Albania's Fertile Grounds for Oil Opportunities

Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors writes:

Texas is oil country. The state I now call home leads the nation in oil production and would be one of the top oil-producing nations if it were its own country. But that doesn’t stop us from exploring other promising oil opportunities further afield. Last week I traveled to Albania to check out a drill site of Petromanas Energy, a Calgary-based international oil and gas company focused on exploration and production throughout Europe and Australia.

We own the junior stock in our Global Resources Fund (PSPFX) and Emerging Europe Fund (EUROX).

To many, Albania is an unknown country yet it has a rich and interesting history. It declared independence from the Ottoman Empire in 1912, was conquered by Italy in 1939 and occupied by Germany in 1943. Albania allied itself with the USSR until 1960 and then with China until 1978.  Democratic development has progressed since the country’s first multiparty elections in 1991. The 2009 general elections resulted in the country’s first coalition government and the 2013 election saw a peaceful transition of power. A parliamentary democracy, the country has steadily been welcoming foreign direct investment (FDI) since it shifted away from communism in the early 90s. The recent FDI into the country comes on the back of the extensive development of its rich petroleum resources.

Third Time’s a Charm

This was my third trip to Albania. I last visited the country in 2004 when we were seed investors in another oil play there, Bankers Petroleum. Today Bankers’ Albanian discovery is the largest onshore oilfield in all of Europe. The company is now close to 40 percent of Albania’s FDI and is reinvesting all cash flow back into the country, about $300 million per year. Bankers has done an amazing job cleaning up the environmental disaster left behind by previous operators of the assets which Bankers is developing. Today the fields are green and sheep roam freely. Old and dirty early rigs have been replaced with new safer, cleaner technology.
 So much has changed since my last visit.  The country is more prosperous and more verdant. Capital city Tirana’s infrastructure and roads have improved by a quantum leap in the past 10 years. Every morning I ran in Rinia Park, the large central public park, with Marin Katusa of Casey Research. We were impressed with the hundreds of locals jogging at 7 a.m.

Meeting A Man of Many Colors

On this visit I was honored to meet the Prime Minister of the country since 2013, Edi Rama, who also served as the mayor of Tirana from 2000 to 2011. He is a fascinating leader. Rama is a native of Tirana and, in addition to becoming involved with the first democratic movements in Albania, he is an artist and a former basketball player for the Albanian national team. He is, to a large degree, responsible for the vibrancy I saw in Tirana, his Clean and Green project resulting in nearly 100,000 square meters of green land and parks, and his creative efforts to use art and color helping to curb corruption and revive civic pride and responsibility. You’d enjoy watching him explain this dramatic transformation in his TED talk Take Back Your City with Paint. Rama has helped form a stable political environment in Albania, just one reason Petromanas Energy has invested in drill sites here.

Fertile Ground for Oil and Gas

The company’s assets in Albania cover more than 1.1 million gross acres.  In the company’s presentation during our visit, management explained why Albania’s landscape is also key. Petromanas is exploring for large, deep, fractured carbonate structures of Eocene-Cretaceous age, similar to those in southern Italy which are the sites of several prolific oil fields.

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Located across the country’s Berati thrust belt, you can see the multiple wells in the map below: Papri, Shirag and Molisht. Petromanas is looking for a light oil deposit in these wells. Super major Royal Dutch Shell has invested $200 million to partner in these plays.

While at Petromanas properties, our group saw a few of these wells, but most notable was the visit to the Molisht-1 well that is currently being drilled. As Keith Schaefer points out in his recent Oil and Gas Investments Bulletin on the Albania trip, the Molisht-1 well has the potential to be an 8,000-10,000 barrels of oil production per day well, an absolute company maker. And according to Petromanas’ presentation, the Molisht-1 well could potentially hit earlier than expected, which would be a positive surprise for the company.

What do the founder of Lionsgate Entertainment and a former NATO Commander have in common?

Petromanas Energy is an example of a company that is currently in a strong area of the market and exhibits robust fundamentals. Its management, research and location are only a few reasons I see great potential for this organization. Escorting us on the research trip were two of the company’s directors, my good friend the legendary Canadian venture capitalist and philanthropist extraordinaire Frank Giustra, and General Wesley Clark, who as the former Supreme Allied Commander Europe, led the charge to stop Serbian forces from committing genocide in Kosovo. I’ve also had the privilege of working alongside these distinguished gentlemen with the International Crisis Group, a non-profit, non-governmental organization committed to preventing and resolving deadly conflict around the world.

The Path from War to Peace and Prosperity in 20 Years

Albanians and their Balkan neighbors have seen more than their share of conflict. The trigger for World War I was the assassination in Sarajevo of Archduke Ferdinand, heir to the throne of Austria-Hungary, by a Yugoslav nationalist in 1914. The Yugoslav Wars fought from 1991 to 1999 on the territory of former Yugoslavia have been described as Europe’s deadliest conflict since World War II and the first since the Great War to be formally judged genocidal. It is estimated at least 130,000 lost their lives.  In the last of these ethnic conflicts, the Kosovo War, a million ethnic Albanians fled or were forcefully driven from Kosovo by Yugoslav troops. Under the command of General Clark, NATO forces bombed Serbian forces to prevent the continued displacement and persecution of the Albanian people.

Prime Minister Rama told us that he is profoundly grateful to the American people, President Clinton, and NATO for saving the lives of at least 900,000 Albanians and ushering in stability and positioning the region for progress. It was a case study in the successful use of force to bring peace to a region and a consequent drive for prosperity for its people. Our collective investment in this humanitarian success story is paying dividends for a new generation of Albanians. The country’s transition to a free market economy has been difficult and there are many economic challenges on the road ahead but the government believes in creating a path favorable for business. Companies such as Bankers Petroleum and Petromanas are helping Albania to develop its natural resources, improve its economy and create growth opportunities for investors who see the potential of this resilient country.

Gold Market

For the week, spot gold closed at $1,300.62, down $2.58 per ounce, or 0.20 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, declined 0.38 percent. The U.S. Trade-Weighted Dollar Index fell 0.28 percent for the week.

Strengths

• Gold jewelers in India, the world’s second-largest consumer, are expecting a surge in demand at the country’s bullion buying festival this week. The anticipation for the Akshaya Tritiya festival, which is considered by the nation’s more than 900 million Hindus as an auspicious day to buy precious metals, has driven jewelers to buy gold from importing banks at premiums as high as $110 per ounce over the London fix price.
• Global demand for silver jewelry exports from India soared 59 percent over the past year as industry officials expect further growth in exports this year. Trade organization officials expect exports to rise in the 2014-15 season as jewelers try to meet rapidly rising demand from China, Russia, and the U.S. The CPM group, a commodities consultant, has reported silver demand for jewelry rose to 266.5 million ounces in 2013, the highest level in at least 10 years, increasing its share of the declining global supply of silver, which only reached 971 million ounces in 2013.
• Klondex Mines announced the results of the PEA on its Fire Creek project. Despite the very conservative assumptions underlying the report, the PEA shows an initial mine plan with immediate positive cash flows. The company noted the IRR could not be calculated because the cash flow is positive in the first year and every succeeding year after that. In a similar note, NGEx Resources reported results from drill holes which confirm the continuity of the high-grade copper and silver mineralization at its Filo del Sol project in Argentina. The drill holes reported grades as high as 7.59 percent copper, and 314.5 grams per tonne silver over 12 meters.

Weaknesses

• Gold fell $2.58 per ounce for the week, as positive data in the U.S. lowered demand for the precious metal. The Fed meeting appeared to be a non-event as the cut of an additional $10 billion in asset buying matched economists’ predictions. Hong Kong gold exports to China offered a relief, as net imports reached 80.6 tonnes in March, down from 111.4 tons in February. Silver, which fell 0.99 percent for the week, is being undermined by its association with gold despite nine-year-high buying by makers of jewelry and solar panels.
• A U.S. Senate Special Committee on Aging staff report “conservatively estimates that more than 10,000 Americans have been victimized through [precious metals] schemes, with losses around $300 million.” Seniors, looking for a safe haven for their life savings, have been led into buying leveraged gold, silver, platinum, or palladium bets under the impression that they are participating in safe investments. The sellers scam seniors with multiple fees and interest costs that benefit scammers, while leaving the seniors’ principal to bear all the risk of the leveraged bets.
• Election violence has flared in South Africa’s platinum belt ahead of the elections, according to a Reuters report. Police used water cannon and stun grenades to disperse rioters in South Africa’s strike-hit platinum belt on Sunday after protesters, allegedly affiliated to the ACMU union, attacked a government minister while campaigning for the May 7 election. The ACMU’s 70,000 members remain off the job after wage talks aimed at ending the 13-week long strike collapsed.

Opportunities

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• The latest Platinum and Palladium Survey by GFMS, the leading independent precious metals consultancy, shows the impact on platinum by South African strikes has been muted; however, palladium has begun to move strongly. The highly successful launch of two South African palladium ETFs, together with supply constraints arising from the events between Russia and Ukraine are further emphasizing the market deficit for the precious metal. As such, GFMS believes palladium has bottomed out already and expects the robust fundamentals to propel the price towards a test of $930 per ounce before year-end.
• Agnico Eagle Mines reported record first-quarter gold production which prompted the miner to forecast it will surpass the high end of 2014 production guidance, with costs expected to come below the low end of the original forecast range. Northern Star Resources, the Australian producer that agreed to buy assets from Barrick Gold, announced it is seeking further acquisitions amid a “once-in-a-generational change in ownership in the Australian gold space.” Desjardins Capital Markets initiated coverage of MAG Silver Corp. with a Buy-Speculative rating and a C$10 price target.
• Randgold Resources will start a study of Kenya’s gold-mining potential at the end of this month to help the government assess whether it is viable to mine gold in the country. According to the African Development Bank, Kenya has known gold deposits, yet mining represents less than 1 percent of GDP. In a similar move, Mark Bristow, Randgold’s CEO, praised the Ivory Coast government in coming up with a new mining code which, in his view, addressed the needs of investors while remaining potentially hugely beneficial to the African nation’s economy.

Threats

• ABN-AMRO, the largest Dutch bank by assets, revised its gold forecast price down to $1,235 per ounce as it expects the U.S. economy to accelerate, and U.S. yields and the U.S. dollar to move higher. The bank released its outlook to coincide with the Fed’s announcement of a further $10 billion monthly taper. Important macroeconomic indicators to follow next week are U.S. Non-Manufacturing ISM, Chinese CPI and PPI data, and the Japanese Leading Index, which is expected to show further deceleration.
• Morgan Stanley bank analysts almost “outbear” Goldman Sachs analysts on gold price, according to Mineweb’s Lawrence Williams. Morgan Stanley’s analysts suggest gold will trade down to $1,168 in the second half of the year, and will continue trending down to $1,138 in 2015. The main driver, according to the analysts, is the fall-off in Chinese demand caused by a weakening economy and depreciating currency. However, Chinese gold import demand has continued to show resiliency, even as the currency depreciation makes gold more expensive in local terms. February and March import data from Hong Kong show imports of over 190 tonnes, roughly in line with the pace of imports in the fourth quarter of 2013.
• Barrick Gold shareholders were in for a major disappointment on Wednesday at the company’s annual general meeting. The announcement of a 90 percent plunge in Barrick’s profits from last year was eclipsed by Peter Munk, the unpopular retiring chairman of the board, who gave a rude awakening to hopeful shareholders in announcing that he intends to remain “very involved in Barrick” and that he will retain an office at the company’s corporate headquarters in Toronto.

May 2, 2014 (Source: U. S. Global Investors)

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