Winning the Energy Investing Game with Zero-Risk Capital
Commodities / Energy Resources Mar 05, 2010 - 01:00 AM GMT
"In this game," according to Marin Katusa, senior editor of Casey's Energy Report, "you only get profits when you sell." The zero-capital investing philosophy he advocates wins the hearts and lines the pockets of investors. At the same time, though, it often puts him in the doghouse with some the companies and people he admires most. That's because following this strategy, you a) recoup your original investment once your stock rises, b) pull your original investment out, and then c) return for more when the price dips to the point that the company becomes an undervalued bargain. In addition to learning more about the Casey Free Ride approach and Marin's current energy sector views, get an early glimpse of the European shale plays that have captured his fancy in this exclusive Energy Report interview.
The Energy Report: Let's start with your quick macro overview of the various energy sectors—would you be in oil, gas, uranium? Then we'll drill down into what you see as some opportunities. Marin Katusa: Sure, I'll start with natural gas. As I've told Energy Report readers before, natural gas is a very localized market. It's very geographic-dependent, based on varying infrastructures. With that as a backdrop, we see North American natural gas going sideways or down near term. We don't see it going to $10, and in fact, expect it to stay under $6.50, even maybe below $6 over the next six months. I discussed our main reason for that view in an article called "The Hidden Supply of Natural Gas in the U.S." Thousands of wells have been drilled, waiting for to be completed. Any of them could come on stream within 72 hours, so that's a lot of supply.
TER: What do you think about uranium these days?
MK: Again, I am going to sound like a negative guy. Uranium is going sideways to down. The long-term spot will stay where it is—sideways to down—but that doesn't matter. Five years ago, when uranium was at $15, if you had asked uranium companies how they would feel about $40 uranium, they would have been ecstatic. This just proves to people that you want to be investing in companies that are real. In the uranium world, that means ISL (in situ leaching) in the U.S. or the Athabasca Basin where grade is king and where $40 is economic for certain deposits.
TER: And oil?
MK: I believe $80 oil has a lot of weakness. Even though there's a lot of speculation, I don't see oil popping to previous highs in the near term (within six months), because people are looking for tangible assets. We use $45 per barrel for our numbers. That's proving very successful in our newsletter because you only invest in the most undervalued and best companies that can actually return a significant profit at $45.
TER: The markets have run up since the March lows last year. What are you telling subscribers in terms of whether they should commit more capital to this market?
MK: Let me set a bit of context here before I answer that. When we introduced the Casey Free Ride formula in the June 2008 issue, I went on TV and radio, and I was ridiculed for telling investors to take a "Casey Free Ride." People were emailing and phoning. Brokers in the streets were saying, "You've lost your mind; you should go back to teaching calculus at the university. How do you not understand this is the greatest bull market of our career? How could you be selling these stocks?"
That's because the Casey Free Ride is all about taking profits off the table when a stock you hold has appreciated by a certain percentage or amount. People fall in love with stocks. The companies get angry at you for selling their stocks. It's a very small world here in Vancouver, so I've become very unpopular for selling these junior companies. Do I care? No, because I make our subscribers money. This is the real world; selling stocks is how you make money. If your broker gets upset with you for selling a stock because he's friends with management or he sees an upside, fire that broker. He is not working in your best interest. It's about making money.
So I introduced the Casey Free Ride in mid-2008. We all know what happened four months later. Was I a little bit early? Sure. Did we nearly get the top? Yeah. So, was it a great call? It was a fantastic call when we mentioned to take a Casey Free Ride in the June 2008 Casey Energy Report.
It's funny when I think back to the summer of 2008, for two months people were laughing at me, but subscribers who followed that advice did very well. We put five buy recommendations in the November 2008 issue; that's a very rare newsletter with five recommendations in. And those produced potentially up to more than 10 times your money, depending on if you bought, if you went in. In this game, you only get profits when you sell.
So what are we telling subscribers? We're telling people to make sure they have zero-risk capital in the game. If you invested $10,000 in a stock and it's trading at $16,000, pull out that $10,000. The liquidity of these junior stocks is so brittle. In an environment where a junior's trading at four, five, 10 times its average volume, you have to sell. We've all seen these markets go zero bid or illiquid and then you can't sell your stock. So, that's what we've told our subscribers.
So why do I say that? Number one, I want people to book gains and have their powder dry when the market correction hits. One of the most important lines you'll hear in this report is "keeping your powder dry"—that's keeping cash on the side. The Rockefellers were famous for saying, "Buy when there's blood in the streets." You can only do that if you have cash when there's blood in the streets. You have to be forward-thinking.
TER: And how's that working for you now?
MK: In the last issue of the Casey Energy Report, we basically said we cut a third of our companies and closed the positions. It was a tough thing to do as you like holding the winners, and its psychologically difficult to sell, but you must stay disciplined and sell. We've used the Casey Free Ride Formula on almost 75% of the portfolio and we have closed a little over 35% of all the stocks in our portfolio. We've had fantastic runs. We've had stocks return over 10 times.
Our portfolio has done fantastic; we're sitting here on the sidelines; we've got a lot of cash, and we're waiting. We've not just been watching the Olympics every day. We're actually doing our homework, interviewing companies, running our database models. And we're waiting for companies that I like that are overvalued right now so they hit our price targets. We run fundamental values. When I introduce the stink bids I get a lot of negative feedback, but that's a psychological reinforcement confirming that the market is overvalued right now.
TER: What are some of these overvalued stocks that you're watching and waiting for to hit your price targets?
MK: A perfect example would be Ram Power Corporation (TSX: RPG). One of my very close friends and mentors is one of Ram Power's largest investors in that, Rick Rule. Rick will work his book, and, you know, God bless his soul, he's a great man. But I crunch the numbers on it; I think it's a good buy under $3. This stock has gone over $4, and it hit a low recently of C$2.91. I got hundreds of emails asking, "Hey, it's C$3.06, should we go buy it?" I said, "Let's hold tight. If it hit C$3.06, it's probably going to hit C$2.96." And it went to C$2.91, and our subscribers got in, and it took many months to do so. Discipline is the name of the game. Unfortunately for the buy side, from that C$3.06, it ran to over C$4, but then it came back. Just be patient. And this is a PERFECT example of how it came back from C$4 to C$2.91 and our subscribers got filled. So, that's a perfect example of a company I really like and I really like their investors. It will take only one or two funds to blow up to get that stock down to C$2.75 or C$2.50 or even C$2.90; so, be patient.
TER: And patience will pay off.
MK: Another perfect example is another company I really like. In our Casey Energy Confidential alert service, we told subscribers to be patient and wait and buy under C$1.50. It got there, and traded millions of shares under C$1.50. Within three weeks we had over 25% profit, and we told subscribers to take the risk capital out—take the Casey Free Ride. Then about a month later, I said the exact same thing in the Casey Energy Report. It hasn't hit our price target, but it came down to a $1.54.
TER: Which company is this?
MK: Magma Energy Corp. (TSX:MXY); that's where Ross Beaty is the Chairman and CEO. We have the utmost respect for Ross Beaty; Doug Casey calls him the "broken slot machine" because he's delivered nothing but profits for its people. Am I being Scrooge being very picky for a few pennies here and there? Probably, but there's no rush to own these stocks. That's the type of market we're in now.
TER: So, where would you buy Magma?
MK: Under C$1.50.
TER: I can see where Magma might not like that.
MK: You know, it's difficult, but I'm not paid by the companies. I am not paid by the promoters. I am paid by my subscribers, and I have to do the most prudent and right thing for them. The reason we have so much clout in the market is because they know that we're out there pounding the streets for them. You treat your subscribers well, and they'll treat you well.
TER: Any other geothermal companies on your radar?
MK: Breaking it up by risk level, what I call the Cameco Corporation (NYSE:CCJ;TSX:CCO) of the geothermal world is called Ormat Technologies, Inc. (NYSE:ORA). That is as vertically integrated a geothermal company as you can get. They build the geothermal plants; they explore and develop geothermal plants; they run other people's geothermal plants. This is as good a geothermal company as you can get.
Suppose you're in your 60s and don't have an appetite for risk, Ormat is not going to quadruple. It won't have the potential of a Magma or a Ram Power, but it's a solid company that makes money, has great production—more than 500 megawatts of production—and it's without a doubt the leader of the geothermal sector. However, the company has got into some trouble with some violations in their financials, and they may have a lawsuit on their hands. If everything clears out, I really like this company, but would wait and see what happens in the weeks to follow and pick some up after the smoke clears.
TER: Any others?
MK: As you know, Louis James runs the mining side of our Research Department. This guy lives on the road, and no one kicks more rocks than Louis. He is as critical and smart as they come. He went out to Serbia (both Louis James and I have been to Serbia many times), and I got excited when I read his report, because I know how conservative Louis is. Reservoir Capital Corp. (TSX.V:REO) is one of those companies—and I agree 100% with Louis—that you will look back in five years and go, "Why did I not buy that?" It could definitely trade at multiples. We're not talking a two or three-bagger. I believe Miles Thompson (Reservoir CEO) will be in my 10-bagger club within five years. He was a very well-respected management teams, and we're not just talking about respect from the Casey crew. Rick Rule keeps him in high regard; a lot of the European funds, people know that Miles Thompson is going to deliver. It's been a huge run for us on the energy side, because we were buying it all day long. We had it as a best buy under 25 cents.
TER: Is it time for a Casey Free Ride?
MK: So, would we sell it here? To be prudent and follow our discipline, if you bought under 25 cents, yes. The smart thing would be to take your initial capital off the table. However, Reservoir Capital is one stock that you want to own. I can't be more bullish about a run-of-river project. This company accumulated some of the largest geothermal potential in the Balkans. If you know the geography, the geothermal and run-of-river potential in the Balkans is very high. Miles and his team are very connected in that region, and I know that region very, very well.
So for a junior with a 10-bagger potential, I have no doubt that Miles will deliver. We own the stock; we have not sold the stock and we want to own more of it. We're actually looking to buy more on weakness. Rick Rule said something that's resonated with me for a long time. "I want to own a deal that the president of the company is willing to sacrifice his life for five years to make a fortune." I believe that Miles Thompson will follow Ross Beaty's footsteps and become a broken slot machine (which means delivering returns time after time for shareholders).
TER: Anything else in alternative energy arena?
MK: For the alternative side, in the geothermals, you have to be careful that you're in the right ones that are capitalized and run by people who can actually run these projects, not just another "me, too" geothermal company.
TER: Any other stocks that fit your pattern of good stocks that are undervalued?
MK: CBM Asia Development Corp (TSX.V:TCF;Fkft:IY2) is a company we really like. We bought a lot of it in our Alert Service for our subscribers and ourselves personally. We bought it at 30 cents in a private placement, and then actually went into the market and followed our own advice after giving our subscribers three days' head lead, when we bought a lot of stock under 25 cents.
This is an example of a company that the stock came free trading, and there was overselling. This is exactly the type of market that you want to go and take advantage of that type of opportunity. CBM Asia is drilling in Indonesia, within 30 kilometers of the second largest liquefaction plant in the world. The company has the potential of being one of the largest land owners in the Kutai Basin, and I can't overemphasize how strategic this land play is.
TER: Why is that so important?
MK: Land ownership is very fractional in the oil and gas sector, and if CBM Asia can consolidate and become one of the larger land holders in the Kutai Basin, I have no doubt you will see a major company from Japan, or the French, or maybe even some of the U.S. majors knocking on the door because of the multi-billions of dollars of infrastructure sitting there. InterOil Corporation (NYSE:IOC;TSX:IOL) has had huge success in Papua New Guinea, but the infrastructure is not there. Indonesia does have some geological risks, and CBM Asia does have to drill up the project, but its infrastructure risk is much less. And taking out that infrastructure risk is so important for a lot of these projects. That is your highest cost, your largest capex.
TER: You mentioned a consolidation play in oil and gas, isn't that the same in the mining sector?
MK: Exactly the same. That's why for years I've been banging the drum about the Copper Mountain Mining Corporation (TSX:*****) story. Open disclosure: I'm a director of Copper Mountain and have a lot of my personal money in it, but this company has up to a quarter billion dollars worth of infrastructure already built on OPM. That's a famous Casey line, OPM—other people's money. It's ideal to build your net worth on an already existing infrastructure. Raymond James has a "strong buy" on Copper Mountain with a C$3.50 price target, and one of reasons why is that they've got $300 million of infrastructure sitting there already built. So, definitely, consolidation is key in mining, and also on the energy side. It's very important to know that angle when investing. With a lot of uranium mines, for example, although they have uranium, it may not work when you calculate the cost of bringing in the infrastructure.
TER: Switching gears a bit, I imagine you know called Salares Lithium Inc. (TSX-V:LIT).
MK: This is an undervalued story. We are Salares Lithium shareholders. We like the story. The potential of their salares are very, very high. There's a side of junior exploration stories that people don't talk about. You're only as strong as the shareholders you have, and Salares Lithium's shareholders reads like the Who's Who in the Vancouver investment banking scene. These people will write checks to develop the story and help support Todd Hilditch (Director, President and CEO) on his mission.
Although the lithium space, in general, got a little bit too excited, there are a few gems. Salares Lithium is a great story. There's one run by Patrick Highsmith—Lithium One Inc. (TSX-V:LI)—is a great story. I have known Patrick for a few years. So, there are gems out there, and, again, what you want to worry about in the lithium story is I'm hesitant about buying a lithium story that is conventional because of the capex.
TER: They can't produce lithium economically.
MK: Absolutely. If you break it down, I believe FMC and SQM are producing at about 70 to 80 cents per pound. You can't go in the game and try to produce at $2.50 to $3? It ain't going to happen. That's why you go with the salares, and that's where Lithium One and Salares Lithium have positioned themselves very well. They can compete with the big boys. And the lithium market is—people don't realize that three companies produce—what is it?—80% or even more of all the lithium. It is almost like an oligopoly. I worry about investors rushing to conventional, high-cost operations; that's my warning to shareholders is "be careful where you're investing in the lithium market." There are gems, and the ones we went with—Lithium One and Salars Lithium.
TER: How many of the lithium companies own 100% of their land?
MK: Very, very few. A lot of these companies are earning in, there are option payments, JV agreements. In South America, where probably the best brines really are, I believe Salares Lithium owns 100% of its land, and Lithium One owns 100% of its portion of the salar, but it's one large salar, so they don't necessarily own the whole salar.
The Toyotas and the Magmas of the world are looking for a lithium supply. When you're a 100-percent owner, you've got a lot more to work with than if you're a 40% owner or earning into a 60% option. That's another reason why I really like Salares Lithium and Lithium One. Again, it's a consolidation issue.
TER: It's important for investors to understand that lithium is almost like a lake, and if you don't own 100%, somebody else can put a straw in on the other side and be taking your lithium.
MK: Another big problem there is the legal angle. The lake is a good way to visualize it. You're producing on your side of the lake. Someone's going to pop in a straw on the other side. You're not going to allow that, so you'll go to court and it will be in litigation for years. So investors have to be careful about that.
TER: Okay. Any other opportunities that you see on the horizon?
MK: We've been following Utica Shale plays for two years, and I could see a big push happening in that space. A few rumors are going down with the landowners in the Marcellus Shale that the American environmentalists are saying that shales are polluting the water and all that stuff. That's complete nonsense. Geologically, scientifically, it doesn't happen. So, about two years ago, with $6 gas, we wrote up the shale gas story in the energy reports saying, "These are the companies we really like but right now these stocks are trading at unrealistic values. You'd need $12 or $13 gas for these numbers to fly." These stocks have now corrected and we've written them up in our Alert Service. We're working on a full feature on Utica Shale plays, and I think the area's going to get a lot of excitement. We're working on an Eagle Ford Shale report, too. The report of this year for me personally shows an area where we're ahead of everybody and it's an untold story. I've been banging on the drum for three years about this. It's a European shale story; it is just starting to get hot.
When you have Gazprom (LSE:OGZD; Fkft:GAZ;RTS/MICEX:GAZP;OTC:OGZPY) come out and say, "Shale gas is bad; it's going to pollute all of the water of Europe, and our gas projects are economic comparably to the shale," you know that Gazprom is scared that they're going to lose their dominance in the European gas scene.
This is just starting, and the irony—there are fewer than 25 frac sets in Europe; that's to drill, frac and complete a shale gas well. On top of that, only three are modern. There are something like 2000 in the U.S. You'd want U.S. expertise there, with a management team that has drilled thousands of wells. So, again, I caution investors. If you're going to jump into European shale, get answers to a few critical questions first. Who is going to develop these lands? Where are these shales? What are the royalty rates? We have our top pick, and we warn subscribers and investors to be careful of what they're doing because Europe is a very fragmented sector, a very difficult place to get things done. So European shale, which no one's really talked about it yet, will be coming up in our next report, and I'm very excited about that.
TER: I understand you're planning another conference, too.
MK: We are. It's Crisis Investing Opportunities and it's going to go from April 30th through May 2nd in Las Vegas. Doug Casey, Louis James, Bud Conrad, Alex Daley and Rick Rule—we have a whole list of characters coming out, some big names, the best in the mining, energy and tech sectors. We have a panel, with everyone giving three top picks. After the last conference in Denver, everyone's picks at least doubled. Mine gained an average of 500%. And the companies we like will be there, some virtually unknown in the market. It's going to be an exciting show, and I look forward to it. This is definitely a show you want to see.
TER: We'll see you there.
Investment Analyst Marin Katusa is the senior editor of Casey's Energy Report, Casey's Energy Opportunities and Casey's Energy Confidential. He left a successful teaching career to pursue what has proven an equally successful—and far more lucrative—career analyzing and investing in junior resource companies. With a stock pick record of 19 winners in a row—a 100% success rate last year—Marin's insightful research has made a great deal of money for his subscribers. Using his advanced mathematical skills, he has created a diagnostic resource market tool that analyzes and compares hundreds of investment variables. Through his own investments and his work with the Casey team, Marin has established a network of relationships with many of the key players in the junior resource sector in Vancouver. In addition, he is a member of the Vancouver Angel Forum, where he and his colleagues evaluate early seed investment opportunities. Marin also manages a portfolio of international real estate projects.
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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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