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Natural resources conference

10th April 2005

Dear All

Jeff Roberts has asked me to let you know about a conference on the 29th April – Natural resources on the Russian frontier at the National Liberal Club, Whitehall. There are special concessions for Russian speakers and GB Russia Society members.

I'm afraid I can't copy and paste the attachment because of its format, but if you are interested, please contact Jeff on the numbers at the bottom of this email.


IMPIVAARA # 150 27th February, 2005

29th April: Russian Natural Resources/Lithuania/ Precambrian Greenhouses

I have to start with a bit of boasting, as it isn't every day my genius is recognized nor Impivaara richly rewarded for its brilliant strategy of investing in Russia via bordering states. 'Snowball Earth' http://www-eps.harvard.edu/people/faculty/hoffman/snowball_paper.html turns on the idea that global levels of carbon dioxide both triggered total glaciation of the planet 600m years ago as the 'greenhouse gas' levels fell dangerously low: it was locked up in carbonate rocks. But volcanoes kept pouring out carbon dioxide and that saved the day with a new Greenhouse Effect that melted the endless ice when sunlight had failed. I attended a brilliant lecture at the Geological Society recently at which Prof. Paul Hoffman from Harvard laid out his argument. I've been out of the Precambrian for a while, and was therefore amazed to be immediately recognized and warmly thanked for my old papers on the subject; a Letter to Nature in 1971 v.234, 216-7 (Late Precambrian Glaciation: An Anti-Greenhouse Effect?) and Journal of Geology, 1976, v.84 p.47-64 (Late Precambrian Dolomites, Vendian Glaciation and Synchroneity of Vendian Glaciations). I just sat in the Geol. Soc. Library in Piccadilly looking up records of carbonate rocks underneath glacial beds anywhere in the world, and had some brilliant geochemical help from the referee of my Chicago paper. Thirty years is a long time to wait for Harvard fame, and I hope the Impivaara/Pomor approach to Russia, initiated in 1991, will bear fruit earlier than that.

Off to Riga and then various places in Lithuania in Week 11 to continue work on 'EUROPE'S NEW NEAR ABROAD' covered by our successful seminar on the Baltic States & Kaliningrad last October in the National Liberal Club. Riga, as the 'capital' of the Baltic States, has special interest for me, as for Russian enterprises, whilst you must travel widely in Lithuania to get a feel of that less centralized country. Estonia is very much Tallinn, though its eastern, Russian-speaking parts offer unrealized scope for Western European companies seeking salvation from deflationary pressures on profit margins. Estonians are smart enough to realize this, whilst, sad to say, Finns generally miss the lessons of their history and geography. Ukraine is now newly fashionable in the facile West, just as Russian government bonds were so attractive to greedy folks in London before 1998. I recommend daily BBC Monitoring for an informed view (see link from www.impivaara.com) of the Ukraine and the whole XSU. Beware companies that still use 'CIS' – just like those who use the 'Barents Region' to describe Pomor. They don't get it.

Lithuanians speak Russian well, and have no hangups unlike their 'Belgian' neighbours in Latvia, and are superbly placed to guide ignorant Westerners into nearby XSU spaces like Ukraine and Kaliningrad. Even Belarus, perhaps if you look at things from a company rather than short-term portfolio investment standpoint. The scope for 8m people in EUROPE'S NEW NEAR ABROAD (see presentations at www.impivaara.com and my essay on the unimportance of stock markets there) is better than those in that cul de sac called Sweden, which does well to export capital as seen in the Eesti Telekom and Hansabank cases. But, here and there, as with SAF Tehnika in Riga, there will be IPOs, even if post-natal depression in the absence of independent stockbroking research, is likely to set in. As might be expected, Americans recognize that paying peanuts gets you monkeys, and so serious ways of paying for 'IR' (independent research, not company puffing) can be seen coming from the US, whilst London still has very few examples and the last independent large broker has just been banked.
Murmansk: National Liberal Club, Friday 29th April

Organizing conferences is not easy, and not usually profitable. But my Murmansk colleagues have done a brilliant job getting our meeting going on the Russian side. The meeting will be opened by the head of the Duma Natural Resources Committee, and officially supported by it. I cannot give you any better idea of it till we have a list of company acceptances, but it now looks like a more Russian Day than presented in Impivaara # 149 last December. I had hoped to put Western oil companies into their proper place in a portfolio. But I suspect big companies just want to control everything, and some might be reluctant to be involved with a discussion which reminds people why the North American Arctic was left undeveloped. After frantic excitement in the 1970s, e.g. Dome Petroleum etc., it stayed frozen over. The reserves were, and remain, modest compared to the Barents Sea which is in Europe and, thanks to the Gulf Stream, not covered by ice. I suspect that major companies, desperate to refill their depleted reserves, might forget the reality of past history and use the Fortress Mentality of America to support 'patriotic' oil & gas sources 'close' to home. There could be huge blunders ahead, consistent with the end of Great Empires. 'Lions led by donkeys' was the phrase in the First War that sealed the fate of the British Empire.

With the paper copy of these notes, I'll put a nice map of the Barents Sea showing just that – it's in Europe, and not all covered by permanent ice. I have a plentiful supply of Russian maps for a Finnish project http://www.arcop.fi/arcop.htm which I hope make this point. An even better map was used by Robert Blaauw of Shell to illustrate his excellent talk on plans for Shtockman development at the Murmansk Arctic Shelf meeting in November: he showed the whole Arctic from the pole with only the Barents Sea free of it. It's odd to think that the Gulf Stream ends at Novaya Zemlya (New Land) but it is so at present. And don't forget that the Kurils dispute with Japan is really about the division of the Sea of Okhotsk which has huge potential.

Shell also mentioned Sakhalin at the other end of the Russian Arctic. It's quite close to Japan, just as the Barents Sea is to Europe and even North America on the open sea. Best of all, would be development of a vast field in the Norway:Russia Disputed Zone (see maps under 'Information' then Russian oil & gas at www.pomor.com) which might be easier to develop than the Shtockman everyone has heard about. Latest rumour is for an elegant solution to the old boundary problem: split it down the middle – Western Part 51% Norway/49% Russia – Eastern Part 49% Norway, 51% Russia. My friends in Kirkenes are organizing a conference in Arhangel'sk in the same week as ours at the National Liberal Club. I'm going on a Russo-British Chamber of Commerce Trade Mission to Arhangel'sk at the end of March, but suspect that portfolio managers are rather more likely to pop into the NLC to enlarge their understanding of Pomor and the scope for investment. Norsk Hydro and Statoil are important in all this, which is why we have Excel files on them. They're openly available by going to 'spreadsheets' at www.finnishstockmarket.com though 'investment advice' can only be found at www.impivaara.com through the usual passwords ……. Life will show us – but following Russia is not easy and people should give up proven useless ways to attempt it.

Impivaara Securities Limited Jeffery Roberts
Tel. (0)20 7284 3937 FAX 7284 3938 gsm 07808 765 787
[removed] www.impivaara.com www.pomor.com

IMPIVAARA # 140 9th February, 2004

Romance of Russia

Just back from ten days in Murmansk/Apatity via Kirkenes, with the very strong feeling that Impivaara has something to offer on the road to Russian wealth. Things are looking up in the Frontier natural resources area of Europe which is Pomor. If you go via Norway and Kirkenes, you think oil & gas and the Barents Sea/Timan Pechora; if by land you think a South Africa of mineral wealth via northern Finland and the Baltic. In both cases, you reach the unknown via the known; the original Impivaara idea that Finland and northern Norway, with a thousand miles of Russian borders, should be safer ways into post-Soviet Russian investment than sitting in Moscow hotels listening to Bulgakov's men in suits speaking nice English. With my own Wood Gundy background in the North Sea/North American frontiers of the 1970s, let alone a Ph.D. across the fjord in Finnmark from Murmansk Oblast' the circle closes. There remains the language difficulty, though I cling to the view that stumbling through a bit of a foreign language helps a lot, and I recall those in my German days with excellent language and no understanding of what they were actually talking about. As Hard Times befall the overblown West, and a long overdue catharsis in the shape of a severe Bear Market, Russia offers something quite different: connected to the world mainly by the oil price, but disconnected in just about every other way if you can say that about a land of eleven time zones which straddles north and south by land just as the British used to straddle them by sea. Fund Managers should be looking for something disconnected to the usual ideas – this is not a normal economic cycle with the dawn just breaking. US lack of demand for paper shows the reality that the economic recovery painted by economists is just paper; though it might take harsher winds to show the truth of that. In Europe, companies will be forced to look for cheaper ways to do things, and the new EU members, especially around the old Hansa, should do better than the rest, whilst countries and companies will now become far more important than so-called sector analysis. Stock picking, really. Forget the economists, look at companies and national cultures.

I quoted Krilov's fable, The Swan, the Pike and the Crayfish which is all about collaboration amongst colleagues, or the lack of it, as a good lesson for the Barents Sea in my article about Pomor oil & gas for the Russo-British Chamber of Commerce bulletin. Work that should be easy doesn't get done if there is not proper understanding and collaboration:

И.В.Крылов Лебедь, Щука, и Рак

Когда в товарищах согласья нет,
На лад их дело не пойдет
И выйдет из него не дело, только мука.

[When comrades do not agree, no good comes of things, only trouble…]

BP learnt the lessons of Krilov and, through exactly the right approach, BP-TNK must be the premier Russian oil play. BP learnt from earlier mistakes, and its rivals, too slow, are now effectively shut out from the Grand Plan of BP in Russia. This doesn't mean that oil companies below the majors who followed the тише едешь, дальще будишь 'softly, softly, catchee monkey' approach will not build meaningful wealth in Russia, but it does narrow the scope for international investors sharply. Yukos signalled the return of business as usual in Russia, and though some will still try to apply normal Western dollars & cents to Russian majors, they ought to fail. So there should be a shorter list of foreign companies to look at, such as those who have had exploration & production in Pomor like ConocoPhillips, ENI, the French, Norsk Hydro and Statoil. Not difficult to shape an oil portfolio which covers most eventualities. The Norwegians could be very important indeed and there are only two of them, if the Barents Sea is driven ahead by events far away in the Persian Gulf as I expect. But if the oil price go up, the first beneficiaries would be those with West Siberian production – ie BP-TNK and the Russian majors that Westerners will never be able to visit and understand normally. An oil shock from the Gulf would bring on the inevitable catharsis in the West, and perhaps there are lessons from the 1970s here. But the main risks to being overweight in BP and the oils mentioned above must be a lower oil price, which seems a low enough risk given the knaves and fools running the world at present.

In lighter vein, beer isn't a bad proxy for Russia. But Scottish & Newcastle does not give me the feeling that it really understands Russia. It worries me that Baltika quality is not so good, and it is so clear that Russians are taking to other brands; especially to local, quality versions of Real Ale. More importantly, I feel S&N is locked in a troika with two very strong horses, Carlsberg and Baltika Brewery in St. Petersburg, liable to pull in different directions. One of the reasons that the Hartwall family sold out was that they did not think, long term, that they would be able to get money out of Russia, and that they were in a troika with much bigger horses. Fresh from my Murmansk Russian lessons, I think some people might be looking at Tyuchev's poem too lightly –

Умом Россию не понять,
Аршином общим не измерить
У ней особенная стать –
В Россию только верить

[Russia cannot be understood by brains, nor measured by the usual measures, nothing especially fits, you just have to believe]

Just a few lines. Russians, like the Arab world, set great store on poetry, whilst Anglo-Saxons seem weak in the culture department at the moment, which might explain their crass foreign policy. You don't need money and bombs for foreign policy, but you do need brains; sadly lacking in our own school prefect. Here we are, on the Road to Serfdom, and not much Opposition in sight. But enough of this pretty writing….


For a dozen years, Impivaara/Pomor have tried to help the darling of the scientific community in Apatity, O.A.O Pana. Our little Pomor Petroleum, originally formed to get and farm out oil licences in 1991, has 10% of Pana, now by far the most serious mining exploration company in Murmansk Oblast'. This year, it will spend twice as much drilling the new 'Bushveldt' complex on Kola as all other mining exploration activity on the peninsula. At www.impivaara.com inside the passwords

you will find a map of the three licence areas of Panskiy and Fedorova Tundra. O.A.O. Pana, with an average of 45 employees last year, operates on all of them and will spend about $4m on drilling this year, using a new rig able to reach 500m at many times the rates of the past. Rum to think that an interest in Pana could have been bought years ago for about that – it showed that the City didn't understand layered intrusions very well! In any event, the full extent of platinum metal reefs could be much longer, but still only make 5% or so of the area of Bushveldt itself. And of course, Bushveldt has the right platinum:palladium ratios, roughly the same as Pd:Pt in Pana and Russia generally, of 5:1 When I was first introduced to Pana in 1992 the price of platinum was about 5 times higher than palladium, then $80 per oz. so that we had a 25 times disadvantage. Briefly, O happy days! Palladium went over $1,000 per oz. or double platinum though we stuck to a third of that speculative excess, $300, as a rule of thumb for Pana. Alas! not low enough as it fell to even half of our figure at the very time that Outokumpu decided to give up in its own low grade efforts on the Finnish side of the border. These were set up with Gold Fields around those $1,000/oz days and a great deal of serious work undertaken. At one time, as Impivaara clients know, the gross value of the PGM on APP acreage was much the same as the total market capitalization of Outokumpu and Avesta Polarit. But then Outokumpu decided to quit mining altogether, despite the needs of nickel for its enlarged Tornio stainless plant, just as the nickel price went wild. It all shows how much you can rely on bankers' strategic advice when running a company based on natural resources.

As noted many times, the rocks don't stop at international borders, even if too many Finnish companies still do. Gold Fields, through Arctic Platinum Partnership, did a great deal of work on thick low grade platinum metal licences given free to Outokumpu by the Finnish State. (the fact that State companies dominated exploration so long explains why so little is known in the north of Finland today, despite excellent exploration licence terms and helpful authorities). In any event, there are 12.2m oz. [7 tonnes] of PGM (plus a little gold) in Northern Finland, with details at http://www.goldfields.co.za/Investor/Annual_Reports/FY_2003/gf_ar03/ar_03/operations/exploration.htm#arctic
Good work brought the average grade of these thick deposits to 2.45gm/tonne but, as noted in Impivaara # 131 a better palladium price is needed. This is a Big Subject, but skipping over the border to Pana, it seems clear that Barrick Gold (with BHP/Cascadia) on the westerly licence, Fedorova Tundra, have proved up a thick, low grade deposit which might be compared with the Finnish prospects largely abandoned by Outokumpu at the bottom of the Pd price graph. I cannot give a figure for reserves indicated, but you do not need great insight to understand that it would be cheaper to exploit low grade reserves on the Russian, rather than the Finnish side. Perhaps they could even share an enrichment plant?

Next to Barrick Gold's mining licence, lies the original 'Little Pana' mining licence which has 12 years to run. Here are quite different styles – two 'reefs' with much higher average grades, and ranging up to many times those on Fedorova Tundra. Eastwards again from Little Pana lies Bema Gold's Exploration licence, with just 3 years left to run. Pana is the Operator for all these areas, but of course there is no information available on Bema's area. No doubt they would have liked to take over the whole area, but it is already clear that the Panskiy Tundra is a world class platinum metal province, and that Pana will be a very serious Russian company in a very short space of time. We hope to list it on St. Petersburg. This is not an area for junior companies, and Pana is extremely fortunate to have such sound partners as Barrick Gold and BHP. Bema has been a useful source of public information for others on the area, however at

As for reserves, we cannot say what has been proven to date, but it is clear that we are on the way to $billions in gross values as so long anticipated by the Faithful Few. Each tonne of platinum metals is worth something like $7m gross if you take it all as Palladium at the current $236/oz, and I think gross values are already on the way to $1bn on both Pana-operated mining licence properties. It is fairer to take an average value for the PGM between Pt currently at $839/oz and Pd at $236 or say $325/oz which is about the same as the $300/oz rule of thumb we had been applying so cautiously in the past. There is also significant Rhodium. At 30,000 oz. per tonne, that gives you almost exactly $10m per tonne gross. The net value as refined metal might be 10% of that, ie $1m per tonne, or $100m each hundred tonnes for illustration. The net value would clearly be greatly influenced by the price of Pd which itself has something to do with how expensive the alternative, Pt, happens to be. Unlike many things in financial markets today, this has to do with real or potential demand for platinum metals, with the huge potential of fuel cells yet to be felt.

Our idea of forming a Pomor Development Company has perhaps taken root at last, but in Apatity, where we could work on industrial minerals like barytes for the coming oil boom. There is a marvellous deposit just inside the border at Sallanlatva, (cf. Kemira at Sokli in N.Finland) which could eventually be a $100m project, able to send material worth $90/tonne in either direction: to the Baltic via Kemi, or to the oil fields in the east. Drilling conditions are difficult in Timan-Pechora (high pressures and hydrogen sulphide) so you need barytes to increase the mud weight in the hole. A.O.Apatit pointed up the shortage of barytes in Russia, especially away from the Urals which have their own supplies at last winter's Murmansk oil conference.

So, many reasons to think the Impivaara/Pomor idea of Russian romance in natural resources finally coming into focus. Meanwhile, there is the long awaited increase of goods coming into Russia, and clients of adventurous bent should consider the upcoming auction of 12.5% of the Murmansk Trade Port. Volumes have already exceeded USSR records, and the company is profitable. The shares currently yield 9% in thin trading in Moscow, and offer an indirect approach to benefit from the coming boom in Pomor. $40m is not a lot for Russia's only ocean-going port in the West. More information on request – our Pomor colleague Stanislav Tcheredeev of StockInvest is a manager in this issue which closes end February.

Impivaara Securities Limited Jeffery Roberts

Tel. (0)20 7284 3937 FAX 7284 3938 gsm 07808 765 787
[removed] www.impivaara.com www.pomor.com

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