors. Sid is ranked a 4-star analyst in the energy sector by Deutsche Asset Management, a division of Deutsche Bank, with 2009 picks in energy and mining sectors that outperformed their respective benchmarks after transaction costs. Prior to joining FRC in April 2006, he had a mix of engineering and finance experience including work in corporate finance at a leading investment bank in Kuwait. Sid holds a Bachelor of Technology degree in Electronics Engineering from India's Cochin University of Science & Technology, and an MBA in Finance from the University of British Columbia. He is also a Level 3 candidate in the CFA (Chartered Financial Analyst) program, and has completed studies in exploration and prospecting at the British Columbia Institute of Technology.
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DISCLOSURE:
1) Karen Roche, of The Energy Report, conducted this interview. She personally and/or her family own none of the companies mentioned in this interview.
2) None of the companies mentioned in the interview are sponsors of The Energy Report.
3) Keith Schaefer—I personally and/or my family own the following companies mentioned in this interview: West, Petrominerales, Bankers, Painted Pony. I personally and/or my family am paid by none of the companies mentioned in this interview.
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