Meridian's Energy Insights
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The Falling Dollar...
Well, I have returned from the Hard Assets Conference in New York. I must admit, that was my first time in New York and I spent the entire time in wide-eyed amazement. The conference itself was rather interesting too and oddly enough I ended up talking to a number of folks who were concerned not with the Commodity Supercycle and not with gas prices at the pump but rather with the falling Dollar and the notion that if some countries ever start accepting Euros for their Oil, the Dollar may come under severe pressure.
On the plane ride home, I took the time to catch up on my reading and I finished a book called Dark Ages America by author Morris Berman (isbn# 0-393-05866-2). In one of the final chapters he too raises the issue of the Dollar and goes on to note....the standard of living in the US now depends on borrowing from abroad. In essence the US economy is propped up by huge foreign loans, enabling American consumers to buy even more foreign products. This will come to an end when China and the European Union decide that America is an unsafe bet. This situation will be further abetted when Oil producing nations begin to sell Oil in Euros. If this happens, the Oil importing nations will no longer need dollar reserves to purchase Oil....
As the above chart shows, the Dollar is without a doubt in a downtrend and is within a whisker of testing its late 2004 low. As famous scientist and philosopher Sir Isaac Newton once said...an object in motion tends to stay in motion....
This shorter term view is also not encouraging. The 200 day moving average remains well overhead and price action has not broken through this moving average in a meaningful way since last October. At present, the 50 day moving average is providing a stiff challenge to the Dollar.
So all in all, not very encouraging and I can now understand why people I met at the conference in New York were so concerned. I have talked on previous occasions about the concept of countries like Iran selling Oil in Euros. Let's watch this theme closely. The effects of such a move could prove profound.
Uranium is the Attention Getter
At the New York Hard Assets Conference, there were a number of companies giving presentations as well as a number of noted newsletter writers giving talks. I can tell you that at any presentation where the topic of presentation was Uranium - there was standing room only and you could have heard a pin drop in the room. Attendees were literally hanging onto every word spoken by the presenters. The one idea that was common to all was the notion that Uranium spot prices are headed higher, driven so by a glaring supply-demand imbalance. The question, though, that has been nagging at me is how high is too high? At what price inflection point does Uranium as an energy source no longer make sense? This week I finally found my answer thanks to the Canadian Nuclear Safety Association (CNA). It turns out the cost breakdown of operating a nuclear reactor is 5% related to Uranium and 95% related to things like labor, management salaries, maintenance etc...So with this being the case, we could easily see Uranium prices carry on with their upward trajectory. In fact CNA spokeswoman Claudia Lemieux quoted in the Globe and Mail on Friday May 18th says Uranium prices could go to $1000 per pound and not have a deleterious effect on the operating costs of a reactor. Similar comments by Ux Consulting LLC of Georgia claim that $500 Uranium is not out of the question.
However, investing in Uranium stocks is not a slam dunk, easy money proposition. Getting at the Uranium mineralization is a challenging issue and remains so. This has been aptly illustrated by the trials and tribulations of Cameco at its Cigar Lake Project in Saskatchewan, Canada. The other issue is that of grade. Investors instinctively always seem to ask what is the grade? But we are not talking Gold mining here. As I will explain in a moment, grade is of secondary importance when exploring for Uranium. Of primary importance to investors is the Uranium geological setting. You see, in North America, Uranium mineralization occurs in 2 basic formats - Pegmatite style mineralization and Unconformity style mineralization. Pegmatite formations were created 1.5 billion years ago by hot, molten, igneous volcanic matter coming to surface and re-crystallizing. Certain areas of Canada are ripe with such pegmatite formations that lay just beneath surface. Unconformity style mineralization occurs in those areas where a layer of metamorphosed sedimentary sandstone overlays a layer of older rocks. Around 1.5 billion years ago as compressive forces in the earths crust gave way to tensile forces, massive fault zones opened up and hot hydrothermal liquids rich in base metals, precious metals and Uranium rushed to surface. Where these hot liquids intersected the sandstone layer, the mineralization in the liquids precipitated out of solution. This zone of intersection is called the unconformity. In places like the Athabasca Basin made famous by the mining activities of Cameco, up to 1200 feet of sandstone may overlay the unconformity zone. Getting at this mineralization entails sinking a shaft through the sandstone. Sandstone, if you have ever seen it or handled it, is brittle. As shaft sinking progresses, the chances of having the sandstone crack apart increase proportionately. And this is exactly what happened at Cigar Lake. The sandstone cracked, water seeped in and a series of untimely management decisions resulted in the entire underground operation flooding. Investors who have studied the Thelon Basin may or may not be aware that a similar issue exists. The Thelon Basin is structurally similar to the Athabasca Basin in that the Uranium mineralization is unconformity style. Depths of sandstone are apparently up to 600 feet. There is one other area of North America that deserves attention and that is Wyoming. Here the mineralization is also unconformity style but the unique geology to the area means the mineralization can be recovered by a technique called in-situ leaching in which a sodium bicarbonate solution is injected at pressure down a well that has been drilled into the unconformity. A series of recovery wells strategically placed in the surrounding area are then used to recover the Uranium-rich slurry.
Newsletter writer Doug Casey is well aware of geological setting issues. He recently made a comment in the Bull and Bear newspaper to the effect that investors now should be starting to focus on those companies that are exploring in areas away from these Basins. And I trust you can see why he would say this. The cost of drilling through the thick layer of sandstone is far from cheap. Any eventual mining or bulk sampling will entail having to sink a shaft which will be prone to a Cigar Lake type of flooding incident. Mr. Casey goes on to argue that investors should now be looking at companies exploring in lower grade areas absent the thick sandstone cover. With rising Uranium prices, the economics of lower grade deposits are starting to really make sense. This week I introduce 6 Uranium exploration companies. Two are active in the Wyoming area and will use in-situ leaching. Three are active in areas of Canada with pegmatite style mineralization and one is active on the fringes of the Athabasca Basin where thanks to a geological anomaly, the area is largely absent the thick covering of sandstone thus making exploration easy and future mining cost effective.
Uranium City Resources (TSXv: UCR): Here is a trivia question: Where was Uranium first mined in Canada? Answer: Uranium City, Saskatchewan. Uranium City is located on the fringe of the Athabasca Basin and from 1950 to 1982 a total of 65 million pounds of lower grade Uranium was mined from open pit operations in the area. Falling Uranium prices in 1982 saw the area shut down. Today, Uranium City Resources has over 70,000 acres of exploration property in the area. Mineralization is at or near surface thanks to the lack of thick sandstone cover. So far, the company has focused on what it calls its East Target and a 43-101 compliant resource calculation is expected out soon from engineering firm Griffis Watts McOuat. Meanwhile, drilling is ongoing at a couple of its other properties. Given the issues with the thick cover of sandstone discussed above, I say this is a company to follow, especially given that it is in an area with a documented history of open pit mining.
Ur-Energy (TSX: URE): Ur-energy has 2 very interesting projects under development in Wyoming. Both the Lost Soldier Project and Lost Creek Project came with historical data collected by major US companies during the last Uranium boom. Further drilling by Ur-Energy to make this data 43-101 compliant has shown measured and indicated Uranium content of 22 million pounds. Work continues to advance these projects to a production scenario with 2009 slated as the start date.
Strathmore Minerals (TSXv:STM): Strathmore's focus is squarely on its US properties in New Mexico and Wyoming. In New Mexico, the Roca Honda Project and Church Rock Project contain collectively 46.8 million pounds of resource that is suited for in-situ leaching. In Wyoming, the Gas Hills group of properties was extensively drilled back in the 1980s by previous operators. Historical drilling records indicate 8 million pounds of low grade resource that is amenable to open pit mining. Also in Wyoming, the Sky Project has been drilled and at present a 43-101 resource is being calculated. Historical data shows in the order of 1.6 million pounds of Uranium could be contained. Other properties in Wyoming all with historical data include Pine Creek, Red Creek and Power River Basin. The plan remains to be in production at one or more of these properties by 2010.
Crosshair Exploration (TSXv:CXX): Crosshair is actively exploring for Uranium mineralization in Labrador, Canada. Work to date has focused on the C Zone which was the subject of historical drilling during the last Uranium boom by Shell Canada. Uranium mineralization in this area is at/near surface and in fact records show that Shell drilled to only 75 meters below surface. Data obtained to date shows a 43-101 compliant resource of 688,000 pounds of Uranium grading 0.25%. In the next month or so, this 43-101 resource will be updated to include the data from recent drilling. The structure that hosts this C Zone appears to extend for over 4 kms and so could be quite significant. Watch this company closely.
Ucore Uranium (TSXv:UCU): Ucore is active in Newfoundland Canada and also in Alaska. In Newfoundland, the flagship property is called Lost Pond. The area is replete with at-surface boulders (so typical of pegmatite type deposits) with strong scintillometer readings. It is these strong readings that attracted Shell Canada to the area in the early 1980s. At-surface grab samples have revealed an average Uranium content of 0.39% which is certainly economic. In Alaska, Ucore has acquired the past producing Ross-Adams Mine which in its lifetime produced 1.3 million pounds at 0.76%. Ucore postulates that this mine remains open at depth and perhaps along strike. A total of 20 sq. kms has been staked around the mine site to investigate the prospects for mineralization extensions. Ucore is definitely early stage, but is in the right areas. Watch closely.
Uracan Resources (TSXv:URC): Uracan's efforts to date have all been focused on its North Shore Property in Quebec (on the north shore of the St. Lawrence River). This 900 sq. km property has a documented history of exploration from the late 1960s and late 1970s by Denison, Imperial Oil and Uranerz. These companies found mineralization in the basement rocks (ie pegmatite) of grades up to 0.5 pounds per ton. Uracan has just released its drill data on 46 of 58 holes drilled over the past several months. Assay results confirm the historical data. The next step will be to continue drilling at tighter spacings to accumulate sufficient data to calculate a 43-101 compliant resource. With Uranium prices set to rise even further, the economics of a lower grade deposit such as this start to come into clearer focus. Uracan is also well positioned in Saskatchewan outside the Athabasca Basin in an area where the mineralization is at surface/near surface. Historical grades on its Pipewrench Property located 130 kms NW of La Ronge indicate grades of up to 0.5 pounds per ton. Keep a close eye on this company as it marches forward with determination.
Crude Oil - Short Term
First Notice Day for June Futures
Thursday of this week was first notice day for the June Futures contract and I was convinced that we would see the usual drop-off in price action as market players rolled out of their June positions and into July. But, surprisingly we saw the exact opposite. Prices rose. With this action, the July contract finished the week just a shade above its 200 day moving average - an encouraging move to be sure.
Inventory data released this week showed Crude inventory up by 1.0 million barrels to 342.2 million barrels and Distillate stocks up 1.0 million barrels to 119.8 million barrels. Interestingly enough, last year at this time, Crude in storage was 347 million barrels so we have a way to go yet to equal these levels. Last year at this time, Distillate levels stood at 114.6 million barrels, so there is no shortage of Distillates. On the unleaded gasoline front, the downtrend appears to be getting some relief. Gasoline stocks showed an increase of 1.7 million barrels this week and we remain nearly 11 million barrels below where we were a year ago. Data from the EIA shows average nationwide retail gasoline prices to be $3.10 a gallon, some 15.5 cents a gallon higher than where prices stood last year at this time. We may be reaching a tipping point here where the consumer makes an economic decision to drive less.
Natural Gas - Short Term
Out the Top of the Wedge?...
Natural Gas is looking good here. Price action is very close to breaking out of its wedge pattern to the upside. Gas storage data released this week showed Gas in storage at 1842 Bcf, an increase of 95 Bcf from last week. Inventory data shows we are 225 Bcf below where we were last year at this time.
Blended Gasoline - Short Term
Gasoline Futures continue to grind higher. If Commodity Trading is something you do, talk to your Broker and discuss the possibility of selling Put Options or even implementing Bull Call Spreads.
This week I present the charts of the Uranium exploration companies introduced at the outset of this letter.
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Meridian is a covert figure who prefers to keep a rather anonymous low profile. But despite his low profile, Meridian has big picture insight and solid connections to some of the most influential personalities in the Canadian energy industry.
An Engineer by profession, Meridian spent many years in industry. After completing his MBA in 1999 from a recognized business school in Europe, Meridian bade farewell to industry and followed his passion to master the financial markets. He became an Investment Advisor with one of Canada's leading independent brokerage firms with a decided focus on energy and resource equities and commodities. The learning curve was steep and at times seemingly almost vertical. But Meridian was determined to succeed. And succeed he has. No more mind-numbing newspaper columnists and no more talking heads on television. After several years of pouring over piles of financial statements and studying charts and technical indicators until nearly dizzy, Meridian has refined an approach to trading and investing that involves a unique blend of both the fundamental and the technical. It is this approach and insight that Meridian now seeks to share with those who subscribe to Energy Central.
Meridian recently left the brokerage industry and now consults to the resource sector and writes full time for www.themarkettraders.com.