Friday File: Putin, Nickel and Oil

by Travis Johnson, Stock Gumshoe | October 9, 2015 4:30 pm

Solving a Crisis & Opportunity Teaser, plus some updates on a junior oil stock

Christian DeHaemer was an eager evangelist for “blood in the streets” investing many years ago, when we first started covering his hyped-up hints about earthshaking discoveries and — but it’s not the the Rothschild “buy when there’s blood in the streets” dictum, it’s quite a bit more literal. He has long talked of buying stocks in countries where investors think political risk is high or war is imminent, not just stocks that have metaphorically been bleeding.

And he seems to be getting back into that groove again with this latest pitch of his about Russia… so, will this turn out well, like some of his past “buying in war zones” or frontier markets ideas have? Let’s look into it a little bit.

Many of you probably weren’t aboard the good ship Gumshoe the last time we looked at a “frontier” or “war zone” idea from DeHaemer, but for a while it seemed he was chucking a new one at our heads every few weeks — partly because everyone was scouring the remotest parts of the world for mineral deposits and oil discoveries in those days before copper, cobalt and crude became dirty words for investors.

Some turned into fantastic trades for at least a brief while, like the Mongolian oil explorer Petro Matad (which went from 23 pence to 200 pence or so at one point… though their drilling eventually was a bust and they pretty quickly gave up all those gains) and the Kenya oil explorer Africa Oil (AOI.V, AOIFF — more on that one in a minute, since I own shares and there’s been some news). Some have also been terrible over time, like Tag Oil (TAO.TO, TAOIFF) or Lightbridge (LTBR) or New Zealand Energy (NZ.V, NZERF) — but there have been dozens of them, both good and bad, and they’re almost always heavily hyped and are often fun or interesting stories… so let’s see what’s on the docket from DeHaemer today.

The headline is “Putin: 2016” for this ad, and it essentially suggests that Russian stocks in general are so cheap and so beaten down that they’re a buy now… despite the Russian sanctions and Putin’s strongarm posing. But we do get into some specifics about which ones, too. From the ad:

“As Vladimir Putin slowly reveals his hand in Russia’s inevitable clash with the West…

A surprising investment opportunity has arisen, giving YOU the chance to bank ‘retire now’ riches.”

And, as pundits have been wont to do for a decade now, he tries to read Putin’s mind and figure out his “end game”…

“Ex-KGB or not, any single one of his accomplishments shows him to be smarter than your average hammer-fisted dictator.

“And while his continued foray into Eastern Ukraine appears to be nothing more than a thuggish power grab… it’s also a shrewd business move.

“Thing is, this was just the first of Putin’s plays… and he’s slowly been revealing his hand ever since.

“The main question is: What’s he up to next?


“What investors fail to realize is that Putin’s moves aren’t just saber-rattling for old-time’s sake — they’re a huge geopolitical power grab for entirely economic motives.

“However you feel about Putin ‘the man’ or Putin ‘the USSR thug,’ you have to recognize that Putin is making huge waves in the international markets.

“And whatever you do, listening to the American media propaganda is worse than useless.”

Dehaemer goes into the Russian push to “de-dollarize” the oil trade, including its deals in past years to sell oil direct to China in Yuan, and to set up banking and trading systems that circumvent the Euro and, more particularly, the US Dollar. That’s true, though the impact of low oil prices and sanctions continues to be felt in Russia — perhaps low oil prices more than sanctions, since the sanctions have not prevented them from dealing with much of the world (and Russian oil and gas companies are still dealing pretty freely with European energy firms who are able to circumvent the sanctions, even if most US energy partnerships in Russia are frozen).

Dehaemer then begins to hint that some Russian exports, not touched by sanctions, are key to making a profit. Here’s a bit from the ad:

“While Obama focuses on military distractions and ‘threatens’ sanctions, Sberbank, Russia’s largest bank, sold $1.4 billion worth of bonds — except they were issued in euros.

“And on the heels of a recent Russian announcement that it would double energy sales to China over the next 25 years, Putin said, ‘The unipolar model of the world is over. The global picture has completely changed.’

“There’s no longer a debate: Russia is selling more oil than anyone, it’s selling more of it in rubles, and it’s using Crimea as an entrée to sell more oil and gas to Europe and Asia.

“And while the U.S. dollar still accounts for over 80% of all trade, that number was over 85% just a few short years ago — and over 90% for decades…

“But this is great news for investors. It’s not the end of American dominance…

“But it is a ground-floor opportunity to triple your money or more in one little-known stock.

“What Obama won’t tell you is that Russia has something America needs very badly…”

Oooh, what could it be?

We have to sit through a bit more of the ad before we get any more clues — but he does also throw in a general “Russia is cheap” argument, in case you’d like the details on that:

“While investors saw huge gains over the past few years in the U.S. — to the point that the market is trading at all-time highs and well above the historic norm in terms of value…

“Russia has a price-to-earnings ratio of six. That’s right, six — a quarter of the value of U.S. stocks. Some major Russian oil companies now trade with a price-to-earnings ratio of two! That’s absurd.

“Russian companies would have to go up by over 1,000% to reach the value of their U.S.- and European-based peers.

“Russian stocks went up over 25,666% the last time this happened…”

That’s true, though the crisis then was much worse, I think, than the crisis in Russia today — he’s referring to the 1998 crash which was caused in part by the fall in oil prices brought on by the Asian Financial Crisis (Brent Crude went from about $25 at the 1996 peak to below $10 in the 1998 trough) and by a currency crisis (they revalued the Ruble dramatically in 1998 to rescue the domestic economy), but inflation spiked to 80%+, confidence collapsed with the economy and Russia needed an IMF bailout, and Yeltsin’s government, already shaky and weak, went into an accelerating decline that led to Putin’s first premiership in 1999 — and his longstanding push to broadcast an image of confidence and strength). Oil prices hit $30 in 2000, and that dramatically helped the recovery and helped lead to the Russian boom over the next eight years (until Russian stocks collapsed, along with the rest of the world, during the financial crisis… which, no coincidence, also drove oil prices down.

And he thinks the boom is just about to begin again:

“The massive moneymaking boom is starting to happen again.

“In fact, we’ve seen the very beginning of a recovery. The RSX was up 45% last year… the second-best performing market on earth!

“The Putin factor is setting off the next and final stage of the new Russian bull market.

“And if past is prelude, it will crush the gains of just about anything we’ve seen lately… including stocks like Apple, Chipotle, or Netflix…”

I don’t know where he gets that info, honestly. Except that he might be talking in Ruble terms, since the MICEX (Russian index) did indeed go up by about 45% between the lows of 2014 and the highs of very early in 2015. That was at least in part because the Ruble fell dramatically during that period, from being worth US 2.5 cents to about 1.5 cents in just a few months during the (nearly simultaneous) oil price crash and the intense back-and-forth of the Russian invasion of Ukraine (accompanied, as you might remember, by the “rush to safety” trade as the dollar surged against most currencies).

The RSX, which is the US-traded index ETF of Russian stocks, fell during that period. And, of course, more than 90% Gumshoe readers trade mostly in US dollars and spend their money mostly in US dollars, so that’s the number that matters most to us. The RSX has perked up very recently, up 10% in just the past week — but oil is also up 7% during that time, and the Ruble’s value versus the dollar also improved.

Then he mentions that metals have also been beaten down, including chromium, palladium, platinum and aluminum… and he implies that the threat of war is partly what’s driving down the price of iron ore (Russia has major reserves of iron). That’s a little silly — Russia does have big iron ore reserves, but their production is dwarfed by China, Brazil and Australia (and even India, frankly)… and the driving force in iron’s collapse has been falling Chinese demand coupled with oversupply from new mines built to supply China, none of which has much to do with Russia.

More from Dehaemer:

“Spot prices are at two-year lows. The threat of war has scared commodity traders away from not just iron but a handful of vital resources.

“This Element is Not on the Sanctions List

“But there is one company whose main product escaped the sanctions list — because it is essential to every major economy on earth.

“Obama and his cronies at GM and in Silicon Valley need this mineral desperately… As does German Chancellor Angela Merkel and her friends at Daimler AG.

“As do the Chinese — and they are running out.

“The Wall Street Journal recently wrote, ‘China’s stockpile is running short: Stocks in five of the country’s main ports have halved within one year.’

“Cutting-edge scientists at Google, Space X, and Boeing need it for super alloys for airplanes, rockets, and satellites.

“In fact, this element is one of the few that is bucking the commodity downdraft and is expecting demand growth of up to 40%.

“And Russia has the most and is the lowest-cost producer.

“But time is running out to buy this company for pennies on the dollar.

“When the blood is mopped up from the streets of Ukraine and peace breaks out, it will be too late. If that seems distasteful, so be it…”

So what is he talking about there?

This, friends, is a veiled reference to nickel — and if you’re talking nickel and Russia, the only real name you have to think about is Norilsk Nickel, so that is almost certainly the “pennies on the dollar” opportunity that Dehaemer is hinting at here.

And he might have something — assuming that political and currency risk reaches some plateau of normalcy. Nickel prices have been on a downward slide for years, not all that different, broadly speaking, from the decline in iron ore or copper prices, but there has been chatter about a recovery in nickel. Last year nickel did quite well for a while… but that was partly because people know Norilsk Nickel is one of the world’s largest producers, and they feared that an embargo on Russian nickel would drive prices up for everyone else. There were also (and continue to be) supply fears, because Indonesia, in a bid to move up the value chain and do more refining instead of exporting raw materials, banned the export of nickel ore about 18 month ago — since refiners and smelters aren’t built overnight, that means less nickel is available to the world.

Russia is still exporting nickel. And the nickel price is still falling, despite the drop in production from Indonesia and the presumed political risk from Norilsk. So presumably this is, to a large extent, a under-demand problem rather than a over-supply problem keeping prices low. Nickel is used in lots of fancy alloys and high tech gear, but the primary use is in the making of stainless steel. So, big surprise, China’s big slowdown in steel production leads to lower nickel prices, not just lower iron ore prices.

Which means, in the end, that yes, Norilsk Nickel is pretty cheap based on a lot of different metrics… but it’s still a bet on nickel, which is still faltering, and a bet on palladium and platinum, which are also down but are, at least, much more rare (and palladium is actually staging a little rally in recent weeks).

Here’s what Norilsk said about their key metals in their latest earnings report:

“Nickel outlook – deficit pushed back to 2016, medium-term positive

“We remain cautiously optimistic on nickel in the near term as we see little further downside for nickel price as over 60% of the global industry is making cash losses. We believe that nickel industry cash cost downward adjustment due to the USD appreciation and weakened oil price is by and large over. We expect further reduction of NPI production in China as the ore supplies from the Philippines are not able to substitute the nickel units lost as result of the Indonesian ban, while nickel ore inventory at Chinese ports continue to deplete and the tightening environmental regulations force further NPI capacity closures. In the world ex China, we see an increasing pressure on high cost producers to cut production. We also believe that the nickel demand from the Chinese stainless industry will remain robust, with nickel demand in other industries is expected to grow marginally above 2014 levels. We expect the nickel market to be fairly balanced in 2015 and to develop a sizeable deficit (of 60 kt) in 2016. In a short term we are looking for a continued reduction of LME inventories and announcements of production cuts in the world ex China.”

NPI is what’s referred to as “Nickel Pig Iron,” a cheaper substitute for pure nickel that uses nickel-heavy iron ore, and which was adopted pretty widely in China when nickel prices were high… but it also requires certain types of iron ore that are apparently more common in the tropics, including those ores from Indonesia and the Philippines. With Nickel now down to new lows (near $10,000/metric ton) in London trading, from over $15,000 last year, perhaps the cheap alternative in China is not as compelling — or maybe they just can’t get the NPI ore. Chinese stainless steel production is, apparently, still rising.

And on Palladium…

“Palladium outlook – positive, deficit to persist

“We consider the current weakness in palladium price as temporary. The metal consumption by auto industry is expected to grow at a moderate rate of around 1-2% in 2015, with the recent inflows into ETFs implying also a recovery in the investment demand. Although South African producers were successful to restore quickly their production to pre-strike levels in 2015 we do not expect any significant production growth in 2016 and beyond as the weak price environment is curbing the capital investments and incentivizes shutdowns of marginal cost mines. The cost pressure in South Africa is rising with a number of high cost mines earmarked for divestiture or major cost optimization. In addition to the electricity issues and worsening mining conditions, we see additional risk to the supply coming from the forthcoming negotiations with labour unions as the current collective bargaining agreement is expiring in June 2016. We expect palladium to remain in a deficit in 2015, albeit at a smaller level than the record high 2014, with the wider deficit persisting into 2016.”

Nickel is about 40% of Norilsk’s revenue, copper and palladium are each about 25%. And almost all of that comes from their far northern projects in Russia, mostly on the Taymyr peninsula in north-central Siberia which hosts probably the world’s largest nickel and palladium deposit, but also on the Kola peninsula next to the Norwegian border (and a little bit in Finland and Botswana).

Here’s the last bit from Christian Dehaemer:

“And I’ve just written a report on exactly how you can buy into this company that produces a ‘must-have’ mineral.

“I call the report, ‘Make Putin Pay: Retire-Now Riches from the Russian Crisis.’

“In it, I discuss the importance of striking while the iron is hot in Russia — and why buying these investments now is like buying the U.S. market back in 2009 when some stocks sold for less than the cash they had in the bank.”

So yes, although we can’t be absolutely certain of the match (there weren’t many specific clues), I’m quite sure he’s hinting that we should buy shares of Norilsk Nickel. Which is relatively easy to do, if you’re so inclined — Norilsk is a Russian company, but their primary listing is on the London Stock Exchange at MNOD and it’s traded in US dollars. There’s also a ticker symbol for a Norilsk ADR on US exchanges, NILSY, though it’s a bit less liquid — the prices at those two listings should be almost identical, at least at times when both London and NY are open for trading.

Norilsk is actually doing pretty well, for a commodity producer — they have a decent balance sheet, they have been able to keep sales and profits up by increasing production, they’ve scaled back on the overseas expansion projects that they jumped on a few years ago, and… probably most importantly… they get to sell their nickel and other metal exports in US dollars, but incur their costs (like paying workers) in Rubles. 90% or so of their production is exported, and almost all of it is still priced in US$, so even though nickel prices have fallen 30% they get a margin boost because input costs are dropping more than that — because oil is falling, and the ruble is dropping to bring down their labor and operating costs (down about 40% in US$ terms in a year). Even the balance sheet moves they’ve made have provided some marginal help, issuing bonds in Euros and making most of their sales in US$, though overall the debt picture has gotten slightly worse because their borrowing costs are up a bit (they’re still in better shape than many big miners, if you ignore any political risk considerations). Their total cost of sales from their Russian mines in the first half of this year was down 34% from the same time last year — some of that was because of active cost-cutting, but most of it was because of the cheaper Ruble.

So it’s not all sunny and bright, it’s still a miner and it’s still facing a world where the prices of the metals they produce have fallen pretty consistently for years, but it’s brighter than things are at many big commodity producers. And Norilsk is indeed big — to give you some idea of the scale, their market cap is about $25 billion and the enterprise value, after about $6 billion in debt, is $31 billion, so they’re not quite in the same league as Vale (which has crazy amounts of debt) or Rio Tinto (RIO) or BHP Billiton (BHP), but they’re atop that next tier of giant miners that includes Freeport McMoran (FCX), the big US gold miners Goldcorp and Barrick, and Anglo American.

Norilsk earned $9.50 per share in the first half of 2015 — prices have continued to fall and the Ruble has recovered slightly, so that number might be a little worse for the second half — if we assume that it maybe drops to $6 (that’s a wild guess — the company has been cautious and talked about cutting costs in recent news reports[1]), then you’re dealing with something like $15 for current-year earnings, and with whatever projections you can muster about the future for nickel and palladium. Palladium is getting a little speculative boost right now partly because of the Volkswagen emissions problem, presumably because there’s an expectation that the emissions fix might have something to do with using more catalyst in the catalytic converters or selling fewer diesel engines (more likely to use platinum) and more gasoline engines (more likely to use palladium), but really palladium and platinum should just be supply and demand stories — the supply comes mostly from South Africa and Russia, and Russia is cheaper, and the demand comes primarily from increasing volumes of cars sold.

That $15 is for the regular shares in Russia, to be clear — it takes 10 US or London shares to make a Russian share, so that would be $1.50 per share in potential earnings for 2015, which would mean that Norilsk Nickely is trading at a current-year PE of about 10. In actuality, their second-half numbers for last year were below that $6 guess (more like $3), so it could certainly be that we’ll see something lower — though I don’t know how that year might have been impacted by the Ukraine war. Norilsk also pays a dividend, with currently policy still being that they will pay out half of their profit — so in 2014 the dividend for US shareholders would have been about $2 a share. Likely to be lower this year, but probably still substantial — the dividend for the first half is about 45 cents per US/London share, though it has already gone ex-dividend so folks buying today would not receive that payout.

Sound like the kind of thing you’d like to buy? It’s certainly a bet on Russia, and on nickel and palladium… but it’s also quite possible that if the Ruble improves and/or the world starts trading nickel using Rubles or Yuan instead of US$, that could actually be quite bad for Norilsk Nickel’s margins… at least in the near term. The weak Ruble is realy what’s backstopping their performance of late — if the Ruble stays low and nickel demand increases, assuming that they’re not locked out of trading to China for some reason, then Norilsk could certainly see a boost over the coming years. Apparently Chinese stainless steel production is still pretty high and growing, despite the general softness in steel/iron demand in China more broadly, so that’s also relatively good.

The short answer? If the Ruble stays low relative to the US$ and the Euro, and people keep buying lots of cars around the world, and China keeps making more stainless steel each year, then Norilsk is looking pretty good at roughly 10X earnings with a meaningful dividend. As long as the oligarchs who control Norilsk don’t piss in Vladimir Putin’s coffee one of these mornings and get themselves on the naughty list.

Altius Minerals (ALS.TO, ATUSF), by the way, is also, though to a pretty limited extent now, a nickel play — their first big royalty, bought years ago, is on Vale’s Voisey’s Bay nickel mine, so since Altius is a large personal holding I’ll be fairly content to let that be my nickel exposure for the time being… though it’s far from being a pure play, and there’s actually some risk that Voisey’s Bay might reorganize to cut the effective royalty a bit, or that they’ll slow down expansion plans given low global nickel prices. Just thought I’d mention it, since Altius has come up a few times in recent weeks with another wave of Dan Ferris hype from Stansberry about the stock[2]. Royal Gold (RGLD), by the way, also has a substantial royalty on Voisey’s Bay that came from their acquisition of International Royalty about five years ago, I think it’s still their biggest non-gold royalty.

And I said I’d get back to Africa Oil (AOI.TO, AOIFF) — remember them? That’s one we followed after a couple newsletters teased late in 2011 and early in 2012, including Christian Dehaemer (who pitched it as “stealing King Saud’s oil” because the expectation was that Somalia and Kenya would have oil reserves similar to the Saudi peninsula, across the Red Sea). Back then they were drilling their first well in Kenya — a well that hit paydirt and helped them establish the potential of many of their drilling targets. The stock soared from $1.50 or so to well over $10 for a while before calming back down due to more ordinary drilling results (some good, some bad), some political risk, and the fear that delays on a pipeline from Uganda through Kenya would mean that production might be years and years and years away… and then, of course, the bottom fell out of the oil market starting a year ago and no one wanted to invest in speculative explorers in Africa. It’s back near $1.50 again.

I sold half of my personal position in chunks in the $5-10 range over the years to take profits, but let the rest ride and determined to more or less ignore it as we wait for whatever development occurs — there was certainly a big oil reservoir in their blocks, they were not at risk of disappearing anytime soon since they had enough cash to cover their exploration costs, they were working with a couple strong partners on many of their blocks, and they had already proven at least one commercially viable project.

And I’m still essentially ignoring the stock, though I check in every now and then to see what the progress is — so it was nice to see a loooooong update from Marin Katusa, who was an early backer of Africa Oil when he was with the Casey folks, write a long update on the stock (and admit, as many newsletter editors won’t, that he sold the stock into the runup to their first drilling results and therefore missed almost all of the stock’s advance). He decided to buy back into the stock just in the last few weeks, which caught my attention. You can check out Katusa’s update on his website here[3], it’s free — this is just a tiny excerpt for you:

“This is a high risk speculation, and should not be speculated on with money you cannot afford to lose. The company does not have production nor does it pay a dividend. AOI, fortunately, has no debt either. My fund’s cost base in AOI is around the C$1.55 range.

“The main thing to remember is that there are very few parcels of untracked land left in the world with the size and potential of what AOI has accumulated. Underexplored areas mean huge potential for oil companies; high risk, high reward is the motto in Africa. While African production as a whole has fallen off due to capacity and infrastructure issues, which does not mean investment in the area is unwarranted. In 2013 alone, six of the top 10 global discoveries by size were made on the African continent.”

He essentially reiterates a lot of the things Africa Oil shareholders already know — that they have a world-class discovery in the Lokichar Basin (that’s where they drilled the first well in January of 2012), but that the infrastructure in Kenya is not at all ready for any kind of production… there’s no pipeline, no real refinery, etc.

But, on the optimistic side, there’s a huge discovery and a pipeline route laid out from Uganda to the Kenya coast, passing through or near the Lokichar area… and if the Kenyan government works at full speed it’s possible that the pipeline will actually be operating within the next decade. They probably won’t, but there’s still that potential — particularly if the government brings in some major companies to develop (and probably own and operate, at least in part) the infrastructure. So Katusa seems to believe that it’s worthy of speculation again because Africa Oil is not in crisis, they can afford to wait for better oil prices or some improvement in Kenyan infrastructure, and as (if) that comes they will be a very attractive takeover target for one of the big oil companies. I’d be a little surprised if it weren’t a Chinese or Indian oil company, since they arguably have the most strategic interest in developing East African oil, but it could be anyone.

Africa Oil will continue to depend on stronger oil prices at some point in the future driving interest in new field development again, but that’s true of any junior oil company — and they, at least, already have that big discovery. Katusa now says he thinks there’s a good chance they could get bought out by a major for C$4-5, which would be more than a double (it has bumped back up to about C$2 recently), or that they could partner more of their assets to someone to push development forward once they’ve released their next detailed report about their resources in the next six months or so.

They raised a lot of money this year, so they are flush with cash to do more drilling, and they’re not under any pressure — but it would be a shame to see them sell out for $4 after raising almost 200 million dollars just this year at an average of $2.50 or so. We’ll see — as junior oils go this one is a lot less worrisome than most, given their established discoveries and their cash balance and strong shareholders (like Lukas Lundin)… but it’s also not tiny anymore, even at their depressed share price this is still a $700 million company.

Neither Norilsk nor Africa Oil are the kinds of stocks that investors are excited about these days, other than little pockets of excitement among folks who think that we’re seeing a turn in commodities prices — whether that means you’re interested in exploring them further, or you think they’re ridiculous, probably says a lot more about what your big picture view is of the commodities markets for the next year or two than it does about the relative merit of these corporations… and, frankly, that’s how it should be. They’re commodity stocks, so if the stuff they produce is dropping in price they’re a lot less interesting. If you’re not exposed to commodities and are open to diversifying your portfolio to get some exposure to nickel or oil, however, these are the kinds of stocks that could conceivably generate very strong returns in the next commodity bull cycle without being completely speculative junk penny stocks.

Assuming, that is, that we do get that next commodity bull market someday. I would guess that we probably will, but I’m not at all certain even on if, let alone when — if I were betting on commodities taking off again in a big surge, I’d keep my bets small and stay diversified.

That’s it for me. Enjoy your weekend!

  1. cautious and talked about cutting costs in recent news reports:
  2. another wave of Dan Ferris hype from Stansberry about the stock:
  3. Katusa’s update on his website here:

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