Money for the funny

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Watch ZEITGEIST The Movie in Educational | View More Free Videos Online at Veoh.com

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Andrew Sheldon www.sheldonthinks.com

MIL Resources (MGK.ASX) - break out due?

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Over the last week MIL Resources has made its way up from 3.6c to 4.3c on small volumes. One might ask whether this stock is about to break out. Looking at the chart, the stock has been in a consolidation channel. The question is - Is this ascending wedge going to hold up as a trend line? I suspect it will break out in coming weeks)based on news either about a JV over its Amazon Bay iron ore project in PNG, or activity with respect to its gold project in PNG.
There are so many iron ore projects. The question I ask is? How many of them are so close to prospective DRI plants in Asia, how many lie on the coast? How many of them involve extraction of unconsolidated beach sands with dredges? This is a project which lends itself to incremental scaling up. It is the type of project well suited to a minor, but a major would help. You don't need a major terminal. I would suggest offshore self-loading 8,000dwt barges would be adequate, loading into 20,000dwt vessels destined for Singapore, the Philippines or Malaysia. I would be surprised if the total capital cost is more than $20-30million. Of course you can start big and bring in a major partner. In this type of market a Chinese partner might be nice.

I think this stock is way under-valued so I expect as much.
Need a stock update - see the updated chart at Google Finance!
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Andrew Sheldon www.sheldonthinks.com

A few more emerging gold producers

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A number of small emerging gold producers that I have identified and bought this week are:
1. Republic Gold (RAU): This company has a number of interesting deposits - a large iron ore resource in Bolivia, which adjoins a Jindal Group project (Indian steel company). It also has a gold resource in Bolivia which will achieve feasibility study stage next year. In Queensland it has a small resource suited to heap leaching. It has not really responded to the gold price increase, and it has $5mil in cash.
2. Adamus Resources: This company has gold interests in Africa. They are an emerging producer, they have a solid resource base, which is likely to expand.
3. NorthWest Resources (NWR): High gold prices favour those with the most advantageous position. At current share price NWR are capitalised at just $7.2mil, yet they have 370,000 oz of gold, a small treatment plant, $5.7mil in cash, and resource upside. I must confess to finding such small vein deposits messy, but the they are just too cheap.

There is a few strategically placed medium-sized emerging gold producers in Africa which are going to be taken over by larger companies, or similar sized companies seeking to increase their PER profile in international markets. I would not be surprised to see Ampello Mining (AMX.ASX), Perseus Mining (PRU.ASX) or Adamus Resources (ADU.ASX) taken over in the next 6 months. Perhaps just as likely is a three-way merger between these companies. Of course no CEO likes to lose their job, so it would depend on other opportunities they have. You didn't really expect them to act in shareholder's interests did you? :) Well least not primarily.
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Andrew Sheldon www.sheldonthinks.com

A1 Minerals set to perform

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A1 Minerals yesterday released a glowing outlook for their mining project. The company is due to commence mining this month (Dec'09). News could not be better as gold breaches the $1200/oz mark. In its latest drilling it encountered 6m of 69g/t. This looks more impressive than it is given the the bulk of the high grade occurred over 2m, meaning that its less likely to be continuous. This is near-surface enrichment of gold. The promising aspect about such gold discoveries is that they promise the mining company a 'bonanza' in terms of upfront cash flows. This is the type of situation in which miners can have exceptional years. Importantly the A1 ground has yielded some very high grades over the years, so we might expect some higher output than is indicated by grade control. There is even talk about expanding output to 100,000 oz per annum. I suggest the likelihood of this is likely to come from toll treatment of their ore. Remember - when you have the highest grade in the district - everyone wants to process your ore. You price the competitors out of the market. See the presentation at the A1 Minerals website.
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Andrew Sheldon www.sheldonthinks.com

MIL Resources (MGK.ASX)

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When looking for gold stocks I am always trying to anticipate what will be the next big story. One of my strategies is to systematically read through reports for all of the listed stocks on the ASX. This is how I started doing it when I was 14yo. Over 25 years later, I don't have to go to the stock exchange anymore. All the information is online.
When I last did my periodically research a month ago, a stock that I stumbled across was MIL Resources. I remember this stock from about 8 years ago when it had magnesium projects. Today its focus is iron ore and gold in PNG. There are several aspects I like about this company:
1. The small market capitalisation of just $10mil - this gives me a lot of upside or bang for my buck if they have somerthing
2. They have $3.7mil in cash according to the latest quarterly - so they have some spending to do before the next capital raising, so I don't need to worry for a while.
3. They are currently preparing a gold project in PNG for drilling. I am expecting some high grade drilling results which could well capture the interest of the market
4. They have the Amazon Bay iron ore project. There are numerous deposits like this around the world. One of the other such deposits is controlled by Rio Tinto off the Taranaki coast of NZ. Unfortunately for Rio, the Maori Party is not so keen on seabed mining. I don't expect this will be a problem in PNG. In fact, there are other benefits. This iron ore could be barged a relatively short distance to Singapore or Malaysia as feed for a Direct Reduction Iron (DRI) plant. In fact the resource at Amazon Bay is so large that the project could justify its own on-site DRI plant. These are small-scale modular plants. All the better that PNG has onshore gas which would provide a local energy feedstock. But it gets better. This iron ore resource lies both onshore and offshore. It is unconsolidated so its easy to dredge.
5. There is another company based in Indonesia - I forget but I think its Indo Mines - which is ccapitalised at $17mil, and it has no gold exposure. I'd have thought this company justifies a $20-30mil market capitalisation prior to drilling the gold project, just to be on par with that company. Frankly, why would a Chinese steel maker want to buy into a WA based project when they would have to pay a steep rail and port charge. WA does have the offsetting benefit of deepwater port, however this project should be able to more than match those WA projects on costs. Why so cheap? Its a strategic asset close to Asia.
6. Pat Elliot is a well-known WA mining industry executive, so the company has some legs. He is accustomed to large projects. He's prepared a few feasibility studies :) I think we can expect a new investor for this iron ore project in coming months. The Chinese government I think was put off by the likes of Rio Tinto & BHP merging recently. Expect China to spend on a multitude of resource projects, just as Japan did from the 1960s. What else can China do with all those surpluses. It makes more sense for it to buy into resource projects than hoard commodities.

I bought some MGK.ASX over the last few weeks for 3.7-4.1c. I will retain them on the expectation of a JV partner for the Amazon Bay iron ore project, plus the prospect of some positive drilling results from their nearby gold prospect. I am expecting the bullish gold market to help lift this stock significantly. The iron ore project is longer term, however the short term decisions will be important in underwriting both projects, and the gold target is attractive.
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Andrew Sheldon www.sheldonthinks.com

Red 5 gets final approval for Philippines gold project

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We have followed Red 5 Ltd for about 10 years now. The attraction of this company was for a long time the geology. The company has some very prospective geological terrain in the Philippines. The drilling has demonstrated some exceptionally wide zones of gold mineralisation with good grades, not to mention deeper ore zones with zinc and silver from memory.
My initial interest was also sparked by the possibility of a large porphyry copper/gold mine, i.e. a repetition to the nearby AngloGold project. Instead they came up with wide intersections of sub-economic gold grades. It highlighted the plausibility, but not the likelihood of a large tonnage mine which would instigate the involvement of global majors. So the focus shifted back to the Siana pit, and our interest became long term.
The problem in the Philippines is the slow pace at which their government approves projects. They move at a very slow pace. This is in response to a number of mine spills by foreign companies. Having secured final approval, its worth looking at the economic merits of the company.
According to Google Finance, the company is capitalised at $122 million, yet based on my basic calculations, I get a value of their gold mining pre-tax cashflows of $560mil. This values the company 3-5 times high. Basically its trading at a PER of 1x. This of course ignores:
1. Project financing costs - low because they have already raised $35 mil in equity
2. Higher gold price - I have ratios suggesting gold is going to $2400/oz, so giving the company a valuation of closer to $750 million. Essentially the escalation in gold prices is going to offset the discounting of those future earnings, so it becomes basically $75mil x 10 years
3. Increase in reserves - There is the prospect of mine life increasing by 30-50% I'd say, as they shift to UG mining.
4. Increased production - An increase in reserves will allow for an increase in mine life, or more likely an expanded production, as the company moves to take advantage of higher gold prices.

Of course this is just an example of the power of 'positive thinking'. Well I call it Romantic Realism - applied to the mining industry. Anyway, this is what recreates mining millionaires when there is no prospect in the current market of being a real estate millionaire. If you look at the proportion of millionaires in Australia, most do it from real estate and mining. That is why there are more millionaires in Perth per unit population compared to any other place in the world. Basically its the centre of excellence in mining and they are now exploiting wealth around the world. I think you should learn how 'money makes money', or how to make money from mining. You should also read up about a nickel stock called Poseidon to understand the impact of speculation. Se our Mining Fundamentals book.
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Andrew Sheldon www.sheldonthinks.com

Sovereign risk in miners abroad

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There is a propensity to fear investment in foreign countries, at least there once was. Britons of course have been accustomed to investing in foreign countries for centuries, given that they funded the development of Africa, Australia, NZ and an array of other colonies. Of course for most of those times they also controlled the governments. In modern times, all investors are coming to grips with the benefits of foreign investment. With respect to mining stocks the benefits are:
1. A new global order which has resulted in a decline in governments resorting to expedient, populist, fascist policies like nationalisation of mines. The consequence of this has been a diminished risk of foreign stakes in mines being nationalised. The only case I can recall in modern times is the nationalisation of oil assets in Venezuela by a populist President Chirez. Union Res had dispersions caste upon its equity in a Iranian base metals mine, and a few projects are facing insurmountable delays getting title in some of these Central Asian states. The bigger the project, the greater its strategic importance, and the greater risk of nationalisation. That said large companies have more power to bear upon these rouge governments.
2. More prospective exploration areas in foreign, third world countries because the land is basically only had slight work undertaken, so any resources are likely to be near-surface, and potentially larger, otherwise they would have been more evident.
3. The development of a mine can be faster or slower. It depends on how supportive the local govt is for the project.
4. The costs of doing exploration are usually lower because of the low cost of labour. Capital items are usually more expensive because of lack of infrastructure. But some areas already have well-developed mining scenes, with plentiful skilled labour and power nearby. It depends.

Sovereign risk thus is less likely to involve nationalisation of assets. In the case of Democratic Republic of Congo, there are guerrillas occupying the border who can exhort money for guns. In PNG, there is the prospect of local tribal landowners attacking mine camps and destroying property. In these infrequent cases, a worker might be killed by gun or spear, but they tend not to disrupt operations too much. The governments are often quick to offer security. The Bougainville mine seizure in the 1980s was a different case because it was associated with a political coup. The massive mine closed permanently.
The latest example of sovereign risk is perhaps no worse than we might expect from Western governments. The government of Ghana has opportunistically decided to raise the royalty it imposes on gold mines from 3% to 6%, at a time when gold prices are on the rise. In defense of Ghana, its revenues might have been impacted by the recession, and third world countries have a lot of difficulty collecting taxes on citizens, so they levy import duties and resource royalties. The ugly side is that investors want to retain the upside of an investment, and they don’t want to share with governments on the basis of unexpected tax imposts. It is not a serious increase, but then its a bad precedent.
Such issues are considered in our Mining Fundamentals report.
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Andrew Sheldon www.sheldonthinks.com

How to pick flying stocks

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For those interested in how to assess gold stocks in this bull market I recommend a report I wrote last year called Mining Fundamentals. It incorporates a lot of the knowledge I have accumulated over the last 25 years of researching mining stocks. I have been doing this a long time. I bought my first stock when I was 11yo (through parents), by age 15yo I was going to the Dept of Minerals and Australian Stock Exchange (when it was in Bond St) to research stocks. Imagine a young mind soaking up all that info. I was researching during 1986 when I should have been studying for my exams. Anyway, the report will be updated next year. I will increase the price of it from $20 to $295 to reflect its value since only aspiring analysts seem to be buying it.
Beats me....I think its a useful tool. You can easily find free tips, but do you know the difference between one going up 300% and 3000%. Anyway, the book can be found here.
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Andrew Sheldon www.sheldonthinks.com

Good gold stocks in Australia

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There are a number of gold stocks which I have followed for some time which have been doing rather well of late. These stocks are emerging gold producers. They include:
1. Red 5 Ltd: This stock has moved from 3c to 14c. By no means is this stock over-valued, though I would caution people about the 'Philippines risk' even if that risk is less apparent in the NE region of Mindanao. This is a historic mining area, and the company claims to have good relations with the community. Nevertheless there are risks in this country. Misinformation seems to rule.
2. A1 Minerals: This company will produce 30,000 oz per annum from Xmas 2009, with plans to use the proceeds to fund expansion to 50,000 oz per annum. They have a 1.7mil oz deposit. The plant is funded and under development. The company is capitalised at just $37mil, so still good buying even though it has moved up from a low of 7c to 33c today.
3. Integra Mining (IGR.ASX) is another emerging gold producer starting production next year. It plans to expand output to 100,000 oz per annum.
4. Navigator Resources (NAV.ASX) has lower grade material, but it is developing two projects, having acquired Bronzewinger for $34 million. It has just 4 years life remaining unless they can find more ore.
5. Marengo Mining (MGO.ASX): Marengo is a long term stock pick which has a large scale copper-gold deposit in PNG. The CEO Les Emery is a straight shooter. This size project will likely attract Chinese investment or Xstrata investor. This is definitely a good buy. The 15c mark is support, so hopefully we will find that price on a weak day.

These are the best play at the moment.
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Andrew Sheldon www.sheldonthinks.com

New blog for mining & energy news

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I have created a new blog for mining and energy stock news - http://sheldonmining.blogspot.com. This is blog is nothing more than a news feed for the stocks I like. I will be adding to it slowly over time. I will over the next few months be reviewing all of the ASX mining stocks which I am out of touch with. During these periodic reviews its common for me to find a few exceptional stocks.
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Andrew Sheldon www.sheldonthinks.com

Lynas Corporation (LYC.ASX) an interesting story

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I have been interested in Lynas for a long time now. I first discovered the company 10 years ago when it was producing gold from the Purarooda(?) gold mine in WA. Of course it was nice that they were producing gold, but the greater interest was in their rare earths project at Mt Weld. There are several compelling features to rare earths and this deposit in particular:

1. Very high grade: From memory the average grade is between 9-14%, whilst the competition is around 3-5%.
2. Supply: The supply of rare earths is dominated by China, such that they produce 80% of the global supply, as well as processing the stuff.
3. Increasing applications: Rare earths, a groups of some 30 metals - the light series and heavy series, and I am going from memory, are increasing used in some pretty high value applications.
4. Quantities required: The small quantities of the metal required in any application mean that the price of these metals could soar very high if the Chinese have the power to manipulate supply. i.e. The price of elasticity is very low. I might draw a parallel with platinum, because very little platinum is used in car catalyst converters, so prices can go very high because the car industry substitutes platinum for palladium.
5. Substitution: I am less aware of the availability of substitutes for rare earths, since there are so many of them, however I would expect substitution to be a less compelling motivation.
6. Lack of resources: You might find this difficult to imagine, but rare earths are actually quite rare. Well, more accurately, its rare to find them in commercial quantities. This is where Mt Weld is special because millions of years of insitu weathering in WA have concentrated the rare earths from this volcanic plug, making it quite the oddity.

Now there is an even more important factor than the Chinese power over the market. Its the angst of China over iron ore, that Australia and other countries seem to be 'conspiring' against the Chinese to keep iron ore prices. Of course these iron ore magnates are inclined to take over each other to control market pricing. This annoys the Chinese of course who are forced to pay high prices. This has forced the Chinese to develop their conceptual thinking skills. They have appreciated that just as Australia, Brazil, South Africa, Gabon, etc dominate iron ore, they dominate a few metals as well, particularly rare earths.

The interesting issue is whether the Australian Labor government will approve the move by the Chinese to control the company with 51%, even if Nick Curtis, the CEO has the controlling equity in the company. Nick will support the investment because he's an 'independent' director with a lot of stock in the company.

The implication is that an investment in Lynas is risky in the sense that the Australian government could reject the takeover. I would suggest however that acceptance is more likely for several reasons:
1. Australia has a great deal of control over the iron ore market
2. Australia will not want to annoy China, because there is probably a gas contract at stake
3. Australia has no control over the processing of rare earths anyway because the metal will go to China
4. The US has a strategic supply in the USA, so it will not care either
5. These metals are rare until the next discovery is made. Rare metals have no uses. When prices skyrocket, it will take them 10 years, but then they will suddenly find millions of tonnes of the stuff in outback Russia...my guess the Ural Mountains.

Anyway, my point is that when this agreement is finally reached, the price of Lynas Corp stock will have a very sure path to heaven. It might take some time, but I'd expect some movement on the expectation of some market manipulation by the Chinese. The Chinese have never been so market-savvy, though after the Rio price fiasco, its fair to say they know what they are doing now. We are currently in recession, but that company is going to soar one day. Unless...I'm wrong and the Australian government rules against it. Well that is of course are even rarer story!
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Andrew Sheldon www.sheldonthinks.com

Google trends outlook for gold

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One way of determining the attraction of an investment is by looking at an indicator you might not have considered. I note that there is a considerable increase in traffic to this website this week. This prompts the question in my mind - what is motivating the increase in interest in my site. I'm not posting so regularly lately. I suspect there has been some newspaper articles on the global appeal of gold. I did however use the Google Trends analytics tool to determine if there had been a recent increase in Google searches for 'gold stocks' and 'buying gold', and I see no significant increase. Without looking at the technical (chart) patterns, I am inclined to think the reason is a favourable article.
We must remember however that buying stocks is not a popularity contest, and the 'smart money' is invested before the herd. The question then remains - when is the right time to buy. I will reserve that opinion for another day when I am working from my other computer. If you go to this website you can actually download the underlying data as a CSV (excel) file and overlay the gold price data over it. It might be more interesting to correlate changes in these numbers vs changes in gold prices (%change).
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Andrew Sheldon www.sheldonthinks.com

Bendigo Goldfields up for sale

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Bendigo Goldfields (BDG) is in trouble after Lihir Goldfield's decided to place the mine up for sale. There are several problems for Lihir I would suggest:
1. Low grades
2. Low predictability of gold grades
3. The lack of scalability of the mine
4. Low gold prices

The first two factors are unlikely to change, however there is the prospect of higher gold prices resulting in an increase in production in future. The problem is that there is some prospect of weaker gold prices in the medium term as we witness a recovery in the USD. For this reason, this is not the time to buy this stock. For Lihir, it seems a little too late to sell. Anyway, these developments are not surprising given our view on this stock dating back to October 2008. There is of course always the prospect of trading this stock when gold prices recover. In the interim, I would stay away from most gold stocks since the USD is stronger for now.

It seems probable that no party is likely to be interested in buying Lihir's BDG stake. I can't imagine a buyer. Perhaps the stock will be offered to an institution to place over time in exchange for a high commission. Otherwise maybe they will dump the stock on the market using some slight of hand. Well of course not...that's illegal....if they know about it. Usually institutions perform this type of dirty work...for a commission. It is the role of institutions to perform such work. They charge a large commission for such practices. The last one I remember was the Qld Metals Corp fiasco, where the major investment banks were peddling this company's stock issue in exchange for a 7% commission. The higher the commission the more dodgy the issue. Mostly issues involve a 3-5% commission, so 7% must be a dog, and you wouldn't do it in a bad market. So I guess an investment broker would be looking at a large share of the stock or 10% straight commission to unload this stock. Well its not without some value given the outlook for gold, and that treatment plant will be worth something. Maybe they can use the kilometres of underground development for carbon sequestration. Just kidding. It might have a useful life yet.
PS: Qld Metals Corp went broke. No thanks to my negative report on the issue. That did not stop my employer from recommending the issue...sorry not recommending...just not disclosing my report or findings. Its hard to knock back a 7% commission.
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Andrew Sheldon www.sheldonthinks.com

Kentor Gold (KGL.ASX)

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A reader asked me my view of this stock. I must say I saw nothing but risks attached to this stock for several reasons:

1. The narrow mineralisation
2. The nuggetty gold effect is likely to disappoint

3. The reliance on Russian drilling - which has historically shown itself to be unreliable. I see that they have done 400m of drilling, but that is not going to say much until they get a bulk sample back, and even then, the mineralisation is just 0.8m in thinkness in places, which means they will have to cut back the walls for mine entries. Nope, I'm not interested in this stock. They can talk up the prospect of a pre-feasibility as mine executives are prone to do...I've sailed on that ship a few times. But I can't see this project flying unless more info proves otherwise. They also have geothermal interests in Central Asia. Hmmm....Is there any demand there?

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Andrew Sheldon www.sheldonthinks.com

Ramelius Resources (RMS.ASX)

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Ramelius Resources was another stock asked about by a reader. The company has 181mil stock on issue worth $111mil at the current share price $0.60. The company will generate revenues of $A110mil from the Wattle Dam mine once production reaches 70,000 oz per annum, so we are likely looking at earnings of $50-60 mil. This mine is the highest grade mine in Australia. We do need to be careful to factor in the possibility of a 'nugget effect'. Being an underground mine I don't see the scalability in future production even if they can extend the orebody at depth. That's not to say there is not more upside. There recent performance however suggests predicted ore grades are 'understated', so thats a positive, plus the upside I expect in gold prices. Given the possibility of $50mil earnings and a conservative PE ratio of 5, I would expect RMS to reach $1.20 in the medium term, with a long term target of $1.80 (its previous high) in the long term as the gold boom moves into full swing. The problem with this stock is the inability to scale up production...unless I am missing something. If they find adjoining resources., i.e. parallel structures..that adds upside, but thats hopeful wishing.
The further I investigate though, the more concerned I become. These are very narrow veins and high grade, so there will be a nuggest effect. One is of course reminded of Bendigo Goldfields. Grade control (predictability) issues, though it does win on easier accessibility. The very high gold cut-off grade of 400g/t does not give confidence. Really until this company gets down into the high grade ore and does bulk sampling, there is no way of predicting the bulk grade of the ore. The company has just $6.1 million in the bank, so perhaps they are looking at an issue because their options expiring in June are well out of the money. For this reason I would expect the shares to fall back to 40c support. Perhaps 50c will be the 'discounted' issue price. This stock is certainly one I would watch, though I'd want more certainly over grades.

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Andrew Sheldon www.sheldonthinks.com

Troy Resources (TRY.ASX) - sell on strength

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A reader has sent me an email asking for news/updates on some stocks. Only too happy to offer this. If you have any tips, I will happily write recommedations on them. Technical analysis suggests Troy has hit some short term resistance, though it remains on an uptrend. The gold price has fallen $60/oz of late, so that's the fundamentals driving the stock in the short term. See my commodities blog for the gold outlook.
This is an interesting stock because its producing gold, yet we need to be mindful of its resource outlook. It produced 32,450 ounces of gold in the last year, however the annualised production is 60,000 oz since it produced 15,233oz in the quarter. There was however some treatment of low grade stockpiles which elevated output. They are making an average cash profit of $US400 per ounce. The company has liquid (cash, gold) reserves of $60mil, so it has considerable capacity to finance further capacity acquisition or development.

You can essentially write off any possibility of the Andorinhas iron ore project being mined. At $1.35 the company is worth $94mil, which seems a reasonable valuation given the cash reserves. The problem for Troy Resources is the lack of measured + indicated resources - at least gauged from their recent reports. The other problem is the company's lack of disclosure about its gold resources at Andorinhas - I just don't know where I stand as an investor. The poor quality of disclosure is the biggest obstacle for investors. The company claims to have 5 years resources, but there is no inventory of gold in its reports. Perhaps the company needs to invest some of its $60mil in an advanced gold project to give a kickstart to earnings because its Brazilian gold interests, whilst offering some promise, at this point lack tangibility. At least until they disclose more. I would add however - if there is something substantial at Andorinhas, they will spend the $60mil developing the project in no time. For this reason, I don't see Troy breaking above $1.50 in the short term, but rather probably drifting back to $1.00.
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Andrew Sheldon www.sheldonthinks.com

The types of gold stocks you should buy

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If you are interested in gold stocks - as you should be right now - there are several things that you should look for. These factors will make the difference between exemplary share price performance and the mediocrity. It should be apparent that some stocks have already started moving up, so you need to look at your leverage to the gold boom. The factors you want to consider are:

1. Long life precious metals preserves - This is important because large resources support long life mining operations, they have greater scope for expansion, and they are more likely to be taken over. They also tend to have lower unit costs, though higher upfront capital costs.
2. The prospect of reserve (production) increases: This is important because greater production offers the prospect of higher earnings through more sales, lower costs (economies of scale) and maybe even greater resources (i.e. lower costs extends the boundaries of the mineralisation that is commercially viable, particularly if gold prices continue going up - as they will). Any incremental production expansion is also very cheap since a lot of the original plant does not need to be duplicated.
3. Unhedged gold output (or moving towards unhedging): This is important because you don't want to hold a stock that is getting only $US600/oz for its gold output when the market price is $1000/oz. The decision to hedge is often thrust upon projects by investment banks who don't understand the metals market. Hedging - contrary to popular opinion - can prove to be the death of a mining company. e.g. Highlands Pacific. As prices move up hedgers have to buy back gold at >$US1000/oz, to buy back their forward hedges at say $600/oz, in the hope that gold will go to $US2000/oz (as I expect).
4. Large tonnage resource - a lot of gold resources are messy, and thus small scale, selective and high cost. These types of resources are much more difficult to mine profitably. Incidentally the times of gold deposits which offer the most consistent gold grades tend to be 'porphyry copper-gold deposits' along former or current continental margins.
5. Grade & access: The grade of the gold and its depth underground are other important issues. We would prefer to see the gold at depths of <100m for easy ore body access.
6. Gold recovery: Metallurgical techniques tend to be well-proven these days making the gold recovery relatively less important. It is normall for gold recoveries to be >88%, and as high as 98%. The best possible resources allow treatment by solely cheap gravity methods, say if free, nuggetty gold, but in most cases this is just a portion of the recoverable gold, so both process circuits might be required for the optimal recovery.
7. Stage of development: Gold projects vary in their development lead time from 2 years to 10 years; even longer if there is a period of stagnant metal prices. We would be interested in gold projects which are close to financing. This is a very hard time to raise capital, so we would hope that the equity contribution has already been raised and not spent sustaining exploration in these hard times, notwithstanding the value of exploration.

These are the most important factors. If you want further information, please refer to the eBook on selecting mining stocks. It will give you a greater understanding of these topics, as well as identify other issues. View the table of contents and save $20 on this book by paying just $US19.95.
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Andrew Sheldon www.sheldonthinks.com

Find & development cost for WA gas

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Reading a recent report for Buru Energy, a spin-off from the old ARC Energy absorbed by AWE Worldwide, I am inclined to think that the energy market is worth a sniff or two. The following chart is food for thought. It shows the find & development costs and revenues for gas discoveries in Western Australia (based on oil equivalent prices). The implication is that oil & gas prices have fallen almost to the level of baseline costs. This would of course scare off a lot of buyers, but I reflect on the collapse in equity prices and ponder whether its time to buy as a counter-cyclical opportunity.

Looking at the structure of the Canning Basin, one would have to conclude that the onshore area has potential, though it does remain relatively unproven in terms of prospectivity. My initial view would be that they would inevitably face competition from any gas pipeline built from northern Australia to Perth. Having said that, if such a pipeline was going to be built, you would more likely target the East Coast market given that there is an existing pipeline (half way) from Brisbane/Sydney to Roma. More likely still is a 100% focus in northern Australia on LNG exports. Why? Because northern Australia is very attractive as a gas supply point compared to less secure areas like Yemen or Oman. Australia is (less importantly given the scale of ships) is also closer to Asia.
Buru Energy might just have a lucrative opportunity in WA supplying gas to future gold mines as the gold price takes off. This company has cash reserves of $60mil, and its only capitalised at $40mil. Looks cheap to me! And based on a gas price at current costs, you would have to conclude that this stock has nothing but upside. The problem is that drilling of targets is not due until 2010. In the interim you can focus on gold. So for now I would just watch this one. I am more interested in the gas potential than the oil given the following economics and the history of discoveries from the basin.
Current production from Blina and associated oilfields:
Ultimate recoverable 2P reserves of all fields ~3 mmbbls
Discovered 1981 - first production in 1983 at ~1,000 bopd
Production of 30 bopd when Buru acquired the fields
Recent workover program increased production to +200 bopd
Energy economics:
Field opex ~$10/bbl
Blina oil production facility
Trucking costs to Perth ~$25/bbl
Current A$ oil price ~$65/bbl
Projected annual net revenue at 100 bopd rates ~$2.4 million

This is hardly attractive, but you can readily see that if they have an oil or gas discovery, this company is shaping up as a positive play. The Blina field highlights the potential, and this field is relatively untested. One to watch!
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Andrew Sheldon www.sheldonthinks.com

Intrepid Mines (IAU.ASX)

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Just a quick review of some mineral explorers given that the majors are starting to move up. The intent is to look for large tonnage project sponsors. Intrepid Mines does not interest me much because its Tujuh Bukit porphyry gold project in Indonesia does not host rich enough gold mineralisation. We will follow with interest.

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Andrew Sheldon www.sheldonthinks.com

Energy - Are 'hot rocks' so hot?

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Reading the PTR website you could be forgiven for thinking that renewable energy has a positive outlook and thus, it must be considered a good investment. I think there will come a time when it will be a good investment, but I would suggest that its a long way off. The attached figure comes from the PTR 'hot rocks' presentation on the 23rd Feb 2009. The company highlights the positive funding and licensing for this industry. The bad news however is that its going to come from major energy companies like British Gas/Origin Energy, Santos, and others. I can see in the medium term that investment in the smaller players is just going to evaporate. Maybe it already has because they are already putting their hands out for government funding. You might ask yourself is the government going to put money into renewable energy to stimulate the domestic economy. I would suggest that the Australian government is more likely to subsidise home insulation or wind farms than 'hot rock' technology. The reason for suggesting this is that the technology is tangible, the visual presence is far greater (wind farms on the horizon - so like as they are in Bourke's backyard), and it will create more jobs. I think hot rocks will get token funding so Kevin Rudd can appear green nevertheless. The presentation provided a list of all the current players in the industry:

1. Geodynamics 2. Petratherm (PTR.ASX)
3. Geothermal Resources 4. Green Rock Energy
5. Torrens Energy 6. Eden Energy/Terratherma
7. Panax 8. Pacific Hydro
9. Teck Cominco (Canada) 10. Granite Power
11. Gradient Energy 12. AGL (w/Torrens Energy)
13. TRU Energy (w/ Petratherm) 14. Tata Power (w/ Geodynamics)
15. ASX Listed International SX Listed 16. Tri-Star Energy
17. Clean Energy Australasia 18. Osiris Energy
19. Origin Energy 20. Callabonna
21. Deep Energy 22. Inferus (Southern Gold)
23. A-B-L-R Joint Venture 24. AAA Energy
25. Earth Heat 26. New World Energy
27. Near Surface Geothermal 28. Stuart Petroleum
29. Beach Petroleum

I have added a red line to the image above to highlight the probability that, as more money goes in, the corresponding share price for the remaining hot rock companieswill fall. The best prospects will be those companies which are able to affiliate with some major companies. The final result will be that they will be absorbed by those enterprises. The implication is that there is a lot of money to be spent before any of these companies realise a profit. The next 4-5 years is going to be a period of low energy prices which means there will be less justification for this greenfields exploration. There will come a time when the industry has appeal, though it remains to be seen whether any small player will be significant enough to justify an investment in this sector. The capital investment is significantly more than coal seam methane.
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Andrew Sheldon www.sheldonthinks.com

How to pick the best gold mining stocks!

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Picking stocks is an art form. A great deal of knowledge and experience goes into finding a good stock. With the gold market abuzz, it is important to be able to differentiate a good stock from a bad stock. In times of booms, like the current gold boom, there is a tendency for people to catch on to the latest stock recommendations from brokers or friends. The reality is brokers are sales people with vested interests, and friends can be just as blinded by monetary gains as the broker.
The challenge judging stocks through your own eyes is that lack of knowledge and experience. For this reason I have encapsulated over 20 years of skill and experience 'picking mining stocks' into a single eBook. You will have a tool to critically assess your friend's tips and broker recommendations. A rising tide tends to lift all ships, but we are really looking for a king tide. There is no reason you cannot invest in the best stocks. All you need is the skills to differentiate.
I started picking stocks when I was just 14yo. I would go into the Australian Stock Exchange in Bond Street, Sydney (now Bridge Street). At the time you could pay just 50c for mining data sheets. The good news then was that you could pay 50c and get a whole series for a particular alphabetic letter. Today you would pay 50c per page. The 50c was a lot of money to me then, so I'd stay in the library all day, going through all the stocks. It was so easy to pick them by this approach as the good stocks stuck out like a sore thumb. I did this on my school and university holidays. When I wasn't researching stocks I was working with mining companies. I had such a good attitude. I really was quite distinct from my peers. They might have been smart, but they were not street smart. Well not Bond Street smart! More like dope street smart! Anyway, read my eBook and find out how to invest in stocks and company options that will make you over 1000% returns.
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Andrew Sheldon www.sheldonthinks.com

Atlantic Gold NL (ATV.ASX) & Acadian Mining Corp (ADA.TSX)

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Another tip coming from a reader. Rest assured I have checked these stocks out myself, and you are free to do so. Atlantic Gold is an Australian gold project developer. It has a 1.8moz gold resource in Nova Scotia, Canada. The company has 228mil shares, which last traded at 5.2c, giving the stock a market capitalisation of $11.8mil.

The grades for this resource are not high, however the attraction is the capacity to process the ore through a nearby base metals mine 40km away. The net present value of these project options is around $CAN50mil. This does not strike me as great returns, though there is substantive upside from an increase in resources and higher gold prices. I have a bigger concern actually. Will not the operational viability of the gold plant depend on the processing of base metals. If the plant is designed for base metals now, one would want to be assured that the gold is processed through a completely different circuit as opposed to blending with the base metals ore. Actually I'm not so familar with gold hybrid processing plants. If they are separate streams, then it might in fact be an opportunity for ATV to purchase ADA in future to control the plant.

The charts show that both stocks are cheap, but I think the upside is short run for the foreseeable future. They need to clarify a strategy. There is a possibility of a merger between these operations, and perhaps between the companies. Not so interested in this play. Too many things can go wrong. eg. Processing, JV negotiations, exploration upside. The ADA resources are small satellite deposits making it messy mine planning. No way do I see them processing ore by the end of 2009.
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Andrew Sheldon www.sheldonthinks.com

How to pick winning stocks! Based on results.

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About 8 months ago I wrote an eBook titled 'Mining Fundamentals - How to pick winning stocks'. It encapsulates the ideas that I use to find the best performing stocks. Perhaps the greatest market myth is that you need a mining boom to make a lot of money from mining stocks. I will give you several reasons why this is not true - both conceptual and based on actual experience. Starting with the experience:
1. Before the recent mining book even started in earnest I made a great deal of money on Aquarius Platinum options. I purchased these for 25c and sold them for $8.75. When I bought them they were a $4mil company. In the mining boom they were worth as much as $4billion. But I had already made my fortune by 2000. I was living in Japan at the time. Platinum prices at the time were doing very well, but also management had a string of good platinum projects which South African (open cut) and Australians (platinum) analysts did not understand. Investors in London quickly appreciated the stock when it was listed on the Alternative Investment Market (AIM) in London. I made almost 3000% on the options in 3 years. You need to understand why. Decision making in financial institutions is driven by managers who invest in old, proven paradigms. If they ever had critical thinking skills they abandoned them when they moved into mining finance. I assure you stockbroking is all about making money, so you can understand why broking executives like proven stories. My former employer would introduce me as 'This is Andrew......he picked Aquarius Platinum several years ago'. I had become a 'bankable proven story'.

2. The other stock was Minotaur Resources. This was also a very cheap stock - capitalised at just $2mil at the time. It had even less when I bought it. Just a VERY large untested coincident geochem/geophysical anomaly in an outback Australian area where nobody had ever looked for base metals. What was more interesting was that there was a $4 billion mine (Olympic Dam) up the road. I bought the shares at 14c because the options were tightly held. In the week following I managed to pick up $6000 of options at 5c. I actually sold this stock too early. Several months passed as I anxiously waited drilling results. In all honesty I was VERY pissed off with the management of this company. They waited until they completed the hole at 729m before they released the results to the market. I'd lost confidence in that time and sold the 'spec' to pay for a NZ holiday with my GF. Upon my return the stock had raced to $2.40, the options around $2.20. On paper I should have been a millionaire. I contemplated legal action, but I also said that I can do this again, since this occurred in the wake of Aquarius Platinum. So this stock offered gains of 4300% odd in around 3 months. The project was eventually bought out by BHP Billiton.

The implication is that a mining boom is like a rising tide that lifts all boats. It is actually harder to find great bargains in a mining boom because even speculative appeal has a premium value attached to it. There are thousands of analysts employed to search for such stories. They have just lost their jobs. When I bought these 2 companies no one was interested in them. In a mining boom Minotaur (the explorer) would have been valued at $40-60mil, and Aquarius Platinum around $150mil. The future lies with investors who can see new paradigms - not old proven ones that no every mining analyst appreciates. In 2001 analysts in Australia did not understand platinum (as there was only Helix Res, which had no great results). In South Africa, analysts did not understand the benefits of open cut economics, or the coming platinum boom. For a year there were no buyers after I bought Aquarius Platinum. Minotaur was the same - no one was interested in exploration, yet that is the time when you should be, if you can establish credible evidence that they will be a future miner. Minotaur's first drill intersection was over 400m of 1% copper. No question that is going to be a mining operation.
Paladin Resources was another example. I actually missed this one, despite having looked at it. I missed it because I did not attempt to understand the uranium market 8 years ago. If I did I would have realised that there was no new supplies to replace the depleting weapons-grade uranium stockpiles. Instead I diminished the story thinking 'There is plenty of uranium'. The issue was however - 'Lack of operating mine capacity in an energy boom'. Plenty of resources, not enough capacity, and it takes 4-10 years to commission a new mine. Paladin did very well like the stocks above. Another more recent great story was Queensland Gas Co. In fact all coal seam gas producers have done pretty well but I liked that this company has the largest acreage close to gas transmission pipelines, but Arrow Energy was another good one. QGC is now being taken over by British Gas. So what is the next great story? I've got some ideas.

Stock analysis is a conceptual science which requires anticipating future events. The returns are greatest for those people who can see further and wider than anyone else. There is money in it. You don't even need people skills to achieve these results. But you need something else.... the right trading psychology. Issues such a patience, keeping information in perspective, assessing market sentiment can lead you astray.

For those who buy the report I will identify a number of stocks which will offer spectacular returns in future. There are 3 stocks which I have in mind based on the current market dynamics.

This is a good time to start looking!
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Andrew Sheldon www.sheldonthinks.com