Petrohawk: A Play on Appreciating Natural Gas Prices

Oil's current valuation is a slippery slope. No one knows when the price will come down. One side will argue the peak oil theory. The other side will tell you that speculators are to blame and the price run-up will be short-lived.

The problem with the media is they are trying to sell you a magazine, and the truth relies solely with the individual. With oil, it comes down to supply and demand. OPEC is milking it a little more than they should, trying to get as much as they can out of their supply. They announced that they will be increasing production to 9.7 million barrels of oil per day and that they will be able to increase production to 15 million barrels in 2 years.

This is all very negative for oil in the long term. These numbers wouldn't have been so convincing had it not been that OPEC even outlined where the production was coming from. Even with this news the oil market increased all day yesterday. When markets are this shaky it is dumb to jump in. Let the market find solid footing first.

The way to play an unsure oil market is through natural gas and oil exploration and production companies. My XTO call on theupdown.com is up 18% in the last 81 days, GMXR is up 67% in 48 days and MMR is up 7% in 60 days. All of which have been good, and should continue to be good even in an oil pullback if you are in for the long haul.

It looks as though the Fed is going to let supply and demand work. As the price of oil increases, demand should decrease. In this event, there is even more reason to be bullish on natural gas. Without a hike in rates because of a terrible housing market, commodities still look good going forward. This may even help oil in the short term, until consumers pull back their usage through vehicles with higher mpgs and by driving less. General Motors (GM) is already offering 0% for 72 months on most of their vehicles, which is unheard of at this time of year. The current market looks horrible for disposable income and even oil can be cut back on.

PetroHawk (HK) looks to be a good investment for those interested in growth. Their assets are concentrated and well placed. There is low risk in these sites coupled with high reward potential. Most sites are low cost, with improving margins. Many of their assets were bought on sale and have appreciated significantly since their purchase.

They have increased capital expenditures to further their development and the liquidity to pursue future endeavors. Quarter over quarter they have 10% organic production growth. They experienced 25% annual organic production growth in the core areas of their business.

Their cash margins are also very good, and here are their estimates for natural gas prices. With the price at $7, margins are at 73% or $5.09, at $8 there are 75% margins or $6.02. When the price is at $9, 77% and $6.96. $10 natural gas is 79% or $7.89, while $11 is 80% or $8.83. With an average price of $12, operating margins are at 81% and operating cash margins are $9.76 when looking at Mcfe.

It's easy to be scared off by HK as it has a PE of 429. Looking at the forward PE, the stock seems cheap at just 32. Current growth this year is estimated at 44% while next year is 24%. Five year estimates have average yearly growth of over 30%. I would wait for a good pullback on the stock as I think it will get cheap again.

How to control losses

Everyone knows how to win; but, few know how to lose! Yet the secret to making money in the market is knowing how to lose; or how to control your losses. Listen to the pros:

“I’m always thinking about losing money as opposed to making money. Don’t focus on making money; focus on protecting what you have.” – Paul Tudor Jones

“The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.” – William O’Neil

“One investor’s two rules of investing:

1. Never Lose Money
2. Never forget rule No. 1” – Warren Buffett

Verily, most investors don’t want to be wrong and take a loss. They stubbornly seek perfection – a profit in every trade or investment. And, the neurotic pursuit of market perfection is the Achilles Heel of most investors. Perfection is impossible on Wall Street! As Martin Sosnoff said in his book “Silent Investor, Silent Loser,” “There is only perfection in the cemetery above Omaha Beach. There no crabgrass grows among the bright green blades cropped three inches above the earth. It is truly as Walt Whitman has said, ‘The hair of the Lord.’ And the crosses stretch out in that echelon of perfect longitude. The only perfection is in death.”

Is Agrium the new Potash?

Since my last report back in October 2007, when I highly touted and recommended agricultural equities, particularly Agrium (AGU), my fundamental point of view on this trend has not changed:“The word needs food."

The basis of my previous points in that article were to come to a new reality and realization that the “West” is not the only place that will have its steak (it has been for a long time); the people in new developing economies and countries are demanding lifestyle changes in the form of better living conditions, enjoyment of life, and the need for better food (it is not just the basic needs anymore - standards are continuing to adjust as the growth of the middle class outstrips supply).

These observations and beliefs bring me to Agrium (AGU), which I previously stated (in the October article) would experience unprecedented demand and growth, along with the other fertilizer equities.

In my opinion the growth and demand that is being driven is in no way a “bubble” as some have propagated in hopes of popularizing themselves as “today's Nostradomises." Some of these bubble theorists, or so called analysts, have been speculating bubbles for many years in these plays (one such foolish analyst, at a financial institution in Canada had been negative on Potash (POT) since it was at an adjusted price of about $30; imagine if you took their advice - you would have missed at least a 700 % upside, plus, what I believe is to come over the next several years), many in the bubble camp have never properly analyzed the middle class trends and demands being incurred in places such as China, India, Russia and South America, not including the rest of the industrialized world that is in need of resources to build strong economies. They simply are looking at charts and guessing at certain points, in hopes of being the first to call “their” so called top in these equities (these are perhaps calculated MBA superstars) .

The fundamental basis when building strong economies is that people work harder to maintain and develop a new level in their standards; the spin-off to the growth of the middle class is the enjoyment of the benefits for their effort, particularly their habits and necessities around the food they consume.

Specifically on Agrium: the company’s growth will be very positive for the next several years (as they recently indicated); the demand for fertilizer products is unprecedented today and will continue to have further growth and demand within the industry, with prices escalating due to the continued absorption and pressures from growing nations, as mentioned above.

My previous target on Agrium was that it would see $100 within 6-18 months. I now, based on research and my own opinion, as well as recent confirmations in growth, have to upgrade my longer term target; some may see this new adjustment as excessive and unjustified, but my basis is directed towards the logic of supply/demand, pricing power, as well as the recent integration of the retail operations in the United States (which Agrium has previously stated will have a definitive positive effect on earnings/cash flow going forward).

My new target on AGU (Agrium) is being set to reflect a supply/demand scenario for the industry as well as pricing power on several fronts, specific to AGU, as well as new drivers, particularly seed products that will potentially enhance their products and expand their portfolios; the new 12 month target is set at $160 (though aggressive for some, I believe this price will be realized and possibly exceeded. I am not going to get into the specifics around PE/Cash Flow ratios at this point, even though my basis and target has encompassed and been evaluated based on the potential PE and Cash Flow multiples, as well as current and future prospects for growth and sustainability).

There are always going to be some form of price shocks in all types of markets; the ultimate difference separating prosperous and growing nations from stagnate nations will be how these occurrences are integrated and absorbed into the economies. The low price environment for staples and possible other goods in some first world nations will be gone forever (my opinion). I believe we will have various ups and downs in market prices, though I think the lifestyle (when it comes to prices for staples) has been forever changed, and will continue to change/adapt as the population and developing nations grow.

Disclosure: I am definitely long and will continue to purchase AGU on an ongoing basis (dips, occurrences).

Agrium eying 150 pct potash expansion, sees M&A
Thu Jun 12, 2008 3:22pm EDT

(Adds details; in U.S. dollars, unless noted)

TORONTO, June 12 (Reuters) - Agrium Inc's (AGU.TO: Quote, Profile, Research, Stock Buzz) potash output could rise by 150 percent to 5 million tonnes by the middle of the next decade, while small-size acquisitions are also likely down the road, company officials said on Thursday.

"We could go very well from a 2 million tonne producer to a 5 million tonne producer," Ron Wilkinson, head of the company's wholesale division, told investors at a presentation in Montreal.

The Calgary, Alberta-based company is looking at a $500 million expansion of its current Potash mine in Saskatchewan and is also planning on building a new mine, but has yet to decide exactly where it would build it.

The new mine would have capacity of about 2 million tonnes a year, with capital costs expected around $2.5 billion. Production would begin in 2014 or 2015 and hit its full stride by 2017, Agrium said.

Agrium, the smallest of the three main potash producers active in Canada, has benefited from a sharp rise in prices brought on by skyrocketing agricultural demand. Potash is used as a crop nutrient.

Agrium acquired agricultural retailer UAP Holding Corp in May for $2.7 billion, and bolt-on acquisitions are likely down the road, Chief Financial Officer Bruce Waterman said.

With strong cash flows -- cumulative flows were $1.1 billion in 2005-2007 -- Agrium would also consider giving cash back to shareholders if acquisitions or other investments don't pan out, he said.

Agrium reaps spoils of potash surge

From Thursday's Globe and Mail

June 11, 2008 at 8:12 PM EDT

Booming agriculture markets have lit a fire under fertilizer maker Agrium Inc., whose shares jumped above the $100 mark Wednesday after the company said it's going to make even more money this year than expected.

But the company has a dilemma. To take advantage of the explosion in demand for fertilizer, Agrium is planning a new potash mine in Saskatchewan, but it's going to have to wait five or six years before the project is up and running.

The lead time for building new mines is lengthy, chief financial officer Bruce Waterman told a mining conference in Toronto Wednesday. That's mainly because developers need to place orders way ahead of time to get mining equipment, and book the expert drillers to drive shafts into the ground. There are only a handful of firms worldwide with those kinds of skills.

As a result it'll likely be 2014 before the new mine is in production, Mr. Waterman said. “It sounds like a long time, but it does take a long time to get in the order queue for [mining equipment].”



Fortunately for Agrium, other potash mine developers are in the same boat. And because the lead times are so long, everyone in the business knows when more capacity is going to be coming on stream.

Meanwhile, fertilizer prices are not likely to slip in the short, or even medium-term, Mr. Waterman said. “The cycle looks really good for three to five years. We really don't see supply-demand [ratios] being anything but tight for the next few years.”

Agrium, like other Canadian firms in the fertilizer business, is riding the agricultural wave up the Toronto Stock Exchange. Potash Corp. of Saskatchewan is now the top weighted stock in the S&P/TSX composite index, outpacing EnCana and Research In Motion.

Agrium, though smaller, has moved into 26th place, ahead of giants in other sectors such as Telus Corp., Husky Energy Inc., Shoppers Drug Mart and Bombardier.

The market for fertilizer is so hot that Agrium now projects second quarter earnings of $2.80 to $3 a share, up sharply from previous projections of $1.92 to $2.22.

And that doesn't even count the contribution it will get from UAP Holdings Corp., the U.S. fertilizer and seed retailing giant Agrium bought last year. That $2.1-billion acquisition just closed in early May.

With the UAP acquisition, the company now has control of about 15 per cent of the U.S. market for the retail distribution of fertilizer to farmers. In Canada, there has been too much competition for Agrium to consider getting into the retail game, Mr. Waterman said, but things are going so well that the company is reconsidering its position.

“It's quite possible we'll expand into [Canadian retailing],” he said. “It's a market we know very well.”

While some farmers are suffering from the “sticker shock” of higher fertilizer prices, most don't see it as a big issue, Mr. Waterman said. With current prices for farm commodities so high, they can easily afford to pay more. The key to a farmer's success is to get more crop yield, so “it doesn't make any sense to cut back on fertilizer.”

There was some bad news from Agrium Wednesday. Its new nitrogen plant in Egypt is now on hold because of a fight between the national government and local politicians. While the company has the required permits for the $1.2-billion project, public concerns over environmental issues could prevent Agrium from continuing work on the plant, Mr. Waterman said.


Agrium Inc. has not enjoyed the same level of attention this year as Potash Corp. of Saskatchewan Inc., even though both produce that hotter-than-gold commodity, fertilizer. Agrium's shares are up 19 per cent this year, about half the increase of Potash Corp.'s shares.

Now, Agrium's lesser-status might be shifting: While the price of potash has been soaring in recent months, pricing is also on the rise for phosphate and nitrogen, helping Agrium top expectations in its first quarter results.

Paul D'Amico, an analyst at TD Securities, maintained his “buy” recommendation on Agrium . However, he raised his 12-month target on the shares to $125 (U.S.) from $98 previously – a 28 per cent bump and nearly 50 per cent higher than the current price of the shares. The upgrade makes him the most bullish analyst among those who follow the stock. The shares traded in New York at $83.76 on Monday morning, up 1.4 per cent. (The shares are listed in Toronto as well.)

Part of Mr. D'Amico's bullishness stems from higher commodity prices, but another part relates to Agrium's strong retail operations, which have performed far better than expected. “To be clear, better than expected pricing was evident in both nitrogen and phosphate, but retail's execution was a big positive,” he said in a note to clients.

Add it up, and he believes management's guidance on earnings is too conservative. He has raised his 2008 earnings estimates to $6.48 a share from $4.66 previously; he raised his 2009 estimates to $7.40 a share from $5.52. Right now, the shares trade at a slight premium, based on the company's earnings before interest, taxes, depreciation and amortization – but Mr. D'Amico believes the premium is justified.

“We speculate that a premium for AGU is reasonable versus its immediate peers given our view that investors look favourably upon AGU's increasing retail business influence in its earnings stability, and as such justifies a better valuation multiple, especially on a relative basis,” he said

Many analysts believe that we are still in the early stages of fertilizer shortages. As long as the government continues to support ethanol usage, stocks like Agrium could continue to move higher. Another key company in the sector is Potash (NYSE: POT), which has also seen a dramatic run-up in price.

Both Potash and Agrium have moved up nearly 200% since 2007, but Agrium still trade at a reasonable 20x earnings. In fact, given its substantial growth prospects, this P/E radio remains substantially below where it should be at. The PEG ratio (P/E to growth) is a more accurate measure of value and shows Agrium undervalued and Potash evenly valued at current prices.

In the end, many industry experts agree that Agrium and Potash have a lot of upside. However, there are some investors that are taking money off the table because of the previous run-up in the stock. This has created a buying opportunity that many investors may want to take advantage of before the next earnings announcement.

May 7 (Reuters) - Agrium Inc is plowing more money into its search for a new potash mine site amid record prices for the crop nutrient, the chief executive of the fertilizer producer and farm-products retailer said on Wednesday.

Agrium is examining a new development in Saskatchewan as it proceeds with with expansion of its current potash mine in the province, CEO Mike Wilson said.

"Our board just today approved additional capital to accelerate our look-forward on greenfield facilities," Wilson told shareholders at the company's annual meeting.

Potash prices have soared as farmers around the world try to capitalize on skyrocketing grain prices, which have caused food inflation in some countries and shortages in others.

Agrium, the smallest of three producers in Canada's potash belt, mines 2.05 million tonnes of the mineral from a Saskatchewan operation and has said it is considering expanding capacity there by a total of 800,000 tonnes.

That will likely cost $500 million, with one stage starting up in 2012 and a second a year later, he said.

A new mine producing 2 million tonnes could cost $2.5 billion, Wilson told reporters.

Earlier this year, Wilson said the company planned seismic tests on a greenfield potash mine site in the second half.

Agrium shares were up 35 Canadian cents at C$87.10 on the Toronto Stock Exchange on Wednesday.

Calgary-based Agrium, the world's third-largest nitrogen producer, has also bought several farm-retailing competitors to become the largest U.S. retailer of fertilizer, seed and chemicals.

This week, it closed its $2.7 billion takeover of Colorado-based UAP Holding Corp.

Wilson said the retail business provides stability amid cyclical swings in its commodity fertilizer sales.

With fertilizer and crop prices surging, the company is generating stacks of cash above a $1.7 billion kitty on its balance sheet earmarked for funding the UAP deal.

But Agrium will likely wait before jumping back into the acquisition market for retail assets, he said.

"From a big acquisition point of view, unless something fell in our laps, I think we need a year to digest (UAP)," he said. "We obviously look at small things all the time, and on the other front, we're always entertaining opportunities."

Agrium does not see world demand slowing down for fertilizer, but Wilson said producers will eventually boost supplies to ease the shortage.

"In theory, the cycle should last anywhere from four to six years and beyond. In practice, usually you wake up and there's a surprise," he said.

"But we keep looking over our shoulder and we don't see that. We think it's going to be an extensive cycle."

Meanwhile, Agrium's nitrogen operations are thriving, despite the recent run-up in natural gas, its raw feedstock, above $11 per million British thermal units.

Nitrogen prices have surged nearly $200 a tonne in the last three weeks, which, Wilson said, would be the equivalent of an $8 per mmBtu jump in gas price if that were the sole reason.

"So actually, margins are spreading," he said.

Agrium has hedged about 35 percent of its gas needs for the third quarter and 15 percent for the last quarter of 2008. ($1=$1.01 Canadian) (Additional reporting by Roberta Rampton; editing by Rob Wilson)

Petrobras: Poised for Growth

Petrobras has estimated that the Tupi field alone probably holds between five billion and eight billion barrels of oil. Brazil already has a proven oil reserve base of 14 billion barrels.

The find would represent the biggest single oil discovery in the world since the mid-1990s. Furthermore, the company's director of exploration and production suggested this week in a London newspaper that the Tupi field could be just a small part of potential discoveries in neighbouring fields.

By way of comparison, Petro-Canada shares have returned just 7.7 per cent in the last year; Suncor Energy Inc. 45.8 per cent and Husky Energy Inc. 13.9 per cent. (It should be noted that Petrobras, in addition to its oil and gas operations, also has thermal power plants, fertilizer plants and petrochemical units.)

Given such potential, Petrobras has caught the eye of many an investor banking on the share prices rising still further. Just how much the shares of Petrobras - already the world's seventh largest company by market value - will climb seems to be a matter of debate.

Tereza Mello, who follows the company for Citigroup Global Markets Inc., has just raised her target price for the preferred shares to 58 Brazilian reais ($36.05 Canadian) from 50. The preferreds ended yesterday at 46 reais, down from a high of 53.68 reais on May 21. Frank McGann, an analyst with Merrill Lynch & Co. Inc., has a price objective of 78 reais for the common shares, which closed yesterday at 54.3 reais. The American depositary receipts, which trade under the symbol PBR on the New York Stock Exchange, fell $2.71 (U.S.) yesterday to $66.29.

The share price will, it is expected, be driven by news about the company's exploration and production and by oil prices, which the head of Petrobras said yesterday he expects will likely stay high for four to five years.

Investors are well aware of the potential connected to Petrobras's discovery, but it is going to cost huge amounts of cash to develop the Tupi deposit and nearby prospects. Last week, Bloomberg reported that Peter Wells, director of a British research firm and former exploration manager for Royal Dutch Shell PLC, has estimated that developing those fields will probably cost $240-billion. This year alone, Petrobras has indicated it will spend the equivalent of $33.5-billion on investments.

A key item on its shopping list will be drilling rigs and other vessels. Among other things, Petrobras expects to lease 57 rigs capable of drilling in waters deeper than 2,000 metres between 2009 and 2017.

Petrobras (PBR), Brazil’s largest energy company, was founded in 1953 and is now one of the world’s largest oil company with 109 production platforms, with 77 fixed and 32 floating. It has 5,973 service stations all over Brazil, in addition to another 990 of them abroad, and 15 refineries with installed capacity to process 2.2 million barrels per day.

USEC (USU): 'Ben Graham value play' in uranium

Over the last year, USEC Inc. (USU) has fallen from a stock price of over $22 to just over $6. The stock has recently moved upward after falling as low as $3.15, but has since recovered somewhat. Since my call on fool.com, the stock is up 16.82%. Last year USU moved up quickly and was grossly overvalued, but the sell off was extreme and I believe this stock has higher to go in the upcoming months.

USU has had many critics, and many reasons not to support nuclear energy. It seems inevitable that current energy pricing will not increase the need for more power through electricity. The biggest problem with current plans is with hybrid vehicle production. In the very near future, we will have hybrid vehicles that will be plugged in at home for the purpose of taking the pressure off oil inventories. This move of using electricity in conjunction with combustable engines seems to be part of the equation. Other methods are starting, such as the use of natural gas to propel government and other vehicles, as with Clean Energy Fuels Corp.(CLNE). There is also talk of a development stage use of hydrogen, but it is far enough off that we need something that will work in the interim.

When looking at USU, it is better to focus on the positives with respect to the company. Worries that USU would not be able to come up with financing for its new plant have recently been stifled by anticipation it will have a DOE guaranteed loan. This is by no means for sure, but prospects are good.

USU is the only uranium enrichment facility in the United States. It provides half the nuclear fuel to the US and a third to the rest of the world. It acts as the executive agent for the program to convert the US and Russian nuclear warheads into fuel. As of the end of last year, its order backlog was $6.5 billion. If we are to look long term at this company, its American centrifuge will dramatically cut costs, as its margins have been pressured by the increased cost of electricity.

Nuclear energy has many advantages. Its zero emissions and reliability are very important, as it can be used as base as it is not reliant on the weather such as wind or solar. Electricity production costs by nuclear are cheaper than any of the fossil fuels. It is currently, the third largest source of electricity in the United States and provides approximately 20%.

The US has 104 reactors of the current 435 worldwide. USU's enriched uranium is used in three continents and in 150 reactors. Its revenues have increased every year since 2005. Net income was down in 2007 from 2006 based on costs. Revenue for last year was 68% United States, 18% Asia and Europe, and 14% Japan. 81% was from enrichment, 10% US Government contracts and 9% natural uranium.

Current valuation seems inexpensive as its PE ratio is only 10 times earnings. The company's forward PE is even better at 6.69. Earnings for the current year are already valued correctly in the stock price and next year is estimated to increase by 190%. I believe this stock is a good buy at these levels.

Tuesday, 10 June 2008
"USEC (NYSE: USU) is the nation's leading supplier of enriched uranium for use in commercial nuclear power plants -- in fact, it is the only supplier," notes value investor Nathan Slaughter.

In Half-Priced Stocks, he explains, "Low-enriched uranium is commonly used as fuel in nuclear reactors, and no other company in the U.S. provides it, giving USEC a dominant position in a key niche market."


Turnaround time for pharmaceuticals?"Its competitive advantage? USEC has the single best competitive advantage there is: zero competition -- at least in the United States. While the firm does have a handful of rivals overseas, it has reaped the benefit of being the lone U.S. supplier.

"The company has also been awarded lucrative contracts to perform work for the U.S. Department of Defense. The company also benefits from the nation's longstanding nuclear non-proliferation treaty with Russia.

"Specifically, it participates in the salvaging of old Soviet nuclear warheads under the 'Megatons to Megawatts' program, which essentially gives the firm a sharply discounted source of uranium.

"And, given the federal government's continued push toward alternative energy, regulators have a vested interest in seeing USEC prosper and could help the company obtain financing for new projects by backing its debt or assisting in other ways.

"Right now, there are 104 nuclear power plants operating in the US, and those facilities get roughly half of their uranium from foreign sources. However, incoming shipments from Russia (which account for about 40% of the nation's fuel) are scheduled to be cut in half within the next five years.

"In short, USEC doesn't have the capacity to meet demand now, and supply could be even more restrained in the coming years -- meaning the company won't have to worry about finding customers. And until new capacity enters the market, prices should remain firm.

"And that's just here in the United States. Demand for nuclear power is also on the rise elsewhere around the globe. In fact, the World Nuclear Association is forecasting the addition of 70 new reactors by 2015.

"And keep in mind, USEC has already built up a sales backlog of $6.5 billion, more than triple the revenues it reported all of last year.

"At the moment, USEC is still operating out of its Paducah, Kentucky plant, which relies on an outdated, energy-intensive process. However, the company is rapidly moving forward with the most advanced uranium enrichment plant in the world, a state-of-the-art Ohio facility that will use energy-efficient centrifuge-based technology.

"Unfortunately, rising prices for everything from materials to labor have led to cost overruns, and the budgeted $2.3 billion plant is now projected to cost upwards of $3.5 billion.

"The increased cost has caused many frustrated investors to pull the plug, sending the shares spiraling from $25 down to around $5.

"However, those with a less myopic viewpoint have plenty of reasons for optimism. According to Morningstar, the new centrifuge plant will require far less personnel to run and will operate on 95% less power, both of which should help profit margins expand considerably.

"Furthermore, many old contracts with utility customers (which were indexed to overall inflation rather than faster-growing energy costs) are set to expire, and new contracts in force will allow for more favorable terms.

"USEC is a classic Ben Graham pick. The company is now trading at just five times trailing cash flows, offers a stable earnings outlook, and has a healthy balance sheet sporting $161 million ($1.46 per share) in net cash.

"And since the most recent financial snapshot, the company just paid $5 million to acquire a 74-acre uranium enrichment facility in Tennessee with an assessed value in excess of $13 million.

"Perhaps most important, net tangible assets have risen 45% over the past two years and currently stand at $1.3 billion, or roughly $11.84 per share -- meaning the stock is trading at less than half of its book value."

Deere & Company (DE)

Deere & Company (DE) just reported a decent quarter (see conference call transcript) and is now a buy on any dips simply due to its positioning in one of the hottest secular growth stories I've ever seen: agriculture.

Rejuvenation of spot uranium price predicted for 2H 2008

Haywood Securities says uranium demand will “manifest as a technology-driven nuclear renaissance across a growing number of countries for generations to come.”Author: Dorothy Kosich
Posted: Friday , 06 Jun 2008

RENO, NV -

In their Uranium Industry Report published Thursday, Haywood Securities forecasts primary uranium production at 113.5 million pounds this year, which is well below reactor demand as secondary uranium sources dwindle.

Haywood predicts that the second half of 2008 will see a rejuvenation of the spot price.

Meanwhile, demand continues to outstrip primary supply, while a sustained injection of capital is needed to meet required primary production increases, according to Haywood.

In the report, Haywood analyst Geordie Mark noted that production costs have increased across the sector with the uranium price representing only a small fraction of operating costs.

The World Nuclear Association had earlier forecast uranium production of 124.8 million pounds of U₃O₈ this year, which had been projected to be a 16.5% increase on 2007 production. However, Mark said that, "based on the stilted flow of supply to venture on stream thus far due to various technical and infrastructural impediments, it is anticipated that 2008 production will rise only moderately above 2007 production."

Mark attributed the drop in production to: 1. ongoing production pressure within the sector; 2. Uncertainty of power and acid supply; and, 3. Technical nuances of bringing new production on-stream. "Consequently, these factors provide greater potential for upward pressure on the spot price."

Haywood asserted that 2008 primary production "will continue to fall short of future reactor demand. Thus, the entire sector will be ever more reliant on dwindling secondary supplies that progressively become more expensive, as well as technically, and politically difficult to extract."

"These factors will continue to support uranium prices into the future, where geopolitical interests will become ever more focused on security of domestic supply," Mark suggested. "This is particularly pertinent given that the major producers (Canada, Australia, and Kazakhstan) have little domestic demand."

"Primary uranium production has failed to deliver at estimated forecast rates over the last few years, and 2008 appears to be no except with Q1 production data being lower than either the forecast estimates and/or the previous quarter for a range of operations owned by Cameco, BHP Billiton, Denison Mines, Energy Resources, Australia, Paladin Energy, AngloGold Ashanti, Uranium One and Uranium Resources.

LONGER TERM OUTLOOK

Haywood asserts that the public's quest for a cheap, cleaner alternative to hydrocarbon-based energy production is being met "with a measurable change in view and broader acceptance of nuclear power generation by the general populace.

"Popular acceptance equates to a shifting political outlook on nuclear policy leading to potential changes in nuclear power production policy in both: countries ramping down future production (e.g., Sweden and Germany, as well as those countries considering a nuclear future. These motions are leading to a shift, a rebalance in sources used for future energy supply leading inexorably to a greater role for nuclear energy; and a sustained nuclear renaissance."

Nevertheless, Mark acknowledged that "future growth is at a bottleneck that continues to narrow and lengthen due to infrastructural impediments, political and NGO engagement, and an over reliance on second source material."

Haywood advises that, in the midterm, increased uranium production capacity is going to be largely derived by the expansion of current mines, or the exploitation of deposits in currently producing countries, such as Kazakhstan, the United States, Canada and Australia. "This is primarily due to infrastructural, regulatory and community support that is in place to expand and/or develop mines in locations with a ready draw on personnel currently engaged in mining," Mark suggested.

New long-term nuclear capacity will be driven mainly from China, India, Russia, and the United States, Haywood suggests. The Gulf States, mainland Europe, Africa and other counties will also increase nuclear generating capacity at a smaller rate

In their report, Haywood predicts that the next uranium companies to move to producer status within the next three years will originate from U.S. operations. "The rationale is that the USA was the primary producer of the world's uranium, and thus is a producer with a regulatory framework and a well established infrastructure that can be employed to bring projects into production rapidly," according to Mark.

The U.S. uranium projects may be small at under 2 million pounds of U₃O₈ of annual production. The mostly likely states that will experience increased production are Colorado, Utah, Wyoming and Texas, Haywood predicts. Despite this production, the U.S. will still have significant need for uranium.

In the meantime, Haywood forecasts that primary production to 2015 will continue to rely on secondary supplies, "which is unsustainable, and particularly acute in an environment seeking to expand nuclear energy capacity."

Study sees a uranium price lift ahead as buyers venture back

A just-released and detailed quarterly report on the global uranium scene estimates that the current uranium price of $US60 a pound – down 15% from March end – will rebound to around $US75/lb.

Author: Ross Louthean
Posted: Friday , 30 May 2008

PERTH -

Sydney-based Resource Capital Research (RCR) believes that a perceived recovery in the uranium price in the next quarter is linked to signs of improved market sentiment for uranium equities both on the Australian and Canadian bourses.

RCR said the industry average, long term uranium price was now estimated at $US90/lb, down $US5/lb from where it had held firm for nearly 12 months to March 2008.

RCR's senior analyst, John Wilson, said positive market sentiment has returned, driven by indications the spot uranium price is about to head up, combined with relative stability in the equity markets following the sub prime rout.

Forward indicators (fund implied price) currently indicate an expectation for an upward correction to the uranium price to around US$75 (+25%). In the past 3 months the fund implied price has ranged from US$57/lb to US$90/lb. According to recent market commentary by Trade Tech "[uranium] buyers are beginning to venture back into the market and sellers are less willing to cut prices".

RCR said the market valuation of Australian companies with one or more uranium projects (266 companies) is up 23% over the past month, up 12% over the past 3 months, and down 8% over the past 12 months.

This compares with a selection of 289 Canadian companies with one or more uranium projects, up 7% over the past month, down 6% over the past 3 months, and down 32% over the past 12 months. The RCR report covers explorers operating in Australia, North America, South America, southern Africa and Mongolia.

RCR echoed a point made several times recently by Mineweb that the Beverley Four Mile uranium project in South Australia -- Heathgate Resources 75%, Alliance Resources (ASX: AGS) 25% -- may beat the Honeymoon in situ recovery (ISR) project in the same region into production. (This is looking more certain now that Honeymoon's troubled owner Uranium One (TSX: UUU) has admitted it may sell Honeymoon so it can focus on remedying problems at its Dominion mine in South Africa and on developing its Kazakhstan projects).

In the past month the majors have mostly demonstrated positive share price performance. Cameco (CCO) is up 10%, Denison Mines (DML) up 21%, Uranium One (UUU) down 3%, Energy Resources of Australia (ERA) up 15% and Paladin (PDN) up 45%.

Planned and proposed construction of new nuclear power reactors worldwide has increased "strongly" in the past two years. From January 2007 to May this year there was an increase of 89 reactors from 222 reactors to 311 reactors (+40%). This compares with 439 nuclear power reactors currently in operation and 36 under construction.

America's Congressional Budget Office reported that nuclear power would be commercially competitive compared to conventional fossil fuel technologies at a carbon price of $US45/t. Rising prices of competing energy sources - both spot oil and thermal coal prices, which spiked over $US130/bbl and $US130/t respectively, reinforces the commercial potential of nuclear energy.

Major issues in the past three months were:

• NamWater (Namibia) announced plans to construct a second desalination plant to support water needs of the growing Namibian uranium industry - commissioning expected 2010 (capacity 25 million m³ per annum). The other desalination plant is already under construction (Areva and NamWater) - commissioning 4Q09 (capacity 20 million m³ per annum) to serve Areva's Trekkopje heap leach project.
• Kazakhstan's new sulphuric acid plant at Balkhash (capacity 1.2Mtpa) is expected to be commissioned this June. Kazakhmys Corporation is building the plant adjacent to its copper smelter. Capacity is expected to be sufficient for KazAtomProm's planned ISR uranium mining needs.

Key corporate developments in the past three months included Bluerock Resources Ltd (TSXV: BRD) starting ore production from the J-Bird project in Colorado in the United States and Hathor Exploration (TSXV: HAT) reporting a significant discovery in the Roughrider Zone at its Midwest NE project in Canada's Athabasca Basin. Intercepts include 15m @ 10% U₃O₈ and 9m @ 10% U₃O₈.

Zambia is expected to issue uranium mining licenses in July. Companies with advanced uranium projects in Zambia include Equinox Resources (ASX: EQN) which released its updated feasibility study for a stand-alone uranium plant at Lumwana and African Energy Resources (ASX: AFR) which released a pre feasibility study for its Chirundu uranium project.

RCR said an enhanced scoping study is expected at Bigrlyi in Australia's Northern Territory, while a market positive on the ASX was the listing of Energy and Minerals Australia (ASX: EMA) with exploration focus on the Mulga Rock Deposits in Western Australia, which had been a major discovery dropped by PNC of Japan about 20 years ago.

Extract Resources (ASX:EXT) expects to announce an initial resource at Ida Dome (Namibia) 2Q08. Globe Uranium (ASX:GBE) expects to complete a scoping study at the Kanyika uranium/specialty-metal project (Malawi) 2Q08. Significant resource upgrade at Kvanefjeld (Greenland, Greenland Minerals - ASX:GGG) May '08 (to 229Mlb U₃O₈, up 104%). An initial resource is expected at Bennet Well (WA, Scimitar Resources, ASX:SIM) 2Q08. Toro Energy (ASX:TOE) expects to complete a PFS at Lake Way/Centipede mid '08 and drilling in Namibia starts 2Q08. Uranex (ASX:UNX) has scoping studies and resource statements expected at Thatcher Soak (WA) and Bahi (Tanzania) 3Q08. West Australian Metals (ASX:WME) expects the next resource statement at Marenica (Namibia), adjacent to Trekkopje, July '08, targeting 35Mlb to 50Mlb U₃O₈.

Strong growth predicted for uranium as global energy demand could rise 50% by 2030

Australian broking house Southern Cross Equities has reiterated a comment attributed to BHP Billiton chief Marius Kloppers that, driven by China, India and developing nations, global energy demand could grow 50% by 2030.

Author: Ross Louthean
Posted: Tuesday , 20 May 2008

PERTH -

A detailed study on energy issues released by Southern Cross Equities has painted a strong growth pattern for uranium for nuclear power and assumes that if uranium mine production grows only by the current 3% per annum then the shortfall in 2030 could be 30,000 tonnes based on China's unrelenting growth continuing.

Southern Cross said the unprecedented structural increase in commodity demand "has coincided with decades of under-investment in productive capacity.

The Sydney-based broking house cited Kloppers' reported statement that current energy supply "is fully utilised" that has resulted in higher prices that are "structural rather than cyclical."

"The significance of this comment should not be under-estimated. We believe this represents a genuine endorsement of our ‘stronger forever' commodity view," Southern Cross' review said.

The report said there is little doubt energy, water and food are globally scarce and that the security of supply for these vital commodities will become a major issue for governments world-wide.

"In this regard currently we are witnessing China through its sovereign wealth fund (or masquerading State-owned vehicles) taking equity stakes in companies supplying strategic commodities.

"There is no doubt that strategic commodities in the form of oil, LNG or uranium are strategic commodities of the highest calibre," Southern Cross said.

In Australia the Rudd Federal Government has committed to a 20% increase in alternate renewable energy use by 2020, as well as plans to reduce CO₂ emissions by introducing a carbon credits trading scheme by 2010.

"We expect (Australian) environmentally-friendly companies with low carbon emissions generating carbon credits will trade at a significant price/earnings premium," the report said.

"Uranium is the ultimate alternate green energy source. It is highly environmentally friendly compared to oil considering that after the initial mining and processing a nuclear reactor emits no CO₂ emissions.

"However, even adjusting for mining and processing, the carbon emissions of nuclear power are less than all renewable energy sources with the exception of hydro-electricity.

"In our view the world continues to have irrational fear of nuclear power."

Southern Cross said the World Nuclear Authority (WNA) reported nuclear reactors supply about 17% of global electricity requirements. In contrast to the rest of the world, Asia is a major nuclear power generator. South Korea and Japan generate 45% and 30% respectively of electricity through nuclear power while the global figure is 18%.

WNA reportedly said China, Japan, India and South Korea will account for 36% of the world's new electricity generation out to 2020, of which nearly 40% will come from nuclear power. But at this stage China generates just 1.4% of its power from nuclear plants and India just 4%. "The upside for uranium as an energy source in these countries is huge."

Southern Cross said right now some investors have been spooked by the spot uranium price falling to the low $US60/lb range, however, unwinding of large speculative positions has played a large part in the fall.

"At current levels, we believe the downside risk for the uranium spot price is very limited. The hedge fund selling has abated.

"In fact, we are hearing that speculative short positions have been unwound with the global power disruptions. In addition, supply remains dependent on secondary sources."

"We believe the spot price is now close to the marginal cost of new production," Southern Cross said.

Inside US uranium markets

The latest uranium marketing annual report from the Energy Information Administration suggests flat US buying volumes for much of the next decade.

Author: Barry Sergeant
Posted: Thursday , 29 May 2008

JOHANNESBURG -

The latest Uranium Marketing Annual Report from the Energy Information Administration (EIA), a US government agency, suggests that US buyers of uranium, some of the biggest in the world, could have played a part in the collapse in spot prices from a manic $138/lb in June 2007, to, eventually, current levels around $60/lb, a level which has not yet demonstrated a bottom.

The latest EIA annual marketing report says that owners and operators of US civilian nuclear power reactors purchased a total of 51m pounds U₃O₈e (uranium oxide equivalent) of deliveries from US government, US suppliers and foreign suppliers during 2007, at a weighted-average price of $32.78/lb U₃O₈e.

The 2007 total of 51m pounds U₃O₈e decreased significantly by 23% compared with the 2006 total of 67m pounds U₃O₈e. On the flip side, the 2007 weighted-average price of $32.78/lb U₃O₈e increased significantly by 76% compared with the 2006 price of $18.61/lb U₃O₈e.

The EIA makes no comment on or analysis of commercial uranium prices, an issue that is compounded, in any event, by parallel term (contract) and spot markets. The EIA defines spot contracts as a one-time delivery (usually) of the entire contract to occur within one year of contract execution (signed date). Long-term contracts include those with one or more deliveries a year following contract execution (signed date), and as such may reflect some agreements of short and medium terms as well as longer term.

Eager to secure maximum possibility of supply, utilities are apparently resigned to holding inventory - stockpiles - of uranium. One factor here is that only 8% of the 51m pounds U₃O₈e delivered to US buyers in 2007 was US-origin; foreign-origin accounted for the balance. During 2007, 13% of the 51 million pounds U₃O₈e delivered was purchased under spot contracts at a weighted-average price of $88.25/lb U₃O₈e. The remaining 87% was purchased under long-term contracts at a weighted-average price of $24.45/lb U₃O₈e.

As of the end of 2007, the maximum uranium deliveries for 2008 through 2017 under existing purchase contracts for owners and operators of US civilian nuclear power reactors totalled 230m pounds U₃O₈e. Also as of the end of 2007, unfilled uranium requirements (not under contract) for 2008 through 2017 totaled 264m pounds U₃O₈e.

These contracted deliveries and unfilled requirements combined, according to the EIA, represent the maximum anticipated market requirements of 493m pounds U₃O₈e over the ten year period. Simply divided, this is roughly the same annually as the 51m pounds delivered to US buyers in 2007. For 2008, the maximum anticipated requirements of owners and an operator of US civilian nuclear power reactors is 43 million pounds U₃O₈e. This suggests a good to high level of standing inventories on US soil.

According to Ux Consulting, a specialist trade consultant, with the focus on term deliveries, uncovered needs shift forward by one year. Ux Consulting says that uncovered demand for 2011 stands at 17.4m pounds U₃O₈e, but jumps to 30m pounds U3O8e in 2012 and reaches its high point of 48m pounds U₃O₈e in 2016.

Ux Consulting and TradeTech this week reported spot prices unchanged from the previous week at around $60/lb. Ux Consulting has also introduced what it calls the "mid-term" market, typically for deliveries beginning one to two years out with deliveries over two to three years.

Ux Consulting says the average mid-term price starts around the mid-$70/lb range, and features base-escalation or stair-stepped provisions. Ux Consulting believes that the supplies for mid-term transactions come from inventories, rather than from new production as is usually the case for term contracts.

This week the term price for U₃O₈e was unchanged at $90/lb for both Ux Consulting and TradeTech.

Teck's transformation

June 1

The latest zinc trade data out of China came as a huge positive surprise to the market and should bode well for a balanced zinc market this year and next, according to Desjardins analyst John Hughes.

Investors Are Diving Into Water ETFs

By Rob Wherry
May 15, 2008

ITT (ITT¹) is well known as a maker of the technology behind modern warfare, from night-vision equipment to radar that detects low-flying cruise missiles to sensors that pick up chemical and biological agents. Some investors may not realize, though, the company makes 39% of its revenues, or $3.5 billion in 2007, from a more mundane industry: water. While soldiers rely heavily on ITT's products on the battlefield, millions of consumers and businesses count on the company's pumps and valves to get H20 to their faucets and factory floors.

To remind investors just how important an industry water is to the global economy — and to its bottom line — ITT tucked a couple of impressive statistics into one of its recent publications. It takes a whopping 62,000 gallons of water to make a ton of steel. The typical automobile requires 39,000 gallons during its manufacturing phase. It takes 3,000 gallons to produce a single semiconductor before it is placed into the nerve center of a computer. In addition, several studies have shown that trillions of dollars of upgrades need to be done to the world's aging water infrastructure in order to keep everything humming right along.

Those big numbers caught the attention of Jim Reardon, president of Peoples Wealth Management in Topeka, Kan. He's one of a growing number of financial advisors who've started using individual stocks, mutual funds and exchange-traded funds to give clients' portfolios exposure to an industry that is booming as global demand for water surges. Of course, making a sector bet, regardless of its growth story, is always filled with risks. But advisors like Reardon are betting water will be a theme that will continue to pay off over the long term.

"I never looked at this as a casino bet," says Reardon. "It's just a fact of life that there is a water shortage."

It's not uncommon these days for the typical portfolio to contain funds that focus on energy or commodities or financial services — the choices are almost endless. While some advisors view those positions with promise, others see them as an easy way to lose a lot of money.

The water business is no different. It's enjoying its day in the sun thanks, in part, to the increasing popularity of the alternative energy investing theme. It has also benefited from the emergence of growing economies in parts of the world like Asia, the global demand on agriculture and the spotlight infrastructure upgrades were put in after last year's bridge collapse in Minnesota and a steam pipe explosion in New York City. However, the water industry is slow-moving, it's expensive to transport the liquid, its use tends to decrease during recessionary times, the industry is fraught with political potholes and water utilities really never know what they are going to run into until they start digging. What was thought to be a pesky leak can turn out to be an all-out system failure.

"It's not something I would ever recommend," says David Hayes, a financial planner in Mount Juliet, Tenn. "My pain threshold is too low."

Reardon, though, recognizes both the risks and the potential rewards. He divides his water investments into what he calls "new world portfolios" — a series of smaller bets that are outside a portfolio's core holdings. In general, these positions would be less than 5% of an entire well-diversified portfolio. We think that's a sound strategy.

Investors could play the water theme by investing in companies like General Electric (GE²), which derives a small portion of its revenues from water-treatment equipment and other products. If investors have time to do homework, they could also explore smaller firms like Itron (ITRI³), a maker of wireless water meters and reading devices. There are also several mutual funds to consider, including Kinetics Water Infrastructure (KWINX⁴), launched last June.

Many advisors are opting to use exchange-traded funds, since their trading flexibility allows them to more easily get in and out of the position. One of the leading water ETFs is the $2.2 billion PowerShares Water Resources (PHO⁵) fund. It owns 35 firms with an average weighted market capitalization of $20.7 billion. The fund was launched in late 2005. Since then it returned 22.2% in 2006 and 16.7% in 2007. Year to date, this ETF is up 1.7%, about five percentage points ahead of the broad market, according to Morningstar. It owns an eclectic collection of water utilities, consulting firms, infrastructure companies and conglomerates. Top holdings include Aecom Technology (ACM⁶), an engineering and construction consulting firm, and Valmont Industries (VMI⁷), which makes irrigation equipment in addition to other products.

Claymore S&P Global Water (CGW⁸) owns a large share of water utilities, both here in the U.S. and abroad. These companies have seen customers' water usage decrease as they do some belt tightening during these tough economic times. Indeed, Aqua America (WTR⁹), a prominent U.S. water utility and a holding of this ETF, has seen its shares drop 18% this year over concerns its earnings were being dinged by macroeconomic issues. At 16 times future earnings, this ETF's portfolio does appear cheap. But it has returned a negative 3.9% this year, almost six percentage points behind the PowerShares product.

Other funds to consider are the PowerShares Global Water Portfolio (PIO¹⁰), an international sister fund to the one above, and the SPDR FTSE/Macquarie Global Infrastructure 100 (GII¹¹). The SPDR offering won't only give you access to water; it will be an effective play on the building and upgrades going on in that industry and in the electricity business, too.

World coal shortfall to grow: Arch CEO

Tue Jun 03 05:58:16 UTC 2008


HOUSTON (Reuters) - The world coal shortfall will last at least two or three years and could reach 70 million tons next year, Arch Coal Inc Chairman and CEO Steve Leer said Monday.
"In 2008, we estimate we're 25 to 35 million tons short across the globe," Leer told the Reuters Global Energy Summit in Houston. "We see that virtually doubling," he added, explaining later he meant by the end of 2009. World production totals about 6 billion tons annually.
Leer said the shortfall has driven recent price increases, with benchmark U.S. coals doubling in the past year to more than $100 a ton, but he declined to predict how high prices might go.
He forecast a strong market for at least two or three years, saying it will take at least that long to ease rail and port bottlenecks in Australia and electric power shortages in South Africa, both key producing countries.
"Delays in infrastructure improvements probably would tend to support a longer time frame," Leer said
Leer said he has been through several booms and busts in his 30 years in the oil and coal business but this one feels different to him.
"The world has never seen 2 billion people go through an industrial revolution, and we're witnessing it right now. It is changing everything. It is certainly changing basic commodity demands and flows," he said.
The United States is in a coal-fired power plant-building boom, despite recent cancellations, he said. "About 4 million tons of annual demand will come on line in 2008, and I think about 20 million tons in each of the next two years," he said.
At the same time, he said, several important coal basins are maturing, in South Africa, Poland and central Appalachia in the United States. "We're seeing some fundamental changes on the supply side," Leer said.
In the United States, Leer said the failure to build more power plants faster is going to put the nation at risk of electricity shortages within five years because demand growth is outstripping supply.
"It's not coal-fired power plants. It's power plants," he said, citing a North American Electric Reliability Council study published last November.
"Right now, over half the U.S. will cross below the 15 percent reserve margin in 2009," Leer said, warning of brownouts and blackouts. "If the economy would slow down appreciably more, I think that would delay that by one year. But it doesn't resolve the issue."
(For summit blog: summitnotebook.reuters.com/)
(Reporting by Bruce Nichols; Editing by Gary Hill)

Coal earnings will be constrained by cost increases, as regulations stall new coal plants

Uncertainty surrounding carbon legislation and capital costs is slowing the development of new U.S. coal plants. Nevertheless, the new plants are expected to match demand lost from closing inefficient coal-power plants.Author: Dorothy Kosich
Posted: Thursday , 05 Jun 2008

RENO, NV -

As U.S. coal producers benefit from tight global markets for both steam and metallurgical coals, Fitch Ratings cautioned that "high consumable prices and labor costs will constrain earnings growth over the new few months. "

In the report, ‘Coal Outlook: Summer Burn, Supply Response', which was released by Fitch Wednesday, Monica Bonar, Director, Fitch Ratings, and analyst Sean Sexton noted that "mining in new or challenging regions can amplify already high maintenance and capital costs."

Constraints to developing new coal mines include high capital costs, the need for sales contracts covering a high portion of new tonnage, and a lengthy permitting process, according to Fitch. While some producers are announcing new projects, the analysts noted that "these have more than two years lead-time and may only replace declining production at existing mines."

While coal producers are benefiting from tight global markets for steam and metallurgical coal, regulatory uncertainty about carbon emissions has stalled plans for construction for many new coal plants, which Bonar and Sexton said, will cap domestic demand in the medium term.

"Stocks are reportedly tight for Northern Appalachian coal, high for Powder River Basin coal, and comfortable for Central Appalachian and Illinois Basin coals, according to the report. However, the analysts predicted that coal company earnings growth will be constrained by cost increases. "Coal producers are experiencing high prices for consumables such as fuel, explosives and steel in addition to high labor costs. Maintenance and capital costs have been on the rise, which can be amplified when mining in new or difficult areas."

While steam coal inventories are reported to be at comfortable levels, contract prices are up. Fitch expects steam coal realization growth to flatten out over the 12-18 months "absent a new supply growth."

Meanwhile, metallurgical coal prices "have blown through expectations on short supply. World growth in demand for metallurgical coal has not been met by a corresponding increase in Australian coal export infrastructure, particularly port and rail," the report said. Currently, prices are settling at $305/mt for the year ending March 31, 2009, with supply not expected to significantly ease until 2010.

The report noted that U.S. steel producers are benefiting from a weak dollar and high transportation costs. "The U.S. metallurgical coal market also benefits from the growth of the Brazilian steel industry."

Fitch said it expects the metallurgical coal market to continue to benefit from tight supply and robust steel demand over the next 12-18 months. "While U.S. metallurgical coal varies by quality, realizations may be up $100/ton on average for the period."

The Energy Information Administration (EIA) expects slow growth in domestic energy consumption, combined with projected increases in wind and hydroelectric power generation, will lead to "virtually flat U.S. coal consumption in 2008 and 2009."

While new U.S. coal plants are being developed, the analysts noted that "it is at a much more modest level than previously anticipated given uncertainties surrounding carbon legislation and capital costs. Fitch expects demand from newer efficient plants to match demand lost from shuttering inefficient plants over the medium term. The EIA's current Annual Energy Outlook does not anticipate incremental demand from net new coal plants until 2020."

The United States is increasingly benefitting from the international coal trade as "European demand for high Btu U.S. steam coal is robust in the longer term as two- and three-year transactions are being completed," according to the report.

"The weak dollar, combined with high freight rates, renders U.S. coal cheaper than South African or Australian coal. In addition, growing internal demand from transitional economic reduces exports from Russia, China and Indonesia," the analysts noted. "Coal trade has been hampered by rail and port constraints in Australia, derailments and power outages in South Africa, and weather and rail constraints in Colombia and China."

Fitch expects the seaborne coal to remain robust.

"While there are indications that European buyers are looking for multiyear transactions with U.S. suppliers, a modest export infrastructure and focus on large domestic demand limit how much exports can grow in the next 12-18 months," Fitch advised. "If U.S. ports can sustain the March 2008 rate of 6.7 million tons, 80 million tons can be reached for the year."

The EIA's most recent forecast is that U.S. coal production will increase 1.1% this year and to remain relatively flat next year. The National Mining Association last month forecast a total demand of 1.218 billion tons of U.S. coal this year, including 80 million tons of exports.

Fitch forecasts that western coal production "may be pulled east as Appalachian production to be pulled overseas. ...Appalachian production should fall given difficulties in gaining valley fill permits as well as changed mine plans associated with avoiding historic mining areas and safety concerns."

The analysts predicted that cost escalation for coal producers this year will range from 5% to 7%. They estimated that underground mining costs have increased between $2/ton and $4/ton in lost productivity associate with new federal mine safety regulations.

Nevertheless, while 2007 was a challenging year for U.S. coal producers and the financial markets, Fitch noted that most coal miners have worked to improve their liquidity. "

"Fitch expects the coal producers under view to continue to balance capital spending with free cash flows for the most part and maintain healthy capital structures. We note that companies with weaker capital structures are selling common stock or converting debt to common stocks and generally working to shore up liquidity."

The analysts expect coal mining company consolidation to "continue on a modest scale and generally involve acquisition and sale of reserves."

POT MOS RIG FCX CSX: 5 promising stocks for patient investors

In a challenging market amid an uncertain U.S. economic landscape, identifying long-term, promising investment opportunities becomes a difficult task. Further, to make the investment equation even more challenging, there's election risk, as well, with the 2008 U.S. Presidential election five months away.

Still, risk-adjusted investment opportunities exist. Accordingly, here's a 'Fab Five' that should rank with the best the equity markets have to offer, 3-5 years out.

(Note: Don't buy these stocks if you're interested in a short-term trade of six months or less. These are longer-term investments where the goal is a double-digit, average, annual, total return on equity over 3-5 years.)

Potash (NYSE: POT). Current Price: $212, p/e 47. Revised Stop Loss: $170. Potash remains the best of a very good fertilizer bunch, due to its 20% global market share in the namesake fertilizer. Consider buying POT on a pull-back to $202-203, but keep in mind Potash may not retreat to that level.

Mosaic (NYSE: MOS). Current Price: $132, p/e 40. Revised Stop Loss: $97. Mosaic also is well-positioned in phosphate and crop nutrients. Further, the fact that 66% of its revenue is internationally based is especially appealing, given the U.S. economic slowdown.

Transocean (NYSE: RIG). Current Price: $144, p/e 10. Revised Stop Loss: $110. RIG offers deepwater oil drilling services in all regions of the world, and it's an oil-thirsty world.

Freeport-McMoRan (NYSE: FCX). Current Price: $114, p/e 14. Revised Stop Loss: $69. Copper / gold / molybdenum miner Freeport is one of a handful of companies that have the economies of scale to compete in the global mining sector of the early 21st century, and it boasts impressive clients, to boot. Consider buying FCX on a pull-back to $111-113, but keep in mind Freeport may not retreat to that level.

CSX Corp. (NYSE: CSX). Current Price: $66, p/e 23. Revised Stop Loss: $48. Ride the railroad resurgence with this superior trade / commodity / freight transport company. The rails are in the transportation sweet spot: truck transport costs are rising with fuel costs, and the U.S. highway system is inadequate, with increased congestion likely, pending future investment.

Top Pick: Potash.

Chasing Value: You want power, buy power -- Huaneng Power HNP

One of my more avid readers and obviously another believer in Huaneng Power Intl ADS (NYSE: HNP) asked why the stock price was so erratic lately. I find that question strange given the following two year chart that indicates it is not behaving any different than it always has, it fluctuates.


I elected to show the two year chart because it is the closest to the length of time that BloggingStocks.com has been around. During that time I have written numerous stories about the company and it is one of our top five holdings. There does seem to have been a lot of volatility recently as the the short term chart indicates, where the stock moved 5% to 10% in 48 hour periods, but making anything of it is just wild speculation.



Last August I posted Volatile Markets: Huaneng Power (HNP) is my pick for the next 50 years discussing the strength of utility stocks and even showing how this value play had beaten Google, the "growth" stock. I also have made a big deal about utility stocks and dividend paying stocks in one of my early stories Dow Jones Utilities BEAT Industrials with ease!.

It is human nature to want to know why something occurs. This is exaggerated when you have invested heavily in something, be it your stocks or your kids.

The bottom line is that stocks jump around for a multitude of reasons. Sometimes an earnings report or industry news. Sometime because major investors are making a play and volume is up. It could be the government allowed for price increases or decreases or changes in subsidies. It could also be that something corrupt is happening behind the scenes -- heaven forbid -- and that you cannot find out about until it is too late usually.

The last issue is of course the most disconcerting and there was news reported by the China Daily on Monday that makes one wonder, Huaneng Power says chairman resigns. However, if I let my imagination run wild with each news story or press release I could not invest in stocks at all.

We originally got into HNP at $26.35 in May of 2006. We followed up into the $50's and back down where we have been acquiring more, most recently at $28.00 per share. It is trading around $35 mid-day today which is a nice return in a short period of time and I must add that the current 5% dividend yield (20% higher for me) does allow one to be a very patient investor.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of HNP.

Potash (POT): Fertilzer 'breakout'

"Potash (NYSE: POT) scored a technical breakout by rising above $210," says technical expert Leo Fasciocco. In his Ticker Tape Digest, he says, "With earnings set to soar the stock now targets a move to $265."

"Postash, based in Canada, produces fertilizer. It produces phosphate and nitrogen from 12 facilities in the United States and South America. Fertilizer stocks have been strong due to rising profits reflecting strong demand for their products and rising prices.

"A long term chart shows an extraordinary bull market advance with the rising 170% the past 12 months versus an 8% decline in the S&P 500 index. Now, the stock has broken out from a seven-week flat base. The move carries POT to a new high on expanding volume.

"The stock's recent action showed aggressive institutional buying. The momentum indicator is solidly bullish and the accumulation - distribution line has hit a new high and compliments the price action. The key will be for POT to follow through on the upside with expanding volume.

"Strong demand for fertilizer products is sending POT's earnings soaring. This year, analysts project a 222% surge in net to $10.95 a share from $3.40 a year ago.

"The stock sells with a price-earnings ratio of only 19. We see that as low given projected earnings growth of 51% next year with net climbing to $16.56.

"Based on 2009 net, the stock has a p/e ratio of just 7. So, on a valuation basis POT should have more to go on the upside. Also, the stock is positioned for a possible stock split which could spark a move higher. Overall, POT remains 'hot.' We are targeting the stock for a move to 265 within the next few months. A protective stop can be placed near 205."

Mosaic: The fertilizer story

As food prices rise, fertilizer producer Mosaic Co. is cashing in. And despite the massive runup in its shares, they actually look underpriced.

By Jon Birger, senior writer

(Fortune) -- How deep do you have to dig to find last year's best-performing FORTUNE 500 stock? Try a mile underground.

That's where I was one morning this past March, riding shotgun with Mosaic Co. mine superintendent Murray Schlamp as he navigated his pickup through an underground labyrinth so vast that we had to drive nearly half an hour just to get to the latest drilling site. (How we didn't get lost, I'll never know.)

Located in Esterhazy, a 2,500-person hamlet in the Canadian province of Saskatchewan, the mine produces potash--a reddish, crystalline mineral used as fertilizer by farmers all around the world. Esterhazy is the world's largest potash mine, and Mosaic (MOS, Fortune 500) is the second-leading producer of potash and the leading producer of another key fertilizer, diammonium phosphate, otherwise known as DAP.

Not so long ago, those designations weren't worth much. As recently as 2006, Mosaic was losing money and was considered by analysts and investors to be one of the agriculture sector's weakest companies.

"The returns in fertilizer were very poor, and there just wasn't enough money to go around for all the players," says Mosaic CEO Jim Prokopanko, a former Cargill executive who took Mosaic's reins in January 2007.

Food riots raging in Haiti and Egypt demonstrate how much has changed. With global food demand rising and biofuels consuming an ever-bigger slice of the grain supply, the prices of corn, wheat, rice and soybeans have all doubled or tripled since 2006, driving up demand for fertilizer. Along the way, Mosaic has become to the "dot-corn" era what Cisco was to dot-com: the pick-and-shovel stock of a new boom. (You know the cliché: it wasn't the prospectors who got rich during the California gold rush but the folks who outfitted them.)

Since 2006, potash prices have increased 190% while prices for DAP have risen 400%. Mosaic's share price and earnings growth have followed similar trajectories. Mosaic's stock gained 342% last year--the best showing of any Fortune 500 company--and it's up another 25% so far in 2008.

As for Mosaic's earnings, they were up 1,134% in the quarter ended February 29th, to $521 million, from $42 million in the same quarter last year. That three-month profit tally was more than Mosaic earned in all of 2007, 2006, and 2005 combined. Yet Merrill Lynch analyst Don Carson declares in a recent report that while Mosaic's latest earnings rise is "significant, it will appear minor when compared to the margin expansion in coming quarters." Carson's rationale: Mosaic was selling both potash and DAP for less than half current market prices last quarter, on account of a time lag in its sales contracts.

Indeed, Mosaic's earnings are growing so rapidly that the stock looks underpriced despite the massive run-up. Its forward P/E--the ratio of Mosaic's stock price to next four quarters of projected earnings per share--now stands at 14. That's a shade lower than the forward P/E of the S&P 500 (whose collective earnings are projected to be up only 7%, vs. 160% for Mosaic). It also represents a discount to ag-sector peers Syngenta (SYT) (18 P/E), Potash Corp. of Saskatchewan (POT) (18), and Monsanto (MON, Fortune 500) (30).

Higher food prices, more demand for fertilizer

Valuation isn't the only reason Mosaic remains an attractive long-term holding. Fertilizer prices are tied to grain prices, and it's hard to see a scenario whereby food prices don't keep rising long-term, even if there are some dips along the way.

"If you look at the supply and demand numbers, you can see there's a lot of pricing momentum for fertilizer companies," says Robb Parlanti, a senior portfolio manager at Turner Funds, which owned 1.6 million Mosaic shares at year-end.

While much of the credit (or blame) for rising food prices gets heaped on ethanol, Prokopanko thinks ethanol is getting a bad rap. "It's still a food-driven market," he says. World population and world food demand are both growing at a 1.25% annualized rate, whereas about 5% of world grain and oilseeds are used to make biofuels. "So even if you were to take biofuels out of the equation," he says, "within four years that hole would be filled up with food demand."

The growth in food demand may actually outstrip population growth going forward. Why? The urbanization of the developing world--formerly rural populations in India and China adopting a more middle-class lifestyle--will lead to greater consumption of beef, pork and chicken. Thought it sounds counterintuitive, shifting from grains to meat actually increases demand for grains. For every pound of beef produced, a steer must consume approximately 15 pounds of grain. The ratios are only slightly lower for pork and chicken.

The impact of this shift can already be seen in the sharp decline in world food stocks, which are at their lowest levels in decades. Back in 1986, farmers grew 30% more grain and oilseeds than the world population consumed. This year, the so-called stock-to-use ratio will be 12%, even less in India and China. "At 10%, that means you have 36.5 days of grain left in the world," says Prokopanko. "You probably have more food in your refrigerator and pantry."

The only solution, he says, is to grow bigger crops. Whichever way that is accomplished--via higher-yielding seeds or by putting more land into farm production--it's going to require more fertilizer. "These plants are going to grow more vigorously," Prokopanko says of the latest generation of genetically-modified seeds. "My view is that GMO is going to require more crop nutrients to feed these plants."

GMO isn't the only advance in ag technology likely to boost fertilizer demand. So too will the push for cellulosic ethanol that was codified in the 2007 energy act. One goal of the act is to alleviate pressure on the food supply by creating a new kind of ethanol derived from agricultural waste (corn stalks, for instance) or from low-maintenance crops like switchgrass that can be grown on marginal farmland.

Prokopanko is dubious about making cellulosic ethanol from switchgrass: He believes the cost of bailing and transporting switchgrass will prove uneconomic. Corn stalks (also known as corn stover) may be a more viable feedstock, but there's a reason farmers traditionally leave stover on their fields after harvest.

"There is some residual phosphate and potash in it," says Prokopanko. "It's a closed system--you take the corn stover off the field, the soil deteriorates and the nutrients need to be replaced." In other words, any shift towards cellulosic ethanol would create even keener demand for fertilizer.

All this begs a key question: Won't rising demand and sky-high prices lead to new fertilizer supply coming online and eventually to lower prices? Over time, it probably will. But the barriers to entry for newcomers are high. The mine shaft in Esterhazy cost $50 million when it was completed in 1962. "To replicate that today would be $500 million--just to put the shaft down," says Prokopanko. "And it's going to take you five years minimum to develop a new mine complex and a mill and all the infrastructure. Total, it would probably cost you $2.5 billion." (Mosaic recently announced mine-expansion plans that will increase its annual potash production from 10 million metric tons to 17 million, a project expected to cost $3.2 billion over 12 years.)

This is not to say that Mosaic's stock is without risks. Agriculture remains a cyclical industry, and while the new floor for corn, for example, may prove to be $3.50 a bushel instead of $1.50, any big drop in grain prices would temper demand for fertilizer.

There could also be short-term pressure on Mosaic stock if its biggest shareholder--Cargill--were to sell. Mosaic was formed in 2004 by the merger of publicly traded IMC Global (which at the time was in some financial trouble) with Cargill Crop Nutrition, a spun-off unit of Cargill. The deal has been a big winner for all involved--Mosaic stock is up tenfold since the merger--but the payoff for privately held Cargill has been otherworldly.

IMC Global contributed all of Mosaic's potash reserves and about two-thirds of its phosphates, yet Cargill wound up with two-thirds of Mosaic's common stock. "The stupidest thing the former IMC Global ever did was agree to the merger with Cargill," says one Wall Street analyst who tracks Mosaic.

Cargill's stake in Mosaic is now worth more than $35 billion, and analysts are a little worried about what might happen to Mosaic's share price should Cargill decide to cash out, thereby flooding the market with a secondary offering.

Prokopanko won¹t speak for his former employer, but he does have a plan that could alleviate pressure on Cargill to take profits. Were Mosaic's credit rating to be upped to investment grade--an upgrade that could come "within the next few quarters," according to Standard & Poor's--it would free the company from debt covenants that currently prevent Mosaic from paying dividends. "Given tight fertilizer markets and very strong cash flow," reports Fitch Ratings, "the company continues to pay back debt and will likely reach its goal of achieving an investment grade rating in 2008/2009."

Once Mosaic gets an investment grade rating, Mosaic will likely start paying a dividend, Prokopanko says.

Add a dividend to triple-digit earnings growth, and Mosaic might even repeat as the FORTUNE 500's stock market champ

Learning to trade stock

Baruch: My Own Story" which I recommnd especially for those of you looking for a book to take with you on your summer vacations.

Although I've provided several quotes from Bernard Baruch through the years, here are some notes that I've taken from reading about him and his market wisdom. Enjoy!

• Baruch started out as most traders do - i.e. losing lots of money because he lacked the knowledge, experience, & discipline. "You have to lose money in order to better yourself."


• Real success in the market takes time and money. Unfortunately "most people view the market as the place where the miracle of great and quick riches can be performed with little effort."


• Overtrading and holding too many positions in his early years caused Baruch to go broke many times before he developed the discipline to succeed.


• A successful speculation is "a man who observes the future and acts before it occurs." Acting swiftly in the market is important.


• After losing money from the recommendation of others, Baruch focused himself on the facts. "One must search through a maze of complex and contradictory details to get to the significant facts.....Then he must be able to operate coldly, clearly, and skillfully on the basis of those facts." The challenge for the successful speculator is "how to disentangle the cold hard facts from the rather warm feelings of the people dealing with the facts." Moreover, "if you get all the facts, your judgment can be right; if you don't get all the facts, it can't be right."


• Be honest with yourself and expect to be wrong as many times as you are right. "If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong." Cutting losses quickly was THE most important trading rule.


• Don't underestimate the power of thinking. "During my eighty-seven years I have witnessed a whole succession of technological revolutions. But none of them has done away with the need for character in the individual or the ability to think."


• If your stocks are keeping you awake a night worrying about them, you should sell them to a "sleeping point."


• The way to truly succeed in the market is to devote oneself full time to the task. "Because of the extreme challenge, one must commit full attention to it." Market speculation is "no different than trying to be a successful doctor or lawyer....you simply must devote yourself full time to the study of your craft."


• Through experience, Baruch learned the golden rule - never take stock tips from others. Self-reliance and "doing one's own thinking" is a must.


• Baruch found it best to keep silent about his positions and trades and he believed it was "best to trade alone." When he retired from A.A. Housman & Company and go out on his own, Baruch did so because he thought it was best to trade independently and remain focused in order to achieve the greatest profits. "Most of the successful people I've known are the ones who do more listening than talking."


• According to Baruch, the stock market does not determine the health of the economy but "rather reflects it." The ability to understand this is an important skill.


• Baruch would often trade both sides of the market - long & short. "Having flexibility should not be underestimated."


• On risk, "there is no investment which does not involve some risk and is not something of a gamble." Moreover, "what we can try to do perhaps is to come to a better understanding of how to reduce the element of risk in whatever we undertake."


• Baruch did not believe in diversification, but that it was "better to have a few stocks and to watch them carefully."


• Having a "good supply of cash on hand at all times in reserve is important" to take advantage of market declines and major crashes.


• He believed that traders should focus on one thing at a time. He thought no one could be an expert at too many things. He liked to focus on "one thing at a time, perfect it, and do it well."


• Baruch believed the two main mistakes that contributed to his early losses were the same mistakes most investors make which are: 1) "they know too little about the company's management, earnings, prospects, and possibility for future growth," and 2) "they tend to trade beyond their financial capital capacity."


• Baruch was a fundamentalist versus technical focused investor. In essence he required strong real assets of the company (cash and properties), that the company produced or performed something that is needed and valued, and that it had good management.


• "Successful speculation requires staying on top of changes in industries and companies that either create new industries or improve on existing industries. The majority of your profits will come from these two.....The shrewdest traders throughout history all adapted the skill of reactionary change, as the market constantly presents new and different opportunities."


• What drives stock prices are human reactions. Ironically, the key to successful speculation is to remove our decisions from our emotions. "Without control over your emotions, there is very little chance for profitable success in the stock market."


• Baruch often described the market as a thermometer and the economic environment as the fever. "The market does not cause economic cycles but merely reflects them and the judgments of what traders believe business and the future will be like."


• He believed no one could sell at the top and buy at the bottom (both for stocks and the market itself). "Don't try to buy at the bottom and sell at the top. It can't be done except by liars." That said, Baruch said that through all of his time and research, he would develop a "feel" for when it was time to reduce positions. "I made my money by selling too soon." While he didn't have sell rules per se, he developed more of a sense that one gets when they trade for many years and follow the market with intense study.


• "It is much harder to sell stocks correctly than to buy them correctly." Because of the emotional aspect of trading, if a "stock went up, the average investor would hold because he wants more gains - he's exhibiting greed. If the stock declines, he also holds on and hopes the stock will come back so he can at least sell and break even - he's hoping against hope." Baruch worked hard to avoid these emotions by recognizing mistakes early and taking immediate action to own up to his mistakes quickly.


• Baruch believed that you had to take responsibility for your decisions. "Do not blame anybody for your mistakes and failures." In addition, he blamed most of his losses on the failure of judgment and taking time to think. "Whatever failures I have known, whatever errors I have committed, whatever follies I have witnessed in private and public life have been the consequence of action without thought."


• It is important to "follow what the market is currently doing as opposed to following what one might personally think the market should do." As he said, "Every man has a right to his opinion, but no man has a right to be wrong in his facts."


• Knowing your biases and weakness are important. "Only as you do know yourself can your brain serve you as a sharp and efficient tool. Know your own failings, passions, and prejudices so you can separate them from what you see."


• Baruch was highly regarded and well-respected, but he frequently practiced humility and understood the challenges of the market. He is often quoted with the saying "The main purpose of the stock market is to make fools of as many men as possible."


• Taking time away from the market is necessary. He took many vacations and used the downtime to "reflect on one's past transactions." For Baruch, this time away was important so he could have the peace of mind and concentration to reflect and improve his abilities. He devoted lots of hours and effort to examining past trades to find out why he lost money.