Gippsland - worth another look

For several years I have been following the fortunes of Gippsland Ltd, an Australian listed company developing a tantalum, tin, feldspar deposit in Egypt. Just today I was carrying out a price review and I came across the tantalum price - see http://metalsplace.com/prices/?a=14&grt=6. A few years ago the tantalum price rose to over $200/lb, but then collapsed as a result of over-supply. The demand was prompted by the PDA, cellphone, laptop demand for resistors. As you can see tantalum prices are recovering so it seems likely that over-supply has been absorbed.

Logic would suggesr new mine capacity is required, and Gippslands tantalum project must be a contender given that its a world class deposit capable of supplying 8% of the world's demand. I guess however there are several problems:

1. The International Finance Corp (World Bank affiliate) walked away from financing the project. Why?

2. The government has a 50% free carried interest

3. Country risk - Egypt is perceived to be a high risk

The outlook for tin is good as well. I dont place much value on the gold/copper exploration they are doing. Anyway, you can see the latest (Aug'07) broker report at www.gippslandltd.com/i_broker_reports.asp. I new financial advisor was appointed 6mths ago, but there are no visible signs of progress. Its quite possible this project will be overlooked in favour of others. I think banks are unlikely to accept the financial terms, and it seems unlikely that the government will alter the law for one project, although perhaps the foreign investment regulations are under review anyway. So thats worth following up. There are a number of tantalum projects in Africa looking to develop, and in this industry manufacturers have been an important source of finance....so perhaps this company poses an unacceptable risk at this time.

- Andrew Sheldon www.sheldonthinks.com

Gryphon Minerals (ASX.GRY)

Gryphon Minerals is another very attractive gold explorer in West Africa. Th attraction of this company is that they are outlining a multitude of ore zones, and drilling results to date have been high grades over commercial zones. With a multitude of targets to test, it has scope to be a significant gold mining operation. Exploration over the next 12mths should demonstrate this, and with the gold price proving its meddle, there should be a substantial re-rating in this company from $50mil to $150mil.

I have actually been following this stock for some time, though it fell off my radar. Looking at the chart we can see consolidation at this level - I think this will turn out to be a flag structure. The implication is that I can see a move to 80-85c pretty soon. But we should wait to see if that flag structure is confirmed by consolidation at current levels. And weakness below 55c would be a sign of a fall back to lower support, and present an even better entry (if you can get it).

- Andrew Sheldon www.sheldonthinks.com

Gold Aura (ASX-GOA)

I love grassroots exploration because its the opportunity to see value before everyone else can see it. Several months ago I bought GOA at 9c in anticipation of attractive drilling results from its Anomaly A & B drilling program in the Carpentaria region of North Qld. This region of course hosts some VERY significant resources with a value of $100+billion - so its a good place to find elephant-size deposits. There are the Mt Isa Cu-Ag-Zn deposits, the Cloncurry Cu-Au deposits and the Cannington Zn-Ag deposit.

GOA is targeting a geophysical anomaly and is discovering zones of multiple veinlets running 2-4% zinc and 60-140g/t silver. For preliminary drilling these results strike me as highly significant. Ok the negative is that the minralised zones are being struck at 300-400m depth. The upside might be a Mt Isa size underground deposit. So when you consider this company is capitalised at just $9.3 million, its quite possible this company has huge upside. Its still early days but the tenure of the grades and widespread occurrence of mineralisation I think point to a future mine. The question is whether there is something more significant at 800m depth. Ultimately we are not going to know for another 6months - by which time they should be looking at drilling some much deeper drill holes. In the interim they will be drilling shallow holes to determine the structural controls. But with gold & silver about to go very high over the next few years, the market is going to find very few prospective silver stocks. There is just Macmin (MMN) offering significant silver exposure, so I see this as an opportunity to get in early. Nevertheless I've never been one to buy and hold. So try to avoid those capital raisings. That is hard as capital raisings tend to be paired with drilling results.

- Andrew Sheldon www.sheldonthinks.com

BC Iron Ltd (ASX.BCI)

I learned about this stock in the process of researching Alkane Exploration (ALK). ALK has a 16% stake in BCI, and whilst I like ALK, I dont see it as a buy for another year or two, since its attractive zirconia and gold projects still need some work.

The attraction of BCI is that they have a large iron ore exploration area just north of one of the front-runners in the iron ore game - Fortescue Metals (FMG). Already Fortescue have tied up marketing agreements with a Chinese buyer, and its likely that FMG will emerge as a large (iron ore) mining house. So why not buy FMG you say? Well thats not a bad idea, its just that the returns are likely to be better on BCI, but FMG might be considered a lower risk investment by many. I dont think so...but it seems to be convention that bigger stocks are safer.

BCI's project has had little work done on it, but preliminary investigations suggest there are areas of good iron ore content. The project areas are 70km from the Fortescue loadout facilities, but of course its likely that the rail line would be extended to the mine in cas of production.

In case you are wondering why FMG-BCI, you need to understand that iron ore consumers have a vested interest in negotiating supply agreements with smaller companies like FMG. For the last 20 years, Rio Tinto, BHP Billiton and CRVD (Brazil) have been consolidating control over iron ore production worldwide, and have lead in price negotiations. The Chinese, Indians and other consumers have a vested interest in breaking that 'cartel' by offering purchasing agreements and finance to alternative suppliers.

FMG has already negotiated access to the BHP rail infrastructure and are building a new loading port on the WA coast. By tying up with FMG, BCI will gain access to FMG's infrastructure. For a $60mil -odd company thats alot of leverage. Its possible that FMG will eventually takeover BCI. It seems likely.

Mind you - there are alot of iron ore projects....so expect future price weakness. But given the cost of establishing a new mine & supporting infrastructure, as well as the current shortage of mine services, it seems likely that over-supply is likely 5 years away. I see significant price weakness then because:

1. A plethora of new iron ore mines

2. A fall in iron ore (steel) demand because of rising interest rates globally.

Anyway, you should have fun in the next few years on commodity stocks. Looking at the technical analysis for this stock, its apparent that we ae looking at an ascending wedge with 2 plausible growth paths. The $2.10-2.20 levels are going to prove to be tough resistance levels, so I would advocate taking profits at these levels. The stock price is currently $1.45 - so that doesn't leave much upside. The reality is - I cant see any short term break out (above $2.20) because they still have alot of work to do. But given the tie-up with FMG I might be proven wrong on this. The reality is that it really depends on how much supply FMG can contract and whether FMG can service that ore from its own leases. It would be prudent for it to defer BCI developmenr until its ore deposits reach a mature phase of development. Given that risk, I see this stock as a speculative BUY, and FMG as the safer entry. But having said that....I prefer gold and silver.

- Andrew Sheldon www.sheldonthinks.com

Gold stocks - Sept 07

Well as posted on my Commodities Trading blog I have a renewed interest in gold as previous resistance appears to be falling and gold seems destined to rise, and after testing $720-730/oz, rise even further. The question is - where does the best value lie in gold stocks.

When you review the market you realise that there is surprisingly little exposure. We can look at 2 types of company:
1. Established producers: I like emerging small producers that are cashed up, debt-free, unhedged, offer significant leverage as well as having significant resource upside.
2. Advanced projects: There are a host of companies that have no production interests but will have them within 12-18months. The benefit of these companies is that they will receive a re-rating at a time when gold prices are much higher, and the technical risks have fallen somewhat. We need to appreciate that most funds are run by accountants or actuaries that are 'conceptually blind'. You cant convince them of the value of a 'concept' - they need a feasibility study at the least, and even then they might be sceptical until those forecasts are converted into earnings. The added benefit of these companies is that they are often take over targets (if their resources are significant - say PRU) and they are able to lock in much higher gold prices to finance their project.

In Australia, I like the following companies listed on the ASX:
1. Bendigo Mining (BDG): BDG has one of the largest gold inventories in Australia, and its project lies in one of the most proliferate gold producing provinces in the world. At its peak of activity in the 1850s this gold province produced 40% of the world's gold. BDG has proven that the ribbon-type reef structures extend over a wide area, and even though the grades (and thus resources) were downgraded, they are still compelling value. The company has a 600,000tpa plant and is unhedged with $70mil in cash reserves. The newly appointed MD has not disappointed either. At 31c the company is valued at $158mil. With $70mil in cash, that places just a $88mil value on its project which has the capacity to produce 600,000tpa x 10g/t of gold = 200,000 oz per annum of gold. Thats amazing! Fund managers might however be a little slow crawling back into this one given the losses they incurred on the issue a year ago. But that has not stopped the State Teachers Union Super Fund of Ohio (USA of all places) from increasing its holding in the last week.
2. Sub Sahara Resources (SBS): SBS has a huge tenure holding in Africa - including JV interests in Tanzania, Eritrea and Ghana with a number of companies including Barrack Mines. Its Zara & Koka projects are the most advanced, however it has a number of other advanced projects with a focus on gold. The compelling value of this company was highlighted when Anvil Mining took a 10% equity stake in the company several months ago. I think this company will do very well as it has a huge portfolio of interests to trade with, and a diverse exposure that could yield some attractive discoveries. The intention with companies this size is to expose oneself to exploration upside. Capitalised at $40mil (at 8.7c), we can say a significant discovery in itself would double the value of the company.
3. Alloy Resources (AYR): I jumped on this one at 11c, its now 13-15c. They are an explorer, but I like that they are a mouse of a company hunting elephants along strike from some significant deposits held by the heavyweights Oxiana Resources and Pan Australian Resources (PNA). I will be hoping for greater gold content as opposed to copper, but I wont complain. The company should be close to releasing some drilling results, so I see that lifting the market.

These are not gold, but I still have MRX and MKY:
4. Matrix Metals (MRX): I still like this company even if its copper. I cant see copper prices coming off too much given that China is still growing so fast. Their project in West Qld is a cash producer, and I still see benefits from expanded output, not to mention the exploration upside. Current price 13c.
5. MKY: They had some attractive uranium soil sampling results 6mths ago and are currently drilling them. Uranium spot prices have come off but they are still high, so I'm expected a phenomenable rally if drilling results are good because the anomaly is quite large. Current price 4.2c