Why Three Analysts Believe This Natural Gas Small Cap Is Undervalued

Source: Streetwise Reports   05/26/2020

The firm’s project in Brazil has a contract price that is twice the natural gas price in the U.S.


Alvopetro Energy Ltd.’s (ALV:TSX.V; ALVOF:OTCQX)
Caburé natural gas discovery in Brazil is ready to come online and the firm just amended its long-term sales agreement with Bahiagás, the distributor for the state of Bahia, to double its Firm deliveries.

Bahiagás, which is extending the pipeline 15 kilometers and constructing a new City Gate—gas receiving station—has agreed to increase its natural gas deliveries from Alvopetro to 300,000 cubic meters per day (10.6 million cubic feet per day), reduce any potential supply failure penalties through 2020, and prepay Alvopetro for 120,000 cubic meters a day for the months of May and June, a figure roughly equivalent to US$1.1 million. Alvopetro agreed to provide a 15% discount on the prepaid natural gas in May and June.

“Once the Caburé field is on production we expect ALV to generate significant free cash flow to fund an extensive drilling program in 2021.” – Bill Newman, Mackie Research

Based on a floor price of US$5.20/million BTU (mmbtu), Alvopetro expects gross revenues in 2020 to total US$11.3 million, and expects EBITDA of approximately US$7.5 million for the second half of the year.

These actions were favorably viewed by analysts covering the company. Analyst Bill Newman of Mackie Research wrote on May 15, “We view these amendments as positive and we maintain our SPECULATIVE BUY recommendation and our $1.65 target price.” Alvopetro shares are currently trading at around CA$0.80/share.

Hannam&Partners research analyst Anish Kapadia wrote on May 15, the “Gas Sales Agreement amendment provides further security and reduces risk even further.” Concerning Alvopetro’s contracted price of US$5.20/mmbtu, Kapadia stated, “to put this price in context, global spot gas prices are currently trading at or below US$2/mmbtu. From August to December, ALV will likely receive the floor pricing in the contract, which remains a very attractive US$5.2/mmbtu, generating an operating netback of >US$4/mmbtu.” The firm calculates a risked net asset value of C$1.67/share, “which includes the value for development upside, potential tolling revenues and one exploration prospect. We estimate that Alvopetro is trading on 2x EV/EBITDA in 2021, with a ~30% FCF [free cash flow] yield.”

Trickle Research senior analyst and managing partner David L. Lavigne wrote on May 25, “. . .we think Alvopetro has arrived. In retrospect, management has delivered on the project and that should translate into growing cashflow and better corresponding valuations. . .As a result of the recent milestones, we are establishing a new (higher) 12-24 month price target of $1.25 per share.”

Alvopetro has been developing the Caburé gas field for several years, when it discovered that the deposit crossed a block boundary. “In Brazil, when that happens, you unitize the discovery with your neighbor, which we completed in April 2018,” Alvopetro CEO Corey Ruttan told Streetwise Reports. “Almost in parallel, we signed a gas sales agreement with Bahiagás to monetize the natural gas. As opposed to an oil project, where you basically bring the well on production and take it to a refinery, for a gas project, the lead times are much longer: you have to identify a market, build the infrastructure to connect your discovery to the market and then you sell the gas.”

The company has built a gas processing facility; Bahiagás is extending its pipeline and constructing the City Gate at Alvopetro’s physical plant to transport the gas from the field to the market, and expects to complete construction in June. “We’ll be starting production from our share of the unitized field at the end of this quarter,” Ruttan said.

“This project is really the first of its kind in Brazil,” Ruttan explained. “No independent company has built a gas processing facility and signed a gas sales agreement with a local state distribution company, to my knowledge. We’re leading the charge in Brazil on its initiatives to open up and expand the natural gas market in Brazil. So there’s certainly a lot of support for the project at the government and regulatory levels.”

The contract with Bahiagás blends three different international benchmark commodity prices to calculate the price of the natural gas: Brent oil, Henry Hub natural gas and the UK NBP, national balancing point gas price. “The contract has a floor and a ceiling, that insulates us from massive price shocks. Our price is much higher than what we are seeing in North America right now. Even at our floor pricing, which is just over US$5.20 per MMBTU, that’s roughly 2.5 times what producers in the United States are getting.” Ruttan said.

As far as doubling the firm delivery volume, Ruttan explained that when the contract was set up, “we had partly firm deliveries and partly flexible or interruptible volumes. Given that our price is more attractive for consumers than Petrobas’, our assertion was being able to deliver flexible volumes was a beneficial thing for us. Now with the pandemic, there has been a lot of demand destruction, hopefully just on a temporary basis, but we thought it prudent to lock in those volumes and make sure our supply has a firm commitment associated with it. The revised contract also allows us to significantly reduce our potential supply failure penalties, so we can do that on a relatively low risk basis.”

The amended agreement provides a guaranteed level of revenue. “When you combine that with the floor pricing, it allows us to be free cash flow positive at a time when most companies are shutting in production, realizing massive reductions in their share prices, and are looking at being free cash flow negative,” Ruttan said. “I think we’re uniquely positioned. At these production volumes, we can basically keep a flat production profile for 8 to 10 years with virtually no maintenance capital.”

In addition, there is room for Alvopetro to expand. “There’s a lot of excess capacity in that City Gate so that we can we can grow our business,” Ruttan said. “Our business plan is, step one, get first cash flow from this discovery, and that will get us close to 11 million cubic feet per day. The plant capacity that we have built is for 18 million cubic feet a day, so our second step will be to ramp that production up toward 18 million cubic feet a day because we can do that at virtually no incremental cost. It’s basically fixed costs for us so that next 7 million cubic feet per day is quite profitable.”

Bahiagás City Gate has a capacity of handling 70 million cubic feet a day. “We’d like to capture as much of that as possible and it would be relatively straightforward for us to double the size of our processing facility,” Ruttan said. “So we’d like to build the business into 36 million cubic feet a day as a medium- to longer-term step.”

Next up is an early-stage gas project, Gomo, that Alvopetro is working to prove up. “We have an inventory of exploration prospects. In our current portfolio we’ve got eight conventional prospects, mostly gas weighted,” Ruttan said.

“This is the only independently owned facility capable of delivering sales specified natural gas. We think there’s a lot of opportunities here from a business development perspective,” Ruttan concluded.

Mackie analyst Bill Newman notes that Alvopetro will be “self-funding once Caburé is on stream. ALV has reprocessed over 1,200 km2 of 3D seismic and has a current inventory of 8 conventional oil and natural gas exploration prospects. Once the Caburé field is on production we expect ALV to generate significant free cash flow to fund an extensive drilling program in 2021.”

Trickle Research’s David Lavigne stated on May 25, “…there is the potential for additional increases to Caburé reserves as well as perhaps the delineation of Gomo reserves and/or others that may emerge. Each of those opportunities could result in added reserves and associated value. Moreover, as we covered in the initial research, we believe the completed infrastructure could lead to additional midstream opportunities for Alvopetro as well. To translate, we expect other opportunities, perhaps on various fronts, to emerge as we move forward. In our opinion, those and other emerging opportunities coupled with management’s now proven ability to accomplish what they set out to do could provide a basis for additional valuation legs for the stock price.”

Alvopetro has approximately 88.4 million shares outstanding, and officers and directors own a little over 8%.

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Disclosure:
1) Patrice Fusillo compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: Alvopetro Energy. Click here for important disclosures about sponsor fees. An affiliate of Streetwise Reports is conducting a digital media marketing campaign for this article on behalf of Alvopetro Energy. Please click here for more information.

3) Comments and opinions expressed are those of the specific experts and not of Streetwise Reports or its officers. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
4) The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.

( Companies Mentioned: ALV:TSX.V; ALVOF:OTCQX,
)

Source: Streetwise Reports   05/26/2020

The firm's project in Brazil has a contract price that is twice the natural gas price in the U.S.


Alvopetro Energy Ltd.'s (ALV:TSX.V; ALVOF:OTCQX)
Caburé natural gas discovery in Brazil is ready to come online and the firm just amended its long-term sales agreement with Bahiagás, the distributor for the state of Bahia, to double its Firm deliveries.

Bahiagás, which is extending the pipeline 15 kilometers and constructing a new City Gate—gas receiving station—has agreed to increase its natural gas deliveries from Alvopetro to 300,000 cubic meters per day (10.6 million cubic feet per day), reduce any potential supply failure penalties through 2020, and prepay Alvopetro for 120,000 cubic meters a day for the months of May and June, a figure roughly equivalent to US$1.1 million. Alvopetro agreed to provide a 15% discount on the prepaid natural gas in May and June.

"Once the Caburé field is on production we expect ALV to generate significant free cash flow to fund an extensive drilling program in 2021." - Bill Newman, Mackie Research

Based on a floor price of US$5.20/million BTU (mmbtu), Alvopetro expects gross revenues in 2020 to total US$11.3 million, and expects EBITDA of approximately US$7.5 million for the second half of the year.

These actions were favorably viewed by analysts covering the company. Analyst Bill Newman of Mackie Research wrote on May 15, "We view these amendments as positive and we maintain our SPECULATIVE BUY recommendation and our $1.65 target price." Alvopetro shares are currently trading at around CA$0.80/share.

Hannam&Partners research analyst Anish Kapadia wrote on May 15, the "Gas Sales Agreement amendment provides further security and reduces risk even further." Concerning Alvopetro's contracted price of US$5.20/mmbtu, Kapadia stated, "to put this price in context, global spot gas prices are currently trading at or below US$2/mmbtu. From August to December, ALV will likely receive the floor pricing in the contract, which remains a very attractive US$5.2/mmbtu, generating an operating netback of >US$4/mmbtu." The firm calculates a risked net asset value of C$1.67/share, "which includes the value for development upside, potential tolling revenues and one exploration prospect. We estimate that Alvopetro is trading on 2x EV/EBITDA in 2021, with a ~30% FCF [free cash flow] yield."

Trickle Research senior analyst and managing partner David L. Lavigne wrote on May 25, ". . .we think Alvopetro has arrived. In retrospect, management has delivered on the project and that should translate into growing cashflow and better corresponding valuations. . .As a result of the recent milestones, we are establishing a new (higher) 12-24 month price target of $1.25 per share."

Alvopetro has been developing the Caburé gas field for several years, when it discovered that the deposit crossed a block boundary. "In Brazil, when that happens, you unitize the discovery with your neighbor, which we completed in April 2018," Alvopetro CEO Corey Ruttan told Streetwise Reports. "Almost in parallel, we signed a gas sales agreement with Bahiagás to monetize the natural gas. As opposed to an oil project, where you basically bring the well on production and take it to a refinery, for a gas project, the lead times are much longer: you have to identify a market, build the infrastructure to connect your discovery to the market and then you sell the gas."

The company has built a gas processing facility; Bahiagás is extending its pipeline and constructing the City Gate at Alvopetro's physical plant to transport the gas from the field to the market, and expects to complete construction in June. "We'll be starting production from our share of the unitized field at the end of this quarter," Ruttan said.

"This project is really the first of its kind in Brazil," Ruttan explained. "No independent company has built a gas processing facility and signed a gas sales agreement with a local state distribution company, to my knowledge. We're leading the charge in Brazil on its initiatives to open up and expand the natural gas market in Brazil. So there's certainly a lot of support for the project at the government and regulatory levels."

The contract with Bahiagás blends three different international benchmark commodity prices to calculate the price of the natural gas: Brent oil, Henry Hub natural gas and the UK NBP, national balancing point gas price. "The contract has a floor and a ceiling, that insulates us from massive price shocks. Our price is much higher than what we are seeing in North America right now. Even at our floor pricing, which is just over US$5.20 per MMBTU, that's roughly 2.5 times what producers in the United States are getting." Ruttan said.

As far as doubling the firm delivery volume, Ruttan explained that when the contract was set up, "we had partly firm deliveries and partly flexible or interruptible volumes. Given that our price is more attractive for consumers than Petrobas', our assertion was being able to deliver flexible volumes was a beneficial thing for us. Now with the pandemic, there has been a lot of demand destruction, hopefully just on a temporary basis, but we thought it prudent to lock in those volumes and make sure our supply has a firm commitment associated with it. The revised contract also allows us to significantly reduce our potential supply failure penalties, so we can do that on a relatively low risk basis."

The amended agreement provides a guaranteed level of revenue. "When you combine that with the floor pricing, it allows us to be free cash flow positive at a time when most companies are shutting in production, realizing massive reductions in their share prices, and are looking at being free cash flow negative," Ruttan said. "I think we're uniquely positioned. At these production volumes, we can basically keep a flat production profile for 8 to 10 years with virtually no maintenance capital."

In addition, there is room for Alvopetro to expand. "There's a lot of excess capacity in that City Gate so that we can we can grow our business," Ruttan said. "Our business plan is, step one, get first cash flow from this discovery, and that will get us close to 11 million cubic feet per day. The plant capacity that we have built is for 18 million cubic feet a day, so our second step will be to ramp that production up toward 18 million cubic feet a day because we can do that at virtually no incremental cost. It's basically fixed costs for us so that next 7 million cubic feet per day is quite profitable."

Bahiagás City Gate has a capacity of handling 70 million cubic feet a day. "We'd like to capture as much of that as possible and it would be relatively straightforward for us to double the size of our processing facility," Ruttan said. "So we'd like to build the business into 36 million cubic feet a day as a medium- to longer-term step."

Next up is an early-stage gas project, Gomo, that Alvopetro is working to prove up. "We have an inventory of exploration prospects. In our current portfolio we've got eight conventional prospects, mostly gas weighted," Ruttan said.

"This is the only independently owned facility capable of delivering sales specified natural gas. We think there's a lot of opportunities here from a business development perspective," Ruttan concluded.

Mackie analyst Bill Newman notes that Alvopetro will be "self-funding once Caburé is on stream. ALV has reprocessed over 1,200 km2 of 3D seismic and has a current inventory of 8 conventional oil and natural gas exploration prospects. Once the Caburé field is on production we expect ALV to generate significant free cash flow to fund an extensive drilling program in 2021."

Trickle Research's David Lavigne stated on May 25, "...there is the potential for additional increases to Caburé reserves as well as perhaps the delineation of Gomo reserves and/or others that may emerge. Each of those opportunities could result in added reserves and associated value. Moreover, as we covered in the initial research, we believe the completed infrastructure could lead to additional midstream opportunities for Alvopetro as well. To translate, we expect other opportunities, perhaps on various fronts, to emerge as we move forward. In our opinion, those and other emerging opportunities coupled with management's now proven ability to accomplish what they set out to do could provide a basis for additional valuation legs for the stock price."

Alvopetro has approximately 88.4 million shares outstanding, and officers and directors own a little over 8%.

Sign up for our FREE newsletter at: www.streetwisereports.com/get-news

Disclosure:
1) Patrice Fusillo compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: Alvopetro Energy. Click here for important disclosures about sponsor fees. An affiliate of Streetwise Reports is conducting a digital media marketing campaign for this article on behalf of Alvopetro Energy. Please click here for more information.
3) Comments and opinions expressed are those of the specific experts and not of Streetwise Reports or its officers. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
4) The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.

( Companies Mentioned: ALV:TSX.V; ALVOF:OTCQX, )

Crude Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life

Source: McAlinden Research for Streetwise Reports   05/21/2020

Though gasoline demand remains historically weak, commuters are beginning to head back to their offices, opting for the isolation of their personal vehicles and abandoning public transit, reports McAlinden Research.

Saudi Arabia enhanced their commitment to OPEC+ supply cuts as the Kingdom said they’d shut production of additional 1 million barrels of crude oil per day next month. Most of the OPEC+ countries have already come close to compliance with the deal that took effect this month and cuts from non-member states like Norway, Brazil, Canada, and the US are compounding the already steep curbs on production. Though gasoline demand remains historically weak, commuters are beginning to head back to their offices, opting for the isolation of their personal vehicles and abandoning public transit.

Crude Cuts Continue to Deepen

As part of its latest efforts to reign in the global glut of crude oil, Saudi Arabia’s energy ministry ordered the Kingdom’s oil giant Aramco to reduce its crude oil production in June “by an extra voluntary amount of one million barrels per day (bpd), in addition to the reduction committed by the Kingdom in the latest OPEC+ agreement,” the official Saudi Press Agency reported.

The 23-country OPEC/non-OPEC coalition known as OPEC+ agreed to cut output by 9.7 million bpd for two months from an agreed baseline level starting May 1. These countries will also cut 7.7 million bpd between July and December and 5.8 million bpd from January 2021 to April 2022.

Under this OPEC+ deal, Saudi Arabia has pledged to cut its oil production to 8.5 million bpd, beginning this month. With the voluntary additional reduction in June, the Saudis would produce 7.492 million bpd next month, down from more than 12 million bpd in April.

Russia, also committed to the OPEC+ syndicate, saw oil output fall to 8.75 million bpd in the first 5 days of May, just shy of the 8.5 million bpd target set for this month and next.

However, as executive director of the International Energy Agency (IEA) Faith Birol recently stated, non-OPEC+ reductions in output “may well be similar to reductions that will be coming from OPEC+ throughout the year… We are not yet there but we seeing some [production cuts] already.” Cuts from non-OPEC+ partners industries, such as Brazil, Norway, Canada and the United States, the total reduction in supply could double global output curbs to around 20 million bpd when fully-implemented.

Norway, Europe’s largest oil producer, said it would cut production by 250,000 bpd in June and by 134,000 bpd in the second half of the year.

Brazil’s Petrobras initially reduced output by 200,000 bpd, which accounts for 20% of Brazil oil exports, after shutting down production at 62 offshore platforms last month. However, those cuts have been partially reversed.

The most significant non-OPEC market to watch, however, is North America where crude oil output is set to fall by 1.7 million bpd in June, which would mark a decrease of about 10% from its all-time high in March.

Analysts have estimated Canada may need to shut-in about 1 million to 1.5 million barrels of oil per day, from an average daily production of about 4 million bpd in 2019. Given the lack of crude demand coupled with low Canadian pricing and little in the way of extra storage capacity, “it is hard for us to fathom how Western Canadian crude production can avoid a ~1 million+ bbl/d drop in output in the coming weeks,” Stifel FirstEnergy analyst Michael Dunn told clients in a note.

US Energy Secretary Dan Brouillette said in April that the department expected US production to drop by 2 to 3 million bpd by year-end without any government-enforced cuts. The number of active oil rigs decreased last week by 33 rigs, according to Baker Hughes data, bringing the total to 292 — a 513-rig loss year over year. It is the fewest number of active oil rigs since late 2009.

The heaviest reductions are coming from Texas, the largest US producing-state, with 5 million bpd of output. Texas output is likely to drop by 20%, or 1 million barrels, by the end of May, Karr Ingham, executive vice president of the Texas Alliance of Energy Producers, told Reuters. “Operators are shutting in anywhere from 20% to 50%, and some more than that, based on what they think they can get to market,” Ingham said.

Signs of Life

While positive stories in crude markets have been few and far between, glimmers of hope have begun popping up around the world.

Crude inventories in China, the world’s largest buyer of oil, have shrunk in recent weeks after rising to record levels, according to analysts and satellite observations. “The trend in April was a net withdrawal driven by higher refinery runs and lucrative margins,” said Yao Li, chief executive officer of consultancy SIA Energy, which estimated inventories fell by 9.5 million barrels in April after growing by 161 million in the first quarter.

Though inventories have yet to enter a decline, the actual increases in storage have certainly begun to slow. Crude builds peaked in mid-April at more than 19 million barrels, but have since fallen to just 4.6 million barrels in the most recent week.

Shrinking inventories are even more critical than production cuts in today’s oil industry. Inventory numbers will be the primary evidence for the effectiveness of the cuts by illustrating an increasing or decreasing balance of supply and demand.

The main catalyst in April’s unprecedented oil collapse that sent prices into negative territory for the first time ever was actually lack of storage above all else. At the time, MRP wrote that the negative pricing could be more so chalked up to a short-term inefficiency in the rolling over of the May WTI contract on the crude futures market, resulting in the United States Oil Fund LP (USO), who owned 25% of all outstanding shares in the contract, not actually having facilities to accept or store physical barrels of crude as any other crude processing or storage facility were already overflowing. Therefore, the only way for the USO to rid themselves of their newfound oil barrels was to offer compensation to take it off their hands.

One of the most positive demand-side developments has been the increasing use of cars, as opposed to public transit, in the age of COVID.

Subway ridership remained about 50% below pre-virus levels in Beijing and about 30% below in Shanghai, according to data compiled by BloombergNEF, as fears of large crowds push commuters toward the relative isolation of cars.

Bloomberg writes that this pattern can be observed across the world:

In Berlin, among the first European cities to relax its lockdown, public transit use remains down 61% while the number of people driving has recovered to 28% below normal, according to data from Apple Inc., which tracks request for directions on its popular Maps app.

In Madrid, driving is only 68% below normal levels, up from about 80% in April, while use of public transport remains down 87%, largely the same level as last month.

The same is occurring in Ottawa, the Canadian capital, where driving directions on the app have recovered to 40% of normal levels, up from a decline of 60% in April, while directions for mass transit remain flat from April at 80% below normal levels.

Apple Maps data for 27 world cities shows that driving directions are recovering more quickly than directions for mass transit.

In the U.S., gasoline consumption is clawing back from record lows, rising by 400,000 barrels a day during the week ended May 1. Cities in Florida, one of the first American states to re-open, has seen fuel sales rebound to 30% below normal levels, from 50% weeks ago, according to the Florida Petroleum Marketers Association.

Oil demand will certainly not be what it was in prior years for some time, but the use of automobiles could play a significant role in drawing down gasoline inventories and allowing refiners to start processing new crude oil orders. The amount of total motor gasoline in storage, per EIA data, accounts for the largest share of finished crude and petroleum product inventories, roughly 6.5 times the size of outstanding jet fuel stocks.

Long-Term Supply Shortage?

Some may say it’s a bit early to be thinking about the long-term implications of all of these production shutdowns, but it is important to note that there are undoubtedly going to be some negative side effects to such a cataclysmic disruption.

Though Goldman Sachs is predicting a V-shaped bounce back in oil demand, supply will exhibit an L shaped recovery. Effectively, the Investment Bank expects supply to be suppressed for some time as, not only does shutting in oil wells damage their output capacity and take work to get them back online, but declines in capital expenditure and access to capital will suppress new exploration and drilling for some time. A combination of poor returns means people are unlikely to line up capital to work in this space, according to Goldman’s head of global commodities research, Jeff Currie. “Now investors do not want to hear anything about oil. They have been beaten up they are done with this space, it is going to take a lot for them to come back.”

Oilprice.com writes that investments in exploration and new production are set to be delayed because companies are looking to preserve cash and avoid cutting dividends–something oil majors Equinor and Shell just did. So, global investments and project sanctioning activity are already drying up this year.

Due to the oil price crash, Rystad Energy expected at the end of March that exploration and production (E&P) companies were likely to reduce project sanctioning by up to $131 billion, or down about 68% on the year, compared to $192 billion in projects approved in 2019.

Muted investment levels and new project activity will combine with the rebound in global oil demand once the coronavirus crisis is over to swing the global oil market into a potential oil supply deficit of some 5 million bpd, according to Rystad Energy’s latest estimates. Oil prices would top $68 a barrel to balance the market, the consultancy said.

MRP continues to believe these early supply-side measures taken by oil producing nations are a sign of more measures to come, holding the market over until sufficient demand can return. We also believe that the most well-positioned firms to withstand the intermediate period will be large-scale operators with diversified, productive assets.

We will continue to track these themes with the United States Oil Fund, LP (USO) and Energy Select Sector SPDR Fund (XLE). Since we launched the theme on April 7, the USO is has unsurprisingly declined a steep 48%. However, the XLE has actually garnered a 19% return over the same period, outperforming the S&P 500’s 10% gain.

WTI Crude

WTI Crude

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McAlinden Research Partners (MRP) provides independent investment strategy research to investors worldwide. The firm’s mission is to identify alpha-generating investment themes early in their unfolding and bring them to its clients’ attention. MRP’s research process reflects founder Joe McAlinden’s 50 years of experience on Wall Street. The methodologies he developed as chief investment officer of Morgan Stanley Investment Management, where he oversaw more than $400 billion in assets, provide the foundation for the strategy research MRP now brings to hedge funds, pension funds, sovereign wealth funds and other asset managers around the globe.

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This report has been prepared solely for informational purposes and is not an offer to buy/sell/endorse or a solicitation of an offer to buy/sell/endorse Interests or any other security or instrument or to participate in any trading or investment strategy. No representation or warranty (express or implied) is made or can be given with respect to the sequence, accuracy, completeness, or timeliness of the information in this Report. Unless otherwise noted, all information is sourced from public data.

McAlinden Research Partners is a division of Catalpa Capital Advisors, LLC (CCA), a Registered Investment Advisor. References to specific securities, asset classes and financial markets discussed herein are for illustrative purposes only and should not be interpreted as recommendations to purchase or sell such securities. CCA, MRP, employees and direct affiliates of the firm may or may not own any of the securities mentioned in the report at the time of publication.

Source: McAlinden Research for Streetwise Reports   05/21/2020

Though gasoline demand remains historically weak, commuters are beginning to head back to their offices, opting for the isolation of their personal vehicles and abandoning public transit, reports McAlinden Research.

Saudi Arabia enhanced their commitment to OPEC+ supply cuts as the Kingdom said they'd shut production of additional 1 million barrels of crude oil per day next month. Most of the OPEC+ countries have already come close to compliance with the deal that took effect this month and cuts from non-member states like Norway, Brazil, Canada, and the US are compounding the already steep curbs on production. Though gasoline demand remains historically weak, commuters are beginning to head back to their offices, opting for the isolation of their personal vehicles and abandoning public transit.

Crude Cuts Continue to Deepen

As part of its latest efforts to reign in the global glut of crude oil, Saudi Arabia's energy ministry ordered the Kingdom's oil giant Aramco to reduce its crude oil production in June "by an extra voluntary amount of one million barrels per day (bpd), in addition to the reduction committed by the Kingdom in the latest OPEC+ agreement," the official Saudi Press Agency reported.

The 23-country OPEC/non-OPEC coalition known as OPEC+ agreed to cut output by 9.7 million bpd for two months from an agreed baseline level starting May 1. These countries will also cut 7.7 million bpd between July and December and 5.8 million bpd from January 2021 to April 2022.

Under this OPEC+ deal, Saudi Arabia has pledged to cut its oil production to 8.5 million bpd, beginning this month. With the voluntary additional reduction in June, the Saudis would produce 7.492 million bpd next month, down from more than 12 million bpd in April.

Russia, also committed to the OPEC+ syndicate, saw oil output fall to 8.75 million bpd in the first 5 days of May, just shy of the 8.5 million bpd target set for this month and next.

However, as executive director of the International Energy Agency (IEA) Faith Birol recently stated, non-OPEC+ reductions in output "may well be similar to reductions that will be coming from OPEC+ throughout the year… We are not yet there but we seeing some [production cuts] already." Cuts from non-OPEC+ partners industries, such as Brazil, Norway, Canada and the United States, the total reduction in supply could double global output curbs to around 20 million bpd when fully-implemented.

Norway, Europe's largest oil producer, said it would cut production by 250,000 bpd in June and by 134,000 bpd in the second half of the year.

Brazil's Petrobras initially reduced output by 200,000 bpd, which accounts for 20% of Brazil oil exports, after shutting down production at 62 offshore platforms last month. However, those cuts have been partially reversed.

The most significant non-OPEC market to watch, however, is North America where crude oil output is set to fall by 1.7 million bpd in June, which would mark a decrease of about 10% from its all-time high in March.

Analysts have estimated Canada may need to shut-in about 1 million to 1.5 million barrels of oil per day, from an average daily production of about 4 million bpd in 2019. Given the lack of crude demand coupled with low Canadian pricing and little in the way of extra storage capacity, "it is hard for us to fathom how Western Canadian crude production can avoid a ~1 million+ bbl/d drop in output in the coming weeks," Stifel FirstEnergy analyst Michael Dunn told clients in a note.

US Energy Secretary Dan Brouillette said in April that the department expected US production to drop by 2 to 3 million bpd by year-end without any government-enforced cuts. The number of active oil rigs decreased last week by 33 rigs, according to Baker Hughes data, bringing the total to 292 — a 513-rig loss year over year. It is the fewest number of active oil rigs since late 2009.

The heaviest reductions are coming from Texas, the largest US producing-state, with 5 million bpd of output. Texas output is likely to drop by 20%, or 1 million barrels, by the end of May, Karr Ingham, executive vice president of the Texas Alliance of Energy Producers, told Reuters. "Operators are shutting in anywhere from 20% to 50%, and some more than that, based on what they think they can get to market," Ingham said.

Signs of Life

While positive stories in crude markets have been few and far between, glimmers of hope have begun popping up around the world.

Crude inventories in China, the world's largest buyer of oil, have shrunk in recent weeks after rising to record levels, according to analysts and satellite observations. "The trend in April was a net withdrawal driven by higher refinery runs and lucrative margins," said Yao Li, chief executive officer of consultancy SIA Energy, which estimated inventories fell by 9.5 million barrels in April after growing by 161 million in the first quarter.

Though inventories have yet to enter a decline, the actual increases in storage have certainly begun to slow. Crude builds peaked in mid-April at more than 19 million barrels, but have since fallen to just 4.6 million barrels in the most recent week.

Shrinking inventories are even more critical than production cuts in today's oil industry. Inventory numbers will be the primary evidence for the effectiveness of the cuts by illustrating an increasing or decreasing balance of supply and demand.

The main catalyst in April's unprecedented oil collapse that sent prices into negative territory for the first time ever was actually lack of storage above all else. At the time, MRP wrote that the negative pricing could be more so chalked up to a short-term inefficiency in the rolling over of the May WTI contract on the crude futures market, resulting in the United States Oil Fund LP (USO), who owned 25% of all outstanding shares in the contract, not actually having facilities to accept or store physical barrels of crude as any other crude processing or storage facility were already overflowing. Therefore, the only way for the USO to rid themselves of their newfound oil barrels was to offer compensation to take it off their hands.

One of the most positive demand-side developments has been the increasing use of cars, as opposed to public transit, in the age of COVID.

Subway ridership remained about 50% below pre-virus levels in Beijing and about 30% below in Shanghai, according to data compiled by BloombergNEF, as fears of large crowds push commuters toward the relative isolation of cars.

Bloomberg writes that this pattern can be observed across the world:

In Berlin, among the first European cities to relax its lockdown, public transit use remains down 61% while the number of people driving has recovered to 28% below normal, according to data from Apple Inc., which tracks request for directions on its popular Maps app.

In Madrid, driving is only 68% below normal levels, up from about 80% in April, while use of public transport remains down 87%, largely the same level as last month.

The same is occurring in Ottawa, the Canadian capital, where driving directions on the app have recovered to 40% of normal levels, up from a decline of 60% in April, while directions for mass transit remain flat from April at 80% below normal levels.

Apple Maps data for 27 world cities shows that driving directions are recovering more quickly than directions for mass transit.

In the U.S., gasoline consumption is clawing back from record lows, rising by 400,000 barrels a day during the week ended May 1. Cities in Florida, one of the first American states to re-open, has seen fuel sales rebound to 30% below normal levels, from 50% weeks ago, according to the Florida Petroleum Marketers Association.

Oil demand will certainly not be what it was in prior years for some time, but the use of automobiles could play a significant role in drawing down gasoline inventories and allowing refiners to start processing new crude oil orders. The amount of total motor gasoline in storage, per EIA data, accounts for the largest share of finished crude and petroleum product inventories, roughly 6.5 times the size of outstanding jet fuel stocks.

Long-Term Supply Shortage?

Some may say it's a bit early to be thinking about the long-term implications of all of these production shutdowns, but it is important to note that there are undoubtedly going to be some negative side effects to such a cataclysmic disruption.

Though Goldman Sachs is predicting a V-shaped bounce back in oil demand, supply will exhibit an L shaped recovery. Effectively, the Investment Bank expects supply to be suppressed for some time as, not only does shutting in oil wells damage their output capacity and take work to get them back online, but declines in capital expenditure and access to capital will suppress new exploration and drilling for some time. A combination of poor returns means people are unlikely to line up capital to work in this space, according to Goldman's head of global commodities research, Jeff Currie. "Now investors do not want to hear anything about oil. They have been beaten up they are done with this space, it is going to take a lot for them to come back."

Oilprice.com writes that investments in exploration and new production are set to be delayed because companies are looking to preserve cash and avoid cutting dividends–something oil majors Equinor and Shell just did. So, global investments and project sanctioning activity are already drying up this year.

Due to the oil price crash, Rystad Energy expected at the end of March that exploration and production (E&P) companies were likely to reduce project sanctioning by up to $131 billion, or down about 68% on the year, compared to $192 billion in projects approved in 2019.

Muted investment levels and new project activity will combine with the rebound in global oil demand once the coronavirus crisis is over to swing the global oil market into a potential oil supply deficit of some 5 million bpd, according to Rystad Energy's latest estimates. Oil prices would top $68 a barrel to balance the market, the consultancy said.

MRP continues to believe these early supply-side measures taken by oil producing nations are a sign of more measures to come, holding the market over until sufficient demand can return. We also believe that the most well-positioned firms to withstand the intermediate period will be large-scale operators with diversified, productive assets.

We will continue to track these themes with the United States Oil Fund, LP (USO) and Energy Select Sector SPDR Fund (XLE). Since we launched the theme on April 7, the USO is has unsurprisingly declined a steep 48%. However, the XLE has actually garnered a 19% return over the same period, outperforming the S&P 500's 10% gain.

WTI Crude

WTI Crude

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McAlinden Research Partners (MRP) provides independent investment strategy research to investors worldwide. The firm's mission is to identify alpha-generating investment themes early in their unfolding and bring them to its clients' attention. MRP's research process reflects founder Joe McAlinden's 50 years of experience on Wall Street. The methodologies he developed as chief investment officer of Morgan Stanley Investment Management, where he oversaw more than $400 billion in assets, provide the foundation for the strategy research MRP now brings to hedge funds, pension funds, sovereign wealth funds and other asset managers around the globe.

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Cypress Development’s Clayton Valley Lithium Project vs. Chinese LCE/EV Battery Supply

Source: Rick Mills for Streetwise Reports   05/21/2020

Rick Mills of Ahead of the Herd asks if it’s possible to rescue the economy while also making big cuts to greenhouse gas emissions and improving overall health, and discusses one company with a large lithium deposit that could go a long way to providing U.S.-sourced material for batteries.

The pause in industrial activity brought about by the Covid-19 crisis has led us to a fork in the road with respect to the direction we as a society take in fulfilling the twin mandates of suppressing global warming and growing the economy in challenging times.

To some extent these goals are incompatible. In a world that continues to run on fossil fuels, how do policymakers wean countries off oil and gas without wrecking their economies? And from an environmental point of view, how can we continue to drive gas-powered vehicles and heat our homes with natural gas and coal, when we know emissions from these fuels add to greenhouse gases that, left unchecked, will eventually render much of the earth uninhabitable?

Unexpectedly, the coronavirus has provided a window into a future with fewer carbon emissions. While nobody hoping for a cleaner environment would wish to pair ecological progress with the worst economic slowdown since the Great Depression, the pandemic does show what happens when industrial activity abruptly stops.

As we now know, clearer skies owing to Covid-19 lockdowns have become the silver lining of the global economy coming to a screeching halt in March.

Combine stay at home orders with travel bans, business closures and the fact that demand for oil has fallen off a cliff with economies locked down, and you get global carbon output dipping for the first time since the 2008 financial crisis.

China, the world’s worst polluter, emitted 25% less carbon during a one-month period compared to a year ago, as people were instructed (and in some cases forced) to stay home, factories were shuttered and coal use fell by 40%.

The South China Morning Post reported a significant improvement in China’s air and water quality during the first three months of 2020. Limits on industry and travel upped the number of good air quality days by 11.5% compared with the same time last year in 337 cities across China.

Levels of PM2.5, the smallest and most harmful air pollution particles, dropped 18% between January 20 and April 4. The amount of nitrogen dioxide, a greenhouse gas that causes respiratory problems and cancer, was down 42%.

The country’s water quality was also much improved, shown by reduced phosphorous and ammonia chemicals.

The sharp drop in fossil fuel pollution during the month of April will result in 11,000 fewer deaths in European countries. A study by the Centre for Research on Energy and Clean Air found measures in Europe to contain the spread of coronavirus resulted in a 40% drop in coal-generated power and one-third lower oil consumption.

Madrid saw a 56% drop in the levels of nitrous oxide, a product of burning fuel, with Paris, Milan, Brussels, Belgium and Frankfurt experiencing similar reductions. In New York State, the U.S. epicenter of Covid-19, measures to contain the virus have cut air pollution in half.

So here we are, at a crossroads. In several countries Covid-19 case curves are leveling off, prompting health authorities to gradually lift social distancing restrictions and allow businesses to resume operations. As the re-opening continues, policymakers need to ask themselves: How do we return the economy to pre-virus levels, by getting people working and spending again? Is it possible to rescue the economy while also making big cuts to greenhouse gas emissions and improving our overall health?

The answer to the second question is “yes.” And the way to do it is through a massive “green stimulus” program. We are not talking pie-in-the-sky, no “Green New Deal” schemes costing trillions, espoused by twits and putting governments even deeper in debt, which as we know from a previous article, strangles gross domestic product. No, what we want to see happen is the roll-out of clean and green infrastructure that puts thousands of people to work, restores confidence in heavy industry, while at the same time cleans up the environment and provides renewed hope for a cleaner, safer, sustainable planet for future generations.

It’s something we here at AOTH have been talking about for years, and we’re not alone.

The International Energy Organization’s executive director recently said that turmoil in the oil sector caused by Covid-19 should be seen as an opportunity to embrace green energy. In an interview with Reuters, Faith Birol said lithium-ion batteries and the use of “electrolyzers” to produce hydrogen should be candidates for government subsidies and policy support.

A recent report from Oxford University cited by Oilprice.com concurs the world is at a crucial point in its history, when we either take a step forward in supporting industries that get us to where we need to go in terms of reducing our carbon footprint and cleaning up our environment, or we slide back to a business-as-usual scenario where fossil fuel use continues apace:

Given the scale of spending under consideration, then, there is a once-in-a-generation opportunity to “build back better,” the Oxford report argues. “The recovery packages can either kill these two birds with one stone—setting the global economy on a pathway towards net-zero emissions—or lock us into a fossil system from which it will be nearly impossible to escape,” they warned.

For the United States and China, infrastructure spending is a key piece of the rebuilding puzzle.

U.S. President Trump realizes he needs a strategy for playing through the pandemic, i.e., a means to pull the U.S. up from its bootstraps when, not if, the economy turns around.

At the end of March Trump took to Twitter to renew his 2016 election campaign pledge for infrastructure renewal, urging Congress to pass a $2 trillion plan for improving the country’s roads, bridges, water systems and broadband Internet:

It’s likely that Trump stole the idea from the Chinese, who have been touting their own form of blacktop politics as a way of restoring the economy, particularly manufacturing, which has been crushed by the coronavirus.

Beijing is reportedly eyeing a $570 billion infrastructure build-out, not unlike its stimulus package of 2008, to get the economy back on track.

Among the projects that could receive a huge boost in investment, courtesy of a government rescue package, are a $44.2 billion expansion to Shanghai’s urban rail transit system, an intercity railway along the Yangtze River ($34.3B), and eight new metro lines worth $21.7 billion, to be constructed in the virus epicenter city of Wuhan.

Employment creation must obviously be a factor in deciding how to restore crippled economies, given the millions of jobs losses from Covid-19.

The Oxford economists note that construction jobs for renewable energy installation or retrofitting buildings can’t be offshored, and that they are labor-intensive—for every million dollars spent, 7.49 full-time renewable energy jobs are created but only 2.65 jobs in fossil fuels.

Lithium vs hydrogen

If we accept the idea that we need to “go green,” the next question is, which technologies should be supported? Solar and wind are well-developed verticals that will continue to grow, especially as their costs per kilowatt-hour drop relative to natural gas, coal and hydroelectric power, and as renewable energy storage technology keeps improving.

While the biggest obstacle to large-scale energy storage is cost, recent analysis by BloombergNEF found that for applications requiring two hours of energy, lithium-ion batteries are beating natural gas peaker plants on price.

Vehicles are a major source of air pollution. According to the Environmental Defense Fund, the transportation sector is responsible for a quarter of U.S. greenhouse gas emissions. Passenger vehicles produce four times more greenhouse gases than all of domestic aviation.

The electrification of the global transportation system has long been seen as essential to reducing carbon emissions. The two technologies with the capability of delivering vehicles with zero emissions are battery-electric powertrains and hydrogen fuel cells.

An electric vehicle can run on either rechargeable batteries or fuel cells that convert hydrogen into electricity. Both have zero tailpipe emissions, but over the years, cars run on batteries have emerged as the clear winner compared to hydrogen-powered EVs.

There are a few reasons for this. The first is the lack of hydrogen infrastructure. Although fuel cell technology has the advantage of a fast fill-up time, minutes as opposed to the hours-long charge that batteries need, it has proven challenging and expensive to build and support a network of fueling stations that can deliver a highly explosive gas, compressed to 10,000 psi, reliably, quickly and safely.

In California, the only place where hydrogen vehicles can operate as it’s the only state with a (still unreliable) hydrogen fueling network, a goal of 100 hydrogen fueling stations by 2020 has fallen short; as of April 8, the state only had 40. Each station costs around $2 million, making them prohibitively expensive.

Compare that to 18,000 EV charging stations servicing half a million plug-in cars currently traveling on California’s roads.

Also, hydrogen isn’t all that green if the feedstock used to create it is natural gas, which it usually is. Until the electricity is fully renewable, hydrogen vehicles will always have higher CO2 emissions than electric cars.

Finally, the cost per mile favors battery-electric vehicles over hydrogen. Filling a Toyota Mirai or Honda Clarity Fuel Cell—two of only three (the other is the Hyundai Nexo) hydrogen models available—costs north of $50. Home-charging an electric car on average costs what a gasoline car would if gas sold at $1 a gallon.

The upshot is that BEVs have swamped hydrogen cars. According to The Drive, Despite more than half a century of development, starting in 1966 with GM’s Electrovan, hydrogen fuel-cell cars remain low in volume, expensive to produce, and restricted to sales in the few countries or regions that have built hydrogen fueling stations.

Meanwhile, 10 years after the first modern EVs went on sale, electric cars sell in the low millions a year globally—two orders of magnitude higher than their hydrogen counterparts.

Since 2010 1.3 million battery-electric and plug-in hybrid vehicles have been sold in the US, compared to around 8,000 hydrogen cars.

A Reuters analysis shows that automakers are planning on spending a combined $300 billion on electrification in the next decade. Meanwhile more battery factories are being built globally; demand for lithium-ion batteries is forecast to grow at a CAGR of over 13% by 2023.

All of this growth in battery plants and EVs will mean an unprecedented need for the metals that go into them. This includes lithium, cobalt, rare earths, graphite, nickel and copper.

Lithium carbonate and lithium hydroxide are key components of the lithium-ion battery cathode, making it an extremely sought-after battery ingredient.

Lithium, therefore, is expected to see a 29X increase in demand, driven not only by lithium required in EVs batteries, but in consumer electronics like smart phones and power tools, and grid-scale electricity storage.

Yet despite the rosy projections, electric vehicles have a long way to go before they make any kind of a dent in the total vehicle market, which remains dominated by cars, trucks and vans run on gasoline or diesel fuel.

In 2019 sales of plug-in passenger cars achieved a 2.5% market share of new car sales, and while that is up from 2.1% in 2018 and 1.3% in 2017, it means over 97% of global new-car sales were regular vehicles.

The biggest obstacles to higher EV market penetration are resistance to change, range anxiety and price. According to The Drive, 58% of drivers are afraid they will run out of charge while on the road, and another 49% fear the low availability of charging stations.

For many North Americans, sticker shock is a non-starter. While some EV models have come down in price, the lowest-cost Tesla Model 3 in 2019 was $42,900, nearly 19% higher than the national new-car average of $36,115.

Building a better battery

Although electric vehicles have existed as prototypes and with limited commercial production since the 1990s (General Motors’ EV1—for a great history watch ‘Who Killed the Electric Car?’), the momentum in the switch from cars equipped with gas and diesel-powered internal combustion engines (ICE) to vehicles powered with lithium-ion batteries started in 2009 by then-President Obama. Obama announced his administration was putting aside $2.4 billion in order for American manufacturers to produce hybrid electric vehicles and battery components.

Of course Tesla was a few years ahead of Obama, forming in 2003 and producing its first model, the all-electric Model S sedan, in 2008.

Electric vehicles have far fewer moving parts than gasoline-powered cars they don’t have mufflers, gas tanks, catalytic converters or ignition systems. There’s also never an oil change or tune-up to worry about. But the clean and green doesn’t end there. Electric drives are more efficient than the drives on ICE cars. They are able to convert more of the available energy to propel the car therefore using less energy to go the same distance. And applying the brakes converts what was wasted energy in the form of heat, to useful energy in the form of electricity to help recharge the car’s batteries.

EV automakers want to know: How can batteries be made cheaply enough to compete with gas-powered vehicles, and with a reasonable range that doesn’t have the driver frantically searching for a charging station in the middle of nowhere?

By 2025 the cost of a large battery pack, say 60 kilowatt-hours with a range of +200 miles, is expected to fall to $100 per kWh or less, which is the point when EV prices would reach parity with gasoline vehicles, notes The Drive.

Achieving price parity is critical. Lower prices would not only give people an incentive to buy their first EV, they would facilitate the green infrastructure build-out we and others have been suggesting could be a way out of the virus-induced economic slump.

Recently Tesla announced plans to introduce a new battery in its Model 3 sedan, in China this year or early next.

Reuters reports the new low-cost, long-life battery is expected to bring the cost of electric vehicles in line with gasoline models, and will allow EV batteries to have second and third lives in the electric power grid.

The batteries designed to last a million miles will rely on low-cobalt and cobalt-free chemistries. The California-based company with “gigafactories” in Nevada and China, is reportedly talking to CATL, the largest electric-vehicle battery maker in the world, about employing CATL’s lithium iron phosphate batteries, which use no cobalt, the most expensive metal in EV batteries.

Prices for these cobalt-free battery packs have fallen below $80 per kilowatt hour, while CATL’s low-cobalt NMC (nickel, manganese, cobalt) battery packs are close to $100/kWh. Comparable low-cobalt batteries being developed by General Motors and Korea’s LG Chem are not expected to reach those levels until 2025.

Tesla is also working on recycling and recovering nickel, cobalt and lithium, and re-purposing lithium batteries in grid storage systems such as the one it built in South Australia in 2017 to capture electricity from nearby wind turbines.

Reuters states,

Taken together, the advances in battery technology, the strategy of expanding the ways in which EV batteries can be used and the manufacturing automation on a huge scale all aim at the same target: Reworking the financial math that until now has made buying an electric car more expensive for most consumers than sticking with carbon-emitting internal combustion vehicles.

US mine–>battery–>EV supply chain

We applaud Tesla and its pioneering, though mercurial CEO, Elon Musk, for being first out of the gate with electric-vehicle technology. Being a first mover in the EV space has made Musk rich beyond his wildest dreams and allowed Tesla the capital to innovate and stay ahead of its competitors.

However, we question Musk’s strategy of rolling out his new batteries in China, which has become the bogeyman of international commerce, and getting into bed with a Chinese company, CATL.

Need we remind readers, the Chinese government undertook pernicious measures to conceal the coronavirus outbreak in Wuhan. They included destruction of virus samples, suppression of information, and delaying lockdown of a city of 11 million, allowing the virus to spread throughout China and worldwide, through airline travel during the Chinese Spring Festival, the largest annual migration of holiday travelers on earth.

The U.S., Australia and all 27 nations of the EU are demanding an investigation into whether the World Health Organization was complicit with China in concealing Covid-19 from the rest of the world for six weeks—enough time to prepare a public health response.

Shenanigans like hoarding key medical gear in a near monopoly, then profiting handsomely from sales to desperate buyers, has led to the Trump administration “turbocharging” an initiative to distance itself from China. According to a recent Reuters article, economic destruction and the U.S. coronavirus death toll are driving a government-wide push to move U.S. production and supply chain dependency away from China…

The U.S. wants to create an alliance of “trusted partners” called the Economic Prosperity Network. Participating countries include Australia, India, Japan, New Zealand and Vietnam. Secretary of State Mike Pompeo said the goal is to “prevent something like this from happening again.” (Canada, which refrains from criticizing Beijing due to fear of retaliation, didn’t get an invite.)

Pompeo is referring to how the pandemic exposed China’s tight grip on global supply chains for generic drugs and medical equipment. Although the country accounts for only 13% of active pharmaceutical ingredient (API) makers supplying the US market, it produces many APIs for widely used medicines along with chemicals used to formulate APIs. Often China ships them to India for processing into tablets.

Such medicines include antibiotics, ibuprofen, acetaminophen and heparin, an anticoagulant taken by patients with heart disease.

We like the idea of a network of trading nations who believe in free trade and open borders without harboring secret ambitions to monopolize certain sectors, as China has done with critical minerals, solar power and medical supplies, to name just three.

China has locked up the rare earths market and is the primary player in a number of critical metals markets including lithium, cobalt, graphite, manganese and vanadium.

The Asian superpower imports 98% of its cobalt from the DRC and produces around half of the world’s refined cobalt.

Last year, as part of its trade war strategy, China raised the prospect of restricting exports of rare earths, which are critical to America’s defense, energy electronics and auto sectors, similar to a 2010 Chinese ban on rare earth oxide exports to Japan.

We know from previous articles that China has been extremely active in acquiring ownership or part-ownership of foreign lithium mines and inking offtake agreements.

China produces roughly two-thirds of the world’s lithium-ion batteries and controls most of the processing facilities.

Lithium is also among 23 critical metals President Trump has deemed critical to national security; in 2017 Trump signed a bill that would encourage the exploration and development of new U.S. sources of these metals.

According to Benchmark Mineral Intelligence, the U.S. only produces 1% of global lithium supply and 7% of refined lithium chemicals, versus China’s 51%. The country is about 70% dependent on imported lithium.

To lessen U.S. lithium dependency will require the building of a mine to battery to EV supply chain in North America.

The first step is to develop new North American lithium mines.

Currently the only U.S. lithium producer is chemicals giant Albemarle. Lithium products from Albemarle’s Silver Peak lithium brine operation in Nevada are sent to its processing plant in North Carolina. This material is then loaded on ships and sent to Asian battery manufacturers, which sell the batteries to EV companies.

It’s curious how several top automakers are planning on, or are already building, electric vehicle plants and facilities without disclosing how they will source their raw materials.

In 2017, Mercedez-Benz announced plans to set up an electric car production facility and battery plant at its existing Tuscaloosa, Alabama, plant. The $1-billion expansion will include a new battery factory near the production site, with the goal of providing batteries for a future electric SUV under the brand EQ. Six sites are planned to produce Mercedes’ EQ electric-vehicle family models, along with a network of eight battery plants.

Volkswagen has said it will invest $800 million to construct a new electric vehicle—likely an SUV—at its plant in Chattanooga, starting in 2022. For more read Volkswagen to drag Tesla, making EVs in Tennessee.

Korean company SK Innovation has said it will invest US$1.7 billion in the U.S.’ first electric vehicle plant, to serve Volkswagen, in neighboring Georgia. The 9.8 gigawatt-hour-plant would be the first EV battery plant in the United States. SK recently announced a second 10-GWh plant requiring an investment of $1 billion.

GM has rolled out its 2020 Cadillac SUV, built in Spring Hill, Tenn., in a move designed to challenge Tesla.

EV Sales

EV demand

Tesla’s vulnerability

Last year a Tesla executive said the company is worried about a long-term shortage of nickel, copper and lithium. The number of EVs are expected to multiply in coming years, but they can only progress as fast as the lithium-ion batteries can get built that go into them. In June of 2019, Musk said that in order to ensure Tesla has enough batteries to expand its product line, Tesla might get into mining lithium for itself.

That, so far, has failed to materialize, although the EV maker has signed an off-take agreement with a planned mine and refinery project in Australia.

Instead Musk seems to be going out of his way to court China, using its mine-battery-EV supply chain rather than supporting North American companies trying to develop domestic sources of EV raw materials.

Currently Tesla produces nickel-cobalt-aluminum (NCA) batteries with Japanese company Panasonic at its Sparks, Nevada, plant, and buys NMC batteries from LG Chem in China. Nothing local about that.

If Musk thinks his company can lead the world in EV sales by getting its raw materials from China, I’m afraid he is setting himself up for a big fail.

Chinese companies dominate the EV space and will do what they need to do to win market share. While Tesla in December surpassed BYD as the world’s largest electric car maker, without a safe, reliable supply chain, the company is vulnerable to a sudden supply shock that could stop production in its tracks. Case in point: in January the Chinese government temporarily shut down Tesla’s new factory in Shanghai over the coronavirus, delaying production of the Model 3 and denting the company’s first-quarter profits.

The trade war between China and the United States is far from over, in fact it appears to have entered a new phase. This week Trump said he was disappointed with China over its failure to contain the coronavirus and that the worldwide pandemic cast a pall over his trade deal with Beijing—despite a “phase 1” agreement signed in January.

Reuters reports the Trump administration is planning to deploy long-range, ground-launched cruise missiles in the Asia Pacific region, including versions of the Tomahawk cruise missile carried on U.S. warships, and the first new long-range anti-ship missiles in decades. The U.S. Air Force has also begun developing the first hypersonic cruise missile, capable of eluding detection by flying at least five times the speed of sound.

The technology the U.S. intends to deploy to counter China’s missiles uses lithium batteries and rare earth magnets. China controls the market in both.

Cypress Development Corp. (CYP:TSX.V; CYDVF:OTCQB; C1Z1:FSE)

We have an idea for Elon Musk and Tesla: how about they forget about signing battery deals with China and offtake agreements with Australia, which is a long way from Nevada, and instead look at investing in a lithium mine in the United States?

Three and a half years ago Cypress began prospecting in the Clayton Valley, Nevada, hoping to find a property that could support a lithium carbonate resource to compete with or possibly complement its neighbor, Albemarle’s Silver Peak Mine, whose lithium brine grades are declining.

Its Clayton Valley Lithium Project hosts an indicated resource of 3.835 million tonnes LCE (lithium carbonate equivalent) and an inferred resource of 5.126 million tonnes LCE. The project is ranked among the largest in the world.

Last year Cypress Development Corp. completed the first two phases of a prefeasibility study (PFS), confirming that lithium can be acid-leached and extracted at high recovery rates and successfully separating the lithium-rich claystone ores from the sulfuric acid leachate.

It is a major technical problem to separate ultra-fine clay particles (<5 microns) from a leach solution. Cypress has done it, putting the company at the forefront of lithium clay projects globally.

The U.S. now has a major source of lithium carbonate and lithium hydroxide and potentially a not-inconsiderable amount of rare earths including scandium, a highly prized metal used in aircraft components, for example.

The eagerly awaited prefeasibility study is crucial to moving the project forward, not only for proving that the metallurgical process for separating lithium from clays is commercially viable, but demonstrating that Cypress’ costs are in line with the 2018 preliminary economic assessment (PEA).

Cypress’ vision is to build a mine with the ability to extract whatever oxides they choose, from the processing plant. The project design is based on mining 15,000 tonnes per day to produce 25,000 tonnes per year of LCE.

The end result is that through by-product credits Cypress could shave millions of dollars off of their processing costs, further enriching what we already think is looking to be a very profitable mine.

Cypress is the only lithium junior in North America that has yet to sign an offtake or major financing agreement, despite its project being further advanced than nearby Clayton Valley lithium properties.

Partnering up with Tesla would make sense. Cypress needs a very large buyer for its lithium carbonate and lithium hydroxide end-products, and rare earth oxides needed for permanent magnets that go into EV motors. Tesla has to find a way to bring the cost of batteries down to $100 per kWh, which is the point when EV prices reach parity with gasoline vehicles. Cypress gives them the opportunity to buy their lithium raw materials directly from the mine, cutting out the Asian middlemen. No CATL, no more LG Chem. Surely that would bring down Tesla’s costs of production, allowing them to pass on the savings to EV buyers.

Finally, a U.S. company would have the capability of producing electric vehicles that are affordable to the average American, while also becoming the beach-head for a powerful North American electric-vehicle supply chain that could compete with China, and be independent of its critical minerals.

That would be huge.

There’s no way Silver Peak can produce enough lithium to supply American needs, especially with all of the EV battery and auto production facilities planned.

When you think about the huge amount of ore available to be mined—it’s among the largest LCE resources in the world—and the valuable products that will be coming out of the relatively easy processing flow sheet at the end, we believe Cypress may have the most important mine in America in decades.

Cypress has a very important study release coming virtually any day—the Prefeasibility study (PFS) on its Clayton Valley Lithium Project. A positive study result means CYP completes another step on its development path to building a mine.

The project is next to Albemarle’s Silver Peak Mine, Albemarle (NYSE:ALB) is the world’s largest lithium producer. Tesla is the world’s largest EV manufacturer, its gigafactory is just 200km away from CYP’s Clayton Valley Project.

Current annual lithium (LCE) supply is around 360,000 tonnes. Total lithium demand of LCE is expected to reach over 1 million tonnes by 2025 or higher, states S&P Global Platts Analytics.

The United States is about 70% dependent on imported lithium.

How will the United States, how will Volkswagen, Tesla, Albemarle, GM, Mercedes and SK Innovation obtain enough lithium for the storm of demand that is brewing?

Cypress Development Corp
TSX-V:CYP Cdn$0.19 2020.05.16
Shares Outstanding 90,077,001m
Market cap Cdn$17,114,630m
CYP website

Richard (Rick) Mills
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Richard (Rick) Mills, AheadoftheHerd.com, lives on a 160-acre farm in northern British Columbia. Richard’s articles have been published on over 400 websites, including: Wall Street Journal, USA Today, National Post, Lewrockwell, Montreal Gazette, Vancouver Sun, CBSnews, Huffington Post, Beforeitsnews, Londonthenews, Wealthwire, Calgary Herald, Forbes, Dallas News, SGT report, Vantagewire, India Times, Ninemsn, Ib times, Businessweek, Hong Kong Herald, Moneytalks, SeekingAlpha, BusinessInsider, Investing.com, MSN.com and the Association of Mining Analysts.

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( Companies Mentioned: CYP:TSX.V; CYDVF:OTCQB; C1Z1:FSE,
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Source: Rick Mills for Streetwise Reports   05/21/2020

Rick Mills of Ahead of the Herd asks if it's possible to rescue the economy while also making big cuts to greenhouse gas emissions and improving overall health, and discusses one company with a large lithium deposit that could go a long way to providing U.S.-sourced material for batteries.

The pause in industrial activity brought about by the Covid-19 crisis has led us to a fork in the road with respect to the direction we as a society take in fulfilling the twin mandates of suppressing global warming and growing the economy in challenging times.

To some extent these goals are incompatible. In a world that continues to run on fossil fuels, how do policymakers wean countries off oil and gas without wrecking their economies? And from an environmental point of view, how can we continue to drive gas-powered vehicles and heat our homes with natural gas and coal, when we know emissions from these fuels add to greenhouse gases that, left unchecked, will eventually render much of the earth uninhabitable?

Unexpectedly, the coronavirus has provided a window into a future with fewer carbon emissions. While nobody hoping for a cleaner environment would wish to pair ecological progress with the worst economic slowdown since the Great Depression, the pandemic does show what happens when industrial activity abruptly stops.

As we now know, clearer skies owing to Covid-19 lockdowns have become the silver lining of the global economy coming to a screeching halt in March.

Combine stay at home orders with travel bans, business closures and the fact that demand for oil has fallen off a cliff with economies locked down, and you get global carbon output dipping for the first time since the 2008 financial crisis.

China, the world's worst polluter, emitted 25% less carbon during a one-month period compared to a year ago, as people were instructed (and in some cases forced) to stay home, factories were shuttered and coal use fell by 40%.

The South China Morning Post reported a significant improvement in China's air and water quality during the first three months of 2020. Limits on industry and travel upped the number of good air quality days by 11.5% compared with the same time last year in 337 cities across China.

Levels of PM2.5, the smallest and most harmful air pollution particles, dropped 18% between January 20 and April 4. The amount of nitrogen dioxide, a greenhouse gas that causes respiratory problems and cancer, was down 42%.

The country's water quality was also much improved, shown by reduced phosphorous and ammonia chemicals.

The sharp drop in fossil fuel pollution during the month of April will result in 11,000 fewer deaths in European countries. A study by the Centre for Research on Energy and Clean Air found measures in Europe to contain the spread of coronavirus resulted in a 40% drop in coal-generated power and one-third lower oil consumption.

Madrid saw a 56% drop in the levels of nitrous oxide, a product of burning fuel, with Paris, Milan, Brussels, Belgium and Frankfurt experiencing similar reductions. In New York State, the U.S. epicenter of Covid-19, measures to contain the virus have cut air pollution in half.

So here we are, at a crossroads. In several countries Covid-19 case curves are leveling off, prompting health authorities to gradually lift social distancing restrictions and allow businesses to resume operations. As the re-opening continues, policymakers need to ask themselves: How do we return the economy to pre-virus levels, by getting people working and spending again? Is it possible to rescue the economy while also making big cuts to greenhouse gas emissions and improving our overall health?

The answer to the second question is "yes." And the way to do it is through a massive "green stimulus" program. We are not talking pie-in-the-sky, no "Green New Deal" schemes costing trillions, espoused by twits and putting governments even deeper in debt, which as we know from a previous article, strangles gross domestic product. No, what we want to see happen is the roll-out of clean and green infrastructure that puts thousands of people to work, restores confidence in heavy industry, while at the same time cleans up the environment and provides renewed hope for a cleaner, safer, sustainable planet for future generations.

It's something we here at AOTH have been talking about for years, and we're not alone.

The International Energy Organization's executive director recently said that turmoil in the oil sector caused by Covid-19 should be seen as an opportunity to embrace green energy. In an interview with Reuters, Faith Birol said lithium-ion batteries and the use of "electrolyzers" to produce hydrogen should be candidates for government subsidies and policy support.

A recent report from Oxford University cited by Oilprice.com concurs the world is at a crucial point in its history, when we either take a step forward in supporting industries that get us to where we need to go in terms of reducing our carbon footprint and cleaning up our environment, or we slide back to a business-as-usual scenario where fossil fuel use continues apace:

Given the scale of spending under consideration, then, there is a once-in-a-generation opportunity to "build back better," the Oxford report argues. "The recovery packages can either kill these two birds with one stone—setting the global economy on a pathway towards net-zero emissions—or lock us into a fossil system from which it will be nearly impossible to escape," they warned.

For the United States and China, infrastructure spending is a key piece of the rebuilding puzzle.

U.S. President Trump realizes he needs a strategy for playing through the pandemic, i.e., a means to pull the U.S. up from its bootstraps when, not if, the economy turns around.

At the end of March Trump took to Twitter to renew his 2016 election campaign pledge for infrastructure renewal, urging Congress to pass a $2 trillion plan for improving the country's roads, bridges, water systems and broadband Internet:

It's likely that Trump stole the idea from the Chinese, who have been touting their own form of blacktop politics as a way of restoring the economy, particularly manufacturing, which has been crushed by the coronavirus.

Beijing is reportedly eyeing a $570 billion infrastructure build-out, not unlike its stimulus package of 2008, to get the economy back on track.

Among the projects that could receive a huge boost in investment, courtesy of a government rescue package, are a $44.2 billion expansion to Shanghai's urban rail transit system, an intercity railway along the Yangtze River ($34.3B), and eight new metro lines worth $21.7 billion, to be constructed in the virus epicenter city of Wuhan.

Employment creation must obviously be a factor in deciding how to restore crippled economies, given the millions of jobs losses from Covid-19.

The Oxford economists note that construction jobs for renewable energy installation or retrofitting buildings can't be offshored, and that they are labor-intensive—for every million dollars spent, 7.49 full-time renewable energy jobs are created but only 2.65 jobs in fossil fuels.

Lithium vs hydrogen

If we accept the idea that we need to "go green," the next question is, which technologies should be supported? Solar and wind are well-developed verticals that will continue to grow, especially as their costs per kilowatt-hour drop relative to natural gas, coal and hydroelectric power, and as renewable energy storage technology keeps improving.

While the biggest obstacle to large-scale energy storage is cost, recent analysis by BloombergNEF found that for applications requiring two hours of energy, lithium-ion batteries are beating natural gas peaker plants on price.

Vehicles are a major source of air pollution. According to the Environmental Defense Fund, the transportation sector is responsible for a quarter of U.S. greenhouse gas emissions. Passenger vehicles produce four times more greenhouse gases than all of domestic aviation.

The electrification of the global transportation system has long been seen as essential to reducing carbon emissions. The two technologies with the capability of delivering vehicles with zero emissions are battery-electric powertrains and hydrogen fuel cells.

An electric vehicle can run on either rechargeable batteries or fuel cells that convert hydrogen into electricity. Both have zero tailpipe emissions, but over the years, cars run on batteries have emerged as the clear winner compared to hydrogen-powered EVs.

There are a few reasons for this. The first is the lack of hydrogen infrastructure. Although fuel cell technology has the advantage of a fast fill-up time, minutes as opposed to the hours-long charge that batteries need, it has proven challenging and expensive to build and support a network of fueling stations that can deliver a highly explosive gas, compressed to 10,000 psi, reliably, quickly and safely.

In California, the only place where hydrogen vehicles can operate as it's the only state with a (still unreliable) hydrogen fueling network, a goal of 100 hydrogen fueling stations by 2020 has fallen short; as of April 8, the state only had 40. Each station costs around $2 million, making them prohibitively expensive.

Compare that to 18,000 EV charging stations servicing half a million plug-in cars currently traveling on California's roads.

Also, hydrogen isn't all that green if the feedstock used to create it is natural gas, which it usually is. Until the electricity is fully renewable, hydrogen vehicles will always have higher CO2 emissions than electric cars.

Finally, the cost per mile favors battery-electric vehicles over hydrogen. Filling a Toyota Mirai or Honda Clarity Fuel Cell—two of only three (the other is the Hyundai Nexo) hydrogen models available—costs north of $50. Home-charging an electric car on average costs what a gasoline car would if gas sold at $1 a gallon.

The upshot is that BEVs have swamped hydrogen cars. According to The Drive, Despite more than half a century of development, starting in 1966 with GM's Electrovan, hydrogen fuel-cell cars remain low in volume, expensive to produce, and restricted to sales in the few countries or regions that have built hydrogen fueling stations.

Meanwhile, 10 years after the first modern EVs went on sale, electric cars sell in the low millions a year globally—two orders of magnitude higher than their hydrogen counterparts.

Since 2010 1.3 million battery-electric and plug-in hybrid vehicles have been sold in the US, compared to around 8,000 hydrogen cars.

A Reuters analysis shows that automakers are planning on spending a combined $300 billion on electrification in the next decade. Meanwhile more battery factories are being built globally; demand for lithium-ion batteries is forecast to grow at a CAGR of over 13% by 2023.

All of this growth in battery plants and EVs will mean an unprecedented need for the metals that go into them. This includes lithium, cobalt, rare earths, graphite, nickel and copper.

Lithium carbonate and lithium hydroxide are key components of the lithium-ion battery cathode, making it an extremely sought-after battery ingredient.

Lithium, therefore, is expected to see a 29X increase in demand, driven not only by lithium required in EVs batteries, but in consumer electronics like smart phones and power tools, and grid-scale electricity storage.

Yet despite the rosy projections, electric vehicles have a long way to go before they make any kind of a dent in the total vehicle market, which remains dominated by cars, trucks and vans run on gasoline or diesel fuel.

In 2019 sales of plug-in passenger cars achieved a 2.5% market share of new car sales, and while that is up from 2.1% in 2018 and 1.3% in 2017, it means over 97% of global new-car sales were regular vehicles.

The biggest obstacles to higher EV market penetration are resistance to change, range anxiety and price. According to The Drive, 58% of drivers are afraid they will run out of charge while on the road, and another 49% fear the low availability of charging stations.

For many North Americans, sticker shock is a non-starter. While some EV models have come down in price, the lowest-cost Tesla Model 3 in 2019 was $42,900, nearly 19% higher than the national new-car average of $36,115.

Building a better battery

Although electric vehicles have existed as prototypes and with limited commercial production since the 1990s (General Motors' EV1—for a great history watch 'Who Killed the Electric Car?'), the momentum in the switch from cars equipped with gas and diesel-powered internal combustion engines (ICE) to vehicles powered with lithium-ion batteries started in 2009 by then-President Obama. Obama announced his administration was putting aside $2.4 billion in order for American manufacturers to produce hybrid electric vehicles and battery components.

Of course Tesla was a few years ahead of Obama, forming in 2003 and producing its first model, the all-electric Model S sedan, in 2008.

Electric vehicles have far fewer moving parts than gasoline-powered cars they don't have mufflers, gas tanks, catalytic converters or ignition systems. There's also never an oil change or tune-up to worry about. But the clean and green doesn't end there. Electric drives are more efficient than the drives on ICE cars. They are able to convert more of the available energy to propel the car therefore using less energy to go the same distance. And applying the brakes converts what was wasted energy in the form of heat, to useful energy in the form of electricity to help recharge the car's batteries.

EV automakers want to know: How can batteries be made cheaply enough to compete with gas-powered vehicles, and with a reasonable range that doesn't have the driver frantically searching for a charging station in the middle of nowhere?

By 2025 the cost of a large battery pack, say 60 kilowatt-hours with a range of +200 miles, is expected to fall to $100 per kWh or less, which is the point when EV prices would reach parity with gasoline vehicles, notes The Drive.

Achieving price parity is critical. Lower prices would not only give people an incentive to buy their first EV, they would facilitate the green infrastructure build-out we and others have been suggesting could be a way out of the virus-induced economic slump.

Recently Tesla announced plans to introduce a new battery in its Model 3 sedan, in China this year or early next.

Reuters reports the new low-cost, long-life battery is expected to bring the cost of electric vehicles in line with gasoline models, and will allow EV batteries to have second and third lives in the electric power grid.

The batteries designed to last a million miles will rely on low-cobalt and cobalt-free chemistries. The California-based company with "gigafactories" in Nevada and China, is reportedly talking to CATL, the largest electric-vehicle battery maker in the world, about employing CATL's lithium iron phosphate batteries, which use no cobalt, the most expensive metal in EV batteries.

Prices for these cobalt-free battery packs have fallen below $80 per kilowatt hour, while CATL's low-cobalt NMC (nickel, manganese, cobalt) battery packs are close to $100/kWh. Comparable low-cobalt batteries being developed by General Motors and Korea's LG Chem are not expected to reach those levels until 2025.

Tesla is also working on recycling and recovering nickel, cobalt and lithium, and re-purposing lithium batteries in grid storage systems such as the one it built in South Australia in 2017 to capture electricity from nearby wind turbines.

Reuters states,

Taken together, the advances in battery technology, the strategy of expanding the ways in which EV batteries can be used and the manufacturing automation on a huge scale all aim at the same target: Reworking the financial math that until now has made buying an electric car more expensive for most consumers than sticking with carbon-emitting internal combustion vehicles.

US mine-->battery-->EV supply chain

We applaud Tesla and its pioneering, though mercurial CEO, Elon Musk, for being first out of the gate with electric-vehicle technology. Being a first mover in the EV space has made Musk rich beyond his wildest dreams and allowed Tesla the capital to innovate and stay ahead of its competitors.

However, we question Musk's strategy of rolling out his new batteries in China, which has become the bogeyman of international commerce, and getting into bed with a Chinese company, CATL.

Need we remind readers, the Chinese government undertook pernicious measures to conceal the coronavirus outbreak in Wuhan. They included destruction of virus samples, suppression of information, and delaying lockdown of a city of 11 million, allowing the virus to spread throughout China and worldwide, through airline travel during the Chinese Spring Festival, the largest annual migration of holiday travelers on earth.

The U.S., Australia and all 27 nations of the EU are demanding an investigation into whether the World Health Organization was complicit with China in concealing Covid-19 from the rest of the world for six weeks—enough time to prepare a public health response.

Shenanigans like hoarding key medical gear in a near monopoly, then profiting handsomely from sales to desperate buyers, has led to the Trump administration "turbocharging" an initiative to distance itself from China. According to a recent Reuters article, economic destruction and the U.S. coronavirus death toll are driving a government-wide push to move U.S. production and supply chain dependency away from China...

The U.S. wants to create an alliance of "trusted partners" called the Economic Prosperity Network. Participating countries include Australia, India, Japan, New Zealand and Vietnam. Secretary of State Mike Pompeo said the goal is to "prevent something like this from happening again." (Canada, which refrains from criticizing Beijing due to fear of retaliation, didn't get an invite.)

Pompeo is referring to how the pandemic exposed China's tight grip on global supply chains for generic drugs and medical equipment. Although the country accounts for only 13% of active pharmaceutical ingredient (API) makers supplying the US market, it produces many APIs for widely used medicines along with chemicals used to formulate APIs. Often China ships them to India for processing into tablets.

Such medicines include antibiotics, ibuprofen, acetaminophen and heparin, an anticoagulant taken by patients with heart disease.

We like the idea of a network of trading nations who believe in free trade and open borders without harboring secret ambitions to monopolize certain sectors, as China has done with critical minerals, solar power and medical supplies, to name just three.

China has locked up the rare earths market and is the primary player in a number of critical metals markets including lithium, cobalt, graphite, manganese and vanadium.

The Asian superpower imports 98% of its cobalt from the DRC and produces around half of the world's refined cobalt.

Last year, as part of its trade war strategy, China raised the prospect of restricting exports of rare earths, which are critical to America's defense, energy electronics and auto sectors, similar to a 2010 Chinese ban on rare earth oxide exports to Japan.

We know from previous articles that China has been extremely active in acquiring ownership or part-ownership of foreign lithium mines and inking offtake agreements.

China produces roughly two-thirds of the world's lithium-ion batteries and controls most of the processing facilities.

Lithium is also among 23 critical metals President Trump has deemed critical to national security; in 2017 Trump signed a bill that would encourage the exploration and development of new U.S. sources of these metals.

According to Benchmark Mineral Intelligence, the U.S. only produces 1% of global lithium supply and 7% of refined lithium chemicals, versus China's 51%. The country is about 70% dependent on imported lithium.

To lessen U.S. lithium dependency will require the building of a mine to battery to EV supply chain in North America.

The first step is to develop new North American lithium mines.

Currently the only U.S. lithium producer is chemicals giant Albemarle. Lithium products from Albemarle's Silver Peak lithium brine operation in Nevada are sent to its processing plant in North Carolina. This material is then loaded on ships and sent to Asian battery manufacturers, which sell the batteries to EV companies.

It's curious how several top automakers are planning on, or are already building, electric vehicle plants and facilities without disclosing how they will source their raw materials.

In 2017, Mercedez-Benz announced plans to set up an electric car production facility and battery plant at its existing Tuscaloosa, Alabama, plant. The $1-billion expansion will include a new battery factory near the production site, with the goal of providing batteries for a future electric SUV under the brand EQ. Six sites are planned to produce Mercedes' EQ electric-vehicle family models, along with a network of eight battery plants.

Volkswagen has said it will invest $800 million to construct a new electric vehicle—likely an SUV—at its plant in Chattanooga, starting in 2022. For more read Volkswagen to drag Tesla, making EVs in Tennessee.

Korean company SK Innovation has said it will invest US$1.7 billion in the U.S.' first electric vehicle plant, to serve Volkswagen, in neighboring Georgia. The 9.8 gigawatt-hour-plant would be the first EV battery plant in the United States. SK recently announced a second 10-GWh plant requiring an investment of $1 billion.

GM has rolled out its 2020 Cadillac SUV, built in Spring Hill, Tenn., in a move designed to challenge Tesla.

EV Sales

EV demand

Tesla's vulnerability

Last year a Tesla executive said the company is worried about a long-term shortage of nickel, copper and lithium. The number of EVs are expected to multiply in coming years, but they can only progress as fast as the lithium-ion batteries can get built that go into them. In June of 2019, Musk said that in order to ensure Tesla has enough batteries to expand its product line, Tesla might get into mining lithium for itself.

That, so far, has failed to materialize, although the EV maker has signed an off-take agreement with a planned mine and refinery project in Australia.

Instead Musk seems to be going out of his way to court China, using its mine-battery-EV supply chain rather than supporting North American companies trying to develop domestic sources of EV raw materials.

Currently Tesla produces nickel-cobalt-aluminum (NCA) batteries with Japanese company Panasonic at its Sparks, Nevada, plant, and buys NMC batteries from LG Chem in China. Nothing local about that.

If Musk thinks his company can lead the world in EV sales by getting its raw materials from China, I'm afraid he is setting himself up for a big fail.

Chinese companies dominate the EV space and will do what they need to do to win market share. While Tesla in December surpassed BYD as the world's largest electric car maker, without a safe, reliable supply chain, the company is vulnerable to a sudden supply shock that could stop production in its tracks. Case in point: in January the Chinese government temporarily shut down Tesla's new factory in Shanghai over the coronavirus, delaying production of the Model 3 and denting the company's first-quarter profits.

The trade war between China and the United States is far from over, in fact it appears to have entered a new phase. This week Trump said he was disappointed with China over its failure to contain the coronavirus and that the worldwide pandemic cast a pall over his trade deal with Beijing—despite a "phase 1" agreement signed in January.

Reuters reports the Trump administration is planning to deploy long-range, ground-launched cruise missiles in the Asia Pacific region, including versions of the Tomahawk cruise missile carried on U.S. warships, and the first new long-range anti-ship missiles in decades. The U.S. Air Force has also begun developing the first hypersonic cruise missile, capable of eluding detection by flying at least five times the speed of sound.

The technology the U.S. intends to deploy to counter China's missiles uses lithium batteries and rare earth magnets. China controls the market in both.

Cypress Development Corp. (CYP:TSX.V; CYDVF:OTCQB; C1Z1:FSE)

We have an idea for Elon Musk and Tesla: how about they forget about signing battery deals with China and offtake agreements with Australia, which is a long way from Nevada, and instead look at investing in a lithium mine in the United States?

Three and a half years ago Cypress began prospecting in the Clayton Valley, Nevada, hoping to find a property that could support a lithium carbonate resource to compete with or possibly complement its neighbor, Albemarle's Silver Peak Mine, whose lithium brine grades are declining.

Its Clayton Valley Lithium Project hosts an indicated resource of 3.835 million tonnes LCE (lithium carbonate equivalent) and an inferred resource of 5.126 million tonnes LCE. The project is ranked among the largest in the world.

Last year Cypress Development Corp. completed the first two phases of a prefeasibility study (PFS), confirming that lithium can be acid-leached and extracted at high recovery rates and successfully separating the lithium-rich claystone ores from the sulfuric acid leachate.

It is a major technical problem to separate ultra-fine clay particles (<5 microns) from a leach solution. Cypress has done it, putting the company at the forefront of lithium clay projects globally.

The U.S. now has a major source of lithium carbonate and lithium hydroxide and potentially a not-inconsiderable amount of rare earths including scandium, a highly prized metal used in aircraft components, for example.

The eagerly awaited prefeasibility study is crucial to moving the project forward, not only for proving that the metallurgical process for separating lithium from clays is commercially viable, but demonstrating that Cypress' costs are in line with the 2018 preliminary economic assessment (PEA).

Cypress' vision is to build a mine with the ability to extract whatever oxides they choose, from the processing plant. The project design is based on mining 15,000 tonnes per day to produce 25,000 tonnes per year of LCE.

The end result is that through by-product credits Cypress could shave millions of dollars off of their processing costs, further enriching what we already think is looking to be a very profitable mine.

Cypress is the only lithium junior in North America that has yet to sign an offtake or major financing agreement, despite its project being further advanced than nearby Clayton Valley lithium properties.

Partnering up with Tesla would make sense. Cypress needs a very large buyer for its lithium carbonate and lithium hydroxide end-products, and rare earth oxides needed for permanent magnets that go into EV motors. Tesla has to find a way to bring the cost of batteries down to $100 per kWh, which is the point when EV prices reach parity with gasoline vehicles. Cypress gives them the opportunity to buy their lithium raw materials directly from the mine, cutting out the Asian middlemen. No CATL, no more LG Chem. Surely that would bring down Tesla's costs of production, allowing them to pass on the savings to EV buyers.

Finally, a U.S. company would have the capability of producing electric vehicles that are affordable to the average American, while also becoming the beach-head for a powerful North American electric-vehicle supply chain that could compete with China, and be independent of its critical minerals.

That would be huge.

There's no way Silver Peak can produce enough lithium to supply American needs, especially with all of the EV battery and auto production facilities planned.

When you think about the huge amount of ore available to be mined—it's among the largest LCE resources in the world—and the valuable products that will be coming out of the relatively easy processing flow sheet at the end, we believe Cypress may have the most important mine in America in decades.

Cypress has a very important study release coming virtually any day—the Prefeasibility study (PFS) on its Clayton Valley Lithium Project. A positive study result means CYP completes another step on its development path to building a mine.

The project is next to Albemarle's Silver Peak Mine, Albemarle (NYSE:ALB) is the world's largest lithium producer. Tesla is the world's largest EV manufacturer, its gigafactory is just 200km away from CYP's Clayton Valley Project.

Current annual lithium (LCE) supply is around 360,000 tonnes. Total lithium demand of LCE is expected to reach over 1 million tonnes by 2025 or higher, states S&P Global Platts Analytics.

The United States is about 70% dependent on imported lithium.

How will the United States, how will Volkswagen, Tesla, Albemarle, GM, Mercedes and SK Innovation obtain enough lithium for the storm of demand that is brewing?

Cypress Development Corp
TSX-V:CYP Cdn$0.19 2020.05.16
Shares Outstanding 90,077,001m
Market cap Cdn$17,114,630m
CYP website

Richard (Rick) Mills
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Richard (Rick) Mills, AheadoftheHerd.com, lives on a 160-acre farm in northern British Columbia. Richard's articles have been published on over 400 websites, including: Wall Street Journal, USA Today, National Post, Lewrockwell, Montreal Gazette, Vancouver Sun, CBSnews, Huffington Post, Beforeitsnews, Londonthenews, Wealthwire, Calgary Herald, Forbes, Dallas News, SGT report, Vantagewire, India Times, Ninemsn, Ib times, Businessweek, Hong Kong Herald, Moneytalks, SeekingAlpha, BusinessInsider, Investing.com, MSN.com and the Association of Mining Analysts.

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Disclosures:
1) Rick Mills: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Cypress Development Corp. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company currently has a financial relationship with the following companies mentioned in this article: Cypress Development is an advertiser on Ahead of the Herd. I determined which companies would be included in this article based on my research and understanding of the sector. Additional disclosures/disclaimer below.
2) The following companies mentioned in this article are sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees.
3) Comments and opinions expressed are those of the specific experts and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.
4) The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.

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( Companies Mentioned: CYP:TSX.V; CYDVF:OTCQB; C1Z1:FSE, )

Oil & Gas Company Reports ‘Solid Q1/20’ and ‘Progress on Cost Reductions’

Source: Streetwise Reports   05/14/2020

Devon Energy’s first quarter operational and financial numbers are reviewed and a 2020 cash flow forecast are provided in a Raymond James report.

In a May 8 research note, analyst John Freeman reported that Raymond James increased its target price on Devon Energy Corp. (DVN:NYSE) after updating its estimates on the company. “Devon delivered a solid Q1/20, reporting modest beats on oil volumes, capex and pricing” and is making “solid progress on cost reductions,” Freeman highlighted.

The new target price is $15 per share, up from $11. In comparison, Devon Energy’s current share price is about $11.53.

Freeman discussed the Oklahoma-based company’s results and cost improvements of Q1/20.

Regarding performance, Freeman noted that Devon’s Delaware Basin asset, which accounts for 75% of its production, continues to deliver. During Q1/20, it averaged IP30 of 2,500 barrels of oil equivalent per day at an average well cost of $705 per foot.

Devon expects total 2020 oil production to be 145–150 million barrels of oil per day (145–150 MMbbl/d), roughly in line with Raymond James’ forecast of 151.9 MMbbl/d and consensus’ projection of 150.5 MMbbl/d.

Devon’s oil volumes guidance for Q2/20 is 145–155 MMbbl/d. This compares to previous projections by Raymond James and the Street of 156 MMbbl/d and 154 MMbbl/d, respectively. The pace of completions will remain slower throughout Q2/20 and Q3/20 and then ramp up in Q4/10.

As for costs, “Devon’s off to a good start” with Q1/20 cash costs coming in 6% below Raymond James’ prediction, Freeman indicated. For example, the Wolfcamp well cost during the quarter was 17% lower than in Q1/19.

Capital guidance for Q2/20 is $200–250 million as opposed to previous estimates by Raymond James of $193 million and consensus of $227 million.

Overall, Devon expects to lower its full-year 2020 cash costs, both for production and general and administrative expenses, by $250 million, beating Raymond James’ estimate. That includes a 40% drop in executive compensation.

Freeman pointed out that Devon’s liquidity at the end of Q1/20 “remains strong” with 1.7 billion in cash and cash equivalents and an undrawn revolver of $3 billion. The company has an outstanding debt balance of $4.3 billion with the earliest maturities taking place in late 2025. During Q1/20, Devon repurchased 2.2 million shares for $38 million but has since suspended the repurchase program to preserve liquidity.

As for the Barnett sale, the closing was delayed, which “is a short-term disappointment,” Freeman wrote. “However, with the gas strip currently topping $2.75/thousand cubic feet in Q1/21, the sale looks set to net Devon additional contingency payments beyond the $570 million beginning in 2021,” he wrote.

Freeman concluded that accounting for the already made cash cost improvements plus 2020 estimates of about $1 billion in capex and about 150 MMbbl/d of oil production, Devon could generate $60 million in free cash flow this year, excluding the Barnett sale and dividend, according to Raymond James’ calculations. Further, the company’s robust hedge book, in which about 90% of the remaining oil volumes are hedged at a $42 per barrel floor, protects its cash flow.

Raymond James has an Outperform rating on Devon Energy.

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Disclosure:
1) Doresa Banning compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees.
3) Comments and opinions expressed are those of the specific experts and not of Streetwise Reports or its officers. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
4) The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.

Disclosures from Raymond James, Devon Energy Corp., May 8, 2020

ANALYST INFORMATION

Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst’s success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.

The analyst John Freeman, primarily responsible for the preparation of this research report, attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months.

RAYMOND JAMES RELATIONSHIP DISCLOSURES
Certain affiliates of the RJ Group expect to receive or intend to seek compensation for investment banking services from all companies under research coverage within the next three months.

Raymond James & Associates, Inc. makes a market in the shares of Devon Energy Corporation.

Raymond James & Associates received non-investment banking securities-related compensation from Devon Energy Corporation within the past 12 months.

Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available here.

( Companies Mentioned: DVN:NYSE,
)

Source: Streetwise Reports   05/14/2020

Devon Energy's first quarter operational and financial numbers are reviewed and a 2020 cash flow forecast are provided in a Raymond James report.

In a May 8 research note, analyst John Freeman reported that Raymond James increased its target price on Devon Energy Corp. (DVN:NYSE) after updating its estimates on the company. "Devon delivered a solid Q1/20, reporting modest beats on oil volumes, capex and pricing" and is making "solid progress on cost reductions," Freeman highlighted.

The new target price is $15 per share, up from $11. In comparison, Devon Energy's current share price is about $11.53.

Freeman discussed the Oklahoma-based company's results and cost improvements of Q1/20.

Regarding performance, Freeman noted that Devon's Delaware Basin asset, which accounts for 75% of its production, continues to deliver. During Q1/20, it averaged IP30 of 2,500 barrels of oil equivalent per day at an average well cost of $705 per foot.

Devon expects total 2020 oil production to be 145–150 million barrels of oil per day (145–150 MMbbl/d), roughly in line with Raymond James' forecast of 151.9 MMbbl/d and consensus' projection of 150.5 MMbbl/d.

Devon's oil volumes guidance for Q2/20 is 145–155 MMbbl/d. This compares to previous projections by Raymond James and the Street of 156 MMbbl/d and 154 MMbbl/d, respectively. The pace of completions will remain slower throughout Q2/20 and Q3/20 and then ramp up in Q4/10.

As for costs, "Devon's off to a good start" with Q1/20 cash costs coming in 6% below Raymond James' prediction, Freeman indicated. For example, the Wolfcamp well cost during the quarter was 17% lower than in Q1/19.

Capital guidance for Q2/20 is $200–250 million as opposed to previous estimates by Raymond James of $193 million and consensus of $227 million.

Overall, Devon expects to lower its full-year 2020 cash costs, both for production and general and administrative expenses, by $250 million, beating Raymond James' estimate. That includes a 40% drop in executive compensation.

Freeman pointed out that Devon's liquidity at the end of Q1/20 "remains strong" with 1.7 billion in cash and cash equivalents and an undrawn revolver of $3 billion. The company has an outstanding debt balance of $4.3 billion with the earliest maturities taking place in late 2025. During Q1/20, Devon repurchased 2.2 million shares for $38 million but has since suspended the repurchase program to preserve liquidity.

As for the Barnett sale, the closing was delayed, which "is a short-term disappointment," Freeman wrote. "However, with the gas strip currently topping $2.75/thousand cubic feet in Q1/21, the sale looks set to net Devon additional contingency payments beyond the $570 million beginning in 2021," he wrote.

Freeman concluded that accounting for the already made cash cost improvements plus 2020 estimates of about $1 billion in capex and about 150 MMbbl/d of oil production, Devon could generate $60 million in free cash flow this year, excluding the Barnett sale and dividend, according to Raymond James' calculations. Further, the company's robust hedge book, in which about 90% of the remaining oil volumes are hedged at a $42 per barrel floor, protects its cash flow.

Raymond James has an Outperform rating on Devon Energy.

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Disclosure:
1) Doresa Banning compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees.
3) Comments and opinions expressed are those of the specific experts and not of Streetwise Reports or its officers. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
4) The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.

Disclosures from Raymond James, Devon Energy Corp., May 8, 2020

ANALYST INFORMATION

Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.

The analyst John Freeman, primarily responsible for the preparation of this research report, attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months.

RAYMOND JAMES RELATIONSHIP DISCLOSURES
Certain affiliates of the RJ Group expect to receive or intend to seek compensation for investment banking services from all companies under research coverage within the next three months.

Raymond James & Associates, Inc. makes a market in the shares of Devon Energy Corporation.

Raymond James & Associates received non-investment banking securities-related compensation from Devon Energy Corporation within the past 12 months.

Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available here.

( Companies Mentioned: DVN:NYSE, )

Natural Gas Stocks Ride Upcoming Wave of Oil Well Closures

Source: McAlinden Research for Streetwise Reports   05/14/2020

McAlinden Research Partners reports that hedge funds that had been shorting natural gas have suddenly developed a strong appetite for natural gas stocks and bonds on the expectation that U.S. oil wells that generate gas as a by-product will close fast enough to make up for the collapse in global natural gas demand.

2019 was such a rough year for natural gas that by the time February 2020 rolled by, hedge funds had built up the largest net short position on record for the sector. Those investors have suddenly developed a strong appetite for natural gas stocks and bonds on the expectation that U.S. oil wells that generate gas as a by-product will close fast enough to make up for the collapse in global natural gas demand. Some Appalachian gas producers are especially well-positioned to benefit from such a prospect.

Global consumption of natural gas is on track to drop by 5% in 2020, according to the International Energy Agency (IEA). While that number sounds harmless, it represents a huge shock to the gas industry which has enjoyed ten years of uninterrupted demand growth, until the COVID-19 lockdowns brought that streak to an end.

Early evidence of the impact has already cropped up in the first quarter data, even though the lockdowns in Europe and the United States were still relatively new. While global demand fell more than 3% in 1Q 2020, demand in the United States dropped 4.5% from a year earlier, dragged down by an 18% decline in residential and commercial demand. For context, the last time U.S. gas demand contracted to this extent was during the Great Depression, when domestic demand tumbled by 13% in 1931 and by 7% in 1932.

Worsening Demand/Supply Imbalance

Although demand has experienced a historic plunge, supply has not been adjusted downward to match that plunge. In fact, the demand/supply imbalance that weighed on natural gas prices last year has only worsened. Natural gas inventories in the United States stood at 2.210 trillion cubic feet on April 24—up 783 billion cubic feet from a year ago and 360 billion cubic feet above the five-year average, according to the EIA. In other words, U.S. gas stockpiles are 55% higher than a year ago and 20% higher than the five-year average.

The biggest challenge to adapting output lies in the fact that turning the taps off at typical gas fields isn’t easy. Moreover, those that can be stopped take time and money to restart, says the CFO of InfraStrata Plc, a U.K. firm focused on the development and commercialization of advanced energy infrastructure.

Almost Out of Storage

Back in April, MRP wrote about the sudden wave of oil storage demand that’s been boosting the oil tanker market. It so happens that gas storage sites are also filling up quickly due to growing stockpiles of the commodity. Unless a major change occurs in the near-term, Europe could run out of storage space for its natural gas by July, or even earlier in some markets, according to industry players.

Speculators Flip from Bearish to Bullish

Some investors are already betting that the near-term change will be supply-driven, and that it will originate from the same place that, years ago, seeded the conditions that would eventually grow into today’s natural gas glut. When oil prices plunged into negative territory last month, the US energy industry received a wakeup call. Better to start shutting off money-losing wells, they realized, than to have to pay traders to get rid of the oil.

More than 12% of U.S. gas output is “associated gas”, extracted as a byproduct of oil drilling. Less oil drilling means less associated gas, which effectively equates to a supply cut. The notion that there may be less shale gas coming from U.S. oil wells this year has prompted the fast money set to reverse their bearish bets on the commodity and its producers. In mid-February, hedge funds and other speculators were piled into the largest net short position on record for natural gas. Now, those same investors are net long for the first time since May 2019.

Beyond April’s 26% Natural Gas Price Surge

Such a dramatic shift in sentiment has helped pushed the price of U.S. natural gas 26% higher in one month—from $1.55 per million British thermal units (MMBtu) on April 2nd to $1.96/MMBtu on May 4. Despite those gains, the commodity’s price is still 10% lower than at the start of the year when it was trading at $2.17/MMBtu.

The question some investors are asking is whether these ultra-low prices will compel enough utilities to switch out of alternate power sources into natural gas, triggering a demand-driven price surge in the process. The IEA’s forecasts for 2020 also shed some light on this matter.

As mentioned earlier in this report, the Paris-based agency which advises nations on energy policy estimates that global natural gas consumption will fall by 5% this year. Should the world economy recover faster than anticipated from the COVID-19 disruptions, the overall demand loss could narrow to about 2.7%, which would still mark the first annual drop in natural gas consumption since 2009. Much of the decline is expected to come from power generation.

The IEA has also projected that all sources of energy—i.e., oil, coal, natural gas, and nuclear—will see a decline in demand this year, with the exception of renewable energy. That’s because renewables in many countries get first priority to feed electricity into the grid, enabling them to maintain or increase market share when there’s a huge plunge in overall energy demand.

The energy source most at risk of losing market share to natural gas is coal, which is heading for its biggest fall in annual demand (-8.0%) since World War II. The fact that coal’s share in the electricity mix has fallen in India, China, Europe, and parts of the U.S.—four regions with large and varied electricity markets — implies there is more pain ahead for this commodity. Based on the IEA’s figures, any market share losses to natural gas are not enough to push the latter’s overall growth into positive territory this year. This means, there likely won’t be a demand-driven surge in the price of natural gas, unless the recovery from coronavirus delivers an upside surprise.

How to Invest

Investors can gain exposure to movements in the price of natural gas via the United States Natural Gas Fund, LP (UNG), which holds near-month contracts in natural gas futures. Those looking for exposure to natural gas equities can use the First Trust Natural Gas ETF (FCG) as an investment vehicle. FCG tracks an equal-weighted index of US companies that derive a substantial portion of their revenue from the exploration & production of natural gas.

Given that the world is awash in natural gas, it could take a while for the market to rebalance itself, which means there is limited upside for the UNG in the near-term. Any positive headlines, however, would have a bigger impact on FCG. That’s because natural gas producers have struggled with declining gas prices for 10 years, during which time their stocks have gotten hammered, losing 92% of their value.

The closure of oil wells in the Permian and North Dakota regions could be especially beneficial to gas-focused companies operating in the Appalachians, since they will be able to capture a greater share of the market by default. Some of these companies—including EQT Corp (EQT), Range Resources Corp. (RRC), and CNX Resources Corp. (CNX)—saw their share prices more than double during the month of April. Those gains helped the FCG deliver a return of +51% last month. There is room for the Appalachian gas stocks to climb higher, since they are rising from a very low base.

This content was delivered to McAlinden Research Partners clients on May 4.
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McAlinden Research Partners (MRP) provides independent investment strategy research to investors worldwide. The firm’s mission is to identify alpha-generating investment themes early in their unfolding and bring them to its clients’ attention. MRP’s research process reflects founder Joe McAlinden’s 50 years of experience on Wall Street. The methodologies he developed as chief investment officer of Morgan Stanley Investment Management, where he oversaw more than $400 billion in assets, provide the foundation for the strategy research MRP now brings to hedge funds, pension funds, sovereign wealth funds and other asset managers around the globe.

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Disclosure:
1) McAlinden Research Partners disclosures are below.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.
4) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.

McAlinden Research Partners:
This report has been prepared solely for informational purposes and is not an offer to buy/sell/endorse or a solicitation of an offer to buy/sell/endorse Interests or any other security or instrument or to participate in any trading or investment strategy. No representation or warranty (express or implied) is made or can be given with respect to the sequence, accuracy, completeness, or timeliness of the information in this Report. Unless otherwise noted, all information is sourced from public data.

McAlinden Research Partners is a division of Catalpa Capital Advisors, LLC (CCA), a Registered Investment Advisor. References to specific securities, asset classes and financial markets discussed herein are for illustrative purposes only and should not be interpreted as recommendations to purchase or sell such securities. CCA, MRP, employees and direct affiliates of the firm may or may not own any of the securities mentioned in the report at the time of publication.

Source: McAlinden Research for Streetwise Reports   05/14/2020

McAlinden Research Partners reports that hedge funds that had been shorting natural gas have suddenly developed a strong appetite for natural gas stocks and bonds on the expectation that U.S. oil wells that generate gas as a by-product will close fast enough to make up for the collapse in global natural gas demand.

2019 was such a rough year for natural gas that by the time February 2020 rolled by, hedge funds had built up the largest net short position on record for the sector. Those investors have suddenly developed a strong appetite for natural gas stocks and bonds on the expectation that U.S. oil wells that generate gas as a by-product will close fast enough to make up for the collapse in global natural gas demand. Some Appalachian gas producers are especially well-positioned to benefit from such a prospect.

Global consumption of natural gas is on track to drop by 5% in 2020, according to the International Energy Agency (IEA). While that number sounds harmless, it represents a huge shock to the gas industry which has enjoyed ten years of uninterrupted demand growth, until the COVID-19 lockdowns brought that streak to an end.

Early evidence of the impact has already cropped up in the first quarter data, even though the lockdowns in Europe and the United States were still relatively new. While global demand fell more than 3% in 1Q 2020, demand in the United States dropped 4.5% from a year earlier, dragged down by an 18% decline in residential and commercial demand. For context, the last time U.S. gas demand contracted to this extent was during the Great Depression, when domestic demand tumbled by 13% in 1931 and by 7% in 1932.

Worsening Demand/Supply Imbalance

Although demand has experienced a historic plunge, supply has not been adjusted downward to match that plunge. In fact, the demand/supply imbalance that weighed on natural gas prices last year has only worsened. Natural gas inventories in the United States stood at 2.210 trillion cubic feet on April 24—up 783 billion cubic feet from a year ago and 360 billion cubic feet above the five-year average, according to the EIA. In other words, U.S. gas stockpiles are 55% higher than a year ago and 20% higher than the five-year average.

The biggest challenge to adapting output lies in the fact that turning the taps off at typical gas fields isn't easy. Moreover, those that can be stopped take time and money to restart, says the CFO of InfraStrata Plc, a U.K. firm focused on the development and commercialization of advanced energy infrastructure.

Almost Out of Storage

Back in April, MRP wrote about the sudden wave of oil storage demand that's been boosting the oil tanker market. It so happens that gas storage sites are also filling up quickly due to growing stockpiles of the commodity. Unless a major change occurs in the near-term, Europe could run out of storage space for its natural gas by July, or even earlier in some markets, according to industry players.

Speculators Flip from Bearish to Bullish

Some investors are already betting that the near-term change will be supply-driven, and that it will originate from the same place that, years ago, seeded the conditions that would eventually grow into today's natural gas glut. When oil prices plunged into negative territory last month, the US energy industry received a wakeup call. Better to start shutting off money-losing wells, they realized, than to have to pay traders to get rid of the oil.

More than 12% of U.S. gas output is “associated gas”, extracted as a byproduct of oil drilling. Less oil drilling means less associated gas, which effectively equates to a supply cut. The notion that there may be less shale gas coming from U.S. oil wells this year has prompted the fast money set to reverse their bearish bets on the commodity and its producers. In mid-February, hedge funds and other speculators were piled into the largest net short position on record for natural gas. Now, those same investors are net long for the first time since May 2019.

Beyond April's 26% Natural Gas Price Surge

Such a dramatic shift in sentiment has helped pushed the price of U.S. natural gas 26% higher in one month—from $1.55 per million British thermal units (MMBtu) on April 2nd to $1.96/MMBtu on May 4. Despite those gains, the commodity's price is still 10% lower than at the start of the year when it was trading at $2.17/MMBtu.

The question some investors are asking is whether these ultra-low prices will compel enough utilities to switch out of alternate power sources into natural gas, triggering a demand-driven price surge in the process. The IEA's forecasts for 2020 also shed some light on this matter.

As mentioned earlier in this report, the Paris-based agency which advises nations on energy policy estimates that global natural gas consumption will fall by 5% this year. Should the world economy recover faster than anticipated from the COVID-19 disruptions, the overall demand loss could narrow to about 2.7%, which would still mark the first annual drop in natural gas consumption since 2009. Much of the decline is expected to come from power generation.

The IEA has also projected that all sources of energy—i.e., oil, coal, natural gas, and nuclear—will see a decline in demand this year, with the exception of renewable energy. That's because renewables in many countries get first priority to feed electricity into the grid, enabling them to maintain or increase market share when there's a huge plunge in overall energy demand.

The energy source most at risk of losing market share to natural gas is coal, which is heading for its biggest fall in annual demand (-8.0%) since World War II. The fact that coal's share in the electricity mix has fallen in India, China, Europe, and parts of the U.S.—four regions with large and varied electricity markets — implies there is more pain ahead for this commodity. Based on the IEA's figures, any market share losses to natural gas are not enough to push the latter's overall growth into positive territory this year. This means, there likely won't be a demand-driven surge in the price of natural gas, unless the recovery from coronavirus delivers an upside surprise.

How to Invest

Investors can gain exposure to movements in the price of natural gas via the United States Natural Gas Fund, LP (UNG), which holds near-month contracts in natural gas futures. Those looking for exposure to natural gas equities can use the First Trust Natural Gas ETF (FCG) as an investment vehicle. FCG tracks an equal-weighted index of US companies that derive a substantial portion of their revenue from the exploration & production of natural gas.

Given that the world is awash in natural gas, it could take a while for the market to rebalance itself, which means there is limited upside for the UNG in the near-term. Any positive headlines, however, would have a bigger impact on FCG. That's because natural gas producers have struggled with declining gas prices for 10 years, during which time their stocks have gotten hammered, losing 92% of their value.

The closure of oil wells in the Permian and North Dakota regions could be especially beneficial to gas-focused companies operating in the Appalachians, since they will be able to capture a greater share of the market by default. Some of these companies—including EQT Corp (EQT), Range Resources Corp. (RRC), and CNX Resources Corp. (CNX)—saw their share prices more than double during the month of April. Those gains helped the FCG deliver a return of +51% last month. There is room for the Appalachian gas stocks to climb higher, since they are rising from a very low base.

This content was delivered to McAlinden Research Partners clients on May 4. To receive all of MRP's insights in your inbox Monday - Friday, follow this link for a free 30-day trial.

McAlinden Research Partners (MRP) provides independent investment strategy research to investors worldwide. The firm's mission is to identify alpha-generating investment themes early in their unfolding and bring them to its clients' attention. MRP's research process reflects founder Joe McAlinden's 50 years of experience on Wall Street. The methodologies he developed as chief investment officer of Morgan Stanley Investment Management, where he oversaw more than $400 billion in assets, provide the foundation for the strategy research MRP now brings to hedge funds, pension funds, sovereign wealth funds and other asset managers around the globe.

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2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.
4) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.

McAlinden Research Partners:
This report has been prepared solely for informational purposes and is not an offer to buy/sell/endorse or a solicitation of an offer to buy/sell/endorse Interests or any other security or instrument or to participate in any trading or investment strategy. No representation or warranty (express or implied) is made or can be given with respect to the sequence, accuracy, completeness, or timeliness of the information in this Report. Unless otherwise noted, all information is sourced from public data.

McAlinden Research Partners is a division of Catalpa Capital Advisors, LLC (CCA), a Registered Investment Advisor. References to specific securities, asset classes and financial markets discussed herein are for illustrative purposes only and should not be interpreted as recommendations to purchase or sell such securities. CCA, MRP, employees and direct affiliates of the firm may or may not own any of the securities mentioned in the report at the time of publication.

Energy Firm Posts Solid Q2, Positions Itself for Price Uncertainty

Source: Streetwise Reports   05/14/2020

A Haywood report explains why TORC Oil & Gas is “well positioned to ride out the current tumultuous oil price environment.”

In a May 6 research note, Haywood analyst Christopher Jones reported that TORC Oil & Gas Ltd. (TOG:TSX) had a “sound” Q2 FY20 and made strategic moves in response to oil price uncertainty. The company is “well positioned to ride out the current tumultuous oil price environment,” he added.

Jones reviewed the energy company’s results in Q2 FY20, noting that production and cash flow were in line with estimates. Production totaled 28,515 barrels of oil equivalent per day (28,525 boe/d), compared to Haywood and the Street’s forecasts of 28,500 boe/d and 28,400 boe/d, respectively. Capex also was as expected, at $65 million.

Cash flow per share amounted to $0.21, which was one cent above projections. The company’s hedge book on March 31, 2020, had an unrealized gain of $7.1 million at current strip.

During the quarter, TORC was hit with a total impairment charge of $853 million, as were many of its peers. Broken down, $704 million was for its Saskatchewan business, $132 for its Cardium business and $17 for its Monarch business.

At the end of Q2 FY20, TORC’s net debt was $382.7 million with $190.7 million available on the $500 million line.

In his report, Jones presented the changes TORC made to support liquidity in an ongoing uncertain market and commented, “These actions are logical in today’s environment and should not shock investors.”

The oil and gas entity decreased its planned capex spend to $75 million from $190 million. It shut in 4,000 boe/d of production with a potential increase of that. It suspended the monthly dividend and reduced costs where possible, including salaries.

“We believe TORC needs a West Texas Intermediate oil price of about US$25 per barrel to cover its cash costs and more than US$35 a barrel to reinstate the dividend and resume drilling,” wrote Jones.

Haywood has a Buy rating and a CA$1.75 per share target price on TORC Oil & Gas. The stock is trading now at around CA$1.05 per share.

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Disclosure:
1) Doresa Banning compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees.
3) Comments and opinions expressed are those of the specific experts and not of Streetwise Reports or its officers. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
4) The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.

Disclosures from Haywood Securities, TORC Oil & Gas Ltd., May 6, 2020

Analyst Certification: I, Christopher Jones, hereby certify that the views expressed in this report (which includes the rating assigned to the issuer’s shares as well as the analytical substance and tone of the report) accurately reflect my/our personal views about the subject securities and the issuer. No part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations.

Important Disclosures

Other material conflict of interest of the research analyst of which the research analyst or Haywood Securities Inc. knows or has reason to know at the time of publication or at the time of public appearance: n/a.

Research policy available here.

( Companies Mentioned: TOG:TSX,
)

Source: Streetwise Reports   05/14/2020

A Haywood report explains why TORC Oil & Gas is "well positioned to ride out the current tumultuous oil price environment."

In a May 6 research note, Haywood analyst Christopher Jones reported that TORC Oil & Gas Ltd. (TOG:TSX) had a "sound" Q2 FY20 and made strategic moves in response to oil price uncertainty. The company is "well positioned to ride out the current tumultuous oil price environment," he added.

Jones reviewed the energy company's results in Q2 FY20, noting that production and cash flow were in line with estimates. Production totaled 28,515 barrels of oil equivalent per day (28,525 boe/d), compared to Haywood and the Street's forecasts of 28,500 boe/d and 28,400 boe/d, respectively. Capex also was as expected, at $65 million.

Cash flow per share amounted to $0.21, which was one cent above projections. The company's hedge book on March 31, 2020, had an unrealized gain of $7.1 million at current strip.

During the quarter, TORC was hit with a total impairment charge of $853 million, as were many of its peers. Broken down, $704 million was for its Saskatchewan business, $132 for its Cardium business and $17 for its Monarch business.

At the end of Q2 FY20, TORC's net debt was $382.7 million with $190.7 million available on the $500 million line.

In his report, Jones presented the changes TORC made to support liquidity in an ongoing uncertain market and commented, "These actions are logical in today's environment and should not shock investors."

The oil and gas entity decreased its planned capex spend to $75 million from $190 million. It shut in 4,000 boe/d of production with a potential increase of that. It suspended the monthly dividend and reduced costs where possible, including salaries.

"We believe TORC needs a West Texas Intermediate oil price of about US$25 per barrel to cover its cash costs and more than US$35 a barrel to reinstate the dividend and resume drilling," wrote Jones.

Haywood has a Buy rating and a CA$1.75 per share target price on TORC Oil & Gas. The stock is trading now at around CA$1.05 per share.

Sign up for our FREE newsletter at: www.streetwisereports.com/get-news

Disclosure:
1) Doresa Banning compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees.
3) Comments and opinions expressed are those of the specific experts and not of Streetwise Reports or its officers. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
4) The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.

Disclosures from Haywood Securities, TORC Oil & Gas Ltd., May 6, 2020

Analyst Certification: I, Christopher Jones, hereby certify that the views expressed in this report (which includes the rating assigned to the issuer’s shares as well as the analytical substance and tone of the report) accurately reflect my/our personal views about the subject securities and the issuer. No part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations.

Important Disclosures

Other material conflict of interest of the research analyst of which the research analyst or Haywood Securities Inc. knows or has reason to know at the time of publication or at the time of public appearance: n/a.

Research policy available here.

( Companies Mentioned: TOG:TSX, )

Brien Lundin: To Insure Yourself Against Financial Upheaval, Buy Gold and Silver Now

Source: Maurice Jackson for Streetwise Reports   05/12/2020

Brien Lundin, sector expert and publisher of the Gold Newsletter, offers his perspective on the monetary ramifications of the COVID-19 pandemic in this conversation with Maurice Jackson of Proven and Probable.

Maurice Jackson: Today we will discuss the 2020 financial crisis and investment opportunities for your portfolio. Joining us for a conversation is Brien Lundin, the president of Jefferson Financial.

Mr. Lundin, investors are in a state of confusion and they’re looking for some sound guidance. These are truly unique times. For someone who says, “We’ve been here before, it’s going to be all right,” can you please share what are the primary differences between the global financial crisis of 2008 versus 2020?

Brien Lundin: Well, two things really. The primary difference, first off, is the degree of monetary accommodation and stimulus efforts. We always predicted this would happen to a greater degree this next time around. But the second big difference has been the rapidity of the move. We expected—and I had been predicting in Gold Newsletter for a couple of years now—that the next crisis would come, they would find some excuse to demand more easing from the Federal Reserve, and the patient would demand more of the drug this time, so they would have to do more than they did before. But I expected all of this to play out over, say, five years. I did not expect it to play out over veritably five days, as it has. That’s been the big difference. Time has been compressed, everything’s on turbo, it’s all coming at us very quickly. That is why I believe that investors have to just really focus and leap ahead, and think ahead about all of the ramifications.

Maurice Jackson: Are you surprised at the responses from the Congress, the Treasury and the Fed?

Brien Lundin: No, not at all. As I mentioned, I had expected it to come—really this year at some point; I expected it later in the year. And more a function of the passage of time, because this market has been built on the adrenaline of easy money—and by this market, I mean the stock market, which, in turn, now means the economy. It had all been built upon this foundation, a very shaky foundation of the historic accommodation from the Federal Reserve. And then, at some point, I predicted. . .the market was going to throw a hissy fit and start correcting and demand that the Fed come back and start this whole rate cutting cycle again.

And what I had been saying was that this time around, it would have to do more quantitative easing—go back to zero again on interest rates, but do more quantitative easing—than they had ever done before, and that this time around they would have to actually get into some fiscal measures, stimulus spending, direct aid and spending to the economy infrastructure and that sort of thing. So none of this came as a surprise. I knew the market was going to look for some excuse.

As it happened, COVID-19 was the excuse, it was the perfect excuse. It’s a very valid excuse in my mind. But all of this happened anyway, but later and at a much slower pace. So no, I’m not surprised at their reaction and I think it’s only the beginning. I think they’re going to do much, much more.

Maurice Jackson: All three of the aforementioned are going to be extremely resilient in their efforts to solve problems that they and their predecessors created. When you hear the Fed chairman state that now is not the time to worry about debt, but use the great fiscal powers of the U.S. to avoid deeper damage to the economy, does that signal to investors that everything is going to be OK?

Brien Lundin: Well, I think it signals to investors that it’s whatever it takes—in that all of the rules, all of the restrictions have been thrown out the window; in that the Fed will overshoot, if anything, in its mitigation efforts.

So I think what that tells investors is that we’re going to see the Fed’s balance sheet soar to the sky. We’re going to see money printing of a degree we’ve never seen before out of war time, and probably even including that. And they’re not going to be restrained in any way. So I think that’s telling us that everything we expected is going to happen, but it’s going to be almost exponential to what we would have realistically expected.

Maurice Jackson: Speaking of the national debt, where do we currently stand and where do you think it’ll be by the end of the year?

Brien Lundin: Well, we were pushing $23 trillion, in terms of the gross federal debt before this crisis. And I think by the end of the year, or by the time this crisis runs its course, will be in excess of $26 trillion.

And when Donald Trump was elected, I made the remark that, judging on past history, every eight-year term, eight-year presidential administration, typically doubles the debt of the previous administration. And if that was going to happen, in this case, we would have a federal debt of $40 trillion. At the time I admitted that sounded absurd, but this was the pattern and I just wanted to bring to everybody’s attention. Now, it doesn’t seem so absurd anymore—that by the time we get out of this, we’ll be approaching a federal debt of $40 trillion.

But at some point it doesn’t much matter anymore because we’ve already reached the point of no return. We’ve already reached a level in the federal debt where we can no longer have real interest rates, at least above zero. Now that is interest rates adjusted for inflation. And the debt is so large now that it must be depreciated away more quickly than the debt service costs are being paid on that debt, otherwise, the federal budget would collapse.

There’s no way we can’t afford to pay, and no way politically that I think American citizens would agree to pay a trillion dollars or more on debt service costs every year. And that’s where we’re getting to, that’s where we would be if we had interest rates at any appreciable level, so we simply cannot have interest rates at those levels. Again, the debt will have to be depreciated away, moreover through the devaluation of the dollar, and that’s going to happen, I think, to greater effect and at a greater speed than we expected before or that we’ve seen before.

Maurice Jackson: The big elephant in the room that many investors may be overlooking, is GDP (gross domestic product). How does GDP factor into this discussion?

Brien Lundin: Well, in terms of this crisis, it’s going to take a big hit. It already took a big hit, down 4.5–4.8%, I believe, in the first quarter. The second quarter is going to be absolutely abysmal. I mean, there are economists predicting 20–30% declines in GDP for the second quarter, and that’s going to be shocking.

I think that may be the impetus for that second dive down in the stock market that everybody’s talking about. So we may see all of that play out.

But again, I think that the policy response, which you’ll see from the Fed, which you’ll see from Congress and the administration, is a redoubling of their efforts to rescue the economy, to stimulate the economy. And we’ll see the money printing, we’ll see the fiscal spending, the stimulus programs, the infrastructure spending. Really, it’ll be a blank check mentality.

Maurice Jackson: Our government representatives must not be students of monetary history, as they appear to have no regard for the unprecedented inflation of our currency. When do you foresee the effects of inflation to begin impacting us all?

Brien Lundin: Well, it’s going to happen. First off, this time I think we need that. In 2008, post-2008, we did not see much, we didn’t see all of that money printing translated into retail price inflation, which is what the general public and the general investing public perceives as real inflation. We didn’t see that because it was all encapsulated within the financial system and, of course, the rescue efforts back then were aimed more toward rescuing the financial system.

So this time around. it’s a bit different. It’s not a crisis within the financial system and a lot of the rescue efforts, a lot of the stimulus, is being aimed more at Main Street rather than Wall Street.

So I think we’re going to see is more real-world effects of this monetary stimulation. We’re going to see inflation perk up this time around. I think. . .to keep gold on a bull market path this time around, we’ll actually have to see that kind of inflation.

But the good news for gold bugs is I think we will see it. I think it’s, at this point, unavoidable, because there’s so much. . .helicopter money this time around, checks being sent to American citizens directly. With that kind of monetary stimulus, I think inflation is unavoidable.

Maurice Jackson: Turning our focus to the stock market: With the declining currency, what kind of impact do you foresee in the general equities? Is this the time to get out?

Brien Lundin: Well, I haven’t been a big stock bear. I don’t think that you can look at, say, gold and the stock market as being contra-cyclical. I think everything right now—the metals, commodities, the stock market, the bond market—everything’s being driven by central bank stimulus. It has been to great degree since 2008, and really over the decade or so before that, as we’ve seen the Fed become more and more involved in trying to manage the downturns in the economy. We’ve had these boom-and-bust cycles over and over again, but with all of this liquidity being thrown into the market, all of these typical inverse correlations or uncorrelated assets—all those correlations tend to go toward one.

So what happens is this kind of monetary stimulus is bullish for not only gold and precious metals, but also equities, also the bond market. So I don’t think that the stock market necessarily will falter in the days ahead, I don’t think it has to. Now, I think initially, all of this stimulus will be bullish for the stock market.

Maurice Jackson: And I’m assuming that includes mining and junior mining companies. Is that correct, sir?

Brien Lundin: Oh, absolutely. Absolutely. Because they’re going to be supported by two big trends, by a bullish environment for equities in general, and by a bullish environment for the precious metals.

Maurice Jackson: And I guess oil would also factor in that discussion as well, lower oil prices, correct?

Brien Lundin: Yeah. Oil prices for the producers help tremendously, because energy is one of the primary input costs into gold production. Not only that, but we’re going to see the CPI [consumer price index]—the public, the readings of inflation—drop a bit because of lower energy prices over the next few months.

But as we see supply destruction on oil, and we see the CPI get to lower levels because of lower oil prices, when oil prices do rebound, it’s a lot easier to see a rebound in oil from say, $15 to $25 a barrel, and that’s a tremendous. On a percentage basis, that’s a tremendous increase. So we’re going to see, once we get some economic recovery and some demand recovery in oil, we’re going to see oil prices bounce, not to necessarily the $45, $50, $55 level, but to a significant degree, to where it will really boost the inflation readings. And I think that’s going to come as a shock to the markets.

Maurice Jackson: Speaking of mining and junior mining companies, which ones have your attention at the moment and why?

Brien Lundin: Well, a lot of them, Maurice. I tell my readers that they need to buy the companies that are either in production or getting ready to get into production, and or have large established resources, because these kinds of optionality plays will be the first to benefit.

So that’s the general advice I’ve been giving my readers. I haven’t necessarily been taking that advice personally, because I know a lot of these companies very well. They have great exploration programs and great drill targets, and I’ve been pecking away at that myself and recommending them to my readers, at some of these very low levels.

Some of the companies I like out there—I had a chance recently to talk with the management of the geologic team of Lion One Metals Ltd. (LIO:TSX.V; LOMLF:OTCQX) and I really liked their project in Fiji, in particular the Caldera target. I think it’s one of the most spectacular exploration targets you’ll find in the world today.

And I’m also very familiar with Fiji and I think that’s because I’m the chairman of Thunderstruck Resources Ltd. (AWE:TSX.V; THURF:OTC.MKTS), which is a exploration company with a drilling program ongoing in Fiji. I’m very familiar with that regime and I think a lot of investors aren’t familiar with it. It’s a blossoming new frontier for mining and metals exploration.

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Maurice Jackson: And if I may interject there, with Lion One Metals, the CEO there is Walter Berukoff and their flagship project is the Tuvatu, and it’s an alkaline deposit (VRIFY). That’s what’s very interesting here—it’s an alkaline deposit, so we’re looking at some significant tonnage and grade here, potentially.

Brien Lundin: Gold deposits, specifically alkaline deposits of that sort—the list of those kinds of deposits that have not become world-class mines approaches zero. The odds dramatically increase if it’s a major discovery. So yeah, you bring up a very good point for that deposit. That’s why I like it a lot; that’s why I’m a shareholder personally.

Maurice Jackson: And was there another company you were about the reference? I’m sorry I interrupted you.

Brien Lundin: I’ve been recommending Millrock Resources Inc. (MRO:TSX.V; MLRKF:OTCQB), because their project adjacent to, on trend with, and surrounding the Pogo deposit in Alaska, is just amazing. They did an extraordinary joint venture agreement with an Australian company, where they will have $5 million of drilling accomplished this year.

They were just cut off by the COVID crisis and had to halt drilling after one-and-a-half holes. Now they got the results back from that first one and a half holes and they were disappointing.

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And, in fact, the second hole didn’t reach the targeted depth, so it was really just one of the holes, and it didn’t turn up with good gold grades at all. So the stock has taken a hit.

But the key here is that the Pogo deposit—the new drilling on the Pogo deposit—trends onto their ground in two directions, and with $5 million of drilling upcoming, the chances that they’re going to vector into what could be a world-class deposit are very good. So, I still like that one and I think it’s a bargain right now.

Maurice Jackson: And likewise, the CEO there is a Gregory Beischer. You were discussing the 64North Project and the Aurora targets and yes, they only got about 25% completed there, but you couldn’t be in a better location. And again, the gold wasn’t high, correct, but the indicator minerals, they’re there, that’s what’s remarkable. It was identical, basically, to the Pogo mine, which is Northern Star Resources Ltd. (NST:ASX) by the way, that’s their neighbor there. But they’re within walking distance of that mine. Strategic location, you couldn’t beat it.

Brien Lundin: And the drilling of Northern Star kept going, progressing step by step closer to their property boundaries and essentially reached the property boundaries. And yes, the indicator minerals are there. The geology is just what they were looking for. The gold grades are barely anomalous at this point.

But with $5 million of drilling being done, they can vector in to where the higher grades are potentially, where you hope the higher grades and a deposit would be. It’s hard to vector, though, with one drill hole, because it’s just a point. But with $5 million worth of drilling, again, I have great confidence that they’ll be able to find what they’re looking for.

Maurice Jackson: And they have two strategic partners, Resolution Minerals Ltd. (RML:ASX) and EMX Royalty Corp. (EMX:TSX.V; EMX:NYSE.American) and they’ve done their due diligence.

Brien Lundin: And they always do: some of the smartest people in business.

Maurice Jackson: Absolutely. All right. Germane to this conversation, if the U.S. currency is going to lose purchasing power, how does money—i.e., gold and silver—factor into one’s portfolio?

Brien Lundin: As you can imagine, I’ve gotten a lot of inquiries, and people are generalist investors, and we’re publishing a newsletter called Gold Newsletter that really is the preeminent, the longest-lasting, the first of the precious metals advisories out there. I get a lot of people coming to me and asking, “How do I get started?” And I tell them all the time, “You have to start with a physical allocation of precious metals, physical metals, either in your possession or accessible to you.” And you can build on that later and you can store more elsewhere, but you need to ensure your wealth with physical precious metals holdings.

You can then look into other ways to leverage these things we’re talking about—of higher rising prices for gold and silver, which seem inevitable, and those are investments—but I tell them they need to have insurance for their wealth, insurance for everything they’ve worked for all their life, by holding physical gold and silver.

Maurice Jackson: Very, very responsible words. Thank you for sharing that. What does the current spot price of gold suggest to you, as the number of golden investors have been expecting a more robust response in the price?

Brien Lundin: When I began writing our May issue of Gold Newsletter, I was thinking, gold’s really got to get moving. And then I started reading the previous month’s issue, and then looked at the gold price. And said, “Damn, gold was $100 cheaper a month ago.”

And it’s $100 higher today, but it doesn’t seem like it’s really got that momentum and that’s because it had a really torrid run the first two weeks of April, and spent the last two weeks of April and now early May, just digesting those gains. It hasn’t fallen, it hasn’t really resumed the rally yet, but it’s been bouncing around that $1,700/ounce level.

I think it’s completely normal. I think gold’s waiting for the next shoe to drop, and the next indication that we’re going to have more and more of the stimulus—and it’s going to get that because, as I said, the second-quarter GDP numbers are going to be absolutely horrendous. And Congress just has to get back to trying to fill the trough once again.

And they’re going to do that. We’re going to have more and more stimulus programs, the most accommodative Federal Reserve we’ve probably seen in history, and we’ve only just begun.

Maurice Jackson: I’m not a big fan of the big banks, but Bank of America recently shared that they expect the gold price to reach $3,000/ounce. So it’s not just you sharing this.

Brien Lundin: Yeah, yeah. And that’s a very staid, credible institution. They tend to be a little bit more dramatic than the other banks and the other big institutions. But still, that’s something that I’m even loath to say in interviews, without sounding crazy.

But that said, I fully expect it at some point and I think their logic is absolutely accurate and impeccable.

Maurice Jackson: We all have our favorites—gold, silver, platinum and palladium. May I ask, what are you buying right now and why?

Brien Lundin: I am buying more silver than gold. I am buying silver because it has not caught up to gold yet. It typically takes a while to catch up to gold in a long-term monetary-based gold bull market, which is what we’re in. It typically takes silver longer to respond, but then it outperforms gold. We haven’t really gotten to that outperform process yet, or stage yet, and I think we’re going to get there. So I’m buying physical silver; have been buying physical silver. And in general the mining stocks, I’m buying the exploration plays that I know a lot about.

Maurice Jackson: Can you share your outlook on all four of the metals referenced?

Brien Lundin: Yeah, I’m very bullish of gold. I tell people, if you like gold, you have to love silver, so they are one in the same, as far as the big drivers.

Platinum and palladium, I’m bullish on them but for different reasons. I think that there are genuine supply-demand dynamics in play for both of those metals that are inescapable. Right now. . .those precious metals had been abated a little bit, because a lot of the demand is driven by automobile demand and catalytic converter demand. So that will take a while to come back. But in the meantime, there are real supply issues with both of those metals, and I can tell you that the major producers are very bullish for the long term, and they’re looking to invest in new projects.

I just recommended Group Ten Metals Inc. (PGE:TSX.V; PGEZF:OTCQB; 5D32:FSE) recently. It’s another one of my platinum-palladium plays, and I think the majors are going to be aggressive. Over the next couple of years, there’s a window of opportunity for some of these PGM [platinum group metal] juniors are going to be taken out. And I know that those juniors are working toward that opportunity.

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Maurice Jackson: And the CEO for Group 10 Metals is Michael Rowley. We had an opportunity to do a live webinar with him two weeks ago (click here). And the flagship project is the Stillwater West, located in Montana.

Switching gears, sir: you’re the host of the New Orleans Investment Conference, the world’s greatest investment event. For someone new, can you please introduce us to the New Orleans Investment Conference?

Brien Lundin: The New Orleans Investment Conference is the original retail investment conference, or really investment conference of any stripe. It was started in 1974 by Jim Blanchard, to teach American citizens how to invest in gold, and that right to invest in gold was something that Jim was instrumental in helping get back to American citizens. It had been taken away by Roosevelt in the 1930s.

So the modern gold bull market. . .has to thank the New Orleans conference for bringing that market to the populace, and showing retail investors how to buy gold, how to buy precious metals.

It’s not your typical conference. We cover all of the sectors, all of the asset classes, but we do have a golden thread that runs through our event, or golden theme that’s run through it over the decades, and we feature a lot of conservative/libertarian speakers. We feature a lot of big-name speakers that you won’t find at other events.

And the camaraderie of our attendees, and the intelligence that they’re willing to share, because they’re all generally very successful investors in their own right—it’s just an experience that you have to be there to really understand it. And we encourage anyone interested, whatever level of interest or experience they may be, if they’re interested in preserving their wealth and building it during uncertain times, they really do need to attend the New Orleans Conference.

Maurice Jackson: And speaking of attendance, what are the dates this year?

Brien Lundin: October 14 through 17, and we’re planning for a live event down here in New Orleans. It’s always a lot of fun. And we’re hopeful and actually expecting that all of this pandemic crisis and nervousness will be behind us—well behind us—by then.

Maurice Jackson: Who are some of the featured speakers this year and the discussion topics?

Brien Lundin: Well, we’re featuring the best of the experts in gold, silver and alternative investments, and how to protect your wealth, and again, how to build it during these uncertain times. We’ve invited most of the major newsletter writers and commentators on the economy and on precious metals and mining stocks, because I really feel like this is an opportunity that only comes around once or twice in our investing careers. We’ve been very fortunate to be on the cutting edge of every bull market in the metals, and the results have just been stupendous for investors who come to our conference, who get the hottest picks from the world’s top experts and get to meet a lot of the companies in our exhibit hall.

Maurice Jackson: I’ve had the opportunity to attend five years at the New Orleans Investment Conference, and I must say it is very welcoming experience. No matter what your background is or level of investment experience is, you are welcome there with open arms and you have the opportunity to learn, not just from the speakers but from fellow investors, to share intellectual ideas and take them back home. The relationships that I’ve created in these last five years I still have today, and I thank you for that, sir.

Brien Lundin: Yes. And these attendees are my clients, but they grow to be, over the years have grown to be close friends, and it’s like an old-home week. Every year everybody gets together and makes new friends and greets old friends, and everyone is so willing to share their ideas and thoughts and strategies.

And I tell people every year, as we open the conference: “Y’all going to be looking at the stage, going to see some extraordinary speakers come up to the podium and give you their ideas over the next three, four days, but look around you in the audience. There’s just as much to be gained from the people that come to this event.” Because by coming to the New Orleans conference, they’ve already identified themselves as very smart, very active, intellectually curious, successful investors and there’s so much to be learned and shared amongst all of us.

Maurice Jackson: Speaking of clients, Mr. Lundin, please introduce us to Jefferson Financial and the Gold Newsletter.

Brien Lundin: Jefferson Financial is essentially the holding company that operates both the Gold Newsletter and the New Orleans Investment Conference, and publishes our very special reports and other special projects.

So Gold Newsletter is the first precious metals advisory. We’re now in our 50th year of helping investors navigate gold. In the first few years, Gold Newsletter was primarily involved in advocating for the legalization of gold ownership. That’s how long we’ve been around. The New Orleans Conference, as we’ve just said, is where we all get together every year and share ideas and our predictions for the future.

And I can tell you that in times like we’re in right now, it is not only not unusual, it’s expected for us to find companies and get stock recommendations of companies that go on to go up four or five, 10, 20 or more times in value. This is where you find opportunities like that. This is where you find investors that have that kind of potential.

Maurice Jackson: Before we close, sir, what keeps you up at night that we don’t know about?

Brien Lundin: Oh, well, lately maybe the pandemic, but really nothing keeps me up at night these days.

In regards to the economy, et cetera, I think that what we’re seeing play out right now in the economy has been inevitable for some time. And if I do have any worry, I guess it’s that not more investors know how to protect themselves through gold and silver.

You buy fire insurance, but you don’t really expect your home to catch on fire. But gold and silver are the insurance for an event that you know is going to happen, that you know the dollar is going to be depreciated over time. It’s insurance you only have to pay the premium one time, to get some protection. So it’s a thing that more people need to know about, and they need to do, and they need to do it now. We’re still in the very early stages of this game and we have literally years to come, of watching these trends play out and people really need to own gold and silver now, while they still can.

Maurice Jackson: And we’re proud to have an affiliation with the Gold Newsletter. Mr. Lundin, I think, are we not in the Gold Newsletter as a licensed representative for Miles Franklin?

Brien Lundin: Yes, actually we have an investor’s guide to gold and silver that tells people every way to invest in the precious metals, from physical metals, through mining stocks, even futures and options and more. But we also list the best dealers, the best conferences to go to, the best newsletters to subscribe to. So it’s all there in one stop shop, a 30-page special report that explains it all, and which also lists you, Maurice Jackson, as a recommended dealer.

Maurice Jackson: Well, we’re honored to be part of that elite team, sir. Last question. What did I forget to ask?

Brien Lundin: Well, I guess you forgot for me to give you a specific price prediction over a specific timeframe, which I would not have done anyway. But a lot of people try, a lot of people try.

Maurice Jackson: No, I think that’s responsible, because we don’t know where the currency is going to go and we don’t know the government’s response. So that’s a moving target.

But I think you said the most responsible thing—the prudent thing to do as a cornerstone for your investment portfolio is to own some physical precious metals. It’s insurance, and that’s the most responsible way I can approach it and I think you’ve covered well, sir.

Brien Lundin: Yes. It gives you peace of mind, so you can sleep at night knowing that you have that working for you.

And again, these trends are undeniable, they’re inevitable. People have gone through them throughout human history. It’s going to happen again—the dollar will be depreciated, so people need to own gold and silver.

Maurice Jackson: Mr. Lundin, for someone listening that wants to get more information on your work, please share the contact details.

Brien Lundin: www.goldnewsletter.com and www.neworleansconference.com.

Maurice Jackson: And as a reminder, I am licensed representative for Miles Franklin Precious Metals Investments, where we provide a number options to expand your precious metals portfolio, from physical delivery, offshore depositories and precious metals IRAs. Call me directly at (855) 505-1900 or you may e-mail maurice@milesfranklin.com.

Finally, please subscribe to www.provenandprobable.com; subscription is free.

Brien Lundin of Jefferson Financial, thank you for joining us today on Proven and Probable.

Maurice Jackson is the founder of Proven and Probable, a site that aims to enrich its subscribers through education in precious metals and junior mining companies that will enrich the world.

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Disclosure:
1) Maurice Jackson: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Group Ten Metals, Millrock Resources, and Lion One Metals. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: Group Ten Metals, Millrock Resources, and Lion One Metals are sponsors of Proven and Probable. Proven and Probable disclosures are listed below.
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( Companies Mentioned: PGE:TSX.V; PGEZF:OTCQB; 5D32:FSE,
LIO:TSX.V; LOMLF:OTCQX,
MRO:TSX.V; MLRKF:OTCQB,
)

Source: Maurice Jackson for Streetwise Reports   05/12/2020

Brien Lundin, sector expert and publisher of the Gold Newsletter, offers his perspective on the monetary ramifications of the COVID-19 pandemic in this conversation with Maurice Jackson of Proven and Probable.

Maurice Jackson: Today we will discuss the 2020 financial crisis and investment opportunities for your portfolio. Joining us for a conversation is Brien Lundin, the president of Jefferson Financial.

Mr. Lundin, investors are in a state of confusion and they're looking for some sound guidance. These are truly unique times. For someone who says, "We've been here before, it's going to be all right," can you please share what are the primary differences between the global financial crisis of 2008 versus 2020?

Brien Lundin: Well, two things really. The primary difference, first off, is the degree of monetary accommodation and stimulus efforts. We always predicted this would happen to a greater degree this next time around. But the second big difference has been the rapidity of the move. We expected—and I had been predicting in Gold Newsletter for a couple of years now—that the next crisis would come, they would find some excuse to demand more easing from the Federal Reserve, and the patient would demand more of the drug this time, so they would have to do more than they did before. But I expected all of this to play out over, say, five years. I did not expect it to play out over veritably five days, as it has. That's been the big difference. Time has been compressed, everything's on turbo, it's all coming at us very quickly. That is why I believe that investors have to just really focus and leap ahead, and think ahead about all of the ramifications.

Maurice Jackson: Are you surprised at the responses from the Congress, the Treasury and the Fed?

Brien Lundin: No, not at all. As I mentioned, I had expected it to come—really this year at some point; I expected it later in the year. And more a function of the passage of time, because this market has been built on the adrenaline of easy money—and by this market, I mean the stock market, which, in turn, now means the economy. It had all been built upon this foundation, a very shaky foundation of the historic accommodation from the Federal Reserve. And then, at some point, I predicted. . .the market was going to throw a hissy fit and start correcting and demand that the Fed come back and start this whole rate cutting cycle again.

And what I had been saying was that this time around, it would have to do more quantitative easing—go back to zero again on interest rates, but do more quantitative easing—than they had ever done before, and that this time around they would have to actually get into some fiscal measures, stimulus spending, direct aid and spending to the economy infrastructure and that sort of thing. So none of this came as a surprise. I knew the market was going to look for some excuse.

As it happened, COVID-19 was the excuse, it was the perfect excuse. It's a very valid excuse in my mind. But all of this happened anyway, but later and at a much slower pace. So no, I'm not surprised at their reaction and I think it's only the beginning. I think they're going to do much, much more.

Maurice Jackson: All three of the aforementioned are going to be extremely resilient in their efforts to solve problems that they and their predecessors created. When you hear the Fed chairman state that now is not the time to worry about debt, but use the great fiscal powers of the U.S. to avoid deeper damage to the economy, does that signal to investors that everything is going to be OK?

Brien Lundin: Well, I think it signals to investors that it's whatever it takes—in that all of the rules, all of the restrictions have been thrown out the window; in that the Fed will overshoot, if anything, in its mitigation efforts.

So I think what that tells investors is that we're going to see the Fed's balance sheet soar to the sky. We're going to see money printing of a degree we've never seen before out of war time, and probably even including that. And they're not going to be restrained in any way. So I think that's telling us that everything we expected is going to happen, but it's going to be almost exponential to what we would have realistically expected.

Maurice Jackson: Speaking of the national debt, where do we currently stand and where do you think it'll be by the end of the year?

Brien Lundin: Well, we were pushing $23 trillion, in terms of the gross federal debt before this crisis. And I think by the end of the year, or by the time this crisis runs its course, will be in excess of $26 trillion.

And when Donald Trump was elected, I made the remark that, judging on past history, every eight-year term, eight-year presidential administration, typically doubles the debt of the previous administration. And if that was going to happen, in this case, we would have a federal debt of $40 trillion. At the time I admitted that sounded absurd, but this was the pattern and I just wanted to bring to everybody's attention. Now, it doesn't seem so absurd anymore—that by the time we get out of this, we'll be approaching a federal debt of $40 trillion.

But at some point it doesn't much matter anymore because we've already reached the point of no return. We've already reached a level in the federal debt where we can no longer have real interest rates, at least above zero. Now that is interest rates adjusted for inflation. And the debt is so large now that it must be depreciated away more quickly than the debt service costs are being paid on that debt, otherwise, the federal budget would collapse.

There's no way we can't afford to pay, and no way politically that I think American citizens would agree to pay a trillion dollars or more on debt service costs every year. And that's where we're getting to, that's where we would be if we had interest rates at any appreciable level, so we simply cannot have interest rates at those levels. Again, the debt will have to be depreciated away, moreover through the devaluation of the dollar, and that's going to happen, I think, to greater effect and at a greater speed than we expected before or that we've seen before.

Maurice Jackson: The big elephant in the room that many investors may be overlooking, is GDP (gross domestic product). How does GDP factor into this discussion?

Brien Lundin: Well, in terms of this crisis, it's going to take a big hit. It already took a big hit, down 4.5–4.8%, I believe, in the first quarter. The second quarter is going to be absolutely abysmal. I mean, there are economists predicting 20–30% declines in GDP for the second quarter, and that's going to be shocking.

I think that may be the impetus for that second dive down in the stock market that everybody's talking about. So we may see all of that play out.

But again, I think that the policy response, which you'll see from the Fed, which you'll see from Congress and the administration, is a redoubling of their efforts to rescue the economy, to stimulate the economy. And we'll see the money printing, we'll see the fiscal spending, the stimulus programs, the infrastructure spending. Really, it'll be a blank check mentality.

Maurice Jackson: Our government representatives must not be students of monetary history, as they appear to have no regard for the unprecedented inflation of our currency. When do you foresee the effects of inflation to begin impacting us all?

Brien Lundin: Well, it's going to happen. First off, this time I think we need that. In 2008, post-2008, we did not see much, we didn't see all of that money printing translated into retail price inflation, which is what the general public and the general investing public perceives as real inflation. We didn't see that because it was all encapsulated within the financial system and, of course, the rescue efforts back then were aimed more toward rescuing the financial system.

So this time around. it's a bit different. It's not a crisis within the financial system and a lot of the rescue efforts, a lot of the stimulus, is being aimed more at Main Street rather than Wall Street.

So I think we're going to see is more real-world effects of this monetary stimulation. We're going to see inflation perk up this time around. I think. . .to keep gold on a bull market path this time around, we'll actually have to see that kind of inflation.

But the good news for gold bugs is I think we will see it. I think it's, at this point, unavoidable, because there's so much. . .helicopter money this time around, checks being sent to American citizens directly. With that kind of monetary stimulus, I think inflation is unavoidable.

Maurice Jackson: Turning our focus to the stock market: With the declining currency, what kind of impact do you foresee in the general equities? Is this the time to get out?

Brien Lundin: Well, I haven't been a big stock bear. I don't think that you can look at, say, gold and the stock market as being contra-cyclical. I think everything right now—the metals, commodities, the stock market, the bond market—everything's being driven by central bank stimulus. It has been to great degree since 2008, and really over the decade or so before that, as we've seen the Fed become more and more involved in trying to manage the downturns in the economy. We've had these boom-and-bust cycles over and over again, but with all of this liquidity being thrown into the market, all of these typical inverse correlations or uncorrelated assets—all those correlations tend to go toward one.

So what happens is this kind of monetary stimulus is bullish for not only gold and precious metals, but also equities, also the bond market. So I don't think that the stock market necessarily will falter in the days ahead, I don't think it has to. Now, I think initially, all of this stimulus will be bullish for the stock market.

Maurice Jackson: And I'm assuming that includes mining and junior mining companies. Is that correct, sir?

Brien Lundin: Oh, absolutely. Absolutely. Because they're going to be supported by two big trends, by a bullish environment for equities in general, and by a bullish environment for the precious metals.

Maurice Jackson: And I guess oil would also factor in that discussion as well, lower oil prices, correct?

Brien Lundin: Yeah. Oil prices for the producers help tremendously, because energy is one of the primary input costs into gold production. Not only that, but we're going to see the CPI [consumer price index]—the public, the readings of inflation—drop a bit because of lower energy prices over the next few months.

But as we see supply destruction on oil, and we see the CPI get to lower levels because of lower oil prices, when oil prices do rebound, it's a lot easier to see a rebound in oil from say, $15 to $25 a barrel, and that's a tremendous. On a percentage basis, that's a tremendous increase. So we're going to see, once we get some economic recovery and some demand recovery in oil, we're going to see oil prices bounce, not to necessarily the $45, $50, $55 level, but to a significant degree, to where it will really boost the inflation readings. And I think that's going to come as a shock to the markets.

Maurice Jackson: Speaking of mining and junior mining companies, which ones have your attention at the moment and why?

Brien Lundin: Well, a lot of them, Maurice. I tell my readers that they need to buy the companies that are either in production or getting ready to get into production, and or have large established resources, because these kinds of optionality plays will be the first to benefit.

So that's the general advice I've been giving my readers. I haven't necessarily been taking that advice personally, because I know a lot of these companies very well. They have great exploration programs and great drill targets, and I've been pecking away at that myself and recommending them to my readers, at some of these very low levels.

Some of the companies I like out there—I had a chance recently to talk with the management of the geologic team of Lion One Metals Ltd. (LIO:TSX.V; LOMLF:OTCQX) and I really liked their project in Fiji, in particular the Caldera target. I think it's one of the most spectacular exploration targets you'll find in the world today.

And I'm also very familiar with Fiji and I think that's because I'm the chairman of Thunderstruck Resources Ltd. (AWE:TSX.V; THURF:OTC.MKTS), which is a exploration company with a drilling program ongoing in Fiji. I'm very familiar with that regime and I think a lot of investors aren't familiar with it. It's a blossoming new frontier for mining and metals exploration.

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Maurice Jackson: And if I may interject there, with Lion One Metals, the CEO there is Walter Berukoff and their flagship project is the Tuvatu, and it's an alkaline deposit (VRIFY). That's what's very interesting here—it's an alkaline deposit, so we're looking at some significant tonnage and grade here, potentially.

Brien Lundin: Gold deposits, specifically alkaline deposits of that sort—the list of those kinds of deposits that have not become world-class mines approaches zero. The odds dramatically increase if it's a major discovery. So yeah, you bring up a very good point for that deposit. That's why I like it a lot; that's why I'm a shareholder personally.

Maurice Jackson: And was there another company you were about the reference? I'm sorry I interrupted you.

Brien Lundin: I've been recommending Millrock Resources Inc. (MRO:TSX.V; MLRKF:OTCQB), because their project adjacent to, on trend with, and surrounding the Pogo deposit in Alaska, is just amazing. They did an extraordinary joint venture agreement with an Australian company, where they will have $5 million of drilling accomplished this year.

They were just cut off by the COVID crisis and had to halt drilling after one-and-a-half holes. Now they got the results back from that first one and a half holes and they were disappointing.

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And, in fact, the second hole didn't reach the targeted depth, so it was really just one of the holes, and it didn't turn up with good gold grades at all. So the stock has taken a hit.

But the key here is that the Pogo deposit—the new drilling on the Pogo deposit—trends onto their ground in two directions, and with $5 million of drilling upcoming, the chances that they're going to vector into what could be a world-class deposit are very good. So, I still like that one and I think it's a bargain right now.

Maurice Jackson: And likewise, the CEO there is a Gregory Beischer. You were discussing the 64North Project and the Aurora targets and yes, they only got about 25% completed there, but you couldn't be in a better location. And again, the gold wasn't high, correct, but the indicator minerals, they're there, that's what's remarkable. It was identical, basically, to the Pogo mine, which is Northern Star Resources Ltd. (NST:ASX) by the way, that's their neighbor there. But they're within walking distance of that mine. Strategic location, you couldn't beat it.

Brien Lundin: And the drilling of Northern Star kept going, progressing step by step closer to their property boundaries and essentially reached the property boundaries. And yes, the indicator minerals are there. The geology is just what they were looking for. The gold grades are barely anomalous at this point.

But with $5 million of drilling being done, they can vector in to where the higher grades are potentially, where you hope the higher grades and a deposit would be. It's hard to vector, though, with one drill hole, because it's just a point. But with $5 million worth of drilling, again, I have great confidence that they'll be able to find what they're looking for.

Maurice Jackson: And they have two strategic partners, Resolution Minerals Ltd. (RML:ASX) and EMX Royalty Corp. (EMX:TSX.V; EMX:NYSE.American) and they've done their due diligence.

Brien Lundin: And they always do: some of the smartest people in business.

Maurice Jackson: Absolutely. All right. Germane to this conversation, if the U.S. currency is going to lose purchasing power, how does money—i.e., gold and silver—factor into one's portfolio?

Brien Lundin: As you can imagine, I've gotten a lot of inquiries, and people are generalist investors, and we're publishing a newsletter called Gold Newsletter that really is the preeminent, the longest-lasting, the first of the precious metals advisories out there. I get a lot of people coming to me and asking, "How do I get started?" And I tell them all the time, "You have to start with a physical allocation of precious metals, physical metals, either in your possession or accessible to you." And you can build on that later and you can store more elsewhere, but you need to ensure your wealth with physical precious metals holdings.

You can then look into other ways to leverage these things we're talking about—of higher rising prices for gold and silver, which seem inevitable, and those are investments—but I tell them they need to have insurance for their wealth, insurance for everything they've worked for all their life, by holding physical gold and silver.

Maurice Jackson: Very, very responsible words. Thank you for sharing that. What does the current spot price of gold suggest to you, as the number of golden investors have been expecting a more robust response in the price?

Brien Lundin: When I began writing our May issue of Gold Newsletter, I was thinking, gold's really got to get moving. And then I started reading the previous month's issue, and then looked at the gold price. And said, "Damn, gold was $100 cheaper a month ago."

And it's $100 higher today, but it doesn't seem like it's really got that momentum and that's because it had a really torrid run the first two weeks of April, and spent the last two weeks of April and now early May, just digesting those gains. It hasn't fallen, it hasn't really resumed the rally yet, but it's been bouncing around that $1,700/ounce level.

I think it's completely normal. I think gold's waiting for the next shoe to drop, and the next indication that we're going to have more and more of the stimulus—and it's going to get that because, as I said, the second-quarter GDP numbers are going to be absolutely horrendous. And Congress just has to get back to trying to fill the trough once again.

And they're going to do that. We're going to have more and more stimulus programs, the most accommodative Federal Reserve we've probably seen in history, and we've only just begun.

Maurice Jackson: I'm not a big fan of the big banks, but Bank of America recently shared that they expect the gold price to reach $3,000/ounce. So it's not just you sharing this.

Brien Lundin: Yeah, yeah. And that's a very staid, credible institution. They tend to be a little bit more dramatic than the other banks and the other big institutions. But still, that's something that I'm even loath to say in interviews, without sounding crazy.

But that said, I fully expect it at some point and I think their logic is absolutely accurate and impeccable.

Maurice Jackson: We all have our favorites—gold, silver, platinum and palladium. May I ask, what are you buying right now and why?

Brien Lundin: I am buying more silver than gold. I am buying silver because it has not caught up to gold yet. It typically takes a while to catch up to gold in a long-term monetary-based gold bull market, which is what we're in. It typically takes silver longer to respond, but then it outperforms gold. We haven't really gotten to that outperform process yet, or stage yet, and I think we're going to get there. So I'm buying physical silver; have been buying physical silver. And in general the mining stocks, I'm buying the exploration plays that I know a lot about.

Maurice Jackson: Can you share your outlook on all four of the metals referenced?

Brien Lundin: Yeah, I'm very bullish of gold. I tell people, if you like gold, you have to love silver, so they are one in the same, as far as the big drivers.

Platinum and palladium, I'm bullish on them but for different reasons. I think that there are genuine supply-demand dynamics in play for both of those metals that are inescapable. Right now. . .those precious metals had been abated a little bit, because a lot of the demand is driven by automobile demand and catalytic converter demand. So that will take a while to come back. But in the meantime, there are real supply issues with both of those metals, and I can tell you that the major producers are very bullish for the long term, and they're looking to invest in new projects.

I just recommended Group Ten Metals Inc. (PGE:TSX.V; PGEZF:OTCQB; 5D32:FSE) recently. It's another one of my platinum-palladium plays, and I think the majors are going to be aggressive. Over the next couple of years, there's a window of opportunity for some of these PGM [platinum group metal] juniors are going to be taken out. And I know that those juniors are working toward that opportunity.

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Maurice Jackson: And the CEO for Group 10 Metals is Michael Rowley. We had an opportunity to do a live webinar with him two weeks ago (click here). And the flagship project is the Stillwater West, located in Montana.

Switching gears, sir: you're the host of the New Orleans Investment Conference, the world's greatest investment event. For someone new, can you please introduce us to the New Orleans Investment Conference?

Brien Lundin: The New Orleans Investment Conference is the original retail investment conference, or really investment conference of any stripe. It was started in 1974 by Jim Blanchard, to teach American citizens how to invest in gold, and that right to invest in gold was something that Jim was instrumental in helping get back to American citizens. It had been taken away by Roosevelt in the 1930s.

So the modern gold bull market. . .has to thank the New Orleans conference for bringing that market to the populace, and showing retail investors how to buy gold, how to buy precious metals.

It's not your typical conference. We cover all of the sectors, all of the asset classes, but we do have a golden thread that runs through our event, or golden theme that's run through it over the decades, and we feature a lot of conservative/libertarian speakers. We feature a lot of big-name speakers that you won't find at other events.

And the camaraderie of our attendees, and the intelligence that they're willing to share, because they're all generally very successful investors in their own right—it's just an experience that you have to be there to really understand it. And we encourage anyone interested, whatever level of interest or experience they may be, if they're interested in preserving their wealth and building it during uncertain times, they really do need to attend the New Orleans Conference.

Maurice Jackson: And speaking of attendance, what are the dates this year?

Brien Lundin: October 14 through 17, and we're planning for a live event down here in New Orleans. It's always a lot of fun. And we're hopeful and actually expecting that all of this pandemic crisis and nervousness will be behind us—well behind us—by then.

Maurice Jackson: Who are some of the featured speakers this year and the discussion topics?

Brien Lundin: Well, we're featuring the best of the experts in gold, silver and alternative investments, and how to protect your wealth, and again, how to build it during these uncertain times. We've invited most of the major newsletter writers and commentators on the economy and on precious metals and mining stocks, because I really feel like this is an opportunity that only comes around once or twice in our investing careers. We've been very fortunate to be on the cutting edge of every bull market in the metals, and the results have just been stupendous for investors who come to our conference, who get the hottest picks from the world's top experts and get to meet a lot of the companies in our exhibit hall.

Maurice Jackson: I've had the opportunity to attend five years at the New Orleans Investment Conference, and I must say it is very welcoming experience. No matter what your background is or level of investment experience is, you are welcome there with open arms and you have the opportunity to learn, not just from the speakers but from fellow investors, to share intellectual ideas and take them back home. The relationships that I've created in these last five years I still have today, and I thank you for that, sir.

Brien Lundin: Yes. And these attendees are my clients, but they grow to be, over the years have grown to be close friends, and it's like an old-home week. Every year everybody gets together and makes new friends and greets old friends, and everyone is so willing to share their ideas and thoughts and strategies.

And I tell people every year, as we open the conference: "Y'all going to be looking at the stage, going to see some extraordinary speakers come up to the podium and give you their ideas over the next three, four days, but look around you in the audience. There's just as much to be gained from the people that come to this event." Because by coming to the New Orleans conference, they've already identified themselves as very smart, very active, intellectually curious, successful investors and there's so much to be learned and shared amongst all of us.

Maurice Jackson: Speaking of clients, Mr. Lundin, please introduce us to Jefferson Financial and the Gold Newsletter.

Brien Lundin: Jefferson Financial is essentially the holding company that operates both the Gold Newsletter and the New Orleans Investment Conference, and publishes our very special reports and other special projects.

So Gold Newsletter is the first precious metals advisory. We're now in our 50th year of helping investors navigate gold. In the first few years, Gold Newsletter was primarily involved in advocating for the legalization of gold ownership. That's how long we've been around. The New Orleans Conference, as we've just said, is where we all get together every year and share ideas and our predictions for the future.

And I can tell you that in times like we're in right now, it is not only not unusual, it's expected for us to find companies and get stock recommendations of companies that go on to go up four or five, 10, 20 or more times in value. This is where you find opportunities like that. This is where you find investors that have that kind of potential.

Maurice Jackson: Before we close, sir, what keeps you up at night that we don't know about?

Brien Lundin: Oh, well, lately maybe the pandemic, but really nothing keeps me up at night these days.

In regards to the economy, et cetera, I think that what we're seeing play out right now in the economy has been inevitable for some time. And if I do have any worry, I guess it's that not more investors know how to protect themselves through gold and silver.

You buy fire insurance, but you don't really expect your home to catch on fire. But gold and silver are the insurance for an event that you know is going to happen, that you know the dollar is going to be depreciated over time. It's insurance you only have to pay the premium one time, to get some protection. So it's a thing that more people need to know about, and they need to do, and they need to do it now. We're still in the very early stages of this game and we have literally years to come, of watching these trends play out and people really need to own gold and silver now, while they still can.

Maurice Jackson: And we're proud to have an affiliation with the Gold Newsletter. Mr. Lundin, I think, are we not in the Gold Newsletter as a licensed representative for Miles Franklin?

Brien Lundin: Yes, actually we have an investor's guide to gold and silver that tells people every way to invest in the precious metals, from physical metals, through mining stocks, even futures and options and more. But we also list the best dealers, the best conferences to go to, the best newsletters to subscribe to. So it's all there in one stop shop, a 30-page special report that explains it all, and which also lists you, Maurice Jackson, as a recommended dealer.

Maurice Jackson: Well, we're honored to be part of that elite team, sir. Last question. What did I forget to ask?

Brien Lundin: Well, I guess you forgot for me to give you a specific price prediction over a specific timeframe, which I would not have done anyway. But a lot of people try, a lot of people try.

Maurice Jackson: No, I think that's responsible, because we don't know where the currency is going to go and we don't know the government's response. So that's a moving target.

But I think you said the most responsible thing—the prudent thing to do as a cornerstone for your investment portfolio is to own some physical precious metals. It's insurance, and that's the most responsible way I can approach it and I think you've covered well, sir.

Brien Lundin: Yes. It gives you peace of mind, so you can sleep at night knowing that you have that working for you.

And again, these trends are undeniable, they're inevitable. People have gone through them throughout human history. It's going to happen again—the dollar will be depreciated, so people need to own gold and silver.

Maurice Jackson: Mr. Lundin, for someone listening that wants to get more information on your work, please share the contact details.

Brien Lundin: www.goldnewsletter.com and www.neworleansconference.com.

Maurice Jackson: And as a reminder, I am licensed representative for Miles Franklin Precious Metals Investments, where we provide a number options to expand your precious metals portfolio, from physical delivery, offshore depositories and precious metals IRAs. Call me directly at (855) 505-1900 or you may e-mail maurice@milesfranklin.com.

Finally, please subscribe to www.provenandprobable.com; subscription is free.

Brien Lundin of Jefferson Financial, thank you for joining us today on Proven and Probable.

Maurice Jackson is the founder of Proven and Probable, a site that aims to enrich its subscribers through education in precious metals and junior mining companies that will enrich the world.

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Disclosure:
1) Maurice Jackson: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Group Ten Metals, Millrock Resources, and Lion One Metals. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: Group Ten Metals, Millrock Resources, and Lion One Metals are sponsors of Proven and Probable. Proven and Probable disclosures are listed below.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: Lion One Metals, Group Ten Metals. Click here for important disclosures about sponsor fees. As of the date of this article, an affiliate of Streetwise Reports has a consulting relationship with Group Ten Metals. Please click here for more information.
3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.
4) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own shares of Millrock Resources, EMX Royalties and Group Ten Metals, companies mentioned in this article.

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( Companies Mentioned: PGE:TSX.V; PGEZF:OTCQB; 5D32:FSE, LIO:TSX.V; LOMLF:OTCQX, MRO:TSX.V; MLRKF:OTCQB, )

Finding Solar Opportunity in the Pandemic Downturn

Source: Streetwise Reports   05/12/2020

Small-cap UGE International boasts a $50 million project backlog and a $250 million pipeline.Difficulties facing solar industry operators have been highlighted in recent reports, incl…

Source: Streetwise Reports   05/12/2020

Small-cap UGE International boasts a $50 million project backlog and a $250 million pipeline.

Difficulties facing solar industry operators have been highlighted in recent reports, including by Bloomberg and the Washington Post; among the issues cited are decreasing demand among homeowners, disruptions in supply, and capital shortages.

But not all parts of the solar industry are equal, and while the industry as a whole may be facing headwinds, UGE International Ltd. (UGE:TSX.V; UGEIF:OTCQB) is thriving during the coronavirus-induced downturn. The firm, which focuses on project development in the commercial and community solar sector, announced at the end of March its largest project ever, a 6.6 MW solar installation in Westchester County, New York. The project will feed electricity into the grid and provide savings to community subscribers by selling them energy credits at a discounted rate.

"The project is approximately 12-15 times the size of UGE's average project and, when completed, will produce power for an estimated 1,000 homes for the duration of the system's lifetime," the company stated. The company also has the option of installing battery storage, "which would provide a further boost to project revenue and returns."

The project in Westchester may be just the tip of the iceberg for UGE. The firm currently has a committed project backlog valued at approximately $50 million, consisting of more than 40 projects, and a pipeline in excess of $250 million. The firm's global solar experience has exceeded 400 MW.

Several macro factors are working in UGE's favor. Large real estate owners are clamoring to rent UGE their rooftops, happy to have cash flow during the recession. "There has been a shift in the thinking of real estate owners; they are prioritizing finding ways to earn more revenue," UGE's CEO Nick Blitterswyk told Streetwise Reports. "Community solar allows real estate owners to boost revenue by receiving lease payments for their empty rooftops and open land, which is especially attractive during a time when their revenue may otherwise be decreasing."

Under the community solar model, UGE rents a location, designs, constructs and, in most cases, finances the project, retaining ownership, selling the electricity to community members for less than the price the regional utility is charging. The company is maintaining ownership of many of its projects, allowing it to capture recurring revenue and boosting its gross margins. "The company's gross margins jumped to 27% in 2019 as it transitioned to this model, from 10-20% in the years prior," Blitterswyk noted.

UGE also believes it could benefit from the slowdown in construction that has accompanied the pandemic. "We should see more competitive costs for subcontractors and other expenses," Blitterswyk said. "You could argue that costs of equipment are probably going to go down too."

Interest rates have tumbled. "To the degree that interest rates are low, that helps us as well," Blitterswyk explained.

While construction has been restricted in hard-hit areas, such as New York, even that has not affected UGE in a major way. "It may take nine months to fully mobilize, engineer and install a project. So from that perspective, the process is spread out anyway. We are definitely losing a couple of months, but construction is one of the first things opening up as restrictions ease," Blitterswyk noted. The company "will focus on accelerating schedules once such local restrictions are lifted," the company announced, and expects to be on-site in most regions that it operates in by the end of May.

Supply lines appear to be intact. "We've actually been seeing a surplus of panels. Most of the panels are made in Asia, and Asia seems to have the virus somewhat under control, and factories are producing," Blitterswyk explained.

The firm notes that "new project development continues at a rapid pace, as demonstrated by the significant number of new projects won in recent weeks. UGE expects to move several of these new projects into the construction phase before the end of the year."

"Of our $50 million backlog, we expect about one-quarter will be fulfilled in 2020 and the remainder in 2021, so we are looking at 80 to 100% growth in both 2020 and 2021," Blitterswyk stated, "just based on the projects we already have under contract."

UGE has around 24 million shares outstanding, and around 27.6 million fully diluted; management and insiders own 55%. The company's market cap is around CA$6.7 million.

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Disclosure:
1) Patrice Fusillo compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: UGE International. Click here for important disclosures about sponsor fees.
3) Comments and opinions expressed are those of the specific experts and not of Streetwise Reports or its officers. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
4) The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of UGE International, a company mentioned in this article.

( Companies Mentioned: UGE:TSX.V; UGEIF:OTCQB, )

First Cobalt Delivers News of Robust Definitive Feasibility Study on 100%-Owned Cobalt Refinery

Source: Peter Epstein for Streetwise Reports   05/12/2020

Peter Epstein of Epstein Research profiles the company that has the only permitted, primary cobalt refinery in North America.

Activity in the junior mining space for almost everything except gold and uranium has essentially ground to a halt. Yet, on May 4th, First Cobalt Corp. (FCC:TSX.V; FTSSF:OTCQX; FCC:ASX) announced the results of a Definitive Feasibility Study (DFS) on its 100%-owned, permitted, primary cobalt (Co) refinery in Ontario, Canada.

Unlike many junior miners that are 5+ years from production, First Cobalt, with Glencore as its strategic/funding partner, expects to reach commercial production within two years. Glencore proposes lending First Cobalt most, or possibly all, the capital needed to get the refinery up to full capacity by the end of 2021. Then, the companies would split the refinery’s economics (terms yet to be announced) for up to five years, aligning with the expected debt repayment period.

First Cobalt delivers robust DFS

The DFS, summarized in this detailed press release, is highlighted by a 53% after-tax internal rate of return (IRR), at a long-term cobalt price of $25/lb (all figures in US$ unless stated otherwise). Even at today’s spot price of ~$16.5/lb, the IRR would be 39%. Management commissioned a comprehensive industry report from prominent consulting group, Benchmark Mineral Intelligence. That report showed an average price of $26.81/lb, with several years above $30/lb, and as high as $36/lb later this decade.

Cobalt prices are increasingly tied to the pace of electric vehicle (EV) adoption. Many pundits now believe that globally there will be a tsunami of multi-year infrastructure bills (trillions of dollars) to combat the ongoing COVID-19-induced economic crisis. If true, I believe this would be very good for the rollout of EVs.

Importantly, management is actively exploring (with Glencore’s help) opportunities to enhance the refinery’s flow sheet to improve upon already robust economics. In addition to a 53% IRR, the after-tax NPV(8%) of $139 million is 2.5 times upfront cap-ex of $56 million (includes a $4.2 million contingency).

Notably, most of the cap-ex is spoken for as Glencore has pledged support for $40 million in loans, of which $5 million has been advanced. According to the press release, third-party lending and government funding options are also on the table. A funding package is expected to be in place by the summer.

Refinery restart now meaningfully de-risked

First Cobalt’s Refinery, ~600 km from the U.S. border, is a hydro-metallurgical facility in the Canadian Cobalt Camp of Ontario. It’s the only permitted, primary cobalt refinery in North America. This is a long-lasting, valuable hard asset with decades of use ahead, and >C$100 million invested in it since the mid-1990s.

Even at full proposed capacity {5,096 tonnes Co/year, equal to 24,857 tonnes battery-grade Co sulfate} the refinery would account for just 5% of the global (refined) Co market. There appears to be minimal risk of flooding the market with excess supply. On top of possible improvements in op-ex and cap-ex, management believes that the assumed 93% Co sulfate recovery rate has room to improve to 95% or 96%. This might sound trivial, but a 2.5% increase would equate to an additional $7.5 million in annual cash flow.

Glencore is strongly backing First Cobalt’s cobalt refinery with debt financing. Depending on prevailing Co sulfate prices, loan pay down would likely take about five years. Note: If First Cobalt were to keep 50% of refinery economics, and remit most of it to Glencore, it could repay $56 million in 4–5 years.

Peak borrowings could come in below $56 million as management is in discussions with a dozen or more funding parties, some of which could provide grants or invest at the project level. Numerous NDAs have been signed. Unless First Cobalt defaults on its debt obligations, it will retain 100% ownership of an increasingly valuable, globally-significant refinery asset.

Cobalt market looks promising for next few decades

Benchmark Minerals forecasts cobalt demand from EV batteries alone will exhibit a compound annual growth rate (CAGR) of ~18% from 2019 to 2040. If reasonably accurate, cobalt prices would likely move higher, perhaps by a lot. Supportive of a strong cobalt price is the simple fact that two years ago, cobalt was trading at >$40/lb.

Also underpinning stronger cobalt prices is the industry’s dangerous over-reliance on supply (~67%) from the Democratic Republic of Congo (DRC). While it’s beyond the scope of this article, there are a number of reasons why producers in the DRC face growing operating risks.

Unfortunately, we need to add COVID-19 to the list of risk factors. This once-in-a-century coronavirus will exacerbate pre-existing problems in the DRC and surrounding countries.

Will there be significant cobalt supply disruptions?

Look no further than the uranium sector to see the considerable impact that an unexpected supply shock can have. The uranium spot price is up ~41% in the past six weeks. COVID-19 has barely shown up on the African continent. Confirmed cases have reached ~50,000, only about 1.4% of the global total. Yet, Africa is home to 18% of the world’s population.

Perhaps more important than a near-to-intermediate-term increase in Co prices is the reminder or warning that an industry sourcing two-thirds of a critical material from a single country is a terrible idea! And then there’s China, controlling 79% of the global market. Will Canada and the U.S. continue to allow China to have so much leverage on such a critical material?

Readers should take a closer look at First Cobalt. In past articles and interviews I’ve mentioned a spectacular board, retained advisors and management team. But most important, if there’s one thing that readers should take away from this commentary—in uncertain times it’s impossible to overestimate the benefits of being partnered with a giant mining industry company like Glencore.

While the refinery restart is significantly de-risked, and well situated in North America, it will take a considerable amount of time for debt amassed this year and next to be repaid.

Debt in excess of US$50 million might appear unsettling. But, after paying it off, 100% of operating cash flow would accrue solely to First Cobalt. Make no mistake, the plan to incur $50+ million in debt is risky. However, Hatch estimated the replacement value of just the refinery complex buildings and housed equipment at close to $80 million.

It would take more than five years to design, permit, conduct studies, fund and build a new cobalt refinery. Time is money. Saving years of headache, expense and managerial resources is valuable to a company like Glencore.

Around that time, the newly unencumbered refinery complex would be worth quite a bit, especially to Glencore, who might want to acquire it even before the debt has been repaid. The refinery is worth considerably more in the hands of Glencore than First Cobalt. It would diversify Glencore’s operations, while providing incremental operating and trading flexibility, as well as cobalt/EV market intelligence.

The refinery economics—instead of discounting cash flows at 8%, Glencore’s much lower cost of equity and debt capital means it could probably discount the project at 4% or 5%. All else equal, over an 11-year period, the after-tax NPV(4%) would be ~40% higher than a NPV(8%).

Looking at it a different way, how much might a refinery producing 11,234,757 pounds/year of battery-grade Co sulfate be worth as a multiple of gross revenue? In the chart below are a number of producing mining companies. On average, they’re trading at an Enterprise Value to trailing 12-month revenue ratio of 3.5x.

If First Cobalt’s refinery were to be worth half as much (a 1.75x multiple of revenue at full capacity), that would be C$660.6 million, (assumes Co price of $24/lb). Discounting that figure back at 15% for seven years (in seven years, loans to Glencore would be paid off) generates an approximate refinery valuation of C$248.3 million.

Other scenarios are provided at Co prices ranging from US$18-$33/lb and discount factors of 10%–20%.

On May 4th, CEO Trent Mell said there’s no need for a private placement for the remainder of 2020. Still, assuming 15% equity dilution between now and the achievement of cash flow positive operations, an indicative share price at a valuation of C$243.9 million {11,234,757 pounds Co, sold at US$24/lb, discounted back 7 years @ 15%/yr.} = C$0.56. The current share price is C$0.16.

U.S. and Canadian exploration assets are out-of-the-money call options

Astute readers may have noticed that I’ve ignored the company’s considerable exploration assets in the U.S. and Canada. Admittedly, at current cobalt prices they don’t seem to garner much attention. But, think of First Cobalt’s 25 million (combined) Indicated & Inferred pounds in the U.S., plus brownfield exploration properties in Ontario, as out-of-the-money call options. If/when the Co price returns to, say, $30 or $35/lb, this unattributed value might be appreciated again.

How much is 25 million Indicated and Inferred pounds in the ground worth? The gross in-situ value is $750 million, but since half of the resource is Inferred, let’s call it $540 million. Early-stage copper juniors are trading at an Enterprise Value to pound of about $0.005 (a half penny). By applying that valuation metric to cobalt juniors, 25 million pounds might be ascribed a value of up to $35 million (~C$0.12/share) once animal spirits return to the battery metals space.

In addition to the U.S. exploration assets, the third leg of the investment valuation stool is First Cobalt’s Canadian land package that hosts 50 past-producing cobalt/silver mines in Ontario. Like the U.S. resources, these properties should attract a lot more attention in a better battery metals market.

By no means am I suggesting that the share price will more than triple in the near-term (I offer no predictions or price targets), but I believe First Cobalt (TSX-V: FCC) / (OTCQX: FTSSF) offers compelling risk-adjusted upside potential over the next 12 months. Especially if management notches notable successes in upgrading its DFS and/or the Co price rises back above $25/lb.

Peter Epstein is the founder of Epstein Research. His background is in company and financial analysis. He holds an MBA degree in financial analysis from New York University’s Stern School of Business.

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Disclosures:
The content of this article is for information only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research [ER], (together, [ER]) about First Cobalt Corp., including but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is to be considered implicit or explicit investment advice. Nothing contained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market making activities. [ER] is not directly employed by any company, group, organization, party or person. The shares of First Cobalt Corp. are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making any investment decisions.

At the time this interview was posted, Peter Epstein owned shares of First Cobalt Corp., and the Company was an advertiser on [ER].

While the author believes he’s diligent in screening out companies that, for any reasons whatsoever, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. [ER] is not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. [ER] is not expected or required to subsequently follow or cover any specific events or news, or write about any particular company or topic. [ER] is not an expert in any company, industry sector or investment topic.

Streetwise Reports Disclosure:
1) Peter Epstein’s disclosures are listed above.
2) The following companies mentioned in the article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.

4) The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.

Graphics provided by the author.

( Companies Mentioned: FCC:TSX.V; FTSSF:OTCQX; FCC:ASX,
GLEN:LSE,
)

Source: Peter Epstein for Streetwise Reports   05/12/2020

Peter Epstein of Epstein Research profiles the company that has the only permitted, primary cobalt refinery in North America.

Activity in the junior mining space for almost everything except gold and uranium has essentially ground to a halt. Yet, on May 4th, First Cobalt Corp. (FCC:TSX.V; FTSSF:OTCQX; FCC:ASX) announced the results of a Definitive Feasibility Study (DFS) on its 100%-owned, permitted, primary cobalt (Co) refinery in Ontario, Canada.

Unlike many junior miners that are 5+ years from production, First Cobalt, with Glencore as its strategic/funding partner, expects to reach commercial production within two years. Glencore proposes lending First Cobalt most, or possibly all, the capital needed to get the refinery up to full capacity by the end of 2021. Then, the companies would split the refinery's economics (terms yet to be announced) for up to five years, aligning with the expected debt repayment period.

First Cobalt delivers robust DFS

The DFS, summarized in this detailed press release, is highlighted by a 53% after-tax internal rate of return (IRR), at a long-term cobalt price of $25/lb (all figures in US$ unless stated otherwise). Even at today's spot price of ~$16.5/lb, the IRR would be 39%. Management commissioned a comprehensive industry report from prominent consulting group, Benchmark Mineral Intelligence. That report showed an average price of $26.81/lb, with several years above $30/lb, and as high as $36/lb later this decade.

Cobalt prices are increasingly tied to the pace of electric vehicle (EV) adoption. Many pundits now believe that globally there will be a tsunami of multi-year infrastructure bills (trillions of dollars) to combat the ongoing COVID-19-induced economic crisis. If true, I believe this would be very good for the rollout of EVs.

Importantly, management is actively exploring (with Glencore's help) opportunities to enhance the refinery's flow sheet to improve upon already robust economics. In addition to a 53% IRR, the after-tax NPV(8%) of $139 million is 2.5 times upfront cap-ex of $56 million (includes a $4.2 million contingency).

Notably, most of the cap-ex is spoken for as Glencore has pledged support for $40 million in loans, of which $5 million has been advanced. According to the press release, third-party lending and government funding options are also on the table. A funding package is expected to be in place by the summer.

Refinery restart now meaningfully de-risked

First Cobalt's Refinery, ~600 km from the U.S. border, is a hydro-metallurgical facility in the Canadian Cobalt Camp of Ontario. It's the only permitted, primary cobalt refinery in North America. This is a long-lasting, valuable hard asset with decades of use ahead, and >C$100 million invested in it since the mid-1990s.

Even at full proposed capacity {5,096 tonnes Co/year, equal to 24,857 tonnes battery-grade Co sulfate} the refinery would account for just 5% of the global (refined) Co market. There appears to be minimal risk of flooding the market with excess supply. On top of possible improvements in op-ex and cap-ex, management believes that the assumed 93% Co sulfate recovery rate has room to improve to 95% or 96%. This might sound trivial, but a 2.5% increase would equate to an additional $7.5 million in annual cash flow.

Glencore is strongly backing First Cobalt's cobalt refinery with debt financing. Depending on prevailing Co sulfate prices, loan pay down would likely take about five years. Note: If First Cobalt were to keep 50% of refinery economics, and remit most of it to Glencore, it could repay $56 million in 4–5 years.

Peak borrowings could come in below $56 million as management is in discussions with a dozen or more funding parties, some of which could provide grants or invest at the project level. Numerous NDAs have been signed. Unless First Cobalt defaults on its debt obligations, it will retain 100% ownership of an increasingly valuable, globally-significant refinery asset.

Cobalt market looks promising for next few decades

Benchmark Minerals forecasts cobalt demand from EV batteries alone will exhibit a compound annual growth rate (CAGR) of ~18% from 2019 to 2040. If reasonably accurate, cobalt prices would likely move higher, perhaps by a lot. Supportive of a strong cobalt price is the simple fact that two years ago, cobalt was trading at >$40/lb.

Also underpinning stronger cobalt prices is the industry's dangerous over-reliance on supply (~67%) from the Democratic Republic of Congo (DRC). While it's beyond the scope of this article, there are a number of reasons why producers in the DRC face growing operating risks.

Unfortunately, we need to add COVID-19 to the list of risk factors. This once-in-a-century coronavirus will exacerbate pre-existing problems in the DRC and surrounding countries.

Will there be significant cobalt supply disruptions?

Look no further than the uranium sector to see the considerable impact that an unexpected supply shock can have. The uranium spot price is up ~41% in the past six weeks. COVID-19 has barely shown up on the African continent. Confirmed cases have reached ~50,000, only about 1.4% of the global total. Yet, Africa is home to 18% of the world's population.

Perhaps more important than a near-to-intermediate-term increase in Co prices is the reminder or warning that an industry sourcing two-thirds of a critical material from a single country is a terrible idea! And then there's China, controlling 79% of the global market. Will Canada and the U.S. continue to allow China to have so much leverage on such a critical material?

Readers should take a closer look at First Cobalt. In past articles and interviews I've mentioned a spectacular board, retained advisors and management team. But most important, if there's one thing that readers should take away from this commentary—in uncertain times it's impossible to overestimate the benefits of being partnered with a giant mining industry company like Glencore.

While the refinery restart is significantly de-risked, and well situated in North America, it will take a considerable amount of time for debt amassed this year and next to be repaid.

Debt in excess of US$50 million might appear unsettling. But, after paying it off, 100% of operating cash flow would accrue solely to First Cobalt. Make no mistake, the plan to incur $50+ million in debt is risky. However, Hatch estimated the replacement value of just the refinery complex buildings and housed equipment at close to $80 million.

It would take more than five years to design, permit, conduct studies, fund and build a new cobalt refinery. Time is money. Saving years of headache, expense and managerial resources is valuable to a company like Glencore.

Around that time, the newly unencumbered refinery complex would be worth quite a bit, especially to Glencore, who might want to acquire it even before the debt has been repaid. The refinery is worth considerably more in the hands of Glencore than First Cobalt. It would diversify Glencore's operations, while providing incremental operating and trading flexibility, as well as cobalt/EV market intelligence.

The refinery economics—instead of discounting cash flows at 8%, Glencore's much lower cost of equity and debt capital means it could probably discount the project at 4% or 5%. All else equal, over an 11-year period, the after-tax NPV(4%) would be ~40% higher than a NPV(8%).

Looking at it a different way, how much might a refinery producing 11,234,757 pounds/year of battery-grade Co sulfate be worth as a multiple of gross revenue? In the chart below are a number of producing mining companies. On average, they're trading at an Enterprise Value to trailing 12-month revenue ratio of 3.5x.

If First Cobalt's refinery were to be worth half as much (a 1.75x multiple of revenue at full capacity), that would be C$660.6 million, (assumes Co price of $24/lb). Discounting that figure back at 15% for seven years (in seven years, loans to Glencore would be paid off) generates an approximate refinery valuation of C$248.3 million.

Other scenarios are provided at Co prices ranging from US$18-$33/lb and discount factors of 10%–20%.

On May 4th, CEO Trent Mell said there's no need for a private placement for the remainder of 2020. Still, assuming 15% equity dilution between now and the achievement of cash flow positive operations, an indicative share price at a valuation of C$243.9 million {11,234,757 pounds Co, sold at US$24/lb, discounted back 7 years @ 15%/yr.} = C$0.56. The current share price is C$0.16.

U.S. and Canadian exploration assets are out-of-the-money call options

Astute readers may have noticed that I've ignored the company's considerable exploration assets in the U.S. and Canada. Admittedly, at current cobalt prices they don't seem to garner much attention. But, think of First Cobalt's 25 million (combined) Indicated & Inferred pounds in the U.S., plus brownfield exploration properties in Ontario, as out-of-the-money call options. If/when the Co price returns to, say, $30 or $35/lb, this unattributed value might be appreciated again.

How much is 25 million Indicated and Inferred pounds in the ground worth? The gross in-situ value is $750 million, but since half of the resource is Inferred, let's call it $540 million. Early-stage copper juniors are trading at an Enterprise Value to pound of about $0.005 (a half penny). By applying that valuation metric to cobalt juniors, 25 million pounds might be ascribed a value of up to $35 million (~C$0.12/share) once animal spirits return to the battery metals space.

In addition to the U.S. exploration assets, the third leg of the investment valuation stool is First Cobalt's Canadian land package that hosts 50 past-producing cobalt/silver mines in Ontario. Like the U.S. resources, these properties should attract a lot more attention in a better battery metals market.

By no means am I suggesting that the share price will more than triple in the near-term (I offer no predictions or price targets), but I believe First Cobalt (TSX-V: FCC) / (OTCQX: FTSSF) offers compelling risk-adjusted upside potential over the next 12 months. Especially if management notches notable successes in upgrading its DFS and/or the Co price rises back above $25/lb.

Peter Epstein is the founder of Epstein Research. His background is in company and financial analysis. He holds an MBA degree in financial analysis from New York University's Stern School of Business.

Sign up for our FREE newsletter at: www.streetwisereports.com/get-news

Disclosures:
The content of this article is for information only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research [ER], (together, [ER]) about First Cobalt Corp., including but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is to be considered implicit or explicit investment advice. Nothing contained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market making activities. [ER] is not directly employed by any company, group, organization, party or person. The shares of First Cobalt Corp. are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making any investment decisions.

At the time this interview was posted, Peter Epstein owned shares of First Cobalt Corp., and the Company was an advertiser on [ER].

While the author believes he's diligent in screening out companies that, for any reasons whatsoever, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. [ER] is not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. [ER] is not expected or required to subsequently follow or cover any specific events or news, or write about any particular company or topic. [ER] is not an expert in any company, industry sector or investment topic.

Streetwise Reports Disclosure:
1) Peter Epstein's disclosures are listed above.
2) The following companies mentioned in the article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.
4) The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.

Graphics provided by the author.

( Companies Mentioned: FCC:TSX.V; FTSSF:OTCQX; FCC:ASX, GLEN:LSE, )

Texas Oil & Gas Firm Achieves EBITDA, EPS Beats in Q1/20

Source: Streetwise Reports   05/07/2020

A recap of Parsley Energy’s Q1/20 performance and projections for this year and next are given in a Raymond James report.

In a May 5 research note, analyst John Freeman reported that Raymond James increased its target price on Parsley Energy, Inc. (PE:NYSE) after it posted its Q1/20 numbers.

Raymond James’ new target price on Parsley is $12 per share, up from $11. The Texas-based energy company’s stock is trading now at about $9.38 per share.

Freeman reviewed and commented on Parsley’s Q1/20 results. The company “delivered modest EBITDA and earnings per share beats relative to the Street” due to oil pricing,” Freeman pointed out.

Production was relatively in line at 126,600,000 barrels of oil per day (126.6 MMbbl/d), which was 1% higher than consensus’ forecast but 1% below Raymond James’ estimate. Total production was 1% above the Street’s projection but 3% below Raymond James’ forecast.

“The performance on the quarter was encouraging, however, the highlight from earnings was the significant reduction in 2020 capex (down from about $1 billion to less than $700 million),” Freeman commented.

Capex, “a welcome surprise,” Freeman wrote, came in 5% and 7% lower than the investment bank and the Street’s estimates, respectively. Opex was 3% under Raymond James’ projection

Moreover, Parsley’s related maintenance capital needs were greatly below expectations as well, indicating that Parsley made capital efficiency gains during the period.

“We were pleasantly surprised that Parsley is able to maintain in line Q4/20 oil volumes (about 115 MMbbl/d) on a capital program that’s about $300 million/30% below the Street,” added Freeman.

Looking forward, Raymond James modeled a base case, or stable scenario for Parsley, that implies a West Texas Intermediate oil price of about $30 a barrel and Parsley having four to five rigs and one to two crews operating. In that scenario, Parsley would produce about 117 MMbbl/d in 2020 and 115 MMbbl/d in 2021.

Capex would amount to about $678 million in 2020, dropping to $598 million in 2021.

Free cash flow would be about $300 million in 2020, which coincides with Parsley’s guidance of $300M plus, and increasing to $370 million in 2021.

Raymond James has an Outperform rating on Parsley Energy.

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Disclosure:
1) Doresa Banning compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees.
3) Comments and opinions expressed are those of the specific experts and not of Streetwise Reports or its officers. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
4) The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.

Disclosures from Raymond James, Parsley Energy Inc, May 5, 2020

ANALYST INFORMATION

Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst’s success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.

The analyst John Freeman, primarily responsible for the preparation of this research report, attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months.

RAYMOND JAMES RELATIONSHIP DISCLOSURES
Certain affiliates of the RJ Group expect to receive or intend to seek compensation for investment banking services from all companies under research coverage within the next three months.

Raymond James & Associates, Inc. makes a market in the shares of Parsley Energy, Inc.

Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available here.

( Companies Mentioned: PE:NYSE,
)

Source: Streetwise Reports   05/07/2020

A recap of Parsley Energy's Q1/20 performance and projections for this year and next are given in a Raymond James report.

In a May 5 research note, analyst John Freeman reported that Raymond James increased its target price on Parsley Energy, Inc. (PE:NYSE) after it posted its Q1/20 numbers.

Raymond James' new target price on Parsley is $12 per share, up from $11. The Texas-based energy company's stock is trading now at about $9.38 per share.

Freeman reviewed and commented on Parsley's Q1/20 results. The company "delivered modest EBITDA and earnings per share beats relative to the Street" due to oil pricing," Freeman pointed out.

Production was relatively in line at 126,600,000 barrels of oil per day (126.6 MMbbl/d), which was 1% higher than consensus' forecast but 1% below Raymond James' estimate. Total production was 1% above the Street's projection but 3% below Raymond James' forecast.

"The performance on the quarter was encouraging, however, the highlight from earnings was the significant reduction in 2020 capex (down from about $1 billion to less than $700 million)," Freeman commented.

Capex, "a welcome surprise," Freeman wrote, came in 5% and 7% lower than the investment bank and the Street's estimates, respectively. Opex was 3% under Raymond James' projection

Moreover, Parsley's related maintenance capital needs were greatly below expectations as well, indicating that Parsley made capital efficiency gains during the period.

"We were pleasantly surprised that Parsley is able to maintain in line Q4/20 oil volumes (about 115 MMbbl/d) on a capital program that's about $300 million/30% below the Street," added Freeman.

Looking forward, Raymond James modeled a base case, or stable scenario for Parsley, that implies a West Texas Intermediate oil price of about $30 a barrel and Parsley having four to five rigs and one to two crews operating. In that scenario, Parsley would produce about 117 MMbbl/d in 2020 and 115 MMbbl/d in 2021.

Capex would amount to about $678 million in 2020, dropping to $598 million in 2021.

Free cash flow would be about $300 million in 2020, which coincides with Parsley's guidance of $300M plus, and increasing to $370 million in 2021.

Raymond James has an Outperform rating on Parsley Energy.

Sign up for our FREE newsletter at: www.streetwisereports.com/get-news

Disclosure:
1) Doresa Banning compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.
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Disclosures from Raymond James, Parsley Energy Inc, May 5, 2020

ANALYST INFORMATION

Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.

The analyst John Freeman, primarily responsible for the preparation of this research report, attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months.

RAYMOND JAMES RELATIONSHIP DISCLOSURES
Certain affiliates of the RJ Group expect to receive or intend to seek compensation for investment banking services from all companies under research coverage within the next three months.

Raymond James & Associates, Inc. makes a market in the shares of Parsley Energy, Inc.

Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available here.

( Companies Mentioned: PE:NYSE, )