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

Universal Resources (URL) vs Golden Cross Resources (GCR)

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Universal Resources (URL) has doubled since I recommended this stock in Aug'07. I still think there is considerable upside, but from herein there is considerable risk. The risk factors are:

1. The copper price: There project is a low margin project because of the low grades.

2. Project cost: There is a risk that a blow-out in project development costs would undermine the earnings of the project.

3. Mineral exploration: The company has a JV with Xstrata Copper, and is also exploring for uranium.

For these reasons, I see this company as high risk henceforth, yet there is no overlooking the fact that, after Mt Isa (Xstrata) and Golden Cross Resouces' Copper Hill project (NSW), this company controls arguably the 3rd largest copper resource in Australia. The current resource is 50.7Mt at 0.69% Copper, minor gold. Not bad for a company with $6mil in cash and a market capitalisation of just $29mil. But how rediculous was it for the market to value the project at $9mil after allowing for cash in Aug'07.

Interestingly, whilst we wait for the final feasibility study, its worth reflecting on the economic parameters for the similarly sized Copper Hill copper deposit. GCR is ahead of URL in its feasibility study. GCR must have considered its project marginal, as it ended up farming out the project. Copper Hill has resources of 51Mt at 0.43% copper and 0.39g/t gold. So whilst URL has 0.26% more copper, it has 0.34g/t less gold. Another point of diference is that copper prices have limited upside, whereas gold looks to have considerable upside. URL has full project equity, GCR has farmed out to a Canadian company. Both companies are close to infrastructure, as well as $6mil in cash, and a string of other interesting project targets.

Interestingly GCR is capitalised at $22mil whilst URL is capitalised at $29mil. The ultimate value of these companies depends on the price outlook. so this is where GCR's Copper Hill project analysis comes in handy. Assuming a $250mil capital cost for both (similarly sized plants 8Mtpa, same ore mix), the GCR project is break-even at a gold price of $US500/oz and $1.80/lb copper. But since I would place a long term conservative base price of $2.50/lb copper and $800/oz gold, I think the NPV of these projects is more likely to be $400mil for URL and $700mil for GCR, by virtue of GCR's higher gold grades, and the better outlook for gold prices. Also GCR has more advanced projects, though reduced equity in the project.

Based on these parameters, I'm more inclined to go with GCR because of the better outlook for its commodity mix, and because its 30% cheaper market capitalisation. The other compelling reason is that its project already has a larger equity partner - a Canadian company. For URL, Xtrata is the mostly likely partner, but is perhaps not inclined to act in accordancw with URLs time schedule. Although GCR has less equity, they will also have less debt burden as a result. Having said that URL has the more prospective exploration area, but thats less tagible. So my preference is to buy GCR. GCRs chart also looks the more safer trend. I'm concerned that URL might slip back to base to form a double bottom.
Feel free to join my forum discussion on Universal Resources or Golden Cross at Google Finance.

- Andrew Sheldon www.sheldonthinks.com

Namoi Cotton Cooperative (NAM)

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It wasn't long ago that I recommended Queensland Cotton as a BUY, and it was soon the subject of a takeover play. Well now Qld Cotton's smaller cousin with a 30% market share is looking very appealing. I should qualify the investment by saying that we ae currently in a drought, which is severely affecting earnings, but thats why the company is so cheap. Consider some of the merits:
1. Capitalised at just $A42mil - thats a EPS of 12c a share, or a PER 3x
2. Net profit of $12.9mil - down 46% from the previous year

Granted that the drought might not end for more than a year, there other compelling reasons why this stocks is a buy:
1. Takeover: If Qld Cotton was a good buy, then NAM at these prices must make alot of sense as a bolt-on business to Qld Cotton.
2. Asset value: Net tangible asset backing of 100c, when the share price is 42c

You would think that the depressed NAM share price would be a smoke signal to international cotton producers interested in diversifying their production base. I dont see this as the case because:
a. The strong $A - albeit alot of these commodity producing countries also have strong currencies
b. High cost output - If you were to buy production capacity, then you would want NAM to be doing the buying of lower cost capacity in third world countries. Unfortunately for shareholders it didn't do that like Qld Cotton.
c. Unreliable water supplies in Australia - this is perhaps the big problem for Australia. There has been a decision to allocate more water to the environment. Given the value of farming land, I wonder whether the high water consumption intensity of cotton would justify shipping the cotton gins to third world countries and transforming cotton farms in Australia into wheat, which requires less water.

- Andrew Sheldon www.sheldonthinks.com

Some good buys in base metals, gold

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We have had a good pull back in gold and base metals, but after a bit of trepidation, the signs are starting to look good for another rally. Its easy to get side-tracked by the sub-prime fiasco, but there are several compelling factors supporting the market:

1. Low interest rates - with the Fed likely to reduce rates I think before Xmas, but i think that will be the last one because of inflation concerns

2. Excess liquidity - there is still alot of dollars sloshing around in the global economy. Until those dollars are eroded by inflation or debt liquidation, I think the market is not going to collapse, but rather go sideways for a long time. But there will be rallies to trade. This is actually not a new assessment.

3. Strong China - There has always been a strong propensity for China to overproduce to get economies of scale. So I can see China doing this over coming months, resulting in a resurging commodities demand. Base metal prices are starting to recover on the basis of falling metal inventories in China.

As a side note on gold, bond yields are falling again because of the Fed cutting rates, so expect this, higher inflation, Iran/Iraq to drive gold prices higher.

So the stocks I like are:

1. Austindo Resources (ARX): This you might label a 'spec' but its not far off production after having technical glitches during project development. Having bedded down a large issue, and rallied after, they have since fallen back with the retracement in gold prices. They are currently trading at a PER of just 2 next years full earnings. Mind you they only have 4-5 years resources, but upside on exploration. The pull-back to thei Moving Average makes this an appealing trade over the next 3-4months. You should be able to double your money.

2. Gippsland Ltd (GIP): Everytime I touch this company I do well. This would be about the 5th time I have been in this stock. All successful short term trades. The attraction is the completion of the feasibility study, and the finalisation of an off-take agreement for essentially all of the tantalum (600,000 lbs/year) to a German trader HC Starke. This should turn this stock into a growth stock, though I would not hold it long term because of its location in Egypt. As we can see below, GIP has recently dropped off as traders dumped it after the German sales contract. Traders are not inclined to wait 1yr through construction, but investor interest will grow in a stronger metals market.

3. Matrix Metals (MRX): As much as I like this company I was forced to sell it at 13c the other day. Not my best exit decision in as much as it was a late one, but a least I was rewarded since I was able to pick up 150K of MRX at 12c on Friday. I do believe this is the bottom. I sold purely because of the negative news on Wall Street, but also because the price slide was eroding my asset base and the copper price dipped below $3/lb technical support. With stocks falling in China, and all metals rallying on Friday, I think this is a turning point, so time for a re-entry. The other reason to like these stocks is that lower metal prices translate into lower $A, so moderating any $A earnings. One need only look at the $A gold price on http://www.kitco.com/. The $A price hardly dipped belo $900 during the gold price retracement, as the $A slipped from $840 to $772. Well its back to $823/oz now, and in Aust terms over $A940/oz. Matrix is copper, but same principle.

As we can see below, MRX share price has fallen to a support at 11.5-12c. So I essentially got a very good re-entry, albeit it was a poor exit.

4. CBH Resources (CBH): CBH is an attractive purchase because it is developing another 2 new mines which are expected to more than double base metals output - with the new mines to be commissioned in 2008 and 2009.

As we can see from the chart below, the recent fall in base metals has pushed them down, but with prices on the recovery, they are trading at their medium term trend line, making them a favourable BUY. From 2009 they will be producing 250,000 tonnes of zinc equivalent. And they have a substantial resource base (4Mt Zn equivalent), and base metal deposits tend to occur in clusters. They are forecasting 5c earnings per share (EPS), thats a 15% earnings yield, with the promise of significant expansion in earnings over the next 2 years. Mind you the conversion of $200mil of convertible notes into shares will dilute the EPS by a third. Still they have $219mil in cash. The Endeavour resource has alot of potential at depth too! Plus the Western Mineralisation of the Broken Hill Lodes, which was actually the core project when I visited Broken Hill in 2001 to look at this mine. They wont need any more equity raisings since $219mil cash is enough to carry the Panorama project, so its looking good for its mid-2009 start. There are alot of other targets in the cluster at Panorama.

- Andrew Sheldon www.sheldonthinks.com

Stock Selection

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Its not easy to make a stock selection at this time given the state of the US market, the volatility in commodity prices. I think its a good time to hold a swab of cash. But having said that, there is some compelling buying opportunities:
1. Matrix Metals (MRX.ASX): Matrix commissioned their 5500tpa copper mine in west Qld last June, and its already at nameplate capacity. There are plans to expand output to 9000tpa, and they have upside from further copper and uranium exploration.
2. Austindo Resources (ARX.ASX): This company is commissioning a gold mine near Jakarta, Indonesia in the next 6mths. The mine has struggled to date because it was not engineered correctly, but with a new consultant and contractor, things are back on track, and after the low-priced equity issue to recapitalise the mine, and the promise of higher gold prices longer term, this stock has some upside. The company doesn't have the resource security that I would like to see, so go easy.
3. RED 5 Ltd (RED.ASX): Red 5 is developing a gold mine in Mindanao, Philippines. The Open cut development goes underground from year 3 unless further OC gold resources can be found. There is a great deal of appeal to the UG as broad zones of high grade gold, and zinc credits have been found. The project lies along a promising mineralised structural trend, so there is upside from further regional exploration, which is being led by Anglogold. The Net Present Value of the gold project is around $90mil, so there is alot of upside in this company.
4. AIM Resources (AIM.ASX): AIM is developing the Perkoa zinc-lead mine in the state of Burkina Faso, Africa. When you consider they just raised $A90mil by issuing 290mil shares at 31c, at 20c support this stock looks highly appealing. The Mumbwa copper project with BHP Billiton could be attractive bulk sacle target as well. The project has a respectable 12yr mine life based on a resource of 6.3Mt at 14.5%Zn, thats 1.1Mt of concentrate. They will start production of 70,000tpa of zinc metal in 2009. I dont place any value on the platinum project in RSA. Market cap is $220mil with $85mil in cash, which is being used to develop the mine, and on exploration. Its a long time to wait for production though. The best entry into this stock might be the Jun'09 options currently trading at 14c, which have 10c to pay. Based on the current 22c price, the options have about 2c of time value. Not bad considering the leverage and 8mths to expiry.

Timing will be important buying these stocks. Its readily apparent that AIM is falling back to its 20c support, RED has previously rallied with gold to 17c, but seems likely to be sold back to 12-13c, and represents a good long term bet at these prices. MRX has alot of appeal on a corporate level, though I would like to see copper prices hold above $3.20/lb. Nevertheless any falls in copper will be offset by a falling $AU, and its now a cashflow-yield story, with the added appeal of copper and uranium exploration upside.

Remember MKY - a uranium explorer I recommended about 3-4 mths ago. Its up significantly today (20%). At this point its hard to say whether they have anything real or its just fluff. You can be highly selective with rockchip sampling, and trenching too. But it might turn out to be a significant deposit...lets watch! There was something I liked about the geology...on a structural trend I think, which gives me more confidence than a remobilisation of uranium from weathering of granites., which might be superficial, but widespread (12km2).

- Andrew Sheldon www.sheldonthinks.com