“Putin’s Resource Roulette” — part II, nickel …

By Travis Johnson, Stock Gumshoe, April 21, 2008

Well, time to finish up writing about that looooong teaser ad from Andrew Mickey’s Breakaway Investor that I started over the weekend. Yesterday we spent some time looking at his LNG play, which has very tenuous connections to Russia, but apparently these next few are all about our friends in the former Soviet empire.

This one actually teases three more companies, all of which have some connection to Russia or to Vladimir Putin, everyone’s favorite bad boy these days. Personally, Russia scares the pants off of me — I tend to agree with investing guru Jim Rogers on this one, who has essentially said that Russia is a disaster waiting to happen. Insanely wealthy crime families and oligarch’s controlling everything, and very little to show for their massive natural resource wealth other than an enriched upper class and a strengthened central government …. kind of like Saudi Arabia, without the unifying forces of religion and royalty, though Putin’s status as a Sun King for life touches on both of those as well.

Rogers seems to think the country could balkanize further and collapse again into anarchy at any moment with dozens of little Chechnyas (at least, that’s how I read his comments), which is further than I would go, but I’m still skeptical of Russia. Which has, by the way, been a wildly wrong position in recent years, so if I were you I might consider the Gumshoe’s opinion a contrarian indicator here. I certainly wouldn’t actively bet against Russian stocks, but I haven’t put any money into them, either.

Now I hear you asking, “Since when did this become about you, Gumshoe?”

And you’re right — what we care about is discovering some new stock ideas … so let’s move on. Russia’s stock market dropped like a stone in January, along with so many others, but certainly has had a remarkable run over the past three years, so one could absolutely have made money there … and I’m sure many will do so in the future as well.

The first teaser is for a nickel company … here’s how Mickey breathlessly begins this section:

“Putin Protection Play #2: Double Your Money With This Micro-cap Miner Breaking Putin’s Metal Monopoly…”

Nickel is an area where Russia has very strong natural resources as well, and we’ve seen plenty of teasers that touch on this and on related mining issues — everything from Norilsk Nickel’s alleged attempt to corner the cobalt market, to a Philippine nickel miner that’s helping China keep supply growing. So far, those teasers have amounted to not much, but perhaps this time will be different (famous last words, I know).

I expect that these kind of teasers probably work pretty well because talking about a relatively obscure commodity like nickel makes us all believe that we’re in on something that regular investors don’t know about — it’s different from a gold miner, or a silver or copper miner, because you’re unlikely to overhear talk of nickel mines in your barbershop. But when a good copywriter weaves a nice commodity tale like this, with a commodity that’s not quoted all day long on CNBC, we feel like maybe we really are in on a bit of a secret. Nickel is a key metal, of course, not least for stainless steel, so it has a good story behind it, too.

Which isn’t to say the demand for nickel not real, or not important — but I think we all need to recognize the things that make stocks appealing to us personally, take a step back to understand those feelings, especially when those feelings are driven by the work of top-notch advertising copywriters, and think about the facts a bit. I expect this particular advertising piece is built as much around trying to tie together a few ideas into a Putin fear writeup as it is sharing the actual best ideas for Russian investing … that doesn’t mean the stocks won’t do well, though, so let’s continue.

Part of the story is the importance of stainless steel to healthcare, apparently — Mickey’s letter shares some charts that show correlation between the rising cost of nickel and the rising cost of healthcare, and he tries to draw the line that the important stainless steel items (scalpels, etc.) used by hospitals are in danger of facing massive inflation due to Putin’s emerging control over the nickel market.

Even if we accept that Russia is essentially renationalizing Norilsk Nickel, which appears to be true, the connection to healthcare seems a bit odd. The ad says that …

“The bottom line: As long as Putin has the power to drive up nickel prices and bleed the stainless steel market dry, then you’ll be paying for it out of your health insurance.”

Really? Given the relatively small portion of any hospital’s budget that must be taken up by small instruments and similar stainless steel products — which are not disposable, by the way — I’m very skeptical of that. I’ll buy that stainless steel demand is climbing and that prices are going to continue to go up significantly over time, but I won’t buy that this is any more than a blip on the overall cost of health care … or that a particularly outsize part of that blip is necessarily connected to nickel prices. That’s got to be a stretch.

But regardless, we’ve got a Russian nickel miner here that apparently is sitting on a big ‘ol pile of nickel, inside Russian borders, but for some reason is going to remain outside Putin’s control.

Here’s what Mr. Mickey shares with us on this one:

“During my travels, I discovered a small mining company, currently trading for only around $1, that’s quietly acquired a very valuable nickel reserve inside Russian borders. More valuable, in fact, than anyone could have dreamed.

“You see, the land they’re sitting on holds a potential $15 billion worth of nickel!

“When I visited their site, tucked away in no-man’s-land inside the Arctic Circle, I took a look over their data and was amazed at the profit potential this company has.

“Estimates show that there could be as much as 700,000 lbs of nickel in their reserve.

“Now, this company’s production costs for extracting that nickel are around $7 per pound.

“With nickel currently selling for around $13 per pound, that’s a $6 profit for every pound they pull out of the ground! “

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And as far as I can see, the only justification for this one continuing to build shareholders’ wealth without being taken over by Putin’s cronies is that it’s still “relatively obscure” and has remained under Putin’s radar. How Mickey knows that I have no idea.

But even without a copy of the special report, “”Double Your Money With This Micro-cap Monopoly Breaker,” the Thinkolator is warmed up and ready and can ponder on this one (thanks to the nudging of a few readers), and share with you that this company is …

Kola Mining (formerly Centrasia Mining), traded in Canada at KM or on the US pink sheets at KMNFF.

This is a company that has properties on the Kola peninsula — and this is a very significant deposit area for platinum group metals and nickel, apparently, so how it might be out of Putin’s view I have no idea. Norilsk Nickel certainly also has positions in the same general area, and indeed one of the company’s stated strengths is that it’s near a Norilsk smelter.

The 700,000 number must reference their historic Soviet estimates, which top out at 678,400 tons of nickel at a .3% cutoff. I don’t know the significance of that, but I’m sure there are some mining mavens among you who can share their opinion.

So this is a Canadian company, with their major resource in Russia and also a few other sites in the former Soviet republics.

As you might expect they’re running at a big deficit of a few million dollars a year (since they haven’t actually mined anything yet). They’re doing a fair amount of drilling, but I haven’t seen an updated site report yet, which appears to be due sometime soon and might have a newer assessment of reserves.

I think it was a little while ago that Mickey was in Russia, so this one should still fit the $1 a share teased amount, though it hasn’t been there in several months (shares have fallen significantly to the 30 cent range). That’s the only thing that makes me question this solution, though I’m still fairly certain that it’s correct since all the other clues match up pretty well.

Time’s running out to get this released to you, so I’ll stop here and put the fertilizer and infrastructure plays in my next writeup later this afternoon … hope you’re all starting out your Monday on a high note.