Monday, September 26, 2016

Indian economic growth driving oil demand growth

The National:

India has become the centre of the world’s oil demand growth and the country’s economic expansion will affect global commodities, Citigroup said in a research note.

The world’s second-largest country by population after China will see its economy expand at about 8 per cent a year through 2021, Citi researchers including Ed Morse said. The country’s working-age population will increase by 220 million over the next 20 years, and about 240 million people will move to cities.


Urbanisation and rising incomes will boost demand for transportation fuels, gold jewellery and electricity generation, while looser regulations should spur increased exports of iron ore into the market.

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"While India is no China, the sub-continent’s largest economy is becoming the third-largest oil consumer and importer of oil, with a tangible impact on oil, coal and iron ore markets, less so on metals," Mr Morse said. "As India’s base rises, so too should its global commodities’ impacts."

Urbanization and rising incomes are the key. India is not the only country experiencing these phenomenon but it is the biggest. 

Sunday, September 25, 2016

Canacol Energy steps up natural gas development program

Canacol:

Canacol Energy Ltd.  is pleased to provide a revised capital plan for 2016. The new capital plan accelerates the Corporation’s natural gas opportunities in Colombia with three new gas wells. In addition,    one new oil well will be drilled over the remainder of 2016. The revised 2016 capital plan has increased by $34 million, from $58 million to $92 million.

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Over the past three years, the Corporation has made four gas discoveries and added 302 BCF in 2P reserves on the Esperanza and VIM 5 E&P blocks located in the Lower Magdalena Basin, Colombia. Canacol recently added a second rig to the two blocks. The objectives of the expanded gas drilling program are to 1) target management’s estimate of more than 100 billion cubic feet (“BCF”) of new potential recoverable resource in 2016 to secure new gas sales contracts, and 2) increase the productive capacity of the Corporation’s gas assets to more than 190 million cubic feet per day (“MMcf/d”) in anticipation of new sales contracts. Canacol has a large inventory of prospects and leads targeting 2.4 – 2.8 trillion cubic feet (“TCF”) of unrisked mean estimate resource potential. The Corporation’s gas resource capture strategy remains balanced for the remainder of 2016 with two gas exploration wells and two gas development wells.

The news keeps getting better out of Canacol. I think the market still perceives the company as a strictly oil producer and is missing the boat on how they have shifted to gas production. the netbacks are tremendous and after a couple of quarters of huge cashflow we should see a revaluation. In addition they just keep finding more gas as they continue to drill. I continue to like long term. 

Saturday, September 24, 2016

Ukraine on the way to recovery

UAToday:

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Four years on, with investors starting to look past the festering conflict in the nation's east, spending on agriculture and real estate is once again gathering pace. Second-quarter capital investment surged almost 18 percent from a year earlier and 9 percent from the previous three months, data this week showed.

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"Investment started to increase earlier than we expected," said Olena Bilan, chief economist at investment bank Dragon Capital in the Ukrainian capital of Kyiv. "We expect it to expand further in the second half of the year as the economy was heavily underinvested over last two years and many companies need to upgrade equipment."

In order to have sustained recovery the conflict in the eastern part of the country needs to be resolved. I do see an eventual arrangement where the Donbass area remains part of Ukraine but has a certain amount of autonomy from Kiev. 

However this may take some time as there are many factions in the country that really have quite a bit of animosity towards the ethnic Russians in the east. Unfortunately politicians take advantage of this emotion and this leads to a lack of progress.

I am optimistic on Ukraine and it was so cheap I am playing it through agriculture (Agroton and Astarta). Also my holdings in gas producer Cub Energy.

Friday, September 23, 2016

A Mongolian Speculation

Printed in its entirety from Capitalist Exploits.

I've not done this before and quite frankly don't expect to do it again. 

Today I'm sharing with you an opportunity that I believe has a favourable risk/reward setup whereby - if I'm correct - we can conservatively make 5x our money. But before I give you the background and thesis, let me explain why you're receiving this.

What follows is the thinking behind a trade I am currently long both personally as we as well as in the Asymmetric Opportunities Fund. I need to make this very clear. I am long at HK$0.12 this stock and I have already provided a very small group of friends and personal clients the information I am about to share with you. 

As such please be aware that you are receiving this information nearly two weeks later and things are already moving quite quickly.

I have agonized a bit over whether or not to share this with you for a couple of reasons. 

This opportunity is very speculative, as you'll see. And if you do buy, do it carefully and don't, just don't, chase the share price above the level I mention below. I'm mentioning the opportunity to you because:

1) You might be able to make some money, and I want to be completely transparent with you about my own existing positioning and how I'm investing.

2) I wanted to give you a peek into a service I will be launching shortly where I together with my team scour the globe looking for asymmetric opportunities sourced from my rolodex of friends, and colleagues and other times originated by myself or one of my team. This particular opportunity isn't necessarily typical but does highlight the sorts of opportunities that are out there.

Onto the topic for the day…

I have very close contacts throughout the world and one country where my contacts run deep is in Crazystan Mongolia, a country that was both spectacularly successful for me right up until when it was just as spectacularly unsuccessful. 

The government which came to power in 2012, through infighting, nepotism, stupidity, and a host of characteristics not uncommon in government everywhere - managed to obliterate foreign capital investment (FDI) putting a halt to the incredible growth Mongolia had experienced for the previous decade. 

I won't rehash the story for you here as it's well documented elsewhere.

What follows is the thinking behind the opportunity and why I believe it to be worthy of investment.

---------------------

If I was to ask you what is the most contrarian thing you can buy today, what might that be?

How about the equity in a bankrupt Mongolian miner?

Mongolian Mining Corp (MMC) 975 in Hong Kong also trading as an ADR in the US under the ticker MOGLF has the makings of a multi-bagger (possibly even 20-bagger). Crazy, right? That's why it's called contrarian investing. 

Apologies in advance, but this write-up will be short on numbers and tangible data and long on Mongolian politics. In the end, that's the thesis here. The past no longer matters.

MMC owns the Ukhaa Khudag (UKG) coking coal mine, which makes up a tiny fraction of the massive Tavan Tolgoi (TT) coking coal deposit. 

TT is the world's largest coking coal deposit situated about 200 km from the border of China, the largest user of the stuff. Due to the size and seam width of the deposit, it is one of the lowest cost coking coal mines in the world, and its proximity to China should effectively knock Australian seaborne coal out of the market. 

In a perfect world, UKG and TT coal should be mined and railroaded directly to Chinese steel plants from the mine-mouth, saving substantially in handling cost when compared to Australian chipping costs. 

The Aussies on the other hand railroad it to a port, put it on a ship, unload the ship in China and then ship it by train to the steel mill in China. It's the handling costs that are expensive and Australian coal should not be going to China when compared with Mongolian coal that can be shipped anywhere in China directly from the mine-mouth by rail. 

Unfortunately, due to domestic politics (more below), MMC now trucks the coal in huge caravans of trucks nearly 200 km to the border, where it is dumped in large piles to be picked up by Chinese traders who then drive it to railheads in China before finally getting on a railroad. 

Due to this dysfunctional supply chain MMC coal is currently uncompetitive. This has led to a near ceasing of production and the default of MMC's approximately US$700 million debt burden. The odds look decent that over the next few months there will be a clear path to resolving the debt and railroad issues, which should lead to a very substantial revaluation of the shares, which have effectively been left for dead.  
Let's talk politics

Mongolian politics is notoriously colorful and dysfunctional where personal feuds and interests often overshadow national interests. There are 2 key parties, Democratic Party (DP) and Mongolian People's Party (MPP). When the DP won the election in 2012, they immediately set out to destroy all MPP owned companies and interests. MMC is the largest MPP owned company and it was directly targeted for destruction. 

During the past four years, the country changed the tax and royalty rates on coal companies, selectively closed and moved border crossings to inhibit MMC coal from being sold, confiscated MMC's existing paved road to the border, banned MMC from building a railroad to the border and generally succeeded in destroying the company's ability to operate or succeed. 

Adding insult to injury, the government owns the TT deposit and has consistently produced and sold coal for less than market prices, effectively undercutting MMC coal—while also creating a glut at the border and largely bankrupting the government's coal company (ETT) in the process. MMC stopped production, but the government's ETT continues to produce at massive losses for no logical reason.

In 2015, MMC was able to put together a consortium of leading Chinese and Japanese firms (including Shenhua Energy and Sumitomo) that would pay to build a railroad to the border, build a power plant and then operate the TT mine so that the government of Mongolia would no longer be in the coal business. 

Instead, the government was to earn royalties and taxes. MMC would benefit as project operator, but more importantly, they would get access to the new railroad that would make their coal cheaper than Australian coal and let them once again ramp up production from almost nothing to nearly 10 million tons a year without substantial additional capital investment as all mining is done by a contractor. It was a brilliant deal for all involved, but the DP government was so focused on destroying MMC that they refused a deal that would have improved the government's own finances. 

The complete incompetence of the DP became their undoing. When they took over in 2012, the economy under MPP leadership was growing at 17%. Following a war on MPP and foreign businesses, confiscations of assets and arbitrary imprisonment of many foreign business leaders the economy has collapsed. 

Today, the GDP is rapidly contracting. The government's deficit is over 20% of GDP, the central bank has a negative balance sheet and the government hasn't paid workers in months. It appears that an IMF bailout is imminent and that the government may default on its sovereign debt. 

In June, the MPP won a landslide victory where they secured 65 out of 76 seats in parliament, giving them a clear mandate to fix the disaster created by the DP and much more importantly, to reward key MPP businesses. No Mongolian owned business in Mongolia is larger than MMC and the key MMC shareholders directly funded much of the MPP election campaign. I suspect that those shareholders will now reap the rewards. 

It has now been 2 months since the elections, the key ministers have been chosen and I think everyone is ready to get down to business. To start with, the government will stop selling coal for US$25/ton when the price at the border is over US$50. This became clear when the head of ETT, the government's coal company was replaced just recently with an MPP executive. The head of Erdenes Mongol, the state company that owns ETT, resigned last Sunday without a replacement announced. 

It seems pretty obvious that the consortium deal is back on the table and will probably become sweeter for MMC than the prior version. In addition, there's also a strong likelihood that MMC's 18 million ton wash plant will be used to wash ETT coal in a toll milling situation.

The new railroad, a toll washing agreement on ETT coal, management of the ETT mine will all create huge value. No one knows the terms yet, but people are throwing around cash flow estimates to MMC in the hundreds of millions (possibly even a billion) annually. There's just one problem with this all playing out, MMC still owes globs of debt that it has defaulted on—the creditors are still in control (sort of). 

Let me state the obvious—the creditors have no idea what to do with this debt. It's not like they can seize the crown jewel of one of the most powerful guys in Mongolia and then operate it when he controls the government. In one of the craziest bankruptcies you're likely to ever witness, the creditors have agreed to take a massive haircut on their debt (US$750m becomes US$570m) with the new bonds paying interest in PIK format along with varied payments based on coal prices. In exchange, creditors are getting 10% of the equity. 

The only holdup now is BNP Paribas who is fighting for better terms on their US$93 million of debt. Fortunately, the joint provisional liquidator (JPL) seems to be pushing back against them and is likely to force a deal soon. 

As you can imagine, MMC wants to look as broke as possible during bankruptcy negotiations and any deal on the consortium is very much on the back-burner and out of sight as well. For this reason, despite an increase in coal prices to a level that is quite profitable, MMC has not increased production—heck, they even took an impairment on their coal stockpile to make their first half loss look worse. 

So, that's the roadmap for you. 

At some point in the next month or 2, MMC will have settled with creditors and no longer have onerous cash interest costs. At that point, it can start producing coal and selling it into a market that is no longer saturated with underpriced ETT coal. A consortium deal will be announced before year-end and suddenly there will be a roadmap towards a company that can produce hundreds of millions a year in cash flow. Not bad for a company with a market cap today of only a hundred million. 

By the way, if you don't believe me, look at the stock trading lately. Since the election, lots of plugged in Mongolians are buying all that they can get and many of these guys are the parliamentarians who will approve the consortium deal this fall. 

I apologize in advance if this is the most unorthodox write-up of all time. Any analysis of the past is almost irrelevant. All that matters is that there's an MPP government, an MPP controlled company and a country that is totally broke and in desperate need of good news, jobs, taxes and royalties. A deal was on the table last year, it's still on the table (silently) and MMC is going to clinch it this year. 

It's worth noting that when the consortium deal was only talk in the back rooms of parliament, the MPP shareholders did a rights offering at 0.28 and fully subscribed for their shares in order to increase their ownership, even though it was unlikely that the consortium deal could get through a DP government. If they thought the shares were cheap at 0.28, they must think it's a much better deal today at 0.12 with a higher coal price and full control of the government.

The above was written about two weeks ago and today the stock trades at HK$0.16 which is a lot higher than 12 cents but still a long way off the buck I think it gets to. 

I'd suggest being patient and I'd buy up to 0.25 if I had to move on it now. I have noticed that the volatility is lower in the stock and I suspect this is due to less sellers coming in and a fairly solid base being set. 

Please realize that this is NOT something you want to be betting the farm on as the downside is that liquidity evaporates and this goes straight to zero. It can and does happen. Please trade accordingly.

Disclosure: I, as well as the Asymmetric Opportunities Fund, have an average buy price of HK$0.12 and a conservative position where if this goes South it won't be a killer. 

And if it runs as I think it has the very real potential to do, then I could buy myself that Aston Martin DB9… though, I won't. 

Sincerely,

Chris  

I was buying shares in MMC before this article came out. I did notice that shares have popped since the article. I was speaking with contacts that are familiar with the situation and can confirm this is an excellent speculation. However it is a speculation. The company is in default and there is no guarantee that events will play out in MMC's favor. Nevertheless, the reward is so large and the downside minimal that a small position could pay off handsomely. Caveat Emptor. 

I would suggest that you sign up for Capitalist Exploits free daily email that is packed with excellent information and gives insight that you will not see in the mainstream. 


Thursday, September 22, 2016

Sales manager's Index in India shows expanding economy

World Economics:

The Indian economy continued to expand rapidly in September with a Headline Sales Managers’ Index (SMI) of 70.5 indicating rapidly growing levels of economic activity. The Business Confidence Index level for September has maintained its very high level and panel feedback suggests that the summer monsoon season has done little to dampen expectations.

 The Sales Index has surged to a new all-time high reading, reflecting very high levels of growth across virtually all market segments, and indicating 7-8% GDP growth in the third quarter. New staffing levels continue to be buoyant and maintain a consistent level.

A growing economy does not always mean a higher stock market in the short term. However in the long term it does. India is looking good long term and I am playing ti using Fairfax India Holdings. 

Cyprus has highest number of tourist arrivals ever in August

Malay Mail:

Mediterranean holiday island Cyprus recorded its best ever August when arrivals jumped nearly 17 per cent to reach more than 458,000 visitors during the peak season, official data showed Monday.

“August 2016 had the highest volume of tourist arrivals ever recorded in Cyprus during the specific month,” the finance ministry said.

In a clear indication that the economy is on an upward curve, August marked a 16.9-per cent hike in tourist arrivals compared to the same month in 2015.


Only July saw more tourists for a single month with a record 482,000 arrivals.

No one is talking about it but Cyprus is doing really well since they had their crisis a couple of years ago. This continued good news should also end up benefiting Bank of Cyprus which remains cheap. 

Wednesday, September 21, 2016

More pension bad news

Bloomberg:

The $1.9 trillion shortfall in U.S. state and local pension funds is poised to grow as near record-low bond yields and global stock-market turmoil reduce investment gains, increasing pressure on governments to put more money into the retirement systems.

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There’s little light at the end of the tunnel as far as pension funding is concerned,” said Vikram Rai, head of municipal-bond strategy at Citigroup Inc. in New York. “I expect funded ratios will drop further. It’ll require increased pension contributions on the part of the states and local government, but most state and local governments don’t have the ability to do so.”

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“If markets are flat or negative in upcoming years, we will continue to lose principal at a double digit rate,” Jim Mohler, executive director of the fund, told lawmakers in Chicago on Monday. “The projected insolvency for the fund will escalate.”


The politicians will try and raise taxes to pay the shortfall but in the end the people in these plans will have to take a hit. Taxpayers, many of whom have no pension, are not going to like to see their taxes go up to pay lavish municipal employee pensions. Receiving less government services because the money is diverted to pensions will not sit well either I would venture. 

If you are an employee that is vested in a pension plan I would pay attention to your administrates annual review of the plan and determine whether it is fully funded of underfunded. When I ask most people they have no idea. Not knowing the condition of the plan you are relying on for retirement is just plain dumb. 

Tuesday, September 20, 2016

India oil demand hitting new highs

Bloomberg:

Indian refiners imported 18.81 million metric tons (about 4.45 million barrels a day) of crude oil during the month, a 9.1 percent increase over last year, according to the oil ministry’s Petroleum Planning & Analysis Cell. That is the highest level in data on the PPAC’s website going back to April 2009.

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The nation’s gasoline consumption reached a record in August, surging 25 percent from a year earlier, while demand for diesel rose 13 percent, the fastest pace since March. Virendra Chauhan, an oil analyst at Singapore-based consulting firm Energy Aspects Ltd., expects India’s oil demand to grow by 0.4 million barrels a day this year and by 0.2-0.3 million barrels a day next year.

Rising economic growth leads to more energy consumption. I have said it before, oil is the life blood of an economy. I am bullish long term on India.


The worst is over for Mongolia?

Ganzorig Ulziibayar, chief executive officer at Golomt Bank, discusses Mongolia's economy, the level of government debt and the outlook for foreign direct investments. Link to video. I have been loading up on Mongolian Mining Corp. as a speculative play. More on this over the next day or two but suffice to say that many in the new Parliament have direct stakes in making sure MMC is successful.

Sunday, September 18, 2016

Driver less revolution accelrating

Wolf Street:

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No one is going to switch to fully autonomous trucks next year. This will take some time. But given the amount of resources pouring into it, it won’t take all that much time. A few years perhaps before the first significant numbers are starting to crop up.

Then what? What are the 3.5 million professional and trained full-time drivers going to do? OK, some of them are going to retire by then. But this is still one of the big job opportunities for people without a degree in engineering, willing to be trained and willing to work hard and long hours. These opportunities are now scheduled to go away.


And what are the part-timers going to do? How are they going to supplement their incomes to maintain their consumer spending, which is so critical to this economy? Are they going to tighten their belts further?

These are the questions I have been asking for a while. What are these four million people going to do? Plus there are additional jobs that support all these drivers. As more and more jobs get automated we will see more social, economic, and political tension. 

This increased automation in also making me reassess my frontier market strategy. Many of these frontier markets are using there low labor costs as a way to attract manufacturing to their country. When robots become more ubiquitous will it even make sense to even move factories overseas? 

What will that do to their development plans and my investment themes. There is much to contemplate as this trend will not slowing.
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