Rudd and the coal seam gas industry

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The coal seam gas industry will be greatly impacted if Rudd's tax goes ahead, as will a lot of the smaller, marginal gold producers with shorter project lives.
This is the most blatant abuse of power I've seen since President Magabe seized farming assets from whites in Zimbabwe, President Chiraz nationalised the oil industry in Venezuela and Saudi Arabia nationalised its oil industry in the 1960s. This is not a tax, which would be bad enough, as you can plan for an incremental tax. This is extortion by a government looking to opportunistically grab a share of private wealth. It is government speculating on asset values, and grabbing a share before the prices rise. Consider the impact on asset prices, the higher cost of capital because of the blow-out in sovereign risk. Rudd is not smart enough, or too fascist to be a prime minister. This strategy is a desperate attempt to stay in power and he's extorting wealth from asset owners to pay for it. It is your super money, its your more expensive housing mortgage, its your personal mining investments, its your opportunity cost from Rudd wasting billions on dubious investments. I estimate that the cost of a home loan will rise by 0.2% because of this decision by Rudd. There will be less job creation, loss of investment income, and offsetting losses in tax receipts which will override the benefits of Rudd's tax take. This is the silliness of the proposal. He will cost billions in investment which would otherwise have made the government money. Read about the impact on Qld coal seam gas industry. It will also impact on the coal industry. Even the oil & gas industry will be impacted. Why? The majors will instead commission projects in Oman and Yemen....previously (before Rudd) considered to have a sovereign risk disadvantage. Shell will be saying to the Yemen government....this is what happens when you lack respect for property rights....investment dries up....CASE STUDY Zimbabwe, Middle East, Venezuela and now Australia.

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Andrew Sheldon www.sheldonthinks.com

Alliance Resources Limited (ASX:AGS) - uranium asset in waiting

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Alliance Resources Limited (ASX:AGS) has developed the Four Mile & Four Mile West uranium projects in South Australia near the existing Beverley uranium mine. The project JV is a satellite development to the existing mine owned by Quasar Resources. The company also has gold exploration interests in Maldon, Victoria, which were to be the basis for a amalgamation, however that separate deal did not go through.

In the case of the Four Mile project, the uranium resource is the highest grade project in the world, and offers a 15 year life based on existing resources. The problem is that the JV has been riddled with contentious JV disputes. The share price of AGS has fallen back to 40c from a high of $2.74, and after an issue at 68c. The dispute is currently before the SA Supreme Court.

This is a very attractive project. Sadly you could argue (ethics aside) that this project has been sabotaged by:

1. The 'hard-nosed' strategic games played by Quasar Resources

2. The failure of AGS to anticipate the problems which ought to have been expected with this type of JV agreement, which left them beholden to the JV partner.

There was a lack of critical thinking, or dealing from strength, displayed by AGS. So the project ends up in court, where the judge will evaluate the respective ethical and commercial arguments. There seems to be an expectation that people will do the right thing by you. People can rationalise all types of actions, and the only way to protect yourself is to anticipate problems. This is the role of critical thinking. One cannot really rely on the courts to protect you in these instances as a shareholder because you just don't know where you stand. The project as an investor is that the Four Mile project is captive to the Beverley treatment facility.

Nice project - but what a mess! Anyway for anyone interested in the details, take a look at the following presentation (25th Nov 2009) which I viewed. Draw your own conclusions. AGS is currently capitalised at $130 million, it has $45 million in cash, and a project tied up in the courts. At this point, the uranium spot price is at a low. The appeal of this company is:

1. If AGS win the court action, they will have achieved a significant payout to fund new developments, as well as resolving their previous issues (you would hope).

2. If Quasar win, then you might expect a takeover at current prices for the assets.

Certainly I think this project is one to watch for a decision on the Supreme Court case. I also note that the stock price has fallen to 42c. This is getting close to its 5-year low of 29c, so that should provide an excellent entry. I also note that spot uranium prices are at their lows, and are probably going to recover from this point. Remember, this is the highest grade uranium project, so it ranks high in terms of cost competitiveness. Of course, not having to duplicate (Beverley) processing facilities is another strong point. See Google Finance for 5-year chart.

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Andrew Sheldon www.sheldonthinks.com

A1 Minerals (ASX.AAM) - best entry for gold

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Unsurprisingly, gold has broken out, reaching a new 'record' high of $1230/oz. More promising is the fact that it closed at its high, a strong indicator that it will go higher. We might reasonably expect a rally to around $1500/oz. We think A1 Minerals (AAM.ASX) - a new gold producer - is the best exposure to this sector because it has just secured funding for a plant expansion.

Their management does not much have my confidence - but you don't buy a car because its pretty, you but it because its cheap and gets you from A to B. And you don't care if you crash it. :)

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Andrew Sheldon www.sheldonthinks.com

Cockatoo Coal (ASX.COK) - finds support

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Cockatoo Coal (ASX.COK) is a stock which we have highlighted before. I see that Patersons Research has placed a BUY on this stock, and I agree. Based on their report, they look to have a lot of promise moving forward. A lot of the executives behind the company have a marketing background. The people I would see at a lot of coal conferences years ago. You have to credit the coal industry. They know how to sell coal. Coal conferences in tropical paradises like Bali and Goa. I wonder if they still do that. Tax deductive as well. Lovely life if you are looking for career direction. My problem was remembering to eat food between beers. The beer comes looking for you, but you have to go looking for the food. I never remembered too.

See the Paterson report here. Importantly the stock has hit technical support at 40c and recovered. Good exposure to the coal industry.

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Andrew Sheldon www.sheldonthinks.com

Comet Ridge Ltd (ASX:COI) at support

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In the same vein as the last pointer - Comet Ridge Ltd (COI) has fallen to support. The chart for Blue Energy (BUL.ASX) by comparison does not look good.

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Andrew Sheldon www.sheldonthinks.com

Bandanna Energy (BND.ASX) has upside

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Bandanna Energy (BND.ASX) is another one of the coal seam methane developers in Queensland. The company is exploring in the Bowen & Gallilee Basins, and I understand it is preparing a pre-feasibility study, so they are at a pretty advanced stage.

I have not investigated this stock closely. I mention it only because I stumbled upon it. The chart suggests this is a good time to buy after the US-Asia sell-off. As you can see the current price is at the base trend price. I used to work for the chairman of this company. I do not have inside information. He just has a good track record, is a good manager, and is a major equity holder in this company. I also suggest the coal seam gas sector has a lot of promise. It should find support around current levels.

This is a moot point but - Gas will be a major source of energy in future for distributed power solutions. This is a long term outlook - but I suggest in future, you will each have a $5,000 power generating fuel cell in your home which will produce electricity, distilled drinking & hot water, air conditioning and refrigeration. I also believe that this will be a precursor to a solar concentrator which does the same thing in combination with a variant of the Stirling engine. The Stirling engine is old, under-appreciated technology. It was never developed because of its low electricity output and higher cost components.

Update - I have just had a read of a presentation by Jeremy Barlow about this company. They have a suite of coal projects as well which adds a lot of value to the company. Based on the basic information provided, the coal resources to the coast is decent quality coal, though the coal thickness is on the 'thin side'. They have thicker coal seams further out west which will incur higher transport costs. The reality I guess is that securing quality coal with the best logistics is getting harder. They have AMCI, a major coal trading company spending $25mil, and they have other projects.

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Andrew Sheldon www.sheldonthinks.com

A1 Minerals poised to move (AAM.ASX)

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A1 Minerals (AAM) has just absorbed a $4.3 million placement. The implication of that issue is that is that the company is well-placed to expand gold output over the coming year. The company is the most recent gold producer, and is thus best positioned to benefit from the current increase in gold prices. Being a new miner, it is probable it will be able to process some of its higher grade ore, as it has a number of resource areas to chose from. This will of course depend on the ore distribution, however I seem to remember some very attractive near-surface drill intersections. We might thus expect a high profit in the first year, particularly to benefit before the 'new tax', which I believe will be dropped. That is more upside of course for this market. It will of course depend on the quality of the argument presented by the mining industry...they do not give me confidence.

AAM might get an immediate kick from the $40/oz rise in the gold price, though the market might be more conservative because the gold price is lingering below the $1220 resistance level. We have yet to see gold break out to a new high. More importantly however is that AAM is poised on support above 20c - see chart from Google Finance. The other attraction of AAM is its relatively higher grade gold compared to other miners. There will be quarters where they are mining 4-5g/t average, maybe better judging from the grades.

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Andrew Sheldon www.sheldonthinks.com

Opportunities for resource rent tax

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My advice to investors is that this resource rent tax will not proceed for several reasons, so it will actually make a compelling opportunity to buy resource stocks. The reason why I think so is:

1. The Rudd govt is going to be attacked (and rightly so) by the combined financial resources of the mining industry, and there are a few billionaires among them.
2. The Rudd government is only doing this to win the election. He does not even care if he raises the money, he only needs to be 'perceived' to be raising the money, so for the sake of giving you 'seemingly' funded election promises.
3. The tax proposal is already costing you money because Australia's sovereign credit rating is going to rise just by threatening to introduce the tax, and will increase further still if he does adopt the policy. i.e. All those Australians will housing loans will be slugged by higher interest rates. Rudd does not know, or does not care.

I want to correct some misconceptions:

1. Australians own the resources so the government has a right to tax them - 40% is reasonable? That is the same logic that Saudi Arabia used when it nationalised BP's oil in the Middle East. Yes, we are fighting in the Middle East for freedom right? Did you ever wonder whether we should be fighting for freedom in Australia when your leader is arbitrarily applying taxes like they have no consequences. Resources are not just 'found' - lest not some of them. It takes a lot of money to find them, and investors need upside to justify the investment. They are also very volatile, so if there is no 'huge upside', people will not invest.
2. Rudd cares little about Australia's long term future, he is only interested in his short term political budget. He needs to 'out-promise' the Liberals. Frankly 'I think nothing will save him' as Gough would say. Sounds like Gough politics doesn't it.
3. The misconception that mining makes HUGE GAINS. We need to remember that whilst metal prices have risen a great deal over the last decade, they were at VERY LOW levels for 15 odd years. That is why the stock prices have done rather well. Also consider that the exchange rage has doubled over that period, so since metal prices are based in USD, the real metal price gain is less. Also consider the huge cost inflation for mining services because of the demand for minerals from China and India.

Frankly, I think Rudd's move is the thin edge of the wedge. I can see South Africa, Canada, Chile, Brazil, USA and other countries to adopt the same tax system to increase the government's share of corporate profits. After all these companies can't move minds offshore. This will still hurt investors, it will be inflationary, and it will be a sad day for freedom. This is the worst type of government policy - the opportunistic, arbitrary, unprincipled...so what's new? The amount of waste it will add up to, and the huge opportunity cost.

Mind you - you don't want to give him the chance to raise taxes - because you don't know how stupid he is. The prospect of no tax of course means there could be great market opportunities for you when Labor finally abandon the tax - after the election to be sure!

see my taxation blog - I have a lot to say on this issue!

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Andrew Sheldon www.sheldonthinks.com

Opportunistic take expropriation by Rudd fascism

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Mining stocks have been hit by plans by Kevin Rudd to adopt a resource rent tax on mining company profits. This is huge because basically its going to drive a lot of exploration offshore - at least in non-strategic mining industries like base metals. Even iron ore might suffer. Its not simply a case of taxing, its the lack of warning. Kevin is really going to get punished for this STUPID decision. I have written more about this on my taxation blog.

I think he will be forced to reverse this idea, or severely back down. I don't even think he understands the tax, because if he thinks a company making the same return on investment as a bond investor is fair he doesn't understand mining risks. Ok, there are huge resources of iron ore, oil & gas in WA, and the exploration risks are relatively small. But thats not true for most other mining.

My suggestion to investors is abandon mining companies with projects in Australia. I am curious - is this a project-related tax or a corporate tax, because if its a corporate tax, he is destined to push all mining companies offshore. Is this a project tax? Then it pushes investment offshore, so I can still invest in mining companies with projects overseas.

I think this is not going to last. Australia Minerals Council CEO is currently hyperventilating, but will be on the next flight to Canberra, to talk Rudd down out of the trees, where he is truly lost. He will understand the full force of the mining industry in the next election if he does this. Twiggy Forester of Fortescue Mining fame will I suspect be spending $20mil on campaigning in the next election if I am not mistaken.

P.S. Please don't tell me I don't know what fascism is....I have yet to meet anyone who knows. But its the only word you might understand since too few people are politically correct. Read my taxation and politics blogs and you will understand.

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Andrew Sheldon www.sheldonthinks.com