Marshall Auerback: Decoding Energy Investment
Source: Brian Sylvester of
Pinetree Capital's Marshall Auerback sees a number of
supply/demand imbalances in the energy space, particularly in
uranium. "We like uranium because it's both a supply and demand
story," he says, believing the price could "easily double" over
the next few years. But yellowcake won't be alone in its ascent
up the energy hierarchy. As developing nations begin to realize a
standard of living more akin to the West, opportunities could
arise in other areas across the energy spectrum. In this
exclusive, Marshall decodes the energy enigma, making a
strong case for U308, oil and gas E&Ps and even natural
The Energy Report:
Shares in Pinetree Capital have had a good run in the last six
months, going from about $1 per share in July 2010 to about $3.38
now. What's largely responsible for that remarkable run?
A number of things. I think Pinetree has been an undervalued
stock for a long time based on its net asset value. But we had
very adverse financial conditions in 2008, particularly adverse
for small-cap companies, which comprise most of our portfolio.
Even though we started to see an improvement in the credit
markets in 2009, they really didn't start to loosen up until last
year for the smaller companies. Your risk in holding these small
caps is not so much market risk as liquidity risk. A number of
these companies had cash on their balance sheets but they were
clearly capital-constrained because they were dependent on
ongoing capital injections to develop these assets.
In 2010, the capital markets began to re-engage and that made
it easier for some of these companies to access funding. In turn,
they were able to develop their assets, which helped improve
their share prices. But it took a while. The markets were
basically trendless until about September of last year, then all
of a sudden you have this big move in the commodity space.
Clearly, that's Pinetree's sweet spot.
Your stated objective is to "invest ahead of the crowd by
anticipating emerging trends and macro changes in consumption and
translate that knowledge to successful investments in small- and
micro-cap companies." What macro changes are taking place in the
energy market, and more specifically in the uranium market?
People have discussed peak oil for a long time. It's been
controversial. Some people say you can always find oil at a given
price. We don't disagree with that but the main thesis behind
peak oil is that mother nature has only given us so much oil. The
low-hanging fruit has largely been picked. It's getting
increasingly difficult to extract oil from conventional sources.
If you look at each successive economic crisis and the price of
oil during each one, we have continued to bottom at increasingly
higher prices. Even in the worst conditions we had in 2008 and
2009, the oil price bottomed at about $36 a barrel and it didn't
stay there for long. It was driven by a collapse in demand.
The other problem in energy, in all commodities really, was a
complete collapse in trade financing. So, we had both a financing
shock and a demand shock, which caused this collapse in
commodities. But as trade financing began to normalize and these
emerging economies began to normalize, there was a big increase
in demand. Along with that you've got very significant shortages
in supply. The
BP Plc. (NYSE:BP; LSE:BP)
oil-spill disaster that occurred in the Gulf of Mexico is a
symptom of the supply problem. We wouldn't be drilling for oil
three miles below the surface of the ocean if it were easier to
get oil from more conventional sources. To me that's symptomatic
of a fact that you have to look for the oil in increasingly
expensive places, which means increasingly expensive oil.
How is expensive oil influencing the uranium market?
Clearly, as the oil price has continued to appreciate people have
started to look at alternative fuels. For a while the sexy ones
were wind and solar, but there's very low power densities in
those types of energy generation. Wind is intermittent.
Obviously, solar is not a great resource to use in cold-climate
countries like Canada or Russia. Natural gas is an important
transitional fuel, but there's also uranium.
To me, a seminal moment in the uranium market occurred about
five years ago when
, a leading environmentalist who used to be the head of
Greenpeace, said that uranium has to be a major part of our
response to global warming. Before that, uranium was seen as part
of the problem, not part of the solution. Clearly, the nuclear
waste issue hasn't gone away but we treat the stuff a lot more
effectively than we used to. The waste problem relative to the
millions of tons of coil that get belched out into the atmosphere
is fairly minimal.
I think the reason we like uranium is because it's both a
supply and demand story. On the demand side, a number of nuclear
reactors are under construction. Haywood Securities Analyst
Geordie Mark says there's been a 61% increase in the last couple
of years. There's also been a 54% increase in the number of
reactors planned and a 45% increase in those proposed. These new
plants alone will eat up 32,900 tons of nuclear fuel
annually-that's almost half the demand from this year's 443
commercial reactors. We've got a very good story there, and then
you have the supply side. The current price is around $68 and
that's still too low to support a lot of new investment. You need
much higher prices to invest in large-scale, development-stage
As it is now, the uranium industry is having a hard time
boosting production. There have been shortfalls from large mines,
Energy Resources of Australia Ltd.'s (ASX:ERA)
Ranger Mine and
BHP Billiton Ltd.'s (NYSE:BHP; OTCPK:BHPLF)
Olympic Dam Mine in Australia. Of course,
Cameco Corp. (TSX:CCO; NYSE:CCJ)
had water problems related to reaching production at its proposed
Cigar Lake uranium mine. Those are other problems.
Do you think we will see another surge in uranium prices like
that in 2005?
Generally, I find that these moves in the commodity cycle take
two phases. The first is the "fantasy" phase where you get
recognition that a real supply/demand deficiency is developing. A
lot of speculative moves are made and the stocks start to go up,
but then they crash because it hasn't yet been validated by
actions in the real world. But this speculation moved ahead of
reality. Typically, what happens is that you get a wash out, and
then 18 months to two years later people come back and say, "This
thing is for real." We saw that happen in gold. There was a big
move in gold in 2003 and 2004, but the gold price didn't move up
a huge amount. So, the market went dead for a couple of years. I
think uranium would've had some interest in 2009, but obviously
everything was superseded by the Lehman Brothers meltdown and the
financial crash. So, it's taken a bit longer, but I think the
supply/demand outlook I've sketched here is still very much in
existence. Now we're starting to see an increasing amount of
pricing pressure developing on uranium, which I think will help
reignite interest in the sector.
What's your forecast for the price of uranium?
The price could easily double over the next three or four years,
and it could even go much higher. A number of these projects in
places like Kazakhstan and Namibia don't even begin to make money
until the price gets closer to $80 or $90 per pound.
A lot of the demand will be driven by the pace at which these
nuclear reactors are built. The problem here is that we've often
got political delays. I don't think nuclear construction in the
U.S. will come for another four or five years because with
natural gas prices being as low as they are there's no urgency to
move into nuclear. However, in other countries where natural gas
prices are much higher, I think we'll likely see accelerated
development. Certainly, in countries like South Africa, we're
already seeing brownouts. China is definitely going to move ahead
very rapidly, as is India-that's going to be the big source of
demand. It's just a matter of how quickly these countries start
to build reactors. It may be a case where, occasionally,
perception races a bit ahead of reality; but the underlying
reality is that uranium has the soundest supply/demand features
of almost any commodity out there right now.
As of Sept. 30, 2010, Pinetree had 55 separate investments in
uranium plays. That accounted for 18% of your asset mix. With
this expected price appreciation, do you want to keep your
uranium exposure at around 20% or are you going to increase
I think it really depends on the opportunities; we're focused on
a number of ventures. Again, you have to weigh the existing
investments against the increased political risks as you move
into some of these funkier countries in central Asia. You've
always got to measure it against that. I think 20% is a fairly
substantial bet, and I suspect that's even higher now due to
share price appreciation. But if it's become a hot sector, we may
start to look in an area that's become less loved.
You mentioned "funkier countries" in central Asia. Do you mean
I have a view that it's always tough investing in any country
that ends with "stan." Basically, I'm saying you have to be much
more aware of that risk. Increasingly, we're seeing examples of
resource nationalism. And that's not just in the emerging world,
it's in places like Canada. There were very significant
resource-nationalism reasons for the Canadian government's
disapproval of BHP's acquisition of
PotashCorp (NYSE:POT; TSX:POT)
. I happen to think that was the right decision because I believe
it's much more valuable as a standalone asset. Increasing
resource nationalism means you've got to be careful. You don't
want to develop something, and then find out the local government
is taking 50% or more of it. I think that we have to make
political risk assessments as part of our investment judgments
What are some of your biggest success stories when it comes to
picking uranium stocks?
Mega Uranium Ltd. (
is a classic example. It started to appreciate at $0.10 and got
to $9 at its peak. That's probably one of the best examples. A
couple of other examples would be
Rockgate Capital Corp. (TSX:RGT)
, which has gone from under $1 to $2.70 recently. It's a uranium
explorer and developer in West Africa.
Rockgate's main project is the 100%-owned Falea Uranium/Silver
deposit located in southwest Mali. It was initially discovered in
the late 1970s by Cogema, now
. Rockgate has expanded Falea substantially with 45,000 meters of
diamond drilling now completed in more than 175 holes. This work
identified a new zone of uranium and high-grade silver; and on
May 15, 2009, Rockgate released the first independent NI 43-101
resource calculation for the Falea project reporting a total
uncapped resource of 20,252,000 pounds of uranium and 31,600,000
ounces of silver.
Another company is
U3O8 Corp. (TSX.V:UWE)
, which has gone from a $0.35 to a $1.03 stock. It acquired some
projects in South America Mega Uranium last year. In Colombia, it
acquired Berlin Project-a 38 Mlb. historic uranium resource at
0.13% U3O8-a high-value, multi-element opportunity with the
presence of uranium, phosphate, vanadium, molybdenum, yttrium,
rhenium and silver grades.
In Argentina, U308 Corp. has sizeable land holdings near the
country's largest known uranium deposits. The
target at the company's Laguna Salada Project there appears
amenable to low-cost mining, and it's working to complete an NI
43-101 uranium resource estimate on that project.
Additionally, U308 Corp. holds prospective lands in Guyana-in
the Roraima Basin, which is similar to Canada's Athabasca Basin
in size, composition and basement characteristics. Its Kurupung
Batholith Project has an NI 43-101 resource of 5.8 Mlb. at an
average grade of 0.10% U3O8 (Indicated) and 1.3 Mlb. at an
average grade of 0.09% U3O8 (Inferred). A pipeline of
uranium-bearing structures will help grow the current resource at
Kurupung, which is geologically similar to sizeable
albitite-hosted deposits around the world.
Khan Resources Inc. (TSX:KRI)
Summit Resources Ltd. (ASX:SMM)
would represent a few of our other big successes.
What are some other promising uranium juniors Pinetree has in its
Mawson Resources Ltd. (TSX:MAW; OTCPK:MWSNF;
, which has metal and energy interests in Finland, Peru and
Sweden. The stock recently went from $0.75 to $1.99. And not long
ago, the company increased its landholding at the Rompas Gold
Uranium Project in Finland by 40%. Mawson has a strong cash
position and a very prospective deposit. Highlights from recent
channel samples included 0.95m at 1,424 g/t Au and 1.3% U308 and
2.05m at 191.3 g/t Au and 0.44% U308.
We also like
Energy Fuels, Inc. (
, which is consolidating uranium mining in western Colorado's
Uravan Mineral Belt and eastern Utah, U.S.
Let's move on to oil. Global oil consumption has rebounded from
the early 2009 lows and now exceeds pre-financial crisis levels.
The usage gap between developed markets and their emerging-market
counterparts has shrunk from 12 million barrels per day (Mbpd)
three years ago to just 4 Mbpd. The International Energy Agency
(IEA) forecasts global energy demand will rise to 82.2 Mbpd in
2011 up from 86.9 Mbpd this year-that's almost 500 billion
barrels annually. Where's that oil going to come from?
It's a good question. Ultimately, I think that's what keeps the
bid on the price. You have these situations wherein you've got
massive increases in demand and you just don't have the available
supply, so you're going to see much higher prices.
once said the best cure for higher prices is higher prices
because that's how you solve the problem. I think we'll see
increasing price pressures. The possibility of a conflict
developing or resource wars is rising. I think countries that are
in the sweet spot are countries like Canada, which has very
substantial energy reserves.
Since it peaked in the 1970s, conventional oil production in
Canada and the United States has been declining. Recently, the
application of horizontal drilling and hydraulic fracturing to
tight oil basins-or, as one oil pundit put it, "a replay of the
shale gas movie with different actors"-is bringing a growing
amount of light oil to market. Perhaps the best example is the
North Dakota Bakken where oil production went from virtually zero
a few years ago to about 250,000 bpd now. Are these new dense
rock plays putting an end to the notion of peak oil, or is it too
soon to declare that?
It's too soon to declare that. First of all, two things are going
on there. We need these kinds of projects just to sustain the
levels of demand going forward, but I don't think they are a
panacea to the problem of peak oil. It's more accurate to look at
them as the response to substantially higher oil prices from
conventional sources. And some of the supply gains from the
non-conventional sources are temporary. In the case of these
Barnett shale-type developments, for example, you get very
significant early production gains but the asset gets exhausted
much more rapidly because the technology accelerates depletion
rates. Working these tight basins may provide a short-term fix
but it doesn't actually solve the problem of peak oil. In fact, I
would say it validates the whole thesis. If there was an easier
way to find oil, no one would have considered it worthwhile to
look at these areas.
What are some of your noteworthy oil holdings?
Brownstone Energy Inc.'s (TSX.V:BWN)
stock has gone from a low of $0.27 to a high of $1.16; it's
currently trading around $0.75. The company's main focus remains
on its Colombian and offshore Israel projects.
In Colombia, the Canaguay # 1 well on the Canaguaro Block in
the Llanos Basin produced oil at rates in excess of 3,900 bpd.
BWN has 25% working interest and long-term production tests are
expected to take place in February.
The offshore Israel project is a joint venture with
Adira Energy Ltd. (TSX.V:ADL; OTCBB:ADENF)
Noble Energy, Inc. (
Delek Drilling LP (TASX:DEDR.L)
Tamar discoveries are within 60 km. of Brownstone's Gabriella and
Yitzhak Blocks. Completion of Adira's 3D high-resolution seismic
programs are expected in January 2011; so far, the results look
Donnybrook Energy Inc. (
is an emerging Canadian oil and natural gas explorer and producer
we like. It's focused on Montney, Bluesky Wilrich and Fahler
formations in the Deep Basin, West Central Alberta. The company
now owns working interests in 46 gross sections (30 net sections)
of Montney petroleum and natural gas rights in its core area of
the Alberta Deep Basin.
Primary Petroleum (TSX.V:PIE)
has focused a majority of its resources in the acquisition of
prospective oil and gas acreage in Montana. It is engaged in
exploration and development activities in Montana and Alberta and
owns a significant land position in the Alberta Basin Bakken
Fairway in Western Montana and in the NW area of the Williston
Basin in Eastern Montana. The company holds 100% interest in all
of its landholdings in Montana and has been increasing those
Centric Energy Corp. (TSX.V:CTE)
is another one we like. It is an oil and gas explorer with
interests in Kenya and Mali, with a particularly promising land
position in Kenya. The Kenyan government recently approved the
Block 10BA farmout to
Tullow Oil plc (LSE:TLW)
. The Block is in the northwestern part of Kenya, located in the
eastern part of the Tertiary-age East African Rift system and is
considered analogous to the Albertine rift in Uganda, where an
estimated 1 billion barrels of reserves have been proved to date
and contains another 1.5 billion barrels of prospective
resources. The Lake Albert Blocks are operated by Tullow Oil, and
35 out of 36 of the exploration wells drilled have been
Most people are staying away from gas plays right now. Are you
saying that Pinetree is heading in that direction?
There's a very strong secular case to be made for natural gas in
the sense that it's a "green" fuel and will be instrumental in
helping governments achieve their objectives to reduce carbon
emissions. That said, a lot of the so-called gas plays are
actually existing byproducts of oil extraction, so there is less
price sensitivity to natural gas prices per se. And the new
technologies in place have substantially increased extraction
techniques, whilst reducing cost. So our focus can't be on
companies on the basis of higher prices, but rather on good,
low-cost producers with ample reserves. Those companies can make
money at these depressed prices, which are likely to stay low for
the foreseeable future.
Do you have some closing remarks on the energy sector on a macro
I think what Pinetree Chairman and CEO Sheldon Inwentash says is
correct. At the end of the day, you're dealing with a structural
phenomenon where you've got 2.5 billion people in India and China
and other emerging areas of the world who are rapidly trying to
get wealthy like we did using the same sort of growth model. But
because these people are at an earlier stage of economic
development, the intensity of their commodity usage is much
higher. With that in mind, we tend to believe that there's a
structural bull market in any number of commodity classes.
Pinetree has effectively constructed a business plan on that
thesis. Now, are we likely to see significant corrections in the
future? Of course. These things don't go up in a straight line.
You could have vicious 30%-40% falls. We have to learn to live
with that volatility. We employ responsible risk-management
techniques and do a lot of due diligence and technical work to
get the high-quality assets and get them early.
Thank you for talking with us today, Marshall.
corporate spokesperson, Marshall Auerback is a member of
Pinetree's board of directors and has some 28 years of global
experience in financial markets worldwide. He plays a key role
in the formulation and articulation of Pinetree's investment
strategy. Currently, Marshall is a senior fellow at the
Roosevelt Institute, a research associate for the Levy
Institute and a fellow for the Economists for Peace and
Security. He previously served as an advisor to a number of
fund-management organizations, such as PIMCO, the world's
largest bond fund management group, RAB Capital and David W.
Tice & Associates. He graduated magna cum laude from
Queen's University in 1981 and received a law degree from
Corpus Christi College at Oxford University in 1983.
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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:
Mega Uranium, Mawson Resources, Energy Fuels and Primary
3) Marshall Auerback: I personally and/or my family own shares of
the following companies mentioned in this interview: None. I
personally and/or my family am paid by the following companies
mentioned in this interview: None. See Pinetree Capital's
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