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Investor with extensive analytical and portfolio management experience and a focus on discovering and exploiting differentiated ideas with significant dislocations and clear catalytic paths.
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  • InterOil: The Final Chapter

    InterOil (NYSE:IOC) announced last week that the "final binding bid solicitation period for the partnering process currently being undertaken will close on February 28", uncharacteristically transparent guidance for the company. Though the market construed the release positively, the implications could be much more significant than investors are contemplating for the following reasons:

    1. InterOil must have considerable clarity and optimism on the outcome of the bidding process, as its latest release leaves little room for a deferral of the sell-down. InterOil has always been vilified for its vague commentary, unwillingness to provide specific targets, and excuses for pushing out timelines. The specificity of last week's press release implies that InterOil strongly believes it will be able to report the selection of an accretive binding bid in the first half of March. After prolonged discussions with many prospective partners, their continued involvement in the bidding process bodes very well for InterOil shareholders. As CEO Phil Mulacek indicated, "The interest demonstrated by major oil, national oil and global utility companies remains strong, and bodes well for the conclusion of our sell down of interest in the Elk and Antelope fields and partnering in the Gulf LNG Project".

    2. The bids that are due prior to February 28 are binding, and hence InterOil's selection of the winning bid will be the final substantive step required for closure. Though the company previously acknowledged that it had received bids for its Project, there was no indication that these bids were binding; hence unlike the bids that are due by February 28, the previous bids may have been subject to further negotiation, resulting in a prolonged deal process. InterOil's three investment banks would not have furnished prospective partners with a firm date by which binding bids must be submitted unless they were certain that the interest would support a positive outcome.

    3. The PNG government is supportive of InterOil's project. In its press release, InterOil stated, "We are pleased to have the continued support of the PNG Government during the conclusion of our partnering process". Perplexingly, InterOil's stock is still trading 20 points below its price at the time of the initial WSJ leak on the structure of the NEC agreement. Reports that the government may take its 22.5% of the resource in kind for domestic use indicates that InterOil could control 100% of the Gulf Project's first train, which is the Project's most valuable segment and the component which majors are obviously most interested in buying into. Unfortunately there aren't active sell-side analysts to highlight this point, but the resulting dislocation will dissipate with the announcement of a deal in the next 45 days.

    The most relevant recent LNG transaction was arguably Marubeni's acquisition of a 1% stake in the PNG LNG project through its purchase of a 20% stake in Merlin Petroleum for $297.96 million in November of 2011. The stake equates to ~$3 per mcf of reserves, or in excess of 5X InterOil's market cap assuming no additional resource upgrade from the successful drilling of Triceratops-2 and Antelope-3 last year.

    InterOil's short interest has been consistently appreciating towards an all-time high, and it's now 11.48 million shares, >23% of its outstanding shares. With the company having one of the best projects and lowest cost natural gas resources in the world in close proximity to Asia's largest import markets, LNG prices at their highest levels ever and surging LNG demand, majors' cash balances at unprecedented and bloated levels, PNG undergoing a period of unprecedented stability and economic prosperity, and significant risks developing in the global LNG supply picture, there has never been a more compelling time for InterOil to close its sell-down and maximize the value attained for its resource.

    The majors recognize the risk of a significant deficit emerging in the LNG market, as production estimates from regions like East Africa, Australia and the US are increasingly at risk. According to a Bloomberg article published on Friday, for example, "The U.S. may export 50 metric million tons a year of LNG by the end of the decade, or about 10 percent of the projected world market, [Royal Dutch Shell CEO Peter] Voser said today in a Bloomberg TV interview in Davos, Switzerland. That's below the 120 million tons a year he said is predicted by some forecasters and less than Qatar's current annual production of 77 million tons." According to another recent article, "A strong ongoing environmental protest movement in New South Wales and Queensland against coal seam gas (NYSE:CSG) projects is threatening to cripple the development of Australia's liquefied natural gas (NYSEMKT:LNG) industry".

    As this Oxford Business Group Review highlights, PNG has been increasingly attracting the majors' attention as a result of its unprecedented political stability, world class unexploited resources, and proximity to Asia. The $19 billion Exxon (NYSE:XOM)-led PNG LNG Project is coming online next year and is expected to generate $6.2 billion per year in revenue for the government for the next 28 years; Shell (NYSE:RDS.A) recently reentered the country and expressed interest in building a hydrocarbon resource; Total (NYSE:TOT) just struck a JV with Oil Search to explore for prospects in the Gulf region, which is where InterOil's acreage lies; Last May, the PNG National reported that "Chevron Niugini (NYSE:CVX), one of the United States' petroleum and gas giants, is returning to PNG to partner with InterOil to develop the second Gulf LNG project, Treasury minister Don Pomb Polye has revealed… He said he met with the representatives of Chevron Niugini yesterday who were here to look at the InterOil Gulf LNG project".

    The only remaining short case may revolve around the cynic's arbitrary expectation that a deal may involve little upfront cash or that the price will disappoint investors. Given how excessively capitalized the majors' balance sheets are at this juncture, however, it seems probable that the transaction will contain a significant upfront cash component. The most important point that the cynics have not yet grasped is that irrespective of the size of the cash component, the consummation of this deal will result in an imminent FID and a bankable resource. The stock's valuation will be increasingly predicated on the NAV of the resource, which I estimate is well in excess of 4X the current market value of the company. The company's cost of capital will be significantly reduced, liquidity will be plentiful, and the NPV of the aggregate payment to InterOil will establish a much more realistic benchmark by which the stock market will establish a worst case valuation for the stock. With InterOil's stock trading at less than $0.40 per mcf on my estimated year-end 2013 resource estimate and with confirmed interest in InterOil's project by majors, national oil companies and global utilities, it will take a miracle for the short thesis not to be obliterated in the coming weeks.

    Disclosure: I am long IOC.

    Tags: IOC, LNG
    Jan 28 5:52 AM | Link | 12 Comments
  • InterOil - Are NEC Approval And A Sell Down Of Elk/Antelope Imminent?

    Last week, The Korea Economic Daily reported that an official with the Korean Ministry of Knowledge Economy said "KOGAS has formed a consortium jointly with Mitsui and JAPEX to participate in Papua New Guinea's US$5.4-billion InterOil LNG project." (http://english.hankyung.com/news/apps/news.view?c1=04&nkey=201208222330311) Despite the conciseness of and market's apathy towards the article, there are several interesting nuggets of information that could have very meaningful implications:

    1) After an extended due diligence process, JKM wants a stake in InterOil's Gulf Project:

    In February, it was reported that KOGAS stitched together a consortium with Mitsui and Japan Petroleum Exploration to join InterOil's project as a strategic partner. (http://blogs.wsj.com/dealjournalaustralia/2012/02/07/kogas-japan-companies-eye-papua-new-guinea-lng/) As Wayne Andrews conveyed in a conversation transcribed in my previous Seeking Alpha piece (seekingalpha.com/article/815881-why-roya...), "We have provided unfettered data room access to qualified bidders with whom we have completed confidentiality agreements including a standstill provision. Many have accessed our data room and conducted thorough assessments. We are now working with a short list of parties capable of bringing an LNG processing facility to Papua New Guinea of a nature and in a manner which will be satisfactory to the PNG State."

    JKM, which comprises the biggest LNG importing company in the world, a $27 billion market cap Japanese conglomerate, and a formerly state-owned Japanese energy company with its primary objective being "to enhance Japan's self-sufficiency ratio", is blatantly one of the qualified bidders to which Mr. Andrews was referring. The reaffirmation of JKM's interest in InterOil's project after an extensive period of time has elapsed indicates that the conglomerate's due diligence confirms the resource contained in the Elk and Antelope fields is more than adequate to underpin an 8 mtpa liquefaction project.

    2) There are multiple bidders and the final selection process is underway:

    On InterOil's first quarter press release, Phil Mulacek stated, "We have received conforming and non-conforming bids for the LNG partnering and sell down of an interest in the Elk and Antelope fields that we believe would be accretive to shareholders." The last line of last week's article in the Korea Economic Daily, "The ministry official added, 'Currently the Papua New Guinean government is working on selecting development partners and detailed terms of the deal…'", provides a third party confirmation that there are in fact multiple interested development partners from which the PNG government and InterOil are choosing.

    The selection process is likely the final stage of InterOil's deal process, and it is almost certainly not a coincidence that this leak occurred subsequent to the PNG elections and the government's explicit support for the Project, which were in retrospect logical prerequisites for a multibillion dollar transaction to be consummated.

    Governor-General Sir Michael Ogio said the InterOil LNG project would be given priority support to ensure its delivery during the five year term of the new government in his opening address to Parliament last week, and the writing is on the wall. NEC approval of the Gulf LNG Project and final partner selection are clearly now imminent. Skeptics may continue their erroneous analogies between aquifers drilled at Puri and InterOil's massive reefal reservoir and they may continue to ignore that the non-reef micritric limestone matrix contains only a small fraction of the gas in place relative to the dolomitized reef in the Elk and Antelope fields, but last week's comments by the Korean government official make it evident that subsequent to an extensive due diligence process, major LNG operators believe that the Elk and Antelope reservoirs contain enough gas to underpin an 8 mtpa project, accretive bids were in fact submitted for a stake in InterOil's resource and selection and finalization could be days or weeks away.

    Disclosure: I am long IOC.

    Tags: IOC
    Aug 26 9:01 PM | Link | 1 Comment
  • Coeur D'Alene Mines Reports A Transformational Quarter That Warrants A Revaluation Of The Company’s Shares

    This morning, Coeur D'Alene Mines (NYSE:CDE) reported its second quarter earnings results, which significantly exceeded expectations. Following disappointing cash cost and production results from Barrick (NYSE:ABX), Goldcorp (NYSE:GG), and Newmont (NYSE:NEM) in the past two weeks, Coeur's stellar results were in stark contrast to those of the industry and a function of the company's relatively new world class mine portfolio. The company reported revenue of $254 million, significantly exceeding the $222 million consensus expectation. Importantly, gold production was up 44% sequentially, which was driven by Coeur's Kensington mine. Recall that Kensington was in a transitional phase in the first quarter of this year, and the company's disappointing results last quarter caused the stock to decline substantially. Cash costs were virtually flat sequentially, and gold cash costs were down significantly from artificially escalated levels. The company guided up its annual production to the high end of its previous guidance and costs to the low end. There hasn't been a single precious metals company of which I am aware that has guided up both metrics; in fact, most companies in the GDX index have guided both metrics down as a result of lower than expected grades and soaring labor costs. The company now has $200 million of cash on its balance sheet, and it is in a position to repurchase a substantial portion of its outstanding shares through its buyback program implemented this quarter.

    One highlight of Coeur's press release that is likely to be overlooked is the company's exploration success. As I indicated in my previous article, "Though the market may be concerned about CDE's production profile declining beyond 2014, the company has several low cost sources of production and reserve growth that investors are currently overlooking. Coeur is implementing an aggressive spending program on Palmerejo this year to advance the Guadalupe and La Patria deposits located near the primary deposit and to expand existing ore bodies through the operation of 6 core drills. As the core assays are released to the market in the months ahead, investors could begin to contemplate a significant upside scenario in which Palmerejo's production growth potential amounts to millions of additional ounces of silver. Past exploration at Palmerejo had been focused on only 10% of Coeur's >12,000‐hectare land position." CDE reported this morning that "mineralization at Guadalupe has now been defined over a length of more than 2.5 kilometers (+8,200 feet) from southeast to northwest and remains open to the northwest and at depth." Beyond the strong possibility that these results will lead to Palmerejo's resource being upgraded, veining and alteration similar to that of the main Kensington mine with encouraging gold grades were encountered at CDE's Kensington South target and the August 2012 mineral estimate for Joaquin reflects a 102% increase in contained silver and an 18% increase in contained gold in measured and indicated resources compared to the May 2011 mineral estimate.

    As I articulated in my Seeking Alpha piece on June 23rd (seekingalpha.com/article/739641-coeur-d-...), "As Wall Street grapples with the mining industry's persistent string of earnings misses, the monolithic declines across the group have presented an unprecedented opportunity to extract alpha. The confluence of peak gold production, rapidly depleting grades, and substantial escalations in cash mining costs has been supportive of higher commodity prices. Such trends, however, have had a significant adverse impact on the industry's margins. The key to making a fortune in the mining realm going forward is to invest in unique high quality assets with stable cash mining costs, clean balance sheets, and flat or rising production and reserves. Coeur d'Alene Mines (CDE) fits this profile perfectly and perplexingly trades at a significant discount to NAV, close to 3X EBITDA, and an 18% FCF yield despite having almost $100 million of net cash on its balance sheet. Coeur is buying back stock after recently implementing the first repurchase plan in the history of the company, and the resulting accretion could be significant."

    Coeur perplexingly continues to trade at a significant to its NAV of ~$25, but this discount should substantially dissipate following its results this morning.

    Disclosure: I am long CDE.

    Tags: CDE, gdx, nem, abx, gg
    Aug 07 11:25 AM | Link | 1 Comment
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  • Speculation PNG Prime Minister Peter O'Neill's trip to Japan this week is tied to $IOC LNG sell-down http://bit.ly/ZDcNqn
    Mar 18, 2013
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