By Dr. Mike Berry
Chris and I have spent several months redefining our approach to the natural resource, life science, and high tech discovery markets. Chris is focusing on Energy Metals and has honed his attention to portfolio trading strategies across the entire value chain. We believe that we are still in the midst of an economy that has not, and will not, achieve escape (growth) velocity for many months or possibly several years.
Given the Fed’s money printing proclivities we should be seeing significant and sustainable economic growth. That is not yet the case. The Fed, through the FOMC, is now walking on egg shells. Members of the FOMC are as divisive on the Hawk / Dove spectrum as ever. The Fed’s goals are constantly being redefined.
This Note is not about the ongoing economic struggles of the world following the 2008 episode and near banking failure. I will write on that soon. On June 9th I present again to the Federal Reserve program in Arlington, Virginia. We will certainly know more about this “recovery” in due course.
We believe that the hiatus in global economic growth will provide an opportunity to “not mine.” Yes that’s correct, I said that the next 2 to 3 years will be tough economically and they will provide the opportunity to develop properties and create value - not metals.
These ore bodies have been in the ground for millions of years. They are not going anywhere. Three years of development work will take us, hopefully, to the new credit cycle and the oncoming tsunami of the 2 billion new, emerging middle class citizens.
Someone once told me that the way to make real wealth is by recognizing the potential of great properties, buying them cheap, and then putting lipstick and pancake makeup on them. It’s the selling that counts. Nothing could be truer in today’s economy and capital markets. In three years, properties like US Precious Metal’s (USPR:OTCBB) 37,000 acre La Solidaridad property will be very well known and potentially worth much more than they are today.
I could list quite a few properties of interest today that are selling for pennies. They also contain the potential to be worth much more in a few years. That’s part of our business plan. However, I want to write about something completely different today.
At Chris’ urging we decided to redesign our approach to continue providing top quality research.
Chris took on the challenge and we morphed our Discovery Investing discipline into a new “Journal” that we will populate with significant discoveries that we believe will be destructive in their impact and hence will revolutionize the geopolitics and economics of the world.
The rate of these discoveries is now accelerating. They are the enabling factors that allow for Nobel Prize Winner Dr. Michael Spence’s global Convergence of lifestyles – a theory to which we subscribe.
So today I write about two such discoveries, one of which is already revolutionizing the energy world and one that is in formative stages.[i]
Hydraulic Fracking and Horizontal Drilling for “Tight Hydrocarbons”
Pioneered a decade ago, skeptics said that George Mitchell’s hydraulic fracking and horizontal drilling would never work. Devon Energy didn’t believe them. In 2002, Devon bought George Mitchell’s innovation which was to drill horizontally into shale exposing thousands of feet of gas bearing Barnett formation shale. Fracking has gone global, but the best shale opportunities are in the United States.
We are focused on the Eagle Ford and Eagle Bine shale in Texas. They will become one of the world’s largest producers of oil, condensate and gas in the future.
With “fracking,” oil production is now a lower risk manufacturing process and not a speculative hit and miss exploration effort.
Almost all wells in the Eagle Ford have produced oil and gas (97%). We have invested in the royalties that are available from this disruptive technological discovery.
What are the macro results?
U.S. Natural gas production has increased 25 % since 2010. The U.S. is now the world’s largest gas producer, greater than Russia. By 2020, the U.S. will become the world’s largest gas exporter. Given the situation in Eastern Europe, specifically the Ukraine, fracking has huge geopolitical implications.
Results of this Disruption?
U.S. oil production has risen 60% since 2008 to more than 8 million barrels per day (BPD) today. By 2016, U.S. oil production will exceed 10 million barrels each day and will overtake Saudi Arabia and Russia combined as world’s largest oil producer.
The journal Foreign Affairs forecasts this occurrence by 2016! The geopolitical impacts are enormous.
Production from Texas’ Eagle Ford shale will last for 50 years, or more. By 2020, U.S. oil production will exceed its 12 million BPD historical maximum level of production achieved in the 1970’s.
The implications for U.S. gas production are even more significant. Most of the rest of the world uses natural gas for heat as well as industrial production, as will the US in the future. The Eagle Ford Shale has an oil window, a condensate window, and a gas window. The prospects for exporting LNG are now just beginning to be realized. They are enormous for global growth and geopolitical power.
Disruptive Discovery? Yes. Another way of seeing this is to consider a PARADIGM shift in our view of hydrocarbons. Green energy initiatives still need government help. More oil and gas is on the way.
Also, U.S. energy consumption is falling, so production also has major implications for the Canadian and US trade deficit and global growth.
But here is another advantage of disruptive discoveries. Almost universally, they can be improved and made more efficient. Each year we have witnessed a 25% efficiency improvement in fracking and horizontal drilling technology. Initially, wells on the Eagle Ford were drilled on 160 acre parcels. That has decreased to 40 acres today and will likely be 20 acres in the near future.
We expect over 90,000 wells to be drilled on the Eagle Ford shale alone. Productivity has increased 50% in a short time frame.
The North American energy juggernaut is back - in US and Canada - and perhaps Mexico which contains 50 billion barrels of tight shale oil.
The technology will drive all in oil recovery costs to about $50 / barrel. We think global oil prices will eventually decline, based on global production, to $70 per barrel.
This edition of the Foreign Affairs journal indicates that Canadian and American households will save ~$35 billion each year or approximately $350 per family as a result of this new oil producing technology.
There are a number of very lucrative royalty funds in the U.S. shale markets. Land owners (royalty owners) receive 25% off the top of the production and there is no liability or working interest payment. Most of the first 4 years of royalty payments are tax free due to depletion tax shields. To date 150,000 horizontal wells have been drilled in the United States for a cost of $1 trillion. The US has fracked about 150,000 miles of shale about 2 million times. Destructive? Innovative? Game Changing? Definitely!
Plasma Arc Technology Processing for Mining Industry
There is nothing much new about plasma torch technology. The technology been around and applications published for a couple of decades. You can access Scientific American or the Journal Science and read articles devoted to it. Space travel has been one of the focal points of the technology. Garbage gasification with resulting production of syngas has also been a much sought after goal.
Everyday lighting, by the way, is another example of a plasma type of physics.
Last month I met Dr. Edgar Choueiri of Princeton University. Princeton is not far from my home in Morristown. Professor Edgar Choueiri and a friend, Barry Schneer, have been instrumental in developing a second generation application of plasma torch technology devoted to processing mined ore.
Dr. Choueiri is the Director of Princeton University's Program in Engineering Physics, and Director of Princeton's Electric Propulsion and Plasma Dynamics Laboratory (EPPDyL). Professor Choueiri's laboratory (EPPDyL) at Princeton University, a recognized center of excellence in research in the field of advanced spacecraft propulsion, has been continuously funded by NASA since he became EPPDyL's Chief Scientist in 1996.
I had a chance to discuss the new generation of applications of the plasma torch as related to processing “complexed” mined ores.
I’ll keep this simple, but plasma technology uses electricity and very hot temperatures to break down complex material into atomic / ionic components thereby breaking bonds that obscure the true content of precious and base metals in the ore.
I show a cartoon below to indicate the possible structure of a plasma torch system. Obviously second generation systems such as those now in pilot use by Plasma Arc Technologies and U.S. Precious Metals (USPR OTCBB) are more complex and capable. But this cartoon gives you an idea.
Based on super high temperatures (6000 degrees Fahrenheit) and injection of inert gases such as argon, the molecular structure of complex ores such as sulphides, oxides, and silicon encased metal atoms is broken down. Essentially this creates the fourth state of matter. The heat is supplied by an electron arc between electrodes, which are copper or other metals, so there is no combustion. In effect the plasma torch technology particularly this advanced second generation technology ends up with “pure constituents of matter”, to quote Dr. Choueiri.
Organic material is gasified and vented off. Solid material (pure metal) is layered and drained off ready for smelting.
Does this technology work? The answer is yes. There will be more work necessary to perfect and improve the technology for the mining (recovery) industry of course as there was in the case of hydraulic fracturing discussed above.
Will this be economic? The answer seems to be a resounding yes. Here’s why.
Plasma Arc Technologies’ Barry Schneer tells us that early test results indicate that recoveries are much greater than standard hydro or pyro metallurgical techniques. We think the increase will be in the range of 20% to 40% depending on the complexity of the ore being processed.
There are many, many ore dumps around the world that are not economic to process because recoveries are low, say 50% to 60%. Once ore dumps are rained on for decades ores tend to oxidize which makes the metals almost impossible to recover. Plasma torch technology as USPR and Plasma Arc Technologies have jointly implemented shows promise in solving that problem.
If this is the case, their Plasma Torch recovery system will be operational in the near future.
Not only does the technology free up hidden ores in a complex material, but it has the potential to increase metal extraction by 5 to 100 times according to some test results, potentially providing recoveries close to 100%.
Most dumps in existence today have been hand-picked or processed. They are non-economic by standard metallurgical approaches such as hydrometallurgy or pyrometallurgy.
The results from a number of plasma torch experiments on complex ores (for example Silica encased gold ores) indicate that the metal content (the grade)of most dumps and ore bodies may be underestimated. This, then, is another significant benefit that may accrue to the future of plasma torch processing of ore material.
Plasma torch appears to be “green” insofar as it does not require cyanide leaching methodology, nor any of the acid technologies that traditional separation techniques use plasma technologies use heat without combustion. No chemical reactions or contamination takes place.
Further, the next generation of plasma technology will quite likely be modularized and perhaps truck mounted. This has special significance for the mining industry. Hauling costs for ore to a mill can be expensive on the order of $.25 per tonne per kilometer. A 100 kilometer trip incurs a $25 per tonne charge plus penalty costs at the mill for small volumes so characteristic of dump processing. Site processing of the material means that the economics are even more appealing. While this may seem like a stretch, technology has a way of morphing into innovative new and positive economics.
I have visited the USPR 37,000 acre property in the state of Michoacan, Mexico. It in itself is promising with a significant amount of satellite detected gold and copper anomalies. Exploration geologists and geo physicists are on the ground today as I write. A drilling program should be starting soon.
The relationship between Plasma Arc Technologies and USPR is a most interesting one and one on which we will be writing further in the future.
Ed Note: Today (Thursday), Chris will be presenting at the Murdock Capital Critical Metals Symposium where I’ll discuss the current state of the critical metals and the benefits of disruption in this sector. He speaks at 12:20pm EST, but you can view some or all of the entire day here: http://murdockcapital.com/wordpress2/live-webcast-may-15-from-a-z/
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[i] Bower, Joseph L. & Christensen, Clayton M. (1995). However the concept of new technologies leading to wholesale economic change is not a new idea since Joseph Schumpeter adapted the idea of creative destruction from Karl Marx. Schumpeter (1949) in one of his examples used "the railroadization of the Middle West as it was initiated by the Illinois Central". He wrote, "The Illinois Central not only meant very good business whilst it was built and whilst new cities were built around it and land was cultivated, but it spelled the death sentence for the [old] agriculture of the West."["Disruptive Technologies: Catching the Wave" Harvard Business Review, January–February 1995