Kazakhstan and Australia’s Energy Future

Enough hot air about politics, let’s move on to greenhouse gas emissions, energy, and real, tangible commodities like oil, gold, zinc, and, of course, uranium.

And you thought Borat was Kazakhstan’s biggest export, didn’t you? On Monday, Kazakh company Shalkiya Zinc announced its intention to go public. The initial public offering will be in Global Depository Shares (GDRs), offered to institutional investors in London.

The company claims to own Kazakhstan’s largest known zinc deposit, which accounts for 30% of the country’s total zinc reserves. But the quality of the company and its particular assets are not what interests us about the story. It’s the IPO. This could be the beginning of a rush of zinc-oriented public listings, designed to profit from the coming zinc squeeze we profiled in the November issue of Outstanding Investments.

Yes, it’s true, uranium is getting all the attention these days. But zinc stocks at the London Metals Exchange fell by 950 tons on Tuesday, down to 89,450 tonnes, which is less than three days of supply at current rates of global demand. The zinc squeeze is coming, even though the zinc price yesterday settled at $4,267. We’re sticking with our forecast that it’s headed to US$5,000/per tonne.

The stock market works on the principal of supply and demand just like any other market. Stocks are, well, like a commodity. If people want zinc stocks, they’ll buy what’s available. Prices will rise. Rising prices will attract new producers, in this case the producers of stocks. Wall Street’s investment banks, and probably Mac Bank here in Australia will give the people what they are demanding, more zinc stocks. Between now and then, though, the zinc stocks that already exist—the real companies with real mines and real profits—should benefit tremendously.

The same is true for oil and especially gold. The commodities are scarce, the producers are few, and the demand is growing. December gold prices rose by $6.60 in New York. Despite its tarnished image, gold is up twenty percent on the year and trades at $627 as we go to press. Gold benefits from its demand as jewelry, otherwise known as a wearable form of wealth and a portable Indian wedding dowry. It is also money not backed by a liability. It is not, in other words, debt-based money, which is why we admire it so much, and continue to recommend small, local gold producing stocks.

Crude oil went back over $60 when bad weather at Alaska’s main oil export terminal interrupted loading. Oil is not like information. It doesn’t magically appear in your car’s petrol tank the way a YouTube video magically appears on your computer screen. “Supply disruptions in Alaska and the North Sea are all playing into the market today,” reports Mark Waggoner of Excel Futures in California.

By the way, a few weeks back we mentioned the market “BBC,” or “beyond Bush and Cheney,” and mentioned much-reviled U.S. oil service company Halliburton (NYSE: HAL). At the time, HAL was on the cusp of spinning off Kellogg Brown and Root (NYSE: KBR) as its own company in another big Wall Street IPO (With Hertz, NYMEX, and KBR, it’s been a huge period for IPO activity on the Street…and when Wall Street starts dealing new stock at this pace, it reminds us of the heady days of 2000…watch out.) Since we mentioned HAL, it’s up nearly 24%. Not only is the oil service business a good business to be in these days, it usually pays to buy what’s hated, and HAL was about as hated as a publicly-listed company gets.

Back to the oil markets for a second. Whether they are local and incidental or global and strategic, disruptions in the flow of oil are one reason why oil prices are so volatile. The world’s oil supply is depleting. And its oil infrastructure is more costly to build and maintain and more vulnerable than it was just five years ago. All of this—along with the rip-roaring debate over climate change—is contributing to the, uh, mushrooming of interest in uranium.

Former Telstra (ASX: TLS) boss Ziggy Switkowski released his much anticipated report on Australia’s nuclear future yesterday. He reckons the country will have twenty five nuclear power stations supplying 30% of its electricity needs (which are growing) by 2050. “Dr. Switkowski’s review found nuclear power could be 50 per cent more expensive that that generated by coal, but said the gap could close in the coming decades as the costs of greenhouse gas emissions were factored in,” today’s Australian reports. It continues, “The report estimated enriching uranium could quadruple the value of exports to $2.4 billion a year.”

There are plenty of economic (and environmental, and scientific, and political, and just plain kooky) takes on Australia’s energy future. We’ve posted some here. In this space we’ll only say at $3 billion a pop, 25 new nuclear stations will cost only $75 billion. That is less than half Google’s (NASDAQ: GOOG) market cap, as of yesterday’s American close. The stock closed over US$500 and is worth, if you were dealing it on the street, around US$150 billion. There are still buyers at the current price.

It’s an irony that without power generated from coal, nuclear, or mice on a spinning wheel, Google is just an idea without any value at all, although it remains a fun word to say. According to an article in today’s Australian, “the power needs of the average data centre have grown to from about 1kW per rack in 2000 to 6kW at present… By 2010 the electricity needs of the average data centre will jump to 20kW per rack.”

We don’t know much about racks. But in nature, something can’t come from nothing. Energy has to come from somewhere, whether it’s coal, splitting the atom, fusing atoms, or gas and steam turbines used to produce electricity. If Australia agrees that it wants to reduce greenhouse gas emissions there are only two alternatives we can see.

The first is to become a nation of dirt farmers. This means Australians will have to use energy more efficiently, conserve use, and not seek nuclear or hydrocarbon replacements from current fuel stocks.

In plain terms, this means we’d all live like the people on the commune in the 1970s classic Easy Rider. This is energy-subsistence living. And thought it appeals to some people, we don’t have any dirt to farm out the back of the Old Hat Factory. And even if we did, there’s no water to grow anything with anyway. Plenty of sun mind you, just not enough water or top soil.

The other alternative is to find cleaner ways to harness the stored solar energy in nature’s various repositories, including coal, uranium, and natural gas. We either learn to live smarter or we learn to live smaller. Australia, like America is big. So we’re guessing it will think big and turn its back on small.

The energy future may or may not involve massive, state-funded, centralized power generation and distribution. But it will almost certainly involve new uranium mines, fuel cells, and innovative technology companies that figure out how to deliver commercially viable wholesale and retail power.

Practically speaking, that means investors (and this space) should leave politics aside for moment and look at two sectors, mining services and alternative energy technologies. New mining infrastructure will have to be built. Who are the mine builders? And in the alternative energy space, are there Australian firms turning dirty coal into cleaner energy? You bet there are. We’re visiting one December sixth. We’ll tell you what we find out.

Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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