By: The Energy Report and Peter Epstein
Source: Rita Sapunor of The Energy Report
Big gains are rarely found by jumping on the bandwagon. Independent Analyst and founder of MockingJay Inc., Peter Epstein argues that market darlings won't reward latecomers; that's why he spends his time finding undervalued, underfollowed junior resource companies. In this interview with The Energy Report, Epstein gives his take on uranium, graphite, potash, and oil.
The Energy Report: You've written that "a great company doesn't necessarily make a great investment." Are you implying juniors are better bets?
Peter Epstein: Yes—juniors are highly risky in that they can move up or down by quite a large amount, but if, for example, a junior is trading at its cash value, how risky is it really? At some point the upside outweighs the risk. Make no mistake: You still need good projects, cash in the bank and a strong management team, but if you're buying shares in a company that's trading below its cash value, you're basically getting its assets for free.
TER: Your portfolio really runs the gamut of resource sectors. How do you choose which commodities to focus on?
PE: I read a lot and I speak with many management teams and industry experts. It's not necessarily difficult to pick the commodities that have strong core fundamentals.
Uranium fundamentals appear quite strong. Japan is restarting a number of nuclear reactors early next year and China and India are building new reactors as fast as they can. China has little choice. Its major cities are choked with coal-related air pollution, not to mention the millions of new cars on its roads. India's coal market is hopelessly complicated and corrupt. Coal-fired electricity generation there can't possibly keep up with demand. India's stated goal is to get 25% of its power from nuclear energy, from which it currently gets just 3%. All of this suggests increasing demand for uranium.
TER: How do you determine the top-five U.S. projects? Is it based solely on size?
PE: It's largely based on the scale of the projects. The U.S. is home to a number of emerging in-situ recovery (ISR) projects that should produce 2–8 million pounds (2-8 Mlb) of resource over the next four to eight years.
TER: You follow some potash stocks as well. Do you consider potash a way to play emerging economies? What are you projecting for that commodity?
PE: Potash has solid long-term fundamentals. Like uranium, it's an essential commodity with few if any substitutes. It is a play on an emerging middle class in developing economies. But there's a domestic angle as well: The U.S. imports 90% of the potash that it consumes
TER: Let's move on to oil. The oil price is holding above $100 per barrel. Do you think that's a sustainable price? What oil price do you use to evaluate an oil company's worth or upside potential or downside risk?
PE: I never try to predict commodity prices. I just try to pick the companies with the best fundamentals. Commodity prices can rise and fall well beyond what known fundamentals would suggest. Who would've thought that oil prices would be up 19% year-to-date while silver is down 35%, gold down 23% and copper down 15%?
TER: There's a lot of discussion about coal becoming less competitive as a U.S. fuel source compared to cheap domestic natural gas. In an article you wrote last December, you argued that the coal industry would probably never return to its 2011 highs. Has your outlook changed?
PE: Like it or not, coal will be with us for the next several decades. Some places around the world are increasing coal-fired electricity generation faster than other sources of energy. In the U.S., coal-fired power generation has fallen from about 50% of the total mix to about 40% over the past five years, largely due to low natural gas prices. But while coal use is in decline in the U.S., in China and India it's still increasing at a fairly good clip. Coking coal is a bit different. It's somewhat viewed as a necessarily evil because it's used for making steel and there are few substitutes for coking coal in blast furnaces. But the amount of coking coal used globally is a small fraction of that of thermal coal that's used to generate electricity.
TER: Let's conclude with your take on graphite. Last year was a rollercoaster ride for investors. What do you see as the demand drivers?
PE: It's true that graphite has been a wild ride. The key to the story is that graphite prices have settled in well above historical levels. Demand drivers include the proliferation of electric vehicles.
TER: Do you have any final advice for investors in the energy space?
PE: Patience will be rewarded. While many global stock markets are at near-term highs, true contrarians should be happy to walk away from those markets and hold a basket of juniors. If one picks a diversified basket of well-positioned juniors, returns should dramatically outperform indexes like the S&P 500. It's just a matter of time.
TER: Thank you for taking the time to speak with us today.
PE: Of course, thank you for having me.
In 2011, Peter Epstein, CFA, left his senior analyst position at a $3B hedge fund and formed MockingJay Inc., a consultancy for companies in the natural resources space and an informal investment advisor to high net worth investors, family offices and funds. Epstein's areas of expertise include uranium, coal, potash, gold and oil & gas. He has published hundreds of articles on investment sites such as Seeking Alpha, The Motley Fool and Au-Wire.com.
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