But otherwise, Kazakhstan was an empty desert. Even in the days of the old Silk Road, traders would skirt Kazakhstan’s southern border rather than try to cross that hell of a desert. It was remote. Desolate. The Soviets used parts of the northeast to test nuclear weapons.

The Aral Sea, site of one of the greatest environmental disasters ever, is in Kazakhstan. A century ago, carp, perch, caviar-bloated sturgeon and much more filled the Aral Sea. Fisherman hauled hundreds of tons of fish per year, fed themselves and loaded trains full of fish headed to Moscow. Then the Communists had some harebrained scheme to use the water for irrigation. And the great Aral Sea eventually ran dry.

It seems fitting. Kazakhstan has been a relatively barren and primitive place for millennia. The Soviets didn’t help that much.

Then Kazakhstan found oil.

The stuff just bubbled up from salt-encrusted lowlands. Exploratory drilling dates to 1979, but the oil and gas only really started to flow in 1991. That’s when Chevron hooked up with the Kazakh national oil company, Tengizneftgaz. Chevron supplied the technology to boost production.

Since then, many of the world’s largest oil companies are now active in Kazakhstan. Today, Kazakhstan has about 3% of the world’s oil reserves. Vast areas remain unexplored. And more than $130 billion in spending is on tap for the region.

In 2001, a pipeline opened up connecting the Tengiz oil field to the Black Sea. Another pipeline serves China. But the delivery of oil through here still has challenges. Oil flows through the pipeline only seven months out of the year. In the winter, they have to mix a less viscous fluid with the oil so it doesn’t freeze.

China would love to expand its oil supply from Kazakhstan. It helps diversify away the risks China takes by relying heavily on oil from the Straits of Hormuz (out of the Persian Gulf) and the Straits of Malacca (from across the Indian Ocean; the U.S. Seventh Fleet controls these Straits, only adding to China’s oil security concerns). By getting its oil from an overland source, China is less susceptible to oil blockades. That must make Chinese defense ministers smile.

And Kazakhstan is China’s western neighbor. The two share almost a thousand miles of border. Kazakhstan’s oil fields are not far from China’s border. It seems a natural partnership, but there are a couple of flies in the sugar.

The first is that the history between the two countries is complicated and ancient. The Qing Dynasty did some brutal things to the Muslim peoples of Central Asia in the 17th century. And even today, there is suspicion of the Chinese. It may seem strange from an American point of view, but people here have long memories of such things.

Then there is Russia.

Russia has ambitions here as well. That makes things much more complex. Kazakhstan’s closest ally is Russia, historically speaking. About a third of the population is of Russian descent. And the two countries maintain a tight dialogue. The president of Kazakhstan meets with Putin once a month.

The Russians have a complex history with Kazakhstan, too. Stalin and his goons killed millions of Kazakhs. In 1926, there were 6 million people in Kazakhstan. By 1933, after Stalin’s bloody work, 2.5 million of them were dead. Yet somehow, the Kazakhs overlook this more recent tragedy in snuggling up with Russia.

Even the U.S. has tried to make nice with Kazakhstan, but it runs a distant third. Kazakhstan is like the girl everyone wants to date in high school.

Meanwhile, billions of dollars from oil sales flows to Kazakhstan’s coffers. Oil and gas now make up nearly 60% of the country’s exports. Economic growth tops 8%. (Still most of its people are poor. Monthly per capita income is about $770, which is less than it sounds because as is typical with great boomtowns, the cost of living where the money is, namely the oil towns, is pretty high.)

To invest in the boom directly, you can own a Kazakh oil producer. The one that stands out is JSC KazMunaiGas. JSC is the second largest producer of oil in Kazakhstan. Even if you have no intention of buying a Kazakh oil producer, this is a fascinating story on the face of it.

JSC is the only listed Kazakh oil producer. It trades in London under the ticker symbol KMG. JSC had a $2 billion IPO back in 2006. Today, the market values the stock at $8 billion. It generated $2 billion in net profit last year, so it trades for 4 times earnings. Since the IPO, the company has made about $1.3 billion in distributions to shareholders. It’s also buying back stock now.

The government owns 62% of JSC – which is not a bad thing, I would say. It’s like having a fight judge in your corner as a boxer. In fact, JSC has right of first refusal on any takeover for oil and gas assets in Kazakhstan – thanks to the government. So there you go.

JSC exports about 75% of its oil at market prices. So it is not forced to sell a lot to Kazakhs at below-market prices. About 25% is sold at home at prices about 40% less than market prices. There are no hedges, so investors get the full benefit of any upside in oil prices.

JSC is cash-rich and has zero net debt. So no financial risk, either. The company also has some of lowest finding and development costs in the world at only $4.80 per barrel of oil. It has proven reserves of 700 million barrels and has been successful in building new reserves.

Plus, Kazakhstan is lowering its tax burden. As a result, JSC pays less in taxes than Chevron does as a percentage of profits.

Finally, JSC enjoys low geologic risk. In the past, this has been a problem in Kazakhstan. The geology is complex and hard to predict. But most of JSC’s oil fields are traditional sandstone formations.

All in all, JSC looks like a great way to play the growth in Kazakhstan’s oil industry. So, if you’re feeling speculative – and can buy LSE shares – then you might look to dip your toes in the water here. And there may be U.S. shares one day. I’ll be watching, and so should you.

Source: What Would Borat Do?

It was two years ago that I first met Dr Jeffrey Malaihollo, the geologist and Managing Director of Central China Goldfields. Then he described to me the five mining projects, all in China, upon which his company was working.

Last week, when I met him for the second time, the number had been reduced to two. Judging that two of the original five had been insufficiently promising to be worth the struggle with local Chinese bureaucracy, Malaihollo gave up on them. He has also withdrawn from a project at Snow Mountain, but this time was able to walk away with a £1m profit having sold out to its Chinese partner.

This has boosted Central China’s bank balance to about £3.4m, useful ammunition for its two remaining projects. Defying the company’s name these are anything but in Central China.

One of them, Dong Mao Huo, is in Inner Mongolia in the far north of the country, while the Nimu project is in Tibet. The two projects are quite different. Dong Mao Huo is a small gold mine that could be quickly brought into production. Nimu, on the other hand, is at an earlier stage. But it could become a very large copper and molybdenum mine – and the one that could really see shareholders hit the jackpot.

The Dong Mao Huo gold mine has a history of sporadic production, with as recently as 2005 70,000 tonnes of ore being mined and sent to local refineries. Central China got involved in April 2006, when it entered into a joint venture with the Shandong Zhengyuan Geology & Resource Company.

Eighteen months later it had completed a thirty four hole exploratory drilling programme which suggested that there may be more gold than previously thought. Further drilling is now underway to define the extent of the resource and Central China intends to release an estimate of the total resource by the end of the third quarter of this year.

All being well it expects to be mining 7,000oz of gold per annum from an open pit mine starting early next year, in which it will have an 80% share, with the potential to extend the resource and ramp up production later on.

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According to broker HansonWesthouse the copper and associated molybdenum grades found so far are ‘about average for this type of system and in order to be economically attractive, a large tonnage deposit will be required. Nimu certainly has the size to fulfil this requirement… and now just needs an increase in grade.’

This month Central China is starting a new drilling programme that will throw further light on the potential at Gan gjiang, while further work will be undertaken on the other six licenses.

In twelve months time Central China could be producing gold at Dong Mao Huo and will have a much clearer idea of the quality of the Nimu project. Although it is early days, there is no doubt that Nimu could be a real company-maker.

At present Central China is valued at just £8m. But in a peer group comparison it lists fourteen other projects from around the world that have an average copper grade equivalent to that at Gangjiang. They have market values of anything from £1bn to about £15m depending upon their location, the size of the resource and their stage of development. This certainly tells us something about the potential for Central China Goldfields, although it does not necessarily indicate that the shares are undervalued at the moment.

Central China must first define its resource, and then it will have to cut deals with Chinese partners in order to bring in the necessary capital for mine development. A railway line that is being built in order to connect Tibet’s capital Lhasa to China’s heartland will pass within some thirty kilometres of Nimu, but still the region is remote.

Hanson Westhouse has declined to put a value on Central China at this stage, preferring to wait for the first resource estimate for the Gangjiang license expected towards the end of this year. A good result here could start to get the ball rolling for a share that has so far flattered to deceive. This is definitely one to watch.

Regards,

Tom Bulford
for The Penny Sleuth

Source: Finding Nimu