Oil, Gas & Potash
Oil & Gas and Potash is a major new theme for 2012. Last January I wrote an article, “Trade your Gold for Ags,” it couldn’t have been more prophetic as Ags look to boom in 2012 while gold sits on the sidelines. Of all the materials themes, I am the most long-term bullish on the Ag sector and products like potash and phosphates. This will be an industry that will survive long past the rest of the mining super cycle mainly for the reason that we have to feed an ever increasing growing population. This theme will go strong until the collapse of the human population growth curve. 2-3 billion people are entering into middle class society over the next few decades. These people have middle class appetites and want to consume beef which is the most inefficient use of arable land as a ranch or as grain to feed the cattle. Compounding this problem is the loss of arable land every year to development in the developing world which means countries like China, India, Brazil will need more and more of the mineral to help feed their growing populations that have growing middle class appetites.
Brazil consumes 14% of the world’s potash supply, has arguably a more advanced middle class than India or China and could be an example of the appetite that an exploding middle class has on a countries need for the fertilizers to feed their populations. Potash prices are expected to steadily increase over the next 10 to 15 years as there is limited supply, barriers to entry in this industry are huge because even the smallest mines are some ofhte msot expsnive mines in the world and are capital intensive projects. On top of the barriers to entry Cantoplex is a cartel that controls a large supply of the commodity and has accused by some of price fixing in the past. Prices for potash are expected to steadily rise to $600 and above over this time period and could jump further with any geopolitical tensions causing oil and gas to spike which would make shipping the commodity that much more expensive. It is vital for these developing countries to secure their own sources of potash outside of Cantoplex or they will be hamstrung just like Chinese steelmakers are by the Big 3 in the iron ore industry.
Some key stats for developing economies and potash consumption...
Asia is projected to produced 7.24Mt of potash and consumed 17.07Mt in 2012.. a deficiit of 10.54Mt!!! Over a 5 year period potash consumption has increased 18%. At the current rate Asia will consume 20.2Mt of potash by 2017 which is the equivalent of one 3Mt potash mine needed to come online over the next 5 years or 3 Allana Potash AAA-V.
Just to satisfy growing demand in Asia!!!
In another 5 years after that, Asia will need a 3.5Mt potash mine to satisfy its demand for potash. That is if growth remains similar to the previous 5 years. Just to satisfy growth in Asian consumption of potash over the next 10 years, the equivalent of 3 Western Potash's or 7 Allana Potash's is needed.
Latin America is another place that needs potash and currently imports a net 3.4Mt to satisfy their needs. They consume a total of 5.9Mt of potash and produce only 2.5Mt. The deficit was close to 5Mt last year, but Vale's Potasio Rio Colorado (PRC) stepped up Latin American potash production by 150% to 2.5Mt and is expected to be responisble for the majority of potash production in Latin America going forward. Latin American consumption saw steady growth at 16% and in another 5 years is expected to add another milion tonnes of potash demand. By the time PRC is ramped up to 4.8Mt in 2020, Latin America will still be in a potash deficit by 2Mt - 3Mt if no other major potash projects are initiated.
Shipping the commodity around the world costs as much as producing it $60 - $80 per tonne, it makes sense to build the mines at home where the potash is needed if you can. Obviously some areas of the world are in deficit and will always remain in deficit like Asia and will always import, but others areas like Latin America are mineral rich in potash, phosphates and other minerals. These countries will first look to supply their own needs and then supply the worlds needs if competitive against producing basins such as Saskatchewan, Russia and up and coming producers in Argentina and Ethiopia. As Latin America continues to develop, look for them to exploit these resources to supply thier own needs and move into surplus trade balance. Potash coming out of Neuquen PRC or brines in Peru will be competiitve against anything coming out of Saskatchewan. It is also an area of the world that is much more politically stable than areas like Ethiopia. The Dankil Basin lies in an area of dispute between Ethiopia and Eritrea where one of the bloodiest wars of the last decade was fought.
The goal for these developing countries is to beat Cantoplex at its own game and avoid having only one supply of potash.
I have barely looked at O & G in 5 years. It was one of the first things I invested in when I started investing and got pretty lucky with the first few companies in this sector. The first company I ever bought when I was 17 was Gentry Resources at $0.50 which ended up a $6 stock at the height of the ‘Peak Oil Theme’ in 2007. The second a third stocks I bought 6 or 7 years later (2005) when I decided to learn the industry was CLL and PDP. PDP made a huge discovery in the Neuquen Basin years ago that is the subject of this theme, but whose production declined much more rapidly than expected after very good initial flow rates in the early years. PDP went from $2 to $25 before collapsing with the rest of the oil companies and being bought out by Gran Tierra GTE earlier this year who is reworking the field with some success. Since 2006, I have been entrenched in the gold train, but now is a good time to look at the Black Gold again as Peak Oil seems to be a concern over the next few years as well as geopolitic tensions may rise over the next decade.
I am also a conspiracy theorist and one conspiracy I have is that there is a concerted effort to drive up oil prices to force consumers to adopt change and new technology which will be a major driver over the next decade in economic growth for auto manufacturers as high gas prices will force consumers into quicker turnover times since turnover for vehicles has drastically reduced over the last 20 years because consumers simply don't need to buy new cars with the increased quality over cars made in the 1980's.
Geopolitical tensions are rising around the world for which many countries use oil as a bargaining chip. Oil may continue to increase over the next few years because of increasing geopolitical tension, decreasing supply and conventional discoveries and the increasing costs to bring new supply to the market. Speculation could also drive up oil meaing that 2011/2012 could be the last year we ever see WTI under $100. Another factor that will cause upward pressure on the price of oil is in the age of hyper-inflation, gold will be an inflation barometer. If gold doubles, a good rule of thumb is that most commodities will generally follow suite unless there are serious oversupply issues or lack of demand. One commoditiy that has lagged the pack is oil and I expect that to change. It looks like a year where there are some sectors that will play catch-up and energy seems like one that will come back a bit and be stronger than most as aresult of lagging other sectors. Certainly oil is a theme that is primed to run this year and has received very little attention by many since 2007/2008 and could challenge peak oil prices over the next few years.
Get ready for Jeff Rubin, Josef Schachter and Keith Scheaffer and the gang as these guys are going to be relevant again. One big theme that continues to shake up and revolutionize the industry is shale oil and gas, with some of the companies mentioned below have great success spudding wells and tying in production in 2011. When looking at these companeis, look for oily companies and not gassy names, although a discovery is a discovery which usually means a material revaluation no matter what comes gushing out of the ground. Has natural gas bottomed in 2012?
Tough question.
Tag Oil & Gas TAO-T $7.04
$362M Market Cap
51M Shares Outstanding
54M Fully Diluted
TAG Oil & Gas has been a great performer but has been in a sideways consolidation pattern for the past 9 months after initial discovery at the Sidewinder and Cheal prospects with the market waiting for TAG to tie in production form its discoveries. TAO should break out of its range bound pattern between $5 and $7 and move towards a $10 - $15 valuation in 2012. Key drivers are near term production expansion in the Taranaki Basin expected to grow to at least 5,000 to 10,000 BOED in 2012. The bluesky potential is the East Coast Basin which has 14 billion barrel resource opportunity which they recently did a 50/50 joint venture with Apache valued at over $100M.
The company has made significant progress in 2011 on their Cheal and Sidewinder oil and gas concessions including a huge gas discovery at Sidewinder where 5,000 BOED capacity is planned from there production facilities completed with current production from two wells producing tied in at a rate of 6 -12 million cubic feet per day or about 1000 – 2000 BOED.
The Cheal targets have also been very successful with a 50/50 gas to oil discovery with on well flowing 1700 BOD and another well flowing 14.0mmmcf per day (2,333 BOED). The Cheal wells are close to existing production facilities and can be easily tied in to production putting TAG on track to produce in excess of 10,000 BOED by 2013. At the end of September TAG was producing at a rate of 2,000 BOED which exceeded their production targets for 2011. One risk with shale oil and gas is that flow rates are initially very high and can decline dramatically over a 3 to 5 year time period.
Cheal
| Well | Status | Flow Rate | Net Pay Zone | Notes |
| BH1 | Producing | 500 BOED | (horizontal) | Mostly oil |
| B4ST | Producing | 360 BOD | 17 meters | Mostly oil |
| C1 | N/A | 256BOED | 15 meters | 240 BOD / 100mcf gas |
| C2 | N/A | 2,333 BOED | 12 meters | 14.0mmcf gas |
| A-8 | N/A | 616 BOED | 15 meters | 50 BOD / 3.4mmcf gas |
| B-5 | N/A | 1870 BOED | 35 meters | 1,700 BOD / 1.0mmcf gas |
Currently drilling B-6 and B-7 (4th and 5th wells of 10 well program)
Sidewinder – Gas Discovery – 4 successful wells drilled
| Well | Status | Flow Rate | Net Pay Zone | Notes |
| S-1 | Producing | 7.4mmcf | 14 meters | |
| S-2 | Awaiting tie-in | 8.8mmcf | 47 meters | West of S1 |
| S-3 | Producing | 7.21mmcf | 15.4 meters | 1.1 km south of S1/S2 |
| S-4 | Awaiting tie-in | 6.98mmcf | 19 meters | 1 km east of S1 |
- Production facility complete with capacity of up to 30 million cubic feet per day (5,000 BOED)
- 2 sidewinder wells in production totalling 6 – 12 million cubic feet of gas and 60 -80 BOD of light oil
In addition to the 5 additional wells planned at Cheal, TAG has received approval for 18 additional wells which means if all goes well TAG could be looking at an additional 10,000 – 20,000 BOED production on top of the 10,000 plus BOED they have already discovered at Sidewinder and Cheal permits. What makes this prospect very exciting is the fact that the discoveries cover only a small part of the Taranki concessions. Giving TAG very good potential of a 50,000 to 100,000 BOED production once more fully developed over the years. This gives the company the cashflow to explore the bluesky opportunity within the 14 trillion barrel East Coast Basin for which TAG recently entered into a joint venture agreement with Apache that includes over $100 million in exploration and development costs.
TAG Oil and Gas remains a top oil and gas pick and after a bit of sideways consolidation, looks ripe and ready to rocket to the next level in 2012.
Canacol Energy CNE-TO $0.77
$465M Market Cap
618M Shares Outstanding
$669M Fully Diluted
It looks like this dog is going to shine again as Canacol has made some outstanding discoveries recently that should start moving the share price in the right direction and set to drill more wells and increase production in 2012. On December 28th the company announced a well spudded producing 10,000 BOD with 2,541 net to Canacol which is a nice little post-Christmas present to shareholders. On Christmas Eve the company recorded maximum production of 19,173 BOD which is over 5,000 BOD above the guidance of 14,000 BOD to end 2011 which is a 37% increase.
CNE is ready to rock and roll. CNE has enough coverage so I don’t really need to mention it that much or go indepth… I am sure after the 28th news release that many analysts will be quick to jump on board and drive this company back up to a billion market cap.
Americas Petrogas BOE-V $2.98
$581M Market Cap
186M Shares Outstanding
201M Fully Diluted
Americas Petrogas has been a closely followed but little talked about company. It also sticks true to the theme of Oil, Gas & Potash with both near term evaporate potash production in Peru and massive Oil and Gas potential in Argentina’s Neuquen Basin. BOE was first mentioned in the “Trade Your Gold for Ags” article in January at $1.55 where it shot up to $3 in a month. It has been in a consolidation pattern for most of the year but bottomed in mid-October and has broken trend now knocking on a very important resistance level of $3. At $3 a whole new crowd comes to the table and BOE has what it takes to go to the next level. It has already broken a more precise level of resistance, but for sake of convenience and the fact I like to use nice big round whole numbers a $3 close will suggest some very good momentum.
With O & G and Potash being major themes for 2012 replacing gold and rare earths as momentum sectors Americas Petrogas has it all with what I think are two top themes going into 2012.
Peru Potash
The evaporate Bayovar Potash project in Peru, covers 82,000 hectares and is a potash brine project owned 80% by BOE’s subsidiary GrowMax. The other 20% is a strategic investment made by the Indian Farmers Co-op. Bayvor is a top notch fast track project with low capital costs. It does has limited upside as far as scalability to the 1Mt to 5Mt giants that the potash majors look to develop, but it provides great exposure to the potash industry as brine projects are easily fast-tracked to production and can take advantage of any supply shortages or price fixing by Cantoplex. This is also in Latin America that needs all the potash supply they can get. Bayovar is a low capex project expected to produce 250,000 tonnes of KCl potentially expandable up to 500,000 tonnes per year. It isn’t a mammoth 1Mt – 5Mt potash mine in Saskatchewan or what is planned in Ethiopia, but the advantages of a low cap-ex ($125M) and near term cash flows in excess of $100M a year make this project quite attractive and a little sweetener to the BOE portfolio of assets. Operating costs are expected to be around $100 tonne. Evaporite projects take 2-3 years to bring to production, solution projects are 4-5 year timeline while underground conventional projects can take 5-7 years to put into production and several more years after that to ramp up to full capacity. A resource calculation and study is underway and expected in the first quarter of 2012 with a full feasibility study to follow in 2012. BOE plans to start mine construction in 2013 -14 and production by 2015. On top of the potash opportunity the claims are highly prospective for phosphate which is another Ag product that is under tight supply demand constraints whose supply is constrained to one major source.
Argentina Shale O & G
What really makes this company tick is its 1M plus acres in the Neuquen basin, which is highly prospective for both shale oil and gas, conventional O & G and in some areas of the basin high value potash exploration and development. Some of the better potash claims in the basin are controlled by Marifil Mines and Vale among others. One of the shale formations called the Vaca Muerta has a max gross thickness of up to 2350 feet which is in excess of 600m of rocks to source from. It is 4 times the thickness of another shale basin in North America, Horn River and 10 times thicker than Eagle Ford. The Neuquen Basin is one of the more prospective shale basins in the western hemisphere with the top 11 O & G companies having staked 5.7M acres which is comparable to the Bakken Shale at 7.3M acres. 
BOE recently announced the discovery of a 700 BOD light oil discovery over a 10 meter pay zone at a relatively shallow depth of 1000 meters. This isn’t the Vaca Muerta Shale but is a very nice light oil discovery at a shallow depth giving BOE high value for exploration in this part of the basin. The Neuquen Basin is one of the top shale opportunities in the western hemisphere making Americas Petrogas one of the top emerging shale oil and gas mid-tier explorers on the venture. Add in the high value evaporate potash project and BOE is true winner in my Oil, Gas & Potash theme. BOE has hinted that they may do a spin out of the potash assets into a new company in 2012 which is always a great way to create value for shareholders.
Americas Petrogas… A unique opportunity in the Oil, Gas & Potash space.
Marifil Mines MFM-V $0.135
$8.5M Market Cap
63M Shares Outstanding
74M Fully Diluted
Marifil’s K2/K3/K4 properties… half a million acres in the Neuquen Basin!!!
Marifil has an extensive property portfolio in Argentina that includes 100% interest in 220,000 hectares in the Neuquen Basin. Wasn’t I just talking about the Neuquen Basin and how highly prospective it is for oil and gas? Marifil’s claims are highly prospective for potash mineralization as well as O & G. Since the claims are 50km from Vale's PRC and were staked by the same man who discovered Potasio Rio Colorado years ago, Marifil is appropraitely targeting the potash mineralization. The claims were staked on historic old oil well data that is publicly available so were chosen on a priority basis, but in addition to claims that have the potential to support both solution and underground conventional mining, the K3/K4 claims are at the north end of the recently realized shale fairway that hosts the aforementioned Vac Muerta formation which has been subject to a recent staking rush and the K2 claims lie right in the middle of the Neuquen Basin!!! Since K3/K4 are on the Mendoza side of the border, claims in the area were largely ignored but are still highly prospective for shale oil and gas. MFM controls approximately half the land position that BOE controls in the basin with over 500,000 acres when you convert hectares to acres.
Is there something wrong with this picture? I don't care MFM hasn't sunk a hoel in the ground...
MFM owns half the claims in the same basin as BOE and is less than 2% the market cap Americas Petrogas is. Either BOE is overvalued or MFM has oodles of potential and value just waiting to be unlocked by the right team.
Currently MFM is targeting development of a potash mine where the claims are within 50km of Vale’s Potasio Rio Colorado (PRC) which Vale bought from Rio Tinto in development stage for $850 million cash. PRC is a planned 5Mt potash mine which currently produces at aroudn 1.5Mt per year rate and won't be ramped up until 2020.
Can you believe this?!??!
MFM has a project that could be a 5Mt clone of Vale's PRC and has Vaca Muerta shale running deep underneath...WOW!
ALL FOR LESS THAN $10M!!!
The almost slam dunk potential to be a billion dollar potash miner and the bonus of drilling a little deeper to spud 500 - 3000 BOED wells from the Vaca Muerta shale. WOW.
K2 claims (99,964 hectare) ~100km south of Vale’s 2Bt Potasio Rio Colorado Project PRC in the province of Neuquen
- Potential solution mining
- Horizons between 1,280 and 1,500 meters
- Grades range between 17% - 24% KCl
- Analysis of historical drill holes revealed mineralization over and an area of 13km(e-w) by 18km(n-s) covering a 115km sqaure area
| Well | Depth | Intercept and Grade |
| Conin X1 | 1,306.7m to 1321.2m | 5.8m @ 15.22% K2O & 5.4m @ 11.5% K2O |
| Pillantoqui X1 | 1408.2m to 1421.7m | 10m @ 11.7% K2O & 1.6m @ 14% K2O |
| Quilimalal X-1 | 1280.3m to 1291.6m | 7.7m @14.45% K2O & 1.6m @ 15% K2O |
| Pasa Hacha X-1 | 1498.8m to 1497.9m | 3.1m @ 11.35% K2O & 1m @ 13% K2O |
K2 vs. Western Potash’s Milestone…
K2 is that is compares well to other well-known development projects such as Western Potash’s Milestone in Saskatchewan.
- 2.8Mtpa for 40 years / $4B NPV @ 10% / 22.7% IRR / 3 years construction / 5 years payback
- Opex at $62.35 / tonne
| Milestone | K2 | |
| Combined widths | 16 – 21 meters | 8 – 12 meters |
| Depth of horizons | 1700 – 1900 meters | 1200 – 1500 meters |
| Grade | 19% K2O | 12 - 15% K2O |
Logistics, Logistics, Logistics!!!
One major advantage that K2 will have over Milestone is logistics. Argentina potash production is destined for Brazil which eliminates a huge cost in shipping out of the Canada whose costs range from$60 - $80. That is what it costs to pull it out of the ground for most operations giving any potash project whose product is destined for the Brazil market a huge price advantage.
K3/K4 – POTENTIAL UNDERGROUND CONVENTIONAL MINING PROSPECT
K3/K4 claims (139,869 hectare) ~50km to the northwest of Vale’s Potasio Rio Colorado Project PRC in the province of Mendoza
2 HIGH GRADE SHALLOW TARGETS!!!The K3/K4 claims in my opinion are the star of the whole show with potential high NPV, high IRR project world class underground mine that is comparable to any mine in operation today. With depths starting at 200 meters and not one but two separate targets at that depth K3 and K4 will stand out from the rest. K3 has real potential to be one of the more profitable potash operations in the world and being only 50km from Vale’s PRC has similar grades widths and geology. Vale has made the production decision 50km to the east which has de-risked exploration significantly and becomes more financing risk than anything else. The claims have the combination of grade, width and depth to be a comparably low cap-ex high return underground conventional mining operation when compared to deeper underground conventional mines.
Underground mines take the longest to get into production, but the shallow nature of the claims promise to cut down on construction time to get into the salt horizons as well as capital costs to build the mine.
Historic holes intercepted…
- 4.5 meters of 35% KCl at 221.5 meters
- 4.0 meters of 31% KCl at 741 meters
- High Grade
- Shallow Depth
- Mineable Widths
PRC highlights include… production of 4.3Mtpa (2020) with $6B total capex investment. Vale, one of the world’s biggest miners wouldn’t be ramping up PRC to a 5Mt operation if this wasn’t a world class project.
Why Argentina? Why Target Brazil?
- They fear cantoplex and need potash outside of the cartel
- Biggest consumer of potash - 14% of the world’s supply
- Vale is ramping up PRC 50km away… Synergies!!!
- Potential metrics of a world class potash mine
- Create their own South American Potash Cartel
- South American potash and phosphate trade deficit, but resource rich
The Most Undervalued Stock on the Venture!!!
Marifil Mines is currently the best deal on the planet as far as I am concerned. They have a predevelopment potash project that has the potential to be a clone of PRC with a land position that covers 5 times that of the current PRC project which Vale bought for $850M price tag in 2009 and has quickly bought to production in 3 years. In addition to a slam dunk world class potash development play, you get a lottery ticket with the Vaca Muerta Shale which has oil companies in the revitalized Neuquen Basin in a renewed old fashioned exploration staking rush.
Are you kidding me?
This is a $10M market cap company? MFM should be a $100M market cap company with the projects they have and being promoted as a company with billion potential. Let's just screw the "lets get this to $100 market cap strategy" and go straight for the billion dollar target because that is what these projects are worth with a little time and energy and of course $$$.
I know it takes some money to develop... but this company in my opinion is the most mis-priced company on the venture with oodles and oodles of value just waiting to be unlocked. Once the value is unlocked here, then we can concentrate on what is going to be one of the biggest growth stories of any potash company over the next 2 to 3 years and beyond. I have been in constant conversation with John Hite the CEO and he is dead set on bringing value to MFM shareholders with this project.
The best exposure to this project is to buy MFM itself as the most likely route is that MFM spins the assets out as a standalone potash company and finance it from there.
If there is any company I put an urgent EXTREME VALUE/GROWTH BUY RATING ON
MARIFIL MINES MFM-V at $0.135!!!
Are you kidding me?!?!?!
Under a $10M market cap!!!
The most mispriced materials stock on the planet!!!
Buy this one until you are blue in the face boys… No need to worry at current prices.
MARIFIL MINES MFM-V at $0.135!!!
Are you kidding me?!?!?!
Under a $10M market cap!!!
The most mispriced materials stock on the planet!!!
Buy this one until you are blue in the face boys… No need to worry at current prices.
John Hite: A Genuine Minefinder
I know John Hite well. I have written up Marifil years ago in 2006 and have followed the progress on some of their discoveries. One discovery, San Roque has been optioned off to Nova Gold who is spending millions developing this massive multi-element gold-silver-zinc-indium deposit to a production decision. Nova Gold doesn’t joint venture projects that they do not believe will be a mine, nor do the jv small projects. John Hite is a geological prospecting and exploration genius when it comes to sniffing out potential mines and I am sure there are other potential mines in the portfolio just waiting to be developed. John Hite has stated he wants Marifil to be a royalty company which I am sure it will be with projects like Neuquen Basin and San Roque. Really what he means though is he doesn’t want the headache that comes with building mines.
That is why I am here writing up Marifil and trying to get involved. I can build a mine on John’s claims and I’ve brought him wheelbarrows full of cash any time he wants to start a company like Argentina Potash. Not only have I given John the keys to the family treasury, I have put together an all-star cast. Not one, but three potash guys want their names on this project. I have a New York firm begging to lead a $25M second round financing above $1. My management team includes one of the top political contacts you can get in the Neuquen Basin who is close with the current governor and whose companies own the majority of the infrastructure in the basin and can turn off the gas on a whim.
This project is sooo good…
I can’t find one who can say no to the lucrative returns that the Neuquen claims offer.
NOT ONE!!!
NOT ONE!!!
2012 is the Year for Marifil to Shine…
This is truly an investment of a lifetime, and you get it all in an $8.5M market cap company. The only way retail is going to get a sniff at seed financing prices is to buy MFM on the open market and hope you get a spinout which is a very real possibility. At current prices MFM is trading well below any proposed financing prices. The San Roque project should give MFM a $30M market cap value on it’s own and the Neuquen projects have a spinout value of at least $30M - $50M including financing. A year from now with development of the K3/K4 claims, Argentina Potash or whatever this claims end up being called will be worth multiples of the original financing.
This is truly a billion dollar opportunity sitting ripe at less than $10M market cap.
Investing highlights…
- Potential world class underground conventional potash mine 1Mt - 5Mt
- Right grade, width and depth
- Logistics, logistics, logistics!!!
- Bluesky shale gas opportunity
- Major Joint Venture partnership with Nova Gold
- 2 companies for the price of 1!!!
Marifil Mines: Oil, Gas & Potash and much, much more!!!
First Trade Target: $0.50
Happy Trading in the New Year!!! Marifil will be sure to treat everyone well. TOP STOCK!
Christopher Skidmore
Beat the Market Stock Picks
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