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Andrew Sheldon www.sheldonthinks.com

MIL Resources (MGK.ASX) - break out due?

Over the last week MIL Resources has made its way up from 3.6c to 4.3c on small volumes. One might ask whether this stock is about to break out. Looking at the chart, the stock has been in a consolidation channel. The question is - Is this ascending wedge going to hold up as a trend line? I suspect it will break out in coming weeks)based on news either about a JV over its Amazon Bay iron ore project in PNG, or activity with respect to its gold project in PNG.
There are so many iron ore projects. The question I ask is? How many of them are so close to prospective DRI plants in Asia, how many lie on the coast? How many of them involve extraction of unconsolidated beach sands with dredges? This is a project which lends itself to incremental scaling up. It is the type of project well suited to a minor, but a major would help. You don't need a major terminal. I would suggest offshore self-loading 8,000dwt barges would be adequate, loading into 20,000dwt vessels destined for Singapore, the Philippines or Malaysia. I would be surprised if the total capital cost is more than $20-30million. Of course you can start big and bring in a major partner. In this type of market a Chinese partner might be nice.

I think this stock is way under-valued so I expect as much.
Need a stock update - see the updated chart at Google Finance!
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Andrew Sheldon www.sheldonthinks.com

A few more emerging gold producers

A number of small emerging gold producers that I have identified and bought this week are:
1. Republic Gold (RAU): This company has a number of interesting deposits - a large iron ore resource in Bolivia, which adjoins a Jindal Group project (Indian steel company). It also has a gold resource in Bolivia which will achieve feasibility study stage next year. In Queensland it has a small resource suited to heap leaching. It has not really responded to the gold price increase, and it has $5mil in cash.
2. Adamus Resources: This company has gold interests in Africa. They are an emerging producer, they have a solid resource base, which is likely to expand.
3. NorthWest Resources (NWR): High gold prices favour those with the most advantageous position. At current share price NWR are capitalised at just $7.2mil, yet they have 370,000 oz of gold, a small treatment plant, $5.7mil in cash, and resource upside. I must confess to finding such small vein deposits messy, but the they are just too cheap.

There is a few strategically placed medium-sized emerging gold producers in Africa which are going to be taken over by larger companies, or similar sized companies seeking to increase their PER profile in international markets. I would not be surprised to see Ampello Mining (AMX.ASX), Perseus Mining (PRU.ASX) or Adamus Resources (ADU.ASX) taken over in the next 6 months. Perhaps just as likely is a three-way merger between these companies. Of course no CEO likes to lose their job, so it would depend on other opportunities they have. You didn't really expect them to act in shareholder's interests did you? :) Well least not primarily.
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Andrew Sheldon www.sheldonthinks.com

A1 Minerals set to perform

A1 Minerals yesterday released a glowing outlook for their mining project. The company is due to commence mining this month (Dec'09). News could not be better as gold breaches the $1200/oz mark. In its latest drilling it encountered 6m of 69g/t. This looks more impressive than it is given the the bulk of the high grade occurred over 2m, meaning that its less likely to be continuous. This is near-surface enrichment of gold. The promising aspect about such gold discoveries is that they promise the mining company a 'bonanza' in terms of upfront cash flows. This is the type of situation in which miners can have exceptional years. Importantly the A1 ground has yielded some very high grades over the years, so we might expect some higher output than is indicated by grade control. There is even talk about expanding output to 100,000 oz per annum. I suggest the likelihood of this is likely to come from toll treatment of their ore. Remember - when you have the highest grade in the district - everyone wants to process your ore. You price the competitors out of the market. See the presentation at the A1 Minerals website.
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Andrew Sheldon www.sheldonthinks.com

MIL Resources (MGK.ASX)

When looking for gold stocks I am always trying to anticipate what will be the next big story. One of my strategies is to systematically read through reports for all of the listed stocks on the ASX. This is how I started doing it when I was 14yo. Over 25 years later, I don't have to go to the stock exchange anymore. All the information is online.
When I last did my periodically research a month ago, a stock that I stumbled across was MIL Resources. I remember this stock from about 8 years ago when it had magnesium projects. Today its focus is iron ore and gold in PNG. There are several aspects I like about this company:
1. The small market capitalisation of just $10mil - this gives me a lot of upside or bang for my buck if they have somerthing
2. They have $3.7mil in cash according to the latest quarterly - so they have some spending to do before the next capital raising, so I don't need to worry for a while.
3. They are currently preparing a gold project in PNG for drilling. I am expecting some high grade drilling results which could well capture the interest of the market
4. They have the Amazon Bay iron ore project. There are numerous deposits like this around the world. One of the other such deposits is controlled by Rio Tinto off the Taranaki coast of NZ. Unfortunately for Rio, the Maori Party is not so keen on seabed mining. I don't expect this will be a problem in PNG. In fact, there are other benefits. This iron ore could be barged a relatively short distance to Singapore or Malaysia as feed for a Direct Reduction Iron (DRI) plant. In fact the resource at Amazon Bay is so large that the project could justify its own on-site DRI plant. These are small-scale modular plants. All the better that PNG has onshore gas which would provide a local energy feedstock. But it gets better. This iron ore resource lies both onshore and offshore. It is unconsolidated so its easy to dredge.
5. There is another company based in Indonesia - I forget but I think its Indo Mines - which is ccapitalised at $17mil, and it has no gold exposure. I'd have thought this company justifies a $20-30mil market capitalisation prior to drilling the gold project, just to be on par with that company. Frankly, why would a Chinese steel maker want to buy into a WA based project when they would have to pay a steep rail and port charge. WA does have the offsetting benefit of deepwater port, however this project should be able to more than match those WA projects on costs. Why so cheap? Its a strategic asset close to Asia.
6. Pat Elliot is a well-known WA mining industry executive, so the company has some legs. He is accustomed to large projects. He's prepared a few feasibility studies :) I think we can expect a new investor for this iron ore project in coming months. The Chinese government I think was put off by the likes of Rio Tinto & BHP merging recently. Expect China to spend on a multitude of resource projects, just as Japan did from the 1960s. What else can China do with all those surpluses. It makes more sense for it to buy into resource projects than hoard commodities.

I bought some MGK.ASX over the last few weeks for 3.7-4.1c. I will retain them on the expectation of a JV partner for the Amazon Bay iron ore project, plus the prospect of some positive drilling results from their nearby gold prospect. I am expecting the bullish gold market to help lift this stock significantly. The iron ore project is longer term, however the short term decisions will be important in underwriting both projects, and the gold target is attractive.
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Andrew Sheldon www.sheldonthinks.com

Red 5 gets final approval for Philippines gold project

We have followed Red 5 Ltd for about 10 years now. The attraction of this company was for a long time the geology. The company has some very prospective geological terrain in the Philippines. The drilling has demonstrated some exceptionally wide zones of gold mineralisation with good grades, not to mention deeper ore zones with zinc and silver from memory.
My initial interest was also sparked by the possibility of a large porphyry copper/gold mine, i.e. a repetition to the nearby AngloGold project. Instead they came up with wide intersections of sub-economic gold grades. It highlighted the plausibility, but not the likelihood of a large tonnage mine which would instigate the involvement of global majors. So the focus shifted back to the Siana pit, and our interest became long term.
The problem in the Philippines is the slow pace at which their government approves projects. They move at a very slow pace. This is in response to a number of mine spills by foreign companies. Having secured final approval, its worth looking at the economic merits of the company.
According to Google Finance, the company is capitalised at $122 million, yet based on my basic calculations, I get a value of their gold mining pre-tax cashflows of $560mil. This values the company 3-5 times high. Basically its trading at a PER of 1x. This of course ignores:
1. Project financing costs - low because they have already raised $35 mil in equity
2. Higher gold price - I have ratios suggesting gold is going to $2400/oz, so giving the company a valuation of closer to $750 million. Essentially the escalation in gold prices is going to offset the discounting of those future earnings, so it becomes basically $75mil x 10 years
3. Increase in reserves - There is the prospect of mine life increasing by 30-50% I'd say, as they shift to UG mining.
4. Increased production - An increase in reserves will allow for an increase in mine life, or more likely an expanded production, as the company moves to take advantage of higher gold prices.

Of course this is just an example of the power of 'positive thinking'. Well I call it Romantic Realism - applied to the mining industry. Anyway, this is what recreates mining millionaires when there is no prospect in the current market of being a real estate millionaire. If you look at the proportion of millionaires in Australia, most do it from real estate and mining. That is why there are more millionaires in Perth per unit population compared to any other place in the world. Basically its the centre of excellence in mining and they are now exploiting wealth around the world. I think you should learn how 'money makes money', or how to make money from mining. You should also read up about a nickel stock called Poseidon to understand the impact of speculation. Se our Mining Fundamentals book.
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Andrew Sheldon www.sheldonthinks.com

Sovereign risk in miners abroad

There is a propensity to fear investment in foreign countries, at least there once was. Britons of course have been accustomed to investing in foreign countries for centuries, given that they funded the development of Africa, Australia, NZ and an array of other colonies. Of course for most of those times they also controlled the governments. In modern times, all investors are coming to grips with the benefits of foreign investment. With respect to mining stocks the benefits are:
1. A new global order which has resulted in a decline in governments resorting to expedient, populist, fascist policies like nationalisation of mines. The consequence of this has been a diminished risk of foreign stakes in mines being nationalised. The only case I can recall in modern times is the nationalisation of oil assets in Venezuela by a populist President Chirez. Union Res had dispersions caste upon its equity in a Iranian base metals mine, and a few projects are facing insurmountable delays getting title in some of these Central Asian states. The bigger the project, the greater its strategic importance, and the greater risk of nationalisation. That said large companies have more power to bear upon these rouge governments.
2. More prospective exploration areas in foreign, third world countries because the land is basically only had slight work undertaken, so any resources are likely to be near-surface, and potentially larger, otherwise they would have been more evident.
3. The development of a mine can be faster or slower. It depends on how supportive the local govt is for the project.
4. The costs of doing exploration are usually lower because of the low cost of labour. Capital items are usually more expensive because of lack of infrastructure. But some areas already have well-developed mining scenes, with plentiful skilled labour and power nearby. It depends.

Sovereign risk thus is less likely to involve nationalisation of assets. In the case of Democratic Republic of Congo, there are guerrillas occupying the border who can exhort money for guns. In PNG, there is the prospect of local tribal landowners attacking mine camps and destroying property. In these infrequent cases, a worker might be killed by gun or spear, but they tend not to disrupt operations too much. The governments are often quick to offer security. The Bougainville mine seizure in the 1980s was a different case because it was associated with a political coup. The massive mine closed permanently.
The latest example of sovereign risk is perhaps no worse than we might expect from Western governments. The government of Ghana has opportunistically decided to raise the royalty it imposes on gold mines from 3% to 6%, at a time when gold prices are on the rise. In defense of Ghana, its revenues might have been impacted by the recession, and third world countries have a lot of difficulty collecting taxes on citizens, so they levy import duties and resource royalties. The ugly side is that investors want to retain the upside of an investment, and they don’t want to share with governments on the basis of unexpected tax imposts. It is not a serious increase, but then its a bad precedent.
Such issues are considered in our Mining Fundamentals report.
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Andrew Sheldon www.sheldonthinks.com