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Where are the hot and cold spots in the world for resource investors? The bull market in commodities is forcing investors to look for new ideas. Lawrence Roulston, respected author of the “Resource Opportunities” newsletter, favors Canada, Alaska and China for investing in mining and energy companies.
StockInterview: Let’s get the cold spots out of the way so investors are forewarned about which countries to avoid.
Lawrence Roulston:
Many of the (mining) companies that went overseas decades ago are realizing the political challenges of doing business in some jurisdictions. These include Indonesia, Colombia and some African countries like Congo, Sudan and Eritrea. These are all places where there is great geological potential but where it is increasingly risky to do business. I think some of that mining is coming back home to Canada.
StockInterview: So Canada is on your list of “favorite countries”?
Lawrence Roulston:
Canada is at the top of the list. As of right now, given the geological potential, the political situation, the infrastructure and all the other considerations, I would rate Canada and British Columbia (highly). They have decades of work. But not much has been done for the last ten years. Companies are just now coming back and adapting to what is happening. Similarly Ontario, Quebec – tremendous geological potential – and it was ignored for a long time. Canada is now the most important place in the world for diamonds and represents 50 percent of diamond exploration spending.
StockInterview: Is there a particular mineral or metal that makes Canada particularly attractive?
Lawrence Roulston:
There’s everything. Canada has always been one of the top metal producers and it’s coming back to life. Of course gold tops the list, but there are base metals and uranium as well. The Athabasca Basin in northern Saskatchewan is the most important area to look at from a geological point of view. It’s now the largest source of uranium and contains the highest-grade deposit. There are other areas of emerging uranium potential in Canada. The Thelon Basin in the Northwest Territories, north of the Athabasca Basin, is geologically very similar to the Athabasca Basin. Some work was done in this basin in the 1970s and it was ignored until very recently. A little further north, in the Hornby Basin, a similar situation exists. In Labrador, the central mineral belt is just emerging as a very important place to look for uranium.
StockInterview: Do you have any favorite companies that you follow and have good prospects?
Lawrence Roulston:
NovaGold Resources (TSX:NG; Amex:NG), for example Galore Creek. This is a billion-tonne deposit with enormous metal content. (Editor’s Note: Galore Creek has been called one of the largest and highest-grade porphyry-related gold-silver-copper deposits in North America).
StockInterview: What’s another one of your favorite areas that has been largely unexplored during this bull market?
Lawrence Roulston:
Nevada is at the top of the list of places to work in the world, and Alaska is close behind. There’s huge potential in Alaska. The mining companies have only scratched the surface of the discoveries there. Two of the world’s largest metal deposits are in Alaska. Both of these are decades old discoveries, but work over the last few years has brought them to the point where they are now considered among the largest metal deposits in the world: Donlin Creek, a 25 million ounce gold deposit, and the Pebble deposit operated by Northern Dynasty (TSX:NDM). The Pebble deposit is significantly larger than and comparable in grade to Ivanhoe’s (NYSE: IVN) Oyu Tolgoi (copper-gold) deposit in Mongolia. (Editor’s Note: The Donlin Creek project is a joint venture between NovaGold and Barrick Gold).
StockInterview: Considering how hard the commodity bull has struggled over the last few years, is there anywhere else in the world where you can find a great but still “new” resource investment opportunity?
Lawrence Roulston:
Often a better value or a better opportunity is to stay a little bit outside of the crowd. One of the areas that offers some extraordinary opportunities is China.
China has done a tremendous amount of geological work over the last few decades, but it’s all from the perspective of finding small deposits and then rapidly developing them. There has been very little effort to look at China from a bigger picture. Those companies that have been able to look at China from a bigger perspective have started to make developments that I think will yield some pretty dramatic results over time.
StockInterview: Isn’t it difficult to do business in China?
Lawrence Roulston:
There is still a perception out there that China is a difficult place to do business. Most people coming from the West enter China coldly and try to make a deal. It would be impossible for them. But for western companies that can cooperate with groups that are well established in China – so that they can find their way through the system there – then there are extraordinary opportunities. There are mountains of geological knowledge – all in Chinese, of course. You have to be able to work within that system, get the information and know how to put deals together.
StockInterview: What do you mean by “knowing how to put deals together”?
Lawrence Roulston:
If I were to go to China and try to negotiate a deal to get access to a coalbed methane field, I wouldn’t have the slightest idea how to start. On the other hand, I could walk into the Petroleum Club in Calgary and meet half a dozen guys and talk to them. I could build on the leads I had and probably talk about a deal within a day. When you go to China, if you don’t have somebody on your team who can go into the system and deal with people, because of language issues, cultural issues and just accessing information and knowing what kind of terms they’re looking for… It’s a different culture in every aspect and most importantly a different way of doing business.
StockInterview: In your April issue, you recommended a company that overcame those hurdles, met your criteria and already had a coal bed methane deal in China.
Lawrence Roulston:
Pacific Asia China Energy (TSX:PCE) has made connections in China. They can leverage their connections and their network. They can meet with the right people that they can talk to seriously about doing a deal and they can have a huge advantage over someone who comes in cold and tries to make connections and try to do a deal. I think that’s an absolutely phenomenal opportunity that they’ve seized.
StockInterview: There are a lot of coal bed methane opportunities in Alberta. Why are you looking at China?
Lawrence Roulston:
One of the things that makes China interesting is that the cost of entry into a coalbed methane (CBM) play in China is quite modest. It’s extremely expensive to go to Alberta, for example, or anywhere in the United States and access exploration rights or operating rights. In China, they went in and got a controlling position in a CBM deposit for a very modest upfront commitment.
StockInterview: How does Pacific Asia China Energy’s coalbed methane field in Guizhou, China compare to other coalbed methane fields?
Lawrence Roulston:
I think it’s an extraordinary opportunity. Chinese government agencies have done a tremendous amount of work to define the limits of coal. To be able to step into that amount of data as a starting point to build CBM resources? The bottom line is they’re not out there looking for coal. They know exactly where the material is and can quickly start to identify issues like recoverability. They are drilling to determine the basic physical parameters of the flow rates and the content within the coal. I think the companies in China that can effectively utilize CBM technology will be the pioneers in this space.
StockInterview: For Americans, any business in China may seem like “pioneering” because many still see China as a third world country.
Lawrence Roulston:
I’ve been to China many times and I’ve been to parts of China that most people would never go near as tourists because I go there to look at mineral exploration projects and mining projects. I’ve been to every corner of the country as well as the big cities. What I’ve seen everywhere I’ve been is a pace of development that I’ve never seen anywhere else in my life, anywhere else in the world. So 1.3 billion people are basically moving from a rural farm economy to a modern industrial economy at a pace that has never been envisioned before.
StockInterview: How do you measure that?
Lawrence Roulston:
It’s a number that most people don’t understand, and you won’t understand it until you go there and see it. There are 300 million people in China who are already in the middle class. When I say middle class, I’m comparing (the Chinese middle class) to the absolute standards that we have in Canada or the United States in terms of dollars in your bank account, the value of your house and your car and everything else. There are 300 million people who have already achieved that status, which is more than the number of people in North America. There are another 1 billion people who are working their asses off to get to that level.
StockInterview: But isn’t the rest of the world’s rural population just as hardworking and ambitious?
Lawrence Roulston:
I’ve been to Africa, the Middle East, Asia and Latin America, and when you go to any of those regions and you go into small towns, you see a lot of people sitting around drinking coffee, moping and complaining about how crappy life is. If you go to a similar area in China, people are working in the fields. In the middle of winter they are repairing their fences, dams and terraces, clearing rocks, uprooting trees and things like that. This is a high level industry that I have never seen anywhere else in the world. So it goes from the ground level all the way up to the entrepreneurs and the people who are building the high-rise apartment complexes in Shanghai.
StockInterview: How long will it take for American investors to realize China’s impact on the global economy?
Lawrence Roulston:
It will happen gradually. I think those who bury their heads in the sand will be left behind as the world moves forward. I would suggest that any investor in any company should ask the company this question: “Does this company operate in China in some way?” There are many North American companies that have a very significant presence in China in terms of doing business in China, getting established, selling products or manufacturing products.
StockInterview: Why is China so important to this commodity bull market and are there still opportunities for investors?
Lawrence Roulston:
There’s a lot of geological potential and there’s a perception that it’s difficult. So there’s not a big crowd of people chasing opportunities there yet. On the other hand, China and its neighbors in southeast Asia represent 3 billion people and they are going through a process of modern industrialization. And I think that’s going to continue to create a huge demand for metals for a decade, possibly even several decades.
StockInterview: And it’s very likely that the US investor will be left behind or will be the last one to get into the pool?
Lawrence Roulston:
Americans tend to be more inward focused as a result. I was having dinner the other night with a Texas oilman who had spent a lot of time in China. He had seen China firsthand and it was very bullish. I asked him, “How many of your citizens do you think really understand China?” He replied, “About five.” And then he said: “Congress doesn’t understand, investors don’t understand, and the man on the street doesn’t understand.” Americans don’t yet understand what is happening there.
