How to buy spec mining stocks in the forthcoming market correction

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There comes a time when investors can make enormous profits from market corrections. You can 'short' the blue chip stocks, however you can also buy various spec stocks when they collapse. Remember that spec stocks are more vulnerable to market corrections, some more than others. So if the 'broad blue chip' market index is destined to fall 12-20%, the specs are probably going to fall 50-70%, depending on the merits and capitalisation/liquidity of specific stocks.
For this reason, I wanted to introduce readers to the benefits of 'knowing when to buy'. I'm telling you now because I will have a serious conflict of interest telling you later. Well, I can assure you if you are asking me when I'm trying to buy, I'm not going to tell you when and what to buy because you'll be competing with me in a very illiquid market. Read this blog post - it should give you helpful advice. You might think illiquidity is a bad thing, but its the cause of a corresponding 'opportunity', so you can't say its bad. Its a trade-off. You get more upside with your downside. Over all, if you choose the right stocks, you will come out ahead anyway, but why endure substantial downside unnecessarily.
Don't forget to use your chart trends and levels to pick points. And avoid 'market indicators' because they are 'too insensitive' in times of substantial market moves. i.e. They are seriously lagging the price action. 

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Red 5 Ltd (RED.ASX) moves closer to resumption of gold mining

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Gold is not exactly the hottest metal in the performance stakes at the moment, but if you have good grades and low operating costs, then that's not too much of a concern. Red 5 Ltd (RED.ASX), a gold miner in the Philippines, was doing fine until it breached an environmental condition of its operating lease, and was forced to close its operations in the Philippines. During the shutdown it has been rebuilding a tailings dam so that it could resume operations. My expectation is that, given the cost burdens of a mothballed operation, I'm expecting that it will attempt to fast track the reconstruction of the tailings dam. The dam wall was breached by a gapping crack that brought into question the integrity of the wall. I suspect the crack developed because subsidence, which would suggest inadequate preparations of the foundation before building the wall.
In any respect, the company has already resumed mining, though it will need to finish the tailings dam wall before it can start mining in earnest. I'm expecting an earlier rather than later decision. Looking at the chart, the stock has already broken out from the 9c resistance, and we can expect this stock to get to 11c, before it will face some selling pressure. The resumption of mining will be the news that 'propels them' beyond 11c.
The company is capitalised at just $68 million, despite having:
1. Some $35mil in cash - less the cost of earthworks
2. The capacity to produce mine output of 70,000 oz per annum until they move underground
3. Exploration upside - there is appealing targets still

I've not performed a financial valuation of the company, since I'm only looking for a short term trade from the stock. Long term investors will need to look at the cost demands of the transition from an open-cut to underground operation. The gold price is the uncertainty. There is little reason to fear inflation; but we must also remember that gold is a 'stable asset' class in these times of high 'yield-valued' commodities. When you have high asset prices, gold is by default, the only asset class that is under-valued. Of course there is emerging market property as well. We actually think there is more upside to asset prices generally, and that we are destined to see a succession of 'mini-bubble bursts' if you like....as opposed to a 'whomper bust'. The fundamentals for the global economy are actually pretty good.

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The nature of a good gold stock

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I want to pose the question of what would constitute the nature of the best gold stock. My pre-qualification criteria are:

1. A large in-situ gold resource, say over 3 Million ounces; preferable with over 800,000oz of oxide ore  amenable to low-cost open-cut mining
2. A reasonable oxide resource suitable for heap leach processing. The appeal of such ore is that such a plant can be built for just $60-80 million rather than $150-200 million for a CIL/CIP plant
3. A market advantage like cheap costs (because they are located in a country with low labour costs or established 'competitive' mining industry) or high grades to limit (so corresponding low mining costs per tonne of ore because of the added gold), as these reduce the project vulnerability in the short term, given the low current gold prices. Don't for a moment think that gold prices are 'still high' because costs of extraction have increased, and all asset prices have risen a great deal.
4. Good cash reserves - say $30 million plus is required to ensure the project sponsor has enough money to explore, evaluate and commission a modest project. This is still a difficult market to raise 'equity cash' so seek out those companies which still possess large cash holdings. Surprisingly, they have been marked down in equal measure to the stocks with no cash. You will also want $10 million odd for exploration and appraisal and at least $20million for project equity. 

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook   Global Mining Investing Community.

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Investment club - assignment exercise - Bandanna Energy (ASX:BND)

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This is an exercise I am doing to highlight value opportunities at different ends of the market. Below I have listed information on an emerging coal producer in the Bowen Basin, Queensland. The company, Bandanna Energy (ASX.BND) holds a number of coal prospects; the most advanced being the Springsure project near Emerald. The project is close to existing mines like Rolleston, as well as rail and port infrastructure.

Below I have provided pertinent information that prospective investors might like to acquaint themselves with. If you are interested in learning how to appraise and invest in mining stocks, and why, you might like to engage in the discussion on Facebook, where you can ask questions. Let me first provide some resources for a company Bandanna Energy (ASX:BND).
1. Cashflow statement - download from the Australian Stock Exchange - note the level of cash holdings and no debt. Appreciate the simplicity of these companies to understand. Its quantitatively grade 1 maths.
2. Activities statement - quarterly - this is the more tricky part that requires understanding geology, mining,  marketing, logistics, global economics and finance, commodities and mineral processing, among other issues like politics, maybe even farming. It sounds like an education in itself just researching these companies.
3. Company presentation - these companies make it easy for you (presentation), but are they offering a complete picture of the stock?
4. Company comparison - Acacia Coal (ASX:AJC) - this is another company in the same vicinity with another project, but it offers slightly different exposure. They have less cash, low-energy, smaller project, open cut. They have a different presentation - which is a source of more information useful for both companies. Note the coal prices. Does this look like the time to buy, or the time to sell? Why?
5. Google Finance - So what do you get for your money. Let's look at Bandanna Energy and Acacia Coal  on Google Finance - note the number of shares and market capitalisation - compare that with cash.

So what's your appraisal of these companies? What is their likely relationship moving forward if any? What is the best stock exposure in the current market context? Do we have all the information we need to know? What other information might be pertinent? Learn more on our Facebook page. 

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Bandanna Energy (BND.ASX) - cashed up buy - Acacia Coal (AJC.ASX) -a speculative buy.

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There will be some good buying in the resource stocks over the next 3 months - up until the end of the tax season. The appeal is generally because of two issues:
1. The general malaise in the mining sector - so we need to be either looking for long term upside or exceptional stories that break the mould.
2. The sell of stocks for tax reasons - because people want to realise their losses in the current year
3. The low commodity prices across the board.

So the question is - where to start. Well, the first stock which has appeal to us is Bandanna Energy (BND.ASX). As of today, they have fallen to a stock price of 10c; which is within 3% of their all-time low of 9.7c. This makes this 'psychological level' a strong support, so today we bought a lot of them.




There aew several appealing elements to this company:
1. Enormous cash backing - They have $108mil in cash, and their market capitalisation is $52million at 10c. The implication is that their cash holdings are worth 20c/share, or that they are trading half of their cash backing. That's just crazy because it also ignores the value of their project; it makes them a compelling takeover target, or opens the prospect of a capital return or share buy-back. Any of them outcomes would at least push the company's share price to 15-20c range, so depending on the option, it makes you wonder why it has not happened. Not, you don't usually issue shares and then have a special capital return, but you might have a share buy-back to raise the price. The question is whether the executive team thinks the current low price will be sustained. Certainly the cash is needed given the size of investment.
2. Project in Qld - They have a pretty decent coal project in Qld near Emerald, surrounded by other coal mines, and close to rail infrastructure.
3. Prospective buyer - They have a Korean power utility on their share register. Typically Asian power utilities have taken stakes in coal companies in order to secure the marketing rights to coal. In this market, there is no reason to expect a project to proceed, or a power shortage to exist. This requires some understanding of the Korean utility market, which I don't have...which you might like to investigate. Any developments here however offers long-term upside.
4. Low coal prices - they will eventually recover. The appeal of Australia is access to capesize shiploading facilities, proximity to Asia, good quality coal, and the reliability of its law. This has been called into question recently with the Rudd-Gillard governments introducing huge tax imposts on the sector; making Australia look like a pretty sordid 'graft economy'. Anyway, they have gone, but coal prices remain low. For some perspective here, take a look at this chart, and consider this a contrarian buy opportunity.
5. Demand side - There is destined to be strong demand still for coal given that security of supply considerations remain. In fact, you might wonder if Germany is forced to re-open old coal-fired power stations given that it could struggle for gas supplies from Russia. I'm not sure if these plants have been mothballed. It is more probable that nothing will become of the issue. The more trusted outcome is simply more coal demand from China, India, Korea. I'm expecting China to continue investing in domestic infrastructure, to expand the size of its domestic economy. This will boost domestic demand, and that will mean more coal and gas. Some of this will come from Mongolia. Indonesia is increasingly struggling to supply more export-grade coal to Asia, so Australia is well-placed, but it needs competitive cost structures.
6. Problems to be solved. The coal industry is struggling in Queensland from a number of problems which I would expect to be resolved in due course. These hurdles will permit a number of projects to proceed; foremost those with cash, who are able to sustain exploration, or which are at an advanced stage. The problems are:
        a. High labour costs - The Australian Labor Party has effectively priced a lot of Australia's potential and existing miners out of business with a $18/hr minimum wage. This is not the nominal wage rate in the mines, but it effectively pushes all wages up to $35-40/hour because people don't want to work in the outback. The fact that people can earn a good '$18/hr' lifestyle wage on the coast means they are not so keen to work in the bush. You have to pay $35-40. Abbott will probably lower the threshold to $15.
        b. Carbon tax - I think this legislation is highly controversial to remove, but it deserves to go, but  I suspect Abbott will want to adopt some form of charge upon carbon, but I think he will seek another way to do it, with say a compulsory level after the first 5 years of mining.
       c. Queensland Rail Rates - The Queensland government holds a monopoly over railways in their state. The problem is that existing rail rates were negotiated at far higher levels. The problem is that coal prices have dropped markedly. Now, maybe QR considers itself as a business, whether a monopoly or not, but the implication is that contract prices are very high. The question is - do rail shippers sell more coal at these prices, or do they attempt to negotiate lower rates for incremental increases in production when they finally get some more customers. Certainly high rail rates are an impediment to further investment, so I'm expecting a concession by the Queensland government when they realise that they are competing with the Chinese government, which is prepared to subsidise coal deliveries from Mongolia. This would of course be good news for new projects as well.
       d. Resource Rent Tax - I twould expect the Abbott government to drop the Mineral Resource Rent Tax, and replace it with some type of public resource tax. They will of course have to negotiate or reconcilate that type of tax with the states, which already charge a royalty, and with the prospect of Liberal governments across Australia, that becomes easier. There would I expect be efforts to harmonise these taxes.

There is one issue that bothers me. The Springsure Creek project has approval. Given the company's cash reserves and their familiarity with the region, I wonder if they will acquire a neighboring company, Acacia Coal (AJC.ASX). The reason is the 7-11Mtpa of coal is a lot of capacity to add to the market, and their sponsoring utility is not going to want all of its supply from a single mine. I wonder whether BND will acquire Acacia for access to open-cut ore, as a short term precursor to full UG longwall production. Acacia's project is also well-advanced, and Acacia has access to the same rail infrastructure. Acacia has an open-cut project which better serves as an incremental project. Acacia is struggling to raise cash in this environment; their cash requirements are a modest $50 million, and it would make sense at least to better utilise the company's cash. Acacia Coal has 900 million shares on issue at 1.1c, and thus a market capitalisation of just $10 million; with $4.2 million in cash.

In times of low coal prices; we look for rationalisations of capacity. These companies seem well-suited. They are close together, they have strategically common interests, and one presents short term upside (but no cash), whilst the other presents enourmous production potential (but no incremental fit for current subdued coal market). Both companies stand to benefit from restructuring of costs in the Queensland coal industry. The coal industry is powerful in Queensland politics. I am expecting both a state and federal concession on costs to rekindle the Australian coal industry, as Mongolia has made a similar concession in 2012 after 'they pulled a Rudd'. I hope that catchphrase 'catches on'. 

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook   Global Mining Investing Community.

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Gryphon Minerals (GRY.ASX) - technical buy like few others

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On the 3rd Dec 2013 I made this chart for Gryphon Minerals and displayed it for my Facebook readers. The stock was up 11% yesterday to 15c, before settling at 14.5c. The breakout has occurred, and I'm expecting more upside in this stock because its pure gold exposure of the best type - emerging gold miner needing a re-rating.
I won't reiterate what I've already said about this stock, but you might also visit my market and commodities pages.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook   Global Mining Investing Community.

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Acacia Coal (ASX.AJC) - turning point

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There is a stock I recommended about 2 months ago at 1.1c called Acacia Coal (AJC.ASX). It has rallied up to 1.5c in the last few day, before falling back to 1.3c, where I bought some more stock. This company is capitalised at at $12 million. The company has around $4.5mil in cash, giving them an enterprise value of $7.5 million. So what do you get for your money. Well, they have an appealing coking coal project in the Emerald region of Queensland. This is prime coking coal territory.

The company has 60Mt identified coking coal resources, and it has scope to increase this. It has negotiated access to a coal loading facility, and is well-set to find a coal buyer who is willing to finance development of the project. This looks like very good exposure to the coal market at a time when we are destined to see:
1. Stronger demand for coal
2. Price recovery
3. Return of interest to resource stocks
4. Governments commitment to end carbon tax, Mineral Resource Rent Tax

Ideally, I might prefer a thermal coal stock, but I suspect they are capable of producing a thermal product as well. You can view the company's latest presentation here. Technically this stock appears ready to break-out of their long downtrend. I suspect that the motivation for that break will be an updated resource calculation, or perhaps an announcement of a farm-in partner. I'm looking for a break above 1.5c. 

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook   Global Mining Investing Community.

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com