canmex minerals

Canmex Minerals

Screw the Pyramids! Introducing Africa’s Real Treasure

Over the past decades, the word oil has grown to become more or less synonymous with the Middle East. Not many associate the black gold with Africa. Even fewer know that the two used to be one and the same.

Geologically speaking, that is. We’ve all been taught that the continents rest on huge plates, and that these plates are constantly on the move. Collisions between plates cause phenomena such as earthquakes and volcano eruptions. When they move away from each other, on the other hand, the motion rips land apart, allowing water to rush in.

One the most well known plate movements today is California making a split from the rest of the continental US (not just culturally, but literally), allowing the Sea de Cortez to travel further and further up into the Imperial Valley. The Gulf of Eden was created in a similar manner. The plates holding the Middle East and Africa moved apart and water flowed in, separating Yemen, where explorers have made some of the nicest oil discoveries in the world, from . . . Somalia.

More precisely, straight across the water from Yemen lies an autonomous part of Somalia called Puntland. Upon surveying Puntland, researchers have concluded that the geological area in Yemen where all those high-producing oil basins are located, was simply split in the middle when the continents parted. Some even go as far as saying Puntland has the same type of geology as Saudi Arabia, which holds the largest oil wells in the world.

So why is it that Somalia is about the last country that comes to mind when one thinks of oil? The main reasons: fear and political problems.

In the early nineties, this was quite a competitive area. Half a dozen companies rummaged Puntland, mapping it, drilling test wells, and learning all about it. Approximately one out of four of their wells hit oil. Unfortunately, there was no infrastructure to bring it to the markets. And before anyone got around to solving this problem, civil unrest broke out, scaring most companies away.

For those who have had the pleasure of reading previous issues of The Goldbug Letter, it should come as no surprise that the Lundins were some of the people competing for the rights to develop Puntland back then. Known for their tolerance for political risk and for making bargains in areas where no one else wants to go, they were also some of the first people to return once things started showing signs of quieting down.

Similar to the case with Jura Energy and those concessions (October issue), not long ago, an Australian company called Range Resources got their hands on the rights to all areas of Puntland. Unfortunately, they lacked the money to explore and develop them. The Lundins - followed wherever they go by their faithful fan club - doesn’t have such a problem. And so their company Canmex Minerals (CXM-V), was able to seal a sweet deal with Range. Basically, with all the competition gone from Puntland, the Lundins got to pick and chose; they literally circled the basins they wanted. The terms of the deal? By spending $50 million on these properties over the coming four years, Canmex gains an 80% interest in everything developed.

Having secured these rights, the Lundins immediately recruited a management team familiar with Yemenese geology from a company called Valkyrie’s Petroleum. The later was recently acquired by Lundin Petroleum after climbing from $0.70 to $14.00 – a sweet twenty-for-one - over the past three years. Needless to say, with that kind of history these people, too, have a certain following among investors, adding further to the financial power of Canmex.

So what’s the downside? Why isn’t everyone buying Canmex and how come it’s trading for as little as $3.40? Well, remember the most basic principle of investing? The higher the risk, the higher the potential return? Canmex is no exception. Somalia is not a politically stable country. Quite the contrary, actually. After more than ten years of battles, the south of the country is still unsafe (especially around the capital of Mogadiscio), with numerous groups fighting each other and no sign so far of a reconciliation. The middle region of the country is occupied by a large, Somalian tribe, which has so far proven strong enough to defend themselves and hold their grounds. This functions as a buffer between the war zones in the South and Puntland in the North. There’s also a bit of unrest in the Northwestern region of the country, although the inhabitants seem more prone to fight the Ethiopians on the other side of the border than their fellow Somalians.

Where does this leave Puntland? Just like the geographically alike Yemen on the other side of the Gulf of Eden, this area mainly consists of inhabitable desert. The few residents are actually quite peaceful – Puntland has a democratically elected president and declares itself an autonomous region of Somalia. No significant conflicts have been reported from the area during the past two years.

So while Canmex certainly isn’t for the weak hearted, or for those prone to anxiety or sleeplessness, I can’t help but thinking that I would be crazy if I passed on this one. Who wouldn’t want a shot at the next Middle East? This could be a second chance to get in early on an emporium. The Microsoft or Qualcomm of oil stocks. Yes, if something goes wrong along the way I could lose just about every dime I put into it. But if things happen according to plan, Canmex will go from a $45 million market cap junior to a multi billion dollar enterprise.