[Editor’s note: Please click here for Part I of this interview]
Uncovering early stage opportunities in the junior resource sector is no problem for Marin Katusa, senior editor of Casey Research’s Energy Division. Using a combination of boots on the ground and a diagnostic resource market tool that he created, Marin can easily analyze and compare hundreds of investment variables to determine the best investments and most promising private placement offerings. In this exclusive interview with The Energy Report, Marin shares his macro view on the energy sector, trends he anticipates in 2009 and major market forces that will drive energy in 2009 and 2010.
TER: Is geothermal a large enough market to be an investment opportunity?
MK: It is, but you have to have a long-term perspective. Geothermal is an unexciting but real sector. It’s true and real play—it will deliver investors profits—but it’s not like a uranium junior, such as Hathor Exploration Ltd. (TSX: V.HAT, Stock Forum), where the drill results can triple the price of a stock. Hathor is a company that, early on, we had recommended under C$0.50. It went to just under C$5, and we have since taken profits. In the U.S., there are some great companies that have the potential to deliver significant profits to investors and they’re looking pretty cheap right now. Again, the risk for a lot of the geothermals is will they be able to raise the money to put their projects into production? So that’s a major risk going forward.
TER: I live in California, and it appears that the state is going to start giving tax rebates; I think this will also be true in Nevada, but I don’t know that for sure. Does that offset this financing issue?
MK: It’ll help, but there will have to be big financings because these projects are not cheap to put into production. Drilling geothermal holes are very high risk and they’re deep. Some can go down 3,000 meters, that’s just under two miles; so it’s difficult as many things can go wrong when you’re drilling that deep. Improvements have been made in drilling but it’s still risky and difficult. We did a full geothermal report in August that you can get on our website. We looked at every single publicly traded geothermal company—the ones operating in the U.S, Nicaragua, Iceland and Australia.
TER: Now the one in Nicaragua is being financed by the government, isn’t it? And that’s Polaris Geothermal Inc. (TSX: T.GEO, Stock Forum)?
MK: Well, no, it’s a partnership—Polaris Energy Nicaragua S.A. ("PENSA")—and not 100% financed by the government. You need the private factor and also the expertise. So it has just under $12 million cash right now, but it does have some debt.
We sent one of our analysts out to Nicaragua to meet the president of the country and to analyze the projects. The Central American economy is going to recover soon, and they will need more power generation. That’s good news for a company that’s able to prove it can produce the electric generation—a key issue—and the company’s on good terms with the government. There’s always the risk, but I would say that it’s been oversold just like a lot of good companies in this market because everybody went down. This is something that we’ve definitely been looking at and, at these prices, we’re attempting to put out a best buy on it—but we’re looking at what the forward cash requirements will be for the company. Both Polaris and Nevada Geothermal Power Inc. (TSX: V.NGP, Stock Forum) are good companies. Nevada has some very serious investors in it, such as Rick Rule, who is a very aggressive investor in the geothermal sector. When Rick talks, the smart money listens. Doug Casey and Rick are very close friends, so I get the benefit of picking Rick’s brain from time to time.
TER: Going back to Polaris, I thought it had financing lined up with the International Monetary Funds.
MK: Let’s hope so but, until the money is in the bank, don’t count on it. We have it in our portfolio and for Nevada, we took profits on it, so we made 100%. Then I introduced something called the “Casey Free Ride Formula,” which states that when you feel you want to take your money out, always take your initial investment out, and then the rest is playing with the house’s money, so it’s a bonus.
TER: Are there any other geothermal projects that look interesting at this point?
MK: One I think is very interesting—Ormat Technologies Inc. (NYSE: ORA, Stock Forum), which is what I would call a central service provider for the geothermal sector, as it provides both construction and operations. Nevada has contracted Ormat to build its Blue Mountain project; so Ormat is something that we recommended. It was trading in the $50s, and we said wait ‘til the low $30s to get in. We did not see it coming down as fast as it did, but Ormat has positive earnings—and, if you’re a geothermal company, you will need the material from Ormat.
TER: What does the company make, specifically?
MK: They build the actual plants and even operate their own electric-producing plants. So it is like a one-stop shop for a lot of these geothermal projects.
TER: What about solar?
MK: I think solar’s interesting, though I think the solar sector needs to improve the technology further to make it more economic. I’ve read about all sorts of companies that are trying to do things like put solar in paint and make solar windows. I think it’s a story down the road; but to rely on the energy, I don’t think we’re there yet. Economically, without the subsidies, they don’t work. So, again, is it subsidized? If the government takes away the subsidies, will this be profitable? Right now, the answer is no.
There was a little bit of a surge going on in the solars when oil was hitting close to $150. A lot of demand was going on for solar companies, and we looked at everything. For any of our research reports, whenever we recommend a company, we make sure that we not only talk about that company but also talk about the whole sector—and we studied every single company in that sector. We looked at the manufacturing companies, installers and silicon providers—and our recommendation was Lonestar Capital Corp. (TSX: V.LON-P) at C$0.1 back in March of 2008, we have since put a sell on the stock and realized +400% gains.
We recommended it at 10 cents, and we took profits. We have since sold the company. It’s an interesting dilemma, but the key is you have to take profits if you want to make money. So would I buy Lonestar now at $1.00? No. But at 10 cents, it’s an interesting story and we saw the upside in oil. Oil doubled in a short period of time. And you’re going to see a lot of derivative markets that, like the solars, will also heat up when oil comes back up. The key is to take profits.
TER: Going back to oil, do you see investment opportunities there? You referred to peak oil before; the prices are low. Will they continue to be low through 2009?
MK: If you’re a speculator and you believe in the peak oil theory, let’s look at the oil sands companies like Suncor Energy (NYSE: SU, Stock Forum), which we actually have a buy under $20 recommendation on (it was $28 when we put out the speculation). We are long-term believers in the oil sands, and at $30 oil it’s not that exciting of a story. But at $60, $70, $80 it’s a very exciting story. So during these recessionary times, when a company like Suncor has over $4 billion in cash and is already producing, it doesn’t need to go into the high costs of new production. It has other projects that it may bring on in four years, but it is currently producing and profitable under US$35. Now you can pick up these companies at significant discounts. Remember in the summer, this was a $50+ stock. So these are major companies that are getting corrected. If you’re a long-term believer, put in your stink bids and wait to be filled. That’s the way I am playing it.
If you’re a very high-risk speculator, we can look into the North Sea. The North Sea isn’t necessarily a $30 oil story; it’s more of a $75 per barrel story, but there are some big resources there. And there are companies that were trading at $15 to $20 just three months ago that are trading at 50 cents per share today. The reason they’ve gotten so reduced is, again, financing risk. Their credit lines were taken away from them because the banks had the problems, so they have a $700 million debt that’s going to be due. So this one company’s producing 20,000 barrels per day. It plans on going to 40,000, and then the stock went from $15 to 50 cents within two and a half months. That is the opportunity that we have identified if you’re high risk and you believe in future oil. The question is: will it be bought out? We think it will; we think that it’ll be bought out for significantly higher than the 50 cents it is trading at today. So there are definitely opportunities in the market today.
TER: Are you familiar with clean coal technology?
MK: Yes, we looked at the clean coals. The problem with the clean coal is the cost of the wash plants. Bringing in the wash plant can cost up to $1 billion, and that’s when it breaks the economics of the company. We’ve also looked at closed clean furnaces, which will be more viable.
TER: And what about the ongoing production? Is it just a capital one-time cost or are there ongoing costs?
MK: No, no, for a wash plant at a mine, it’s a one-time initial cost. Obama’s going to want to go towards independent energies, so there’s a lot of potential for wind, solar, geothermal and run of river; but coal is going to be the ugly duckling because, right now, 50% of America’s electricity is derived from coal. So they’re going to want to decrease that. Now they will go and move towards a lot of these green energies. There’s going to be a lot of support, a lot of money and a lot of incentives toward green solutions, but the reality is a lot of these companies will not be able to deliver on the purchasing agreements (basically they won’t deliver the expected amount of electricity). That’s very key here.
A lot of these coal companies are going to get taxed because of the carbon credits, and they’re going to get taxed heavily. You won’t see new coal power plants come on the line either. Then a lot of these coal companies are going to decrease in price as the green energies increase because of the demand, hype, psychology and incentives.
There’s going to be a point in the future, however, when a large percentage of these green energies will not be able to deliver the expected amount of electricity. At that point, the coal will be the unfavorable one but they will have to turn back to the old reliable dirty energy. But, you see, there are clean coal furnace technologies; so coal will come back in vogue at some point—four to six years from now.
TER: But we have this new energy director under Obama and he has more of a scientific and economic bent to him. Why wouldn’t he be looking at something like clean coal?
MK: I’m sure he will, but don’t fool yourself that science will have more weight than politics in Washington. Dr. Chu is very science-based. His main argument was against using food for fuel, so they’re going to look at alternatives. The problem is the politics behind it. So you have Obama’s head guy on the energy side against using corn for fuel, but what about the politics? There are a lot of political factors. And let’s not forget—from a geopolitical point of view—if Iran does something, oil could double in a week.
TER: But that would bode well for ramping up coal. Basically, aren’t we like the Saudi Arabia of coal in North America?
MK: Yes, that’s right. So the key is coming up with a very good economic clean coal technology, and we’re working towards that. Casey Energy’s chief geologist, Dr. Bustin, actually wrote a paper about that—how long it takes to put those into capital costs. It’s like the wash plants—they definitely work, but they’re very expensive and, right now, it’s not economic for a lot of the companies. It also requires looking at what type of coal. Is it metallurgical or thermal coal? So we’re looking at the different types.
TER: Going back to the geopolitical factors for oil, when you say the volatility of oil could be very high, what do you think will be the biggest surprise in energy in 2009?
MK: I think it’s going to be the differentials of Europe oil and gas prices from North America, and people haven’t yet fully discussed where the differentials between Europe and North America—or even between crude or gas—are significant. More so than OPEC, I think Putin is someone you really have to watch; what Russia is going to be doing. The disputes with Georgia were about pipelines. The disputes with Ukraine are about the pipeline. It is all about the pipeline with the former Russian states, so I think the story of 2009 and 2010 will be the differentials and the European struggle for energy independence.
TER: Very good. Marin, we really appreciate your time.
Investment Analyst Marin Katusa is the senior editor of Casey Energy Opportunities, Casey Energy Confidential, and the Casey 50. He left a successful teaching career to pursue analyzing and investing in junior resource companies. In addition, he is a member of the Vancouver Angel Forum where he and his colleagues evaluate early seed investment opportunities. Marin also manages a portfolio of international real estate projects. Using his advanced mathematical skills, he has created a diagnostic resource market tool that analyzes and compares hundreds of investment variables. Through his own investments, Marin has established a network of relationships with many of the key players in the junior resource sector in Vancouver.