Shale Envy: Why North America Is the Global Oil & Gas Sweet Spot

The Energy Report: You work for a London-based research organization, and I imagine that you have a somewhat broader outlook on the oil and gas investment arena than most firms do in North America. Tell us a little about what you see ahead for energy markets.

Peter Dupont: Actually, some of the most interesting developments over the past year or two have taken place in North America. North America experienced a production increase of about one million barrels per day (1MMb/d) last year, whereas output dropped about .5MMb/d in other parts of the world. The North Sea was a major contributor to that. I see North America driving the global increase in output in 2013-2015.

I see the global supply/demand picture as pretty comfortable, barring natural, political or technical disasters. Those are always the wild cards. The demand side of the picture looks about the same as 2012, with a fairly subdued increase of perhaps 1MMb/d or a bit less. Demand growth is clearly constrained by recessionary or quasi-recessionary conditions in Europe and sluggish economic activity elsewhere in the OECD countries, including North America. China should see similar increases to recent years, maybe 3–4%. Overall, I don’t think we’re looking at particularly large increases in demand, which is just a function of the global economic situation.

TER: Politics are playing an increasingly important role in resource development. What do you see ahead that’s significant in this respect?

PD: Politics and nationalism concerns have always been there to some degree since the formation of OPEC. That’s inevitable.

TER: Are there any areas you’re watching that could have some significant upsets as a result of government greed?

PD: I think that risk applies wherever oil is produced in significant quantities. It applies here in the North Sea, where you get changes in the tax regime that to some extent reflect movements in share prices. One reason why the U.S. and Canada are perceived as being attractive is you don’t have the same degree of nationalism reflected in taxes. State production taxes and royalties vary, but the situation is vastly different compared to a place like Russia, where it’s very easy to find the revenue completely consumed by taxes and local operating costs. It’s no great surprise that the shale revolution has taken place in North America. In addition to geological conditions and the great fund of expertise available in the U.S. and Canada, the tax regime for oil and gas is more favorable than in other parts of the world. Even if you take into account the discounts on West Texas Intermediate (WTI) against Brent, there’s still a pretty good margin after all the associated production costs and taxes are factored in.

Furthermore, North America is one of the most favorable places to operate now because of all the infrastructure and oil field services already in place. The terrain lends itself to oil field development. A lot of people are also very experienced in the business. Breakthroughs in tapping into shales certainly makes it one of the most interesting places to operate because the resources are there and you don’t have major problems dealing with governments and tax regimes. At the end of the day, you’ve got to go where the oil is—or where you think it is.

TER: What other jurisdictions do you find interesting at this point?

PD: Shale probably has very big opportunities outside North America. The most interesting area, arguably, is Argentina, which has very substantial resources. There are political issues there, but you have to go where you think the opportunities are and Argentina is high on my list. Colombia is another shale opportunity. Australia has very big potential, with a combination of shale and conventional onshore opportunities.

China is also getting a lot of attention now. Theoretically, it has very large shale oil and gas opportunities, generally in tight reservoirs. The Chinese are very keen on tapping into shale gas to limit their import exposure and emissions.

Europe also has shale possibilities. Because of high population density, it’s more difficult to operate onshore in Europe than in the Great Plains of North America. In Europe, you also have all sorts of planning and socio-political issues with any form of oil and gas development onshore. Another factor is sometimes a lack of oil field services, although this is not an insuperable problem.

Most countries are very envious of North America’s shale production, and want to emulate it. Ukraine, for example, is going down this route and announced a big joint venture several weeks ago with Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) to potentially unlock the country’s shale resources. Efforts should gather momentum in many countries to unlock shales. It’s mainly an engineering and economic issue. Some places are obviously easier than others.

In Argentina, the shales are very much laterally continuous, as they are in the U.S., which makes development much easier. Argentina also has low population densities, terrain similar to the Great Plains, good highway infrastructure, adequate oil field services and people who know something about the industry. It’s a very hot area at the moment and I think it will continue to be.

TER: What companies look most interesting at this point?

PD: One situation I’d like to mention in particular is CBM Asia Development Corp. (TCF:TSX.V). It’s basically a play on coal bed methane opportunities in Indonesia that’s still at a fairly early stage. Momentum is increasing rapidly there following the joint venture with Exxon Mobil Corp. (XOM:NYSE) that CBM Asia announced at the end of last year. Development and derisking is likely to get underway in Q2/13, which potentially should provide some very interesting news flow over the year. It’s already announced nearing a trillion cubic feet (Tcf) of resources, which has been independently audited by Netherland, Sewell. There could be further announcements on the resource base by the end of the year.

TER: What could be the potential impact on the company and the stock price?

PD: If it all comes off, it could move from being a junior valued at about $40 million ($40M) to something that starts becoming a midtier, possibly valued in the hundreds of millions. We would reckon that there’s a resource, based on the existing projects, which is about 14 Tcf net. That’s a big number in gas circles. The work program is to derisk and unlock that potential. If CBM can do that, then it will have a very substantial business. I think CBM Asia has indicated that it would possibly spin off projects as they are derisked.

Indonesia is interesting from a gas perspective because the coal reserves there are very gaseous, with very thick and reasonably permeable and porous seams. CBM’s management believes that Indonesia’s coal seams have superior characteristics to the Powder River Basin (PRB) in Wyoming, the second-largest source of coal bed methane in the U.S. The coal seams in Indonesia tend to be laterally continuous and are not heavily impacted by faulting, as they are in China, where development is very difficult and expensive.

TER: Would this gas be used mainly domestically or would CBM Asia try to export it?

PD: There’s a big domestic market. Indonesia has a very big population and some of CBM’s projects are near infrastructure. There are also export opportunities for liquified natural gas. Conventional oil and gas production has been going down while the economy’s growing at probably 5–6% a year. The domestic price is around $7.50 per million cubic feet. Coal bed methane development and operating costs are low in Indonesia. It’s important to note that CBM Asia actually is in the driving seat (it is the operator) as far as the ExxonMobil joint venture is concerned, which says a great deal about the technical capabilities of the company.

TER: What about some other companies that may have good upside?

PD: Although I don’t follow it closely, one of the most interesting shale stories is another Canadian company called Americas Petrogas Inc. (BOE:TSX.V), which has one of the biggest shale development projects in Argentina. The main focus of shale development there is on the Neuquén basin in central-western Argentina. Americas Petrogas has joint ventures with Exxon Mobil. Apache Corp. (APA:NYSE) has made some very significant discoveries, including the very promising Los Toldos II in the west of the basin. It has significant exposure to the Vaca Muerta shale formation, which, according to industry estimates, could have 23 billion barrels in recoverable reserves. Americas Petrogas has a lot of upside and there’s good potential for a takeout as well. I think it’s a very interesting shale play.

There are a number of companies that have done very well in recent years in Colombia, most significantly Pacific Rubiales Energy Corp. (PRE:TSX; PREC:BVC), which is a Canadian company founded by Venezuelans. Gran Tierra Energy Inc. (GTE:TSX; GTE:NYSE) and Amerisur Resources Plc (AMER:LSE) are two other companies that have been highly successful in Colombia in recent years. Gran Tierra also has exposure to the Neuquén basin in Argentina.

Another company we’re a bit closer to is Range Resources Corp. (RRC:NYSE). It has made a significant move into the Caribbean and Latin America over the last couple of years, principally by buying some assets in Trinidad, which it’s now developing. Despite a few operational problems, the performance of the wells it’s been drilling has been very good. It has also bought into some acreage in the south of Colombia near Gran Tierra’s and Amerisur’s blocks that holds considerable potential.

Range has also recently bought an interest in some assets in Guatemala. Guatemala is not particularly well known as an oil province, but there has been oil production there for quite a few years. Perenco, a French private company, is the operator. Range has reported some very positive test results from the Atzam 4 well in Guatemala of late. The shares had come under a lot of pressure in Q4/12 and the early weeks of 2013 because of financing issues and some exploration plays elsewhere that didn’t come to fruition. With development activity in Trinidad gaining momentum, and with the other interests in Latin America appearing to offer considerable promise, the share price has recovered significantly of late, albeit from a low base. The development story in Trinidad is underway, with production scheduled to rise from about 1,000 barrels per day (1Mb/d) currently to maybe 6Mb/d by year-end 2014. By 2015, it could be more like 8Mb/d if all goes well.

TER: There’s also a lot going on in Australia. Who is on your radar there?

PD: What we’re looking at now are developments onshore in the central part of Australia, where there’s been relatively little exploration historically. Admittedly, over the last 40 years or so, the Cooper basin has generated highly significant production but there are other large basins in various parts of Northern Territory, Queensland and Western Australia that offer both conventional and shale potential.

One company that has very considerable acreage is Central Petroleum Ltd. (CTP:ASX), with about 60M gross acres or so in areas where there’s been relatively little exploration and development activity. This is an early-stage play with both shale and conventional opportunities. It announced the Surprise discovery about a year ago in the Amadeus basin in the Northern Territory. We’re expecting it to soon announce a reserve estimate for that project, which should be quite interesting.

To unlock the opportunities, particularly for the shale projects, it announced two big joint ventures at the end of last year. One is with Santos Ltd. (STO:ASX), a major Australian independent that was instrumental in developing the Cooper basin in South Australia and Queensland, and the other is with Total S.A. (TOT:NYSE). We’re expecting the work program on these opportunities, particularly in the south Amadeus basin, to begin during the Q2/13.

TER: With a land package that big, the upside has to be huge.

PD: It’s had to concede some of the acreage through joint ventures. Nevertheless, Central Petroleum still has about 40M net acres. Near term, the stock is a play on the scale of Surprise’s reserves, but longer term there is the potential blue-sky upside relating to the joint ventures with Santos and Total.

An additional point you have to remember here is that there are other companies operating in the central and western Australian basins and creating news flow. Santos remains the key local player in the Cooper basin (and it also has exposure to the Amadeus basin) but Beach Energy Ltd. (BPT:ASX), Drillsearch Energy Ltd. (DLS:ASX), New Standard Energy (NSE:ASX) and Senex Energy Ltd. (SXY:ASX) are all examples of growing independents with a focus on the central and western Australian basins. Among U.S.-based companies, Hess Corp. (HES:NYSE) and ConocoPhillips (COP:NYSE) have exposure to the region. Importantly, Central Petroleum has the largest gross land position spread across the Amadeus basin, the Pedirka basin, the Georgina basin and the Lander Trough.

TER: Can you summarize where you think investors should be looking over the next year?

PD: Both in 2013 and 2014, I expect quite significant increases in non-OPEC oil production capacity to be brought onstream. We should be looking at 1MMb/d or more in both years. Over the next decade, I believe there are major exploration and development opportunities globally in unconventionals and, particularly in shale. I think that companies like CBM Asia, Central Petroleum, Range Resources Ltd. and Americas Petrogas all present interesting opportunities at this time.

TER: Thank you very much for talking with us today, Peter.

PD: Thank you for the opportunity.

Peter Dupont is an energy analyst at Edison Investment Research in London. He has been involved in investment research for 30 years in the industrial and resource sectors. Between 1983 and 1998, he worked for Union Bank of Switzerland (UBS) in London covering engineering and metals stocks. In early 1998, Dupont moved to Commerzbank to head its research activity in the European and U.K. metals and natural resources sector. Between 2005 and 2009, he worked as a consultant analyst for a London-based boutique investment bank, Libertas Capital. Since 2009, Dupont has worked for Edison Investment Research covering the oil and gas sector. Dupont produces regular macro oil and gas studies and covers developments in the “unconventionals” field. He has a Bachelor of Science from the London School of Economics.

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DISCLOSURE:
1) Zig Lambo conducted this interview for The Energy Report and provides services to The Energy Report as an employee or as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.2) The following companies mentioned in the interview are sponsors of The Energy Report: CBM Asia Development Corp. and Royal Dutch Shell Plc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.3) Peter Dupont: I or my family own shares of the following companies mentioned in this interview: None. I personally or my family am paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: CBM Asia Development Corp., Range Resources Ltd. and Central Petroleum Ltd. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. 6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

( Companies Mentioned: BOE:TSX.V, AMER:LSE, APA:NYSE, BPT:ASX, TCF:TSX.V, CTP:ASX, COP:NYSE, DLS:ASX, XOM:NYSE, GTE:TSX; GTE:NYSE, HES:NYSE, NSE:ASX, PRE:TSX; PREC:BVC, RRC:NYSE, RDS.A:NYSE; RDS.B:NYSE, STO:ASX, SXY:ASX, TOT:NYSE, )

Summer Shopping Opportunities for Mining Equities Abound: Rick Mills

The Gold Report: Prices of the mining equities were languishing when we spoke in January, particularly precious metals equities, and we’ve had little respite since then. But you foresee potential for a bullish resurgence in gold equities. What’s your rationale behind that outlook?

Rick Mills: I believe we’re going to see higher levels of inflation. We’re going through a deflationary bout now because most of the money issued by the Federal Reserve is actually parked at the Fed. It isn’t out there being spent, so it’s not causing inflation. It’s basically just propping up the banks. When the banks start lending and when the money gets into circulation, we’ll see increased levels of inflation and, of course, that will be good for gold.

Related Articles:
Derisking Gold Juniors, Step by Step: Rick Mills

How to Minimize Risk and Increase Returns on Juniors: Joe Mazumdar

Gold Producers in the Catbird Seat: Jay Taylor

TGR: Lack of access to capital for small business due to stringent credit requirements is one factor that has put a damper on the economy. What will prompt banks to ease up on credit standards?

RM: I’m probably going to stir up a little bit of controversy by saying so, but I firmly believe that the way out of the dilemma we’re in is to spend more money. A lot of people don’t agree. They think we should cut back on spending, raise taxes and go onto an austerity program. That is absolutely the wrong thing to do. Taxes should be reduced. I believe they should be spending a lot more money.

TGR: Who should be spending more money?

RM: World governments should implement massive global infrastructure maintenance and build-out programs, and put the money not into the banks but into the small businesses that will build the infrastructure. These small businesses are the ones responsible for most of the job creation. So, give the money directly to the small businesses. Hire them to do this infrastructure build.
“World governments should implement massive global infrastructure maintenance and build-out programs, and put the money not into the banks but into the small businesses that will build the infrastructure.”Take a look at our global water supply problems, our highways, our bridges, the brownouts because our hydroelectric power corridors are so outdated, the switching stations literally melt when they overload. We can actually spend our way out of this. In a fiat currency regime, because nothing is anchored to gold, the only way to move forward is to keep spending money. We saw this when the U.S. Quantitative Easing Two stopped and the lack of liquidity immediately upset the markets. If we undertake the infrastructure build-out program and give the money to the small businesses that create jobs, as people get back to work, they’ll have money, spend it and revive the economy. And it’s not only the U.S.—every country in the world has an infrastructure deficit.

TGR: What would more capital distribution among small business mean for the price of precious metals?

RM: The moderate to high levels of inflation I anticipate will make gold a much more attractive asset. The banks will keep interest rates low to help stimulate business borrowing, and with low rates, typically below 2%, you’ve got higher rates of inflation than you are getting for interest. I wrote an article called “Six Percent Can Draw Gold from the Moon.” With high levels of real returns people don’t favor gold as an investment. But when rates are below 2%, the exact opposite happens, because the real rate of return is negative. For instance, if investors are getting 2% on bonds but the real rate of inflation is running at 3–3.5%, they actually lose purchase power because the real rate of return is negative 1–1.5%. So higher inflation just makes gold all that more attractive. It preserves purchasing power and, of course, the gold price is going up at the same time.

TGR: As we speak today, gold is up $25/ounce (oz), flirting with $1,600/oz. Given that—and the fact that gold is not only a store of value but also a hedge against inflation—where do you predict the gold price will go during the rest of the summer and into the fall?

RM: I honestly don’t have a price prediction except that gold will go higher. When we talked last year, I was perfectly comfortable with $1,500/oz gold and thought that was a good price for it. Of course, it immediately spiked up to $1,900/oz but has come back to my range. I’m still perfectly happy with $1,500/oz gold. As more people catch on to the fact that they need to own some gold, the price will slowly rise.

TGR: Some people believe one of the reasons gold will go higher is because of the whispers we’re hearing that the Bank for International Settlements (BIS) intends to reclassify gold as a risk-free asset in the context of the Basel III framework. Could you help our readers understand why that would be bullish for gold?

RM: Tier 1 capital is the core measure that regulators use to gauge a bank’s financial strength. It typically consists mostly of common stock and disclosed reserves or retained earnings but it might also include non-redeemable, non-cumulative preferred stocks. The Basel Committee for Bank Supervision, known as the BCBS, which is the maker of the global capital requirements, also implemented the Basel III rules that form the basis for global bank regulation. The BCBS is studying making gold a bank capital Tier 1 asset. Gold has typically been a Tier 3 asset, which means that it’s been discounted at 50% of its current market value. With that discount, banks really never had reason to hold gold as an asset. If the BCBS raises gold to the level of a Tier 1 capital asset, though, banks could operate with far less equity capital than is normally required and gold would be the ultimate backstop for debt, currencies and bank equity capital. It would be a huge move, and making it would really propel some superior interest in gold.

TGR: Certain central banks, such as China’s, are stockpiling gold already. If it becomes a zero-risk-weighted Tier 1 asset, countries all over the planet would start accumulating gold, which would of course drive up demand. What’s the timeline on the BCBS decision?

RM: We simply don’t know. But if it happens, you’re going to see substantial demand for physical bullion and it’s going to be a hugely important step toward gold’s re-monetization. Moving from a Tier 3 to a Tier 1 asset would have gold compete directly as a safe-haven investment against bonds issued by over-indebted governments and yielding less than zero in inflation-adjusted terms—those negative real interest rates we discussed.
“As more people catch on to the fact that they need to own some gold, the price will slowly rise.”Another factor to bear in mind, one that isn’t widely recognized, is that there is a huge shortage of good collateral; banks are increasingly accepting gold as collateral because they’re reluctant to take each other’s fiat currencies. So there’s another huge step toward the re-monetization of gold.

TGR: That would certainly suggest increasing value for the shares of companies searching for and producing gold. Some of them are producing gold very profitably at well under $1,500/oz, and a number of them, juniors in particular, have significant gold resources in the ground—but in both cases, their share prices remain weak. In this scenario, what are you able to identify as big opportunities for investors over the next several years?

RM: I can tell you about several juniors with some very exciting things happening this summer. They’re interesting companies that everyone should have on their radar screens.

TGR: Where shall we begin?

RM: Starting alphabetically, Altair Ventures Inc.’s (AVX:TSX.V) geologists and consultants (including Jim Oliver, former senior vice president, geology at Hunter Dickinson) have provided guidance on drill hole locations for the just-started minimum 5,000-meter (m) drilling program, as the company chases resources on two zones on its Kena gold property in British Columbia. Total Measured and Indicated (M&I) resources for the two zones comprise 549,000 contained ounces of gold, while total Inferred resources comprise 513,000 oz. Altair is going to twin some historical holes from these two zones, check results, make sure everything is good and then try and expand the existing, already sizeable, kernels of resources. Altair is looking to grow the two resource blocks and bring them together to form one large block.

Altair is well run. President and CEO Fayyaz Alimohamed—whom you’ve interviewed in The Gold Report—is very, very smart. Robert Archer, president and CEO of Cangold Limited (CLD:TSX.V) and Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.A), is on Altair’s board so the technical advice he receives is second to none. The company has been holding its own, but this is one investors should be looking at because the drill program has started and the results off of this beautiful property could really propel Altair upward.

TGR: Do you anticipate permitting being an issue with Altair?

RM: No, I don’t see any unusual problems cropping up.

TGR: Okay. What else do you have in your quiver besides this micro-cap gold explorer in B.C.?

RM: NioGold Mining Corp. (NOX:TSX.V; NOXGF:OTCPK) will be releasing its updated NI 43-101 resource calculation in early August. It has done lots of drillings, released lots of assays and still has lots of news coming on its Marban and Malartic Block properties in Québec’s Abitibi region. NioGold finished its second-year program and, with $9 million (M) to spend, it’s planning its third year. It will get very aggressive with the Norlartic-Kierens. This thing is going to have a huge amount of news flow from its third year program.

TGR: And it has a joint-venture partner spending the money.

RM: That’s right. NioGold has $5M, but Aurizon Mines Ltd. (ARZ:TSX; AZK:NYSE.A) is spending the money, hitting on just about every hole drilled and growing the resource. I think the NI 43-101 that’s due in August is going to surprise a lot of people. In fact, NioGold is one of the few companies that’s having money spent on a project by another company and in this business, spending a lot of money means a lot of news flow. News is the lifeblood of a junior. If you want to move the share price, put out a lot of great assay results. This one has that kind of potential. I think it’s set to have a really great summer.

TGR: Who else is on your list?

RM: I really like Terraco Gold Corp. (TEN:TSX.V). It’s a unique company. Besides the exploration potential on its Moonlight property in Nevada, its Almaden project in Idaho already has a significant gold resource—and to this cowboy it certainly looks as if it’s increasing the resource by metallurgical studies and huge drill holes. Instead of putting down the skinny drill holes, Terraco put down a four-inch hole and the grade went up drastically, to 1.3 grams/ton. Judging just on the basis of the internals of the deposit, it looks as if the company can increase the grade and the resource size simultaneously.

TGR: That’s terrific.

RM: But it goes beyond the projects. Terraco has a royalty option—an option to acquire up to a 2.5% net smelter royalty (NSR) on the Spring Valley gold project, which adjoins Terraco’s Moonlight project in Nevada and is joint ventured between Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and Midway Gold Corp. (MDW:TSX.V: MWD:NYSE.A). A royalty is simply a right to receive a percentage of production from a mine. So when you invest in a royalty you’re buying a percentage of the metal produced from a given property in exchange for an initial payment, but you’re not assuming any responsibility for the actual mining operation. So Terraco doesn’t have to contribute to the operating or capital costs at the mine after the initial payment is made. This is one of the things I like most about Terraco.

TGR: Could you elaborate? Some investors may not understand the value of these royalties.

RM: When thinking about how to value a junior gold company, you usually look at how many ounces it has in the ground. The company gets a certain amount of money for each one, say $90–113/oz in the ground. The market values royalties much higher, something like $800/oz and sometimes as high as $1,200/oz in the ground gold production. It’s 800% higher than a normal company would be valued.

TGR: What do you see when you look at Terraco in light of its royalty position?

RM: When you do the math on Terraco, you can see why I like this company so much. Even if Spring Valley were to remain at 3.5 million ounces (Moz), 75% recovery on $1,200/oz gold for the next 15 years at $650/oz gold cost at a 3% discount rate gives you $70M–80M net present value (NPV) minus the $12.5M to exercise the option. Using those very conservative numbers, that comes to about $57M NPV. These outstanding shares fully diluted put a $0.35/share base price on Terraco right now. You can see a minimum, a base that doesn’t even include Moonlight or Almaden, which has 1 Moz and growing in a shallow open-pit resource that could be a mine today.

TGR: And Terraco’s trading around $0.12.

RM: A very good value play for anybody to look at. Terraco offers the Moonlight exploration upside, 1 Moz of gold at Almaden with considerable upside because it’s looking for higher-grade feeder gold shoots coming up from underneath much like the Ken Snyder mine, and the royalty.

TGR: Excellent.

RM: It’s hard to find value like a NioGold or a Terraco and the upside of an exploration program such as Altier’s.

TGR: Now that we’ve heard about a few of your favorite gold mining companies, where shall we go next?

RM: I want to talk about one more, a silver company. Based on 15,000m of widely scattered drilling, the first resource estimate that Kootenay Silver Inc. (KTN:TSX.V) put out on its Promontorio silver project in Sonora, Mexico, showed 10 Moz silver. Total resource silver equivalent would be 21 Moz. Since then, the company has done another 35,000m of concentrated drilling, targeting the resource area in the pit and a 1 kilometer (km) strike length, and is about to release an updated resource estimate. I’m pretty excited to see what it’s going to be—I expect a real barn-burner of a resource. To top it off, the company now realizes its resource is in a diatreme system. These are large-scale, grouped systems, such as Peñasquito. Not only does Kootenay have coming what I expect to be a significant upward revaluation in its early resource, but also some of the greatest blue-sky potential you’ll ever see on the exploration side. Management in all the companies I’ve mentioned is exceptional, and Kootenay has one of the best run teams out there. It’s definitely worth looking at just because of the quality of the management team, and it’s definitely another one that people should have on their radar screens.

TGR: And certainly, Mexico has been a great place to mine, whether it’s gold or silver. Are you as bullish on silver as you are on gold?

RM: Yes, I am, but I think you invest in these companies because of management, not because it’s either gold or silver. While I believe that silver trades more as an industrial metal than a monetary metal, it trades in lock-step with gold. Consequently, when gold goes parabolic for the reasons we discussed earlier, silver will ride right along with it. They’re both going to be fantastic.

TGR: You’re apparently bullish on uranium, too.

RM: Absolutely. The Japanese are turning reactors back on because the country has realized that the economy can’t survive without nuclear power. Germany is finding out that the decision to shut down its nuclear power plants was perhaps a knee-jerk reaction to what happened at Fukushima—a political decision made in the haste of the moment and it is bitterly regretting it. I think we’ll see a reversal there.
“I see this as a perfect time to be looking at companies with great management teams and projects that can really increase their share value at any time.”And, you know, the Megatons-to-Megawatts program with Russia will end next year. The American government did sell off some high-grade nuclear material but that was more of a political gesture in response to lobbying efforts on behalf of one of the more powerful Congressional districts to keep 1,200 people working. Uranium actually has been a very good contrarian play for a while, and now I believe we’ll see much higher uranium prices over the coming years.

TGR: Have you any companies you’d like to mention in that context?

RM: I do. Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.A) potentially has two near-term catalysts that would drive up its share price. Uranerz is approaching its one-year anniversary for construction of its mine in Wyoming’s Powder River Basin. Everything’s going fantastically. The plant is erected; electrical work is ongoing. The only thing left is the plumbing; the only permit still to be issued is for the deep disposal well. The Environmental Protection Agency (EPA) wanted some clarification, which Uranerz supplied, and now the company is waiting for the EPA to come back and approve the permit. The share price has been a little beaten down because it doesn’t have the permit. Dealing with a government organization, you really can’t put a timeline on it but I expect the permit to be in Uranerz’s hands within a month. If that happens in August, the company will be in production in November. Those two catalysts—receiving the final permit and moving quickly into production—can put a swift kick in the butt of any company’s share price.

This is not going to be an insignificant producer, either. Uranerz will produce 300,000 pounds (lb) of yellowcake a year. It has a tolling agreement with Cameco Corp. (CCO:TSX; CCJ:NYSE) to process resin and an offtake sales agreement with Exelon Generation Co. LLC, a subsidiary of Exelon Corp. (EXC:NYSE) to buy product for $65–75/lb.

As I said, I believe all of this is potentially going to happen this year and it represents a fundamental change in the company’s prospects. In an industry that is in a turnaround phase, as a contrarian investment, Uranerz represents probably the best value in the uranium sector today.

TGR: Any other names outside of uranium and precious metals that you want to talk about?

RM: Yes, a district-size nickel play in Greenland. North American Nickel Inc.’s (NAN:TSX.V) Maniitsoq project basically comprises a whole nickel belt 75km long and several kilometers wide. It has 119 drill holes. There’s nickel tenor all along the length of it. The company just released news that the Geological Survey of Denmark and Greenland (GEUS) has announced that the Maniitsoq structure represents the remains of a gigantic meteor impact 3 billion years ago. There’s a lot of postulation that a meteor impact caused the nickel emplacement in the norites at Sudbury (Ontario), which fuels speculation that Maniitsoq could be another Sudbury.

TGR: That would be a real plus.

RM: It would be but I’m not presently overly concerned about how the nickel was emplaced. To me what’s important is that North American Nickel already has three extremely high-quality targets and scads of nickel tenor, it’s currently flying a Variable Time-Domain ElectroMagnetic (VTEM) survey and will be drilling within a month.

Then, if drilling results in good nickel intercepts and identifies nickel emplacements around the area that confirm that Maniitsoq may be another Sudbury, the stock will explode. It can’t help but happen.

What’s important is that North American Nickel drills and hits nickel—the basic, undeniable fact of this play is that North American Nickel owns it all. Other companies won’t be coming in and staking ground. There won’t be any sister plays or feed-off plays or anything like that. Hit nickel here and we’re going to experience potentially one of the biggest speculations that anyone has seen on the Toronto Venture Exchange. And that’s not an embellishment, North American Nickel will own the whole camp.

TGR: So you’re fond of this nickel play, bullish on uranium and clearly enthusiastic about the precious metals companies you talked about. Is part of the rationale behind your thinking the idea that emerging economies and developing nations will be implementing infrastructure programs that need more energy, more steel and more base metals? Would you say you’re generally a commodities bull?

RM: I am a commodities bull, and although everything you just said is true, it goes deeper. It goes to the fact that a discovery is a discovery, and the market rewards discoveries. It rewards finding a resource and doubling it and tripling it. It rewards companies that go from near-term producer status to producers with cash flow. It rewards management, those who go to work for shareholders, build value and run solid junior companies. It rewards those that run ahead of the herd.

To me it doesn’t matter whether we’re in a bull market for commodities or a soft market, this kind of quality, this kind of shareholder value-building, will be rewarded. It always has been and I see nothing going on now in the market to change that. When you add in what we talked about with inflationary pressures and gold potentially as a Tier 1 asset, I see this as a perfect time to be looking at these companies with great management teams and projects that can really increase their share value at any time.

TGR: Excellent summary, Rick. Thank you so much for your time.

Richard (Rick) Mills is the founder, owner and president of Northern Venture Group, which owns aheadoftheherd.com, as well as publisher, editor and host of the website. Focusing on the junior resource sector, Mills has had articles appearing on more than 400 different websites including: The Wall Street Journal, Safe Haven, Market Oracle, USA Today, National Post, Stockhouse, LewRockwell, Pinnacle Digest, Uranium Miner, Beforeitsnews, Seeking Alpha, Montreal Gazette, Casey Research, 24hgold, Vancouver Sun, CBS News, Silver Bear Cafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FN Arena, Uraniumseek, Financial Sense, Goldseek, Dallas News, VantageWire, Resource Clips and the Association of Mining Analysts.

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DISCLOSURE:
1) Sally Lowder of The Gold Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Cangold Limited, Great Panther Silver Ltd., Aurizon Mines Ltd. and Terraco Gold Corp. Uranerz Energy Corp. is an Energy Report sponsor. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Rick Mills: I personally and/or my family own shares of the following companies mentioned in this interview: North American Nickel Inc. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.

( Companies Mentioned: AVX:TSX.V, KTN:TSX.V, NOX:TSX.V; NOXGF:OTCPK, NAN:TSX.V, TEN:TSX.V, URZ:TSX; URZ:NYSE.A, )