Stalin’s Lost Oil — Mongolia

by Travis Johnson, Stock Gumshoe | July 22, 2010 10:45 am

I’ve gotten so many questions about this Mongolia[1] oil[2] teaser that’s circulating in a few different iterations that I’m republishing an older Friday File[3] article about the stock today — this originally appeared on the Irregulars site (for paying members) back in April, and it has not been udpated or revised in any way, though the stock is currently up hugely from that time and trades much more actively on the pink sheets than it did then, probably thanks almost entirely to this newsletter recommendation and to the company’s more recent results that have raised its profile. For an updated disclosure, I personally continue to have no interest in the stock and have never owned it.

The teaser ad that has been buoyant enough to float to the top of the tank today is a good one for a Friday File treatment — it’s a stock that trades in low volume and has a low market cap, and I always worry about writing about such stocks when sharing things with the broader Stock Gumshoe audience on the free site (not that I don’t do so sometimes) … but for you, the few, the proud, the Irregulars, well, there’s not too much risk that we’ll drive a stock crazy just by discussing it among ourselves here, even if it does sound kind of interesting for a nibble.

So what is it?

We’ve had some mixed experiences following the far-flung resource ideas of Christian DeHaemer[4], from the collapsing Range Resources (the Australian company, not the big US gas company) in Somalia[5] to the buoyant Dragon Oil[6] in Turkmenistan (one I found very intriguing but foolishly never bought) — which is to be expected, I suppose, when you’re prospecting in dangerous waters as he tries to do with his Crisis and Opportunity[7] newsletter, looking for great opportunities in war zones, political crises, or far-flung frontiers.

And today is no different — another little company, operating in a remote area in the developing world, with a geopolitical “crisis” story behind it. He calls this tease “Stalin’s Lost Oil,” and he helps ramp up our interest by spinning a little tale of Russian/Mongolian history …

“In the post World War II period, Mongolia was a puppet state of the Russians.

“The strange thing is that even though the Soviets knew that Mongolia contained vast amounts of mineral and oil wealth, they inexplicably ignored it.

“Stalin owned Mongolia. He executed a Prime Minister in Moscow for not following orders. He trained the next leader, Tshoibalsan, in his own image.

“Why, then, would Stalin order his Mongolian puppet to run purges of his own and destroy all Buddhist monasteries in the country… but spare a vast amount of oil?”

That oil is the target of several companies who’ve been surveying a lot of long-dormant exploration blocks in Mongolia for the last few years, thanks in part to the nearby Chinese demand … but there’s one company in particular that DeHaemer is teasing us about today:

“Untouched for 57 years, this $0.64 cent company is sitting on $49 billion worth of oil… And you stand to make 55 times your money from one of history’s greatest oddities.

“The country recently got ten bids on a new refinery. There are also Chinese companies successfully pumping oil out of North-West Mongolia.

“But there is one tiny company that most people have never heard of that is sitting on 638 million barrels of oil.

“My readers have already made 129% gains from this company in the past three months. And this massive profit run is just getting started…

“This company is one of — if not the — cheapest stock I’ve ever found. But the word is starting to leak on this company, and its stock is only going to go up.

“Right now the market value of this company is $80 million U.S…. But the value of its 638 million barrels, at $80 a barrel, equals $51 billion! …

“This Mongolian oil company I’m talking about would have to go up by 612.5 times to equal the value of its oil reserves….

“The upside on this is so large… I’m not going to even do the math. The number would seem unbelievable.

“And the company has two more large exploration blocks that it hasn’t even gotten serious about yet!

“At this point, you can probably see why it’s my favorite stock — one you can’t afford to pass up.

“Don’t kick yourself next month when it doubles again.”

So who is our little Mongolian friend?

Must be: Petro Matad (MATD in London, there is a pink sheets symbol for this one, PRTDF, but it’s really a “grey market” ticker that almost never trades — be careful).

Petro Matad is an interesting one, despite the difficulty in buying it (pretty much any US broker can buy a London stock for you, but it may cost more — if you do try to buy it on the pink sheets, make sure you do so in the morning, when both NY and London exchanges are open at the same time, so they can more easily buy the shares for you at a fair price (your broker would essentially buy them in London, then sell them to you and give them the pink sheets ticker in your account).

I first saw this one teased, also by DeHaemer, back in February as one of many Mongolian picks he made after traveling there — he called the several stocks he teased in that ad campaign a way to “raid China[8]’s pantry.”

So why interesting? Well, they do have an awful lot of potential oil available, and the Chinese have proven that they’re ready and willing to invest in or partner with firms that are extracting petro resources near their borders, so that’s nice. I don’t know if they’re a rock-solid bargain, but the stock doesn’t look expensive to me (though it did run up fast over those last few months, and could easily sell off). There are about 125 million shares outstanding, with a current share price of about 46 pence (so it has gone up a bit over the last few days — no longer 68 cents, it’s more like 71 or 72 cents now, depending on when you check the price and the exchange rate), that gives us a market cap of about $88 million. Definitely a tiny company.

And definitely a risky and prospect-oriented company — the company just listed in 2008 in London, and they’re still defining and exploring in Mongolia’s Block XX, which is their only real asset right now (they also have production sharing contracts signed last year for Blocks V and VI, though I don’t think they’re focusing as much on those yet). They’ve done seismic studies and have identified promising drill targets so far, there was a good article about them back in December over at ProActive Investors[9], and in general the UK investor sites have better coverage of this stock (being that it is, after all, primarily traded in London). The Proactive hub for this stock is here[10] (be careful, Proactive Investors works partially as an advertising platform for AIM companies, and Petro Matad is a sponsor — they have good info, but you might take some of the opinion with a grain of salt), there are some other interesting updates as well, including the appointment of a new exploration manager, but no news yet on this Spring’s drilling program, which would probably be the next catalyst to drive the shares higher or lower.

Petro Matad also has an interesting group of core investors — Citadel owns 10%, which is promising, and the local petroleum distribution company Petrovis, which bought up most of the formerly government-owned gas stations and distribution infrastructure, owns about a third of the company, so there’s definitely some infrastructure backbone that could be brought to bear to help develop and distribute the oil (particularly if more refinery capacity is added).

Given the huge territory they have available for exploration, this seems like an interesting speculation to me — the three blocks that they have access to together encompass more than 80,000 square kilometers, which is a huge holding but is also obviously way too much for them to explore on their own. They will need to raise a lot of money to pay for more intensive seismic studies and drilling, partner with soemone, or get bought out, I’d imagine. (Or, door number three, just take their sweet time in exploring and let the impatient investors sell off along the way). Still, if they’re going to raise more money and continue exploring then I’d wager there’s probably a fair amount riding on this Spring’s drill program — the drilling that they do this year needn’t necessarily determine their success or failure as a stock, but some nice results would make it easier for investors to buy into the bigger story of continuing to develop these underexplored Mongolian assets.

So there you have it — a happy Friday to you, and enjoy your weekend. If you choose to spend the weekend reading up on Petro Matad and studying their filings, by all means, let us know what you find.

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