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