Red 5 Ltd - emerging gold producer (buy)

I first came across Red 5 Ltd (RED.ASX) about 4 years ago. I was quite excited by this stock at the time because I saw alot of potential in its gold deposits in the Philippines. There were 2 targets then:

1. The Siana pit & UG potential

2. The Mapawa area along strike

3. The porphyry copper - volcanic intrusive potential

Notwithstanding the potential of the Siana pit and depths with its historic production of 5 grams/tonne, I was more interested in the bulk tonnage, low grade porphyry deposit at the time. Why? Because there was a similar structure up the road that hosts a multi-billion dollar mine deposit. As far as I was concerned, everything hinged on the first deep drill hole. The results were sold as a 'plus' but 500m of 0.2g/t is not commercial. The distribution of the gold suggests you would have to go very deep to find commercial gold, and that becomes costly. There is still however the prospect of remobilised gold along faults (like Siana), but as far as I am concerned the porphyry potential has been disproven. Well it was a punt worth taking. The stock at the time rose from 5c (from where I started accumulating) to 25c.

For the last few years efforts have focused on defining a 2Moz gold resource at Siana. They have identified a 3 year open-pit deposit, plus a 7yr underrground mine. This has taken some time because they have had trouble getting mining consultants to complete work. But here we are at feasibility study time. The next stages are:

1. Capital raising - Red will requiring $60mil up front for the plant & open-pit, followed by another $8mil in 2 years (which could come from earnings) for the development of the UG. Of the $60mil, they appear to be modelling $25mil of equity, plus $35mil of debt. I suspect this project is robust enough to secure a debenture issue, though maybe underwriters were worried by the way Lafayette Mining was treated by the Philippines government after a mine spill. So we might expect a placement to institutions and Anglogold (13% shareholder) plus an entitlement for other shareholders (say 1:5 issue), with maybe Anglogold & a broker underwriting the shortfall. Thats a positive outcome because Anglogold will have a vested interest in guaranteeing project revenues (as a shareholder), which means no hedging will be required. Many good projects hav been ruined by hedging. We dont want it because we want the upside exposure to a higher gold price. Altrnatively Anglogold could just buy a stake. That would suit Red shareholders. Anglogold's intent I suggest is to ensure it retains ownership of the processing plant after Red's reserves are depleted, as it can use any surplus ore processing capacity for its much larger, longer life mine, as well as grabbing equity in Red's prospective tenure.

2. Plant construction, tailings dam construction, pre-strip - this will take about a year

3. Operation: So we are looking at the commencement of mining in early 2009.

I have prepared a financial model for the project based on the limited data available. I have used my forward estimates for the gold price, which are bullish by others standards, but I think they will be revising their numbers up as inflation picks up. I have factored in a very strong $A ($US1.25 in 2013) because of $US weakness, and expected tight commodity supplies. I have not allowed for any increase in underground resources, or Mapawa pit contributing in later years. The area has excellent potential for further discoveries, and since Anglogold is about to embark on an exploration program in Red areas, we might have exploration upside in 6-8mths. The UG I believe has the potential to be substantive resource too. So its a pretty conservative model....but the intent is to be realistic. Actually I think gold will perform much better.

Based on these numbers I have Red showing very volatile earnings mostly because of its production profile and a rising gold price. My NPV places a value of around $150mil on the company's Siana project after accounting for the $8mil in Year 2. Red offers the following sensitivity analysis for gold price, but I suggest they are not factoring in a much stronger $A.

Now given that Red is now trading at 10.5c, we can expect the company to be attempting to keep the price there prior to announcing the raising of $25mil at I guess 10c per share (as I assumed above). This gives a NPV per share of 29c, but on a yield basis we might give them a value of 18c in 2009, 22c in 2010, and thereafter it really depends on exploration, the gold price and retained earnings. These numbers fit with the chart below. So post issue I can see Red rising to 17-19c level. They will be major resistance levels, and where I would be taking profits. That might not seem like much upside, but dont forget the exploration. This is an evolving story, and this financial model does not really assess the long term possibilities of this project.

- Andrew Sheldon www.sheldonthinks.com

Technology stocks

The focus of my investments have always been mining, however because of my interest in science I have always had an interest in technology and its commercialisation. In recent years I have recommended a number of technology stocks which have done fairly well. The ones that come to mind are:

1. Papyrus Australia (PPY): I originally saw the story of this new paper fibre on ABC's Landline program around 6 years ago, then around 3 years ago I noticed a ASX report announcement by 'Papyrus' and I knew instantly it had been listed, and followed it conscientiously. Missed out on the price action however for lack of patience, as a Japanese paper company took a stake.

2. ZBB Power Systems (ZBB): This company is developing a new battery suited to commercial power storage for back up supplies and load shifting to benefit from the high cost of emergency supplies (diesel gensets) and time-of-day pricing. The batteries can be used to charge at night (off-peak) and discharge during peak periods. It will have an important implication for the shape of the 24hr power demand curve. The concern I have with these battery devices is that if we ever move to overnight car battery charging, the disparity between on & off-peak will be reduced...even inverted. But there is a demand for the next 10-15 years, and the future is hard to pick.

3. Living Cell Technologies (LCT): I started watching this stock after a report was released about 1-2mths ago, though I never acted on it. They have recently rallied on good news. Cant recall why they appealed to me..yet the rally made me take another look at this sector.

Biotron Limited (BIT.ASX)

Well to some extent these are the stories that got away, but I have recently found another stock that has alot of appeal. The stock is close to running stage 2 clinical trials on a HIV drug that attacks a protein that is the source of the HIV viruses capacity to replicate itself. Other HIV drugs have had limited success in destroying the HIV virus because they dont attack the body reservoir. Biotron's inhibitor-type drug shows 100% success in preliminary trials with these other drugs. I dont get the sense that this drug will work alone, or at least the results are not evident, however it seems encouraging, and the company is taking a similar tact on the hepatitis virus, though development of an antiviral drug for hepatitis is less advanced. The results of the Phase 2 clinical trials are due in mid-2008, though I expect the stock to improve before then in anticipation. In the short term, the company has just $1.3mil in cash, so I'm expecting an issue to raise around $5mil in the next month or two, so stay clear of that, but it should offer some buying opportunities before Xmas. The following chart suggests 12-13c is a good entry point. They are currently trading arounf 19c.

- Andrew Sheldon www.sheldonthinks.com

Quick trade opportunity in gold spec

Every commodities boom is littered by bad decisions. There are several that come to mind:
1. Projects where ore resources (or grades) are overstated, either because of poor ore zone definition or nuggetty effects on grade estimation (Bendigo Gold).
2. Projects where the project development costs are understated (Batavia Mining, Gleneagle Gold, Perseverence Mining)
3. Pojects where the operating costs are understated (Gleneagle Gold)
4. Projects that were financed at low prices (Highlands Gold, Lafaytte Mining)
5. Projects that locked in low prices to secure funding (by hedging) and subsequently were forced to buy back metal in the spot market to meet their hedge commitments. eg. Lafayette Mining, Highlands Gold

Austindo Resources (ARX.ASX) is another Australian mine developer whom falls into this category. Poor selection of consultants and contractors, or more precisely work presures caused by a persistent commodities boom resulted in the company under-estimating capital costs, and its project engineers cutting back on underground decline support. The delays cost in excess of $35mil. The project debt has blown out forcing the company to raise equity finance. Whilst existing shareholders are being diluted it offers a compelling opportunity for investing. Why?
1. The stock has been oversold on its problems
2. All the problems are out on the table, so its mostly upside from here
3. The gold price has rallied to $US750 an ounce since the problems besieged the company

The company has partially completed the gold project so they are not totally out of the woods, but I think a second consultant is more likely to perform better correcting the errors in another's work. The project resource upside remains to be seen, but the project offers upside there, as well as from a stronger gold price.

The company has already offered renounceable (tradable) rights at 0.1c trading as ARXR until 18th October 2007 - thats just a few more days, thereafter you have just until 25th October to send in the application money (thats 1c per share) to exercise. It is a buyers market in the rights - no doubt because alot of small shareholders burnt on the share price are unwilling to risk more. This is poor trading psychology as history is no measure of future performance. I bought 500,000 ARXR (rights) today for 0.1c with the intent of paying 1c in the next week to take up the rights. That will give me 500,000 shares in ARX at a total entry price of 1.1c - when they are currently trading at 1.4c. Thats 25% market premium is bait however to take up the rights. I can assure you that once the rights expire the ARX share price will fall. Really that stock price manipulation at the 'market' price margin is what brokers earn huge fees for. eg. Austock is underwriting this issue, and since they are raising $12.4mil - they will earn more from commissions than they loose from supporting the stock. Better still is that they can recommend to their clients to buy the stock...though they might tell their best clients to sell for a 'stag profit'. Of course the better clients will be offered other opportunties like that.
The other positive of the issue is that ARX are offering a free 2012 option exrciseable for 1.5c by June 2012. Thats another compelling reason to buy. So I will get 50,000 options which will be worth 0.3c upon listing based on the current price. Now because I only get 10% offer they have a value of 0.03c. Anyway given their leverage they are probably better to hold for any upside.

- Andrew Sheldon www.sheldonthinks.com

Matrix Metals does not disappoint!

Matrix Metals is so far up 11% today and I suspct it will go much higher. The annual report was released 15minutes ago and it does not disappoint. Here is a basic summary of the points made:

1. There are 550 mining companies listed on the ASX but just 10% of them are in production. Of those 10% Matrix is now one of them.
2. Matrix started copper cathode production from its Cloncurry heap leach operations in June'07
3. Matrix is currently producing 360tonnes of copper per month, and is ahead of schedul ramping production up to 420 tonnes per month
4. Matrix has 4300km2 of tenure around the existing operations. The Mt Isa Inlier - a geological window into older Paleozoic rocks is very prospective for copper and other minerals
5. Copper prices are testing record prices. Back in 2001 copper prices were languishing at 80c/lb, but today they are $3.70/lb. Whilst copper prices are up 380% the benefits of higher $US prices are somewhat offset by a 40% increase in the $A and the higher capital & operating costs of commissioning a mine.
6. Matrix has exploration JVs with Deep Yellow Ltd (where Deep Yellow has increased its JV commitment to uranium exploration) and Xstrata (looking for deeper sulphide ores at McCabe).
7. Matrix expects the current strong copper prices to remain so it remains unhedged exposure to copper
8. The company is considering an expansion from 5500tpa to 11,000tonnes - but this is tentative

The upside in productive capacity will tend to counter any concerns of softer revenues from softer copper prices, as will any fall in the $A (in response to softer commodity prices).

If you want further information on Matrix have a look at their website at http://www.matrixmetals.com.au/.

- Andrew Sheldon www.sheldonthinks.com