The natural resources space has been difficult in recent years. Potash prices collapsed, uranium spot prices hit a nine-year low, the gas market was in glut. Only oil has stayed strong. But Peter Epstein of MockingJay Inc. has found some gems in the resource rubble, and foresees better times ahead. In this interview, Epstein tells The Energy Report who stands to capture the graphite market, how to catch the next wave in potash, and offers his thoughts on when investors might catch a break in the uranium market.
In 2011, CFA Peter Epstein left his senior analyst position at a $3B hedge fund and formed MockingJay Inc., a consultancy for companies in the natural resources space and an informal investment adviser to high-net-worth investors, family offices and funds. The company's mission is to increase awareness of select natural resource companies. Epstein's areas of expertise include uranium, coal, potash, gold and oil & gas. He has published hundreds of articles on investment sites such as Seeking Alpha, The Motley Fool and Au-Wire.com.
The Energy Report: Why are you excited about the oil and gas space right now?
Peter Epstein: Oil and gas is unique in that it hasn't budged when so many commodities have fallen precipitously in price. Coking coal prices, for example, are at multiyear lows. The iron ore price has fallen below $100/metric ton. The uranium spot price has fallen to a nine-year low. But oil prices have held in the $90–100/barrel ($90–100/bbl) range on West Texas Intermediate crude for three or four years, steady and strong. Natural gas prices collapsed in 2012 but have come back fairly strong, only recently giving back a bit of the gains. That's why I like oil and gas. It's a strong commodity. Even with all this talk about a slowdown in China, which causes lots of commodities to fall, oil and gas sticks in there.
TER: Oil, gas and mining industries are tarred with the same brush by environmental advocates, who describe them as dirty, polluting and environmentally destructive. Can these industries be made attractive to investors who put a premium on environmental considerations?
PE: Companies are learning the hard way that they have to have a social license to operate, as well as address the increasingly long list of permitting and environmental hurdles. Extractive industries that are dirty and polluting have to clean up their acts. But this is not a new problem; it's been going on for years—or even decades—depending on the jurisdiction.
Another negative impact for such companies is the longer time frame to production, created by a myriad of factors above and beyond environmental considerations. A longer time frame means more difficulty funding projects, and therefore a lower net present value. Project hurdle rates have to rise to account for the higher risks and longer time frames. This means that industry-wide cost curve increases and commodity prices have to rise in response. Margins will be squeezed somewhat, even if companies enjoy higher commodity prices in the long term.
TER: What do companies have to sacrifice to achieve environmental goals?
PE: Companies have to give up profits to meet these new realities. But companies that approach dirty and polluting industries in innovative ways, frequently with the use of technological advances, will be rewarded.
For example, American Sands Energy Corp. (AMSE:OTCBB) is trying to become one of the first U.S. companies to extract bitumen from oil sands. Located in Utah, the company proposes an entirely new approach—In fact, without this new approach, there's no chance that American Sands Energy could operate in the U.S. The company uses a proprietary solvent to separate the bitumen from the sand, but no water is used in the process. In arid eastern Utah, this is an extremely important factor. No water is required because the oil sands deposits in Utah are entirely different from those in Alberta, Canada. In Canada, the oil sands are a mixture of water, sand and bitumen. In Utah, the deposits only contain bitumen and sand—no water. American Sands Energy is a perfect example of a company that could be a winner by mitigating environmental factors.
Or take a company like Graphite One Resources Inc. (GPH:TSX.V), which has a project in Alaska. Everyone's heard about Tesla Motors Inc.'s (TSLA:NASDAQ) gigafactory, which will produce a large number of batteries for electric vehicles. Around the time of Tesla's big announcement in February, an outcry by certain groups contended that a large quantity of currently sourced graphite comes from dirty, polluting mines in China. This played a role in Tesla's announcing it would source the key materials for its batteries from North America. And Graphite One is one of only two U.S. graphite plays.
Graphite One has a massive graphite resource, of which a significantly sized portion can be mined at surface. The company plans to infill the mined areas to fully reclaim the disturbed areas. Graphite One is definitely worth watching. In fact, it is unique among graphite companies in that it has the opportunity to apply for a loan through a state of Alaska program. Alaska is mining-friendly, and will help ensure that prudent environmental standards are followed.