The outlook for specs

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A reader has asked me my opinion on the outlook specs, given the current weakness, and its significance. A great many people have been surprised by the weakness in the specs, given the strong performance of commodity prices. I have already stated some reasons why specs have not risen, but I summarise here:

1. Higher gold price: There is a tendency to value gold in USD terms because for traders commodities are denominated in USD terms. The USD is however not a fixed, tangible value like commodities. We can see from the gold price has gone up in real terms from the following chart, but the increase in the USD price is mostly because of a weaker USD. In terms of pounds, yen, the gold price has moved less significantly. But rest assured its going higher.

2. Project delays: The spec end of the market tends to rely more on outsourced consultants to get their projects prepared, so they need to sit in queues whilst their contractors deal with other clients. Consider the fact that a lot of geologists become traders, fund managers, investors in times like these because they have wives who don’t like to work in the bush, and certainly not PNG. Others go off and set up their own companies. Same for consultants, so labour markets are tight. Large companies have the capacity to pay more, offer higher benefits because they have the cashflows and larger projects. They are more inclined to have their own drilling rigs on-site.

3. Fund manager criteria: Fund managers tend to have minimum criteria in terms of liquidity (trading volumes), market capitalization, project diversification, which eliminates a lot of the smaller stocks. They want to hold a ‘significant amount’ of stock, and a great many specs have disappointed, eg. Gleneagle, Highlands, Perseverence, Lafayette, Bendigo just to name a few.

4. Role of commodities trading: Two years ago I attended a commodities trading seminar in Tokyo. At the time I heard very little criticism of commodities trading. Why? The market is volatile, so its easy to make large gains quickly (or lose). There is no project risk. It is a new market for fund managers, but in the current market, the ‘China factor’ and weak USD, this activity is booming. They can trade options, futures, CFDs (contracts for difference) and spot indices as well. The implication is that this trading is dwarfing trading activity in the physical market, even in the more liquid markets like gold, silver and copper. Lastly, commodities trading allows you to get the same volatility as specs using leverage. No project risk, and less specific information. Its very easy for a fund to set up, without the huge research department filled with analysts to cover stocks, let alone small spec stocks. In that context its easy to understand the lack of interest.

5. Investors: The spec investor has disappeared to some extent. Increasingly moms and dads are taking the low-risk, low maintenance route to wealth/asset management, and are placing their funds with investment funds. Banks & financial planning are huge growth industries.

6. Stock valuations: I don’t think you can simply say that stocks are cheap because they are trading at discounts to cash backing, if you consider where the funds are going….that is exploration, which is unlikely to see some value for years, and given the risk, its more likely to turn to nothing. It is not a good idea to invest in specs without a good understanding of the project merit. For 1st phase exploration I would only invest if their first hole gave >50-metre intersection of 5g/t, as I might then expect further excitement in the stock. But only if it was close to the surface, and I would tend to trade the stock. A narrow, high grade intersection might also appeal, but I want to see >40g/t and proof of continuity, or a series of such lodes. More likely I will want to see more evidence. I am going to feel more secure if they have indicated reserves, because we are closer to financial closure. There are a great many cheap stocks like that. But yes, quality specs are cheap, which is why I recommend buying.

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Andrew Sheldon www.sheldonthinks.com

Silver Mines Ltd (SVL.ASX)

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Silver Mines Ltd is a stock to keep a watch on. There are several reasons why I like this stock. There has been very little modern exploration in this area of NSW for silver, and the Mole Granite area in particular. Most silver exploration in the area has focused on the Drake area, and to some extent around Hillgrove. The company is testing a number of anomalies but activity will centre on the Webbs Consol mine. This project is speculative at this time despite the VERY high grades received. The other positive aspect of this project is the VERY high grade would easily justify the trucking of ore to Texas, Qld (just 40km away) to Macmin's operating mine.

Given that I expect silver prices to perform at least as well as gold, and this project need not require any significant mine infrastructure, and will be a very selective high grade operation, as soon as this project demonstrates continuity of high grade ores to 200m, I would be inclined to jump on this stock, as you can be sure a toll treating arrangement with Macmin would not be far off. For more info see Google Finance and my stock forum.

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Andrew Sheldon www.sheldonthinks.com

Abra Mining (AII.ASX) - Another promising base metals project

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Abra Mining is shaping up as a very promising lead-silver project in Western Australia based on drilling results to date. Consider the following drilling results which suggest the wide zones of mineralisation are broadening into several wider zones at depth.

AB50 - 37.0m @ 4.3% Pb and 19.6 g/t Ag from 296.0 metres and 273.1m @ 6.2% Pb and 5.3 g/t Ag from 374.2 metres

AB48 - 155.0m @ 5.2% Pb and 21 g/t Ag from 266.0 metres
AB47 - 93.0m @ 3.1% Pb and 4.1 g/t Ag from 502.0 metres
AB45 - 89.3m @ 2.5% Pb and 5.4 g/t Ag from 355.7 metres, 76.0m @ 4.1% Pb and 7.9 g/t Ag from 487.0 metres, 56.0m @ 3.4% Pb, 14.9 g/t Ag, 0.4 g/t Au, 0.3% Cu from 612.0m and 37m @ 0.5% Cu, 0.7 g/t Au and 6.5 g/t Ag from 670.0 metres

Based on these drilling results it seems somewhat premature for Abra to seek a joint venture without further testing the resource. It would have been more prudent to test the resource further to the north (Area 2) since they could be sitting on a resource as significant as Broken Hill. A JV agreement was reached in Dec'07 with Hunan Nonferrous Metals Holdings Group Co (HNG), which allows the HNG to receive 10mil stock at 34c - close to the current market price - plus a further 10mil stock options at 39c upon executing the JV agreement. Wow! I dont think I have ever seen such a generous agreement in favour of a farm-in partner. Shareholders are about to lose alot of value, in what was otherwise a company-making project. The back-end of the deal is reasonable, but I wonder what measures have been taken to prevent HNG just satisfying itself with its 10mil shares at a good price. AII might find itself diluting project equity with other partner. Poor consideration of contingencies by my thinking.
Should HNG step up as expected, it will fund all exploration activity through to feasibility study, as well as fully funding the capital development through to production. A 6Mtpa treatment plant is envisaged. HNG will be able to recover a portion of its costs from Abra's share of mine revenues. HNG already has interests in Australia since its involved in developing the Browns Base Metals Deposit in the Northern Territory with Compass Resources.

Fortuitously Abra & its JV partners control the total 60km strike length of the Jillawarra Sub-basin, which hosts the main Abra base metals deposit. In the adjoining Jillawarra JV, Abra can earn a 70% interest from Apex Minerals (another favourite stock) by spending $1.35million. After a recent capital raising AII has $4.5mil in cash. Abra has 130mil shares on issue at 32c worth $40.5mil. The stock is currently trading at support, however should that support break (as I expect), then the stock is likely to fall to a 25c support. Despite the free-carried nature of this agreement, it will take Abra some time to develop this deep underground mine (600m+), so Goldstream Mining likely serves as a good model of how to trade this stock. I think it will go sideways for at least the next year with rallies between 25-45c based on previous support & resistance. So I see this stock as a buy at 25c.

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Andrew Sheldon www.sheldonthinks.com

Another good week to buy

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Based on my Market Commentary I think this week is going to be another good week to buy mining stocks, particularly the specs. I have been reflecting on the reasons why there is a disconnect between commodity specs and commodity prices. Put another way - Why are commodity-based spec companies, whether small or emerging producers priced so low when commodity prices are at record highs.
I have come to the conclusion that its:
1. Asset deflation - specs are more exposed to sell downs because of the lack of liquidity
2. Projects are less tangible - In a credit or confidence crunch there is a rush towards tangibility, even though gold is high, gold equities are still not held. Risk premiums are under threat, demand is in question.
3. There is little good news - just commodity prices are strong

The implication is that - at some point commodity stocks will do very well - and those companies with large resource inventories will do particularly well. I am expecting the Dow Jones to weaken this week, but I think it will recover to 12,000 points. See my Market Commentary.
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Andrew Sheldon www.sheldonthinks.com

Azure Minerals (AZS.ASX) - presentation

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Azure Minerals will be presenting at the following AMEC Investor Briefings:
1. Adelaide - Saturday March 15th at the Stamford Plaza Adelaide at 11am presented by Anthony Rovira (Executive Chairman)
2. Sydney - Saturday March 29th at the Sydney Harbour Marriott at 9:35am presented by Patrick Manouge (Exploration Manager)
3. Melbourne - Saturday May 10th at the Melbourne Marriott Hotel at 12:20pm presented by Anthony Rovira (Executive Chairman)

The invitations for free registration for each city are located on the homepage of the Azure Minerals website - see www.azureminerals.com.au.

This company has some attractive project interests, though I do think they are a long way from earnings, so premature to buy them. But just its a good opportunity to learn about the company. Need to kiss a few toads to know what a princess looks like.

Gold Aura (ASX-GOA)

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Some time ago I recommended Gold Aura (GOA) as a speculative buy on the basis of its Croydon project. The potential remains, but has been somewhat diminished by more recent results. The suite of minerals and grades returned are attractve, though the ore widths are narrow and at considerable depth. A great deal of money would be required to outline a target, so you can place this one on the 'warch and see' list. Further information at Google Finance and my discussion forum.

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Andrew Sheldon www.sheldonthinks.com

Gryphon Minerals (GRY.ASX)

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Gryphon Minerals is a high calibre gold stock with a great suite of projects. I suspect for the near-term this company will not perform well. It still has alot of work to do on its projects, so I can see alot of dilution ahead and slow progress. For this reason I am inclined to suggest investors wait on the side. There has been some very positive exploration results, but given a value-comparison with other stocks, Gryphon looks over-valued, so I would not be surprised to see it fall back to the 38c support. They do however remain cashed up with $5.2mil in the bank. Some of this will need to be spent moving to 100% equity in their flagship project in the West African state of Burkina Faso. See Google Finance for more info and my discussion forum.

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Andrew Sheldon www.sheldonthinks.com

Macmin Limited (MMN)

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Macmin wshould be good for a trade at the current support level. The company is the only pure silver producer in Australia, and with silver prices at record levels and heading higher, it would have to be compelling reason for a rally. This mine should have a future given the outlook for silver, but I question whether the reserve base is there. Clearly they do as well since they have just raised $20mil. The company also has a 14% stake in New Guinea Gold Corporation, a TSX-listed company which holds various gold-Mo interests in PNG. Looking at the tenure of the exploration results to date, they really need to go out on thin limb. But there might be a good rally in them yet.
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Andrew Sheldon www.sheldonthinks.com

IMX Resources (IXR), previously Goldstream Mining (GDM.ASX)

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IXR Resources, previously called Goldstream Mining, has always has a suite of world-class assets so its surprising that it has over the last 8 years that I have known the company, they have done very little with them. Part of the problem I think has to lie with the executives, and there seems to be some recognition of that because the board has had a reshuffle in recent times. I'm not aware of the problem, but I suspect that their JV partners did not have to meet financial commitments, so they placed a low priority on their projects. There has long been a complaint about South African companies tying up resources...maybe this was a contrived arrangement to do just that, a scheme that would satisfy those wanting 'Black Empowerment'. I dont know. Performance is what matters, and they haven't delivered. In a mining boom might we expect a better board?

Well the company is being restructured as IMX Resources, and they intend to farm-out their iron ore project to a Chinese company to establish a cashflow. They intend to retain their listed investments, which are worth around $US85mil"
1. They have 39.5% stake in Uranex (UNX.ASX) - a uranium explorer
2. They have a 51% stake in Continental Nickel, a Toronto-listed company (TSX:CNI)

IXR has some 164mil shares on issue at 57c worth $93mil. The implication is that the company is trading at the value of its listed investments. The board makes the argument that these assets are worth more to shareholders in the IXR Group - clearly that is not the case since these listed securities are worth $85mil according to the latest presentation (check figures), so its great assets are worth $5-8mil. Mind you one of the stocks is vendor securities - so they can't be sold for 2 years (that would be newly listed Uranex). As you can see from the chart volatility IMX makes for great trading. I would be inclined to recommend it to investors as well at this point because of the low value places on the projects, and the fact that one is getting close to development.
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Andrew Sheldon www.sheldonthinks.com

Glengarry Resources (GGY.ASX)

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Glengarry Resources (GGY.ASX) is perhaps one of the best stocks I have some across at an exploration stage for some time. They are delineating what looks like a very attractive orebody. There are a number of attractive features:

1. The width & consistency of copper grades

2. The high grade intersections they are making - makes me think the original inferred resource will be upgraded - by 40 to 60% - but thats a guesstimate based on the drilling results.

3. Mineralisation close to the service - This will make it easy for them to mine this orebody by openpit, and later sink a decline to chase the main ore zone

4. The occurrence of moderate grade molybdenum at depth, with the positive news that the grades are increasing. One of the deepest holes recorded 35m at 2.09% copper so the mineralisation shows no sign of abating at a depth of 200m. Given the nature of the orebody the company should be able to mine to a depth of 300-350m using open cut techniques.
This is a very attractive orebody, and I suspect this company is going to be taken over. The question is whom by? Well given the open-endedness of the orebody at depth, might Xstrata be interested? But my best guess would be Kagara Zinc, whose Balcoona operations are nearby and they aready have a 19% (blocking?) stake in the company.
The company is not short of cash since they have $5.3mil in the bank, plus $1.5mil in investments so no need to worry about an issue this year. The company has 286mil shares on issue at 10c thats $28.6mil market capitalisation. I think thats very cheap, though I wouldn't necessarily expect the market to get excited just yet. I would suggest though now could be exactly the time to buy with a resource upgrade expected in March, and I suggest there will be financial backers lurking around wanting to put some money into it.
Most importantly this stock is cheap, they are supported by a major backer (Kagara Zinc) and they have cash resources. I suspect the next capital raising will be a convertible note issue, likely to Kagara, and finally an equity issue after feasibility (early 2009). Its the wait that gives me reason to pause. Although 10c is a support, the 8-8.2c level is a far stronger support, so I would be waiting for that level to be reached. This is a company for traders and investors since I believe this mine will have a life in excess of 10-15 years based on the geometry of the deposit and the prospectivity of the region. The open-cut will help fund underground development access, thus avoiding the burden of additional capital raisings down the track.
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Andrew Sheldon www.sheldonthinks.com

Sub-Sahara Resources (SBS-ASX)

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Sub-Sahara Resources strikes me as one of the better buys on the market. It has an array of gold interests in Africa, which I suspect will be better appreciated by a Canadian company in the coming years - in the form of a takeover bid. Anvil Mining is another potential suitor having taken a strategic 20% stake in the company. Perhaps just as a take over defence for a 'friend'. The company is capitalised at $35mil, with 500mil shares trading at 7c. Its assets include:
1. Zara JV with Dragon Mining: A 69% stake in the Koka project in Eritrea. It has a 1Moz resource at an attractive grade of 6.3g/t, and the orebody is still open.
2. Nyanzaga JV with Barrick Gold:The Tusker gold deposit remains at the indicated/ inferred level with resources totalling 4.5Moz of gold grading 1.15g/t from 123Mt of ore. SBS has a free-carried stake of 30% to the point of feasibility study. This is a very low grade gold resource but the large size of the deposit will likely justify development at a higher gold price.
3. Lake Victoria JV with Currie Rose Resources: Targeting a 1Moz deposit.
4. Nyakufuru JV with Resolute Mining (<70%):>Resolute is earning up to 70% stake in this project. So far they have identified a 200x800m gold anomaly.

The company has 501 million shares at 7c worth $35million. It has $2.3mil in cash as well as equity interest in Sunridge Gold Corp worth $A12.4million. The market appears to be attaching little value on the company's gold interests. I do not however believe these values are out of place with the generally subdued pricing for junior gold stocks. The Zara gold project is a very attractive project and there is exploration upside here. This season SBS added to 250,000 oz of resources to this project. There are some very high grade zones.
For further info on this stock see Google Finance or my discussion forum.
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Andrew Sheldon www.sheldonthinks.com

Dioro Exploration (DIO.ASX)

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Dioro Exploration is a modest-size gold producer from its Frog's Leg project in WA in a 50/50% JV with La Mancha. In addition the company recently purchased the South Kal project from Harmony Gold Mines. This project included 3 years mineable reserves, the Hampton treatment plant. The project is expected to generate cashflows of $52mil at a total cost of $A690/oz. The company has $25mil in cash to help fund the acquisition, however it also intends to spend $10mil on exploration in 2008 to increase the reserves at Frogs Leg.

The attached chart would suggest that $1.40 is a technical entry into this stock, but based on the fundamentals, I think $1.20 is more likely to prove the actual support level. Dioro's share of reserves at Frog's Leg stands at just 350,000 oz, though this has been the case for years. Only now the company is making a concerted effort to lift reserves, to give greater confidence to the longevity of its cashflows, such that a greater value can be placed on its shared mine infrastructure. For a further info on Dioro see Google Finance or my discussion forum.

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Andrew Sheldon www.sheldonthinks.com

CBH Resources (CBH.ASX) and Perilya Mines (PEM.ASX)

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CBH Resources is a growing producer of base metals with a number of advanced projects throughout Australia, as well as some $178mil in cash to fund capital expenditure which will expand their earnings power. There is no question that those plans look less appealing than they did 12mths ago since metal prices fell. But with such great projects, still high prices, 24% hedging in place and huge cash reserves, CBH have alot of capacity to expand mine life through more exploration. Their asset holdings are strategically very strong. With a market capitalisation of $353 million, and $179mil in cash, their mine holding are undervalued.

I think it is very likely that discussions between Perilya Mines (PEM.ASX) and CBH will result in a merger of the two companies. There are a number of reasons to think this transaction will proceed:
1. Both companies share alot of synergies
2. The executives of both companies have a long history
3. The CBH & Perilya operations at Broken Hill are closely intertwined, and the East-West spread of operations even makes sense since Perilya in Perth based and CBH is in Sydney.
4. A merged entity would command a significantly greater market premium that the separate entities.
See my discussion forum for these two companies - Perilya and CBH Resources.
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Andrew Sheldon www.sheldonthinks.com

Azumah Resources (AZM.ASX)

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About a year ago I downgraded my expectations of this stock. The results to date have been slightly better than I expected, nevertheless the company remains on my watch list only. They have $3.1 million in cash. Whilst I have little doubt there will be a mine in this area, I dont think it will be such a lucrative entry into the market without some more promising discoveries. See Google Finance or my Google forum.
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Andrew Sheldon www.sheldonthinks.com

Austindo Resources (ARX.ASX)

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Austindo Resources is developing a 70,000 oz per annum gold mine a few hours drive from Jakarta in West Java, Indonesia. After early problems the project seems to be back on track. In the latest quarterly report the company highlights the fact that underground development has reached the 600m mark, with a further 180m of development required. Most of the plant is already onsite. The company has cash reserves on hand of $12mil after raising $20mil late last year. In the last quarterly the company acknowledges that costs are rising. On that note there is some doubt as to whether the banks will require any additional equity cover. The cash reserves seem rather tight, and given the previous problems there might yet be another capital raising. With 3.7 billion shares on issue - which must be a record - the company doesn't need the extra dilution. The flipside is that they have at around another 6mth before they need to raise that capital, and I thus think the issue is likely to come at a time of rising gold prices. For this reason, I see the current weakness in the stock as a buying opportunity, and I do think the current price support will hold. The project might be experiencing a cost blow-out, but then gold prices are more than compensating. For further info see Google Finance or my discussion forum.
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Andrew Sheldon www.sheldonthinks.com

Ashburton Minerals Ltd (ATN.ASX)

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Ashburton is another stock I would be inclined to place on my watchlist, but have no particular interest in at the moment. They have discovered a 4km long structure in Brazil with anomalous gold. Its too soon to judge its commercial significance. Updates can be read at Google Finance or my Google Forum.
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Andrew Sheldon www.sheldonthinks.com

Argonaut Resources (ARE.ASX)

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Argonaut Resources (ARE.ASX) is an attractive stock at these prices. The company has a number of interesting projects. They have just raised $13mil and are capitalised at $47mil, so their zinc project is looking pretty cheap.
The zinc price mind you is not looking great since its at a support level. I think it will hold this support because of USD weakness, but the continued upward pace of zinc stockpiles does not give one confidence in the zinc price outlook. Mind you, Argonaut are drilling a number of projects at the moment, and there is strong basis for a rally since its fallen considerably to a strong support level.
See the zinc price and stockpiles at Kitco.
This stock actually reminds me of a stock I used to hold called Minotaur Resources. Back in 2001 I think when I was working for a broker, spending way too much time watching the market, when I should have been writing research reports. One late dark night, I found this $2mil stock MNR trading at 14c and it was drilling an 'elephant size' magnetic anomaly' that could have been a huge repetition of the Olympic Dam base metals deposit. As it turned out I was right, but I sold out after 3 months because I did not expect the drilling to take so long. Anyway, the stock sailed to $2.40, and the 20c opts when from 5c to $2.00. I had those as well :) But sold too early because of the fucked disclosure still evident today.
Anyway, this company is like that except its capitalised at $47mil, not $2mil, and this Torrens project they are drilling I believe has been drilled before, so that undermines the speculative appeal because a 2nd geological interpretation is less veracious than the first I believe, even though there is more info. But I do believe in such opportunities. I must say its hard to find these opportunities these days. Anyway its a good punt given the zinc exposure and technical support. See Google Finance and my ARE forum.
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Andrew Sheldon www.sheldonthinks.com

Alloy Resources (AYR.ASX)

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I am not suggesting you buy this stock. On the country, I think you should sell it. But I would put it on your watch list because its doing interesting things in Laos, and I suspect they will become a winner in a year or two. Its exploring for gold & copper in the same areas as Oxiana and Pan Australian Resources. The company has fallen to 8c, likely on the recognition that the company will need to raise cash....that means dilution of course. The company has just $1.2mil in the bank.
I have created a Google forum where I can place comments on reports as they become available.
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Andrew Sheldon www.sheldonthinks.com

A1 Minerals (AAM.ASX)

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A1 Minerals (AAM.ASX) would have to be one of the better buys around at current prices. Quite apart from the trading opportunity, it makes a lot of sense to sit on this one to realise the benefits of this strategic gold resource. You could be forgiven for thinking this company is slow to develop its resource - true enough - but I suggest the reason is they are attempting to lease, buy or toll treat their ore through a processing plant rather than having to finance plant construction. I think the plans to build a plant are really 'fluff' or just a backstop. There are several existing plants in the area that could process the ore, so it seems much more likely that 'a deal will be done' that will offer so much more value to shareholders. Very quickly AAM could be in production. Given that gold is going to $2400/oz by my thinking, there is no reason to hurry. This stock makes a lovely passive investment. Fortuitously the stock has fallen back to an important support as investors loose patience. The problem of course is that plant operators also see the strategic value of their plant and are likely holding out for a higher gold price. I however dont see how waiting longer is helping AAM's cause. A higher price means A1 Minerals has to pay more for a new plant, or the existing plant operators can extract more value from A1. It makes me think I should be investing in the plant owner. I think the plant owners know more about the outlook for gold than the A1 board. The company has a number of interesting exploration targets that add speculative upside to the stock. They have $5.9mil in cash, so with a market capitalisation of just $16mil, thats valuing the gold resource at roughly just $10mil, but it has a conservative 0.7mil oz x $A300/oz profit margin = $US200mil. Looks very cheap. You of course would have to discount those cashflows likely to be extracted over 5-7 years, so lets say $120mil. With a strong $A likely, I will suggest $A100mil. And there are these other projects that are at an early stage of assessment.
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Andrew Sheldon www.sheldonthinks.com

Bendigo Mining (BDG)

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There are times when you know you are just about to make some money because all the charts you look at some positive signs. Its like an alignment of the moons, something that doesn't happen enough, but it gives you the confidence to throw all your money at the market and say 'Yes'. On those occasions I can make $35-50K in a matter of a month. In actual fact these are the moments when I make 90% of my income, so you need to fight the tendency to overtrade and 'seize these moments'. Picking the right stocks is key. I am currently working on a report to help you do that.

Bendigo Mining is an emerging gold producer. Based on the nuggetty nature of its gold, it is difficult for the company to establish the veracity of its grade control system without proceeding to trial mining. This will occur from mid-2008. I dont see a great deal of price movement before then, but the stock should gain some support from a strong gold price. Currently the stock is trading at a strong technical support.
Nuggetty gold results in considerable statistical variance that can skew ore reserve calculations. The only way to ultimately determine how much gold is in the lode structures is to mine them. Historically these reefs produced an average of 10-11g/t of gold. The company has an operational gold treatment plant on-site and $58mil in cash. This places a value on the mining operation of just $110mil. Given the implied resource, this is a very low value. There is however the prospect of difficulties at the start of operations because its not the easiest operating conditions. ie. Narrow, often variable, discontinuous reef structures. See my Google Finance forum.
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Andrew Sheldon www.sheldonthinks.com

Why are spec stocks so cheap?

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Investors in speculative stocks could be forgiven for thinking they have lost their minds. How do you account for the fact that gold and copper prices in particular are trading at highs, yet gold & copper project sponsors, even miners like MRX are languishing at lows. Well MRX were up 15% yesterday. A sign that their fortunes are about to change, but how do we explain these events?

My explanation is that markets are increasingly driven by fund managers rather than mom & dad investors taking the proverbial 'punt' on a 'spec'. I think this trend is gathering momentum because the lack of support for specs has resulted in even the mom's & dad's abandoning the sector. So where is all the money going?

I think money is flowing into those areas that suit investors in the 'New World Economy', and I will outline for my reasons why.
1. Commodities trading: Commodities have become the 'new fashion' in investment. Previously this class of security was considered too risky because of high volatility, low liquidity, but the use of derivatives does offer lucrative returns. Better still growth in this security class has increased liquidity. I attended a conference on Commodities for Fund Managers in Tokyo 2 years ago, and there was alot of interest.
2. Blue chip equities: There is I think a great preference for blue chips for several reasons including the capacity for investors to place funds in managed funds that only invest in large companies. Small companies just dont meet their liquidity requirements, nor can they be happy with the string of failed companies, whether its Perseverence Mining, Gleneagle Mining, Lafayette Mining, Highlands Pacific, and others. Add to this the capacity of the investor to leverage their investment with CFDs or margin loans and I think the rationale for the trend away from specs has some merit. I think that is why we are seeing the exceptionally low value being placed on specs.

I think the executives that run speculative companies have a lot to answer for precipitating this trend. I dont think they are wholly responsible, but the poor disclosure, due diligence and lax standards of work highlight a growing problem for the sector. I might add that to some extent small companies are on the receiving end of incompetent services, given the shortage of qualified service providers. Shortage of skilled geoscientists are forcing miners to employ dodgy practitioners I guess. But by the same token, I think there is a failure of executives to apply quality control checks.

I think this increases the disparity between spec and blue chip pricing. Far from heralding the end of the sector, I think it just increases the upside if you can find the right companies. But more generally I think it will mean that rallies in specs will be short lived for most stocks, so specs become trading opportunities rather than investments unless they can demonstrate 'sustained value'.
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Andrew Sheldon www.sheldonthinks.com

McMahon Holdings (MAH.ASX)

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McMahon Holdings is an Australian mining services provider, and as such is greatly benefiting from the strength of the resources sector. The flipside is that service providers too are having a challenge managing costs and completing projects because of labour shortages.
McMahon appear to have reached a support level at $1.30 per share. Though given the poor earnings & dividend yield of 6.2% and 2.2% respectively, might we expect them to fall back to $0.97-1.00, as its a far stronger support level. These are historical figures mind you, so you might want to wait to see the latest earnings growth figures. For more information on McMahon see Google Finance and my discussion forum. -----------------------------------------
Andrew Sheldon www.sheldonthinks.com

Golden Cross Resources (GCR.ASX)

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Golden Cross Resources (GCR) has hit a major support level, and has recovered a little. This company has a commanding position in the East Australia's Lachlan Fold Belt, which has been the centre of a number of important porphyry copper-style copper-gold discoveries like Cadia Hill. It is developing a large-scale project, though its not as promising as larger deposits, it has alot of merit with strengthening gold prices.

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Andrew Sheldon www.sheldonthinks.com

Metals X Limited (MLX.ASX)

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Metals X Limited is a stock that can easily be compared to Minara Resources, which is capitalised at $A2.6 billion. The difference is that Metals X has some tin projects in Tasmania, but they have world-class nickel resources, its just that Minara is already in production. MLX is capitalised around 10% of Minara, but is just 2 years out from nickel production. The MLX nickel project can be expected to have a similar scale of production. In the short term it seems destined to range trade between 25-45c, but nickel stockpiles are showing signs of flattening, so might we expect to see some interest in them. I dont see them falling to the 13c support in this climate. This is a good long term stock. Read more at Google Finance and see my discussion forum.
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Andrew Sheldon www.sheldonthinks.com

Alkane Exploration (ALK.ASX)

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Alkane Exploration is developing a gold mine at Tomingley in Central West NSW, and not far away in Dubbo is developing a VERY large zirconia-niobium-yttria project. The last time I looked they were still proving up the commercial viability of the process route. This deposit has some 200 years of reserves at initial mine capacity, so there is project upside, and it has very low overburden strip ratios. The stock has been trending up over the last few years, and its very volatile, so I would suggest its a stock to trade. Entry is at 30-34c. The target price is 53-55c resistance. For further info see Google Finance and my discussion forum for this stock.
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Andrew Sheldon www.sheldonthinks.com

Marengo Mining (MGO.ASX)

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Marengo Mining is a small player developing a world-class gold-copper project in Papua New Guinea. The project is not far from the Ramu Nickel project being developed by Highlands Pacific. Though if I'm not mistaken I believe poor hedging decisions forced them to sell Ramu to the Chinese. They have over a billion tonnes of ore of low grade copper & gold, but the low overburden costs should
make this a low cost mine. Both copper & gold prices are very favourable, but this is a long term project, so I would be more inclined to trade this stock, since it might not be operational for another 3 years. The stock is currently drifting towards a technical support. Gold looks like going higher (from $US905/oz), copper I suspect is close to resistance at $US3.75/lb. Anyway I like Marengo at 19c support as a trade. That capitalises the company at $US38 million.
For further information go to Google Finance or participate in my discussion forum for this stock.
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Andrew Sheldon www.sheldonthinks.com

Lepanto Consolidated Mining Corp (PSE.LC)

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Lepanto Consolidated Mining Company is a Philippines-listed gold mining company. As of Dec'06 the company had reserves of 1 million ounces of gold, though it was not profitable according to its latest financial statements by Google. Unbelievable given the gold price. I dont know much about this stock, though it has fallen to a strong support level. On technical grounds I like them, but the fundamentals look dubious. See Google Finance and my discussion forum for any news updates.
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Andrew Sheldon www.sheldonthinks.com

Apex Mining (PSE.APX)

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Apex Mining is a Philippines-listed gold miner with a project in northern Luzon. Last year a major UK-Canadian miner Crew Gold took a major stake in the company, with the intent of tripling output from 500tonnes per day of ore to 1500tpd. This is a 2 million oz resource company if I'm not mistaken, with the promise of more. The disclosure of this company, as is customary in the Philippines, is very poor, so I would pay close attention to the charts. The stock appears to have good support at $5.00, though late last year the stock fell to $4.00, so it remains to be seen if it falls back to this support. A downgrade of reserves or delays upgrading the project would surely do that in the current market. I would be a little cautious with this stock. Hold above $5.00 support. The best source of data is clearly going to be the parent company in the UK or Canada. If you would like to read more on this stock - see Google Finance or my discussion forum.
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Andrew Sheldon www.sheldonthinks.com

Philex Mining Corporation (PSE.PX)

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Philex Mining Corporation is a Philippines listed gold-copper producer that has drifted lower despite recent strength in the market copper & gold prices. The company I understand has a JV with a major international mining company in Mindanao. The project is a large-scale, long life mine that will generate healthy earnings, which is already evident in the income statement - see Google Finance or my discussion on this stock.

The attraction of this stock is that appears to be getting support at $9.00, and that it has a stake in a major gold-copper mining project, and thus a nice flow of inflation-adjusted earnings. We should be cautious however if this stock falls below $8.00, as the next support level is $6.00. I dont see any reason for this happening in the short term, though copper prices are close to a peak. It remains to be seen just how robust copper demand will remain. For this reason I prefer a pure gold producer. But I would look for support above $9.00.
Another alternative to Philex is its listed parent company Manila Mining (PSE.MA) - see Google Finance or my discussion of this stock.
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Andrew Sheldon www.sheldonthinks.com

Copper stocks to watch

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Copper stocks are looking good if the current price action is anything to go by, though you will need to look at my commodities blog for the details - http://hot-metals.blogspot.com. Clearly with copper prices getting alot of support from institutions, we can expect copper prices to perform well as it becomes the new play thing of institutions looking for asset classes that are inversely correlated to stocks and property. Commodities are a great hedge against a falling USD, and there is no question institutions see metals going sideways. I suggest they are likely to favour food prices more, but they will hold a portfolio of both. I note that Matrix (MRX-.ASX) stock was being bought by directors at current prices.
Other metals are pretty subdued.
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Andrew Sheldon www.sheldonthinks.com

RED 5 (RED.ASX) - another prospect for a breakout

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Red 5 is another stock that has the potential to break out this week. The 10c level is the resistance. Aside from a strong gold price, there is the scope for developments on approval of mining title, or further exploration results.

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Andrew Sheldon www.sheldonthinks.com

MRX - close to a break out?

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It seems plausible that we are close to a break out in MRX. Why? Well looking at the chart, we can see that MRX has broken out of its downtrend. There is a firm basis for the start of an uptrend, but skeptics might like to wait for greater confirmation, which would come from a break above 9.5c. But why loose 5% profit on a company which is expanding output by 60%. The fundamentals seem compelling.

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Andrew Sheldon www.sheldonthinks.com

Jabiru Metals (JML.ASX)

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JML has been one of my better performers since I recommended them in the 18-22c area. They rose to a peak of $1.70, but have since fallen back to $0.72 in recent times, along with other base metal miners. The attraction was always their high grade volcanogenic base metal deposit in Western Australia. Such deposits also hold the potential for a cluster of deposits, so there was always alot of upside. So reading now the latest report.....there seems little appeal with the Benambra-Stockman project in Victoria, but too early to write-off the exploration potential around the Jaguar-Tectonic Bore project areas.

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Andrew Sheldon www.sheldonthinks.com

Australian Biodiesel (ABJ.ASX)

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This stock was a market darling in 2006. Its $1 shares raced to $1.70 before collapsing in 2 years to just 2c. Transfield stepped up last year by underwriting a $16mil capital raising at 5c. According to the company the problems for the company are:

1. Denied economies of scale – the major oil refining companies are not willing to buy their biodiesel, thus denying them access to 80% of Australia’s fuel market.
2. Significant rise in feedstock prices – tallow has risen in price from $450/tonne to $975/tone today due to strong global demand and also drought in Australia.
3. The Federal government hasn’t offer the same level of support as is offered overseas. The government’s 350 million litre per annum target has proved meaningless without mandatory targets
4. These factors have forced the company to cut production from 11.7Mt in 2006 to 10Mt in 2007. Rather than produce at a loss, it has since closed the plant for the foreseeable future. The capacity of its Brisbane plant is 160Mtpa, so it was producing at just 4% of capacity.

Other pertinent facts:

1. Government support would only undermine the short term viability of biodiesel plants since there is a shortage of tallow, palm oil, jatropha and algae feedstocks worldwide.
2. The company has 456mil shares on issue, with Transfield holding a 56% stake. Those shares at 2c = market capitalization of $10mil.
3. Even if the company got its desired mandatory biodiesel limits, what capacity does the industry have to buy cheap tallow at current prices?
4. It has been losing $10mil every year since it started production. See www.abgbiodiesel.com.
5. In the USA, biodiesel production has increased 10x since 2004 to 950mil litres (2006), but this is dwarfed by the 18 billion litres of ethanol production in the USA. In the USA biodiesel production capacity has growth 4x to 3.2 billion litres.
6. In Australia, local operators took at face value government support for biodlesel. The government was targeting 350 mil litres per year, yet the industry developed capacity of 500Ml by 2008. Go figure? They also criticize the government for decimating their sales by withdrawing a tax rebate for users.
7. On the positive side the plant is designed to treat a variety of feedstocks. Its interesting that Transfield underwrote the rights issue. The issue raised $16mil at 5c. Transfield were hardly generous – the issue was at 5c, but not the share price is 2c.

The question is – Is there scope for a deal here? Is it not likely that the newly-elected ALP government will adopt mandatory biodiesel limits. Such a move would make the world of difference to this project, but in a world short of commercial grades of biomass, will it fly with government supportive policies. It should get a kick, but I doubt its viability will be underwritten. Also governments are notoriously slow at making decisions.
See my ABJ discussion forum on Google Finance.

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Andrew Sheldon www.sheldonthinks.com

MRX and Google Finance - charts and forum

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MRX appear to have finally found support - oversold more than i expected - see chart.
Anyone wants to know more about this company, you can ask questions at http://finance.google.com/finance?q=ASX:MRX - I have opened a discussion forum on this page.
At the same time you can check out Google's Finance page. Its catching up to Yahoo. Several failings though - it does not allow you to download CSV or excel format market data like Yahoo. Also they dont cover the currencies very well, but they do cover Australian stocks - hence this discussion. I like the fact that you can search for stocks by name - with the added benefit of auto word complete - unlike Yahoo!
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Andrew Sheldon www.sheldonthinks.com

RED 5 (RED.ASX) buy on weakness

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Red 5 is an emerging gold producer with an attractive gold project in Mindanao, in the southern island of the Philippines. The company has raised the equity component to debt finance mine construction. The much higher gold price and any weakness in the $A will have a positive impact on its future earnings. The project should start to generate cashflows in about a year. There is of course the prospect of locking in the higher gold prices that are likely to arise by then.

There is a strong upward sloping trendline offering support at 8c, and a strong horizontal support at 9c.
Join my discussion on Red at Google Finance Forum.

- Andrew Sheldon www.sheldonthinks.com

Matrix Metals (MRX) - great entry now

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Well I have been proven wrong on timing my entry into this stock. Why? I was too focused on business interests and commodity prices. Having said that - the stock just makes more compelling sense as a BUY - though the chart suggests it can go a little lower. So why a buy? Well you will find they are selling because they are falling. They are being oversold because foreigners are selling the stock to reduce forex exposure to the AUD - which is likely to fall back to USD0.80 from USD0.87 now. So MRX gets oversold, buteventually they become over-bought again because export revenues will be phenomenable as AUD weakens, they commission the 2nd plant - for a 60% lift in output.

Yes, I am aware that USD-denominated commodity prices are likely to come off, but consider that there are already significant supply constraints for all metal commodities.

Join my Google Finance discussion forum on MRX!

- Andrew Sheldon http://www.sheldonthinks.com/

Bendigo Gold (BDG.ASX)

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Just to update my recommedation for this stock - after a recent rally and retracement - I still think Bendigo represents good buying.

Batavia Mining (BTV.ASX) - what the?

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Batavia Mining (BTV.ASX) is an interesting stock drawn attention to me by one of my readers. Actually I have held this stock on occasion, and it remains on my watch list. The company has made several mistakes of late of late I feel. These are: 1. Diversifying into iron ore - I guess not a problem if they float off the project 2. Delaying the Delfector gold project - the problem being the dont understand gold, or where gold was always destined to go. So what do we know about this company? 1. Following an issue it has 114mil shares on issue at 12.5c worth $A14mil 2. It has liquid cash & investments of $8mil 3. It is publicly listed generally worth around $4-5mil, essentially making its gold project worth $2mil 4. It has a 0.8Moz gold deposit in WA 5. It has a 0.3Mtpa gold treatment plant remaining from prior mining at this site. The mine closed prematurely because of low metal prices, though BTV has since increased resources through exploration 6. The gold price has more than doubled since the project was acquired, but so have the costs to establish a mine, though operating costs have increased by less, I suspect more than the 6% they quote. 7. The company is considering a 0.23Mtpa processing capacity, though economies of scale favour 0.4Mtpa, though they might need to find added ore to make that option worthwhile. This all sounds very good. The company is sitting on cash in investments, it has a mine resource. Looking at the plant, it looks worse than the treatment plant (Orroyo - the Mt Gibson plant) that I looked at in WA, so it seems likely that the process water from mining previously had a high salt water content, or the wet season has resulted in surface corrosion. Hard to say if they are understating capital costs without a site visit or independent info. So that is reason for caution. Thats not to say you can't trade them. Afterall a rising gold price (tide) lifts all boats. I think they are a pretty good punt. I do however prefer other stocks for resource upside, in ground gold resources.

- Andrew Sheldon http://www.sheldonthinks.com/

Megnesium International Group (MIG.ASX) - any good?

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I made the following response to a forum, so I have provided here for my reader's benefit. Magnesium International Group (MIG.ASX), a listed ASX company has acquired farm-in rights to a iron ore project on the south coast of PNG. A statement was made on the forum that since PNG is closer to China than South American competitors, then MIG's project must be good. Sorry, not that simple. It is not just a matter of 'distance to port' as implied. Sure PNG is closer to China, the major market, but shipping from PNG involves some hurdles. 1. Larger vessels have far greater freight advantages - can this part of PNG handle large vessels? Nope, so either $50-100mil needs to be spent dredging or buiilding a wharf going out to a depth of 18-25m to handle capesize vessels, as large steel mills in China are used to handling this size vessel. This side of PNG is a low energy coastline so the coastline is generally shallow.2. Larger vessels are expensive so you need to have high capacity shiploaders to reduce demurrage costs. This requires alot of low capacity floating cranes (not viable) or dredging to build a fixed shiploader on the jetty.By comparison, WA and South America where the bulk of iron ore comes from have lovely deepwater coastlines, shared infrastructure (rail and port) which are developed by third parties, so its a unit cost, not a capital item that will create a barrier to development. They are building greenfields capacity, WA and Sth America essentially brownfields (incremental) capacity. So with these factors in mind, South America is looking pretty good. Anyway, given the freight penalty from Sth America, and the fact that most new mines are being built in WA, this project is competing with Australia, not Brazil. And Sth America ships into Europe, not Asia, since they have an advantage over Australia there albeit a smaller one in the Atlantic because of WA's capesize capacity. MIG does have the advantage of handling unconsolidated ore, so no crushing, they have little handling cost, though its a small benefit since most mines freight from site by conveyors into crusher, into rail, into ship. They will not have the economies of scale because of the shiploader constraint. They have the disadvantage of lower ore grade, though they might get significant metal credits from titanium, gold, though this will increase the processing cost. But it might actually subsidise iron ore mining. We dont know the primary ore grades - at least herein, we only get the concentrate grades. I trust that helps. Join my discussion forum at Google Finance. - Andrew Sheldon www.sheldonthinks.com

Gold miners - which companies to buy?

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The great news about any boom is that 'a rise tide rises almost all boats' - except those that sink by default, eg. Bad grade control, high capital costs, hedging debacle (eg. LAF, SGW in Australia). Keeping it simple. I started researching when I was 15yo. I had no degree then, but if you read enough company reports, you can see the factors that matter. Having degrees has not helped me a great deal with investing. Reading technicals "Market Wizards' by Jack Schwager is important, or the like. Anyway, 1. Gold content in the ground (more than 1mil oz to be safe, or better still confidence it will be found, eg. orebody not closed, drilling only to 50-70m depth, so likely extensions. 2. Prospective areas, look for companies with >1000km2 of tenure, as more likely to be under-explored area. Better still in Africa or Asia, where virgin areas. 3. Sovereign risk - An over stated problem...rare! In the last 20 years, only Bolivian (strategic) oil assets have been nationalised and gold projects halted by environment concerns in Ghanian forest parks. Companies are negotiating upfront agreements with natives before exploring these days. 4. Entry - Avoid explorers still along way from production, since they need to spend more money, unless they are at pre-feasibility stage, committed to plant construction. Need to watch equity raisings, ie. dilution. Better still if the company has a 2nd hand treatment plant, or access to toll treatment facilities in established gold provinces. 5. Geometry - It takes time & money to access deep orebodies, so look for Open Cut projects. The wider the average gold intersections the better (8-100m) is grade, with corresponding grades of 4 to 1g/t. Larger deposits can tolerate lower grades because more mechnised, less selective. Best if orebody <150m> 6. Exploration - look for geochemical or geophysical anomalies along structural trends with at least anomalous gold, but preferably already some signs of commercial drilling intersections, eg. >6metres at >2g/t. Think about how easy to get out. eg. Are the richest grades near the surface, or deep. Is the ore distribution patchy requiring selective (more expensive) mining? 7. Capital - Watch their cash reserves - avoid dilution to finance project construction. 8. Hedging - Hedging removes the upside and also poses a risk. eg. Lafayette Mining had a mine spillage in the Philippines. The govt closed the plant down, so LAF was loosing $3mil a month on hedging. 9. Risk - The lowest risk entries are often the projects with the highest risks, meaning that the risks are priced in, so they can only go up. Be strategic. Look for exposures that provide the best upside. The perfect company has a 2nd hand treatment plant (or is close to a plant), $3-5mil in cash, 0.5-1mil oz of gold indicated resources, grades 2-4g/t, 10+ untested anomalies to test, no hedging, few shares on issue, company listed options (to maximise leverage), and is located in Australia or Canada. Get good at this, you will get strategic, being able to anticipate deals.You said or the big companies are already expensive. Bear in mind, that assumes a certain gold price, which can change. I can see gold going at least to $US1250/oz, maybe $2000. There has been alot of inflation since 1980, so adjust that $850/oz high for that. A blue chip gold stock is a yield proposition with most of the risks stripped out. You want risk if you want return. RISK is good! You dont avoid the risk, you understand it, you learn to read it & manage it. Whats risky to you is less risky for me because I know something about gold mining & gold prices that you dont. So learn. The benefit of knowing investment is that you can live freely without being tied to a job or mortgage. Money makes money. Know how to manage it. The best areas to pick are IT (project & capital leverage) and commodities (volatile prices, project & price leverage).

PS: This is an old posting of mine - from Jun'05 - see http://www.gaijinpot.com/bb/showthread.php?t=11552.

- Andrew Sheldon www.sheldonthinks.com

Philippines Mining Stocks to watch

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

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

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



- Andrew Sheldon www.sheldonthinks.com

Specs that could face project delays

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

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

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

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

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

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

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

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

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

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

- Andrew Sheldon www.sheldonthinks.com

Tantalum – emerging miners

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

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

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

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

- Andrew Sheldon www.sheldonthinks.com

AIM Resources - buy

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

- Andrew Sheldon www.sheldonthinks.com