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Geothermal & Nuclear Energy Stars Spark Gianni Kovacevic's Interest

Commodities / Energy Resources Sep 17, 2009 - 01:43 PM GMT

By: The_Energy_Report


Best Financial Markets Analysis Article"It's all about the management," says corporate development strategist and consultant Gianni Kovacevic, who has identified a single player in both geothermal and nuclear energy sectors—the "absolute leaders in the space." In this exclusive interview with The Energy Report, Gianni discusses some of the elements that make their management teams so powerful.

The Energy Report: What appeals to you about the energy sector?

Gianni Kovacevic: The world cannot live without energy, thus we've seen many governments around the world dedicated to creating energy in a greener and cleaner way. We need to look at the types of industries that are going to benefit from just a general interest in doing the right thing, and significant government incentive to create this energy (i.e., geothermal, wind, and even nuclear power).

TER: The greener and cleaner people usually focus solely on alternative energy, overlooking nuclear and geothermal. You have an interest in nuclear and geothermal, though. What's brought you to that point as opposed to wind, solar, wave, ethanol?

GK: These are the best two forms of green energy because they really do work. Geothermal has never had a true leader that could take a company, assemble assets, create shareholder value, and drive this industry, offering investors a vehicle to participate from inception to final vision. In my opinion, when Ross Beaty formed Magma Energy Corp. (TSX: MXY)-which had an IPO in early July—it signaled the first time we've had a leader with a storied track record that goes back three decades who is dedicating a large part of his efforts to leave behind this legacy company.

TER: Are you suggesting that with Ross Beaty coming in that Magma Energy is on a consolidation strategy?

GK: Magma Energy is going to be an explorer, a developer, an operator and in due course I believe with strong Mr. Beaty at the helm, they will consolidate this space. My contacts around the world have been disappointed with the lack of strong management in this space but now they have a management team with all the core competencies that is absolutely 100% dedicated to make this business succeed. Is there investment interest? Absolutely. When the IPO took place and Magma raised a significant amount of capital at $1.50 a share, it was more than double over-subscribed. There is a ton of appetite for this sector, this company and this management team.

Look at Mr. Beaty's pristine track record and the amount of shareholder value that's been unlocked from his franchises—be it Pan American Silver Corp. (TSX:PAA; NASDAQ:PAAS), which he formed with one goal—to become the world's largest primary silver producer. Check! Accomplished. Or a Lumina Copper Corp. (TSX:LCC), which is the sporting equivalent to hitting four grand-slam home runs in one game. This franchise paid initial investors in excess of 5,000% in dividends and they still hold their original share. Magma Energy should be the default company in geothermal for investors if they are active in the space or to follow and consider as a core holding within the sector due to these strong assets and the strongest management team. In fact I don't believe any company that Mr. Beaty was involved with has ever failed and that goes back three decades. I'll back that jockey all day long especially when the jockey is as passionate as he is for Magma and geothermal.

TER: That's quite an endorsement.

GK: I have experience with them and can say from my discussions and meetings with them, they are absolutely committed to developing this company and developing shareholder value through fundamentals. As I said, from exploration to development to the consolidation front, all of this bodes well for shareholders.

TER: You sound more excited about Magma Energy than about geothermal in general.

GK: Geothermal is a win-win-win. I like this industry. It's good for the environment. I like the fact that it basically goes forever. With fluid going into hot rocks, coming up creating steam and electricity, it just goes in perpetuity once that circuit is installed and efficiently managed and maintained. We've seen it in Italy. It's operated for 100 years.

From an investment perspective, I like the fact that we have government incentives, which make an already very economic and very good business better and easier to finance and maintain. With all the "green" money out there development of each megawatt of power is going to be heavily supported. Investors need to fluently understand just how much government support will be offered companies like Magma. This is unprecedented and takes a lot of the financial risk onto the shoulders of others and less so to the shareholders and management. That's good.

I just see this as an incredible win-win-win situation for the citizens around the world, for the shareholders of companies such as Magma, and for local communities. Rather than have a coal-fired or other fossil fuel-fired power plant, if a community can have a geothermal plant, where's the downside in this equation? I don't see it.

TER: In addition to Magma Energy with its all-star team and multi-pronged strategic process, do any other companies in the geothermal sector interest you?

GK: There's another company, Ram Power Inc., which is going to IPO probably next month. It is led by Hezy Ram, a developer of projects. While he was with Ormat Technologies Inc. (NYSE:ORA), Mr. Ram initiated and executed the aggressive North American acquisitions of the geothermal plants that provided the base for a lot of the company's growth. So RPI is another company that eventually could have some significant interest around the world. With someone of Hezy Ram's caliber at the helm, I think RPI will be able to execute and, in the course of time, it would not surprise me to see a marriage between Ram and a company such as Magma. Who knows? I have an interest in both companies so I would endorse a marriage like that.

TER: When we started our conversation, you mentioned nuclear energy and wind in addition to geothermal under the "greener and cleaner" heading. What excites you about nuclear energy?

GK: Nuclear energy is a fantastic way to generate electricity because it works. We know that, because in America, 20% of the power comes from nuclear power and in Japan, about a third. In the ultimate demonstration of nuclear energy at work, over three-quarters of France's power comes from nuclear power plants. Even many environmentalists now acknowledge that nuclear power is better than fossil fuel power.

So we look at companies that will be able to provide this fuel for where the action's going to take place. We need to recognize where the environmentalist lobby is either limited or nonexistent (i.e., China and India), is where the projects are under construction and where the proposed projects will be built. I don't mean a few; I mean dozens of these nuclear reactors are going to be built in China and India. And where's the fuel going to come from?

We already know that a good third of the fuel that feeds the global nuclear plants right now comes from the dismantling of nuclear weapons. We also know that not every nuclear weapon will be dismantled. The nuclear plants also have contracts that expire in the next three to four years. Where will the fuel to cover this shortfall come from? New contracts? Perhaps? New supply is going to have to come on-line, but not at $50 per pound uranium.

In many places, including most of the U.S., it is so difficult to permit and develop uranium mines that when a company achieves this Holy Grail, they immediately go to the top of the list. If nothing else, if you monitor the uranium market, go through the lens of a company that's achieved this Holy Grail.

TER: And that would be?

GK: For us, there's only one name in the space: Uranium Energy Corp. (NYSE-ALT:UEC; FSE: U6Z). It operates in south Texas, and Texas is a very special jurisdiction within the uranium mining jurisdictions around the world. In Texas, as people may or may not know, they decide all permitting issues at the state level. UEC is in uranium-mining country; they have decades of experience as they have a dozen individuals that have developed and operated in South Texas for three decades. Their Goliad project is now in the final phases of comments from what are already approved draft proposals for their project permit and on September 1st they received another couple of draft permits.

TER: So their project is not yet built.

GK: Uranium Energy recently raised over $20 million. It was very well supported at this financing level and, due to the fact that they are now financed and they're going into their final comment period for their permit, they should be producing in the third quarter of next year. From a uranium mining perspective, that's as good as it gets and better yet, it should make them the very next producing operation in the U.S. and a very sought-after asset, indeed. By the way they are building new reactors in the area of the Goliad Project. Where will the fuel come from?

TER: You mentioned earlier that if you were looking at the uranium market and you were looking for the Holy Grail, it is Uranium Energy Corp. What makes it the Holy Grail as opposed to current producers?

GK: Only six projects in the United States are going through this permitting process. UEC is in the lead among them; three years ago there were only two and even now due to the fact that the others are not in Texas they have to deal with both federal and state permitting issues. Not UEC. So one can witness the significance of establishing this milestone. When you have so few projects, even worldwide, that are going through permitting to get to development, it makes UEC a very special story. If you cannot permit and develop your project, what value are your pounds in the ground?

UEC plans to start producing one million pounds a year, but the permit will allow them to produce two million pounds per year as per the amount of fluid they can move through the earth. So UEC will be quite a significant producer. And they're going to be a very low-cost producer at around $20 p/lb, otherwise very economically robust.

TER: Is that due to in situ recovery (ISR) methods?

GK: Yes. With ISR, it's around $20 a pound to get it out of the ground. They put solution through different holes into sandstone or certain host rocks. The solution seeps through this porous material, leaching the uranium into the solution. Then it's pumped back up through different holes and processed. UEC isn't reinventing the wheel with the use of ISR. A lot of uranium mines, including operations in south Texas, used it for decades before the U.S. uranium mining industry pretty much shut down when the price of uranium declined so sharply in the late 1970s and early 1980s that mining uranium became uneconomic.

Another good thing about UEC is that the management team consists of a good half dozen people who are career south Texas ISR people. They've done it before and they're simply doing it again for UEC. So, as with Magma Energy, it again all goes back to the management team. They have the people with the experience, people who have executed numerous times. The president and CEO of UEC, Mr. Amir Adnani, is someone I like to call a junior Ross Beaty. He turns over every dollar bill three times before spending it, and if one ever meets him they will be amazed at his depth of knowledge in this space and unbelievably tireless work ethic. He has assembled an all-star development team for UEC, and continues to look for opportunities to create shareholder value. As a side note there are seven Canadian analysts who cover this U.S.-listed uranium miner, a record, I think, and a huge endorsement to the validity of the project, not to mention a good way to research the details.

TER: The last greener cleaner energy source you'd mentioned is wind.

GK: Wind is a fantastic type of energy, but from a baseload perspective, it's only 30% to 40%. Wind is not constant; we all know that. I also like wind because it's extremely copper-intensive. T. Boone Pickens was planning on building the world's largest wind park in the United States. I don't believe that project's going ahead anymore, but the Chinese have taken the lead and they are building five or six significant wind parks, 10- to 20-megawatt parks. That's mind boggling. I think it's going to create a cheaper way to create wind power going forward, because any time you have this kind of development, I think people find shortcuts and economies of scale. So that's something we'll monitor very closely.

TER: Are you looking at any other clean energy sectors?

GK: I think with geothermal, nuclear and wind we've talked about the most significant clean-and-green plays. The important point to stress in how we think is to follow the leaders with decades of track record of the ultimate goal, creating recognizable shareholder value in industries that actually do work. There is no sense in succeeding in a sector that is only marginal, trendy and/or gimmicky. Both geothermal and nuclear energy generation will be around for our kids and our kid's kids. We like that and we love the fact that we are on the Magma bus from IPO to let that team deliver as they have for decades and look forward to seeing how the supply short falls will affect the uranium market and ultimately companies like our sector favorite UEC.

DISCLOSURE: Gianni Kovacevic
I personally and/or my family own the following companies mentioned in this interview: MXY and UEC.
I personally and/or my family am paid by the following companies mentioned in this interview: UEC.

Gianni Kovacevic, who works in corporate development at Global Opportunities AG Zurich, Switzerland & Kovacevic Consulting, brings more than a decade of investment experience in the resource sector to the task. In addition, over the past several years he has assisted with negotiated financings well in excess of $250 million from a large pool of global investors. A widely traveled citizen of the world who cultivates and nurtures relationships everywhere his interests take him, Gianni is fluent in German, Italian, Croatian and English, and is busily mastering Russian as well. A tireless researcher and avid reader, he maintains homes in both Vancouver and Zurich.

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