A1 Minerals (AAM.ASX)

A1 Minerals (AAM.ASX) would have to be one of the better buys around at current prices. Quite apart from the trading opportunity, it makes a lot of sense to sit on this one to realise the benefits of this strategic gold resource. You could be forgiven for thinking this company is slow to develop its resource - true enough - but I suggest the reason is they are attempting to lease, buy or toll treat their ore through a processing plant rather than having to finance plant construction. I think the plans to build a plant are really 'fluff' or just a backstop. There are several existing plants in the area that could process the ore, so it seems much more likely that 'a deal will be done' that will offer so much more value to shareholders. Very quickly AAM could be in production. Given that gold is going to $2400/oz by my thinking, there is no reason to hurry. This stock makes a lovely passive investment. Fortuitously the stock has fallen back to an important support as investors loose patience. The problem of course is that plant operators also see the strategic value of their plant and are likely holding out for a higher gold price. I however dont see how waiting longer is helping AAM's cause. A higher price means A1 Minerals has to pay more for a new plant, or the existing plant operators can extract more value from A1. It makes me think I should be investing in the plant owner. I think the plant owners know more about the outlook for gold than the A1 board. The company has a number of interesting exploration targets that add speculative upside to the stock. They have $5.9mil in cash, so with a market capitalisation of just $16mil, thats valuing the gold resource at roughly just $10mil, but it has a conservative 0.7mil oz x $A300/oz profit margin = $US200mil. Looks very cheap. You of course would have to discount those cashflows likely to be extracted over 5-7 years, so lets say $120mil. With a strong $A likely, I will suggest $A100mil. And there are these other projects that are at an early stage of assessment.
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Andrew Sheldon www.sheldonthinks.com