So It Begins

by Dave Forest
August 2, 2010

First off, an overdue welcome to the many of you who've joined Pierce Points over the last several weeks.

I'm often asked why I don't charge for this letter. By connecting with people like you, this forum creates far more value than any subscription fees could provide. And it looks like the latest group of subscribers will be no exception.

Creating value is a critical concept. It's the reason that Pierce Points and its sister company Notela Resource Advisors were created.

My associates and I long felt that there was a lot to be done in creating value in the natural resources business. Creating mining projects that actually have a chance of producing a valuable ore deposit. Creating oil and gas companies that pump profits rather than just share prices. And (perhaps most importantly) creating understanding of the resource business with well-researched, no-strings-attached analysis and advice.

To do any of this, it's key to have an ongoing dialogue with the top people on the front lines of these businesses. Pierce Points has given us that. Thanks to all of you for being part of it.

One of the first things I'm often asked when meeting new people is, "What do you like right now?" By way of quick introduction, let me run down a few of the big picture themes I see unfolding in the resource space.

There will be a major new uranium deposit discovered soon. The yellowcake business needs it. I'm betting it will come in the form of an "old" deposit, reinvented by a metallurgical or processing breakthrough. Or the discovery of high-grade, "unconformity-style" mineralization in a Proterozoic basin where such deposits were previously unknown.

Shale gas will go global. America has proven it works, and now everyone is itching to take the show on the road to other countries. But there will be a lot of disappointments as would-be producers realize this is a game of cost containment. The winners will be the companies who master the services supply chain before they even think about drilling a well. (Bonus prediction: Japan will emerge as a leader in cheap, high-quality oil field services for Asia.)

Speaking of Japan, this may be the site of the next stage in the financial crisis. The next crisis will be in the government bond market. Governments are going to try to spend their way back to prosperity. And they will spend until inflation-wary buyers start boycotting their bond auctions. At that point, rising interest rates and falling exchange rates will wreak havoc. It won't happen in the U.S. like everyone expects, but it could in Japan or Europe.

One thing that will happen in America: geothermal power will go primetime. The big players are already starting to jockey for position in the southwest states. Junior geothermal project developers will be the big winners.

In fact, more evidence emerged on that front this week. Geothermal major Ormat Technologies announced it has selected John Hancock Life Insurance to arrange $350 million in loan facilities for three of Ormat's geothermal projects under construction in Nevada.

This is one of the first major geothermal loan facilities that will be secured by the U.S. Department of Energy. Under the "Financial Institution Partnership Program" introduced in 2009, geothermal project developers can apply to have the DOE guarantee up to 80% of project construction loans.

This is a big boost. Without DOE guarantees, project developers often paid outrageous amounts of interest (up to 15%) on project loans. But with DOE backing, interest rates are likely to be around 5%. Making project economics much, much more attractive.

Ormat's loan facility will be an important test of how this system works. If things go smoothly, it will prove to project developers, financiers and investors that there's money to made in geothermal.

Such proof will bring a lot of attention to this sector.

Here's to all that's to come,

Dave Forest