Guy Bennett President, Q1 Publishing

CIBC says this run is far from over…not by a long shot.

 

Buried deep in a recently released 70-page report, analysts at CIBC, Canada’s 4^th largest bank, state:

 

With the lack of announced greenfield projects needed to match growing demand in the next six to eight years, we believe the race is on to ramp up capacity, to take advantage of current potash prices of US$1,000/t or more.

 

CIBC goes on to detail the now all too familiar macro-fundamentals that have made potash into the top story so far in 2008. This is great news for Potash One (TSX:KCL), who were one of the earliest movers into potash.

 

Potash One secured its prospective potash mine in 2005, long before the fertilizer story started attracting all the “hot” money moved into the sector. Potash One’s early mover status has put it on course to take its

By now I’m sure you’re familiar with the global agri-boom story…

Corn, wheat, soybean prices are at or near multi-decade highs. Skyrocketing wheat prices have caused bread prices to double. Fertilizer stocks have soared more than 500% across the board in the past two years. Despite recent pullbacks, these five factors assure that that the agriculture boom is a long way from being over:

    - Record global population growth
    - Decrease in arable (farmable) land
    - Biofuel Boom: Crops for fuel instead of food
    - Soaring demand from growing global middle class
    - Government intervention to “solve” the problem

Across the globe, hungry voters are rioting for affordable food. Politicians are under massive pressure to provide solutions.

And according to CIBC, the solution to the global food crisis may be – excuse the pun – “solution mining”.

Potash is mined from deposits left behind when ancient sea beds evaporated.

 In a solution mine, in instead of spending billions of dollars to dig a shaft 1,000’s of meters into the ground and scooping the stuff out, solution mining is completely different. Solution mining involves pumping water into the ground, dissolving the potash in water, and then pumping it back to the surface.

Solution mining has been around for decades. Solution mining has been used to mine uranium in the United States since the 1960’s. And fertilizer giant, Mosaic Corp, also uses solution mining to extract potash from the ground at it’s mine in Saskatchewan (just a few miles away from Potash One’s operations).

There are a lot of benefits to solution mining. This method incurs significantly lower up-front costs than traditional mining. It has a quicker timeline to production. And it costs less to operate.

CIBC states, “We estimate that the break-even potash price for a solution mine is US$200 [per tone] and for a conventional underground mine US$235 [per tonne].”

 

“We prefer potash solution mining over conventional mining,” CIBC adds, “due to lower engineering risk and a shorter construction time period, thus capturing the benefits of higher potash prices. Based on our calculations, solution mines have a greater net asset value compared to conventional mines.” 

 

With the “race to ramp up capacity” in the potash mining industry, speed to production is key. Analysts predict the price of potash could double in the next five years and farms are willing to pay. A current potash prices, farmers spend about $40 per acre on fertilizer. Considering they are average $850 in revenue per acre this year, the cost of not using potash fertilizer is far greater than the extra $40.

 

As you can see, potash demand isn’t going to wane for a very, very long time and supply isn’t keeping. CIBC believes solution mining is the answer.

 

CIBC Stated Benefits of Solution Mining

 

·         Low operating costs

·         Low capital costs

·         Well-known and well-understood procedure

·         Reduced time to production

·         Low demand for manpower

·         Can mine deep or irregularly shaped deposits

·         Flexible operations

 

A few weeks back I indentified Potash One as a possible buyout target (“The Majors Go Shopping: Who’s Next?”). Since then, shares of Potash One have traded flat as the junior resource markets experienced one of the worst months in the past five years.

 

CEO and President of Potash One, Paul Matysek is an experienced geologist with a sparkling track record of creating shareholder value. Matysek biggest success was the CEO of a uranium which was bought out in 2007 for $1.2 billion.

 

The CIBC report confirms what many have been whispering. And it looks like Matysek is working on something pretty big…again.

 

When you look at junior companies, there are always a lot of risks. But if you can eliminate as many risks as possible, investing in the junior sector can be very profitable. By scouring for companies like Potash One, that are led by people with excellent resumes, were very early into the region, and have a few years of development already completed, the rewards can certainly offset the risks.

 

Make money, not war

 

 

 

Guy Bennett

President, Q1 Publishing

 

Andrew Mickey, Q1 Publishing

The recent correction in commodity stocks has caused a lot of investors to ask themselves tough questions. The across the board sell-off in commodities has sparked a big debate about how “super” the supercycle really is.

A rising U.S. dollar and a sharp global economic slowdown (or at least the fear of one) has sent most metal prices down. In just the past few months, the spot prices for base metals like copper, zinc, and nickel are down 12%, 30%, and 42% respectively. The sell-off has hit precious metals just as hard. As I write, gold, silver, and platinum prices are off 20%, 30%, and 35% from their recent highs.

Through this correction, which I’m sure it is just a correction, moly prices have held up very well. In fact, moly prices have held steady throughout the commodity downturn. Is this strength a sign of unwavering demand or merely just a result of a significantly less liquid and transparent market for moly?

More importantly, is it a time to buy moly stocks?

The simple answer is yes, but…with a really big “BUT.” Let me explain.

Moly, like almost every other commodity, has had a good run over the past few years. A pound of moly has climbed from a 2002 low of about $4 up to about $33 today. That’s a run of more than 700%. Moly’s surge has made big winners out of moly producers like General Moly (NYSE:GMO) and Thompson Creek Metals (NYSE:TC).

Moly: A Back Door Energy Play

On top of that, the moly boom shows no signs of slowing down.

You see, moly is used in steel production and is a key ingredient in making steel for oil and natural gas transporting pipelines.

According to the Oil & Gas Journal, there are currently more than 57,000 miles of pipelines slated for construction around the world. It takes 2,500 pounds of moly to make one mile of pipeline. So that’s $4.7 billion dollars worth of moly need just for pipes, which only account for about 8% of the total global moly market.

Safe to say that moly demand won’t be falling off for quite a while.

The metal is also heavily used to construct nuclear power plants. It takes as much as half a million pounds of moly to build a nuclear power plant.

Demand from nuclear power plants could be the proverbial straw that breaks the camel’s back in this situation.

There are more than 30 nuclear power plants under construction or slated to begin construction in the next few years. The construction of all them would add a total of about 1.5 million pounds of moly consumption to an already tight market.

It’s not just the construction of new nuclear power plants that will drive the demand for moly. On average, nuclear power plants around the world are very old. Most nuclear plants in the U.S. are well over 30 years old and are within a few years of decommissioning. They must be retrofitted and it’s going to take plenty of high moly steel to do that.

The U.S. Geological Survey states, “There is little substitution for molybdenum in its major application as an alloying element in steels and cast irons.”

Since it’s used extensively in these two key areas and there’s no substitute, it’s no wonder the price of moly hasn’t been hit by the recent downturn. But it’s not just demand that has kept moly prices up.

Mind the (Supply) Gap

The supply side of the equation is also helping to keep moly prices bouyant. Last year, 187,000 tonnes of moly were produced globally. That’s only 3,000 more tonnes than was produced in 2006.

That’s a growth rate of less than 2%...it’s not going to cut it.

China, Chile, and the United States produced 78% of the world’s moly last year. We all know China is willing to go the extra mile to put mines into production. Chile is a mining friendly country focused on copper, not moly.  In fact copper mining accounts for 7% of Chile’s GDP. Theoretically, the United States could ramp up moly production but permitting and environmental challenges make this difficult.

There is more moly supply coming on line, but at current growth rates it won’t meed short term demand.

Kevin Loughfrey, Chairman and CEO of Thompson Creek Metals, says, “We think the molybdenum demand relative to those other commodities is strong, and our outlook for the molybdenum continues to be good.”

Jonathan George, CEO of Creston Moly, stated a few days ago, “Molybdenum is trading at around US$33.85/lb but we see it moving up into the US$40/lb range in 2009 bcause there is a stranglehold on molybdenum supply.”

Moly has a lot going for it. Demand is growing and supply is not keeping up. But, all of that good news could be what makes us shy away from moly right now.

Good News can be Bad News

As investors, we always have to look at the risk/reward situation.

 Moly is in demand and new production is lagging, there just isn’t a big upside here. Moly prices have held up relatively very well during the recent downturn and many moly stocks have too. That’s good for current shareholders of moly companies, but not good for investors looking to get in now.

This year and 2009 should be good years for moly. However, that’s all expected to change in 2010. Freeport McMoRan (NYSE:FCX) has a new mine expected to increase world moly supply by 2%. In 2011 and 2012 there is even more new moly supplies slated to come on line.

The upside for Moly over the short-term is appealing, but over the medium and long term, the situation is not nearly as strong. High prices are the solution to high prices. In this case, high prices have attracted a lot of mine developers into new moly projects. Since we value stocks using long-term expected cash flows, new supplies will likely push moly prices down and reduce long-term cash flows, starting in 2010.

The moly industry even admits it. Jonathan George, who called for moly prices to rise 20% this year, also said, “"Once a lot more of these molybdenum projects get on line in 2011-12, then you'll probably see the price come back down to the US$25-30/lb range. But in the interim, there are a lot of potential molybdenum producers that just aren't getting permits and that won't be online as quickly as they thought.”

Though a price drop is anticipated, the industry is still expecting moly prices to stay more than 300% higher than the long-run average. Clearly, there are a lot of high expectations built into the moly industry.

At the Prosperity Dispatch, we stay away from stocks that are smothered in high expectations. High expectations often lead to disappointment in the stock market.

Moly likely has a few good years ahead of it, but the good news is already built into moly stocks. As a result, the downside risk offsets any upside potential. The odds are against us and it’s best to steer clear of shares of moly producers for now.

Good investing,

 

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

 

Andrew Mickey, Q1 Publishing

It’s been a long – very long – wait, but now it looks like it’s time to jump back into uranium. In fact, uranium is looking like it could be one of the best places to have your money over the next year. And there are two trampled down stocks that should perform very well from uranium’s reboom.

 

We’ve come a long way, but as long as we don’t forget the lessons of the uranium bubble bursting we should do fine. This time around, quality matters. And I think you’ll find my two uranium picks in this article are very high quality and extremely cheap. But again, we can’t forget the past.

 

If you recall, uranium was on everyone’s tongue…it was everywhere. I even had a few people ask me about thorium as an alternative to uranium. It was ridiculous and we all knew it.

 

Then the Cigar Lake Disaster happened and catapulted a bull market into a bubble, a bust, and now the return of an uptrend.

 

It’s a pretty basic story. The world’s largest uranium producer, Cameco (CCJ:NYSE), was banking on pumping out uranium from its Cigar Lake mine to in 2008. That was the only way for it to capitalize on rising uranium prices.

 

Cigar Lake was going to be massive. All told, the mine was expected to provide as much as 17% of the world’s yearly uranium production. With spot uranium prices hanging around $60 a pound, it would also be a major cash cow for Cameco. The uranium bubble was set to deflate slowly.

 

The exact opposite, however, happened. A retaining wall collapsed and the entire mine flooded. Cameco confirmed a single pound of uranium wouldn’t come out of Cigar Lake for at least five years. The bubble grew even larger.

 

Then the summer came. Uranium prices surged even higher to $137 a pound. Everything uranium was soaring. That is, until a liquidity crunch spurred by the first signs of problems in the subprime lending market in the United States, brought the whole uranium market crashing down.

 

Flash Forward

 

Here we are one summer later and it’s finally time to buy uranium again. A couple hundred of the junior uranium companies have fallen 80% or 90% from their highs (if they even still exist).

 

The pretenders are getting sorted out from the smart money is loading up on the high potential uranium stocks. But the whole time, the fundamentals have not changed.

 

There are 40 new nuclear power plants slated to come on line within the next 10 years. There’s an additional 30 in pre-planning stages. China and other countries are putting up billions of dollars to ensure they have enough electricity to power their growth.

 

Nuclear power will play a role helping the world keep the lights on at night. Nuclear power is clean, efficient, and, probably most importantly, proven.

 

When you decide to build a nuclear power plant, you can be pretty sure the juice will be flowing within eight years. Unlike other alternative energy sources, nuclear power will provide electricity. That has nothing to do with the time of day, whether it’s windy, or it’s cloudy outside (solar and wind power are highly variable).

 

Nuclear power requires uranium. There is not other near-term solution. Thorium is a pipe dream and there is no alternative. Uranium has to be used in all these new \nuclear plants as well as the old ones. Uranium prices can’t drop much lower from here, the fundamentals are too strong.

 

Uranium’s Next Flash Forward

 

That’s all why it looks like uranium prices have bottomed. At around $60 per pound, uranium could even be considered cheap. The correction (a 60% is a bit more than a correction, but it seems fitting) has wreaked havoc in on uranium stocks. Uranium exploration companies are going bust, they are more out of favor than ever, and that has got me thinking it’s time to delve back in.

 

I realize that it might seem crazy to move back into uranium. That’s even more so if you got caught up when the bubble burst last summer, but it’s always best to be a buyer when everyone else is selling.

 

Now, a few uranium stocks are set to truly outperform.

 

For instance, Hathor Exploration (HAT:TSXV) appears to be an absolute steal at a little over $3 per share. This company has struck it big in the Athabasca Basin.

 

The Athabasca Basin in Saskatchewan, Canada is home to the largest and highest-grade uranium deposits in the world. A single strike can easily be worth as much as $40 billion. In fact, the smallest deposit in the Athabasca Basin is worth $4 billion.

 

It’s that kind of high return potential that has attracted so much exploration activity. Picture the California Gold Rush. Prospectors knew the odds were against them in there heads. But it was their heart and emotions that brought them there anyway. The same is true in Athabasca. It’s just uranium instead of gold.

 

But Hathor is not like a prospector with wet feet and a pan. Hathor has found its gold nugget (a bit more than a nugget though). It could be worth as much as $40 billion and as little as $4 billion. That’s the range.

 

With a market cap of just $200 million, the upside is there. Hathor is technically an exploration company, but the only question that remains is how much uranium does it have. But if it’s in the Athabasca Basin, it’s a lot.

 

Hathor should be valued much higher. As Hathor continues to prove how much uranium it has, the stock will be valued much higher. At less than $3 per share, Hathor is on its way to the $6 to $10 per share range within next two years.

 

More Nuclear Fallout

 

Hathor’s not the only undervalued play in the uranium sector. Denison Mines (DML:TSX or DNN:AMEX) is one too.

 

Denison is set to be another top performer in the uranium rebound. After peaking at more than $15 per share in 2007, Denison has watched its share price get more than cut in half.

 

Denison is one of the few uranium producers in the world. It is not out drilling holes in the ground and is value on hope and odds. Denison is a uranium mining company. It has operations in the Athabasca Basin as well as the United States.

 

Densison’s position as a uranium producer will allow it to directly benefit from the next rise in uranium prices. Denison’s profits go up with each dollar uranium rises in price. Growing profits will attract more investors willing to pay a higher price for Dension’s shares.

 

This one is just too undervalued. Urnaium is way out of favor and Denison will be one of the biggest bounceback winners in the sector. Its size, a market value of $1.3 billion, will limit the upside.

 

Regardless, Denison is already back on the rise from its lows a few months ago. From here, I’d still expect between a return between 50% and 100% from Denison over the next two years.

 

Big Risks Don’t Always Equal Big Rewards

 

I realize the upside potential of Denison and Hathor may not get too many investors focused on uranium stocks excited. After all, uranium stock traders have been used to chasing that 20 cent uranium explorer that could soar five-fold overnight.

 

Regrettably, that’s just not going to happen in the next leg of the uranium bull market. There might be the occasional huge winner, but chances of choosing that one needle in the haystack of more than a hundred are pretty slim. The odds are against you.

 

However, when it comes to a high quality exploration company like Hathor or beaten down producer like Denison, the odds of success are much greater and the potential rewards are pretty good.

 

I expect returns on these between 50% and 200% over the next two years. You’d be hard pressed to find that kind of upside with as little risk as these stocks carry. These two are further proof that you don’t need to take big risks to earn a big return.

 

Right now, with uranium still out of favor, there’s still an opportunity to buy. With rampant speculation a thing of the past, it’s best to stick to quality to catch the next leg of the uranium run which is still just getting started.

 

Good investing,

 

 

Andrew Mickey

Chief Investment Strategist, Q1 Publishing

 

P.S. Uranium is not the only sector to be a leader as we begin to emerge from the recent commodity correction. I think there is an even bigger one in agriculture.

 

I’ve got to warn you, it’s probably not in the agriculture stocks that have already had a big run. There’s plenty of value in the agriculture stocks and this bull market is set to last at least another five years.

 

Learn how to profit from it all in my latest research report: Fields of Gold: 5 Agriculture Gems that Haven’t Run…Yet. Claim your free report here.

 

 

 

 

Andrew Mickey

The old saying, there has to be a bull market somewhere, rings true. There’s about $50 trillion swashing around in the global financial system…and it has to go somewhere.

 

The way things are looking right now, one of those “somewheres” will be the Middle East. High energy prices have been a boon to many countries in the Middle East. Countries like Kuwait, Bahrain, Qatar, and UAE have become some of the wealthiest countries in the world.

 

In the UAE the number of millionaires grew by 15% last year. In Saudi Arabia a new millionaire is minted every 46 minutes. Most importantly, the Middle Eastern economies are showing strength when most of the world is fearing financial ruin.

 

Getting in now is far from early, but there’s still some money to made in the region. The Middle East still isn’t perfect. There many rules restricting foreign investment, the local markets are poorly regulated, and there is a severe lack of transparency.

 

But if that’s where the big money is going next, all that doesn’t matter. Still, it’s probably best to let a financial institution put your money to work in this region.

 

I’ve got to warn you though; there are only a few options available to invest in this fast-growing region. And they can be very, very different. Knowing those differences is the first step.

 

ETF vs. Mutual Fund

 

I’ll be honest, I want to be invested in the Middle East. I want direct exposure to Qatar, Kuwait, Bahrain and other oil-rich countries. That kind of direct exposure tough to find. The problem is the Middle East is normally lumped together with North Africa. In some cases, the Middle East is linked to all of Africa.

 

Recently there have been a slew of Middle East and North Africa (MENA) funds made available to the public. T. Rowe Price Africa and Middle East Fund (TRAMX) and SPDR S&P Emerging Middle East & Africa (AMEX:GAF) caught my attention. They are two quick and easy ways to get some exposure to the ongoing growth of the Middle East.

 

The SPDR ETF trades like a stock, has low expenses, and certain tax advantages. It is an ETF after all.

 

The T. Rowe Price fund has higher expenses and you have to buy and sell at the close of trading just like most other mutual funds.

 

Initially, I leaned towards the ETF for all the benefits listed. I wanted exposure to the Middle East and didn’t want to pay much for it. In this case, however, a bit of extra cost may go a long way. It all has to do with the focus of the funds.

 

A Tale of Two Funds

 

As an investor, I want exposure to the Middle East…not Africa. The Middle East is booming. Africa, frankly, is still a very tough place to make money.

 

For instance, some of the world’s most lucrative mines could be built in the Democratic Republic of Congo. But due to political instability, they may never go into production. China has had success developing mines in Africa. In most cases though, they bring at least 500 troops (literally).

 

Africa is not a place I want to be invested in too deeply yet. There are some opportunities there, but they are limited. I much prefer the Middle East and want the fund that is truly focused on the Middle East.

 

Take a look at the table below. GAF is heavily focused on Africa. Six of its ten largest holdings are in South Africa. None are in the oil rich high growth countries of the Middle East.

 

SPDR S&P Emerging Middle East & Africa (AMEX:GAF) – 10 Largest Holdings
Company	Country	Percent of Assets
Teva Phama	Israel	8.27%
MTN Group	South Africa	6.96%
Sasol	South Africa	5.54%
Impala Platinum	South Africa	5.33%
Israeli Chemicals	Israel	3.11%
Remgro	South Africa	2.85%
Arab Bank	Jordan	2.78%
Banque Marocaine	Morocco	2.30%
Standard Bank	South Africa	2.30%
Anglo Platinum	South Africa	2.24%
Source: Yahoo Finanace

 

That’s not the case with TRAMX. As you’ll see in the table below, TRAMX has the high degree of exposure to the Middle East. Three of its largest 10 holdings are in the UAE, two in Qatar, and two in Oman.

 

 

T. Rowe Price Africa and Middle East Fund (TRAMX) - 10 Largest Holdings
Company	Country	Percent of Assets
Emaar Properties	UAE	6.35%
Commercial Bank of Qatar	Qatar	5.74%
Impala Platinum	South Africa	4.54%
EFG-Hermes	Egypt/Saudi Arabia	4.45%
BankMuscat	Oman	4.36%
Gulf Fin House	Bahrain	4.18%
Aldar Properties	UAE	3.68%
Dubai Finl Market	UAE	3.52%
Raysut Cement	Oman	3.17%
Qatar National Bank	Qatar	3.03%
Source: Yahoo Finanace

 

 

If you’re looking to invest in the Middle East, it’s imperative to do your research. This is not like the energy sector where most of the ETF’s and funds are all investing in the same stocks.

 

The Middle East is still not a perfect place to invest. But the region is making big strides. Dubai, Abu Dhabi, and Qatar are becoming global financial centers. The region is growing and maturing.

 

The Middle East has learned that high oil prices probably won’t be here forever and are already diversifying. They’re attracting foreign investment and the local markets are sure to do well over the coming years.

 

GAF and TRAMX, as ways to get in on the booming Middle East economies, are very different. If you want to invest in the Middle East, TRAMX is probably one of the best ways to do so.

 

The Race is On

 

Of course, there are still yet a few more ways to capitalize on the Middle East, but they are brand new. Two new ETF’s have been launched in the past few weeks. But again, you have to look at the amount of direct exposure each has to the Middle East.

 

The Gulf States Index ETF (NYSE:MES), Wisdom Tree Middle East Dividend Fund (NASDAQ:GULF), and Powershares MENA Frontier Countries Portfolio (PNMA) all have varying degrees of exposure to the Middle East.

 

But, as we can see from the amount of newly opened ETF’s and the funds focusedon the Middle East and North Africa, there’s a lot of money flowing into the region. This could be a big wave of money flowing into a small area and profits would surely follow for those that move in now.