Interest rates may be near zero, but financing big projects is still tough for most mining companies. That's why James West has switched his focus to energy investments, where the payoff is often much faster. In this interview with The Energy Report, West explains why intermediate-term energy opportunities have become his sweet spot
The Energy Report: In the three months since your last interview, the sailing certainly hasn't been clear. What's your view of the global economic picture and the next focal point for investors?
James West: The competition for shrinking resources is indicative of an advanced civilization that has reached its zenith in terms of its ability to expand on the planet and is now in a state of decline. All of these macroeconomic situations that are engulfing the world—sovereign debt crises, currency debasement, resource nationalization and protectionism, declining employment opportunities, rising violence and rising competition for food resources—are part and parcel of that decline. From a macroeconomic focus, the possibility for growth is limited by these overriding factors. There are just too many people competing for increasingly scarce resources and opportunities. I don't have a lot of hope for the economy, barring a massive decline in the global population.
TER: Last November, you talked about interest rates. Are they ever going to go up or can the U.S. economy and debt structure even stand the consequences of "normal" interest rates at this point?
JW: Interest rates can't stay too low for too long and still have a positive economic impact. At this point, the purpose of low interest rates has been maximized. Despite the fact that interest rates are at all-time lows, lending is almost nonexistent and is mostly limited to the highest-quality corporate borrowers. The whole purpose of low interest rates is to spur economic activity and investment, but nobody is lending for startups. Nobody is lending for exploration. Nobody is lending even for resource development. They're only lending when it's safe. The only reason that we must maintain low interest rates now is so that the G7 sovereign group can continue to borrow at ridiculously low rates.
TER: In your last interview, you stated that you favor energy stocks over mining stocks because of the difficulty in getting financing. Has your opinion changed?
JW: It hasn't changed. The mining market has become very company and management team specific rather than metal specific. In every deal, you have to look at management, where it is in its development and whether it can access capital. The best real-world example is what's happening with Northland Resources Inc. (NAU:TSX; NPK:FSE). It has basically had to halt construction of its iron ore project in Sweden because it could not access the roughly $400 million ($400M) it needed in combined debt and equity. Shareholders are stranded in the deal, which is now frozen. Its management team cannot convince bankers to lend or invest in equities in the project because it doesn't have the track record. There's a large resistance out there to financing high-capex mining projects.
On the energy side, that's not so much the case because the time from drilling a hole to bringing a well onstream is much shorter than the usual production timeline for mining projects. In a risk-averse universe, energy is far more attractive, especially conventional oil and gas.
TER: Where were you able to get your best returns last year?
JW: My best performer in 2012 was Abakan Inc. (ABKI:OTCQB), which should soon be listed on the NASDAQ. Abakan has developed a technology that extends the life of metal assets used in oil and gas drilling between six and 20 times. Most of the world's remaining oil and gas reserves are high in sulfur or other corrosive materials, so the lifetime of these metal assets used to explore, extract and transport can determine whether some projects are viable or not.
The Natuna Island project, which is owned by CNOOC Ltd. (CEO:NYSE), is one case in point. Here's a $20 billion ($20B) gas deal that cannot viably move ahead using pipeline infrastructure that only has a life of five to seven years, which is what happens to pipes in a high-use environment. CNOOC has been waiting for this project to proceed, and Abakan has the solution through its MesoCoat product for cladding pipe and its Powdermet product for coating metals assets.
Abakan has agreements in place with Petrobras (PBR:NYSE; PETR3:BOVESPA) and other major oil companies that can't be disclosed because they're subject to confidentiality. That's been my biggest win of 2012.