Victor Goncalves: Green—the Color of Money
Source: The Energy Report (4/9/09)
Everybody's talking about renewable resources and going green; but we have yet to see a meaningful shift away from fossil fuels to alternative energies. With energy security now the prevailing agenda of countries all around the world, investors are looking to position themselves in the 'right' renewable. In this exclusive interview with The Energy Report, Victor Goncalves, editor of the Equities and Economics Report, weighs the various alternative energies and shares three hot opportunities he sees emerging in this space.
The Energy Report: Of those two websites, the Green Money Report and Equities and Economics Report, which ones are you focusing in on, or do they focus in on the same topics at this point?
Victor Goncalves: They're somewhat complementary in the sense that my economic theory holds true for both newsletters. I started writing the Green newsletter specifically to talk about the fundamental shift in the use of energy that we're going to see going forward; whereas, the Equities and Economics focuses more specifically on mining, precious metals and base metals.
TER: So I went on to your Green website and read that nice overview that you wrote. I thought it was interesting that you were looking at 2006 numbers and that renewable energy was only 7% and nuclear is 8% and you were commenting that you were expecting renewable to grow threefold over the next five years and nuclear only 25%. Can you comment about which renewables you see really growing over the next five years and why? I guess go back to the economic theories of why those are going to grow.
VG: Certainly. In terms of which renewables, I think we're going to see three of them really take some life. Anything to do with biomass or algae, if you will, for bio diesel; I think those will do well going forward because they are proven technologies and technologies that solve a problem. On the biomass side of things, not only do we create energy and heat—both of which are needed for humans to live—but we also solve a landfill problem and a garbage problem. I think, going forward, we're going to see more in the European and Asian economies only because in North America we still have the abundance of land, so that's not as pressing an issue here.
Additionally, I think solar is going to really come to life due to the fact that the efficiency of solar technologies has developed so much in the past decades. We have seen some phenomenal changes in terms of efficiency. One of the deficiencies with solar has been that it is relatively inefficient as an energy-generating source because it retains reasonably little solar energy when the solar panels collect the sunlight. Some fairly recent changes have drastically increased the efficiency of solar panels, and we’re seeing places like California give out government grants and tax credits and so on even for individuals to install these in their homes. So we’re really seeing a great shift.
We’re probably not going to see a huge move wind, due to its higher cost and the fact that it’s pretty much reached the efficiency point so far. I really see more on the solar and biomass side of things.
TER: We’re kind of in the perfect storm in terms of needing to come up with alternative fuels and renewables, and that these technologies will help us get through a depression and they will grow and carry some jobs, as well as investments, forward. Can you talk a little bit about that concept—the perfect storm—and how it’s going to help us through this economy in the next five years?
VG: The way I’ve looked at it is, I broke it down to the last time we really had an economic crisis, if you will, of any sort of magnitude, coming out of the ‘30s and again right after World War II in the ‘40s. One thing I noticed was—and I just did this at a conference I spoke at—in the late ‘40s, early ‘50s, debt as a percentage of GDP for the U.S. economy was 125%. That was a combination of war spending, and World War II really took a chunk out of the U.S. economy, as opposed to this war we’re fighting now—it’s less than 1% of the GDP, so hardly noticeable in comparison. One of the other things I noted was that the U.S. economy was, for the times, fully developed, so it’s reached its capacity in terms of what it could do with what it had available, including the energy as a technology.
In the ‘40s and ‘50s, a huge infrastructure spending spree happened to take the U.S. from full capacity and extend its capacity. So more refineries got built and the power grids got revamped—became more efficient—using better metals. When that happened, all of a sudden the U.S. became a ton more productive because it now had this extra capacity. So now we’ve got a situation where the U.S. is pretty much tapped out in terms of capacity.
A new refinery hasn’t been built since the ‘70s and for good reason. Oil is a depleting commodity; when you build a refinery, you want at least a 50- to 70-year lifespan for it. So to build one when there’s less than 30 years of oil left doesn’t make a lot of sense. Now you start building solar panel fields, windmill farms and algae plants, these are things that have renewable capacities. When it comes to a wind and solar operation, depending on where you put it—places like Arizona and Palm Springs—you pretty much have infinite capacity. It’s just a matter of building the infrastructure for it.
TER: You mentioned building the infrastructure and needing this 50- to 70-year lifespan for refineries. At this point in time with gas being so incredibly cheap, we have some people saying we have peak oil; but gasoline for your car, gasoline for homes is still pretty inexpensive. What will really be the catalyst to move forward in building these new infrastructures?
VG: It’s twofold. One is foresight, which we’ve never been really good at just as a human species. But the second one has more to do with the fact that demand for green energy, as opposed to in the ‘70s, is primarily mandated by government in order to reduce our carbon footprint—we’re looking for better air quality. Whereas, when it happened in the ‘70s, it was more of an economic choice in the sense that they were hoping to find a cheaper alternative, or at least a more abundant alternative, over time. Now the more pressing fact is we’re running out of this, yes, but we’re looking to clean up our act and that’s really the driving factor. So even though the price of oil and gasoline has dropped, it’s still a pollutant and Obama could have very easily said, ‘oh, gasoline’s come off, we don’t have to worry about these carbon credits and expanding green capacity,’ but not true. They’re saying that we still need to keep going with this and it’s primarily to do with the environmental side of things.
TER: So we’re looking at the environmental side of things and I’m thinking about coal because you’ve studied coal in the past and we have an abundant source of coal in North America. Why aren’t there more technologies to make more clean coal, or is that moving forward? And would you see that as a viable source of “green” energy?
VG: That is moving forward. Part of the problem with doing anything is that it costs money. And when you look at lot of the coal power plants, obviously any kind of revamp to the power plant would cost a substantial amount of money. That being said, it’s nowhere near as much as a nuclear power plant would cost to build. One of the big reasons is that we actually have seen development in coal. The issue becomes lobbyists; they may not want it due to the fact that, quite frankly, a lot of their buddies are making pretty good money with dirty coal. Why is it that oil, most gasoline cars, still only run 30 miles to the gallon when in Europe your average fuel economy is over 50? It’s an ‘I-scratch-your-back, you-scratch-my-back’ kind of business and that’s very evident.
TER: Do you see the green energy movement really happening in the United States, or will we be dragged through it as Europe and Asia embrace it?
VG: Let’s talk about Europe for a second. Europe has embraced it. In fact, Europe is over 10 years ahead of North America in terms of green technology. The only reason the U.S. hasn’t been “dragged through it” is because Europe is about 6% of the world’s energy demand; whereas, the U.S. is 24% to 25%. So when 6% of global energy demand decides to do something, it’s really insignificant. But when 25% of the world’s energy demand decides to do something, that’s highly significant. So I think it’s going to be more of the U.S. dragging Asia into it vs. Asia dragging the U.S. because Europe has been doing this for a decade now. Like I said, most European vehicles have an average fuel economy of well over 50 miles to the gallon; whereas, North America’s is less than 27. Their new target is 27.3 miles per gallon and that’s supposed to be efficient. In Europe if you had that, you’d have a gas guzzler.
TER: Other than the government making some noise about the need to start looking at green energies—and earlier in our conversation, we were a little bit cautious about oil and coal and the relationship these two organizations have with Washington, D.C., which is why we never get off of it—to me it seems like the government could say we’re going green, but because coal and gas have big lobbies in Washington, we may not move forward. Do you see it differently?
VG: And that’s a possibility, to be completely fair. But I think those ties are slowly being severed with the shift in power in Washington. Yes, there’s still going to be some kicking and screaming, if you will, from those organizations, but especially with 2010 being a pretty significant year. That is the year when carbon cap and trade becomes mandatory vs. where it has thus far been a voluntary market. So we’ve got some pretty big milestones coming across globally that the U.S. is going to have to get on the bandwagon, to some degree at least, or face some pretty big backlash globally in that regard.
Look at the governmental shift in the U.S. that we’ve had in this past election; for example, my newsletter was launched after Obama won because, had McCain won, I’m not convinced I would have launched it yet. Obama was pretty much the push for this. So, yes, there have been lobbyists in Washington, there’s been a lot of force in Washington to keep coal and oil going strong, but that is about to change and that’s part of the conviction that I hold.
TER: How does an investor begin to look at these alternative energy sources, these green sources, and make some investment profits off of that?
VG: Basically, what I’ve been telling a lot of people is don’t expect this to turn around in three to six months and have five and ten baggers on your investments. The way I’m looking at this right now is the green sector, if you will, right now and for the next little while, is going to be likened to the metals market in ’99, ’98, 2000, in that range—very, very subtle. It took a couple of years for it to really take off.
Right now what we’re going to see is a couple of years of some base building, some recognition in the markets. After all, there’s going to be a lag time from when you say you’re going to do something and when you actually do it (assuming you actually do it, of course, and this in reference to infrastructure building). So, under that assumption, we’re going to have a bit of a lag time for construction projects to go through for this push to happen. I’m really expecting that 2010 is going to be the beginning of the real move forward in terms of being able to really make some money on this. We’re going to see a bit of a move up, but we’re going to really need to see this once things get a bit of a push. So the way I’m looking at it is 2009 is really a good year to start positioning yourself in high-quality companies and 2010, 2011, going forward is when these things are really going to start picking up steam.
TER: Do you have any particular companies you’re looking at? Earlier we talked about sectors of biomass and solar. Any particular plays in there?
VG: In terms of publicly traded plays on the biomass side, not yet—but I’ve been looking. A lot of private companies are looking to IPO with them in the next six months or so. Let’s back up to cars for a minute. A lot of these cars are going to go hybrid to some degree; so looking at rare earth elements, I think that will be very profitable on the mining side. Mining rare earth elements and using them in the hybrid vehicle, I think that’s going to be very important and, though I agree that oil dependency is going to start waning, there’s that detox period, if you will, to get off of that dependency. Hybrid is going to be really big going forward in North America. The projections are, in the next five years, we’re going to go from 250,000 hybrid cars on the road to over 3 million. So that’s a twelve fold increase in those types of vehicles—and that’s going to be a large increase in the demand for rare earth elements. So I think in these kinds of things, companies like Avalon Rare Elements Inc. (TSX:AVL), which is a rare earth element company, is probably one of the more advanced ones that I’ve seen. There are some grassroots companies that I wouldn’t be comfortable mentioning yet because it’s still very early stages.
TER: You mentioned that Avalon is a rare earth element company. There’s also a company called Rare Element Resources Ltd. (TSX.V:RES). Are you familiar with them?
VG: Rare Element Resources? Yes, I am familiar with that one. My preference has been with Avalon only because their project is a fair bit larger than REE's. Feasibility, metallurgy, all these things are pretty much under way now, so they’re probably one of the most advanced projects on the market. So that’s why I prefer that one. They’re well cashed up, reasonably low float, so that’s what makes that attractive to me. Rare Element Resources as well as many other these rare earth companies are going to do well because, the way I see it progressing in the next little while, is again like what happened in the metals market seven or eight years ago. All boats are going to rise some time, and then people are going to get selective. So, Rare Element Resources, in fact, are also coming along quite nicely.
TER: These rare earth elements are critical in automobiles. Do you see a possibility of some major automobile manufacturer acquiring, basically, vertically integrating a rare earth element company?
VG: Oh, yeah. There have been talks—I’ve heard talks of Magna (more on the Canadian side of things, anyway) trying to pick up some of these deposits. And if not pick them up, at least finance them so they can get the offtake of the metals. That is certainly something that is being talked about by car manufacturers. A lot of the Japanese car manufacturers are talking about the same thing. So, in terms of when that will actually start happening, that is still to be determined.
It is quite likely that will happen. I’ve heard talks of Japanese automakers and some Canadian parts makers looking to actually pick up these, or at least finance deposits, because that way they can get first dibs on the metal. Part of the issue with the rare earth element market is not only is it a boutique market, if you will, because it’s not traded on an LME per se, it’s more on a contract basis.
One of the other issues is that 85% of your rare earths come out of China. I’ve seen China do this many times where they would internalize the products by cutting exports out. Tungsten was a great example. China used to export 54,000 tons of tungsten and now it got cut down to 16,000 because they did the strategic metal. They haven’t done anything or said anything on the rare earth side, but it has been made pretty well known in the press that China wants to be a leader in the hybrid vehicle market—or at least on the battery side of things. So it would not be a far-fetched thought to see China cut back their supply to the market on rare earth elements. And being 85% of the market, that’ll have a huge influence on price. That being said, any deposits outside of China will carry a heavy premium. It’s entirely possible to see companies—if not automobile makers, at least parts makers—purchase these things or finance them.
TER: What’s the likelihood they’re going to be able to take that 85% of rare earth coming out of China and just even decrease it to 50%? Are there enough rare earth potential deposits elsewhere?
VG: The funny thing about rare earths is that rare earth elements aren’t actually rare as an occurrence on the crust of the earth. They’re actually quite common. Why they’re called rare earths is because they’re rare in economic form. So there are lots of rare earths around the globe, the only problem is finding an economic deposit.
I’ve seen some occurrences in Quebec that have looked very strong in terms of companies that have done some drilling. I know a company that I’m sort of following on the mining letter. It’s called Three Gold. These are the very early days. They were drilling for gold and found rare earths in such concentration that they had to get them re-assayed because they came back at a really high value. There are two types of assaying. First, you send in for regular assaying and if it comes back at a really high value, you have to get it re-assayed on a more precise scale. They had every assay they sent in come back with rare earth numbers that had to get re-assayed.
In Quebec, we see potential for deposits. Chile, I think, is the number two producer of rare earths. There’s been some in the ‘States, but 85% is a pretty big number. I don’t think it’s going to change much more than, let’s say, 60:40 once we start looking for other deposits because of the demand situation.
TER: Going back to our more traditional sources of energy—oil and coal here in the United States—what do you see for potential investors? Are there some investment opportunities there?
VG: There will be things going on in that area that will be quite exciting—something like coal to liquid, which takes coal and, instead of burning it for energy, turns it into gasoline. That has some potential. It’ll fill a bit of a gap. It won’t be, obviously, a long-term solution; but it’ll definitely fill a gap. That will create cleaner gasoline. It’ll have a lot lower sulphur content and have a lot lower carbon content. And, in the process of creating the gasoline, it’ll have zero carbon content as opposed to the normal amount. So that is something that is happening in the ‘States and Canada, and it’s something that investors can get in on; but I don’t have specific stocks yet. Again, some of the ones I know of are private or way too small to make a difference. It’s sort of like trying to invest in GE to get the green component. It’s such a small portion, there’s almost no point in doing so. So on the gasoline side of things, we are seeing that. Yes, clean coal is coming through. There are some companies out there trying to make that a centerpiece of what they’re doing. So we’re going to get more traditional sources, or the more traditional sources of energy in the U.S. are going to see a shift toward a cleaner version and there will be some opportunities in the market going forward.
TER: So your new Green Money newsletter is going to be following the private companies, seeing when they IPO, and beginning to identify those investment opportunities?
VG: Absolutely. I’ll be looking at some of those companies. I’m following three or four private companies right now. They’re not yet listed in the newsletter. I want to list them only when they get close to their IPO. It’s really an educational resource, which is why I’ll list them in the newsletter before they IPO, so people can a) get the education behind what’s going on, and b) know about it—even contact the company if they want in on the IPO. There are possibilities there, of course. I have not made such arrangements yet; but they are always possibilities.
TER: Just going back to the old style of energy, there’s been a lot written about the tar sands up in Canada—extracting oil from them. Do you see that as a viable source of energy and, secondly, as an investment opportunity?
VG: Yes and yes. I think it is a viable investment opportunity for the simple reason that, in North America, we’re going to be moving to green; but that doesn’t mean tomorrow we’re going to stop burning fuel and gasoline. And that’s 84 million barrels a day of oil being burned; we need a source that’ll be able to keep supplying that. There’s going to be at least 10 to 20 years of gasoline and diesel, being used that is non-renewable and we’re going to need sources that are outside of hostile countries, such as Venezuela. So, yes, the Canadian tar sands are going to be quite important going forward. Alberta has been doing some work to try to clean up its act in terms of making it a cleaner source.
Just yesterday, I was asked: ‘will there be a clean source?’ My answer is quite plain—there will never be a clean source. Tar sand is the dirtiest oil to use but, at the end of day, with the current demand for oil and the fact that it’s only going to go up, the best thing to do is make efforts to clean it up. That is something the Alberta government and some of the companies out there, such as Suncor Energy (NYSE:SU), are taking very active roles in, and investing substantial amounts of money to do so.
TER: At the current price of oil, though, is it economically viable to do tar sands oil extractions?
VG: The numbers have varied in terms of the different projects. I’ve heard as low as $40 and as high as about $55 in terms of being economically viable. So if we use $40, which is the number I’ve heard more often than not, then, yes, it is economically viable (albeit barely). But at the end of the day, I can’t really see the price of oil staying this low for this long, especially if we subscribe to a global recovery—to a theory of a global recovery by 2010. Obviously oil demand is going to start shooting up again at a faster rate then. Even if we believe in an Asian recovery, where the rate of growth has gone from about 10% or 11% to 5%; yes, it’s contracted, but it’s still growing quite rampantly. So even if that comes back up to, let’s say, 8% again, the demand for oil is going to resume at a very daunting rate.
So I do see the price of oil coming back to about $70 a barrel probably by the end of this year and sustaining $70 through next year, most likely rising from there. Oh, yeah, I believe that going forward it’ll be a viable place to be in terms of an investment, and getting in at these levels is quite an opportunity because the last time people really talked about the tar sands, oil jumped from $40 to $140. In terms of a due diligence period, if you will, it almost fell like overnight. So having it come back down and giving people an opportunity to come back in again is actually quite a treat.
TER: Are there any specific tar sands plays that look good at this point?
VG: There are a few. I haven’t particularly been focusing on tar sands plays in either one of the newsletters because I’ve been just, on principle, trying to focus on cleaner energies. Yes, a tar sands is a viable investment—you’ll make money. I’ve just personally been trying to focus on cleaner energies in general.
TER: One of the sources of energy that we, fortunately, have out here is geothermal, but I’m not hearing much in the press about that. Is that not considered clean? Is it just not abundant enough? What do you see with geothermal?
VG: Geothermal is abundant. There’s lots of geothermal through Europe, for example. In Italy, they’ve been using that for decades—since the ‘30s, really. Where I live here in Vancouver, there’s actually a steam clock, which is effectively a geothermal clock that they’ve tooled and engineered to operate on steam. Geothermal is viable in one sense, it’s doable.
There are companies such as Nevada Geothermal Power Inc. (TSX:NGP) (OTCBB:NGLPF) and Western GeoPower Corp. (TSX.V:WGP), who are moving forward with $180 million, $200 million projects to get these things up and running. It’s one that hasn’t been given a lot of press because it’s got a very high discovery cost. I looked at one project a couple of years ago. They showed me—I was on the project and we were looking at it and the hole—to drill one hole it costs $10 million; whereas, in terms of mining—yeah, it’s a very expensive discovery. It’s kind of like diamonds. By the time you get a diamond mine into production, it’s like a billion shares out because you have to try and try again.
Geothermal, you don’t have to try as many times, but all it takes, for example, when you’re drilling the well, is putting too much water through the drill to keep the bit reasonably cool and you could actually extinguish the source for decades. And that’s actually what happened on one of the sites that I was looking at. They’d extinguished the source because they’d used too much water. So there are a lot of variables that can make it a bit of a challenge, shall we say. But should you actually get all the right stuff together, it can be a viable source, and it’s something that several companies are pursuing and have done so fairly economically. Again, Nevada and Western are probably the leaders—even US Geothermal Inc. (AMEX:HTM) (TSX:GTH) has done quite well.
TER: Do you see it expanding out from bigger than the size it is now? I think we were quoting the size now as only 5%.
VG: It’s 5% of its whole green energy. Really, it’s a fraction. I see it expanding. All the green energies, I do believe, are going to expand with the exception of the hydro side of things. It’ll expand, but I don’t think nearly as much as the rest of them. We’ve got a high, high demand for energy in the world. It’s only going out, especially with Asia and China growing at the rates that they’re growing, so I do see any source of energy that can be exploited—a reasonably green way or in any way, for that matter—and used at its capacity. So geothermal has gotten fairly little press, but it’s been more on the stealth side of things. A lot is going on, so it’s just been a lot more stealth. People think geothermal, oh, it’s on a fault line, you’ve got to drill it, you’ve got to do these dirty things to actually get it, but it’s a fraction of the actual CO2 output of most any other sources.
TER: I’ve been hearing on the geothermal side—and this may be caused by the quote you gave us in terms of just doing holes and discoveries—that we should be looking at some type of consolidation because you’ve got Polaris Geothermal Inc. (TSX:GEO) down in Venezuela on geothermal and you’ve got some up here and you’ve got some worldwide. Are you seeing a potential for consolidation in there?
VG: Not yet. Consolidation, mergers, acquisitions and that kind of activity in a business cycle tends to happen after an explosion in that sector. We haven’t seen an explosion in that sector yet. It could happen. I’m not barring that from being a scenario. But in terms of when you consider a standard business cycle, mergers and acquisitions only tend to happen after there’s been a lot of companies in that sector. So we’re looking at, for example, a slightly different topic on gold. And on the mining side of things, there are some mergers and acquisitions happening because there are way too many companies and not enough money to go around. However, on the geothermal side of things, there really aren’t that many. So I can’t really foresee acquisitions, mergers, and these kinds of things happening at this point of the cycle.
TER: So, as we look at your Green Money newsletter, what parting thoughts would you like to give our readers regarding the focus of that newsletter and what you’d like them be looking at?
VG: The focus of that letter is—as the title implies—Green Money. At this point in the development of the green side of the market, I like to focus on, and then highlight, green sources that are said to be ‘green,’ but really aren’t green at all. I like to talk about those kinds of things because, in the development of anything new, you’re going to get a lot of the imitators’ things-coming-out-of-the-wood-works, as well.
What I want to impart to your readers is that the Green Money Report is going to be highlighting companies that are going to do well a little bit longer term. This isn’t kind of a three- to six-month outlook; we’re playing this rally in the market business. It is something for a new trend that is going to be building over a five- to ten-year period. So it’s not something for people who are looking for instant returns. It’s something that people should be looking to build a position in slowly and really taking advantage of the longer cycle as opposed to a short-term cycle.
TER: Very good. Victor, I really appreciate your time and insights.
Victor Goncalves is the editor of the Equities and Economics Report . With training in economics, his expertise is in seeing the true economic trend. This is evident as Victor was one of the first to identify and track the performance of the nanotechnology industry with one of the first nanotech indices. He was also the only person calling top on uranium in the summer of 2007.
Similarly, his market model has helped him be accurate on the direction of the market nearly 100% of the time. Victor has spoken at many difference conferences and radio shows. He has written commentaries for publications, such as the Resource World and The Canadian Institute of Mining, the Toronto Star, Barron’s Magazine, as well as Kitco.com.
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