small scale NUCLEAR POWER…MAYBE THE NEXT BIG THING? NUSCALE POWER – SMR-NYSE

By
Keith Schaefer
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0

My big question with the energy transition has always been: where’s the baseload going to come from?

We want to get rid of oil.  Okay.  Around 80% of a barrel of oil is used in transportation.  If we electrify everything – EVERYTHING – you get rid of a lot of oil demand.

But now you need a whole bunch more electricity.   It can’t come from gas, oil, and certainly not coal.

How do we get all this electricity, all day, and all night, from wind, solar and water?

Batteries?  Storage?  That always the response, but I’m skeptical that can do it on its own. 

Battery tech is hitting more walls than it is scaling.

I’m not the only one to have a healthy skepticism.

Just last week Tennessee Valley Authority (TVA) CEO Jeff Lyash said that “without technological advances” the Biden administration goal of 100% renewables by 2035 is not going to happen.

Lyash cannot be brushed off easily.  The TVA is the largest public utility in the United States.

Lyash pointed out that electricity use could as much as double by 2050 as we shift all our transportation to electric.  We don’t have a clear path to meet that demand.
 

HOW DO WE GET THERE?

 
Lyash called out technologies that need to move ahead fast if we want to hit our zero-emission goal.

Energy storage, carbon capture – you’ve heard those before.  But he also named a third, one that is often maligned – small modular reactors (SMRs); small nuclear really.

As a potential solution to our zero-emission goal, SMRs get a pretty bad wrap.

When four Canadian provinces – Ontario, Alberta, Saskatchewan and New Brunswick – recently announced plans to jointly develop SMRs, it set off a flurry of commentary.

Canada’s Globe and Mail business newspaper and The Toronto Sun both published more than one article throwing shade on SMRs.

The arguments against SMRs are not without merit.  But many of these arguments could be said of any new technology: it’s expensive, its uncertain, its not yet in operation.

Those ARE challenges.  But they can be overcome.

When I see broad bashing of a new technology that clearly holds some promise, I wonder if it has more to do with where the interests lie than the merits of the technology itself.

 

NUSCALE POWER – THE SMR PLAY

 

To help form my own opinion, I decided to dive into a newly public company (A SPAC no less) right in the middle of the SMR debate – NuScale Power Corp (SMR – NYSE).

NuScale is a provider of SMR technology.  They have been developing an SMR module for over 20 years.

They recently signed their first deal, with Utah Associated Municipal Power Systems (UAMPS) to provide a 460 MW plant by 2028.

NuScale reached an agreement with Spring Valley Acquisition Group in December to go public via a SPAC.

The SPAC gave NuScale $413 million of cash, including $180 million from a PIPE financing.

NuScale says this will be enough cash to get them through to cash flow positive – expected to happen 2024.

The SPAC values NuScale at $1.9 billion.  This is NOT a cheap name.

I am skeptical of any SPAC in this market.  NuScale has many of the same markings of past, failed SPACs – long dated forecasts, revenue growth to the 2030s, 2026 EBITDA projections.

We know where that sort of thinking got us.

But there is reason to keep an eye on NuScale.

 

SUPPORTED BY INDUSTRY AND GOVERNMENT

 

First, this is not some fly-by-night operation.  NuScale comes out of Fluor (FLR -NYSE). Fluor has been building BIG mines around the world for decades.

Fluor owned 100% of the company pre-SPAC and still owns ~60% of them now.

Second, NuScale seems to have the US government on its side.

Even as the Canadian media turfs the idea of SMRs, the US Government is taking a different tact. 
The DOE has been shoveling money to NuScale for over a decade.

In 2013 Nuscale won $226 million in funding from the DOE, outcompeting bids from Westinghouse and General Electric.

In 2020, after receiving design approval from NRC, the DOE awarded Utah Association of Municipal Power $1.4 billion to assist them in de-risking that first NuScale project.

In total, Nuscale has received $500 million from the DOE over the course of the last 10 years.  They have another $200 million of award still coming.

According to NuScale management, the Biden administration has been “extremely supportive”.  The Build Back Better plan added another $10 billion towards nuclear.

The support has been bi-partisan.   Management says that the Trump administration was supportive as well.

It also extends outside of the US.  Japan and Korea have moved ahead with investments in NuScale.
Samsung C&T Corp took down 5.2 million shares as part of the PIPE investment.

The Japan Bank for International Cooperation, which is a financial arm of the Government of Japan, invested $110 million into NuScale.
 

FIRST MOVER – OR ONE OF THEM

 
It has been a long road.  NuScale has been developing their tech since the early 2000s. 

They applied for their regulatory license in 2016.  It wasn’t until 2020 that the NRC approved the application.

Their process is patented: 425 patents issued and another 209 pending.

Yet even though the tech has been in development for 20 years, it is still considered a new technology. 

In fact, this is one of the points the naysayers love to point out.  It took 20 years!  We still don’t have one in operation!  It must be a dud.

Well, maybe.  The first solar panel was made in the 1950s.  The first wind turbine for power generation in the 1880s.  Sometimes technology takes time.  Especially when you are dealing with a nuclear rod.

The NuScale module is a very simple machine.  A modular design, this is a light water reactor, a 70-year-old technology.  No fancy materials, most of it is off-the-shelf.  It is like the big nukes that are used today, only smaller.

One power module can produce 70 MW of electricity.
 

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Source: NuScale April Investor Presentation

Modules scale up to 12 per plant which gives you a size of 924 MW or the size of a large coal plant.

NuScale has 3 standard configurations for their design:
 

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Source: NuScale April Investor Presentation

The target sites are existing coal plants.  NuScale counts 132 coal plants that need retiring by 2050 – all sites ripe for SMRs.

The footprint fits because the scale is MUCH smaller than a big nuke site.  A 12-module plant takes up about 30 acres, whereas a traditional nuclear plant has a 10-mile radius.

 

NOT THE ONLY GAME IN TOWN


 
NuScale said on their conference call in December that they were ahead “5-7 years of any other US technologies”.

That may be the case.  I’m no nuclear physicist, so far be it for me to compare tech.  I will say that NuScale is not the only game in town.

Bill Gates funded TerraPower is another US SMR developer.  Like NuScale, TerraPower is getting big-time funding from the Federal Government.

TerraPower was almost first out of the gate.  Before the Trump administration put the kibosh on China, where TerraPower was in line to build the first SMR there, a 600 MW reactor. 

With China on hold, TerraPower is still on target to build their first reactor–now in Kemmerer Wyoming, with it being operational by 2028.

The TVA and Ontario Power General (OPG) both announced SMRs in the last few months.  The utilities are partnering on their development, using a common platform – but notably it’s not from NuScale.  Instead, TVA and OPG are going with a Ge-Hitachi BWRX-300 reactor.

 

THE MARKET IS BIG… I THINK

 
Even with the competition, there is plenty of opportunity if SMRs catch on.  This is a potentially huge market.
 

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Source: NuScale April Investor Presentation

The big questions are how many get built and when.

A recent decision by the Oregon Public Utilities Commission (PUC) highlights the challenge.

In March, PUC “declined to acknowledge” – a polite way of saying they aren’t endorsing but also not vetoing – a plan by PacifiCorp (PPW – NYSE) for a 345 MW SMR to be built by TerraPower. 

Now to be clear, the project isn’t dead.  PacifiCorp said they would “move forward in pursuing advanced nuclear technology”.  TerraPower is intent to move forward as well. 

But it does show that this could be a bumpy road.

Another datapoint: recently Duke Energy (DUK – NYSE) reduced their own expectation for their installed SMR capacity in the next 10 or so years from 1,350 MW to only 300-600 MW.

So how many get built remains a big question.  But you can’t deny the growing interest.
 

SMR’S GAIN STEAM

 
NuScale has said they had 140 opportunities in their pipeline.  These ranged from “very developed” to early stage.

They have publicly announced 20 memorandums of understandings (MOU).
 

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Source: NuScale April Investor Presentation

Their first deployment is going to be with UAMPS, where they have an agreement signed and are ramping up the early-stage development.  The UAMPS SMR is expected to deploy 2029.  This is a VOYGR-6 plant, meaning 6 modules producing ~460 MWe of power).

The plant is part of UAMPS initiative to replace 700 MW of coal power by the end of 2030. 

Next steps for the project are ordering materials for the power module by the end of this year and submitting an operating license to the NRC in 2023.

NuScale noted that there has been a surge in interest among other utilities with the Russian-Ukrainian war lighting the spark. 

NuScale has an aggressive forecast for deployments.  They expect to deliver 16 modules in 2029 (6 of those being the UAMPS project).  That will scale to 85 modules by 2033.
 

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Source: NuScale April Investor Presentation
 

NUSCALE ECONOMICS

 
NuScale will earn revenue through the life of each SMR project. Revenue starts about 9 years before the SMR is deployed.

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Source: NuScale April Investor Presentation

Revenue scales up in the four years right before deployment.  Service and maintenance revenue continue over the life of the SMR.

NuScale collects payments from the customer in advance, which they can use to acquire materials and parts. 

They are always running a cash surplus.  This should allow them to hit cash flow positive sooner.

If there is a “gotcha”, it’s in the accounting, which is caused by GAAP.

GAAP accounting will not let NuScale recognize revenue until the modules are delivered.  That means that while NuScale will be collecting revenue for years up to deployment, that revenue won’t be recognized on the income statement until 1-2 years before deployment.  It will be a bit messy.

If they can meet their forecast, the cash will flow.  Cash EBITDA is expected to reach $1.6 billion in 2028 – about the current enterprise value.  Free cash flow will be nearly $1.2 billion in 2028.
 

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Source: Nuscale Power April Investor Presentation
 
 

THE NUCLEAR ELEPHANT IN THE ROOM – COSTS


 
The big issue with nuclear (other than safety) is costs.  Can we trust the cost projections and will the project produce cheap power?

A report released by the Institute for Energy Economics and Financial Analysis (IEEFA) in February scrutinized the cost of NuScale’s project with UAMP.

According to the report, in 2015 the company said the entire capital cost “would be $3 billion, which has more than doubled to $6.1 billion, even before construction begins”.

The IEEFA report also says that costs of electricity will be significantly higher than solar or wind.
 

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Source: IEEFA Article

I suspect this report was in part the source for some of the negative Globe and Mail and Toronto Sun coverage on SMRs.  On the surface, it looks like a kill shot for NuScale.

But maybe not.  I dug up the most recent NREL report–National Renewable Energy Laboratory–on Solar PV + Storage costs (here) and the devil seems to be in the details. 

The costs of solar PV plus storage is indeed around $55/MWh.  But that is with something called the ITC – investment tax credit.
 

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Source: NREL: U.S. Solar Photovoltaic System and Energy Storage Cost Benchmark: Q1 2020 – Jan 2021

Without the ITC, costs are $80+/MWh, or above NuScale’s estimates.

The analysis is also based on something called LCOSS accounting.  LCOSS stands for “Levelized cost of solar plus storage”.  While the details make my head spin a bit, NREL themselves says that “it is important to remember that LCOSS does not necessarily tell us which option is the most economically viable”

Now I for one don’t know whether NuScale’s costs are accurate or even NRELs for that matter.  I also don’t know which technology is going have lower costs 10-years from now (though assuming that solar and wind will see improvements while SMRs does not seems a little biased to me).

But tax credits aside, it looks to me like NuScale’s SMRs are in the ballpark.
 

MAYBE, THE NEXT BIG THING?

 
Energy is always after the next big thing.

Shale oil, LNG going global, these were all HUGE, decade long stories that made (and lost) millions and changed the energy landscape.

Each of these next-big things has one thing in common.

It is trying to fill the energy gap.

Today there is a BIG energy gap on the horizon.   Small nuclear could help fill it.

Small nuclear could be a big story.   BUT: I can’t say that for certain.

I see a media that is not on board.  I see government’s that are onboard.  I see hesitation, baby-steps.  It is going to be uphill, but not impassable.

Meanwhile, as for NuScale, if SMRs takeoff then the stock will be the real deal.  But it is far from cheap right now given where we are at.

The best thing to do I think is watch and wait.  See what the regulators approve.  See what the utilities say on their calls.  See where solar and wind costs actually go – not where they are supposed to go.

We already see what solar and wind did to Europe when the wind stopped blowing and it got cloudy for a while.   When Mother Nature does not cooperate, having a nuclear baseload that provides stability to the grid seems like a pretty good idea to me.

GOLDEN SHIELD GSRI-CSE IS THE NEW MICRO-CAP STOCK of LEO HATHAWAY

By
Keith Schaefer
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0

Golden Shield Resources (GSRI:CSE, 4LE0:FRA) is Leo Hathaway’s new micro-cap company–with just 28 million shares out–that holds the 100% owned Marudi Mountain asset—one that Leo believes has the potential to be a multi-million ounce gold deposit.

And he is backing that up very quickly with some BIG numbers—in the first drill program he hit 9.1 grams per tonne gold (g/t Au), and gave the Market a much larger hint of what Marudi could be.

GSRI has only been listed for two months—nobody knows this story. That’s why retail investors—usually the last to know—have the rare opportunity to get in on the ground floor ($20 million market cap) with Leo.

Golden Shield is backed by mining sector billionaries because they know exactly what Leo can do—because he has made them so much money before.  They hogged the only round of financing Leo has done so far.

Golden Shield is being built around a big (5500 hectare) out-of-the-way asset with incredible geology.

Leo and his team brought a new thinking to the Marudi project—and hit BIG on the very first round of drilling. New lobe, open at depth, much higher grade.  Dream start.  Hitting on every cylinder.

With enough money to start his next round of drilling, Leo will keep the news flow going steadily through 2022.
 

Marudi Mountain – The Opportunity Is Clear As Day
 

 
Marudi is located in Guyana, the only English speaking country in South America. Guyana is absolutely booming on the back of major oil discoveries and massive infrastructure spending.
 

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To run Golden Shield Leo has partnered with CEO Hilbert Shields——Guyanese born, Canadian since 1980s—the perfect guy with Leo on this play.

His career has touched many major gold assets in Guyana Shield—he was a big part of the team that discovered Omai Mine—and that stock went from 40 cents to $6 as the asset went from acquisition to feasibility and became a producer.

Shields was also on the team that discovered the +10 million ounce Rosebel gold deposit in Suriname right next door, owned by IAMGold.

So now we have TWO men at the helm who have created a lot of wealth for shareholders.

Guyana’s region at the northern tip of South America is host to the Guiana Shield (+110 million ounces of gold discovered) the geological sister of western Africa’s Birimian Shield (+275 million ounces of gold discovered).

Marudi is in southern Guyana—which is much more remote and much less explored than the north.  Leo liked that—off the beaten path.  And, Hilbert had actually been on the property 20 years, ago, and knew there were sniffs of very good gold grades.

The two men studied the data, and realized that not only was there a vast open property with historical high grade on it—they had a sense of what others had missed.

And it didn’t take long to prove themselves right. The first thing they did was a detailed re-interpretation of the geophysics, which made multiple drilling targets as clear as day: just follow the blue in the map of the property below——  the existing discovery (the oblong white object) at the Mazoa Hill target is in the middle of it. This is the one with a historic resource of 269,700 ounces in the Indicated category and 87,600 ounces in the Inferred category.
 

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So far, all of those squarely deep blue areas are like Mazoa and when Leo’s team goes onto those areas, they are finding surface mineralization and often rock with visible gold.

That means that potentially there is a huge number of other Mazoa-Hill-like-resource-accumulations across the project. Everywhere that is blue on that map is ripe for exploration and almost all is undrilled.

Almost 95% of the property is untouched and all of that blue in the map above deserves attention. They’ve got seven other prospects that all have similar characteristics to Mazoa Hill.

Surprisingly, nobody else had interpreted the geophysics in this way.

With that data, and the idea that previous operators had NOT been drilling perpendicular to the way they thought the orebody was trending—they set out for their first drill program.

And wow, did they hit a whopper.

 

Marudi Mountain’s Evolving Model


 
They came up with a drill hole of 9.1 g/t Au over 50 (FIFTY) metres.  And the way they drilled it now makes them think there is an entirely new lobe of high grade mineralization to be found.

Now folks, listen to me here—this is early-stage drilling.  I can’t promise you there is a multi-million ounce deposit here. But I know Leo, his track record, and that he hit a hole like this on the first round—and the stock is still just 70 cents—has me excited!

Leo and team’s initial drill results at Mazoa Hill have changed the entire geological model—which is what they thought might happen.  They had a good sense it would be open at depth, but they had no idea they could start to model another lobe completely.

See OLD Interpretation of Mazoa on the left.  Then see NEW interpretation. See a difference?
 

GSRI drill holes


Drilling so far intimates that this is wide open to depth.   The next drilling—which will be starting soon—will step out until they find the bottom of this big structure. 

If these grades hold up, with drilling you can add a lot of ounces quickly. 

These drill results will be coming steadily through 2022.

And this is just one target. There are seven high priority targets to go after next. 

Marudi now has HUGE potential. They hit a crackerjack hole.  It makes Leo and Hilbert—who have a lot of success backing them—think this is not just higher grade, but bigger tonnage.

With just a small tweak in thinking, Leo is seeing that this could be a much bigger deposit than even his team thought.  There are great grades at surface and now they are also getting great grades at depth.

Hilbert says this is how all these Guyana Shield assets develop; start with one pod, and then over time several more get found to give a mine critical mass and into development.

 

I Wish All My Investments Were This Easy
 

 
All of that blue on the geophysical map is the opportunity. Almost 95% of this promising property is completely untouched.

The first terrific hole would stand up as one of the best holes in any deposit anywhere.

They find mineralization all over the property.

They have a new lobe, increased depth potential, and an upcoming drill program run by a guy who knows the geology, the people and the government like the back of his hand.

Oh, and that guy has a multi million-ounce discovery on his own, without Leo, in Guyana already.

There is already a historic gold resource at just Mazoa Hill and numerous addition prospects to go and test.  All of this is packed into a company with an incredibly tight share structure (only 28 M shares out!!) , led by Leo who has billionaires lining up to bet on him. 

On any kind of good news, he has a network that can bring money to the table instantly.

And there’s now newly discovered geology here that has high grade AND, size.

Great team, great structure, great hit on the first program, enlarging both grade and size potential. 

But this is exploration. The price you pay for a potential 10-50 bagger in the geology world is fickle.

They don’t all turn out like you want.  But we couldn’t ask for a better jockey.

And it looks like he’s riding a thoroughbred.  Drill results will be steady throughout 2022.  Be ready—I am. I own stock.
 
Sources:

  1. https://statisticstimes.com/economy/country/guyana-gdp-growth.php
  2. https://archive.macleans.ca/article/1985/8/12/a-high-risk-hunt-for-guyanese-gold


Golden Shield Resources has reviewed and sponsored this article. The information in this newsletter does not constitute an offer to sell or a solicitation of an offer to buy any securities of a corporation or entity, including U.S. Traded Securities or U.S. Quoted Securities, in the United States or to U.S. Persons. Securities may not be offered or sold in the United States except in compliance with the registration requirements of the Securities Act and applicable U.S. state securities laws or pursuant to an exemption therefrom. Any public offering of securities in the United States may only be made by means of a prospectus containing detailed information about the corporation or entity and its management as well as financial statements. No securities regulatory authority in the United States has either approved or disapproved of the contents of any newsletter.

 
Keith Schaefer is not registered with the United States Securities and Exchange Commission (the “SEC”): as a “broker-dealer” under the Exchange Act, as an “investment adviser” under the Investment Advisers Act of 1940, or in any other capacity. He is also not registered with any state securities commission or authority as a broker-dealer or investment advisor or in any other capacity.

SHOULD YOU GET KOLD THIS SPRING ? KOLD-NYSE–SHORT NATURAL GAS

By
Keith Schaefer
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0

I want to tell you that you HAVE to short natural gas.
 
I want to tell you that the $8.50/mcf natural gas that we saw this week is crazy.  
 
That the price is going to come down hard.  The market is hugely backwardated–meaning prices are much lower in the months farther out on “the strip”.
 
The easy way to get short is through the levered inverse ETF Proshares UltraShort Bloomberg Natural Gas (KOLD – NASDAQ).
 
I want to tell you this because everything I have seen over the last 20 years is telling me this is the perfect setup. I mean $8.50 gas? $8.50 gas!
 
I have lived through 20 years of watching every pop in natural gas come right back down as producers ramp production and flood the market with product.
 
My gut instinct when I see a 8-handle on gas: Sell it All.
 
But I can’t do it. I can’t tell you to short this.
 
I’m not saying be long. I’m just saying don’t short. Sit this one out.
 
Why? Because there are two big reasons that natural gas might not go down this time.
 
I know, I know, I’m really going out on the limb here. Might. Maybe. But again, this is $8 gas we are talking about here. This should be a sure thing. You should buy KOLD like it is a blue light special (sorry, showing my age there).
 
Instead, two big shifts are going on with natural gas. These shifts make it really hard to know the right price for gas. It could be different this time. At least for a while. 
 

PRODUCER CALLS ARE DEPRESSING

 
I just finished listening to my 7th natural gas producer conference call. It is hard to believe that natural gas is $8+ after listening to these execs. You would be hard pressed to find a more dour group.
 
The sour mood is not without reason. These are executives schooled in the era of production growth. Now, with a gas price that should be fueling hyper-growth for their business, most are sitting around with their hands tied.
 
How so? Takeaway capacity. It is just not there. Building it could take years.
 
Consider EQT (EQT – NYSE), which produced 5.1 bcf/d of natural gas in the first quarter (about 5% of US production). CEO Toby Rice basically said they would not, could not, increase production in response to the strong gas price.
 
We’re sticking to maintenance mode. We’ve been pretty vocal about this. Without more pipelines, the prudent thing for us to do is to continue to stay in a maintenance mode. So that’s been our mentality in the past. It’s our mentality until we start getting some more pipelines put in.
 
Instead, EQT will be directing cash to buybacks and dividends.
 
Ditto for CNX Resources (CNX – NYSE), producer of 1.7 bcf/d of natural gas and liquids, almost entirely in the Marcellus and Utica basins. CNX CEO Nick Deluliis had some particularly harsh words.
 
The domestic natural gas, oil and pipeline industries in the nation, they can’t ramp up production to anything close to the levels that the U.S. and the EU is clamoring for anytime soon. And that’s not because of industry unwillingness…
 
No. Instead, it’s simply and starkly because the policy is consciously and methodically looked to strangle infrastructure investments in the pipes and in the processing and the power generation and, yes, in the LNG infrastructure.
 
On top of the regulatory environment CNX sees the capital markets as second constraint. Their solution? Become debt free.
 
We believe access to the capital markets for our industry is going to continue to be more restricted… to manage this risk, we believe the prudent course under our sustainable business model is to maintain a debt level and a maturity schedule on a liquidity level, whereby we never need access to debt markets.
 
Same story from Range Resources (RRC – NYSE). No plans to raise capital expenditures. 
 
Coterra Energy (CTRA – NYSE), the recently merged Cabot and Cimerex play, produced 3.1 Bcf/d of natural gas in Q4. Conterra guided to a decline to 2.7 – 2.85 Bcf/d in 2022.
 
Coterra is actually increasing production, just not natural gas. Coterra’s production is balanced between the Permian and Marcellus. They are putting their capex towards the Permian, which favors oil over gas.
 
Only Southwestern Energy (SWN – NYSE) has offered a glimmer of growth among the mid-cap names. Southwestern produced 1.8 bcf/d of natural gas in Q1, up from 1.7 bcf/d in Q4. Production should reach 2 bcf/d by year-end.
 
What was the reason for the increase? Simple – they can.
 
Southwestern has a large position in the Haynesville – in Louisiana – where regulatory constraints are loose and pipelines are aplenty.
 
With a couple of acquisitions late last year, Southwestern increased their Haynesville land position significantly. The Haynesville is now the focus of their capital spend.
 
But even Southwestern has constraints.  While there is growth in the Haynesville, it will be offset by declines in Appalachia.
 
Comstock, another Haynesville play that produced 1.3 Bcf/d in Q4, is also forecasting modest growth – 4-5% year-over-year. Comstock report Thursday and it will be interesting to see if they adjust that forecast up at all.

THE STORY OF THREE BASINS

 
There are really only 3 basins on the Lower 48 that can put a meaningful dent in natural gas production. 
 
Appalachia, Permian and the Haynesville.
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Source: Morgan Stanley

Most of those miserable executives talking about capacity constraints produce mainly from the Marcellus/Utica in Appalachia.
 
That leaves the Haynesville and the Permian, where there also appears to be plenty of takeaway capacity.
 
But natural gas is not the reason you drill the Permian. Gas is associated with oil production, and how much natural gas is produced depends more on oil prices than on natural gas.
 
Chevron (CVX-NYSE) has become a big player in the Permian. 
 
It accounts for 20% of their capital budget this year. Chevron sees lots of room for growth (both oil and associated gas):
 
“We don’t flare in the Permian and so we’ve got to be sure we’ve got gas takeaway or we aren’t going to produce any oil. And so it’s a high priority for our midstream tea.  But we don’t see pinch points anytime soon.”
 
Chevron’s US natural gas production grew from 1.7 Bcf/d to 1.8 bcf/d in Q1 largely on the back of the Permian. They expect to grow Permian production 5-10% this year.
 
The other big Permian player, Exxon (XOM-NYSE) produced 560,000 boe/d from the Permian in Q1 and is expecting to grow Permian production 25% this year.
 
Pioneer Natural Resources (PXD-NYSE), another big Permian producer, produced 0.8 bcf/d of natural gas in Q4, which was double the year before.
 
Pioneer CEO Scott Sheffield had been one of the loudest voices saying he would not grow production. 
 
We’ll have to see what he has to say when Q1 results are released Wednesday.
 
Occidental Petroleum (OXY-NYSE) another large Permian and Rocky Mountain producer with 1.3 bcf/d production in Q4, said at the time of their Q4 release: “ we have no need and no intent to invest in production growth this year.”
 

 INCENTIVES NOW AND IN THE FUTURE

 
 What complicates matters this time around is that we are not just incentivizing natural gas demand for next winter. We need to look further ahead.
 
Since the Russian-Ukrainian war, the gas market has taken more of a forward-looking view, realizing that it has to replace Russian gas quickly.
 
LNG, LNG, LNG. The world needs more LNG. It is about to get it.
 
When the company reported two weeks ago, Baker Hughes (BKR – NYSE) CEO Lorenzo Simenilli put out an extremely bullish LNG forecast to 2030.
 
“Given the current LNG price environment and the quickly changing dynamics, we believe that global LNG capacity will likely exceed 800 MTPA by the end of this decade to meet growing demand forecast. This compares to the current global installed base of 460 MTPA and projects under construction totaling almost 150 MTPA.”
 
That works out to almost 50 Bcf/d of new installed capacity in the next 8 years.
 
In February Shell (SHEL-NYSE) gave their annual LNG outlook. 
 
Near the end of the conference call, they gave us their estimate of the supply gap that was developing.
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Source: Shell 2022 LNG Outlook Presentation

 
This was before the Russian invasion of Ukraine.
 
What Baker Hughes is now telling us is that this supply gap, which already looked pretty bad, has grown – potentially by a lot – and we are going to need a lot more gas over the next 5-10 years in order to fill it.
 

 WHERE IS THE GROWTH GOING TO COME FROM?

 
When I step away from all these company calls and consider how much gas we will need if Baker Hughes and Shell are right and I weigh that against how much we can get from our big basins given the constraints… well, I just find it hard to be too bearish.  
 
Producers in the Appalachian are telling us they can’t grow–but I’m not convinced that’s true. What certainly is true is that there is no more LNG exports for a couple years–so any big demand increase is capped.  
 
Producers from the Permian can grow, and some of them will grow, but others are reluctant, and anyway the growth depends far more on oil prices than gas. The Haynesville can certainly grow, as can the second-tier basins, but at what price will they grow enough?
 
And remember–they are growing production now for the hope of big LNG prices when the next US LNG train comes online–not for another couple years.
 
That is the question that the market is trying to figure out. What price of natural gas do we need to get ready to meet all this LNG demand?
 
In other words, $7 gas is incentivizing the marginal basins to produce more gas now so the gas is there where the LNG comes.
 
We know that more gas will come as prices rise. Sentiment of these execs be damned. When a wildcatter sees $$$’s they will pick up the drill bit. 
 
Now is $7-$8 the right price to incentivize production? I still think its too high. It could be $5. It could be $6. It probably isn’t $4, and it definitely isn’t $3.
 
But a finger-waving guess that $7 is too high is far from a good reason to go short natural gas. 
 
There are times to be long and times to be short and times to just step aside. Let the market figure this one out first. This is one of those times.
 
One smart way to get long this trade (and short natgas) via KOLD is to do it as a paired trade where you go long a natgas producer. Because multiples are low, the world still has to figure out how to replace Russian molecules—sentiment could keep these stocks higher than the highly backwardated natgas curve.
 
(I just bought a big position in a fast growing natgas play this week)

Keith Schaefer
Publisher, Investing Whisperer 

Our Oil Reliance On Putin Is Scary — Our Food Reliance Even More Concerning

By
Keith Schaefer
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As I’m sure you noticed———the world has just changed.

For years now we’ve ignored the fact that Putin’s Russia is a threat. 

Reality has hit home.  Reliance on Russia for anything important is now a major concern for every Western Country.

The obvious problem is energy, but the role that Russian and Ukraine play in feeding the world is huge. 

Russia/Ukraine combine for a third of the world’s wheat and barely exports…….while Russia is the world’s single largest supplier of FERTILIZER.

No surprise then that fertilizer prices have skyrocketed since the invasion broke out.

Food prices are headed the same way.  Bloomberg indicates that wheat has traded between $3 and $6 per bushel for decades…..it is now over $13.

This is going to hurt us here in North America.  For developing countries the problem is much bigger——people are going to be priced out of the food market and human beings are going to starve.

If you think energy security and independence is important then how big of a deal to you think FOOD INDEPENDENCE is going to be going forward?

This invasion is going to continue to pressure prices of everything but beyond that the West had already realized that we need to have our own supply chain IN ALMOST EVERYTHING.

We need to get every ounce of food that we possible can out of our productive land but we can’t continue to blast that land with chemicals that are also destroying it.

Thus we come to our solution.
 

Bio-Fertilizers Are The Future



Microbial activity is essential to the soil.

Though we can’t see them in action without a microscope, beneficial soil bacteria are an active part of nutrient absorption and are spread within the soil. Without these microbes, the organic cycles that allow plants to naturally use nutrients will not work properly.

The use of synthetic fertilizers, fungicides, and pesticides destroys these bacteria over time.
Bio-Fertilizers do not.

Bio-Fertilizers are designed to restore the soil’s beneficial bacteria and microbial health. These biological fertilizers contain beneficial bacteria cultures and nutrient solutions to support both plant and soil health.

They are ideal substitutes for conventional fertilizers that have been causing soil degradation.

Bio-Fertilizers are substances that contain living micro-organisms, which colonize in the soil or interior of the plant.

Working with natural systems, rather than against, natural fertilizers feed the plant by feeding the soil. Think of using traditional fertilizers as a body-building steroid for the plant for that one season—but steroids can be harmful for human body builders (addiction/hair growth/mood changes/higher risk of infection).

Bio-Fertilizers are more like eating super healthy every day, and not using any steroids. Bio-Fertilizers leverage the soil’s biology help unlock nutrients that are tied up in the ground, improving ROI for farmers.

It works!  The key being the biochemical reaction that mimics the conventional fertilizer production process to deliver nutrients to the plant.

Regenerative fertilizer is the future.

The opportunity here is huge and it is an inflection point in the world of agriculture. 

Western countries simultaneously need to produce as much food as possible, domestically source as much fertilizer as possible and IMMEDIATELY find a replacement for the fertilizers that have massively degraded our essential topsoil.

My #1 junior stock is a fast growing fertilizer PRODUCER that comes complete with offtake agreements for every bit of BioFertilizer they can make for the next 5 years.

That means that as fast as they can produce it customers have already committed to buy it.

What an opportunity.  Insatiable demand for what you produce.  All that this company needs to do is ramp-up that production.
 
To get the name and symbol CLICK HERE

WE’RE KILLING OUR SOIL WHEN WE NOW NEED IT MOST HERE IS THE SOLUTION

By
Keith Schaefer
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0
Fertilizer stocks have been on a tear.
 
This is just the start of a major move. These stocks are going to have a long runway.
 
There multiple tailwinds behind these companies——each of which are going to be supportive for years to come.
 
It all starts with a problem here at home.
 
In the quest for ever-greater productivity from our farmland — using traditional fertilizers, herbicides, pesticides — is KILLING our soil. 
 
I’m not kidding. And it’s polluting our water bodies too.
 
While the United States has some of the richest soils in the world, decades of agricultural abuse have taken their toll. The soil has been depleted of essential nutrients and bacteria and fungi. The organic material essential to plants is being depleted.
 
What happens is that the current herbicides and pesticides are like chemotherapy for cancer. It isn’t targeted——it kills the good bugs as well as the bad bugs. All of the fungi in the soil gets targeted. But the fungi and bacteria are essential.
 
The result has been soil degradation. Farmers are left with unhealthy soils that are less productive———which in turn makes them use even more chemicals to enhance their crop yield.
 
The world grows 95% of its food in the uppermost layer of the soil. Because of conventional farming practices, half of the most productive soil in the world has disappeared over the past 150 years. (1)
 
In the United States soil on cropland is eroding 10 TIMES FASTER than it can be replenished. The UN Food and Agriculture Organization have warned that the world could run out of topsoil in 60 years. (2)
 
Conventional fertilizer changes the pH of the soil, leaving it more acidic, more susceptible to disease, and less able to withstand changing moisture conditions.
 
Those conventional Chemical fertilizers known as Urea, MAP, DAP and AMSare all salt based and pH altering. They are soil bio-diversity’s worst enemy.
 
I want you to think about this issue in another way—Vitamin C is essential and important to your health. But if you chew it in tablet form to get it in your body, it erodes the enamel on your teeth.
 
So they are nutrients, yes, but if not applied properly it can have some harmful side effects.
 
The global annual application of Chemical fertilizer is equivalent to dumping 460 billion litres of bleach into the world’s soils. This is a global issue, not just North America.
 
Half of all applied phosphorous and two thirds of applied nitrogen is NOT used by crops – so it ends up in ground water contaminating natural environments.
 
To appreciate how big of a problem this water contamination is all you need to do is learn about the Gulf of Mexico “DEAD ZONE”. This is an area of low oxygen that can kill fish and marine life near the bottom of the ocean——and now measures 6,340 square miles!
 
 
Sources: https://www.epa.gov/ms-htf/northern-gulf-mexico-hypoxic-zone
 
That equates to more than four million acres of now uninhabitable ocean for fish and bottom species. If you understand the Butterfly Effect you will appreciate how worrisome and ecological impact like this is.
 
The cause of the Dead Zone is what the Mississippi River is dumping into the Gulf of Mexico. The Mississippi is like the drainage system for your street, but it connects 31 U.S. States and even parts of Canada. The excess fertilizer/herbicide/pesticide pollution from farm fields all along the Mississippi is now all getting dumped into the same place.
 
What happens from this massive pollution dump in the ocean is called hypoxia, where oxygen in the water becomes so low it an no longer sustain life.
 
We have a growing disaster both in the water and on land where the productivity of the soil is cratering. Food production takes up 38% of the world’s land surface and fears of global food shortages grow each day with the world’s population about to crest 8 billion—making this a very big deal.
 
We need to stop the destruction of the topsoil and pollution of our water.
The world can no longer choose between yield and soil health—fortunately we don’t have to.
 
Salt-less fertilizer is one of, if not THE fast growing sector of the global fertilizer market. The stock market is buying up these stocks like crazy—look at the chart of Verde Agritech, NPK-TSX:
 
 
I’m not buying Verde right now—I’m buying the next fertilizer stock to move. It too is growing incredibly quickly…
 
And their stock trades for less than 50 cents a share! I just completed a full report on the company—and you can get it risk-free by clicking HERE. 
 
Get the name, symbol, and my take on the upside that this incredibly cheap stock has—right now!
 
 

BANK WEAKNESS BODES WELL FOR GOLD STOCKS

By
Keith Schaefer
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0

Gold stocks look like they might be, just maybe, on the verge of a breakout. Maybe…

Can we believe it this time?

Any breakout in gold stocks needs to be taken with a healthy dose of skepticism. We have been through this before. It has been a decade of pain.

But… this time could be different. We have had a long consolidation. Central bank policy are at their backs. Valuations are very undemanding.

As well, one of my favorite contra-sectors to gold stocks – the banks – are breaking down hard.

Bank stocks are acting VERY sick right now. The SPDR Regional Banking ETF (KRE – NYSE) has taken it on the chin. It has failed to recover even as the market has put together a nice rally

Source: Stockwatch.com

Since putting in a top in early January, the KRE has stumbled hard. 

That only accelerated in the past couple of weeks.

Canadian banks are following suit. The Horizons Canadian bank ETF (HEWB – TSX) has also slipped – putting in an ominous head and shoulders pattern followed by a similar move down.

Source: Stockwatch.com

HOW DOES THIS IMPACT GOLD?

Banks and gold stocks do not always run-in opposition. In fact, on bear market bottoms both banks and gold often rally together. 

In 2016, after the market bottomed in February, both GDX and KRE rallied together for 8 months. After the COVID bottom of March 2020, banks and gold stocks rose together until the late summer.

But these are exceptions not the rule. More often these sectors move in opposition.

Past breakdowns in gold stocks have foretold big moves in the banks. This happened after the 2011 peak in gold stocks. It happened again after the 2016 bear market rally in gold stocks and again after the COVID rally.

Source: Stockcharts.com

What we have today is the opposite. If we are on the verge of a breakdown in the banks, could this forecast run in gold stocks?

There are a lot of reasons to think so.

THE WAR RALLY IS ON ITS LAST LEGS?

In my last blog post I gave you my view that this is a war rally.

This is not a fundamentally driven rally.  But it is also not driven by your usual bear market dynamics.

The stocks that have taken off are the same-ole names – meme, SaaS, momentum.

But the stocks that do depend on economic strength have hardly rallied at all!

The most economically relevant sectors are TAKING IT ON THE CHIN even as the market has rallied. Industrials, trasnports – especially trucking – have all been weak.

The banks have been most concerning of all.

In the United States the most comprehensive bank index is the S&P Regional Banking Index, which is the index the KRE tracks.

That is a broad ETF of 141 banks. None of these banks has more than 1.8% weighting in the index.

These are not too-big-to-fail banks. Citigroup (C – NYSE), Bank of America (BAC – NYSE), Goldman Sachs (GS – NYSE) that generate profits from trading and deal making: none of these are in the index.

The KRE is made up of its namesake – regional banks. These are the banks that do the heavy lifting for the United States – the job of making loans to businesses, developers, and homeowners.

Source: S&P Global

That makes the index a measure of the health of lending in the economy. 

Yet the KRE has been in free-fall the last two weeks. We saw a nasty reversal down off the inflation report Tuesday.  That means it is slipping on good news. Never a good sign.

WHAT IS DRIVING THE WEAKNESS IN THE BANKS?

Bank stocks are falling as investors question how they are going to make money.

Banks borrow short (deposits) and lend long (loans). That means that they need short term rates to be less than long term rates.

We are on the verge of the opposite – a negative yield curve. A negative yield curve means short term rates are higher than long-term rates – something that happened a couple weeks ago. While the spread has reverted back, it is still narrow, meaning a tough lending environment for banks.

Second, banks have recession risk. Recessions equal more bad loans, more charge-offs, and lower earnings.

No surprise that bank performance has gone south since the start of the Russian invasion and has not really recovered since.

Source: Bank of America Global Research

WHAT IS BAD FOR THE BANKS

IS GOOD FOR GOLD STOCKS

Gold stocks thrive on this environment. Uncertainty in geopolitics is good for gold. Recessions – or slow economic growth – is also good for gold stocks, as long as the risks don’t escalate to being systemic.

But it is real rates that are the big driver the yellow metal. While the short-term gyrations of gold are hard to make sense of, over the longer-term gold moves inversely with real rates.

Source: Bank of America Global Research

WITH GOLD STOCKS – NOTHING IS A SURE THING

Gold ALWAYS marches to its own drum. If you think it is about to break out – it won’t. If it looks like a sure short – it’s not.

It has been a VERY LONG TIME since we have had a strong rally in gold stocks.

Take another look at that chart at the beginning of the post. Since 2012 the gold miners have basically done nothing. While bank stocks have rallied some 300%!

Keep a healthy skepticism! But there are several factors lining up right now.

Looking at gold supply, one overlooked fact is that Russia produces a lot of gold. China produces even more.

Source: Bank of America Global Research

Gold company insiders are acting like something is up. According to Ink Research, gold insider activity remains “in a strong bullish pattern”.

Gold companies face the same inflation headwinds as everyone else. But most mines operate outside of the United States. While revenue is in US dollars, operating costs are in local currency. The US dollar has been relentless the last year, which has helped keep costs down. 

Finally, the charts sure look good. The chart of the largest gold stocks looks primed to break out. The Van Eck Gold Miners ETF (GDX – NASDAQ) looks primed to break out after consolidating at highs last seen in May.

Source: Stockwatch.com

Where am I looking for ideas? At mid-tier miners.  The mid-tier miners trade at a big discount to the seniors, even though in many cases they have better growth prospects.

Mid-tier miners are trading at just about net asset value (NAV). Senior miners are 70% higher!

Source: Bank of America Global Research

That gives A. room for catch-up and B. room for take-over premiums.

It has been 10 years – 10 YEARS! – since the last true gold bull market. 

We’re due! Maybe, just maybe this move in the banks is signalling an end to the drought.

EDITORS NOTE: I have an incredible gold stock coming to you very soon. It has The Dream Team geologically, and in raising money. Financed by billionaires. Explosive share structure. STAY TUNED!

HOW TO FERTILIZE YOUR PORTFOLIO

By
Keith Schaefer
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0

When I see a bullish trend in the markets (like rising commodity prices) I go look for the most highly levered (or high “beta”) play to that trend.

Generally, I say the lowest cost intermediate producer in any commodity is the best beta. There are lots of junior gold, copper & oil producers. There is only ONE junior phosphate producer: Itafos (IFOS-TSX/MCNB-NASD)

So early in this year, I bought a position at $1.50. Within three months, I was able to sell half at $3 and now I’m riding for free. I love free–especially in a cyclical industry.

Today, I’m sending you my initial report on Itafos from back then–so it’s dated now. While there is still a lot of upside in Itafos in the coming 12 months–paying down debt, re-negotiating debt, asset sales ($$$$), reducing the 70% shareholder–I’m just watching now.

I have now found a new junior fertilizer producer, with stunning growth and offtake deals with the majors that could see it increase production 500% in the coming 3-4 years and become one of the biggest successes in the history of my newsletter.

I have a report just like this one below–on my new #1 fertilizer stock. Fertilizer prices have skyrocketed as Russia banned exports. Itafos was just a double for me. I think this new pick–which trades under 50 cents a share–will be my biggest win of 2022.

This report gives you a flavour of how I write up my investments for my subscribers. I would urge you quickly download my report on my next fertilizer stock, where I lay out all the information in a similar manner.

 

COMPANY ANALYSIS

ITAFOS INC.

IFOS-TSX / MBCF-NASD

 

Itafos is the only junior fertilizer producer I see–and that’s where The Big Beta is. As you will read, the large and expensive debt they carry is a big drag here, but commodity prices and asset sales can remedy that in the next couple quarters.

The 70% controlling shareholder means the stock will never be liquid, but experienced management who also understand finance to me says the business will improve over time. Actually, the business is doing GREAT now, it’s just the finance picture that will improve.

I do own a small bit of stock here—20,000 shares at $1.50. But the lack of liquidity says I can’t really own much more.

I see 4 Big Catalysts in 2022—#1 being asset sales that de-lever the company. And #2 is re-negotiate the debt package. Then #3 is just continued high cash flow from the bull market in phosphate will be a catalyst over time. Number 4 is in Q3 when their Idaho mine should get its permit for Life-Of-Mine extension. But from here, the stock could do nothing until one of these things happens.

This bull market is also happening in grain prices, which is helping farmers pay for higher phosphate prices. 

 

QUICK FACTS

 

Trading Symbols:                                     IFOS

Share Price Today:                                   $1.35

Shares Outstanding:                                185 million*

Market Capitalization:                              $250 million

Net Debt:                                                  $225 million

Enterprise Value:                                     $475 million

* fully diluted

 

POSITIVES

 

– MANAGEMENT—former Potash Corp exec

– Cheapest valuation of a fertilizer producer in the public markets

– Cash cow right now. Will continue to generate A LOT of free cash if prices hold up (big de-lever)

– Top line is directly tied to the price of phosphate fertilizer

– US asset—located in Idaho

 

NEGATIVES

 

– BIG debt and it is not priced cheap

– Need to see permits granted for mine life extension

– Minimal float on stock/Castlelake owns 70% (so this will forever be a retail stock)

– Small fish in big pool competing against Nutrien (NTR-NYSE) and Mosaic (MOS-NYSE)

 

The Investment Thesis

 

At less than 3x next year’s EBITDA, Itafos is the cheapest valuation fertilizer play on the market.

At current phosphate prices, FCF (Free Cash Flow) could reach nearly half the market cap next year.

Itafos is so cheap for a couple of reasons.

First, no one has heard of this stock. Limited analyst coverage. No institutional ownership. 

Second, Itafos has no float. Float is what stock is available to trade (usually considered as all the stock NOT owned by management or 10% + shareholders). Itafos trades by appointment; it has no liquidity. And it may never have any because…

70% of the company is held by a private equity fund called Castlelake LP. Castlelake is a not a big player in the Ag business; far from it. And they also don’t appear in a hurry to divest their shares.

Third, Itafos is cheap because fertilizer stocks are cheap

Source: Company Disclosures

None of these companies trade at lofty multiples. In a market where stocks are far from “cheap”, here is a sector where you can say they are.

Investors are playing wait-and-see on the sector. Fertilizer prices have gone through the roof. Phosphate, which is the fertilizer of choice for Itafos, has seen an incredible price rise the last year, with DAP NOLA up 86% ytd 2021 ($400/st to $745/st) (DAP=Di-Ammonium Phosphate/NOLA=New Orleans Louisiana price hub)

Source: BMO Capital Markets

The question is, can prices stay here?

The work I’ve done says yes. Prices may not be going a lot higher, but I also don’t think they are going a lot lower, at least for another year or so.

The phosphate market is being driven by demand from India and reduced exports from China and Russia. This will continue for at least the first half of 2022. Strong US grain markets are keeping farmer affordability in line despite the current increases in the price of phosphate fertilizer.

Itafos is led by veterans. I spoke with their CEO David Delaney and Chief Strategy Officer David Brush a couple weeks ago. Delaney worked for Potash Corp for 30+ years, including 5 as COO. Brush has an equally long history in private equity.

The wind is at their back with fertilizer prices at multi-year highs. There should be plenty of cash to bring down debt. When they do the market should start to notice.

 

CONDA MINE AND PROCESSING FACILITY

 

Itafos main asset is Conda, a phosphate mine and processing facility located in Idaho.

Conda can produce up to 600,000 tonnes of fertilizer, or about 7% of production in the United States.

Two mines, Rasmussen Valley and Lanes Creek, deliver phosphate rock into the processing facility. Two additional mines, collectively referred to as H1/NDR, are at the permit stage and are expected to begin mining in 2024.

Source: Itafos Investor Presentation

Reserves at Rasmussen/Lanes Creek are enough to feed the plant until mid-2026. By that time, H1/NDR will be operating with enough ore for another 10+ years of production.

They are in the process of permitting H1/NDR. They submitted an Environmental Impact Statement (EIS) in October. They expect permits to be granted early next year.

Source: Itafos Investor Presentation

The Conda facility produces monoammonium phosphate (MAP), superphosphoric acid (SPA), and ammonium polyphosphate (APP).

MAP is the standard granulated phosphate fertilizer.  It contains about 10% nitrogen and 50% phosphate.

SPA is a very high (~70%) phosphate concentrated liquid. It is an ingredient in APP, which is used in fertilizers, flame retardants and as a food additive.

By tonnage, Conda produces about 70% MAP, 25% SPA and 5% APP.

The MAP is sold to Nutrien through a long-term offtake agreement. This agreement is up for renewal in 2023. 

The selling price is tied to the posted DAP fertilizer price (DAP is just a slightly different mix of phosphate/nitrogen than MAP). As you can see below, Conda’s revenue per ton follows closely to MAP prices.

Source: Itafos Filings

SPA and APP that is produced is sold directly to retail/blenders via an Itafos brand.

The facility requires a combination of phosphate rock, sulfuric acid and ammonia as inputs.

Ammonia is sourced from another long-term agreement with Nutrien. Like the MAP agreement, it comes up for renewal in 2023.

About 40% of the sulfuric acid is produced internally. The other 60% come from the Rio Tinto Kennecott mine, just southwest of Salt Lake City Utah.

Sulfuric acid supply has proven itself to be risk. Twice in the last two years, they have experienced “significant disruption” of the sulfuric acid supply, including Q4 21.

In September the Kennecott smelter was shutdown following the release of “molten copper materials”. Sulfuric acid shipments to Itafos were stopped until mid-November. The disruption will impact Q4 results, but not enough to keep the company from raising guidance when they announced Q3.

 

FOREIGN ASSETS FOR SALE

 

A few years ago the strategy was to become a global player in the fertilizer market. As part of that, Itafos purchased assets in South America.

But the debt burden became too much and with fertilizer prices in the dumps for the last decade, Itafos struggled to just keep them up to date. Now they plan to take advantage of the improved landscape and sell the international assets:

 

Source: Itafos Investor Presentation

Of the four, Arrais and Farim are the most likely near-term sales. Both are an EBITDA drain on the company ($4 million and $2 million respectively) and need larger capital to get back to full operation.

 

 

 EXPECT DEBT BURDEN TO COME DOWN

 

 

As Itafos builds cash, expect that cash to go towards paying down some very expensive debt they are carrying.

Itafos has $250 million of debt. Most of the debt comes from a $206 million term loan (paying 8%) and a $42 million promissory note that is held by Castlelake.

The $42 million note is killing Itafos with interest. The loan pays 15% interest (increasing to 18% next year) with 4% of that paid in stock.

Sadly, Itafos can’t pay down the promissory note without first paying off the term debt. When I talked with Delaney and Brush, they said that one way around this would be to restructure the entire debt load in one swoop.

That would be ideal, but given that they just refinanced their term loan in August (it has a 3-year term) I’m not sure how easy it will be. Given that uncertainty, I have not modeled in any significant reduction in interest costs over the next year.

 

STOCK CHART

 

 

CONCLUSION

 

Itafos is a cash cow right now, but the stock in the last year reflects that—up 5x. (Many good commodity producers are up that much in the last 12 months)

Arguably, the stock will not have another Big Move up until that debt comes down, either by re-negotiating the terms or selling assets–or both.

But at current phosphate prices, this stock has big leverage–and a great operational team.  It’s the ONLY junior phosphate producer. It’s in the US. 

Part of it will come with results. Itafos should be able to cut debt by US$100 million next year if phosphate prices stay at this level.

In the last 3-quarters, 65% of EBITDA has translated to free-cash-flow. If that continues and if prices stay at the current level, debt should be under $50 million by YE 2023.

Source: Itafos Disclosures, Our Forecast

Another Big Catalyst–but not likely until Q2/Q3–is the permitting of the mine-life extensions at H1/DNR. That will check another box.

Firming up the mine extension will bring on new lenders, which will lower the cost of their debt. Another check.

Itafos has 185 million shares outstanding. Let’s assume the market gives them no multiple expansion over the next year.

If that happens (eg. A flat Enterprise Value) the debt reduction alone should give you a 50% gain on the stock.

A more bullish case is that the market recognizes Itafos and gives it a market multiple (maybe 4x EBITDA). If that happens, you are looking at more than a double.

The very bullish case is the market starts revaluing the fertilizer stocks overall. Instead of Mosaic trading at 4x EBITDA and a price to earnings of 7x, maybe the market gives them 6x and 12x. The same thing happens to Itafos and it is a triple from here.

You get the picture.

Nowhere am I talking about fertilizer prices moving higher.

Buy Itafos on where fertilizer prices are today. Watch the news and make sure they are staying there. As long as we remain at these levels, the stock has legs to go far higher.

EDITORS NOTE: I HAVE A NEW FERTILIZER STOCK PICK–and it has everything I could ask for

  1. a management team who has built and sold one agriculture related company already.
  2. They have a unique science, technology, and product–
  3. and it’s so good, they have offtake deals for up to 5x their current production.
  4. They did over $15 million in revenue last year and are growing quickly.

To get this company’s name and symbol before the institutions rush in, CLICK HERE

THE WAR THAT SAVED THE MARKET

By
Keith Schaefer
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0

The market is flying.  Meme stocks are back.  It is good times again. 

But I have not been a big buyer.

Instead, I have taken the opportunity to reduce my positions – particularly in oil – and regroup.

I am not convinced that what we have here is a sustained bull market run.  So I still have a huge cash position, and have been doing mostly…nothing.

Instead, I think this is a market that has lost its roots.

Here’s my thinking (caveat: after making A LOT of money from late 2019 – mid 2021, I have been wrong a lot lately).  A month ago, I was sure that we were on the road to a much larger move down.  The S&P was headed to a 3-handle.  The micro-cap stocks that I work with would have been that much worse. 

Then the Russian invasion of Ukraine—war–happened.

The war changed everything.   But front and center is that it changed the narrative.

The S&P had been falling for two months.  Most stocks had been dumping since the summer.  The narrative accompanying the fall was a world of rising rates and the demise of a 30-year bond bull market.

But then – BOOM!  An about face: war, shortages, fear of escalation.

It was scary.  It IS scary.

But here’s the thing.   This new narrative – war – it follows a whole new set of rules.

These rules aren’t nearly as bad for stocks as endlessly rising rates, particularly for the stocks that had been going down the most.

BUT – and why I am being cautious–the war narrative will be transitory.  Fundamentals – the economy, inflation, the Fed tightening – they will come into play again.

The economy sure looks like it is rolling over to me.  There are an awful lot of headwinds once we get past any moment of triumph.
 

THE NEW WAR NARRATIVE

 
Do you remember that we had sky-high natural gas prices in Europe as far back as November?  I do.
Doesn’t matter.  Natural gas was now up because of the war.

Same with oil, same with coal, corn, soybeans, steel, metals and rates.  Every move up and down was now because of the war.

That laid the seeds for a rally.  A boomer!   A positive development on the war front, any positive development, is now a reason for the market to rally.

Do you really think that unprofitable tech and meme stocks like Gamestop (GME – NASDAQ) could have rallied as the 10-year note took off to 2.5% absent the war?


Source: CNBC

No way!  Rising rates are the sworn enemy of these stocks.

But if rates are rising because of war?  Especially if we are winning?  Bullish!

It is no surprise that the best performers have been those stocks that were shorted the most – meme stocks and unprofitable tech. 

Check out the biggest winners since March 11th (only 11 trading days ago!):

  • Gamestop (GME – NASDAQ) up 143%
  • AMC (AMC – NYSE) up 116%
  • Kodak (KODK – NYSE) up 67%
  • Virgin Galactic (SPCE – NASDAQ) up 44%
  • Tesla (TSLA – NASDAQ) up 43%
  • Bed Bath (BBBY – NYSE) up 37%
  • Beyond Meat (BYND – NASDAQ) up 36%

See a theme?  Former darlings, beaten down for months, now back with a rocket-ship-like rise.
It’s a war rally – driven by the euphoria of winning the war.  Worrying about rates is for another day.
 

CAN THIS GO ON?

 
Because this is a war rally, it is hard to know how far it will go.  We know how far bear market rallies go – they would normally be ending right about now.  War rallies are more uncertain.

But I doubt this is a new bull market.  We almost never see a new bull market led by the winners of the last one.

What’s more, the craziest moves have been in the most heavily shorted stocks.   Short-selling rallies run out of steam when there are no more shorts to cover.

Given the pain, we may be getting there soon.

Morgan Stanley put out an interesting piece this week.  They pointed out that as of last Tuesday, almost 80% of the shorts established in the first quarter had been covered.

They called last week the biggest week of short covering since they started following the data!

That number has surely only gotten higher as we have continued to grind up since then.

The moves we have seen in the most shorted names have been remarkable.  Stocks up 50% or more in the matter of a couple of weeks.

It is hard to ignore that this is the hallmark of a bear market rally.  They don’t call it a ‘rip-your-face-off’ rally for nothing.
 

COMMODITY STOCKS –
RISKS TO THE LEFT, RISKS TO THE RIGHT

 
Two weeks ago, I told my subscribers I was selling all my oil stocks. The reason? I just didn’t see enough upside left.

“I sold all my oils this morning.  Everything.  All of it… I’m not worried about missing A Big Trade in oil now. “

That turned out to be a good call.  It has been a rollercoaster ride for oil since then.  All commodities rocket up and down on each new promise of or failure to resolve the war.

But if you zoom out a bit further, oil stocks, all commodity stocks, aren’t doing much of anything.
There are good reasons.  Commodity stocks have multiple headwinds.

First, there is the news cycle.  Every indication of some sort of deal means that oil, coal, steel, grains – they all take a hit.

Anyone that has bid up these stocks over the past month has now been thrice burned by the news flow.  Investors are getting more reluctant to hit the ask going forward.

While no one really knows what is in Putin’s mind, what does seem clear is that Russia is not winning this war.  Putin’s only out – to save-face – is through a negotiated settlement.

That will be great for the world – but it would be less great for commodities.

The other headwind to commodities is the economy.

If and when an agreement is signed – what then?

A lot of evidence is pointing to a weakening economy.

A classic sign of a coming recession, the inversion of the yield curve, is already on us.

Source: Bloomberg

Consumer confidence is plunging and at levels typical of recessions.


 

Source: Federal Reserve

The consensus for first quarter Real GDP estimates has decline from 3.7% in late December to 1.7% now.   

The more-accurate Atlanta Fed data driven model (GDPNow) predicts only 0.9% GDP.   We are getting REAL close to negative numbers.

Source: Bank of America Capital Markets

Maybe most concerning – retail sales is starting to teeter.  Headline retail sales were flat in February (meaning Real or inflation adjusted retail sales fell).

Source: U.S Census Bureau

Restoration Hardware (RH – NYSE) shocked the market this week with the dour outlook CEO Gary Friedman gave on their quarterly call.

Friedman said that RH had seen demand soften in Q1.  But he was even more uncertain going forward – in fact he said he has never been more uncertain about the outlook in his 22 years in the business.

I don’t think anybody really understands what’s coming from an inflation point of view, because either businesses are going to make a lot less money or they’re going to raise their prices. And I don’t think anybody really understands how high prices are going to go everywhere.

Central banks are marching ahead and tightening right into this.

Bank of America is still saying the Fed is behind the curve.  They believe that we will see faster rate hikes and a “higher terminal rate”.  They see 50bp rate hikes in both June and July with 25bp hikes each of the other meetings.

The result – a Fed funds rate over 3% by May of next year.
 

NOT A BEAR MARKET RALLY – A WAR RALLY

 
Yeah, I know, the market is brushing this off like it does not matter.

It could be that the market is telling us we worry too much.  That the economy will be fine.  Don’t ever underestimate Mr. Market!

But it might not be saying that at all.  What if this is a war rally–not be confused for a bear market rally or cyclical upturn.

A war rally doesn’t care about rate-tightening or 3rd quarter GDP.  It is looking for stocks that outperform, for momentum, for exuberance!  We’re winning!

It is massacring complacent shorts in the process.

To be blunt, while war is not really “good” for anyone, it is not necessarily bad for stocks.  There are plenty of examples of a flat or up market during war-time periods, particularly if things on the front lines are going well.

Yet I’m being extremely careful here.  At some point this war rally will have run its course.  When it does, I think it’s quite possible that the market gives its head a shake and remembers what it was before the war.

I don’t want to be all-in when that happens. So I continue to sit on a huge cash pile.  My only real purchase of size was a tiny but fast growing fertilizer producer just hitting positive EBITDA.  I think it has a chance of being my biggest winner of 2022.

The move down in January and February was not about the fear of invasion.  It was about pricey equities, unprofitable equities, running into a freight train of rising rates.

It was about a slowing economy at a time of rising inflation.

It was about COVID still rearing its head and throwing a wrench in the supply chains again and again.
All those worries?  Still here. Worse now.

Right now, the market doesn’t care.  The post-war victory run is in full force.

But that will end.  All things do.  Reality will set back in.

When it does, I’m not so sure it won’t come crashing down on us.

EDITORS NOTE: To get Keith’s fast growing fertilizer stock CLICK HERE

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