Big Picture, Small Cap Investing: Jim
Source: Zig Lambo of
Examining the macro-economic environment is how Jim
Letourneau, publisher of the
Big Picture Speculator,
likes to begin his stock-picking process. However, his
understanding goes beyond headline news to reveal surprising
investment themes with profit potential. In this exclusive
The Energy Report
, Letourneau talks about the hype and commodity investment cycles
and where to dig for blue-sky stocks.
The Energy Report:
You publish the
Big Picture Speculator.
What does that title imply?
I believe the macro context is often more important than the
details about an individual company. I read a broad range of
material every day that helps me form my views, and one of my
best skills is putting together the big picture and connecting
the dots for audiences. A recent example of my method is my
coverage of the natural gas sector, which focused on how the
abundant supply of natural gas has led to a complete shift in the
types of companies that people should be following. Rather than
natural gas producers, investors should find companies that are
consuming natural gas, like
Methanex Corp. (MEOH:NASDAQ; MX:TSX;
Westport Innovations Inc. (WPT:TSX)
Energy Fuels Inc. (EFR:TSX)
. These companies are in great shape because their costs are
significantly lower. That's a huge big-picture shift, but people
get bogged down in all of the debates about fracking and other
The bottom line is the U.S. now has the cheapest natural gas
in the world, and that's not a horrible problem to have. When I
talk to technical people, we just look at each other and think
this is a miracle. No one saw this coming.
As a geologist, how does your technical knowledge shape your
investment decisions? What do you look for in potential
Technical knowledge includes pluses and minuses. In general, the
types of companies I look for are usually going to have a market
cap of under $100 million (
) and for me to get excited about them, they have to have the
potential to surmount that $1 billion (
) market cap. So there's a potential tenbagger upside in them, if
everything pans out. That potential could be in the form of a new
technology backed by a critical management team or a
higher-quality mineral property. Either way, management teams are
critical for these types of things to play out.
How far down in market cap do you go when considering
Sometimes I go down too far, but I think $50M is better than $5M.
While you can argue that it's easier for a $5M market-cap company
to go to $50M, your odds start to dwindle. It's a matter of
finding that balance point. Obviously, it's nicer to buy a
company cheap and have it grow into something bigger, but the
company is usually cheap for a reason. I don't want to have to
write about 50 companies a year that didn't quite make it. I'd
rather go up the food chain a little bit and follow ones that are
going to survive, and whose progress we can track year by
You spoke at the
Cambridge House Energy and Resource Investment Conference
in Calgary on March 30 and 31. What subjects did you cover?
My keynote talk was called "Making Money Using Commodity and Hype
Cycles." I overlayed two kinds of cycles: The commodity cycle is
a longer cycle that we've been in for over 10 years now. Hype
cycles refer to heightened public awareness of a new technology
or a particular element on the periodic table that hasn't been
speculated on yet. A recent example would be graphite. Uranium is
another really good example of a hype cycle; there was a huge
amount of interest about eight years ago and hundreds of
companies were formed. Investors were making lots of money with
uranium stocks. Then it all withered away. There is still
opportunity because some of those companies are still around and
advancing their businesses.
I also did a workshop called "How to Find Billion-Dollar
Companies," where I mentioned some of the companies I like that
have market caps near $100M with the blue-sky potential to get up
to the $1B level.
What do you think the potential is on a percentage-wise basis of
finding billion-dollar companies?
The odds are challenging. This is more speculative and it's much
higher risk than a nice dividend-paying stock with cash flow.
These companies have lower market caps for a reason; there is
either skepticism about the technology or a lot of competition.
We don't need 100 new rare earth mines, but maybe we have 100
rare earth companies. So which companies are going to win that
race? It's a bit like horse racing; you pick your favorites. The
odds are you're not going to win on every one of them.
For a company to get to a $1B market cap these days is probably
going to involve some acquisitions and consolidations, unless it
really has some amazing property or technology.
That's very true. Sometimes companies just lay it out and if you
can see that it can get the sales and the trajectory, it is
certainly possible, and it does happen. It's a challenge, and
that's what we're looking for.
The other important part of the stock-picking process is the
timeframe. The commodity cycle has a long-term timeframe, whereas
the hype cycles can be pretty brief. Eventually, the market turns
and the interest goes away. The challenge for these companies, if
they have something real, is to keep moving the project forward
until the next hype cycle comes around, when people get really
interested again. If you're investing in equities related to
commodities, you're speculating both in the market and on
commodities. Sometimes you can have the right commodity, but the
company you pick doesn't follow that commodity's price
performance very well.
Can you point to any companies you've seen in the last few years
that have turned out that way?
There are a few. To be honest, the other part of this strategy is
that for every company that I talk about and like, there are
probably 100 that I don't. There's a lot of screening and
filtering to get rid of the ones that don't have the potential.
One company that I like right now is a biotech that I think we're
at a triple on right now called
biOasis Technologies Inc. (BTI:TSX.V)
. It has a protein that can cross the blood-brain barrier.
Therapeutic molecules can be conjugated to this protein, allowing
it to cross the blood-brain barrier. This can dramatically
increase an existing drug's effectiveness. That's one. We found
it under $0.50, and now it's in the $1.40-1.50 range.
DNI Metals Inc. (DNI:TSX.V; DG7:FSE)
has also performed really well. While it's down now, it had gone
from around $0.20 to more than $0.60. I like it because it's
pushing the frontiers a little bit. It has a very large, black
shale metal deposit in northeastern Alberta, a bit north of the
oil sands. Historically, very few geologists studied shales, but
they've become more popular now because of shale oil and gas. The
Alberta Geological Survey has done numerous studies going back to
the early 1990s that mention an anomalous metal content in the
Second White Speckled Shale. The grades are really low, but the
deposits are very extensive. There are huge resources in place
containing a whole cocktail of meterials, including rare earths,
nickel, iron, vanadium, uranium, zinc, copper, cobalt and
molybdenum. It's almost a conceptual play in some ways. Although
the grades are not stellar, they are a little bit higher than
we'd expect anywhere else.
So it's a resource-in-place story, but it's also a technology
story because we've seen other industries dealing with a
low-grade resource that suddenly become economic plays because of
technological breakthroughs. The best example of that is probably
shale gas, where people knew for a long time that there was gas
in these shales, but nobody was really making any money from
them. New technology comes along, and suddenly these shale
deposits are worth a lot of money.
For DNI Metals, the challenge is how to get the metals out and
make money doing it. The best method to extract these metals is
pointing to a technology called bioleaching, which is being used
by a company called
Talvivaara Mining Co. Plc. (
in Finland. That's the exciting part that's pushing the
Are these metals pretty much disseminated throughout this whole
deposit, or are certain metals concentrated in certain areas?
The metals are widely disseminated within a fairly uniform and
consistent material. That makes it similar to coal or potash
mining, where the ore bodies are tabular in shape. They may not
be exciting, but at least you know what to expect and you can
plan very large operations around that.
With bioleaching, is
) an option?
There may be some way to use ISR, but the bioleaching at
Talvivaara involves actually digging it up, piling it onto pads
and leaching it by letting the bugs do their work and make acid.
But there may be a way to apply in-situ technology in the upper
zone. Bioleaching in heaps seems to be the approach with the most
potential at the moment.
The value of the minerals in this shale is probably $40 per
ton (/t). Extracting the metals for less than $30/t is the
challenge. No one's done it before, so there's a lot of
skepticism. I think a really big mining company would eventually
take interest in this because it's the kind of project that, if
it can get up and running, has a life-of-mine potential of over
You mentioned uranium earlier. Despite Fukushima, people are
realizing that nuclear is here to stay and one of our best
sources of energy generation for the foreseeable future. Is there
still life after its hype cycle has ended?
I think uranium's future is very bright and it is a critical part
of the world's energy matrix. We can't really afford to just turn
it off. There actually are a lot of benefits to using it. In
terms of the actual price of uranium, the market may not be as
excited about it yet, but Russia said it will not renew its
supply agreement with the U.S. so analysts are anticipating
shortages starting in 2013, which isn't that far away.
What other companies would you like to comment on?
I like the uranium companies that use ISR technology. The main
plays I've been considering are either in Wyoming or Texas, where
you don't get the really high grades that you find in the
Athabasca Basin. There were hundreds of uranium explorers in the
Athabasca Basin and the only one that's really been successful
for investors was Hathor Exploration Ltd., which was recently
Rio Tinto (RIO:NYSE; RIO:ASX)
. With an ISR uranium project, you have a degree of certainty
that a company will actually be able to build the mine and get it
There are three companies in that space that I like. Going
from the smallest market cap to the biggest, there is
Ur-Energy Inc. (URE:TSX; URG:NYSE.A)
, in Wyoming. It's on track to be a producer very soon with
expected permitting for its Lost Creek mine early this summer.
Then it will be able to get its mine into production probably
within six months.
Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.A)
is a similar company in Wyoming. It has actually started its mine
construction and is looking to start producing 600-800 thousand
pounds (Klb) uranium/year very shortly. Both are very near-term
The last one,
Uranium Energy Corp. (UEC:NYSE.A)
, is currently producing in Texas. It has an inventory of
projects coming online and the company announced property
acquisitions in Paraguay and Arizona earlier this year. These are
all companies with uranium resources that, once their facilities
are built, enable extremely long production runs. Typically,
they'll have a centralized uranium processing plant and all of
the mines around it will be satellite projects.
The challenge for all of these companies has been permitting.
The various U.S. government regulatory bodies didn't really have
anyone qualified to evaluate ISR projects because there haven't
been any new ones developed for decades. The absence of a
competent regulatory structure has slowed down progress on
getting these mines built. These companies have typically spent a
year or two longer than they expected on the regulatory process;
it's not a reflection of any gaps in the quality of their
At least the regulators are willing to permit these operations,
which apparently was quite a problem for a while.
That's a very good point. These are viable, useful industries
with quite good safety records and low environmental impact.
Again, I like to talk about the big picture.
What sort of capital costs do these uranium ISR projects
There's a range, but the costs are usually $20-30/lb. But these
companies are pretty comfortable that they can eke out a living
at the current uranium price, which is not going to encourage a
whole bunch of new projects to come along. They're anticipating
higher longer-term prices, which should make them quite
Do you have any thoughts on the current gold market?
I just tell people to look at a 12-year gold chart. Gold is
probably the best-performing investment product over that
timeframe. I personally don't think gold has that critical a role
in the monetary supply, but it is a place to preserve wealth and
look for protection. This recent consolidation pullback is
probably an opportunity, but people need to remember that bull
markets don't last forever. However, gold still has legs right
now, and the trend is your friend.
Looking at the "big picture," what do you suggest people do to
figure out how they should invest their money these days?
Investors have to do their research and be informed. We are in
dangerous times. A lot of assets are correlated so it's hard to
find safety. Sometimes maybe the best safety is not even being in
the market, which I hate to say. I like finding good companies
that are going to grow into viable businesses. But the markets
are not kind, and we've seen what can happen when the flow of
capital gets turned off. The valuations of publicly traded
companies, big and small, in all sectors, tend to drop in unison,
even precious metals prices. It's important to be mindful of the
downside. I look for upside opportunities because I'm an optimist
and I assume that life will go on.
We do have some structural issues in the financial system. If
that breaks down, you really don't want to own anything that's
not tangible. That's the strongest investment thesis for owning
hard assets. That doesn't mean owning shares in a hard asset
company; that means owning the physical hard asset. If you own a
car, a house or some gold, those things will still be around no
matter what happens to the money supply and currency valuations.
The monetary system is a wild card, and that's the thing that
keeps everybody nervous. We can make informed guesses, but nobody
really knows how that's going to play out.
We appreciate your time and input today.
is the founder and editor of the
Big Picture Speculator
and is a professional registered geologist living in Calgary,
Alberta. He has over 20 years of experience in the oil and gas
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1) Zig Lambo of
The Energy Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Energy Report
The Gold Report:
DNI Metals Inc., Uranium Energy Corp., Ur-Energy Inc., Uranerz
Energy Corp. and Energy Fuels Inc. Streetwise Reports does not
accept stock in exchange for services.
3) Jim Letourneau: I personally and/or my family own shares of
the following companies mentioned in this interview: biOasis
Technologies Inc. and DNI Metals Inc. I personally and/or my
family am paid by the following companies mentioned in this
interview: I am on the Advisory Committee of DNI Metals. I was
not paid by Streetwise for participating in this story.
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