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Falcon Gold has two advanced stage projects ready to generate cash flow

2021.10.13
It is unusual for a junior gold company to have as many properties as Falcon Gold (TSXV:FG, Frankfurt:3FA.G, OTC:FGLDF), and rarer still for…

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This article was originally published by A Head of the Herd

2021.10.13

It is unusual for a junior gold company to have as many properties as Falcon Gold (TSXV:FG, Frankfurt:3FA.G, OTC:FGLDF), and rarer still for two of those projects to have reached such an advanced stage of development as to become cash-generating assets.

With all that it has going on, Vancouver-based FG has been generating a lot of news lately, so much that it’s a challenge to keep up. We spoke to CEO Karim Rayani on Thanksgiving Monday who gave us the ahead of the herd track on the company’s business strategy as it relates to advancing multiple mineral exploration properties across Canada and one in Argentina.  

Central Canada flagship

With a total area of 10,392 hectares, Falcon Gold has the largest land position in Ontario’s Atikokan gold camp — bested only by Agnico Eagle and its 32,070-hectare Hammond Reef exploration project.

Central Canada project and surrounding properties

The company’s flagship project — known as the Central Canada Gold & Polymetallic Project — is located about 20 km southeast of Agnico’s Hammond Reef gold deposit, which has an estimated 3.32 million ounces of gold (123.5Mt grading 0.84 g/t Au) in mineral reserves, and 2.3 million ounces of measured and indicated mineral resources (133.4Mt grading 0.54 g/t Au).

The Hammond Reef property lies on the Hammond shear zone, which is a northeast-trending splay off of the Quetico Fault Zone (QFZ), and may be the control for the gold deposit. Falcon’s Central Canada property lies on a similar major northeast-trending splay of the QFZ.

Under Falcon Gold’s ownership, an initial seven-hole, 1,055m program completed in July 2020 featured a 3m interval of 10.17 g/t Au at 67m downhole. Falcon also intersected a new mineralized zone, untested by previous operators, at 104m depth, which sampled 18.6 g/t Au over 1m.

A second round of drilling took place last November-December, with another 10 holes totaling 1,890m.

By March 2021, all assays from Falcon’s inaugural drill program were received, from which continuity of the mineralized trend containing the historical shaft was confirmed.

Encouraged by these results, the company has undertaken additional work programs on the property this year, with initial focus on the outcrop exposures and trenched areas. The geological team has been conducting detailed structural mapping along the 275 meter-long strike of the Central Canada mine trend.

The team is also attending to the other high-priority gold targets along strike and paralleling the mine trend.

For the 2021 drill program, Falcon plans to complete up to 20 diamond drill holes for approximately 2,000m of core. The goal is to target gold mineralization in the shaft area, and to test other excellent gold zones such as mineralized quartz-feldspar porphyries and the northern vein, also known as the No. 2 vein.

A notable aspect of the Central Canada gold project, which hosts a historical resource of 230,000 oz grading just shy of 10 g/t Au, is the historical Staines copper and cobalt showing, with a reported drill intersection of 0.64% copper, 0.15% cobalt, 1.1% zinc and 0.35% gold over a true width of 40m.

“Part of this polymetallic system, we’re very fortunate to have cobalt numbers, we have the copper, we have the gold, when you add the cobalt in there it’s quite a significant project,” says Rayani, referring to the mineral necessary for electric vehicle batteries whose price he is bullish on.

According to Rayani, as the company moves towards a new NI 43-101-compliant resource at Central Canada, for every hole they drill, they are adding significant ounces to the original resource estimate.

“We’ve done three phases of drilling, hitting mineralization all the way through. Our first two programs were designed to test the surface mineralization, we’ve been adding a meter to a meter and a half, some zones are higher-grade some are low. Even the low it’s 2-3 grams per tonne, that really helps with our modeling.”

Additional field work including sampling, mapping and stripping has identified a number of new zones that extend the high-grade mineralization. The next step for Falcon is to continue drilling the system to depth, going beyond the current 200m level being tested, to 300m below surface.

Newfoundland properties

The Hope Brook property’s 996 claims, or 24,900 ha, acquired by Falcon Gold in July, are contiguous to the Sokoman MineralsBenton Resources joint venture, Marvel Discovery Corp’s claims and First Mining’s ground which is optioned to Big Rig Exploration. Rock lithologies and structures on the property are also related to those associated with Marathon Gold’s Valentine gold deposits, Sokoman’s Moosehead gold project and New Found Gold’s Queensway gold project — the first mover in the highly prospective Central Newfoundland Gold Area Play.

The Hope Brook mine was in production from 1987 to 1997, producing 752,163 oz. Coastal Gold outlined 6.3Mt at an average grade of 4.68 g/t Au, for 954,000 oz in the indicated and inferred categories.

Asked why the focus on snapping up fresh, unworked ground in Central Newfoundland, Rayani told me, “We were able to acquire this ground for 10 cents on the dollar, most of our assets are owned 100%, no NSRs (net smelter royalties). That’s really my motto,” he stated. “By doing this we can really focus in on the projects ourselves and the company doesn’t have to give away the farm, the objective here is to really assess what we have on our three assets.”

An enticing glimpse of what could lie beneath came via the Sokoman MineralsBenton Resources alliance, in September. The two companies said that 35 of 58 samples taken from lithium-bearing pegmatite dikes on their Golden Hope project in southwestern Newfoundland confirmed that the pegmatites carry significant lithium values — making it the first documented occurrence of lithium in the province of Newfoundland-Labrador.  

Golden Hope is only a kilometer away from Hope Brook, suggesting the mineralization could carry onto Falcon’s property. The company plans to follow-up that theory with further exploration. 

“Falcon and our sister company Marvel Discovery have made a lot of noise as of late not only in acquiring sizable land positions tied on to major structures but also following the structures to find what we believe are hidden gems that were overlooked and passed by. Sokoman and Benton’s new Lithium discovery being less than a 1 km away is a testament to our business model,” Rayani stated in a Sept. 17 news release.

Initial permits have been filed for a first phase of exploration at Hope Brook which includes high-resolution magnetic gradiometry surveys that help to sort structural complexities in geological terranes. The company will also be sending prospecting crews to begin baseline prospecting to determine if the magnetic trends highlighted in regional government surveys are due to similar mineralized structures as those hosting the nearby Sokoman/Benton lithium discovery.

Falcon Gold recently acquired two new properties in Central Newfoundland, both located in strategic locations close to known mineral zones or producing mines.

Baie Verte

The first deal, announced on Aug. 18, involved 548 claims totaling 13,700 hectares located along the Baie Verte Brompton Line (BVBL) of the Central Newfoundland gold belt, home to some of the province’s largest gold deposits.

Falcon’s claim groups in Central Newfoundland

There are more than 100 gold prospects and zones, many of which are orogenic-style, related to major splays and associated structures linked to the BVBL. Falcon’s new property covers a 50-km corridor along the BVBL.

Producing mines in the region are headlined by Anaconda Mining Inc.’s Point Rousse gold mine and Rambler Metals & Mining operations. Former producing mines include the Terra Nova mine, and deposits of the Rambler mining camp. All of these mines are close to the BVBL.

Falcon’s new claims are also 13 km southwest of the Glover Island Trend, an 11-km mineralized corridor that hosts 17 base metal and polymetallic mineral prospects as well as numerous gold showings and anomalies.

These include the Lunch Pond South Extension (LPSE) deposit owned by Mountain Lake Resources, which has indicated and inferred resources of 120,000 ounces of gold (June 2017).

The new land acquisition is also close to the Four Corners project held by Triple Nine Resources (see map below).

Location of the new Falcon Gold land along the BVBL

The Four Corners project consists of iron-titanium-vanadium mineralized rock that has been outlined for 3,000m of strike with intercepts 200m wide and 600m vertically. This project is said to contain sufficient tonnage and grades to warrant developing a world-class mineral resource.

With the Baie Verte acquisition, Falcon now controls a large swath of mineralization for a distance of between 10 and 15 kilometers, including a 300-meter-long identified gold structure.

And with much of the ground already surveyed by government, the company saves a lot of money — Rayani estimates around $2 million — in geophysical studies. “Because we have government mag with at least 60 to 70% of it [surveyed], we’re in pretty good shape.”

Great Burnt

Then, in early September, Falcon announced it has acquired through staking 91 claims totaling 2,275 hectares in the Great Burnt greenstone belt of central Newfoundland, which is rich in base metals.

The Great Burnt greenstone belt is host to the Great Burnt copper zone that contains an indicated resource of 381,300 tonnes at 2.68% Cu and inferred resources of 663,100 tonnes at 2.10% Cu.

Recent drilling by Spruce Ridge Resources returned some of the best copper results across the board, highlighted by 8.0% Cu over 27.2m and 6.9% Cu over 22.7m.

The Great Burnt greenstone belt also hosts the South Pond A and B copper-gold zones and the End Zone copper prospect within a 14-km mineralized corridor.

The greenstone belt is characterized by Besshi-type massive sulfide deposits, which generally occur in thick sequences of marine sedimentary rocks. Sulfide lenses can be several meters thick and extend for several kilometres. Besshi-type massive sulfide deposits are generally copper-dominant and can contain precious metals such as gold, and often cobalt.

As shown on the map below, Falcon’s Great Burnt property is located right in the middle of Spruce Ridge’s land package. It is also situated 4 km west of the Crest Resources-Exploits Discovery joint venture project within the Exploits Subzone.

Falcon Gold’s Great Burnt copper property acquisition

The Exploits Subzone is known to contain deep-seated gold-bearing structures of the Dog Bay-Appleton Fault — GRUB Line deformation corridor, and is home to the high-grade Keats Zone of New Found Gold. Falcon’s new property is located just 20 km west of the Queensway project held by NFG.

“This property not only has the potential to host important Exploits Subzone orogenic gold mineralization but also copper-rich massive sulphides that contain gold,“ Rayani stated in a news release.

In my conversation with him, Rayani commented,

“The Great Burnt project is in a world-class copper district, it’s probably one of the more prolific mining camps in Newfoundland. Most of the defined deposits are in that jurisdiction. We’re next door to some of the highest-grade deposits there.”

Falcon now intends to perform a high-resolution airborne magnetic and electromagnetic survey over the entire property, integrating mineralization trends and historical results to vector its exploration efforts.

Spitfire/Sunny Boy

Heading to the other side of the country, at Falcon’s Spitfire/Sunny Boy project near Merritt, BC, a second phase of exploration commenced in mid-September.

Best described as a swarm of low-sulfidation, epithermal gold veins, Spitfire/Sunny Brook features reported gold grades up to 127 g/t gold and 308 to 514 g/t silver in quartz vein material from underground workings. The high-grade veins have been trenched, pitted, blasted and drilled but never commercially mined.

Falcon Gold’s first phase of exploration last year successfully identified gold mineralization over a 300m strike length. Highlights from a September 2020 sampling program included a 2.2m channel sample that averaged 59.8 g/t Au; a 1m channel sample from within the 2.2m sample assayed 122 g/t Au on the Master Vein. Additional highlights are in the table below.

The company’s second phase is a more aggressive follow-up using pack-sack drilling along the Master Vein and four parallel vein systems. Fifteen holes have been completed with assays pending.

“We are thrilled to finally send exploration crews to follow up on our original findings from last year. We believe the nature of the veining conforms to a low sulfidation epithermal deposit type model that could host world class gold grades,”  Rayani said in the Sept. 22 news release.

In my conversation with him Rayani went further, telling me the objective at Sunny Boy is to try and pull together anywhere from 30,000 to 100,000 ounces of high-grade gold at surface, enough for a bulk sample that, by his estimates, would be a very nice cash generator for Falcon Gold. 

Gaspard

Meanwhile Falcon Gold’s Gaspard gold claims acquisition was approved by the exchange in March.

Comprising three mineral claims (3,955 ha) in the Clinton mining district of central BC, the Gaspard property is located 60 km from Williams Lake and about 16 km from the Blackdome gold mine. Blackdome has indicated resources of 144,500 tonnes grading 11.29 g/t gold and 50 g/t silver, and 90,600t inferred grading 8.79 g/t Au and 18.61 g/t Ag.

Blackdome mineralization is characterized as volcanic-hosted epithermal gold and silver, and according to Falcon, may represent the target type for the Gaspard gold claims.

Historical work includes stream sediment and soil sampling in the northern part of the claims, where gold geochemical anomalies were discovered.

Next steps include a helicopter magnetic survey comprised of 320 km of flight lines along 150m spacings; additional stream sediment sampling; and more prospecting, mapping and sampling of the brecciated rhyolite with quartz vein stockwork, needed to determine the source of the stream and soil anomalies. A budget of around $250,000 is expected to yield drill targets.

Latamark spinout

On March 11 the TSX Venture Exchange approved the company’s option to acquire a 100% interest in the Esperanza gold, silver and copper mineral concessions located in La Rioja province, Argentina.

On Oct. 7 Falcon Gold announced it plans to spinout the project into a new entity known as Latamark Resources Corp. Under the terms of a reworked option agreement, Falcon will pay the vendors 500,000 common shares plus 500,000 warrants along with USD$350,000 in exploration expenditures to earn an 80% interest in the project.

Comprising 10 mineral concessions covering 11,768 hectares, Esperanza is within the Sierra de Las Minas district, where there are a number of past-producing gold and silver mines.

High-grade gold mineralization was first discovered in 1865 at the Callanas occurrences, which was followed by limited mining on a gold-copper-silver zone. Nine hundred meters of drilling was conducted at Callanas during the 1990s, from which two holes reported encouraging results — 1m @ 9.11 g/t gold and 28.59 g/t silver; and 0.42m @ 24.3 g/t Au and 61.10 g/t Ag.

More recently, Esperanza Resources mapped the Callanas West zone along a northwest-southeast strike for about 4 km.

In 2018 Falcon Gold completed a limited sampling program as part of its due diligence on the property. Highlights included a trench sample from Callanas East reporting 1m @ 5.61 g/t Au, and a 2.5m continuous chip sample from Callanas East showing 5.90 g/t Au, 20.6 g/t Ag and 0.29% Cu.

Around 4 km east of the Callenas area, a 30-cm chip sample assayed 15.63 g/t Au and a grab sample of a quart vein float returned 28.43 g/t Au.

Surface sampling results featured 27.03 g/t Au across 50cm from Callana III vein; and a 50-cm width of visible gold from the Callana IV vein that assayed 45.71 g/t Au with >100 g/t silver and 0.78% Cu.

Falcon completed its first exploration work on the Esperanza property in January 2019, with visible gold samples from the Callenas area of 44.90 g/t Au, 123.2 g/t Ag, 0.73% Cu; and another 50-cm chip sample that assayed 26.07 g/t Au, 424 g/t Ag and 1.23% Cu.

Rayani told me the company has similar plans for Latamark Resources, as for their Spitfire/Sunny Boy property in south-central British Columbia.

The project has about a 100,000-ounce resource with high-grade narrow veins and topography similar to Nevada — known for its epithermal, near-surface gold deposits and disseminated, “Carlin-style” gold.

“There’s multiple pods and we believe we can turn it into a cash-flow property. If each pod has 20koz on the low side we can bulk sample and process it ourselves. Because this project is outside of North America I thought it was in the best interests of Falcon and its shareholders not to dilute the current share structure, we’d spin this out into a wholly owned subsididary called Latamark Resources,” said Rayani, in explaining the rationale for the spinout.

He added the company is currently going through the process of filing an NI 43-101 resource, with the structure of the new-co expected to unfold within the next four the six weeks.

Conclusion

Falcon Gold is very active junior with multiple properties located within some of Canada’s best mineral districts, and an advanced-stage project in Argentina.

Since we started covering the company about a year ago, Falcon has reported visible gold at its flagship Central Canada project, significantly expanded its land position in the Central Newfoundland Gold Area Play, started phase 2 exploration at Spitfire/Sunny Boy in BC, and spun out the high-grade Esperanza gold project in Argentina into a new company, Latamark Resources.

As the company moves towards a new NI 43-101-compliant resource at Central Canada, for every hole they drill, they are adding significant ounces to the original resource estimate. The first two programs were designed to test surface mineralization, and they’ve been hitting it all the way through.

Now the drills are diving deeper, up to 400m, to see how far down the system goes. Sampling, mapping and stripping have identified a number of new zones that extend the high-grade mineralization.

Rayani told me “we’re in the system” and Falcon is in the process of completing a model on it. “There’s 50,000m of historic drilling and I would say ~50% of that we’re actually able to use towards the current 43-101, the former numbers and the numbers we’re drilling right now are all very consistent.”

A notable aspect of the Central Canada gold project, which hosts a historical resource of 230,000 oz grading just shy of 10 g/t Au, is the historical Staines copper and cobalt showing, with a reported drill intersection of 0.64% copper, 0.15% cobalt, 1.1% zinc and 0.35% gold over a true width of 40m.

Falcon has “close-ology” in its favor at Central Canada too. With a total area of 10,392 hectares, Falcon has the largest land position in Ontario’s Atikokan gold camp — bested only by Agnico Eagle and its 32,070-hectare Hammond Reef exploration project. Hammond Reef has an estimated 3.3 million ounces of gold in reserves and 2.3Moz in measured and indicated.

In Central Newfoundland, Falcon Gold has been busy acquiring projects in ground attached to the larger players in the camp. They started off with the Hope Brook project and now have Baie Verte and Great Burnt. With the Baie Verte acquisition, Falcon controls a large swath of mineralization between 10 and 15 kilometers, including a 300-meter-long identified gold structure. Great Burnt not only has the potential to host important Exploits Subzone orogenic gold mineralization but also copper-rich massive sulfides that contain gold.

In September the Sokoman MineralsBenton Resources alliance discovered the first occurrence of lithium in the province of Newfoundland-Labrador.  It happens to be 1 km away from Falcon Gold’s Hope Brook. Initial permits have been filed for a first phase of exploration at Hope Brook.

The last but certainly not least two projects, have the exciting potential to give Falcon Gold a revenue stream as it continues to develop, or perhaps spin out other properties within its exploration portfolio. The nature of the Gaspard mineralization, a series of low-sulfidation, epithermal gold veins, makes it amenable to a bulk sample. Fifteen short holes have been drilled with assays pending.

A similar model applies to the Esperanza gold project now under the rubric of a new Latin America-focused company, Latamark Resources. Falcon Gold’s management team has smartly decided to separate out Esperanza and has done so without having to dilute the share structure.

The project has about a 100,000-ounce resource with high-grade narrow veins and a long history of previous exploration.

In 2019 FG identified visible gold-silver copper samples of 44.90 g/t Au, 123.2 g/t Ag, 0.73% Cu; and another 50-cm chip sample that assayed 26.07 g/t Au, 424 g/t Ag and 1.23% Cu. Pretty impressive.

Two future cash-cow projects would be nice, but for now, Falcon Gold’s treasury is flush from a recent financing, raising just over a half-million dollars at $0.13. Rayani told me that current exploration activities have already been paid for, and with a low burn rate, he expects they will get most of the first-pass drill targets in Newfoundland identified, and still have lots of money left over for drilling. Again, pretty smart.

From what I’ve seen so far, I have a lot of confidence in Falcon Gold being able to deliver on its goals. Between drilling in Ontario, assay results from the Sunny Boy program in BC, potential lithium at the Hope Brook project in Newfoundland, plus developments at the two new projects, Baie Verte and Great Burnt, we can expect a ton of news flow from Falcon Gold and multiple catalysts for stock price appreciation for the remainder of this year and into 2022.

Falcon Gold Corp.
TSXV:FG, Frankfurt:3FA.G, OTC:FGLDF
Cdn$0.09, 2021.10.12
Shares Outstanding 100.2m
Market cap Cdn$9.9m
FG website

Richard (Rick) Mills
aheadoftheherd.com
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Author: Gail Mills

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Musgrave makes another ‘bonanza’ grade gold discovery in the Murchison

Special Report: Everything Musgrave touches turns to gold (literally!). The company has reported a ‘bonanza’ 898g/t gold intercept as close … Read…

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Everything Musgrave touches turns to gold (literally!). The company has reported a ‘bonanza’ 898g/t gold intercept as close as just 49m from surface at its Big Sky prospect in Western Australia.  

Musgrave Minerals (ASX:MGV) has unearthed yet another near-surface, extremely high-grade gold intercept at its Big Sky Prospect on its Cue Project in the highly fertile Murchison region of Western Australia, while also identifying new gold mineralisation in a footwall dolerite which is open and untested along strike.

Recent drilling delivered an intersection of 28m at 35.9 grams per tonne (g/t) gold, including 1m at 898g/t, from just 49m at Big Sky. Coarse visible gold was identified in the logged sample.

Musgrave says it has also identified a new high-grade gold position within the footwall at Big Sky.

Coarse gold nuggets and gold in quartz sieved from 49-50m down hole in RC drill hole 21MORC277 at Big Sky. One metre interval assayed 898g/t Au.

“This is a very good result and highlights the high-grade potential at Big Sky over the broader 2.6km of strike,” managing director Rob Waugh said.

“It is unusual on the Yilgarn to see such coarse gold in RC drill chips. It validates our belief that there are high-grade zones within the Big Sky trend.”

Notable results returned from drilling into the footwall zone were 7m at 8.6g/t gold from 43m, including 1m at 55.2g/t from 44m; 3m at 13.2g/t gold from 3m; 2m at 6g/t from 94m; 6m at 3.6g/t from 24m; and 2m at 12.0g/t from 110m.

Several of the new high-grade gold intersections came from within a newly identified dolerite-hosted zone in the footwall, which Waugh said could be the southern extension of the same dolerite unit identified to the north on the JV ground with Evolution Mining (ASX:EVN).

“Gold can be hosted in many different rock types on the Yilgarn but dolerites are one of the most prolific host lithologies for large deposits,” Waugh explained.

Musgrave plans to test this new mineralised target zone over an extended strike extent of more than 5km in a separate 9,000m aircore drilling campaign.

Resource definition drilling is continuing at Big Sky in tandem with infill drilling at Target 14 and reverse circulation drill testing of new Starlight-type targets along the Break of Day trend.

“We are drilling full steam ahead to deliver a maiden resource for Big Sky in Q2 2022,” Waugh said.

 


 

 

This article was developed in collaboration with Musgrave Minerals, a Stockhead advertiser at the time of publishing.

 

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

The post Musgrave makes another ‘bonanza’ grade gold discovery in the Murchison appeared first on Stockhead.


Author: Special Report

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Carawine identifies two new priority targets at West Paterson JV

Special Report: Carawine Resources’ West Paterson JV partner Rio Tinto (ASX:RIO) subsidiary RTX has identified two priority anomalies from an … Read…

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Carawine Resources’ West Paterson JV partner Rio Tinto (ASX:RIO) subsidiary RTX has identified two priority anomalies from an airborne electromagnetic survey over the Baton tenements.

Anomaly BEM001 is a discrete anomaly associated with a gravity high, located about 1km northwest of the Wheeler prospect, a coincident magnetic/gravity high anomaly defined by the company prior to the JV.

Anomaly BEM006 is a single line anomaly, coincident with a gravity high.

Both anomalies will be integrated with other datasets for target prioritisation and drill planning for 2022.

Anomalies potential indicators of mineralisation

“Heliborne EM surveys have been highly successful in the Paterson Province in identifying conductive anomalies as potential indicators of mineralisation,” Carawine (ASX:CWX) managing director David Boyd said.

“The identification and prioritisation of these new conductive anomalies is therefore seen as a significant development for the Baton tenements.

“We look forward to these new targets, along with the other priority Baton targets at Discus, Wheeler and Javelin, being advanced ahead of drill testing planned for the 2022 field season.”

Pic: Baton tenements airborne EM anomalies and previously identified targets.

Drilling underway at three different projects

RTX has the right to earn up to an 80% interest in Carawine’s Baton and Red Dog tenements and is managing and operating exploration activities while farming in – with RC drilling underway at Red Dog.

Plus, the company’s Fraser Range JV partner IGO Ltd (ASX:IGO) is drilling (and managing and funding) work while Carawine itself is continuing drilling at its Tropicana North Project.

“Today’s announcement adds to an already active period for Carawine,” Boyd said.

“With diamond drilling ongoing at the Hercules gold prospect at the company’s Tropicana North Project, IGO drilling at Red Bull in the Fraser Range Joint Venture, and Rio Tinto drilling at Red Dog in the West Paterson JV.”

 


 

 

This article was developed in collaboration with Carawine Resources Limited, a Stockhead advertiser at the time of publishing.

 

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

The post Carawine identifies two new priority targets at West Paterson JV appeared first on Stockhead.


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Green Energy: A Bubble In Unrealistic Expectations

Green Energy: A Bubble In Unrealistic Expectations

Authored by David Hay via Everegreen Gavekal blog,

“You see what is happening in Europe….

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Green Energy: A Bubble In Unrealistic Expectations

Authored by David Hay via Everegreen Gavekal blog,

“You see what is happening in Europe. There is hysteria and some confusion in the markets. Why?…Some people are speculating on climate change issues, some people are underestimating some things, some are starting to cut back on investments in the extractive industries. There needs to be a smooth transition.”

– Vladimir Putin (someone with whom this author rarely agrees)

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of its citizens.”

– John Maynard Keynes (an interesting observation for all the modern day Keynesians to consider given their support of current inflationary US policies, including energy-related)

Introduction

This week’s EVA provides another sneak preview into David Hay’s book-in-process, “Bubble 3.0” discussing what he thinks is the crucial topic of “greenflation.”  This is a term he coined referring to the rising price for metals and minerals that are essential for solar and wind power, electric cars, and other renewable technologies.

It also centers on the reality that as global policymakers have turned against the fossil fuel industry, energy producers are for the first time in history not responding to dramatically higher prices by increasing production.  Consequently, there is a difficult tradeoff that arises as the world pushes harder to combat climate change, driving up energy costs to painful levels, especially for lower income individuals. 

What we are currently seeing in Europe is a vivid example of this dilemma.  While it may be the case that governments welcome higher oil and natural gas prices to discourage their use, energy consumers are likely to have a much different reaction.

Summary

  • BlackRock’s CEO recently admitted that, despite what many are opining, the green energy transition is nearly certain to be inflationary.

  • Even though it’s early in the year, energy prices are already experiencing unprecedented spikes in Europe and Asia, but most Americans are unaware of the severity.

  • To that point, many British residents being faced with the fact that they may need to ration heat and could be faced with the chilling reality that lives could be lost if this winter is as cold as forecasters are predicting.

  • Because of the huge increase in energy prices, inflation in the eurozone recently hit a 13-year high, heavily driven by natural gas prices on the Continent that are the equivalent of $200 oil.

  • It used to be that the cure for extreme prices was extreme prices, but these days I’m not so sure.  Oil and gas producers are very wary of making long-term investments to develop new resources given the hostility to their industry and shareholder pressure to minimize outlays.

  • I expect global supply to peak sometime next year and a major supply deficit looks inevitable as global demand returns to normal.

  • In Norway, almost 2/3 of all new vehicle sales are of the electric variety (EVs) – a huge increase in just over a decade. Meanwhile, in the US, it’s only about 2%. Still, given Norway’s penchant for the plug-in auto, the demand for oil has not declined.

  • China, despite being the largest market by far for electric vehicles, is still projected to consume an enormous and rising amount of oil in the future.

  • About 70% of China’s electricity is generated by coal, which has major environmental ramifications in regards to electric vehicles.

  • Because of enormous energy demand in China this year, coal prices have experienced a massive boom. Its usage was up 15% in the first half of this year, and the Chinese government has instructed power providers to obtain all baseload energy sources, regardless of cost. 

  • The massive migration to electric vehicles – and the fact that they use six times the amount of critical minerals as their gasoline-powered counterparts –means demand for these precious resources is expected to skyrocket.

  • This extreme need for rare minerals, combined with rapid demand growth, is a recipe for a major spike in prices.

  • Massively expanding the US electrical grid has several daunting challenges– chief among them the fact that the American public is extremely reluctant to have new transmission lines installed in their area.

  • The state of California continues to blaze the trail for green energy in terms of both scope and speed. How the rest of the country responds to their aggressive take on renewables remains to be seen.

  • It appears we are entering a very odd reality: governments are expending resources they do not have on weakly concentrated energy. And the result may be very detrimental for today’s modern economy.

  • If the trend in energy continues, what looks nearly certain to be the Third Energy crisis of the last half-century may linger for years. 

Green energy: A bubble in unrealistic expectations?

As I have written in past EVAs, it amazes me how little of the intense inflation debate in 2021 centered on the inflationary implications of the Green Energy transition.  Perhaps it is because there is a built-in assumption that using more renewables should lower energy costs since the sun and the wind provide “free power”. 

However, we will soon see that’s not the case, at least not anytime soon; in fact, it’s my contention that it will likely be the opposite for years to come and I’ve got some powerful company.  Larry Fink, CEO of BlackRock, a very pro-ESG* organization, is one of the few members of Wall Street’s elite who admitted this in the summer of 2021.  The story, however, received minimal press coverage and was quickly forgotten (though, obviously, not be me!). 

This EVA will outline myriad reasons why I think Mr. Fink was telling it like it is…despite the political heat that could bring down upon him.  First, though, I will avoid any discussion of whether humanity is the leading cause of global warming.  For purposes of this analysis, let’s make the high-odds assumption that for now a high-speed green energy transition will continue to occur.  (For those who would like a well-researched and clearly articulated overview of the climate debate, I highly recommend the book “Unsettled”; it’s by a former top energy expert and scientist from the Obama administration, Dr. Steven Koonin.)

The reason I italicized “for now” is that in my view it’s extremely probable that voters in many Western countries are going to become highly retaliatory toward energy policies that are already creating extreme hardship.  Even though it’s only early autumn as I write these words, energy prices are experiencing unprecedented increases in Europe.  Because it’s “over there”, most Americans are only vaguely aware of the severity of the situation.  But the facts are shocking… 

Presently, natural gas is going for $29 per million British Thermal Units (BTUs) in Europe, a quadruple compared to the same time in 2020, versus “just” $5 in the US, which is a mere doubling.  As a consequence, wholesale energy cost in Great Britain rose an unheard of 60% even before summer ended.  Reportedly, nine UK energy companies are on the brink of failure at this time due to their inability to fully pass on the enormous cost increases.  As a result, the British government is reportedly on the verge of nationalizing some of these entities—supposedly, temporarily—to prevent them from collapsing.  (CNBC reported on Wednesday that UK natural gas prices are now up 800% this year; in the US, nat gas rose 20% on Tuesday alone, before giving back a bit more than half of that the next day.)

Serious food shortages are expected after exorbitant natural gas costs forced most of England’s commercial production of CO2 to shut down.  (CO2 is used both for stunning animals prior to slaughter and also in food packaging.)  Additionally, ballistic natural gas prices have forced the closure of two big US fertilizer plants due to a potential shortfall of ammonium nitrate of which “nat gas” is a key feedstock. 

*ESG stands for Environmental, Social, Governance; in 2021, Blackrock’s assets under management approximated $9 ½ trillion, about one-third of the total US federal debt.

With the winter of 2021 approaching, British households are being told they may need to ration heat.  There are even growing concerns about the widespread loss of life if this winter turns out to be a cold one, as 2020 was in Europe.  Weather forecasters are indicating that’s a distinct possibility.  

In Spain, consumers are paying 40% more for electricity compared to the prior year.  The Spanish government has begun resorting to price controls to soften the impact of these rapidly escalating costs. (The history of price controls is that they often exacerbate shortages.) Naturally, spiking power prices hit the poorest hardest, which is typical of inflation whether it is of the energy variety or of generalized price increases. 

Due to these massive energy price increases, eurozone inflation recently hit a 13-year high, heavily driven by natural gas prices that are the equivalent of $200 per barrel oil.  This is consistent with what I warned about in several EVAs earlier this year and I think there is much more of this looming in the years to come.

In Asia, which also had a brutally cold winter in 2020 – 2021, there are severe energy shortages being disclosed, as well.  China has instructed its power providers to secure all the coal they can in preparation for a repeat of frigid conditions and acute deficits even before winter arrives.  The government has also instructed its energy distributors to acquire all the liquified natural gas (LNG) they can, regardless of cost.  LNG recently hit $35 per million British Thermal Units in Asia, up sevenfold in the past year.  China is also rationing power to its heavy industries, further exacerbating the worldwide shortages of almost everything, with notable inflationary implications.

In India, where burning coal provides about 70% of electricity generation (as it does in China), utilities are being urged to import coal even though that country has the world’s fourth largest coal reserves.  Several Indian power plants are close to exhausting their coal supplies as power usage rips higher.

Normally, I’d say that the cure for such extreme prices, was extreme prices—to slightly paraphrase the old axiom.  But these days, I’m not so sure; in fact, I’m downright dubious.  After all, the enormously influential International Energy Agency has recommended no new fossil fuel development after 2021—“no new”, as in zero. 

It’s because of pressure such as this that, even though US natural gas prices have done a Virgin Galactic to $5 this year, the natural gas drilling rig count has stayed flat.  The last time prices were this high there were three times as many working rigs. 

It is the same story with oil production.  Most Americans don’t seem to realize it but the US has provided 90% of the planet’s petroleum output growth over the past decade.  In other words, without America’s extraordinary shale oil production boom—which raised total oil output from around 5 million barrels per day in 2008 to 13 million barrels per day in 2019—the world long ago would have had an acute shortage.  (Excluding the Covid-wracked year of 2020, oil demand grows every year—strictly as a function of the developing world, including China, by the way.)

Unquestionably, US oil companies could substantially increase output, particularly in the Permian Basin, arguably (but not much) the most prolific oil-producing region in the world.  However, with the Fed being pressured by Congress to punish banks that lend to any fossil fuel operator, and the overall extreme hostility toward domestic energy producers, why would they? 

There is also tremendous pressure from Wall Street on these companies to be ESG compliant.  This means reducing their carbon footprint.  That’s tough to do while expanding their volume of oil and gas. 

Further, investors, whether on Wall Street or on London’s equivalent, Lombard Street, or in pretty much any Western financial center, are against US energy companies increasing production.  They would much rather see them buy back stock and pay out lush dividends.  The companies are embracing that message.  One leading oil and gas company CEO publicly mused to the effect that buying back his own shares at the prevailing extremely depressed valuations was a much better use of capital than drilling for oil—even at $75 a barrel.

As reported by Morgan Stanley, in the summer of 2021, an US institutional broker conceded that of his 400 clients, only one would consider investing in an energy company!  Consequently, the fact that the industry is so detested means that its shares are stunningly undervalued.  How stunningly?  A myriad of US oil and gas producers are trading at free cash flow* yields of 10% to 15% and, in some cases, as high as 25%.

In Europe, where the same pressures apply, one of its biggest energy companies is generating a 16% free cash flow yield.  Moreover, that is based up an estimate of $60 per barrel oil, not the prevailing price of $80 on the Continent.

*Free cash flow is the excess of gross cash flow over and above the capital spending needed to sustain a business.  Many market professionals consider it more meaningful than earnings. 

Therefore, due to the intense antipathy toward Western energy producers they aren’t very inclined to explore for new resources.  Another much overlooked fact about the ultra-critical US shale industry that, as noted, has been nearly the only source of worldwide output growth for the past 13 years, is its rapid decline nature. 

Most oil wells see their production taper off at just 4% or 5% per year.  But with shale, that decline rate is 80% after only two years.  (Because of the collapse in exploration activities in 2020 due to Covid, there are far fewer new wells coming on-line; thus, the production base is made up of older wells with slower decline rates but it is still a much steeper cliff than with traditional wells.) 

As a result, the US, the world’s most important swing producer, has to come up with about 1.5 million barrels per day (bpd) of new output just to stay even.  (This was formerly about a 3 million bpd number due to both the factor mentioned above and the 2 million bpd drop in total US oil production, from 13 million bpd to around 11 million bpd since 2019).  Please recall that total US oil production in 2008 was only around 5 million bpd.  Thus, 1.5 million barrels per day is a lot of oil and requires considerable drilling and exploration activities.  Again, this is merely to stay steady-state, much less grow. 

The foregoing is why I wrote on multiple occasions in EVAs during 2020, when the futures price for oil went below zero*, that crude would have a spectacular price recovery later that year and, especially, in 2021.  In my view, to go out on my familiar creaky limb, you ain’t seen nothin’ yet!  With supply extremely challenged for the above reasons and demand marching back, I believe 2022 could see $100 crude, possibly even higher. 

*Physical oil, or real vs paper traded, bottomed in the upper teens when the futures contract for delivery in April, 2020, went deeply negative. 

Mike Rothman of Cornerstone Analytics has one of the best oil price forecasting records on Wall Street.  Like me, he was vehemently bullish on oil after the Covid crash in the spring of 2020 (admittedly, his well-reasoned optimism was a key factor in my up-beat outlook).  Here’s what he wrote late this summer:  “Our forecast for ’22 looks to see global oil production capacity exhausted late in the year and our balance suggests OPEC (and OPEC + participants) will face pressures to completely remove any quotas.” 

My expectation is that global supply will likely max out sometime next year, barring a powerful negative growth shock (like a Covid variant even more vaccine resistant than Delta).  A significant supply deficit looks inevitable as global demand recovers and exceeds its pre-Covid level.  This is a view also shared by Goldman Sachs and Raymond James, among others; hence, my forecast of triple-digit prices next year.  Raymond James pointed out that in June the oil market was undersupplied by 2.5 mill bpd.  Meanwhile, global petroleum demand was rapidly rising with expectations of nearly pre-Covid consumption by year-end.  Mike Rothman ran this chart in a webcast on 9/10/2021 revealing how far below the seven-year average oil inventories had fallen.  This supply deficit is very likely to become more acute as the calendar flips to 2022.

In fact, despite oil prices pushing toward $80, total US crude output now projected to actually decline this year.  This is an unprecedented development.  However, as the very pro-renewables Financial Times (the UK’s equivalent of the Wall Street Journal) explained in an August 11th, 2021, article:  “Energy companies are in a bind.  The old solution would be to invest more in raising gas production.  But with most developed countries adopting plans to be ‘net zero’ on carbon emissions by 2050 or earlier, the appetite for throwing billions at long-term gas projects is diminished.”

The author, David Sheppard, went on to opine: “In the oil industry there are those who think a period of plus $100-a-barrel oil is on the horizon, as companies scale back investments in future supplies, while demand is expected to keep rising for most of this decade at a minimum.”  (Emphasis mine)  To which I say, precisely! 

Thus, if he’s right about rising demand, as I believe he is, there is quite a collision looming between that reality and the high probability of long-term constrained supplies.  One of the most relevant and fascinating Wall Street research reports I read as I was researching the topic of what I have been referring to as “Greenflation” is from Morgan Stanley.  Its title asked the provocative question:  “With 64% of New Cars Now Electric, Why is Norway Still Using so Much Oil?” 

While almost two-thirds of Norway’s new vehicle sales are EVs, a remarkable market share gain in just over a decade, the number in the US is an ultra-modest 2%.   Yet, per the Morgan Stanley piece, despite this extraordinary push into EVs, oil consumption in Norway has been stubbornly stable. 

Coincidentally, that’s been the experience of the overall developed world over the past 10 years, as well; petroleum consumption has largely flatlined.  Where demand hasn’t gone horizontal is in the developing world which includes China.  As you can see from the following Cornerstone Analytics chart, China’s oil demand has vaulted by about 6 million barrels per day (bpd) since 2010 while its domestic crude output has, if anything, slightly contracted.

Another coincidence is that this 6 million bpd surge in China’s appetite for oil, almost exactly matched the increase in US oil production.  Once again, think where oil prices would be today without America’s shale oil boom.

This is unlikely to change over the next decade.  By 2031, there are an estimated one billion Asian consumers moving up into the middle class.  History is clear that more income means more energy consumption.  Unquestionably, renewables will provide much of that power but oil and natural gas are just as unquestionably going to play a critical role.  Underscoring that point, despite the exponential growth of renewables over the last 10 years, every fossil fuel category has seen increased usage. 

Thus, even if China gets up to Norway’s 64% EV market share of new car sales over the next decade, its oil usage is likely to continue to swell.  Please be aware that China has become the world’s largest market for EVs—by far.  Despite that, the above chart vividly displays an immense increase in oil demand

Here’s a similar factoid that I ran in our December 4th EVA, “Totally Toxic”, in which I made a strong bullish case for energy stocks (the main energy ETF is up 35% from then, by the way): 

“(There was) a study by the UN and the US government based on the Model for the Assessment of Greenhouse Gasses Induced Climate Change (MAGICC).  The model predicted that ‘the complete elimination of all fossil fuels in the US immediately would only restrict any increase in world temperature by less than one tenth of one degree Celsius by 2050, and by less than one fifth of one degree Celsius by 2100.’  Say again?  If the world’s biggest carbon emitter on a per capita basis causes minimal improvement by going cold turkey on fossil fuels, are we making the right moves by allocating tens of trillions of dollars that we don’t have toward the currently in-vogue green energy solutions?”

China’s voracious power appetite increase has been true with all of its energy sources. 

On the environmentally-friendly front, that includes renewables; on the environmentally-unfriendly side, it also includes coal.  In 2020, China added three times more coal-based power generation than all other countries combined.  This was the equivalent of an additional coal planet each week.  Globally, there was a reduction last year of 17 gigawatts in coal-fired power output; in China, the increase was 29.8 gigawatts, far more than offsetting the rest of the world’s progress in reducing the dirtiest energy source.  (A gigawatt can power a city with a population of roughly 700,000.)

Overall, 70% of China’s electricity is coal-generated. This has significant environmental implications as far as electric vehicles (EVs) are concerned.  Because EVs are charged off a grid that is primarily coal- powered, carbon emissions actually rise as the number of such vehicles proliferate. As you can see in the following charts from Reuters’ energy expert John Kemp, Asia’s coal-fired generation has risen drastically in the last 20 years, even as it has receded in the rest of the world.  (The flattening recently is almost certainly due to Covid, with a sharp upward resumption nearly a given.)

The worst part is that burning coal not only emits CO2—which is not a pollutant and is essential for life—it also releases vast quantities of nitrous oxide (N20), especially on the scale of coal usage seen in Asia today. N20 is unquestionably a pollutant and a greenhouse gas that is hundreds of times more potent than CO2.  (An interesting footnote is that over the last 550 million years, there have been very few times when the CO2 level has been as low, or lower, than it is today.) 

Some scientists believe that one reason for the shrinkage of Arctic sea ice in recent decades is due to the prevailing winds blowing black carbon soot over from Asia.  This is a separate issue from N20 which is a colorless gas.  As the black soot covers the snow and ice fields in Northern Canada, they become more absorbent of the sun’s radiation, thus causing increased melting.  (Source:  “Weathering Climate Change” by Hugh Ross)

Due to exploding energy needs in China this year, coal prices have experienced an unprecedented surge.  Despite this stunning rise, Chinese authorities have instructed its power providers to obtain coal, and other baseload energy sources, such as liquified natural gas (LNG), regardless of cost.  Notwithstanding how pricey coal has become, its usage in China was up 15% in the first half of this year vs the first half of 2019 (which was obviously not Covid impacted).

Despite the polluting impact of heavy coal utilization, China is unlikely to turn away from it due to its high energy density (unlike renewables), its low cost (usually) and its abundance within its own borders (though its demand is so great that it still needs to import vast amounts). 

Regarding oil, as we saw in last week’s final image, it is currently importing roughly 11 million barrels per day (bpd) to satisfy its 15 million bpd consumption (about 15% of total global demand).  In other words, crude imports amount to almost three-quarter of its needs.  At $80 oil, this totals $880 million per day or approximately $320 billion per year.  Imagine what China’s trade surplus would look like without its oil import bill!

Ironically, given the current hostility between the world’s superpowers, China has an affinity for US oil because of its light and easy-to-refine nature.  China’s refineries tend to be low-grade and unable to efficiently process heavier grades of crude, unlike the US refining complex which is highly sophisticated and prefers heavy oil such as from Canada and Venezuela—back when the latter actually produced oil.

Thus, China favors EVs because they can be de facto coal-powered, lessening its dangerous reliance on imported oil.  It also likes them due to the fact it controls 80% of the lithium ion battery supply and 60% of the planet’s rare earth minerals, both of which are essential to power EVs.    

However, even for China, mining enough lithium, cobalt, nickel, copper, aluminum and the other essential minerals/metals to meet the ambitious goals of largely electrifying new vehicle volumes is going to be extremely daunting.  This is in addition to mass construction of wind farms and enormously expanded solar panel manufacturing.

As one of the planet’s leading energy authorities Daniel Yergin writes: “With the move to electric cars, demand for critical minerals will skyrocket (lithium up 4300%, cobalt and nickel up 2500%), with an electric vehicle using 6 times more minerals than a conventional car and a wind turbine using 9 times more minerals than a gas-fueled power plant.  The resources needed for the ‘mineral-intensive energy system’ of the future are also highly concentrated in relatively few countries. Whereas the top 3 oil producers in the world are responsible for about 30 percent of total liquids production, the top 3 lithium producers control more than 80% of supply. China controls 60% of rare earths output needed for wind towers; the Democratic Republic of the Congo, 70% of the cobalt required for EV batteries.”

As many have noted, the environmental impact of immensely ramping up the mining of these materials is undoubtedly going to be severe.  Michael Shellenberger, a life-long environmental activist, has been particularly vociferous in his condemnation of the dominant view that only renewables can solve the global energy needs.  He’s especially critical of how his fellow environmentalists resorted to repetitive deception, in his view, to undercut nuclear power in past decades.  By leaving nuke energy out of the solution set, he foresees a disastrous impact on the planet due to the massive scale (he’d opine, impossibly massive) of resource mining that needs to occur.  (His book, “Apocalypse Never”, is also one I highly recommend; like Dr. Koonin, he hails from the left end of the political spectrum.)

Putting aside the environmental ravages of developing rare earth minerals, when you have such high and rapidly rising demand colliding with limited supply, prices are likely to go vertical.  This will be another inflationary “forcing”, a favorite term of climate scientists, caused by the Great Green Energy Transition.

Moreover, EVs are very semiconductor intensive.  With semis already in seriously short supply, this is going to make a gnarly situation even gnarlier.  It’s logical to expect that there will be recurring shortages of chips over the next decade for this reason alone (not to mention the acute need for semis as the “internet of things” moves into primetime). 

In several of the newsletters I’ve written in recent years, I’ve pointed out the present vulnerability of the US electric grid.  Yet, it will be essential not just to keep it from breaking down under its current load; it must be drastically enhanced, a Herculean task. For one thing, it is excruciatingly hard to install new power lines. As J.P. Morgan’s Michael Cembalest has written: “Grid expansion can be a hornet’s nest of cost, complexity and NIMBYism*, particularly in the US.”  The grid’s frailty, even under today’s demands (i.e., much less than what lies ahead as millions of EVs plug into it) is particularly obvious in California.  However, severe winter weather in 2021 exposed the grid weakness even in energy-rich Texas, which also has a generally welcoming attitude toward infrastructure upgrading and expansion.

Yet it’s the Golden State, home to 40 million Americans and the fifth largest economy in the world, if it was its own country (which it occasionally acts like it wants to be), that is leading the charge to EVs and seeking to eliminate internal combustion engines (ICEs) as quickly as possible.  Even now, blackouts and brownouts are becoming increasingly common.  Seemingly convinced it must be a role model for the planet, it’s trying desperately to reduce its emissions, which are less than 1%, of the global total, at the expense of rendering its energy system more similar to a developing country.  In addition to very high electricity costs per kilowatt hour (its mild climate helps offset those), it also has gasoline prices that are 77% above the national average. 

*NIMBY stands for Not In My Back Yard.

While California has been a magnet for millions seeking a better life for 150 years, the cost of living is turning the tide the other way.  Unreliable and increasingly expensive energy is likely to intensify that trend.  Combined with home prices that are more than double the US median–$800,000!–California is no longer the land of milk and honey, unless, to slightly paraphrase Woody Guthrie about LA, even back in the 1940s, you’ve got a whole lot of scratch.  More and more people, seem to be scratching California off their list of livable venues. 

Voters in the reliably blue state of California may become extremely restive, particularly as they look to Asia and see new coal plants being built at a fever pitch.  The data will become clear that as America keeps decarbonizing–as it has done for 30 years mostly due to the displacement of coal by gas in the US electrical system—Asia will continue to go the other way.  (By the way, electricity represents the largest share of CO2 emission at roughly 25%.) 

California has always seemed to lead social trends in this country, as it is doing again with its green energy transition.  The objective is noble though, extremely ambitious, especially the timeline.  As it brings its power paradigm to the rest of America, especially its frail grid, it will be interesting to see how voters react in other states as the cost of power leaps higher and its dependability heads lower.  It’s reasonable to speculate we may be on the verge of witnessing the Californication of the US energy system. 

Lest you think I’m being hyperbolic, please be aware the IEA (International Energy Agency) has estimated it will cost the planet $5 trillion per year to achieve Net Zero emissions.  This is compared to global GDP of roughly $85 trillion. According to BloombergNEF, the price tag over 30 years, could be as high as $173 trillion.  Frankly, based on the history of gigantic cost overruns on most government-sponsored major infrastructure projects, I’m inclined to take the over—way over—on these estimates.

Moreover, energy consulting firm T2 and Associates, has guesstimated electrifying just the US to the extent necessary to eliminate the direct consumption of fuel (i.e., gasoline, natural gas, coal, etc.) would cost between $18 trillion and $29 trillion.  Again, taking into account how these ambitious efforts have played out in the past, I suspect $29 trillion is light.  Regardless, even $18 trillion is a stunner, despite the reality we have all gotten numb to numbers with trillions attached to them.  For perspective, the total, already terrifying, level of US federal debt is $28 trillion.

Regardless, as noted last week, the probabilities of the Great Green Energy Transition happening are extremely high.  Relatedly, I believe the likelihood of the Great Greenflation is right up there with them. 

As Gavekal’s Didier Darcet wrote in mid-August:  ““Nowadays, and this is a great first in history, governments will commit considerable financial resources they do not have in the extraction of very weakly concentrated energy.” ( i.e., less efficient)  “The bet is very risky, and if it fails, what next?  The modern economy would not withstand expensive energy, or worse, lack of energy.” 

While I agree this an historical first, it’s definitely not great (with apologies for all the “greats”).  This is particularly not great for keeping inflation subdued, as well as for attempting to break out of the growth quagmire the Western world has been in for the last two decades.  What we are seeing in Europe right now is an extremely cautionary case study in just how disastrous the war on fossil fuels can be (shortly we will see who or what has been a behind-the-scenes participant in this conflict).

Essentially, I believe, as I’ve written in past EVAs, we are entering the third energy crisis of the last 50 years.  If I’m right, it will be characterized by recurring bouts of triple-digit oil prices in the years to come.  Along with Richard Nixon taking the US off the gold standard in 1971, the high inflation of the 1970s was caused by the first two energy crises (the 1973 Arab Oil Embargo and the 1979 Iranian Revolution).  If I’m correct about this being the third, it’s coming at a most inopportune time with the US in hyper-MMT* mode.

Frankly, I believe many in the corridors of power would like to see oil trade into the $100s, and natural gas into the teens, as it will help catalyze the shift to renewable energy.  But consumers are likely to have a much different reaction—potentially, a violently different reaction, as I noted last week. 

The experience of the Yellow Vest protests in France (referring to the color of the vest protestors wore), are instructive in this regard.  France is a generally left-leaning country.  Despite that, a proposed fuel surtax in November 2018 to fund a renewable energy transition triggered such widespread civil unrest that French president Emmanuel Macron rescinded it the following month.

*MMT stands for Modern Monetary Theory.  It holds that a government, like the US, which issues debt in its own currency can spend without concern about budgetary constraints.  If there are not enough buyers of its bonds at acceptable interest rates, that nation’s central bank (the Fed, in our case) simply acquires them with money it creates from its digital printing press.  This is what is happening today in the US.  Many economists consider this highly inflationary.

The sharp and politically uncomfortable rise in US gas pump prices this summer caused the Biden administration to plead with OPEC to lift its volume quotas.  The ironic implication of that exhortation was glaringly obvious, as was the inefficiency and pollution consequences of shipping oil thousands of miles across the Atlantic.  (Oil tankers are a significant source of emissions.)  This is as opposed to utilizing domestic oil output, as well as crude from Canada (which is actually generally better suited to the US refining complex).  Beyond the pollution aspect, imported oil obviously worsens America’s massive trade deficit (which would be far more massive without the six million barrels per day of domestic oil volumes that the shale revolution has provided) and costs our nation high-paying jobs.

Further, one of my other big fears is that the West is engaging in unilateral energy disarmament.  Russia and China are likely the major beneficiaries of this dangerous scenario.  Per my earlier comment about a stealth combatant in the war on fossil fuels, it may surprise you that a past NATO Secretary General* has accused Russian intelligence of avidly supporting the anti-fracking movements in Western Europe.  Russian TV has railed against fracking for years, even comparing it to pedophilia (certainly, a most bizarre analogy!). 

The success of the anti-fracking movement on the Continent has essentially prevented a European version of America’s shale miracles (the UK has the potential to be a major shale gas producer).  Consequently, the European Union’s domestic natural gas production has been in a rapid decline phase for years. 

Banning fracking has, of course, made Europe heavily reliant on Russian gas shipments with more than 40% of its supplies coming from Russia. This is in graphic contrast to the shale output boom in the US that has not only made us natural gas self-sufficient but also an export powerhouse of liquified natural gas (LNG). 

In 2011, the Nord Stream system of pipelines running under the Baltic Sea from northern Russia began delivering gas west from northern Russia to the German coastal city of Greifswald.  For years, the Russians sought to build a parallel system with the inventive name of Nord Stream 2.  The US government opposed its approval on security grounds but the Biden administration has dropped its opposition.  It now appears Nord Stream 2 will happen, leaving Europe even more exposed to Russian coercion. 

Is it possible the Russian government and the Chinese Communist Party have been secretly and aggressively supporting the anti-fossil fuel movements in America?  In my mind, it seems not only possible but probable.  In fact, I believe it is naïve not to come that conclusion.  After all, wouldn’t it be in both of their geopolitical interests to see the US once again caught in a cycle of debilitating inflation, ensnared by the twin traps of MMT and the third energy crisis?

*Per former NATO Secretary General, Anders Fogh Rasumssen:  Russia has “engaged actively with so-called non-governmental organizations—environmental organizations working against shale gas—to maintain Europe’s dependence on imported Russian gas”.

Along these lines, I was shocked to listen to a recent podcast by the New Yorker magazine on the topic of “intelligent sabotage”.  This segment was an interview between the magazine’s David Remnick and a Swedish professor, Adreas Malm.  Mr. Malm is the author of a new book with the literally explosive title “How To Blow Up A Pipeline”.   Just as it sounds, he advocates detonating pipelines to inhibit fossil fuel distribution. 

Mr. Remnick was clearly sympathetic to his guest but he did ask him about the impact on the poor of driving energy prices up drastically which would be the obvious ramification if his sabotage recommendations were widely followed.  Mr. Malm’s reaction was a verbal shrug of the shoulders and words to the effect that this was the price to pay to save the planet.

Frankly, I am appalled that the venerable New Yorker would provide a platform for such a radical and unlawful suggestion.  In an era when people are de-platformed for often innocuous comments, it’s incredible to me this was posted and has not been pulled down.  In my mind, this reflects just how tolerant the media is of attacks on the fossil fuel industry, regardless of the deleterious impact on consumers and the global economy.

Surely, there is a far better way of coping with the harmful aspects of fossil fuel-based energy than this scorched earth (literally, in the case of Mr. Malm) approach, which includes efforts to block new pipelines, shut existing ones, and severely restrict US energy production.  In America’s case, the result will be forcing us to unnecessarily and increasingly rely on overseas imports.  (For example, per the Wall Street Journal, drilling permits on federal land have crashed to 171 in August from 671 in April.  Further, the contentious $3.5 trillion “infrastructure” plan would raise royalties and fees high enough on US energy producers that it would render them globally uncompetitive.)

Such actions would only aggravate what is already a severe energy shock, one that may be worse than the 1970s twin energy crises.  America has it easy compared to Europe, though, given current US policy trends, we might be in their same heavily listing energy boat soon.

Solutions include fast-tracking small modular nuclear plants; encouraging the further switch from burning coal to natural gas (a trend that is, unfortunately, going the other way now, as noted above); utilizing and enhancing carbon and methane capture at the point of emission (including improving tail pipe effluent-reduction technology); enhancing pipeline integrity to inhibit methane leaks; among many other mitigation techniques that recognize the reality the global economy will be reliant on fossil fuels for many years, if not decades, to come. 

If the climate change movement fails to recognize the essential nature of fossil fuels, it will almost certainly trigger a backlash that will undermine the positive change it is trying to bring about.  This is similar to what it did via its relentless assault on nuclear power which produced a frenzy of coal plant construction in the 1980s and 1990s.  On this point, it’s interesting to see how quickly Europe is re-embracing coal power to alleviate the energy poverty and rationing occurring over there right now – even before winter sets in.  When the choice is between supporting climate change initiatives on one hand and being able to heat your home and provide for your family on the other, is there really any doubt about which option the majority of voters will select?

Tyler Durden
Tue, 10/26/2021 – 19:30





Author: Tyler Durden

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