Month: March 2014

By MoneyMorning.com.au

The Australian property market is patchy at the moment. There’s growth in some cities, no growth in others and overall, it’s a tough market for first home buyers.

But one segment of the property market is booming.

That’s the market for inner city apartments in Sydney and Melbourne. Prices are taking off as investors snap up wave upon wave of new developments.

According to ABS data, at the end of last year there were 17,461 units under construction in Melbourne. Of those 21,546 had received approval. In Sydney, there were 14,595 units under construction and another 24,546 had received approval.

The craze kicked off in 2012 when apartment high-rises in Melbourne’s CBD outnumbered office buildings for the first time. And it hasn’t slowed down since.

The high rises in the Australian property market
that could leave you ‘high and dry’

But while apartments are booming across Sydney and Melbourne, you need to be careful about following this Aussie property trend.

Melbourne in particular is at risk of an over-supply.

Small, cheap and poorly designed apartments are clogging areas of the city as developers capitalise on the city’s stable geography and jam tall buildings in tight spots.

Developers have shrunk the median floor size from 52 to 44 square meters in five years…

And as more apartments come on market, it’ll be harder to find positively geared buys.

Many banks and mortgage lenders just won’t finance apartments that are too small. 30m2 is about the benchmark for approval, but this doesn’t include studios.
You can expect councils to take a harder line on approvals too.

Melbourne City Council is proposing minimum floor space requirements to prevent what it says is the risk of landlords ripping off renters.

Some advice when buying into this Australian property trend

So if you’re looking to buy, there are three bits of advice. Check out the floor size and make sure it’s a well-designed building in an area in demand.

If the floor sizes appear small, find out occupancy rates in other developments with similar sized apartments.

It’s basic advice, but as this Australian property trend continues and people lose their head in the apartment boom, it’s worth remembering.

Callum Denness
Contributing Editor, Money Morning
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By MoneyMorning.com.au

USDCAD moved sideways in a trading range between 1.0910 and 1.1224. Support is at 1.0955, as long as this level holds, the price action in the range could be treated as consolidation of the uptrend from 1.0182 (Sept 19, 2013 low), one more rise to 1.1500 area is still possible after consolidation. Resistance is at 1.1192, a break above this level will signal resumption of the uptrend. However, a breakdown below 1.0955 support will indicate that the uptrend from 1.0182 had completed at 1.1224 already, then the following downward movement could bring price back to 1.0700 zone.

Daily Forex Analysis

By MoneyMorning.com.au

For all the negative headlines, we’re still picking this market to go higher.

Sure, some parts of the world economy don’t look great right now.

But will it really make a difference to the seemingly inevitable growth path of China’s economy over the next five or six years?

And what about the impact on US stocks? US stocks are near an all-time high. But if a report from Bloomberg is right, even at this level stocks are still cheap when compared to the 1990s bull market.

So cheap in fact, that ‘huge gains’ may still lie ahead…

But before we explain where these gains could come from, isn’t there a chance that your editor has ‘confirmation bias’?

In other words, that we’ve become so convinced that the market is going higher, that all we can see are news stories confirming that view.

As an investor that’s something you should always consider. Looking back on yesterday’s Money Morning, that’s another reason why it’s helpful that we publish opposing views.

It should serve to make sure that when the next stock market crash arrives it doesn’t take you by surprise. We can only pity the poor saps who only feed on the ‘single view’ analysis from the mainstream.

But just because your editor has a high conviction view of where the market is going over the next five years, don’t assume that we have a distorted view of the market. Maybe the reason we see a bright future for stocks isn’t because of confirmation bias, but because things are looking pretty good.

We see Value Because There is Value

Put it this way. Nearly two years ago we upgraded our car.

We bought a Subaru Forrester.

Until that time we can’t say that we had ever knowingly seen one on the road.

But after buying the car it seemed as though every second car was a Forrester.

It’s funny how that happens. One day we barely knew a model of car existed, the next we can’t drive for more than a minute without seeing one.

Was that just a kind of confirmation bias? Were we just seeing something because we were looking for it?

It turns out that the Forrester is one of the most popular small SUV’s on the Aussie market. The reason we started seeing a lot of them is, well, there are a lot of them on the road.

In the same vein, the reason we feel as though we can see a lot of good value stocks on the market is because there are a lot of good value stocks on the market.

Take this report from Bloomberg:

‘While the S&P 500′s multiple of 17 times reported earnings is close to the average since 1937, it’s about 40 percent below where it was in 2000, data compiled by Bloomberg and S&P show.

‘The lower valuation reflects faster earnings expansion. Profits for S&P 500 companies have climbed an average 21 percent a quarter since 2009, almost double the growth rate during the dot-com boom, according to data complied by S&P.’

Most investors agree that the dot-com boom was one of the biggest stock bubbles in history. And yet according to S&P, stock values today are 40% below the 2000 peak valuation levels.

What does that do for the idea that stocks are in a bubble? At the least it casts doubt on the idea.

Chance for Investors to Buy Beaten Down Stocks

The fact is if you take the trouble to look for good value you can find it.

Take the ‘terminally ill’ iconic Aussie media stock that we tipped in Australian Small-Cap Investigator in November 2012. As of today that ‘ill’ stock is up 143%.

Jason Stevenson continues to find beaten down resource stocks on the Aussie market. Jason’s head for numbers means he can take apart any balance sheet you put before him. His task is to figure out which mining stocks have real potential, and which are licences to lose money.

Or take the biotech stock Sam Volkering uncovered for Revolutionary Tech Investor subscribers last July. It’s now up 453%, with further gains to come. Sam says he’ll have more details on the latest opportunities available to investors later this week.

And unlike the 1990s, when tech stocks went mental, this time the gains have been far more realistic. Investors have spread their money around the market rather than focusing on one sector.

As Bloomberg reports:

‘Health-care ETFs drew $4.6 billion, almost half of the $10 billion that sector-focused funds added through March 6, data compiled by Bloomberg show. Real estate and energy funds got $3.1 billion and $2.5 billion, respectively. Technology ETFs absorbed $1.5 billion while those investing in consumer-discretionary companies saw the biggest withdrawals among 12 sectors tracked by Bloomberg, with outflows totaling $2.2 billion.’

Got that? Only 15% of ETF inflows have gone towards tech stocks. That’s another good sign. It means that investors haven’t just bought high-risk stocks, looking for outlandish gains.

This says to us that the current market is a long way from a bubble or a market top. Analyst E William Stone from PNC Wealth Management in Philadelphia says he sees the market making ‘huge gains’ from the 2009 bottom.

Investor sentiment isn’t always an accurate guide. But the skittish behaviour of investors over the past year should be proof that investors still have a negative view of the market.

That means there are still opportunities for savvy investors to take advantage of this and buy stocks that are trading for knockdown valuations.

Cheers,
Kris

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By MoneyMorning.com.au

By MoneyMorning.com.au

Seth Klarman is one of the most respected value investors out there. He’s not as famous as Warren Buffett (by choice, it seems). But he has an excellent track record.

So the fact that he’s apparently feeling very worried about the state of the current market should give us all pause for thought.

A portion of Klarman’s most recent letter to clients has been published on the Zero Hedge website. It makes for quite sobering reading.

Klarman compares the current market environment to The Truman Show. If you haven’t heard of it, it’s a mildly diverting but overrated film in which the main character discovers that his whole life has been a reality TV show stage-managed by a benign dictator.

Today, the stage managers are the world’s central bankers. They’ve created an illusory, manipulated set for investors to gambol cheerily within, enjoying a rampant bull market.

But as Klarman notes, when the dream is shattered, markets have a very long way to fall indeed…

Timing The Market is a Mug’s game

It’s little wonder that Seth Klarman is worried. There are signs of excess everywhere in the markets. Technology stocks being sold at crazy valuations. Initial public offerings being slung out left, right and centre. More junk bonds than you can shake a stick at, offering lower yields than you’d have been able to get on a risk-free cash Isa back in 2007 (oh, those were the days!).

Even the biggest perma-bulls would have to admit that there have been better times to buy than today.

So what are you meant to do as an investor about all this? Well, that’s where the problem lies. Ultimately, trying to time the market is a mug’s game. And Klarman effectively admits that. The punchline to his letter says of the bull market:

‘Can we say when it will end? No. Can we say that it will end? Yes. And when it ends and the trend reverses, here is what we can say for sure. Few will be ready. Few will be prepared.’

In short, many markets are significantly overvalued. That means they are running on hope. When hope runs out, they’ll fall. And the ones that will fall hardest, are the ones that are most overvalued.

But as we don’t know when they’ll fall, the obvious solution — sell everything the day before the crash and buy back in at the bottom — is not a viable strategy. So what can you do to make sure you are prepared?

How to Build a Durable Portfolio

Overall, you need a plan. You need an end goal (retirement for many of us) so you know your time horizon. You need to be saving money regularly. For most people, monthly is probably the easiest option. And you need to know where you are going to invest your money.

On that front, there are four main points to consider.

Firstly, diversify. Don’t put all your eggs in one basket, regardless of how attractive that basket looks. If your entire portfolio’s success hinges on one particular outcome — be that a good outcome or a bad one — then you are asking for trouble. You need a mix of assets, ones that will do well in hard times, and others that will do well in good times.

Secondly, buy stuff for the right reasons. You should buy any asset because it offers good value. In other words, the likely return you are getting on your money is attractive. If your main reason for buying an asset is that you think the price is going to go up, then you’re making a mistake. (Unless perhaps if you’re a short-term trader, and even then, that’s a whole other different world from investing.)

Thirdly, rebalance. You should know your ‘ideal’ asset allocation — 45% equities, 25% bonds, 10% gold etc (that’s not a recommendation, it’s an example). When the allocations get out of whack with one another, you simply top up the ones that have fallen in value as a proportion of your portfolio, and leave the ones that now form too big a part of your portfolio. This ensures that you follow a ‘buy low, sell high‘ methodology almost automatically.

And finally — but perhaps most importantly — don’t allow transaction costs to fritter away your capital. There’s lots of data to suggest that private investors have an unfortunate tendency to over trade and second-guess themselves. Don’t do it. Make a plan, stick to it, and find the cheapest way to execute it. Most markets can be bought through passive exchange-traded funds (ETFs), but if you find an active manager you like, just make sure their outperformance can justify their charges.

Like any good habit, it’s not complicated — but it is surprisingly challenging to stick to.

For what it’s worth by the way, I suspect the trigger for the next big crash will be rising interest rates. That’s pretty much what triggers most crashes. The turning point will come when investors realise that the world’s central banks can no longer afford to prop up stock markets as part of their core remit. But I’ll admit, there’s no obvious sign of that happening yet. I’ll be keeping a very close eye on inflation and bond yields though.

John Stepek,
Contributing Editor, Money Morning

Ed note: The above article was originally published in MoneyWeek.

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By MoneyMorning.com.au

Those that have traded the financial markets are all-too-familiar with the phrase “speed counts”. Whether you are trading equities, futures, or Forex, executing your trade quickly can make the difference between a winning or losing trade. It has become an industry in itself on constantly improving the speed of trade execution.

Many hedge funds or arbitrage groups may rent or lease server space in order to get an advantage on their trade execution. While this may be the case that is it is an exclusive club with regards to equities and futures the Forex world has afforded low latency Forex trading to the masses.

If you do your research and find a Forex broker, you may find that your broker has a colocation facility already in place.  What does this mean; it simply means that the servers of the broker are in the same server location as the banks or tier one liquidity providers. A low latency trading system does not just mean that you can get your trade executed but it also means you may get price improvement. Another advantage with this low latency Forex trading set up by your broker it also means that they are in a very secure location with some of the most secure servers in the world. Many Forex traders are either trading a system or they may be trading an event. This makes the speed of trade execution all that more important.

With the low latency Forex trading system one can find a lot of opportunities to see if their system really works and also lets them make sure that their trades are not only the quickest but also the most secure.

To learn more please visit www.clmforex.com

Disclaimer: Trading of foreign exchange contracts, contracts for difference, derivatives and other investment products which are leveraged, can carry a high level of risk. These products may not be suitable for all investors. It is possible to lose more than your initial investment. All funds committed should be risk capital. Past performance is not necessarily indicative of future results. A Product Disclosure Statement (PDS) is available from the company website. Please read and consider the PDS before making any decision to trade Core Liquidity Markets’ products. The risks must be understood prior to trading. Core Liquidity Markets refers to Core Liquidity Markets Pty Ltd. Core Liquidity Markets is an Australian company which is registered with ASIC, ACN 164 994 049. Core Liquidity Markets is an authorized representative of Direct FX Trading Pty Ltd (AFSL) Number 305539, which is the authorizing Licensee and Principal.

Wednesday will see the release of major Japanese data on consumer confidence. The following are some trade ideas based on the forecast and projections for the economic event. For USD/JPY you want to but it on dips near 102 with a stop on 101.50 and set the target at 104.20. As for the EUR/JPY, the pair experienced a rising wedge formation last week. If the pair breaks the wedge then 145.66 will be exposed, the high of December of last year. A potentially profitable strategy may be to purchase the pair around 143.6 and sell below channel support (140.90). Remember that bullish momentum is likely for the pair if the reports come in better than expected.

Written by Daniel Elo, analyst for www.EconomicCalendar.com

USDCHF: Although USDCHF may be vulnerable to the downside, it faces a corrective threat. Support comes in at the 0.8700 level, its psycho level. Below here will set the stage for further weakness towards the 0.8650 level. Further down, support is located at the 0.8600 level and then the 0.8568 level. On the other hand, resistance resides at the 0.8895 level where a break will clear the way for a run at the 0.8950 level. Further out, resistance resides at the 0.9050/81 levels followed by the 0.9100 level. Its daily RSI has turned higher supporting its present recovery mode . All in all, the pair remains biased to the downside medium term.

Article by www.fxtechstrategy.com

How much faith can we put in our ability to decipher all the numbers out there telling us the US is closing in on its cornering of the global oil market? There’s another side to the story of the relentless US shale boom, one that says that some of the numbers are misunderstood, while others are simply preposterous. The truth of the matter is that the industry has to make such a big deal out of shale because it’s all that’s left. There are some good things happening behind the fairy tale numbers, though—it’s just a matter of deciphering them from a sober perspective.

In a second exclusive interview with James Stafford of Oilprice.com, energy expert Arthur Berman discusses:

• Why US gas supply growth rests solely on Marcellus
• When Bakken and Eagle Ford will peak
• The eyebrow-raising predictions for the Permian Basin
• Why outrageous claims should have oil lawyers running for cover
• Why everyone’s making such a big deal about shale
• The only way to make the shale gas boom sustainable
• Why some analysts need their math examined
• Why it’s not just about how much gas we produce
• Why investors are starting to ask questions
• Why new industries, not technologies will make the next boom
• Why we’ll never hit the oil and gas ‘wall’
• Why companies could use a little supply-and-demand discipline
• Why ‘fire ice’ makes sense (in Japan)
• Why the US crude export debate will be ‘silly’

Arthur is a geological consultant with thirty-four years of experience in petroleum exploration and production. He is currently consulting for several E&P companies and capital groups in the energy sector. He frequently gives keynote addresses for investment conferences and is interviewed about energy topics on television, radio, and national print and web publications including CNBC, CNN, Platt’s Energy Week, BNN, Bloomberg, Platt’s, Financial Times, and New York Times. You can find out more about Arthur by visiting his website: http://petroleumtruthreport.blogspot.com

Oilprice.com: Almost on a daily basis we have figures thrown at us to demonstrate how the shale boom is only getting started. Mostly recently, there are statements to the effect that Texas shale formations will produce up to one-third of the global oil supply over the next 10 years. Is there another story behind these figures?

Arthur Berman: First, we have to distinguish between shale gas and liquids plays. On the gas side, all shale gas plays except the Marcellus are in decline or flat. The growth of US supply rests solely on the Marcellus and it is unlikely that its growth can continue at present rates. On the oil side, the Bakken has a considerable commercial area that is perhaps only one-third developed so we see Bakken production continuing for several years before peaking. The Eagle Ford also has significant commercial area but is showing signs that production may be flattening. Nevertheless, we see 5 or so more years of continuing Eagle Ford production activity before peaking. The EIA has is about right for the liquids plays–slower increases until later in the decade, and then decline.

The idea that Texas shales will produce one-third of global oil supply is preposterous. The Eagle Ford and the Bakken comprise 80% of all the US liquids growth. The Permian basin has notable oil reserves left but mostly from very small accumulations and low-rate wells. EOG CEO Bill Thomas said the same thing about 10 days ago on EOG’s earnings call. There have been some truly outrageous claims made by some executives about the Permian basin in recent months that I suspect have their general counsels looking for a defibrillator.

Recently, the CEO of a major oil company told The Houston Chronicle that the shale revolution is only in the “first inning of a nine-inning game”. I guess he must have lost track of the score while waiting in line for hot dogs because production growth in U.S. shale gas plays excluding the Marcellus is approaching zero; growth in the Bakken and Eagle Ford has fallen from 33% in mid-2011 to 7% in late 2013.

Oil companies have to make a big deal about shale plays because that is all that is left in the world. Let’s face it: these are truly awful reservoir rocks and that is why we waited until all more attractive opportunities were exhausted before developing them. It is completely unreasonable to expect better performance from bad reservoirs than from better reservoirs.

The majors have shown that they cannot replace reserves. They talk about return on capital employed (ROCE) these days instead of reserve replacement and production growth because there is nothing to talk about there. Shale plays are part of the ROCE story–shale wells can be drilled and brought on production fairly quickly and this masks or smoothes out the non-productive capital languishing in big projects around the world like Kashagan and Gorgon, which are going sideways whilst eating up billions of dollars.

None of this is meant to be negative. I’m all for shale plays but let’s be honest about things, after all! Production from shale is not a revolution; it’s a retirement party.

OP: Is the shale “boom” sustainable?

Arthur Berman: The shale gas boom is not sustainable except at higher gas prices in the US. There is lots of gas–just not that much that is commercial at current prices. Analysts that say there are trillions of cubic feet of commercial gas at $4 need their cost assumptions audited. If they are not counting overhead (G&A) and many operating costs, then of course things look good. If Walmart were evaluated solely on the difference between wholesale and retail prices, they would look fantastic. But they need stores, employees, gas and electricity, advertising and distribution. So do gas producers. I don’t know where these guys get their reserves either, but that needs to be audited as well.

There was a report recently that said large areas of the Barnett Shale are commercial at $4 gas prices and that the play will continue to produce lots of gas for decades. Some people get so intrigued with how much gas has been produced and could be in the future, that they don’t seem to understand that this is a business. A business must be commercial to be successful over the long term, although many public companies in the US seem to challenge that concept.

Investors have tolerated a lot of cheerleading about shale gas over the years, but I don’t think this is going to last. Investors are starting to ask questions, such as: Where are the earnings and the free cash flow. Shale companies are spending a lot more than they are earning, and that has not changed. They are claiming all sorts of efficiency gains on the drilling side that has distracted inquiring investors for awhile. I was looking through some investor presentations from 2007 and 2008 and the same companies were making the same efficiency claims then as they are now. The problem is that these impressive gains never show up in the balance sheets, so I guess they must not be very important after all.

The reason that the shale gas boom is not sustainable at current prices is that shale gas is not the whole story. Conventional gas accounts for almost 60% of US gas and it is declining at about 20% per year and no one is drilling more wells in these plays. The unconventional gas plays decline at more than 30% each year. Taken together, the US needs to replace 19 billion cubic feet per day each year to maintain production at flat levels. That’s almost four Barnett shale plays at full production each year! So you can see how hard it will be to sustain gas production. Then there are all the efforts to use it up faster–natural gas vehicles, exports to Mexico, LNG exports, closing coal and nuclear plants–so it only gets harder.

This winter, things have begun to unravel. Comparative gas storage inventories are near their 2003 low. Sure, weather is the main factor but that’s always the case. The simple truth is that supply has not been able to adequately meet winter demand this year, period. Say what you will about why but it’s a fact that is inconsistent with the fairy tales we continue to hear about cheap, abundant gas forever.

I sat across the table from industry experts just a year ago or so who were adamant that natural gas prices would never get above $4 again. Prices have been above $4 for almost three months. Maybe “never” has a different meaning for those people that doesn’t include when they are wrong.

OP: Do you foresee any new technology on the shelf in the next 10-20 years that would shape another boom, whether it be fossil fuels or renewables?

Arthur Berman: I get asked about new technology that could make things different all the time. I’m a technology enthusiast but I see the big breakthroughs in new industries, not old extractive businesses like oil and gas. Technology has made many things possible in my lifetime including shale and deep-water production, but it hasn’t made these things cheaper.

That’s my whole point about shale plays–they’re expensive and need high oil and gas prices to work. We’ve got the high prices for oil and the oil plays are fine; we don’t have high prices for the gas plays and they aren’t working. There are some areas of the Marcellus that actually work at $4 gas price and that’s great, but it really takes $6 gas prices before things open up even there.

OP: In Europe, where do you see the most potential for shale gas exploitation, with Ukraine engulfed in political chaos, companies withdrawing from Poland, and a flurry of shale activity in the UK?

Arthur Berman: Shale plays will eventually spread to Europe but it will take a longer time than it did in North America. The biggest reason is the lack of private mineral ownership in most of Europe so there is no incentive for local people to get on board. In fact, there are only the negative factors of industrial development for them to look forward to with no pay check. It’s also a lot more expensive to drill and produce gas in Europe.

There are a few promising shale plays on the international horizon: the Bazherov in Russia, the Vaca Muerte in Argentina and the Duvernay in Canada look best to me because they are liquid-prone and in countries where acceptable fiscal terms and necessary infrastructure are feasible. At the same time, we have learned that not all plays work even though they look good on paper, and that the potentially commercial areas are always quite small compared to the total resource. Also, we know that these plays do not last forever and that once the drilling treadmill starts, it never ends. Because of high decline rates, new wells must constantly be drilled to maintain production. Shale plays will last years, not decades.

Recent developments in Poland demonstrate some of the problems with international shale plays. Everyone got excited a few years ago because resource estimates were enormous. Later, these estimates were cut but many companies moved forward and wells have been drilled. Most international companies have abandoned the project including ExxonMobil, ENI, Marathon and Talisman. Some players exited because they don’t think that the geology is right but the government has created many regulatory obstacles that have caused a lack of confidence in the fiscal environment in Poland.

The UK could really use the gas from the Bowland Shale and, while it’s not a huge play, there is enough there to make a difference. I expect there will be plenty of opposition because people in the UK are very sensitive about the environment and there is just no way to hide the fact that shale development has a big footprint despite pad drilling and industry efforts to make it less invasive.

Let me say a few things about resource estimates while we are on the subject. The public and politicians do not understand the difference between resources and reserves. The only think that they have in common is that they both begin with “res.” Reserves are a tiny subset of resources that can be produced commercially. Both are always wrong but resource estimates can be hugely misleading because they are guesses and have nothing to do with economics.

Someone recently sent me a new report by the CSIS that said U.S. shale gas resource estimates are too conservative and are much larger than previously believed. I wrote him back that I think that resource estimates for U.S. shale gas plays are irrelevant because now we have robust production data to work with. Most of those enormous resources are in plays that we already know are not going to be economic. Resource estimates have become part of the shale gas cheerleading squad’s standard tricks to drum up enthusiasm for plays that clearly don’t work except at higher gas prices. It’s really unfortunate when supposedly objective policy organizations and research groups get in on the hype in order to attract funding for their work.

OP: The ban on most US crude exports in place since the Arab oil embargo of 1973 is now being challenged by lobbyists, with media opining that this could be the biggest energy debate of the year in the US. How do you foresee this debate shaping up by the end of this year?

Arthur Berman: The debate over oil and gas exports will be silly.

I do not favor regulation of either oil or gas exports from the US. On the other hand, I think that a little discipline by the E&P companies might be in order so they don’t have to beg the American people to bail them out of the over-production mess that they have created knowingly for themselves. Any business that over-produces whatever it makes has to live with lower prices. Why should oil and gas producers get a pass from the free-market laws of supply and demand?

I expect that by the time all the construction is completed to allow gas export, the domestic price will be high enough not to bother. It amazes me that the geniuses behind gas export assume that the business conditions that resulted in a price benefit overseas will remain static until they finish building export facilities, and that the competition will simply stand by when the awesome Americans bring gas to their markets. Just last week, Ken Medlock described how some schemes to send gas to Asia may find that there will be a lot of price competition in the future because a lot of gas has been discovered elsewhere in the world.

The US acts like we are some kind of natural gas superstar because of shale gas. Has anyone looked at how the US stacks up next to Russia, Iran and Qatar for natural gas reserves?

Whatever outcome results from the debate over petroleum exports, it will result in higher prices for American consumers. There are experts who argue that it won’t increase prices much and that the economic benefits will outweigh higher costs. That may be but I doubt that anyone knows for sure. Everyone agrees that oil and gas will cost more if we allow exports.

OP: Is the US indeed close to hitting the “crude wall”—the point at which production could slow due to infrastructure and regulatory restraints?

Arthur Berman: No matter how much or little regulation there is, people will always argue that it is still either too much or too little. We have one of the most unfriendly administrations toward oil and gas ever and yet production has boomed. I already said that I oppose most regulation so you know where I stand. That said, once a bureaucracy is started, it seldom gets smaller or weaker. I don’t see any walls out there, just uncomfortable price increases because of unnecessary regulations.

We use and need too much oil and gas to hit a wall. I see most of the focus on health care regulation for now. If there is no success at modifying the most objectionable parts of the Affordable Care Act, I don’t suppose there is much hope for fewer oil and gas regulations. The petroleum business isn’t exactly the darling of the people.

OP: What is the realistic future of methane hydrates, or “fire ice”, particularly with regard to Japanese efforts at extraction?

Arthur Berman: Japan is desperate for energy especially since they cut back their nuclear program so maybe hydrates make some sense at least as a science project for them. Their pilot is in thousands of feet of water about 30 miles offshore so it’s going to be very expensive no matter how successful it is.

OP: Globally, where should we look for the next potential “shale boom” from a geological perspective as well as a commercial viability perspective?

Arthur Berman: Not all shale is equal or appropriate for oil and gas development. Once we remove all the shale that is not at or somewhat above peak oil generation today, most of it goes away. Some shale plays that meet these and other criteria didn’t work so we have a lot to learn. But shale development is both inevitable and necessary. It will take a longer time than many believe outside of North America.

OP: We’ve spoken about Japan’s nuclear energy crossroads before, and now we see that issue climaxing, with the country’s nuclear future taking center-stage in an election period. Do you still believe it is too early for Japan to pull the plug on nuclear energy entirely?

Arthur Berman: Japan and Germany have made certain decisions about nuclear energy that I find remarkable but I don’t live there and, obviously, don’t think like them.

More generally, environmental enthusiasts simply don’t see the obstacles to short-term conversion of a fossil fuel economy to one based on renewable energy. I don’t see that there is a rational basis for dialogue in this arena. I’m all in favor of renewable energy but I don’t see going from a few percent of our primary energy consumption to even 20% in less than a few decades no matter how much we may want to.

OP: What have we learned over the past year about Japan’s alternatives to nuclear energy?

Arthur Berman: We have learned that it takes a lot of coal to replace nuclear energy when countries like Japan and Germany made bold decisions to close nuclear capacity. We also learned that energy got very expensive in a hurry. I say that we learned. I mean that the past year confirmed what many of us anticipated.

OP: Back in the US, we have closely followed the blowback from the Environmental Protection Agency’s (EPA) proposed new carbon emissions standards for power plants, which would make it impossible for new coal-fired plants to be built without the implementation of carbon capture and sequestration technology, or “clean-coal” tech. Is this a feasible strategy in your opinion?

Arthur Berman: I’m not an expert on clean coal technology either but I am confident that almost anything is possible if cost doesn’t matter. This is as true about carbon capture from coal as it is about shale gas production. Energy is an incredibly complex topic and decisions are being made by bureaucrats and politicians with little background in energy or the energy business. I don’t see any possibility of a good outcome under these circumstances.

OP: Is CCS far enough along to serve as a sound basis for a national climate change policy?

Arthur Berman: Climate-change activism is a train that has left the station. If you’ve missed it, too bad. If you’re on board, good luck.

The good news is that the US does not have an energy policy and is equally unlikely to get a climate change policy for all of the same reasons. I fear putting climate change policy in the hands of bureaucrats and politicians more than I fear climate change (which I fear).

See our previous interview with Arthur Berman.

Source: http://oilprice.com/Interviews/Shale-the-Last-Oil-and-Gas-Train-Interview-with-Arthur-Berman.html

By. James Stafford of Oilprice.com

By Jeff Clark, Senior Precious Metals Analyst, Casey Research

Many investors, especially those new to precious metals, don’t know that gold is seasonal. For a variety of reasons, notably including the wedding season in India, the price of gold fluctuates in fairly consistent ways over the course of the year.

This pattern is borne out by decades of data, and hence has obvious implications for gold investors.

Can you guess which is the best month for buying gold?

When I first entertained this question, I guessed June, thinking it would be a summer month when the price would be at its weakest. Finding I was wrong, I immediately guessed July. Wrong again, I was sure it would be August. Nope.

Cutting to the chase, here are gold’s average monthly gain and loss figures, based on almost 40 years of data:

Since 1975—the first year gold ownership in the US was made legal again—March has been, on average, the worst-performing month for gold.

This, of course, makes March the best month for buying gold.

But: averages across such long time frames can mask all sorts of variations in the overall pattern. For instance, the price of gold behaves differently in bull markets, bear markets, flat markets… and manias.

So I took a look at the monthly averages during each of those market conditions. Here’s what I found.

Key point:

The only month gold has been down in every market condition is March.

Combined with the fact that gold soared 10.2% the first two months of this year, the odds favor a pullback this month.

And as above, that can be a very good thing. Here’s what buying in March has meant to past investors. We measured how well gold performed by December in each period if you bought during the weak month of March.

Only the bear market from 1981 to 2000 provided a negligible (but still positive) return by year’s end for investors who bought in March. All other periods put gold holders nicely in the black by New Year’s Eve.

If you’re currently bullish on precious metals, you might want to consider what the data say gold bought this month will be worth by year’s end.

Regardless of whether gold follows the monthly trend in March, the point is to buy during the next downdraft, whenever it occurs, for maximum profit. And keep your eye on the big picture: gold’s fundamentals signal the price has a long climb yet ahead.

Everyone should own gold bullion as a hedge against inflation and other economic maladjustments… and gold stocks for speculation and leveraged gains.

The greatest gains, of course, come from the most volatile stocks on earth, the junior mining sector. Following our recent Upturn Millionaires video event with eight top resource experts and investment pros, my colleague Louis James released his 10-Bagger List for 2014—a timely special report on the nine stocks most likely to gain 1,000% or more this year. Click here to find out more.

Source: J. Alec Gimurtu of The Mining Report (3/10/14)

http://www.theaureport.com/pub/co/3195

Advances in automotive battery technology are making graphite the next big thing for commodity investors. Graphite is the critical material for the new generation of batteries, even more than lithium or rare earths. In this special interview with The Mining Report, Focus Graphite President and Chief Operating Officer Don Baxter explains the eyebrow-raising supply/demand picture of the graphite industry, the attractive financials of the Lac Knife project and the significance of the graphite industry’s first offtake agreement, including what it means to investors looking to understand an unfamiliar but well-positioned market.

MANAGEMENT Q&A: VIEW FROM THE TOP

The Mining Report: The recent news from Tesla Motors about its plans to build the largest battery factory in the world has generated a lot of investor excitement. Can you give us your perspective on the role of automotive battery technology as the driver of global graphite demand?

Don Baxter: As a starting point, the graphite industry today is about a half million tons per year of natural flake graphite. It is used in everyday products across many industries including steel, automotive and technology. Graphite touches our lives every day. Graphite is in the brake pads in our cars and has many other common applications. But that is not where the excitement in the graphite industry comes from.

The big interest in graphite comes from the growth in lithium-ion battery technology. Sales of electric and hybrid vehicles are increasing every quarter and companies like Tesla are spending heavily on battery technology. Graphite is one of the key materials needed to build a lithium-ion battery. In fact, a lithium-ion battery contains 10 times more graphite than lithium. The most critical material for a high performance lithium-ion battery is graphite, not lithium.

With the accelerating growth of electric and hybrid vehicles, the additional graphite demand from the automotive battery sector could exceed a million tons a year by 2020. That is not including the half million tons that are already used. The world is going to need a lot more graphite. China controls close to 80% of the world’s supply right now. That makes battery makers very uncomfortable.

TMR: A tripling of current graphite consumption in less than six years?

DB: Yes. The traditional uses for graphite in the steel and automotive industries will continue because there aren’t a lot of substitutes in those applications. In the entire battery segment, we are seeing more and more lithium-ion batteries taking over the market space. Lithium-ion batteries are now the battery of choice in most consumer goods, from laptops to cell phones to power tools and more. Not only are the number of applications growing, but also the size of each battery is getting bigger. Inside a lithium-ion battery, the battery component that is made from graphite is the anode. Anodes can be either synthetic or natural graphite, but synthetic is extremely expensive at approximately $20,000/ton ($20/Kt), compared to battery-grade, natural flake graphite at approximately $8/Kt. Not only does natural flake graphite have a cost advantage, there are several performance characteristics that are better for natural than they are for synthetic.

TMR: What grades or types of graphite are used in the battery sector?

DB: A producer will make a run-of-mine (ROM) product, which is all the different graphite flake sizes at various carbon grades. In the case of our Lac Knife property in Quebec, all of our products (large, medium and fine flake graphite) are 98% carbon. That is a very pure concentrate for ROM production, especially with the fine flake size.

In our case, we’ll be able to take our lower valued product, the ROM fine flake, and enhance it by sizing, shaping and purifying. In technical terms, we will micronize and spherize the fine flake graphite to create a battery-grade product with a much higher value than the ROM fine flake. In that case, we will have taken a product that we normally would have sold for $900/ton and turned it into a product worth $8/Kt. Even with an increased all-in cost for that value-added processing of between $1,500 and $2,000/ton, it is a significant margin increase.

TMR: Is the processing of the material at Lac Knife different than at other mines?

DB: Graphite from varied locales behaves differently during processing. The key thing with Lac Knife is that we can divert our fine size material, which is extremely high purity carbon at 98%. That means our purifying step is only from 98% to 99.95%. Other mines typically have much lower carbon grades, say 90% or less. Lower grades make the initial purification step much more difficult. Producers may be able to physically size and shape the graphite, but the purification is the challenge, if it’s possible at all. Lac Knife is unique in that we can divert our high-grade fines to battery applications.

TMR: Are the upgrading to battery grade and the associated much higher revenue products included in the initial financial models on your website?

DB: No. All of our current financials are based on run-of-mine product, which is the market that is here today. The Industrial Minerals publication out of the U.K. publishes prices for different sizes and grades of graphite flake and we base our economics on those figures. The analysis shows that the Lac Knife deposit is profitable at today’s market prices. That said, we think that we are at the bottom of this price cycle, so we’re basing our economics on current market prices.

Based on today’s prices, our economics show great potential, even with what appear to be low market prices. Additional upside will come from value-added processing, which we are advancing in parallel. Once we have the capital expenses (capex) and operating expenses for the value-added processes, we can then add that into our overall economics. There is a tremendous upside based on the high margin of the value-added processing, but it will be a gradual process to get that part of the business up and running because it is dependent on the initial ROM production.

If everything works out, we would start off with several thousand tons a year going through the process of making battery-grade graphite. Over time and with expansion, we could increase our ability to produce battery grade and spherical graphite as the market demands it. Ultimately, could we put all of our flake into it? Maybe, but for starters, we are basing our project build on conventional mining, which in the case of Lac Knife is a high margin project. Additional margin from value-added processing is a long-term option.

TMR: So are you saying that the prefeasibility study does not and the full feasibility study will not reflect any additional revenue or expense from the potential production of spherical or battery-grade graphite by Focus Graphite Inc. (FMS:TSX.V; FCSMF:OTCQX; FKC:FSE)?

DB: Correct. While we are working in parallel with the design of our value-added processing and our ROM processing, the former is not likely to be ready at the time of the overall mine feasibility design. But it will be close. In a sense, the value-added projects keep us as an innovator and a development-stage company longer, so that investors will have a more interesting news flow and more upside over a longer time period.

TMR: Graphite has been an investment theme for a few years. There are a lot of companies that are moving toward production. Is the market looking at a tidal wave of graphite coming on-line soon?

DB: I don’t think so. At the end of the last economic cycle everybody suddenly noticed graphite. The market went from two companies, Northern Graphite and Focus Graphite Inc., to 50 or 60 companies. There may now be as many as 135 different companies and probably several hundred graphite projects at various stages. However, the leader board is pretty small. There’s a long lead time from grassroots exploration to production. In many cases these graphite properties, once you get into the metallurgy, just may not work. I don’t see a tidal wave of new mine supply coming to market. I see possibly two or three new producing mines in the next three or four years.

TMR: What will that new supply do to the market?

DB: The market can handle that quite well. We expect to see prices trending up through 2016. As demand returns, we have to remember that there were no new mines built in the last economic cycle, so the problem is going to be that much more acute. The time to be building to reach that demand is now. We are excited that Lac Knife shows extremely good economics now, at the bottom of the market. It will get even better as prices start to tick up. By the time we’re in production, which should be mid-2016, prices could possibly be as much as $1,000/ton higher than today.

Investors need to keep in mind that with so many components to a graphite deposit, they have to look at each opportunity very carefully. When the market evaluates all the deposits out there, many won’t make the cut and a lot of those companies will just disappear.

TMR: Can you give us an overview of Lac Knife and what makes it a standout project?

DB: The Lac Knife deposit is a 9.5 million ton Measured and Indicated resource at 15% Cg (graphitic carbon). It has excellent infrastructure with road, rail and seaport links and immediate access to the electrical grid. The deposit is at surface and will be a low cost, open-pit mine. The low cost mining method is critical. Another important feature of a commercial graphite deposit is a good distribution of large, medium and fine flake in the ore; that is a feature of Lac Knife. We have demonstrated in our pilot plant that we can recover a potentially economic proportion of the large, medium and fine flake graphite at extremely high-grade carbon. We’re able to remove the flake from the rock while preserving its size and keeping it clean.

The nature of the Lac Knife deposit allows us to produce a high-grade concentrate based upon our ROM crushing, grinding and floatation process, entirely by mechanical means. Our ROM production does not have a purification step through a third party. We’re able to get the Lac Knife flake extremely clean—even the fine sizes. Most deposits can’t do that.

TMR: The financials based on the prefeasibility study or Preliminary Economic Assessment showed about a $126 million ($126M) capex, including a $25M contingency and a nearly 40% internal rate of return (IRR). Can you give us an overview of those financials?

DB: The $126M capex is low for a mining project if you compare it to copper, nickel or gold, which many investors are more familiar with. Compared to those same industries, the IRR is fairly high. Taken together, it is a compelling and unique combination in the graphite industry. A lot of people don’t understand graphite, but they understand a good investment and a high rate of return.

Because we think we are now at the price cycle bottom, the project looks extremely good. The net present value at an 8% discount rate comes in at $317M in pretax numbers with a short 2.4-year payback. From a mining industry perspective, that’s pretty inviting.

TMR: What is the significance of the offtake agreement that Focus recently signed?

DB: The offtake agreement was a first in the graphite industry. There have been some long-term relationships, but as far as having an offtake agreement directly with an end-user, the agreement is historic.

The significance of the offtake agreement is that it demonstrates we can sell our product. No one asks gold, nickel or copper producers if they can sell their product. For those minerals, there are active commodity markets. Not so in graphite. If I am talking to mine financiers about a graphite project, the first thing they will say is, “How will you sell it?” The offtake agreement removes much of that uncertainty and is proof that we can sell our product.

The offtake agreement has a 10-year term and was signed with a Chinese conglomerate. This further underpins what we’ve been saying about the Chinese domestic graphite supply situation. Even within China, people are concerned about a reliable supply. The agreement has a 20,000 ton per year (20 Ktpa) minimum offtake with provisions for up to 90% offtake. Potentially up to 90% of our production could be spoken for. Prices will be set based on current market prices, so if prices rise as we expect, our upside will be protected. The material is all FOB Québec, so we are not paying to ship it to China.

The offtake agreement has had several follow-on positive effects. It has increased the urgency to line up supplies for some battery manufacturers, companies that may have been a little slow out of the gate but are now suddenly nervous about the availability of supply given the growth prospects. Another positive effect of the offtake agreement is that it leaves us room to advance our value-added processing goals. And the offtake agreement advances the company toward production in that it makes the whole financing step that much easier.

TMR: What’s the next step? Financing?

DB: Definitely. We’re in the middle of the feasibility study right now. We are also working through the permitting, especially the mine closure plan. I want to continue the process toward production. That means going directly into detail engineering, the full engineering, procurement and construction management process to build a mine. To do that we need to finance our project. We’re in a due diligence phase on the financing end of things. Because graphite projects are not that common, we’re not going straight to the markets but instead working with people who are interested in graphite.

TMR: What is the timeframe for the feasibility study and goal to get financing secured?

DB: We’re hoping to secure financing in the second quarter of this year. The feasibility study results should be published by late spring/early summer. We’re moving fast to get the project shovel ready by the end of this year. That is contingent upon many things including permitting approval and financing. We will look to overlap some of these timeframes if we can. For example, if the mill design is ready to go before we announce the feasibility study, and we’ve got money in the bank, then we’ll proceed right into detailed engineering on the plant.

TMR: How does rapidly advancing Lac Knife mesh with the long-term goals for the company?

DB: Based on the progress at Lac Knife, Focus Graphite is now a development company. We’re looking to build a mine. The graphite industry is unusual in that it does not have a single large graphite miner. The big companies in graphite are not mining companies. They don’t want to be mining companies. We are in the business to build and operate this mine and then grow from there. The longer-term vision for Focus Graphite is to become the company that consolidates more advanced graphite properties.

TMR: Do any of the international, large-cap miners produce graphite? Companies like Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK), BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) and Freeport-McMoRan Copper & Gold (FCX:NYSE), for example?

DB: No, none of them. They’re all into gold, base metals and a few minor industrial minerals. The graphite situation is very similar to the rare earths where the Chinese cratered the markets two decades ago and then made it uneconomic to develop graphite or rare earths anywhere else. I mean, rare earths aren’t rare. They’ve just never been developed outside of China because it wasn’t economic.

The same with graphite. The Chinese in the early 1990s flooded these markets in exchange for foreign currency. The result was both graphite and rare earth mining became uneconomic outside of China. When it was over, there was one operating flake graphite mine in North America. It was small and produced only 20 Ktpa of concentrate. There aren’t the big graphite plays out there that make it interesting for the majors. Further, they’re not used to the market because it is not a deeply traded commodity market. It’s an industrial mineral and it’s a marketing game. That is why the offtake agreement is so important.

TMR: What are three reasons why investors should listen to the graphite story and take a look at Focus Graphite?

DB: First, investors should look at graphite because there is a lot of evidence that graphite is going to be the next big thing. Investors realize that graphite is used in a lot of everyday products, but with the growth of new battery technology and the China supply situation, the world is going to need a whole lot more graphite. The supply/demand story is very compelling.

The second reason investors should look at Focus Graphite is because of our industry first offtake agreement. The agreement is a clear sign that we can sell our product and that a third party has reviewed our plans and done enough due diligence to sign up to do business with us for the long term. The offtake agreement provides a level of investor security that is head and shoulders above our potential competition.

The final reason investors should take a look at Focus Graphite is our overall cost structure and financials. Our production cost will be competitive with the lowest cost producers in China. The financials are compelling based on ROM production and we have options to increase revenue significantly from additional value added processing.

TMR: Thanks for speaking with us.

DB: It has been a pleasure.

Click here for Focus Graphite Corp.’s Corporate Presentation.

Don K.D. Baxter, P.Eng. is the President of Focus Graphite Inc. He served as President of Northern Graphite Corporation between February 2011 and July 2013 and was responsible for all technical aspects relating to the Bissett Creek graphite project including the bankable feasibility study, metallurgical test work and environmental and mine permitting. He also served as mine superintendent at the Kearney Graphite mine when it operated in the 1990s and as a director of mining at Ontario Graphite Ltd. Baxter has worked for Inco and Noranda Minerals, as well as numerous consulting projects for base and precious metals. He holds a degree in mining engineering from Queen’s University, is a Registered Professional Engineer and a Qualified Person under NI 43-101.

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DISCLOSURE:
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