Trading - a moment of reflection

Traders will have made a nice profit in recent weeks. Several stocks recommended in recent times have performed nicely. Metals X (MLX.ASX) and Windimurra Vanadium (WVL). Pike River Coal are doing ok as well, and you might be inclined to sell those too, since they are metallurgical rather than thermal coal, though there is more upside if you want to wait until after the end of the tax year (Jun 30th). The reality is metallurgical coals are always going to be in tight supply since they are not very abundant. I also believe Pike River Coal is a possible takeover target. Its not a natural investment for its parent company, and the recent IPO might be a precursor to a sale of the parent's stake.
My focus is on the gold & silver stocks, though I like some stocks in other metals, eg. Nickel. Red 5 has started to move, up about 30% in the last few weeks. A1 Minerals too is starting to stur, though I feel this stock could have delays entering into a toll treating agreement. Hard to know when a deal will be done here.

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Andrew Sheldon www.sheldonthinks.com

Aviva Corporation (AVA.ASX)

Anyone who reads my analysis of new IPOs on the ASX will still be shuddering from my comments on the various coal floats on offer. Not that they are all bad. The problem is they are a ‘flash in the pan’, profiting from the current high coal prices. There are some decent new floats out there like Pike River Coal in NZ. The other opportunity is a coal-power stock Aviva Corporation. Canadians might actually prefer their competitor for this independent power tender - CIC Energy, listed in Toronto. Their project is also experiencing delays, but is more advanced. Given the power shortages in Botswana and South Africa – its more than likely both projects will eventually proceed. Eskom is really playing catch-up.

There are power outages and new projects are hungry for power supplies. Just to highlight how bad the countries power shortages are: “Free State farmers were on Thursday asked by Eskom to cut their power consumption by 10%, mainly during peak hours”. "Power supply in both countries remains very tight. Regular load shedding and reduced supplies are forecast to continue for the next 5 years. Not a great state of affairs in a minerals boom for a major commodities exporter.

Another problem for miners in Southern Africa is the high Rand. This might actually cool new mining capacity. This and the constrained port export capacity, mean that there should also be ample short term coal for domestic power production. But new power stations need to be built on sustainable supplies of low grade coal which don’t have export potential. Low grade means high water, high ash coal that requires washing and can only be transported short distances. These types of projects offer captive, cheap coal supplies because they barely have an alternative market. In these tenders coal supply and power station development and management is being offered as a single contract.

Both CIC Energy of Canada and Aviva Corp of Australia are front-runners for power purchasing agreements which would help underwrite the financing of their combined 1500MW power stations based on their own delineated coal supplies. See Article A2. Aviva has outlined a 1 billion tonne resource, though the coal will require washing to reduce ash to 30%.

CIC Energy is actually proposing a larger 5,000MW project based on Botswana's Mmamabula coal field. CIC has agreements in principle to supply power to both Botswana and South Africa, but negotiations have snagged over the price of the power, the cost of the project and engineering constraints.

One gets the impression that Eskom is delaying the bidding despite political pressure to ensure it attracts competitive bids from several consortia. It has a large amount of capacity to negotiate with. I am wondering if Aviva is a serious bidder for early development, or whether it might be delayed. For security of supply reasons I think both parties will be winners, it’s just that the more competitive bidder will secure more capacity. Reading its ASX announcements “The drilling campaign is expected to be completed by the end of August, with final coal quality test results expected by the end of October”. CIC Energy is also struggling securing power plant components, so there is some scope for delays. Last week, CIC Energy announced that the schedule for the Mmamabula project would be delayed by about six months. It said strong demand for power plant builds, and the prevailing engineering resource constraints, were increasing lead times for power plant equipment and construction services. So CIC is also facing delays. See Article 1 and Article 1A. For info on the competitor see Article 2.
Source: Article 3. If you read the following statement you will get the impression that Eskom is between a rock and a hard place in its current coal procurement negotiations – see article 4.

Aviva has the advantage I suggest of exposure to another promising project - a proposed coal-fired power station in Western Australia where the arguments are even more compelling. This exposure might however be of concern to Eskom. Aviva has 118mil shares on issue at 87c = $100mil, plus $22mil in cash reserves. Major shareholders already control 83% of the company’s stock.
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Andrew Sheldon www.sheldonthinks.com

Profiting from the next gold boom

You might be asking yourself how high is the gold price going to go. I recall years ago (around the year 2000) people saying that gold would never recover from $290/oz, that there was just no use for the metal. Since the gold standard had been abandoned, what were all the central banks to do with gold. I think there are a number of problems with this argument:
1. Gold has been a monetary unit for 5000 years
2. Just because governments have abandoned gold, it does not mean people have. In fact I would suggest any attempt by the central banks to abandon gold just makes it more valuable.
3. No other commodity shares gold's characteristics - silver comes close, but gold 'shines' because any years production or consumption is a fraction of total inventories, making pricing of the metal more stable. The speculative demand for gold today is really just because central bankers dont play homage to gold.
I produced this report to provide an analysis of where I think gold prices are heading, and the timetable for the gold boom. I have used several indicators to outline where I think gold is heading. Further details here.

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Andrew Sheldon www.sheldonthinks.com

New service - information

Just a notice for those who may not have realised.
I have provided a complete list of Australian Stock Exchange listed companies involved in basic materials (including metals & mining) at the bottom of this blog. It provides details on:
1. Company name
2. ASX Stock Code
3. Sector, eg. Metals, Energy, Building
4. Specific materials they pursue, say U (uranium), W (tungsten), Sn (tin), Au (gold)
5. Stage of development, eg. Exploring, emerging (identified commercial target), construction, production, mothballed
6. Location - this lists the countries or states in which they have an interest
7. Website - most companies have one

Anyone who purchases an ebook from my website is entitled to a free excel version of this data, so they can add detail to it.
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Andrew Sheldon www.sheldonthinks.com

Citadel Resource Group (CGG.ASX)

This is a company that was listed recently which escaped my attention. It has released some compelling drilling results lately suggesting it is delineating a large-scale resource. The Jabal Sayid project is located in Saudi Arabia. Drilling results include:

- 200m @ 2.5% Cu plus 13m @ 4.9g/t Au (BDH4007)
- 87m @ 1.5% Cu (BDH 4006)
- 34m @ 5.2% Zn and 64m @ 1.4% Cu (BDH4005)
- 39m @ 2.6% Cu (BDH2023)
- 22m @ 2.0 g/t Au (BDH1025)

There is a lot of institutional support for this company and its not hard to understand why. The high grade ore (31Mt at 2.3% copper), large scale of the mine. The recent listing has provided the company with $29mil of working capital. The company is still cheap, but its not compelling value since the IPO has focused attention on the stock. There was also a sizeable vendor consideration to this stock. The project is well advanced with the final bankable feasibility study currently being prepared. Mine commissioning is expected within 4 years. The underground decline is already 4km long (based on 1:9 slope, thats 420m deep). Saudi Arabia has some compelling benefits - there is no personal income tax, only a 20% corporate income tax. Energy costs are very cheap - 15c/litre for diesel and 2.5c/kWh for electricity.

This mine will be a low cost operation. Modelling by the company suggests an operating cost of $0.96/lb copper and a $US300mil plant. Production is likely to be 75,000tpa, increasing to 100,000tpa.

Shares on Issue
480m (listed)
398m (escrowed for 2 years)
247m (CMCI subject to EGM)
1125m Total, so the company has a market value of around $260mil. Based on the long development lead time, I would suggest this company will be trading sideways for a long time. The structure is called a 'channel' and it will eventually break out. Until then they have a lot of money to spend. So trade this stock between 20-30c support-resistance levels.
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Andrew Sheldon www.sheldonthinks.com

North Qld Metal (NQM.ASX)

North Qld Metal (NQM 60%) and Hermskirk Consolidated (40%) purchased the Pajingo gold mine in Dec'07. The project holds 465,000oz of gold resources. Its currently producing 5400oz/mth, or 62,000oz per annum. The mining cost is $US550/oz. Based on the companies 144mil shares at 29.5c, they are worth $33mil. The company currently has around 5 years of production left with scope to increase it. The company is currently generating $16.7mil in earnings from its 60% stake, giving it a PER of just under 3x earnings. We do however need to consider the short 5-6-year mine life vs the upside in the gold price, and possibly the discovery of additional resources. The $25mil (NQM's share $15mil) acquisition was funded from cash and the issue of shares to Newmont, so NQM currently has no borrowings. The acquisition included a 300ktpa treatment plant, included all surface plant and underground mining equipment plus 830km2 of highly prospective exploration tenements. The company will resume exploration in Jun'08. I can see a small company being able to extract extra value out of this project, plus some added resources, and an increase in the gold price. The company has a NPV of $60mil based on a 12% discount factor, current earnings of $16mil per year for 5 years, or 11.6c earnings per share. I think NQM is worth a trade off its 27c support. Gold is about to move and exploration might yield further upside. I can't see them rising above their previous high of 55c without a significant discovery.

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Andrew Sheldon www.sheldonthinks.com

Leyshon Resources (LRL.ASX or AIM)

Leyshon Resources (LRL) is dual-listed on the Australian Stock Exchange and Alternative Investment Market (AIM). The stock is currently at support, and given its gold-zinc exposure we can expect this company to attrack some support in coming weeks. LRL is developing a gold-zinc mine in China. The project has not yet been approved, but critical plant components have already been ordered anf negotiations for financing are already underway. The plant will cost $US45 million to develop. The company has cash reserves of $A12.9 million ($US11mil), which will be required for working capital. I would suggest finalisation of the debt financing is imminent. A roughly $15-20mil equity raising could not be far off, with a good share going to institutions. For Paul Atherley's sake I hope the bankers have short memories - one is reminded of the Murchison United (MUR) attempted acquisition of a project in Europe years ago. It didn't quite get there. The company was buried by a currency hedge for its Renison tin project, now controlled by Metals X. Well I guess they all know him :)

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Andrew Sheldon www.sheldonthinks.com

Gold finally reaches support level $US850/oz

As forecast several weeks ago, gold has finally fallen back to reach the $US850/oz support level. It will be worthwhile buying I believe at this level, though you can wait for support/consolidation to prove the point. Its a pretty solid level as discussed on my Commodities blog. So now is a good time to get into gold stocks. Long suffering spec buyers should find some joy soon.
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Andrew Sheldon www.sheldonthinks.com