Kentor Gold (KGL.ASX)

A reader asked me my view of this stock. I must say I saw nothing but risks attached to this stock for several reasons:

1. The narrow mineralisation
2. The nuggetty gold effect is likely to disappoint

3. The reliance on Russian drilling - which has historically shown itself to be unreliable. I see that they have done 400m of drilling, but that is not going to say much until they get a bulk sample back, and even then, the mineralisation is just 0.8m in thinkness in places, which means they will have to cut back the walls for mine entries. Nope, I'm not interested in this stock. They can talk up the prospect of a pre-feasibility as mine executives are prone to do...I've sailed on that ship a few times. But I can't see this project flying unless more info proves otherwise. They also have geothermal interests in Central Asia. Hmmm....Is there any demand there?

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Andrew Sheldon www.sheldonthinks.com

Ramelius Resources (RMS.ASX)

Ramelius Resources was another stock asked about by a reader. The company has 181mil stock on issue worth $111mil at the current share price $0.60. The company will generate revenues of $A110mil from the Wattle Dam mine once production reaches 70,000 oz per annum, so we are likely looking at earnings of $50-60 mil. This mine is the highest grade mine in Australia. We do need to be careful to factor in the possibility of a 'nugget effect'. Being an underground mine I don't see the scalability in future production even if they can extend the orebody at depth. That's not to say there is not more upside. There recent performance however suggests predicted ore grades are 'understated', so thats a positive, plus the upside I expect in gold prices. Given the possibility of $50mil earnings and a conservative PE ratio of 5, I would expect RMS to reach $1.20 in the medium term, with a long term target of $1.80 (its previous high) in the long term as the gold boom moves into full swing. The problem with this stock is the inability to scale up production...unless I am missing something. If they find adjoining resources., i.e. parallel structures..that adds upside, but thats hopeful wishing.
The further I investigate though, the more concerned I become. These are very narrow veins and high grade, so there will be a nuggest effect. One is of course reminded of Bendigo Goldfields. Grade control (predictability) issues, though it does win on easier accessibility. The very high gold cut-off grade of 400g/t does not give confidence. Really until this company gets down into the high grade ore and does bulk sampling, there is no way of predicting the bulk grade of the ore. The company has just $6.1 million in the bank, so perhaps they are looking at an issue because their options expiring in June are well out of the money. For this reason I would expect the shares to fall back to 40c support. Perhaps 50c will be the 'discounted' issue price. This stock is certainly one I would watch, though I'd want more certainly over grades.

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Andrew Sheldon www.sheldonthinks.com

Troy Resources (TRY.ASX) - sell on strength

A reader has sent me an email asking for news/updates on some stocks. Only too happy to offer this. If you have any tips, I will happily write recommedations on them. Technical analysis suggests Troy has hit some short term resistance, though it remains on an uptrend. The gold price has fallen $60/oz of late, so that's the fundamentals driving the stock in the short term. See my commodities blog for the gold outlook.
This is an interesting stock because its producing gold, yet we need to be mindful of its resource outlook. It produced 32,450 ounces of gold in the last year, however the annualised production is 60,000 oz since it produced 15,233oz in the quarter. There was however some treatment of low grade stockpiles which elevated output. They are making an average cash profit of $US400 per ounce. The company has liquid (cash, gold) reserves of $60mil, so it has considerable capacity to finance further capacity acquisition or development.

You can essentially write off any possibility of the Andorinhas iron ore project being mined. At $1.35 the company is worth $94mil, which seems a reasonable valuation given the cash reserves. The problem for Troy Resources is the lack of measured + indicated resources - at least gauged from their recent reports. The other problem is the company's lack of disclosure about its gold resources at Andorinhas - I just don't know where I stand as an investor. The poor quality of disclosure is the biggest obstacle for investors. The company claims to have 5 years resources, but there is no inventory of gold in its reports. Perhaps the company needs to invest some of its $60mil in an advanced gold project to give a kickstart to earnings because its Brazilian gold interests, whilst offering some promise, at this point lack tangibility. At least until they disclose more. I would add however - if there is something substantial at Andorinhas, they will spend the $60mil developing the project in no time. For this reason, I don't see Troy breaking above $1.50 in the short term, but rather probably drifting back to $1.00.
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Andrew Sheldon www.sheldonthinks.com

The types of gold stocks you should buy

If you are interested in gold stocks - as you should be right now - there are several things that you should look for. These factors will make the difference between exemplary share price performance and the mediocrity. It should be apparent that some stocks have already started moving up, so you need to look at your leverage to the gold boom. The factors you want to consider are:

1. Long life precious metals preserves - This is important because large resources support long life mining operations, they have greater scope for expansion, and they are more likely to be taken over. They also tend to have lower unit costs, though higher upfront capital costs.
2. The prospect of reserve (production) increases: This is important because greater production offers the prospect of higher earnings through more sales, lower costs (economies of scale) and maybe even greater resources (i.e. lower costs extends the boundaries of the mineralisation that is commercially viable, particularly if gold prices continue going up - as they will). Any incremental production expansion is also very cheap since a lot of the original plant does not need to be duplicated.
3. Unhedged gold output (or moving towards unhedging): This is important because you don't want to hold a stock that is getting only $US600/oz for its gold output when the market price is $1000/oz. The decision to hedge is often thrust upon projects by investment banks who don't understand the metals market. Hedging - contrary to popular opinion - can prove to be the death of a mining company. e.g. Highlands Pacific. As prices move up hedgers have to buy back gold at >$US1000/oz, to buy back their forward hedges at say $600/oz, in the hope that gold will go to $US2000/oz (as I expect).
4. Large tonnage resource - a lot of gold resources are messy, and thus small scale, selective and high cost. These types of resources are much more difficult to mine profitably. Incidentally the times of gold deposits which offer the most consistent gold grades tend to be 'porphyry copper-gold deposits' along former or current continental margins.
5. Grade & access: The grade of the gold and its depth underground are other important issues. We would prefer to see the gold at depths of <100m for easy ore body access.
6. Gold recovery: Metallurgical techniques tend to be well-proven these days making the gold recovery relatively less important. It is normall for gold recoveries to be >88%, and as high as 98%. The best possible resources allow treatment by solely cheap gravity methods, say if free, nuggetty gold, but in most cases this is just a portion of the recoverable gold, so both process circuits might be required for the optimal recovery.
7. Stage of development: Gold projects vary in their development lead time from 2 years to 10 years; even longer if there is a period of stagnant metal prices. We would be interested in gold projects which are close to financing. This is a very hard time to raise capital, so we would hope that the equity contribution has already been raised and not spent sustaining exploration in these hard times, notwithstanding the value of exploration.

These are the most important factors. If you want further information, please refer to the eBook on selecting mining stocks. It will give you a greater understanding of these topics, as well as identify other issues. View the table of contents and save $20 on this book by paying just $US19.95.
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Andrew Sheldon www.sheldonthinks.com

Find & development cost for WA gas

Reading a recent report for Buru Energy, a spin-off from the old ARC Energy absorbed by AWE Worldwide, I am inclined to think that the energy market is worth a sniff or two. The following chart is food for thought. It shows the find & development costs and revenues for gas discoveries in Western Australia (based on oil equivalent prices). The implication is that oil & gas prices have fallen almost to the level of baseline costs. This would of course scare off a lot of buyers, but I reflect on the collapse in equity prices and ponder whether its time to buy as a counter-cyclical opportunity.

Looking at the structure of the Canning Basin, one would have to conclude that the onshore area has potential, though it does remain relatively unproven in terms of prospectivity. My initial view would be that they would inevitably face competition from any gas pipeline built from northern Australia to Perth. Having said that, if such a pipeline was going to be built, you would more likely target the East Coast market given that there is an existing pipeline (half way) from Brisbane/Sydney to Roma. More likely still is a 100% focus in northern Australia on LNG exports. Why? Because northern Australia is very attractive as a gas supply point compared to less secure areas like Yemen or Oman. Australia is (less importantly given the scale of ships) is also closer to Asia.
Buru Energy might just have a lucrative opportunity in WA supplying gas to future gold mines as the gold price takes off. This company has cash reserves of $60mil, and its only capitalised at $40mil. Looks cheap to me! And based on a gas price at current costs, you would have to conclude that this stock has nothing but upside. The problem is that drilling of targets is not due until 2010. In the interim you can focus on gold. So for now I would just watch this one. I am more interested in the gas potential than the oil given the following economics and the history of discoveries from the basin.
Current production from Blina and associated oilfields:
Ultimate recoverable 2P reserves of all fields ~3 mmbbls
Discovered 1981 - first production in 1983 at ~1,000 bopd
Production of 30 bopd when Buru acquired the fields
Recent workover program increased production to +200 bopd
Energy economics:
Field opex ~$10/bbl
Blina oil production facility
Trucking costs to Perth ~$25/bbl
Current A$ oil price ~$65/bbl
Projected annual net revenue at 100 bopd rates ~$2.4 million

This is hardly attractive, but you can readily see that if they have an oil or gas discovery, this company is shaping up as a positive play. The Blina field highlights the potential, and this field is relatively untested. One to watch!
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Andrew Sheldon www.sheldonthinks.com

Intrepid Mines (IAU.ASX)

Just a quick review of some mineral explorers given that the majors are starting to move up. The intent is to look for large tonnage project sponsors. Intrepid Mines does not interest me much because its Tujuh Bukit porphyry gold project in Indonesia does not host rich enough gold mineralisation. We will follow with interest.

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Andrew Sheldon www.sheldonthinks.com

Energy - Are 'hot rocks' so hot?

Reading the PTR website you could be forgiven for thinking that renewable energy has a positive outlook and thus, it must be considered a good investment. I think there will come a time when it will be a good investment, but I would suggest that its a long way off. The attached figure comes from the PTR 'hot rocks' presentation on the 23rd Feb 2009. The company highlights the positive funding and licensing for this industry. The bad news however is that its going to come from major energy companies like British Gas/Origin Energy, Santos, and others. I can see in the medium term that investment in the smaller players is just going to evaporate. Maybe it already has because they are already putting their hands out for government funding. You might ask yourself is the government going to put money into renewable energy to stimulate the domestic economy. I would suggest that the Australian government is more likely to subsidise home insulation or wind farms than 'hot rock' technology. The reason for suggesting this is that the technology is tangible, the visual presence is far greater (wind farms on the horizon - so like as they are in Bourke's backyard), and it will create more jobs. I think hot rocks will get token funding so Kevin Rudd can appear green nevertheless. The presentation provided a list of all the current players in the industry:

1. Geodynamics 2. Petratherm (PTR.ASX)
3. Geothermal Resources 4. Green Rock Energy
5. Torrens Energy 6. Eden Energy/Terratherma
7. Panax 8. Pacific Hydro
9. Teck Cominco (Canada) 10. Granite Power
11. Gradient Energy 12. AGL (w/Torrens Energy)
13. TRU Energy (w/ Petratherm) 14. Tata Power (w/ Geodynamics)
15. ASX Listed International SX Listed 16. Tri-Star Energy
17. Clean Energy Australasia 18. Osiris Energy
19. Origin Energy 20. Callabonna
21. Deep Energy 22. Inferus (Southern Gold)
23. A-B-L-R Joint Venture 24. AAA Energy
25. Earth Heat 26. New World Energy
27. Near Surface Geothermal 28. Stuart Petroleum
29. Beach Petroleum

I have added a red line to the image above to highlight the probability that, as more money goes in, the corresponding share price for the remaining hot rock companieswill fall. The best prospects will be those companies which are able to affiliate with some major companies. The final result will be that they will be absorbed by those enterprises. The implication is that there is a lot of money to be spent before any of these companies realise a profit. The next 4-5 years is going to be a period of low energy prices which means there will be less justification for this greenfields exploration. There will come a time when the industry has appeal, though it remains to be seen whether any small player will be significant enough to justify an investment in this sector. The capital investment is significantly more than coal seam methane.
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Andrew Sheldon www.sheldonthinks.com

How to pick the best gold mining stocks!

Picking stocks is an art form. A great deal of knowledge and experience goes into finding a good stock. With the gold market abuzz, it is important to be able to differentiate a good stock from a bad stock. In times of booms, like the current gold boom, there is a tendency for people to catch on to the latest stock recommendations from brokers or friends. The reality is brokers are sales people with vested interests, and friends can be just as blinded by monetary gains as the broker.
The challenge judging stocks through your own eyes is that lack of knowledge and experience. For this reason I have encapsulated over 20 years of skill and experience 'picking mining stocks' into a single eBook. You will have a tool to critically assess your friend's tips and broker recommendations. A rising tide tends to lift all ships, but we are really looking for a king tide. There is no reason you cannot invest in the best stocks. All you need is the skills to differentiate.
I started picking stocks when I was just 14yo. I would go into the Australian Stock Exchange in Bond Street, Sydney (now Bridge Street). At the time you could pay just 50c for mining data sheets. The good news then was that you could pay 50c and get a whole series for a particular alphabetic letter. Today you would pay 50c per page. The 50c was a lot of money to me then, so I'd stay in the library all day, going through all the stocks. It was so easy to pick them by this approach as the good stocks stuck out like a sore thumb. I did this on my school and university holidays. When I wasn't researching stocks I was working with mining companies. I had such a good attitude. I really was quite distinct from my peers. They might have been smart, but they were not street smart. Well not Bond Street smart! More like dope street smart! Anyway, read my eBook and find out how to invest in stocks and company options that will make you over 1000% returns.
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Andrew Sheldon www.sheldonthinks.com

Atlantic Gold NL (ATV.ASX) & Acadian Mining Corp (ADA.TSX)

Another tip coming from a reader. Rest assured I have checked these stocks out myself, and you are free to do so. Atlantic Gold is an Australian gold project developer. It has a 1.8moz gold resource in Nova Scotia, Canada. The company has 228mil shares, which last traded at 5.2c, giving the stock a market capitalisation of $11.8mil.

The grades for this resource are not high, however the attraction is the capacity to process the ore through a nearby base metals mine 40km away. The net present value of these project options is around $CAN50mil. This does not strike me as great returns, though there is substantive upside from an increase in resources and higher gold prices. I have a bigger concern actually. Will not the operational viability of the gold plant depend on the processing of base metals. If the plant is designed for base metals now, one would want to be assured that the gold is processed through a completely different circuit as opposed to blending with the base metals ore. Actually I'm not so familar with gold hybrid processing plants. If they are separate streams, then it might in fact be an opportunity for ATV to purchase ADA in future to control the plant.

The charts show that both stocks are cheap, but I think the upside is short run for the foreseeable future. They need to clarify a strategy. There is a possibility of a merger between these operations, and perhaps between the companies. Not so interested in this play. Too many things can go wrong. eg. Processing, JV negotiations, exploration upside. The ADA resources are small satellite deposits making it messy mine planning. No way do I see them processing ore by the end of 2009.
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Andrew Sheldon www.sheldonthinks.com

How to pick winning stocks! Based on results.

About 8 months ago I wrote an eBook titled 'Mining Fundamentals - How to pick winning stocks'. It encapsulates the ideas that I use to find the best performing stocks. Perhaps the greatest market myth is that you need a mining boom to make a lot of money from mining stocks. I will give you several reasons why this is not true - both conceptual and based on actual experience. Starting with the experience:
1. Before the recent mining book even started in earnest I made a great deal of money on Aquarius Platinum options. I purchased these for 25c and sold them for $8.75. When I bought them they were a $4mil company. In the mining boom they were worth as much as $4billion. But I had already made my fortune by 2000. I was living in Japan at the time. Platinum prices at the time were doing very well, but also management had a string of good platinum projects which South African (open cut) and Australians (platinum) analysts did not understand. Investors in London quickly appreciated the stock when it was listed on the Alternative Investment Market (AIM) in London. I made almost 3000% on the options in 3 years. You need to understand why. Decision making in financial institutions is driven by managers who invest in old, proven paradigms. If they ever had critical thinking skills they abandoned them when they moved into mining finance. I assure you stockbroking is all about making money, so you can understand why broking executives like proven stories. My former employer would introduce me as 'This is Andrew......he picked Aquarius Platinum several years ago'. I had become a 'bankable proven story'.

2. The other stock was Minotaur Resources. This was also a very cheap stock - capitalised at just $2mil at the time. It had even less when I bought it. Just a VERY large untested coincident geochem/geophysical anomaly in an outback Australian area where nobody had ever looked for base metals. What was more interesting was that there was a $4 billion mine (Olympic Dam) up the road. I bought the shares at 14c because the options were tightly held. In the week following I managed to pick up $6000 of options at 5c. I actually sold this stock too early. Several months passed as I anxiously waited drilling results. In all honesty I was VERY pissed off with the management of this company. They waited until they completed the hole at 729m before they released the results to the market. I'd lost confidence in that time and sold the 'spec' to pay for a NZ holiday with my GF. Upon my return the stock had raced to $2.40, the options around $2.20. On paper I should have been a millionaire. I contemplated legal action, but I also said that I can do this again, since this occurred in the wake of Aquarius Platinum. So this stock offered gains of 4300% odd in around 3 months. The project was eventually bought out by BHP Billiton.

The implication is that a mining boom is like a rising tide that lifts all boats. It is actually harder to find great bargains in a mining boom because even speculative appeal has a premium value attached to it. There are thousands of analysts employed to search for such stories. They have just lost their jobs. When I bought these 2 companies no one was interested in them. In a mining boom Minotaur (the explorer) would have been valued at $40-60mil, and Aquarius Platinum around $150mil. The future lies with investors who can see new paradigms - not old proven ones that no every mining analyst appreciates. In 2001 analysts in Australia did not understand platinum (as there was only Helix Res, which had no great results). In South Africa, analysts did not understand the benefits of open cut economics, or the coming platinum boom. For a year there were no buyers after I bought Aquarius Platinum. Minotaur was the same - no one was interested in exploration, yet that is the time when you should be, if you can establish credible evidence that they will be a future miner. Minotaur's first drill intersection was over 400m of 1% copper. No question that is going to be a mining operation.
Paladin Resources was another example. I actually missed this one, despite having looked at it. I missed it because I did not attempt to understand the uranium market 8 years ago. If I did I would have realised that there was no new supplies to replace the depleting weapons-grade uranium stockpiles. Instead I diminished the story thinking 'There is plenty of uranium'. The issue was however - 'Lack of operating mine capacity in an energy boom'. Plenty of resources, not enough capacity, and it takes 4-10 years to commission a new mine. Paladin did very well like the stocks above. Another more recent great story was Queensland Gas Co. In fact all coal seam gas producers have done pretty well but I liked that this company has the largest acreage close to gas transmission pipelines, but Arrow Energy was another good one. QGC is now being taken over by British Gas. So what is the next great story? I've got some ideas.

Stock analysis is a conceptual science which requires anticipating future events. The returns are greatest for those people who can see further and wider than anyone else. There is money in it. You don't even need people skills to achieve these results. But you need something else.... the right trading psychology. Issues such a patience, keeping information in perspective, assessing market sentiment can lead you astray.

For those who buy the report I will identify a number of stocks which will offer spectacular returns in future. There are 3 stocks which I have in mind based on the current market dynamics.

This is a good time to start looking!
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Andrew Sheldon www.sheldonthinks.com