Energy Investing in Saskatchewan: Tom MacNeill
Source: Brian Sylvester of
The Energy Report
Tom MacNeill doesn't have to go far to find the most unique
early-stage energy companies to invest in. The President and CEO
of Saskatchewan-based investment firm 49 North Resources,
MacNeill is bullish on his own backyard, and says of the
province's resources, "You name it, we've got it." In this
exclusive interview with
The Energy Report,
he explains why Saskatchewan resource plays trump their Alberta
or Ontario counterparts.
The Energy Report:
Even some of the most successful small-cap resource investors
were schooled in 2011. What did you learn from last year's ups
We were definitely reminded of the nature of resource
investments. Liquidity absolutely vanished in 2008, but by the
time it reappeared in 2009 and 2010, investors had decided they
wanted to keep their hands on their cash. Oil entered and exited
2011 at roughly the same price, but at times it had been much
higher and much lower. That spooked investors. It became evident
that most of the investors who were still comfortable with equity
investments preferred dividend paying structures. It's been a
very edgy time.
We were reminded that investors were walking on thin ice. The
companies that stepped up and started increasing distributions
from their oil and gas production were well served. Those that
did not, were not. There's been a bifurcation in the market. The
entire capped energy index is down relative to most of the
broader indexes for the simple reason that investors were
withdrawing money from the sector even though one barrel (bbl) of
oil was about $100 throughout the year.
Will the legacy of 2011 be the split between those companies that
brought in dividends and those that didn't?
It's one of the legacies. A lot of companies die in the aftermath
of an event like the 2008 downturn. However, not enough
undeserving companies died off because they had just completed
financings and had millions of dollars in their treasuries that
enabled them to weather the storm. We didn't have enough of a
Going into 2011, there were still a bunch of these
Johnny-come-latelies and investors got wise. They started to
watch the burn rate and what management was doing. It was a
wakeup call. It was a really bad year in '08, it was OK in '09
and '10, and then '11 leveled as investors became objective. I
believe that investors are more objective this year than they
have been in five years.
Your company doesn't just invest in resource companies, it also
instills management teams and brings in consultants with specific
expertise. It's an investor and a partner.
We've had to be a little bit of everything within 49 North. We
act as in-house management for developing companies. We provide
seed capital and later-stage capital. We've got 25-plus of the
best geoscientists in Saskatchewan on staff in one of our
subsidiary companies, Northrim Exploration Ltd. That enterprise
works with most of the senior players working in the province
developing potash, oil and gas, and other sedimentary resources
and is moving into hard rock mining consultation. We also have
substantial connections within the junior resource capital market
and investment banking community worldwide.
We had to develop it that way for the simple reason that we
had no capital market in Saskatchewan. Where government used to
hold business back, it is now very supportive. The resource
business is now wide open. It's a tremendous opportunity for us,
and anybody who wants to invest in the province, because it's
like Alberta was in the '40s and '50s.
Saskatchewan certainly shares some of the same commodities with
We view ourselves as much better off than Alberta from a
geological perspective. The Western Canadian Sedimentary Basin
overlays almost all of Alberta, meaning there's really no hard
rock mining with the exception of some coal mining and some other
assets in the Rockies. Alberta is very much an "energy only"
Saskatchewan is the opposite. The sedimentary basin covers the
southern half, but the northern half is exposed Precambrian
shield. We've got all of the mining prospectivity and assets that
you would find in Ontario and other hard rock jurisdictions, plus
all of the oil and gas that you find in Alberta, and a sea of
potash and other natural resources. You name it, we've got it.
The neatest part is that it's mostly still in the ground. There
are 27 active mines in the province, but we should have a
multiple of that given our resource base.
How long do you think it will take you to get to that point?
We have just begun, but it is moving fast. There is $15 billion (
) worth of capital committed already to expansion in the potash
industry, not including capital commitments from
BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK)
, which is moving into the final feasibility stage of its 8
million tons (Mt) per annum potash mine at Jansen Lake. When
mining is combined with our exponential growth in energy
development I expect that $15B will double or triple in the next
One new gold mine just came on-stream this past year. There
are three others that are prospective in the Greenstone Belt in
northern Saskatchewan. There's a potential rare earth elements
deposit that's near development. In the next 10 years, at least
10-20 mining operations should reach feasibility in the
One commodity that Saskatchewan is well known for is uranium. The
Athabasca Basin is one of the richest areas for uranium in the
world. In a
The Gold Report,
you told us that you had mostly purged uranium from 49 North
Resources' portfolio and wouldn't get back in until it was
"time." Is it time yet?
The comments I made were based on a couple of observations. There
was a physical price spike in 2006 due to uranium speculators. It
created a parabolic price chart, so we knew that the price of
uranium was going to come off. When that happens, all of the
junior explorers get crucified. We took that time to exit our
We've been diligently watching the uranium price chart and
energy complex in general and view this year as the time to be
taking positions. Uranium stocks have been beaten up. That's the
time when we get involved in projects and we're actively pursuing
more than what we have on the books right now.
We've got a significant investment in
Unity Energy Corp. (
, which is an early-stage explorer in the same area as
Hathor Exploration Ltd.'s (HAT:TSX.V)
RoughRider deposit and the area were
Fission Energy Corp. (FIS:TSX.V; FSSIF:OTCQX)
is exploring. Also we have been accumulating a large position in
Eagle Plains Resources. They have substantial landholdings in the
Athabasca basin in Saskatchewan and recently announced a
high-grade uranium discovery on their property near the Rabbit
and Cigar lake mines.
Tell us about Unity.
It's in the early stages of a promising exploration program
having done the geophysical work necessary to advance their
package of properties. We hold approximately 12% of Unity. Given
that initial results have been very encouraging, we will likely
be expanding our exposure shortly.
What's the earliest that Unity would have a resource
They are at a very early stage in the exploration cycle so the
earliest would likely be at least 2-3 years. Investors need to
realize uranium exploration takes time, is expensive and if you
want good science you can't rush the process. This is a long-term
investment, as all uranium exploration plays are.
What macroeconomic trends are going to continue to drive energy
Oil acts a lot like gold in that it's a good parking lot for
rampant money printing in the U.S. One thing that can quell
inflation in the short term is a high oil price since it slops up
many of the newly printed dollar bills in an asset that is used
almost immediately. This seems counter-intuitive, but it takes
time for the inflationary effect of high oil prices to bleed into
higher asset prices. So in the short term, it actually helps the
money printers because all over the world, oil is traded in U.S.
currency, thus distributing the new liquidity worldwide. The U.S.
is the only country with this advantage, which creates some
ironic economic activity that investors should pay attention to.
As long as the U.S. keeps printing money, there's going to be a
high oil price. If the liquidity being added actually creates
economic development, there will be rampant inflation. Usually
that's a tap that can't be turned off, which could lead to much
gold prices. We view the coming five-year period as very
interesting and probably very lucrative for resource investors,
especially in gold and energy.
What energy commodities are you most bullish on this year?
We're focusing on heavy oil and coal (for conversion to crude
oil), but our backyard is unique. There are 20-40 billion barrels
(Bbbl) of heavy oil in place in west central Saskatchewan. There
are also staggering quantities of light oil as well in
Saskatchewan, but I'm not as interested in that. Everyone knows
about the Bakken shale and other tight light oil plays now being
developed using modern multi-staged fracturing but very few
follow heavy oil development.
My interest is tied to the recycle ratio, which is the net
profit/bbl divided by acquisition and development costs/bbl. The
ratio for light oil in Saskatchewan averages somewhere around
two, meaning if a company puts $1 million (
) into acquiring and developing an average well, it will get $2M
out of it. But heavy oil in Saskatchewan can have a recycle ratio
as high as five.
That's not true of everywhere in the world. We have two heavy
oil upgraders in Saskatchewan that have been consistently adding
capacity so we've got a real blessing here in that we can develop
our heavy oil fields and achieve higher netbacks than elsewhere
because of that very unique refining capacity in our
What are some of the companies benefiting from that?
Most of the companies that are developing these heavy oil assets
that are in production are very large already and beyond our
scope, such as Canadian Natural Resources LTD. (CNQ;TSX) and
Baytex Energy Corp. (BTE.UN:TSX)
. We're sponsoring private companies in this space. However,
Baytex is coming up with ingeneous ways to drill multiple lateral
wells from one drill pad and get enormous production out of
thin-formation, heavy oil projects. They also pay a pretty decent
dividend yield as well. That's the kind of story we're looking
for, but we're looking for it at a very early stage when a
company has a prospective heavy oil development field and is
investing its first $1-5M in the project.
Are any of your private oil plays expected to go public?
Probably. Allstar Energy Ltd., in west central Saskatchewan, is a
light oil producer that is converting into a heavy oil producer
as well. We've actually taken that one in-house and made it a
subsidiary company. Had the capital markets been a little bit
more buoyant over the last nine months, we might have entertained
taking that company public sometime last year. At some point,
given it's growth potential, its capital needs will outstrip our
ability to supply it and we'll have to take the training wheels
off and take it public. That could be in 2012 or 2013 depending
on how development goes.
We also sponsor Admiralty Oil Ltd., a very early-stage light
oil development in southeastern Saskatchewan. It will probably go
public if it has some success this year.
You said you are bullish on coal. What are some of your holdings
in that space?
There are two that we really like, which are both developing
coal-to-liquid technology. We view coal as just another long
carbon chain that can be converted into a shorter carbon chain to
make heavy crude. These two enterprises are going about it in
NuCoal, a private company in southern Saskatchewan, will use
full gasification to convert coal into transportation fuels at
the mine site. It's a multibillion-dollar project. The company
has control of one of the largest coal resources in the world and
it could possibly go public sometime in the next 12-18
Westcore Energy Ltd. (WTR:TSX.V)
, which we have an approximate 25% stake in, has a significant
thermal coal resource that it's developing on the
Saskatchewan-Manitoba border. It is working with Quantex Energy
in Calgary, which has a proprietary technology developed at the
University of West Virginia. Quantex tested some of Westcore's
coal and determined that it's perfectly adequate for converting
into heavy or light crude depending on the extent of
Westcore is currently starting its winter drilling exploration
program. It already has at least seven defined targets that have
hit intersections as thick as 100 meters (m) of coal, which is
absolutely enormous. It's conservative to estimate that those
intersections average 50Mt/coal, which could mean that the
company has at least 300Mt/coal in one small area. That's world
class. It appears it will cost about $40-50/bbl of oil for the
conversion technology. It will probably cost approximately $200M
to build an initial 10,000 bbl/day conversion facility. Given
that the process appears to convert coal to heavy crude at a
ratio of 3-4 bbl crude from each ton of coal, there's an almost
endless potential supply of heavy crude oil for the refiners in
Saskatchewan. Now that is an exciting energy story.
It does sound exciting. Is the process by which they turn coal
into heavy oil similar to what's happening in the oil sands where
they steam the bitumen to separate the oil from the sand and
That's a liberating technique using steam to get the bitumen.
Then the bitumen is processed through hydrocracking, which
involves heating up the bitumen under pressure with catalysts to
separate it by strata into various elements. The lights float to
the top of the column and the heavy stuff stays at the bottom,
leaving five or six different strata. These synthetic crude
products are then piped to refineries for further processing. The
NuCoal project is similar to that in that it uses similar
full-scale gasification technology but with the intention of the
plant refining all the way to the transportation fuel level right
The Westcore/Quantex route involves using a low-temperature
direct liquefaction process. It adds some proprietary chemicals
to the coal once it's emulsified and converts it into heavy
crude. The beauty is that the process does not leave much of a
greenhouse gas footprint at the mine/processing site because most
of the carbon dioxide and other problematic gases that would be
emitted stay in the heavy crude and go to the refinery. The
exciting part about low temperature conversion is its
scale-ability with initial capital cost of probably one tenth
that of full-scale gasification.
Both companies have viable approaches; they are simply on
opposite ends of the development spectrum. One has low capital
cost with smaller initial production while the other has large
capital requirements at startup and therefore large initial
output. At these energy prices we believe both approaches will be
Once it's converted it goes to the refineries. Where does the oil
go from there?
It is channeled into the North American distribution system
running from northern Alberta into a hub center near Chicago. It
goes directly into the pipeline system that bisects Saskatchewan
diagonally. That's the beauty. We're infrastructure laden because
we're in between the consumptive market in the eastern U.S. and
the production of western Canadian oil sands and conventional
producers in the Western Canadian Sedimentary Basin.
Do you have some parting thoughts on the energy space?
I'm curious to see what prices are going to do. We're comfortable
that the price of uranium has bottomed and that it's likely a
very long-term bottom. We got our feet wet last year in some of
the early-stage investments we've made. We're going a lot harder
this year and repatriating capital back into projects that we
like. There are lots of good opportunities out there within
companies that have done poorly in this twitchy market but have
The energy space should be an exciting one. If the governments
keep adding liquidity, the resulting competitive devaluation of
currencies will be inflationary and good for commodity prices. Or
perhaps the world is going to get a little bit better-also good
for commodity prices. It's a bit of a win-win situation over the
next five years if investors are patient.
Investors have to make sure that they stick to certain
criteria. Look at management first, not the project, because the
best project in the world can be screwed up by bad management. A
marginal project can be made wonderful by good management.
of Tom MacNeill's gold investing ideas.
is the founder, president and chief executive officer of 49
North Resources Inc., a Canadian resource investment company
headquartered in Saskatchewan. As the first entity of its kind
in the province's history, 49 North is a pioneer in what is
rapidly becoming one of the world's most renowned resource
jurisdictions. A graduate of the University of Saskatchewan
(economics/geology), MacNeill is also a certified general
accountant and holds a chartered financial analyst designation.
MacNeill's extensive knowledge of Canadian capital markets has
been gained through experience as a management accountant
within the mining industry, investment advisor with a major
Canadian brokerage firm and chief financial officer of a
Canadian trust corporation. He is a well-respected member of
the resource industry and part of a worldwide network of
exploration professionals and resource developers which enables
him to source and structure projects.
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1) Brian Sylvester 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:
Fission Energy Corp. Streetwise Reports does not accept stock in
exchange for services.
3) Tom MacNeill: I personally and/or my family own shares of the
following companies mentioned in this interview: Westcore, 49
North Resources, NuCoal Energy, Allstar Energy, Admiralty Oils,
Unity Energy. I personally and/or my family am paid by the
following companies mentioned in this interview: 49 North
Resources. I was not paid by Streetwise for participating in this
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