Rebel Yell: Computer & Hi-Frequency Trading: Makes the Market Buck Up & Down Like an Angry Rodeo Bull

Smartly leverage the volatility, don’t fear it.

Computer trading and the financial enterprise news media’s megaphone corrections and rallies that took months now can happen in a single day.

The Dow’s plunged lower by 1,000 points on Monday morning’s open was immediately followed by dramatic intraday swings that included a rally of 850 points. The rally was so strong many thought including myself thought the Dow might even go in to the green.

Alas that rally was but a brief respite. The Dow then fell lower by 700 points only to bounce and flutter down 350 points, but leaned south and ended down 588 points.

Today we did go green until the end of the day giving up all gains before closing lower by -1.35%. Since last Wednesday the S&P 500 has lost -0.83%, -2.11%, -3.19%, -3.94% and today’s -1.35%.

This kind of volatility is driven by lower and lower commissions, fees and being fused with computer trading based on algorithms. It services as possible proof of Artificial Intelligence (AI) being able to threaten human existence. Aside from that, the three day decline is so oversold that Erlanger’s weekly indicators are in an oversold region not visited by the market since October of 2011.

The Dow Jones Industrial Average now has a 13 P/E Ratio. You expect a crash when the P/E climbs over 20, and is most often accompanied by an inverted yield curve. We do not expect one when the P/E is 13.

If you have the guts to go long using two and three week forward options on the Dow and S&P this is an potentially a very rare money making opportunity. A genuine chance to turn $20,000 into $40,0000 or even more. We could climb 65 S&P points in the next 10 days AND Still fall 69 points the following three days. The #$%^&*! computers do not care.  The siren song of a press that needs to make money with the latest sensationalized crisis as viewership is at all time lows.

The media needs to pay the bills and make the stockholders happy. The Movie Network missed the impact of the 21st Century’s media cacophony on the financial markets, we are now living.

http://www.optionsindextrader.com/page/oit/

If you’re not a subscriber of Options Index Trader, then now is the time to jump on board. Click on the link above to review. This is the kind of market Geoff Garbacz and his quantitative sentiment methodology is especially suited for to help you claw your way back to gains in 2015.

 

Uranium: Where do we go from here (Part 2)

On July 6, 2015 I released the first part of this article that made the case that the long-term fundamentals underpinning the uranium market are very bullish, but at this point in time the uranium market is still in the grasp of a bear market.

In review, despite the nightmarish Japanese Fukushima nuclear disaster of 2011, most nuclear power generating countries are STILL committed to nuclear power, and today there are more reactors under construction than before the disaster.

In spite of the radiation horror unleashed by the massive Japanese earthquake, Tsunami and the tremendous fear its generated among the public around the world — nuclear power remains the cleanest and most inexpensive source of electricity. Given the economics of nuclear generation and the reality that electricity is one of the main determinants of a country’s standard of living. In fact, reliable electricity is one of the universally proven ways to lift people out of poverty.

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After the Fukushima disaster, Japan decided to shut down all their remaining reactors. However, as a result the cost of energy has been soaring because Japan has been forced to import larger amounts of fossil fuels.

Then in 2012  a pro-nuclear government was voted into office in Japan and they have and continue to work on restarting all of the country’s idled 48 nuclear reactors. While Japan’s pro-nuclear energy forces have been making headway, it hasn’t been a cake work.

Strong opposition from the Japanese population still is evident given the steady and large protests that still take place around the country frequently.

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So even though the numbers of people in favor of nuclear energy are larger than the number of opponents in Japan, the future for uranium is still uncertain in Japan, but the government continues to plan for about 20% of the country’s electric generation will come from domestic nuclear power plants by 2030.

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Germany is another country that received a lot of press when they announced that they planned to completely eliminate their dependence on nuclear power, and instead has banked on an “renewable energy revolution” where the majority of electricity will come from solar, wind, and hydrogen by mid-century.

German confidence in developing renewable energy generation, government planners have announced the intention to close down all the country’s nuclear reactors by 2022. However, as with Japan, the cost of electricity has risen substantially in Germany as a result of its recent efforts to move away from nuclear power.

In fact, the economics of nuclear electric generation, Germany is actually “cheating” by importing nuclear-generated electricity from France. Some argue that the renewable energy generation will not be cost effective enough to be relied on for 10 even 20 years. While the argument of nuclear energy rages in Germany, the  country remains committed to eliminating nuclear energy generation and relying on emerging renewable energy alternatives. Only time will reveal if German aversion to nuclear energy will last.

Current Supply Demand Picture for Uranium

Despite demand being higher than primary supply, uranium prices are depressed due to a short/medium-term supply glut from secondary stockpiles. Prices might stay low for the foreseeable future, especially now that oil and gas prices have tumbled, making fossil fuel-generated electricity less expensive.

But the stockpiles are slowly dwindling, and in the longer term uranium prices should go up. In a world of rising demand and dwindling supply, UPC’s stockpiles should become valuable because utilities that need to cover their short-term uranium demand can purchase it from the company.

The International Energy Agency has estimated that nuclear energy will grow 66% from 2011 to 2035. However, uranium supply is not readily available because the current price is too low for it to be economical to open new mines. When increasing demand eventually catches up with decreasing supply, prices should go up.

Taking advantage of the depressed environment in the Uranium market to start taking positions in companies that will see dramatic gains – as the nuclear paranoia subsides. 

Uranium Participation Corp (U.TO) which we will refer to as UPC was founded in 2005 and is listed on the Toronto Stock Exchange. It trades under the ticker “U” and currently has a market cap of around $CAD 600 million.

The business of the company is to buy and hold uranium in the form of U3O8 and UF6. The primary objective of the company is to achieve appreciation in the value of its uranium holdings and the company invests at least 85% of its funds in uranium. Uranium is not a freely traded commodity and UPC is therefore a vehicle that enables investors to invest in the commodity directly. Some analysts have likened UPC to an exchange traded fund, however the company has pointed out that they are a publicly traded corporation, not an ETF.

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UPC does not actively speculate on the price of uranium and it does not enter into long-term contracts, nor does it trade its inventory. Due to the nature of the company the risks associated with UPC are lower than for other uranium companies. The benefit of UPC is that it does not mine uranium so there is no project risk or operating risk.

The strategic decisions of the company are made by the directors, but the daily running of the company is outsourced to Denison Mines Inc., which takes directions from the board. The management is paid an annual fee of $CAD 400,000+0.3% of net asset value (NAV) in excess of  $CAD 100. At fiscal yearend 2015 (February 2015), the NAV was around $CAD 730 million. Management also receives a fee if the company purchases uranium, which is 1.5% of the purchase amount.

Investors who believe in the uranium renaissance, but who think it’s too risky to buy uranium producers, might find that UPC is a good option. Below I lay out the details of the company and the aspects that potential investors need to be aware of.

Uranium Participation Corp’s Directors

Below I have laid out short bios on the directors and the management to give readers a sense of their background and their capabilities to run the company.

The Directors: The board of UPC makes the strategic decisions of the company, but the actual managing of the company is outsourced to Denison Mines Inc. (which is owned by uranium producer Denison Mines Corp.). Denison does not own any part of UPC and the two companies do not have any directors in common.

Paul Bennett is one of the directors and has been with the company since it was founded in 2005. In addition to his decade’s experience with UPC, Bennett has over 40 years’ experience in the natural resources industry and has a bachelor’s and master’s degree in geology.

Thomas Hayslett has been a director for little over a year and has 35 years of experience in the uranium industry. He has held several positions within the industry and was Senior Consultant at The Ux Consulting Company, which is one of the uranium industry’s leading consulting companies. He has a bachelor’s and a master’s in nuclear engineering.

Jeff Kennedy has been a director at UPC since 2005 and has experience from the finance industry. He is currently CFO and a Director at Cormark Securities, an investment dealer focused on Canadian companies.

Garth MacRae has been a director since 2005 and has also served as a director of Dundee Corporation since 1991. Dundee is a Canadian company with operations within investment advisory, corporate finance, energy, resources, agriculture, real estate and infrastructure. MacRae also holds directorships in several other companies.

Richard McCoy has been a director since 2005 and is the Chairman of the Board. He was previously Vice Chairman of TD Securities, the Canadian investment bank. He also serves as a director for several other companies.

Ganpat Mani recently joined the board of UPC. He retired from his position as CEO and President of ConverDyn in 2013. ConverDyn provides UF6 conversion to utilities that operate power plants in North America, Europe and Asia. Mani also has previous experience with Australian uranium producer Paladin, and currently also sits on the board of Uranium Energy Corp. He also served as a director of the Nuclear Energy Institute and was a member of the U.S. Civil Nuclear Trade Advisory Committee.

UPC’s Experienced and Competent Management

The management of UPC is made up of three key people, Ron Hochstein (President and CEO), James Anderson (CFO), Scott Melbye (Vice President, Commercial) and Sheila Colman (Corporate Secretary).

Ron Hochstein is a professional engineer and he is also Executive Chairman of Denison Mines Corp., which owns Denison Mines Inc., the company that manages UPC. Before Denison he was President and CEO of International Uranium Corporation.

James Anderson, is the CFO of UPC and he is currently a consultant to Denison Mines Inc. (the Manager). He previously served as CFO for Denison Mines Inc., but he stepped down in 2012.

Scott Melbye recently joined UPC and he has 31 years of experience in the uranium industry. He is also Executive Vice President of Uranium Energy Corp. He also spent 22 years at Cameco, one of the biggest uranium producers in the world, and had a stint at Uranium One. He has also held several other relevant positions within the uranium industry.

Evaluation of the directors and managers 

Based on the bios above it is clear that the directors and managers of UPC have extensive experience in the industry. With several of them having decades of experience with uranium I believe shareholders can trust the directors and managers to be good stewards for the company.

UPC’s operations

UPC’s strategy is to achieve appreciation in the value of its uranium. This value is reported as Net Asset Value (NAV) and is calculated every month. The NAV figure is calculated by deducting the company’s liabilities from its assets. At the end of the calendar year 2015 (February 28th 2015) the NAV figure was around $CAD 730 million. That was an increase from about $CAD 602 million at the end of fiscal year 2015.

Historically the company has traded at both premiums and discounts to the net asset value. During good times it has tended to trade at a premium, while during bad times (e.g. after the Fukushima incident) it has traded at a discount. This is represented in the chart below. Investors who are interested in buying UPC should first determine if the company is trading at a discount or premium to the NAV before investing.

Premium/discount to NAV Char

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If the discrepancy between the share price and NAV is very large, the board can choose to buy back shares (if the stock is trading at a discount to NAV) or issue new shares (if the stock is trading at a premium to NAV).

Since its incorporation in 2005 the company has made nine public offerings with aggregate proceeds of $704.6 million. The last public offering the company had closed in February 2014. They used the proceeds to buy uranium at an average price of $USD 35.07 per pound, which is a good price. The average cost per pound of U3O8 for the company is now $USD 38.75 and the price for UF6 is $USD 105.41. These average prices are low when put in an historical perspective, which shows that management is adept at buying at depressed prices. However, their timing has not always been perfect as they bought uranium in 2007 at $USD130, which was almost as close to the top as possible.

As of February 2015 the company had 9.3m pounds of U3O8 and 2m KgU of UF6. The uranium is stored with reputable third parties in the US, Canada and France. In 2014 the company’s storage fees totaled $2.4 million and the management fee totaled $1.9 million.

The company also entered into an agreement to loan out 1.3 million pounds of uranium for two years. This will provide the company with revenues to cover future operational costs. 

The Numbers 

Net Income: UPC’s corporate strategy is different from other uranium companies. It does not produce and sell uranium and the profits are derived from an increase in the value of the uranium that the company holds. Consequently, UPC does not present a profit and loss statement in its annual report for the fiscal year ended February 2015. It does, however, present the balance sheet and cash flow statement.

Due to the absence of a profit and loss statement we cannot evaluate UPC as we would another company. The profit and loss for any year comes from the unrealized appreciation or depreciation in the value of its uranium holdings (assuming that they did not sell any of their holdings). Due to the fluctuations in the uranium price over the last decade, the net income has in turn fluctuated considerably (chart below).

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As a result, looking at the company’s P/E ratio does not make much sense because earnings are derived from the movement of the price of uranium, not from the operations of the business. Additionally, looking at measures such as net profit margin and return on equity does not give us much information either.

However, even if the company does not have normal operations, they still report unrealized profits/losses and these must be taxed. Up to this point the taxes have fluctuated due to fluctuation in net income over the years.

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Over the last 10 years the income tax per year has averaged out to $CAD 1.1 million, which is a low figure compared to the company’s net asset value. In fiscal year 2014 and 2015 the tax was nil. However, one important thing that investors must be aware of is that as the price of uranium starts to increase, the company will have to pay income taxes on its unrealized profit. Subsequently if investors sell their shares, they are taxed a second time when they pay capital gains taxes. The result is that investors will have to pay double taxation for holding a commodity. So although UPC can be compared to an ETF, at the end of the day they are not. They are a corporation, and must therefore pay income taxes.

Balance Sheet and Cash Flow 

As I pointed out above, UPC differs from other companies due to its operating nature. But since the company is a corporation, it’s important for investors to understand its balance sheet and cash flow.

In 2015 the balance sheet was effectively made up of cash and uranium on the left hand side, and mainly equity on the right hand side of the balance sheet. The assets summed up to $CAD 733 million, while the equity summed up to $CAD 731 million. The difference of $CAD 2 million comes from payables to Denison for managing the company. The equity of $CAD 731 is the net asset value of the company, i.e. the value to the shareholders.

From 2014 to 2015, cash reduced from around $CAD 65 million to $CAD 17 million. This is a result of the company purchasing uranium for a cash consideration of about $CAD 42 million, so the reduction in cash is not a cause for concern. It’s actually a good sign because the company bought more uranium at low prices.

The other notable changes in the balance sheet from 2014 to 2015 are the line items “investments in uranium” and “total equity”. Investments in uranium increased from about $CAD 540 to $CAD 715 because the company purchased CAD 42 million worth of more uranium, while at the same time the price of uranium increased over the year. Total equity increased from around $CAD 602 million to $CAD 731 million, which was a result of a $CAD 129 unrealized profit for the year.   

Cash flow from operations has been somewhat negative each year. Unrealized gains or losses from the uranium holdings are non-cash items so they are added back in the cash flow statement, which is also the case with deferred income taxes.

Since the company does not present a profit and loss statement, it’s somewhat difficult to glean how the cash flows from operations are made up. The unrealized gain/loss for the company’s uranium holdings for the year is added back to the net profit figure for the year, however there is a slight discrepancy between the numbers, which leads to the slightly negative net operating cash flow each year.

I believe it is safe to assume that these cash outflows are related to the operations of the business, mainly management fees paid to Denison, as well as storage fees for the uranium. These cash outlays are small compared to the value of the company. The cash outflow in 2015 was $CAD 6 million, which compares to a net asset value of around $CAD 731 million in February 2015.

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Cash Flow From Investing is mainly affected by the company purchasing uranium. In 2015, net cash from investing activities was $CAD 41 million (cash outflow). That was made up of $CAD 42 million used to purchase uranium, minus $CAD 1 million for the “sale of conversion components, net of cost”. This last item simply means that the company sold some of its UF6 in exchange for U3O8 and cash. In 2014, the company did not buy any uranium and the only cash inflow they had from investments was cash that they received from the conversion of UF6 to U3O8. This amount totaled about $CAD 2 million.

Cash Flow From Financing activities is mainly affected by issuance of new shares and the repurchase of old shares. The only cash outflow from financing activities in 2015 was a cost of $CAD 82,000 related to the share issuance that took place the year before.

Risks

Although UPC is inherently less risky than other uranium companies, there is still risk related to investing in the company.

The most apparent risk is naturally the price of uranium. The long-term prospects for the industry are favorable, however, there are factors that may jeopardize the outcome. Firstly, the situation in Japan is tentative and nobody knows for sure what the outcome will be. Secondly, renewable energy might start to play a bigger part of the energy mix in the years to come, exemplified by Germany’s efforts to switch over to renewables. Lastly, weaker oil and gas prices put pressure on uranium prices because electricity from these alternative sources becomes less expensive.

Another risk is that the companies that UPC stores their uranium with can go bankrupt. This happened in 2013 when a company (USEC) that stored $CAD 142 million worth of UPC’s uranium, announced that it would cease uranium enrichment at one of its plants. As a result UPC decreased the fair value of it’s uranium by $CAD 4 million due to the risk associated with holding uranium at the plant. UPC plans to move its uranium over the next 18 months and the cost is expected to be offset by the fair value adjustment of $CAD 4 million.

Conclusion

UPC is essentially a pure play on the price of uranium and is a good vehicle to get exposure to the commodity. The company essentially buys uranium and holds it, with the aim that it will increase in price. The risk profile is lower than other uranium companies because UPC does not have any project risk or operating risk. Moreover, the directors and management of UPC are very knowledgeable and they have long experience within the uranium industry.

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UPC can be a good investment for more risk averse investors who want to play the uranium market. And now might be a good time to buy as the share price is back at levels seen in 2005. The uranium market will probably not turn for a while, but investors with a contrarian inclination and patience might want to consider buying shares of UPC on dips back to its 52 week low of $4.81. That’s about 10% from current levels.

(Contributions from Lars Haug)

 

 

 

Rebel Yell: Update On VIPS

Back on June 15th, I recommended VIPSHOP Holdings (VIPS) and it closed that day at $25.35. From there, it ran to a high of $26.17 before falling with other China stocks as that market correct.

The low was hit in early July as it hit $18.34 intraday on July 7th before closing at $20.52.  From there, it ran to a high of $23.56 before starting to slide again. Real time it is at $21.49. My price target still remains $32 for this name and when Geoff and I spoke we agree that $17.80 was probably the worst case scenario for this name.

If you are still in this name, then there are two solutions. The first is sell the shares and wait 30 days to avoid a wash sale then reenter when it makes sense. The second is to sell a call and by a put if you own the stock.

I am a big fan of selling calls and Geoff is a big fan of put protection. Therefore, for each 100 shares you own buy 1 put and sell 1 call. We will go out to September for these  options. Buy the September $21 Put for $1.95 or $195 per put. Then sell the September $24 Call for $0.80 or $80. The net cost of this trade will be $1.15 or $115 per 100 shares owned.

That is all for now.

James

Rebel Yell: Kite Pharma, Inc. (KITE)

Kite Pharma, Inc. (NASDAQ: KITE) is a BUY heading to $90 a share!

Use the volatility from China and Greece Economic Woes that’s been rocking the financial markets to buy shares of on a dip!

By James DiGeorgia with contributions from Mathew Shilling, Geoff Garbacz

Headquartered in Santa Monica, California and possessing a market capitalization of just under $2.6 billion, Kite Pharma, Inc. (NASDAQ: KITE) is a clinical-stage biopharmaceutical company, focuses on the development and commercialization of novel cancer immunotherapy products.

A Pipeline Built On A Number Of Autologous Cell Therapies

The company is developing a pipeline of engineered autologous cell therapy-based product candidates for the treatment of solid and hematological malignancies. Its lead product candidate is KTE-C19, which is being developed as a chimeric antigen receptor (CAR)-based therapy that is in Phase 1-2a clinical trials for the treatment of patients with refractory diffuse large B cell lymphoma. The company is also developing T cell receptors-based therapies, which targets SSX2, NY-ESO-1, and MAGE antigens in various cancers.

Laying The Groundwork For Further Advancement

As Kite Pharma inches ever so closer to the launch of KTE-C19, there are a number of other developments that we as potential investors should note. For starters, the company currently possesses a very strong pipeline of both Chimeric Antigen Receptor (CAR)-based therapies and T-Cell Receptor (TCR)-based therapies that are all in various stages of clinical trials.

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Secondly, the company has aligned itself with a number of strategic partners in an effort to access additional targets, examine enhanced technologies and speed up the process when it comes to referencing human POC data for further R&D projects.

First Patient in North America Treated With KTE-C19

On June 4, 2015 it was formally announced that the Moffitt Cancer Center had treated the first US-based patient in Kite Pharma’s Phase 1/2 clinical trial of KTE-C19. The trial includes an investigational therapy for patients with refractory aggressive non-Hodgkin’s lymphoma (NHL). As it has been previously noted, KTE-C19 is an investigational therapy in which a patient’s T-Cells are genetically modified to express a chimeric antigen receptor (CAR) designed to target the antigen CD19, a protein expressed on the cell surface of B-cell lymphomas and various types of leukemia.

Facilities Expansion Enhances Kite’s Manufacturing Process

In addition to the above referenced key developments that are directly related to the company’s flagship therapy, there are also a number of alliances in place to provide a proprietary and low-cost manufacturing process once the company’s drugs are launched commercially. It is through these alliances that the construction for two California-based facilities has been initiated. The breakdown of each facility is as follows:

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Santa Monica: The Santa Monica facility has approximately 18,000 square feet and will provide space for clinical manufacturing, research and development, and offices upon completion. In addition, Kite plans to continue to utilize its contract manufacturer to support clinical trials of eACT™ based product candidates.

El Segundo: The El Segundo facility has approximately 44,500 square feet, and, under the lease agreement, Kite has an expansion option for an additional 17,000 square feet until July 1, 2017. Kite was represented in the negotiation of the lease by Andrew Riley and Jeff Pion of CBRE. Kite anticipates the El Segundo facility will be operational to support the planned commercial launch of KTE-C19 in 2017.

Kite’s Near-Term Milestones Should Attract Additional Investors

When it comes to the biotech sector, one of the first things we must ask ourselves after a flagship therapy is launched is – What will the company do in the next 12-month period to not only advance itself, but rather attract additional investors? Whether you happen to be an individual investor looking to acquire additional shares or the CEO of a company in the market for a $5-to-$6 billion dollar acquisition, you need to pay close attention to the following set of milestones that Kite Pharma intends on reaching:

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If the company can successfully establish a presence that resonates throughout the entire European Union as well as build out its US-based manufacturing capabilities, there’s a very good chance the commercialization of KTE-C19 could exceed even most aggressive revenue-driven estimates. For example, a strong and positive response in both the US and European markets could help drive full-year revenues way past their suggested target of $40 million for 2016 and my estimated target of $70 million for 2017. One of the things we need to keep in the back of my minds is that many of the company’s project revenue estimates are designed on premise that KTE-C19 is approved by the US Food & Drug Administration, if roadblocks arise or clinical trials fail to meet to their prescribed endpoints, then there’s a very good chance estimates would be missed and Kite’s share price would tank.

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Recommendation: The wild swings in the world’s financial markets thanks to the Greek Default Soap Opera and fears over a China slowdown — should be used to open a new initial position in KITE on a dip — at $67.50 a share or lower.  If you are an aggressive trader, then you could establish a half position now.

My upside target is $90 a share by the end of this year assuming Kite Pharma successfully executes on the following three fronts. The company must meet the above mentioned near-term milestones which include filing an IND for its KTE-C19 therapy as well as an IND for an unnamed TCR therapy. Next, I’d like to see Kite Pharma continue to develop its KTE-C19 cancer therapy in an effort to battle against various types of rare cancerous tumors. Finally, I’d like to see the company establish a strong presence in both the US and Europe in the event KTE-C19 is approved, its commercialization-based infrastructure is already ahead of the game.

Keep in mind there is always a wild card with Kite Pharma. If it establishes one or more additional big names in biotech sector over the next 6-12 months to partner, we could see Kite’s share price vault over $120 a share in a best case scenario.

Technically the stock is in good shape as the chart above shows. The Erlanger EC Spread is positive and there is not enough history for a weekly EC Spread. Both Erlanger Volume Swing on a daily and weekly basis are positive. Relative strength and cumulative alpha are also in outperform mode.

 

Uranium: Where Do We Go From Here? (Part 1)

Uranium has never really had a good reputation, and after the Fukushima disaster in 2011 it seemed like the nail was firmly in the coffin for the industry. Japan shut down all its remaining 48 reactors after the incident and Germany announced they would retire all their 17 reactors by 2022.

Despite the public’s negative perception, nuclear power has been the world’s fastest-growing source of industrial scale energy in every decade since the 1950s. Many countries are still committed to nuclear, among them the US, China, France, India, Saudi Arabia and South Korea, to name a few. And four years after the Fukushima disaster the Japanese government is in full swing to restart their reactors.

Moreover, Germany’s green revolution is proving costly as electricity prices are rising and their carbon footprint is spreading. And the country is arguably “cheating” by importing nuclear-generated electricity from France.

Nuclear is seen as a bad source of energy, but the truth is that nuclear plants have low emissions and they provide a steady source of necessary base load power (steady source of reliable electricity). Nuclear energy is in fact the most environmentally friendly way to produce electricity on a large scale.

Electricity supply is one of the main factors driving prosperity and quality of life in a country, and currently around 2 billion worldwide do not have access to electricity. Emerging market countries, especially China and India, want to increase their citizens’ living standards and access to electricity is key to achieving this goal. Electricity produced from nuclear has on average one of the lowest costs in the world and as mentioned before it provides a reliable stream of base-load power.

It seems that there might be some energy left in the nuclear market after all.

The Nuclear Market Is Expanding

Today 437 nuclear reactors are operable around the world, and 66 new ones are being built. A further 168 are planned and 322 are proposed. Countries without reactors will soon build their first ones, including Turkey, Kazakhstan, Indonesia, Vietnam, Egypt, Saudi Arabia and several of the Gulf emirates. Despite its bad reputation, uranium is still the only fuel that can produce base-load electricity economically and without emitting greenhouse gasses.

In the U.S., six new reactors are scheduled to come online by 2020. That’s in a country that hasn’t begun construction on a nuclear plant since 1977, nor commissioned one since 1985. The U.S. is the biggest producer of nuclear energy in the world (comprising more than 30% of worldwide total). There are 65 nuclear plants in the country, housing just over 100 reactors, which generate 20% of US electricity.

France is heavily dependent on nuclear power. In fact, about 75% of its electricity comes from uranium. In China 17 reactors are in operation and 29 more are being built. The country wants a fourfold capacity increase by 2020, which is not surprising given the pollution problems in the country. In India 20 plants are in operation and they are adding 7 more. In Africa several countries are exploring the possibility of nuclear power as currently 90% of the population is without electricity.

And what about Japan? In 2012 Russia signed an agreement with Japan that guarantees the availability of uranium enrichment services for Japanese utilities. Japan, despite Fukushima, seems unable to give up on nuclear power. And after Fukushima the new facilities will be safer. Containment systems at Fukushima were 40 years old, generations behind today’s containment systems, and would soon have been a candidate for decommissioning. Today’s reactors are much safer.

Rising Demand And Limited Supply Will Drive Prices Up

The World Nuclear Association predicts that demand for uranium will grow 33% from 2010 to 2020. In 2011 the world consumed 160 million pounds of yellowcake. In 2024 it will be consuming 200 million pounds annually – if available. On the supply side uranium mines are few. Only 20 countries in the world have a uranium mine, and half of global production comes from only 10 mines in six countries. This means a shortage is likely coming.

The International Energy Agency (IEA) has estimated electricity demand until 2035 and according to their estimates electricity is projected to grow 69% from 2011 to 2035, under their New Policies Scenario. This scenario is IEA’s baseline scenario and takes into account new measures that countries have planned to implement in the future, such as reducing greenhouse gasses. Under this scenario nuclear increases 66% to maintain its current share of worldwide electricity production of around 11%.

In 2012 the world consumed 25% more uranium than was produced from mines (shortfall of 40 million pounds) and the yearly deficit is likely to rise to 55 million by 2020.

Rising demand cannot be rapidly met by increased supply. It takes minimum 10 years to go from decision to production on a uranium mine, and bringing a mine into production is more difficult than any other resource due to engineering challenges, safety requirements, permitting and environmental considerations. Tim Gitzel, CEO of Canadian uranium producer Cameco, believes that a price well north of $60-$70 is needed to get new players interested. Other analysts estimate that a price level of $80-85 is needed to bring new supply online. The spot price is currently around $36.

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Why Is The Price So Low Given Supply/Demand Imbalances?

The uranium spot price peaked in 2007 at around $140 per pound and then later crashed down below $50. It started to resume its upward trend in 2010, but then the Fukushima disaster occurred and the price started a slow and grinding decline. The price kept going lower, reaching $28 per pound in May 2014. It has since recovered to about $36 per pound in June 2015.

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Fukushima did not scare the world away from nuclear energy, however, and as mentioned above the world is currently consuming more uranium than is being produced each year, and has been doing so for the last 20 years.

But how is this possible? The answer is Russia. The country has been filling the supply gap for the last 20 years. After the Soviet Union fell, Russia agreed to down blend the equivalent of 20,000 nuclear warheads to reactor grade uranium, and sell it to the United States. The program was called Megatons to Megawatts and from 1993 to 2013 it helped fill the supply gap in the market. But the program has now ended. 2013 marked the end of 24 million pounds of secondary uranium supply entering the market each year (to put that into context, in 2011 the world consumed 160 million pounds). But even though the program has ended prices have not risen. There are several reasons why.

First, Japan previously accounted for 13% of global nuclear power generation, but that demand is now gone.

Second, at the time of Fukushima, Japanese utilities were holding three years of stockpiles, and they have since received a further two years of supplies that they committed to buying under long-term contracts. Japan dumped most of this supply on the spot market, which had a big impact on the price. Additionally, South Korea sold some of its inventory after Fukushima.

Third, the Fukushima disaster accelerated the retirement of other reactors, which added to one-time sales of uranium stockpiles. This was exemplified by the decommissioning of the San Onofre nuclear plant in California, which released about 10 million pounds on the market.

The fourth point is that in 2013 the U.S. Department of Energy shut down ConverDyn for most of the year for maintenance purposes. ConverDyn is the only U.S. plant that can convert yellowcake into uranium hexafluoride gas (UF6). Converting yellowcake to UF6 is a crucial step in producing fuel for reactors. Without a conversion plant supplies were building up so the U.S. Department of Energy started selling yellowcake and UF6, which depressed prices.

Finally, low-cost U-235 (enriched uranium that is used in reactors) from Russia is currently flooding the market. This might continue to about 2018, at which time all the cheap uranium will be gone.

A Closer Look At Japan

You can’t discuss nuclear energy today without mentioning Japan. Nuclear energy is currently not very popular in the country of the rising sun. This is not surprising given the Fukushima disaster, however according to the World Nuclear Association there were no deaths or serious radiation exposure that resulted from the disaster (the direct death toll of the tsunami, however, was around 19,000).

Despite the public’s negative perception the government is trying to revive the nuclear industry. After shutting down their reactors, electricity has become much more expensive and it’s hurting an already fragile economy. Japan is aiming to restart most of its 48 reactors, but there have been efforts to delay the process by local residents. It’s impossible to predict how many reactors will come back online, but currently the plan is for nuclear to provide about 20% of the nation’s electricity by 2030.

Japan is also endeavoring to significantly increase energy from renewable resources, however it will still be dependent on nuclear and imported fossil fuels. A diverse energy mix is sensible for any country, especially Japan who has few natural resources of its own.

From the chart above we can see that LNG imports have increased about 60% since the Fukushima disaster. According to an article from the Wall Street Journal dated May 13th 2015, businesses say that the rise in electricity costs makes it harder to run a factory in Japan. And it now seems that utilities will pass double-digit price increases on to their customers as the industry is becoming deregulated in 2016. Utilities have had to draw on their cash reserves over the last few years to pay for their higher cost of importing fossil fuels, however some are running low on cash and a price increase might be the only solution to avoid bankruptcy. According to the Finance Ministry the cost of importing fuel rose 25% in 2011 and 10% in 2012.

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In an article dated 16th February 2015 by World Nuclear News, a report was cited saying around 90% of Japanese small and medium sized companies think their business would be adversely affected by rising electricity costs in the future. Companies said they might cope by reducing their staff, cutting salaries and reducing capital expenditures, measures which would negatively affect the Japanese economy.

Not only are higher electricity costs bad for businesses and the economy, but they can also be bad for the environment. Japan plans to continue its reliance on CO2-emitting coal to reduce the cost of importing liquefied natural gas. Japan previously had ambitious goals to reduce carbon emissions, but those plans have now been scrapped.

Germany’s Energy Revolution

The second country that comes up when discussing the nuclear industry is Germany. The country is aiming for what they call an “energy revolution”. Germany plans to shut down all its remaining (currently nine) nuclear reactors by 2022, and to wean the country off fossil fuels by mid century. The plan is to get 80% of the country’s electricity from renewable sources by 2050, however many people worry about the viability of this plan.

According to a Wall Street Journal article from 26th August 2014, the average price of electricity for German companies has jumped 60% over the past six years because the cost of subsidizing the renewable energy industry has been passed on to consumers. The price is now twice that paid in the U.S. Kurt Bock, the chief executive of BASF, the world’s largest chemical maker, said German industry is going to gradually lose its competitiveness. In fact, the company has decided to reduce its investment in Germany over the next five years from 33% of total investments, to 25%.

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In a survey done by PWC nearly 75% of small and medium sized German industrial businesses say rising energy costs are a major risk. In a survey done by the Chamber of Commerce in the U.S. around 75% of American businesses operating in Germany also said the Energy Revolution made the country less attractive for business. German companies also say that rising costs are a reason to start investing abroad, according to the German Chambers of Commerce and Industry.

To date the beneficiaries of the Energy Revolution have been investors in wind and solar installations. Although the price of electricity has declined because of the added capacity, a surcharge is added to pay for the subsidies that the government has given to the renewable industry. The renewable energy surcharge has nearly tripled since 2010 and today accounts for approximately 18% of German households’ electricity bill. According to Germany’s economics ministry, the subsidies amount to about €24 billion a year.

And last, the departure from nuclear energy has increased greenhouse gas emissions in Germany because utility companies have turned to uranium’s cheap cousin, coal. The government says it’s temporary, but critics say that renewable power is unpredictable and it could force the continued use of coal.

Conclusion

The long-term fundamentals for the uranium market are very attractive. Despite the Fukushima disaster, most nuclear power generating countries are still committed to nuclear power, and today there are more reactors under construction than before the disaster. Japan and Germany famously planned to completely reduce their dependence on nuclear power, however Japan is planning on restarting its reactors while Germany’s energy revolution might be faltering.

Despite supply/demand imbalances, prices are depressed due to a short/medium-term supply glut. Prices might stay low for the foreseeable future, especially now that oil and gas prices have tumbled, making fossil fuel-generated electricity less expensive. But in the longer term uranium prices should go up and for savvy investors this might represent a valuable buying opportunity.

In Part 2 of  Uranium: Where Do We Go From Here? We’ll offer a some more insight in to the Uranium market and the best way to invest in Uranium. Look for Part 2 of this article next week!

 

Contributions By Lars Haugen

The Rest Of The Story: Grekxit

INVESTORS RED ALERT: Greek Default Comes with a 30 Day Grace Period!

The world’s markets including the major U.S. Indices have been in retreat since last Friday, June 12.  Down over 250 points!

The Greek Government and their European counterparts don’t appear to be in a position to come to a mutually acceptable agreement. A Greek default on its international debt looks increasingly likely. The politics in Greece actually favor financial suicide in the event that no deal is struck.

Yet, a default by Greece would come with a 30 Day grace period that few on Wall Street are pointing to. That extra 30 days may give both sides enough time to salvage a coherent mutually acceptable compromise deal.

The problem however with this extra 30 day grace period is it will drag on to the 11th hour, come with many emotional swings between hope and despair. These manic swings could seriously disrupt the world’s financial markets, and increase the magnitude of the rallies and selloffs to the point that investors could be hit with a serious case of financial whiplash!

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Investors should be extremely careful going forward until the situation becomes clearer.

Unless, calmer heads prevail on both sides this dispute, could result in several 200, 300 even 500 point swings on the Dow Jones Industrial Average in the next few weeks.  Investors should keep in mind the historically low volume in the U.S. and European markets in the summer months. This could compound the volatility making this an even hotter and dizzier summer than normal for equity and bond holders around the world.

Rebel Yell: VIPShop Holdings ADS (VIPS) Update

Our recommendation of VIPShop Holdings ADS (VIPS) last week (June 10, 2015) is starting to pay off. Using ErlangerChartRoom.com analysis, VIPS looks like it could easily run $7 higher in the next couple of months. 

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The correlation between the price movement of the stock and EC Spread, give us great confidence in the follow through in the upward momentum.

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Today’s sell off based on the macro-economic concerns over Greece is giving you another chance to buy VIPS under $25 a share. These types of macro-economic sell offs can drive the market to deeply oversold levels that can act like spring boards to much higher levels as the sell the rumor, buy the news event plays out. A rally from a deeply oversold position can be especially powerful for high beta stocks like VIPS.

Recommendation: BUY VIPS at $25 or less.

Rebel Yell: A Great China Play

One of my favorite plays on China the past couple of years has been Vipshop Holdings Limited (NYSE: VIPS). It began to trade in 2012 at a price of $0.44. As such, the stock has had an amazing run but the best could be yet to come.

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Headquartered in Guangzhou, China and possessing a market capitalization of just under $15.4 billion, Vipshop Holdings Limited offers both a broad universe of popular brands of discount of consumer goods for the massive Chinese market via its Internet Websites and direct email offerings.

VIPS also offers high end online hosting and marketing support for many of the Chinese-based third party Internet vendors that lack the infrastructure to execute the needed Internet technology.  So how exactly is a business model of this size attractive to potential long-term investors? The attraction, in all honesty, comes in the fact that Vipshop is spending a majority of its efforts exploiting the highly underdeveloped  concept of buying at a DEEPLY DISCOUNTED PRICE INSTEAD OF PAYING full the full retail prive. Discounting in stores in China much less the ability to buy at a deeply discounted price online is something very new in China. The Chinese consumer has until the last few years been sold on the concept that buying products at a “DISCOUNT PRICE” somehow cloaks the consumer as being cheap. The Chinese consumer for years believed paying the full price was the only honorable way to shop.

Vipshop platform provides the infrastructure for a large number of Chinese-based third-party discount retailers to liquidate inventory. For example, if a company was looking to get rid of excess inventory of Women’s dresses, Vipshop can assist in the both brand management of that retailer market and sell the retailers inventory for a cut of the sales.

Vipshop Holdings: A Solid Start to 2015

Before we get into some of the meatier details of how the company operates and where its strengths lie, I wanted to first take a look at its most recent earnings performance. Vipshop’s first quarter revenue of $1.4 billion was 98% higher on a year-over-year basis and slightly above consensus estimates of $1.3 billion. Its non-GAAP EPS of $0.13/share was also ahead of the consensus estimates of $0.10/share but it was the second quarter guidance that may have worried some investors with revenue coming a bit below the consensus estimates of $1.42 billion.

Vipshop’s net income on a year-over-year basis has significantly exceeded that of both the S&P 500 and the Internet & Catalog Retail industry. Its net income increased by just under 123% when compared to the year-ago period, rising from $26.59 million to $59.29 million.

Nonetheless, operating metrics are all hitting the right notes with total active customers recently exceeding 12.9 million despite the company shifting focus away from its former group-buying business. It should be noted that repeat customers accounted for over 90% of VIPS total GMV and this highlights the platform’s stickiness after the company expanded into the baby, maternity, cosmetics and home goods space. From an overall revenue generation standpoint, its cosmetic segment contributed more than double the year-ago period.

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China: Huge Market Potential For Online Discount Retailers

When it comes to the China, one of the first words that come to mind is clearly the word opportunity. Having one of the largest and most condensed populations, China possesses huge market potential especially when it comes to the online-based discount retail segment. In the first graphic below we can see the rapid rate of growth the market is currently displaying and it is in these numbers that we get a tangible feel for what exactly Vipshop does as a retail-oriented platform.

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Over the last five years we’ve seen the Chinese Retail Market jump from generating the equivalent of $2.53 Trillion US Dollars in 2010 to generating the equivalent of $4.23 Trillion US Dollars in 2014. Based on those specific numbers, we can see that the Chinese Retail Market has demonstrated an average CAGR of 13.43% between 2010 and 2014. That being said (and using the same CAGR rate of 13.43%), I strongly believe that we could see the generation of the equivalent of at least $5 Trillion US Dollars by the end of 2016.

Vipshop’s approach to capitalizing on the opportunity at hand is actually quite simple. By understanding the fact that consumer demand continues to grow at record levels and that a constant supply of excess inventory enters the third-party marketplace on a daily basis, Vipshop is now able to attract more and more buyers. At the end of the day it comes down to the fact that consumers are always looking for bargain, and if that bargain exists online instead of in-person, many consumers would rather click a mouse then travel to a specific brand’s physical retail location.

A Brief Look At Why More & More Retailers Are Choosing Vipshop

One of the most interesting catalysts to consider when it comes to Vipshop isn’t something we’ll find in a single-page earnings recap or in the first few paragraphs of an analysts’ recommendation. Rather, it’s a metric that was most recently displayed during the company’s first post-earnings presentation of 2015 which highlighted the exponential growth of the number of brand partners within Vipshop’s portfolio.

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Over the last five years we’ve seen the number of Vipshop’s Brand-based partners jump from 411 in 2010 to an unprecedented 7,110 in 2014. What’s the driving force behind these particular numbers, you ask?

In order to be successful in any niche of the retail market (either online or offline) one must possess a number of key characteristics, especially when dealing with third-party vendors. For example, one must be a seasoned industry leader who puts the concepts of brand integrity, inventory monetization, and the behavior of the individual customer at the forefront of each and every brand they represent and as long as Vipshop continues to do that there’s no reason its partners will not jump well past 10,000 by the end of 2016.

BUYING OPPORTUNITY!

Chinese companies have been taking a beating on Wall Street even as they have doubled and redoubled over unfounded rumors of phony accounting. It’s become the same repeated false narrative that somehow companies including VIPS are not complying with U.S Securities and Exchange accounting and filing. THIS IS NOT TRUE!

A combination of both a lack of understanding, ignorance and concern over an economic slowdown in China has knocked more than 20% (over $7 off the share price of VIPS in recent weeks). While China is experiencing a economic slowdown, the fact is the Chinese consumer is still buying. The number of middle-class Chinese is also growing rapidly.

Brokerage firm Stifel on May 26, 2015 initiated a BUY on VIPS with a target of $32  Share. This gives an upside of 34% from the current share price.

VIPS has big upside potential.

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I consider the downside target risk to be only 10% from the current level. While the upside in the short term to be over 67%.

Current Recommendation:

Open a new initial position on a dip below $25 a share. Begin to double or even triple your position in the event that shares of VIPS drop to $21 or lower. This should be a great addition to any portfolio especially if shares can be acquired at these very attractive levels!

My upside target is $33 a share by the end of the year  and could hit $41 especially if Alibaba (BABA) were to bid for it.

Even without a bid for the company, I believe that Vipshop Holdings (VIP) will continue to monetize the massive amount of China’s heavily underdeveloped discounted retail marketplace.  Assuming Vipshop can also continue add a significant amount of brand-based partners over the next 12-36 months, we could see VIPS share price vault to over $100 a share.

 

 

OPEC To Maintain Current Output

OPEC just announced that it will maintain its current output noted the Saudi Oil Minister. Let’s see how oil trades by the end of the day. We will weigh in after the close in our Rebel Yell column on the markets reaction and how to trade energy markets for the rest of the summer.

Rebel Yell: Huntsman (HUN) Looks Ready To Buy

Is Huntsman Corporation (HUN) a Buy, Sell or Hold?

For those of you following my recommendation and updates of Huntsman Corporation (HUN) the following is a brief refresher and update. I’ll be updating and re-examining all of the stocks I have been covering –  FREE here in Wall Street Rebel.

Huntsman Corporation (NYSE: HUN) was founded in 1970 and is based in Salt Lake City, Utah is a worldwide Chemical Manufacturer operates approximately 100 R&D-based facilities in over 30 countries. Its products are used in various applications, including adhesives, aerospace, automotive, construction products, personal care and hygiene, durable and non-durable consumer products, electronics, medical, packaging, paints and coatings, power generation, refining, synthetic fiber, textile chemicals, and dye industries. Huntsman Corporation a market capitalization of just under $5.6 billion and although it is a tightly held corporation I believe it may become a takeover target in the next 12-24 months thanks to a number of initiatives the company has undertaken in recent months.

An Overview of Huntsman’s Recent Projects

Huntsman’s business model can be broken down into the following five units: Polyurethanes, Performance Products, Advanced Materials, Textile Effects, and Pigments and Additives. And it is within these segments that many of the company’s most recent projects encompass.

In the referenced image above we’ll notice that Huntsman has a 100% ownership interest in six of the eight noted projects. These six projects include but are not limited to MDI expansion through its polyurethane segment in both the US and Netherlands, EO expansion through its Performance Products segment in the US, and lastly the expansion of its Multifunctional Resin operations through its Advanced Materials segment here in the US.

From a capital expenditure perspective, it should be noted that the company spent $601 million throughout 2014 and estimates it will spend $625 million throughout 2015.

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Huntsman’s Diamond In The Rough: Aerospace Revenue Growth

One of the most compelling points of interest for an investor to consider when it comes to Huntsman is clearly the revenue that is being generated by the Aerospace unit of its Advanced Materials segment.  For starters, its CAGR between 2009 and 2014 was a very impressive 14% and if orders to continue to pile on (especially when it comes to the 125 Airbus A350’s and the 48 777x’s that are due to be completed by 2017) there’s a very good chance its CAGR could exceed 17.5% by Q4 2017.

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In addition to the above mentioned completions we, as both existing shareholders and potential investors, need to keep a close eye on both Huntsman’s ability to demonstrate both double digit revenue growth within the unit and maintain the rate at which long-term builds are completed. If Huntsman is capable of showing consistency in both areas, there’s a very good chance its stock will demonstrate very favorable returns over the next 24-to-36 months.

The Restructuring of its P&A Segment Could Mean Stronger Long-Term Growth

Anytime a company intends on increasing its cost savings by reducing operational expenses, radars start to flash and potential investors begin to take a closer look at the company’s plan. In the case of Huntsman the plan is a simple three-step process that clearly spells out how the company plans on demonstrating a $175 million dollar reduction in costs.

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The process, which encompasses a work force reduction, the closure of its Calais, France TiO2 facility and the consolidation of four US-based Color Pigment sites includes the removal of just under 1100 full-time positions and nearly 100 KT (kilo-tons) of pigment-based capacity. Although the reduction in capacity is a notable variable, Huntsman realizes the most cost-related savings through the elimination of nearly 1100 jobs. With that said, I don’t think the company its entirely finished with its P&A restructuring, especially since there’s a slight chance we could see the company’s P&A cost savings exceed $200 million by 2018 given the measures it has taken since the start of 2015.

Should we expect similar cost savings initiatives to occur within Huntsman’s remaining segments? In no uncertain terms, the answer is YES. Given the impressive success of its P&A cost savings initiative (that was first enacted in early 2015), there’s a very good chance we could see both job cuts and the sale of its underperforming non-core assets sales occur in the next 24-to-36 months.

Huntsman Prepares Itself For A Major Boost In The Demand For Polyethramine

On May 5th it was announced that Jacobs Engineering Group (NYSE: JEC) had been awarded an engineering, procurement and construction management (EPCM) contract for an expansion program at Huntsman Corporation’s world scale polyetheramine facility in Singapore.

It should be noted that Polyetheramine is used as an ingredient or additive to improve the properties of many products, including paint, adhesives and composites and since Huntsman is a major producer of all three, an increase in global demand could some serious profitability over the next 7-to-10 years. From an infrastructure perspective, Jacobs will be responsible for the detailed engineering and design, procurement of major equipment, and the subsequent management of all construction services. Initial project-based construction is expected to begin by mid-2015 and be completed by late-2016.

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Recommendation: Open a new positions on a dip to $22 a share or lower. This should be a great money maker if you can get your shares at these very attractive levels!

My upside target is over $30 by the end of the year assuming that Huntsman’s cost-saving initiatives don’t go beyond its P&A segment. If such initiatives encompass the company’s additional segments, we could see HUN’s share price vault over $$34 a share.