Universal Resources (URL) vs Golden Cross Resources (GCR)

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Universal Resources (URL) has doubled since I recommended this stock in Aug'07. I still think there is considerable upside, but from herein there is considerable risk. The risk factors are:

1. The copper price: There project is a low margin project because of the low grades.

2. Project cost: There is a risk that a blow-out in project development costs would undermine the earnings of the project.

3. Mineral exploration: The company has a JV with Xstrata Copper, and is also exploring for uranium.

For these reasons, I see this company as high risk henceforth, yet there is no overlooking the fact that, after Mt Isa (Xstrata) and Golden Cross Resouces' Copper Hill project (NSW), this company controls arguably the 3rd largest copper resource in Australia. The current resource is 50.7Mt at 0.69% Copper, minor gold. Not bad for a company with $6mil in cash and a market capitalisation of just $29mil. But how rediculous was it for the market to value the project at $9mil after allowing for cash in Aug'07.

Interestingly, whilst we wait for the final feasibility study, its worth reflecting on the economic parameters for the similarly sized Copper Hill copper deposit. GCR is ahead of URL in its feasibility study. GCR must have considered its project marginal, as it ended up farming out the project. Copper Hill has resources of 51Mt at 0.43% copper and 0.39g/t gold. So whilst URL has 0.26% more copper, it has 0.34g/t less gold. Another point of diference is that copper prices have limited upside, whereas gold looks to have considerable upside. URL has full project equity, GCR has farmed out to a Canadian company. Both companies are close to infrastructure, as well as $6mil in cash, and a string of other interesting project targets.

Interestingly GCR is capitalised at $22mil whilst URL is capitalised at $29mil. The ultimate value of these companies depends on the price outlook. so this is where GCR's Copper Hill project analysis comes in handy. Assuming a $250mil capital cost for both (similarly sized plants 8Mtpa, same ore mix), the GCR project is break-even at a gold price of $US500/oz and $1.80/lb copper. But since I would place a long term conservative base price of $2.50/lb copper and $800/oz gold, I think the NPV of these projects is more likely to be $400mil for URL and $700mil for GCR, by virtue of GCR's higher gold grades, and the better outlook for gold prices. Also GCR has more advanced projects, though reduced equity in the project.

Based on these parameters, I'm more inclined to go with GCR because of the better outlook for its commodity mix, and because its 30% cheaper market capitalisation. The other compelling reason is that its project already has a larger equity partner - a Canadian company. For URL, Xtrata is the mostly likely partner, but is perhaps not inclined to act in accordancw with URLs time schedule. Although GCR has less equity, they will also have less debt burden as a result. Having said that URL has the more prospective exploration area, but thats less tagible. So my preference is to buy GCR. GCRs chart also looks the more safer trend. I'm concerned that URL might slip back to base to form a double bottom.
Feel free to join my forum discussion on Universal Resources or Golden Cross at Google Finance.

- Andrew Sheldon www.sheldonthinks.com

Namoi Cotton Cooperative (NAM)

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It wasn't long ago that I recommended Queensland Cotton as a BUY, and it was soon the subject of a takeover play. Well now Qld Cotton's smaller cousin with a 30% market share is looking very appealing. I should qualify the investment by saying that we ae currently in a drought, which is severely affecting earnings, but thats why the company is so cheap. Consider some of the merits:
1. Capitalised at just $A42mil - thats a EPS of 12c a share, or a PER 3x
2. Net profit of $12.9mil - down 46% from the previous year

Granted that the drought might not end for more than a year, there other compelling reasons why this stocks is a buy:
1. Takeover: If Qld Cotton was a good buy, then NAM at these prices must make alot of sense as a bolt-on business to Qld Cotton.
2. Asset value: Net tangible asset backing of 100c, when the share price is 42c

You would think that the depressed NAM share price would be a smoke signal to international cotton producers interested in diversifying their production base. I dont see this as the case because:
a. The strong $A - albeit alot of these commodity producing countries also have strong currencies
b. High cost output - If you were to buy production capacity, then you would want NAM to be doing the buying of lower cost capacity in third world countries. Unfortunately for shareholders it didn't do that like Qld Cotton.
c. Unreliable water supplies in Australia - this is perhaps the big problem for Australia. There has been a decision to allocate more water to the environment. Given the value of farming land, I wonder whether the high water consumption intensity of cotton would justify shipping the cotton gins to third world countries and transforming cotton farms in Australia into wheat, which requires less water.

- Andrew Sheldon www.sheldonthinks.com

Some good buys in base metals, gold

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We have had a good pull back in gold and base metals, but after a bit of trepidation, the signs are starting to look good for another rally. Its easy to get side-tracked by the sub-prime fiasco, but there are several compelling factors supporting the market:

1. Low interest rates - with the Fed likely to reduce rates I think before Xmas, but i think that will be the last one because of inflation concerns

2. Excess liquidity - there is still alot of dollars sloshing around in the global economy. Until those dollars are eroded by inflation or debt liquidation, I think the market is not going to collapse, but rather go sideways for a long time. But there will be rallies to trade. This is actually not a new assessment.

3. Strong China - There has always been a strong propensity for China to overproduce to get economies of scale. So I can see China doing this over coming months, resulting in a resurging commodities demand. Base metal prices are starting to recover on the basis of falling metal inventories in China.

As a side note on gold, bond yields are falling again because of the Fed cutting rates, so expect this, higher inflation, Iran/Iraq to drive gold prices higher.

So the stocks I like are:

1. Austindo Resources (ARX): This you might label a 'spec' but its not far off production after having technical glitches during project development. Having bedded down a large issue, and rallied after, they have since fallen back with the retracement in gold prices. They are currently trading at a PER of just 2 next years full earnings. Mind you they only have 4-5 years resources, but upside on exploration. The pull-back to thei Moving Average makes this an appealing trade over the next 3-4months. You should be able to double your money.

2. Gippsland Ltd (GIP): Everytime I touch this company I do well. This would be about the 5th time I have been in this stock. All successful short term trades. The attraction is the completion of the feasibility study, and the finalisation of an off-take agreement for essentially all of the tantalum (600,000 lbs/year) to a German trader HC Starke. This should turn this stock into a growth stock, though I would not hold it long term because of its location in Egypt. As we can see below, GIP has recently dropped off as traders dumped it after the German sales contract. Traders are not inclined to wait 1yr through construction, but investor interest will grow in a stronger metals market.

3. Matrix Metals (MRX): As much as I like this company I was forced to sell it at 13c the other day. Not my best exit decision in as much as it was a late one, but a least I was rewarded since I was able to pick up 150K of MRX at 12c on Friday. I do believe this is the bottom. I sold purely because of the negative news on Wall Street, but also because the price slide was eroding my asset base and the copper price dipped below $3/lb technical support. With stocks falling in China, and all metals rallying on Friday, I think this is a turning point, so time for a re-entry. The other reason to like these stocks is that lower metal prices translate into lower $A, so moderating any $A earnings. One need only look at the $A gold price on http://www.kitco.com/. The $A price hardly dipped belo $900 during the gold price retracement, as the $A slipped from $840 to $772. Well its back to $823/oz now, and in Aust terms over $A940/oz. Matrix is copper, but same principle.

As we can see below, MRX share price has fallen to a support at 11.5-12c. So I essentially got a very good re-entry, albeit it was a poor exit.

4. CBH Resources (CBH): CBH is an attractive purchase because it is developing another 2 new mines which are expected to more than double base metals output - with the new mines to be commissioned in 2008 and 2009.

As we can see from the chart below, the recent fall in base metals has pushed them down, but with prices on the recovery, they are trading at their medium term trend line, making them a favourable BUY. From 2009 they will be producing 250,000 tonnes of zinc equivalent. And they have a substantial resource base (4Mt Zn equivalent), and base metal deposits tend to occur in clusters. They are forecasting 5c earnings per share (EPS), thats a 15% earnings yield, with the promise of significant expansion in earnings over the next 2 years. Mind you the conversion of $200mil of convertible notes into shares will dilute the EPS by a third. Still they have $219mil in cash. The Endeavour resource has alot of potential at depth too! Plus the Western Mineralisation of the Broken Hill Lodes, which was actually the core project when I visited Broken Hill in 2001 to look at this mine. They wont need any more equity raisings since $219mil cash is enough to carry the Panorama project, so its looking good for its mid-2009 start. There are alot of other targets in the cluster at Panorama.

- Andrew Sheldon www.sheldonthinks.com

Stock Selection

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Its not easy to make a stock selection at this time given the state of the US market, the volatility in commodity prices. I think its a good time to hold a swab of cash. But having said that, there is some compelling buying opportunities:
1. Matrix Metals (MRX.ASX): Matrix commissioned their 5500tpa copper mine in west Qld last June, and its already at nameplate capacity. There are plans to expand output to 9000tpa, and they have upside from further copper and uranium exploration.
2. Austindo Resources (ARX.ASX): This company is commissioning a gold mine near Jakarta, Indonesia in the next 6mths. The mine has struggled to date because it was not engineered correctly, but with a new consultant and contractor, things are back on track, and after the low-priced equity issue to recapitalise the mine, and the promise of higher gold prices longer term, this stock has some upside. The company doesn't have the resource security that I would like to see, so go easy.
3. RED 5 Ltd (RED.ASX): Red 5 is developing a gold mine in Mindanao, Philippines. The Open cut development goes underground from year 3 unless further OC gold resources can be found. There is a great deal of appeal to the UG as broad zones of high grade gold, and zinc credits have been found. The project lies along a promising mineralised structural trend, so there is upside from further regional exploration, which is being led by Anglogold. The Net Present Value of the gold project is around $90mil, so there is alot of upside in this company.
4. AIM Resources (AIM.ASX): AIM is developing the Perkoa zinc-lead mine in the state of Burkina Faso, Africa. When you consider they just raised $A90mil by issuing 290mil shares at 31c, at 20c support this stock looks highly appealing. The Mumbwa copper project with BHP Billiton could be attractive bulk sacle target as well. The project has a respectable 12yr mine life based on a resource of 6.3Mt at 14.5%Zn, thats 1.1Mt of concentrate. They will start production of 70,000tpa of zinc metal in 2009. I dont place any value on the platinum project in RSA. Market cap is $220mil with $85mil in cash, which is being used to develop the mine, and on exploration. Its a long time to wait for production though. The best entry into this stock might be the Jun'09 options currently trading at 14c, which have 10c to pay. Based on the current 22c price, the options have about 2c of time value. Not bad considering the leverage and 8mths to expiry.

Timing will be important buying these stocks. Its readily apparent that AIM is falling back to its 20c support, RED has previously rallied with gold to 17c, but seems likely to be sold back to 12-13c, and represents a good long term bet at these prices. MRX has alot of appeal on a corporate level, though I would like to see copper prices hold above $3.20/lb. Nevertheless any falls in copper will be offset by a falling $AU, and its now a cashflow-yield story, with the added appeal of copper and uranium exploration upside.

Remember MKY - a uranium explorer I recommended about 3-4 mths ago. Its up significantly today (20%). At this point its hard to say whether they have anything real or its just fluff. You can be highly selective with rockchip sampling, and trenching too. But it might turn out to be a significant deposit...lets watch! There was something I liked about the geology...on a structural trend I think, which gives me more confidence than a remobilisation of uranium from weathering of granites., which might be superficial, but widespread (12km2).

- Andrew Sheldon www.sheldonthinks.com