Our VIP arrival in Hong Kong...

Our VIP arrival in Hong Kong... Mines and Money... Bankers missing the Midland boom... Private equity in natural gas... Curzio's favorite gas stocks... Kind words for Porter...

 When we pulled up to the Grand Hyatt in Hong Kong, we were met by a mob of reporters and flashing bulbs sequestered behind velvet ropes to the left of the hotel entrance. Reporters stood at the ready with microphones. And a line of cars that cost six-figures sat idling at the hotel entrance...

Matt Badiali and I wondered if Kristen Anderson, the miracle worker who handles our travel, had arranged a special arrival... No such luck. There's a celebrity gala at our hotel tonight. As we hobbled in, hair disheveled and shirts untucked, a mob of black-tie-attired Asians swarmed around us toward the hotel's main entrance... Even if we were invited, we were too tired to attend.

 Matt – who writes the S&A Junior Resource Trader and S&A Resource Report – and I are visiting Hong Kong to attend the Mines and Money conference, one of the world's premier mining conferences. The five-day event is a mix of workshops, company presentations, and keynote speakers.

Located on China's southern coast, near where the Pearl River flows into the South China Sea... the city-state of Hong Kong has for centuries been one of the world's great financial hubs.

The British seized control of Hong Kong in 1839 during the First Opium War with China. Britain ruled it as a colony until 1997, when it relinquished sovereignty to the Chinese. Hong Kong is today officially part of China... but as a "special administrative region," it has its own political system and currency. And it continues to serve as one of the critical international financial centers.

 One on-the-ground observation...

A Kentucky Fried Chicken advertisement in the back seat of our taxi reminded me of the Chinese's affinity for the general's fried chicken. Yum Brands opened its first KFC in Beijing in 1987. Today, the company has more than 3,701 locations in the country. In total, between KFC and Pizza Hut, Yum operated 4,500 restaurants in China with total annual revenues of $5.6 billion. Most people don't realize it, but Yum is sort of a China play in drag. Around 40% of its profits come from its China division.

 While sharing a quick dinner in the hotel, Matt and I went over the conference itinerary. Lots of heavy hitters are gathered in this hotel. Among the speakers is Tian Yuchuan, the CEO and executive director of CITIC Dameng Holdings Limited, the world's largest manganese producer (which is also controlled by the Chinese government). Peter Kukielski, senior executive vice president and head of mining for Indian mining giant ArcelorMittal, is also presenting.

I'm most excited to see billionaire mining guru Robert Friedland, the founder and CEO of Ivanhoe Mines. Friedland is a rainmaker in the junior mining space. (For those who read the Steve Jobs biography by Walter Isaacson, you'll recognize Friedland as the mining magnate who met Jobs at Reed College.)

 As we've explained many times when discussing the junior mining sector, following the right managers and executives is just as important, if not more so, than understanding the geology of a potential discovery. As Matt tells his S&A Junior Resource Trader subscribers, "The resource business is full of managers who are inept, crazy, corrupt, or a mixture of all three."

Rick Rule, another legend in the resource field, says it another way... Success in the resource sector isn't just depending on "know-how," but also on "know-who."

The folks presenting at this conference are definitely the people you want to know in the mining sector. And I have no doubt we will leave with several winning ideas for our readers.

 Matt recently attended another resource conference, the North American Petroleum Expo (NAPE) in Houston. He was invited to an exclusive dinner with the movers and shakers from the conference – mostly fund managers, bankers, and analysts for big banks. Matt sat next to an energy banker from Midland, Texas…

Right now, Midland is producing so much natural gas, it won't all fit into the pipelines that deliver it to the market. So at any time of day in Midland, you'll see them "flaring off" excess gas – literally burning what they can't use. The energy business in Midland is booming...

While the rest of the country is experiencing 8.3% unemployment, companies like McDonald's are having a hard time finding help in Midland... The energy business is taking all the labor. Everybody's making a mint in Midland… everyone but the bankers. The energy banker sitting next to Matt at the conference was having troubles...

 This banker loans money to oil and gas companies looking to drill wells. You'd think he'd be printing cash today with all the activity in his area. He's not. His loan-to-cash ratio is around 50%... In other words, half his cash is unused.

The loan demand exists. But he's not getting any deals. According to the banker, private equity is snapping up every deal it can in the area... And for now, private investors are willing to take on more risk than banks to loan money to drill wells and build pipelines.

"By our count, 12 to 15 of the larger energy-focused funds are out there raising what could add up to $15 [billion] to $20 billion," said Bill Montgomery, managing director of Quantum Energy Partners, a giant energy-focused private-equity fund. "There will be a crushing amount of money coming into the sector."

 We've recently seen several high-profile private-equity deals in the energy sector... Last month, Blackstone Group gave Cheniere Energy $2 billion to build a natural gas liquefaction plant. The company will build a plant in Louisiana – the first of its kind in the continental U.S. – to chill and compress gas for export to Europe and Asia, where natural gas prices are higher.

 Also in February, a group led by private-equity firm Apollo agreed to pay $7.5 billion for El Paso Corp's oil and gas exploration and production business. And the biggest energy deal in the past six months was Kohlberg Kravis Roberts' (KKR) $7.2 billion acquisition last November of Samson Investment, a U.S. oil and gas exploration firm.

Normally, so much private-equity money going into a sector would signal a top... Blackstone's $39 billion takeover of Sam Zell's Equity Office Properties in February 2007 is the quintessential example. It was the largest private-equity deal in history. And of course, within months, real estate markets were collapsing nationwide. (While it signaled the top of the real estate market, Blackstone was still able to profit by quickly flipping the properties.)

But the natural gas sector isn't at a top. Natural gas trades for $2.30 per thousand cubic feet (mcf). That's its lowest price in a decade, down from $15 in 2005. In this case, we think private equity is making a smart, long-term investment.

 Frank Curzio has been covering a developing megatrend in natural gas for his Small Stock Specialist subscribers. Two of the companies he's recommended hit 52-week highs last Friday. But he thinks they'll increase multiples from here. We wrote about Frank's thesis in the February 22 Digest…

Earlier this month, Chrysler announced it would begin building natural-gas powered pickup trucks this June. And General Motors will roll out natural-gas powered trucks in the fourth quarter of 2012. This mega-trend is just beginning. To receive Frank's special report, which outlines the best companies to benefit from natural gas as a transportation fuel, we encourage you to learn more about a subscription to Small Stock Specialist by clicking here...

 New 52-week highs (as of 3/16/12): Westport Innovations (WPRT), Anheuser-Busch InBev (BUD), Abbott Labs (ABT), Prestige Brands Holdings (PBH), Calpine (CPN), Chart Industries (GTLS), BLADEX (BLX), and Clean Energy Fuels (CLNE).

 Are you attending the Hong Kong conference? If so, we'd love to say hello. Tell us which sessions you're focused on at feedback@stansberryresearch.com.

 "Given your views on solar power, thought you might enjoy this." – Paid-up subscriber Justin Seli

 "The March 2012 issue of SIA represents a fantastic effort on your part. You explained the insurance business better than I have ever read before. That would have been enough for me. But then you shift gears and give a great breakdown on the natural gas business. What is most incredible is you researched and prepared this report while working through excruciating back pain and the resulting surgery.

"We all (your core audience) would have been happy to give you a pass this month with what you are going through physically. Your indomitable will and desire to serve has shown through with one of your best efforts. Bravo." – Paid-up subscriber Bob Lunder

Porter comment: Thanks, Bob! I had plenty of time in bed to read, and I have two new analysts to help with the number crunching. Even more important, my back healed significantly this week. I'm much stronger. I could finally sit up for long enough to type the nearly 10,000-word issue.

As you must know, I love what I do and appreciate my audience... You've given me and my family a wonderful life and the resources to always write what I believe – whether it's popular or not.

Regards,

Sean Goldsmith

Hong Kong

March 19, 2012