The underlying index uses a modified capitalization weighting with “pure play” companies receiving an 80% allocation and “diversified” companies receiving just a 20% allocation. The expense ratio will be capped at 0.70% for two years.

The top sectors are currently Industrials 42.2%, Technology 15.1%, and Utilities 7.0%. Top holdings include SMA Solar Technology AG 12.1%, Schneider Electric S.A. 8.9%, ITC Holdings 7.1%, Quanta Services 7.0%, and NGK Insulators 6.9%. I could not find information on country breakdown.

Additional information can be found in the Smart Grid Investor Guide, ETF summary page, fact sheet pdf, and list of complete holdings.

Ron Rowland
Invest With An Edge

Disclosure compliant with FTC 16 CFR Part 255 covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Let’s take a practical example and look at some of the dynamics behind the Nabucco pipeline and at the different interests involved.

Nabucco and the competing projects

Nabucco is a 3,300 km natural gas pipeline going East to West, with a capacity of 31 billion cubic meters (bcm) per year that would reduce Europe’s dependency on gas supplied by Russia. It will go from Turkey to Austria via Bulgaria, Romania, and Hungary. That project would be in direct competition with the Russian-endorsed South Stream pipeline, with a capacity of 63 bcm per year, that would start from Russia and end in Austria but with two prongs: one via Bulgaria, Greece, and Italy, and one via Serbia, Hungary and Slovenia. Nabucco’s estimated cost is about  €8 billion with a completion date of 2014 while south Stream’s estimated cost is from  €19 to €24 billion with a completion date of 2015. South Stream was launched in 2007 when Russia’s President Dmitry Medvedev was then Chairman of the Board of Directors of Gazprom, Russia’s largest company and the world’s largest gas producer.

Nabucco and the supplier countries

Formidable battles have been taking place between the Nabucco and South Stream backers to sign supply agreements, not only to guarantee that the much needed gas will be made available – as underutilizing the pipelines is not a viable option – but also to secure a political and financial will for the projects. Gazprom is engaged in a battle to preempt gas supplies and to keep European countries from what it considers as a Russian natural chasse guardée such as Azerbaijan and Turkmenistan, though both countries have pledged to supply Nabucco as they understand their vulnerability by not having several export routes.

The courtship is ongoing and in October 2009, Alexey Miller, Chairman of Gazprom, personally went to Baku, Azerbaijan to sign a long-term natural gas purchase and sale contract with the State Oil Company of the Azerbaijan Republic (SOCAR). Following the signature, Miller made a statement, which gives a good insight on what is at stake: ”Russia and Azerbaijan have a common border and have already been connected by the unified infrastructure. This enabled Gazprom to propose the State Oil Company of Azerbaijan Republic the most attractive commercial terms and conditions of gas purchase. Our partnership is logically consistent and fully meets our mutual interests. I am confident that in the coming years the volume of Azerbaijani gas supplied to Russia will increase.”

This statement and contract are interesting because the agreement provides for a supply of 500 million cubic meters starting in January 2010, with potential increases depending on Azerbaijan’s export potential. This comes at a time when Gazprom has interrupted its deliveries of gas from Turkmenistan since April 2009, arguing a lesser demand from Europe. A few days after being in Azerbaijan, Miller was meeting with the President of Turkmenistan but no decision was reached regarding resumption of gas imports from Turkmenistan.

Who is holding whom by the tail?

The dynamics around Nabucco when looked at closely highlights a web of sweet deals corresponding to a complex reality of entangled needs.

Russia has very aggressively pursued locked-in supply agreements for extensive periods of time. The initial idea is that getting a deal in first could work towards keeping other players out. That approach did not end up creating exclusive relationships as countries such Azerbaijan and Turkmenistan appear to have enough supplies to satisfy multiple parties. Pricing agreements were also locked in for specified periods of time but the tumble in world energy prices put Gazprom in a dire situation: Gazprom is reported to have been paying $375.50 per thousand cubic meters (tcm) for Turkmen gas while only paying $217/tcm for Kazakhstani gas and $210/tcm for Uzbek gas. An “unfortunate” explosion in April 2009 that the Turkmens blame on Russia hit the pipeline connecting the two countries and deliveries have stopped. Gazprom stated it had not intention to resume purchasing Turkmen gas in 2009. Turkmenistan is said to be losing $1 billion/month over this issue. With Turkmenistan, Gazprom has a 25-year sale and purchase agreement Turkmenneftegaz signed in 2003. Prices were locked below world market prices, at less than half the price Europe was paying for its gas.  Subsequent price increases were negotiated but in exchange for the promise of higher delivery volumes with 60 bcm of gas in 2007, 60-70 bcm in 2008 and subsequently export up to 80 bcm annually through 2028.

Needless to say that Turkmenistan’s announcement in July 2009 of its willingness to provide gas to Nabucco does not come as a surprise in this context. Similarly the completion in October 2009 of $400 million 188-km section in Turkmenistan of a 7,000 km natural gas pipeline that will reach China is an important step towards diversification. The Turkmen government stated: “Getting gas supplies to China will mark another important milestone in the successful implementation of Turkmenistan’s strategy of diversifying energy export routes to world markets.”

Turkmenistan has been assiduously courted because of it immense gas reserves. In 2008 the oil advisory firm Gaffney Cline & Associates (GCA) conducted a study on the South Yolotan-Osman field and determined that that field alone was the fifth largest in the world, with an estimated 4 trillion to 14 trillion cubic meters of gas. That good new was tampered in October 2009 when reports surfaced that GCA may have been misled (see article: “Turmen Gas – Caveat Emptor” http://www.oilprice.com/article-turkmen-gas-caveat-emptor.html). In any event, the potential of Turkmenistan should not be underestimated.

Nabucco and the transit countries

Several Eastern European countries have been turning their back to Russia and have joined the European Union, espousing the EU’s energy security objectives to reduce its dependency on Russia gas.  The January 2009 showdown between Russia and Ukraine, which resulted on the gas supply to be cut to most of Europe in the midst of winter, could only serve as a wake-up call for the need to diversify energy routes. Bulgaria – which has the ambition to become an international gas hub and that is a party to both the Nabucco and South Stream projects – will benefit from that situation, notably by increasing its bargaining position to negotiate better energy agreements with Russia. It could, among other things, threaten to raise transit fees. Ukraine is using this threat against Russia and in September 2009, Gazprom expected Ukraine to increase gas transit fees by up to 58% in 2010. The stakes are high as transit fees represent a bonanza. While visiting Bulgaria in 2007, Vladimir Putin estimated that Bulgaria could earn up to $2.5 billion per year in transit fees alone.

Russia: just another shrewd player but…

One may think that Russia pockets the difference from rates below market prices, but the reality is that Russia uses the discounted gas for its own domestic needs. It also has been using it to supply Ukraine under very favorable terms, and Ukraine has been very vocal in resisting Russia’s attempts to raise prices. Note must be made that Ukraine imports the bulk of its natural gas from Turkmenistan via Russia. Countries like Russia and Ukraine have been resisting passing on price increases to end-users to avoid social unrest and have been struggling to keep non-competitive industries afloat. One way of doing so is by keeping the cost of energy low. The adverse effect is that Ukraine is one of the most energy inefficient countries in Europe.

A point must be made that Russia should not just be perceived as a natural bully but more as a wounded bear. Russia, like any country, is looking after its own interests and is not always subtle about it, even more so as it feels that everyone is ganging against her, rightfully or not. Russia is also confronted with its own economic reality, most notably the over reliance of its economy and state budget on oil & gas revenues. Efforts to diversify the economy have failed to generate visible results. It is therefore essential for Russia to secure a guaranteed income flow from the sale of it oil and gas, and from the oil and gas of its neighbors, that it buys to resale at a profit or that it routes through its extensive pipeline network for a fee. But things change: sourcing oil and gas from or routing it via Russia is no longer the only option.

… a new transportation mode is emerging

As the gas pipeline battles are under way, a new trend is emerging which is the transition towards Liquefied Natural Gas (LNG). That transportation mode of natural gas through seaborne tankers will open new markets, alleviate the dependency of some countries on existing pipeline routes, and reduce the number of players able to impact proper delivery and pricing.

This article was written by Philip H. de Leon for OilPrice.com – Who offer free information and analysis on Energy and Commodities. The site has sections devoted to Fossil Fuels, Alternative Energy, Metals, Oil prices and Geopolitics. To find out more visit their website at: http://www.oilprice.com

While a number of factors are responsible for this oversight, including relative geographical isolation (Uzbekistan, along with Liechtenstein, is one of the world’s doubly landlocked nations, requiring crossing two other nations to gain access to the oceans), which currently limits energy exports available for the global market, there are a number of pluses that the country has for investors willing to “think outside the box.”

With a population of 27 million, Uzbekistan is Central Asia’s most populous and dominant power. A conservative fiscal policy since 1991, including inconvertibility of the national currency, the som, has shielded its citizens from the hyperinflation that ravaged other former Soviet republics, but the policy previously diminished potential foreign investment.

Since the global recession that began a year ago, however, Uzbekistan’s fiscal conservatism, previously dismissed by the foreign investment community, has looked more and more like a pragmatic policy that isolated the country from the worst aspects of the recession in stark contrast to other post-Soviet states that fervently embraced free market capitalism like Lithuania, whose economy contracted 18.1% this year and is expected to shrink further by 3.9% in 2010. In a move certain to be welcomed by foreign investor Uzbekistan is slowly moving towards making its currency convertible but whenever it happens, for the present the country offers a fiscal stability unmatched by many of its more free-market neighbors.

And now, the good news about the country’s resources. In 2006 Uzbekistan’s natural gas reserves were estimated at 1.798 trillion cubic meters (tcm). During the Soviet era Uzbekistan was the USSR’s third-largest producer of natural gas, accounting for more than 10% of the Soviet Union’s production, trailing only Russia and Turkmenistan. In 1992, the country’s first year of independence, Uzbekistan produced 42.8 billion cubic meters (bcm) of natural gas. Uzbekistan currently produces 60 bcm of natural gas annually, an amount nearly equal to Turkmenistan’s production. Uzbekistan’s reserves are primarily concentrated in Qashqadaryo province and near Bukhara in the country’s south-central region. During the 1970s Uzbekistan’s largest natural gas deposit at Boyangora-Gadzhak was discovered in Surkhandaryia province north of the Afghan border.

Unlike its energy-rich neighbors to the West, Kazakhstan and Turkmenistan, nearly 80 percent of Uzbekistan’s production, about 48.4 bcm, is currently reserved for domestic use at heavily subsidized rates. Of the remaining 12 bcm of natural gas that Uzbekistan exports, more than half currently goes to Russia, with the remainder to neighboring Central Asian states.

Under Uzbekistan’s fiercely patriotic President Islam Karimov relations with Europe’s favorite bête noire, Russia’s state-owned gas firm Gazprom, have been subject to fierce negotiations to win an equitable price for the country’s exports. Like other former Soviet republics, the Uzbek government chafed under Gazprom’s "buy cheap, sell dear" policies and in early December 2008 scored a significant negotiating success by getting an agreement that in 2009 Gazprom would pay $305 per thousand cubic meters (tcm). To put the accomplishment in perspective, Uzbekistan’s state gas company Uzbekneftegaz sold gas to Gazprom for $130 per tcm in the first half of 2008, which then rose to $160 in the second half of 2008.

Those betting on the eventual pacification of Afghanistan and the subsequent pipelines that would crisscross the country to deliver Central Asian gas to the massive Pakistani and Indian markets would also do well to take note of Uzbekistan’s persistent, low key policies over more than a decade attempting to bring peace to its hapless southern neighbor. The initiatives put forward by Uzbek President Islom Karimov during the NATO summit in Bucharest in April 2008 take on heightened importance as one of the few foreign policy ideas offering some hope to quelling Afghanistan’s three decades of turmoil. The text of Karimov’s address is at http://www.jahonnews.uz/eng/sections/politics/address_by_president_of_the_republic_of_uzbekistan_he_mr_islam_karimov.mgr.

Nearly completely overshadowed by the Bush administration’s relentless efforts to have Georgia and Ukraine join the alliance, Karimov proposed that the UN’s Afghanistan "6 plus 2" assembly, established in 1999, be revived by expanding it into a "6 plus 3" ensemble by including NATO because of its anti-terrorist operations in Afghanistan among the "six" members Uzbekistan, Tajikistan, Turkmenistan, Pakistan, China and Iran and the "two," the United States and Russia.

Noting that that it is impossible to solve Afghanistan’s problems without the direct involvement of neighboring countries, which have felt the destructive impact of the Afghan crisis for more than 30 years, as Afghanistan’s problems are now of global nature, Karimov told his audience in Bucharest that their resolution must also be global, with the participation of members of the international coalition that comprise NATO’s International Security Assistance Force (ISAF). Karimov concluded by noting that the current situation in Afghanistan precludes a purely military solution and that while it is possible to continue increasing the foreign military presence there, without a clear model of national reconciliation it will be impossible to end the conflict.

Needless to say, one of the benefits of peace and the aforementioned pipelines for Uzbekistan would be that it could export its surplus gas through Afghanistan to southern Asian markets for a higher price than it receives at home or Gazprom’s miserly accountants. Acting on Tashkent’s belief that economic assistance is of greater utility than military operations, Uzbekistan has become involved in a host of reconstruction projects in Afghanistan, including railways, power generation, mining, agriculture, irrigation, education and the exchange of specialists as well as providing its neighbor with construction materials, metals, fertilizer, food and other goods. Uzbek companies and engineers have built 11 bridges in the Mazar-e-Sharif-Kabul area and are finishing the construction of a 275-mile high-voltage line capable of transmitting 150 megawatts from Termez to Kabul across some of the world’s most mountainous terrain, which when it becomes fully operational next month, will provide power and light not only to the capital but the country’s five northern provinces.

For now, Uzbekistan remains largely a transit country rather than a net energy exporter in its own right. But the fiercely independent nationalist policy that Tashkent has followed since 1991 indicates that any company whose policies most benefit the country will have an inside track, and as the old saying goes, “fortune favors the bold.” Chinese, Malaysian, Russian and South Korean companies have already begun investing in Uzbekistan’s energy infrastructure – what do they seemingly know that American and European companies do not?

This article was written by John C.K. Daly for OilPrice.com – Who offer free information and analysis on Energy and Commodities. The site has sections devoted to Fossil Fuels, Alternative Energy, Metals, Oil prices and Geopolitics. To find out more visit their website at: http://www.oilprice.com

A shining example of using the sun’s energy to heat, cool and light the homes and businesses of a desert community in California is poised to power up next year. It’s due in part to the emergence of a technology that uses refraction rather than reflection to produce solar power on a utility-size scale at half the price of photovoltaic technology. But major credit also goes to the pioneering efforts of REDCO, a privately held company, which Ryan Davies established last year to unite free-market concepts with sound environmental policy. The Energy Report caught up with Ryan in the midst of Solar Power International 2009, North America’s largest B2B solar industry event. The event in Anaheim was about 250 miles from the forward-thinking community of Needles, where Ryan’s company is awaiting permit approvals to build a solar thermal plant that will provide peak power to some 2,500 homes.

The Energy Report: Let’s begin with a little thumbnail of REDCO—what your company is and what you do.

Ryan Davies: Sure. REDCO—the Renewable Energy Development Company—is a developer of renewable energy projects. We have a particular focus on wind and solar. We look for good pieces of land that have a strong wind and/or good solar resource and that have good proximity to transmission lines. Sometimes we do joint-venture projects, sometimes we sell projects; but, for the most part, we like to own and operate our own developments.

TER: What brought you to the solar arena? Why do you see solar as a great place for investors to be or for energy to be created?

RD: We have an abundance of sun, and our ability to harness the sun’s energy and create electricity is a pretty remarkable opportunity. The primary demand for power generation or power consumption is during the peak hours of the day; it’s called peak power. That’s when usage of electricity is the highest and also when the cost of the electricity is the highest. So utility companies are constantly looking for ways to increase that peak supply of power.

Because it’s an intermittent power source—wind, sun, etc.—solar is not the answer. But it is an important part of the answer. It doesn’t provide 24-hour-a-day, 7-day-a-week power. What is unique about solar is not only is it renewable but it also provides power during the peak periods of the day, when the sun is shining, which is very valuable to utility companies.

TER: The government is encouraging utilities and individuals to use solar. Could you talk a little bit about that, particularly the cities or utilities?

RD: A number of different mandates and incentive programs are sponsored by both federal and state governments. The most common of which is called a "renewable portfolio standard"—the acronym is RPS. There is not a federal RPS at this point, but I believe about 24 or 25 states have adopted their own programs. Much of the growth in demand stems from these mandates.

With an RPS, a certain percentage of power produced must come from a renewable resource. So the utility companies have to either go out and buy green power on the open market or build their own facilities. Every state is a little bit different. In California, for example, the goal is to have 33% of power come from a renewable resource by 2020, and that initiative, that mandate, kicks in next year, starting at 10%. Then it increases by about 2.5%, 2.7% per year until it reaches that 33% mark.

TER: And aren’t some consumer incentives offered as well?

RD: Yes, from an individual standpoint, there are federal and state tax incentives and benefits if you include solar in your development or if you retrofit a business or home to include solar.

TER: You’re involved with two solar projects for Needles, California. Could you describe how that’s working?

RD: At REDCO we really pride ourselves in being technology agnostic; in other words, as we see our opportunity as a developer is to find a good piece of land with a strong resource, find the right technology for that development, put the entitlements and financing in place, build a project and sell the power. As we did our due diligence and looked for the right solar technology, we came across International Automated Systems, Inc. (IAUS:PK) and have become quite enamored with their technology. It’s very different from the conventional, traditional solar that you see in the marketplace today.

TER: How does it differ?

RD: The majority of the solar systems in the market today are photovoltaic—it’s a reflective, mirror-type technology where the sun’s rays hit a reflective surface and bounce off into a collector shield above it. The IAS technology is very, very different in that they’ve created a technology using simpler, less expensive materials. It’s easier and cheaper to mass-produce. Another unique attribute is that it is a refractive technology, wherein the sun’s light passes through the panels instead off of them. They collect heat, which then heats up a water source. The hot water turns into the steam that propels a turbine. The turbine spins a generator, which creates electricity.

As a result, it’s quite different from conventional solar and it’s much, much cheaper—quite a bit less expensive to purchase. We’re in the process of building the very first commercial plant using IAS technology. All of our engineering reports and research data indicate that this technology will be significantly more efficient than PV. We’re quite excited about it.

TER: Is this a patented technology that IAS has?

RD: There are a number of patents on the technology, covering various facets from proprietary panels to the bladeless steam turbine. Several different patents have been issued, and several are pending on various other aspects of the technology and process.

TER: What are some of the companies in the flat panel technology?

RD: Suntech Power Holdings Co., Ltd. (NYSE:STP), First Solar, Inc. (NASDAQ:FSLR) ‎and BrightSource Energy, Inc. are a few. A number of companies that have good technology are doing very well. But it’s almost an apples-and-oranges scenario in the solar market because IAS is quite a bit different. In our estimation it’s much better alternative for utility-scale use. In addition to being less expensive to build and more efficient, it has a longer life and requires less maintenance. Plus, this technology has a lot fewer restrictions. For example, the way it’s constructed and developed, you can put it on various types of terrain. You don’t need costly grading plans prior to construction. It’s easier to permit because it has a very low impact on the environment. We see a number of advantages.

TER: You say it’s less expensive. Could you give us a relative cost comparison between IAS and photovoltaic technology?

RD: When you look at costs, you have to look at the entire system—not just the solar panel but the overall development, including the turbine and all of a project’s components. From a turnkey perspective, the majority of the PV technologies sell somewhere in the range of $4 to $6 per watt. That equates to about $4,000 to $6,000 per kilowatt or $4 million to $6 million per megawatt. In most cases, the IAS technology is about half the cost.

TER: Wow! And that’s total cost, when you boil everything down?

RD: When you compare all aspects of the development, yes.

TER: What’s the timeline on your Needles project with IAS?

RD: Phase 1 is a 5-megawatt project. We have executed a long-term Power Purchase Agreement (PPA) with the Needles Public Utilities Authority, wherein they have agreed to purchase the power we generate for 20 years. We’re in the permitting stage and hope to be in construction early next year.

TER: Once you get the permit, how long will it take to complete the project and when will the city of Needles be able to start using that electricity?

RD: We’re looking at construction period of about four to five months, and then maybe a month beyond that for testing before we go online. So, all in, it’s a five- to six-month process from the beginning of construction to when we begin selling the power. It’s a relatively short construction time.

TER: The key catalyst, then, is getting that permit

RD: That’s correct. We don’t have any reason to believe that the permit will not be issued. We have completed all of our studies—archeological, geotechnical, hydrology, water quality, drainage, environmental, biological. It’s just a matter of working through the normal bureaucratic process. We hope to have the project completely operational sometime next year.

TER: And that would lead to your second project. Beyond having the 5-megawatt plant up and running, do any conditions or milestones need to be reached to facilitate that?

RD: No, not at all. In fact, we are working on not just one other project but several. There will be a second phase in Needles but the power purchaser is a different entity. We will begin that project shortly after the 5-megawatt project is completed. We’re already working on all of the permitting for the project; we just haven’t made any formal announcements yet.

TER: Assuming that the first 5-megawatts goes according to plan, what do you think this means for International Automated Systems?

RD: Once the IAS technology is proven, it will show the marketplace its potential and I anticipate that would be quite good for the company. Having the ability to introduce low-cost solar to the marketplace in an innovative way could be a real boon.

TER: A lot of other utilities would be looking at this, especially in light of the fact that government mandates may be requiring up to one-third of their power either purchased or produced green within 10 years.

RD: That’s correct. And this really is a utility play. A lot of other technologies are better-suited for a shingled, residential home. IAS is not that, and from that standpoint, you’re absolutely correct. I am sure the utilities are eyeballing this and are very aware of it. Obviously, their intention is to not only to buy as much solar and as much renewable as they can, but to do it as cost effectively as possible. So there’s a tremendous upside for IAS if it can produce renewable energy 40% to 50% cheaper than its competition.

DISCLOSURE: Ryan Davies
I personally and/or my family own the following companies mentioned in this interview: N/A

Ryan has been active with the Oquirrh Institute, a nonprofit public policy organization whose mission is to create innovative market-based solutions for technology and the environment, and is an active member of his community. Ryan was elected to the Draper City Council in 2001 and during his tenure, CNN named his community one of the top 100 places to live (2003). (Draper, population 30,000, is located in the South Mountains about 20 miles south of Salt Lake City.)

S&A Resource Report editor Matt Badiali covers a broad expanse of ideas as well as geography in this exclusive interview with The Energy Report. He discusses the immense potential of Iraqi oil, and the smaller but surer resurrection of old oil fields in Illinois. In addition to sharing views about areas within the oil industry worthy of investors’ attention, he talks about the promise—and problems—associated with major oil finds that have been making the news. These discoveries may postpone peak oil by a decade or two, but they will take a long time to bring to production, too. Matt also points out how data reporting metrics (BOE) manage to hide the extent of dwindling oil production.

The Energy Report: When we interviewed you six months ago, you were talking about some new oil finds in the Tupi field off the coast of Brazil. Since then another big oil field has been identified offshore of Sub-Saharan Africa. Can you speak to these finds and what they will mean to the oil sector?

Matt Badiali: Sure. There have been several big pre-salt or sub-salt discoveries offshore South America, offshore Brazil. The ability to gather much more detailed seismic energy information is driving these new discoveries. They go out and collect seismic information, shooting sound waves through the ocean into the sediment beneath the ocean floor. The further away, the deeper it gets into the earth, the noisier it is. With the advances in computing power, they can actually filter out that noise and see deeper and deeper.

And salt created its own special problem because it attenuates the actual sound you put in; in the past, you couldn’t see underneath it with seismic data. They can do it now with the algorithms they’ve developed and faster, stronger computers.

Having found the oil is one thing. The problem is that the ability to see the oil got ahead of the ability to develop it. This oil is going to require some of the deepest wells ever drilled and the deepest production infrastructure ever placed. Superlatives like that concern me, because the costs go up. Because it’s never been done before, you can probably add a zero to the price tag when you bid out this oil pipeline. Making money on this oil will be a challenge for Petrobras (NYSE:PBR).

And as you mentioned, there is a new discovery in offshore Sub-Saharan Africa, kind of the horn of West Africa. Anadarko Petroleum Corporation (NYSE:APC) and Tullow Oil plc (LSE:TLW.L) have made a couple of really exciting discoveries there. They’re exciting because they’re separated by about 700 miles, stretching from Ghana on the east to Sierra Leone on the west. I think Exxon Mobil Corporation (NYSE:XOM) is competing with one of the Chinese oil companies to get a 25% stake in the Jubilee Field, which is the one south of offshore Ghana.

TER: This might move the peak oil date farther ahead.

MB: I think this is a really, really massive play. And yes, if that’s the case, it pricks the peak oil balloon again for another decade or so. When you start putting the discoveries together on this one, and consider some of the work that Anadarko has put together, you’re looking at 6 billion barrels conservatively.

That’s very similar to the Tupi discovery. So offshore Sub-Saharan Africa could be the next offshore Brazil, in which case we have lots and lots of oil out there. We just have to figure out how to develop it.

TER: And at what price.

MB: David O’Reilly, CEO of Chevron Corporation (NYSE:CVX), came out last week saying there’s going to be a shortage of oil in the next decade and he’s pointing to $100-plus a barrel again. His line of reasoning is rational. For instance, Venezuela basically uses all of its oil revenues to subsidize bizarre projects such as donating heating oil to people in the United States, keeping Chavez in power. Basically, Mexico did the same thing and ran themselves right into the ground. They are on track to becoming net oil importer from one of the biggest oil exporters in the world. And Mexico has the potential of doing the same thing. We’ve already seen it with Indonesia, which was one of the founding members of OPEC but got kicked out because they became a net oil importer a couple of years ago.

Oil fields require sustaining capital. You have to keep drilling. You have to rehabilitate the fields. You have to spend money on them. They’re not a golden goose. A lot of these countries where the sole source of GDP is oil don’t do that. They spread the wealth around and that’s a problem.

The other thing that you see—and you see it reflected in the mix of oil-to-gas reserves in a lot of these big companies—is that the discoveries of oil are declining and they’re replacing oil production with natural gas reserves. It’s very subtle because most oil companies present their data in BOE (barrels of oil equivalent), which is oil and gas combined and published in barrels. It’s kind of a slick way to not tell you that they’re actually finding natural gas and not oil.

So we could see more robust oil prices going forward. We hit $65–$70 a barrel in 2005, 2006, 2007, before things really got crazy, and we’re right back in that same groove. This isn’t out of line. I think $35 a barrel earlier this year was a market over-reaction to the catastrophe. Everybody was looking for the end of the world and when it didn’t happen, things are starting to get back to normal.

TER: Are you talking about a temporary spike due to the oil-producing countries depleting reserves and we don’t yet have the oil from these deepwater finds?

MB: If these countries continue to lose production, it’s going to be very, very difficult to replace it. So even when you bring these massive oil discoveries online, that’s going to take a long time—five, six, eight years down the road to build these pipes and put in the infrastructure they need. These are discovery stage. It takes a long time to go from discovery to 100,000 barrels a day, 300,000 barrels a day.

Part of the equation that’s still in limbo is Iraq. I think they’re shooting for 10 million barrels a day, and that’s oil that’s inexpensive to produce, is land-based, and just needs the infrastructure to be upgraded. That’s going to be the real hinge on what happens to oil prices. If Iraq doesn’t get its act together, we’ll have to rely on offshore oil fields to take up the slack. Then the oil price is going to be very, very cyclical. If there’s a storm, if there’s a riot, it’s going to get bad and oil prices will spike.

I won’t say oil is never going to go below $100 a barrel again, but I certainly am further over in the $100 a barrel camp today than I was April of 2008 when people were saying it was going to go to $200 a barrel and I couldn’t figure out why it was at even $100.

TER: In our last conversation, you were really hot on the oil services sector—partly because you expected the oil price to rise (which it has) and also because you saw the services sector trading for just about book value. You gave us a couple of recommendations, which have doubled or tripled since then. What do those oil service sector companies look like now in terms of investment opportunity?

MB: When you take gains like that, things get too expensive. We were buying those shares at fractions of book value. I think Parker Drilling Company (NYSE:PKD) was trading at 30 cents on the dollar in terms of the value of its rigs. When oil is cheap, the market looks at drill rigs sitting in parking lots and assigns them basically no value at all. I wanted things to get a little better and I knew we would make money that way—and we did. But now they’re trading at multiples of book value again and things could get worse.

The nice thing about the oil and gas industry is it’s very cyclical, so we get these opportunities. Right now I’m less interested in the service companies. There are sectors of it that I probably should be paying more attention to right now. When we talked in April, the number of onshore rigs drilling specifically for oil went from 224 to 204. They were getting clobbered. Today that’s rebounded all the way up to 309 rigs from its bottom in June. So, our timing on the investment was absolutely perfect.

Gas drilling rigs are starting to come back a little bit now, but they didn’t bottom until the middle of July. They went from 800 in April to 675 rigs in July and they’re back up to 721. To me that also speaks to the oil-versus-gas situation I mentioned earlier—300 rigs are out there drilling for oil and 700 are drilling for natural gas. These companies are replacing their reserves with natural gas, so there could be less oil available in the future.

TER: So if not oil services anymore, where do you see the action these days?

MB: I’m very excited about companies that have oil production that’s not the cheapest production in the world, so maybe they’re paying $25 or $30 a barrel to produce it. But as the oil prices go up, their earnings rise faster than lower cost producers. They have leverage to the oil price, so now I think gains will be made in those kinds of companies. These are companies that maybe produce heavy oil or tar sand.

But my favorite group of companies right now does enhanced oil recovery (EOR) or tertiary recovery. They go back into oil fields discovered around the turn of the last century, produced millions or billions of barrels of oil, and then were left for dead in the ’70s or ’80s or ’90s when oil hit $10 or $15 a barrel.

The Lawrence Field in Illinois is a great example. It probably still has 50% or 60% of its original oil in place. They produced maybe half of it, so a little company is back there now and injecting a chemically that acts basically like Dawn liquid dish soap.

TER: Dawn?

MB: Dawn takes the grease out of your way. It’s not really Dawn, but a surfactant. When they put the chemical into the reservoir, it kills the surface tension and the oil mixes with the water. They figure they’re going to get 20% of the original oil out. That’s hundreds of millions of barrels. And they’re going to do it for $25 or $30 a barrel. If oil hits $90, they’ll make a fortune. People are starting to pick up on it, but they haven’t quite gotten there yet.

I like that better than, say, tar sand, because it’s light, sweet crude—the real stuff. A couple of other companies that I really like are injecting CO2 into oil fields to lower the surface tension and loosen up the oil. With today’s society seeing carbon dioxide as a bad actor, an oil company that’s injecting carbon dioxide into its oil field to produce low-carbon oil is going to get a lot of attention. I think they will get a higher multiple for that oil, whether it’s deserved or not.

TER: Who are the companies?

MB: Probably 10 companies are doing this kind of stuff. Marathon Oil Corporation (NYSE:MRO) has done a lot of this, but I haven’t recommended them because it represents only a small fraction of their production. EnCana Corporation (NYSE:ECA) does this too. Marathon and EnCana are the two big guys.

TER: Which one is in Illinois?

MB: The company that’s working in the Lawrence Field is Rex Energy (NASDAQ:REXX). It has absolutely exploded, though, not because of the EOR work, but because they’re based in State College, Pennsylvania, right in the heart of the Marcellus Shale region and they have a partnership in the Marcellus. As soon as natural gas prices turned around, Rex exploded out of the gate.

TER: Do you have a target for Rex?

MB: No. I typically don’t do targets on the upside. I let the market tell me because my experience with a lot of these smaller companies is that I would be way too conservative. I basically told people to buy it up to $8 and it’s closing in on $10.

We don’t know what the oil price will be when the Lawrence Field production comes on and how much money they’re going to make. But at $90 a barrel, the economics of that field look much, much better than they did when I first recommended it, so that’s pretty exciting.

TER: And when do they anticipate production?

MB: The first or second quarter of 2010. I think the Lawrence Field story is fantastic. And bear in mind, this is a region of the United States that’s been hit particularly hard in the downturn and this oil company is putting people to work on an old oil field that was discovered in 1906.

To tie this back to Brazil, Petrobras very quietly put together a $145 million research project to inject CO2 into one of its fading onshore oil fields and it was pretty clear that they will do this to their offshore fields too, because it almost guarantees an additional 20% production. The people at Petrobras are no dummies. They want to get as much oil out of these fields as possible, so I wouldn’t be surprised if they build the infrastructure for their CO2 floods on the front end rather than trying to retrofit things.

TER: You said maybe 10 companies are doing enhanced oil recovery. Can you tell us about any more of them?

MB: BreitBurn Energy Partners L.P. (NASDAQ:BBEP), I believe, is doing some EOR work in California. And Venoco, Inc. (NYSE:VQ), which—believe it or not—has oil wells in downtown Los Angeles, also does this. They have elaborate façades; you wouldn’t even know you were walking by an oil well.

TER: Are you looking at any other oil plays?

MB: This is the perfect time to look at leveraged oil. Suppose a company produces oil for $30 a barrel and sells it for $40. The market says it will value the company at 10 times earnings. If this company then doubles its production or the oil price goes up by $10, it doubles its earnings. On a P/E multiple, that doubles the market cap. It usually doesn’t work quite that nicely, but that’s the way leverage to your commodity works.

With the higher-cost producers—EOR, heavy oil, tar sands—where their production costs are $25 or even $35 a barrel, that’s a very nice increase in share price if oil goes from $80 to $90. So that’s kind of what I’m looking at across the board.

TER: So do both heavy oil and tar sands provide more of that leverage?

MB: They both do. They’re both high-cost production, basically. But you don’t want to buy these high-cost producers in an environment where the price of the commodity could fall. That’s our biggest risk. If the dollar strengthens, the price of oil will come down and these high-cost producers will fall because that leverage also works in reverse. But I think we’re going to hit $90 before we hit $50; that’s what I keep in mind.

TER: Other than these leveraged oil plays, what are you watching?

MB: I’m still really excited about Iraq. I think there’s going to be some enormous discoveries. We recommended a company called Addax Petroleum Corporation in Iraq in May, because they had a discovery we really liked. I was really disappointed because we were only able to be in Addax for six weeks before Sinopec International Petroleum Exploration and Production Corporation (NYSE: SNP.N)bought it. But we made a 55% gain in those six weeks.

There are a couple of other oil companies in Iraq, but they trade mostly on foreign exchanges. Heritage Oil plc (LSE:HOIL; TSX:HOC) is in the process of merging with a privately held Turkish company, Genel Energy International. That’s a spectacular oil company and I think they’re going to make some big discoveries. But they haven’t moved a blip lately because they’re in the middle of a merger and the merger hit a couple of bumps.

Another company I recommended was working on a joint venture with the Iraqi government, the Iraqi State Drilling Company, to bring western drilling techniques into Iraq. Basically, Iraq has had no modern drilling since the ’80s. It is the home of billion-barrel-plus fields with very, very low operating costs. If I were going to start an oil company, Matt Badiali Enterprises, I’d go to Iraq. My operating costs would be less because people still think of Iraq as a war zone, but I’d have a great chance of finding massive oil reserves. To me it’s the best place for a small oil company to go to add a zero to its market cap, if it’s willing to accept the political risk.

When I’m playing oil discovery, I’m looking at places where people are a little afraid to go, political risk over technical risk. That’s the mistake that 90% of analysts are making with those offshore Brazil discoveries. There figure there’s no political risk, that Brazil is as excited as all get-out, but the technical risk is enormous. When you make a mistake on a $4 billion oil pipeline, it’s a problem. And there is political risk in Brazil that people are undervaluing.

TER: How so?

MB: Brazil has proposed to create a brand new company—a quasi state-owned, quasi public company—that will oversee all of these offshore oil fields and will take ownership in part of all fields held by foreign companies. And they’re going to go to production sharing agreements (PSAs), where the foreign companies will get cash per barrel, but won’t be able to book reserves. Knowing what I know about Brazil, I thought, "Man, they just legally added a whole other layer of graft to that system." This is just another way for Brazil to tax that oil discovery and to steal as much as they can.

This is a massive discovery but it’s not going to be the oil industry’s savior. As soon as the size of the deposits became clear, the country changed the rules. If Brazil isn’t careful, it could go the same route as Venezuela and Indonesia.

TER: Could you give us a quick synopsis of your view of the geothermal market as an investment? It’s been attracting a lot of attention of late.

MB: There are two very different investment theses behind some of the companies in this space. Ormat Technologies Inc. (NYSE: ORA) is a play on everybody else getting excited about geothermal. It does produce some geothermal energy, but it is more the general store for the geothermal industry.

And I think if any form of cap-and-trade passes that makes coal-generated electrical power much more expensive, Calpine Corp. (NYSE:CPN) is going to make a lot more money. I’ve actually visited the geysers, which is where Calpine produces a lot of its geothermal energy. They generate hundreds of megawatts and it’s silent, the coolest thing in the world.

TER: It sounds as if geothermal appeals to you.

MB: It does. What really what gets me excited about geothermal is that it works. It’s not solar and wind, which need subsidies; and it’s not tidal energy that works well on some engineer’s drawing board, but doesn’t translate into the real world.

I’ve heard that every megawatt of wind or solar energy needs a megawatt of natural gas or some other consistent power source to back it up, because there’s no way to store this energy. If you produce wind power and suddenly the wind stops blowing at peak hours, you have to be able to turn something else on and generate that electricity.

Geothermal works. It’s an economic, 24-hours-a-day source of power, and it makes a lot of sense. That’s why I’m glad to see these new mid-sized entrants into the geothermal space. I think it will be a race between Ram Power Corp. (TSX: RPG) and Magma Energy Corp. (TSX:MXY) to roll up the junior geothermal industry.

TER: Rick Rule and Ross Beaty. They’re good friends, too.

MB: The fact that Ross (Magma’s founder) got into this is very exciting, and Rick has been pounding the table on geothermal for a long time. So this is good. We’re going to need every source of energy we can get. As China gobbles up more and more energy abroad and our population grows, we will need as much domestic energy production as we can. That’s electricity and fuel.

I look at oil as not so much a source of electricity, but as a source of fuel for trains and boats and planes and cars, trucks. I look at natural gas, like coal, as a source of electricity.

I find it unbelievable how any carbon-producing fuel is suddenly bad. People getting angry about coal, to me, is a complete disconnect. I grew up about 50 miles from Three Mile Island. Remember all the horrors of the 1970s nuclear scares? Now we see green TV commercials with baby birds and bunnies and a nice lawn and an attractive couple who get their electricity from nuclear power. Talk about cyclical. Holy smokes.

Now coal’s the bad guy. But if we’re going to get rid of coal, we need more sources of electricity. That’s where geothermal fits in. It’s also going to spark the renaissance of natural gas, because we need a transitional fuel. If you want to get away from coal, you need something to produce electricity with and natural gas is going to be the source. You can build a natural gas plant far, far faster than you can build a new nuclear plant with far fewer regulations.

TER: That takes us into a whole other discussion. There’s so much to talk about. You’re in an exciting area.

MB: Oh, man, I love it. It’s been spectacular and it’s been fast, with opportunities flying by.

DISCLOSURE: Matt Badiali
I personally and/or my family do not own any of the companies mentioned in this interview.

A member of the Stansberry & Associates Investment Research team of editors, Matt Badiali produces the The S&A Resource Report, a monthly investment advisory that focuses on oil, energy and mining and sectors—from the biggest resource companies in the world to small-cap junior explorers. With "the global economy still in the grip of a long-term bull market for oil, precious metals and other natural resources the likes of which the world has never seen," his company says those are the sectors in which "demand is going through the roof, and one of the best places investors can have their money over the next few years."

Matt, who’s spent the last four years flying all around the world digging up the best resource investments, has more than 15 years of experience as a hydrologist, geologist and a consultant to the oil industry. He holds a master’s degree in geology from Florida Atlantic University and is pursuing his PhD at the University of North Carolina. He’s also a regular contributor to Growth Stock Wire, a free daily pre-market briefing on trading opportunities.

And it’s as simple as supply versus demand.

Big investors in the East are concerned about their supply of oil.  Investors in the West are more concerned about the lack of demand.

In an October 18 research note, Goldman Sachs echoed this theme, explaining that China cannot produce enough oil to meet their domestic needs, and will need to consistently acquire foreign reserves.

The Goldman analysts who authored the report also say that in their opinion, China’s growth and infrastructure build out will continue for many years.  And so nervous investors in Europe and North America who are fretting about a collapse in China and oil prices will be miss the boat on oil stocks.

The report stated: ”China-based investors focused on supply side of our bullish view as opposed to demand in sharp contrast to most investors in US and Europe we meet with that are focused on demand uncertainty as opposed to oil supply…Given that China is emerging as an economic super power at a time of limited oil supply growth, we think it is likely to lead to the country adding to its SPR (Strategic Petroleum Reserve) continuously for many decades to come.”

Oil bulls are quick to point out that China only used 2.2 barrels of oil per person in 2008, versus the 23.3 barrels used in the USA.

Supply versus demand.  East versus West.  And with oil at US$80, it looks like the Eastern philosophy is winning out.

There is another huge benefit to national oil companies (NOCs) buying oil assets, and it is this: they get to spend their large currency reserves in US dollars into an asset that basically hedges against the greenback’s decline.

Asian countries like China and South Korea run a large trade surplus with the US.  They then use those excess dollars and buy US Treasuries, the largest, the most liquid, and the most transparent investment vehicle in the world.

But the US dollar is moving steadily down, eroding value for Treasury buyers.  So instead, they diversify and buy hard assets like Canadian oil companies such as Harvest Energy Trust. 

Harvest’s stock was a huge laggard compared to its peers, because of the high debt levels in the company.  But KNOC didn’t care about that – not with South Korea running a trade surplus of $5 billion in September alone.

KNOC’s $4.1 billion bid values Harvest at $77,700 per flowing barrel of production, which is almost exactly the average for the energy trust valuations in BMO Nesbitt Burns coverage universe this week.  (Peters & Co. out of Calgary called it $63,000 after removing value for Harvest’s downstream assets.)

Regardless, it was a 47% premium over what western investors thought it was worth.

How typical.

Keith Schaefer
Oil & Gas Investments Bulletin

Will companies be able to top estimates again? Earnings estimates are low, but they’re not as low as they were last quarter when 70% of the S&P 500 beat estimates.

Will the $3.5 trillion parked in money market funds continue to make its way back into the market? Once cash and bank deposits are added in, there’s $9.55 trillion ready to be spent once consumer confidence returns or that could go chasing after stocks.

Will the Fed put an end to the party and start raising interest rates sooner than later? Australia’s central bank started raising rates yesterday.

These are all questions for the short-term though and, if they’ve been on your mind, you know how easy they are to get caught up in. But I want to step aside from the daily upheavals and look at where some of the savviest investors with a time horizon of three to five years see the biggest rewards.

Buy and “Can’t Sell” Investing

Imagine you were forced to buy and hold a stock for five years. You cannot sell out early, take partial profits, or anything like that. You must hold on for five years.

What sector would you invest in? Biotech, healthcare, gold, energy, etc?

Kind of a tough choice, huh?

Well, there are some investors who are faced with this question every day.

They’re venture capitalists. They invest in private businesses – start-ups, mostly – and they’re in them for the long haul. In most cases there’s no early or easy out. Either takeover or IPO is the only way to really cash out. That’s why venture capitalists are true long-term holders.

And for the first time in history, they’re betting on a completely new sector which has an exceptionally high upside.

Last quarter, venture capitalists (as a whole) drifted away from the traditional mainstays of biotech and software and moved into clean energy technologies. Deloitte & Touche reports 27% of all venture capital investments flowed into clean tech. Meanwhile, biotech, software, and medical devices moved to the back of the line with 24%, 18%, and 17% respectively.

The clean tech investments were spread across all sorts of sub sectors. Solar led the way with the most investment dollars and was followed by energy efficient building materials, advanced batteries, hybrid cars, etc.

The investments were spread around the world too. Two-thirds of all clean tech venture capital investments were in North America. Europe and Israel took 29%. And 4% went to Asia and India.

The Next Big Thing

Although this news didn’t make too many headlines, it does signify a very important trend.

You see, in exchange for being “tied up” in a high-risk investment for years, venture capitalists need to see the potential for massive rewards. After all, many of the companies will fail (I’ve seen estimates as high as 60% of all venture capital investments fail completely). And many of those venture capital investments that do “succeed,” they may never turn out to be anything more than a dozen guys installing solar panels in Arizona.

That’s why venture capitalists have to go after the big prizes and it’s always good to keep an eye on where they’re putting their high-risk/exceptionally high reward investment capital.

It looks like they see what we see…

– Much higher energy prices – inevitable result of inept nationalized oil companies, offshore drilling ban, and inflation
– Government mandated energy efficient – fuel efficiency, building codes, light bulbs
– Consumers turning green – green is the new black, being green is “cool,” etc.

There are a lot of drivers for an ongoing rally in green energy.

Pockets of Strength

Prosperity Dispatch readers know, there are two ways to make money in the stock market.

There’s the contrarian approach, which entails buying stuff no one wants and waiting for it to be in demand again. This is perfect at inflection points in the market.

Then there’s the herd approach. This involves catching onto a major trend and riding it to the top. The Internet in the mid 90’s is a good example. The modern Internet was around for over a decade, yet it was for geeks only. Then in the 90’s, thanks in large part to the efforts of AOL and billions of low-cost free CDs, the Internet turned mainstream.

You certainly wouldn’t have been the first to buy into the Internet in the mid-90s, but you certainly weren’t the last either. And that was a bubble that turned more regular investors into millionaires than any one I can think of. 

That’s the key thing to remember in the clean technology field. You certainly won’t be the first in, but at this point you certainly won’t be the last either.

Clean technology, regardless of its relative efficiency or the seriously flawed global warming/climate change arguments (ironic how a lot of folks blame the computer models which helped create the housing bubble now implicitly trust the climate change computer models which predict the end of the world), is going to be a big winner in the years ahead.

Earlier this year I called clean energy the “next big bubble” and yesterday I told Prudent Investing readers it’s “like 1995” in clean tech. It’s still coming together and it’s just another positive sign the venture capitalists are getting on board too.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Editor’s Note: Not all clean technologies are created equal. Andrew believes one of the biggest opportunities will be hybrid car batteries. And from his early research of the “hot” A123 Systems months before it hit the major headlines up to now, he has been through almost every battery-maker and technology company out there and identified one as the best.

Learn more about how to ensure you get his top hybrid battery pick when it’s released tomorrow here.

U.S. natural gas prices will have to move higher to spur a resurgence in drilling activity and keep output of the fuel steady, the head of Chesapeake Energy Corp (CHK.N) said on Wednesday.

(skip)

"The industry can cope with $4 gas. The industry can’t grow or sustain production with $4 gas," Chesapeake CEO Aubrey McClendon told an IHS Herold energy conference.

(skip)

"We at Chesapeake think that price has to be three times the finding costs, and that translates to $6 to $9 in the next 12 months," McClendon said.

A price in that range would likely prompt producers to increase the number of rigs drilling new wells to 1,100, he said.

My comment: As I said the other day I am playing this through some royalty trusts so that I can get paid while waiting for the natural gas price to rebound. I have seen the 1200 rig number mentioned before as the number needed to keep supply/demand in balance.

John Polomny
The Real Deal

It seems to many, oil has it all.

Oil is a popular way to protect against inflation.

It’s truly a liquid asset. Someone, somewhere, always needs oil. It can be bought and sold very easily.

Also, oil is tough not to keep track of. The financial media gives us daily updates on gasoline prices.

On top of that, even slight increases in demand can send oil prices soaring. For instance, world oil consumption increased from 76 million barrels per day in 2000 to 87 million barrels per day in 2008. Meanwhile, oil prices climbed from around $30 per barrel in 2000 to average more than $80 a barrel last year. A 14% increase in demand led to more than a 150% rise in prices.

There’s the “Peak Oil” argument too. Which makes sense in there isn’t too much “easy” oil left, but there’s still plenty of oil in the world. It’s just more expensive to produce. Also the truly economically viable alternatives will come along, but they’re realistically years away from mass implementation. Remember, it took a couple of decades for the world to get rid of its addiction to whale oil after Peak Whale Oil.

So oil doesn’t look too bad. At $74 a barrel though, it’s not too good to pass up either.

There is, however, one energy sector which is looking much better than oil at the moment. A sector growing much faster than wind and solar power. A sector which doesn’t require any government legislation (ref: Cap-and-Trade) to make it economically viable. And one that has China, ExxonMobil, and other deep-pocketed energy heavyweights cutting multi-billion dollar checks every few months.

And best of all the investment opportunities will be limited. So when the big money wakes up to this high-growth energy sector, their will only be a few options for them to plow money into.

Better than Oil

I’m talking about liquefied natural gas, or LNG.

For long-time long time Prosperity Dispatch readers the growth of LNG over the next few years is nothing new. The last time we went over the growth potential of LNG was back in April. We determined the continuation of the LNG boom was “all but inevitable.”

Of course, the most attractive part of investing in LNG (we’ll look at the two best ways to do that in a moment) is that it’s still relatively small. And since it is small, it can grow very quickly.

For example, the latest Short-Term Energy Outlook from the Energy Information Administration predicts:

U.S. (LNG) imports to increase to about 500 billion cubic feet (Bcf) in 2009, up from 352 Bcf in 2008, and rise to about 740 Bcf in 2010. 

That’s a two-year increase of 110%. And it’s only going to get bigger as time goes on.

Consider this. Last week, PetroChina (NYSE:PTR) announced it had cut a $41 billion LNG purchase deal with ExxonMobil (NYSE:XOM). The deal says PetroChina will purchase $41.29 billion worth of LNG from Exxon’s stake in the massive Chevron-operated Gorgon LNG Project in Australia.

The deal guarantees future sales from the project. It’s already sold. It’s like opening a factory, but you already have orders for the next 20 years.

This deal though is just one of many already in place. And it’s only one of many more to come.

The thing about natural gas is the Asian countries which consume the most produce very little of it. The chart below of Japan’s natural gas consumption and production is the perfect example of what is happening in other countries like South Korea and China:

Meanwhile, the countries which have a lot of it – Australia, Papua New Guinea, and Indonesia – are capable of producing far more than they are able to consume.

The only realistic solution is more and more LNG imports.

The Middle East continues to move into the LNG market too. A few days ago the Ras Laffan LNG Company in Qatar announced its latest LNG project has come on line too. This project matches the largest LNG production in the world. And there’s more on the way before 2009 is out.

Change Creates Opportunity and Catastrophe

Now, the LNG boom is in full swing and more and more deals are getting done. The thing about the growth of LNG is that it makes natural gas, for the first time in history, a truly global commodity. In a matter of time, LNG shipments will be free to find the highest price in the world, just like oil.

It’s a dramatic shift which will create a lot of winners and losers.

Think about the fate of typewriters, Polaroid cameras, and Walkmans. They’ve been outmoded through change. Typewriters were replaced by word processors which were replaced by PC’s. Walkmans were replaced by portable CD players which were replaced by iPods.

It’s the basic product lifecycle. A technology is introduced, it gains acceptance from “early adopters,” and then eventually gains wide acceptance and becomes the standard in itself, until something new comes along.

The changes were opportunities for the innovators and catastrophic for the old leaders.

The LNG boom will have similar consequences and create its own set of winners and losers.

The Losers Are…

Now, with LNG becoming a truly global commodity, capacity coming on line quickly, and a general economic malaise, there will be supply gluts. The gluts are already starting to appear.

Reuters reports, “State-owned China National Offshore Oil Corporation (CNOOC) has been struggling to find end-users for [LNG] to be imported from Qatar.”

It’s not just China though. Bloomberg reported yesterday, “U.K. gas plunges on excess LNG, supplies from North Sea, Norway.” The U.K. is in terrible shape economically and now all of the LNG import facilities it built over the past year have created a significant glut. The current cost of a million cubic feet is about $1.50 – nearly half the price it is in the U.S.

The top outlet for excess supply is and will be the world’s largest consumer of natural gas – the United States. That’s good news for consumers – there’s more competition in the natural gas market. It’s bad news, however, for the major natural gas producers in the United States – there’s more competition.

And it couldn’t be coming at a worse possible time. The number of natural gas rigs operating in the U.S. has been cut in half. Natural gas storage levels are hitting five-year highs. And hopes for a really cold winter, which drives a lot of natural gas demand, are a quickly fading.

That’s why natural gas prices have finally broken down below the $3 mark. We’ve been watching them closely. They fell to $3.25 and then rocketed back up to around $4 a few times since last winter. But now, we’re in the second half of 2009, and the time for playing around in the North American natural gas market is over. LNG-laden ships are already headed to U.S. shores.

This is going to make it even tougher for domestic natural gas producers. Now, I’m not saying they’re going to simply fall from here, but the upside will be quite limited. After all, any significant uptick in natural gas prices will surely be met with an influx of LNG.

The Winners Are…

Although the short-term picture for natural gas may not be too bright in the U.S., it’s not going to have much of an impact on LNG projects. The simple reason is because it takes so long to build an LNG plant. Some of the larger LNG projects aren’t expected to be completed until 10 or 12 years from now.

So the LNG industry isn’t focused on the short-term. It’s focused on the long-term demand for natural gas – the very long term. That’s why I still see a few opportunities in the global LNG boom.

One way is to invest in the countries with too much natural gas. This is the high-risk/very high-reward way to get in on the LNG boom. Currently there are a few very small companies which have been developing natural gas fields in Australia, Indonesia, and Papua New Guinea.

Most of them are trading at pennies on the dollar relative to their North American counterparts. But thanks to the build out of LNG infrastructure, they’re likely to be going head-to-head with the likes of Chesapeake Energy and EOG Resources which are sporting $15 billion and $19 billion market caps.

That’s where you’ll find the truly exceptional risk/reward opportunities out there. For instance, we’ve found a small Indonesian company that’s so undervalued we’re looking at a 100% to 600% payoff within the next six to 18 months in our small and microcap-focused research service, the President’s List.

The other way to get in on the LNG boom is from the companies which provide the “picks and shovels” to the boom.

There are quite a few companies which have developed the expertise in building the LNG plants. Regrettably, most of the companies which are best suited for taking on the massive LNG projects are the big leaders like Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL). They’re going to get the biggest cut of the LNG infrastructure action.

There are a few other ways, however, which are more direct. One of the ways that has caught my attention is with FLEX LNG (Norway:FLNG). This company is building mobile liquefaction plants – the plants which turn natural gas into LNG. These special LNG vessels will be able to move to wherever the natural gas is produced. It will be able to transform previously remote and unusable natural gas fields into economically viable LNG producers at a much lower up-front cost than many other traditional LNG plants can do.

FLEX LNG may or may not be a “buy” at this point, but it is a great example of smaller innovative companies positioning themselves to capitalize on the LNG boom.

It’s coming and it’s going to be a big industry in the years ahead.

Don’t Sweat the Small Stuff

That’s why the window of opportunity in natural gas and LNG is still open. At the moment, the industry is going through a lot of change.

Natural gas prices have been hit hard in the U.S. They’ve been hit a lot harder in other parts of the world. As LNG continues to grow, the regional differences in prices will be limited. And as we’ve seen with oil, the highest bidder sets the price, regardless of how high.

Over the long run, natural gas will become a more suitable alternative to oil. Based on energy to price value, natural gas is as cheap as it has been in the past decade. It will take time – probably a lot of time – but natural gas’ time to shine will come again. Oil may be a 50/50 bet at this point, but the long-term outlook for natural gas is very bright. You just have to be selective about how you’re going to go about profiting from it.

More importantly though, LNG is just another example of the bigger opportunities which are out there. The kinds of opportunities which won’t depend on a continued rally in the world’s stock markets either.

It reminds me of something PIMCO’s Bill Gross wrote a few weeks ago. He was writing about investing in the “new normal” economy where growth is muted, unemployment is high, and the world economy will be dipping into and out of recessions over the next few years.

Gross said:

Investors looking for love potions or successful investment strategies in this new normal economy dominated by deleveraging and reregulation must focus on some very macro-oriented ingredients as opposed to typical news-dominated minutiae.

One of those “macro-oriented ingredients” will be the changing energy landscape. There will be many changes and just as many opportunities along with them. Whether it’s the boom in hybrid car batteries or the globalization of natural gas, there will be opportunities.

The most successful investors over the next decade will be the ones who are able to isolate those opportunities.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

America’s future energy course is being charted today because of the ramifications of peak oil, because cars pollute too much, because of global warming, because America wishes to end her dependence on foreign supplied energy and to be blunt. . .Americans need jobs.

"A new energy economy is going to be part of what creates the millions of new jobs that we need," said President Obama.

Because of these reasons a whole new industry, a domestic automotive and industrial lithium-ion battery industry, is going to be built.

President Obama recently said, when announcing US$2.4 billion in grants to accelerate the manufacturing and use of next-generation car batteries and electric vehicles, "I’m committed to a strategy that ensures America leads in the design and the deployment of the next generation of clean-energy vehicles. This is not just an investment to produce vehicles today; this is an investment in our capacity to develop new technologies tomorrow."

Obama’s plan is to have one million electric cars on U.S. roads by 2015. JPMorgan predicts hybrid sales will reach 9.6 million cars three years later. Global Strategic Analysts predicts that the market for lithium-ion batteries is likely to grow at a compound annual growth rate of over 32% through 2010. With an increased demand for hybrid automobiles this growth rate will continue.

Commodity Rules Rule! Will Electrification Ignite a Lithium Boom?

Only time will tell. But with lithium batteries poised to play a key role in the auto industry and eventually appearing throughout the electrical grid it’s entirely plausible, in this author’s humble opinion, that lithium is the next break out investment.

There’s billions and billions of dollars, courtesy of the government’s stimulus package, still to come (Washington has already handed out US$8 billion in loans) for advanced battery technology R&D companies and battery manufacturers. The auto industry is gearing up to make its first real go at marketing plug-in vehicles for the masses. The start flag has dropped and the race to build lithium-ion batteries for vehicles has started.

If the U.S. does not develop a lithium-ion battery manufacturing sector at home it may very well be shut out of the electric car business – he who makes the batteries will also make the cars. Lithium demand will skyrocket as more and more hybrids roll down the assembly line. Current processing potential is limited, making it vulnerable to market disruption. And limited supplies could mean big profits for lithium miners and producers.

It’s extremely hard to believe that any politician or lobbyist would consider sourcing the needed supplies for Obama’s Energy Revolution from offshore suppliers and risk the same foreign dependence as they have today with oil. Politicians will fight tooth and nail to avoid importing lithium or lithium-ion batteries.

Because there is so much money being thrown around and because lithium is the key ingredient to make these future electric cars viable it shouldn’t come as a surprise to anyone if investors are smiling with glee over the prospects of a huge boom in the prices of their favorite lithium explorers and producers.

Will the Electrification of America Become Unplugged?

The U.S. Government Accountability Office, in a report to congress, warned that by switching from gas-powered cars to lithium battery powered cars the U.S. might simply "substitute reliance on one foreign resource for another."

"Politicians. . .ran on a plank based on ending foreign oil dependence, and it is unlikely that voters will want to meekly transfer this dependence to lithium," said the Council on Hemispheric Affairs, Washington, D.C.

Obama said this during his election campaign: "Finding the new driver of our economy is going to be critical. There’s no better driver that pervades all aspects of our economy than a new energy economy. . .That’s going to be my No. 1 priority when I get into office."

And it appears he’s going to keep his promise…

White House news release (8/5/09)

It would be very difficult to overstate the importance of U.S. sourced lithium in Obama’s coming Electrification of America.

U.S. Lithium Sources & Reserves

Lithium carbonate is needed to make the cathode material and the electrolyte used in a lithium battery, lithium Carbonate (Li2CO3) is produced from Lithium Chloride.

Economic concentrations of lithium are found in brines, minerals and clays in various parts of the world. Brines and high-grade lithium ores are the present source for all commercial lithium production.

• Pegmatites: Course grained igneous rocks. The principal lithium pegmatite minerals are spodumene, petalite and lepidolite.
• Continental Brines: The lithium contained within these salt lake brines comes mainly from the leaching of volcanic rocks, which then flows into a catchment basin.
  
• Geothermal & Oilfield Brines
• Hectorite Clays: Hectorite is found in a number of areas in the western U.S.

According to the United States Geological Survey (USGS) U.S. reserves of lithium total 760,000 tons. One kilogram of lithium equals 5.3 kilograms of the lithium carbonate used to make batteries.

South America accounted for 60% of world output of lithium in 2008, followed by Australia and China, which combined produced 30% of the total. Two-thirds of the world production was from brines and one-third from lithium minerals (used mainly in the ceramic and glass industry).

Nevada—The U.S.’s Own Saudi Arabia of Lithium?

Clayton Valley is home to the only lithium producer in the United States. This plant extracts lithium from brines pumped from aquifers below the valley and has been in production since 1967. The plant is designed to produce 1.2 million kg of lithium per year and to date has produced an estimated 50 million kg of lithium.

In 1975, I.A. Kunasz of the American Institute of Mining estimated the mineral endowment of Clayton Valley to be 750 million kg of lithium. A more recent study by Price, Lechler, Lear and Giles in 2000, suggests that significantly more lithium was released into the Clayton Valley catchment by the weathering of high lithium bearing rocks. They suggest that as groundwater enters the basin, it appears to be dissolving lithium minerals accumulated in valley sediment and is partially recharging the lithium content of the brine, while mining operations have been ongoing.

Replenishment of brines comes from surrounding Rhyolite, which are the most lithium rich in the world. Brines in the area have concentrations as high as 1000 ppm. Concentrations as low as 166 ppm have been used in lithium brine pool extraction methods.

The following two junior companies have brine deposits in Nevada:
Rodinia Minerals Inc
TNR Gold Corp

Lithium also occurs in significant concentrations in the mineral hectorite, a trioctahedral smectite, lithium can be extracted from the clay through either a pyrometallurgical (roasting) or hydrometallurgical (solution) method.

Western Lithium Corp. is working on a hectorite clay deposit in Nevada.

Conclusion

Lithium is one of the best ways to play President Obama’s energy agenda. The power of the Office of the President of the United States will be backing the Eco-Energy Revolution and billions of dollars will be given out to develop the technology behind the lithium-ion battery. This energy revolution is a serious investable long-term trend and we, as investors, have to take advantage of the opportunities being presented. We’d be smart to get in early, ahead of the herd, to take advantage of the coming global rush to electricity.

Currently lithium supply and demand are relatively in balance, however with the race to develop lithium-based batteries for an electric automotive industry there will be a shortfall of supply in the future.

New potential U.S.-based lithium supply side companies are coming and early strategic investors are already positioning themselves. It’s not often in investors’ lives that they get the opportunity to invest in something so profound—something so huge it constitutes a sea change in the way we go about our daily business. With the full might of the Office of the President of the United States of America behind it, the push for electrification is becoming a reality. And because of this new reality in America, lithium might just become the commodity of choice for investors.

If you’re interested in the junior resource market and would like to learn more please come and visit us at www.aheadoftheherd.com

Richard (Rick) Mills
www.aheadoftheherd.com
rick@aheadoftheherd.com

Bio – Richard is host of www.aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 60 websites including – Wall Street Journal, 321Gold, Kitco, USAToday, SafeHaven, Stockhouse, The Gold/Energy Reports, Gold-Eagle and Financial Sense.

DISCLOSURE: Rick Mills
I personally and/or my family own the following companies mentioned in this interview: Rodinia, iCo Therapeutics, Alder Resources, Skygold and Cangold.

Legal Notice / Disclaimer This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

The Energy Report: There’s a lot of "news" swirling around uranium (i.e., Russia has a moratorium, China is building dozens of nuclear facilities, recession is pausing development of nuclear facilities and more.) What is the truth regarding uranium? What should investors in this sector be watching?

Merrill McHenry: Let’s start with the last question first. If investors had to watch one thing in the uranium market, it would be the uranium "term price." That is the long-term contracting price for uranium suppliers and (utility) buyers. Over time, the spot and term prices will tend to converge (i.e., if the spot price drops too far below the term price, utilities will purchase additional inventory and store it).

The spot market is more illiquid than most think; and it is far from realistic for the sector to be affected by minimal spot volumes—sometimes they are as low as one or no transactions. In effect, too often the small tail of the spot market wags the dog (sector). Investors need to look at the big picture of the sector, and it is fine.

The ‘truth’ on uranium is the secular (long-term) bullish case never went away—people and human behavior just accentuated a cyclical (short-term) correction. It’s human nature that people overreact and chase prices on the way up, and, while in a panic, bail shares on the way down. I have been on both the "buy" and "sell-side" and I know how people do not want to buy when they should—and vice versa. (It is called "group think.") Human nature also has people mistakenly thinking in absolutes, when in the end most things are relative. Even "experts" do this. These factors often wrongly affected investors’ perspectives, and I would say this was the case with the uranium sector. Investors should remain objective as well as aware of this.

Uranium’s spot market massive price rise from its long-term range in the $10 range was a parabolic moon shot to $138. I keep telling people any asset (i.e., commodities) that does a parabolic price rise is going to have a crack in the vertical price rise [note the chart] where the meddle of the bullish thesis will be tested. That is the time to see about the real secular case.

Technically speaking, giving up one-third or two-thirds the parabolic price rise frequently happens, just as stocks may have similar cyclical rally retrenchments. If the secular case really exists, then the asset will hold a new pricing equilibrium and a new paradigm exists; the asset will not fall back to the previous trading range. Low and behold, uranium did not fall back to the previous multi-decade $10 range; a new supply and demand equilibrium was established in the $40 range—off approximately two-thirds from the parabolic high.

China stepped in, filled its North American and European storage contracts, and started taking physical delivery. India stepped in, and the utility spot buyers resurfaced. We have endured the highest spot market volume in 13 years of TradeTech data this year from the remaining financial players liquidating inventories. We are over 20% ahead of the next closest record and yet the new uranium floor is over four times higher than the previous paradigm. This is where you see the secular bullish case. The new uranium pricing paradigm held and a new floor was put in place for a new bullish cycle within a secular bull market. This is when one should start buying aggressively. There was a selling exhaustion on the stocks—the good thrown out with the bad—and the sector was/is oversold versus its long-term fundamentals.

The bottom line is the vast majority, if not all, nuclear reactor construction projects have gone ahead. Those are in China and India, and they are either state or quasi-state sponsored projects. Moreover, this year China added three new reactor projects, to 24 under construction, with its stimulus funding. China currently has only 11 nuclear reactors.

People’s tendency to think in absolutes misses the real point about demand growth—over the last year, what the private sector took (if any), the public sector more than gave. Largely, unlike other commodities, the credit crunch effects on the private sector did not hit uranium’s fundamentals. I am minimally concerned if U.S. reactor projects are delayed because those are 10 to 12-plus year project completions. What I do care about are China and India’s ("Chindia") much nearer term reactor projects—those are four to six year and current uranium demand situations, respectively. Those are the main uranium secular drivers—and the truth is both actually got better.

The U.S. private sector projects have always been awaiting Congressional and DOE loan guarantees. They still are. In my book, the U.S. "if" of incremental uranium demand is so far down the road as to be of minor investment consequence.

Theoretically, any investment’s value is the net present value of the future cash flows. The sector’s cash flow changes due to Chindia’s changes in uranium demand in five years, and currently, is of far greater investment value than potential changes in U.S. uranium demand 12 years hence. Typically, those outlier years are of minimal impact on TradeTech’s uranium pricing forecast models as well.

I want to emphasize that the only thing better than bullish supply and demand factors are exogenous events. Both China and India have recently had favorable exogenous events that will greatly affect uranium demand. Both are seeking to buy well beyond current needs.

Only this year India entered the spot market after a 34-year Nuclear Suppliers Group embargo (due to India’s 1974 nuclear test and refusal to sign the Non-Proliferation Treaty). India is not only seeking uranium for it is current needs, but also after years of shortages and a strong national sentiment towards nuclear sovereignty, is seeking to buy sufficient uranium for all reactors for the entire service life of those reactors. Needless to say, that is and will be quite a bit of additional uranium demand. Investors should note, that was not factored in the market one year ago; it is a new and significantly bullish event.

Korea also has good sector news. Korea Resources Corp. expressed they are seeking a US$1 billion uranium mine.

So, we have had three major future uranium players—India, China and Korea—come forward with billions of dollars in additional uranium demand over the last year; and actually increasing reactor builds over plans. The uranium sector has had nothing bearish in the last year even close to those bullish factors.

As for uranium supplies, the continuing theme of 2008 was "lowered production guidance becomes a norm." My total of production cuts for 2008 was 4.7mlbs, which by way of relative comparison was roughly two months of a typical year’s spot market volume. At the margin, that is a bullish number as well. Also, people do not realize the rate of existing mine depletion. Based upon current estimates, by 2020, six of the world’s top 10 uranium mines will be depleted, and the top two mines will be entering the latter stages of production.

In summary, while many unknowingly ditched the sector, arguably the uranium space has a better price floor and verifiable new pricing paradigm in place than most—if not all—commodities. To use the street phrase, for uranium what has transpired in the last year—"It’s all good." The exogenous events significantly boosting uranium demand for China and India are far greater than the minimal and distant "ifs" of private sector reactor delays. Not to mention China has actually boosted reactor construction; while India made no delays and entered the world market.

TER: To what extent is any pending gap between supply and demand reliant on increased demand from new facilities being constructed versus on-going operations of existing nuclear facilities?

MM: Here are the stats:

• World electricity growth is forecast to grow 85% by 2030. Approximately 4%/yr.
• 435 current reactors supply 370 Gwe and require 78,500 tonnes of uranium oxide
• 31 reactors under construction—approximately 27 Gwe
• 222 planned & proposed—187 Gwe
• Each additional Gwe requires 195/t year of uranium and 3X for initial load.
• Uranium production has to ~ double (on current consumption) to offset TENEX end in 2013 (if Russia does not replace any TENEX uranium supplies).
  Source: World Nuclear Association; Merrill W. McHenry

In the "Cold War" Americans were concerned about Soviet nuclear weapons reaching American soil—unbeknownst to them many of the weapons have—just in supplying approximately 11% of the U.S.’s electricity needs via highly enriched uranium ("HEU") down blending into nuclear reactor fuel. (Nuclear is 20% of U.S. electrical production.) In the future investors are not going to know for sure the amount of Russian supplied uranium after the TENEX agreement expires in 2013. We will have to wait and see.

As for the uranium price equilibrium the players know the backdrop, and while new reactor growth will have ‘date certain’ for commencing operation requiring uranium, the utilities set the reactor uranium purchases up with longer lead times and somewhat discretionary timing as to when to secure "X" amount of contracted and/or "Y" amount of spot uranium. Add to that the massive additional purchases beyond specific and current reactor needs by Chindia and uranium pricing becomes determined more and more by utility discretion than specific timing needs. One should also note much of the spot market volume has traditionally been as a backstop supplement to long-term utility uranium contracts. With the exception of Taiwan, most nuclear utilities do not primarily supply their reactors from the spot market. Another component of utility purchases is the old "like sheep in a pin" analogy. Old time uranium traders often claimed the utilities would jump to purchase uranium like ‘like a flock of sheep following the first sheep out of the gate’. The point is utilities are competitive and will chase supplies if they think others making purchases are on to something (e.g. production cutbacks), and it can strongly move the spot uranium market if the participants get excited. ("Group think" by utilities.)

TER: Do you see certain geographical areas for uranium exploration being better for investors, like Canada’s Athabasca Basin? Western U.S.? Other global?

MM: The interplay between the variables— capital expenditures (capex), cash cost of extraction, size of the deposit, average deposit grade, sovereign risks, etc. make it incorrect to make geographically mutually exclusive choices. Unfortunately, it is not so simple. However, each region has its idiosyncrasies. African and East European countries have various and changing sovereign risks (at the moment Niger has heightened sovereign risks); Canada’s Athabasca basin has cost issues from deposit depth (and potentially flooding—see Cigar Lake); the Western U.S. has an element of permitting risk, and the lower hanging fruit/larger deposits are largely done. Namibia, with its larger potential size bulk deposits and sovereign desire to develop mines, is attractively leveraged from a risk/reward standpoint. One could say Australia, with the largest uranium resources in the world (approximately 40%) has some of the best combination of factors—but it is a difficult market for foreign investors to access, handle additional share price volatility, and become educated on. Even for non-Australian projects (i.e., Namibia), Australian-listed companies are some of the best opportunities. In time, more of the Australian companies will offer dual-listed shares in Canada.

There are major stock market/business culture differences among countries as well. For example, having come from the U.S., I can vouch for shell-shocked surprises in share float size differences. Relative to market cap, Canadian share floats on explorers may be something like 10 times what a U.S. investor may be used to. (Caveat: there is no U.S. close sector comp, a rough approximation based on ~20Yrs U.S. experience.) The U.S. also had a bad end to the 1970s resource stock bull market biasing U.S. investors against the dreaded "penny stock." Most of the rest of the world has no idea how biased and derogatory the "penny stock" label is in the U.S.

For most in the U.S. foreign uranium stock share prices and share floats optically make them a ‘non-starter.’ A bias I find unfair based on a relative risk/reward basis (aka "Treynor ratio.") Canadian investors would do well to keep in mind share floats here vs. the U.S. when they balk at the proportionately larger Australian mining company share counts. While I do shy away from the really larger share counts (or hold my nose/ be very precise on price if I really want the stock), it is relative. What typical Canadian share floats are to U.S. investors, Australian floats are to Canadian investors. Not only is it driven by country industry norms, but it is also driven by the relative size of the investor base. When there are far less investors trading shares in Australia than the U.S., Aussie companies are more inclined to issuing shares to increase trading volume. While that may not be our preference an investor is well served to realize the norms exist, they are relative, there are some reasons for them, and they should not always be a categorical deciding factor.

As a rule, keep in mind that the larger the share float, the more the company’s shares will tend to track the sector. Thus large float companies are more difficult to get ahead of the company’s prospects—so timing the buy with some ebb and flow of the share price becomes more important. The best times to buy those stocks are more challenging as you have to be very contrarian; the cheapest share prices are when the sector is very oversold and seemingly you are alone in buying the shares.

TER: From an individual investor’s point of view, provide your perspectives on investing in juniors compared to seniors.

MM: Investors need to be aware of the lifecycle of the company’s property portfolio. What stage(s) the projects and/or exploration is at. Aside from the price of uranium (systemic risk), the smaller and/or more early project stage the company, the more company risk (unsystemic risk) will affect the share prices. Technically, you would call that volatility the stock’s "sector beta." That is, the stock’s volatility relative to the sector.

Sector beta encompasses many company factors (e.g. management, financing, cost of production, etc.) but in general, a company’s sector beta is reduced proportionate to the visibility of the cash flows (how soon, and to what degree the company is producing uranium).

Often investors wrongly perceive the risk of their investment as category wide (systemic risk), when in a larger measure the company’s sector beta is the greater stock volatility factor. When an investor wants a stock from the sector, the investment(s) chosen should be with recognition of the company’s sector beta; again, which is based on the stage of the company’s land package—production at one end of a continuum vs. exploration at the other end.

Someone who is conservative may best have sector exposure via a major (i.e., Cameco Corp. (TSX:CCO)), which has an advanced property portfolio with significant production, and projects ramping toward various stages of development. Keep in mind many of the producers have longer-term uranium pricing contracts; so if an investor wants to be in the sector because they feel uranium is going up in price, a major producer will slowly only adjust sales and earnings to the new spot market prices ("repricing"), depending on the company’s order book/strategies.

Most of us break the sector down into Producers (what I call "Tier 1"), Developers ("Tier 2"), and Explorers ("Tier 3"). A typical, modest sector knowledge investor may be best served by having a Tier 2 company. Several of the Tier 2 companies (i.e., Mega Uranium Ltd. (TSX:MGA) offer diverse portfolios of developing projects (Lake Maitland in the MGA’s case) with plenty of early-stage exploration for the future. A more advanced and therefore typically less volatile (lower sector beta) Tier 2 company would be Denison Mines Inc. (TSX:DML) (NYSE.A:DNN). To my thinking, perhaps the best width (geographically diverse) and depth (development to production) prospective uranium portfolio is Aussie company Toro Energy Ltd. (ASX:TOE). TOE also has world-class management to execute on its portfolio. (The story is tempered by TOE’s huge share float.)

For someone more experienced perhaps a diversified Tier 2 and Tier 3 portfolio is suitable. Obviously, keep in mind the risk increases significantly as one moves earlier in project lifecycles.

I concentrate on advancing Tier 3 companies; but keep in mind, I spend significant time following the sector and companies. I would note, given recent market conditions, many of the Tier 3 Explorers are simply not exploring—but they are burning company capital in wages and salaries to the detriment of the future exploration budget. While I can appreciate some companies really do need to wait for a better financing time—implicitly for a worthy project—I would not recommend investors own a company that is burning capital but not really exploring. By "really exploring," I do not mean picking up rocks ("grab samples"), I mean the company has near-term drilling plans. Many of those exploration companies standing pat may not be around in the future. In any event, this is not the market environment for investors in exploration companies to own shares in companies where management seems to be paying themselves first.

TER: What favorite uranium companies, seniors or juniors, are you following?

MM: One of my favorites is Strathmore Minerals Corp. (TSX.V:STM) (OTC:STHJF). There is simply no way to overlook 159.658mlbs of STM’s 43-101 and Historical (non-43-101 compliant) uranium resources. Most explorers and many developers should be so lucky. On an EV/Lb basis, the company is one of the cheapest in the world. (I have one of, if not the largest, compliant uranium database in the world.) If you exclude companies whose projects have little chance of producing I would say STM is definitely the cheapest in the world. Many of STM’s projects are lower cost and simpler technologically, in situ leaching ("ISL") projects. STM owns significant and diverse land packages in the premier historical uranium producing districts in the U.S. While the "Church Rock" project in New Mexico (with 14.8mlbs) may not produce owing to the current Navaho opposition (the adjacent, also called "Church Rock" project by Uranium Resources Inc. (NASDAQ:URRE), is in litigation and negotiation with the Navaho tribe.), in time I expect STM’s other roughly 145mlbs of uranium to get produced. Moreover, when modern geological exploration techniques and drilling are applied to STM’s older projects they have been able to expand the historical uranium resources. I expect that to continue. While I have had some concern about STM’s ability to execute (cut expenses, marketing) the company President David Miller is very capable and seasoned; and STM has Japanese trading giant Summitomo Corp. ("Summi") as a $50mil JV partner on its more difficult/expensive "Gas Hills" NM project. In short, I expect Mr. Miller can, and Summi will, be able to carry the ball and get the projects developed. At the end of the day if STM cannot monetize these lbs someone will—note, STM’s market cap is $11 million less than the $50 million Summi is paying for only roughly 12.5mlbs of STM’s 160mlbs in projects. If it were politically viable (it is not), Summi would do better to buy the company, recapture the other 40% of the JV, and gain roughly 145mlbs in resources!

Another favorite, which I have let the cat out of the bag a bit, is Pitchstone Exploration Ltd. (TSX.V:PXP). In my opinion, perhaps the best-kept uranium exploration secret in Canada has been PXP’s greenfield Namibian project. I would say that is because the project and its potential not only flew under investor’s radar—but management’s as well! PXP has a 55% interest in two properties from Manica Minerals Ltd. through Manica’s wholly owned subsidiary Cheetah Minerals Exploration Ltd. The two properties are large; Kaoko and Dome projects total approximately 300,000 ha. It is important to note approximately 70% of these projects are under desert sand overburden which render airborne radiometrics useless. While this will require more ‘blind drilling’ from widely spaced drilling "fences" based upon gravity surveys, it does not rule out the prospects merits. After all, Extract’s new Namibian world-class "Rossing South" development project was a self-described "blind target" as well.

DISCLOSURE:
I personally and/or my family own the following companies mentioned in this interview: Strathmore and Pitchstone (owned before interview proposed)
I personally and/or my family am paid by the following companies mentioned in this interview: N/A

Merrill W. McHenry, MBA, CFA, has been in the investment business for 25 years. As a portfolio manager he managed over US$1.5 billion in two U.S. mutual funds, and set up an international mining merchant bank. As an analyst he has worked both the buy and the sell sides; and currently provides contract research for Tier 1 and Tier 2 Investment Dealers, as well as prominent global investors. Mr. McHenry is a member of the CFA Institute, and the Toronto Society of Financial Analysts. He is owner of the domain name, and previously ran the website Uraniumanalyst.com . He can be reached at uraniumanalyst@gmail.com.

The Energy Report checked in with Barbara Thomae, Senior Mining Analyst with the MineralFields Group, who says that they believe the economic recovery will spur reinvestment into the uranium sector, especially once uranium prices strengthen in line with other commodities. She says her firm’s prudent portfolio picks (overweight in uranium and heavily overweight in gold juniors) have enabled them to have the best performance track record among all flow-through limited partnership groups for the past four years. Read on.

The Energy Report: There’s a lot of "news" swirling around uranium (i.e. Russia has a moratorium, China is building dozens of nuclear facilities, recession is pausing development of nuclear facilities and more.) What’s the truth regarding uranium? What should investors in this sector be watching?

Barbara Thomae: All this news does seem to be confusing investors and part of the problem is that there is no formal physical exchange for uranium as with other commodities like precious metals or oil. Indications for the price of uranium appear to have been trending lower (now at US$48.50 per pound) at a time when other commodities are trending higher in anticipation of an end to the recession. We believe that since uranium prices are negotiated through contracts between producers and consumers, investors need to look at the long-term supply and demand equation when it comes to uranium. They should consider the positive impact that the global acceptance of nuclear energy will have on the demand side over the next 10 years. Countries are definitely getting more politically motivated toward utilizing nuclear energy as a viable non-greenhouse gas-generating alternative to oil or coal.

TER: Is there a current or pending shortage? How large (in size or duration) is the shortage?

BT: We understand that mined production of uranium fell short of consumption by 60 million pounds last year, and the shortfall was made up by using recycled nuclear material from weapons from Russia. But this agreement is set to end in 2013 and if it is not renewed, primary uranium production will need to be stepped up significantly. With some 436 new reactors being planned worldwide, uranium demand is expected to rise at least 30% over the next decade.

While many assume that the supply from primary uranium sources (mines) will be there to meet demand, we believe that this is wishful thinking considering that new uranium deposits are very hard and expensive to find and then equally as complicated to permit and develop, creating a huge time gap between discovery and mining phases. The Europeans and Asians are not taking any chances and are busy locking into uranium supply deals now when prices are low. There are reports out that the Japanese government is encouraging domestic companies to invest in Australian uranium mining ventures to secure its nuclear fuel requirements down the road. Cameco, which controls some 15% of global supply, is in talks with the Chinese about a possible supply agreement.

TER: To what extent is any pending gap between supply and demand reliant on increased demand from new facilities being constructed versus ongoing operations of existing nuclear facilities?

BT: Since about three times as much uranium is required during the start-up phase when compared to reactors that are operational, we believe these new facilities will be responsible for a significant increase in future demand. In addition, the new reactors will be higher capacity than those operating, thereby adding to the demand.

TER: Do you see the fundamentals of investing in uranium changing much before the end of the year?

BT: We believe that the economic recovery will spur re-investment into the uranium sector, especially once uranium prices strengthen in line with other commodities. More foreign supply agreements are bound to put upward pressure on prices before the end of this year.

TER: Is the value of uranium and uranium stocks dependent on an economic recovery? So if the economic recovery stalls, will this be reflected in uranium stock prices?

BT: I believe that the value of uranium and uranium stocks depend at least in part on an economic recovery. The recovery should spur development and hence increase energy needs and drive prices for fossil fuels and uranium higher. This should result in getting nuclear energy projects approved and result in higher demand for uranium. An economic recovery will also serve to bring in the capital investments required for uranium projects at both the exploration and the development stages, and go a long way toward easing investors’ fears that projects will not get financing.

TER: Do you see certain geographical areas for uranium exploration being better for investors, like Canada’s Athabasca Basin?

BT: In terms of economic potential, the Athabasca Basin can’t be beat for high uranium grades; however, there are many other issues that need to be considered beyond the exploration stage. Proximity to infrastructure, permitting, First Nation and environmental and safety issues, as well as ground conditions can significantly impact the economics of a project. We have seen key players, like Cameco Corp. (TSX:CCO), having to delay the start of production yet again at its Cigar Lake property owing to flooding.

Areas in Canada that look interesting in terms of future production include the Thelon Basin in Nunavut. Kivalliq Energy Corp. (TSX.V:KIV) is taking a proactive approach towards exploring and developing its Lac Cinquant uranium deposit in Nunavut. It struck a deal with the Inuit that includes a working interest in the project that was discovered in the 1980s. While the deposit has moderate uranium grades compared to the Athabasca, they are still fairly high and located closer to surface. We also believe that companies exploring in the Central Mineral Belt in Labrador could regain their foothold once the moratorium on exploration is lifted in two years time if not sooner.

TER: There seems to be some American properties that are getting attention. . .are you as interested in the companies with assets in Texas, Wyoming, Utah and New Mexico? What about other global areas?

BT: Since MineralFields Group and Pathway Asset Management currently are primarily focused on flow-through financing, we support the junior uranium exploration sector throughout Canada (with the exception of British Columbia, which placed a ban on exploring and mining uranium in the province last year).

Each U.S. state must be judged on its own merits. Wyoming, which is very rich in uranium resources, ranks as the most mining-friendly jurisdiction in the U.S. by the Fraser Institute. But I am hearing about companies like Denison losing money on some of their in situ leach operations in the U.S. and it doesn’t help that the government just designated nearly one million acres of Arizona land near the Grand Canyon off limits to new uranium mining claims for two years.

On a global scale, parts of Australia are very prospective for uranium and considered low risk. There seem to be some very worthwhile projects in places like Kazakhstan, Mongolia, as well as Niger; however, the geopolitical risk there is much too high for most juniors.

TER: From an individual investor’s point of view, provide your perspectives on investing in juniors compared to seniors.

BT: MineralFields Group looks for undervalued juniors that are trying to expand their resource base, those that are approaching development and those that have compelling geologic targets for new discoveries, all with credible and experienced management. We believe that the investment rewards are definitely highest during the discovery phase of the mining cycle. But this can be fairly challenging for a junior in terms of expenses and time constraints so we prefer to back those with senior levels of professional or academic expertise on board.

Seniors do offer more security, but they tend to be more secretive about their new finds—leaving investors out of the action when discoveries are made.

Actually, MineralFields and Pathway have been overweight in uranium, and heavily overweight in gold, juniors for the last several years, and our prudent portfolio picks have enabled us to have the best performance track record among all flow-through limited partnership groups for four years in a row (from 2005 to 2008 inclusive), with details on our website (see below).

TER: Do you have any favorite uranium companies, seniors or juniors?

BT: Our MineralFields and Pathway funds are holders of Northern Continental Resources Inc. (TSX.V:NCR) due to the outstanding discovery potential at its Russell Lake property in the Athabasca Basin. A superior takeover bid by Hathor Exploration Ltd. (TSX.V:HAT) last month over rival Denison’s initial bid for Northern Continental will likely be approved in the coming weeks. We really like Hathor’s aggressive yet scientific approach to exploration and feel it will lead to a discovery at Russell Lake before too long.

We also invested in Fission Energy Corp. (TSX.V:FIS) recently as part of a $3.9 million raise as the company plans to drill test a similar structure as that which hosts the adjacent high-grade Roughrider uranium deposit that Hathor is successfully defining. Fission was spun out from Strathmore Minerals Corp. (STM.V) in 2007 to separate out its Canadian properties. The company has plans to drill its Dieter Lake property in Quebec this summer using flow through dollars.

We are investors in Vancouver-based Anglo-Canadian Uranium Corp. (TSX.V:URA) who has two early stage uranium properties in Quebec’s Otish Mountain area. We like the diversity this company brings as it also has 13 uranium properties in the western U.S. and is expanding its portfolio through recent acquisitions in gold and copper prospects in the Yukon, British Columbia and Quebec.

As mentioned, we financed Kivalliq Energy’s (KIV.V) in its efforts to confirm historical uranium resources and test the extent of this mineralization along an anomalous trend at its Lac Cinquant property in Nunavut. We believe they should be successful because surface showings along the trend have returned encouragingly high grades of uranium in association with silver and copper.

Our most recent investment is in CanAlaska Ventures Ltd. (TSX.V:CVV) to support its drilling program that will test for basement-hosted feeder systems at the Fond du Lac property that it can earn up to 49% in from the First Nation reserve lands. We were encouraged by the company’s uranium expert, Dr. Karl Schimann, who has identified the type of alteration/mineralization that signals uranium mineralization potential nearby and the fact that the property is situated on the northern portion of the Athabasca basin where the unconformity target is within 100 metres of the surface. CanAlaska is also active on several other fronts within the Basin this year.

DISCLOSURE: From time to time, Streetwise Inc. and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site and their families 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. Streetwise Inc. does not guarantee the accuracy or thoroughness of the information reported.

With over 25 years of experience as a geologist in the resource sector, Barbara Thomae’s (P.Geo.) work history includes consulting work for junior and senior mining companies since the early 1980s. Barbara is currently a Senior Mining Analyst with the MineralFields Group . She joined MineralFields Group as its Senior Mining Analyst in October 2005 and heads its Vancouver office to focus on coverage of Western Canadian based junior mining companies and financing opportunities. Barbara also holds a graduate level Diploma in Environmental Science and is a professional geoscientist (1992) registered in the province of British Columbia and a member of the CIM and the Geological Association of Canada. She graduated from the University of British Columbia’s Geological Sciences program in 1983.

The whole alternative energy field has gotten a big boost recently due to two concerns. The first being global warming the other being our dependence on imported foreign oil. Of course my personal opinion is that I do not subscribe to man made global warming. However this has nothing to do with making money. The rent seekers like General Electric, Goldman Sachs, and various electric utilities know they can make money from this issue. My view is that I am personally opposed to what is going on however in the times we live in my obligation is to ensure my family survives and prospers. I will worry about saving the world later.

With public opinion and the Democratic party, specifically this President, aligned on alternative energy we now are facing an unprecedented time where the powers that be are fully behind and are endorsing a resource market we can invest in with high odds of success. If you have been keeping track of the various spending bills you will see that the rent seekers lobbyists have gotten certain provisions inserted that benefit their particular interests.

With respect to alternative energy we are seeing production credits, capital investment tax credits, and various incentives to try and get more alternative energy up and running. Of course most of these schemes will be unprofitable or have low rates of return without the subsidies but there is one area that can stand on its own and will only have its returns enhanced by more government support. I am talking about geothermal.

Geothermal energy is using the heat that is present in the earths crust, particulary in areas of high volcanism, to produce steam which is sued to create electricty. I am not going to go into all the engineering details here, you can read that at this link. The reason I like geothermal over wind or solar is because once the plant is built the fuel like wind and solar is free. The most important reason is that geothermal energy is baseload which means it is on all the time or least >98% of the time. Wind and solar suffer from the fact that the wind doesn’t always blow and the sun is not always out. Power companies prefer to buy baseload power because they do not have to put in backup generation, like natural gas fired turbines, to pick up the slack when the wind is dead or it is nighttime.

Having established that geothermal has advantages over wind and solar what are the investment options. There are many well established geothermal facilities in the western US, however they are owned by Chevron and Calpine. Your direct exposure would be limited by the size of the geothermal assets relative to the companies other assets. A pure play would be Ormat and I own this company. Ormat owns, operates, and builds geothermal plants not only for itself but others. In fact the company has one of the better technologies for capturing geothermal heat. However I am looking for a ground floor opportunity to make some big bucks. I think I have found it with Magma Energy.

Magma Energy is a company that recently came public to take advantage of the upcoming bullmarket in alternative energy. When dealing with resource companies the key ingredient to success is management. Good management in the resource sector can take a mediocre project and make it shine. Conversely poor management can ruin a a great project. Magma is headed by Ross Beaty whom is nicknamed "the broken slot machine" because of all the successful resource companies and shareholder wealth he has created. To be able to partner with an icon like this on the ground floor is a rare opportunity.

Magma came public in June 09 and raised $152 million dollars. The company already has one small operating plant with expansion potential in the next six months. Magma has 4 advanced stage exploration projects and 21 early stage projects in the pipeline. I found it interesting that the company took a position, announced last month, in the big Icelandic geothermal company HS Orka. The management is very entrepreneurial and agile and I expect a steady stream of news and deal flow. I am taking an initial position and then will be adding on any dips as I view this as an opportunity for a long term ten bagger if Mr. Beaty’s track record is repeated. Please do your own due diligence.

John Polomny
The Real Deal

In the waning days of the Great Depression, Franklin D. Roosevelt signed the Rural Electrification Act (REA) of 1936 into law, heralding a new era of growth and prosperity for the U.S. heartland.

You see, while electricity was generally available in cities and towns, it was nearly unheard of on farms, ranches and other rural areas. But the REA brought electric power to these sparsely populated Midwest farms and ranches.

Today, we’ve got the opposite situation.

President Obama is hoping that rural areas in the Midwest will return the favor by providing much needed wind-generated power to densely populated cities and towns on both the east and west coast.

Trouble is, the wind turbines that produce such power are huge and not well suited to heavily populated areas. They’re a better fit in the vast, open plains of the nation’s heartland, where the wind almost never stops blowing.

Here’s why wind power is still going to be the driving force that changes the way we use energy – and one of the biggest obstacles it currently has for getting us to where we need to be…

Gale-Force Growth

2008 was a banner year for the wind power industry. Previous installation records were smashed, with over 8,500 megawatts (MW) of new generating power installed in the U.S. alone. That’s enough to light over two million homes.

In fact, wind power installations represented 42% of all the new power generation capacity added in 2008. And the 44 million tons of carbon emissions avoided in the process equates to taking seven million cars and trucks off the roads.

As a result of the current recession, wind energy installation for 2009 will be somewhat muted compared to last year – about 5,000 MW expected to be installed. But despite the downturn, the industry is still in expansion mode.

And for the U.S., that bodes well, since a lot of the components are engineered and “made in the USA” – components that now make up about 50% of the average system, up from 30% in 2005.

And like any other burgeoning sector, when business is booming, companies expand and hire people. For example…

• In just the past two years, wind turbine, tower and component manufacturers added or expanded 70 facilities, 55 of them in 2008 alone.
• Today, 85,000 people are employed in the wind industry – a 70% increase from just one year ago.

So it’s all good news, right? Well, almost all of it…

Power Gridlock

As I noted earlier, while plenty of wind farms dot the ranchlands of the Midwest, the bulk of the power is needed in the dense urban areas on the east and west coasts.

But there’s a big problem: The existing power grids won’t get the job done.

Consider this: 3,000 utilities generate power and send it to 500 transmission owners. They control over 164,000 miles of transmission lines, divided into three major interconnection regions: East, West, and Texas.

As an electrical engineer, I can appreciate the technology, but it’s truly amazing that it all plays together.

But they’re fragmented, low-power grids that aren’t capable of transmitting the hundreds of thousands of megawatts needed for the big metropolitan areas that are thousands of miles away from the wind farms.

The bottom line is that in order for the estimated 300,000 MW of proposed wind power to get to where its needed, the U.S. will need to spend $60 billion on grid upgrades and interconnects by 2030.

But even if that $60 billion were available on this kind of alternative energy right now, not a dime of it would be used to build transmission lines.

The problem? Red tape with a capital “R”…

Can The Wind Industry Blow Through A Mass Of Red Tape?

Here are just three regulatory problems standing in wind power’s way…

• Regulations that aren’t designed for power transmission between states.
• Rules that burden the local ratepayers unfairly with the construction costs instead of distant beneficiaries.
• Approval times are measured in years, not months.

Here’s an example of how ridiculous it gets: American Electric Power (NYSE:AEP) is a public utility holding company in the business of generation, transmission and distribution of power at both the retail and wholesale level.

As part of an expansion of its network, the company erected a transmission line between West Virginia and Virginia. The construction time was two years. The approvals took 14.

Susan Tomasky, AEP Transmission President, explains the problem: “There are lots of people with authority to make pieces of the decision – and no single entity that can say ‘yes’ or ‘no’.”

Clearly, what we need is a federal permit to locate cross-country transmission lines. And it’s not a new idea. The government has done it with natural gas pipelines since the 1960s.

The Future For Wind Power

So what are the chances of the feds saving us and getting it done in the near future?

Better than you might think. Jeff Bingaman – Chairman of the Senate Energy Committee – has a proposal that will require comprehensive plans for grid interconnections.

More importantly, it will greatly expand the Federal Energy Regulation Commission’s powers to include locating big new transmission lines at the federal level (bypassing the myriad of local regulations) and the authority to properly allocate their costs.

And firms like AEP and ITC Holdings Corp. (NYSE:ITC), another power generation and transmission company, are both eager to invest and build lines from the Midwest to cities in the east.

However, even if all goes according to plan – which isn’t ever the case in Washington – these lines wouldn’t be in service until 2020 or so. Clearly, a more streamlined approach is needed. And the refreshing news… it appears that politicians are actually working on the problem.

I’ll be watching and reporting on it here and in my Energy and Infrastructure newsletter, soon to be published by The Oxford Club.

Good investing,

David Fessler
Guest Contributor, Smart Profits Report

The thought that jumps to mind is that solar power isn’t going to be “alternative energy” for much longer.

In spite of the current economic malaise and market downturn we’re navigating through, solar energy is one of the few bright spots (pun intended) in the alternative energy space.

The reason?

• Continued advances in solar panel technology are resulting in cheaper, more efficient panels.
• Government subsidies at both the state and federal levels are making the installation of residential solar more compelling than ever.

Here’s why solar is looking brighter by the day, and a major retailer that could change everything.

The Solar Energy Industry’s Solar Cell Production

For the past few years, the solar power industry has been capacity constrained by the lack of polysilicon, the basic foundation on which chemicals are deposited to produce the solar cells used in panels.

But as in other areas of the semiconductor industry, technology marches on. The newest panels are based on thin-film technology, and don’t require polysilicon. No fewer than 143 companies are involved in some aspect of thin-film panel technology.

Thin-film is fast becoming the new standard in panel technology, and in a few years will render polysilicon panels obsolete. Right now, thin-film panels are averaging about $1.40 per watt, but that number will be halved in a year or two.

That alone will make thin-film panels competitive with their polysilicon predecessors, but panel efficiencies – currently around 9% – are rising, and will likely reach 18-20% in the next few years.

Combined, decreasing costs and increasing efficiencies will soon make solar panels the cheapest power source on the planet.

Like everything else, economics will ultimately drive the solar panel industry, just like it has in the computer industry. And one of the greatest modern companies to exploit economics of scale is getting into the act.

Wal-Mart’s Solar Energy Experiment

Wal-Mart Stores (NYSE: WMT) is already evaluating the feasibility of installing solar energy panels on the roofs of its stores. Consider it “dipping a toe” in the water to check its temperature.

• If an experiment involving a few stores pans out, Walmart could decide to roll out panels to all of its stores. That’s about 35 square miles of surface area.
• Using a very conservative figure of around 3 watts per square foot, Walmart could realistically expect to produce in the neighborhood of 3 Gigawatts of power.
• That would make the low-cost retailer one of the largest power producers in the country.

Now replicate that scenario on every warehouse, and big box store in the country, and you begin to get the idea that solar energy could reasonably provide a significant percentage of the power we use, especially during peak usage times.

Storage when the sun isn’t shining is certainly an issue, but scientists and engineers are already designing load-shifting storage systems that will provide power during times of darkness or on cloudy days.

The entire sector recently got a boost when SunPower Corporation (Nasdaq: SPRWA) announced earnings and blew away analysts estimates.

If Wal-Mart does forcefully enter the solar space, we’re going to see it use its tremendous pricing power to lower the cost of solar energy and gain mass production. The kinds of things only a company of that size and negotiating power can do.

And when that happens, consumers everywhere will be jumping aboard.

Investors who want exposure to the sector should view market pullbacks as opportunities to establish small positions in their favorite solar stocks.

Good investing,

David Fessler
Investment U

Martin Denholm, Managing Editor, Smart Profits Report

The “Pickens Plan”… One Year On

Of all the people you might expect to spearhead a movement away from oil and onto alternative energy, T. Boone Pickens probably wouldn’t be at the top of the list.

But a year ago, the 81-year old chairman of BP Capital spent his own money to buy prime time on major networks and mobilized an “army” of believers in order to get the word out about the dangers of continued dependence on foreign oil.

Earlier this month, Pickens appeared on CNBC’s “Squawk Box” to discuss the progress of the “Pickens Plan,” which essentially seeks to reduce the nation’s dependence on foreign oil through a combination of wind-generated power and natural gas powered vehicles. The goal: Drastically reducing or eliminating the need for foreign oil in as little as 10 years.

His timing was perfect, as oil prices shot to all-time highs around $150 a year ago. The plan garnered a lot of attention. And to his credit, over the past 12 months, nobody else has articulated a plan as clearly and succinctly as Pickens’ has.

Today, however, oil prices are down some 54% and the U.S. is sliding deeper into recession. Is shutting off foreign oil still a concern? Have we made any progress in doing so? Are we any closer to a national energy plan?

The short answers are:

1. Definitely yes
2. Yes
3. Almost

Let me explain…

Get Rid Of The Rogues… And Pocket $400 Billion

While the price of oil has declined dramatically over the past year, our dependency on foreign oil is as great as ever. We still get over 70% of our oil from other countries, and it’s a huge security issue.

While the transfer of wealth – dollars out for oil in – is less, it’s still a huge net outflow of nearly $400 billion annually.

There’s no question that keeping that money here will not only have a positive effect on our trade balance, it’ll make a huge difference in the U.S. economy – a “free” $400 billion annual stimulus package, if you will.

Alternatively, according to Pickens, “If we go 10 more years with no plan, we’ll be importing 75% of our oil and it will cost us $300 a barrel.”

Even if he’s wrong by 50% – which is unlikely given increasing world demand – it’s still a big problem. So how do we get rid of the rogues?

The “Anti-Oil”: U.S. Natural Gas Reserves Soaring

In terms of our progress in displacing foreign oil, there’s only one quick way to do it: Replace it with natural gas.

The Potential Gas Committee – the nation’s authority on natural gas supplies – recently issued a report that showed a substantial increase in U.S. natural gas reserves.

The report indicated that the nation’s gas reserves have increased by 25% to 2,074 trillion cubic feet (tcf) from 1,532 tcf in 2006 – the last time the report was issued. It was the largest increase in the 44-year history of the committee and its language reflected that: “[The report] shows an exceptionally strong and optimistic gas supply picture for the nation.”

That’s an understatement. By 2030, it projects a supply of nearly one hundred years – the most in the world.

John B. Curtis, a geology professor at the Colorado School of Mines and the report’s principal author, said, “New and advanced exploration, well drilling and completion technologies are allowing us increasingly better access to domestic gas resources – especially unconventional gas – which, not that long ago, were considered impractical or uneconomical to pursue.”

The findings have shifted the focus onto natural gas as a possible transition fuel as we move from coal and oil to solar, wind, geothermal and other non-carbon sources of power. It couldn’t have come at a more opportune time.

A National Energy Plan: Slow And Steady, But Are We Winning The Race?

The best thing the government can do to move us away from fossil fuels is to provide funding and tax incentives to develop and use something else (and then get the hell out of the way). And it appears as though Congress is trying to do just that with natural gas.

H.R. 1835, known as the “New Alternative Transportation to Give Americans Solutions Act of 2009,” amends the Internal Revenue Code of 1986 to create jobs and encourage alternative energy investments.

Here’s what this act provides:

• An excise tax credit through 2027 for alternative fuels and motor vehicles involving compressed or liquefied natural gas (LNG).

• An income tax credit through 2027 for vehicles powered by compressed or LNG.

• A new tax credit for the production of vehicles fueled by natural gas or LNG.

• A tax credit for alternative fuel vehicle refueling property expenditures for refueling property relating to compressed or LNG and allow an increased credit for such property.

• Requires 50% of all new vehicles purchased or placed in service by the U.S. government by December 31, 2014, to be capable of operating on compressed or LNG.

• Authorizes the Secretary of Energy to make grants to manufacturers of light and heavy-duty natural gas vehicles for the development of engines that reduce emissions, improve performance and efficiency, and lower cost.

Now before I get a dozen e-mails pointing out that natural gas is just a different fossil fuel, let me head them off. There’s no argument there. But here’s where it’s very beneficial…

The Benefits Of Natural Gas – And How To Play It

Natural gas is a much cleaner burning fuel, produces less carbon emissions and, most importantly, it’s found here in abundance. It’s a walk in the park to produce new cars and trucks that run on it, and convert older ones as well.

And if it helps free of the grip of rogue nations around the world in 10 years or less, then I’m all for it. We’ll all be better off economically, and we’ll all have greater piece of mind.

How do you play it? Take a look at Clean Energy Fuels Corporation (Nasdaq: CLNE), a provider of natural gas as a vehicle fuel, primarily for fleet use in the United States and Canada. It designs, builds and operates natural gas fueling stations, and provides financing for natural gas vehicles. It and others in the sector will undoubtedly benefit from this legislation when it’s passed.

Good investing,

David Fessler
Guest Editorial, Smart Profits Report

CNOOC and Sinopec will form a 50-50 joint venture to buy the stake in the so-called Angola Block 32, which has 12 previously announced discoveries. The Chinese energy giants purchased the stake from U.S.-based Marathon Oil Corp. (NYSE: MRO), but the sale is still subject to government and regulatory approval.

Marathon’s existing partners in the block – France’s Total SA (NYSE ADR: TOT), Portugal’s Galp Energia SGPS SA, Exxon Mobil Corp. (NYSE: XOM), and Sonangal, Angola’s state-owned oil company – have a right of first refusal. Marathon will keep a 10% interest in the block.

The oil field “is a significant resource base with estimated recoverable light crude oil reserves of 1.5 billion barrels,” Goldman Sachs Group Inc. (NYSE: GS) analysts wrote in a report, according to MarketWatch. “The $1.3 billion consideration compares with our valuation of $1.4 billion to $1.65 billion and Marathon’s publicly disclosed offer of $1.8 billion to $2 billion.”

The acquisition will build on CNOOC’s “growing deepwater exposure” and values the recoverable reserves at $4.30 a barrel, the analysts said.

The acquisition will also build on two of Beijing’s broader objectives: Securing long-term energy resources and expanding its presence in underdeveloped, and riskier, countries in Africa and the Middle East.

Since last fall, China has been using the Western world’s financial crisis as an opportunity to stock up on commodities while prices are low.

Sinopec recently paid $7.22 billion to acquire the Addax Petroleum Corp., a Canada-based energy company with operations in West Africa and Iraq.

Meanwhile, Sinopec’s rival, China National Petroleum Corp. (CNPC), made its own foray into Iraq, winning the first contract in more than 30 years to develop the Rumaila oil field.

China’s involvement in Africa has an even richer history.

In 2006, Beijing hosted the China-Africa Cooperation Forum – an event attended by more than 40 African heads of state.  At the forum, China unveiled $9 billion in preferential loans, export credits, and trade incentives – all part of a strategic plan to achieve a preferential status with key African nations.

The meeting was more than a mere publicity stunt to play up Beijing’s humanitarian efforts. It was a symbolic acknowledgment of growing cooperation between the regions.

China has invested tens of billions of dollars directly into African-infrastructure and social-development projects, all in an effort to tighten its grip on the continent’s resources. Some examples:

• In Freetown, the capital of Sierra Leone, office blocks, military headquarters and a refurbished stadium are all the work of planners from Beijing.
• In Uganda, the new State House was built with Chinese money. 
• In the city of Rwanda, Chinese companies built 80% of all new roads.
• And in Nigeria, China’s Civil Engineering Construction Corp. is building an $8.3 billion railroad linking Lagos and Kano.

And Money Morning Investment Director Keith Fitz-Gerald says this is only the beginning.

“It’s a virtual certainty that China will maintain this policy going forward,” Fitz-Gerald said. “My contacts in China and Africa have told me point blank that China’s leaders ‘don’t care about human rights or nukes or hostile governments.’ What matters is anyone who provides oil to China no matter what the rest of the world thinks.”

By Jason Simpkins
Money Morning

The oil giant is looking to spend more than $600 million on the research and development (R&D) of next generation biofuels from photosynthetic algae in an alliance with privately held Synthetic Genomics Inc (SGI), which was founded by genome map pioneer J. Craig Venter.

“This investment comes after several years of planning and study and is an important addition to ExxonMobil’s ongoing efforts to advance breakthrough technologies to help meet the world’s energy challenges,” said Emil Jacobs, vice president of research and development at ExxonMobil Research and Engineering Company. “We believe that biofuel produced by algae could be a meaningful part of the solution in the future if our efforts result in an economically viable, low net carbon emission transportation fuel.”

Under the program, if research and development milestones are successfully met, ExxonMobil expects to spend more than $600 million, which includes $300 million in internal costs and potentially more than $300 million to SGI.

“While significant work and years of research and development still must be completed, if successful, algae-based fuels could help meet the world’s growing demand for transportation fuel while reducing greenhouse gas emissions,” said Michael Dolan, senior vice president of ExxonMobil. “Our new algae biofuels program complements ExxonMobil’s ongoing efforts to reduce emissions in our operations and by consumers of our products, through both efficiency improvements and technology breakthroughs.”

Exxon Mobil’s collaboration with SGI will last between five and six years and will involve the creation of a new test facility in San Diego to study algae-growing methods and oil extraction techniques. After that, he said the company could invest billions of dollars more to scale up the technology and bring it to commercial production.

Neither company is making guarantees.

“We’re not claiming to know all the answers,” said Venter. “There are different approaches to what is truly economically scalable, so we’re testing things and giving a new reality to the timelines and expectations of what it takes to have a global impact on fuel supply.”

By Bob Blandeburgo
Money Morning

P.S. 1,100 People Just Learned How To Collect $4,000 In One Month

No tricks or “catches” were involved. No fancy investment “plays” either.
In fact, the $4,000 was guaranteed. No ifs, ands, or buts.
All these people had to do to get this money was take a few simple steps every investor knows how to do in his sleep.Now, it’s your turn to get in on this “secret.”Read Martin Hutchinson’s report here…

It introduces huge new distortions in markets, imposes onerous new regulations on a number of industries, requires a large addition to bureaucracy and risks a trade war.

And it does very little to fight global warming.

At this point, however, investors really only need to know two key things about this legislation in order to set themselves up for profit, while avoiding any losses from the bill’s fallout:

• From a political standpoint, Waxman-Markey is likely to become law in something close to its current form, meaning investors can craft a plan of attack with a fairly high degree of confidence.
• And, from an economic standpoint, it seems to define a pretty clear set of winners and losers, enabling us to flesh out that plan.

A “Good” Tax?

I’m not sure whether I believe in global warming. We clearly seem to be producing more carbon dioxide than we used to, but it’s not clear how much of an effect that’s having on global climate. Equally, the effects of extra carbon dioxide are long-term and largely irreversible, so even if the warming effect is limited in our lifetime, we probably owe it to our grandchildren not to leave them living in a steam bath.

To the economically minded who share my skeptical-but-cautious view, the optimal policy is pretty obvious: We should enact a carbon tax. Government operations have to be funded somehow, and there’s no obvious reason why a carbon tax should be any more economically damaging than any other kind of tax.

A carbon tax has two advantages over other alternatives:

• First, it can be varied easily, as we get new information and become more worried or less worried about global warming.
• Second, it allows investment and purchase decisions to be made by the market, just tweaking the price mechanism a bit to reflect our concerns about carbon emissions.

We’re not going to get a carbon tax, because it has the politically deadly word “tax” as part of its name. Still, during the presidential campaign, then-candidate Barack Obama showed off a pretty sensible “cap-and-trade” program. All the carbon emissions permits were sold, so the market was able to work properly, with no freebie giveaways to politically favored recipients. Further, there were no  “offsets” by which companies could satisfy domestic permits by persuading the Chinese not to build a dirty coal-fired station, for example (these have given rise to innumerable scams in the European Union cap-and-trade system).

Such a system would have raised lots of revenue, helping to close the budget deficit and pay for healthcare reform, which ought to be one of its major objectives, given the United States’ now-dire fiscal position.

The Lowdown on Waxman-Markey

That’s not what we’re getting with Waxman-Markey, under which 85% of the emissions permits will be given away for free. That depresses the amount of carbon emissions saved, because with so many free permits available, the price of permits will be low.

Also, Waxman-Markey forces new buildings to use 30% less energy by 2012, intruding the U.S. federal government into yet another business previously regulated at the state level. It allows “offsets” for 2 billion tons of carbon emissions a year – 50% domestic and 50% international.

Finally, it doesn’t even raise any net revenue, because the giveaways and administration costs match the fairly paltry revenue raised through selling permits; according to the Congressional Budget Office (CBO) it’s just barely “revenue neutral” in the 2010-2019 time frame. That’s a major problem for President Barack Obama’s budget, which had assumed $624 billion in revenue from cap-and-trade in that same period.

The Winners and Losers

Needless to say, with the government rearranging deckchairs and giving out goodies in such a big way, there will be winners and losers. Clearly that’s what investors most need to understand.

One winning category will be distribution-oriented public utilities – the guys who actually send out electricity bills, including Consolidated Edison Inc. (NYSE: ED), Pepco Holdings Inc. (NYSE: POM) and Northeast Utilities System (NYSE: NU).

These companies will be given permits for 35% of the total “cap” amount in the early years, with instructions to provide rebates on electricity prices. Some of the value of those free permits is bound to flow through to shareholders. In fact, the bill was passed on a Friday, and it was notable that on the following Monday that the distribution-oriented utilities showed a nice bounce. If you can get a 7% dividend yield from the company that sends you electricity bills, it’s probably a buy!

Clean-coal technologies (primarily carbon capture and storage) are due to get 5% of the emission permits over a lengthy period. Most of the companies experimenting in this area are privately held, but Duke Energy Corp. (NYSE: DUK) is planning a carbon-sequestering power station in Indiana, so may be a beneficiary here – as well as through its operation as a major power distributor.

Another group of winners will the sharper (most-creative) operators in the financial-services arena. Since emissions permits will trade, somebody will have to trade them. What’s more, there will quickly arise the whole paraphernalia of futures, options, swaptions, and default swaps. Bear Stearns and Lehman Brothers are, alas, no longer with us, but Goldman Sachs Group Inc. (NYSE: GS), as always, will be prominent at the front of the queue!

Losers? Well, all of us who will pay more for power, but also the Canadian oil sands companies, such as Suncor Energy Inc. (NYSE: SU), who seem fated to pay a hefty premium for their carbon-expensive operations. Probably, the major petrochemical companies such as The Dow Chemical Co. (NYSE: DOW) will be losers, too, as will other carbon-intensive industries. Housing companies will be losers – they use quite a lot of carbon-emitting materials, and will be forced to adopt expensive energy-saving technologies, making their products less affordable.

Of course, all this analysis depends on whatever changes the U.S. Senate may make to the legislation. And that chapter has yet to be written.

By Martin Hutchinson
Money Morning

The Energy Report caught up with newsletter writer and analyst Lawrence Roulston, who recently launched the GreenTech Opportunities newsletter. In this exclusive interview with The Energy Report, Roulston gives us his thoughts on developments that are happening in the alternative energy field, and ideas for profiting in a changing world.

The Energy Report: Lawrence, you have just returned from trips to Dubai, Hong Kong and Europe. What does the rest of the world think of the health of the U.S. and European economies?

Lawrence Roulston: It is striking how different the outlooks are in different parts of the world. In North America, most people are totally focused on the U.S. economy, which is not looking that promising in the near term. Therefore, investors are quite gloomy. Europe is also not very upbeat. But, in Europe, they are more pragmatic and they tend to look a little further into the future. As a result, many European investors see this down period as a buying opportunity. Parts of Asia were hit hard by the slowdown, but there is still a lot of growth in China and India. China reacted quickly with an effective stimulus plan that is focused on building infrastructure. Growth there is forecast at 8% for this year. With enhancements to rail, roads, ports and the like, China will become an even greater economic force.

TER: What is the Asian perspective on the importance of emerging markets to global economic turnaround?

LR: There is a myth that Asian growth depends mainly on exports to the West. Much of the economic activity in Asia is related to trade within the region. After the credit crisis, there was a severe shortage of export financing, which meant that exports plummeted. Now that financing is available again, activity is recovering throughout the region. Asians are far less concerned about the global situation than they are with what is happening in the region. With China, which is the third-biggest economy in the world, growing at 8%, it doesn’t really matter what happens in other regions. Once upon a time, Asian growth depended on exports to the West. Now, the West will benefit from growth in Asia.

TER: What do investors in other regions think about the U.S. dollar?

LR: Investors are very nervous about the outlook for the dollar, but it remains the global currency. People can see the long-term downtrend in the dollar. As a result, the dollar is seen more as a medium of exchange. It’s held for the short term, by most investors. Of course, the Chinese government holds most of its $2 trillion dollars worth of foreign currency reserves in dollars. There is growing nervousness about that huge exposure and moves away. In part, the government is buying commodities.

TER: It’s been said that the Chinese government is buying commodities and stockpiling these commodities as a way to get out of the U.S. dollar. If this is true, should we expect commodity prices to fall when China has built up a significant stockpile and, if so, in what timeframe?

LR: The Chinese government is taking advantage of low metal prices to build strategic stockpiles. They are smart enough that they are not going to push the price up with their buying. Recovery in the West should dovetail with the Chinese buying so that the prices will not drop. The amount of actual commodities being bought for the stockpiles is small in relation to the total value of their reserves.

Much of the Chinese buying of commodities that we read about in the popular press is about Chinese companies in the private sector acquiring interests in metal deposits with the intent of developing mines. The Chinese mining industry is becoming quite large and it is only natural that they acquire resources.

TER: What will be the impact on the U.S. dollar if/when commodity prices fall?

LR: I don’t believe commodity prices will fall. What we are seeing now are commodity prices that reflect weak demand as a result of the recession in the West. As the Western world gets back on track, commodity prices will continue higher.

TER: To give our readers some perspective for your comments regarding energy, can you summarize the focus of your GreenTech Opportunities newsletter and why you chose that focus over a general energy or an emerging technology newsletter?

LR: There has to be a shift in the way the world generates energy. At present, burning carbon fuels provides 88% of all the energy in the world. The next biggest energy source is nuclear. The biggest carbon fuel is oil. There is a limit to the amount of oil that can be produced. The alarmists will tell you that we will run out of oil soon. The reality is that oil production has been increasing steadily for decades.

In the not very distant future—estimates range from next year to as much as 12 years from now—the total oil production will no longer increase. With demand continuing to increase, flat oil production will cause considerable disruption. Furthermore, a growing portion of oil production is coming from politically unstable or unfriendly jurisdictions, causing a lot of concern about energy security. It is vital that we begin now to get away from carbon-based energy.

There are numerous alternative energy forms in operation. They all offer enormous promise. But, most of the alternative energy forms are not economically viable at current prices and with current technology. There is enormous scope to improve technologies and to develop new technologies. The focus of GreenTech Opportunities is to raise awareness of the challenges, but more to the point, to make investors aware of the enormous opportunities available.

We have been enormously successful at Resource Opportunities at identifying emerging companies. We are bringing that skill at recognizing successful management and the other elements involved in building winning innovative companies.

We believe that the most important element in the transition to a cleaner energy environment will be the technological enhancements that will allow broader application of alternative energy forms. As in all fields, a great deal of the innovation happens in the small companies.

TER: The first issue of GreenTech Opportunities focused on two key factors for a pending demand for changes in our fuel consumption: 1) peak oil/gas—we will shortly reach the point where consumption is greater than production and 2) environment impacts of using fossil fuels is greater than the benefits of the currently cheaper fossil fuel energy options.

Awareness of global warming (the environment impact of using fossil fuels) initiated the desire for changes in our energy consumption. Without global warming as an issue, is there enough momentum from other drivers to sustain the desire for change?

LR: Global warming helped to mobilize public sentiment and government policy. It’s hard to know, but at this time the momentum has shifted so firmly in favor of alternatives that it really doesn’t matter. I firmly believe that the cost of the alternative energy forms will drop quickly enough that they will become economically viable, and in many cases provide cost advantages over traditional energy forms. Alternative energy will get cheaper as more implementations lead to reduced costs through economies of scale. In addition, there are many technological improvements in the development stage that will have a big impact on cost. In addition, the huge effort being mobilized in that direction will continue to reduce costs.

TER: Peak oil/peak natural gas is fueling the demand for investment in alternatives fuels due to the assumption that as we reach the peak, the prices for these fuels will increase, making energy unaffordable. If the peak for oil/gas is not a reality for another 50 years, will there be enough return for investments in alternatives?

LR: Peak oil is here in the very near future. Many of the big oil producing regions have already passed peaks. Don’t forget, the United States was the world’s largest oil producer for a period, but production has fallen way down. Experts who follow this industry are very clear that the peak is not too far away—at most a dozen years, but more likely much sooner. The pace of new discoveries has fallen way off over recent years. It takes an enormous amount of new drilling to simply replace depletion. Production from existing wells declines steadily. Production won’t drop off suddenly, but it will certainly stop rising. Demand is continuing to rise and we are so complacent about oil production continuing to rise.

TER: What alternative / technology opportunities will emerge first as successful companies/sectors?

LR: Nuclear will be a big part of the move away from carbon fuels, whether people like it or not. Wind and solar are gaining importance, but at present on the basis of “feed-in tariffs,” in effect subsidies. Geothermal is also looking very favorable. At present, geothermal only works in a few places. New technologies are expanding the applicability of geothermal. Solar is an area where there is huge potential for new technologies to impact on costs.

TER: You mentioned earlier that wind and solar are not currently economically viable sources and rely on subsidies. What is the likelihood that Federal subsidies run out before the technologies are developed to make these sources economically viable? How should individual investors look at these segments?

LR: If you are looking at a producing company, then you have to look carefully at the specifics of the company and its revenue projections, taking into account whatever subsidies may be in place. We all know that the subsidies won’t be around forever. That is exactly why we are focused on companies that are developing and enhancing technologies. The new technologies are vital. The flip side of this is that producing companies could lock in subsidies based on today’s cost structure and then bring in new technologies in the future that bring costs way down.

TER: Two years ago there was a rapid increase in uranium fueled by the projected number of nuclear facilities being built around the world and speculation of a shortage of uranium supplies. Subsequently, uranium prices have fallen and many nuclear facilities have been stalled due to the economic recession. Given this, in what timeframe do you see nuclear beginning to increase as a percentage of energy output? What is the investment strategy for this sector?

LR: There is still a looming shortage of uranium. The 400 or so reactors in the world now in operation get about 40% of their fuel from Soviet-era nuclear warheads being converted to fuel grade. The agreement under which Russia is converting uranium and supplying material to the West runs out in 2013. Russia does not intend to extend that agreement, as they will need more material internally. Another hundred reactors are planned over the next decade or so. Uranium mines can’t be developed fast enough to bridge that gap. Nuclear energy will continue to increase, but it is unlikely to increase as a percentage of energy output. It will do little more than keep pace with the overall increase in energy output.

TER: Since coal is in abundance in the U.S. it seems natural that there would be some technological advances in this area. Have you heard of any?

LR: Coal is abundant all over the world. Unfortunately, it is the dirtiest of the carbon fuels. In addition to carbon dioxide, coal-fired power plants also emit sulphur dioxide and ash. That ash contains all sorts of nasty ingredients. The research is aimed at cleaning up the emissions. There are scrubbers that remove a portion of the emissions and work is ongoing to further improve efficiencies. There is also work underway to capture the carbon dioxide. Most of the work is aimed at simply stuffing the CO2 back into the ground. That may work in some areas, but is far from a universal solution.

TER: Can you give us some specifics?

LR: In the last issue of GreenTech we introduced a company called Natcore Technology (TSX.V:NXT) that is working toward a very significant development in solar technology. Two very accomplished scientists with different approaches realized that there was huge synergy in combining their technologies. They set up a company and just took it public to finance their development work. The value of the company is now almost nothing. If successful, the new technology would have a huge impact on the solar industry, and of course on the value of the company.

We are looking now at some emerging geothermal companies that we will introduce in the next issue. There have been some big advances in technology in this area that make it far more broadly applicable than it was even a short time ago.

DISCLOSURE:
Lawrence Roulston may from time to time have a position in the securities of the companies mentioned herein, and may change his positions without notice.

Lawrence Roulston, a geologist, with engineering and business training, and more than 20 years of hands-on experience in the resource industry, launched GreenTech Opportunities (sample issue) in February. He founded Resource Opportunities—which provides objective commentary on the resource industry and emerging resource companies—in 1998. Roulston has established an impressive track record, with a particular knack for picking emerging companies that delivered ten-fold or better returns.

It also signaled the birth of small ethanol companies in the Midwest. Many of them managed to hang around long enough to get a second wind when Iraq’s invasion of Kuwait and the ensuing Gulf War pushed oil prices past $40.

But the renewed interest in ethanol proved to be short-lived, as oil retreated below $20 a barrel just four months later. As a result, many of those smaller ethanol companies couldn’t survive as profitable alternative energy investments.

Flash forward to today, where we’ve seen crude oil prices double in just the past four months. Worldwide oil demand has soared, particularly from fast-growing countries like China and India, and although the global downturn has seen the pace of demand slow, when the global economy gets back on track, it should prove even more bullish for oil.

But there’s another sector that should rise, too…

Rising Oil Prices Spark Interest In Alternative Energy

With oil prices rising again recently, it’s sparked yet another conversation about the viability of certain alternative energies.

One ETF that tracks the performance of clean energy firms is the PowerShares WilderHill Clean Energy (NYSE: PBW) – a widely traded vehicle that gives you exposure to this still-growing sector in a safer way than investing in individual companies.

While firms like Exxon Mobil (NYSE: XOM) rake in billions of dollars per quarter from oil, PBW invests almost entirely in experimental, technology-focused “green” companies. And while these guys stand to benefit from higher oil prices just like specific oil companies, their success depends more on regulatory changes, subsidies and a global recognition of the need for alternative energy solutions.

The Alternative Energy Market Gets More Attention

When it comes to the alternative energy market, wind power, solar, hydroelectric, geothermal and nuclear power have all received attention over the past couple of years.

But when the oil market first began its march towards record high prices, it was the ethanol industry that took center stage and triggered the wider debate over cleaner energy resources.

However, the ethanol market faces a battle. Despite the government’s intervention and subsidies for the industry, newer technologies are needed in order to make ethanol more viable – and the industry’s companies profitable. A good example is Pacific Ethanol (Nasdaq: PEIX) – a company that Bill Gates invested in heavily a few years ago, paying $12 a share. Today, the stock trades for just $0.40.

Below is a daily chart of PowerShares WilderHill Clean Energy (NYSE: PBW), which is currently at a critical juncture:

Chart: http://www.investmentu.com/images/iu063009chart.gif

Three Scenarios for the Clean Energy Fund

As you can see, when the stock market bottomed out in March and oil prices retested their lows, PBW’s Clean Energy Fund did the same.

Since then, however, PBW has doubled off those lows to the June 10 high of $11.37. This is right around the swing high of $11.40 that it tested back in November, before it pulled back to the trendline drawn off the March lows.

In addition, the 50-day and 200-day moving averages are very close to crossing one another – a development that sometimes indicates a short-term top.

So what we have here is a relatively clear-cut conclusion…

• A close above $11.40 would be bullish and should lead to higher prices.
• However, a close below the trendline, currently around $10, would be bearish over the short-term.
• A close or two below the 50-day and 200-day moving averages, which are currently around $9.50, could lead to a move down to $8 or lower.

Good investing,

Jim Stanton
Investment U

Eugene S. Takle, a professor of atmospheric science at Iowa State University, and the director of the school’s “climate science initiative,” says the research study concluded that U.S. wind strength has potentially declined by 15% to 30% during the past 30 years – an average decline of as much as 1% a year.

While conducting the study – which will appear in the Journal of Geophysical Research  - researchers reviewed wind data taken at airports around the United States, and then based their findings on two sets of figures: One set from 1973-2000, and the other from 1973-2005.

The study concluded that three factors could be contributing to the declines in U.S. wind strength: Land-use changes, a changing climate and changes in the kind of instruments used to measure the wind, Takle told MarketWatch.com.

“If there have been trees growing or new buildings constructed near airports, it could impact the speed of winds on airports," Takle said. However, it is also “[basic] meteorology that the wind is driven by differences in temperature between the poles and the equator, and those differences have been narrowed by climate change.”

Tough Timing

The findings come at time when the United States is making a serious push to increase the amount of electricity that’s generated by wind turbines grouped into so-called wind-power “farms.” Attempts to harness the wind are part of a broader national – or even global – commitment to “green” energy sources as a way of reducing dependence on oil and other fossil fuels for power generation.

Other power sources include solar, geothermal, hydroelectric and nuclear for commercial electricity production, while automakers are looking at new types of batteries and such innovations as power-storing “fuel cells” as alternatives to the conventional internal combustion engines that power most of the world’s cars and trucks.

The objectives are twofold. By decreasing the U.S. reliance on foreign oil, the country is hedging against the time when global supplies of the “black gold” begin to dry up, an eventuality that will propel the prices of crude and gasoline skyward. Diversifying away from oil and, perhaps, even coal is also a way of reversing – or at least slowing – environmentally ruinous (and politically controversial) global warming.

President Barack Obama is attempting to use the ongoing financial crisis to create a sense of urgency about America’s energy future, a challenge that no prior administration has yet been able to meet.

About one-third of President Obama’s $800 billion-plus stimulus package will go to infrastructure, with $30 billion allocated for U.S. roads and highways and another $10 billion earmarked for railways and mass-transit systems.

President Obama has also proposed spending $150 billion “over the next 10 years to catalyze private efforts to build a clean energy future.” The administration also proposes to increase the amount of electricity that comes from renewable resources from 10% in 2012 to 25% by 2025, Wall Street 24/7 reported in early January.

Creating the power is only part of the problem. Delivering it will be a challenge, too, especially given the country’s aging power grid. Upgrading that aging equipment is expected to cost more than $880 billion, according to a November 2008 report from the Brattle Group.

An Energy Boon For Entrepreneur T. Boone?

In many cases, those federal outlays will serve only as seed capital. It will likely fall to innovators in the U.S. private sector to really energize the alternative-power market.

One key player is legendary oilman and venture capitalist T. Boone Pickens, who has unveiled a plan to cut U.S. dependence on foreign oil through the power of alternatives such as wind and natural gas, Money Morning reported last July.

“We’re paying $700 billion a year for foreign oil. It’s breaking us as a nation,” Pickens said at the time. Former U.S. President Richard M. Nixon “said in 1970 that we were importing 20% of our oil and that by 1980 it would be 0%. That didn’t happen. It went to 42% in 1991 with the Gulf War. It’s just under 70% now. Where do you think we’re going to be in 10 years when our economy is busted and we’re importing 80% of our oil?”

Pickens wants to create what he calls a “bridge to the future” that will help cut slash the U.S. reliance on imported foreign oil by focusing on two specific alternatives:

• Cars that burn natural gas instead of gasoline.
• And electricity generated by wind power.

There’s a smooth and elegant logic to his strategy: By constructing electric-generating wind-power farms, the United States can free up natural gas supplies that currently generate 22% of the nation’s electricity. That natural gas can then be used to power cleaner-burning cars and trucks, thereby reducing our dependence on imported oil while also reducing the damage to the environment. This will also buy time for the development of other, even-greener, alternative sources of energy.

Pickens’ Wind Power Project

According to Pickens, wind power could eventually fulfill as much as 20% of the United States’ energy needs. Calling the Great Plains region of the United States the “Saudi Arabia of wind,” Pickens last summer launched plans for a $10 billion alternative energy project in the Texas panhandle that has the potential to one day become the world’s largest wind-power farm.

Picken’s Mesa Power LLP plans to purchase 667 wind turbines from U.S. industrial giant General Electric Co. (NYSE: GE). Each turbine can produce 1.5 megawatts of electricity – enough to provide the ongoing power needs of 360 to 600 U.S. homes, according to Money Morning calculations based on statistics provided by Oregon Power Solutions Inc., a Baker City, OR consulting firm.

The first phase of the Pickens project, already under construction, will produce 1,000 megawatts of electricity, enough energy to power 300,000 homes. GE will begin delivering the turbines in 2010, and current plans call for the project to start producing power in 2011.

Ultimately, Mesa Power plans to have enough turbines to produce 4,000 megawatts of energy. Overall, the “Pampa Wind Mill” project is expected to cost $10 billion and be completed in 2014.

Pickens has launched a “Pickens Plan” Web site, which is urges the country’s “energy army” to lobby Congress for funding and a commitment to green-energy projects.

Other Players Showing Interest

An Irish company – its interest in the U.S. alternative energy market piqued by the green-technology money included in the Obama administration’s stimulus package – on Monday acquired three Illinois wind farms located within 100 miles of Chicago, The Chicago Tribune reported.

Plans call for the Dublin-based Mainstream Renewable Power to invest $1.69 billion over four years to develop the wind farms. The purchase price was not disclosed.

"The U.S. market is of strategic importance to Mainstream, and the scale of the opportunity is strongly reflected in President Obama’s economic stimulus package, which includes $56 billion in grants and tax breaks for U.S. clean energy projects over the next 10 years and a budget of $15 billion a year to fund renewable energy programs," Mainstream co-founder and Chief Executive Officer Eddie O’Connor said in a statement. “The administration’s goal of generating 25% of the nation’s electricity from renewable energy sources by 2025 will help revitalize the U.S. economy and protect consumers."

The farms have the potential to generate 787 megawatts of electricity by 2013, The Tribune said. The most advanced is the 120-megawatt Shady Oaks project in Lee County. When finished next year, it should be able to generate enough electricity to power about 30,000 homes, Mainstream said.

The other two wind-power farms are the 467-megawatt Green River project, also in Lee County, and a 200-megawatt project set for Boone County. Construction on the Green River project will begin next year, while the Boone County project is still in is development stages.

This is Mainstream’s second North American deal in three months; it earlier announced a Canadian wind farm project. It has also announced plans to build a wind farm in Chile.

Founded a year ago, Mainstream was created to build and operate wind-energy, solar-thermal and ocean-current power plants in partnerships with government agencies, electric utilities, developers and investors in North and South America, Europe, and South Africa. Barclays Capital (NYSE ADR: BCS) has a 14.6% stake in Mainstream.

Going Global

As Mainstream’s proposed forays into South America, Europe and Africa demonstrate, the push to harness the wind isn’t limited to the United States.
As of the end of last year, worldwide wind-powered generators were capable of generating 121.2 gigawatts (GW) of electricity. Wind power produces about 1.5% of the world’s electricity and its use is surging: The amount of electricity generated by wind power doubled between 2005 and 2008 alone.

Several countries have already embraced wind power in a major way: As of last year, it accounted for 19% of electricity production in Denmark, 11% in both Spain and Portugal and an estimated 7% in both Germany and Ireland. As of this May, 80 nations around the world were using wind power on a commercial basis.

Not surprisingly, China is making a big push to commercialize wind power and by last year was already the world’s sixth-largest user of wind-generated electricity. The country’s largest manufacturer of wind turbines – Xinjiang Goldwind Science & Technology Co. Ltd. – went public last year, raising nearly $250 million. It has about 33% of China’s wind-power-equipment market, according to KGI Securities Co. Ltd., a Taiwan investment-banking and brokerage firm.

"As China’s wind power sector takes off, we think Goldwind is well positioned to become a major beneficiary, thanks to its strong brand and first mover advantage,” KGI wrote in a research report. 

Not a Complete Answer

Although wind power has substantial promise, it’s not an infallible energy solution, and has some serious limitations – as the U.S. wind-power study shows. For one thing, although an estimated 72 terawatts of wind power on Earth can be potentially commercially viable – an amount that’s six times the estimated 15 terawatts of total power usage on earth – not all the wind energy flowing past any given point can be recovered.

Accoridng to a science axiom known as Betz’s Law – named for the German physicist,  Albert Betz, who discovered the rule in 1919 – no turbine can capture more than 59.3% of the potential energy in wind.

And there are other challenges, some of which are caused by the natural lay of the land in a given location. In the United States, for instance, where there are now concerns about diminishing wind strength, some coastal areas may retain wind strength because of the greater temperature differences between the land and the ocean.

Given the growing importance of wind power, more study will be required.

Concludes the study: “Given the importance of the wind-energy industry to meeting federal and state mandates for increased use of renewable energy supplies and the impact of changing wind regimes on a variety of other industries and physical processes, further research on wind climate variability and evolution is required."

By William Patalon III
Money Morning

P.S. Protect your wealth and profit too

China’s export-based economy, once dependent on American greed, is now but a fading memory. While the U.S. was busy printing and preening, the Chinese were long-range planning. But America wasn’t the only country caught off guard by China’s strategic, if surreptitious, supply procurement. In this exclusive interview with The Gold Report, John Kaiser, mining analyst for more than 25 years, explains how the East-West economic tables got turned and why he remains steadfast in the belief that "we are not at the mercy of places like China."

The Gold Report: John, you have indicated that base metal prices will be stronger than one would expect given the gloomy global economic outlook, but more importantly, that the valuations of companies with "pounds in the ground" will surprise us on the upside. You believe that security-of-supply concerns will replace what you call short-term "economic logic" with a long-term "strategic logic" as a driving force behind valuations—particularly for the group of metals you call "infrastructure support metals." Can you give us an overview of those metals and why you think there’s such a strong upside possibility?

John Kaiser: These days I’m not only concerned that the United States is losing its relative clout on the global stage, but also that countries like China are going to have to go it on their own. They’re sitting on these enormous foreign reserves—$2 trillion—two-thirds of which are U.S. denominated instruments—and all of this was built up when they were very dependent on an export economy. They were making things, selling them to the United States, and then shipping the dollars back for IOUs in the future.

But this game is now over. They know it and they are developing infrastructure internally to develop their own domestic economy. They’re looking around and saying, "Where are we going to get all the raw materials that will allow us to keep building our own infrastructure and economy, and what are we going to do with all these IOUs?" So they’re taking these IOUs and solving this security-of-supply problem by acquiring deposits and assets around the world to ensure that they will have control of the key raw materials that are needed for their long-range plan.

Now long-range planning is not something that we in the West are accustomed to. We’re always just thinking of the economics of profitability in the short term. So the rest of the world is being caught off guard as China sneaks around the world and buys up these assets. And the critical ones are not nickel and zinc and copper, the traditional base metals. There are a lot of those deposits around the world, and if the price is high enough, they can be put into production and everybody will have whatever copper they need. It’s the more obscure metals—what I call infrastructure support metals—like molybdenum, the rare earth oxides, lithium, tungsten and tantalum. They represent just an incremental cost of the total end product.

Uranium is a classic example. The uranium fuel represents just 3% of the cost of producing nuclear energy. These things are essential. You cannot have the larger product without them. In the case of rare earth oxides, we’re looking at a situation where the Obama Administration would like to see clean energy replace gasoline-based energy in transportation fuel. The Chinese are thinking along similar lines because they don’t want to be dependent on foreign oil supplies any more than the United States does. Rare earth oxides go into these super magnets that are a key part of these hybrid and electric cars. The Japanese, the Europeans, and North American carmakers would like to commercialize the production of hybrid cars, but they are afraid to do so because all the rare earths right now come out of China. And China has said "we would like all the manufacturing to be done in China and we’ll sell it to the rest of the world." Well, that puts everybody at the mercy of China. So now there’s a scramble afoot to look for these deposits outside of China and never mind that China could flood the market with their rare earth oxides. The end users are thinking we need to have security of supply for these rare earth oxides so we’re not at the mercy of political machinations by a country like China.

Tantalum is another metal where it’s a key input in cell phone capacitors. The supply has come only from a few mines, all of which are now shut down as part of the strategy to get the processors to allow a price increase. A company like Commerce Resources Corp. (TSX.V:CCE) (PK SHEETS:CMRZF) has tied up deposits in British Columbia that are lower grade than some of the ones that have traditionally supplied this market, but their angle is that the end users need to know that their tantalum for their capacitors is assured for the next 20 years. So they will probably end up forming a consortium of end users that fund these mines and puts them into production.

But for the juniors, the opportunity right now is to source these projects. They get title to them, and when these end users want to develop them, they’re going to have to pay a premium to have these projects developed. So it will not be economic logic that results in these companies getting bought out and having their deposits developed. It’ll be a strategic logic linked to long-term security-of-supply and redundancy concerns. And we’re seeing that sort of psychology at work in this market. It’s a bit of a niche in this market. Not as big as gold, but it is an interesting one because of the long-term real economy link implications that it has.

TGR: If this becomes a strategic logic play as opposed to economic, are the potential acquirers government or large companies?

JK: In the case of most of the Chinese mining companies, they are all at least partly if not wholly owned by the State. And we just saw an example where a distressed Australian company, which had several hundred million dollars lined up from Western sources to put its rare deposit into production, had the plug pulled on them. The stock was at 10 cents, they were dead in the water, and then the Chinese came in and ponied up $360 million in a combination debt equity financing that will give them majority control of this company and, of course, they’ve got all the boilerplate in the news release saying we will honor all the offtake agreements. All these offtake agreements are just good for five years and they only represent a small fraction of the total resource that will now be under the control, indirectly, of the Chinese government. So, in a sense, they’ve tied up what could have been one of the independent sources of raw materials in the world for the non-Chinese manufacturers.

And the governments in the Western world still aren’t waking up to this problem. For example, we have Mountain Pass here in California, which Molycorp owns and which a group of private investors has now bought from Chevron; and they want to get back into production. They want the government to recognize that we need these things to happen for our military and space programs and even our domestic consumer economies, so we are not at the mercy of places like China.

TGR: And is the government doing that?

JK: At the government level, nobody seems conscious of the need to nail down security of supply of some of these raw materials within friendly jurisdictions. They are very aware of it with regard to oil because you look at what countries have the big long-term reserves and they aren’t exactly the "friends of America" club. Part of this move towards clean energy isn’t just concern about global warming and carbon dioxide emissions. It is a strategic desire to reduce the dependency on oil coming from these unstable or unfriendly parts of the world.

But they haven’t really thought about that in terms of these more obscure metals. Everybody assumes that in this globalized economy, price will determine supply. Anybody who has the dollars to pay for this stuff will get all the moly they need. Except what I’m seeing is we’re starting to see a destruction of the fungibility of these commodity markets. These supply contracts are not in the open market; they’re private supply contracts.

In fact, the uranium market is like that. Utilities nail down long-term contracts with suppliers so they are assured the uranium. And it’s interesting that the spot price, which was as high as $140 a year and a half ago, collapsed to $40; but the lowest the long-term contracts went was about $65. So you’re seeing prices being paid for commodities in this hidden market that are not reflected in the so-called public reviewable spot markets.

So with regard to these more obscure metals, you do not have the transparent global markets that we have for the more traditional metals such as gold, platinum, nickel and copper. When you simply assume that when the need arises, the price will go up and the supply will materialize, one finds that all the supply has already been privately contracted at fixed prices and there is nothing to really put into the market. Then you would probably see the spot price go crazy as the parties that absolutely need that incremental demand rush into the market to tie it up so that they can, in the case of uranium, keep their reactor going.

TGR: So are we chasing our tail? It sounds like we have technology that needs to be developed that will use these rare earths, but it won’t be developed if we don’t have a commercially guaranteed supply of it.

JK: Yes, exactly. It’s a classic chicken-and-egg problem and what’s interesting now is when you have these sorts of big picture strategic needs like clean energy or reducing dependency on a certain type of energy, suddenly there’s the impetus to solve this chicken-and-egg problem. And with these commodities, it’s not so much an issue of ‘can we get a significantly higher price for them?’ It’s more ‘can we expand the market for them?’ Three years ago, the rare earth market was worth a piddling $1 billion.

TGR: The entire market?

JK: Yes. So that’s not very interesting and the prices had already gone up a fair bit at that stage. What becomes interesting is that this market could become $5 to $10 billion due to demand growth arising precisely because end-users are guaranteed an unending supply at these prices.

There are deposits out there where they could be profitable. They have rock values of $300 to $1,000 a ton, but nobody had dreamed of developing them during the last 30 years because the size of the market wasn’t large enough to absorb the supply of this raw material.

In fact, eight years ago, the Chinese did glut the market with rare earth oxides before all this hybrid stuff really started taking off. And it’s only recently that they realized they were depleting their own internal resources and decided to put export quotas in place. And now that we have these application scenarios where you can scale the demand 10, 100, 1,000 times bigger and you suddenly say, "uh-oh, where are we going to get this raw material?" Well, this is where, again, I see the strategic logic come into play—where the end users, who can make a lot of money selling hybrid cars if they have these raw materials in place, will actually pay a premium to control these pounds in the ground and see them developed (even if it is at a break-even basis after it’s in production).

TGR: Are there some specific rare earth or minor metals that investors should be aware of and, if so, what companies should they be looking at?

JK: There are very few companies that have any sort of meaningful resources that you can buy in the market. One that I follow is Avalon Rare Metals, Inc. (TSX:AVL), which has the Thor Lake deposit in the Northwest Territories.

They don’t mine anything yet. They’re doing all the pre-feasibility work to establish where the highest-grade zones of these rare earth oxides are in the system, and then they’ll start a mining scenario where they’ll initially produce enough to feed expected demand in the market. But the total resources are large enough so that this thing could operate for 50 years. So these types of projects with the very large resources are of enormous interest to the end users because, once these things get going, they’ll operate forever.

Another company, Rare Element Resources Ltd. (TSX.V:RES) has its Bear Lodge deposit in Wyoming. The deposit, on the one hand, is farmed out to Newmont Mining Corp. (NYSE:NEM) for its gold potential and Newmont has been waiting for two years to get a full-blown environmental assessment done so that when it starts drilling, the 5 million-plus ounce target that it’s seeking doesn’t get stalled by having to reapply for permits. At the same time, the company has just published a 43-101 resource estimate outlining the rare earth resources that they have on the project.

So it’s a nice company in that you get two completely unrelated stories for the price of one, and it doesn’t have a lot of stock outstanding either; so while it would net only 20% of any multi-million ounce gold deposit that Newmont finds, it has 100% of the rare earth deposits there.

And one other one that I recently discovered because it was disguised as a uranium company is Quest Uranium Corporation (TSX.V:QUC). It turns out that they own part of the Strange Lake deposit that straddles the border between Quebec and Labrador. This was found during the ’80s and it’s lower grade than some of these other deposits. They did the pre-feasibility work and then shelved it and eventually abandoned it. Then Quest staked it and they found other showings suggesting similar grade.

The interesting thing about that deposit is it seems to have an unusual percentage of the heavier rare earth elements, which there was no market for back in the ’80s. So these metals may have had a high price, but it was simply high because the stuff was rare and scientists would pay whatever it took to get these metals. Well, here you have an interesting situation where Quest may have an unusual abundance of the heavier rare earth elements that could become commercialized thanks to new applications that were not around during the ’80s. Quest was trading at just a nickel a couple months ago and is now at $0.20 as the market discovers its rare earth story. We’re seeing stocks like this start to attract market attention.

TGR: This has been very educational. Are there any other parting thoughts you’d like to give our readers who are investing in mining stocks?

JK: Yes, I would say when you’re looking at these juniors, you’ve always got to figure out what is it that’s going to change with regard to the company. Is it going to be a discovery? Is it going to be some breakthrough in metallurgy or on the cost side of the project? Or is it going to be a change in the price of the commodity that suddenly completely changes the value potential of the company’s project and results in it being re-priced upwards?

You have to assume that the market is reasonably efficient in pricing these companies at the current price and you need to identify what it is that needs to change to justify a significantly higher price. And, also, on the downside, what is your downside risk? What negative potential changes are there associated with this company and its projects that could make your investment go down significantly? The lesson learned in the last 10 years is if you want significant upside potential, it only comes with significant downside potential. So you have to understand that risk-reward balance. At least with these companies, you have your 1,000% upside balancing your 90% downside, as opposed to owning a bank stock with 10% upside delivering you 90% downside.

TGR: This has been great. John, we appreciate your time.

DISCLOSURE:
I personally and/or my family own the following companies mentioned in this interview: Quest Uranium.
I personally and/or my family am not paid by the companies mentioned in this interview.

John Kaiser, a mining analyst with over 25 years experience, is editor of the Kaiser Bottom-Fishing Report. He specializes in high risk speculative Canadian securities and the resource sector is the primary focus for an investment approach he developed that combines his "bottom-fishing strategy" with his "rational speculation model." Kaiser began work in January 1983 as a research assistant with Continental Carlisle Douglas, a Vancouver brokerage firm that specialized in Vancouver Stock Exchange listed securities. In 1989 he moved to Pacific International Securities Inc where he was research director until April 1994 when he moved to the United States with his family. From 1989 until 1994 he was also a registered investment advisor. He worked six months as a researcher for Bob Bishop’s Gold Mining Stock Report before branching out on his own with the publication of the first issue of the Kaiser Bottom-Fishing Report in October 1994. He has written extensively about speculative Canadian issues, is frequently quoted by the media, and is a regular speaker at investment conferences.

Private equity investors, although not foreseeing an economic turnaround until 2010 or later, are betting on the energy sector and infrastructure for the long term, according to a survey conducted by KPMG LLP. Energy topped the list of choices for investment when the market turns positive, while infrastructure was considered the next "meaningful" opportunity by many PE managers.

Shawn Hessing, New York City-based managing partner of KMPG’s U.S. private equity group, says in a release that the survey indicates that "market conditions are making it difficult for PE managers to make projections for their portfolio companies. In addition, the PE sector expresses concern about the regulatory and tax landscape, funding commitments and the availability of debt."

More than 35% of the 200 PE investors KPMG surveyed last month said energy would be the most appealing sector for private equity as the economy recovers. Financial services and technology tied for second place with 15% each, followed by healthcare and business services, both of which were cited by 12% of respondents.

As to when that economy will recover, survey respondents tended to be more bearish than the respondents to the National Association of Business Economists, 90% of whom expect the recession to be over by year’s end. In KPMG’s survey—conducted during last month’s SuperReturn conference in Key Biscayne, FL—43% predicted the economy would begin recovering next year, while 39% said it wouldn’t happen until after 2010. Only 18% of respondents said they expect a recovery to happen this year, including 7% who think it could happen by the end of the second quarter.

"PE investors, by their nature, work to anticipate the downside in the market, so I would say those who took this survey are planning for the worst in an elongated cycle and hoping for the best," Hessing says in a release. "They want no negative surprises."

Article can also be found at The Energy Report

Saudi Arabia’s oil minister, Ali Naimi, has indicated that while demand is beginning to pick up, inventories remain dangerously high. Therefore, it would be best for the cartel to “stay its course” by continuing to adhere to previous production cuts until demand stabilizes.

After soaring above $147 a barrel last summer the price of oil tumbled more than 80% to a four-year low of $32.70 a barrel in February. To combat the sharp decline in prices, OPEC has lowered its production quotas by 4.2 million barrels per day (bpd) – about 5% of global demand – since September.

Since February, oil prices have recovered, climbing to their current level above $60 a barrel. But both Naimi and industry analysts have warned that the rally has more to do with market sentiment and the potential for a recovery than it does fundamentals.

“The price rise is a function of optimism that better things are coming in the future,” Naimi told reporters earlier this week.

The International Energy Agency (IEA) estimates global oil consumption will fall by 2.6 million bpd this year. That would be the biggest drop since 1981.

Naimi says that world crude inventories – at current levels – would be sufficient enough to meet about 62 days of global demand. OPEC members would like to see them fall to about 52 to 54 days worth of demand.

An increase in OPEC production “will not happen until we are sure that global inventories return to their normal levels,” Naimi told the Arab daily Al-Hayat.

U.S. crude oil inventories rose to the highest level in two decades earlier this month. However, Naimi did note that demand in Asia, particularly China, seems to be accelerating and crude prices could reach $75 a barrel by the end of the year.

Still, analysts are urging caution, as production quota compliance among OPEC nations is beginning to wane. Production compliance among OPEC nations reached 85% in March – an impressive level by historical standards. Members only delivered on 78% of the promised cuts in April as prices recovered.

Saudi Arabia, OPEC’s largest and most influential producer, actually pumped below its target level in April, but other members have been cheating. Iran, OPEC’s second-biggest producer, accounted for 410,000 bpd of the overproduction last month, while Angola exceeded its target by 170,000 bpd and Venezuela overproduced 130,000 bpd the IEA reported.

“Lagging quota compliance by the non-Gulf Arab states – hovering around 50% – has hamstrung any real discussion of a potential cut to accelerate the drawdown of the glut,” PFC Energy analyst David Kirsch said in a report today. “Purported requests by Angola to revise or suspend its quota, as well as moves by Venezuela to certify a higher production figure leave any proposal for further output restraint effectively stillborn.”

By Jason Simpkins
Money Morning

Techsnabexport, a state-owned nuclear energy company, has agreed to sell an undisclosed quantity of enriched uranium to a consortium of American companies for more than $1 billion, Reuters reported. The U.S. companies involved include PG&E Corp. (NYSE: PCG) and Ameren Corp. (NYSE: AEE).

The deal will give utilities a chance to deal directly with enriched uranium suppliers and creates a better opportunity for Russian energy companies to come into the U.S. market.

However, it also undermines the United States’ ability to dissuade other countries from pursuing their own uranium enrichment programs.

North Korea, which carried out a nuclear test over the weekend, and Iran, which is currently facing United Nations sanctions for pursuing its own enrichment program, are two countries that could potentially use Russia’s commercial uranium sales to justify their atomic ambitions.

Nuclear reactors run on uranium that has a composition of 3% and 5% uranium 235. However, uranium houses just 0.7% of uranium 235 in nature, which means it needs to be enriched. Atomic weapons and nuclear submarines require a uranium 235 density of more than 90%.

Thanks to its Cold War buildup, Russia leads the world with about 40% of global uranium enrichment capacity and has long supplied atomic fuel to countries in Europe and Asia.

Russia is also the leading supplier of enriched uranium to the United States, but those dealings were previously funneled through the United States Enrichment Corporation (USEC) as part of a program to eliminate nuclear weapons.

The USEC was originally part of the U.S. department of energy, but has since been sold to a private company.  Though even after the company was sold, the government allowed the USEC to maintain its monopoly on the sale of diluted weapons-grade uranium from Russia. And Russian authorities complained that the USEC was underpaying.

Sales of diluted weapons grade uranium will still go through USEC, but Techsnabexport and other Russian companies now have the opportunity to sell separate, commercially conscripted uranium directly to U.S. utilities.

That gives Russia, which provides half of all the uranium used in U.S. civilian reactors, a chance to be a key supplier in an industry that is growing exponentially as the demand for clean energy continues to soar.

Nuclear Energy’s Bright Future

There are 104 nuclear power plants currently operating in the United States, and one more under construction. And many more are on the way, as nuclear plants provide 70% of the United States’ non-carbon-generated electricity.

With electricity demand expected to grow by 50% in the United States between now and 2030, utilities have applied to build more than 30 new reactors here in the United States, often at spots adjacent to existing plants. And to meet global warming goals, 42 reactors could be built the next two decades, according to the Electric Power Research Institute.

President Barack Obama is pro-nuclear, but his administration favors renewable sources – such as solar, wind, geothermal, and hydropower – rather than atomic energy. However, there is a strong groundswell of support building for nuclear power in the U.S. Senate.

U.S. Sen. Lamar Alexander, R-Tenn., will call this week for the construction of 100 new nuclear power plants over the next 20 years.

"If we’re serious about clean air, if we’re serious about climate change, if we’re serious about having enough low-cost, reliable electricity to keep our jobs from going overseas, we don’t have any other option," Alexander told the Knoxville News Sentinel.

Alexander acknowledged that renewable sources are the best option for the future but that the technology and infrastructure probably won’t be ready for another 30, 40 or even 50 years.

“Climate change may be the inconvenient problem, but nuclear power is the inconvenient answer," he said.

The Senate Republican Conference this week will begin a series of hearings on issues, such as loan financing, nuclear waste, and labor. Senate Republicans hope to piece together a blueprint over the next several months that will offer more details about building new nuclear plants to meet growing demand.

By Jason Simpkins
Money Morning

And that suggests higher oil and gasoline prices in coming months – perhaps as much as 50% – 70% higher, or more – particularly if a U.S. economic recovery is truly in the offing.

To really see what I’m talking about, let’s start with a close look at consumption. I’m asked about this frequently in my global wanderings, most recently at the Las Vegas Money Show last week.

For months we’ve been hearing about a drop in global demand. It’s a popular story and one that sounds credible: After all, it seems logical to assume that during economic chaos, consumers and businesses alike will rethink their budgets and ratchet back their spending.

For consumers, the continued economic malaise will mean fewer trips to the store, less-ambitious vacations, and car-pooling to school or work . For businesses, the cutbacks by consumers will clearly translate into canceling trips where conference calls will suffice and using lower-cost shipping alternatives for the decreased sales volumes most U.S. companies will experience.

According to the U.S. Energy Information Administration, oil consumption fell by nearly 50,000 barrels a day throughout 2008. According to the latest figures, the EIA suggests that global oil demand may slump to 83.4 million barrels a day in 2009 – nearly 2.4 million barrels below 2008 consumption levels. On a percentage basis, that’s almost a 3% drop. I have my doubts that we’ll actually see a decline of this magnitude, but if it does occur, it will be the first time ever that consumption has declined for two straight years. That alone is pretty noteworthy in this era of cohesive and powerful global growth.

The reason I have my doubts about such a steep decline in demand is this: While overall consumption is dropping in such developed economies as the United States, Europe and Australia, it’s being at least partially offset by continued growth in China, the Middle East and Latin America. Because the data produced there is less than transparent, I can’t help but think that analysts are underestimating the growth we’ll be seeing in those markets, where consumption is accelerating strongly. And it’s entirely possible that growth in those markets will outstrip any fall here in the developed world.

Even if the growth in the emerging markets doesn’t quite offset the decline in their developed brethren, analysts seem to be forgetting that oil prices are a function of two variables – consumption and production. And it’s the change in production that’s going to catch a lot of people by surprise.

After a run of record high oil prices punctuated by frantic resources development, we’re now seeing the opposite scenario. The long period of lower than anticipated oil prices following oil’s meteoric rise last year means that the entire industry is no longer making the investments needed to sustain production capacity or actual production.

And not many folks recognize this fact.

For instance, direct project investment in drilling may be down as much as 20%, while the number of drill rigs in operation in America alone has dropped by more than 40%. Various estimates from the EIA and private sources suggest that actual U.S. production may fall by as much as 320,000 barrels a day. While the amount is a matter of debate, the fact that production is declining is not.

More than 20% of total U.S. oil production comes from tiny wells located in remote areas that were marginally profitable producers when crude oil was trading at $100 a barrel. With oil currently at about $61 a barrel, those producers are practically worthless now.  So the “mom-and-pop” shops that own them are actually abandoning entire fields and equipment without a moment’s thought.

To be fair, at least part of the drop in demand can be attributed to increased reliance on methanol, ethanol and other types of biofuel, but that’s hard to quantify at the moment because the long period of low oil prices has eroded the economic viability of alternative fuels – at least for now.

The story is much the same with new exploration projects being cancelled left, right and center. The trend is particularly apparent in the Canadian oil sands that were everybody’s fancy only 24 months ago. Now we’re seeing Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B), StatoilHydro ASA (NYSE ADR: STO) and Petro-Canada USA (NYSE: PCZ) each backing away from multi-million dollar investments that were to bring online an estimated 500,000 barrels a day.

Russian, Saudi and Mexican producers are reporting the biggest production drops seen in 50 years. Even Venezuelan leader President Hugo Chavez – the perennial motor mouth and longtime U.S. critic – is eating crow. He’s begrudgingly invited (read that to mean “is begging”) the oil companies whose assets he nationalized only a year ago to “come back” into the market.

He has no choice. Venezuela’s oil production is already below its 1997 levels, and many analysts say that output could fall even more since Chavez has done such a thorough job of alienating the big foreign oil companies that actually possess the technology needed to extract crude oil from that country’s hard-to-reach reserves.

Chavez’s Chavez’s government seized the assets of 60 foreign and domestic oil service companies after conflict erupted over nearly $14 billion in debt owed by the country’s state-owned energy company, Petroleos de Venezuela (PDVSA). PDVSA accumulated the debt as oil prices took a dramatic slide from over $147 a barrel last July to less than $35 a barrel in February.

Then there’s simple shrinkage. This is an oil industry term for declining output. The EIA recently released data suggesting that production at more than 800 oil fields around the world is going to decline by about 9.1%. It doesn’t matter whether the decline is prompted by depletion, war, or simple neglect. The fact is that this shrinkage will take an estimated 7.6 million barrels per day out of the system.

I could go on but I think you get the picture.

Now imagine what could happen to oil-and-gasoline prices when normalized demand resumes. Not only will there be less oil in storage, but virtually the entire industry – exploration, production, refining and sales – is going to be caught sitting on its heels when the world needs it to be zooming along in high gear. And that means the companies that make up this industry will have to ramp up again to meet the newly increased consumption demands.

This whole process could take two years – or even longer – to play out.

As for prices, history is replete with examples of what happens when there are major shortages of key commodities.

In the Energy Crisis of 1973-74, for example, I can still remember the numbingly long gas lines and waiting in the car for hours to get a fill-up. My father and grandfather vividly remember that prices quadrupled in a matter of months. I’m sure you do, too.

Only a few years later, in 1979, we got another oil shock when prices quadrupled again. Because it was coupled with stagnant economic growth and virulent inflation (stagflation), this period was an economic disaster for the United States.

For those who had learned from the earlier crisis, however, it was a mondo- profit opportunity.

The same can be said for 2007-2008, when the huge spike in oil prices that I predicted contributed to the bear market in stocks, tight credit and recessionary conditions that led to the current malaise that continues to grip the U.S. economy. As much as anything else, high oil prices contributed to the carnage we’ve seen in the auto-making and airline industries, and to the financial crisis that started here before spanning the globe.
Which brings us full circle.

Many investors will refuse to believe we’ve arrived at this new energy nexus, especially given all the hype we’ve seen surrounding alternative fuels, hybrid vehicles and the new “green” mentality that’s taken hold here in this country. If you listen to some of the real believers, they’ll tell you that we could be living in a petroleum-free Nirvana – as early as tomorrow.

While I personally would like that, too, it’s a misleading argument if for no other reason than there are millions of consumer items we use – from plastic bags to makeup – still created using petroleum. And there are still more than 60,000 manufacturing processes that depend on petroleum, and even the most aggressive estimates suggest that it will take the world decades to shift away from them.

We’re in much the same situation when it comes to hybrid vehicles. There isn’t a mass-produced electric vehicle available today that could offset the coming rise in recovery-driven demand for oil and gasoline. There’s a strong effort underway, but I’m not aware of a single company ready to field the solution in cost-affordable quantities by 2010 – which is when most analysts say a recovering economy will stoke demand for oil.

Of course, U.S. President Barack Obama’s much-lauded efficiency and greenhouse-gas-standards mandate will help significantly, but that’s like bolting the barn door after the horses have run for the fields. The irony of watching auto executives “applaud” his press conference was almost too much to watch with a straight face. But that’s a story for another time.

The bottom line is this: Our society will be highly dependent on oil for many years to come and investors should plan accordingly.

If governments around the world really want to get serious, they could collectively work to eliminate the fuel subsidies that are part of the price paid for gasoline in Asia or sugarcane ethanol in Brazil. We could also stop our own energy pork barreling. But given the complete lack of transparency that surrounds this issue – not to mention the influence wielded by vested industry interests, and the scores of well-paid lobbyists that patrol the halls of power in our nation’s capital – I don’t think we’ll see any big changes anytime soon.

So I’m left with one inescapable conclusion, at least in the intermediate term. Every investor needs to have at least some sort of energy strategy – preferably one that includes a range of drillers, producers and suppliers to cover the spectrum from wellhead to consumer.

That way, we can profit from an increase in energy prices that we can only hope rise fast enough to jump-start the oil industry’s production arm but not so fast that it snuffs out the badly needed economic recovery.

By Keith Fitz-Gerald
Money Morning