Month: March 2014

By MoneyMorning.com.au

Latest figures show that Australians are spending millions of dollars on digital streaming services.

All up we spent $143 million on services such as Quickflix and iTunes last year, up from $117 million during 2012, a jump of 22%.

Those figures make Australian the second biggest market for such services on a per-capita basis.

And that means that Foxtel needs to act quickly if it wants to remain competitive.

Can Foxtel survive the competition from streaming services?

Foxtel enjoys a cosy monopoly in Australia, meaning it has only ever had to compete with free-to-air networks.

But high-speed broadband has become more common, and will be getting faster and even more widespread in the coming decade.

As a business model under threat, free-to-air networks in Australia have been relatively quick to adapt.

The networks are facing falling revenue, a shrinking ad market, and viewers shifting to digital. Channel Seven, Nine and Ten all have catch-up or streaming services, as do SBS and ABC.

In the US competition has been even fiercer. There, free-to-air networks aren’t just competing with hundreds of cable television providers, but a huge number of popular streaming services too.
Because they’ve had to compete in a tight market place, they’ve innovated and have jumped into streaming.

Will Game of Thrones save Foxtel?

Foxtel on the other hand, is only just getting skin in the game.

They’ve launched a new service called Presto, which will offer unlimited streaming of movies across Foxtel’s channels for $19.99 a month.

That’s a smart move—consumers have already shown they’re willing to pay more for movies. That 22% rise in revenue came off the back of a 15% rise in the number of new subscriptions.

The other thing up Foxtel’s sleeve is their acquisition of the rights to popular HBO series Game of Thrones.

Foxtel stitched up a deal with HBO that prevents Australian viewers accessing the show on iTunes and Quickflix before Foxtel has screened the entire series.

Can Foxtel compete with other video streaming options out there?

The advantage of Foxtel’s service over Quickflix is that it is focussing on movies, not TV shows.

Though the service is $5 a month more expensive than Quickflix’s, its back catalogue of movies — everything that has screened across its channels is larger than Quickflix’s meagre offerings.

But for some reason Presto will only be available — initially at least — on computers and iPads, while its competitors are offering multi-device compatibility.

That’s a baffling move, especially considering rumours that both Netflix and Virgin are looking at setting up here.

And given that Australians are spending more money on these services than ever, it looks certain that there will be more competition and more streaming services coming our way.

Foxtel will need to do more if it is to compete.

Callum Denness
Contributing Editor, Money Morning
Join Money Morning on Google+

By MoneyMorning.com.au

By MoneyMorning.com.au

Immersive tech, NFL players and a 3D printed heart. At first glance you might think they have nothing in common.
But they do. I’ll explain shortly.

First, let’s look at each of these three things and why they’re so important to each other…

First off, the 3D printed heart. Now, this isn’t a fully functional 3D printed heart. Although there are technologies out there right now that mean this could be a possibility in the future. No, this is a 3D printed replica of a heart. In other words scientists took a 3D scan of a patient’s heart, and then 3D printed it as a solid form model.

They did this so they could specifically tailor biosensors for that unique heart. This was the crux of a story I linked to yesterday in Tech Extras. It was from the MIT Technology Review. And it explains how researchers use 3D printing technology with heart health. It also goes on to explain a type of bioelectronics that’s key to their research.

‘The researchers used images of animals’ hearts to create models of the organ using a 3-D printer. Then they built stretchy electronics on top of those models.‘

The stretchy electronics help measure the function of the heart with great accuracy. And because the electronics are custom-fit they hold great potential for better heart therapies in the short term future.

They’ll help do this because of more accurate information than is currently available. The level of accuracy might well mean the difference between life and death.

Now none of this would have been possible even a few years ago. Without 3D printing they could never have built such a detailed model of the heart. And without stretchable electronics they’d never get the detailed information needed.

It’s unnatural to get hit that hard

The next thing to look at is NFL players.

NFL, the National Football League, Gridiron, American Football, whatever you want to call it, is a full contact sport.

I’m no professional NFL player, but I did play a season of American Football a few years back in Melbourne. And even at the amateur level I was at the players hit hard.

And in the professional leagues the sheer velocity at which players hit is unnatural. They hit so hard that it leads to long term health issues for many, including serious mental health problems and diminishing brain function.

This has been a hot topic in professional sports in the US. And innovative companies are doing something about it.

Now they can’t change the sport, but they can help medical staff get better information, real-time, about their players.

That’s why a number of ‘early warning’ devices are being made to monitor player concussions.

One company in particular has partnered with Reebok to develop what they call, CHECKLIGHT. It’s one of the best examples of immersive tech I’ve seen to date. This isn’t some wristband or smart watch. It’s a purpose built array of sensors to help improve the health of (in this case) athletes.

They state on their website,

‘In the heat of competition, athletes aren’t always aware of the severity of a blow to the head. We’re delivering a simple solution. Our design uses multiple sensors to capture head impact data during play, while being virtually invisible to the athlete.‘

The company does this with stretchy electronics embedded in a ‘skull cap’. The ‘skull cap’ is like a beanie that’s made of lycra-like material.

Anyway, the device works well in the NFL because many of the players wear skull caps under their helmets. This also means that sideline medical staff can actively monitor their players for concussion in real time.

Just one innocuous knock to the head might be enough to do damage to a player. But CHECKLIGHT helps to prevent that. It’s truly a revolutionary piece of technology.

Immersive tech binds everything together

And finally there’s immersive tech. Immersive tech is the future that’s coming into the present at a rapid pace. It’s where your digital life and physical life converge into one seamless, frictionless experience.

It will involve billions of sensors, processors and microchips. It will mean your home, your office, the car…everything will be immersed with your digital life. This means a lot of data and a lot of information. A big part of this is ongoing information about your own health.

As these sensors find their way into everything, they also find their way into you. That’s not a bad thing, because they’ll be invisible. You won’t even notice they’re there. But these sensors will help you to manage your health in a much more accurate and effective way.

So when we look at immersive tech, NFL players and a 3D printed heart, you’re still probably wondering ‘where’s the link?’

Well here are the three key technologies that link all this together. And they all are a big part of one pioneering bioelectronics company, MC10.

• The stretchy electronics used for the cardiac treatment
• The electronics in CHECKLIGHT
• The sensors and processors used in a world of immersive tech.

These are all things that MC10 has in their ‘technology arsenal’.

MC10 is a company that grew from the research of Professor John Rogers from the University of Illinois. MC10 isn’t just another ‘wearable tech’ company either. Their aim is, ‘To redefine the interface between electronics and the human body. In other words – make humans more superhuman.‘

They make a whole range of electronics that flex, bend and stretch. These electronics are vitally important for the future of immersive tech.

In a world where everything has sensors, processors and electronics in it, these devices need to bend, stretch and flex. And MC10 is at the forefront of making this happen.

MC10 is a private company for now. But the technology they have is unique, and importantly patent protected. In fact one of their most important patents is patent 8.389,862 – Extremely Stretchable Electronics.

In a world where electronics will be everywhere and in everything, it’s fair to say this particular patent could be the golden ticket for MC10 to become a genuine ‘Tech Superstar’.

Join Money Morning on Google+

By MoneyMorning.com.au

By John Mauldin

 

I look at dozens of sources a day on global macroeconomics, but one source I go to every day is my good friends at Gavekal. The Gavekal partnership – father Charles Gave, son Louis-Vincent Gave, and noted economist and journalist Anatole Kaletsky – spans three continents: Charles is based in Paris, Anatole is in London, Louis has set up shop in Hong Kong, and the firm also has an office in the US. And they have an extensive team of outstanding analysts.

Gavekal’s publishes global macro articles for its clients on an almost daily basis, and for today’s Outside the Box they have allowed me to share two of them with you. First, Louis Gave gives us a very insightful analysis of Russia’s permanent interests and makes a very interesting case connecting Middle East oil and Crimea.

The author of the second piece is Gavekal Asia Research Director Joyce Poon, who has been rising on my must-read list because she consistently thinks differently and more deeply than most conventional analysts. Her analysis here on Japan is very intriguing, convincing, and counterintuitive to standard economic theory. But, you’ll note, the end result is to still short the yen.

Incidentally, Anatole Kaletsky will speak at our Strategic Investment Conference this year, as he has for the past several years. This is a must-attend conference.

There has been a great response to the exclusive-to-Mauldin-Economics video interview by Jim Bruce of Janet Yellen when she was the president of the San Francisco Fed. He interviewed her in the course of producing the gonzo documentary on the Federal Reserve, Money for Nothing. The original interview was quite wide-ranging – over two hours – and Jim has edited the interview to just over 10 minutes of the most pertinent and interesting pieces segments. Given that today is the day Yellen chairs her first Fed meeting, I think it might be interesting to see what her views are on the role of the Federal Reserve.

What’s fascinating to me are the risks inherent in so many of her beliefs:

• That the Fed can reduce “the pain that people feel when they want to have jobs” by stimulating financial markets with ultra-low rates
• That the Fed will be able to control inflation no matter how profligate Washington gets
• That the Fed wasn’t irresponsible in deliberately fueling the housing bubble, and shouldn’t raise rates to puncture a bubble because it might impact the economy.

These are the views that are going to be driving Fed policy and shaping the monetary environment in which we all invest. I think it’s worth your time to consider. You can watch the interview here.

As you receive this I am on a plane to Buenos Aires, where I will spend the day before flying on to Salta and then driving three hours up through a beautiful canyon to Cafayate. Sometime early in the week I will make a 4- to 5-hour trek over the roughest terrain I’ve ever driven on, back to see my old friend Bill Bonner at his hacienda at 10,000 feet in the Andes. He retreats there for two months every year, where he continues to write and pursue his avocation of building things with his own hands. In theory there is internet, but in practice I was completely cut off for a few days when I was there last year. Withdrawal was acute, but I survived. I might even need to stay a few days longer with just my books to see if the reflexive tics go away.

As soon as I get back to the resort at La Estancia, I will once again be connected to the world and will be able to write my weekly letter as usual. With everything happening so fast these days, it almost seems like I should be writing to you three times a week. But that is why we have the other writers like Grant Williams and our Outside the Box contributors to supplement my humble weekly missives.

Have a great week, and follow me on Twitter as I try to post from Argentina and from South Africa in a few weeks.

Your getting ready to feast at almost daily asados analyst,

John Mauldin, Editor
Outside the Box[email protected]

Stay Ahead of the Latest Tech News and Investing Trends…

Click here to sign up for Patrick Cox’s free daily tech news digest.

Each day, you get the three tech news stories with the biggest potential impact.

---

Russia’s Permanent Interests

By Louis-Vincent Gave

Nineteenth century statesman Lord Palmerston famously said that “nations have no permanent friends or allies, they only have permanent interests.” As anyone who has ever opened a history book knows, Russia’s permanent interest has always been access to warm-water seaports. So perhaps we can just reduce the current showdown over Crimea to this very simple truth: there is no way Russia will ever let go of Sevastopol again. And aside from the historical importance of Crimea (Russia did fight France, England and Turkey 160 years ago to claim its stake on the Crimean peninsula), there are two potential reasons for Russia to risk everything in order to hold on to a warm seaport. Let us call the first explanation “reasoned paranoia,” the other “devilish Machiavellianism.”

Reasoned paranoia

Put yourself in Russian shoes for a brief instant: over the past two centuries, Russia has had to fight back invasions from France (led by Napoleon in 1812), an alliance including France, England and Turkey (Crimean War in the 1850s), and Germany in both world wars. Why does this matter? Because when one looks at a map of the world today, there really is only one empire that continues to gobble up territory all along its borders, insists on a common set of values with little discussion (removal of death penalty, acceptance of alternative lifestyles and multi- culturalism…), centralizes economic and political decisions away from local populations, etc. And that empire may be based in Brussels, but it is fundamentally run by Germans and Frenchmen (Belgians have a hard enough time running their own country). More importantly, that empire is coming ever closer to Russia’s borders.

Of course, the European Union’s enlargement on its own could be presented as primarily an economic enterprise, designed mainly to raise living standards in central and eastern Europe, and even to increase the potential of Russia’s neighbors as trading partners. However, this is not how most of the EU leaders themselves view the exercise; instead the EU project is defined as being first political, then economic. Worse yet in Russian eyes, the combination of the EU and NATO expansion, which is what we have broadly seen (with US recently sending fighter jets to Poland and a Baltic state) is a very different proposition, for there is nothing economic about NATO enlargement!

For Russia, how can the EU-NATO continuous eastward expansion not be seen as an unstoppable politico-military juggernaut, advancing relentlessly towards Russia’s borders and swallowing up all intervening countries, with the unique and critical exception of Russia itself? From Moscow, this eastward expansion can become hard to distinguish from previous encroachments by French and German leaders whose intentions may have been less benign than those of the present Western leaders, but whose supposedly “civilizing” missions were just as strong. Throw on top of that the debate/bashing of Russia over gay rights, the less than favorable coverage of its very expensive Olympic party, the glorification in the Western media of Pussy Riot, the confiscation of Russian assets in Cyprus … and one can see why Russia may feel a little paranoid today when it comes to the EU. The Russians can probably relate to Joseph Heller’s line from Catch-22: “Just because you’re paranoid doesn’t mean they aren’t after you.”

Devilish Machiavellianism

Moving away from Russia’s paranoia and returning to Russia’s permanent interests, we should probably remind ourselves of the following when looking at recent developments: 1) Vladimir Putin is an ex-KGB officer and deeply nationalistic, 2) Putin is very aware of Russia’s long-term interests, 3) when the oil price is high, Russia is strong; when the oil price is weak, Russia is weak.

It is perhaps this latter point that matters the most for, away from newspapers headlines and the daily grind of most of our readers, World War IV has already started in earnest (if we assume that the Cold War was World War III). And the reason few of us have noticed that World War IV has started is that this war pits the Sunnis against the Shias, and most of our readers are neither. Of course, the reason we should care (beyond the harrowing tales of human suffering coming in the conflicted areas), and the reason that Russia has a particular bone in this fight, is obvious enough: oil.

Indeed, in the Sunni-Shia fight that we see today in Syria, Lebanon, Iraq and elsewhere, the Sunnis control the purse strings (thanks mostly to the Saudi and Kuwaiti oil fields) while the Shias control the population. And this is where things get potentially interesting for Russia. Indeed, a quick look at a map of the Middle East shows that a) the Saudi oil fields are sitting primarily in areas populated by the minority Shias, who have seen very little, if any, of the benefits of the exploitation of oil and b) the same can be said of Bahrain, where the population is majority Shia.

Now of course, Iran has for decades tried to infiltrate/destabilize Shia Bahrain and the Shia parts of Saudi Arabia, though so far, the Saudis (thanks in part to US military technology) have done a very decent job of holding their own backyard. But could this change over the coming years? Could the civil war currently tearing apart large sections of the Middle East get worse?

At the very least, Putin has to plan for such a possibility which, let’s face it, would very much play to Russia’s long-term interests. Indeed, a greater clash between Iran and Saudi Arabia would probably see oil rise to US$200/barrel. Europe, as well as China and Japan, would become even more dependent on Russian energy exports. In both financial terms and geo-political terms, this would be a terrific outcome for Russia.

It would be such a good outcome that the temptation to keep things going (through weapon sales) would be overwhelming. This is all the more so since the Sunnis in the Middle East have really been no friends to the Russians, financing the rebellions in Chechnya, Dagestan, etc. So having the opportunity to say “payback’s a bitch” must be tempting for Putin who, from Assad to the Iranians, is clearly throwing Russia’s lot in with the Shias. Of course, for Russia to be relevant, and hope to influence the Sunni-Shia conflict, Russia needs to have the ability to sell, and deliver weapons. And for that, one needs ships and a port. Ergo, the importance of Sevastopol, and the importance of Russia’s Syrian port (Tartus, sitting pretty much across from Cyprus).

The questions raised

The above brings us to the current Western perception of the Ukrainian crisis. Most of the people we speak to see the crisis as troublesome because it may lead to restlessness amongst the Russian minorities scattered across Eastern Europe and Central Asia, and tempt further border encroachments across a region that remains highly unstable. This is of course a perfectly valid fear, though it must be noted that, throughout history, there have been few constants to the inhabitants of the Kremlin (or of the Winter Palace before then). But nonetheless, one could count on Russia’s elite to:

a) Care deeply about maintaining access to warm-water seaports and

b) Care little for the welfare of the average Russian

So, it therefore seems likely that the fact that Russia is eager to redraw the borders around Crimea has more to do with the former than the latter. And that the Crimean incident does not mean that Putin will try and absorb Russian minorities into a “Greater Russia” wherever those minorities may be. The bigger question is that having secured Russia’s access to Sevastopol, and Tartus, will Russia use these ports to influence the Shia-Sunni conflict directly, and the oil price indirectly?

After all, with oil production in the US re-accelerating, with Iran potentially foregoing its membership in the “Axis of Evil,” with GDP growth slowing dramatically in emerging markets, with either Libya or Iraq potentially coming back on stream at some point in the future, with Japan set to restart its nukes … the logical destination for oil prices would be to follow most other commodities and head lower. But that would not be in the Russian interest for the one lesson Putin most certainly drew from the late 1990s was that a high oil price equates to a strong Russia, and vice-versa.

And so, with President Obama attempting to redefine the US role in the region away from being the Sunnis’ protector, and mend fences with Shias, Russia may be seeing an opportunity to influence events in the Middle East more than she has done in the past. In that regard, the Crimean annexation may announce the next wave of Sunni-Shia conflict in the Middle East, and the next wave of orders for French-manufactured weapons (as the US has broadly started to disengage itself, France has been the only G8 country basically stepping up to fight in the Saudi corner … a stance that should soon be rewarded with a €2.7bn contract for Crotale missiles produced by Thales and a €2.4bn contract for Airbus to undertake Saudi’s border surveillance). And, finally, the Crimean annexation may announce the next gap higher in oil prices.

In short, buying a straddle option position on oil makes a lot of sense. On the one hand, if the Saudis and the US want to punish Russia for its destabilizing actions, then the way to do it will be to join forces (even if Saudi-US relations are at a nadir right now) and crush the oil price. Alternatively, if the US leadership remains haphazard and continues to broadly disengage from the greater Middle East, then Russia will advance, provide weapons and intelligence to the Shias, and the unfolding Sunni- Shia war will accelerate, potentially leading to a gap higher in oil prices. One scenario is very bullish for risk assets, the other is very bearish! Investors who believe that the US State Department has the situation under control should plan for the former. Investors who fear that Putin’s Machiavellianism will carry the day should plan for the latter (e.g., buy out-of-the-money calls on oil, French defense stocks, Russian oil stocks).

Japan’s Self-Defeating Mercantilism

By Joyce Poon

In the 16 months since Japanese Prime Minister Shinzo Abe launched his bold plan to reflate Japan’s shrinking economy the yen has depreciated by 22% against the dollar, 28% against the euro and 24% against the renminbi. The hope was to stimulate trade and push the current account decisively into the black. Yet the reverse has occurred. Japan’s external position has worsened due to anemic export growth and a spiraling energy import bill: in January it recorded a record monthly trade deficit of ¥2.8trn ($27.4bn). Having eked out a 0.7% current account surplus in 2013, Japan may this year swing into deficit for the first time since 1980. So why is the medicine not working?

The standard response revolves around timing issues: the so called J-curve effect usually means that the boost to exports after a currency devaluation lags the rise in the value of imports by about 12-18 months. In addition, consumers may be busily buying goods ahead of April’s scheduled sales tax increase, temporarily jacking up imports. On a more structural note, there is also the suspicion that exports are not benefitting from the cheaper yen partly because so much production has been pushed offshore.

This may all be true, but there is more to the story than the trade data. After all, a big devaluation has a ricochet effect across the broad economy that changes the outlook for producers, consumers, the government and providers of capital. The transmission mechanism can be thought as working in the following way. Consumers are immediately hit with an implicit “tax” as imported goods cost more, while export-oriented firms get an effective subsidy. In the capital markets, the effect is to lower the value of domestic bonds in foreign currency terms, with the result that yields rise. This means that the cost to the government of financing its deficit rises, forcing a reduction in government spending. As a result of these effects, resources are shifted from the household and government sectors and into the corporate sector. The effect of this resource reallocation should be to boost productivity, which in turn initiates a virtuous circle of rising incomes and ultimately higher consumption.

Unfortunately, Japan defies this textbook paradigm because in addition to devaluing, it is also engaging in massive quantitative easing. This keeps bond yields low, enabling the government to keep financing its deficit at low cost. There is thus no incentive for the government to cut spending— and in fact the consumption tax hike will be offset by even more spending. Furthermore, low bond yields suppress the financial income of household savers.

The end result of all this is that the government bears none of the burden of the adjustment and the household sector bears all of it, through higher import costs and lower financial income. With the household sector’s spending power thus crimped, companies have no incentive to invest in domestically-focused production. Instead, all their investment will be geared toward exports—mercantilism on steroids.

A mercantilist policy can feel like it is working during periods when strong global growth allows excess exports to be absorbed without ruinous price falls. Between 2001 and 2006 the yen devalued by almost 40% on a real effective exchange rate basis and Japan’s current account improved sharply. Japan may not have won back its global competitiveness (its share of the global export pie fell by 1.5 percentage points in the period), but strong external conditions did allow exports to grow 9% a year in dollar terms.

Today, Japanese exporters do not face such benign conditions and any successful mercantilist boost can only come from eating the lunch of rivals.

Since all the leading economies favor policies that support production over consumption, the world is getting more goods than it can absorb. The result is ongoing price declines, which have the effect of deferring the ultimate global recovery.

What this means is that Japan’s ultra-mercantilism is self defeating. In a global environment of weak demand and disinflation any volume increase in its exports will have to be paid for through price reductions. To be sure, in the short term the trade balance is likely to improve somewhat as a result of the J-curve effect taking hold. But in the longer term Japan looks to be entering a cycle where it must run harder just to stand still.

There are a few ways this could all end happily. Japan might embrace a structural reform agenda that boosts productivity, raises wages and pushes up domestic demand. Alternatively, world growth could surprise on the upside, creating a rerun of 2001-06. Energy prices could collapse, closing Japan’s trade deficit and reducing the incentives for mercantilist policy. But we are not holding our breath on any of these possibilities.

Instead, Japan’s most likely path is that the yen keeps falling, the BoJ keeps printing money, and the dollar value of exports stagnates as devaluation and price cuts offset any volume increases. And so, paradoxically, the current account will continue to deteriorate into permanent deficit, despite ultra-mercantilism. At this point the game will have changed in Japan and Abenomics will have manifestly failed to deliver on its stated objectives.

Like Outside the Box?
Sign up today and get each new issue delivered free to your inbox.
It’s your opportunity to get the news John Mauldin thinks matters most to your finances.

© 2013 Mauldin Economics. All Rights Reserved.
Outside the Box is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting www.MauldinEconomics.com.
Please write to [email protected] to inform us of any reproductions, including when and where copy will be reproduced. You must keep the letter intact, from introduction to disclaimers. If you would like to quote brief portions only, please reference www.MauldinEconomics.com.
To subscribe to John Mauldin’s e-letter, please click here: http://www.mauldineconomics.com/subscribe
To change your email address, please click here: http://www.mauldineconomics.com/change-address

Outside the Box and MauldinEconomics.com is not an offering for any investment. It represents only the opinions of John Mauldin and those that he interviews. Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with, Mauldin’s other firms. John Mauldin is the Chairman of Mauldin Economics, LLC. He also is the President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states, President and registered representative of Millennium Wave Securities, LLC, (MWS) member FINRA, SIPC, through which securities may be offered . MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB) and NFA Member. Millennium Wave Investments is a dba of MWA LLC and MWS LLC. This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document. Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article. Mauldin companies may have a marketing relationship with products and services mentioned in this letter for a fee.

Note: Joining The Mauldin Circle is not an offering for any investment. It represents only the opinions of John Mauldin and Millennium Wave Investments. It is intended solely for investors who have registered with Millennium Wave Investments and its partners at http://www.MauldinCircle.com (formerly AccreditedInvestor.ws) or directly related websites. The Mauldin Circle may send out material that is provided on a confidential basis, and subscribers to the Mauldin Circle are not to send this letter to anyone other than their professional investment counselors. Investors should discuss any investment with their personal investment counsel. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments. John Mauldin is the President of Millennium Wave Advisors, LLC (MWA), which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS), an FINRA registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. Millennium Wave Investments cooperates in the consulting on and marketing of private and non-private investment offerings with other independent firms such as Altegris Investments; Capital Management Group; Absolute Return Partners, LLP; Fynn Capital; Nicola Wealth Management; and Plexus Asset Management. Investment offerings recommended by Mauldin may pay a portion of their fees to these independent firms, who will share 1/3 of those fees with MWS and thus with Mauldin. Any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest with any CTA, fund, or program mentioned here or elsewhere. Before seeking any advisor’s services or making an investment in a fund, investors must read and examine thoroughly the respective disclosure document or offering memorandum. Since these firms and Mauldin receive fees from the funds they recommend/market, they only recommend/market products with which they have been able to negotiate fee arrangements.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor’s interest in alternative investments, and none is expected to develop.

 

By Dennis Miller

Juniors for seniors… huh? No, I’m not referring to Junior Mints, but rather, junior resource stocks.

I had the.privilege of interviewing Louis James, the chief metals & mining investment strategist at Casey Research.  Louis is the editor of Casey International Speculator, the first subscription newsletter I ever bought, and I am holding a good number of his recommendations. Personally, I’ve really been looking forward to this interview, as it sort of brings my own investment journey full circle.

He is quite the globetrotter, visiting mines all over the world. I am glad we were finally able to corral him long enough to share his expertise with our readers. Let’s get started.

Dennis Miller: Louis, thanks for taking a few minutes to join us.

Louis James: You’re very welcome – I’m happy to help.

Dennis: I want to start with the big picture before we get into specifics. When I interviewed Alex Daley, Chief Technology Strategist for Casey Research a while back, he made an excellent point: While most of my readers are on either side of the retirement cusp – making conservative investing paramount – if 5-10% of your portfolio is in a speculative pick and it doubles, that relieves pressure from the rest of your portfolio, and you’re having a pretty good year. So, can you explain the mining sector and how some of your picks might fit into the speculative portion of a portfolio typical of our subscribers?

L: I’ve got two answers for that question. First, if Doug Casey is right about the Greater Depression, there is no such thing as a safe investment. You have to remember that at the peak of the crisis in 2008, we were told that checks came within 48 hours of not clearing banks. General Motors filed for bankruptcy. American Airlines filed for bankruptcy. In the post-Lehman Brothers world, absolutely nothing is safe.

We are all speculators now. The only difference is whether we recognize that or not, and act accordingly. So while it may seem like the kind of speculation I recommend is too high risk for someone nearing retirement, someone who may not have time to start over again has all the more reason to offset the omnipresent risk with some allocation in high-yield speculations.

As Doug says, it’s better to risk 10% of your portfolio on high-risk, high-reward speculation than to risk 100% of your portfolio on so-called safe investments that may not even keep up with inflation.

Furthermore, if Doug is right about the Greater Depression, even people with considerable assets accumulated may find themselves with liquidity problems and even cash-flow deficits. If, for example, a high-net-worth individual’s wealth is tied up in real estate, and the real estate market seizes up, he or she might not be able to liquidate assets, even if that became necessary to replace lost income.

In a world where no financial institution of any kind can be relied upon absolutely, even a “solid as bedrock” annuity is vulnerable to some risk. Simply put, no one can afford to rest on their laurels.

The second line of reasoning may challenge some of your readers, and may contradict my first point slightly, but not if you consider the long term. Forgive me for being blunt, but I don’t know any polite way to put this: no one who is not on death’s door should plan on dying any time soon.

There are new medical technologies under development now – some quite close to market – that have radical implications for human longevity. Soon it will make no sense to think of anyone who is not over 100 as old. And by the way, I don’t just mean surviving hooked to all kinds of machines in a hospital room, but living in better health than we may have now.

Sure, misfortunes may befall us before we get to enjoy the benefits of these technologies – I’m not promising eternal life next week. What I am saying is that everyone who is not facing a certain and short life expectancy should plan for the future. And they should not assume that they won’t need money after a few more years.

Everyone in their 60s should have a financial plan that, at least conceptually, covers the next 50 years. The world will be vastly different in 10 or 15 years, of course, so clearly plans can’t be too detailed, but they should exist. People should not assume their financial needs will zero out any time soon.

Given these factors, it is more crucial than ever for retirees to use their accumulated capital to generate more capital, and not focus exclusively on protecting the nest egg. They worked hard for their money; now it’s time for that money to work hard for them.

The best way we’ve found for money to generate not just a trickle of income but substantial new wealth is to speculate on what we admittedly call “the most volatile stocks on earth”: junior resource stocks.

Dennis: In the old days, I would fill out retirement planner worksheets that predicted how long my money would last. On the conservative side, if the computer said you were covered until age 120, you were fine. I always figured if I ran out at 119, the hell with it.

You’re saying 120 years old is a lot more relevant than I thought when I was filling out those worksheets in my 50s.

L: Absolutely! No one wants to run out of money at any age, which is why they should always use their capital to generate more capital.

Other People’s Money

Dennis: When we looked at technology stocks, Alex recommended a company that was developing several new medical tests. I got the impression that it was basically doing the research and development, but once the tests were perfected and had the necessary approvals, they would be purchased by a larger company.

Are junior mining companies similar? Are they, in effect, like research and development for the mining industry?

L: That’s a very good analogy. The major mining companies look at the juniors as a source of Other People’s Money – we call it “OPM.” It’s a good symbiosis. The big companies tend to be bureaucratic – and we can’t really blame them because they have tens of thousands of employees all around the world. But mineral exploration is a high-risk venture, not very compatible with a bureaucratic mindset. The big companies are happy to buy quality assets that have been studied and de-risked, even if it means paying many times what it cost the junior company to make its discovery.

The situation is highly analogous to Alex’s technology companies, where the outcome tends to be binary. If a company developing a new drug gets FDA approval, it goes from having nothing but a very expensive dream to having something with a potential multibillion-dollar market.

Similarly, a junior exploration company goes from having nothing but a geologist’s dream to having Probable and Proven mining reserves in the ground that even bankers will lend money on. The consequences for shareholders who buy in early can be staggering – life-changing, in fact.

Why Not Invest in a Junior Mining ETF?

Dennis: Why wouldn’t a person just invest in a junior mining ETF or something? That would give them real diversification, wouldn’t it?

L: It would, but it would also put someone else’s judgment in charge of the speculation, not their own. Furthermore, when funds take significant positions in small companies that don’t trade a lot of shares daily, they face liquidity problems entering and exiting at good prices. An individual investor can often get their orders filled at better prices on both the buy and sell sides, and can take better advantage of market volatility to achieve lower cost bases. Even if the fund includes a big winner, that upside is diluted across the average portfolio performance of every company in the fund.

Truth be told, we would never bet on the sector as a whole. Junior mineral companies as a group are a lousy speculation. You have to be able to pick out the diamonds in the rough – speculate only on the best of the best.

Many fund managers approach this in a highly quantitative way. They have their spreadsheets, their models, and their parameters. They make their picks based on what fits the numbers they’re looking for best. In my experience, this actually does help identify companies selling cheap, but often fails to identify the reasons why a company is selling cheap.

Discovery Zone

Dennis: Earlier we discussed the similarity of junior mining stocks to pharmaceutical stocks. One of the major differences I see in the two sectors is this: If a pharmaceutical stock hits a winner with FDA approval, there will probably be multiple bidders for the patents, regardless of how the sector is performing at the time. But in the case of junior mining stocks, say gold jumps a couple hundred dollars an ounce: wouldn’t your entire sector move in tandem and benefit a lot?

L: Yes, that’s true about the sector. However, not all companies are equal, nor do they all benefit equally.

First, and somewhat ironically, a miner with a very high profit margin benefits proportionally less from an increase in the price of the metal being mined.

Say you’re a gold miner, producing for $500 an ounce. If gold goes from $1,600 to $1,700, your profit increases from $1,100 to $1,200, or less than 10%. But if you’re producing for $1,500 an ounce, and gold rises by the same amount, your profit increases from $100 to $200 dollars per ounce, or 100%.

That’s no reason not to buy a highly profitable producer. You just play things differently if you want to speculate on changes in the price of gold vs. buying a great company.

Second, when you speculate on a junior exploration company making a discovery, it doesn’t – or shouldn’t – make any difference how the price of gold fluctuates. The company has no gold yet; changes in the price of something it has none of should not matter.

We don’t buy these stocks because we think gold is going up; we buy them because we think their chances of making a significant discovery are excellent. When this happens, they can go from having nothing to having something of great value. The change in value is substantial, and the consequences for shareholders can be spectacular.

Successful smaller companies can be bought out by the bigger players in the field, just as with those pharmaceuticals you mentioned. This is actually one of our preferred exit strategies; it can be hard to get a good price on a large block of shares in a lightly traded stock, but that’s not a problem if a larger company buys us all out – often at a nice premium to market.

Dennis: Louis, on behalf of all of my readers, I’d like to thank you for taking the time to teach us about a very important sector.

We want the buying power of our portfolio to increase, not dwindle away due to inflation, and you have me convinced that there is good reason to take a calculated risk with a small portion of it. As more people realize that inflation is on the rise, having some of our life savings in junior mining stocks will offer a lot of protection.

L: You’re very welcome. I hope we all not only survive but thrive in the years to come.

As the editor of Miller’s Money Forever, I often have the pleasure of interviewing my colleagues on a variety of topics to give our subscribers even greater exposure to different investing sectors. Recent interviews include:

• Maximizing Your IRA with Terry Coxon, senior economist and editor at Casey Research;
• The Ultimate Layer of Financial Protection with Nick Giambruno, editor of International Man;
• There Is Room for Speculative Picks in Your Portfolio with Alex Daley, Chief Technology Strategist for Casey Research; and
• Other esteemed colleagues.

Gain access to everything our portfolio has to offer, as well as access to these top minds through occasional interviews and input, with your risk-free 90-day trial subscription to Miller’s Money Forever.

The Birth of a New Ukrainian Nation? Interview with Robert Bensh

By OilPrice.com

Ukraine’s Crimean Peninsula is now Russia’s. It was done with an impressively organized non-violent military operation, and supported by the foregone conclusion of a referendum on independence from Ukraine. One Ukrainian soldier was reportedly killed on 18 March, after Russian President Vladimir Putin signed the treaty to annex the Crimea and troops moved to take over a Ukrainian military facility in Simferopol. The US has imposed largely symbolic sanctions on Russian officials who have no American assets to freeze and would be fine foregoing trips to the US, but the game is over.

Ukrainian troops have been ordered to disengage entirely, and Russia will keep its tanks from rolling into Eastern Ukraine. We’ll hear a lot of rhetoric for the next six months before Crimea is forgotten. From an energy perspective, the Crimea is not a major loss for Ukraine, and now it’s up to the new government to get real shale development in motion, and for Turkey to face up to its own strategic realities and join forces with Ukraine to harness LNG potential, according to Ukraine energy expert Robert Bensh.

Robert Bensh is an energy and energy security expert who has led oil and gas companies in Ukraine for over 13 years, and served as an advisor to former energy minister and former vice-prime minister Yuri Boyko on issues of Western capital markets and political systems.

In an exclusive interview with Oilprice.com from Kiev, Bensh discusses:

• Why the Crimea game is over
• What Russia isn’t likely to roll into eastern Ukraine
• What Ukraine is losing from an energy perspective
• How Russia’s moves are strengthening Ukrainian resolve
• How the annexation of Crimea has heralded a new patriotism in Ukraine
• Why a lot rests of Ukraine’s next move on shale
• What opening the Bosporus to LNG would mean for Ukraine
• Why Turkey should be watching very closely

James Stafford: Now that Russia has annexed Crimea, are there fears that it won’t stop there, and that we could see Russian tanks entering Eastern Ukraine?

Robert Bensh: The reality is that this game is over. The Crimea is Russia’s and everyone’s let it go. Ukrainian troops are actively disengaging with Russian troops, even with Russian speakers in general. They will not engage, and in return, Russia will not attempt to move further into Ukraine.

If Russia rolls into Eastern Ukraine–even if they don’t kill anyone–we know that Poland, Romania, possibly Hungary, possibly Slovakia and definitely the Baltic states will invoke Article 5 of the NATO agreement. And when that happens, General Martin Dempsey, chairman of the US Joint Chiefs of Staff, has already stated that if NATO were called in, the US would stand behind it and support it militarily. The rhetoric has been pretty high, but it’s just that–rhetoric.

James Stafford: So the game is over, and Crimea is gone. What does this mean for Ukraine from an energy perspective?

Robert Bensh: With Crimea, Ukraine loses some prospective offshore oil and gas territory in the Black Sea, but it doesn’t lose any shale. All the shale is in Ukraine’s east and west.

But things are going to get tricky now. One of the bigger developments is likely to be the Russian nationalization of Chornomornaftogaz, Ukraine’s state-run gas company in Crimea. This, in turn, would impact Exxon Mobil’s proposed agreement for offshore Black Sea exploration. Exxon never signed the agreement because the Maidan protest movement was blowing up and they didn’t want to give anything to [now ousted] Ukrainian President Viktor Yanukovych, and rightfully so. But what happens next with that potential deal is up in the air.

Interestingly, I think we still have Ukrainian gas prices effective in Crimea but they would fall under Russian law. This is all completely new territory. This isn’t Africa, where something like this is par for the course. High-level government officials here have not been through this before so it’s a very unique, unwanted challenge. It’s upsettingly interesting.

James Stafford: What does this mean for Ukraine’s pipeline system?

Robert Bensh: Ukraine’s pipeline system would continue to belong to Ukraine unless Russia took over all of Ukraine. To get control of the pipeline system you have to roll up to the Ukrainian borders, side to side. And it’s hard for me to believe that NATO wouldn’t react to something like that. It’s hard for me to believe that NATO wouldn’t respond to Russia taking over the Donbass, Ukraine’s heavy industry heartland.

The Russian annexation of the Crimea isn’t going to have a major effect on pipeline gas on either side. Gazprom executives aren’t exactly losing sleep over what could add up to the gain of Crimea and the loss of Ukraine. Russia already ships almost half of its gas to Europe via pipelines that bypass Ukraine, and in 2015, if Gazprom’s South Stream pipeline comes online as planned, it will be shipping a lot more gas to Europe without Ukraine.

James Stafford: How critical, then, will Ukraine’s development of its shale assets be to forging energy independence, and what needs to happen next?

Robert Bensh: We could see some positive developments courtesy of the Russian maneuvering. There may be more impetus to invest in Ukraine’s shale development once the dust settles on the Crimea debacle. We’ll hear a lot of rhetoric for the next six months or so, but then the Crimea incident will be largely forgotten.

Ukraine is a great place to operate, and now it will be more transparent, so the sector should be opened up to more investment, which will happen as energy independence assumes a higher priority on the government’s agenda. The country has 14 per McF gas prices, which is very attractive. But Ukraine has to take the first step—and there is a lot to do.

Clearly, Ukraine cannot be happy with the progress made by Shell and Chevron in the shale development process. The process has been open and transparent, but only on two enormous blocks. To truly get shale development in the country, Ukraine needs to auction off multiple blocks of shale acreage, and the best way to do that would not be through a data-room process in Kiev, but in Houston or Denver, where a majority of the shale industry is located. Ukraine needs about 15-20 oil and gas companies developing shale, not just Shell and Chevron.

James Stafford: What are the prospects for getting liquefied natural gas (LNG) to Ukraine?

Robert Bensh: If you can get it through the Turkish-controlled Bosphorus Strait, you would have an endless supply of LNG going to Ukraine. The US now is pushing very hard to open up new LNG facilities in the US to get US shale gas/LNG shipped to Ukraine–but that won’t happen for five years, if it happens at all. Ukraine can’t wait for that.

But the moment you have access to the Bosphorus you have LNG delivery in Ukraine approximately a year after that. There has been a lot of conversation between the Ukrainian and Turkish governments. It’s all rhetoric on both sides, from my point of view. Until the Turks are shown that LNG is a safe commodity to pass through the Bosphorus, which it is; until they’re shown undeniably from a third party, that’s when they will sign off.

LNG is safe and we have a study to show that. At present, LPG [liquid petroleum gas] passes through the Bosphorus, and LPG is significantly more dangerous. From an environmental standpoint, oil is significantly more dangerous than gas. Let’s not forget that naval warships also pass through the Bosphorus, which is by far the most dangerous thing that is ever going to pass through this strait.

One thing the study shows is that LNG passes through the Houston ship channel, Rotterdam port, Chesapeake bay, ports of New Jersey–all without incident. I’m very respectful of those who are wary of LNG passing through the Bosphorus, but this fear is not based on fact. It’s based on what they believe, and we have facts that prove otherwise; and at that point we would hope that the larger potential here for all involved would outweigh these erroneous beliefs.

James Stafford: How would Ukraine receive gas coming through the Bosphorus?

Robert Bensh: Given that Crimea no longer exists—at least from a Ukrainian perspective—an FSRU [floating storage and regasification unit] would sit off the coast of Odessa, most likely, or around that region, which would still remain in the Ukrainian Black Sea. That’s where you would gasify the LNG and put it into the Ukrainian pipeline system.

James Stafford: Does Ukraine have this capability yet?

Robert Bensh: Ukraine already has an FSRU, for all intents and purposes. The only thing we are waiting on is access to the Turkish-controlled Bosphorus. At that moment, Ukraine’s purchases the FSRU and then we’re only about a year away from LNG gas sales. It’s that close. This was all done under former energy minister and former vice-prime minister Yuri Boyko. The only thing Boyko was missing was access to the Bosphorus. The barge is ready. The facility exists and is waiting to be purchased from a Houston-based company. There are traders with LNG just waiting for an order.

James Stafford: Should Turkey be taking notes here on what is happening in Ukraine with Russia?

Robert Bensh: Ultimately, I think Turkey has to look at Ukraine and realize that it is in the same strategic position with regard to energy independence. Turkey should be using Ukraine as a very real example as to why they need energy independence. They should focus on crude oil from Iraqi Kurdistan, development of Turkish shale assets, a complete break-up of the state-run oil company, TPAO, and transshipment of LNG through the Bosphorus.

James Stafford: You’ve talked before about the possibility of Russia’s actions actually facilitating Ukraine’s move toward signing a trade agreement with the European Union. Is there any room for more optimism over this, and possibly other internal political matters for Ukraine?

Robert Bensh: Yes. Russia’s actions have given Ukraine significant resolve to sign the trade agreement with Europe. Prior to Russia’s occupation of Ukraine, there were a lot of Ukrainians in government and business who were willing to sit on the fence, or even gear themselves more toward Russia, with whom they felt more comfortable, especially in eastern Ukraine. However, the violation of Ukraine’s sovereignty, the threat of recession, and the complete halt of work being done in the country has pushed even the most cynical businessperson or politician toward signing an association agreement.

I don’t meet many Ukrainians who think Ukraine should be part of NATO, but that could change with the annexation of Crimea. The Maidan protest movement was effective in giving the public a voice toward removing what they believed to be a corrupt and unjust government. What’s happening now is that the Russian move is further escalating Ukrainian patriotism. Indeed, it is creating fervent Ukrainian patriotism. I’ve been here for some 15 years, and I’ve never seen anything like it. I’ve never seen the country so united before. For me, this seems to be the birth of a new Ukrainian nation at this point.

I’ve never seen so many 22-40-year-olds completely charged and excited about their country and wanting to be a part of their government. I’m an American—we’re extremely patriotic. Canadians are patriotic, Russians are patriotic. Ukrainians weren’t, and I’ve never seen Ukrainian patriotism higher than right now. And as a visitor to this country I find it quite heartening.

James Stafford: How would you measure the Obama administration’s response to this crisis?

Robert Bensh: Well, I’m not a politician. I’m a businessman on the ground. For 14 years, I’ve been very critical of how the US has handled relations with Ukraine. We’ve had good ambassadors here, some better than others. While I think the US was slow to respond to the Maidan protest movement, and at points in time did not approve of how the administration was handling the situation in Maidan, I am exceedingly proud of this current US ambassador, Geoffrey Pyatt, and how he is handling himself. Even the Ukrainians on both sides of the fence respect him, which is really hard.

I believe that Obama has been quite measured in his response; maybe not the way I would have responded, but I am very proud of how my country is dealing with the situation. I think we all have to recognize that Putin is a very unique world leader. Even other world leaders, such as German Chancellor Angela Merkel, are having a hard time discussing this current situation with Putin. I respect that.

Source: http://oilprice.com/Interviews/What-the-Loss-of-Crimea-Means-for-Ukrainian-Energy-Interview-with-Robert-Bensh.html

Interview by James Stafford of Oilprice.com

Source: Peter Byrne of The Energy Report (3/20/14)

http://www.theenergyreport.com/pub/na/strong-commodities-weak-dollar-canadian-energy-investing-bonanza-chad-ellison

Chad Ellison of Dundee Capital Markets is gearing up for a red-hot Canadian energy sector. Commodity price strength and weakness in the Canadian dollar are creating a discount in Canadian oil and gas explorers and producers. In this interview with The Energy Report, Ellison elaborates on why he’s excited to be an energy analyst again, and names companies with strong economics and management teams likely to reward energy investors.

The Energy Report: Chad, is there a major investment theme that you expect to dominate 2014?

Chad Ellison: From our perspective covering the Canadian exploration and production (E&P) sector, the dominant theme is going to be the weakening Canadian dollar and its relation to higher realized commodity prices. We’ve recently been seeing strength in both natural gas and oil. Western Texas Intermediate (WTI) has increased and Canadian differentials have come down.

TER: What’s your 2014 price deck for WTI and Brent, especially in light of stronger economic data from China?

CE: We currently forecast $92.25/barrel ($92.25/bbl) for WTI and $105/bbl for Brent.

TER: Last year, the price differential between AECO Hub and NYMEX natural gas futures proved to be a significant investment theme. Should investors expect that differential to be a major investment theme again this year?

CE: I don’t believe it’ll have the same impact this year. Last year, the AECO blowout was caused by a change in the toll structure on the Canadian natural gas Mainline and gas volumes from Alberta essentially being displaced by cheap Marcellus gas. TransCanada Corporation (TRP:TSX) increased its interruptible service tolls, which caused shippers to fill up storage in Alberta rather than pay the fees to ship down the Mainline. However, we saw an increase in parties signing up for long-term service over the winter, which has worked to reduce the interruptible tolls to a more normalized level. While we may see some potential for volatility in the summer, we shouldn’t expect anything as dramatic as last year.

TER: The cold winter has left gas inventories low. How long do you think it will take to replace those inventories?

CE: It’s tough to say. U.S. natural gas has already returned to previous production levels after the freeze-offs from the cold weather. That said, full replacement of those depleted inventories will be dependent upon weather and demand. If it’s not abnormally hot, inventories will be back in the mid-range by the time injection season is done in November. But if gas prices do persist higher, we could see a lot of gas-to-coal switching, as that looks pretty favorable at this time.

TER: Do you expect the Henry Hub price to drop even more dramatically than it has over the last few days once the Western winter and the polar vortex ends?

CE: Yes, that’s a possibility. The forward strip still shows a decline in spring and a return to the $4 level in summer, but natural gas storage will be below 1 trillion cubic feet (1Tcf) for the first time since 2003. That’s a lot of gas that has to be replaced.

It will depend on the weather. If the recent cold winter is followed by a hotter-than-normal summer, we can expect to see increased power demand, which will slow the rate of injection and could cause high natural gas prices to persist.

TER: The Henry Hub price of roughly $6/million British thermal units ($6/MMBtu) is about 50% higher than it was a year ago. Are we going to return to those former prices or is it going to be somewhere in the middle?

CE: It will be somewhere in the middle—we’re forecasting an average of $4.15/MMBtu for 2014. The storage indications mean that prices will be in the $4 range, but I can’t see them going down significantly until a lot of that natural gas in storage is replaced.

TER: How are the companies in your coverage universe gaining greater exposure to higher natural gas and crude prices? Are you seeing increased price hedging as commodity prices rise?

CE: A large portion of the companies in our coverage universe are fairly well hedged already. When the gas price started to turn, companies locked in a lot of their volumes. As you look out on the forward strip for natural gas, the price does decline pretty dramatically in the spring. Although we’ve seen high prompt-month gas prices, it hasn’t allowed companies to lock in that level for the full year.

TER: Despite higher crude prices, majors like Exxon Mobil Corp. (XOM:NYSE) and Chevron Corp. (CVX:NYSE) are seeing their margins shrink due to higher costs. Does that underperformance allow companies in your coverage universe to find more time in the spotlight, or is there cost creep and trimmed margins in your space, too?

CE: Most of the companies in our coverage universe are smaller junior and intermediate companies. These companies have smaller programs that allow them to be more nimble in deploying capital. We haven’t seen any significant cost increases, and several of our companies have even reported successful cost reductions. However, if strong commodity prices continue, I expect we will see increased capital budgets on the other side of spring break-up, which could put some upward pressure on service costs later in the year.

TER: When picking companies, do you look for those with an ideal mix of oil and gas?

CE: At the moment, I prefer 60% oil-weighted names. Until this past winter, I would have said the oilier, the better—a lot of the 90%+ oil-weighted companies have traded at significant premiums. But we are now seeing a lot of demand for gas exposure, and companies that are a blend of oil and gas are benefiting on both sides. However, in the medium term, we’re still far more constructive on oil than we are on gas.

TER: The Canadian dollar has fallen dramatically over the last six months. How is the situation affecting the Canadian juniors you evaluate?

CE: Companies are essentially paid in U.S. dollars, but their costs remain in Canadian dollars, so the current environment has shaped up to be a big win for Canadian producers. We’ve also seen oil price differentials narrow since Q4/13. As a result, we’re expecting the majority of our coverage universe to post strong cash flow in Q1/14.

TER: Some of the companies that you cover were having trouble raising cash. However, Tamarack Valley Energy Ltd. (TVE:TSX.V) recently raised $60.2 million ($60.2M) in an equity offering. Is capital more readily available now than it was last year?

CE: Yes, some capital returned to the space in Q4/13, with a host of companies raising money for acquisitions, acceleration and debt reduction. Overall market sentiment seems to have improved, but it’s still selective. The favorite names enjoy access to capital while other names trade at a discount valuation, making it difficult to raise money.

TER: Tamarack is your top pick. Why does it merit that status?

CE: First of all, Tamarack has a topnotch management team and has consistently been one of the top operators in the Cardium play. Management remains diligently focused on cost control and has been successful in driving down costs for the company’s key plays, which significantly increases the rates of return and economics of those projects.

Second, the company greatly expanded its inventory late last year with a farm-in agreement with a major, which covers more than 110 net sections of Cardium rights and increases its potential Cardium drilling inventory to more than 10 years. Its recent equity raise gave it the ability to accelerate drilling and earn all the lands that it deems prospective as part of the farm-in.

Third, the company still trades at a relative discount to its peers. We forecast it to have top growth rates of 30%/share next year while maintaining one of the cleanest balance sheets in the space. While other oil-weighted juniors with these properties trade at 6x debt-adjusted cash flow, Tamarack is just more than 4x.

TER: Would you call it a value play?

CE: Absolutely, it’s been a value story for a while. Between the farm-in, the equity raise and an acquisition it made last year, Tamarack ranks as one of the best, in my opinion. I think it’s only a matter of time until it enjoys that premium valuation, hence our Top Pick recommendation.

TER: Most of your coverage leans toward light oil, but Rock Energy Inc. (RE:TSX) is riding the revived fortunes of heavy oil. Does Rock have any more room left to run?

CE: Rock Energy has had a great run, but it still has further upside potential. The company is yet again trending ahead of its guidance. Current production is estimated to be about 4,500 barrels oil equivalent per day (4.5 Mboe/d). That compares to management’s full-year estimate of 4.1 Mboe/d and our forecast of 4.275 Mboe/d.

The company should also be able to take advantage of a pending royalty break at its Mantario oil pool for proceeding with a polymer secondary recovery scheme. Essentially, two-thirds of corporate production is being charged at 25–30% royalty today. That number could drop to 1% in 2015, which could see 2015 cash flow/share come in north of $2 based on our initial estimates.

The company has also been having some strong initial success in delineating its Viking light oil play, which has added some significant inventory. We’ll be looking for an update on these items when the company reports its year-end results in late March.

TER: The company is planning to drill 27 wells in 2014.

CE: And that number could grow. The company is ahead of budget on production, and commodity prices are stronger. Management has indicated that it would like to drill one well per section on its Viking acreage to delineate the rest of the land base there, which will go a long way to derisking it and potentially making it a more attractive takeover target.

TER: What rate of success has Rock had with previous drill programs of this scope?

CE: It has been successful in all the wells that it’s drilled at the Viking project. Additionally, it has an exploratory program that is looking for other pools similar to its Mantario property, and management is budgeting about a 30% chance of success. The company reported a new pool of discovery in its last operations update for a new Lloydminster pool and we anticipate further details as we hear about its Q1/14 drill program.

TER: Rock has been rumored to be a takeover target for some time. It was rumored when shares were trading below $2, and the price is above $4 today. Who are the potential suitors?

CE: A larger company would be interested given the low-decline nature of Rock Energy’s production. Its first well at Mantario came on at 80 barrels per day (80 bbl/d), and two years later it’s still doing 80 bbl/d. It would provide a nice platform of free cash flow that a company could redeploy elsewhere, either to fund drilling or a dividend.

Given its interest in heavy oil, most speculation about a potential acquisition has pointed to Twin Butte Energy (TBE:TSX, Not covered). However, Gear Energy Ltd. (GXE:TSX, Not Covered), which had its initial public offering (IPO) last year, is another candidate. The Viking light oil discovery has opened Rock Energy up to a lot of other potential consolidators, including Whitecap Resources Inc. (WCP:TSX.V), Raging River Exploration Inc. (RRS:TSX.V), and the private company, Teine Energy Ltd. (Not Covered).

TER: Tell us about some other compelling narratives in your coverage universe.

CE: RMP Energy (RMP:TSX) is one of my favorite names right now. The company recently had a milestone catalyst with the successful completion of its pipeline and infrastructure project at Ante Creek on time. To date, it has had tremendous success drilling a Montney oil pool at Ante Creek, which has produced some of the best economics in the basin. Production had been hindered by takeaway capacity, but this was recently remedied with the commissioning of the company’s pipeline expansion in March.

We estimate there are more than six wells with capability of 1 Mboe/d each, with another four in various stages of drilling or completion in Q1/14. Compared to prior production levels, which were probably around 7.5–8 Mboe/d, there’s going to be a steep ramp up as this pipeline comes onstream. We believe that its 10 Mboe/d guidance is ultraconservative, and production could be well above 12 Mboe/d in short order.

We recently sat down with management, and I was impressed with its level of preparation to handle the increase in volumes. The company has a dedicated, 24-hour trucking terminal that will be able to take any volumes that won’t go down the Pembina mainline.

TER: What sort of cash flow are you estimating?

CE: I’m forecasting production of 11.0 Mboe/d, so I’m ahead of where management is, but ultimately still behind where I think it will end up. That means cash flow/share of $1.31 in 2014, increasing to $1.69 in 2015.

TER: What other companies catch your eye?

CE: Surge Energy Inc. (SGY:TSX) is a dividend-paying company that’s pursuing a strategy to moderate the pace of development. It is looking to reduce its decline profile in order to maximize free cash flow to fund a dividend and reduce risk.

Since Paul Colborne took over as Chief Executive Officer and President, he’s cleaned up the balance sheet, executed on five oil-weighted transactions and focused on cost reductions that have increased the company’s netbacks 32% since Q1/13.

The company is set to grow 3–5%/year (by management’s estimates and our forecast) and offers an attractive 9.4% yield. It is paying debt down to provide greater returns and is cheap compared to some of its peers.

TER: Tell us about the company’s recent exploration success.

CE: Surge’s Valhalla Doig wells were some of the best producers in the basin last year. The company managed to extend its Valhalla play further north, which in turn expanded its inventory. The company is only planning on drilling three to four wells per year in the play, but with initial production capabilities of more than 600 bbl/d, it makes it pretty easy to replace declining production.

TER: And finally?

CE: Finally, Cardinal Energy Ltd. (CJ:TSX) is another dividend-paying company. The company just had its IPO in December and is led by the former Midway Energy Ltd. management team. Cardinal was designed to be the ultimate in sustainability. It has a low decline rate of less than 15% on legacy production.

Cardinal has a low payout ratio and, standalone, the cleanest balance sheet in the entire sector. The company is currently drilling two horizontal Glauconite light wells at its key play, Bantry in southeast Alberta in Q1/14. If results can emulate Cenovus Energy Inc.’s (CVE:TSX; CVE:NYSE, Not covered) offsetting activity, the economics look very compelling.

We believe that with a clean balance sheet and a decent valuation, Cardinal’s team is well positioned to acquire additional assets that fit the company’s low-decline model. The $0.65 annual dividend is currently yielding about 5%, although we believe there is room to increase this along with acquisition activity.

TER: With the declining dollar and narrowing differentials, is it fun to be an energy analyst?

CE: Absolutely. It has been challenging over the last few years, but when you look at the strength of commodity prices, the weakness in the dollar and the comparative discount that a lot of Canadian energy names trade at compared to their U.S. counterparts, it sets up for a very compelling investment in the Canadian energy sector. The key is to find the companies with strong economics on their plays and a management team that’s likely to outperform their guidance. We still see a lot of upside from these levels.

TER: Thank you, Chad.

CE: Great talking to you.

Chad Ellison joined Dundee Capital Markets as an energy analyst in November 2012. Prior to Dundee, he was with Canaccord Genuity’s research team with a focus on Canadian domestic junior and intermediate companies. Ellison gained experience providing financing for E&P and oilfield service companies from 2005 to 2010 with GE’s financial services arm. He holds a Bachelor of Commerce degree in finance from the Haskayne School of Business at the University of Calgary.

Want to read more Energy Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

DISCLOSURE:

1) Peter Byrne conducted this interview for The Energy Report and provides services to The Energy Report as an independent contractor. He or his family owns shares of the following companies mentioned in this interview: Rock Energy Inc.

2) The following companies mentioned in the interview are sponsors of The Energy Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Chad Ellison beneficially owns, has a financial interest in, or exercises investment discretion or control over, companies mentioned in this interview: Surge Energy Inc. Dundee Capital Markets and its affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by, mentioned in this interview: None. Dundee Capital Markets has provided investment banking services to companies mentioned in this interview in the past 12 months: Surge Energy Inc. and Tamarack Valley Energy Ltd. All disclosures and disclaimers are available on the Internet at www.dundeecapitalmarkets.com. Please refer to formal published research reports for all disclosures and disclaimers pertaining to companies under coverage and Dundee Capital Markets. The policy of Dundee Capital Markets with respect to Research reports is available on the Internet at www.dundeecapitalmarkets.com. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.

5) The interview 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.

6) 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 and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise – The Energy Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.

101 Second St., Suite 110

Petaluma, CA 94952

Tel.: (707) 981-8204

Fax: (707) 981-8998

Email: [email protected]

Source: George S. Mack of The Life Sciences Report  (3/20/14)

http://www.thelifesciencesreport.com/pub/na/applying-industry-experience-to-micro-cap-biotechs-hugh-cleland-and-stephen-ireland

Starting a new investment company and investing in very small biotechs can be a minefield. Because the business is fraught with bad science and liquidity traps, it takes insight and industry experience to ensure investment capital doesn’t drop down a foxhole. Roadmap Capital CEO and Founder Hugh Cleland is in the process of negotiating the minefield now. In this interview with The Life Sciences Report, Cleland and Stephen Ireland, Roadmap Capital principal and healthcare partner, discuss five growth names with merit plus two brief bonus picks.

The Life Sciences Report: Hugh, could you tell me why you formed Roadmap Capital?

Hugh Cleland: I wanted to build a team with deep domain expertise in healthcare/biotech and fundamental technologies—two areas where Canada’s investment community has not traditionally focused. There is no shortage of innovation in Canada, but the long bull market and bubble in the resource sector sucked enormous amounts of capital and expertise out of those sectors, leaving a trail of undercapitalized and undervalued assets in its wake, particularly in the private and micro-cap areas of healthcare and technology. I have assembled a team—we are now up to 8 people—that can help me scrounge through the bear market debris left behind in those two sectors.

TLSR: Hugh, it seems you’re on your way. You’re raising money now. My understanding is that you plan to close your first fund on June 30, 2014. How much in assets will you have under management in this fund? What is your goal?

HC: Right now, in Roadmap Capital, we’re just under $50 million ($50M) in total assets. By June 30, we expect that to be in the $75–100M range—hopefully higher.

TLSR: Can you manage $100M efficiently in micro-cap stocks?

HC: Absolutely. But we’re not just investing in micro-cap stocks. We’re putting a lot of new capital to work in private companies, both those we expect to stay private for the life of the investment, as well as those we expect to bring public within the next six to 24 months. In fact, we will go so far as to be involved in company formation, and also in helping companies go public.

TLSR: Why invest primarily in Canadian companies? If you were exclusively a resource investor, and looking for deep value as well as growth, this is understandable, but in the life sciences sector, where the goal is huge growth, why limit yourself to Canadian stocks? Is it about tax advantages? National pride?

HC: I should point out that the new fund has made investments in the U.S. already, and will continue to do so. But we are focusing primarily in Canada. Frankly, it’s about where we see the best opportunities and risk/reward ratio. There’s no shortage of innovation in Canada, but the long, drawn-out bear market that the Canadian tech and healthcare sectors went through for much of the last decade has left many interesting companies valued at levels far below what is available in other countries. To give you an example, we’re putting money into a company with a $2.5M pre-money valuation. Comparable companies in the States would be valued in the $30–40M pre-money range currently. And we have invested a small amount of money into a private stem cell company called Hemostemix. It is raising money at a $25M pre-money valuation, when its best public comparables in the U.S. trade at valuations in the $200—400M range. It comes down to where we see the best valuation opportunities and risk/reward for our investors right now.

TLSR: Stephen, will you do continuing diligence on current portfolio companies as well as diligence on proposed new additions to your portfolio?

Stephen Ireland: In terms of priority, the focus will be on new diligence activities for companies that we’ve identified as potential investment opportunities. But there will be ongoing diligence obligations for companies already in the portfolio. We want to make sure that milestones in business plans are met, intellectual property portfolios maintained and clinical trials executed to best affect company value. Performing diligence on new companies and companies already in our portfolio is part and parcel of our skill set collectively.

TLSR: Stephen, you’ve been in the pharma and biotech industries for more than 25 years, including serving as former senior vice president for business development at North Carolina-based TransTech Pharma Inc., a private biotech company with a lot of strategic partners in drug development. You understand what goes on in a private company. After you sign a confidential disclosure agreement with a private group, do you feel like you know what to look for in a company that does not make quarterly public filings?

SI: Absolutely. The very early, basic discovery-stage science varies from company to company and target to target, and is often shaped by personalities of the founding scientific staff. Once a compound moves into animal trials and, more important, into human trials, there are certain studies regulatory agencies expect a biotech to do. Based on my experience, I have a good idea of the questions to ask to access data at each stage of development, and how to analyze those data. I’m also very familiar with deals biotech companies do with academics, contract research organizations, contract manufacturing organizations and licensing partners, which enables me to evaluate their business obligations and opportunities.

TLSR: Stephen, you’ve been deeply involved in hands-on negotiations between companies big and small. My understanding is that you have led the charge on deals potentially worth in excess of $3 billion ($3B) with Pfizer Inc. (PFE:NYSE) and Forest Laboratories Inc. (FRX:NYSE). Is it fair to say that you might also be involved in business development as far as negotiating between your portfolio companies and the companies you’ve had experience with in the past?

SI: I hope I’m able to facilitate that. I believe my experience adds value to the various processes companies undertake to either sell their assets in a merger-and-acquisition (M&A)-type transaction, participate in outlicensing activities or partner for skill sets that they may not have.

TLSR: Hugh, let’s talk about Cynapsus Therapeutics Inc. (CYNAF:OTCQX; CTH:TSX.V).

HC: It’s been fun. We are up with Cynapsus 280% in Canadian dollars since I mentioned the company in my June 2013 interview with The Life Science Report. It was at CA$0.34/share then, and it’s still just a micro cap, with a CA$45M (basic) market cap today. We continue to be very excited about the company and where it’s going. Of course, these situations are not without risk. But Cynapsus appears to have a very strong risk/reward benefit. I would point to the work of senior biotechnology analyst Jason Napodano of Zacks Investment Research on this stock. He initiated on the stock last June when it was $0.30/share, made it a top pick for 2014 when it was still below $0.40/share, and reiterated that it was one of his best ideas just last month. It was gratifying to see someone with his experience and skill come to the same conclusion that Roadmap Capital has.

TLSR: Cynapsus successfully completed its phase 1b trial with APL-130277 (sublingual thin film strip formulation of apomorphine). The product demonstrated plasma levels of apomorphine that are consistent with those obtained from subcutaneous injections of Apokyn (apomorphine hydrochloride injection; Mylan Inc. [MYL:NASDAQ]). This product will ultimately have to show efficacy in actual Parkinson’s disease (PD) patients who are experiencing “off episodes” (hypomobility or “frozen” states), won’t it? What is the next catalyst?

SI: The company will finish dosing the 25mg strength of APL-130277, then will embark on APL-130277 efficacy studies, the first of which will be in an Apokyn-naïve patient population, I believe.

Cynapsus has development options from a regulatory perspective. It can go down a pure bioequivalence pathway and show the sublingual strip formulation has equivalent pharmacokinetics (PK: absorption, distribution, metabolism and excretion) as subcutaneous Apokyn injection, or it can go after superior safety, along with efficacy. Obviously, if Cynapsus can demonstrate superior safety and efficacy, it will put the product in an even stronger position in a market that is already forecast to be in excess of $700M per year.

TLSR: Do you expect this company to go out on a trade sale in a year or two, or do you expect to see this product commercialized with a partner while it’s partly under Cynapsus’ control?

SI: Positive clinical data will make APL-130277 a very attractive asset for specialty pharma or large pharma, and I expect Cynapsus will be targeted for M&A activity before it gets a chance to commercialize the product.

TLSR: A new drug application (NDA) submission to the U.S. Food and Drug Administration (FDA) is anticipated in 2016. Will we see a launch of this product in 2016?

SI: If things proceed as we expect, yes. It depends on when exactly the submission goes in.

The data package will be fairly straightforward because apomorphine is a known molecule, and its mechanism of action is well understood. It’s just the route of delivery that’s different. The company has compelling PK data from its phase 1 study, suggesting plasma levels are proportional with dose, and the delivery method achieves levels in an important range between the minimum efficacious dose and the minimum dose associated with adverse events. PK profiles I’ve seen suggest that not only does the product get into this range, but it also maintains plasma levels longer. This could mean its activity in patients may have a more sustained duration, which is certainly not the case with the subcutaneous version of the molecule. This all points to a favorable review from the agency, and I think it’s quite possible APL-130277 could launch in 2016.

TLSR: One of the great selling points of Cynapsus’ sublingual strip is that when a patient is having an off episode, rather than trying to handle an injection, the patient may be able to get the drug under the tongue. Therefore, families might be less afraid to leave a patient alone for a while. Do you imagine this is an issue the agency will take into consideration when APL-130277 is up for approval?

SI: Yes. These patients suffer poor quality of life because of these off episodes, and have difficulty self-administering injections. We need therapies that offer these patients a higher quality of life and better ease of use, and I think APL-130277 sublingual strips hold promise in both of these regards.

TLSR: Hugh, do you see Cynapsus shares getting another double or triple from current levels?

HC: My view lines up with Jason Napodano’s, and he sees a lot more potential than just a double or triple if this drug gets approved. We both like the risk/reward at these levels for a company that has a drug candidate with peak sales potential somewhere in the $600–900M range.

TLSR: What’s the next one you wanted to talk about?

HC: Let’s talk about BELLUS Health Inc. (BLU:TSX; BLUSF:OTCPK). BELLUS presented to our advisory board back in May 2013 and came out as one of the favorites. It was a particular favorite of advisory board member Harlan Waksal, who cofounded Imclone Systems Inc., which sold to Eli Lilly and Co. (LLY:NYSE) for $6.5B on the strength of its monoclonal antibody Erbitux (cetuximab; for head-and-neck cancer and metastatic colorectal cancer). Stephen spent a few months digging in. By the time he was finished with his deep due diligence, he was as big a fan.

TLSR: What grabbed your attention about BELLUS?

HC: One thing that really grabbed me was the enormous valuation disparity that has existed for a variety of very unusual circumstances. With BELLUS, you have a fully funded orphan drug candidate called Kiacta (eprodisate disodium, an orally available small molecule) that is in a phase 3 trial reasonably close to the end of enrollment. The drug is being tested in a lethal disease called AA amyloidosis, which affects 50,000 people in the U.S., Europe and Japan.

The company indicates expected peak sales of around US$500M, but our research suggests we could see peak sales significantly higher than that, perhaps as high as US$1B. Yet somehow, the company is still trading at a fully diluted enterprise value of less than US$35M. I have never seen a fully funded phase 3 asset with such a big market opportunity trade at such a ludicrously low valuation.

If you look at publicly traded orphan drug comparables in the U.S., it gives you an idea of the enormous potential upside for this stock. For example, Raptor Pharmaceutical Corp. (RPTP:NASDAQ) is an orphan drug company that successfully completed its phase 3 trial, and is now marketing its drug. Canaccord Genuity’s Ritu Baral estimates peak sales of US$160M in the U.S. and the European Union; Raptor’s market cap is now US$700M. Sarepta Therapeutics Inc. (SRPT:NASDAQ) is another orphan drug company, and is at a more comparable stage of development to BELLUS in that Sarepta does not yet have FDA approval, and is in the midst of studies that could lead to that approval. Sarepta’s enterprise value is currently more than US$800M.

TLSR: The final data collection date for BELLUS’ phase 3 trial is September 2016, according toClinicalTrials.gov, but the company says enrollment of this 230-patient trial will complete earlier than originally anticipated. When could we see a launch of Kiacta?

SI: The study has enrolled faster than anticipated, and the company should complete enrollment by June. BELLUS will follow patients until at least 120 of them have had an event defined as a worsening of renal function. That’s the part that takes the time. It will probably be early 2016 before we’ll get a read-out. If the data are compelling and come out early enough in 2016, it’s possible the company could submit for approval the same year. I think it’s quite likely we’ll see approval and product launch in 2017.

I want to tie these timeframes into our “valuation gap” investment thesis. The thesis starts with the enormous valuation disparity: an enterprise value (EV) of US$35M for BELLUS compared to, for example, an EV of US$800M for Sarepta.

The fact that Kiacta is fully funded to the end of phase 3 means investors won’t get ambushed by a financing. The fact that the phase 3 data doesn’t read out until early 2016 (which would often be seen as a bad thing) means that the stock can gradually move up, filling the enormous valuation gap with minimal event risk for almost a full two years before the binary event occurs.

We also know that speculation as to the outcomes of phase 3 trials typically begins six months before a trial reads out; this would mean the ‘”read-out speculation” should begin in the summer of 2015. In the meantime—in the one and a quarter years between now and then—we fully expect the stock to be able to reach a still-cheap US$200M valuation, or $3/share. We think the fact it can make that move even before the read-out speculation begins, with no financing risk and no event risk makes BELLUS a particularly compelling investment. Our money is where our mouth is: The company is currently among the largest positions in the two Roadmap funds that are actively making investments.

TLSR: Which company did you want to speak about next, Hugh?

HC: I would like to touch on IntelGenx Corp. (IGXT:OTCQX; IGX:TSX.V). We’ve had more than 10% ownership in this company for quite a while; it wasn’t until the company did a financing in December 2013 that our equity went below 10%. We’re still very enthusiastic about the future for IntelGenx.

The company utilizes the FDA’s 505(b)2 pathway to develop already-approved drugs in new ways. There’s less efficacy risk and no toxicity risk. In fact, this is what Cynapsus is doing with apomorphine.

Recent developments suggest that IntelGenx is going to become a sublingual strip company, and its relationship with Par Pharmaceutical Companies Inc. (private) has become a company maker. It has a codevelopment agreement with Par on a generic version of Suboxone (buprenorphine + naloxone sublingual film; Reckitt Benckiser Pharmaceuticals Inc. [RBGPY:OTCPK]) for opiate addiction, for which it filed an abbreviated new drug application last July. In mid-January, the company announced it is working with Par on two more projects. For me, this announcement is a sign of something very special happening at IntelGenx. I believe this relationship gives IntelGenx upside somewhere into the US$3–10 per share range over the next two to three years, depending on what the other assets are. There are other drugs in the company’s pipeline, and we’re expecting another NDA to be filed this year. The two publicly traded U.S. comps, BioDelivery Sciences International Inc. (BDSI:NASDAQ) and Supernus Pharmaceuticals Inc. (SUPN:NASDAQ), suggest there is a valuation gap to be filled here, too.

TLSR: IntelGenx shares have doubled over the past year. Is this on the strength of revenue from its approved product, Forfivo (bupropion HCL extended-release; a dose reformulation of GlaxoSmithKline’s [GSK:NYSE] Wellbutrin XL)?

HC: I don’t believe that Forfivo was the driver; I think it was the Par relationship, as well as the NDA filing for the rizatriptan sublingual film for migraine. We’re expecting the migraine drug to be approved by the FDA in the next few months, and that will be another catalyst.

Frankly, Forfivo is a product that I’m encouraging the company to sell. I think IntelGenx can put the proceeds of that sale to better use in other areas, but I’m not sure the company wants to do that. It is nice to have a cash-generating asset within the company, that’s for sure. But I think if IntelGenx can get a lump sum for that asset above CA$10M, maybe up to CA$20M, it would be cash the company could put toward good uses.

TLSR: The buyer of Forfivo would have the overhang of that Paragraph IV Certification Letter IntelGenx received last August. The company says it intends to enforce its intellectual property rights and fight this thing. So it may be an inopportune time to attempt to shed this product.

HC: It very well may wait until after that’s resolved. But either way, Forfivo is no longer a driver for IntelGenx.

TLSR: So the drivers at IntelGenx are the rizatriptan sublingual film strip for migraine and the opiate-addiction product. Is that right?

HC: Correct. IntelGenx does, however, have a pipeline totaling about seven drugs, as well as the two additional projects with Par Pharmaceutical. The pipeline is deep.

TLSR: Could we hear about another name?

SI: I’d like to mention Immunovaccine Inc. (IMV:TSX.V). I’m a fan of immunotherapies for cancer, and think some cancers will ultimately be cured using some form of targeted immunotherapy. There are significant hurdles to overcome, including 1) how to defeat the defense mechanisms that tumors have developed to evade innate immune responses, 2) how to mount a strong CD8+ T-cell response in the tumor microenvironment, and 3) how to engender an adaptive, durable and sustained T-cell memory for the particular antigen.

Immunovaccine has a novel technology that addresses these issues in its DepoVax platform. The DepoVax vaccine is an antigen-plus-adjuvant combination that’s encapsulated in a liposome, which is then surrounded by an oil emulsion. The result is a depot release leading to sustained and specific immune response to the therapy.

In its phase 1 study, Immunovaccine has been able to demonstrate strong CD4+ and CD8+ T-cell responses and, in particular, specific responses to survivin, a well-validated negative regulator of apoptosis in many types of cancer. The company has good dose response data from its phase 1 study, and is preparing to launch two phase 2 studies with its DPX-Survivac therapy, one in ovarian cancer and one in glioblastoma.

TLSR: Stephen, are we looking at a very long development track with these vaccines?

SI: It’s certainly longer than those faced by other companies that we’ve discussed. Ovarian cancer is an orphan indication, and glioblastoma has very few therapeutic regimens that work. Intervention in each is typically surgical. Regulators are motivated to consider fast-track approval status for any company that can show compelling clinical data in these indications, and I think that’s what Immunovaccine is looking to do.

HC: Let me point out that there will be significant value-creation milestones along the way. Successful phase 2 results are often the largest value-creating events in the drug development cycle.

SI: I agree with Hugh. Positive phase 2 proof-of-concept data can be a tremendous value driver for a biotech company, and often is the trigger for M&A-type discussions with large pharma partners.

HC: That’s a good segue to iCo Therapeutics (ICO:CVE), in that iCo is getting fairly close to the readout of its phase 2 data for diabetic macular edema (DME).

We participated in a save-the-company insider round of CA$0.20 units a year and a half ago. We made a very good return on that investment, and we’ve continued to be big fans of the company for a variety of reasons. The company came through our advisory board process with flying colors.

TLSR: I understand that the company’s phase 2 iDEAL trial with iCo-007, an antisense oligonucleotide, is supposed to read out at the end of April. This is not a company-sponsored trial but rather an investigator-sponsored trial with 208 patients; randomized, but open label. I wonder how much stock you can put into those data when you see them?

SI: The trial has hard primary and secondary endpoints, the change in visual acuity and reduction in retinal thickening, respectively. Both are measured from baseline to month eight. If positive, the data will be robust. The company’s compound offers some advantages in terms of durability of effect over what’s currently on the market, potentially affording iCo a competitive edge. This study will indicate the magnitude of effect iCo-007 has on these endpoints.

I don’t foresee any negative consequences associated with iDEAL being investigator-sponsored. The study is being run at a top-level institution by expert clinicians in DME.

TLSR: This compound will certainly need a pivotal trial, won’t it?

SI: iDEAL has been rigorously designed and well executed, and the data could point to compelling efficacy. It’s hard to anticipate how regulators will react to the data until after it’s submitted. However, it is likely iCo-007 will require a pivotal study for approval in DME.

HC: I’d like to touch quickly on two more companies before we finish up. Tekmira Pharmaceuticals Inc. (TKM:TSX; TKMR:NASDAQ) was one that I highlighted back on June 27, 2013, when it was $4.76. It’s been a spectacular rocket ride. We think it will continue to be successful for investors. The two best U.S. comparables in Tekmira’s space are Alnylam Pharmaceuticals Inc. (ALNY:NASDAQ) and Arrowhead Research Inc. (ARWR:NASDAQ). These comps suggest Tekmira has plenty of valuation upside, even without further fundamental developments.

We became involved with CNS Response Inc. (CNSO:OTCMKTS) a while ago, and although it is already a winner for us, we expect much more. The company’s technology combines EEG brain scan data with a large database of prescription outcomes to improve the ability of physicians to prescribe the “right” medication for psychiatric disorders, without going through what is often a lengthy or unsuccessful trial-and-error process. The company website actually does a good job of describing what they do and why what they do is important.

The first big market that CNS Repsonse can address is post-traumatic stress disorder (PTSD). The Walter Reed National Military Medical Center is now leading a 2,000-soldier, multisite, randomized, controlled trial of the PEER system, focused on depression. If successful, this study should lead to widespread adoption of the CNS PEER system by the U.S. military, which seeks to reduce the horrifically high PTSD-linked suicide rate. Results are expected in Q2/14. If the trial is successful, CNS should trade at multiples of its current price.

TLSR: Thank you, Hugh and Stephen. I enjoyed it.

HC: Thank you very much.

SI: Thank you.

Hugh Cleland, BA, CFA, is cofounder, CEO, president, CIO and principal portfolio manager of the Roadmap Innovation Fund I and the Roadmap Trust. He is also portfolio manager, through a subadvisory contract between Roadmap Capital and BluMont Capital, of the BluMont Innovation PE Strategy Fund. Cleland earned a bachelor’s degree with honors from Harvard University, and his CFA designation in 2001. After graduating from Harvard, Cleland worked in the research department at Midland Walwyn Capital (subsequently Merrill Lynch Canada) as research associate to the senior telecommunications services analyst. From March 1998 to March 2001, Cleland worked at Interward Capital Corp., first as an analyst, and later as associate portfolio manager, specializing in technology equities. He was founding portfolio manager at Northern Rivers Capital Management, where he worked from May 2001 until Northern Rivers was acquired by BluMont Capital in February 2010. Together with Riadh Zine, he cofounded Roadmap Capital Inc. in August 2013.

Stephen Ireland, healthcare specialist and a principal with Roadmap Capital Inc., has been involved in the pharmaceutical, specialty pharmaceutical and biotech industries for more than 25 years. He was the former senior vice-president business development at TransTech Pharma. Ireland managed transactions in 2006 and 2010 with Pfizer and Forest Laboratories, respectively, valued in excess of $2B. Ireland received his bachelor’s degree in biological sciences with honors from Brock University, Ontario, Canada.

Want to read more Life Sciences Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Interviews page.

DISCLOSURE:
1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report:Cynapsus Therapeutics Inc., BELLUS Health Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Hugh Cleland: I own, or my family owns, shares of the following companies mentioned in this interview: BELLUS Health Inc., IntelGenx Corp. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Stephen Ireland: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
5) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
6) The interview 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.
7) 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 and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise – The Life Sciences Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part..

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Life Sciences Report. These logos are trademarks and are the property of the individual companies.

101 Second St., Suite 110
Petaluma, CA 94952

Tel.: (707) 981-8204
Fax: (707) 981-8998
Email: [email protected]

The Australian Dollar has suffered somewhat against its Kiwi counterpart during the past few years; since topping out almost three years ago to the day at 1.37916 AUDNZD has dropped a little more than 23% and now sits around 1.0580. The pair started 2014 with more of the same, dropping throughout January to carve out 2014 lows at 1.0489. A bullish pin bar launched a correction however, and the AUD recouped all, and more, of January’s losses to hit highs at 1.0941. The pair could not sustain this momentum, and normal service resumed with the NZD taking the upper hand and strengthening to lows at 1.0533. A failed close offered up some consolidation, and we come to recent action.

The daily chart highlights the potential for fresh, long-term lows on upcoming data. A couple of relatively low impact releases are scheduled after the close of the US markets, with New Zealand visitor arrivals set for 17:45 EST, Australian CB leading index (Mom) set for 19:00 EST and New Zealand credit card spending set for 22:00 EST. While relatively low impact, the close proximity of the releases could catalyze some volatility if they serve up a confluential bias. Disappointing Aussie data may be enough to break in-term support at 1.0540, which would strengthen the argument for new lows. Disappointing weekend manufacturing PMI data out of China could build upon this strength, and catalyze a break below 1.0489. While it is true that the New Zealand economy is heavily tied to the China, the nation is far less reliant on Chinese prosperity than its Aussie neighbor, which relies upon China for nearly 40% of its trade income. For close to a year New Zealand has been limiting its exposure to a Chinese slowdown, via a range of methods including a redirection of its sheep meat exports to India and subsidies that stimulate domestic demand for wood. Australia has been slow to implement any such action, which could prove to be a big mistake if the Chinese economy wanes.

Looking slightly shorter-term, the four-hour chart hints at a bearish bias, with price currently trading at resistance of a descending triangle. A close below this resistance on the four-hour chart would offer up an initial target at the base of the triangle around 1.0548. A break would complete the pattern and validate 1.0489 as a reasonable downside target.

Written by Samuel Rae – Currency Strategist at Capital Trust Markets

Capital Trust Markets is a fully regulated and compliant online Forex Brokerage, offering a flawless trading environment to traders of all types. The world class trading infrastructure – backed up by advanced trading tools and cutting edge trading software and technology – is combined with award winning customer support to provide a highly successful blend of customized trading solutions.

The USD is on the move since yesterday when the FED said it would reduce its monthly bond purchases by an additional $10 billion to $55 billion. The USD also recovered on hints from Fed Chair Janet Yellen that the bank could begin to raise interest rates sooner than anticipated.

Gold is moving down, S&P falling as well and USD is up against all other major currencies. Our focus today and tomorrow will be on EURUSD. A decline from 1.3966 March high is in three legs, and now we need to have to wait on important evidences, either to confirm a corrective retracememnt which would allow us to look for longs once the market bottoms or we wait more signs for a bearish impulse as this one is also one of the possibility. However, for a bearish case we would need to see further impulsive weakness down 1.3700/40, to make sure it’s an extended wave (iii).

EURUSD count #1

EURUSD count #2

Bearish count has my special attention because of the S&P Futures that can revisit 1820 level from last week. EURUSD and S&P has positive correlation now; in fact EURUSD is even weaker than the S&P so if S&P will fall down, which is expected then EUR may lose even more value against the USD .

EURUSD vs S&P 1h

Written by www.ew-forecast.com

14 days trial just for 1€ >> http://www.ew-forecast.com/register

EURUSD: With EUR extending its sell off during Thursday trading session today, further weakness is expected in the days ahead. On the downside, support lies at the 1.3700 level and then the 1.3631 level. Below here will aim at the 1.3561 level. Further down, support comes in at the 1.3500 level. Its daily RSI is bearish and pointing lower suggesting further downside. On the other hand, if recovery occurs, resistance resides at the 1.3844 level and then the 1.3900 level, its psycho level followed by the 1.3966 level, its Mar 13 2014 high. A cut through there will pave the way for a run at the 1.4000 level, its big psycho level. We expect bears to come in here and turn it lower but if eventually violated further upside is likely. Other resistance levels are seen at the 1.4050 and the 1.4100 level. All in all, EUR remains biased to the downside shorter term.

Article by www.fxtechstrategy.com