Stop Gambling and Find Stable Profits in Energy Investment

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Are junior resource stocks the investment equivalent of a game of blackjack? It depends on the investor as much as it does on the company.

The Energy Report: In your last interview with us, you talked about your firm’s fair-value metric philosophy for evaluating which stocks look like good investment candidates. How has that worked out over the past year and a half?

Sid Rajeev: We are strong believers in fundamentals analysis. Short-term price movements are typically controlled by speculation and a lot of hearsay. It’s easier to identify good investment opportunities through fundamentals analysis, especially with a one-year minimum investment time horizon.

TER: How does the current global economic picture influence your decision-making for resource investments into the foreseeable future?

“Short-term price movements are typically controlled by speculation and hearsay. It’s easier to identify good investment opportunities through fundamentals analysis.”

SR: We have seen a lot of good developments in the overall market in the past few months. First of all, the TSX Venture Index is up 10%. Moody’s rating agency decided to maintain its rating on Spain. The U.S. economy continues to grow gradually. These are good developments that could result in a sentiment shift. We do see continued improvement, but it’s going to be gradual. There are still a lot of extremely undervalued opportunities in this market that can provide high returns over the next 12 months.

TER: Demand projections for China and other developing countries are shifting. How is this going to affect the fertilizer and potash markets?

SR: Potash was trading above $800/ton in 2008. Prices then crashed to just over $300/ton in 2009. They picked up after and went above $500/t. Prices however dropped by about 10% in the past few months. Now, it’s around $460–480/t. Our long-term potash price since last year has been $425/t. While many analysts and investors had to reassess their potash targets, because they were valuing those targets at extremely high potash prices, we did not have to make any significant changes. We continue to be strongly bullish on the segment in the long term, especially because the rationale is very simple. Developing economies need more and better food, and most importantly, the supply of arable land has been stable or decreasing, creating a huge need for fertilizers like potash.

“Many investors had to reassess their potash targets because they were using extremely high potash prices, but we did not have to make any significant changes. We continue to be strongly bullish on the segment in the long term.”

We are bullish on the commodity and even more bullish on advanced junior North American potash companies. Remember that the potash segment is an oligopoly that is currently controlled by a few major producers. India and China are big consumers and need long-term, stable supply at reasonable prices. We think that they would make a move to assure that they can control some advanced-stage potash projects, which are now trading at extremely low levels. We expect to see some kind of joint venture or merger and acquisition (M&A) activity in the advanced junior space in the next 6–12 months.

TER: Which North American projects are looking good?

SR: Two companies that we actually follow and like are Western Potash Corp. (WPX:TSX.V) and Passport Potash Inc. (PPI:TSX.V; PPRTF:OTCQX). Western Potash has been a Top Pick for over 12 months. It’s still one of our favorites. This company is one of the very few advanced-stage projects in Saskatchewan that has yet to be acquired or form a JV. Most of the projects around it have already been acquired. The company is going to come out with a feasibility study by late November. Most of the neighboring projects that have been acquired in the past were all at post-feasibility stage. So we think the next six months is going to be extremely exciting and crucial for the company because, if the feasibility study is positive, as we expect, it should open more doors to some kind of joint venture or M&A activity.

I think an ideal acquirer or JV partner would be a state-owned fertilizer company in India or China. One of the largest Indian fertilizer companies, Rashtriya Chemicals & Fertilizers Ltd., is looking to invest close to $1 billion in potash projects in Canada. I think they have already talked to most of the potash players in the space. A positive feasibility study could trigger some developments for Western Potash Corp.

TER: What’s the story on Passport Potash?

SR: Passport Potash is another interesting story, but a more early-stage play. The project is in Arizona. Passport has dominant land acreage in the Holbrook basin. The company came out with an updated resource estimate last month. Its scoping study is expected in Q1/13. The main difference between Passport’s project and Saskatchewan projects is that it is shallower. But size-wise, it’s going to be significantly smaller. It’s still early and there is still a lot of exploration going on in the region. Passport also recently signed a Letter of Intent with the Hopi Indian Tribe, which has allowed the company to include the Hopi lands in the upcoming Preliminary Economic Assessment (PEA). Passport has quite a few catalysts coming up, including a scoping study. It is also in discussions for financing, so we could see some kind of activity with this company over the next few months. It’s currently trading at $0.20. Our fair value is $0.81.

TER: How does the uranium sector look to you?

SR: We have a long-term bullish outlook on uranium. Prices have dropped significantly over the last year to around $43–44 per pound (lb). Our long-term outlook on uranium is $70/lb. There are a few good uranium stories we cover. One of our favorites is a company called Strathmore Minerals Corp. (STM:TSX; STHJF:OTCQX). It has two advanced-stage projects in the U.S., one in New Mexico and one in Wyoming. The company recently signed a joint venture agreement with Korea Electric Power Corp. (KEPCO) to help advance its Gas Hills project. It also announced a positive PEA on its Roca Honda project.

TER: What about coal?

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