UNE caught my attention lately after having gone up about 200% in short time, without any clear reason for it. I've heard some call it a pump&dump story, mostly because of this thing going around (http://smallcapfortunes.com/uneff/index.html). Well, it's possible that some people wanna put a hype on this company to make quick money, but it doesn't necessarily mean that the company is bad or overvalued.

UNE is a developer of unconventional gas and oil. Today they have a small amount of production and their main activities are in exploration. In the latest financial report (nine months ended september 30, 2008) they showed a total revenue of $658,357, up 350% from last year. Mcap today is about $10M and net cash position is about -$1M, but from what I've seen they have been quite able to raise money.

The 350% increase in revenue is mostly attributable to higher production since gas-prices between the two periods (on average) changed little. So there is definitely a strong growth in the company. The basis of the "hype" for the company is the fact that in total they have almost 2 trillion cf (cubic feet) of natural gas resources. Remember that resources are not reserves, they are merely an estimation based on the large geological structure, whereas reserves are created by lots of drilling. Total reserves are today at about 32 billion cf.

UNE is active in the Appalachian basin and the Western Canadian sedimentary basin. These areas are mainly exploited through unconventional methods that have really just been devloped in recent years and still can be considered cutting edge technology that enables companies like UNE to exploit these shale and tight-sand reservoirs without spending too much money.

Because the operation of installing unconventional wells is a bit tricky, it usually takes a lot of preparations and careful planning before going ahead and installing a well. Therefore in the last three years that he company has been active the development has been going slowly. But as we all can see from the revenue growth, the expansion in productivity can assume quickly. Of course with the financial crisis the activities of the company have been more focused on acheiving higher production and the less developed properties will be put on hold or even sold. It also remains to be seen what happens with the price of natural gas, it has already gone down more than 50% since the top and although it could drop further there still is a long-term shortage of natural gas in North America - that's why unconventional plays came into the picture in the first place.

Besides the pump&dump rumours going around about the recent upswing in the share price, there have at the same time come out two positive news-items. First there was the announcement that a well is being drilled to test a very promising structure in the Appalachian basin (results coming in April). Secondly there was the newly drilled well in Canada that showed flow-rates of 2.3MMcf/day.

To put all this is some perspective: Natural gas is priced in MMbtu (million btu) and one can roughly say that 1000btu is 1cf natural gas. 1 MMbtu today costs about $4, which means that 2 trillion cf of gas is worth ~$8 billion. It would be impossible for UNE to exploit all this gas, but as is mentioned in the "pump&dump"-letter, they might be able to recover 25% - which is still worth a lot. The 2.3MMcf/day well would make UNE $9,200/day - that's $3.4M per year!

As the company now is focusing mostly on ramping up production and putting geological testing/exploration more aside, there could be a good upswing in revenues, even with lower gas prices. The recently drilled well showed very positive results and there is a lot of promise in the other ongoing work, as well. It isn't impossible that the company might not be able to raise more money in the future as things are looking now and the whole thing could be more or less put on hold. But the resource they hold is worth a lot in the long term and should always be of interest, especially with the recent developments in exploting these resources.

To conclude, I can't see how this company is overvalued at only $10M, it might be that I'm underestimating the impact of (potentially) lower gas prices and overestimating the ability of management to ramp up production. But as a long term investment - they have the resources that are just waiting to be developed - and it will be sooner or later (even if it means being bougth out by a larger company).

(Note: I wrote this post a little hastily and forgot to mention that management of UNE sees at least another 30 wells being drilled in the same area as the 2.3MMcf/day well - which once completed could bring revenues of up to - or more - than $100M/year. That's ten times more than the current mcap!!)

When writing about Goldsource Mines, I realized that it's hard to really get a good grip on the pricing of coal. All coal deposits seem to have different characteristics, but by doing some fairly simple comparisons one can perhaps estimate a reasonable price. Below are excerpts from Homeland Energy and Goldsource Mines - about their coal quality:

HEG.TO: "up to 26,000 kJ/kg, 12-13% Ash, 53% FCC (fixed carbon content), 4% H2O, low sulphur"

GXS.V: "20,640 kJ/kg (8,874 Btu/lb) to 23,358 kJ/kg (10,042 Btu/lb) on a "dry" basis. The seam has raw ash values ranging from 11.4% to 18.7% and moisture contents from 24.8% to 37.9% on an "as received basis". Once air dried, the moisture contents drop significantly to as low as 4%."
(FCC was on average ~44%)

In the 3Q of 2008 HEG signed a contract to deliver coal at $88/tonne. The comparison above shows that the HEG coal is a bit better than the one of GXS, but the difference is not that great and besides GXS is still in a very early stage. So as an addition to my previous post, I would claim that $50/tonne for the GXS coal isn't unreasonable.

Now that that's out of the way we can look closer at Homeland Energy. This company is operational in South Africa with one producing mine, two mature projects and a couple of exploration properties. The exploration properties have not yet yielded significant results so I will not get into those. The position of this company is a bit similar to that of GXS, their shares have crashed from about $2 this summer to $0.2 today. The mcap is ~$30M.

The operational mine (Kendal) began deliveries of coal in October 2008 (as mentioned above) at a rate of about 500,000 tonnes a year. The production rate will be ramped up to about 1.8M tonnes and the EBITDA-result is expected at ~$15M in 2009 and as production increases, ~$20M in 2010/11. The resource at Kendal is today at 34M tonnes, the expansion-potential of the resource-base currently looks limited.

The mature projects (soon to be in production) are the Northfield and Eloff projects. Northfield is an old shut down very high-quality coal (coking coal) mine that has a tiny resource left, but will give a small profit for a few years, when operated (cash-costs to get it going are ~$1M).

What's really interesting in terms of resource is the Eloff project. It has an estimated resource of about 500M tonnes of coal with about the same quality as Kendal. It's projected to begin production in 2011/12 for a initial cost of ~$100M, but this would be a very large, very profitable operation that would be running for many years. Profit from Eloff is expected to end up above $32M EBITDA per year.

I should mention that HEG also has a holding of 42% of the Homeland Uranium corporaton. The cash-position of the company today is ~C$8M. What's a little worrying is that they have about $36M of liabilities, but most of these can be written off as the company starts making money (unrealized gains).

As I've mentioned in my post about PGM's, I'm not too optimistic about the situation in South Africa. However, the state-run energy company Eskom is mainly running on coal, so really the outlook for a SA coal miner might actually be quite good (unless the state confiscates the mines). Well, they haven't really confiscated anything yet as far as I know, but things could get crazier in this country, just bear that in mind when investing there. HEG is expecting a $46M EBIDTA-profit in 2011 and although I'm certainly no seer of coal price development, I think it's a fair estimate.

The uncertainty of the South African situation is a pretty large cloud in the sky, but I wouldn't worry too much. HEG has a comparatively very low valuation today and a large proven resource with production already bringing in plenty of money. In conclusion I would say that there's easy money to be made in this company, unless some very unfortunate development brings down coal prices heavily.

These are pretty good times to go scavage-hunting for good stocks that have crashed mostly because of fear. GoldSource would be one such example. In 2008 GXS were looking for diamonds in Saskatchewan and happened to find a lot of coal instead. The stock rocketeered up to $20 and then as everybody started freaking out in the autumn, the stock fell back to about $1 and is now trading at about $2.50.

Other coal-miners/prospectors dropped heavily as well. But the fear that nobody would be wanting to buy coal seems pretty overdone - just recently the contracts for 2009 were signed and the price for the highest valued coal are at about $130/tonne. According to GXS management, their discoveries are of a high quality coal, perhaps not the best kind but from what I've understood it's among the better types of deposits.

The property of GXS's find is estimated to hold 500M-1B tonnes of coal, at least. The company has accumulated other properties in what they perceive to potentially be a coal trendline going from Saskatchewan into Manitoba. The drill-results in so far this year have confirmed the continuity of the deposit and I expect that more of these positive results will be coming in and resulting in further appreciation for the GXS-stock.

In 2008 the company took in $18M in a private placement and I think they should have a lot of that money still with them. They have no debt and the mcap today is at about CDN$50M. Let's say there really is 1B tonnes of coal in the property (called Border), and assuming a lower coal price at, say $50/tonne, that means that the in-ground coal would be worth $50B, which is obviously a lot compared to the mcap. A large North American coal-mining company would probably be very interested in purchasing 1B tonnes of coal for $50M, or why not $500M? Mining large coal-deposits isn't generally that expensive and this property would probably have a real good profit-margin - even at much lower prices.

In conclusion, I really doubt that buying this stock would not make you money. The only fear really should be in the overall economy, but that fear is only short-term - coal is a very inexpensive source of energy and there is technology to clean up emissions from it. The demand for coal isn't likely to go away any time soon; the price might drop but I don't think it could drop so much that a large high-quality coal-deposit in North America would become worthless.

I do get a little tired sometimes of all the focus on precious metals and energy that we have these days. So, I decided to write about one of these tiny tech-companies that very much resemble junior-miners in that they too can have a big break-through and make you lots of money in short order. What's great about tiny tech-stocks is that you know what it is your buying; so it just becomes a game of figuring out just how viable is their product.

Cymat has a fairly easy to understand tech: Aluminum Foam. Actually the product that they're selling is aluminum foam, but the technology that makes them unique is how they actually make the stuff.

The use for aluminum foam is pretty straightforward; it's a very low-density inexpensive material that has a strong shock or pressure resistance. This makes the material very good for use in particularly the military (road-side bombs, mines) and the auto industry (light, shock resistant and stabilizing).

Metal foams have been around since the 1940's, so it's not a new innovation. Since I'm no expert I can't judge if theirs is the best way to make it, but according to Cymat management, what makes their tech really different from similar producers is that they can mold the foam into basically any shape and size they want, which has been difficult in the past.

Cymat has a manufacturing plant in Toronto, Canada. So far Cymat has made a few deliveries, mostly for novelty use in architecture. They have delivered prototype orders to the autoparts-manufacturer Georg Fisher and they will be getting a 10% royalty if GF choose to use it. They also have prototype testing on-going in the Canadian and US military, which management optimistically expects future orders from.

The numbers right now are: No debt, ~$1M cash, mcap ~$10M. I beleive that pretty much all that needs to be said has been said. Cymat management is sounding very optimistic and from the recent testing in the auto and military sections it looks possible that they might receive real orders that would start giving them some real revenue. But buying this stock remains a very big gamble; there seems to have been an almost infinite supply of these sorts of small tech companies that have had one product that hey've been trying to sell, and although they've received lots of prototype orders, they've never quite made it all the way. I cannot honestly judge how good their tech is. Even if their tech isn't all that spectacular they could still get lucky. My final judgment would have to be: buy a very small amount of shares if you like to gamble.

(Note: I wanted to mention that I put up a 'Leave suggestions' page on the top menu, where you can leave suggestions of companies for me to write about. I put it up because it's hard to find interesting stuff to write about sometimes, and also it's an opportunity for readers to partake more in the blog.)

As I stated in my post on PGM's, one of the things that has been pushing down prices for PGM's is the assumption that electric cars will become more common and therefore demand of catalysts (along with PGM's) will decrease. This assumption seems justified since all major auto-manufacturers have been presenting new electric-driven models lately.

The type of electric cars that will probably be most viable are the ones with plug-in and a combustion engine recharging system, like the Chevy Volt. I assume this because it allows an easy switch between gasoline/oil and electric power generation as prices fluctuate. Therefore I also doubt the long-term potential of great depreciation of oil-prices, but neither do I see any real potential for greater appreciation.

Because of the rise of the electric car some have called out for a great rally in lithium. Lithium is the chemical element with the highest electrical potential of all the ions, and therefore makes for the best ion-/rechargable batteries. Only last week the junior-explorer TNR Gold Corp. announced some new acquisitions of lithium-properties, whereas they had previously only focused on the common precious and base metals. The TNR-stock rallied because of these news.

But there are a few problems in the belief that lithium will appreciate perhaps somewhat like uranium did. First, lithium is the 20th most common element in the earth, and secondly, batteries can be recycled. For these simple reasons I wouldn't buy into a lithium hype, but it is very possible that there could be a quick surge in the price before the new paradigm sets in.

So, if not lithium, then what are we supposed to investment in? Well, the PGM prices have almost crashed completely on the basis that the demand for catalysts will go down. But, if a lot of people want to buy these Chevy Volt type of cars (I know I do) then the catalyst demand could actually go up, because that's a lot of new cars to be made, and they all come with combustion engines.

Then there's the actual batteries. There are a few real good battery manufacturers out there like EnerSys or the Korean supplier of GM's batteries, LG Chem. Companies like these will be the new greatest auto-suppliers in the coming years, and should make some good profits from it.

I know that I myself have been wanting an electric car for a long time and I know a lot of other people who have been saying the same thing; actually I've never heard anyone say that they wouldn't want an electric car. I think that there will be a strong demand for these cars as they start coming out and people feel more willing to spend money again. Based on the potential for investment-demand (and the trouble in South Africa) for PGM's as well as a renewed demand for catalysts and the overall strong growth that's coming for the batteries-business, I see this as a really great investment opportunity.

I'd say that the best places to invest would probably be in PGM ETF's and some good looking battery manufacturers. I doubt that these investments would make you a lot of money in the coming year or so, but in the long term there should be a fairly comfortable appreciation - just like watching paint dry, as someone once said.