Saturday, May 23, 2015

Mongolia is again open for business

Or so says the Prime Minister:

Rio Tinto has reached agreement with the government of Mongolia to press ahead with the $5bn (£3.2bn) expansion of the Oyu Tolgoi copper and gold mine.

“Mongolia is back to business. Oyu Tolgoi is a world-class copper-gold asset and its further development is of great economic significance for Mongolia," said Chimediin Saikhanbileg, the Mongolian prime minister.

Rio Tinto has already invested $6bn into the project but the agreement will allow work to begin on the main part of the mine’s development underground. This will entail excavating 200 kilometres of caverns under a vast area of Mongolia on the edge of the Gobi desert.

Regular readers will note that I have written extensively about Mongolia and the potential the country holds. In fact I traveled there myself to check things out and wrote about it on my blog. In summary the country has a population of around 3 million and a annual GDP of around $12 billion. By comparison the GDP of Fargo, ND is about the same size as the entire country of Mongolia. The country is sitting on around $2 trillion in identified mineral resources (there is quite a bit more but it will take time to identify them). The Oyu Tolgoi mine is a large open pit copper mine in the Gobi desert that cost around $5 billion to build. During the construction of the mine the Mongolian economy grew in the 12-17% range for a couple of years. It was deemed as the fastest growing economy in the world and it was nothing but blue skies as far as could be seen. 

The OT open pit mine has been up and running for close to two years and is profitable. However the real value in the mine is in the underground expansion that was to be undertaken by Rio Tinto. This expansion got derailed when the government went batshit crazy a couple of years ago and passed a bunch of nationalistic laws to block the the takeover of a coal mining company by the Chinese Aluminum Company. This coupled with some other poor decisions put the expansion on hiatus and foreign direct investment along with  interest in Mongolia died on the vine as investors moved onto Myanmar and other hot stories. 

Thankfully the government has seemingly learned its lesson as the currency depreciated significantly and the economy has slowed to a crawl. A new Prime Minister made it his mission to get the parties together and get the outstanding issues between the parties resolved. This has apparently now happened as both the GOM and Rio Tinto made announcements that a deal had been reached in the last week. 

I have written before that the disposition of the Oyu Tolgoi situation would be the litmus test for interest in Mongolia returning.I think that the corner has now been turned and it makes sense for prudent speculators to start looking for bargains in Mongolian real estate and stocks. I am still a big fan of Mongolia Growth Group which has continued to execute during the whole downturn and is now poised to reap the benefit of a return of cash to the Mongolia market. Here is an interview that was recently done with the CEO of Mongolia Growth Group, Harris Kupperman regarding the conditions in Mongolia and what the deal on OT will mean for Mongolia going forward. 

I have added to my positions in MGG and the stock has had a nice bounce the last week or so. It is trading well below net asset value and is a real bargain. I would encourage readers to take a look at the recent MGG investor presentation on the company website. 

This whole situation was another example of exercising  patience and knowing that eventually the GOM was going to realize that their prosperous future is tied to cooperating with foreigners who bring capital and expertise. I am sure there will be additional ups and downs as news plays out but I think the worst is over and we will see a gradual improvement in sentiment towards Mongolia. This is excellent time to buy low and catch the next wave of Mongolian development. 

Oil Field services company Weatherford sees opportunity in Argentina


Weatherford Drilling International expects to win contracts in the next two or three months to deploy rigs to Argentina where foreign energy majors are exploring one of the world's largest shale resources, a senior company official said on Thursday.


"There is a fundamental macroeconomic need for Argentina to increase its production, the infrastructure is here, the workforce is here and the ability to explore, find and develop the resource is quicker than in most countries."


State-run energy firm YPF estimates $200 billion is required over the next decade to exploit the barely-tapped Vaca Muerta shale play, which covers an area the size of Belgium. This would help reverse the country's costly energy trade deficit.

I continue to expect Madalena Energy to do well over time as more and more wells are drilled in the Vaca Muerta shale and the volume of news continues to prove up the Argentine shale story. A new more pro-business government should get elected in October and that could be a catalyst for a perception change on all things Argentina. 

Sunday, May 17, 2015

Why you have to invest in frontier and emerging markets


Excellent presentation by Grant Williams detailing the opportunity available in frontier and emerging markets in what he calls the monsoon area of the Indian ocean and southeast Asia. This reaffirms my view and investment thesis that investing long term in these areas as they modernize and urbanize is the way to fantastic wealth creation.

The facts are there for anyone to see;

China recreating the Silk Road

The New Silk Road Initiative will, however, not only result in an enormous surge in growth for China. With "One Belt, One Road," President Xi Jinping is launching one of the largest development projects in history and offers new perspectives to countries such as Uzbekistan and Tajikistan threatened by terrorism. Indeed, he inaugurates the initiative with a visit this week to Pakistan, where China will invest $45 billion in energy and infrastructure projects.

Indian economy to grow 8.1% in 2015-2016

"Growth is forecast to accelerate to 8.1 percent in 2015 and 8.2 percent in 2016, benefiting from the acceleration of infrastructure projects, strong consumer spending due to lower inflation and monetary easing and gradual improvements in market sentiments," said the UN ESCAP report titled, 'Economic and Social Survey of Asia and the Pacific 2015.

Even in Africa things are going in the right direction

The Ethiopian economy grew by over 10 percent annually between 2004 and 2009, slowing to nearly 7 percent since 2012, according to the International Monetary Fund.

Some political commentators have called Ethiopia the “African Lion,” a term similar to the “Asian Tiger,” which described Korea during its period of speedy development.

Most people in the West focus on only their home countries but these various frontier and emerging markets have several things in common. Youthful populations, positive changes in policy that spur economic growth, infrastructure investment, and relatively low debt levels. The most difficult thing investors is to find vehicles that we can use to take advantage of this growth. The other main stumbling block for most people is patience. Even if they have the vision most people do not have the patience to let these trends play out and reap the rewards of their foresight.

However patience is exactly what is required and Mr. Williams presentation shows what can happen when one catches the wave of compounding economic growth. 

Historic oil price recoveries after big declines


Back in March I shared the fact that Americans drove a record 3.05 trillion miles on U.S. highways in January 2015 for the 12-month period, with even more expected this year. Now the International Air Transport Association (IATA) revealed that international passenger traffic in March rose 7 percent from the same time a year ago. Except for Africa, every region around the globe recorded year-over-year increases in air traffic.

Last week, West Texas Intermediate (WTI) crude oil prices reached a 2015 high, rising above $60 before cooling to just below that. It marked the eighth straight week of gains.
Investment banking advisory firm Evercore makes the case that the recent oil recovery is closely following the average trajectory of six previous cycles between 1986 and 2009. Although no one can predict the future with full certainty, this is indeed constructive for prices as well as the industry.

Frank Holmes is the head of US Global Investors and the website for his funds is chalk full of great information and insight. As can be seen by the chart above this most recent decline in oil prices is tracking consistently with the average of previous declines. The dates on the bottom are off by one year and is a mistake. However it appears this time will not be different. Oil is a necessary yet depleting product. The big cuts in capital spending in the oil sector due to the recent temporarily low prices will come back to bite us in the backside over the next year or two. This will also lead to out sized gains for the correctly selected energy stocks.

Saturday, May 16, 2015

A unique and cheap buy from the ruins of Romanian Communism

It is getting more and more and difficult to find undervalued situations with decent upside potential. The continued printing of money by just about every major central bank has led to historical low  rates of return that goes back centuries in some cases. As I have said before one has to become a speculator in this type of environment if one is to get a return on ones money. However, just because we are forced to speculate and go further afield from our home country and comfort zones does not necessarily mean we cannot find decent value and special situations.

One such situation is the recent listing on London Stock Exchange of Fondul Proprietatea. FP is a closed end fund that trades on the Bucharest Stock exchange. The fund was created in 2005 as way to compensate Romanians that lost property during the previous communist regime. Victims were given shares in lieu of compensation and shares began trading on the exchange in 2011. The shares have historically traded at a discount to net asset value. The current discount is 27.61%. The fund manager is Franklin Templeton Group and has been buying back shares over time as a way to narrow the discount to NAV as shown on the most recent fund fact sheet.

The listing of Global Depository Receipts on the London Stock Exchange in late April now gives smaller investors in the US a way to participate as the fund manager continues to seek to buyback shares and lower the discount. 

I like this fund as it gives me a way to play an emerging Eastern European market at only .70 cents on the dollar. Top Hedge Fund manager Paul Singer who runs Elliott Associates has upped his firms stake in FP to 20% and said the following about the fund:

The price of Fondul Proprietatea, a closed-end fund listed on the Romanian stock  exchange, rose during the quarter, accompanied by a narrowing of its discount to net  asset value from 32% to 25%. In early July, the fund completed a significant asset disposal, generating additional cash for deployment toward share buybacks and other  distributions to shareholders. The partial return of the shares’ nominal value to each  shareholder was paid, as expected, in late July. The fund completed its third share  buyback program during the quarter and launched a larger fourth program in late  September. The fund manager also announced that a tender buyback would be considered  in order to accelerate this fourth buyback program. In addition, a resolution proposing a  fifth program was included on the agenda of a shareholders’ meeting to be held in  November.

In other developments, the fund manager recently held discussions with its  local regulator concerning modifications to current regulations necessary to permit the  secondary listing of the fund on the London Stock Exchange, which has already received  shareholder approval. Finally, a new two-year management contract for the fund manager became effective September 30, which formally incorporated a target discount to net  asset value of 15% as proposed by Elliott. 

So basically the largest shareholder has impressed upon the fund manager that they would like to see the discount brought down to the 15% range. I think this is a great 3-5 year hold that will see both increases in NAV and a shrinking of the discount via buybacks. I am placing FP in the investment portfolio. The shares trade on the LSE in US dollars and each GDR represents 50 shares in the fund. I use Interactive Brokers and had no issues getting my limit order fulfilled. 

Economic conditions continue to improve in Cyprus. Bank of Cyprus upgraded


Cyprus's economy grew 1.6 percent in the first quarter, flash data showed on Wednesday, expanding for the first time since it entered recession in mid-2011 and was forced to accept a financial bailout two years later.
Economic output from January to March also rose by 0.2 percent on a year-on-year basis, improving from the fourth quarter of last year when the economy shrank a revised 1.8 percent.
The island had been mired in recession since the third quarter of 2011, albeit at a shallower rate in the past year.

Fitch Ratings has upgraded Cyprus-based Bank of Cyprus Public Company Ltd's (BoC) Long-term Issuer Default Rating (IDR) to 'CCC' from 'CC' and Hellenic Bank Public Company Limited's (HB) Long-term IDR to 'B-', with a Stable Outlook, from 'CCC'. At the same time, Fitch has upgraded BoC's Viability Rating (VR) to 'ccc' from 'cc' and HB's VR to 'b-' from 'ccc'. HB's Short-term IDR has also been upgraded to 'B' from 'C'. A full list of rating actions is at the end of this rating action commentary. These upgrades mainly reflect improved capital buffers following the completion of equity issuances and evidence of better deposit dynamics amid the gradual relaxation of capital controls, which were fully lifted by the authorities in early April 2015. BoC's rating actions also highlight progress made in asset de-leveraging, enabling a reduction of its reliance on central bank funding. 

So this is moving in the right direction. As the economy in Cyprus improves we should begin to see a decline in non performing loans and a continued healing of the bank's balance sheet. It should help that Cyprus passed legislation that will help speed foreclosures and restructuring of real estate loans. The thesis is that over time the bank's condition continues to improve along with continued upgrades which should lead to investor interest and a higher stock price. 

Saturday, May 9, 2015

Russian market the best performer so far in 2015

Back in January I wrote that I was nibbling on Russian stocks because they were the cheapest in the world. However, cheap does not necessarily mean one should buy. I also said that the negative sentiment towards Russia was way over done and I thought that once things calmed down in Ukraine we would get a rally. This is exactly what has happened as the Russian market is up around 40% so far. As oil prices continue to increase we could see additional upward movement in the Russian stock market. In order to make money you have to buy out of favor sectors. You also have to realize when a market or stock is just oversold instead of being broken. Russia was just oversold and is now on the way back.

Telenor share price at record


In Myanmar, one of the world’s poorest nations, Telenor made an unexpected operating profit and predicted rapid growth after starting operations just last year, suggesting the economy was more dynamic than anticipated.

"This is something that we haven’t seen before," Chief Executive Jon Fredrik Baksaas said. "The Myanmar economy has had more money in circulation than we had originally expected."

"We will now increase the speed of our roll-out and ramp up (capital expenditure)," Baksaas said.

It appears that Telenor underestimated the demand for mobile service in Myanmar. I am using Telenor as a relatively safe way to play the growth in Asia. Besides Myanmar, Telenor has operations in several more emerging Asian countries.

Madalena Energy article on Seeking Alpha


This is good article that summarizes what the company is currently doing in Argentina. This remains one of my top specualtions as oil prices are not definitely rebounding.

Oil is definitely rebounding as the rig count has now dropped for 22 weeks in a row. The lower rig count is leading to a peak in Us production. We should see the US production rate drop rather quickly as theses oil shale wells deplete quickly.

Lower crude prices have also boosted demand, while the risk of supply disruptions across the Middle East is growing amid sectarian tensions.

“We have now reached a turning point,” Hall wrote. Growing demand and supply pullbacks “rendered all the doomsday forecasts self-defeating.”

I still am maintaining my outlook for an end of year crude price of $70-$80 per barrel.

Monday, April 20, 2015

As predicted, Obama loses another one. Russian economy recovering nicely



Today, the answer is becoming clear—and it’s not the one the West was hoping for. Not only is Putin still standing, but the Russian economy, against most expectations, is recovering. Its stock market is one of the best performing globally this year; the ruble, after losing nearly half its value against the dollar over the course of a year, is rebounding; interest rates have come down from their post-sanctions peak; the government is taking in more revenue than its own forecast expected; and foreign exchange reserves have risen nearly $10 billion from their post-crisis low.


What’s bailing out Moscow? For the second time in two decades, Russia is showing that while a sharp drop in its currency’s value does bring financial pain—it raises prices for imports and makes any foreign debt Russia or its companies have taken on that much more expensive in ruble terms—it also eventually produces textbook economic benefits. Since a devaluation raises import prices, it also paves the way for what economists call “import substitution,” a clunky way to say that consumers switch to buying less pricey products produced at home instead of imported goods.

Well I told you so. This has been a classic case of contrarian investing. Buying when there was massive pessimism about Russia has yielded a tidy return so far. It will get better as oil prices continue higher and the EU diverges from the US regarding extending sanctions. I still consider Russia a buy.