Wednesday, July 30, 2014

China a trading opporutunity

Many people have gotten on the China is going to implode due to its property bust bandwagon. We have seen the articles regarding the cites built that no one lives in and other examples of Chinese malinvestment. I do not doubt any of the stories and I suspect that in the end China will have to deal with this issue. However the Chinese stock market has been in a bear market for going on six years. I saw a chart over at Growth Stock Wire that got my interest. It shows the Shanghai Stock Exchange Composite  index. The chart action has been compressing into a wedge and has recently broken out of a symmetrical triangle to the upside. This is noteworthy as breaks from a triangle typically lead to a substantial move in the direction of the break, which in this case is to the upside. I am going to play this as a trade with a tight stop loss. I am using the FXI etf (Ishares Chian Large Cap) for this trade. If everything in China is so bad why is the market there moving up? No telling for sure but a Chinese version of QE could be the reason. I do not know when the music stops in China anymore than I know when it will stop in the US. Nevertheless money printing leads to higher stock prices and bubbles. I don't make the rules and I don't like the Central planning by these governments but somebody has to pick up these $100 bills.

Monday, July 28, 2014

Reloading with Mart Resources

I owned Mart Resources (MMT.V) a little over two years ago and the stock was a little more than a double for me. I sold the stock for two reasons; the first being that the company has its operations in Nigeria. At the time and since that time the company has experienced pipeline thefts of its oil of up to 20% per month. This was very disconcerting and I believed it would weigh on the stock which it did. The other reason is that the same pipeline was capacity constrained. The company could not fully develop its field due to the lack of pipeline takeaway capacity. The company made a commitment to build a new pipeline that would tie into an existing Shell pipeline and lead to substantially more capacity and massively cut down on pipeline thefts. However these construction projects take time and my experience is that my time and capital would be better served in other situations that were less opaque and that had lower risk. As Keynes said, when my information changes my view changes. The company completed the pipeline and is ready for a new chapter in its history so it is time for me to take another look. The new pipeline is essentially completed and is in the process of being tied in and tested.

The other catalyst to my mind is that the company has typically drilled vertical wells that flowed in the 2000 boe per day range. It has recently completed a horizontal sidetrack of an existing vertical well that flow tested at approximately 4800 boe per day.  So the speculative play here is continued horizontal drilling leading to material increases in oil production that can then be transported via Shells pipeline via Marts new 50km pipeline. This leads to substantially higher cashflow and a revaluation of the stock higher. At least that is how it is supposed  to work. I think this is a decent speculation and the potential for double is here if everything falls into place.

Sunday, July 27, 2014

Mongolia still on track regardless of recent bunps in road

UB Post:

Mongolia sits on vast raw material resources; each resident is theoretically a millionaire. So why can we still see thousands of gers and small houses built hurriedly, clumped together on the slopes rising above the capital, where about 60 percent of the 1.2 million inhabitants of Ulaanbaatar live? There is neither tap water, nor toilets, nor tarred streets. In the settlements, there are only a few proper roads and mostly dirt roads instead. The fact that the country is not rich yet, is an issue left up to the government and some others external factors. But it could happen fast, with the development of its plentiful natural resources in the last four years, the country with its 16 percent growth in 2013 is at a turning point in a strong economic expansion which has resulted in profound economic and social transformations.  If the GDP of Mongolia still remained modest in 2013 (11.1 billion USD for a nation with less than three million inhabitants), the dynamics of growth above the world average should allow it to continue its economic catch-up in the coming years. Mongolian resources are valuable and numerous, which lead many western countries to take part in the Mongolian gold rush and consider the country as a new, but not mythical, Eldorado.

Because of the natural resources (estimated at a value of more than 1 trillion USD) still largely untapped, the country could quickly become a major energy player. The mining sector currently accounts for 20 percent of GDP and is expected to represent 50 percent of GDP in 2016 according to the World Bank.

Mongolia has fallen out of favor with many international investors because of the poor decisions that were made by the government prior to the last elections in 2012. Nevertheless, the economy continues to grow and the government has realised its mistakes and has gone a long way, via positive legislation, in repairing its reputation. Now they are learning that actions have consequences and that once trust is lost it is hard to recover. However because the prize is so large capital will eventually return and these resources will be developed. The article says that there are resources in Mongolia worth $1 trillion dollars. That is just based on the value of what is known. The country is still relatively unexplored with modern techniques. I expect the value to go up massively.

Another issue is that the poor decisions were coupled with a downturn in commodity prices which also dried up capital spending in Mongolia. That will change also as commodities go in cycles with low prices creating more demand and less supply which gives birth to the new bull cycle. I have been a big advocate of investing in Mongolia and I will continue to put my money there as I have the patience and vision to see what is, in my view inevitable, the development of billions of dollars in mineral wealth along with associated infrastructure investment to extract and transport that wealth. Is Mongolia on your investment radar screen?

Tag Oil and Gas begins drilling second East Coast well

This is the second well of a three well series that will go a long way in determining if Tag Oil has a Bakken like shale play on its hands.

TAG Oil has spudded its Waitangi Valley-1 exploration well in the East Coast basin.
The well, spudded on Wednesday, is being drilled to a depth of about 3,600 metres and is targeting the Waipawa Black Shale and Whangai formations.

The firm says seismic data indicates the well will intersect stacked, repeated sections of the naturally fractured, over-pressured oil-and-gas-rich source rocks.  TAG also expects to encounter conventional oil and gas bearing sands in the Miocene section at depths between 250 metres and 2,000 metres.

“Waitangi Valley-1 will provide TAG with the opportunity to acquire additional sub-surface data on this major exploration prospect, as well as potentially establish the first unconventional production in the East Coast basin,” chief operating officer Drew Cadenhead says.  “The company has previously confirmed that these source rocks are responsible for the oil seeping to the surface just five kilometres from the Waitangi Valley-1 location, so this well may give us the chance to produce oil directly from the source.”  Cadenhead says Waitangi Valley-1 is the first modern well in area, so the firm is unsure how long the well will take to drill.  "We're shooting for 45 days, but have contingency built in."

The firm says the Waipawa Black Shale and Whangai Formations are the source of the high-quality light oil found in nearby oil seeps, core samples and shallow drilling in the Waitangi area.  “These source rocks are comparable in both total organic carbon content and maturity levels to successful unconventional oil and gas plays such as the Bakken Shale of North America's Williston Basin and the Eagle Ford shale in South Texas,” TAG says.
So there is definitely an oil kitchen of shale down there but the question is can it yield economic quantities of oil. The second question is will the New Zealand government allow hydraulic fracing if it is needed to unlock the oil. This is why it is called speculating and not investing. This drilling that is occurring now is the reason I own the stock. If these next two wells indicate the potential for an economic shale play than this stock will soar.

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.