As a geologist and investor, Jim Letourneau, editor of Big Picture Speculator, has a unique perspective on the energy sector. An admitted optimist, he claims to be "short-term bullish, medium-term terrified and long-term bullish." In this exclusive interview with The Energy Report, Jim discusses the irregular flow of today's markets, where to drop anchor for some good short-term returns, and why he foresees a more sustainable balance in oil going forward.
[Editor’s note: For Part 1 of this interview, please click here]
TER: So, in essence, this chart was really proven, but not yet producing, deposits listed with the companies that own them, plus a little bit of background. As you went through these, which ones are standouts? Can you give us a couple of examples?
JL: Obviously, everyone looks at Cameco—we don't have a uranium index; but if Cameco isn't doing well, it's going to be hard for the junior companies to do very well. And then it came down to: where's the deposit located and what is the grade? A low-grade deposit isn't as interesting as a high-grade deposit. One company that keeps coming to the forefront is Hathor Exploration Ltd. (TSX: V.HAT, Stock Forum) because they've got a very high-grade deposit that's still being expanded and it's in a good jurisdiction because there's infrastructure there. Cameco Corp. and AREVA (ARVCF:OTO) are right next door to them and are likely acquirers. It's the type of deposit that, if any company in the world is interested in uranium, that's the kind of company they're going to look at because it is one of the highest grades and one of the most exciting.
Out of all the exploration that's been done in Saskatchewan over the last two or three years during the uranium boom, the Rough Rider deposit looks like the one that's actually going to go somewhere. There are varying estimates of what they'll find, but they're already at a significant level. The jurisdiction's safe and it's around existing mines, so there should be fewer issues in getting that deposit up and running.
TER: Should an investor look at Hathor as a takeover candidate, or could Hathor just become a Cameco?
JL: No, they want to be taken over. They want Cameco to buy them at a nice high price. It's a different skill set for management to look for deposits and develop them vs. running a mine. It's a completely different skill set. And, actually, one of the companies that I like is UEX Corp. (TSX: T.UEX, Stock Forum), which Cameco has a significant ownership position in. The UEX people like to explore and the Cameco people like to produce. They're great exploration geologists that are happy looking for uranium deposits, and Cameco likes to work with them as opposed to doing a lot of exploration themselves.
TER: So what deposits does UEX have that make it particularly interesting to you as an investor and Cameco as a partner?
JL: They were in the Athabasca Basin when nobody else was in the Athabasca Basin, and so they've got a series of fairly high-grade deposits—though nothing seems to be as exciting as what Hathor has found. But they're very solid deposits that are well defined and, again, just from a valuation standpoint, UEX had been a real high-flying company Its share price was over $9, and then it was 50 cents. So what's the fair valuation of that? Probably somewhere between the $9 level and the 50 cent level. The fact that it had a nice little bounce and touched $1.20 briefly and is now pulling back should give investors a sense of hope that these companies can at least get part way back up to where they were. I wouldn't expect them to get all the way back.
TER: Even halfway back is quite a significant increase.
JL: Halfway would be huge. The bottom line is these companies were oversold. I just saw money moving into the market over the Christmas holidays and I found that interesting because, when I first started writing my newsletter, I noticed something similar. A lot of money was moving into these little uranium stocks. Most of the time the actual commodity story is pretty consistent. We talk about supply and demand, and demand was coming from India and China, and nobody had built a new uranium mine in a very long time—you could do that for every commodity. The story's very similar. And it was a pretty good story.
That story everyone loved, and then everyone got scared and hated it, and there was tons of selling and it didn't really matter what you did. If you were a publicly-traded company, you were taken out and shot. And now people are going, well, maybe there's something there. It's one thing to have a company with really marginal projects that spent a bunch of money and didn't really find anything. Some companies deserve to die, but others do deserve to be around in five years because they found something or they have something of value.
TER: One of the interesting things with uranium is clearly its use in nuclear facilities, power generation. And with the capital markets seized up (and not looking like they're going to open up any time soon), wouldn't the development of new nuclear facilities be delayed? And, if so, wouldn't that impact the demand?
JL: Definitely. Now you're talking about the medium-term terrified part. So in the short term—and when I say short term, I'm saying two to three months, four months at the most, the "sell in May" kind of model—uranium companies really oversold like the UEX example. It's $9, and over the course of the year it's 50 cents. Meanwhile, they've actually added reserves and they've got more uranium than they had a year ago. But then longer term, you're right. The global financial crisis is going to impact a lot of commodities, and the demand for them (including uranium) is no exception. So people looking for it have to try to take that into consideration.
Is China still going to go ahead and build all the reactors that they were going to build? We weren't expecting a lot of growth in North America for nuclear fuel simply because of the permitting processes. That was a five- or 10-year process if you even wanted to build a nuclear facility; but China was going pretty gung ho on them. If they don't completely collapse, then maybe the uranium story is going to hold up quite well. Your point is extremely right on the money.
Does the economy slow down for one year, two years, or five years? And, when we talk about the economy, are we talking about the U.S. only, or are we talking about the global economy? If we're talking about the global economy, I'm a little more optimistic, but the U.S. economy is definitely in trouble. We've never seen a crash like this. People make comparisons to the Depression, but this is different and it's somewhat indeterminable; so I like to take my clues from the market, use a bit of technical analysis. I wouldn't jump up and down and buy uranium companies if they went even lower because they might stay low for a long time. We're seeing a nice little bounce right now, and I think people can take advantage of it.
TER: So it sounds like you're saying, "Hey, this is good; all you investors invest in the short term. And, even though there are some underlying fundamental supply-demand issues, jump in—there's some good short-term returns. Then jump back out and wait and see what's going to happen."
JL: Nobody wants to be a long-term investor anymore, and I think we've seen some evidence that maybe that isn't the best way to go. It is not a safe time in the market places by any means. You can't buy anything and just walk away and expect it to be around in five years. We can paint longer-terms pictures, but I don't think anyone really knows what's going to happen over the next few years. There's a lot of uncertainty. So why not take advantage of what's in front of us, right? Take what the market gives us. I like to say there's always a bull market in something—and there always is a bull market in something—but that's all we can do. We can't expect the market to just miraculously recover in six months, and I think we have to be realistic about our expectations of what we can get out of the market.
TER: If the investment strategy is really more short term, we'll take advantage of some of this optimism that's being created by the Obama bump; but then we'll get ready to jump back out of the market. Is uranium really the only sector, or could we look at a broader number of sectors wherein we could use that same strategy?
JL: There are a broad number of sectors. There are base metals; a lot of the base metal companies have been crushed. Infrastructure has some potential, obviously, because Obama's said that that's where he wants to spend a lot of money. Potentially alternative energy, wind, solar—all of those things could see a short-term bump. But, again, I don't know if it's going to be sustainable over the longer term. If they keep going up, well, then we don't have to sell; but I'd just be mentally prepared. It would be a shame to lose the opportunity of the short term by becoming a buy- and-hold-investor and losing those gains into the summer.
TER: You're based in Calgary, where there are many oil and gas companies. You haven't mentioned them. What's your thinking there?
JL: The oil and gas business is a pretty stable business, but a lot of companies took risks on plays that were maybe economic at higher oil prices. Now, especially if they're public, they're running into challenges. The private companies are waiting for the public companies to collapse, so they can pick up their assets cheaply. It's always the game of attrition, so a lot of smart money is actually in private companies right now; and some of the public companies aren't going to survive. And those assets can be taken over by a better-capitalized company, and they could probably make a go of it. So it's a very dynamic market right now, but it's still optimistic. It sounds somewhat counter-intuitive, where people are hoping some companies go under, but the reason they're hoping that is because they know they can take those assets and turn them into something that's going to make them money.
TER: According to the "peak oil" concept, oil really should be back up to $80 a barrel. Why wouldn't oil and gas be a wonderful sector to invest in?
JL: You know, for the longer term, there is going to be a more sustainable recovery in oil just because we haven't come up with a replacement yet and we may have cut back consumption slightly. But there is depletion. There's a lot of technology out there that could extend production and create kind of a plateau, but, at the end of the day, we are going to see a lot of these fields decline. So, even though we're not spending as much money on exploration—Schlumberger just announced a 5% layoff globally and it's rumored to have increased to 10%—the combination of fields declining, less investment in drilling, and demand not falling off a cliff sort of points to a bullish case, again, for oil.
TER: But not short term.
JL: Again, the whole commodity sector was oversold. We'd expect some kind of rebound, but whether it's sustained and gets us back to where we were or goes sideways for a couple of years remains to be seen.
TER: So it sounds like even as some of the oversold stocks recover somewhat, we're going to be back to slim pickings again this summer.
JL: Potentially. For that kind of drop to magically fix itself and become a bull market again, that would be fast. It usually doesn't work like that. I think our optimism is likely to be crushed later in the year, and then maybe things get even cheaper. So that's the scary part, and that's why I'm short-term bullish. There's a lot of opportunity out there right now. Medium term—no idea, terrified. It could get worse. And longer term, we will get through this somehow and there will be investment opportunities down the road. But there's a lot of uncertainty out there.
I graduated as a petroleum geologist in 1985 in Alberta. At that time, there wasn't a lot of work for a petroleum geologist and it was a very long, slow period. Then, just in the last four or five years, it really picked up. Normally, those cycles continue. This commodity cycle was prematurely interrupted by a lot of the financial problems around the globe.
And that's why I think that when we get the financial problems fixed, the strong companies in the commodity sector are going to do really well; but I don't have the expertise—and I think very few people do—to determine how long it is going to take for us to come out of this. It might not be six months; it might not be a year. It might be a lot longer than people think, and time will tell. But I would not want to throw an opinion out there because that's all it would be.
TER: Jim, this has been very insightful. Thank you very much.
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For additional comments on Cameco Corp. (TSX:CCO), Hathor Exploration Ltd. (TSX.V:HAT), AREVA (ARVCF:OTO) and UEX Corp. (TSX:UEX), from newsletter writers, money managers, and analysts, click on the respective links or visit The Energy Report.
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Jim Letourneau, P.Geol. is a geologist, speaker, investment newsletter editor (Big Picture Speculator) and communications specialist living Calgary, Alberta. Jim frequently conducts property visits as part of his due diligence and he has toured mining and exploration projects in many parts of the world. He regularly meets with oil and gas executives in Calgary, Canada.
With the unique perspective of geologist and investor, his expertise is sought all over the world. Jim has served as an expert witness in front of the Canada's National Energy Board, and he's frequently quoted and interviewed in national media including CBC, CNBC, Resource World Magazine, Business in Calgary Magazine, The Korelin Economics Report, Market Matters Radio and HoweStreet.com.