How to buy spec mining stocks in the forthcoming market correction

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

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

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

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

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

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The nature of a good gold stock

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

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

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

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

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

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

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

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

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




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

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

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

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

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

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Acacia Coal (ASX.AJC) - turning point

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

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

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

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Gryphon Resources (GRY.ASX) - the 2nd rally in this stock imminent

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One of our favourite stocks has some into play again. Perhaps you have been following our stock guidance at our Facebook page. Feel free to ask questions on this page. I would however recommend buying our Global Mining Investing eBook, so that I'm not constantly asking the same questions. Buying the book means I only need to answer the rare question not answered in the book. These issues are answered in subsequent updates of the book. Our goal of course is to correct the failings of the public & private education system, which have effectively made students passive dependents, having 'dumbed down' their intellectual efficacy. By reading, absorbing and ultimately following our journey, our intent is to leverage people's intellectual development in a way where they can see personal benefits, whilst benefiting from personal support. I'm 'holding your hand' while we take this journey.
I hope you take this opportunity because its best to get in on 'ground floor'. This is actually our 4th journey. Some time ago I was telling people to buy:
1. Gippsland Ltd  at 6c, we sold at 1.4c
2. Union Resources - we anticipated a takeover at 14c, it finally came after 3 months, taking the stock to a disappointing 33c, for lack of alternative bidders.
3. Gryphon Resources - We like gold at this time. We traded GRY from 13c to 25c earlier this year. We waited for a support at 13c (last week), at which price we simply bought more. So we now believe we have seen a botttom in GRY. A better chart at 4Traders shows the trend (from a double bottom) even better.

The other reason to buy gold stocks, and we particularly like GRY, is that gold is close to its long-term support, as we explain on our Market Commentary blog.

Today, the stock was up 12% on opening, and we expect this to be another sustained rally. We hope you can follow the journey with us, and learn along the way. Only purchases of the $75 book will be offered further stock guidance. Rest assured its a great stock, but of course that is a risk you take. No investment is without risk. But its more risky to you than me since I understand mining. You can trust me; but 'faith' is not knowledge. The book is to 'manage risk', and avoiding responsibility to think is not a 'value proposition'. Governments and welfare states have a habit of disappearing. Those lessons are as old as Ancient Rome. So check out the following chart, and look back at our track record! All the best! 

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Clean Seas Tuna (CSS.ASX) - 7.5c an exit level

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After a solid rally to 7.5c from 1c, we would recommend taking profits on Clean Seas Tuna because:
1. Technically 7.5c is an important resistance level
2. The market cap of $56mil is very high for a stock to support
3. The company is destined to raise money at these levels, and expansion will mean delays, so expect dilution
4. Also expect artificial support to allow an underwriter of the issue to exit the stock

Great story; but only sustained earnings will keep them so...so don't be the sucker who surrendered all their profits. I'm expecting an issue at 4c support level, so expect them to pull back to that level. The underwriter has probably already been announced...but there might be a Japanese trading company or 'buyer' of product who is prepared to underwrite the issue. As we follow the Japanese sushi market, we were actually suggesting people buy this stock, as they had a shortage of sushi in Japan. i.e. Sushi is popular these days globally. 

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

Electricity grid stability - growing renewable energy production might require a grid stabiliser solution

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Occasionally Canadians ask me for advice on Canadian mining stocks. As it turns out today, I have a stock tip which might appeal to Canadians, though its not in mining. Previously I was a coal analyst, and one of my tasks was to work with a power consultancy, so I developed some understanding of power transmission as well as my background in coal-fired power generation. In addition, living in NZ I did a personally was commissioned to write a consulting report on NZ Renewable Energy, wherein I needed to learn about renewable power issues. Well, combine that with my love of Japan, and you see it gets interesting.
Japan is building a large battery power storage facility in order to accommodate all the renewable energy power generation in Hokkaido. Sumitomo is the builder of the facility, however there are other companies which do this. These can be very large contracts, and they can be dispersed around the country.
These battery facilities basically allow unstable, unreliable, volatile influxes of power to be directed into the battery facility, and modulated to the voltage of the main grid. The implication is that the 'irregularity' of wind and solar electricity supplies can be modulated before it goes into the grid. This ensures the ensure grid remains stable. These types of facilities will need to be built if renewable sources become significant. So Hokkaido is a centre of renewables, so they build a 'hub' there to serve private developers needing to export surpluses. An interesting issue is 'who bears the cost' of such 'ancillary plant'. In this case, it seems to be Tepco. Perhaps they are trying to recoup some credibility after the nuclear meltdown. But in Western countries, which like 'user pays', the question is whether people will accept it.

These 'Vanadium-Bromide' batteries have this capacity for being easily charged, recharged, of having good environmental credentials, and low-cost materials, as well as good cycle life. They don't have optimal power density, however they are among the best batteries around for this purpose as an industrial solution. Smaller countries are more likely to go for smaller batteries from a company like ZBB I suspect; though maybe they will manage their grid stability in other ways. The problem is perhaps the prospect of newer battery technologies. I'm pretty confident we will be looking at a 'technology leap' to carbon nanotube batteries in years to come. In any respect, for a speculative play, ZBB Energy Corp might make sense as a 'trade'. The company is trading at its lows now. If I am correct, and I don't know the specifics of the global market, then you'd think that grid stability issues are likely in those countries with variable wind and solar. i.e. Not deserts with no clouds, or in places with constant breeze, and not countries with no money, like the Pacific Islands.
Denmark and NZ are probable target markets for this type of development. NZ's population is not really growing though, so not there. Turkey, South Korea, China are possible markets. Look into ZBB. I've not looked at this stock for sometime. They were doing tests with some companies. Not sure where they are, or their target market. They were looking at 'container' size installations for regional markets. So it seems they feel the 'user' will be picking up the tab for installing these units rather than the grid manager.

Of course it remains to be seen if this is a sustainable solution given the slow lead time for these units. Are these a solution for households? I don't think so. I'd see more solar PV cells and wind turbines in future; but for a cheap battery solution offering greater power density, I suspect carbon nanotubes are 'the next thing'.

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

GRY to find support at 20c

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Gryphon Minerals is looking like a good turn-around story. I originally purchased these at 18c; they were oversold to 13c, at which point I bought a lot more. Now they have in the last few days reached 25c, at which point I sold half, because they were at resistance, and they were trading well-above their moving average. They did publish great drilling results, but the 'high grades' were 'consistently' over just 1-metre wide drill sections, so not so great. They look more impressive when the company averages them over a wider interval, but my thinking is that wider mineralised zones are more likely to be pervasive and thus 'continuous', or sustainable if you like it. This type of news is like an orgasm, so the response was analogous. Regardless, its a good company. On Friday they were sold down to 20.5c, where I had a buy order ready to re-enter the stock...here's why. Resistance on the upside becomes support on the downside. That is pretty strong resistance, so I expect it to hold. The fundamentals of the stock remain very good, even if gold price is vulnerable in the short term. The gold price is on the top-end of a down-trend, so I believe it will fall in order to test its previously established support, as well as giving further support to the long-term uptrend. That would offer another long as well as short term buy point. I'm in at 20.5c for short term trade, whilst retaining stock for long term.When you have supports like this; they can under-shoot, over-shoot, or touch the support/resistance. I like to buy some before, after the support. It touched on Friday, and it will probably do the same today. We might then expect a rally off that support. Just watch that gold price! Not to worry, long term looks good. If you are busy, don't place yourself in psychiatric ward by trading in lunch hours.

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

Good takeover targets among Australian ASX gold companies

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When investing one is presented with a barrage of information. The critical investor of course just doesn't passively accept the information presented, lest they be psychologically confounded by the volatility or eventual unsustainability of any investment. "The truth will set them free". In the process of learning to analyse stocks, you will of course confront articles like this on prospective takeover targets in the gold sector. Of course I should be writing articles like this, but since I'm busy 'spreading myself too thinly', probably like you, I'm destined to 'leverage' off their efforts...as you should be doing. I did write the following article about the makings of a good gold stock, so feel free to leverage off it.
So when I bring my critical eyes to their list of prospective takeover stocks, I do the following:
1. I look at the disposition of the stock
2. Look at whether it provides the optimal upside
3. Whether the premise of the author holds, including for all stocks

Now, the problem I have with this list is that 'cash' can actually be a bad thing. What is the point of having $200 million of cash on your balance sheet in a recovering market. Unless this company takes over something soon, its going to be paying too much for assets (to use that cash), or the flipside (if it doesn't), its going to be under-utilising its cash. If they are planning to get into production, I would prefer they use bank money and repay from project revenues, or from an equity raising at a much higher gold & stock price. For this reason, I would argue the following:
1. Focus Minerals is not a takeover takeover target, but more likely an acquirer. True to form, it has actually just acquired Crescent Gold in WA. Now, this does not preclude them from being a target. Of course, if they are an acquirer, then they are 'shifting' the nature of their business very quickly, which can be a source of vulnerability to suitors trying to catch up. I frankly think they would be too messy for a target. But if they are 'acquired', its more likely to be a merger (because of the size of their project interests), and that of course is not a hostile takeover, so no asset premium, no competitive bid...and cash is not required for their projects; but maybe for the partner's projects. Irrespective...its not an optimal exposure. Now, as an acquirer, with governments looking to increase tax, and costs so high in Australia, I'd be looking at Africa or Asia for acquisition. Got any clues? I suspect this company is well-managed because it seems on scant review to achieve targets. Its nice that they were able to raise $225mil from Shandong Gold at 5c, given that their share price is now 1.6c. Kind of weird that a Chinese company would decide to invest in Australian mines.Perhaps for technical expertise....but weird! Glad they don't manage my money. But then there might be some exploration promise in those resources. Its simply too complex company to understand (i.e. waste my time), and analysts will think likewise. Of course you can twist people's arm with a 'mine visit'. We all like to travel. Gets people out of the office. The company only made a net profit after tax of $7mil in the year, so market capitalisation of $147mil looks nominally low given their cash holdings. Clearly the Chinese think they can greatly expand resources. Clearly the market distrusts this company, its complexity, and did not like the dilution from the placement. I frankly think this is a good stock to trade.
2. Gryphon Minerals is a takeover target for a number of reasons. It is a substantial emerging miner, it has a large acreage position in Africa, it offers low-cost ounces, its largely funded for mine development, and its hellishly cheap. If the market was seeing the upside in the gold price, or at least the 'stability' of the gold price, as it consolidates for its next move, they would realise that the present value of their ounces in the ground is about a billion dollars. Not bad for a company capitalised at $90 million with $60mil in cash. This ignores of course there 2nd promising project in Mauritania, the upside from mine expansion, further exploration upside and the prospect of higher grade ounces being mined earlier to bring cashflows forward (i.e. Better net present value).
3. Perseus Mining (PRU.ASX) is another good company. I was a shareholder in this company a long time ago. This company is similar to GRY in terms of geological setting. It is more likely to attract the interests of major companies. Its project is appealing, so it will not have trouble raising cash, with some $63mil in cash (and bullion) like GRY. It similarly has a large acreage in Africa. The difference is the PRU is a 'miner' producing 250,000oz per annum. The project cash costs are quite high for the quarter at $US1100/oz. This gives a lot of leverage to higher gold prices, however since I don't see substantially higher prices for some time, I'd prefer an emerging gold producer like GRY, which will better time its development schedule to benefit from a gold price rally. The company has hedging in place, however its a small commitment, and I don't see it having any significant impact on earnings since it will be erased in the next few years. The big difference compared to GRY is the low average grade of the ore, i.e. 1.5g/t compared to 2.2g/t for GRY if I'm not mistaken. This however might be improved by further exploration.
4. Ramelius Resources (RMS.ASX) is a miner with a spread of interests in Australia. The company is capitalised at $135mil, it has $54mil in cash, however it suffers from the same problem as 'Focus' - a lack of focus.
5. Saracen Minerals (SAR.ASX) is a less appealing miner because of its focus on WA, the secondary pickings of its resource base. I would have some challenge trying to assess the commercial viability of the 19 deposits that make up its 4.1Moz. I do however note that its hedge position will prove 'unattractive' for investors looking for upside, but at the same time, it will prove financially lucrative because whilst gold can be expected to make rallies, technically, I expect it to go sideways for the next few years. The other problem is that, with just $13mil in cash and $22mil in debt, its facing UG development costs and capital costs. I'd prefer a simply proposition of 'all easily accessible' open cuttable ore, which is why I would give primacy to stocks like Gryphon. The final problem is the spectre of ore coming from far-afield to a centralised plant. You then have to wonder about the commercial viability of this ore. I think you could come away from a field trip without even knowing given there are 19 deposits. Analysts like simply propositions. There are good reasons for this - they will otherwise be buried in detail, but also its not very efficient use of time. Such stocks, as noted however, have value, but in the midst of a gold market recovery, you have to wonder if this is your front-line stock. I'm inclined to say no. Clearly the company is aware of the 'complexity' by arguing in their presentation that "although only the two key medium term projects of Whirling Dervish and Red October will be discussed in this presentation as they make up the bulk of the gold production for the next 3 years". The positive news of course is that they are actually producing. The latter considerations mean that Saracen is unlikely an acquirer or takeover. It will have its hands full with its consolidated interests in Western Australia. **
6. Resolute Mining (RSG.ASX) has a spread of Australian and African interests; so it can be considered a 'mature' example of what GRY and PRU can become. In fact, GRY and PRU are possible merger partners, or takeover targets for Resolute Mining. They are a low-cost miner, they again have a track record of acquiring mines (Noble Resources). They are good stocks, as 'acquirers', but also a reasonable target.
7. Silver Lake Resources (SLR.ASX) has gold interests in Australia. The share price of the company has collapsed in recent times from over $3 to just $0.95. The company is a consolidator of depleted mine assets; hoping to unlock value, as well as acquiring other underloved assets. I'm not going to waste my time trying to understand its plethora of interests. You might get excited about its cash in bank, but what if it was all committed to 'flogging a dead horse'. Apparent resources might well turn out not to be mineable. This is where I prefer virgin, single-operations. It is apparent that they are having to go underground to develop resources. That's another negative as you will need to appraise the amount of development needed.

What I think is an interest fact is the Resolute's Golden Pride mine is due to close this year in Tanzania. I would think there is some appeal in attempting to find an explorer in the vicinity of this mine which might offer resources to toll treat through this plant, or which Resolute can otherwise takeover. Let me know when you find that gem.

So in conclusion, we would consider Gryphon Resources to be the stand-out target for a takeover, by Resolute or a Canadian company, but possibly just a farm-in by a Chinese company with money to throw around. There is also the prospect of another pan-African resource house being formed from PRU, GRY and/or RSG. PRU is also a target, but perhaps not for the next 2 years, as gold prices consolidate (i.e. range trade). There will be good rallies in this stock to trade though because of its thin margins (i.e. low grades).

My apologies for not looking further afield for prospective 'targets'. I personally want to research more emerging miners. By all means email me if you have any ideas.** Prior to this edit, I implied that Saracen had interests in Indonesia. This has since been corrected. I was distracted from researching this particular company.

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The outlook for Gryphon Minerals (GRY.ASX)

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Gryphon Minerals (GRY.ASX) moves inextricably closer to financial closure on its gold project in Burkino Faso, Africa. The company is looking at 150,000oz per annum of gold production, and the timing could not have been better, which is why the following chart should give people guidance on buying for a technical break-out. This pattern is called a descending triangle, or a descending wedge. Which way will it break? Well, I'm confident it will be up, but let's do some maths:
1. Gold price consolidating around trend lows - upside here
2. Emerging gold producer deserving of a re-rating - after all, its $5/oz of exploration expenditure will turn into $500/oz of possible revenue - at least (depending on the gold price). All this will be mined over 15 years, so you need to apply appropriate present value calculations, so let's say conservatively $200 present value of gold for 4mil oz. That's a present value of $800mil for a $64mil company...and there is a lot of upside in resources, production schedules, resources, the positive exploration in Mauritania.
3. Low-cost gold production - surface mining, some high grade material, competitive low-cost labour in Africa.
4. Positive gold fundamentals - Very low interest rates, high asset prices (property, equities), QE-parties at the Fed, high debt levels, stagnant markets
5. Possible increase in gold output
6. Possible merger to give greater industry profile, i.e. Takeover by Kinross Mining would be an example, to create Pan-African miner.

From the following chart it is apparent that support is at 15.5c. My advice is - don't be greedy and be prepared to pay 16c, and if they go to 15c, then buy more. Now, is there any reason they could go lower, as I've indicated in the chart. Well, they I neglected to mention that they have cut costs to conserve cash. Its possible the recent poor trading conditions and inflation have undermined their cash balance, but they still have $52mil in cash, investments, a Mauritania gold project they could farm-out, and a large resource which will become 'bankable' in coming months. So I see no reason for dilution for the next 6 months. By this time, we will probably see some upside in gold prices, and some project developments. Based on this chart I'm expecting a break-out in mid-late September 2013. A nice rally in gold off base line lows will of course be a game-changer, as this company is precisely the type of target that those 'aggressive' mid-range fund managers like. There is already one on the books based in London. 

Source of chart is Google Finance; but my chart interpretation of the 3mth chart.

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Beacon Hill Resources (AIM.BHR) - great stock for UK investors

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I used to work as a coal market analyst, so I have a good idea of coal stock dynamics, even if I have been out of the industry for some time. I would therefore argue that I have found a good coal story for everyone. The stock has appeal for several reasons:
1. The stock holds a very large coking coal resource in Mozambique
2. The company has a 0.5Mt rail allocation, though you can expect this to expand as rail loops are added.
3. There is a bottleneck in the port - which allows only 2Mtpa for non-major users. Not sure how that allocation will be assigned. I will need to find out....so you will have to ask me. But rest assured the Mozambique governments wants to build exports. Its just a question of time.
4. The stock is listed in Australia and on the Alternative Investment Market (AIM) 2nd board of the London Stock Exchange (LSE).

Unquestionably I would have some stock in this if I was a resident of the UK. The stock's name is Beacon Hill Resources (code LON:BHR). I'd argue this stock has been oversold. The ultimate target market for this coking coal is India, which has a robust steel industry. Its a nation that relies on Australia for premium coals, so I expect them to be able to get some lucrative contracts there. I suspect you can probably expect 500% profit, but given the industrial market it will take some time. Its actually a great stock for your super fund. Indian coals are very high in ash, not good coking properties. The coke index of this coal is high - around 9. Indian producers will no likely want to diversify away from Australian dependency, i.e. after floods, but most importantly to turn those pesky Australians into price-takers.

Unfortunately the market for this stock in Australia is too illiquid. The price in Aust should be 5c. but few shares listed there, so its around 11-12c. So if you are a UK resident, this stock is a great story. The company has cash of $21mil after recent raising and its 1.5bil shares are capitalised at $36mil. There is some risk I suspect with port access/allocation delays, but not a major issue for patient shareholders. Logistics can be an issue for coal companies, though I don't think it will be an obstacle for them to move to 1.5Mtpa of saleable coking coal. They will likely stockpile a high-ash 'waste' thermal coal for use as domestic power station feedstock, however I believe that is merely a plan at this point.
News in UK - see here

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Gryphon Minerals (GRY.ASX) - great time to invest - but you can also trade it short term

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Some time ago we recommended Gryphon Minerals (GRY.ASX) as a short term trade. This stock however is a great story, and given that gold is so 'cheap', we suggest that today is the day to start accumulating stock. The reason is:
1. The 'bottom-up strategic value of a great corporation described in my previous blog.
2. The absence of downside - the company at 13.5c is capitalised at $52mil - the company has $62mil in cash, not to mention 4Moz of gold in the ground conservatively worth $2-3billion depending on the gold price. This is a great company, so there is no reason to think its not going to get finance, or be able to produce gold. What were you told about risk is inverse to return, and that 'small companies' are risky....its nonsense. Risk = ignorance. Understand mining and you understand how to make money. Mining is an industry that will never go away....not as long as your bastard kids keep breeding and wanting ipads (aka tantalum, copper, nickel, tin, aluminium, et al).
3. Gold is near its historic support levels - the market will know this, so don't attempt to pick the bottom with your only trade. Find 3 trade entry points, and stick to your plan. So what is the low in gold prices - check this chart - you will see that gold is looking at a retracement to $1090/oz. Now, the global markets have today as much debt as they did after WWII. Now, that's ok because markets are destined to be debased by inflationary Quantitative Easing, which is going to cause a recovery in gold.

This is the plan. If you see a significant collapse in gold prices below what I've saying, then you should sell your shares..but not too cheap because they are trading at below cash value already. Its kind of what you might regard as a 'win-win'. Mind you in the process of writing this, they are now 13.5c buyer..but you will still get a chance, as gold is still $1200/oz, down $40/oz today, but its still got to go to $1090/oz, right!

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What makes a good and bad gold mining stock

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A recent reader of my Global Mining Investing book asked me whether an investment in A1 Consolidated Gold Ltd (AYC:ASX) made sense as an investment. He was 'on the fence'. In this instance, I was a negative for a number of reasons:

Given the name, I knew this project was going to be in the Victorian goldfields, and to be fair, there are some risk avoidance considerations built into this points, but fundamentally, this is not the first place to invest, even if you were to make money. We don't just want to make a profit. If there is a gold boom, we need optimised exposure, or the most upside, so if our gold price forecast is wrong, we still make money.

The problem I see with this company is that they offer:
1. Marginal grades of 5-6g/t for underground mining
2. Risk of under-capitalisation - an upset could cripple them, with a lot of share capital dilution. This project might have a roof collapse which sends them bankrupt, or just results in a great deal of delay and dilution. The boom could pass you by whilst you wait for them to raise capital and commission a mine.
3. Messy small scale 'selective' mining - so they will unlikely get many ounces of gold without a lot of development. Basically you have to mess with a lot of waste to get ore, even if its higher grade.
4. Small companies like this tend to attract less capable geologists who can't get work elsewhere. In fairness, Victoria is a better 'lifestyle' place to work than WA, so this criteria is offered for guidance only. These companies tend to use outside consultants who can be hard to procure in 'booms', which is not currently a problem, and not likely to be so.
5. Seems to be low resource - There is not the type of upside offered as say a mineral explorer in WA.
6. Risk of discontinuous, unrealiable, pinch & swell ore zones
7. Risk of nuggetty gold - This distribution of gold is notoriously hard to predict grade, which means the project will not be trusted by banks, and investors until bulk mining performed, by which time, the investor can only waste for the 'tragic news'. Too risky.
8. UG - better to be surface - I don't know how deep the mining is, but why bother with UG when there are plenty of cheaper gold resources in Africa under-loved. Now, GRY has just struck 4m @ 35-45g/t, and has $62mil in cash and 4Moz of gold besides. So this type of company sitting on a small resource does not make sense.
9. Better to be in Africa with large tracts of land where you find a resource then, like GRY, you find ore 45g/t, then you prioritise that. GRY has probably 100km of prospective strike length to explore...plenty of scope for gold discovery. In Victoria, they might have large tracts, but is it all prospective? Even so, there has already been a great deal of exploration, so less prospective.
10. They are too early stage. They only have a few hundred thousand ounces. Gold is under-loved, so there are even miners like Millenium (MOY.ASX) which are better buying, since its producing. GRY is even better, even though it is not yet mining.

I suggest lookin for companies pursuing projects hosting more favourable geology like Archean type greenstones which are under-explored (Africa, outback Aust & Canada), or porphyry copper-gold projects (Central Asia, Latin-Sth America, PNG, Ring of Fire cordilleras), or skarns, as they are the best propositions.
Vein type deposits won't give you leverage for your money. I like North West Resources (NWR.ASX) - antimony/gold, but still its too small scale, and again its under-capitalised. You might invest them when everything else has moved. These types of companies are left behind....last ones to go in the boom.
Anywhere in African greenstone beltsAlso PNG, Latin-Sth America, Central Asia cordilleras is good too

Investing is strategic. Too many geologists get caught up in 'interesting geology'..much to the annoyance of executives. Mining is about making money...not looking at fascinating rocks. Academic universities like Macquarie University tend to instil these non-commercial values. Fortunately I learned how to make money before I went there.


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Investment advice in a stagnant market with currency debasement - go where the currency is 'hard and fast'

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An old colleague asked me for some financial advice...

Sheldo, I notice that you post a lot of news about the ASX, shares and investing? I am currently unemployed (6 months) yet sitting on some funds from a recent inheritance. I wondered if we could start some dialogue on how to invest money without losing my house and then my balls!!!

Do you intend to learn during your hiatus, or do you just want to outsource funds management? The reason I ask is because I write books about 'active investing', not passive funds management. So I can recommend a stock, but I'd prefer you to get the logic. This is philosophy to me, not just making money. I say 'Risk is managed, not avoided'. So rather than say 'I'm unemployed', I'd prefer you to say, "I'm going to study how to invest' or manage risk..which I say is growing knowledge. To which I would respond, buy my book at www.miningstocks.sheldonthinks.com and I'll offer support as you develop your knowledge. If you don't need some of this money in the next year, today is a good day to buy GRY.ASX at 20.5c. Say $10K worth. If gold price goes as low as $1000/oz, then just build the position. Gold has upside to $2400/oz last time I looked, but given the Dow it might be more like $2800/oz. I think you will know very soon if gold is going to break that $1380-1400/oz level. The US govt says it will end QE. Either way, you have upside. Understand I want to write books, and I write books to sell. Its counter-productive to 're-write history' so to speak...but if you read the book (450pp), and come back with issues/questions, then that is a basis for me to revise the book, and you need only ask me for free updates, or I'll send them. Fair deal. The book challenges 'Modern Portfolio Theory' so its interesting. More importantly, it gives you 30yrs of investing experience in one place which you can share with your children...or are you really gay, and are just coming on to me? :)

Now, the other aspect of what I do is advice people on another type of investment, and that's emerging market property. I am going there in a week if you care to join me. That's the Philippines. To advise that, I need more info. Again this is active, and its probable I would suggest a condo in Manila or outside of it....depending on how much money you have....he...you might have inherited a shoe box of love letters. You'll need to pay cash, so you might prefer to wait until you have a job, depending on your savings. I'd need to look at forex rate as well. But your property portfolio there is a source of leverage. I have a $20 book for that.  A little dated for politics and finance context, but still good buying.

Basically incomes & rents have been rising in the Philippines along with property prices, so yields still good. This is because of lower interest rates, high rates of urbanisation, high 2% birth rate, high remittances to the Philippines. You can make it partially a lifestyle property as well. Sit next to me on the plane and we can yatter on for the 10 hour flight. 

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Why you don't need a super fund - Gryphon Minerals (GRY.ASX) prove the point

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Now, some of you are probably deciding whether you should go to university and study business or accounting. I can't criticise that since I studied geology and mining engineering, but I also studied accounting , finance and economics. At the end of the day, economics and accounting are not very useful sciences without much 'life experience'. Accounting at least gives you some capacity to 'quantitatively' appraise a stock. But the type of stocks that are suitable for quantitative appraisal are simply not very interesting to me. The reason is that financial ratios are not conceptual or for that matter contextually. They are well-suited for a diversified portfolio of assets. Why would I want to tie myself to others portfolio of assets when as a small investor I have the flexibility to invest in 'best offerings'. This is the 'liquidity trap' of super funds. They cannot so readily invest in small companies like you or I, so in a sense, they present a conflict of interest for small investors like you or I. So why would you diminish your investment returns by committing yourself to low-yielding big companies which offer the liquidity they demand? Good question.

Consider the following stock - Gryphon Minerals (GRY.ASX) - its up another 5% today, though they did fall 10% on opening because gold softened $20/oz overnight. Clearly the market is expecting some consolidation in gold, and not a collapse. Gryphon Minerals will be a substantial producer when it commissions its mine in about 12-14 months. No further capital will be required I suspect given they have their 30% equity in cash. i.e. $62 mil of the $200mil capex. Maybe they will want some extra cash for working capital, but I wouldn't expect a heavy capital raising, and it will be well-supported by institutions, who are making their way onto the register as we speak. i.e. Genesis, a London based fund, with a similar investment strategy to me, is already in there...great minds think alike. 

Historically many funds, which unthinking mortals tend to passively outsource their money to, tend to take position in stocks as I'm selling out. Interestingly, the reason is the lack of liquidity of these small stocks...as I mentioned earlier. Yes they wait until the share price goes up and adequate liquidity arises. Kinda silly right? I've already made 200-300% before these funds invest. I personally think investing is 'supremely too much fun to pay others to do....but you have to learn to love it...otherwise you are motivated by fear, and end up hating a bank. That's not sensible...not that they do not deserve your derision. I prefer to love their idiocy. 

Of course Gryphon Minerals have far more liquidity than some other stocks that I support; like UCL Resources, which is another stock I recently invested in, which made a 200% return after jumping as much in a single day, thanks to an anticipated takeover.

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Gryphon Minerals (GRY.ASX) breaks from downtrend

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Gryphon Minerals (GRY.ASX) were up 20% this morning as investors returned to gold stocks. We have liked this stock for the last few months because of the upside, its gold exposure, its project interests and its cash position. At the very least that resistance will become support, but it remains to be seen whether it will be tested.

Gryphon promises to be an appealing gold producer in just over a year thanks to its proven and inferred resource base in Africa of over 4Mil oz. The company is cashed up with $62mil, which means that any capital raising is destined to be to finance its other exploration efforts, i.e. Non-substantial. The implication is the prospect of very little dilution from your current equity exposure to $5.6 billion of gold, equal to around $2.4 billion in cashflow over the life of the mine. Converting that into a NPV and discounting for a number of risks, you might expect this company to be worth around $1 billion....before consideration of the commodity (gold) price risk. But this company, which will justify a market capitalisation of $1 billion in a year (after successfully commissioning its project) is worth just $90 million today. So investors seem to be pricing in a gold price of just $800/oz. Given that gold prices rose to the equivalent of $2400/oz in current dollar terms in 1980, you might wonder why markets are so conservative. The reason is of course the spectre of 'global growth'. The argument is that gold is appealing as 'hedge against inflation'.
The deflationary global labour price disparity means that inflation is well under control; at least the type reflected in food, oil, and general product prices. Of course those types of 'speculative investment' assets are not included in this calculation, despite being 'products'. i.e. Gold is a product too...but given that it offers no 'yield' and 'has little industrial use', it is actually the last store of value to rise in value. Gold has been strong for two reasons:
1. All other asset classes are priced higher
2. Gold prices are appealing given forecasts of where gold prices are expected to go
3. The outlook for yields on other asset classes is deteriorating

Now, with interest rates at very low levels, clearly bonds are abysmal investments. This is one of the biggest markets, so you might ask whether the very small gold market has appeal, and of course the answer is yes, simply because any rise interest rates will undermine equities. i.e. Rising bond yields will not help their value, so gold is still appealing. This is ultimately why people are sceptical that the global outlook is positive. Growth until now has been restored through monetary 'QE' stimulus.

So, reflecting on this, we are inclined to see the recent sell-off in gold as either 'technical' over-selling, or manipulation of the market, so that market pundits can acquire positions. We actually expect gold prices to perform even better, and we also expect several other positive events for Gryphon Minerals:
1. Takeover by another African producer wanting to diversify with pan-African risk
2. Expansion of resources given its large acreage along structural corridors
3. Doubling of gold production - this will bring forward cashflows, reducing the applicable discount factor

4. Development of other project interests - no appraisal has been made of these interests given the already substantive upside.

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Shift from Millennium Minerals to Gryphon Minerals (GRY.ASX) - nice upside

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We have just seen a rally in the gold price and a corresponding recovery in gold stocks. I took this opportunity to take some profits on a small producer, feeling that it had got ahead of itself, and had room for a correction. There was no strong reason for the pull-back in gold. It was technical to a point; and thereafter it was manipulation by a fund to lock in a low price. The strong factors for gold:
1. Very low interest rates - negative real rates
2. High asset prices based on yields
3. End of US stimulus; addition of Japanese stimulus
4. Iran and North Korea as potential issues

So my trading action today inolved, based on the following charts selling MOY.ASX because its a gold producer which has rallied from 1.5c to 2c. Now, in fairness, it still has upside, but in the medium term its earnings are going to be curtailed by the terms of its JV agreement with North West Resources (NWR.ASX), where it will be splitting the revenues. This will diminish earnings. The chart suggests a pull-back to 1.7-1.8c, so I'll expect that.

In the meantime, another one of my favourite stocks, Gryphon Minerals (GRY.ASX) has pulled back considerably in recent times. This stock has significant appeal because it will be a low-cost gold producer. It has 3Moz and a lot of upside. It will of course benefit from low interest rates, and a subdued market to commission a plant, and it is destined to report a revised resource in the next quarter, along with a decision-to-proceed with a mine. The more Iran and North Korea beat their chest, the more one is inclined to expect some imminent action. These countries will not be allowed to develop nuclear weapons. The implications are clear for global monetary policy. The company has $62.8 million in cash, so given the need for 1/3rd equity, it has essentially enough funding to finance the $200mil capex for the plant. It is envisaged to produce 150,000 oz per annum for 5 years, at an average grade of 2.38g/t.
The financial analysis of the company suggests a net present value of $321 million for a rather conservative $1500/oz gold price. Even if you accept the $121million NPV based on a gold price of $1300/oz, you'd have to concede that this is a good investment given:
1. The conservative case gives you upside in terms of economies of scale, i.e. plant expansion and more gold discoveries in the 1200km2 license area.
2. The positive exposure to gold at a time when there is an imminent risk of military action and Quantitative Easings (QE).
3. The company has $62million in cash, a resource base of 4Moz (worth $2.8 million in undiscounted cashflow). The company is capitalised at just $84million, giving the project only a nominal value of $20mil.

The added upside is the prospect of a merger with a similar sized Canadian or Australian producer with the intent of raising the profile and liquidity of the stock to fund managers, as well as diversifying sovereign risk, only adds to the appeal. The prospect of only minimal capital dilution in future as well as the resource upside and exploration appeal is truly good value. The company also has other projects it could divest in future to raise further cash. More likely is the prospect of using mine cashflow to expand these projects. I like this company a lot, so I just bought more of them at 20.5c.

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