Thursday, July 24, 2014

Sylvania Platinum reports production

Sylvania Platinum Ltd Thursday said its full-year production modestly beat its stated production guidance leading to a 22% increase in revenues during the period.

The platinum group metal processor and developer, with operations in South Africa, said its total production for the twelve months ended June 30 increased 22% to a record 53,808 ounces from 44,095 ounces the previous year, exceeding the company's production guidance of 51,000 ounces.

The company said its revenues increased 22% to USD46.4 million from USD38.0 million the previous year the increased production drove up sales despite flat basket prices during the period.

Sylvania Platinum said its production increases were due to increased and more consistent plant feed tons, improved plant stability, improved plant feed grades and technical focus on the operations.

In its fourth quarter, the company said its revenues increased 16% to USD14.2 million from USD12.2 million in the previous quarter as its Sylvania Dump operations platinum group metals production increased 17% to 15,435 ounces from 13,185 ounces in the previous quarter.

This is excellent news and as I expect the price of platinum and palladium to head higher, Sylvania Platinum should see increased cashflow. The company presentation on their website outlines the dividend policy for the company. The management has a stated goal of returning cash to shareholders once they get to $8 million in cash holdings. They have said that they want to be the highest dividend yielding pgm mining stock. The shares have recovered recently since the end of the miners strike in South Africa. That shows how irrational the market is sometimes. This company never had its operations affected by the strike. It also does not mine pgm's it treats old mining dumps to extract the remaining ore. The lower price was an opportunity for those who understood what was really going on.

More on the Mongolia China coal to gas deal


Mongolia is seeking to sign a gas project and supply accord with China next month, in a deal that would help the world’s second-largest economy expand energy supplies and potentially revive foreign investment in Mongolia.

The agreement will cover construction of two coal-to-gas plants with 95 percent of output going to China through pipelines, Erdenebulgan Oyun, Vice Minister for Mining said yesterday in an interview in Ulaanbaatar. Gas production is expected to begin in 2019, he said.

A preliminary contract with China Petrochemical Corp., known as Sinopec Group, may be signed in August during an expected visit by Chinese President Xi Jinping, Chuluunbat Ochirbat, Mongolia’s Vice Minister for Economic Development, said today in an interview in Tokyo. Final details including cost, size and who will mine the coal needed for the plants, are yet to be agreed, he said.

As I said the other day this has the potential to be a big deal for Mongolia and those investors like myself who are invested there. I hope the GOM does not screw it up.

Monday, July 21, 2014

China's coal to liquid/gas plans will be a rocket boost to the Mongolia economy

The Mongolian economy has certainly disappointed many investors over the last couple of years. In fact I know of several people that have packed up and left Mongolia as the hype they traveled there for did not match reality. This was mostly caused by poor decisions by the government in the runup to the presidential elections a couple of years ago. The ongoing discussions, and failure of the GOM and Rio to reach an agreement, regarding the Oyu Tolgoi underground expansion have also cast a wet blanket over investors perceptions. I think investors views are going to change in the next month or so. According to Khan Investment Management:

"China’s Sinopec has agreed to back Mongolia’s first coal gasification plant. President Xi Jinping will make an official visit to Mongolia from August 20th during which the USD 30B investment agreement is expected to be signed and other significant investment “sweeteners” are expected to be announced, including an extension to the MNT / RMB swap facility. The USD 30B coal gasification mega infrastructure project alone represents almost three times Mongolia’s 2013 GDP."

This one mega project would be worth almost three times Mongolia's entire yearly GDP! Why would China do this? China is oil and gas poor and its population is demanding more and more hydrocarbons as per capita income increases. The Chinese are strategic thinkers and do not make policy based on two year congressional election cycles, nor do they buy into currently fashionable memes like man made global warming. This article from Fortune magazine goes into depth on how important coal is to the Chinese economy:

Much of this coal, the government says, is not for burning. While they will supply a large share of China’s urban electricity, to a large degree the coal clusters are being built to convert coal into other forms of energy—synthetic natural gas, coal-based gasoline, chemicals, and fertilizer. That’s in addition to coalbed methane, a gas captured in association with coal deposits, which already powers the bus and taxi fleet in Taiyuan, the capital of Shanxi Province.

These coal-to-liquids and coal-to-gas projects form the keystone of China’s 21st century energy strategy.  Simply put, China has plenty of coal but little petroleum. (The company is trying to unlock its reserves of shale gas, but these are trapped in “tight,” or geologically challenging, formations, and drilling technology in the country is at least a decade behind the U.S.).

China is the world’s second-largest importer of oil, behind the U.S., buying more than 5 million barrels of oil a day. Much of that supply squeezes through the Strait of Malacca, the narrow passage between Malaysia and the Indonesian island of Sumatra that forms the gateway between the South China Sea and the Indian Ocean. Chinese strategists are keenly aware that a military attack, an act of terrorism, or an embargo that shut down the Malacca waterway would quickly squeeze the country’s energy supply. Thus, building vast chemical complexes to convert coal to liquid fuels is more than an economic move; it’s a geostrategic imperative.

You see the difference in the policy initiatives that China is pursuing versus the ridiculous policies the US is following. Who would you bet on over the next 5, 10, 20 years? Anyway this announcement if it occurs will represent huge news for Mongolia and should go a long way in changing investors perceptions on the Mongolian economy. I have been talking about Mongolia for several years and it appears that we may finally be getting to the point where the payoff is going to come. What happens when you shove $30 billion dollars into a $12 billion dollar economy? A stock and real estate boom I would guess. I am long various MSE stocks and Mongolia Growth Group, a real estate firm in Ulan Baatar.

All is not lost at the Oyu Tolgoi mine either. The open pit is producing just fine and "OT's open pit production is generating impressive results. Export of copper concentrate exceeded production this year with 94% of total output for 2014 already committed under contract, and some 84% of copper production from OT has now been contracted for 8 years, according to the first quarter report by Turquoise Hill Resources Ltd." In fact the mine is cash flow positive as of last March. All of this seems to be missed by western reporters. However this lack of accurate info is what leads to opportunity.

Saturday, July 19, 2014

Japan close to restarting nukes



Japan’s nuclear regulator vouched for the safety of two facilities in the country’s south, setting in motion the possible return of atomic power. A resumption of plants may boost uranium prices that slid after the 2011 disaster in Fukushima, said Cantor Fitzgerald LP, a New York-based broker.


The NRA’s commissioners approved the draft safety report at a meeting today and agreed to move to the next step of seeking public comment.

We are getting closer to Japanese restarts, which many have said will lead to a move higher in uranium prices. I have recently read reports that prices will take some time to recover even after the restarts. The fact of the matter is that the uranium price is not high enough to provide enough of a return on capital to motivate firms to build new mines. The longer the price stays low the bigger the price increase will be when prices do in fact turn around. That is the price of being a speculator, even if you right in your analysis you can never know the exact timing. I would rather own uranium at these prices than the S&P 500 Index over the next five years. US stocks are cruising for a big fall yet nuclear reactors keep getting built and uranium is way undervalued.

Sunday, July 13, 2014

PGM's to lead precious metals higher



It's the end of the beginning rather than the beginning of the end, because this is a systemic issue between the miners and companies. The companies are trying to recoup their costs because they are producing PGMs below the cost of production, whereas the miners are still not getting much money for doing a dangerous job. During that five-month strike the mining companies were losing 5,000–10,000 ounces (5,000–10,000 oz) per day of production. It certainly didn't help the supply side of the equation for PGMs.


My premise is that platinum and palladium—and this has been documented by Sprott Asset Management, Rick Rule and several others—are going to be in a long-term supply deficit because the primary producers in South Africa and Russia are not going to be able to ramp up production any time soon, whereas catalytic converters, exchange-traded funds and individual PGM purchases (physical metal, jewelry) continue to sharply move demand.

I believe that sums up the problem pretty well. The industry will have to downsize to enable a higher price so that the surviving mines can make a decent return. This process will not be without turmoil as the miners and the SA government will not take kindly to layoffs and shaft closings. Nevertheless economic reality cannot be suspended by government decree or by the wants of a group of workers. In the end expect PGM prices to continue to move higher.

Cub Energy delivers second quarter operations report

Cub Energy:

Average production for the second quarter was 1,868 barrels of oil equivalent per day ("boe/d") (including Cub's WI in KUB-Gas), up from 1,857 boe/d in the first quarter. This is a 25% increase over the second quarter of 2013 average production of 1,490 boe/d. The second quarter exit rate was 2,154 boe/d, representing a 10% increase from 1,952 boe/d exit rate in the first quarter. The exit rate increased from the contribution of the M-17 and RK-21 wells, both of which started production late in the second quarter 2014. Noteworthy is the fact that KUB-Gas has reached record production with average rates for July to date reaching 35 million cubic feet per day ("MMcf/d") (10.5 MMcf/d Cub WI). This is a 15% increase above 2013 production exit rates. The estimated average prices received in Ukraine during the quarter increased to $10.23/thousand cubic feet ("Mcf") and $79.86/barrel ("bbl").

The compnay continues to execute and increase production. It has had to suspend some operations in eastern Ukraine until the security situation returns to normal as some of their contractors refused to work as it was deemed to dangerous. Nevertheless operations and drilling continue in western Ukraine continue as planned. Cub Energy is the 2014 stock of the year.

Saturday, July 12, 2014

Polar vortex to return next week, global cooling anyone?

I am not going to react like the global warming nutjobs and infer that my thesis on global cooling is correct based on one weather event that may be just an anomaly. However if this type of event becomes more commonplace than my thesis becomes more plausable.

I am buying Greek Banks

Greece was the epicenter of the 2008 meltdown in Europe. The country suffered massively as its economy unwound from the bubble created by its entry into the Eurozone. Greece should never have been admitted to the EU as its economy is uncompetitive with the countries in northern Europe. Once it got in Greece began using the Euro and got the benefit of the low interest rates that being in the Euro provided. This created a huge real estate, public sector, and government debt bubble. Once the crisis came all the malinvestment and bad investments became apparent and the economy collapsed. There has been quite a bit of economic, political, and social upheaval over the last six years. You may remember the riots a couple of years ago and they continue sporadically today. Basically the Greek economy has been in a massive depression for the last six years with unemployment currently around 27% of the labor force. With this poor economic backdrop  it would appear that suggesting one buy Greek banks is insane. However as I am a contrarian I always look for the changes at the margin. The Greek economy will not contract indefinitely and the Greek government will eventually have to take steps to improve the climate for business. Greece has been there for two thousand years and is not going to disappear.

Lets focus on the evidence for a marginal change in the economy and government policy. The economy is actually fore casted to return to marginal growth in 2014.

At the same time, the macroeconomic environment is improving: GDP in 2013 fell by 3.9%, which was the result of a continuous deceleration in the rate of decline of GDP throughout the year, while the initial projection for GDP growth for 2013 was -4.2%. According to the latest estimates, in 2014 Greece will return to positive rates of growth after six years of deep recession. In the years to follow Greece is expected to experience robust growth rates that will gradually rise.

Confidence is being restored. The economic sentiment indicator has reached the highest level in the last five years. The spread of the Greek 10-year government bond compared with the German bund has fallen below 550 basis points, whereas at the peak of the crisis it surpassed 3,000 basis points. In January, the purchasing managers' index (PMI) exceeded the threshold of 50, indicating expansion for the first time since August 2009. Two of Greece's four systemic banks have just raised almost €3bn of fresh capital.

The gradual recovery of economic activity is further captured by several short-term indicators including retail sales and industrial production. On the external side, exports of goods and services in 2013 grew by 1.8%. Net tourist receipts rose by 18.1%, while international tourist arrivals exceeded the target of 17 million that was set for 2013.

 Another problem the Greek economy had was too much government ownership of industry and government influence in the economy. This is both inefficient and unproductive. As a condition of the various bailouts the country has received it has been privatizing various industries such as the postal service, the electric utilities, and the national lottery in a bid to reduce its crushing debt. The country is not out of the woods yet and I do not expect Greece to become a beacon of capitalist innovation. However for my thesis to work out it only needs to shift at the margin so that investor perceptions change enough for a revaluation of these banks.

Now lets shift to my thesis on why the Greek banks look like a decent speculation at this time. As in most western countries the big banks are hooked in politically and have the support of government. Most governments go out of their way to keep their banking system from collapsing. The same is true in Greece as the banks have received massive support. In addition the number of big banks in Greece has shrunk from ten to only four. These four banks control around 90% of the market currently. These banks are still plagued with non performing loans and have been shrinking their asset bases while becoming recapitalized. This also has led to the banks actually becoming stronger and in a good position to meet the Basel 3 Tier 1 ratios. My thesis for speculating in Greek banks is as follows.

  • Greek banks non performing loans begin to recover and reserves set aside to account for NPL's are released book value goes up
  • Greek banks will soon begin to move on foreclosures, something they have not been able to do due to the crisis book value goes up
  • With economy improving, loan origination should improve along with projected increase in mortgage origination's
  • Greek banks also have huge deferred tax allowances. If and when these are reversed the bank' s book value should go up
As book value goes up the banks value in the stock market should adjust upward. What could go wrong? The reforms in Greece could reverse or stall. The economy could perform worse than I expect. The political situation could deteriorate and scuttle all the plans. However these are remote in my view and if they were going to happen it would have happened in the last six years. The big money is made by stepping up and buying at a point of maximum pessimism by the public and when most have given up on an asset, company, or country. However this has to be in the context of some change at the margin that will act as a catalyst to a change in perception of the asset. Things are definitely improving in Greece and this should continue. I am not the only one who thinks so as various hedge funds are moving in also. I am looking at this being a three to five year speculation and I have bought an equal amount of each bank and created my own mini Greek Bank ETF. The banks I am buying are the following:

National Bank of Greece (NBG)
Piraeus Bank (BPIRY)
Alpha Bank (ALBKY)
Eurobank (EGFEY)

Saturday, July 5, 2014

Forget global warming, global cooling is the biggest contrarian bet of all time

I have always been a skeptic and in my investing and speculating I look for contrarian bets as I have found that the crowd is usually wrong. I am not going to get into the psychology of why this is so as many others have done a better job than I ever could. Charles Mackay's book " Extrordinary Popular Delusions" is an old yet good primer on crowd psychology and appears to be free on Kindle.

One of the biggest delusions in my view is the whole global warming scam. The view that man burning fossil fuels is irreversibly raising the global temperature and that this will lead to various catastrophes around the globe. Of course the promulgators of this ridiculous theory are government, politicians, and scientists that are funded by government. These are all people who stand to benefit by pushing this whether by accumulating wealth (Al Gore) or by suggesting that we need more government to address this issue. However a funny thing happened on the way to rising sea levels, melting ice caps, and polar bear die offs, the temprature has gotten cooler the last seventeen years. The article has a great quote:

Moreover, the now extended trend of no global warming is not turning around any time soon. That increasingly established trend is being produced by long term natural causes. Even rank amateurs among the general public can see that the sun is the dominant influence on the Earth’s temperatures. Even the most politicized scientists know that they cannot deny that solar activity such as sun spot cycles, and variations in solar magnetic fields or in the flux of cosmic rays, have contributed to major climate changes of the past, such as the Little Ice Age, particularly pronounced from roughly 1650 AD to 1850 AD, the Medieval Warm period from about 950 AD to 1250 AD, during which global temperatures were higher than today, and the early 20th century Warming Period from 1910 to 1940 AD.

That solar activity, particularly sunspot cycles, is starting to mimic the same patterns that were seen during the Little Ice Age, as I discussed in a previous column. As a result, outside politically correct Western circles, where science today has been Lysenkoized on this issue, there is a burgeoning debate about how long of a cooling trend will result.

Don Coxe, the famed investor and portfolio manager, has written about the sunspot cycle and its effect on agriculture for years. I thank Mr. Coxe for bringing this view to my attention through his writing and interviews. He is fond of saying that sunspot cycles and their investment implications are a page 20 item. This means it is buried in the back of the newspaper and no one is paying attention.

I recently read a book that coalesced my thoughts on this subject and what implications will come from lowered sunspot activity including economics, politics, and social changes. The book is called, "Twilight of Abundance: Why Life in the 21st Century Will Be Nasty, Brutish, and Short" by David Archibald. The description says it all;

Baby boomers enjoyed the most benign period in human history: fifty years of relative peace, cheap energy, plentiful grain supply, and a warming climate due to the highest solar activity for 8,000 years. The party is over—prepare for the twilight of abundance.

David Archibald reveals the grim future the world faces on its current trajectory: massive fuel shortages, the bloodiest warfare in human history, a global starvation crisis, and a rapidly cooling planet. Archibald combines pioneering science with keen economic knowledge to predict the global disasters that could destroy civilization as we know it—disasters that are waiting just around the corner.

But there’s good news, too: We can have a good future if we prepare for it. Advanced, civilized countries can have a permanently high standard of living if they choose to invest in the technologies that will get them there. Archibald, a climate scientist as well as an inventor and a financial specialist, explains which scientific breakthroughs can save civilization in the coming crisis—if we can cut through the special interest opposition to these innovations and allow free markets to flourish.

I do not necessarily agree with all of the predictions that are made in the book. Humans have shown that they are quite resilient and adaptive. Even during the mini ice ages that he discusses although there were famines the world went on regardless. Nevertheless, his view on some of the less developed countries futures especially the countries of the Middle East and North Africa are not good. Shorter growing seasons and lower crop yields will lead to less grain and that is not good for countries in the MENA that import well over 50%-90% of their grain. He predicts famine and massive die off in these countries, he seems to take glee in this, along with a militaristic China that will fill the void left by a declining United States.

How is this investable right now. Well I am long energy in a big way and I think that will continue to work out. I will continue to follow this meme and report as I get more ideas. Here is a website that has both real time and historical sunspot data. I plan on writing additional articles on what occurred the last time the earth experienced a low sunspot cycle.

Friday, July 4, 2014

US to remain largest crude and liquids producer


The U.S. will remain the world’s biggest oil producer this year after overtaking Saudi Arabia and Russia as extraction of energy from shale rock spurs the nation’s economic recovery, Bank of America Corp. said.

U.S. production of crude oil, along with liquids separated from natural gas, surpassed all other countries this year with daily output exceeding 11 million barrels in the first quarter, the bank said in a report today. The country became the world’s largest natural gas producer in 2010. The International Energy Agency said in June that the U.S. was the biggest producer of oil and natural gas liquids.

The article goes on say that without this bounty oil prices would have already soared. This is something I have been saying on this blog for a while. This historic wealth creation is still in its infancy in my view. I hope you are taking advantage of this opportunity.