Saturday, August 13, 2011

Big Exploration Companies Only An Investment Away From Becoming Major Industry Players

   It seems weird when a company with more resources of a particular commodity isn't valued higher by the stock market (compare, for example Seabridge Gold or Northgate Minerals to Detour Gold; Cenovus Energy (oil) to Anadarko Petroleum). When companies aren't producing (such as the case with many big exploration companies) people are more skeptical of their estimates, especially if they don't have the financing in place to turn projects into operations; Ivanhoe Mines suffered from that for years before Rio Tinto confirmed the company's standing by calling Oyu Tolgoi 'the biggest copper resource in the world'. Examples of companies that have gotten away with lieing about resources include Greywolf Resources, a group of companies in Argentina which the president claimed in 2004, lied about reserves, even Shell has been caught but that was at a time when regulations industry-wide, were softer. Furthermore, energy consumption experienced the biggest yearly increase since 1973 in 2010, in 2010 it was up 5.6% largely due to China (up 11.2% surpassing the USA) and non-OECD nations (63% higher than 2000 levels). (World energy consumption up 5.6% in 2010, biggest rise since 1973: BP) Brazil, for example was on pace to import 50% more gasoline in 2011 than in 2010 (3.2M barrels Jan-Aug compared to 3.2M barrels Jan-Dec accounting for 5% of domestic fuel needs). In 2010 90% of cars sold in Brazil run on a combination of bio-fuel and gasoline but bio-fuel is getting more expensive: Sugar cane price is up 85% over the last year. (Brazil boom takes world fuel markets by surprise)

Here are three companies that I think would benefit from more investment and media exposure.

Meg Energy - Recoverable oil resource is close to 6 billion barrels. That's almost as much as Canada's biggest petroleum companies Suncor (7-8 billion, with a market value of over US$50 billion), and Canadian Natural Resources (over 6 billion, MV is over US$40 billion). Being heavy oil doesn't really make a difference anymore as synthetic oil is easier to produce and more widely used than it used to be (though oil prices need to be at least $50/bbl for it to be economically viable to produce but I don't think that level will be breached anytime soon). Phase 2B of the Christina Lake project has costs totaling $1.4 billion (about the same as MEG's total cash and cash equivalents) that will be spent in 2011. The biggest phase of the project (will increase production by 250,000 barrels per day or 7X more than what phase 2B will produce) is the third phase. You can imagine the price tag there, receiving regulatory approval shouldn't be a problem but more investment will probably be needed. The company recently reached $10 billion in market value and China's third biggest oil company has already invested in it so attracting more shouldn't be difficult, but when it's announced, individual investors could show a lot more interest. Update: In October 2011 JP Morgan, the world's #1 bank in terms of revenue, forecast oil at $121/barrel by 2013, at the same time it expects oil prodction that year to rise by about 2M bbls/d to 91 million barrels a day.
By 2045 oil sands will produce close to 11M bbls/d and that will continue for a century. Between 2012 and 2020 oil output from the tar sands will double (1.7 mbpd --> 3.4 mbpd) and triple in the next 25 years to 5.1 million barrels per day. Tar sands crude is over five times more expensive to extract than middle east oil however with oil prices up more than 400% since 2001 and Alberta continuing to charge one of the lowest royalty rates in the world (fell from $3 to $2/bbl between 2001 and 2009) there is much profit to be made.

Bankers Petroleum - Has interest in Europe's largest onshore oil field (7.5 billion barrels in place). 2P reserves are over 268 million barrels and rising fast (proved reserves up 30% in 2010), including stakes held
by other companies, total proved in Albania alone is 469 million barrels. Though production is up 24% in the second quarter of 2011 it remains small relative to potential; 12,152 bbls/d average reaching 13,150 on Jue 30, 2011, other companies with similar resources (Pacific Rubiales Energy, Baytex Energy) are producing at much higher levels.

The 7-8 billion barrels in place figure is also up 30% in 2010, and with the company investing heavily in exploration there (along with state oil company of Albania) there is optimism surrounding it right now. (Bankers Petroleum Announces 2010 Reserves Report)

Seabridge Gold - Has the largest reserves of any small cap gold company based in Canada (almost 40 million ounces with another 214 million in silver) due to its 100% ownership of Canada biggest (North America's biggest when combined with Snowfield) gold property, the 38.5 million ounce (2P reserves) gold project in Northern British Columbia. Measured and indicated reserves are over 55.3 million ounces which represents an increase of 536% over the last seven years, total gold resource is nearly twice as much as reserves (75.801 million ounces). Another thing that has investors gleaming is KSM's extremely low cash cost estimate for the project, $105 per ounce for the first 7 years (total mine life is 52 years). Also of note, it is in an area that has significant molybdenum resources (other companies exploring nearby are interested mainly in that); Molybdenum prices could jump in the future due to China's need for it in infrastructure building/China capping production in the country (world's largest producer accounting for 40-50% of world output) at 200,000 tonnes yearly or 8% higher than 2010 production. China has classified molybdenum as a strategic material and may even build stockpiles of it. Seabridge molybdenum reserves total 257 million pounds with over 350 million in total resources. The company also runs six other gold projects but only KSM has minerals other than gold (the other projects have about 10 million ounces in inferred resource but that should grow with Seabridge investing millions of dollars at Courageous Lake in 2011 with the intent to upgrade resources). Reserves also include 9.985 billion pounds of copper (3 billion of that added in just the last 12 months). in 2010 reserves increased 27% for gold, 42% for copper, 61% for silver and 22% for molybdenum. For the first 7 years annual production is forecast to be 854,000 ounces for gold, 166 million pounds for copper, 2.9 million ounces for silver and 1.1 million pounds for molybdenum. For anyone wondering how reliable KSM's reserve estimates are it would help to know that part of the geological assessment was done by Rescan, a company that has assessed Pueblo Viejo and Ekati (diamonds) and that a team of researchers from Royal Gold have been scouting the area for some time (Royal Gold must have been convinced, since then they have invested more than $200M into Seabridge Gold). In September 2011 Seabridge upgraded its inferred gold resource at Courageous Lake (NWT); It announced a gold density of 3.92 g/t over 55.5m (3.67 g/t over 56.5m), what's most significant is that it reported high densities nearer to the surface (3.9 g/t over 16.1 meters). There's also 53 km of a prospective greenstone belt south of the deposit.

The only thing standing in Seabridge's way is KSM's $4.68 billion capex spending needed to bring it to commercial production (Seabridge gold has under $200 million in cash and cash equivalents meaning it needs heavy investment from other companies and funding from financial institutions which it has yet to receive). However, investor confidence was boosted in June 2011 when Royal Gold, one of the world's largest diversified royalty companies, paid Seabridge $160M for a 2% royalty on KSM (still only a fraction of what the company needs to develop KSM but the move does improve the company's ability to attract further investment). The pre-feasibility report is completed and in 2010 Canada's environment ministry conducted a comprehensive environmental assessment of the area in which no major concerns/objections were made (over 80 exploration projects in BC in 2010). Also, only a couple km's away another huge project known as the Snowfield Deposit (reserves are 2/3 the size of KSM) was sold to a new company (Pretium Resources for $215 million) established around 2010 by one of the mining industry's most influential people (Quarterman who ran Silver Standard Resources prior to that); Meaning that the region's mining aspirations has the support and confidence of key people in the industry. Quarterman banked a $265 million IPO on Snowfield-Bruceback (cost them 81% of the IPO).

Growing interest in Western Canada's oil industry means more business for oil services and fracking companies In 2010 fracking companies outperformed the oil and gas industry (considering market price)

Central Alberta Well Services Corp - A junior player on the tsx venture exchange rising 95% in market value in the last 6 months (32% in the last 3 months). Its focus on the Western Canadian Sedimentary Basin where it operates more than 45 service rigs (oil and gas) and provides oil tubing, benefits the company greatly because that's where a lot of the world's drilling happens; The western basin includes Saskatchewan where there are major reserves of light oil (Baytex Energy), giving the company a bit of protection in the event of declining oil prices.

Trican Well Services - Biggest fracking company in Canada that also operates in the United States and Russia. In mid 2011 the Canadian Association of Oilwell Drilling Contractors estimated that 13,128 new oil wells will be drilled over the entire year (up 11% over 2010 when Trican rose 45% in stock price). The only risk is that oil prices need to be in the 85-100 dollar range per barrel for oil companies to want to drill more (below that they show less interest, reason is an increasing number of new wells target heavy oil and heavy oil requires relatively high prices for production to be economically viable (over $50/bbl in Alberta's oil sands). Today (August 13, 2011) WTI crude oil is at $85 (low but still has a high long term lookout) but Brent crude is still over $100 ($108) per barrell.

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