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North Korea: Witness to Transformation

Psst, Wanna Make a 2,500 Percent Rate of Return?

by | November 15th, 2013 | 06:54 am
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One of the more enjoyable aspects of running this blog is that readers send me things. I’m not yet on the level of Tony Kornheiser, whose listeners send him thing like sausages, bottles of whisky, and porn star autographed paraphernalia, but I can dream. In the meantime, I receive things like brokerage reports flogging 2,500 percent returns investing in North Korean oil refineries.

The report comes from BDSec JSC, of Ulaanbaatar, Mongolia.  According to the 18 October report and subsequent Twitter updates, HBOil (MSE: HBO), a joint venture partner with North Korean state-owned Korean Oil Exploration Corporation (KOEC) has bought out Ninex Energy’s 20 percent shareholding in KOEC International Inc. (KOECII), with the option until 31 January to acquire a 51 percent stake in Korex. According to the report, Korex owns the Sonbong oil refinery (the destination of the heavy fuel oil transfer under the Agreed Framework) and the exclusive rights to oil exploration off North Korea’s east coast. The refinery has been mothballed since 2009, and the plan is to convert the associated power plant to a coal burning plant, a process to be financed by exporting the incoming heavy fuel oil (I wonder if anyone has told the Six Party Talks negotiators about this scheme?). In short, “the land grab in the DPRK is now afoot, and HBO [the Mongolian oil company, not the American cable TV network] has the privileged status as the only publicly traded entity in the world, where investors can exclusively gain an unprecedented access to exposure to the petroleum industry of the DPRK.” Wow.

Calculations in the report suggest that the rate of return on this investment could range from 4,000 percent to almost 42,000 percent. 2,500 percent is a very conservative estimate on BDSec’s reckoning. Double wow.

(At this point I feel as though I should include a disclaimer similar to those that appear on sites providing point spreads for NFL games: this information is purely for entertainment purposes, neither PIIE nor Marcus Noland recommends investing your money with BDSec blah blah blah. I wonder if Paddy Power knows about this?)

Anyway, according to BDSec, everything is going well in North Korea: leader Kim Jong-un has called for “’radical’ economic reforms”; the country has chosen the Vietnam model as the path to imitate; the Chinese and Russians, and even the South Koreans, are jumping in; the country is opening SEZs like Kaesong (though no mention of its closure); there are multiple methods of dispute resolution including the court system (though no mention of Xiyang or similar expropriations), concluding “We met the people, ate the food (which was excellent), walked the land, and it was a tremendous experience. For this reason, we will likely organize a trip for investors in early 2014, so that parties interested in investing in the DPRK will have the same benefit we did.”

Oh, and the “magnificently constructed” Emperor Casino and Hotel “was packed at all hours.”

So what to make of all of this? It is plausible that with increased investment in Rason, the old refinery might be worth something, if only for the land on which it sits. And who knows, maybe there is oil off the coast. But reading the report I had to wonder how much of the sales pitch BDSec actually believed. Is this just sell-side propaganda? Or rather were the statements about Kim Jong-un calling for “’radical’ economic reform” and imitation of Vietnam (juche, be damned), the amazement that there were Korean language signs in some shops in the Yanbian Automous Region, and the four different ways Sonbong was spelled in the report the product of naiveté?

Only one way to find out: who wants to go first?