Ferro-Alloy Resources Ltd (LON: FAR) might well have a superb vanadium project in Kazakhstan – but the problem of course is that it’s in Kazakhstan. This puts many of our usual valuation metrics of a mining or minerals project out the window and brings in something that we don’t usually have to worry about – the legal viability of the project at all.
Do note that nothing here is about Ferro-Alloys’ activities themselves. There is no accusation or even hint about the company. But the more general background does mean that there could be a problem ahead.
The problem is that Kazakhstan is undergoing a certain amount of civil unrest. Ferro0Alloys’ production site is in Kazakhstan. This is why Ferro-Alloys stock is down some 15% or so today. What happens next depends upon what happens to, what is the outcome of, that civil unrest.
The business case, on its own and without political risk, is pretty good for Ferro-Alloys. The conversion of near waste products into a vanadium concentrate or ferrovanadium, well, why not? The associated byproduct of interesting amounts of ferromolybdenum also works as a business case. Kazakhstan has a significant steel industry so local consumers for reasonable amounts of output are available. And there’s always the possibility that the threatened vanadium battery market will really get going in the future, raising price substantially.
But that’s not the base problem today. Rather, there’s that civil unrest. If it all fades back to as it was before then the current share price wilt at Ferro-Alloys will likely rebound. We’d be left with just the usual business risks of ability to perform, the final consumer markets for the production, and so on.
It’s if the civil unrest is successful in toppling the current ruling order that things will become more difficult. Again, this is not casting aspersions on anything at all that Ferro-Alloys themselves have done. However, it is true that large amounts of the current unrest are generated by a general feeling that the allocation of productive assets hasn’t been fair. Claims of corruption or a ruling caste waxing rich while the people waste away are commonplace.
Given this feeling which is generating civil disorder, this has to be a problem for anyone with assets in the country. Not at all because there was any corruption in the allocation but merely because of the feeling that there might have been. Feelings don’t have to be true for people to act upon them after all.
That is, if there is a change of government there’s potentially a wholesale re-examination of who owns what and why. To the point that there could well be a wholesale re-allocation with those who acquired entirely legally, like Ferro-Alloys, being punished along with those who might not be quite so pure.
In this short term, Ferro-Alloys is likely to be trading as the inverse of the probability of the overthrow of the government. Entirely nothing to do with the prospects of the business itself but over worries concerning continued ownership of it. Ferro-Alloys is going to be dominated by that political risk for the likely short-term future.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.