Small cap winner and losers from Russian sanctions

Australian investors may feel somewhat removed from sanctions against Russia due to distance and the lack of business dealings with that market, but there are a handful of small cap stocks that could be directly affected if the West moves to further isolate Vladimir Putin’s regime.

Most in the group will be negatively impacted if tensions between Russia and the West escalate significantly, but there is at least one microcap that may benefit from the chill of a new cold war.

The United States and European Union have already slapped travel bans and asset freezes for a number of Russian and Ukrainian leaders that are directly implicated in Russia’s push to annex Crimea from Ukraine.

The sanctions are more symbolic than punitive but Western leaders are threatening to impose harsher economic penalties if Russia moves to take control of the Crimean peninsula or push further into Ukrainian territory.

The Russian government will surely institute a tit-for-tat response and that could unwittingly catch a number of Australian firms in the crossfire, particularly if Russia is antagonised enough to seize assets belonging to Western companies.

The good news is that the majority of our listed companies have a very small exposure to Russia or the Ukraine. However, Tigers Realm Coal (TIG) is the exception as its two flagship coking coal projects are located in the isolated far east of Russia.

The $79 million market cap explorer is trying to develop its Amaam project, which is touted as a large-scale development with five million plus tonne a year production potential, and a lower cost Amaam North mine that is near the Beringovsky port coal terminal.

The stock last traded at 15 cents and has shed 30% of its value over the past 12 months.

Another that is more immediately impacted is oil & gas microcap Aleator Energy (AWD). The company has declared force majeure at its Povorotnoye project in Crimea on March 12 due to the unrest.

The $3.3 million market cap company has 21.5% of its assets located in Ukraine, with the majority of its asset base located in the United States.

On the flipside, fellow Ukrainian-focused energy microcap Hawkley Oil & Gas (HOG) may be well positioned to benefit from the geo-political tension.

That may sound counterintuitive given that Hawkley generated 94% of 2012-13 group revenue of $15.1 million from that market and has nearly all of its non-current assets of $27.1 million based in Ukraine. If the turmoil spreads, it will be hard to see how Hawkley can keep generating cash from its key assets.

However, Hawkley may be able to extract higher prices of its gas now that Russia’s energy giant Gazprom has said it would remove the discount from gas prices to Ukraine from April. Hawkley currently gets $US280 per 1000 cubic meters of gas.

Interestingly, costs may also decline for the junior as the Ukrainian currency (Ukrainian hryvnia) has slumped by nearly 15% since February against the US dollar. Hawkley sells gas priced in US dollars.  

It’s so-far-so-good for Hawkley with management saying that the conflict has not impacted on production at its Sorochynska project and the company is operating on a “business as usual” basis.

Aleator closed at 0.2 of a cent on Tuesday and has lost 80% of its value in the last year, while Hawkley has shed 68% over the period although it managed to gain 0.1 of a cent this morning to trade at 3.2 cents.

In some ways, you could think Advance Energy (AVD) has either dodged a bullet or missed the boat, depending on how things play out in that part of the world – but not that shareholders would care.

Ukraine is a moot point given that Advanced Energy announced just last month before the crisis that it had terminated its Ortynytska project in Ukraine due to the lack of funds. The $1.3 million microcap is now left with only a 50% working interest in the Mother Lode III project in the Permian Basin in Texas.

Shareholders will at take some comfort that the illiquid stock can’t sink any lower, barring the stock delisting, as its share price last traded in December at 0.1 cent.