ProEdgeWire Assaulted by Hackers: Stans Energy Gets Mugged In a Tough Neighborhood
Yesterday ProEdgeWire was attacked, according to our server provider in Chicago. Receiving 1000-2000 visits a minute, the influx causes us to be down for most of the day and it did not escape our team that this occured on the heels of the Malaysian election, which we and many others declared a win for LYNAS and the ROW rare earth supply.
Since the Technology Metals Summit, many have asked me about an update on Stans Energy after the exclusive interview we recently did, but when I received Byron King’s update, I contacted him and requested a reprint — which he graciously agreed to for a piece he titled: Stans Energy Gets Mugged In a Tough Neighborhood.
Byron King: I’ve seen an influx of questions about Stans Energy (HRE: TSX-V). Stans has issued several news releases of “negative” tone, recently. The company’s share price has been unwinding. Many Stans investors are nervous, and understandably so. Where is this heading? Let’s examine what’s happening, and think it through.
Several RE Ideas In the ESI Stable
If you’re new to ESI, Stans is a Canada-listed company that’s working in Russia and Kyrgyzstan to reactivate the rare earth (RE) capabilities of the former Soviet Union. That is, Stans is not working on a new, green-field RE play — starting from scratch, so to speak. Instead, Stans has worked to redevelop a now-closed mine-mill-processing system that actually used to deliver RE in the days of the Cold War.
Stans is one of several RE horses in the ESI stable, and I’ll address its issues in depth, below. I should mention up front, however, that I’ve followed several different RE plays in ESI, over the past three years, with geographic, geologic and technical diversity.
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In addition to Stans, there’s Ucore Rare Metals (UCU: TSX-V), with a hard-rock play out of Alaska. There’s Lynas (LYC: ASX), operating in Australia and Malaysia. I’ve discussed Medallion Resources (MDL: TSX-V), with its out-of-the-box approach to processing monazite mineral sands, at a site in the Middle East. Plus, I’ve mentioned several other RE plays, over time, here in ESI. So Stans isn’t the “only” RE company I’ve discussed, as at least one reader seems to believe.
The Latest News
Sad to say, we’ve had a generally miserable year and more in the overall small cap resource markets. Pretty much everything to do with natural resources is “down,” on the Toronto Venture Exchange, including Stans — whose shares have tumbled from once-lofty levels to the $.20 range. It’s a terrible take-down.
Now let’s look at the latest unfortunate issue for Stans, which started about a month ago. One arm of the Kyrgyz government sued another arm of the Kyrgyz government over a mining license that Stans holds in Kyrgyzstan, at a site called Kutessay. Specifically, the “State Prosecutor” of Kyrgyzstan sued the “State Geological Agency” (SGA) alleging improprieties in SGA’s decision, in 2009, to grant a mining license to Stans.
This is odd legal procedure, at least to an outsider like me. It would be as if the U.S. Department of Justice sued the Department of Interior over issuing an oil license after a bidding round. The left hand of the government is slapping the right hand. Huh? Don’t these people talk with each other?
Whatever the Kyrgyz legal procedure may be, however, if you follow Stans then you know that Kutessay is the company’s future source of RE ore. There’s much at risk, here.
That is, Stans controls mid-stream RE processing facilities. Stans has access to excellent RE-related scientific and engineering talent in Russia — namely, the Russian Leading Institute for Chemical Technology (VNIIHT). But without a source of RE ore? Then Stans has a very big problem.
On Friday evening, the other day, I received word that a court in Kyrgyzstan just issued an injunction against “communication” between SGA and the Stans Kyrgyz subsidiary. It seems that the Prosecutor doesn’t want SGA to coordinate its defense of the RE mining grant with Stans, the recipient. Again, this is very unsettling news.
The Heightened Political Risks
Where is this going? Well, a lawsuit against the SGA-issued mining license kicks up the political risk for Stans. Yes, Stans will litigate, but this is a whole new ball game. Stans is getting mugged.
Over the past year, and for much of the trip down the escalator of falling share price, I/we could rationalize things and say that the market is unwinding for everyone. Gold, silver, copper, uranium, oil developers, etc. are all down. It’s not as if the Stans RE business model has glaring, fatal flaws — at least, not more than many other speculative, overseas mining plays on the Toronto Venture Exchange. Hold that thought.
This new, heightened political risk issue, for Stans, is immensely frustrating because its technical and execution risk has dramatically decreased. Indeed, based on superhuman efforts by Russia’s VNIIHT, in the past year, the overall RE chemical processes are remarkably good at yielding high quality, saleable material from raw ore.
In other words, on a technical basis, Stans has flows and hydro-metallurgical processes that actually work! Unlike most other RE plays out in investment-land, Stans is on the cusp of producing real, hall-marked ingots of RE. The science experiments are over.
Also, from the standpoint of execution, things have moved along well for Stans. The science and engineering teams are coming together. The necessary facilities are setting up. And Stans is holding fruitful talks about downstream off-take agreements with RE buyers and users. That part is all good.
Now, along comes the Kyrgyz State Prosecutor. If the Kyrgyz G-man wins his case against SGA, Stans could lose its RE mining license. There goes an essential part of the overall Stans RE project. As outside investors looking in, the Prosecutor’s lawsuit kicks up the political risk for Stans.
How Worried Should We Be?
I understand the nervous — even angry — tone of some recent mail from ESI readers, meaning good-faith Stans followers. I’ve spoken with Stans management over the past couple of weeks, including talking with CEO Rob MacKay in Toronto last week. Of course, Stans has excellent lawyers and will fight the Prosecutor, while defending its title and interests.
Looking back to 2009, I’m confident that Stans did nothing wrong when it acquired the Kutessay concession. Stans paid good lawyers to do a good job. Stans followed every law and rule when it acquired its mining title. Still, this new Prosecutor lawsuit is not good, particularly because Stans spent much of last summer and fall fighting off (and WINNING!) similar legal challenges against its mining titles.
I really thought that the previous litigation ended the title challenges for Kutessay. After Stans kicked out the claim-jumpers from last year, I though we’d have smooth (well, smoother) sailing.
Now we have the Kyrgyz State Prosecutor inserting himself into the mix. It’s very troubling. Actually, it stinks to high heaven, and reflects every negative stereotype that outsiders have of doing business in so-called “emerging” markets. (They’ll be “emerging” forever, too, as long as they pull this kind of anti-outsider stunt.)
A Very Irregular “Prosecution”
Now what? Is the Prosecutor’s lawsuit a done deal? Is Stans “doomed,” as one ESI reader asked? Is Stans “toast,” as another reader opined? No, it’s not over… but things may get worse before they get better. Meanwhile, here are some things to ponder.
First (and curiously) the Kyrgyz Prosecutor has filed his case AFTER the statute of limitations expired to challenge the Stans mining license. Indeed, the government lawsuit is asking a court to lift that statute of limitations, to permit a retroactive challenge to the government’s previous grant of title, via SGA.
Perhaps this is all part of some quaint Kyrgyz folk-custom that goes back to the days of Genghis Khan. But to an outsider — unschooled as I am in the nuances of Kyrgyz law — it appears highly irregular, if not gangster-like.
Second, the Kyrgyz press is filled with scandalous details of how the Prosecutor is backed by outside players and money, apparently from China. On that point, I have no first-hand knowledge and can only cite these “foreign press” accounts. But it’s no stretch to say that Stans is clearly under attack by a form of “lawfare,” in which competitors and opponents improperly use the court system to undermine (so to speak) someone else’s development efforts.
Third, this new, “official” Kyrgyz effort harms an important Russian effort as well. From what I understand, there’s Russian state-level interest in the overall RE redevelopment project. The old mine at Kutessay was an important Soviet state asset. The Russians want this redevelopment venture between VNIIHT (an arm of the Russian Atomic Energy Ministry, ROSATOM) and Stans to work.
Now along comes some Kyrgyz legal functionary to screw up the whole Stans-VNIIHT business arrangement, in a way that could set back Russian RE development by five years or more. All while the rest of the world moves ahead — Ucore, Medallion, Lynas, etc. Is this good for Russia? That’s for the Russian partners to answer.
It’s Still a Long Walk Between the Courthouse and the Bank
Stans appears to have legitimate legal defenses against the Kyrgyz Prosecutor. On the merits, Stans ought to “win” — eventually. But along the way, Stans is losing valuable time and burning money that it cannot easily replace. (It’s good that Stans has always run a lean, tight ship. Still, paying lawyers is not how to mine RE ore.)
I started discussing Stans back in 2010. Ever since, people have said things, along the lines of, “Gee, investing in Russia and Kyrgyzstan is risky, isn’t it?” To which my answer was always, yes it’s risky; I know that; and we’re in a tough part of the world.
Now, with the Kyrgyz Prosecutor trying to take away the mining license, we have a very big, negative example that illustrates the point about tough neighborhoods.
I’m not about to concede defeat, over the long term. Stans can fight the Kyrgyz lawsuit, and has a strong case to present. Still, I suspect that the shares are idle money — with down-side risk — while that happens.
Of course, in the event that Stans prevails — after a court proceeding, or if some other intervention occurs (think about a Russian hammer dropping on somebody’s proverbial head) — there’s up-side here as well. As it all plays out, I suspect that we’ll see that, even in Kyrgyzstan (and like in the U.S.), it’s still a long walk between the courthouse and the bank.
Soviet Technology, Tribal Politics
Kyrgyzstan is literally on the old Silk Road. You have to expect bandits and marauders, and you have to fight to hold your property.
At this stage, in partnership with VNIIHT, Stans has made excellent technical progress with the mine, mill and metallurgy, all the way to casting real RE ingots. I anticipate that the Russians don’t want this project to fail, and that the court issues will resolve. But it’s going to be a longer, harder, more frustrating slog than we ever expected. — end of excerpt from Byron W. King and special thanks to Agora Financial for the reprint.
An accomplished entrepreneur and corporate finance professional, Tracy Weslosky is the CEO for InvestorIntel Corp. and the VP of Business Development for Bellotti Capital Partners ... <Read more about Tracy Weslosky>