Turquoise Hill Tumbles Amid Precious Metals & Mining Meltdown

Feb.19.13 | About: Turquoise Hill (TRQ)

Turquoise Hill Resources (NYSE:TRQ), 51% owned by major miner Rio Tinto (NYSE:RIO) has continued to tumble toward its secular post-crash low at $7.10 made in late December 2012. When TRQ commissioned its ore concentrator at Oyut Tolgoi in the presence of high government of Mongolia (GOM) officials, they affirmed the lease - royalty deal and praised Rio, foreign investment and their commitment to maximizing their nation's resources. The moment seemed ripe for steady production at this world class site laden with copper, gold, silver and cobalt. After all, Mongolia is expected to get about 71% of the life-of-mine cash flow and Mongolians have 88% of the jobs at the mammoth project. Issues also seemed resolved with SouthGobi Resources (OTC:SGQRF) which Rio controls via TRQ (58% share in SouthGobi). But exhilaration was brief: about ten days after a rapid ascent of TRQ shares it began a tumble that preceded the collapse of nearly all precious metal and mining shares in February. TRQ sank to $7.26 on Friday the 15th traded a few pennies below that level February 19. The questions are why and what to expect going forward with TRQ, precious metals and mining generally.

Some of the problem is specific to the foreign investment climate in East and Central Asia. Partly this is rooted in ethnic-historic issues, partly in the geopolitics and finance of recent decades. Insight into how these factors play out is offered by a minor event in Rio's arrangement of its holdings in the area: the sale via TRQ of its $300 million interest in Altynamas Gold's Kyzyl mine in northeastern Kazakhstan to Sumeru Gold BV.

Russia had an operational mine there by 1956. It fell into disuse when the Soviet Union was re-structured. After a February 2012 feasibility study at Kyzyl, Turquoise Hill was proceeding toward renewed development when Rio cashed out to focus more on its Mongolian operations. A key to its struggles there lurk in the seemingly routine boilerplate about its sale at Kyzyl: "completion of the proposed transaction is subject to customary closing conditions, including regulatory approvals from the Republic of Kazakhstan's competent authorities."

Let's look at Kazakhstan and what is "customary" in that former Soviet Socialist Republic.

The Altynamas Gold project is near Ust Kamenogorsk (Oskemen) where Russia, China, western Mongolia and northeastern Kazakhstan kiss in a significant geographic crux. Kazakhstan is a "republic" with "authoritarian presidential rule and little responsibility outside the executive branch" as the CIA country overview explains. It is valuable reading.

The president has been around a long time. Nursultan A. Nazarbayev was Chairman of the Supreme Soviet of Kazakhstan S.S.R. for twenty months preceding creation of the new State in December 1991. Then he became President of the republic for the first of his seven-year terms. In May 2007 the terms were shortened to five years with a limit of two consecutive terms. Mr. Nazarbayev however is exempt from this limitation since his "official status" as the "First President of Kazakhstan allows him an unlimited amount of terms." This enables one to appreciate better the language in TRQ's provisional sale of its Altynamas Gold stake about "customary closing conditions, including regulatory approvals from the Republic of Kazakhstan's competent authorities." As to competent authorities, Kazakhstan's "Council of Ministers" is appointed by President Nazarbayev who in 2011's election received 95.5% of the vote; the remaining 4.5% being ascribed to "Other."

Kazakhstan has a bicameral legislature, a Supreme Court (with 44 members) and many political parties but 81% of the seats are held by members of Mr. Nazarbayev's party, Nur Otan ("Fatherland's Ray of Light"). He is the chosen one and those who chose him affect investment, development and the share prices of the companies that make them. Kazakhstan is a crude example of how world management functions.

President Nazarbayev's consultation with representatives of various international advisors help constitute the "competent authorities" that rule on matters like TRQ's sale of its interest in Altynamas to Sumeru Gold. But $300 million is a very small matter compared to TRQ's Oyut Tolgoi mine (34% owned by the GOM) into which Rio has poured $6.2 billion. TRQ itself has a $7.5 billion market cap. Mining legend Robert Friedland began developing the site with his company Ivanhoe Mining which became TRQ when RIO acquired a controlling interest in April 2012. He too poured large sums into the mine and Mongolia and retains a 10% interest in TRQ. But East Asians are chauvinistic, even xenophobic. Those who manage the West into insolvency and social chaos use this nationalism to speed re-distribution of global wealth from West to East. Something similar happens in Europe north to south as part of the predictable malfunctioning of the euro project.

If Kyzyl mines with a half interest valued at $300 million require attention from the competent authorities of the republic of Kazakhstan, imagine the interests and authorities involved in the pace and conditions of development at Oyut Tolgoi and SouthGobi's coal mines at Ovoot Tolgoi. In my previous piece on TRQ's and RIO's efforts in Mongolia I suggested that readers research the adventures of Bat Khurts and Enkhbat Damiran on the intertwining of judicial, geopolitical and economic interests and their interface with Mongolian politics. This last link to Sain Banuu, Mongolians in London is particularly intriguing about Western intelligence agencies in the workings of GOM that like Kazakhstan was a Soviet Socialist Republic in the bad old days before the empire underwent a pre-Internet version of "the twitter revolution."

Mongolian politicians both in and not currently in power must spend significant time consulting with the competent authorities about foreign investment and the equitable proportion of royalties a host State should be paid for permitting outsiders to create wealth. The organizers of the game are more powerful than Rio. For them GOM is just an agency for global wealth management which may explain its volatility. Current President Elbegdorj has been in office only 3 and a half years and an election is upcoming in June. In 2009 he defeated Nambaryn Enkhbayar by a plausible margin, 51-47% similar to our own past two contests. Then Mr. Enkhbayar was convicted of misusing donated television equipment and jailed. He wants GOM to own more than 34% of Oyut Tolgoi. He has compared Rio's agreement with GOM to the 7 decades of Russian occupation. Like all politicians he says he is against corruption. And so it goes. It is starting to seem that RIO-TRQ are an agency for transfer of Western wealth to East-Central Asia. Also indicating flows of power and wealth, the London Stock Exchange is re-structuring the Mongolian exchange.

RIO and TRQ produced the first ore concentrate on January 31 and plan to proceed to phase 2 development of Oyut Tolgoi in June, "pending feasibility studies." These may be affected by the outcome of the elections which have been postponed to enable installing an "electronic polling system." Such systems can facilitate vote manipulation in Chicago, Hoboken or wherever. So the election will be closely watched by those with interest in Mongolia's development.

Given the many interested parties TRQ share prices are likely to remain volatile for years. Mongolia gets 95% of its oil and gas from Russia and nearly all its electricity from Russia and China so those two powers have dogs in this hunt along with Anglo-Australian RIO and its various companies. In a related event, Barrick Gold Corp. (NYSE:ABX) and Antofagasta Minerals (OTC:ANFGF) had their mining lease in Pakistan voided by that state's high court. Is that justice or nemesis? Pakistan was created by Britain in 1946 and is run precariously in cooperation with Western Intelligence agencies via the ISI (Inter Services Intelligence).

The mining sector has had a bad year. If global economies truly were related to markets then miners should be doing fairly well. The fact is that Europe's economy has been declining for 18 months and America's economy is sluggish and slowing. See this link on alarming developments at Wal-Mart, America's largest retailer and employer where executives speak of "a tougher economic environment" and "smaller consumer spending pie." More people are being impoverished and/or indebted by governance focused on fiscal games and increasingly centralized management. Control not growth is the mode and outcome of new policies. The Fed continues its direct intervention (trading) in the markets via its POMO, "permanent open market operation." This is the future: total gaming of systems as the quality of life declines.

Precious metal prices have been battered for four months with the carnage accelerating last week. My previous piece mentioned that paper-trading ETF's like (NYSEARCA:GLD) or (NYSEARCA:SLV) facilitate manipulation of prices by those who, 1) wish to keep acquiring massive amounts of metal at deflated levels and by those who 2) wish to direct investable funds to equities. This latter tactic keeps people happy and, on paper, richer. It also sets them up for panic selling when markets sag. A couple of examples: Kinross Gold Corp. (NYSE:KGC) reported favorable quarterly news and initially held up during the major sell-off last Thursday which saw Barrick Gold soar 5% and then give up half its gains in late day trading. On Friday Barrick gave up the rest of its gains and Kinross' share price collapsed 4.08% to $7.99, both companies falling on double their usual volume. It looks like people are fleeing the sector: buy panic. Similar results occurred from behemoths like Barrick to small and micro-caps from all regions, products (uranium, graphite, copper, gold or silver, rare earth) and stages of development: Uranium Energy Corp. (NYSEMKT:UEC), Focus Graphite (OTCQX:FCSMF), Energizer Resources (OTCQB:ENZR) with its huge hi-grade graphite property in Madagascar, and gold streaming company Sandstorm (NYSEMKT:SAND) lost 8.35%. The Junior Gold Miners ETF (NYSEARCA:GDXJ) made a new secular bottom (intraday) at $17.02 on double its usual volume and is down again Tuesday. The Silver Miners ETF (NYSEARCA:SIL) fared worse, down 3.28% while prominent silver streamer Silver Wheaton Corp. (NYSE:SLW) fell 3.51%. NovaGold (NYSEMKT:NG), held by major investors like Seth Klarman was down about 3.5% and is nearing its 52-week bottom as people hasten to the overheated equities markets. To me that makes NG a good buy. Eric Parnell notes that a surge in precious metal prices usually lags stimulus projects by a couple of months. Regarding Central Bank purchases of gold, the much-quoted 534 tons in 2012 is clearly understated. China's purchases alone exceeded that amount with its holdings now at 3,900 tons.

An exception to the mining downtrend that is pertinent to East-Central Asian affairs was SouthGobi Resources which gained 1.18% to $2.14, still near its 52-week low and looks like a buy for the bold. China's appetite for coal has not abated, nor has the pollution it sheds on our Pacific coast. But people seek inexpensive plays with great upside potential and SouthGobi is one though the context ensures volatility.

It's time to be contrarian, especially on the gold miners and soon on gold bullion, too. Don't sell now except from necessity. The tree is being shaken, don't drop and get put in someone else's basket. As for Mongolia, on the surface its politics are a world-away from neighboring Kazakhstan but its electoral trappings generate more heat than light. As a result, despite the magnificence of TRQ's work at Oyut Tolgoi the stock looks more like a trading vehicle than a buy-and-hold. TRQ has the potential to be the Procter & Gamble (NYSE:PG) or Altria (NYSE:MO) of the resource sector but that time isn't yet. Buy around $7 and sell between $9 - $10. If the Enkhbayar faction gains power tussles over royalties will resume. Let's see what June elections and TRQ's 2nd stage of development brings. As I wrote in my first TRQ piece quoting investing legend Sir John Templeton, buy and "monitor aggressively."

Disclosure: I am long GDXJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.