Out of Africa

"I have been investing in African countries such as Ghana, Botswana, Zambia and Zimbabwe for years. Botswana was rich in diamonds, Ghana in cocoa and gold, Morocco in phosphates… Zamibia, with its emeralds and copper, and Cameroon awash in oil."

— Jim Rogers, Adventure Capitalist

ACROSS THE VAST CONTINENT of Africa, lurking underneath the soft red soil is a promise. The promise lies beneath the dirt, in the land that gave birth to civilization. The promise is of riches, riches given by the world to its people in the awesome form of natural resources.

Africa holds some 99% of the world’s chrome resources, 85% of its platinum, 70% of its tantalite, 68% of its cobalt and 54% of its gold. Africa has vast resources of timber and bauxite. Diamonds, too, with nearly half of the world’s production. At various times in history, it has been a geopolitical playground as nations and companies compete to pry loose Africa’s natural gifts.

So far, success has been hit or miss. Nasty political regimes, corruption and incessant violence — and a long history of it — hamper any effort at a stable and rich Africa.

Despite the wild uncertainty of the place, some companies have had success there. They’ve built up good businesses and have made plenty of money. It’s all of matter of exactly where, of course, and in what commodity.

The idea I have for you here is an oil company with its primary assets in West Africa. It’s a small company, but it’s enjoyed ample success in the region. I’ve followed the company for years with interest. Recently, the shares have come down well off their highs, for reasons I think are temporary. At less than $5 per share today (the old high was nearly $9), you have a good shot at doubling your money.

Let me give you more of an idea about how I’m thinking about Africa these days.

Specifically, I think Africa will play a more important role in slaking the thirst of the West’s oil-guzzling economies. It’s already more important than you may realize, as I wrote in the September issue of my paid newsletter, Capital & Crisis. The U.S. already gets about 18% of its crude oil from Africa, mainly from Nigeria, which makes up about half of that total. Some estimates say we’ll get 25% or more of our oil from Africa by 2015.

That’s not far away — a mere eight years off. My son is eight years old, and that time has flown by like nothing.

If Africa is going to make up 25% of U.S. oil supplies, that implies a lot more growth and interest and money in African oil assets. In particular, West Africa — that band of countries snaking along the Atlantic Coast — Nigeria, Chad, Cameroon, Gabon, Equatorial Guinea, Sao Tome and Principe, Congo and Angola.

West Africa has plenty of oil. Angola alone has proven oil reserves of over 25 billion barrels. (Interestingly, Angola is also one of China’s principal oil suppliers.) Also, in West Africa, new discoveries happen more frequently than anyplace else.

Again, no doubt the oil is there. The question is getting to it profitably. That’s the problem. But there are a few points here that take some of the edge off. For one thing, the U.S. government likes West Africa as a supplier. In many ways, it’s better than the Middle East, especially the offshore oil.

Kevin Phillips makes this point in his book American Theocracy. West Africa is easily controllable by U.S. naval power — much more so than oil supplies in the Middle East. Phillips opines that the waters of the West African nations could be "a middling rival to OPEC." The U.S. already has bases and agreements in place with Senegal, Mali, Ghana, Gabon and Namibia.

Then it gets hard talking about these African countries as one big undifferentiated group. No one likes Nigeria, it seems, which has all kinds of problems. But Gabon, for example, is different. Gabon is one of the most prosperous countries in Africa. Gabon has a per capita income four times that of the rest of the sub-Sahara. It’s rich in manganese and timber — and oil. Explorers discovered oil offshore in Gabon in the 1970s. Oil is now about half of the economy.

Gabon also has the longest serving head of state in Africa — El Hadj Omar Bongo Ondimba, who has been in power since 1967. That doesn’t mean Gabon can’t screw up. It has and will do so again, I’m sure. In the 1990s, the country suffered through massive currency devaluation thanks to inept government policies.

Still, you can soften the risks somewhat by what country you invest in. There are big differences between some of those West African countries, as big as the differences between a bullfrog and a French poodle.

Nonetheless, where there is oil, there is the promise of riches. And where there is the promise of riches, there are people who will try to get them. It’s the lure and romance of buried treasure. It brings fortune hunters like water holes attract wandering elephants across the arid African plains.

Chris Mayer

October 26, 2007

The Daily Reckoning