Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
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@Belgrano - I think you’ve missed one party out whose blessing is required before anything happens.
Barzani has gone to Iran “ According to an official from Barzani's office, the visit is of "significant importance", coming after "extensive talks" with political leaders in Baghdad, which the Kurdistan Region President described as "ushering in a new phase in the relations" between Baghdad and Erbil.”
https://shafaq.com/amp/en/Kurdistan/President-Barzani-lands-in-Tehran-for-an-official-visit
Will bending the knee be sufficient or has he had to take some lubricants with him?
We have 4 separate parties, the IOC's, Kurdistan , Baghdad, and Turkey all in the mix.
Each will have to surrender something in order to obtain steady exports of crude. None wants too, but after a year of inaction all sides hopefully understand that flexibility and trust is required.
1.Turkey will have to give water, and its no small thing as it will cost them dearly in electricity production while they have a chronic water shortage. Also blamed is climate change for this, but more probable is over extraction. Turkey wants Kurdish crude and with current contracts as they part own some companies and get a couple of bites from the crude export cherry. Its more lucrative than water, and might lead to gas exports as well.
2. Kurdistan... Might have to surrender crude control to SOMO, and lose out on backhanders to tribal chiefs. Baghdad wants control of all crude produced not just exported, as they know lots of backhanded deals currently taking place.
Reward will be more regular payments from Baghdad, to its employees and not "ghost employees".
3. Iraq...Dislikes and distrusts the Kurds, and would probably live with additional loss of crude sales just to try and bankrupt them. However seriously suffering water shortage so desperate for deal with Turkey. Fears population unrest from farmers unable to irrigate and polluted water used for drinking.
Sounds crazy but built a nice new large hospital but discharges all waste untreated into rivers used for drinking , then hospital fills with local people made ill by the contamination.
Iraq uses dilution as a method of controlling pollution, so wants more water flows.
Iranian influences still may scupper any deals by stopping legislation to pay the IOCs' more per barrel.
4. IOC's, owed millions in back payments and for crude already produced and sold. may have issues getting these payments. Wants their contract conditions upheld and not financially diluted.
So all in all a bit of a nightmare to sort out, and only takes one party to fail to fully agree and not implement and it all falls apart again.
perhaps a 10% chance of achieving something in my book.
While I do agree with the points so well made by Belgrano, I’m sitting on a fence having heard so many ‘logical’ reasons why the pipeline ‘will open’ in the past. Therefore in the present I for one can only hope the market will reward a cash positive company that even in adversity is profitable. As I hope the next update will confirm.
In the meantime Patience Required.
For me looking at our companies political future this is the way I currently see it.
Erdogen is no fool and Baghdad listed water issues at the top of the meetings agenda. No formal agreement was reached, and notable that unlike last summer we are not seeing a deluge of water being released from Turkish dams "as another act of good faith". /they did that last year and by solving the Iraqi water shortage, it enabled them to then stonewall talks for a year, until the issue appears again as the dry season looms this year.
https://www.rudaw.net/english/middleeast/21042024
However Erdogen then visited Kurdistan, where crude exports were top points of discussion with water reduced to second place. Turkish investments in Kurdish oil companies and export is very heavy and they also want Kurdish crude flowing again to Turkey, as it makes them a lot of money at a time of financial hardship and rampant inflation.
https://www.rudaw.net/english/middleeast/19042024
Now we do have more committees set up I expect as a result of this visits looking at ways to integrate Kurdish exports into Iraqi law to allow the crude to flow again.
https://www.rudaw.net/english/kurdistan/030520244
However I join with fellow investors here in being highly sceptical of any success, and hope to be proved wrong. for the following reasons.
1. they have already carefully covered all this ground before.
2.They know they have to tweak/amend Iraqi laws to enable larger payments.
3. IOC's not being currently included in discussions...Are they actually serious or just playing the normal lip service.
4. Iranian judges control statute, even if the commitee recommend/agree to tweak the law, can easily be delayed by those with Iranian views in power, exactly what they did at the start of this year.
I expect its going to be a very dry year in Baghdad this year.
@SeplatWinner, it’s good to see someone new prepared to put their work up for others to look at.
How have you arrived at the $430 million Sales figure for 2025e?
There a number of variables that need multiplying together, so what values have you used for the individual components and why?
SeplatWinner
Give me an email where I can contact you, and then I can help you regarding the PSC and the cost recovery pool next week.
Without prejudice.
Not being privy to all the discussions going on re settlement of the PSC- and payments issues, I looked again at the contract to see what it says about it all and note that the PSC, signed by GKP, Texas Keystone, MOL and the KRG/MNR on 6th Nov-2007 included the following:
Article 43 – Governing Law, Fiscal Stability and Amendments
Governing Law
43.1 (Confirms contract to be governed by English Law)
Fiscal Stability
43.2 (Contractor obligations shall not be changed by government)
43.3 The GOVERNMENT guarantees to the C0NTRACTOR, for the entire duration of this Contract, that it will maintain the stability of the legal, fiscal and economic conditions of this Contract, as they result from this Contract and as they result from the laws and regulations in force on the date of signature of this Contract. The CONTRACTOR has entered into this Contract on the basis of the legal, fiscal and economic framework prevailing at the Effective Date. If, at any time after the Effective Date, there is any change in the legal, fiscal and/or economic framework under the Kurdistan Region Law or other Law applicable in or to the Kurdistan Region which detrimentally affects the CONTRACTOR, the CONTRACTOR Entities or any other Person entitled to benefits under this Contract, the terms and conditions of the Contract shall be altered so as to restore the CONTRACTOR, the CONTRACTOR Entities and any other Person entitled to benefits under this Contract to the same overall economic position (taking into account home country taxes) as that which such person would have been in, had no such change in the legal, fiscal and/or economic framework occurred.
43.4 (Defines procedures to be adopted should the contractor believe its benefits have been detrimentally affected by any changes)
Not being a Commercial Lawyer, I am unable to determine the weight and watertightness of Article 43.3 and would welcome the thoughts of others.
If completely watertight, does the company have a problem with the KRG’s willingness or ability to pay its dues?
If so, does this problem take precedence over the CGI issue of commercial returns (CO + PO) from the contract?
In a nutshell, Is Erbil the main problem or is it Baghdad?
PUTUP,
A couple of threads back I shared with you my estimates and asked if you could contribute yours, to make my numbers more accurate. You didn't provide us with your estimates, but you advised me to read up on the oil cost recovery mechanism - which I did. Last week again, I published my estimates and ask if you were willing to give us an approximate on how your numbers looks in a reopening scenario. You probably didn't see my Q, considering all the activity and interest in this ticker on this board; I doubt you indeed saw my question and left it unanswered on purpose.
Here's a link with an excerpt of my numbers: https://i.imgur.com/fQlc1zs.png
I'm in contact with two analysts covering GKP and we've discussed the cost recovery pool. We don't see a scenario that it falls to zero, and, even if it did; it's hard to envision profits to implode in a way that you're describing. (I ascribe the receivables 0 value at this moment).
Would you be willing to share with us your approx. net profit in a reopening scenario? Doesn't have to be decimals, of course. Very much appreciated. Thanks!
At least we do have a couple of officials now saying that the export position will be sorted out. I'm also in the sceptical camp on this one and look upon it as a brilliant bonus if it happens but most certainly prepared for a 15 month wait till current pipeline contract expires if nothing but biscuit munching and hot air comes of it. We know its a tactic employed too often by Baghdad when pressure on them builds and in this case from Turkey and Uncle Sam. However we have not had one jot of evidence that they have in any way accepted our contracts, or even going to shift from a paltry $6 per barrel of crude.
A debt is unpaid, who was the bill sent to for payment, presumably there exists somewhere a contract governing the conditions of payment, the recipient hasn’t paid within that time limit…. take them to court seeking payment (plus interest).
I suspect that were the circumstances reversed - we would feel the full wrath of that court in recovering payment ?
It’s that simple.
Unless of course, no enforceable contract exists, or we are operating under a dictatorship with no accountability to anyone anywhere (until the regime is brought down).
"We can all lament that potential loss of $151m, "
Without the clear path to the recovery of this, the short term upside is limited IMHO. A lot is priced in - both with respect to losing the $151m (negative) and reopening of exports (positive).
"without its recovery being a structural impediment to progressing GKP's self-funding proposition."
Growth and the self funding proposition depend heavily on the contract and its cost recovery element. Yet another area of great uncertainty.
So we have $151 million of receivables and future growth up in the air...
We've still got historical costs to recover: the circa $121 million embedded in the receivables balance and, I'd estimate, a further $45-50 million beyond that. After that we just have the profit oil stream (as cost recovery = cost incurred). Free cash flow generation in the future will not look at all like the last couple of years.
This is Iraq, so if the locals get angry enough the FGI will keep the subsidy low but drive the pump prices back down by paying the IOCs less 😁
On a more serious note, that is one hell of a deficit budget they ran last year and doesn’t match Sudani’s comments when he RAISED the spending for this year based on roughly the same income.
Heard the one about the honest Iraqi politician? Asif…
Could well see the local crude prices paid rise a lot more as retail diesel and petrol prices have just risen a full 30%.
https://www.thenationalnews.com/news/mena/2024/05/01/iraq-fuel-petrol-prices-cost/
Sadly the Iraqi Oil Minister is a lying toad and has promised a resumption of oil flows numerous times. Hard to tell if the 'committee' is genuine or another delaying tactic 🤷🏻♂️
I think we have to follow the money here. We produced the crude oil and it was sold (its not still in Turkish tankage), and the proceeds were taken by the KRG, and although they know they owe us 151M which is our rightful dues, they have wrongfully blown the money elsewhere. What can they now do.
1. GKP to have "free carry", taxes, rates, etc to help against debt.
2.Also the KRG do get a decent percentage of the value of the crude produced, possibility that they forfeit this income going forward until debts repaid. will mean more to gkp.
Straycat, no way am I bailing.
When this mess is eventually sorted out we will hopefully be in a much safer climate for future payments and for surety of how the field will be developed into the future. I cannot believe the decisions to restart exports will not encompass all those discussion points. A fresh start, so to speak.
Also, concerning the debt, GKP should not concede, in my opinion. This is a political issue between the central and regional governments. But I agree that the company can make generous proposals for a repayment plan that suits both parties.
Https://www.kurdistan24.net/en/story/34790-APIKUR-welcomes-formation-of-Baghdad-Erbil-committees
"Hayyan Abdul Ghani, Iraq's Oil Minister, told Kurdistan24 earlier that the production and export of oil from Kurdistan Region fields would be resumed."
"Meanwhile, Kurdistan24 was informed by the Director General of SOMO that their recent meetings with the Kurdistan Regional Government and the Ministry of Natural Resources in Erbil were positive on the issue of Kurdistan Region oil export to Turkish Ceyhan Port. The Turkish side is making preparations for export."
Bring it on!
The Markets have obviously discounted the delinquent debt and re-valued GKP accordingly.
Quite rightly in my view.
There's no need for nuance here.
Let's assume the debt's now a real problem while continuing to pursue it relentlessly.
And get on with the development of the business.
In a different climate where the old 'principles' don't apply.
We can all lament that potential loss of $151m, without its recovery being a structural impediment to progressing GKP's self-funding proposition.
There will be no trust between the parties going forward. Obvs.
Yet the stakes are worth the risk...still.
GKP should drill down and enter a new set of negotiations with people they don't know or trust. Bit like they did with the KRG!
Right now, where's the downside?
Or we should all bail.
@invstrat, the KRG have not broken any clauses in the PSC,, they have failed to make payments under a separate Sales Agreement.
When it came to the company’s payments to the KRG they paid those required under the PSC but not those under separate contracts.
KRG have effectively broken their contract with is by not paying according to same contract.
KRG compounded the felony by indirectly involving us in exporting the oil illegally via Turkey.
ICG claim that the local IOC contracts within Kurdistan are not legal under Iraqi law anyway.
Why don’t the ICG offer us a new, legal contract then ?
Why are they afraid of the wealthy KRG tribal rulers ??
Three viewpoints wrt the PSCs:-
#1 The contracts were illegal when signed
#2 The contracts were legal when signed and they are solely with the KRG.
#3 The contracts were legal when signed and through the Sovereignty argument, even though they look like they are with the KRG, they are effectively with the FGI.
So if you were offered 80% of the debt, to be repaid over time as cost recovery through a new commercially equivalent contract with the FGI, would you accept the offer under each of the three scenarios?
#1 YES!!!!
#2 Yes, move on, the future looks good.
#3 Hmmm, probably Yes. Proving you are right sometimes just isn’t worth it.
"And the ICG feel no natural responsibility for the $151m debt because it was not incurred by them. It's not their contract.
If they're going to take it on, it'll be on their terms. Almost certainly ugly for us. But they probably won't.
And that's what we've got to recognise. A problem. "
Of course it's a problem and one fully recognized by all. It's already written off in the current stock price. Also, it represents a quarter (actually just over) of my forward fair value price. That's a big hit if it's gone.
The more nuanced question is the following. Let's assume the ICG say the debt isn't theirs and that the KRG have no way of paying i.e. we never get it. What will be the position taken by the ICG/SOMO with respect to the circa $122 million of it which is cost oil recovery. Will they say "you invoiced it, and it's not our problem that you weren't paid, and hence it can't be invoiced again and recovered from us." That is materially different from a situation in which that $122 million is still recoverable (from SOMO/ICG). In the latter case the hit is only the $30 million of profit oil. Who knows...
No one knows. Correctly, in my opinion, the current stock price has discounted the $151 million to zero - even though the final outcome might possibly be much better. Assuming such a discount is appropriate, and assuming a return to exports in Q4 and NO material impact to the current contract, I believe the market has priced in almost all the value of 50k production through to the end of the license. I make it only 10% cheap at current levels (on those assumptions).
(And paying today for 90k rather than 50k would only add about 60p of value.)
So a lot of value rides on recovering the receivables or at least the cost oil recovery therein.
That doesn't change the fact that the company is carrying excess cash which should be returned (alongside any near-term future cash generation from local sales or otherwise) via a buyback.
Waffle. Waffle. Beach day.
Points well made V.
However, the world's turned.
And as a Board and shareholders we need to recognise that and turn with it.
I know you were punished by previous events, but you've always represented yourself with dignity on this bb.
I'm just asking that you run with the new state of affairs and deal with the prospect that the $151m might not be recognised in any new arrangement.
Nobody would be comfortable with that.
But that could be the new reality.
That's all.