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Invest Your Cash in Colombia's Oil and Brazil's Iron

Commodities / Resources Investing Jun 04, 2010 - 02:31 AM GMT

By: The_Energy_Report

Commodities Best Financial Markets Analysis Article guru Carmel Daniele is none too concerned with the euro debt crisis, hemorrhaging oil in the Gulf or depressed natural gas. She's too busy making money. Whether it's oil in Colombia or potash in Peru, she's always looking for ways to improve the fortunes of her namesake CD Capital Private Equity Natural Resources Fund. In this straightforward interview with The Energy Report, Daniele shares with us her favorite emerging markets and investment opportunities for those willing to place some faith in London's commodity queen.

The Energy Report: What effect will the debt crisis in Europe have on oil prices?

Carmel Daniele: I have to say that the debt crisis in Europe has been blown completely out of proportion. Nearly 70% of the euro-area economy is made up of three countries: France, Germany and Italy. So unless the sovereign debt crisis derails their economies, I just can't see how the euro area can weaken sufficiently. Also, from a global perspective, Greece is quite small. China is 14 times bigger than Greece. In the meantime, we've got the U.S. economy rebounding. When the markets catch up and realize all this, I think that the oil price will increase again. Also, oil is one of the best hedges against inflation. With all the money supply being printed and inflation creeping in, there will be more investment in oil. I see the oil price going higher.

TER: Are you willing to specify a range?

CD: It's very hard to predict, but I think around $80–$90 is the level where everyone seems to be relatively happy.

TER: You mentioned Greece as being a relatively small economy, but we know that Spain is having some debt issues, as well as Portugal and Ireland. If there is contagion, is that cause for concern?

CD: France, Germany and Italy basically constitute 70% of the euro area, so they are the key.

TER: How solvent is the UK right now?

CD: I think that the UK will be fine. They were wise not to go into the euro back in 2000. London has historically been the mining finance center of the world. So, if the commodity super-cycle continues for another 20 years—which I believe it will—I think the UK should be fine. In the short term, there is talk about increasing taxes. But I think the biggest risk is if taxes increase to such a level that it provides a disincentive for businesses to be headquartered here, there will be a mass exit to other jurisdictions. However, the current government is quite sensitive to that and would not do anything drastic to jeopardize London's status as one of the key financial centers of the world.

TER: You started the CD Private Equity Natural Resources Fund in 2006 to take advantage of the commodity super-cycle. So far, oil is doing pretty well, but natural gas is below expectations. What's your take on what's happening with natural gas?

CD: Gas always has really violent cycles. I haven't really invested a lot in gas, but I think now would be a good time to invest because it's so cheap, and I can't see it staying this low.

TER: Any particular plays in the gas sectors that have caught your attention?

CD: There's one private company that I've invested in called Tourmaline Oil Corp. Its focus is on the western margin of the Western Canadian sedimentary basin, where the remaining targets are larger and where its staff has had considerable success in the past. These targets include the Alberta deep basin tight gas sands, unconventional gas resource targets and deeper conventional Devonian carbonate reservoirs. The management team, headed by Michael Rose, has had success more than once in the past in building similar companies, like Durvaney Oil, and selling them to majors. I wouldn't be surprised if the company were to be sold prior to a listing. This is one of the most liquid private companies I have come across.

TER: One of the biggest stories on this side of the ocean is the oil spill in the Gulf of Mexico. What effects do you see the spill having oil market?

CD: I was reading the other day in the Financial Times that the market is overstating the damage to BP and that the damage done to their market cap is greater than the cleanup costs and liabilities. I get the feeling that U.S. lawmakers will be in a hurry to make sure an accident like this doesn't ever happen again. They'll probably push through some legislation that impinges upon Gulf producers' earnings; there will probably be stronger enforcement of safety standards and a rise in the current liability cap. This will all impact Gulf producers' bottom-line earnings.

TER: Do you see the oil spill creating investment opportunities?

CD: We have been looking at oil and gas investments in general and not specifically looking to capitalize on the Gulf of Mexico spill. We invest quite heavily in private companies. One of them is a private Brazilian oil and gas company called HRT Oil & Gas, with properties in the Solimoes basin of Brazil. They have recently done deals in Namibia with the government and entered into a joint venture with Universal Power Corp. (TSX.V:UNX). The properties are close to the Petrobras (NYSE:PBR) fields in the Solimoes basin, which had a further discovery recently. The management team is one of the best in the planet, headed up by Dr. Marcio Rocha Mello, who has over 24 years experience from Petrobras and is considered a world leading expert in Petroleum geochemisty and exploration.

TER: What about some publicly listed oil and gas companies that you have your eye on?

CD: The other oil and gas plays we have our eye on are in Colombia. I was there not long ago, and basically Colombia is a geologist's dream. It is very rich country with about two-thirds of the country untapped. One of the properties that we visited belonged to Pacific Rubiales Energy Corp. (TSX:PRE; BVC:PREC), which is headed by some very impressive Venezuelans who have the expertise to develop the oil there given their experience in building Venezuela's Petróleos de Venezuela, S.A. (PDVSA) before Hugo Chavez's nationalization campaign.

TER: What is the other company?

CD: The other one, Canacol Energy Ltd. (TSX:CNE), has only about a fraction of the market cap of Pacific Rubiales and is often referred to as the "poor man's Rubiales." Management at Canacol has estimated the un-risked resource for its blocks at 5 billion barrels oil in place, which is comparable to the Rubiales field, with 4.2 billion barrels oil in place. Mackie Research, a brokerage firm in Canada, believes that, with exploration success, Canacol has the potential to establish a reserve of similar size to the Rubiales field. We are also keeping an eye on Gran Tierra Energy Inc. (NYSE.A:GTE; TSX:GTE), PetroAmerica Oil Corp (TSX:PTA) and Parex Resources (TSX.V:PXT).

TER: Are you looking at oil and gas suppliers?

CD: Yes, the oil and gas companies in Latin American are all cashed up and looking to spend it on services and drilling. Tuscany International Drilling Inc. (TSX:TID), which listed about two months ago on the Toronto Stock Exchange, is positioned to take advantage of all these cashed-up oil plays in Latin America. It's the same management team that built up Saxon Energy services and sold it to Schlumberger and an investment fund consortium. The management has developed excellent relationships with Pacific Rubiales, Gran Tierra Energy, HRT Oil & Gas and many other players in the region.

TER: What else did you learn on your recent trip to Colombia?

CD: As I said, Colombia is really a geologist's paradise. It's a rich country that has opened up to the world, with two-thirds of the country ready to be explored for the first time. It's a lot safer than it used to be. I felt very safe there; it's changed completely. A lot of the big resource companies are scrambling to open offices there, whereas a few years ago they would not go anywhere near it. Colombia is absolutely booming. The government is very investor friendly; very environmentally conscious, as well. They want some of the bigger players that are environmentally conscious working on their properties rather than the small operators that are probably not as environmentally friendly. The other thing that I noticed was that the Colombian pension funds have a lot of money to deploy and they want to deploy it in their own country.

TER: What size are these funds?

CD: Multibillion-dollar funds. They manage roughly US$40 billion and are growing by about US$400 million to US$500 million monthly. I think it's very exciting when they start investing in their sector.

TER: Are you saying that these funds could create opportunities in terms of publicly listed companies?

CD: Yes, they create a lot of value because they can go in and buy oil and gas companies listed in their country on the Colombian exchange. That drives up the price and creates more liquidity for companies that are dual-listed there. That is what happened to Pacific Rubiales when it listed on the Bogota Exchange, and Canacol is looking at doing the same soon and should benefit in the same way.

TER: One of the reasons you started your fund was to take advantage of the burgeoning middle class in places like China and India. Tell us about the prospects for China considering recent reports that growth there will be somewhat below projections for at least 2010 and possibly 2011.

CD: The thing is China still has its foot on the accelerator and it's growing. It may not be growing as fast as we first expected, but we also have to remember that it's growing from a larger base. The impact is still huge. I'm still very bullish on it. China overtook the U.S. in the number of cars that it purchased in 2009 and more cars means more oil. There are 1.3 billion people in China; 300 million with spending power. It's obvious when you do the numbers that the Chinese will continue to buy as many cars as the 300 million Americans have for the last 20 years because they have five times the population. In China, 1 out of 10 people owns a car. Can you imagine when they catch up to the U.S.? They'll consume a lot of oil.

TER: What sort of opportunities is that creating for you and what companies are you following that are directly positioned to capitalize on China's advances?

CD: China is still on the hunt for acquisitions. It acquired Emerald Energy Plc., which had properties in Colombia, a while ago for about half a billion. They seem to like Latin America for oil and gas lately as they've done quite a few deals there. We are already seeing this wave of M&As (mergers and acquisitions) with overseas oil and gas M&As by Chinese and Indian oil companies bound to reach a record high in 2010. In the first half of this year, overseas M&As reached US$16 billion, surpassing the previous record set in 2009. I'm interested in world-class oil and gas plays in Latin America that have the potential to grow to a sufficient size to attract China and India.

TER: China is stockpiling or has cornered the market on some strategic metals like lithium and rare earth elements. Anything appeal to you in the rare earths space?

CD: One company in rare earths that is quite interesting is a company called Dacha Capital (TSX.V:DAC; OTCQX:DCHAF). They try to stockpile rare earths to control the physical market. They're buying it, stockpiling it and storing it. I know that China has a monopoly and is trying to make sure that it controls rare earths. Of course, the Japanese are trying to break that monopoly by looking for acquisitions. So it will be interesting to see how Dacha Capital goes.

TER: You talked earlier about how many cars are going to be purchased by the Chinese in the coming years. That means that they'll need a lot of steel, and that means a lot of iron. What's happening right now in China's iron sector and how do you see that playing out in terms of investment possibilities?

CD: I love iron ore. I've actually liked it for a long time because of the market dynamics. Asia (excluding Japan) is estimated to spend over $2 trillion in the next five years just building infrastructure. It has been estimated that the world will spend US$41 trillion in infrastructure from 2005 to 2030. You look around for supply and there aren't many new major producing iron ore mines coming on stream. The only one that's gone into production since the start of the super-cycle is Fortescue Metals Group Ltd. (ASX:FMG) in Australia; and even they have announced cutbacks to supply due to the Australian super tax. Three-quarters of the world's seaborne iron ore supply is controlled by three players, Rio Tinto Ltd. (LSE:RIO; NYSE:RTP; ASE:RIO), BHP Billiton Ltd. (NYSE:BHP; PKSHEETS:BHPLF) and Vale S.A. (NYSE:VALE).

China, on the other hand, consumes roughly 70% of the world's supply and doesn't control price. It has desperately been trying to control pricing, without much success. It tried to take a 19% stake in Rio Tinto during the crisis, which would have given them a seat at the negotiating table but that fell through. So you've got these three players that control supply and China who just can't get enough iron ore and that's why we've had a 100% increase this year in the benchmark iron ore price—something that we haven't seen before in history.

The other interesting thing is that China needs to blend the Australian iron ore with the Brazilian iron ore due to high impurities like phosphorous and alumina in the Australian product. So I prefer Brazilian iron ore plays at the moment, and the added bonus is they are not subject to the Australian super tax.

TER: Is there a Brazilian iron ore play worth looking at?

CD: There's a company called Ferrous Resources Ltd. They've got over 4.5 billion tons of iron ore, and it's growing at a rapid rate. They are all cashed up with US$500million in the bank. They've put together a world-class management team from Brazil. CEO Mozart Litwinski was formerly with Companhia Vale do Rio Doce (Vale), and the Executive Chairman Gordon Toll is ex-BHP and Rio Tinto and was previously non-executive chairman of Fortescue Metals Group. Ferrous Resources is my favorite iron ore story.

TER: You're a big believer in potash, too, which plays an essential role in fertilizer. What are some companies with promising projects in that commodity?

CD: There are two private ones that look very promising. One of them is called Brazil Potash Corp. , which will take advantage of Brazil's chronic shortage. Brazil imports 90% of its potash and the country has a growing agricultural market, so its demand for potash will grow. The other one is called Satimola, with potash in Kazakhstan. That one's close to China and has the potential to supply China's needs for potash for the next 100 years.

In the public space, a promising one is Americas Petrogas Inc. (TSX.V:BOE). It started off with oil and gas in Argentina, but it is now monetizing its potash deposit in Peru, GrowMax, which could ultimately be spun out to shareholders. The potash deposit is unique because you don't have to build infrastructure and you can get it into production fairly quickly as near ports, highways and towns and is also near Vale's phosphate plant. Very recently, the Indian Farmers Fertiliser Cooperative came in as a strategic investor.

TER: Thanks so much Carmel. Very informative, as always.

Carmel Daniele is the founder of CD Capital and CEO of the CD Private Equity Natural Resources Fund. The Fund's investment objective is to achieve capital growth through pre-IPO and pre-trade sale companies in the natural resources sector, targeting opportunities that deliver substantial returns on exit. Carmel was previously focused on selecting and negotiating natural resource investments for the Special Situations Fund at RAB Capital. Prior to this she was a Group Executive in Corporate Advisory at Newmont Mining, negotiating and structuring mergers and acquisitions around the world for the Newmont Capital group which included the US$24 billion three-way merger between Franco-Nevada, Newmont and Normandy to create the largest gold company in the world.

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.

1) Tim McLaughlin of The Energy Report conducted this interview. He personally and/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 The Gold Report or The Energy Report: Avalon, Salares Lithium.
3) Michael Berry: I personally and/or my family own shares of the following companies mentioned in this interview: Salares Lithium, Quaterra Resources. I personally and/or my family are paid by the following companies. None.

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