September Idea of the Month: Producing Royalties and Unappreciated Upside to Oil and Gas

By Travis Johnson, Stock Gumshoe, September 17, 2010

I’ve had Mongolia on the brain this week, and would love to point you to some exciting investments in that (possibly) emerging commodity powerhouse — this has been a hot story of exploration and potential for at least five years, with periodic chatter about Canadian or Chinese companies who are making exploration inroads …

… but right now, it’s almost impossible to invest easily in Mongolia. I’ll just share the thought process I went through as Mongolian investments went through my head this week, and then get to the core of today’s note (and an entirely different investment idea).

Ivanhoe Mines (IVN) serves as a sort of Mongolia ETF at the moment (since they own 66% of the huge Oyu Tolgoi mine that is the single biggest project in Mongolia and more than half of SouthGobi Resources, which owns a large (if high cost) coal mine that’s selling coal to China), and I wouldn’t argue against speculating in those shares — or even in their sister company, Ivanhoe Energy (IVAN), though that one has just a small Mongolian exposure due to their purchase of PanAsian Petroleum last year (though they are drilling this winter, so there could be news). Everyone knows about Ivanhoe, though, and it’s pretty expensive (though you would have had to have a strong stomach about Mongolian politics to buy when it was cheap a year or two ago) … and you do take some execution risk as they build their massive Oyu Tolgoi mine. I’m kind of hoping that they have cost overruns (they’re estimating something in the neighborhood of $4 billion to get Oyu Tolgoi’s first mine built), or delays that cause the share price to dip, but if not I still might convince myself to buy in eventually — after all, Oyu Tolgoi will be one of the biggest mines in the world, so even though Ivanhoe Mines is expensive you can see a future, albeit a few years out and with some finger crossing, where they are producing stupendous cash flow for a very long time.

And of course, I’ve also written several times about Petro Matad (MATD in London, PRTDF on the pink sheets), the London-listed oil explorer that had an exciting oil discovery a month or two back that helped to drive the price higher (along with some steady push by Christian DeHaemer to make investors aware of the ...

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