From this perspective, North America’s shale gas revolution truly earns its accolade as a “game changer.” As many people now understand, the boom in natural gas reserves and production in the United States and Canada is changing the way North America will power itself in the future.

What a lot of people do not understand is how to profit from this shift.

Natural gas prices are depressed and expected to remain so for the short to medium term, so investing in natural gas options or a natural gas exchange-traded fund is not likely to bring home the big bucks anytime soon. Domestic natural gas equities are an even riskier idea — most producers are scaling back production and selling assets as they hunker down in preparation for a tough few years.

Coal

But the sector feeling the worst impact from gas’ downturn is thermal coal. Demand for the coal burned to generate power in the US is plummeting as utilities take advantage of the cheapest natural gas in ten years. Consumption of coal to produce electricity is expected to fall 2% this year to its lowest level since 1992, while gas-fired consumption rises 5.6%.

Making matters worse, winter heating demand is falling in the face of mild weather: through January, this has been the warmest winter since 2006 and the fourth-warmest on record. With natural gas and warm weather conspiring against it, coal demand is decidedly down — in the second week of February, coal consumption was 4.3% lower than it was a year ago.

Exports are not going to provide any help. Last year, Europe bought 50% of America’s thermal coal exports, but demand from the EU is shrinking as the region struggles to stave off a recession. The economies of the EU shrank 0.3% in the fourth quarter of 2011 compared to the previous quarter, the first contraction since mid-2009.

In response, US thermal coal prices are deteriorating. Appalachian coal, the US thermal-coal benchmark, fell 15% in January alone to sit near US$60 per tonne and has moved little since (by comparison, Australian thermal coal is currently fetching almost US$120 per tonne). Mining costs to dig thermal coal out of the ground range from $60 to $75 per tonne for Central Appalachian producers, which means margins are already razor thin or nonexistent. Several major US thermal coal producers are reducing output and in some cases closing mines, including Arch Coal (NYSE:ACI), Patriot Coal (NYSE:PCX), and Alpha Natural Resources (NYSE:ANR).

Now for some good news. Thermal coal prices in the United States may be faltering, but that doesn’t mean that coal is in the doldrums across the globe. In fact, quite the contrary: global thermal-coal demand is expected to increase by 50% from 2008 to 2035, with the vast majority of increased demand coming from the developing world. That equates to a demand increase of 1.5% each year, and production is not quite expected to keep up to that pace. Rising demand plus not-quite-enough supply equals investment opportunities — maybe not in the US, but elsewhere.

That’s just thermal coal. There’s another component to the coal world: metallurgical coal, the higher-carbon coal used to make steel. Supplies are even tighter with metallurgical coal, which is why Casey Research recommends that energy investors have exposure to “met coal” through either equities or a fund.

Uranium

The abundance of cheap gas has utilities looking to build more gas-fired power plants. Some observers have suggested that this will be to the detriment of the nuclear sector in the US. But that perspective is pretty shortsighted.

It is true that some utilities have delayed plans for new nuclear plants by a few years, primarily in response to the Fukushima nuclear disaster in Japan and the ensuing public backlash against uranium. But that backlash is already fading; and those delays will have only a minimal impact on the nuclear sector in the US. Five new generators are on track for completion this decade, including two reactors approved just a few weeks ago (the first new reactor approvals in the US in over 30 years). Those will add to the 104 reactors that are already in operation around the country and already produce 20% of the nation’s power.

Those reactors will eat up 19,724 tonnes of U3O8 this year, which represents 29% of global uranium demand. If that seems like a large amount, it is! The US produces more nuclear power than any other country on earth, which means it consumes more uranium that any other nation. However, decades of declining domestic production have left the US producing only 4% of the world’s uranium.

With so little homegrown uranium, the United States has to import more than 80% of the uranium it needs to fuel its reactors. Thankfully, for 18 years a deal with Russia has filled that gap. The “Megatons to Megawatts” agreement, whereby Russia downblends highly enriched uranium from nuclear warheads to create reactor fuel, has provided the US with a steady, inexpensive source of uranium since 1993. The problem is that the program is coming to an end next year.

At present the world is producing just enough uranium to meet global demand, but this precarious balance is already tipping. There are dozens of new reactors under construction in China, India, South Korea, and Russia that will need fuel. Production increases from new mines and mine expansions are not expected to keep pace. The race to secure uranium resources is on, and for the first time the US has to compete.

The answer is domestic production. The rocks underneath the United States hold lots of uranium, enough to make a significant contribution to the country’s uranium needs. The biggest impediment to mining this resource is public opposition to the nebulous dangers of uranium mining, but as the Megatons program ends Americans will start to see that the alternatives to domestic production are decidedly worse: competing against China, India, and the like for uranium is an expensive and unstable way to acquire a desperately needed energy resource. In fact, at Casey Research we have been vocal in predicting a
demand-driven boom in US uranium production. We even expect to see “Made in America” uranium garnering a premium over imported yellowcake, in the same way that in-demand Brent crude oil earns a premium above oversupplied West Texas Intermediate crude.

Well-Field Services

The techniques used to unlock natural gas from shale reservoirs — horizontal drilling and well fracturing — worked so well that they created a supply glut that is altering the global energy scene. That supply glut is now prompting natural gas producers to cut back on output, which you might think would be bad news for the well-field service companies that complete those tasks.

Not to worry: North America is also in the midst of a crude-oil production boom, and the common theme linking most of the continent’s new wells is highly technical drilling and production methods. The purveyors of those techniques are the continent’s well-field service companies, and their services are very much in demand.

Well-field service companies have been able to compensate for lost gas fracking business by shifting to oil, as the oil industry has adopted fracking to unlock its shale deposits. If you’ve read about the oil production boom that is keeping North Dakota’s economy hopping, you read about the Bakken shale formation. In the Bakken, wells are drilled horizontally to follow along the oil-bearing layer, and then high-pressure fluids are forced down the well to fracture the shale and release the oil.

Meanwhile, the challenges of producing oil in the deepwater Gulf of Mexico continue to test the limits of drilling technology. Pushing through kilometers of water before drilling through just as much rock and then extracting and transporting oil from a platform rocked by waves and threatened by hurricanes demands a wealth of specialized equipment and operators.

Most oil and gas companies do not own drill rigs, nor do they actually drill or fracture their own wells. They contract those jobs out to companies that drill and frac for a living, known as well- field service companies. And with wells in America’s booming oil and gas fields requiring more complicated and more technical services with each passing year, the services these companies provide are essential to North America’s oil and gas producers.

The Take-Home

When a machine is as interconnected as the global energy trade, no part can change without impacting the rest. The dramatic debut of shale gas in North America has done far more than just depress domestic natural-gas prices — a shift of this magnitude has impacts that reach far beyond one commodity or one country. Some of those impacts are negative, but hidden in the doom and gloom lie opportunities to profit. The key is to open your horizons and embrace the complexity and interconnectedness of the global energy machine… either that, or find a good mechanic who can do the job for you.

Regards,

Marin Katusa,
for The Daily Reckoning

The Upside to a Natural Gas Downturn originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Louis James: Doug, I’ve heard you say you think the US is setting Iran up to be the next fall guy in the wag-the-dog show — do you think it could really come to open warfare?

Doug Casey: Yes, I do. It could just be saber rattling during an election year, but Western powers have been provoking Iran for years now — two decades, really. I just saw another report proclaiming that Iran is likely to attack the US, which is about as absurd as the allegations Bush made about Iraq bombing the US, when he fomented that invasion. It’s starting to look rather serious at this point, so I do think the odds favor actual fighting in the not-too-distant future.

L: Could they really be so stupid?

Doug: You know the answer to that one. We’re dealing with criminal personalities on both sides, and criminals are basically very stupid — meaning they have an unwitting tendency to self-destruction. One thing to remember is that most of those in power in the West still believe the old economic fallacy that war is good for the economy.

L: The old broken-window fallacy. Paraphrasing Arlo Guthrie, it’s hard to believe anyone could get away with making a mistake that dumb for that long.

Doug: People like those in power still suffer the delusion that it was World War II that ended the Great Depression for the US. Actually, it was only after the end of the war that the depression ended, in 1946. In his book World Economic Development: 1979 and Beyond, Herman Kahn documented long-term growth throughout the 20th century. Between 1914 to 1946 — a very tough time, with WWI, the Great Depression, and WWII — the world economy still grew at something like 1.8%. I believe real growth would have been several times as great, were it not for the state and its products. But people still believe that spending money on things that explode and kill and destroy is somehow good for the economy.

L: I suppose they think it’s okay if it creates jobs here and destroys lives and livelihoods “over there.” But aside from the fact that it’s not safe to assume today’s enemies are not capable of bringing the battle onto US soil, it still ignores the fact that you’re spending money on stuff that gets destroyed — like broken windows — and that impoverishes us all. Worse, the cost is not just economic.

Doug: That’s right. This coming war with Iran has the potential to turn into something resembling WWIII, with enormous consequences.

Now, it’s hard to speak with any certainty on such matters, because most of what we have to go on are press reports. Governments keep most really critical facts on their doings to themselves, and what you read in the press is as likely as not just a warmed-over government press release — in other words, propaganda. Meaningless, if not actively deceptive. It is correctly said that in war, truth is the first casualty.

L: But we do have the Internet these days, with indie reporters offering coverage ignored by the talking heads in the mainstream media.

Doug: True; it doesn’t keep the chattering classes honest, but it does provide some diversity of spin, from which we can try to infer what’s really going on. And from all the various sources — mainstream and alternative, Western and from within the Muslim world — I have to say that it appears to me that the Iranians are not actually developing nuclear weapons.

L: Then why do they act in such aggressive and bombastic ways?

Doug: Western powers are pushing them around, telling them what they can and cannot do, and treating them like children or mental incompetents with no right of self-determination. How else would you expect them to react? They may have a collectivist theocratic regime, but it’s also a proud and ancient culture.

Now, as you know, I don’t think there should be any countries at all — not in the sense of the modern nation-state, and I’m certainly no fan of the Tehran regime, but Iran is a sovereign state. The Iranians resent people from other countries assuming the right to tell them what they can and cannot do with their uranium enrichment program, just as people in the US would if Iranians told them what to do with… well, anything.

L: Do you have specific data to substantiate your view that Iran is not focused on creating nuclear weapons?

Doug: I was just reading about an official report that says that Iran is still not able to enrich uranium to the level needed to make nuclear weapons.

Uranium occurs in two isotopes with half-lives long enough to make it possible to find reasonable amounts of them in the earth’s crust: U235 and U238. Most of it is U238 — 99.3% — but it’s the U235 that’s fissile, meaning, it’s the one you want for making nuclear reactors and weapons. So you have to enrich your uranium — to about 20%-30% U235 to make reactor fuel and 90% or better to make weapons.

L: That’s why the Russians are able to sell “downblended” uranium from decommissioned nuclear weapons for use as reactor fuel. So, you’re saying the reports indicate that Iran is not capable of enriching uranium beyond the level needed for reactors?

Doug: Yes. But again, I have to stress that reliable information is very hard to come by. Remember when the US accused Iraq of having a program to develop so-called weapons of mass destruction? Apart from the fact that, except for nuclear weapons, that term is a complete misnomer, they had no such thing. It was either lousy intelligence or outright fabrication — and I suspect the latter. So how can we trust what they tell us today? Only a fool would be so naïve.

L: Indeed.

Doug: In any event, why shouldn’t Iran have nuclear weapons? I wish none of these countries had them, but they do. No one stopped China, no one stopped North Korea, Pakistan, Israel, India, France, nor any of the others in the disreputable club that have them.

L: Wasn’t it too late to intervene by the time those countries announced their nuclear capabilities?

Doug: I don’t think so. Israel was friendly, so Western powers looked the other way. North Korea was too rabid, so they were left alone. The other countries are too big. The cat’s out of the bag at this point; any country can develop nuclear weapons, if it really wants to. But it’s easier and cheaper to bribe a general — or maybe just a supply sergeant — in India, Pakistan, or Russia to get what you want.

Moreover, with the US on the rampage, prosecuting its counterproductive and unwinnable War on Terror, a lot of governments, especially ones unpopular in the West, have got to be thinking about acquiring nuclear capabilities. If Saddam had actually had nukes, the US would have left him alone, just as they’ve left the Kims to rot in the workers’ paradise they’ve made out of North Korea. It makes sense for a country stricken from the US’s official “nice” list and moved over to the “naughty” category to have some nukes. Everyone needs and wants a slingshot to keep the bully of the block at bay.

If you oppose nuclear proliferation, your first target should be US foreign policy, which is the biggest impetus behind the scramble to arms.

L: What about the argument that Iran would use nuclear weapons on Israel, if it had them?

Doug: That’s ridiculous. It’s true that just one or two nukes would turn most of Israel to glass, but it’s a matter of mutually assured destruction (MAD), just as the détente between the US and USSR was. Israel is reported to have about 200 nuclear weapons, and the Iranians know it. Even if they launched a successful first strike against Israel, they would get wiped off the face of the earth in response. The regime in Iran is repressive and borderline lunatic, but they aren’t that stupid. No way are they going to attack Israel with nukes. They not only cannot, but should not, be singled out for exclusion from the nuclear club.

L: But they’re part of the axis of evil, don’t you know?

Doug: Speaking of evil, it’s evil to initiate the use of force or fraud. If Iran enriches uranium or even builds tools for war, that’s not evil per se. But using force to stop them from doing something that is not in itself wrong is wrong, and that would make Iran’s attackers the axis of evil.

In my mind, the US is the biggest threat to peace in the world today. I can easily imagine those in power in the US starting a war over any silly pretext, real or imagined. It could easily happen by accident at this point. Things go wrong. Maybe some young hotheads in Iran’s Revolutionary Guard decide to take a boat out and attack a US frigate — launch a few RPGs at it before they’re blown out of the water. Then the US feels it needs to mete out some punishment and launches a strike against the base the boat came from — which would be attacking the Iranian mainland — and the thing spins completely out of control. Could happen at the drop of a hat. Maybe the commander of a US ship has a streak of General Jack D. Ripper from Kubrick’s Dr. Strangelove in him. Maybe the Russians or the Chinese — who are aiding the Iranians — mount a false-flag incident, because they want to see the US get involved in another tar baby.

L: So… another case of not just doing the wrong thing, but the exact opposite of the right thing, with economic, political, and ultimately physical world consequences.

Doug: That’s right. Just look at what they’re doing now, trying to isolate Iran from the world with an embargo. That could be seen as an act of war.

L: Well, wait a minute. A blockade is regarded as an act of war, but if Western countries decide to harm their own economies by not trading with Iran, that’s unfriendly, but not force or fraud.

Doug: Well, it would be forcing citizens in those Western countries to pay higher prices for things, denying them the choice of buying oil from Iran if they wanted to. But I agree; that’s more a matter of criminal tyranny and stupidity than an act of war. Still it sure is prodding Iran, throwing rocks at the hornets’ nest, as the US did with Japan before WWII. The Japanese basically have no domestic oil production and were getting their oil from the US and the Dutch East Indies. The US cut off both supplies, backing them into a corner, leaving them little choice but an aggressive response.

At any rate, I think all of this could backfire on the US. Since the Iranians apparently can’t clear deposits through New York, where international dollar trades clear, they’ve made a very commonsense move to cut the US out of the middle and sell their oil directly to India, without using dollars. I think other countries will follow — and then what? Iran isn’t going to want bushels and bushels of rupiah or yen or whatever. I think the odds favor them turning to gold. It’s said that’s one of the means of payment the Indians will be using.

Gold is the logical choice and the next step in the demise of the US dollar as the world’s reserve currency. There’s a lot of demand for the dollar to buy and sell oil. If countries stop using it, demand for the dollar would fall, at the very time the US is greatly increasing the supply of dollars. The day is coming when trillions of dollars outside the US will only be spendable inside the US. At that point it’s game over for the dollar.

L: You’ve talked about the world going back onto a gold standard before. What do you say to the people who say that gold is a barbaric relic from the past that doesn’t work in a modern economy — they can’t go around with pockets full of doubloons to buy cars or chests full of treasure to buy houses…

Doug: Such people are not thinking rationally and are economically ignorant. As always, we should start with a definition: what is money? The short answer is that it’s a store of wealth and medium of exchange. For reasons we’ve discussed and as Aristotle outlined over 2,000 years ago, gold is simply the best form of money ever adopted. And in our modern world, you don’t have to physically cart the stuff around. You can, but you can also transfer ownership of physical gold electronically, through services like GoldMoney.com.

L: Note: We do endorse GoldMoney.com as a convenient and reliable way to own, trade, and transfer gold, but readers should be advised that Doug is an investor in it.

Doug: Right. I like to put my money where my mouth is.

L: Okay, so you see this trend being bullish for gold, clear enough. But most of the gold ever produced in the world still exists in purified form in various vaults around the planet. Gold doesn’t get used up like silver does, so there’s plenty of supply. So, would the physical need for gold as money really impact the price of gold and related equities, or would that be more a function of governments further debasing their currencies?

Doug: Well, it’s estimated that there are some six billion ounces of refined gold in human possession around the world, or, somewhat less than one ounce per person. Global gold production is said to be about 80 million ounces a year, or about a 1.3% annual increase in the supply of gold. That would be the steady, “natural” rate of inflation if we were on a gold standard. The amount of various currency units in the world is increasing at a much, much faster pace than 1.3%. Nobody really knows, not even the Fed, but depending on how you define the money supply, it would take $10,000 to $50,000 — or more — per ounce to back all of the dollars in existence with gold. Whatever the correct number is, I expect gold’s price in dollars to increase dramatically as the world moves closer to and eventually adopts a gold standard.

L: So, any investment implications beyond the obvious? Buy gold and silver for prudence and protection, buy gold stocks for speculative leverage?

Doug: That’s the basic recipe. And diversify your holdings internationally. You can never tell when the government of your home country will have a psychotic break.

L: What do you say to the people afraid that in a world so traumatized as to go back onto a gold standard, the risk of owning any paper asset, including gold stocks, would be too high? No one will trade gold stocks for a can of dog food in a Mad Max world…

Doug: That’s a valid concern. You can’t eat paper, and even owning shares in a gold mine may not be of much use in a real economic cataclysm — the US government shut down gold mining during WWII as a nonessential industry. It could happen again. But that’s why, as you said, we own gold for prudence, and the stocks are strictly speculative vehicles.

But let’s have some perspective. The security of your stock portfolio may become the least of your concerns if the US starts a war with Iran that touches off WWIII. If that happens, the US government and population will both turn hysterical, and the whole country will be locked down like a prison. What was once America will become even more of a police state than it is now. Who knows where that would end?

So, one of the most intelligent things you can do is as I’ve been saying for years: diversify your assets and your physical presence internationally. Having some place you like to spend time off the beaten track, where you can ride the storm out, should be top priority for everyone who can afford it. Preparing for the worst at home should be top priority for those who can’t.

L: Would you care to put odds on open war between the US and Iran?

Doug: I’d say it’s highly probable within the next two to four years — say, between 50% and 75% — that an actual shooting war will break out.

L: Not much time to prepare. I sure hope all our readers are doing what they can.

Doug: Me too.

L: Right then. Thanks for your thoughts and guidance, Doug.

Doug: You’re welcome. We’ll talk again soon.

Doug Casey and Louis James
for The Daily Reckoning

Is a US-Iran War Inevitable? originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Seriously.

There are not very many people outside the “Peak Oil” crowd who care — heck, even know — what “decline rates” are.

Yet the “story that isn’t being told” is often where you find the best investment narratives.

“At first,” our resident energy enthusiast kicks us off with just such a tale, “the conservative approach was to estimate that the Marcellus wells would be productive for about two-three years and then the decline curve would kick in.

“Now, after three years of testing in some areas, that window is more like five years.”

After five years? Many operators will go back and refrack the wells. Those five-year wells might become 10-year wells.

Or 15.

“We’re finally making history,” Byron King goes on. “We’ll look back on 2012 as the best year for the energy business in Pennsylvania since Col. Drake drilled his first well. before the Civil War.”

Full disclosure: We’re still skeptical about some of the big claims Byron makes. Can a domestic energy boom really overcome decades of debt racked up at the local, state and federal levels? As with any functioning relationship, we keep an open mind.

And examine the evidence…

After 20 years of sinking deeper and deeper into dependence on foreign oil, the United States reversed that trend last year.

“Domestic oil output is the highest in eight years,” reports Bloomberg, after crunching the numbers from the Department of Energy. “The U.S. is producing so much natural gas that, where the government warned four years ago of a critical need to boost imports, it now may approve an export terminal.

“The transformation, which could see the country become the world’s top energy producer by 2020, has implications for the economy and national security — boosting household incomes, jobs and government revenue; cutting the trade deficit; enhancing manufacturers’ competitiveness; and allowing greater flexibility in dealing with unrest in the Middle East.”

Ahem.

Let’s examine the numbers:

• U.S. energy self-sufficiency bottomed in 2005 at 70%. Now it’s 81%
• Domestic crude production reached 5.7 million barrels a day last year — the highest since 2003
• Natural gas output grew 10.9% between 2007-10.

“We’ve had large-scale drilling in Pennsylvania only over the past three years or so,” says Byron, putting some flesh on the bones of that last statistic. After a laborious process of leasing land, seismic work, permits, drilling the wells, testing the wells, hooking the wells up to pipelines.

“We’re finally — year 2012 — at that point where literally hundreds of new wells are coming online,” Byron says. “It’s part and parcel of the national ‘gas glut’ that’s contributing to historically low pricing — and keeping your winter heating bills down, to boot.”

Addison Wiggin
for The Daily Reckoning

The Next American Oil Boom? originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

I’ve found many people are particularly energized about predicting a hard landing for China’s economy, but I believe the country is no sinking ship. China isn’t fast-approaching an iceberg in the dark of the night like the Titanic. Beijing has long been anticipating the ice chunks and subtly adjusting the rudder around inflation without steering the economic ship too far off course.

China’s government angled its vessel away from inflation by increasing the required reserve ratio (RRR) every month for the first six months of 2011 and raising interest rates three times. Once inflation was sufficiently under control, the country began to steer in a direction of growth again.

Recent results show how positive this easing has been. In its latest research this week, BCA Research reported that despite the policy tightening of 2011, the “most recent economic data out of China has all but confirmed that the economy remained incredibly resilient.”

One significant data point is the sharp increase in money supply. After the country hit a low level of monthly money supply growth, the three-month change in M-2 money supply climbed to record levels during the final month of the year, says Greg Weldon of Weldon Financial. He says that money supply “pegged at +6.419 trillion, easily exceeding the previous record 3-month increase, seen at the peak of the global crisis, in March of 2009.

Easing in China is expected to continue through 2012, with ISI Group anticipating a potential RRR cut after Chinese New Year celebrations in February, then possibly again in April, June and August. Also, loans “have become more readily available in recent weeks,” says ISI. This should all be bullish for commodities, such as copper, oil and gold, and also trickle down to boost share prices of natural resources equities.

Chinese Copper Inventories Increase

Base metals were the laggards among commodities last year, with copper one of the worst performers, losing 21 percent.

Global consumption of copper increased only 4 percent in 2011, which is lower than the 10 percent growth in 2010, but higher than the decade-average of around 3 percent, says Macquarie Research. China’s consumption of copper—which makes up 40 percent of the global demand—was a primary reason for decreased consumption, as the country was drawing down on its own supply throughout the year.

This can’t continue forever, Macquarie says, adding that “demand made on new supply direct from producers would need to rise, with positive implications for prices.” Europe’s largest copper fabricator agrees with that sentiment, indicating that it anticipated China’s copper demand would be strong in 2012, according to Barclays.

A recent rise in copper imports is likely the result of restocking China’s depleted copper inventories. As is typical for China, after the metal fell in price last fall, the world’s largest buyer of the metal advantageously scooped up copper to replenish its cupboard, says Barclays Capital. As shown below, copper inventories into China reached a record low in 2011, but have sharply reversed recently.

An increase in copper demand places pressure on the supply side, which continues to experience shortfalls in mine output versus forecasts. These are caused by a variety of factors, such as weather, labor strikes, or simply a poor grade deposit. While Macquarie says there’s a possibility the world’s two largest copper mines, the Los Bronces mine in Indonesia and Peru’s Escondida mine, could deliver year-over-year increases in production, it concludes “it is highly unlikely that miners will succeed in delivering this level of additional output in total.”

While Chinese demand growth for commodities is not expected to be as robust as it has been historically, demand is expected to pick up throughout 2012. As confidence returns, Macquarie says there should be “a slow gradient of recovery in the near term before gathering pace into the mid-year.”

Increasing Reliance on Energy Imports

China’s rapid growth and increasing reliance on other countries for key resources has made a powerful case for commodities over the past several years. These three charts from BCA Research illustrate that once the country shifted from exporting to importing a commodity, there was no looking back.

You can see in all three how dramatically the energy balance has shifted to an ever-increasing dependence on imports. In each major commodity, after China began importing, growth took off.

China became a net importer of crude oil in 1994, and today, is the second-largest oil importer in the world. BCA forecasts the country is expected to surpass the U.S. as the largest oil importer in only a few years.

To obtain more natural gas, China spent years building massive pipelines to transport the commodity from Russia and other western Asian counties, and since 2006, natural gas imports have “gone vertical,” says BCA.

Coal, which accounts for the majority of total energy consumption in China has also been imported since 2008, and since that time, imports rose substantially.

Even with these imports, energy consumption is only a fraction of developed countries. The China story is just getting started: Urbanization just surpassed the 50-percent mark, hitting what I believe to be the pivotal moment that dramatically shifts buying patterns, driving an enormous demand for housing, consumer staples and durable goods. You ain’t seen nothing yet!

Happy Chinese New Year!

This weekend, the world’s largest annual migration takes place. Millions of people in China head home to celebrate Chinese New Year and welcome in the Year of the Dragon. U.S. Global Investors’ research analyst and Shanghai native Xian Liang recently talked about the significance of the dragon in Chinese culture:

“Unlike its western counterpart portrayed as evil, the Chinese dragon is an imaginary, mythical creature. Its body parts are from nine animals, including the horns of a deer, mouth of an ox, nose of a dog, trunk of a snake, and claws of an eagle. It has auspicious power because it can make itself invisible or visible at any time. It can both fly and swim. It makes clouds and rain. Because of these magnificent things, the dragon is associated with royal powers as well.”

After bounding through a tough Year of the Rabbit, we anticipate the Year of the Dragon will breathe fire back into Chinese markets in 2012. Kung hei fat choy!

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. For more updates on global investing from me and the U.S. Global Investors team, visit my investment blog, Frank Talk.

It May Take a Dragon to Breathe Fire Into Markets originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Also of interest is the fact that the price of crude oil has been trending higher, even while the prices of most other commodities have been drifting lower.

The US is the world’s largest consumer of oil. It’s not growing much. Yet there oil sits, with a three-figured handle. I think it is a sign that challenges on the energy front will prove more stubborn than in the past.

One day last week, I found it interesting that the main two financial dailies I read every morning both featured special pullouts on energy.

The Financial Times report had a number of good nuggets:

• This is the first year the average oil price is $100 a barrel. In real terms, it’s the highest oil price since 1984.
• US consumers are on track to spend $200 billion more on oil this year than in 2010.
• Exxon Mobil’s capital spending budget for the first 9 months — $26.7 billion — was a record.
• Supply is tight; production from non-OPEC countries (such as Russia) has been disappointing.
• The US is an exception. It is reversing a four-decade decline in production and imports are down to 50% of consumption, instead of 60% as recently as 2005. (Canada is increasing production, too.)
• Tight government budgets are leading to lower subsidies for alternative energy. The brunt of this will be felt most acutely in Europe.
• China is the exception; subsidies for alternative energy have actually increased there.
• The nuclear renaissance is still a long way off. One article discussed the various phase-outs going on around the world.
• There is a new enthusiasm for LNG tankers.

Consider the portrait these bullets paint. To me, they speak to the challenge in producing enough energy to make a dent in prices. There are also some opportunities in these bullets — producing good old-fashioned oil still looks to be a good business.

The Wall Street Journal called its report “Big Oil Heads Back Home.” Some main points:

• Oil is shifting its attention from the Middle East to the West — oil sands in Canada, deep-water oil in Brazil and the Gulf of Mexico and shale oil in the US.
• By 2020, shale oil and gas will make up a third of US production, which could shift power away from OPEC. (The Saudis are worried.)
• Smart grids are coming. There was an article about energy-monitoring devices and other means to increase efficiency and save money.
• Interesting article on Churchill County in Nevada, which is enjoying a boom in geothermal energy.
• Biofuel companies are getting into other markets, selling stuff for skin care and beauty products. (Biofuels, like other renewables, are in trouble.)
• US battery companies are having a hard time trying to survive as they get strong competition from overseas and the adoption of electric vehicles remains slow.
• Townsville, Australia, plans to lay a cable to take hydropower from Papua New Guinea, some 600 miles away.
• How China slowing its nuclear program over safety worries is creating opportunities for some firms.
• How “clean coal” is a boon to companies selling filters and other means to reduce emissions.

This report was more focused on the ways in which people are changing their behavior, about how people are figuring out new ways to create energy and to get it where it needs to go. It’s also more about the frontiers of energy and how they will contribute meaningful slices to the pie.

It also makes me think about how energy is as much about place as it is about any particular source. In Nevada, they can tap geothermal. In Australia, they are trying an innovative way to tap a river in Papua New Guinea for hydro-power.

You can’t really say geothermal is a great energy source. It is in some places, yet it won’t work in others. Ditto, hydro-power. But these stories show you how innovative people can be. And they show you how things can happen that no one would’ve guessed even a handful of years ago. I mean, US oil and gas production up enough to threaten the Saudis? That would’ve been a surprising prediction not too long ago. Yet it’s happening.

These stories also show how political energy is. Everywhere. Government policy has a big impact on the energy mix pursued. Big subsidies for solar, particularly in Europe, essentially built that industry to a point it would never have reached without the help. But now, with austerity measures and tight budgets, a shift in policy can destroy it.

An energy investor has to keep an eye on a lot of things. Technologies change. Consumer patterns change. Government policies change. But the overall backdrop is pretty strong for the producers of energy. The most powerful evidence is the most obvious: Amidst all the turmoil and slow growth in the big markets of the US and the EU, oil is over $100 a barrel.

Regards,

Chris Mayer
for The Daily Reckoning

$100 – The New Floor for Crude Oil originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

That’s the curious thing about water. There always seems to be either too much of it or not enough. What follows is another look at my favorite commodity and the opportunities of investing in it.

At breakfast at the Raffles in Phnom Penh, I read a story about how Levi Strauss is trying to minimize its water use. A pair of blue jeans will consume over 900 gallons of water in its lifetime. That includes everything from the water to irrigate the cotton crop to multiple washings of the jeans.

The pressure is mounting on Levi, and other companies, to reduce their water footprint. Miners, food companies, tobacco companies and beverage makers all face pressure to use less water. In many places where they operate — such as India or China or Africa — fresh water is in short supply. This forces a re-examination of everything — from favoring drought-resistant crops to creating new ways to sanitize things.

Companies are also looking to use all of this to their advantage in marketing. Imagine idyllic farms in India with a smiling farmer using new efficient irrigation methods financed by Levi Strauss. However it may reflect reality, such an ad would appeal to the feel-good consumers of today.

The one part of the story that caught my eye was on a 15-acre cotton farm some 90 miles west of Mumbai. The farmer uses drip irrigation, a method of delivering water and fertilizer piped through veins spread over his fields. It’s vastly more efficient than flood plain irrigation, as the water gets right where it needs to go. There are also fewer weeds and less need for power, a not small consideration in a country in which periodic blackouts, however brief, are as common as flies. The farmer reports his water use is down 70% since using drip irrigation.

A group called the Better Cotton Initiative installed the irrigation equipment. The founders are a group of organizations and retailers, including Gap, Ikea and Adidas. Ikea hopes to use only “better cotton” by 2015. Adidas promises to do so by 2018. You can see how this is appealing to the companies.

There was a time when US companies didn’t really want to know what went on in their factories overseas. That time has passed, probably for the better. In an age when any competitive edge can be a difference-maker, why not try to gain an edge in customers’ minds this way and do some good for the world in the process?

The market is saying it approves. Early research indicates customers like to think they are changing the world for the better. Products that meet that need will enjoy an edge over those that don’t.

Given all of this, I think it is a profitable exercise to think about what kinds of companies benefit in such a world. What kinds of companies enable such a world? As it turns out, there are plenty of them.

Water is a $500 billion industry. You could break that into two giant buckets.

The first is water infrastructure. These include the water utilities — some 250,000 of them globally. These are necessary assets of vital importance wherever they are. They absorb a steady amount of spending that tends to be pretty resilient, regardless of what’s going on in the economy. Population growth drives the creation of new utilities every year. See the chart below on US water and sewer construction spending.

If anything, we’ve underinvested in these facilities over time, leading to leaky pipes and contaminated water. There will be a lot of pressure here to gain efficiencies.

The second big bucket is applied water. You can think of this as irrigation and industrial water uses (such as those used in the manufacturing process). Irrigation is a big one, representing some 70% of applied water use.

Emerging markets play a big role in all of this. Just over the next five years, China alone will spend nearly $50 billion on water, mostly on water treatment systems and flood control projects. In India, there are plans for 30-plus power plants by 2017 — all of which will use heavy amounts of water for cooling. India also has large irrigation projects on the docket, which will divert rivers and soak parched farmland. In Africa, where mining companies are busy cracking open the earth to get at much-sought goodies, there will be a great need to manage the water use of these projects.

As you can see, water touches almost everything — from energy and mining to basic food production and manufacturing. You want to talk about shale gas and the great revolution in American energy? Well, water management is going to play a big role there — testing it, filtering it, recycling it. You want to talk about feeding 9 billion people by 2050? We’re going to need to manage our water assets more intelligently. You want to talk about technology? New smart phones, computers and lifesaving drugs? All of the companies that make these things use tremendous amounts of water. And they need the water to be pure and meet strict standards.

The beauty of water as an investment theme is that “inevitables” power these trends. There is really no way to get around it. If you think about the pressures applied by population growth and urbanization, you can readily see how important efficiency and sustainability will be.

You don’t have to get a lot of things right, either. You don’t need to know what the world’s favored energy source will be in the future — coal, natural gas, nuclear or alternative energy — it doesn’t matter. They all use water, and lots of it.

Water was the key theme that kicked off my Mayer’s Special Situations newsletter in the summer of 2006. The original Blue Gold Portfolio unveiled five stocks with exposure to powerful trends emerging in water — the need to purify it, preserve it and move it. That portfolio delivered an 87% return in its first year and has been a solid winner ever since. We’ve added names since then and over time have sold off some or watched them get bought out. Now only two stocks remain, both part of the original set.

Water remains one of my most favorite investment sectors.

Regards,

Chris Mayer,
for The Daily Reckoning

Water – Still Blue Gold originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

My friend Brad Farquhar is the co-founder and vice president of Assiniboia Capital, which invests in farmland. We had just driven through a canola farm some 50 miles outside of Regina, Saskatchewan. And apparently, the canola crop can get sucked in the car engine and cause a fire.

Worried about a smoky smell, we pulled over to check it out. But we were clean.

You may recall I wrote about Brad and canola investing in the August 2010 issue. (Note: Assiniboia’s canola partnerships are open only to non-US citizens. Blame the SEC and IRS for the draconian rules they impose.) What follows is an update, plus, a pair of new ideas from my Saskatchewan field trip.

The yellow flowers of the canola plant dotted the Saskatchewan prairies while I was there. The plants were full and tall under deep blue skies. Prices for canola are healthy. “This should translate into a net return to investors of between 20-25% for this year,” Brad told me. “We won’t know the final numbers until the crop is completely harvested and shipped, but about 80% of the variables are now removed. The final results may even edge up a bit more as some pretty good-looking fields get combined.”

Last year was a tough year, a kind of worst-case scenario. Excessive rains soaked the prairies. It tested Assiniboia’s business model, which aims to keep risks low by using crop insurance to cover the downside. The partnership broke even, a victory given the conditions. In a best-case scenario, the partnership could double its money in a season. Not a bad set of outcomes.

I like these kinds of ideas, and not only for the payoffs. Whatever happens in Europe
or in the debt markets, the intrinsic usefulness of farmland and food crops seems to offer a relative safe house — with a good shot at making a lot of money as well.

There is another reason, though, to favor such assets. It has to do with something called EROEI, which stands for “energy return on energy invested.” It is an expression of the idea that it takes energy to create energy.

Stephen Johnston at Agcapita is another one doing similar activities up here. I know Stephen as well, and he pens an interesting free monthly letter. (You can get it here.) In his September letter, Stephen talked about “EROEI decay.”

“I feel confident that EROEI is an acronym that will receive much wider recognition over the next decade,” he writes. “Because we are in the process of transitioning from high EROEI sources of hydrocarbon energy to low EROEI sources — think Saudi Arabia versus the Alberta oil sands.”

Stephen points out that more and more of our energy is coming from sources that require more and more energy to extract. He gives us some approximate EROEI ratios for various energy sources:

1970s oil and gas discoveries: 30 to 1
Current conventional oil and gas discoveries: 20 to 1
Oil sands: 5 to 1
Nuclear: 4 to 1
Photovoltaic: 4 to 1
Biofuel: 2 to 1.

Currently, the world produces around 86 million barrels of oil per day. But 86 million from high EROEI sources is much different than 86 million from less-efficient sources. “Effectively,” Stephen goes on, “the net energy left over to drive economic growth is significantly lower in the latter scenario.”

Why does this matter? Simply put, a lower mix of EROEI sources means higher prices for many commodities, because it will take more energy to produce them. This doesn’t automatically mean commodity producers win, however, because people can adjust their behavior.

For instance, when gasoline prices get too high, people cut back on their driving and find ways to save on gasoline. Economists call this the “elasticity of demand.” It means that demand can give and bend, like an elastic band, limiting how high prices will go.

But not all commodities bend so easily. Food is one. EROEI predicts higher food prices, because modern agriculture depends heavily on fossil fuels for irrigation, fertilizers, herbicides, storage and transportation.

Stephen gives examples. The most striking is with irrigation. “Irrigation accounts for approximately 20% of US farm energy use,” Stephen writes. In areas where water is scarce, such as in India, over half of all farm energy use simply drives irrigation pumps.

So in a world in which EROEI is on the decline, those assets with lower energy intensity will enjoy an advantage over less-efficient competitors. Might Canadian prairie farmland, which has no need for irrigation and low fertilizer needs, thrive in such a world?

I believe so. And this is one reason I’ve directed readers of my Mayer’s Special Situations letter toward investments in the province. Most of my field notes on Saskatchewan wound up in that letter, because we own a pair of companies based there.

One is a company called Viterra. It is one of my favorite long-term agribusiness holdings. Viterra processes grain, getting it from the farm to markets worldwide, as well as storing grains in a network of silos and sheds. It also sells seed, fertilizers and equipment to farmers. It also turns raw materials into animal feed and food ingredients. The stock is under my buy price of C$11 per share and trades for about 12 times earnings.

Viterra’s headquarters are in Regina. In fact, its main building was only a few blocks from my hotel. But it has a global presence with trading hubs, terminals and processors in Asia, Australia and Europe.

I like Viterra as a play on Saskatchewan’s bountiful harvests. And recent market woes have put the stock on sale.

Regards,

Chris Mayer,
for The Daily Reckoning

Crack This Code: EROEI originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Unfortunately, the weakest link of all-electric powertrains is the energy storage medium: batteries.

Even with the best technology available, batteries are expensive and bulky and have a low energy density. The result is more-expensive vehicles with lower range between fill ups. Since batteries can’t be topped off in a few minutes like fuel tanks can, the ability to easily extend range also suffers.

Innovators are taking a look at some of the oldest-known technologies as alternatives to batteries. In a sense, they are reinventing the wheel — the flywheel, that is.

The flywheel idea is an old one that dates back to the potter’s wheel: A heavy wheel was used to store rotational energy so that the potter could form symmetrical shapes out of clay.

Unlike batteries, which are a chemical form of energy storage, flywheels store energy mechanically in a rotating device. Flywheels can store more energy than batteries in a package a fraction of the size.

Flywheels were used as a form of energy storage in Swiss “gyrobus” electric buses of the 1950s. Developed for use on bus routes where overhead power lines weren’t available, gyrobuses charged their mechanical “batteries” at passenger stops or terminals.

At these stops, the buses would connect to an electric power source and a motor would spin the flywheel at speeds up to 3,000 revolutions per minute. Upon leaving the stop, the motor would act as a generator instead, using the stored spin energy to deliver electrical power to motors driving the wheels. On a full charge, gyrobuses could travel 3.7 miles at speeds of up to 37 miles per hour.

Unfortunately, flywheel energy storage has had its shortcomings. Energy losses from friction limited the utility of the concept. Older flywheel designs used mechanical bearings and conventional materials, which curtailed the speed at which the wheels could be spun. Since the flywheel housings themselves weren’t vacuum sealed, there were also significant friction losses from spinning against atmospheric gases. However, new technologies are addressing these problems, and there is a resurgence of interest in the concept.

Formula One racing teams, for example, have been using a flywheel-based Kinetic Energy Recovery System (KERS) since 2009. KERS uses a flywheel to recover deceleration energy lost through braking. When the F1 race car exits a sharp turn into a straightaway, the energy, stored in a flywheel, can be released for higher acceleration. The driver has a special boost button he can engage whenever he wants an extra burst of power.

The original 2009 design, named Flybrid, was made of a steel/carbon fiber composite rotating at 60,000 rpm inside a vacuum chamber. The unit is good for 80 horsepower over a period of 6.67 seconds per lap and can decrease the time spent on a lap by up to four-tenths of a second. Four-tenths of a second is make or break in the highly competitive sport. Furthermore, since there is no energy conversion loss as in battery-based recovery systems (which must convert kinetic energy to electrical and then back again), the system is inherently more efficient.

Flybrid and Torotrak PLC, which is the licenser behind much of the technology in the F1 KERS system, is partnering the technology with major automakers. Volvo, for example, is looking at taking flywheel energy storage beyond the race circuit and into everyday automobiles.

Thanks to advanced materials technology, the flywheel Volvo is testing weighs a mere 13 pounds and has a diameter of only 7.8 inches. It also spins in a vacuum to minimize friction losses.

Volvo believes it can be produced at a much higher volume than the battery-based energy recovery technology used in today’s crop of hybrid vehicles. Knowing what we do about resource constraints (whether real or politically caused) affecting the mass production of rare earth permanent magnet motors and lithium-ion batteries, this is a big deal.

According to Volvo, flywheel technology has the potential to deliver double-digit gains in fuel economy and makes a four-cylinder car feel like a six-cylinder.

You may have played with friction-motor toy cars as a child. I had one with a flywheel you would wind up with a zip cord. Once set down on the floor, it would zip to the opposite end of the room. These days, the concept is expanding into more practical uses. Volvo plans to demo a flywheel-enhanced vehicle this fall, and in a few years, your next vehicle might feature the technology.

Regards,

Ray Blanco,
for The Daily Reckoning

Reinventing the Wheel for Greater Energy Efficiency originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

“China is temporarily shutting down most of the industry,” reports The New York Times — closing or nationalizing dozens of rare earth producers.

Considering China already accounts for 97% of world production, that’s putting a squeeze on the producers of everything from wind turbines to hybrid car batteries to ballistic missiles. Oh, and those new compact fluorescent light bulbs.

Betcha didn’t know this contains rare earths…

The average price of a CFL bulb has jumped 37% this year, according to the National Electrical Manufacturers Association.

The increase comes before a federally mandated phase-out of old-fashioned incandescent light bulbs. Come next year, the 100-watt incandescents will be illegal to manufacture or distribute. Come 2013, 75-watt bulbs go bye-bye. And in 2014, even the 40-watt varieties will be no more.

Strictly speaking, the old-style bulbs were not banned under the legislation signed in 2007 by President Bush. Rather, the law set “energy efficiency” standards that incandescents can’t reach.

Think of it as one of the many gifts Uncle Sam bestows on General Electric.

GE, for its part, is defending the rising price of CFL bulbs by pointing out that the price it pays for a rare earth called europium oxide has risen 1,128% in the last 12 months. Things are tough all over.

So what’s behind China’s “temporary shutdown” of rare earths production?

“They’re busting the rare earths mafia in China,” said Byron King in this space on Jan. 20 of this year. That is, many of the mines were operating illegally, dumping loads of toxic chemicals into the soil and the water supply.

What’s more, the black market accounted for up to 40% of China’s rare earth production.

“Both of these are entirely unacceptable” to China, Byron said, “especially in a communist state with a nominally ‘planned’ economy. China leadership truly views rare earths as a strategic center of gravity for national economic development, future tech of many forms and, of course, military power.”

Fast-forward to last month: “Most of the country’s rare earth factories have been closed since early August,” the Times reports, “including those under government control, to allow for installation of pollution control equipment that must be in place by Oct. 1.”

At the same time, the government is consolidating dozens of rare earth companies, public and private, under the umbrella of four companies tightly controlled by Beijing.

So rare earths supplies that were already tight are getting tighter. The shutdown comes on the heels of years of tariffs and export quotas that have forced rare earth prices to rise as much as 40-fold.

You might think recent developments are bullish for rare earth stocks. And if you did, you would be wrong. An ETF made up of rare earth stocks, REMX, got hurt worse than the broad market in the August sell-off… and it’s been far slower to recover.

So what gives? “I’ve reviewed pretty much all of the RE plays out there,” says Byron. “I’ve looked at the web sites, reviewed the technical data, perused the 43-101s [regulatory documents], attended presentations and even met with management of many firms.

“There are a lot of good, sincere people out there, all working very hard to build out their respective projects. Any number of these rare earth companies will pull through, eventually.

“But ‘eventually’ may be a very long time.”

Dave Gonigam
for The Daily Reckoning

Awaiting the Eventual Return of the Rare Earths Market originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

The disaster in Japan slammed the uranium sector…and it still has not recovered. But this washout looks like a buying opportunity, as long as you’re not in a hurry to make a big gain.

I won’t go into the Japan-specific details, but for our purposes, it’s a safe bet that the Japan disaster means that we may not see a large-scale “nuclear renaissance” during the next generation.

Why not? Well, just consider the ability of people to mobilize opposition to large-scale energy development — especially something with the media-driven fear factor of nuclear power. Looking ahead, it’ll be hard for any new nuclear program, anywhere, to make headway. Yes, we’ll see developments here and there — more in China, say, than in the US. But we probably won’t see a global breakout into the nuclear power space.

Still, the fact is that the world has an installed base of over 400 nuclear power reactors, and these systems generate almost 20% of the world’s electricity. The problem is there’s not enough new uranium coming out of the mines and mills of the world to keep these plants running. One key source of nuclear fuel for the past decade has been decommissioned atomic warheads from the Cold War era. But that source is soon about to dry up — in 2013, to be precise.

The investment point is there’s a looming uranium shortage, within the next two years. Two years? That may as well be tomorrow in terms of finding new sources of industrial supply. Two years really means “now,” as in today. This means that the existing players have to step up the pace. It also means that there’s room for new players and growth within the primary uranium and yellowcake spaces.

In my investment letter, Oustanding Investments, I recommended Cameco Corp. (NYSE:CCJ) early in 2006. The stock is down 40% since then! You see, even the nation’s #1-rated investment letter misfires from time to time. Usually, I would suggest cutting losses long before a stock had fallen this much. But I think Cameco is an exception. It is a blue chip company that has faced some very bad luck.

Canada-based Cameco is one of the world’s largest uranium producers. Its shares were trading at over $42 each early in 2011, but crashed to below $30 after the Japan disaster in March. Then, over the past summer, Cameco shares have continued drifting lower. Today, they trade for $21.75.

Last week, Cameco launched a $520 million hostile takeover bid for a much smaller uranium firm named Hathor Exploration. Cameco wants to get hold of Hathor’s high-grade “Roughrider” deposit in Saskatchewan’s prolific Athabasca Basin. Whatever the technical merits of the transaction, this news just dropped Cameco shares to near $20.

At the current share price, Cameco has a price-earnings ratio of 18, with a dividend yield of 1.9%. Yet if uranium pricing firms up over the next year — leading up to the post-2013 looming shortage — Cameco’s earnings could and should increase strongly. So here’s a large company whose shares, on the fundamentals, are poised for a recovery.

Yes, there’s a downside with Cameco from here. But in my view, there’s a strong upside to Cameco as well. Indeed, I think the chances of Cameco going to $30 are better than the chances the share price will drift too far below $20. Cameco is a buy.

Regards,

Byron King
for The Daily Reckoning

Looking at Uranium…Again originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".