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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Japan Crisis Is Not the End of Nuclear Power

Commodities / Nuclear Power Mar 24, 2011 - 08:33 PM GMT

By: The_Energy_Report

Commodities

Best Financial Markets Analysis ArticleJohn Pugsley has been publishing The Stealth Investor newsletter for the past five years, producing a recommendation record that is enviable by any standard. In this exclusive interview with The Energy Report, John reveals his current thinking on energy-related investments in light of the global economic situation and the effects of the catastrophe in Japan.

Editor's Note: Shortly after this interview was recorded, Mr. Pugsley suffered a major heart attack. Our thoughts are with him and his family as we share his insights. New subscriptions to The Stealth Investor have been temporarily suspended.


The Energy Report: Good morning, John. We're glad to have this opportunity to get your current thoughts on energy-related investment areas. Currently, the biggest things on our readers' minds are the situation in Japan, its resultant impact on the entire energy sector and where opportunities might lie now. When you last spoke with The Energy Report in April 2010, you told us about your record with The Stealth Investor . At that point, your portfolio was up about 147% versus the S&P 500, which was down 5%. Can you update our readers on how those percentages compare today versus a year ago?

John Pugsley: March 10 was the 5th anniversary of The Stealth Investor. The five-year period saw a lot of turmoil, as we all know, from the 2008 collapse. And a five-year period is long enough to compare our index to the others. Since our inception, the Dow Industrials are up 10%, the S&P 500 is up 3% and the NASDAQ is up 23%. One of the benchmarks I tend to use is Warren Buffett's Berkshire Hathaway, and it's up 40%. The Stealth Investor, if you count every buy and sell recommendation we made (and someone followed it to the letter), would be up 219%. So, we've done nearly 5x as well as Berkshire Hathaway. Over five years, the very best U.S. stock fund did 14.79% annual growth; The Stealth Investor did 16.7%. So, if we were ranked as a mutual fund, we would've been the number-one stock fund in the United States by more than 20%.

TER: How have you been able to do that?

JP: We've found a very small niche that none of those players can get into. We look for a certain type of stock that just doesn't work for them, nor does it work for most newsletters. The majority of newsletters need a lot of subscribers, and their buying can spike the price of a recommended stock. So, if it's a very tiny stock, like those we tend to look for, it just doesn't work for most newsletters either. Brokers don't follow these stocks and investors don't hear about them. That gives us a very substantial edge, which shows up in our performance.

TER: You said part of the reason you have this remarkable return is that you're going into areas the larger players can't get into due to sheer volume. Is that just one of the elements you choose (because you could've gone toward any number of other small-cap stocks in other sectors)?

JP: Yes, I'm focused on natural resources because I believe the whole economic system is in real trouble. For a number of years now, as the world's central banks print money, the only things that will hold value are tangible goods—the most stable of which are raw materials. So, our focus on natural resources is aimed at offsetting the inevitable collapse of currencies.

Several hundred years ago, the first experiments with paper money began as IOUs for some type of natural resource. Over the years, the people who developed the banking system and politics began to realize they could milk the monetary system. Until 40 years ago, almost all currencies were backed in one way or another. They were promises to pay a real good. In the most-recent century, it's been gold and silver. When President Nixon broke the Bretton Woods Agreement apart 40 years ago and decided the U.S. dollar was no longer exchangeable for gold, it was the first time in 5,000 years that money—in any country—was backed by absolutely nothing. This has not fully unraveled yet—but it's beginning to, which is why I'm more convinced that we are heading into a real monetary Armageddon.

TER: Your comments make a strong case for investing in gold and/or silver as a monetary investment. Yet, The Stealth Investor is invested in far more than just gold and silver. So, what's the rationale for those other investments?

JP: Gold and silver are very interesting, but they are more of a psychological monetary base than a real one. Gold has been considered money, but there isn't much real use for it other than as a monetary metal; so, it's driven by speculation more than utility. Silver is a little different because it has a lot more utility now than it did 100 years ago and many new and different uses. Gold, particularly, will be driven up and down by the psychology of the marketplace, fear of inflation or concerns about the general condition of paper money. Other commodities, such as copper, zinc, steel and phosphates—all those things we use—are really priced according to demand for their utility value and the supply that can be brought out of the ground or raised in crops. There's far more stability in looking into these other things and far less tendency for the prices to hit extraordinary highs or lows.

We could see some of this back in 1980. In the last part of the 1970s, we began to go into inflation. At the beginning of the '70s, gold was fixed at $35/oz. Then it jumped up and nearly tripled to $100, bobbed up and down, and then went through a speculative spike at around $800. In today's terms, that would be roughly $3,000 or so. You wouldn't see such an enormous spike in any of the other commodities, such as copper, oil or phosphates for fertilizer. One of the dangers of both gold and silver is that a lot of speculation is built into them versus other commodities. I think you get a much sounder long-term picture when you look at a broad basket of raw materials and commodities.

TER: For years, the uranium market had been in the doldrums, as some thought nuclear power was just too dangerous or uncertain. Recently, it started to come back with news of plans to build many new plants the world. What impact will the Japan situation have on that thinking? Will people be up in arms again saying that nuclear power is too dangerous? Will we have a setback in uranium?

JP: Well, I don't doubt that what's happened in Japan will light a fire under the green movement. I just read a headline that there's a movement in France to completely abolish nuclear as a power source. The public and, therefore, the politicians will be catering to this. There's going to be a backlash against nuclear power here but, despite the catastrophe in Japan, it won't be the end of nuclear power.

There is such a growing thirst for power of all kinds that we won't be able to avoid using it. There aren't many places in the world that would experience such a catastrophe as the one in Japan. Its nuclear power plants are all along the coastline, where both earthquakes and tsunamis are possible. France, England and most of the other global areas that require nuclear power won't have tsunamis. China would be a good example. Global demand for power is going to grow toward that in America. So, these countries would have to use a lot more fossil fuel or go to nuclear power.

We can use wind power and develop solar power, but these things are miniscule. Yes, geothermal is a power source, but it's restricted to the places it can be found. Wind power is restricted to places where windmills have sufficient wind to propel them and solar power depends upon the sun, which goes down at night. So, really, the only two power sources we can rely on at this point are fossil fuel and nuclear. I just don't believe we'll be able to abandon nuclear—the demand for it will be too great. Engineering progress will be such that we will solve these problems. So, I have a great belief in the long-term need for and use of nuclear power.

TER: You briefly touched on geothermal, and now people are starting to realize that it can be harnessed to produce hydroelectric power in numerous areas around the world. Do you have some thoughts on how our readers can profit in that arena?

JP: I think geothermal is an excellent area for investors. The market hasn't looked favorably upon geothermal in the last couple of years. One of the reasons is that it takes a lot of time and an immense amount of capital to develop a geothermal resource. There are four juniors companies in the field right now. One would be Nevada Geothermal Power Inc. (TSX.V:NGP). The others would be U.S. Geothermal Inc. (TSX:GTH; NYSE:HTM), Magma Energy Corp. (TSX:MXY) that Ross Beaty started and Ram Power Corp. (TSX:RPG). All of them are very cheap because geothermal hasn't gotten investors excited.

Of the four, I think Ram is the cheapest. It got hit when the founder of the company, Hezy Ram, quit. That was based on some problems the company had in developing its resource in Nicaragua. This spooked the market and Ram stock sold way off—down to about $1.20. I think it's a tremendous buy. We bought it at a lot higher price. I think $3.50 was the price at which I recommended buying it—and no more than that. All of a sudden the whole thing began to collapse. It dropped way down, but I'm about to put out a buy order for Ram again because I think the fundamentals are there and the company's going to do just fine. Ram just received a $50 million, two-year-term loan credit facility. It's a great buy at the price it's at right now, based on what I know is happening down there and the people that are involved.

We had another company in our portfolio, Western Uranium Corporation (TSX.V:WUC), but it isn't principally a uranium company anymore. Western Uranium's more of a merchant bank, so it fell from grace and dropped down. When we bought it, it was selling at half its cash costs. Actually, it now owns enough shares (in cash) of Western Lithium USA Corp. (TSX:WLC; OTCQX:WLCDF) that it's selling at a discount to the combination of the two. Basically, all of its liquid assets total more than its market cap. That doesn't even take into account all of the other assets the company has or the prospects for growth. I think Western Lithium is a buy right now, as well. So, I would go after the two stocks that I happen to have in the Stealth portfolio currently; and we'll probably go in and add more to them. I think both Western Uranium and Western Lithium are great buys.

TER: Do you have any further thoughts on junior uranium stocks in general given the current situation in Japan?

JP: Oh, I think it's going to create a great buying opportunity for uranium stocks—but I would just watch them for a while. We've been involved in Rockgate Capital Corp. (TSX:RGT), which has been a tremendous winner for us—up three or four times in a very short period of time. The company's got a tremendous property in Africa, but it dropped 25% in one day due to this uranium scare. So, my feeling is that I'm just going to wait and watch to see what happens with uranium stock prices. My guess is they're going to tumble awhile longer as this gets sorted out. How that will play out in the next month or so is unknown. We may see uranium stocks melt down, and that could be a great buying opportunity for the long term. Incidentally, I might add that I don't believe in short-term trading at all. When we look at a company, we expect to go in for one to four years before these things begin to develop and reach their true potential. So, when I look at uranium and we get in at the bottom, we don't expect it to turn around instantaneously. It's going to be a long-term investment.

TER: Is it possible that the Japan situation will scuttle planned nuclear facilities or those under construction? And, if so, what impact will it have on uranium demand?

JP: Japan has a real power problem now, as the county is having brownouts due to plant shutdowns. So, it can't afford to shut the rest of the nuclear plants down. It has to keep them running in order to supply the country's power needs, and it just doesn't have any other power. That's a highly electrified nation. I don't think that would be cut back, so I believe the demand for uranium will still be there.

TER: When you commented that Rockgate went down 25% in one day, you said: "I'm waiting and watching." What are you looking for, and when do you see it being a buy or a sell decision?

JP: It would be a buy decision, no question. Rockgate has a wonderful deposit. We certainly won't sell unless it looks like the uranium stocks are going to take a much greater dip. As a matter of fact, last week I was about to suggest that we pull a little cash off the table because Rockgate had done so well. But March 11 blew that out of the water; so, right now, I think I'll just wait to see where the dust settles with the big reactors in Japan and decide when to add to the position.

TER: Would you be adding only to your RGT position, or would you add to other uranium positions and/or take new positions?

JP: Well, Rockgate is our major uranium position right now. Western Uranium, as I said, is no longer principally in uranium. But I'll certainly be looking for other alternatives out there and surveying uranium stocks in the market—the small ones that might have some potential. Right now, however, Rockgate is it. We did have a position in Kalahari Minerals plc (LSE:KAH; NSX:KAH), which has a part of that big Exeter Resource Corp. (TSX:XRC; NYSE.A:XRA; Fkft:EXB) position in Africa, and has done extremely well for us.

TER: Can you give us some final thoughts on where you think investors should concentrate their sights in the energy sector, given the economic, geopolitical and geophysical forces at work in today's markets?

JP: Well, it's an interesting world out there energy wise. Cuts in Libyan exports by some 800,000 barrels per day (bpd) have pushed the oil price up 10% or 15%. This is a very interesting event because it shows just how tight oil supplies are around the world. Rick Rule, founder and chairman of Global Resource Investments, frequently has pointed out that most oil production is not under the control of the big oil companies like Exxon Mobil Corp. (NYSE:XOM), Royal Dutch Shell Plc (NYSE:RDS.A; NYSE:RDS.B) and BP Plc. (NYSE:BP; LSE:BP).

The major oil-producing countries like Venezuela are actually controlled by their governments. In many cases, these governments are pushing the profits from those oil exports into social programs rather than putting them back into doing what they should—investing in the infrastructure of growing oil supply. So, we're going to see a gradual reduction. Rick has suggested several times that we're going to see the major oil-producing countries like Venezuela and Mexico suddenly becoming importers, which would have another big effect on the market. To me, this means there's a lot of opportunity to profit in the oil and gas, natural gas and uranium sectors, as well as some of the other energy sectors like geothermal.

TER: John, you gave a wonderful overview for oil and its tight supply in the market. Are you following any oil juniors that you might recommend?

JP: We have a few, and nearly all are Canadian companies. We're into Canadian Phoenix Resources Corp. (TSX.V:CXP), which is one of the companies I've followed for a while. We started buying it at $0.50, and it's up to around $1.38 right now. Canadian Phoenix is one of the companies that I like very much.

We've also got Novus Energy Inc. (TSX.V:NVS), which is a little bit bigger. We bought NVS at $1.05, and it's around $1.23 now—above the price we'd be willing to pay for it. Basically, we're looking at geothermal in the portfolio right now, in terms of oil companies. I think all these commodities will benefit from the nuclear event in Japan and resultant nuclear backlash.

TER: John, we really appreciate your time you've taken to bring us up to date on your thinking and know our readers will find it very useful in these hectic investing times. Thanks, again.

JP: Thank you.

John Pugsley entered the investment business in the late 1960s and began sharing some of what he learned through his first book, Common Sense Economics. The book sold more than 150,000 hardcover copies. The second book he penned—The Alpha Strategy: The Ultimate Plan of Financial Self-Defense for the Small Investor, spent nine weeks on the New York Times bestseller list and is considered a standard reference for stocking up on food and household goods as a hedge against inflation. He started Common Sense Viewpoint, an investment-economic newsletter covering political, economic and investment topics, in 1975 and published it for 10 years. At its peak, it had more than 30,000 subscribers. He then wrote and published John Pugsley's Journal for another decade. A popular speaker and talk show guest, prolific author and successful investor, John is currently pouring his experience and energy into Stealth Investor, a weekly stock advisory that alerts subscribers to potential investments beneath the radar of the big funds and brokerage houses. (Please note that new subscriptions to Stealth Investor have been temporarily suspended.)

Want to read more exclusive Energy 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 Expert Insights page.
DISCLOSURE:
1) Brian Sylvester and Karen Roche of The Energy Report conducted this interview. They personally and/or their families own shares of the companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: None.
3) Greg Gordon: See Morgan Stanley disclosure that follows.*

*The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley C.T.V.M. S.A. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. Incorporated, Morgan Stanley C.T.V.M. S.A. and their affiliates as necessary.

For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA.

The ENERGY Report is Copyright © 2010 by Streetwise Inc. All rights are reserved. Streetwise Inc. hereby grants an unrestricted license to use or disseminate this copyrighted material only in whole (and always including this disclaimer), but never in part. The ENERGY Report does not render investment advice and does not endorse or recommend the business, products, services or securities of any company mentioned in this report. From time to time, Streetwise Inc. directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.


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