Marin Katusa – Chief Energy Investment Strategist

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STEFAN: Marin, your focus and specialty is in the energy sector. Could you talk a little bit about your background, how you became to be interested in, and what drives you in the energy market.

MARIN: I started out in mining and had some good success in that sector. I’m one of the original four directors of Copper Mountain Mining Corp (T.CUM), which is Canada’s third-largest copper mine, and we built that mine in less than five years on time and on budget. I spend a lot of time on the road, roughly 300 days a year looking at projects, from early-stage concepts to producing projects. I’ve been lucky that I’ve been able to see so many projects, as that is the best way to really understand a project’s potential and its limitations. I got heavily involved in energy as an investment first in the uranium sector in 2004, then European shale gas in 2007. During that time, with my relationships with Doug Casey, David Galland, and Olivier Garret, I was asked to head the energy department of Casey Research, and I really enjoy working being part of the Casey Research team.

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STEFAN: One of the biggest developments has been the industrialization of India and China over the past decade or two decades, in particular with China. How much do you think that is driving foreign policy, domestic policy, investment strategies – obviously it’s a huge, huge impact – so where do you think it’s having its major impacts in our economics and investment world?

MARIN: This is such an important question you ask. Recently, an oil deal was done between China and Iran; they’re bypassing the US dollar by having a trade agreement for the oil. If you look at what China has done in East Africa, you can see that Chinese firms are investing heavily in the region to secure future oil production. We were pretty early to – I think we were the first, actually, to write an energy report on this East African rift. Our subscribers made significant returns on that, but the Chinese were there at the same time as I was at the first-ever East African Energy Conference, and it was all Chinese companies doing the seismic and drilling work in the region. So the Chinese more so than the Indians are going to these major reservoirs to do deals where the American companies can’t do deals because of our foreign policy. You know an American company can’t go to Iran and do a deal. The Chinese don’t care. They don’t focus on the political aspects of it. They’re there to secure oil and they’re willing to pay for it with many worthless US dollars – not a bad trade if you think about it, useless US dollars printed on toilet paper for sweet crude oil.

Another great unknown energy story is what’s going on right now in Israel, which Doug Casey and I recently saw during our site visits. Israel has just made a world-class, offshore gas discovery that’s going to change the whole paradigm in the Middle East. Israel potentially can become a net exporter of natural gas. So now you’re putting into question Egypt’s and Russia’s imports into Israel and possibly the region. With energy it’s so important to understand all the changing variables and how the changes will affect investments.

STEFAN: Now a lot of investors seem to have been driven by peak oil. I have a suspicion about the imminence of peak oil simply because the harder oil gets to find, the more its price is going to go up and the more that’s going to drive markets to look for alternatives. How do you view peak oil and its effects on the economy and investment strategies overall?

MARIN: You have to use it with context. Hubbert came out with the whole concept and Matt Simmons really popularized it five to six years ago. What’s important to understand is it didn’t take into account the unconventional potential and the improvements in technology. Unconventional oil and gas projects like the oil sands in Canada and the shale projects in the US are all now major sources of oil and gas, whereas 20 years ago they were concepts or in early-stage development. Five years ago, no one thought that there would be unconventional shale production in Europe. Well, it’s starting now and that’s going to change the energy dependence of European countries on Russian natural gas.

What’s important to understand is that there is new technology coming on board that ten years ago wasn’t even conceptualized yet; now they’re producing, and in 20 years who knows what there will be. An investor must be aware of the changes, but also be careful not to get caught investing in someone’s science project.

STEFAN: There’s an argument that the more energy demand increases in emerging economies, the more it will drive up prices in developed economies. But the reason that the energy is going to developing economies is that they can produce stuff cheaper and sell it to the developed economies. Do you think that the demand for energy for producing cheaper goods may provide some investment opportunities elsewhere?

MARIN: Well, I just got back today from Europe; I was in a country where they make about four times less, let’s say five times less than the average Canadian, yet the gas at the pump is over two times as expensive as it is in Canada – and yet everybody is balking in Canada about the gas price at the pump. Imagine paying eight times more, because of your earning index! GDP growth is directly correlated with energy consumption; so, moving forward I see a major bull market for investing in the energy sector. It’s important to understand that all forms of energy are going to get more expensive in the future.

STEFAN: Ever since I was a young boy, there has been talk of wind and solar power, yet it seems that even with heavy subsidies from the state it remains elusive in terms of its productivity. Do you see any emerging technologies in the alternative energy markets that might be worth looking into?

MARIN: Definitely; we have written quite a bit about it. The problem with most of the alternative energies – you mentioned solar and wind – is they are just not economic. Both solar and wind have major limitations and are not primary electricity producers. Solar doesn’t work at night, and wind power is not dependable enough because of variable weather conditions. Neither are primary base load producers – dependable sources of electricity. Run-of-river is better than wind and solar power from an economic standpoint; but unfortunately, it’s also only about 45% to 60% base load power.

The most economic and dependable primary alternative energy producer is geothermal. Unfortunately for investors in the geothermal sector, the junior geothermal companies have overpromised and underdelivered. It’s been the biggest disappointment in the last five years from an investment perspective, but we think it’s going to bring significant returns within three to five years because the geothermal projects have a very high base load power (+90%); they are economic without government subsidies. Once you build a plant, it operates for 50-plus years with proper maintenance.

Obama said that by 2030 he wants over 80% of the electricity generated in the US to be from green sources. Well, that’s absolutely ridiculous lip service. It’s just not possible. Over 50% of the electricity generated today in America is from thermal coal, and the infrastructure to replace that today would cost trillions and trillions of dollars. It isn’t going to happen.

STEFAN: Does geothermal run into a lot of environmental opposition?

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MARIN: All of the alternative energies are starting to get environmental opposition. Anywhere you go, if you want to do anything, you’re going to have opposition. Whether it’s a coal mine or windmills, there is someone who opposes the development. I was just at a place in Europe where there’s a big protest against windmills; they didn’t want them because they believe that it’s going to kill all the birds. And it’s ugly for the seaside. Geothermal has a very small footprint, zero carbon emissions, and doesn’t need government subsidies. So it will be easier to permit, but there is still a process it has to go through. The largest geothermal production in the world is in the US right now. To say that there’s no opposition is not true, but it’s a lot easier than, say, building a coal mine.

STEFAN: I’m curious about the degree to which energy production, which I traditionally associate with sort of developed Western economies, is being internationalized these days?

MARIN: Oh, it’s significant. Look at North America; they’re planning a pipeline to bring oil produced in the Canadian oil sands down to the US – the permitting aspects for environmental reasons are going to be a nightmare. It’s a lawyer’s dream – a litigation fantasy. Look at what’s going on in China, with not just the coal power plants but also the nukes. When you had Germany and Japan say, “Hey, we’re going to put everything on hold,” the Chinese came out publicly and said, “Look, we have no choice but to diversify our electrical needs. We need more electricity.” If you look at what’s going on in India and Africa, there’s major sovereign wealth funds investing in the development of energy projects.

Many people believe that the largest oil companies in the world are American oil companies, which is completely false. The largest oil companies in the world are all national oil companies, some of which started as projects nationalized from American oil companies. Another aspect of nationalization we spend a lot of time studying in the Casey Energy Report is the amount of government take from oil projects. It’s very important to understand all of these aspects before you invest your money into companies exploring for and producing oil.

STEFAN: Another interesting relationship is the relationship between currency and energy. As you may have heard – I don’t know how wild the theories are – but there are theories that one of the reasons Libya was attacked was because it was starting to shift towards a gold-based currency for trading oil. There were also similar theories about why the war in Iraq was initiated. Given that the US dollar is still the major trading currency for oil and is the reserve currency for the world, do you think that shifts in energy production combined with the inevitable weakness of the US dollar coming up is going to shift the economic pattern significantly?

MARIN: It already has in many ways. Look at what’s going on in Egypt. Canadian companies are generally the early-exploration companies for the oil and gas sector. That’s why the Canadian stock market is much more dominant on exploration and resource-oriented companies than the US market. So you look at what’s going on with the Canadian companies in Egypt and other parts of the Middle East – they’re already pulling out. Without that early-exploration, high-risk money that’s willing to develop these resources, things will change.

I was in Kuwait in December and met with many of the individuals who are in the energy ministry. It’s interesting: America spent billions of dollars to defend and help produce the fields there… but all you see as an American return is an empty Pizza Hut, an empty Wendy’s, Burger King, McDonald’s. All those American franchises are empty because the local people can’t afford to eat there. Meanwhile, American companies can’t get any rights to the oil. I saw the same thing in Iraq when Doug and I were there in June. There are many Canadian companies trying to get exploration blocks, yet there’s a lack of US companies – their presence isn’t what you would expect. They’ve been outbid by the Canadians and especially the Chinese companies.

STEFAN: If there is a shift in demand for currency from the US dollar to the euro or the yuan or some other kind of currency, do you think that’s going to have a significant effect on investment patterns? Where should investors take refuge?

MARIN: I don’t think you’ll see a major transition, oil switching to being traded in euros, for example. I think what you’re going to see is exactly what we just saw last week with China doing a direct deal with the government of Iran. What China did with Australia for their coal is a direct deal for their coal in Australian dollars. It’s going to be deal specific.

We focus more on the junior companies in the Casey Energy Report where there’s big upside. For example, we like companies run by someone like Lukas Lundin, who’s got a history of success, going somewhere where no one else wants to go – in areas like East Africa or Somalia or Syria. He’ll develop resources that other companies are scared to go for or don’t have the ability to develop. We like a junior explorer that makes a major discovery and then gets bought out by a bigger company. An example is Tanganyika Oil: That was a good win for our subscribers. The Chinese came and bought it out because they are willing to buy out a proven reserve, but they’re not willing – and don’t have the technology or the people – to develop those resources.

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STEFAN: Most people think of investing in juniors and casino lights come up in their heads; they think they’re going to get free drinks, steak dinners, and taken for a ride because of the gambling connotation associated with that kind of investment. What are some strategies that you would take to minimize the risk, or at least reduce the risk as much as possible, investing in these kinds of companies?

MARIN: That’s why my counterpart in the Casey Research metals division, Louis James, is always on the road… the ultimate road warrior. That’s why I’m always on the road, looking at projects, learning about the political situation of the region, but most importantly spending time with the management team and getting to know their abilities and limitations. I can’t emphasize enough how important the people are to the success of a resource company. People who have done it before are key.

I use Lukas Lundin as an example – your odds are a lot higher for repeated success. Lukas Lundin is seriously successful. His father was a major explorer who was also very successful, and Lukas grew up under his father’s mentorship. It’s also important to understand and study what price the people running the company paid for their paper, and what you are willing to pay for yours. Did the people invest at the same price as you; or do they have penny paper and you now have to pay a dollar? You have to be very careful.

That’s what we focus on in the Casey Energy Confidential and the Casey Investment Alerts. We focus on private placements in the early stage. We want to focus on the people and then projects, paper, the financing, all the “8 Ps” of resource investing. So you’re correct. The junior resource sector is still seen as the wild, wild West. The fact is, there is nowhere else on the planet that can compare the wealth creation from the resource sector. But that is also why you must be very careful, and the first place I’d start with are the people who are running the companies.

STEFAN: I think that seems to be very good advice. You know they say that the best predictor of future behavior is past behavior, and I think that’s certainly true in terms of one’s ability to generate profits. Now are there any emerging trends that are off the radar for most people that you’re keeping your eye on at the moment?

MARIN: I think the biggest offshore gas discoveries have been in Israel. Doug Casey and I just got back from there. It certainly looks very interesting. We recently published a report on Israel and the Middle East. I think the East African rift – which is still not a front-page story – has more upside. We like to focus on things that aren’t yet on the front page of the mainstream newspapers. If you talk about the “newspaper indicator,” this story is still in small print somewhere on page 16. That’s where you’re going to get your big upside. By the time it makes it to the front page is when we sell. When the big institutions come into it, when it’s a popular story, when everybody wants it, that’s when you sell them your paper.

We were very early into the European shale gas sector. It wasn’t even in the newspapers yet. When the European shale gas story was on the front page, we sold. In retrospect, we perhaps sold a little bit too early, but I am a big believer that you can never lose money taking a profit. You want to stay in early-stage phase before the they are popular, like offshore Israel, the East African rift, and Iraq…

STEFAN: I like that. I think I’m just going to make a note of that, that profit potential is inversely related to font size.

MARIN: We talk a lot about that. By the time the big institutions are buying the stock and it’s a popular story, that’s when we sell our stock, and there’s nothing wrong with selling too early if you can guarantee a profit. Don’t worry, there will always be some new exploration story that has a promoter who promises the world. It’s been going on for a hundred years. It’s going to happen for another hundred years.

STEFAN: Just to finish up, are there any trends or theories or approaches that make you roll your eyes a little bit?

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MARIN: Louis and I think that right now the rare earth sector – something that we talked about early on – has been very well promoted and investors should reduce their risk exposure. I think the uranium sector is very oversold so it’s an interesting buy. I’d stay away from the solar companies that are promising big returns and big government subsidies based on higher electricity prices. I believe the solar sector has been overplayed… I’d also include biofuels in that camp.

STEFAN: Well, thank you so much. It’s been really insightful.

MARIN: My pleasure.

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[Energy is an essential aspect of every economy, but as this interview reveals, investing in energy stocks can be tricky. Put Marin's expertise to work in your portfolio. A trial subscription to Casey Energy Report is risk-free for ninety days.]

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avatarDoug Casey - Conversations with Casey posted Wednesday, August 24th, 2011.

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