What is The Best Growth Story Ever–in the history of junior energy?  That’s easy…it was Pacific Rubiales, symbol PRE-TSX during its heyday from 2009-2012.

Pacific Rubiales grew from 9000 bopd to 300,000 bopd from its Colombian heavy oil operations in just a few years.  It was an incredible run, and made tens of millions for shareholders during that time. It was the very first pick in the Oil and Gas Investments Bulletin at $7. (Like any junior oil, you wanted to keep a 20% trailing stop loss because debt eventually forced the company into a painful restructuring.)

Serafino Iacono was the Chairman of that company.  He is now back in the public markets with PentaNova Energy, symbol PNO-TSX, with another heavy oil play, this one in Argentina.

Much like the Colombian Rubiales field, Pentanova’ Llancanelo field is a development stage asset–no exploration.  The oil is there and the engineers just have to determine the best way to get it out of the ground and get it to market.

Iacono has Pentanova presenting at our Subscriber Investment Summit (SIS) in Vancouver on October 3.  With net cash, an experienced team and a big asset in front of him, he’s confident he can repeat the success of Rubiales today, with the Llancanelo field in Argentina.

When I spoke with him by phone last week, he was at home in Bogota Colombia.  I asked him if he would take me through the growth curve of the Rubiales story, piece by piece–because 9000 – 300,000 bopd in four years is almost too much to comprehend.

Keith: Fino, walk me through the Rubiales growth path.

Serafino Iacono: Before it became Pacific Rubiales, it was called Rubiales Energy, and then Pacific Rubiales. That was the merger that we did with Pacific and Rubiales.

That’s when Frank (Giustra) and us formed the Rubiales Company.

But what is the parallel that we see with Llacanello. We started the company pretty much the same way. We started the life of Rubiales, Pacific Rubiales with the acquisition of a green field actually was in … That was a gas area in northern Colombia, which was the second largest field discovered in Colombia. This was in 2006.

The concession was called La Creciente. We did from the beginning, it was like a wildcat. In the first well that we did, we were doing 90 million cubit feet a day of gas in operation. The stock went from 30 cents to $7.00.

Then with Frank, we did the Rubiales Acquisition and we formed Rubiales Energy, which had the Rubiales field. It had the oil fields in hand. We paid $250 million for the acquisition to buy at the time, 30 million barrels in reserves and a production of 9,000 barrels a day.

It was in a very remote area, with very little infrastructure; there was absolutely nothing there. The oil was being carried by trucks. It was in a very remote area with very rural roads. It would take a truck to get from the fields to a regular highway…it would take them 12 hours in trucks, just to get only 150 kilometers. So imagine how bad the roads were.

We took that operation with the 9,000 barrels a day, everybody thought, including Ecopetrol, that we were nuts and we saw great potential.

What was the great potential that we saw over there? The fields, usually these deposits of heavy oil are massive. They’re not small areas. They’re very, very large sedimentary deposits. We knew that this thing was going be massive.

So, first thing we did, is we took over the operation and looking at the 2-D seismic and a little bit of 3-D seismic, we determined very quickly that it was very shallow oil, very good oil, very easy and there was one great advantage that it was a water driven reservoir.

So, lots of pressure, lots of movement for the oil to come out. You could  cold flow and recover the oil easily. We told Ecopetrol in the first year of operation, Ecopetrol said, we don’t believe in the deposit, you do it at your sole risk.

We started doing drilling in the area and we brought in three machines that started drilling, consequently and what we did different than what they were doing … They were doing only vertical wells. We went in and we did something that hadn’t been done in Colombia frequently, which was horizontal drilling, which we had done in Venezuela many, many times.

The horizontal drilling did one thing. It took a well that was doing 150 barrels a day, which was good, because we were doing one kilometer, two kilometer wells, horizontally.  because we were covering more area. We took the same 150 to 2,000 barrels a day, simply from changing technique.

And so, we took this thing over. We expanded the area and then we started doing drilling in different areas never drilled before; pattern drilling every kilometer or two kilometer a well, so that we started calculating how much oil there was over there.  And out of the 20, 30 million barrels of oil that was in the area, all at once we found ourselves with 400 million barrels of oil in place.

That changed the story of the company.

I’m telling you this whole thing, because it’s important for you to understand, and then I’ll bring you to the parallel of where we are in Argentina with Llancanelo.

____________________________________________

Register for the 7th Annual Subscriber Investment Summit TODAY!

Tuesday October 3, Vancouver B.C.

Presenters 9 am – 4 pm

Click HERE to reserve your space!

____________________________________________

So we developed our gas fields. We created immediate cash flow, because gas was immediate cash flow. We took a production that was a small production, unprofitable at the time in rubiales  and we said ‘Within five months by drilling and doing our horizontal drilling, we can take this production from 9,000 to 35,000 barrels a day’, which we did.

Then once we understud the deposit, it was just a cookie cutting operation. We started drilling more, we raised more money and with the money, what we did was expanded the production.

We took the production to 85,000 barrels a day in the 2nd year of operation . But still with zero infrastructure. At that point, we were carrying 85,000 barrels of oil a day with trucks, 2,500 kilometers to the coast. It was literally a moveable pipeline. It was becoming so inefficient and so cumbersome that we decided that we were gonna build a pipeline.

We did it at our own risk and we built a 300 kilometer pipeline that connected us with the canon-limon pipeline that went to the coast, and that opened up for us then to take the production, increase the production from 85,000 barrels to almost 250,000.

Then we went to Keifa, the extension of Rubiales. We expanded Kipa, that had all but been written off by Ecopetrol. Then we did an additional production in there and we took the full production to 320,000 barrels a day . This was done over a course of four years, we did all of that.

The company made so much money and then we started building infrastructure, ports, everything so that we could be self sufficient in carrying the crude, because there was zero infrastructure in Colombia.

What is the parallel story over here? When we did PentaNova, PentaNova was being created under the same  model and the model was we wanted to get some concessions that would give us immediate cash flow and it would give us a good position that strategically in the country of colombia.

In Colombia, I didn’t want to go for oil because of all the challenges, security and things. The best area for us to go and the biggest growth that I saw in Colombia was the gas. So we went after a bunch of gas concessions that were underpriced at the time because nobody was investing money when we started acquiring these concessions.

Last year, it was the worst year in oil. Nobody was buying anything in Colombia. We took advantage of those low prices and we took Maria Conchita, which we’re gonna start drilling the next two months. We took Sinu-9, two of the greatest fields in gas, developement one right next to Canacol where Canacol is producing 180 million cubic feet of gas a day.

180 million cubic feet of gas a day is the equivalent to 30,000 barrels a day of oil. So we took strategic areas with production, near production, 90% chance of finding gas and we established a front in Colombia in the natural gas, where we see the growth.

But I wanted to have the same story and looking for a concession that had critical mass in Argentina. The concession that had the critical mass to me, outside of Colombia we found Llancanelo.

What does Llancanelo have in common with Rubiales? It’s the same thing, 3 billion barrels of oil in place  300 million barrels recoverable.  It’s a concession that has been known and studied for the past 36 years. It produces  1,800 barrels a day. It flows cold. It’s got even better infrastructure than Rubiales, because it’s seven kilometers off a main highway with an airport and 30 kilometers from a pipeline to connect.

Best of all, a refinery 330 kilometers away in the north that receives all that oil and needs that oil, because every oil, it’s used for deep conversion refinery. The refinery need that kind of oil.

I looked at this massive concession, 50% owned by YPF and 50% owned by … Well, 41% owned by a whole bunch of small guys that didn’t have the money, or it was part of a portfolio that had become an orphan, because they always wanted to put money in easy things, not things like heavy oil.

I took advantage of that, consolidated that and with the idea that this was another Rubiales field. We took the most conservative approach. When we were producing in Rubiales, our recovery rate from the oil in place was 18 to 22%. In Llancanelo, we took a conservative approach and said, “Let’s not do anything special. Let’s say that we can only recover 10% of that oil in cold flow. 10% of that oil out of 3 billion barrels of oil in place, certified, it’s 300 million barrels.

Remember, that we paid for 35 million barrels, we paid $250 million at the time to the owners of the Rubiales field. This acquisition we did it with $25 million less than … $20 million in cash and the rest in shares. We are buying 150 million barrels of oil that cold flows.  I still see huge potential up-side to produce more then 300 million barrels.

We bought if for less than 50 cents a barrel. So by me looking at this thing and taking over this company, now what we’ve done is we’ve consolidated ourselves in being a one decision maker with a partner that is YPF, that is the 800 pound gorilla, who loves the idea, was happy to come in and be our partner, because they know our experience in heavy oil and our understanding of heavy oil between (PNO President) Gregg Vernon and (Head of Argentine Operations) Warren Levy, between what we did in Rubiales.

Gregg Vernon did that in Argentina with heavy oil and he sold it very successfully, so we took all of this and I see the same pattern that I see in the Rubiales field.

This thing will start with us going … In the next six months, seven months, we’ll probably go to 5,000 barrels a day, 6,000, slowly until we understand what’s best drilling technique we will use . Obviously, we know that horizontal drilling works, because its been used there .

What we do now is do a test, our drilling by doing the multiple lateral drillings that will liberate more oil and have better recoveries and go two miles vertical in length, we must do that first. Once we test and we know that we can recover 1500  to 1,800 barrels a day from the multiple layers, we then will start drilling in the pattern another 20, 30 wells.

Remember that one of these wells is going to drill 12 parallel wells. So when we do 17, 20 wells of this thing, what you’re doing really, you’re doing 250, 300 wells underground. So you drain a lot of the deposit.

What’s the difference between Rubiales and Llancanelo? Rubiales was a water driven reservoir. It had some good news and some bad news. Good news is that they had a lot of pressure, so that the oil flew a lot easier, okay?

The bad news was that the more oil you took out, more water you were taking out and then all at once you have a problem with disposition of water out of these deposits. They become impossible to manage. For every barrel of oil at the end of the Rubiales fields, we were taking 50 barrels of water outper 1 barril of oil.

So Llancanelo doesn’t have the water driven reservoir, but Llancanelo’s got a great advantage. Rubiales was pay zone was  30 meters thick, the area, between 15 and 30 meters of  oil. Llancanelo is 190 meters thick. It’s a gigantic field and it’s got another layer that hasn’t been tested that most likely’s going to double those reserves.

It’s not a water driven reservoir, that’s the bad news, but the good news is that it’s got a very low water cut. It’s got less than 20% water cut. We believe that the maximum that it’s gonna achieve is 25% water cut, for the life of the deposit, so very little water, which means that, at one point, once you start  easy oil with cold flow, you will probably get the rest of the oil with steam or with some polymer or some other technology.

But we are going to have a massive deposit that we–very quickly, with very little money–and what I mean by very little money, all the infrastructure is in place. I have to do a 33 kilometer pipeline, but that costs no more than $20 million to do a 33 kilometer pipeline, I’m talking about eight inch to twelve inch pipeline. You bring in night crews that go in to the refinery. You mix it with the heavy oil and you take the heavy oil and you blend it and you take if from 14 degrees to 21 degrees.

Talking about the quality of oil, Llancanelo is a better oil than Rubiales. It’s got less than 2% sulfur, so it’s a very low sulfur oil. It’s 14 to 16 degree oil  normal viscosity, so it’s better than Rubiales,  because Rubiales had 11 degree oil. This thing over here it has 14 to 16, so it needs less dilutants to take it to 22.

So it’s a lot more economic to develop.

It’s massive. I think that within the next four years of drilling Llancanelo, we’ll be able to take the production to 100 to 120,000 barrels a day, which means that it’s 60,000 barrels net to us and we can do this for the next 20 to 30 years and still have more.

Keith: Wow, that’s an amazing story…and an amazing goal for Argentina if you can bring it all together in that kind of short time frame.  How do you see the KM-8 asset developing?

Iacono:  KM-8 is strategic. KM-8 is light crude. It’s in an area where YPF is also working, and it’s taking light crude facilities.

What will get interesting with that is…that I can do swap with a light crude from KM-8 with YPF that it takes into the refinery and use that as the blend, so that I don’t have to go buy blend on the market. I’ll do a swipe of my blend, which is a 34 degree with the blend that comes into the pipeline, so that we have a full cycle of light crude, heavy crude that we can blend and then all the infrastructure in place with our partner in both concessions.

In a nutshell, that’s the story.

Keith: That’s a great story, Fino, and I don’t think investors understand what you did before, only a few short years ago, and what you’re planning now.  So thank you.  And thank you for coming to Vancouver on October 3 to tell your story directly to our retail audience.

Serafino Iacono: I’m sure it will be a fantastic day.  If you need any more information, go on the website and look at the success story that Rubiales was.

Rubiales was a success in the gas. I believe we’re going to be a success in the gas, a ‘money’ discovery. It’s not a discovery, it’s a development and Llancanelo is a world class deposit. There is no doubt whatsoever.

What is the only question? How do we take it out? We know horizontal drilling works. How big do you want to be and how much oil? How fast do you want to get out? And that will be the question–how the technical part gets done on this and that’s what we’re going to do.

Keith: Fino, thanks so much for your time today.  Look forward to seeing you October 3 and getting an update then.

Serafino Iacono: Thanks, Keith. We’ll talk to you, okay?

The Subscriber Investment Summit ‘sells out’ every year (even though it’s free to attend–we have to close registrations ;-) )  REGISTER TODAY–RIGHT  HERE.

There are few countries with amazing geology as Colombia.  I think that’s why I’ve had some of my best stock market wins there.

My very first investment in the Oil and Gas Investments Bulletin in July 2009 was Pacific Rubiales, symbol PRE-TSX at the time–a heavy oil play in Colombia.  It was hands down the best growth story of its day.

In fact, as I’ll explain in my next story, it still is The Best Growth Story in junior energy in the history of the world—going from 9000 bopd to 300,000 bopd in four years.  The stock went from $2-$34 in just over two years.

Petrominerales was another early Colombian winner for me, going from $11-$33 in just 9 months on the strength of some wells in their Corcel field that were hitting 5000 and 6000 boepd.

Great geology means wells that pay back their costs very quickly–allowing junior producers to re-invest that money into new wells–and grow production within cash flow.  That means Free Cash Flow, no dilution and actually reducing debt (if they have debt at all).

There are three international energy stocks–all with Colombian footprints–that I think have great, near term upside for investors—and I want you to meet the management teams, in person, at the Subscriber Investment Summit (SIS) on Tuesday October 3 in Vancouver at the Pan Pacific Hotel.

We close attendance early every year, as this is a sell-out event—and with the star-studded line-up we have this year, that will happen sooner than ever—SO REGISTER TODAY.

I’m very excited to have the new CEO of Parex Resources (PXT-TSX; PARXF-PINK), Dave Taylor, joining us this year.  I have told subscribers FOR YEARS, if you only have one buy and hold oil stock in the junior sector, this is it.  Their wells pay out quickly, so they can re-use that cash to drill another one.  They are just starting on a new play with the Colombian National Oil Company, Ecopetrol.  They have over $100 million in net CASH.

Parex is mostly an oil play.  Canacol Energy (CNE-TSX; CNNEF-PINK) is a natural gas play that again has very fast payback on its wells—about 8 months.  I get excited at 12-14 month paybacks!  Their growth curve in the coming six months is phenomenal…and their natgas contracts are now guaranteed at some of the most profitable rates I have ever seen.  CEO Charle Gamba and CFO Jason Bednar will tell you how quick they are getting a pipeline built, and gas flowing to an underserved market.

And Serafino Iacono’s Pentanova Energy (PNO-TSX) is also presenting.  This team is drilling for natgas in the same highly profitable, underserved market that Canacol is into…but The Big Plan here is heavy oil in Argentina.

Iacono founded Pacific Rubiales–The Greatest Growth Story EVER. This team knows how to grow heavy oil stories like nobody else.

They went into this play when EVERYBODY else was only buying light oil in Argentina—the Vaca Muerta shale play.  There’s a massive resource already proven there.  Pentanova will be an engineering and logistics play really; there is no exploration in Argentina.  Billions of barrels of oil is there.  They bought this play just as heavy oil discounts around the world are getting smaller and smaller—increasing the profitability of their asset.

I have other energy presenters as well, and I’ll be telling you about them in future emails.

The reason to come to these (free) shows is simple: junior oil and gas is a volatile industry.  Even to hold these high quality companies through that volatility, you need conviction.  You get that by meeting management, face to face, and be able to ask them tough questions  and hear their answers…all for FREE.

It’s a one day event, from 9 am – 4 pm, with lots of free time between presentations to go speak to the CEOs directly—one on one, or be part of the throng.  And all the CEOs hang around for an hour afterwards while there is a cash bar.

Retail investors rarely if ever get to meet these management teams directly.

DON’T BE LEFT SITTING OUTSIDE ON OCTOBER 3.  REGISTER HERE

Keith Schaefer

Lithium is probably the most newsworthy metal in decades. Formerly a small niche item for batteries and mainly used in ceramics and glass, it has become mainstream—in a huge global way—with first the rapid rise in personal electronics, and now energy storage for upstream renewable power and downstream Electric Vehicles (EVs).

Roughly 40% of lithium demand goes to the battery business today and energy metals specialist Chris Berry has this percentage rising to as much as 66% by 2025.

Lithium has singlehandedly turned the entire multi-billion US utility industry on its head.

And it is creating massive opportunities for investors because an entire new supply chain is developing around energy storage and EVs.

One of the biggest opportunities was possibly announced yesterday, as FMC Corp. (FMC-NYSE) said it planned to spin out its lithium division in the second half of 2018.

Right now, the Market does not have a BIG, primary US listed, pure play producer for lithium.  Having said that, senior companies like Albemarle (ALB-NYSE), SQM (SQM (NYSE), and FMC have traded on lithium prices and their earnings on lithium—despite both only having a small part of their overall revenue as lithium. The key is the margins that these companies generate from lithium. ALB is showing operating margins of 40+% for the past two years or so—very profitable!

(Aussie listed Galaxy Resources and Aussie/Cdn listed Orocobre are two junior producers that are pure plays)

The stock chart on Albemarle is clear: lithium is the driving factor on this senior stock.  The stock languished for years, but in January 2016, when the lithium boom really took off—so did Albemarle, going from $47 then to $120 today (ok, $119.96).

I made a lot of money on lithium stocks back then (remember how I told you all I was buying Lithium X (LIX-TSXv) at 30 cents & it went to $2.80 in weeks?) but I ignored Albemarle because I didn’t think the Market would adopt it as a lithium stock because it was only a minority metal for the company.  I was sure wrong there!

FMC’s timing looks good.  It turns out lithium is quite profitable at these prices! FMC announced strong earnings with lithium segment revenues up 17% YOY at $74M and segment earnings up 47% at $24M.

Despite the fact that FMC’s results were buoyed more by price than volume (which fell 2%),  the company has raised its 2018 lithium sector earnings guidance to $115M – $125M up from $100M – $120M.

Lithium only accounts for 11% of FMC’s revenue, but the company announced a capacity expansion in its lithium hydroxide and lithium carbonate businesses to 30,000 tpy and 40,000 tpy respectively.

For the sake of context, the lithium hydroxide market is thought to be 30,000 to 40,000 tpy in size today. That’s so big you wonder if that will kill margins for the industry. The carbonate expansion will focus on growth in the company’s Argentina operations and will cost $250M – $300M;  in line with typical industry build outs.

While the hydroxide expansion plans weren’t as clear (specifically security of supply and costs), the company will focus on this as lithium hydroxide has become the lithium chemical of choice in the battery business due to higher energy density.

A look further down the lithium ion supply chain confirms strong growth there as well. Umicore, the Belgian battery technology company, posted strong H1 results led by their “Energy and Surface Technologies” (EST) Division with revenues up 38% to €398M ($471 USD) and recurring EBIT up 66% to €61M ($78M USD).

Albemarle and SQM report later this month and are likely to reveal a similar story around pricing strength in the lithium sector.

So ALB-NYSE stock performance and lithium correlation was a surprise  for me. There was Another Big Surprise, though more recently, and I think it sets up The Lithium Boom for a much larger and longer run than I ever thought could happen.

And that is the CEOs of both oil companies and auto manufacturers moving towards EVs faster than I ever thought.  Volvo (STO: VOLV-B) in Sweden and Volkswagen (ETR: VOW3) in Germany have said they are making the transition to becoming EV manufacturers in just a few years. From 2019, Volvo will only produce hybrid and full EVs – no production of automobiles with only an engine.

Usually, industry lags public opinion on Big Changes like the EV Revolution, but now I wonder if we could see auto manufacturers create more EVs so fast buyers can’t keep up. This all depansd on security of supply which is why understanding opportunities in the upstream mining sector is so important.

Back in early 2016 as the lithium boom started, I was confident it wouldn’t last more than a couple years, and had planned to forget about lithium as the majors brought on production.

But not only has demand increased more than expected, lithium extraction has taken longer than expected.

The Market has (dramatically, actually) under-estimated permitting and development cycles.  The lithium producers may catch up in the next 1-2 years, but right now nobody is betting on a huge increase in supply in the near term.

That will keep the price of lithium high, and create a lot of opportunities for investors.   In the junior sector, not only are new lithium deposits being explored, several companies are now trying to  develop technologies that will recover lithium brine from oil waste (which occurs naturally).

That’s why I’m going to keep writing about energy metals.  Wherever there’s innovation, investors can make money.  As lithium goes from niche to global mainstream metal, billions will get raised getting new assets and technologies into play. With FMC’s announced expansion yesterday, year to date over $1B USD has been raised or committed for lithium project development.

FMC’s spinout is just another validation that the Street is getting behind this upstream way to play the multi-year EV trade.

EDITORS NOTE: My experience is that table-pounding buys in the energy sector only happen once every 12-18 months.  Resolute Energy (REN-NYSE) was my last one, just over a year ago, and it went from $5-$48 in just a few months.  I JUST FOUND MY NEXT ONE…and I can’t believe I’m going to give it to you for just $5–FIVE BUCKS…Click HERE to access the name and symbol.

Keith Schaefer

The EIA’s Weekly Crude Oil Inventory Data
A New Source (and era) of Volatility

Rightly or wrongly, the EIA’s crude oil inventory reports move global markets:  Right before the EIA #s came out three Wednesdays ago, WTI crude oil was trading slightly higher—then plunged $1.61/barrel in just two minutes after the Weekly Petroleum Status Report came out.

The report showed a surprise 3.32 million barrel build in U.S. crude oil inventories, significantly differing from consensus forecasts calling for a 3.25 million barrel draw.

Crude oil prices have since been unable to recover–down about 15%.  If it feels like weekly crude oil inventory releases are becoming more unpredictable – it’s because they are!

In the five years leading up to June 30^th, 2016 analysts forecasted weekly U.S. crude oil inventory changes with an absolute average error of 2.83 million barrels (0.404 million bopd) – a pretty dismal record, but for good reason:  The EIA weekly inventory data is largely unpredictable – with some components appearing to be fabricated at times and an ‘adjustment factor’ averaging 1.01 barrels per week (0.144 bopd).  (Every once in awhile you see SeekingAlpha stories or even in Reuters/Bloomberg talking about how big this # is.)

Since June 30^th, 2016, the average absolute error of consensus crude oil inventory change forecasts has expanded to 3.58 million barrels per week (0.511 million bopd).

Even more telling, in the five years prior to June 30^th, 2016, consensus forecasts had never differed from reported weekly inventory changes by more than ten million barrels and erred by more than eight million barrels on only four occasions.

Since June 30^th, 2016 (51 weekly periods), consensus forecasts differed from the reported inventory change by more than eight million barrels on four occasions and have missed by more than ten million barrels on three occasions! That’s HUGE!

In fact, the three largest forecast ‘misses’ (the absolute forecast error) happened on September 2^nd, 2016 (15.42 million barrels), October 28^th, 2016 (12.42 million barrels) and February 3^rd, 2017 (11.33 million barrels).

Have a look at this chart and guess what it is…don’t peek at the answer below. The only hint is…it relates to the increasing unpredictability of weekly crude oil inventory data:

Give up?  US oil exports.  On December 18^th, 2015, Congress passed and the President signed legislation repealing the decades-old ban on U.S. crude oil exports.

Prior to the resumption of seaborne exports, weekly U.S. crude export estimates were unchanged most weeks – averaging 0.495 million bopd in 2015 (mostly flows to Canada to be re-imported as diluent), with the EIA making small adjustments (+/- 50,000 to 100,000 bopd) to their weekly export estimates every three or four weeks.

At the time, the largest one week change in estimated exports on record was +0.199 million bopd (June 20^th, 2014).  By mid-2016, seaborne crude exports became meaningful, increasing the volatility of exports—by a WIDE  margin.

As the above chart shows, over the past six months the volatility has exploded – perhaps best demonstrated by the swing estimated U.S. crude oil exports from 9.12 million barrels two weeks ago (1.30 million bopd) to just 3.90 million barrels (0.56 million bopd) in EIA estimates released this week – a 5.22 million barrel decline (0.746 million bopd)!

I pay my researchers a lot of money, but even they couldn’t figure out a relationship between these datasets and the weekly exports reported by the EIA.

Several services try to tackle the export data issue (Genscape and Clipperdata, for example) – with new services seemingly being launched monthly – but my researchers have yet to find a useful dataset (to date, they tell me that the best predictor of weekly exports is a mean reversion model).

In the meantime, the situation will only get worse:  US crude oil exports have increased from an average of 0.485 million bopd in 2016 to an average of 0.886 million bopd over the past four weeks and exporters are pushing to use increasingly larger vessels – making the timing of individual loadings increasingly impactful.

What I think is happening is that the EIA is (somewhat mistakenly) taking every increase in storage to be a drop in demand, when it may really be just a lumpy export dataset.  At 2 million barrels per VLCC, one ship leaving port a day late can skew EIA weekly data by a lot.

If this is correct…and I don’t know for sure that it is…that would mean that at some point, the EIA will have to correct/revise their data—to the downside, which is bullish.

Obviously, I am not the only one noticing this.  US brokerage firm Raymond James had some excellent statistics and charts in their weekly Energy Stat on Monday July 19 basically making the same case, with four key points:
1. Monthly EIA demand numbers, which are more accurate than weekly, show a 170,000 bopd discrepancy in Q1 2017–HUGE!

2. PADD 3 demand data (this is where the Gulf Coast is; where most of the 2 million barrel VLCCs come and go from) is  down an impossible 15% YoY.

3. Demand is not down at all–it’s up 1.6% in PADD 3, says EIA data
4. Mileage data is within 0.1 MPG in the last 3 years, so it’s not cars being more efficient

The EIA is very open about the challenges of measuring demand; in no way is anyone chiding them.  They have a very hard job–that was just made a lot harder by a massive increase in crude oil export activity–and volatility.

The Largest “Ethical” Cobalt Explorer in the World is Created

The #1 cobalt explorer in the world is being formed now with a proposal for a 3 way merger that would unite one of the leading cobalt camps outside the Congo.

This is what institutional buyers have been waiting for to get direct exposure to cobalt, a major metal in batteries for electric vehicles (EVs) and the fast growing  battery storage market.

If this proposal becomes reality, the combined assets of First Cobalt (FCC-TSXv), Cobalt One (CO1:ASX) and CobalTech (CSL-TSXv) will bring together more than 10,000 hectares of prospective cobalt-silver properties, 16 historic mining operations, a mill and a refinery with 40 acres of fully permitted property just outside the town of Cobalt Ontario, near the Quebec border.  The deal is still a Letter Of Intent, but Mell is confident it will get approved by shareholders.  It just makes too much sense.

“It becomes a good (public) vehicle,” says First Cobalt Trent Mell, who will remain CEO, and the merged name will stay First Cobalt.

The permitted mill and refinery is key.  With it, Mell says there is a possibility of near term production.

“We have the mill equipment already there,” Mell says.  “The reality is that within a year we could be taking stockpiled material from historic mines; putting it through our mill facility and be shipping concentrate direct to China.  So really, there are 12-24 month cash flow scenarios.”

This is exactly what institutional investors would want to see.  Mell believes the new First Cobalt will have a market cap of roughly $100 million—enough to attract institutional interest.  He says there are over 50 other cobalt explorers listed on Canadian exchanges, with all of them having market caps of $30 million or less—Big Money institutions can’t buy those stocks.

Cobalt prices hit a new 9 year high this week—over USD$26.50 per pound.  Hedge funds and ETFs have already started hoarding the metal, anticipating a supply crunch.

The merged entity will also have two of the most successful mining entrepreneurs in North America on the board—Paul Matysek and Robert (Bob) Cross.  Matysek is the most successful energy metal management man in the world, having built and sold:

1. Energy Metals to SXR Uranium in 2007 for $1.8 billion
2. Lithium One to Galaxy Resources in 2012 for $112 million

He also built and sold Potash One to Germany’s K + S for $434 million in 2012.

Cross is a Harvard MBA with a long track record of creating shareholder value in resources:
1) Bought control of Northern Orion in 2003 at $15 million market cap & sold it to Yamana Gold in 2007 for $1.4 billion
2) Co-founded Bankers Petroleum in 2004, became Chairman, reached market cap of over $2Billion in 2011.
3) Co-Founded B2Gold in 2007, still Chairman, now $3.7 billion market cap, producing almost 1mm ounces/year

I wrote in an earlier article that cobalt supply is much precarious than any other metal in the EV supply chain.  And that should make the price increases be potentially even higher than the more abundant lithium—and the chart above shows that.

But getting a large supply of ethical cobalt is not easy. Here is the problem I wrote about only a month ago:
“Over 60% of the world’s cobalt comes from the Democratic Republic of Congo. Three-quarters comes as a by-product from copper or nickel mines where production is only as secure as the host country.

“The other 25% of Congo’s cobalt is mined “artisanally”, which means it comes from small mines that are often very unsafe.

“Thousands of under-age workers are used, sent down into hand-dug tunnels and shafts that can and do collapse—to pull out bags of rock. Several media stories have exposed this practice.

“This is starting to change. In early March, Apple stopped buying cobalt mined by hand in the Congo, saying all small mine suppliers will have to meet its workplace standards. Other companies have made similar noises.”

The new, larger First Cobalt has the potential to be the first company to fill that gap, and as the Market recognizes that the stock will get A First Mover Advantage—a premium valuation.

Mell says the investment community should not expect miracles in the short term, but the potential for quick cash flow is real:

“The Big Prize–a buyout at a premium valuation–is in the 5-7 (year time frame). But we are motivated to find some short term cash flow and limit the burn and dilution. With everything we’ve got we can ease into production and scale up over time.”