Friday, September 2, 2016

Cyprus and optionality

I have talked in the past about the concept of optionality in some of my investments. Optionality is long term undeveloped potential in a company. The mineral royalty companies are a good example. These companies will give a mining company upfront money and take a royalty on the production of the mine the mining company builds and puts into production.

The royalty company will in many cases also ask to have the same royalty for any land surrounding the mine that may get developed in the future for no additional cost. If the undeveloped land holds any minerals and is eventually put into production the royalty company would benefit. This is an example of optionality.

When Cyprus crashed after its recent banking crisis I noticed that famed turnaround expert Wilbur Ross took a big position in Bank of Cyprus. He brought in new management and the bank has slowly but surely begun turning around. I expect that to continue and for the stock to re rate higher once the shares begin trading in London.

However, one thing I have not talked about is the optionality that exists in Cyprus. Massive natural gas reserves have been found offshore Cyprus. Because Cyprus is an island and no effective transportation exists for this gas it has not been developed.

This could change soon as Cyprus has signed an agreement to deliver natural gas to energy starved Egypt via undersea pipeline.

If this deal in fact proceeds and Cyprus develops its energy industry it will be a huge boost to the island and to the fortunes of the major bank on the island which is my holding Bank of Cyprus.

Now it will be a few years before anything is developed or gas flows but just so people know Italian energy giant ENI is developing a gas field only 90 km from one of the Cypriot gas finds. So it would not be a stretch to run infrastructure to Cyprus's fields. They do it in the Gulf of Mexico all the time.

The emergence of a Cypriot energy export industry is the optionality that exists on Cyprus and Bank of Cyprus.

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