Looking for a Sustainable 15% Yield? It’s Right Here

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I know that everybody hates coal.

But…

Consol Coal Resources LP (CCR) currently sports a massive dividend yield of 15.4%… and analysts think it’s sustainable.

I know what you’re thinking—they get paid good money to say things like that. But I’ve taken a look into the numbers and I agree.  Even though spot met coal prices dropped 30% recently, CCR has contracted prices through the end of next year that make this yield very sustainable.

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And savers and investors are absolutely starved for options that provide income – especially as sovereign rates around the world go negative.

Record Low Yields from All Income Sources

The safest long-term investment on the planet is meant to be the 30 Year U.S. Treasury – but it’s only yielding 2% – an all time low.

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Treasuries hardly provide any income – today they are a place to park money for institutions that have no other option.

They aren’t for investing or for income.

If you think that bonds are the answer for income a person could always look to corporate or even junk bonds.

But I wouldn’t….

Yields on investment grade companies are miniscule.

Junk bond yields do not nearly compensate for the risk involved.

I just saw a small-cap homebuilder offer 7 year unsecured bonds that have a yield of 4%.  That is where we are… a small-cap company in a heavily cyclical business can borrow at 4% on an unsecured basis.

I’d rather stick my money in a tin can and bury it in the backyard.

Perhaps we can travel outside of North America and buy some safe Government bonds with a decent yield.
Perhaps not!

More than a third of bonds that trade globally now have NEGATIVE INTEREST RATES.

There are now almost $20 trillion European Government bonds with negative yields. All bonds issued by the Government’s of Germany, Denmark, Finland and The Netherlands sport negative yields.

I saw an article where a bank in Denmark is even offering a negative rate mortgage – sign me up for that one please….

This is a bizarro world where the borrower has to pay the lender for the privilege of lending him money.

Outside the world of bonds… blue chip dividend paying stocks are no better.

The stock prices on the best businesses on the planet have been bid up so much that the dividend yield on the S&P 500 is now just 1.88%.

That isn’t an income stream… that is a dribble.

Coal Is Dirty – But the Money from That 15.4% Yield Isn’t

This week I read a note from Goldman Sachs that confirmed what I already believed.

Cyclical companies with abnormally high dividends are out of favor (just look at the MLP space in the US!).

According to Goldman the valuation gap between high and low dividend stocks is the widest it has been in 40 years.

Goldman’s obvious conclusion is to buy high dividend paying stocks.

Well… they don’t come with a much higher dividend than Consol Coal LP’s 15.4% current yield.

With a yield that high the market clearly is pricing in a dividend cut.

The analysts that follow the company don’t agree – they think it is sustainable for at least the next three years.

So does Greenlight Capital’s David Einhorn.  Consol Coal is currently the fifth largest position in Greenlight’s portfolio.

Einhorn is pretty savvy.

He publicly predicted the collapse of Lehman Brothers months in advance of its happening by documenting holes in the bank’s accounting.

He has also compounded money for two full decades at a rate of almost 15% annualized.

When I did some digging I found that Consol’s distribution looks pretty secure too.

Consol Coal LP owns a 25% interest in the Pennsylvania Mining Complex (PMC). The other 75% of PMC is owned by Consol Energy (CEIX) which also serves as operator (and owns 60% of CCR’s shares).

PMC is estimated to contain roughly 770MM tons of high-Btu coal reserves.

There is absolutely no disputing that the PMC is a world class coal asset.

These are three low-cost, modern and non-unionized mines that operate in close proximity to the East Coast utilities that purchase from them.

The coal itself is also highly desirable with high heat and low sulphur content.

Higher heat means more energy, and lower sulphur reduces the costs to burn the coal, making it more attractive to utilities. The mines have the capacity to produce up to 28 million tons a year for a long time without needing to spend much cash to keep production going.

Consol has aggressively pushed costs down in recent years with the implementation of zero-based budgeting (where every expenditure has to be justified rather than starting with a baseline budget).

Northern Appalachia coal currently trades for just under $50 per ton.

For CCR’s distribution that coal price works just fine.  The coverage ratio in Q2 was 1.2 times. Net leverage is only 1.6x.  And by the way, with only 16 million shares out, any increase in natgas prices would see this stock go WAY up. (Coal prices compete against natgas.)

The current quarterly distribution of $0.51 has been in place since the beginning of 2016.  The price of Northern Appalachia has been between $40 and $50 per ton for much of that time – never lower.

For all of 2017 coal prices were similar to where they are today and CCR’s dividend held.

What has the market concerned is that the current trend for the price of coal is down.  But given that the price hasn’t been sub $40 in more than a decade those concerns for the next couple of years seem probably overblown.

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Especially since coal inventory levels are actually on the low side.  As of the end of May U.S. electric power sector coal inventories were lower than they have been since 2014.

Further securing the near term distribution is the fact that 95% of 2019 and 80% of 2020 Consol’s coal sales are already contracted with customers… more than half of which locks in better pricing than the spot rate today.

For the very long-term however the crystal ball is cloudy.  And the risks are clearly higher.

Shale gas has taken a huge chunk of coal’s market share.  In 1997 53% of electricity in the United States came from coal – last year the number was 28%.  Coal and natgas pricing are competitive – so if natgas prices keep going lower, coal could too.

However, I would point to two factors:  One is that coal producers are much smarter at shutting in production than natgas producers.  Two is – as I said, CCR has contracted prices for the next couple years.

With its low cost production Consol is going to be one of the last men standing – but if the natural gas producers keep pushing prices down everyone is vulnerable.

Perhaps even worse, if a Bernie Sanders or Elizabeth Warren type nominee comes out of the Democratic Party and wins… then some radical measures targeting coal could arrive very quickly.

Which creates uncertainty – which of course the market hates.

Economically, that 15.4% yield that appears quite sustainable for the near term.  Politics could undo that next November. (Love him or hate him, I’ll bet a steak dinner Trump gets re-elected though.)

So there are definitely risks involved in owning CCR – but IMHO nowhere near the risk that a 15% yield is pricing in.

EDITORS NOTE:  I’m about to alert subscibers to an arcane oil trade that gives investors the best of both worlds – yield and capital gains.  All the volatility has played right into this trade – get it as the same time as subscribers for just $5 for the first month CLICK HERE

SOLAR STOCKS ARE HOT!!

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Solar stocks are flying – especially those that make & sell inverters, like Enphase (ENPH-NASD) and SolarEdge (SEDG-NASD).

Quick refresher: inverters  are devices that try convert power from DC (solar panels) to AC (what your home uses).  There are lots of inverters out there, with slightly different technologies, but all are meant to maximize the AC power out of your DC photovoltaic panels.

This market has just gone CRAZY this year – out of the blue. It’s a grassroots demand scenario that has COMPLETELY taken the Market by surprise. 

How do I know this?

Look at the gaps in the stock charts of both ENPH and SEDG – the Market had not priced anywhere close to the kind of growth these two inverter market leaders are going through right now.

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This is happening despite trade wars, despite Chinese tariffs (SEDG is opening a 2nd plant in Vietnam now; ENPH is opening one in Mexico).

Sell side research I’m reading says component parts pricing has come down A LOT… making solar much more economic.  There does appear to be areas where solar can compete against greenfield coal baseload power or against natgas peaker plants (expensive back-up facilities that are only used during peak power times during the day).

SEDG CEO Guy Sella said on the Q2 conf call that nobody buys solar for subsidies anymore.  I would argue that’s not quite true, as analysts are suggesting the end of subsidies is now actually pulling forward demand.

But the volume of units sold and the stock charts say he is mostly right.

SEDG is a big story on both sides of the Atlantic, in both Europe and the USA – Europe was 48% of business and the USA was 41%.  The ROW – Rest of World – was 11%.

The Market is right to love this story – SEDG – as the growth is phenomenal, it’s organic, it’s not just about the USA, it’s both residential and commercial… and the balance sheet is pristine.

AND… the Market is excited about new products for utility sized solar and energy storage…

AND… management keeps showing innovations not only in new products (mgmt. has made several M&A moves recently, vertically integrating their business and using various technologies together in new ways) but also reducing costs on existing products

AND… there appears to be room for everyone.  Competitor Enphase announced 100% increase in YoY revenues, and it had the same kind of jump recently.

Here are some of the quick financial highlights from SEDG Q2:

  • Record revenues of $325.0 million
  • Record revenues from solar products of $306.7 million
  • GAAP gross margin of 34.1%
  • GAAP gross margin from sale of solar products of 36.4%
  • Non-GAAP gross margin from sale of solar products of 36.9%
  • GAAP net income of $33.1 million
  • Record Non-GAAP net income of $49.3 million
  • GAAP net diluted earnings per share (“EPS”) of $0.66
  • Record Non-GAAP net diluted EPS of $0.94
  • 1.3 Gigawatts (AC) of inverters shipped

I think the Market is ready to start pricing in some great revenue growth as both ENPH and SEDG move from inverter sales to full solar package sales, which is the difference between a $2000 sale and a $10,000 sale.

Who knows what that will mean for margins.  Again, the financial Market is saying there is room for both these companies and it will likely be a decade before the customer base is so saturated that each new sale is a zero sum game between the two.

I’ve owned SEDG in the OGIB portfolio a couple times, most recently when it gapped up to $53 – it was a clear breakout and the stock did not fall back into that gap once.  The stock is up more than 50% in just a couple months!  (I still own it.) Sadly, I convinced myself it had a better product and was more global than ENPH, so I didn’t buy ENPH.  But the Market is saying there is lots of room for both.

To that end, buying the solar ETF – TAN-NYSE – is not a bad idea. This market appears to have a very long runway as guidance is continuing to increase.

Solar has been one of – if not THE best trade in energy this year, but it sure took the Market by surprise.

EDITORS NOTE:  I’m about to alert subscibers to an arcane oil trade that gives investors the best of both worlds – yield and capital gains.  All the volatility has played right into this trade – get it as the same time as subscribers for just $5 for the first month CLICK HERE.

WHY PRIVATE EQUITY IS POURING INTO MIDSTREAM ASSETS AND WHY INVESTORS ARE NOT

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Private capital is POURING into midstream stocks in energy (think pipelines/infrastructure).

Since the start of 2018 private equity or pension fund backed midstream and infrastructure transactions total almost $10 billion.

The list of transactions includes: Wolf Midstream’s purchase from MEG Energy (MEG-TSX), KKR buying from Meritage Midstream, SCV acquiring Paramount’s (POU-TSX) Karr processing facility and Brookfield’s (BAM-TSX) deal with Enbridge (ENB-TSX/NYSE).

(That Brookfield deal is really interesting.  They aren’t usually active in this sector and they are always value focused.)

A perfect example of this was TC Energy’s (TRP-NYSE/TSX) recent $1.15 billion sale of an 85% interest in the Northern Courier pipeline to the Alberta Investment Management Company (AIMCo).

The purchase price for the pipeline was 14 times EBITDA… a good sized premium to the 10 to 12.5 times EBITDA public midstream companies trade at (and WAY above the 4x that O&G producers do now!).

In January this year, I suggested midstream stocks should be strong this year, as capex as a group was declining and increased US production–in both oil AND gas–should increase their cash flow.  And the fact that PE groups are buying up assets should mean midstream stocks are cheap – but stock investors still don’t seem to be sold.  There’s no sector-wide breakout, though a few are trading near their 52-week highs.

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However, even if retail investors ignore midstream valuations, there is a hidden silver lining in this high-valuation for midstream assets for them–that’s all the pipe and processing centres that the juniors own – which may now be worth a lot of money in a market where there is no equity or debt! I’ll get to that later.

After doing some research, I found there’s clearly a different mindset in how private capital deals with midstream plays – that retail investors could never stomach.

I found that private capital is paying big premiums for these assets today because they intend to crank leverage levels up far in excess of what a public operator can.  That higher leverage provides a nice kick to IRRs.

How is the pipeline attractive to AIMCo example above – at current multiples?

Well, according to Bloomberg it turns out that AIMCo is going to leverage up the asset to an astronomical tune of 10X EBITDA.

That would be almost four times the leverage that a modestly leveraged public company uses… at least twice the leverage that the most leveraged public midstream business tries to get away with.

The stock market wouldn’t touch a midstream business leveraged like that with a ten-foot pole.

But private capital can get away with it – in fact AIMco was able to issue debt to finance this incredibly leveraged deal at a rate of just 3.37%.

What the what?

O&G Producers May Benefit More Than Retail Investors

The investment merits of midstream equities are compelling.
They are cheap based on:

  1. the objective data-points that are recent transaction comparables,
  2. they offer good yield,
  3. and they are a great way to benefit from soaring production.

 

Debt-laden producers are benefitting most from these high valuations, like I showed above: they trade at 4x EBITDA but have huge assets inside them that are worth 14x.

Producers can sell these assets to do all kinds of things:
1. Reduce debt
2. Buy back stock
3. Buy another producer and sell the midstream assets to pay for it

Selling these assets helps the balance sheet but not the cash flow as they now have to pay processing fees to use that infrastructure.

It has to be frustrating for the management teams of producers….

For years they were told that they had to own their own infrastructure if they wanted to be rewarded with a decent valuation in the market. Control your own destiny!  Don’t be shut out of processing plants or pipelines – own them yourself!

Now they own their own infrastructure and the market is telling them that the smartest thing that they could do would be to sell their infrastructure because they aren’t rewarded for owning it.

That’s music to the ears of Private Equity.

EDITORS NOTE–I’m giving away one of my Top 2019 Stock Picks for FREE–next week.  Be ready for details in those emails.

Keith Schaefer

 

This Tiny Canadian Company Will Replace Russian NatGas in Germany – Really!

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A PEA-sized Company with a Huge Natural Gas Vision

What do you make of a $70 million company developing a $10 billion project?

Well that is exactly what we have in the case of tiny, Calgary based Pieridae – trading under symbol PEA-TSXv.

Its an uphill battle, but I have to admit the company is giving it their best shot.  After you’re done reading, you’ll realize it’s not as far-fetched as you think.

Goldboro LNG

Pieridae is working toward the development of the Goldboro liquified natural gas (LNG) project in Nova Scotia on the Atlantic Ocean.

The Goldboro terminals will be located 250 km NE of Halifax.  It will be made up of a 5 to 10 million tonnes per annum (mmtpa) liquification and loading facility, depending on the final design decision.

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For comparison, Shell’s LNG Canada project is for 14 mmtpa.

But unlike LNG Canada, which has Shell, Petronas, PetroChina, Mitsubishi and KOGAS all with stakes in the project, Goldboro is 100% owned by tiny little Pieridae.

If that’s not enough chutzpah for you, Pieridae plans to run not just the terminal, but the upstream assets as well.

It would all seem perfectly implausible if the deal didn’t have one large backer with a significant interest in seeing the project being built:  The German government.

The LNG from Goldboro will be shipped across the Atlantic.  Almost the entire first train of the project (about 4.8 mmtpa of a total of 5 mmtpa) will be delivered to German utility giant Uniper.

Uniper is the largest utility in Germany.  They buy 40% of the natural gas consumed in Germany today.

Their contract with Pieridae, which has a 20 year take or pay term, will be for 10% of overall German gas demand – that’s HUGE!

Germany is desperately looking to diversify their gas supply.  Right now, 60% of their natural gas imports come from Russia, which isn’t a safe source of supply (ask Ukraine).

Natural gas is deemed a “scarce commodity” essential for the German economy, which means that imports qualify for the export credit assistance programs.

With Goldboro being a large natural gas importer, it qualifies for Germany’s “Untied Finance Credit” (UFC) program, where the German government guarantees loans for a very big part of the project cost.

The first train of the facility would qualify for a US$3 billion loan guarantee under the program.  That’s HUGE!

In addition, Pieridae will qualify for another US $1.5 billion of loan of guarantees for upstream development of natural gas assets.

All told US $4.5 billion of the US $6 billion expected costs will be guaranteed.

What was implausible becomes more plausible.

Of course, Pieridae still needs to go out and find a commercial lender willing to fork over the $4.5 billion of funding.  But that is a lot easier (and cheaper) when the loan is backed by the German government.

To be sure, there are hurdles that remain.  Before a lender will commit to such a tidy sum, they want to know the costs in detail.  This is where we are at now.

Pieridae has hired Kellogg, Root and Brown (KBR) to perform an engineering and design study that will include a lump sum estimate of project costs that can be used by prospective lenders.

That study – expected to be completed early in 2020 – is really The Next Big Milestone for Pieridae.

Own the Stream

In June Pieridae made a splash with the news that they had acquired Shell’s upstream Alberta assets.

It’s all part of Pieridae’s plan to secure the natural gas supply to feed their LNG terminal, once built.

While it may seem audacious that Pieridae would plan to own not only a multi-billion LNG terminal but the upstream natural gas assets as well – you have to understand this all comes back to cheap German capital.

Shell’s assets produce about 28,000 boepd.  They are primarily older producing wells, many of them 20-30 years old.

The midstream infrastructure was built for much higher production, which means they can be developed without much additional infrastructure.  But most importantly, the assets are conventional reserves and that can be accessed without fracking.

The one stipulation on the US $1.5 billion upstream German guarantee is that hydraulic fracking is prohibited. 

Both the Shell assets, and those of the previous acquisition of Ikkuma, fit that bill.

These two acquisitions make Pieridae a sizable, mid-tier (albeit high-cost) natural gas producer in Alberta.  Pro-forma production is 40,000-50,000 boe/d, 20% liquids.

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Being a natural gas producer in Alberta is less than desirable unless you have a way to get the gas to market.  Here is where Pieridae has a unique advantage.

There aren’t many projects in Canada that can boast accessible pipeline capacity – but Pieridae can.

The majority of the trek east will be made on TransCanada’s mainline system.  This will be followed by shorter legs on regional TransCanada and Enbridge owned lines.

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Capacity on each of these lines can be expanded to accommodate Pieridae’s additional volumes by simply adding compression.  Read my lips – no new pipelines!

Final Investment Decision

Pieridae has a few options for reaching a final investment decision (FID) on Goldboro.  But it seems most likely that they build a single train terminal and defer the second train to a later date.

The Shell and Ikkuma assets are sufficient for the first train of the LNG terminal.  The available pipeline capacity on Mainline and the connector pipelines are enough for the first train.  Same goes for the German loan guarantees.

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A single train terminal is expected to cost $6 billion.  The combined two train terminal would add up to $10 billion.

A $6 billion price tag on the first train leaves a funding gap of $1.5 billion.  That is still a tidy sum to be found–and means more debt and equity.

Pieridae expects to issue between $1 billion to $1.3 billion of preferred equity in the project.  This will sit below the guaranteed term debt but above the common equity.  In an interview, CEO Alfred Sorensen said the company is “well along” the process of raising this capital.

The rest of the money – anywhere between $200 million and $500 million – will be new equity (dilution).  The equity isn’t likely to be issued until next year after the engineering and design study and the FID is made.

While those are still big numbers, they seem more attainable as Pieridae gets closer to securing the low-cost debt guarantee from the Germans.

Project Economics

Here is where the rubber hits the road.  Pieridae has forecast cash costs of $4.50 per mmbtu once the first train is up and running.

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It’s still early in the game but let’s ballpark it to get an idea of the upside.  Assume Pieridae can get 5% debt on the German guaranteed $4.5 billion and 9% on the $1.3 billion preferred.  That would be annual interest costs of $350 million.

With LNG prices of $8/mmbtu (keep in mind Goldboro starts up in 2024 where there is expected to be a shortfall in LNG export capacity) and one train delivering 5 mmtpa per year you can pencil in close to $1 billion of cash flow for the equity in the project.

If we assume that equity is raised at the current share price ($1), there would about 300 million shares outstanding.

That means over $3 per share in cash flow to the common.

Its rough and all the numbers need to be validated but you can see how this could work out big.

All or Nothing

Consider that…

  • Unlike almost all projects in Canada, all major environmental, trade and construction permits are in place.
  • Unlike almost all projects in Canada, this one has available pipeline capacity.
  • Unlike any other project in Canada this one is close to obtaining the explicit loan guarantee from the G7 nation.

If this is David and Goliath, at the very least David has some pretty big rocks in his sling.

In November 2018 VP Mark Brown put the remaining hurdles as:

  1. finalisation of supply
  2. finalisation of transport
  3. finalisation of equity financing

Since that time the question of supply has been answered.  The pipeline capacity is there, but finalization of an agreement for it, like the equity financing, depends on the KBR assessment of costs.

Look, I would be crazy not to be skeptical that such a small company could make such a big project work.  But the guarantee of the German government, the pipeline capacity, the fact that Alberta REALLY needs a natural gas win – these put some wind in the sails.

At the very least, I’m willing to say this is not insurmountable.

What I would like to see is a partner coming on onboard.

Pieridae has made it clear they are open to it.  It would validate a lot of assumptions.  It would make the financing that much easier.  And it’s not going to hurt the economics much – if the project can get built within currently anticipated costs, there is plenty of cash flow to go around.

The acquisition from Shell tells me that these guys aren’t giving up.  While I’m not convinced they can pull it off, I wouldn’t rule it out.

I am certainly am rooting for them.  We all know the natural gas industry in Western Canada could use this kind of feel good story.

This Small-Cap Controls Some Of The Most Important Real Estate in Your Life

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What is the #1 rule of real estate?

Location, location, location.

How about your smart phone? What is the most valuable real estate on your (and hundreds of millions of other’s) smart phone?

It’s the home-screen of course; the one you see as soon as your phone boots up.

Second question.  Who owns the prime real estate on your smart phone?

You, right?  Well, not really.  Actually, you are more like a co-owner – with your wireless carrier. How so?

Before you ever touch your phone, the carrier installs their software on the device.

This is software you can’t uninstall.  You can’t turn it off.

This software the pre-installs apps to your phone before you even get your hands.

It delivers ads, notifications and recommendations to you.

It can even create a library of content curated to what the carrier wants you to see.

Yet you don’t even realize it is there.

But it is – when you try out the apps that appear right there in front of you, or click on a notification that shows up in your stream, or consider the recommended content in a folder.

What you are really experiencing is the carrier monetizing their prime real estate.

I have found THE tiny company that builds that software.  It’s in my portfolio over at www.InvestingWhisperer.com.  It’s a smallcap stock trading under $10, and growing like crazy.

It’s up 29.8% since I bought it, but I think it’s going MUCH higher. I’m going to give you my report on it for FREE.

This company is the landlord that helps the carriers collect their rent.

They find the tenants (the app developers and advertisers).  They analyze the data. They create the tools.

The carriers – and this tiny little company – just sit back and collect their rent.

What is unbelievable is that this company is a small-cap. Some would call it a micro-cap.

Yet it provides the software that lets carriers monetize 100’s of millions of devices.

I’m not exaggerating.

Their software is probably on your phone right now.  You can’t see it. You can’t uninstall it.

But it’s there.  Delivering content to your phone – ads, apps, media – whatever the carrier wants.

This micro-cap controls the prime real estate on more than 250 million  Android devices globally – and is growing at 30+ per year.

And I think this company’s stock is a HUGE winner.  That kind of real estate portfolio just doesn’t go that cheap.  Get my FREE report on it by clicking HERE.

Why is it free? Because I want you to see my independent research at www.InvestingWhisperer.com, and consider subscribing to my service.  But I understand you want to see what you’re buying.

This micro-cap is the #3 app on smartphones after Google and Facebook.  It controls what you see on smartphone home screens.  It’s growing, it’s cash flow positive and I think the stock will be a massive home run – get your FREE report by clicking HERE.

 

Refineries – Why I’m Not Ready to Buy

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The big news out this last week was that Philadelphia Energy Solutions (PES) will permanently shut its South Philadelphia refinery in the next month.

Whether “permanent” means permanent, well, we’ll see.  But at the very least, the refinery isn’t coming back any time soon.

I’ve been watching the refiners closely for the last couple months.  The stocks have been miserable performers–and that has actually piqued my interest.

The South Philadelphia refinery is a good-sized one at 335,000 barrels of oil per day (bopd)–making it one of the larger ones in the country.

Consider that East Coast (Padd II) refining capacity is about 1,200,000 bopd.

The question is – does this new shortage of gasoline increase prices enough to increase crack spreads and make refiners a buy?

I would love to believe that.  Like I said, they have been kicked in the teeth. They can have big moves up when circumstances are right.

Consider how poorly they’ve performed since the peak in the summer of 2018:

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If this group could turn around, the upside could be material.  I’d love to time that turn.

The problem is–I’m not seeing it yet.

The entire refining complex got a nice kick on Tuesday from the Philadelphia news.  Kudos if you were able to catch that.

Some will benefit more than others.  PBF Energy (PBF-NYSE) has 34% of their capacity on the northern East Coast, so I would see them as a beneficiary.

But taking a step back, I just don’t see the refiners outperforming until the Market is confident oil product demand is back on track, and that means a jumpstart to the global economy.

Second, we are just not short of refining capacity.

While the loss of East Coast barrels will hurt, there is enough product capacity out there and so they will be made up with imports from the Gulf Coast or overseas.

Crack spreads have been weak for most of the year.  While they briefly recovered here in Q2 19, they are back down to 5-year lows.

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This is not just happening in the United States–Asian refining margins have also been weak.  Singapore gasoline margins have been close to break-even.  On average for the year they are the lowest since 2008.  Chinese oil demand has been declining and Chinese refiners are responding by exporting products.

Meanwhile in the United States product inventories are mixed. Gasoline inventories are above the 5-year average while distillates are dropping below.

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That isn’t really a bad picture–it’s just not a great one.

You need to believe in one of two things to be willing to bet on the refiners.

  1. A global economic upturn
  2. IMO 2020

Refiners are not safe havens.  They are extremely susceptible to economic swings.  Whenever I get the urge to buy a refiner I go back and remind myself of what happened in 2008.

Now I realize that 2008 was a once in a lifetime event (let’s hope!) but its still worthwhile to review just how bad the refiners did in that recession.

Looking at Valero (VLO-NYSE) –the biggest and “safest” of all the refiner names–the stock dropped from $50 to $10.

Overall they underperformed a terrible overall market by a significant margin.  On average the names fell nearly 80% top to bottom.

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The recovery was even worse.   It took nearly two years after the broad market for the refiners to begin to recover.

The inescapable conclusion is that in a slowing economy a bet on refiners is a dangerous one. Before I can buy a refiner for anything more than a quick trade, I must have confidence in the economy.

I’m not feeling enough love there right now.

If you are looking for a reason to buy refiners, you don’t have to look any further than IMO 2020.

Last summer the prospects of IMO 2020 sent the refiners up to their highs.  Some of that has come off shine has come off since then but IMO will still have an impact.

Investors are still looking at a potentially major disruption to the crude products market.  There will be increases to crude distillate demand, but  how much though is still a matter of opinion.

As a quick recap, the shipping industry has historically used high-sulphur fuel oil to run their ships.  This isn’t very good for the environment and the new UN mandated sulphur cap of 0.5% is intended to rectify that.

IMO 2020 means that ships will be required to either switch to a low-sulphur fuel or use scrubbers on the ships to remove the sulphur from the exhaust.

At this point we know where the scrubber number is going to be;  estimating the required distillate demand from ships isn’t too difficult.

RBC Capital Markets put out a note earlier this year estimating that 860 mbbl/d of additional distillates would be required by refiners through higher utilization rates.

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They went on to say that higher utilization would require better margins.  Refiners respond to price, and we need to see crack spreads increase to spur the supply.

The more complex refiners (mostly located in the United States and run by the big players like Valero (VLO) and Marathon Petroleum (MPC)) will incur extra benefits.  They have cokers and hydro-crackers that can take advantage of what is expected to be wider heavy oil spreads to produce gasoline and distillate products.

That is the bull-case in a nutshell.

When does IMO start to impact the market?

On their Q1 call, Valero said they expected effects on the high-sulphur fuel side to start to appear in late-September, with impacts on distillates occurring in November-December.

If I had more evidence that oil demand (and the global economy) was strong, I would look at the impact of IMO 2020 and jump in for a trade.

But my question is, does it get lost in the shuffle?  A slow economy could offset a lot of that upside.

Another factor to watch is the WTI-Brent spread, which has curiously  been narrowing.  US refiners have the advantage of buying and refining WTI crude, which has trades at a discount to other crude types – particularly the Brent crude used by most European refiners.

The discounted WTI crude used by U.S. refiners boosts their margins as the refined products trade at similar prices across all regions regardless of the crude used to produce them

I’ll keep watching spreads, the forward curve on distillates, and the spreads on heavy oil.  Maybe these spreads will start to show me I’m being too cautious.

I’m willing to change my mind as the facts change.  But until then I’ll take the safer path and keep my money in my wallet.


EDITORS NOTE: I cover all kinds of energy stocks–including some solar stocks, which have been doing great lately.  My latest solar pick is up $7/share in the last 6 weeks. I think it’s going A LOT higher.  Get the name and symbol on this stock: Click here for quarterly access $ 149 per quarter (30 days no-questions refund)

THE NEXT BIG DISCOVERY ROSCAN GOLD ROS-TSXV; RCGCF-PINK

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Roscan Gold is the stock that I think will be The Next Big Discovery in the mining world.

And it couldn’t have come at a better time, with gold breaking out above 5 year highs.

As I explain how CEO Greg Isenor and Director Dave Mosher have discovered over 10 million ounces of gold – with two of those assets now in production, you’ll probably gasp when I tell you this stock is trading at… 20 cents.

Twenty cents.  And here’s what they have:
1. They’re surrounded by some of the highest grade & most profitable gold mines in the world
2. With a cashed up treasury,
3. Two sets of great drill results already released
4. That caused a group of Smart Money to buy the last financing
3. Drills turning now

In a good gold market like we have now, and a Tier 1 team who have built and sold juniors before – the Market will instantly reward this stock it it hits a major multi-million ounce gold discovery.

The next set of drill results will be out in weeks.  Gold stocks are SO cheap, there is a BIG and EASY jump in them when they hit good results. Roscan Gold has a legitimate shot of being a MAJOR WIN before the end of 2019.

In this gold market, it will only take one press release.

Roscan is now drilling at its Mali (West Africa) based Kandiolé Project.  The West Mali Gold Belt has more than 35 million ounces of HIGH GRADE gold discovered – making it one of the most profitable regions in the world, with four HUGE mines operating right around Roscan’s Kandiole.  In fact, one of these mines is quite possibly the single most profitable gold mine in the world right now.

Of course, in a good gold market you own mostly the senior producers.  But Roscan is more than “a cheapie with a chance” as I’ll explain – this company has followed the rules of Discovery Investing to a “T”.

They’ve found and sold mines – that are producing today.  They own 25 million shares of Roscan. They’re in one of the highest grade gold belts in the world. There’s money in the bank and they are drilling NOW.  It ticks all the boxes for Discovery Investing.

And personally, I think a major discovery here is a matter of time – which is why I’ve loaded my portfolio up with Roscan shares right now. See if you agree.

CEO Greg Isenor has already made two major gold discoveries in the West Mali Gold Belt with the Siribya and Diakha deposits, which are now owned by IAMGold.  In fact, Siribya is right beside Kandiole, the property that Roscan is drilling on RIGHT NOW.  So when I tell you Isenor is an expert in this prolific gold belt, believe it. This man finds multi-million ounce gold deposits! And he finds them right here!

Before those two discoveries, Isenor also led the team that discovered the 5 million ounce Bissa gold deposit in Burkina Faso, also in West Africa.  It is now a producing mine operated by Nord Gold, a private Russian producer.

After 15 years in West Africa and 10 million ounces of gold under his belt, Isenor knows this region better than anyone else on the planet.

Kandiole is a project that Isenor has wanted to get his hands on so badly – for a decade – that when it came available, he had to commit the first $750,000 personally because the gold market was so bad at the time.  And he’s kept buying shares in the open market when he wasn’t in blackout periods.  At 20 cents, that tells me all I really need to know.

Director David Mosher brings more serious credibility to the Roscan story.

Under Mosher as CEO the market capitalization of High River Gold Mines increased from $7 million to more than $1 billion before it was acquired… CHA-CHA-CHA-CHING!!!

Mosher took three mines fully from exploration through to production at High River – including a mine in West Africa that is exactly like what the Roscan team sees at Kandiole.

All together the leadership group of Roscan has discovered almost 10 million ounces of gold through projects that are now producing.  And they’re drilling for their next one RIGHT NOW at Kandiole.

They’re considered such a sure bet by the Street, that more than 40% of Roscan’s shares are held by institutions. You NEVER SEE THAT for a junior miner of this size.  The Smart Money already owns the stock.

That credibility means that as soon as Roscan hits – the Market will reward them instantly, because the Street knows that Roscan’s leadership group can monetize a discovery.

That is why The Big Pay-Off here is potentially in months – not years.

Surrounded By Big Profitable Gold Mines

The West Mali Gold Belt is one of the the most productive greenstone gold belts in the world.

There are multiple 5 million ounce plus properties here, including:

Sadiola Mine (Iamgold – IMG-TSX) – 14 million ounces

Loulo Mine (Barrick – GOLD-NYSE) – 12 million ounces

Gounkoto Mine (Barrick – GOLD-NYSE) – 5 million ounces

Fekola Mine (B2 Gold – BTO-TSX) – 5.15 million ounces

The region is loaded with gold to the north, south, east and west of Roscan.

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These 5 million ounce plus projects aren’t just big – they are also extremely profitable.

B2gold’s Fekola Deposit – in production right beside Roscan – is the 2nd lowest cost mine in the world with production of 400,000 oz gold or more.

All-in sustaining costs (AISC) for Fekola in 2018 were $533/oz – that isn’t good; with a $1,350/oz gold price that is great! The mine is gushing cash flow.

When I say best-in-the-world economics I’m not joking.  The table below details the AISC for the top gold miners in the world for 2018.

None of them even come close to $532/oz AISC of Fekola – an asset that could be a sister discovery to what Roscan may find.

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Source: Financial Filings Of Respective Miners

What Are Five Million Ounces Of Gold Worth?

Mali is already home to several 5 million plus ounce discoveries, plus many more that are 1 million or higher.  They are all around Roscan.

It’s easy to see a 5 million ounce discovery in the stable gold mining region like Mali being worth $100/oz – B2Gold paid $108 per ounce to acquire Papillion immediately after discovery.

The table below shows you the price per ounce at which transactions have been taking place – the average and median both point to $100/oz.

Acquirer Seller/Asset US$ Per Ounce
Coeur Mining Northern Empire $115
Orion Dalradian $50
Sandstorm Gold Mariana Resources $226
Agnico Eagle Mines Santa Gertrudis $86
Eldorado Integra $128
B2Gold Papillion $108
Goldmining Inc Bellhaven $11
McEwen Mining Lexam VG Gold $36
High Valuation   $226
Low Valuation   $11
Median Valuation   $97
Average Valuation   $95

 
$100/oz means that a 5 million ounce hit here for Roscan would be worth at least $500 million for a company with a market capitalization under $20 million today.

Being conservative – even if Roscan ends up with a share count of 200 million as it brings this discovery towards production we are looking at a company that could be worth:

$500 million value / 200 million shares = $2.50 per share

With a current share price of 20 cents the upside here is HUGE.

With one of the best exploration teams in the world – certainly in West Africa – working for me, I can see shareholders making millions in a hurry just to fairly value a discovery – there is more upside as the team takes this towards development.

Even if Isenor’s discovery turns out to be considerably smaller, Roscan investors will still do very well; with producing gold mines operating nearby even a 700,000 ounce discovery will be very valuable and worth far more than the current share price.

THE CONCLUSION IS OBVIOUS

Gold has broken out to a five year high!!  Because gold shares are SO cheap, there should be a fast and dramatic, first swing up.

I showed you charts of junior gold stocks that even in a bad gold market, made millionaires out of retail investors within weeks. It’s a fact: when a junior discovers a major gold deposit, the stock soars.  It is THE reason to invest in junior mining.

Now, with a GREAT gold market, the upside and frenzy should be even better.

Discovery Investing gives investors the best opportunity to make a life-changing win. This means:
1. Find a management team who have many discoveries.  Roscan – CHECK.
2. Make sure they own a lot of stock.  Roscan – CHECK.
3. They should be exploring in a big gold belt.  Roscan – CHECK.
4. Treasury is full? Roscan – CHECK.
5. Are they drilling NOW?  Roscan – CHECK.

On top of that, this tiny company already has huge institutional ownership – more than 40 percent of Roscan’s shares are institutionally owned. So the float on the stock is much smaller than you think.

To me, that means that when the retail money finds this stock, the upside here will happen spectacularly fast.  This is what investing in the juniors is all about. I didn’t mortgage my house to buy this stock, but I put enough in it that it will make a difference in my life if they hit.

Roscan looks just like High River Gold was before Roscan Director David Mosher took it from a market cap of $7 million to the more than $1 billion… on the back of another West Africa gold mine he discovered.

That is the upside potential.  The timeline to see that upside really isn’t a mystery.  Roscan is fully funded to drill constantly for this entire summer.

Drills are turning now.  Drill results will be steady for the next few months. All it is going to take is one little positive press release and Roscan’s stock could make investors at this price level very, very rich. That’s why I’m long ROS-TSXv.

Roscan management has 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.

The Next Big Gold Discovery Is Right Here

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Have you ever had a stock go up 1000%–or 10x–in just one year?

It’s exhilarating–and a bit nerve wracking.

The best place to find these Huge Wins is in junior mining stocks.  And I expect to see A LOT more now that the gold price has broken out to 5 year highs.  There’s going to be a lot of new millionaires in the coming year!

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As expected, only the senior gold stocks are moving so far–the intermediates and the juniors will follow.

I’m getting positioned NOW with one junior that has followed all the rules of what I call Discovery Investing

Discoveries makes stocks SOAR. Discoveries make retail investors rich.

Look at Great Bear Resources–GBR-TSXv from this time last year:

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The stock soared from 60 cents to $3.40 in just two months–more than 500%!! once it made a discovery in one of the premier gold belts of the world–Red Lake in Ontario.  They followed all the rules–they had key shareholders who had built and sold juniors before and the company was cashed up with management’s money in a play with a great address.

Below, I’ll break-out these steps to successful to Discovery Investing–AND–show you where it’s pointing me in an email tomorrow. DON’T MISS TOMORROW’S EMAIL!!!!!!!!

I have every confidence that tomorrow’s email will make many of my readers A LOT of money.  I’m going to show you EXACTLY where I see The Next Big Discovery happening–likely within weeks.  And now that gold has broken out, expect the Market reaction to be immediate.

Discovery Investing Rule #1–You invest in a team that has built and sold a deposit before–making themselves and their shareholders rich. The team I’m introducing you to tomorrow has discovered and sold over 10 million ounces of gold!

Rule #1b–it’s even better if the deposit they discovered is in production.  This team has TWO assets now in production.

Rule #2–You want to see that management has put A LOT of their own money into their current company.

Tomorrow’s team owns over 25 million shares, and they paid for ALL of them. In fact, the CEO bought the
company’s property with his own money–this team is ALL-IN like few I’ve ever seen.

Rule #3–You want them exploring in a big mineralized area with lots of other mines–because you know that old saying–

The best place to find gold is next to an existing mine”.

The Next Big Discovery–which I’m giving you on a gold platter tomorrow–is in a gold belt with over 35 million ounces discovered, where some of the most profitable mines in the world are operating right now.

Rule #4–treasury is cashed up and drilling.  Tomorrow’s company has the drills about to turn and is fully funded for this year.

The best part?  Well, exploration takes years–but investors have already seen some proof with the first set of drill results.  The stock ran up 400% in days! But in a tough junior mining market, it has come back to earth.

Management has continued to buy stock now that results are out, and the drills are about to turn again.

This stock has the PERFECT set-up.  It ticks all the boxes; it has followed this tried-and-true formula to a “T”.

I think it’s going to make a lot of people rich, in a very short period of time (including me!).

Here’s the story:

Management Has Already Done All the Hard Work

For more than a decade operating in this region this CEO has been stalking this specific property that is surrounded by major gold mines.

He watched with growing frustration as his most coveted opportunity sat in the hands of a party that couldn’t raise the money to develop it.

For ten long years he was unable to get his hands on the asset.  But he’s patient, and he was just able to buy this asset last year.

Raising money for grassroots exploration projects was almost impossible–so he used $750,000 of his own money as the lead order to buy it!

This man knows this region better than anyone! And for a decade this is the one property that he wanted. Now he has it.

This man has been exploring, developing and cashing out in this prolific gold trend area for 15 years with major success.  With his team he has been involved in discovering–and monetizing–almost 10 million ounces of gold.

At US$1,400 per ounce, that’s $14 billion in gold.  At an average valuation worldwide of $100 per ounce in the ground in a take-out, that’s $1 billion in shareholder value he and his team have created–all in this area.

But this is the Really Big Opportunity that he has always coveted.  And that’s why I want to put my money with this guy!

That is why he was the largest and lead order to get this asset initially and took on all of the risk.

You do that for one reason–because you know exactly what you are sitting on…a life-changing payoff.

It isn’t just the CEO who has loaded up with stock. The management and Board of Directors combined own more than 25 million shares and continue to add to that position. They have placed massive bets and are now on the cusp of being rewarded–the drills are turning NOW.

 
A Tiny Company Surrounded By Monster Gold Deposits

This company isn’t sitting beside an existing mine – it is surrounded by multiple mines which are SEVERAL multi-million ounce gold discoveries.

These are LOW COST producers–because they are high grade and near-surface. This is a mining investor’s dream!

As the only analyst who follows this company says…

In our opinion, this company is in the early stages of making a major gold discovery…..”

We believe these initial targets are only the tip of the iceberg…..”

There is no leap of faith required here. Everything around this property is laden with high-grade gold.

I’ve concluded that, the analyst has concluded that and company insiders have concluded that.

There were some GREAT results last year–and the stock jumped 400% IN ONE DAY.  Since then, the stock has returned to earth, and drilling in this prolific gold belt has just restarted.

The company has cash in the bank and yes, is now drilling.

How well situated is this property in this prolific gold belt?

Right beside this property you can find documented gold deposits of 14 million ounces, 12 million ounces, 5.15 million ounces, 5 million ounces and more.

Plus other recently announced discoveries that have yet to be quantified.

More importantly these discoveries don’t just contain a lot of gold, they contain a lot of gold that is highly profitable to mine.

The most high-profile producer in the region has AISC–All-In Sustaining Costs–of $600 per ounce of gold.
With gold selling at $1,400 per ounce you can make a lot of money by pulling it out of the ground for $600 per ounce.

To be clear I am Big Game Hunting with this stock – I’ve bought it because I expect a major positive announcement this summer.

I’m hoping for a repeat of the many 5 million ounce plus discoveries in the immediate area.  That has the potential (remember folks this is still all potential!) to make this stock a 20-bagger from here–and tomorrow I’ll show you my math on that.

My profits from this one stock will make my year.

WHAT IF I’M WRONG–and they only find a small gold deposit? Well, because it is completely surrounded by operating mines, even a minor gold discovery will result in a huge win for shareholders.

If this company finds only 10 percent of the gold that I’m expecting it will immediately make for an obvious takeover target for a nearby operator.

This management team is one of the top exploration groups in the business–who have already built and sold two other juniors.  They want to sell.  They own a BIG chunk of stock and want to recognized the value they’re creating.

And this puppy is so cheap–you’ll gasp tomorrow when I name this company and you see its share price. I expect any takeover to occur at a nice premium to the current share price.  And with gold starting to run, you can bet the producers will want to buy these high grade gold ounces as quick as they can.

For the next six months this company is going to be constantly drilling holes into this extraordinarily prolific property.

This non-stop drilling starts now and as soon as any good news comes out in this new gold market–this stock is gone.  This isn’t wealth creation that takes place gradually over time.  This is wealth creation that takes place overnight.

And that discovery–which could be worth hundreds of millions of dollars–will be 100% controlled by a company with a current market cap under $25 million.

Do Not Miss Tomorrow’s E-Mail!

That e-mail will tell you where I expect The Next Big Discovery–possibly within weeks.  It has every ingredient I look for:

  1. Management has discovered, developed and sold close to 10 million ounces of gold. Two assets they developed are in production right now in this belt.
  2. They own over 25 million shares
  3. They’re exploring in one of the most prolific gold belts in the world, and are surrounded by other mines already in production
  4. They’re cashed up and drilling NOW.

Tomorrow you’ll get the specifics of the team, the gold belt, their property–and of course the name and ticker of The Next Big Discovery.

Be ready.
 

Keith Schaefer
Publisher, Oil and Gas Investments Bulletin