Philippines Mining Stocks to watch

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I generally only concern myself with Australian mining stocks, but since I have had the opportunity to see some information on a few Filipino mining stocks, let me comment on a few:
1. Philex (PX.PSE) - buy
2. Lepanto Consolidated Mining Company (LC.PSE) - buy
3. Apex Mining (APX.PSE) - buy

Philex (PX.PSE)
Philex has a stake in the Bayogono gold project in Mindanao being developed by Anglogold. I think Anglogold will eventually take over their partner. This is a very large gold mine. Not sure of the development lead times for this project.

Lepanto Consolidated Mining Company (LC.PSE)
Lepanto Consolidated Mining Company is selling 20% of its Far South East gold/copper project to Zijin Mining Group for $70mil. Zijin is a HK-listed company, and one of the biggest gold producers in China. They will immediately develop the project. The project is located at Mankayan, benguet province, philippines. The project feasibility was completed in 1988 by JS Redpath Corp, but uopdated in 1995. The porphry copper reource is 657mil tons at 0.65%Cu and 1.51g/t gold. The 1995 study was based on $1/lb copper and $400 gold. Any upgrade of the feasibility study is likely to highlight the financial merits of this project.



- Andrew Sheldon www.sheldonthinks.com

Specs that could face project delays

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I am what you might call a 'spec lover'. By that I mean its not just about the money. I love tracking down these underloved stocks and investing in them - seeing value before everyone else. It has however dawned on me before that there are certain market-related news that is slow to come out because it is contrary to the vested interests of project sponsors. These examples include:

1. Emerging miners that overstated their capital and operating costs, eg. Gleneagle Gold, View Resources.

2. Emerging miners that overstated their resources, eg. Batavia Mining

3. Emerging miners that overstate the value or utility of reprocessing plant, eg. Oroyo Mining, which found a consultant willing to state that its processing plant was able to refurbished for a very low number. If you want to see the photos of the plant, I can show you.

4. Emerging miners that understate their development lead times, eg. Matilda Minerals, Red 5 Ltd. Matilda took forever, whilst I think Red was caught by surprise

To be fair, there need not be anything dodgy about these disparities in corporate reporting. But I am suspicious because I am a trained cynic and because there is really no process in place by the ASX to protect investors, except in the area of resource calculations, ie. The JORC code. But even so, that is an industry-sponsored initiative, and not an initiative by Australian Stock Exchange (which monitors disclosure), and the over-riding investment regulator - the Australian Securities & Investment Commission (ASIC), which is as useless as piss, and twice as yellow, have no interest or capacity to regulator publicly listed companies. They have no money, and they are only interested in high profile cases. Why? Because thats the way 'big business' wants it, and they are the one's paying the political parties donations. I'd like to know what Rene Rivkin did to the establishment because he was targeted by ASIC. Maybe someone doesn't like Jews or his flamboyance.

So one has to be impressed when a company like Universal Resources (URL) upfront discloses that their plant will take a long time to build because of the delays procuring a SAG (semi-autogenous grinding) mill. In fact the delay is up to 2 years. The implication is that IF you can't buy a 2nd hand one, you need to wait 2 years. I dare say this is because astute mine developers are ordering ahead. It may depend on the size of the grinding unit being sought. But consider the implications:

1. Huge project delay risks for emerging miners - thats alot of the companies I recommend

2. Potential risk with hedging agreements - though I think this is true only for precious metal mine developers using hedging and it is rare to hedge these days

So its important to know whether your project sponsor has secured vital equipment. If they are affected, their share prices can be expected to languish despite the very favourable commodity prices. They will eventually do very well, but you should trade them in the short term, and focus instead on the larger stocks which can expand with brownfields (incremental) capacity expansions that use existing SAG mills, or just stocks that can add to resources, eg. Matrix (MRX.ASX) is a good stock because it can easily add capacity. Why? Heap leach type plants are discontinuous mining processes involving the stacking and leaching of ore on prepared pads. Thus since there are weeks of irrigation, crushed ore could be stockpiled (if not stacked), allowing existing crushing capacity to be better utilised. Alot of gold mines are heap leach operations, so these project types should be favoured. Resolute Gold (RSG.ASX) might be an example.

- Andrew Sheldon www.sheldonthinks.com

Tantalum – emerging miners

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There are 3 companies currently developing tantalum mines in the world. From a risk management point of view there are several issues to consider:
1. Sales contracts - Gippsland and Noventa have contracts.
2. Low unit production costs - Gippsland is best here because of the scalability of the project
3. Diversified output - Gippsland (Ta/Sn/feldspar) and Commerce Resources (Ta/Nb) are best here
4. Production lead time - Gippsland and Commerce Resources are years away from production, which means is any market weakness these companies will suffer most. Gippsland does however have a low unit cost (1:1 strip ratio, low fuel cost) advantage.

The details for each company are:
1. Gippsland Ltd (ASX.GIP): Gippsland, listed on the Australian Stock Exchange, is developing a very large tantalum-tin-feldspar deposit in Egypt. The project is a 50-50% JV with the Egyptian government. The project is close to financial closure, though its still 2 years away from production. The project has a contract for the supply of 600,000tpa to HC Stark of Germany. See www.gippslandltd.com. This stock is weaker today (10c) I think because the 2yr development lead time surprised the market - as it surprised me. They are capitalised at $A33mil and are projected to generate $A. For a forum discussion on Gippsland - see Google Finance.
2. Noventa Limited (AIM.NVTA): They have already commissioned the mine, and production is being ramped up in 2008 to 400,000lbs per annum. The attraction of this company is that it is in production, which justifies the higher market capitalization for this company. See my Google discussion forum on this stock. See www.noventa.net and www.minesite.com/companies/comp_single/company/noventa-limited.html.
3. Commerce Resources Corp (CCE.V): This company hosts a much smaller resource at its Fir project in Canada, but the resource is open along strike. Importantly the resource contains a very high concentration of niobium. Join my discussion of this company at Google Finance. See www.commerceresources.com/s/Properties.asp?PropertyInfoID=892&View=All

As we can see from Gippsland's price comprison below, they are suggesting that Gippsland is 400 below fair market value based on their resource inventory. Unfortunately resources equals long mine life, but it doesn't automatically convert into mine revenue, so we need to consider output. In fact Gippsland is scheduled to produce 600,000 lbs per anum of tantalum, so it will produce 50% more than the others, despite the much larger resource. Gippsland does have the benefit of tin output. Tin supply is quite tight. We need to also acknowledge that the market capitalisation of Gippsland is discounted because its still a project. Nevertheless, the stock has not received a re-rating since it announced its off-take agreement with Germany's HC Stark. Clearly investors are waiting for a bank to commit to finance this project. This is too conservative. I can see upside to 18c over the Xmas period - the driver being completion of the Final Feasibility Study and bank finance commitment. I dont however see this stock continuing up because its still 2 years away from production. Investors are not that patient.

For more info on the tantalum – read www.noventa.net/pdf/presentations/tanatalumSCR_presentation.pdf. The tantalum capacitor market has been soft in recent years. Many tantalum capacitors were designed out of cell phones and computers after the tantalum capacitor shortage of 2000 caused prices to spike to over $US200/lb. Tantalum lost market share to ceramic and aluminum electrolytic capacitors. Nevertheless China remains an attractive market for tantalum since many capacitor manufacturers there weren't around for the shortages of 2000 and have since designed tantalum capacitors into their new products.
See http://www.kemet.com/kemet/web/homepage/kechome.nsf/weben/Tantalum%20Capacitors. There is very litle price info available for tantalum. The best I could do was the US Geological Survey report for 2007 - http://minerals.usgs.gov/minerals/pubs/commodity/niobium/tantamcs07.pdf which suggests tantalum prices have been flat for the last 5 years at between $US30-35/lb. Its a pretty competitive arena with alot of substitutes - niobium, ceramics, 'coltails' tailings. Thats not to say value doesnt lie in the projects or any future shortfall in capacity. It happened in 2000. Anyway you will know what to buy is a shortage develops again.

- Andrew Sheldon www.sheldonthinks.com

AIM Resources - buy

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AIM Resources (ASX.AIM) is an Australian based company publicly listed in Australia and if I remember correctly, its also listed on the Alternative Investment Market (AIM) in London, but I could be confusing acronyms. This company is developing a zinc deposit in Burkina Faso, West Africa. It has a 12 year mine life. The stock peaked at 46c and has since fallen to 15c - a huge drop considering the project is moving closer to production. No doubt the reason is the weaker commodity price outlook. The stock has fallen back to a major (strong) support, so I thought it worth a quick trade. If you would like to participate in a forum on this stock - see Google Finance.

- Andrew Sheldon www.sheldonthinks.com

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

Red 5 Ltd - emerging gold producer (buy)

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I first came across Red 5 Ltd (RED.ASX) about 4 years ago. I was quite excited by this stock at the time because I saw alot of potential in its gold deposits in the Philippines. There were 2 targets then:

1. The Siana pit & UG potential

2. The Mapawa area along strike

3. The porphyry copper - volcanic intrusive potential

Notwithstanding the potential of the Siana pit and depths with its historic production of 5 grams/tonne, I was more interested in the bulk tonnage, low grade porphyry deposit at the time. Why? Because there was a similar structure up the road that hosts a multi-billion dollar mine deposit. As far as I was concerned, everything hinged on the first deep drill hole. The results were sold as a 'plus' but 500m of 0.2g/t is not commercial. The distribution of the gold suggests you would have to go very deep to find commercial gold, and that becomes costly. There is still however the prospect of remobilised gold along faults (like Siana), but as far as I am concerned the porphyry potential has been disproven. Well it was a punt worth taking. The stock at the time rose from 5c (from where I started accumulating) to 25c.

For the last few years efforts have focused on defining a 2Moz gold resource at Siana. They have identified a 3 year open-pit deposit, plus a 7yr underrground mine. This has taken some time because they have had trouble getting mining consultants to complete work. But here we are at feasibility study time. The next stages are:

1. Capital raising - Red will requiring $60mil up front for the plant & open-pit, followed by another $8mil in 2 years (which could come from earnings) for the development of the UG. Of the $60mil, they appear to be modelling $25mil of equity, plus $35mil of debt. I suspect this project is robust enough to secure a debenture issue, though maybe underwriters were worried by the way Lafayette Mining was treated by the Philippines government after a mine spill. So we might expect a placement to institutions and Anglogold (13% shareholder) plus an entitlement for other shareholders (say 1:5 issue), with maybe Anglogold & a broker underwriting the shortfall. Thats a positive outcome because Anglogold will have a vested interest in guaranteeing project revenues (as a shareholder), which means no hedging will be required. Many good projects hav been ruined by hedging. We dont want it because we want the upside exposure to a higher gold price. Altrnatively Anglogold could just buy a stake. That would suit Red shareholders. Anglogold's intent I suggest is to ensure it retains ownership of the processing plant after Red's reserves are depleted, as it can use any surplus ore processing capacity for its much larger, longer life mine, as well as grabbing equity in Red's prospective tenure.

2. Plant construction, tailings dam construction, pre-strip - this will take about a year

3. Operation: So we are looking at the commencement of mining in early 2009.

I have prepared a financial model for the project based on the limited data available. I have used my forward estimates for the gold price, which are bullish by others standards, but I think they will be revising their numbers up as inflation picks up. I have factored in a very strong $A ($US1.25 in 2013) because of $US weakness, and expected tight commodity supplies. I have not allowed for any increase in underground resources, or Mapawa pit contributing in later years. The area has excellent potential for further discoveries, and since Anglogold is about to embark on an exploration program in Red areas, we might have exploration upside in 6-8mths. The UG I believe has the potential to be substantive resource too. So its a pretty conservative model....but the intent is to be realistic. Actually I think gold will perform much better.

Based on these numbers I have Red showing very volatile earnings mostly because of its production profile and a rising gold price. My NPV places a value of around $150mil on the company's Siana project after accounting for the $8mil in Year 2. Red offers the following sensitivity analysis for gold price, but I suggest they are not factoring in a much stronger $A.

Now given that Red is now trading at 10.5c, we can expect the company to be attempting to keep the price there prior to announcing the raising of $25mil at I guess 10c per share (as I assumed above). This gives a NPV per share of 29c, but on a yield basis we might give them a value of 18c in 2009, 22c in 2010, and thereafter it really depends on exploration, the gold price and retained earnings. These numbers fit with the chart below. So post issue I can see Red rising to 17-19c level. They will be major resistance levels, and where I would be taking profits. That might not seem like much upside, but dont forget the exploration. This is an evolving story, and this financial model does not really assess the long term possibilities of this project.

- Andrew Sheldon www.sheldonthinks.com

Technology stocks

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The focus of my investments have always been mining, however because of my interest in science I have always had an interest in technology and its commercialisation. In recent years I have recommended a number of technology stocks which have done fairly well. The ones that come to mind are:

1. Papyrus Australia (PPY): I originally saw the story of this new paper fibre on ABC's Landline program around 6 years ago, then around 3 years ago I noticed a ASX report announcement by 'Papyrus' and I knew instantly it had been listed, and followed it conscientiously. Missed out on the price action however for lack of patience, as a Japanese paper company took a stake.

2. ZBB Power Systems (ZBB): This company is developing a new battery suited to commercial power storage for back up supplies and load shifting to benefit from the high cost of emergency supplies (diesel gensets) and time-of-day pricing. The batteries can be used to charge at night (off-peak) and discharge during peak periods. It will have an important implication for the shape of the 24hr power demand curve. The concern I have with these battery devices is that if we ever move to overnight car battery charging, the disparity between on & off-peak will be reduced...even inverted. But there is a demand for the next 10-15 years, and the future is hard to pick.

3. Living Cell Technologies (LCT): I started watching this stock after a report was released about 1-2mths ago, though I never acted on it. They have recently rallied on good news. Cant recall why they appealed to me..yet the rally made me take another look at this sector.

Biotron Limited (BIT.ASX)

Well to some extent these are the stories that got away, but I have recently found another stock that has alot of appeal. The stock is close to running stage 2 clinical trials on a HIV drug that attacks a protein that is the source of the HIV viruses capacity to replicate itself. Other HIV drugs have had limited success in destroying the HIV virus because they dont attack the body reservoir. Biotron's inhibitor-type drug shows 100% success in preliminary trials with these other drugs. I dont get the sense that this drug will work alone, or at least the results are not evident, however it seems encouraging, and the company is taking a similar tact on the hepatitis virus, though development of an antiviral drug for hepatitis is less advanced. The results of the Phase 2 clinical trials are due in mid-2008, though I expect the stock to improve before then in anticipation. In the short term, the company has just $1.3mil in cash, so I'm expecting an issue to raise around $5mil in the next month or two, so stay clear of that, but it should offer some buying opportunities before Xmas. The following chart suggests 12-13c is a good entry point. They are currently trading arounf 19c.

- Andrew Sheldon www.sheldonthinks.com

Quick trade opportunity in gold spec

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Every commodities boom is littered by bad decisions. There are several that come to mind:
1. Projects where ore resources (or grades) are overstated, either because of poor ore zone definition or nuggetty effects on grade estimation (Bendigo Gold).
2. Projects where the project development costs are understated (Batavia Mining, Gleneagle Gold, Perseverence Mining)
3. Pojects where the operating costs are understated (Gleneagle Gold)
4. Projects that were financed at low prices (Highlands Gold, Lafaytte Mining)
5. Projects that locked in low prices to secure funding (by hedging) and subsequently were forced to buy back metal in the spot market to meet their hedge commitments. eg. Lafayette Mining, Highlands Gold

Austindo Resources (ARX.ASX) is another Australian mine developer whom falls into this category. Poor selection of consultants and contractors, or more precisely work presures caused by a persistent commodities boom resulted in the company under-estimating capital costs, and its project engineers cutting back on underground decline support. The delays cost in excess of $35mil. The project debt has blown out forcing the company to raise equity finance. Whilst existing shareholders are being diluted it offers a compelling opportunity for investing. Why?
1. The stock has been oversold on its problems
2. All the problems are out on the table, so its mostly upside from here
3. The gold price has rallied to $US750 an ounce since the problems besieged the company

The company has partially completed the gold project so they are not totally out of the woods, but I think a second consultant is more likely to perform better correcting the errors in another's work. The project resource upside remains to be seen, but the project offers upside there, as well as from a stronger gold price.

The company has already offered renounceable (tradable) rights at 0.1c trading as ARXR until 18th October 2007 - thats just a few more days, thereafter you have just until 25th October to send in the application money (thats 1c per share) to exercise. It is a buyers market in the rights - no doubt because alot of small shareholders burnt on the share price are unwilling to risk more. This is poor trading psychology as history is no measure of future performance. I bought 500,000 ARXR (rights) today for 0.1c with the intent of paying 1c in the next week to take up the rights. That will give me 500,000 shares in ARX at a total entry price of 1.1c - when they are currently trading at 1.4c. Thats 25% market premium is bait however to take up the rights. I can assure you that once the rights expire the ARX share price will fall. Really that stock price manipulation at the 'market' price margin is what brokers earn huge fees for. eg. Austock is underwriting this issue, and since they are raising $12.4mil - they will earn more from commissions than they loose from supporting the stock. Better still is that they can recommend to their clients to buy the stock...though they might tell their best clients to sell for a 'stag profit'. Of course the better clients will be offered other opportunties like that.
The other positive of the issue is that ARX are offering a free 2012 option exrciseable for 1.5c by June 2012. Thats another compelling reason to buy. So I will get 50,000 options which will be worth 0.3c upon listing based on the current price. Now because I only get 10% offer they have a value of 0.03c. Anyway given their leverage they are probably better to hold for any upside.

- Andrew Sheldon www.sheldonthinks.com

Matrix Metals does not disappoint!

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Matrix Metals is so far up 11% today and I suspct it will go much higher. The annual report was released 15minutes ago and it does not disappoint. Here is a basic summary of the points made:

1. There are 550 mining companies listed on the ASX but just 10% of them are in production. Of those 10% Matrix is now one of them.
2. Matrix started copper cathode production from its Cloncurry heap leach operations in June'07
3. Matrix is currently producing 360tonnes of copper per month, and is ahead of schedul ramping production up to 420 tonnes per month
4. Matrix has 4300km2 of tenure around the existing operations. The Mt Isa Inlier - a geological window into older Paleozoic rocks is very prospective for copper and other minerals
5. Copper prices are testing record prices. Back in 2001 copper prices were languishing at 80c/lb, but today they are $3.70/lb. Whilst copper prices are up 380% the benefits of higher $US prices are somewhat offset by a 40% increase in the $A and the higher capital & operating costs of commissioning a mine.
6. Matrix has exploration JVs with Deep Yellow Ltd (where Deep Yellow has increased its JV commitment to uranium exploration) and Xstrata (looking for deeper sulphide ores at McCabe).
7. Matrix expects the current strong copper prices to remain so it remains unhedged exposure to copper
8. The company is considering an expansion from 5500tpa to 11,000tonnes - but this is tentative

The upside in productive capacity will tend to counter any concerns of softer revenues from softer copper prices, as will any fall in the $A (in response to softer commodity prices).

If you want further information on Matrix have a look at their website at http://www.matrixmetals.com.au/.

- Andrew Sheldon www.sheldonthinks.com

Gippsland - worth another look

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For several years I have been following the fortunes of Gippsland Ltd, an Australian listed company developing a tantalum, tin, feldspar deposit in Egypt. Just today I was carrying out a price review and I came across the tantalum price - see http://metalsplace.com/prices/?a=14&grt=6. A few years ago the tantalum price rose to over $200/lb, but then collapsed as a result of over-supply. The demand was prompted by the PDA, cellphone, laptop demand for resistors. As you can see tantalum prices are recovering so it seems likely that over-supply has been absorbed.

Logic would suggesr new mine capacity is required, and Gippslands tantalum project must be a contender given that its a world class deposit capable of supplying 8% of the world's demand. I guess however there are several problems:

1. The International Finance Corp (World Bank affiliate) walked away from financing the project. Why?

2. The government has a 50% free carried interest

3. Country risk - Egypt is perceived to be a high risk

The outlook for tin is good as well. I dont place much value on the gold/copper exploration they are doing. Anyway, you can see the latest (Aug'07) broker report at www.gippslandltd.com/i_broker_reports.asp. I new financial advisor was appointed 6mths ago, but there are no visible signs of progress. Its quite possible this project will be overlooked in favour of others. I think banks are unlikely to accept the financial terms, and it seems unlikely that the government will alter the law for one project, although perhaps the foreign investment regulations are under review anyway. So thats worth following up. There are a number of tantalum projects in Africa looking to develop, and in this industry manufacturers have been an important source of finance....so perhaps this company poses an unacceptable risk at this time.

- Andrew Sheldon www.sheldonthinks.com

Gryphon Minerals (ASX.GRY)

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Gryphon Minerals is another very attractive gold explorer in West Africa. Th attraction of this company is that they are outlining a multitude of ore zones, and drilling results to date have been high grades over commercial zones. With a multitude of targets to test, it has scope to be a significant gold mining operation. Exploration over the next 12mths should demonstrate this, and with the gold price proving its meddle, there should be a substantial re-rating in this company from $50mil to $150mil.

I have actually been following this stock for some time, though it fell off my radar. Looking at the chart we can see consolidation at this level - I think this will turn out to be a flag structure. The implication is that I can see a move to 80-85c pretty soon. But we should wait to see if that flag structure is confirmed by consolidation at current levels. And weakness below 55c would be a sign of a fall back to lower support, and present an even better entry (if you can get it).

- Andrew Sheldon www.sheldonthinks.com

Gold Aura (ASX-GOA)

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I love grassroots exploration because its the opportunity to see value before everyone else can see it. Several months ago I bought GOA at 9c in anticipation of attractive drilling results from its Anomaly A & B drilling program in the Carpentaria region of North Qld. This region of course hosts some VERY significant resources with a value of $100+billion - so its a good place to find elephant-size deposits. There are the Mt Isa Cu-Ag-Zn deposits, the Cloncurry Cu-Au deposits and the Cannington Zn-Ag deposit.

GOA is targeting a geophysical anomaly and is discovering zones of multiple veinlets running 2-4% zinc and 60-140g/t silver. For preliminary drilling these results strike me as highly significant. Ok the negative is that the minralised zones are being struck at 300-400m depth. The upside might be a Mt Isa size underground deposit. So when you consider this company is capitalised at just $9.3 million, its quite possible this company has huge upside. Its still early days but the tenure of the grades and widespread occurrence of mineralisation I think point to a future mine. The question is whether there is something more significant at 800m depth. Ultimately we are not going to know for another 6months - by which time they should be looking at drilling some much deeper drill holes. In the interim they will be drilling shallow holes to determine the structural controls. But with gold & silver about to go very high over the next few years, the market is going to find very few prospective silver stocks. There is just Macmin (MMN) offering significant silver exposure, so I see this as an opportunity to get in early. Nevertheless I've never been one to buy and hold. So try to avoid those capital raisings. That is hard as capital raisings tend to be paired with drilling results.

- Andrew Sheldon www.sheldonthinks.com

BC Iron Ltd (ASX.BCI)

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I learned about this stock in the process of researching Alkane Exploration (ALK). ALK has a 16% stake in BCI, and whilst I like ALK, I dont see it as a buy for another year or two, since its attractive zirconia and gold projects still need some work.

The attraction of BCI is that they have a large iron ore exploration area just north of one of the front-runners in the iron ore game - Fortescue Metals (FMG). Already Fortescue have tied up marketing agreements with a Chinese buyer, and its likely that FMG will emerge as a large (iron ore) mining house. So why not buy FMG you say? Well thats not a bad idea, its just that the returns are likely to be better on BCI, but FMG might be considered a lower risk investment by many. I dont think so...but it seems to be convention that bigger stocks are safer.

BCI's project has had little work done on it, but preliminary investigations suggest there are areas of good iron ore content. The project areas are 70km from the Fortescue loadout facilities, but of course its likely that the rail line would be extended to the mine in cas of production.

In case you are wondering why FMG-BCI, you need to understand that iron ore consumers have a vested interest in negotiating supply agreements with smaller companies like FMG. For the last 20 years, Rio Tinto, BHP Billiton and CRVD (Brazil) have been consolidating control over iron ore production worldwide, and have lead in price negotiations. The Chinese, Indians and other consumers have a vested interest in breaking that 'cartel' by offering purchasing agreements and finance to alternative suppliers.

FMG has already negotiated access to the BHP rail infrastructure and are building a new loading port on the WA coast. By tying up with FMG, BCI will gain access to FMG's infrastructure. For a $60mil -odd company thats alot of leverage. Its possible that FMG will eventually takeover BCI. It seems likely.

Mind you - there are alot of iron ore projects....so expect future price weakness. But given the cost of establishing a new mine & supporting infrastructure, as well as the current shortage of mine services, it seems likely that over-supply is likely 5 years away. I see significant price weakness then because:

1. A plethora of new iron ore mines

2. A fall in iron ore (steel) demand because of rising interest rates globally.

Anyway, you should have fun in the next few years on commodity stocks. Looking at the technical analysis for this stock, its apparent that we ae looking at an ascending wedge with 2 plausible growth paths. The $2.10-2.20 levels are going to prove to be tough resistance levels, so I would advocate taking profits at these levels. The stock price is currently $1.45 - so that doesn't leave much upside. The reality is - I cant see any short term break out (above $2.20) because they still have alot of work to do. But given the tie-up with FMG I might be proven wrong on this. The reality is that it really depends on how much supply FMG can contract and whether FMG can service that ore from its own leases. It would be prudent for it to defer BCI developmenr until its ore deposits reach a mature phase of development. Given that risk, I see this stock as a speculative BUY, and FMG as the safer entry. But having said that....I prefer gold and silver.

- Andrew Sheldon www.sheldonthinks.com

Gold stocks - Sept 07

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Well as posted on my Commodities Trading blog I have a renewed interest in gold as previous resistance appears to be falling and gold seems destined to rise, and after testing $720-730/oz, rise even further. The question is - where does the best value lie in gold stocks.

When you review the market you realise that there is surprisingly little exposure. We can look at 2 types of company:
1. Established producers: I like emerging small producers that are cashed up, debt-free, unhedged, offer significant leverage as well as having significant resource upside.
2. Advanced projects: There are a host of companies that have no production interests but will have them within 12-18months. The benefit of these companies is that they will receive a re-rating at a time when gold prices are much higher, and the technical risks have fallen somewhat. We need to appreciate that most funds are run by accountants or actuaries that are 'conceptually blind'. You cant convince them of the value of a 'concept' - they need a feasibility study at the least, and even then they might be sceptical until those forecasts are converted into earnings. The added benefit of these companies is that they are often take over targets (if their resources are significant - say PRU) and they are able to lock in much higher gold prices to finance their project.

In Australia, I like the following companies listed on the ASX:
1. Bendigo Mining (BDG): BDG has one of the largest gold inventories in Australia, and its project lies in one of the most proliferate gold producing provinces in the world. At its peak of activity in the 1850s this gold province produced 40% of the world's gold. BDG has proven that the ribbon-type reef structures extend over a wide area, and even though the grades (and thus resources) were downgraded, they are still compelling value. The company has a 600,000tpa plant and is unhedged with $70mil in cash reserves. The newly appointed MD has not disappointed either. At 31c the company is valued at $158mil. With $70mil in cash, that places just a $88mil value on its project which has the capacity to produce 600,000tpa x 10g/t of gold = 200,000 oz per annum of gold. Thats amazing! Fund managers might however be a little slow crawling back into this one given the losses they incurred on the issue a year ago. But that has not stopped the State Teachers Union Super Fund of Ohio (USA of all places) from increasing its holding in the last week.
2. Sub Sahara Resources (SBS): SBS has a huge tenure holding in Africa - including JV interests in Tanzania, Eritrea and Ghana with a number of companies including Barrack Mines. Its Zara & Koka projects are the most advanced, however it has a number of other advanced projects with a focus on gold. The compelling value of this company was highlighted when Anvil Mining took a 10% equity stake in the company several months ago. I think this company will do very well as it has a huge portfolio of interests to trade with, and a diverse exposure that could yield some attractive discoveries. The intention with companies this size is to expose oneself to exploration upside. Capitalised at $40mil (at 8.7c), we can say a significant discovery in itself would double the value of the company.
3. Alloy Resources (AYR): I jumped on this one at 11c, its now 13-15c. They are an explorer, but I like that they are a mouse of a company hunting elephants along strike from some significant deposits held by the heavyweights Oxiana Resources and Pan Australian Resources (PNA). I will be hoping for greater gold content as opposed to copper, but I wont complain. The company should be close to releasing some drilling results, so I see that lifting the market.

These are not gold, but I still have MRX and MKY:
4. Matrix Metals (MRX): I still like this company even if its copper. I cant see copper prices coming off too much given that China is still growing so fast. Their project in West Qld is a cash producer, and I still see benefits from expanded output, not to mention the exploration upside. Current price 13c.
5. MKY: They had some attractive uranium soil sampling results 6mths ago and are currently drilling them. Uranium spot prices have come off but they are still high, so I'm expected a phenomenable rally if drilling results are good because the anomaly is quite large. Current price 4.2c

Tentative trading in MRX - Aug'07

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Hi all, I am trading aggressively just two stocks at the moment and keeping a sizeable amount of cash on the side. Why? Because I believe this market is going lower. I believe there is a lot more bad news to come, and fears might escalate if the credit rating agencies are called into question.

Most of the stock I am retaining is Matrix Metals (MRX.ASX), plus an explorer Alloy Resources (AYR.ASX). The reason being is that both companies were oversold and are expecting drilling results. Matrix is a low cost copper producer aggressively expanding output. It is ripe for a takeover by Xstrata if they find anything big. They recently entered production at are probably trading at a PER of 3x, and they have alot of upside besides. More importantly the chart is signalling to me a technical breakout.

The other stock Alloy Resources (AYR) is drilling a copper-gold target along the same geological trend as Pan Australian Resources (PNA.ASX). For this reason I am holding out for some excellent results which might just be the basis for a company-making mine. PNA have had some impressive results on this trend, so I'm hopeful for AYR despite the long development lead time.

- Andrew Sheldon www.sheldonthinks.com

Are you ready for the forthcoming gold boom?

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The global resources sector has had a bonanza period over the last 3 years, though the bulk of the fortunes made to date have been in the bulk materials (bauxite, manganese & iron ore), energy (uranium, oil, conventional gas, coal seam methane) and base metals (Copper, nickel, zinc, lead) sectors. The lagged has been the gold industry – particularly in the major commodity producing countries like Australia, South Africa and Canada.
Metal price Comparison
Looking at the returns of base metals, copper price was $0.80/lb in 1999 and now its around $US3.50/lb. Copper producers have never had it so good. Now consider the situation in the Australian gold mining sector. Despite a 70% increase in the gold price from $390 to $665 an ounce in the last 3 years in US terms, the 22% rise in the $AUD over the same period meant that the gold price in Australian dollar terms increased by just 40% from $555 to $775 an ounce.

Japanese gold producers have done far better given that the 7% depreciation in the yen over the same period means gold prices over the same period increased by 82%.
The fortunes of the gold industry
Currently the bulk of Australia's gold producers are facing difficult operating conditions, whether its staff or material shortages, rapid increases in mining costs or poor grade reconciliation. While their base metals peers have been raking in the profits, several gold miners have gone into administration, including BMA Gold, Croesus Mining and Gleneagle Gold. Others such as Batavia Mining and A1 Minerals have been forced to delay their projects rather than undermine the viability of their projects.
Consider that Barrick Gold's cash production costs rose 38% between 2005 to 2006 for its Australian and Papua New Guinean operations, whilst Newmont's costs rose 18% in Australia and NZ over a later 1 year period. More broadly, global gold cash costs have nearly doubled since 2001. Some producers have faired better than others, eg. Barrick has hedged much of its exposure to the Australian dollar at lower rates.
Gold outlook
Whilst the global economy becomes de-leveraged by falling asset prices and rising inflation, the gold sector is likely to benefit on both fronts because:
1. The value of gold to the total size of the global economy still has gold under-priced. Gold as we have already indicated has not risen like other commodities
2. Divestiture of other assets leads people into the safety of bonds, but gold for high returns. But gold is a very small market so expect volatility and significant price advances .

The paradox is that gold miners will benefit from the next leg of the gold boom for several reasons:
1. Gold was the laggard in the 2nd stage of the commodities cycle - but not this time - it will rise greatly whilst other metals fall off.
2. Gold (and other metals) will benefit from a weaker $AUD

Gold investment strategy
There is no question that gold miners offer superior exposure to rising gold prices than gold metal (coins or exchange traded funds), but you need to be selective. Consider the following:
1. Location: Seek gold miners located in non-resource based economies, or economies in which mining represents a small portion of the global economy (China, USA), as these countries will not experience stronger currencies as gold prices increase. There are a number of miners in Africa (Resolute Gold, Sub-Sahara Resources), Thailand (Kingsgate Cons), as well as explorers. Eg. Azumah Res, Castle Minerals in Africa.
2. Gold resources: Look for gold stocks that have a large inventory of gold resources because they offer a longer mine life. We are looking for a life of 15+ years. We are more impressed by miners that have large gold inventories because they are more likely to be taken over.
3. Low cost production: Look for miners with lower cash production costs, whether because they have higher grades than normal, significant credits for associated metals, or very favourable ore characteristics, eg. Large, tabular, shallow ore bodies suitable to cheap bulk extraction.
4. Low capital costs: Look for miners with low capital costs, whether because it’s a simple gravity separation process only, a cheap heap leach operation, or they have conscripted a third party plant for toll treatment.
5. No hedging: We don’t want to see gold price hedging, or if they have hedging, it should be for a small proportion of production or will be paid out soon. We should reflect favourably on producers that hedged their currency at lower rates, but any fresh currency hedging now would be a negative factor. We want maximum exposure to the gold price increase.
6. Scalability: We should look favourably upon gold producers who have the capacity to scale up production from existing plant through minor modifications or resource upside.
7. Discounts: We would prefer stocks trading at a discount to market parities. Particularly projects which have low gold grades, so they have the greatest upside from higher prices.
8. Options: We are particularly interested in stocks that have low-priced options because they offer low-cost entry into promising stocks.

A lot of Australian companies are looking outside Australia to find larger ore bodies, as well as to reduce mine costs. Sino Gold's open pit mining costs are one-third the Australian costs, while the salary of a skilled mining operator is about one-fifth of the equivalent Australian labour. This shift in exploration overseas and lost prospectivity has taken its toll on Australian gold production, since it has fallen to its lowest level in 15 years, whilst China had overtaken Australia as the world's third-largest producer. But the other reason gold exploration has floundered is because gold prices have lagged, so more money has gone into uranium, iron ore and base metals. The number of new IPOs for these metals has way surpassed new gold floats. But the major miners still like Australia and see it as part of a global portfolio with lower political risks helping to offset the higher costs.

- Andrew Sheldon www.sheldonthinks.com

Universal Resources (ASX.URL)

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In the process of doing some research for the copper stocks listed in my previous posting, I came across a comparison of copper stocks in a Exco Resources presentation. It is a table which computes the value of insitu (in-ground) copper resources in terms of stock market capitalisation (ie. $A market cap /tonnes of insitu copper). You might wonder why the discrepancy in values. For the most part its because of:

1. Stage of development - the stocks ranking over $1000 are in production, the stocks in the $300-500 range are still developing resources. They have not prepared a feasibility study so the project sponsor can't give you an accurate picture of realistic cashflows from the mine scheduling for ore block extraction. Without that info there is greater risk attached to the project.

2. Recoverable grade - Its apparent that most of the projects have a recoverable grade of around 1% copper. The exception is URL - with a grade of 0.73% Cu. That has to impact on mine profitability...but there are other issues - the big ones being economies of scale, strategic objectives and our forward-looking price assumptions.

So why is URL so low?

Before we get excited there are several things we need to know about URL. The company controls alot of copper - 933,000 tonnes of it, worth billions. These resources are spread among 10 pits, so there is even more upside in exploration potential around the mine planned pit margins and even underground potential below the pits.

The marginal grade of the ore has a big impact on mine value. The forecast cash cost of the mine is $1.10/lb compared to likely $0.60-0.80/lb for the other projects, which have higher grades and less onerous capital expenditure demands. URL need to raise $340mil compared to their much lower market capitalisation of just $25mil. Consider that if we assume an unreasonably high (current) copper price of $3.50/lb, the project has a NPV of $960mil. But if we assume a capital cost of $2/lb, the project has a NPV of $140mil. Thats a huge difference.

But consider the strategic value of a centrally located copper processing facility in one of the most important copper provinces in the world. Xstrata has recognised the potential of these resources since it has contracted to earn a 51% stake in the underground potential (below 200m depth) by spending $15mil. Really $15mil figures means nothing since they can withdrawal after a lesser commitment. In fact the company has screwed up because Xstrata - one of the world's largest copper miners, gets a strategic stake in a huge mine for little outlay, and effectively locks out the competition from dealing with URL. Companies like Teck Corp of Canada. Clearly these copper deposits and and any centrally-located processing plant associated with these deposits has a strategic value. The value its greatest for Xstrata since it already has significant capital invested at Mt Isa Mines (having taken over MIM several years ago). Clearly the deal is sweeter for Xstrata if it can:

1. Find higher grade copper ore through exploration

2. Take over other explorers with higher grade ores in the area

The URL clearly did not see the strategic importance of this project. I would argue that they should have got a firmer commitment on capital expenditures for the testing of the UG potential (the SEET project), or raised more capital to test the UG potential themselves...if only with a few deep holes.

Going forward, URL is a company with a $25mil market capitalisation (292mil shares at 8.8c) and $7mil in cash. Aside from some uranium exposure, the attributed value of their project is $18mil. That seems very low considering the exploration potential of its ground, the outlook for copper prices and established resources. For this reason I bought a stake, in the hope that:

1. Xstrata will make a takeover offer for URL after it has:

a) Proven that higher grade ore exists below the existing pits

b) Found higher grade ores in the area through its only exploration efforts

c) Taken over other companies in the area, or negotiated control over additional high grade ore

Any of these steps would justify Xstrata taking over URL. Given the lack of competition that URL management have effectively excluded, its likely that Xstrata will be able to purchase the company for about double its current value.

So this is a hard stock to pick because Xstrata need not be in a hurry...they have until 2010 to expend $15mil to earn their 51% stake. But in case you are thinking that copper prices might sink to $0.8/lb like they did in the late 1990s, think again...we are in the midst of a commodities boom driven by China, India and other countries. We are not likely to see copper prices under $2.00/lb for some time, and I think $2.50-2.80/lb is a more likely average price. So I see the URL project NPV around $300-500mil. But I dont expect shareholders to see much of that. Xstrata will play hard ball, just as they did over the Windimurra Vanadium project. It seems Xstrata is very good at extracting value from small company managers that under-value the value of their assets. The problem is a lack of commercial/strategic skills in our small mining companies. Take a look at the URL and you see geologists (scientists) and mining engineers (operations). You dont see commericial/strategic thinkers. Thats a problem...because thats a huge source of revenue/value.

I'm sure you are familar with the notion of Australia 'selling the farm' at extraordinarily low prices. Well its not just us, its foreigners as well, as its a global phenomena. Its a lack of capacity for conceptual thinking and the general knowledge required to support it.

Anyway I bought some URL because it offers value from:

1. Further exploration success - by URL or Xstrata

2. Prospect of a URL or neighbour takeover (Exco Res, Copperco)

3. Xstrata (SEET project) drilling success

Haven't decided if it will be a short term trade or a longer term investment. Lets see how the drilling results unfold. At 8.8c its unclear to me whether they will fall to 8c support or even lower.

- Andrew Sheldon www.sheldonthinks.com

Copper stocks - Aug'07

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You could be forgiven for thinking that the world is about to end, that the continents are about to slide into the sea...given the recent equity market slide. This is not totally unwarranted that stocks took a slide over recent weaks, but the rationale seems somewhat dubious. Personally I think its more about profit-taking than fundamentals. Or is the market worried about inflation? Well in any respect there seems little justification for the recent slide in small copper mining stocks in recent weeks - an average fall of 30% according to the Sydney Morning Herald. Gold stocks didnt fair as badly, perhaps suggesting that gold is deemed to have more upside.

Well we should be accustomed to mining stocks falling with the general malaise of the stock market, and we are accustomed to the spec-end of the market being punished more than the blue chips, despite some very favourable fundamentals. As www.basemetals.com/Copper has suggested copper prices have risen 22% this year to $US8,0000/tonne on the basis of tight stockpiles. London Metals Exchange (LME) stockpiles have fallen 42% this year, and more tightness is expected. Interestingly copper prices are still short of their previous high of $4.04/pound reachd in May 2006, but the market seems to be pricing in a fall based on the calamity in th sub-prime market. Might equity investors be seeing a fall before the metals market?

As we can see from the attached charts, copper stocks have fallen on average 30% to their support levels on the basis of a 4.8% fall in copper prices in recent days related to the sub-prime loan issue. Despite the uncertainties in the stock market, the downgrading of copper stocks appears excessive, and the attached stocks offer some good buying opportunities. My apologies this is not a very clear chart - the stocks are:
1. Matrix Metals (ASX.MRX) -at 13.5c
2. Exco Resources (ASX.EXS) - at 30c
3. Copperco Ltd (ASX.CUO) - at 87c
4. Redbank Mines (ASX.RBM) at 12c
Some pundits are expecting the Federal Reserve Board to respond to the weakness in the US housing market with an interest rate cut. I however dont expect as much....I think the Fed will hold the current line. I dont believe the Fed would want to signal easier monetary policy at times of higher commodity prices and tight labour markets, even if 'junk loan' end of the property market and a few funs managers and investors are feeling the pinch. There has been no collapse in earnings, and no significant reduction in credit outstanding....so there remains alot of money sloshing around the global economy, so expect markets to resume their climb. I am expecting copper prices to recover to their previous high of $4.04/pound reachd in May 2006.
It can be said that I have a suspicious nature, but when you consider that one of the reasons that copper prices are strong (supply is tight) is that workers at several very large mines in Mexico and Chile are on strike. That being the case, you'd have to wonder whether price manipulation is going on. Given that the market is driven by such short term factors....it would seem to 'profitable' for several senior mining executives at the major producers to conspire to hold off on pay rises in conditions of very high inflation in the mining districts to push metal prices higher. Why would they do that? Well - because its easy and profitable. Consider what it takes:
1. Several senior mining executives at a metals conference to get together for dinner and talk about metal markets....understand producers are largely price takers....with many producers and few refiners.
2. Only a few executives need to conspire to hold the status quo on wages, to cause strikes, to prompt a temporary supply shortage
3. After copper prices have risen by a significant degree, producers lock in the higher prices in the derivatives market
4. The executives then seek a deal with the miners which results in a concessional increase in wages, and they commence the resumed delivery of copper concentrates into the market by selling into those derivative (futures, options) contractual commitments

This is not an outlandish proposition.....its a small community among the major mining companies. They are constantly talking about prices given the dominance of these players and the benefits of holding the line. They are not really competitors since on prices but volumes. And when there are tight volumes, it makes sense to hold back some for higher prices. I am reminded of Amcor, a paper producer that was involved in price fixing years ago. I think that was a rare occasion that a groups of executives were discovered to be engaging in price fixing. I think its more prevalent than we know. Makes you wonder whether Osama Bin Laden is playing the futures market from some bunker as he blows up US Iraqis?
The only way we can determine if this is happening is:
1. Correlating price movements with strikes and derivative contractual commitments
2. Correlate spot and derivative copper prices to see if the derivatives market is questioning the soundness of copper prices

Disclosure: The author holds Metrix Metal stock.
- Andrew Sheldon www.sheldonthinks.com

Gold stocks - Aug 2007

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Gold stocks are one of the most compelling sectors of the equities market for several reasons.

1. Inflation is emerging

2. Gold is technically close to a breakout. You might be thinking that gold has already risen a great deal, but it has not kept up with the other commodities. See my posting on my Commodities blog.

The next question then is how do we position ourselves for this phenomena. We already have the major stocks trading at huge multiples, so its worth looking at some of the smaller stocks.

Listed on the Australian Stock Exchange (ASX) we have:

1. Bendigo Mining: This company has recently fallen off considerably after it revised its gold resource estimation model that culminated in a significant downgrading of its resource inventory. Since the downgrade the company has found new ore resources in new vein systems.
2. Resolute Gold: Resolute has an operating gold mine in Ghana, Africa and is developing several others.

Stay tuned for more info.

- Andrew Sheldon www.sheldonthinks.com