What makes a good and bad gold mining stock

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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Gryphon Minerals (GRY.ASX) breaks from downtrend

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

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

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

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

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

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

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

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

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

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

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

The dynamics of global commodity supply and cost

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This company specialises in the production of iron ore supply cost curves. I don't know this company, however I spent a lot of time when I came out of university working for a company, Barlow Jonker, generating lots of these curves for the coal industry. The problem with such curves is:
1. Context - like with financial ratios you need to be aware of the context of each mine contributing capacity to the curve. How do these mines differ? Now, you can do things to overcome these obstacles, i.e. Not simply saying that a mine can supply at cost, but you can identify other constraints on these miners and include them in your formula, i.e. They can only supply power stations with certain coal quality specifications. These are really complicated algorithms. It gets even tougher when you have mines producing different blends, and if the fix depends on variability in the ore or product prices. The reality however is that the 'blends' are fixed by contractual undertakings. Another issue is 'destination'. It is one thing to say you have produced a cost curve, but one needs to know to what destination. If to Asia, one needs to consider the characteristics of the port (panamax, capesize), as well as the freight rates that will impact on competitiveness of different routes. The freight market is pretty volatile, so you might wonder how useful these curves are. Of course shippers will fix rate for some sense of certainty. Power stations and steel plants also have an important control over supply because they like 'stable' or certain quality coal or iron ore to ensure predictable furnace geochemistry. But what about those other buyers, like cement plants who are far more flexible in their fuel use? They drive the market in every which way, and they don't care about quality; its the price for 'useful heat content'.
2. Prices - Prices are set at the margin. This is another indicator of how difficult it can one to use cost curves. Consider however that many investors are interested in only the long-run supply cost curve to establish the long run outlook for mines. Of course if they are interested in the long-run, they are interested in the trends.
3. Future proofing - Is it possible to build future assumptions into a cost curve, so that they can become useful indicators. i.e. The curve might become dated if a company announces a new mine, or the closure of one. The problem is less the prospect of a new mine, but the prospect of price changes at the margin causing the deferment, not just of one mine, but 5-10% of the market capacity. What if brownfields capacity is identified in that time. There is a certain utility to such curves, but you mind wonder at just how complex their models would have to be. If you are a senior mining executives, I wonder if you look at the detail.

You might be forgiven for thinking that supply-cost curves are just economic rationalism. The problem is many people just look at the curve....and not the data, and what the data means. Anyway, if you want to explore these types of issues, I suggest looking at the following website - as supply-cost curves are their 'speciality'. Iron ore markets are a little simpler in terms of their dynamics.

We discuss supply-cost curves in our book Global Mining Investing eBook. The book is pitched at investors who want to be active custodians of their savings. We book is focused on mining, so it should appeal to:

1. Active investors who want to specialise in a sector - mining is a good sector because of its cyclical price volatility and range of commodities. This approach is for people who are keen to learn; who take pride in their mental efficacy. 

2. Geoscientists who want to leverage their knowledge of science, finance, mining to achieve non-salary income. I would argue that you can use your savings more effectively than a non-industry person. The popular misconception is that diversification is risk management. Not necessarily; but I can assure you is that 'diversification is opportunity cost'. 

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Union Resources - takeover comes as expected - locked in 180% gain

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On a number of occasions - the last time being November 2012 - we have strongly recommended Union Resources as a takeover target, and therefore a great stock to just buy and to through away the keys until a takeover bid arose. That day has come by 6 months later. This has in the last day caused the stock to rise 180%. We bought this stock for 14c, and on the day of the takeover it was 11c in a weak market. Today its 31c, and truth be told, if markets were logical, it should probably be worth 50-odd cents. The problem as I see it is that shareholders are not going to get a good deal simply because in this market 'cash is king'. People will accept cash, even if its not a good price. Its not a good price because:
1. Mermaid offshore phosphate deposit in Namibia was bought from Minemakers (same share) for $US25mil; valuing the stock at around 41c a share. Correction: The takeover price values the company at $A32million, which is $6mil over and above the valuation of the Minemakers purchase price. 
2. The bid places no value on the company's shareholding in the Iran project; one of the largest undeveloped lead-zinc deposits in the world.

Now, you can wait for a higher offer, but there is the risk that it won't come. This is an unconditional cash offer; so my understanding is that it can be withdrawn after the expiry of the offer. The question for you is not so much the risk of missing out, but the opportunity cost of holding when a higher offer might not come. This is a statistical question because the market has been hit, so it might be more prudent to take this opportunity to take the cash to prepare yourself for the next buy.

The problem as I see it is that the takeover suitor does not necessarily need control of the project. They can creep along and get it slowly at a lower price. Having said that, they might raise it to tidy up lose ends. The question is - is it worth the risk as a shareholder? The last thing you want is to be one of the 10% equity holders holding stock when they move to compulsory acquisition. Now, much depends on how the directors respond to the offer. My problem is that:
1. The directors seem to be saying its a huge premium. That does not give me confidence. Indeed, its kind of misleading if they now come out and say its poor value.
2. I'm wondering if the company executives have a blocking stake of 10% to force a higher shareholding.

I have reluctantly taken the offer because:
1. Its cash and its a good time to re-invest
2. Its a bad market - and the company needs to raise working capital
3. The capital requirements for the company are onerous

But prospective sellers should consider that the upside is another 200% profit, i,e. for a total 400% gain if the directors are able to get a higher price. I frankly think the company is worth $1.50, but until Iran is the subject of a revolution, and shareholders discover that value, I don't see anyone offering that type of money. The lack of cash is a big factor for selling for me. I don't want to be diluted after the expiry of the offer. By al means wait for the offer. I might be a little cynical selling early because I've just become accustomed to the 'big boys' getting all the profits because they can rely on the lack of access to capital for small companies. You have to save your criticism for the governments who make this type of 'boom-bust' economy possible, which is ultimately the source of the tragic market conditions which allows big companies to win the day.

Interested in how you can make 200% profits like this more often. Well, this is actually a disappointing gain given the upside in this stock, and the spectre of a takeover in bad market conditions, however we do try to please. We first suggest learning how to become an active investor. You can become one of an elite group of investors who make exceptional profits by developing 'active minds' to manage risk, or really to dissipate risk, rather than to accept it, and 'diversifying' away from great returns. This only serves the fund managers who make commissions and the large multi-nationals who win on the 'divide and rule' strategy. If you like our active investment strategy - join us on Facebook or our Google Plus Community. Feel free to ask questions.

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

Orica an appealing exposure to mine services - look for that entry

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Orica Ltd (ORI.ASX) is a particularly interesting company because its one of those mine service companies which differs from others in several respects:
1. There are not too many explosive manufacturers that provide a down-the-hole delivery services. i.e. Yes, they actually charge the holes with 'prill' or ammonium nitrate and detonate the charge.
2. They benefit from the economies of scale and rapid expansion in 'volumes' which I describe in an article on mine service contractors. See this article.
3. They are benefiting from the development of larger scale BIF iron ore, copper-gold, copper-Molybdenum, coal mining operations globally.
4. They are involved in a highly concentrated service industry

If we examine the Orica chart over the long term its apparent that this company has been trending sideways ever since the global financial crisis started in late 2008. Now, the dividend yield is currently a very appealing 4% and the stock is actually off its lows.

Now, back in 2001 I made a lot of money using a secured leveraged equity product on Orica. This product was obtained through a company called Leverage Equities Ltd, however there are other companies like Macquarie Bank, which do this as well. Now, it entails them attaching a put option to your equity acquisition, and your downside is effectively underwritten. It is actually a very nice way to invest at certain 'great stock' plays or at certain points in the equity market cycle.

Now from the chart above, it is apparent that the commodities boom was great for Orica. Well, understand that Orica, as a producer of explosives and down-the-hole deliverer of those explosives, did not benefit so much from the 'price premium' for metals and coal, but mostly the volume increases. For the reasons highlighted in the previous blog post, this next cycle, will see Orica benefit more than it did in 2001, when I first bought into Orica. This is a clear indicator for investors to take two strategies:

1. You can trade the stock in the consolidation channel shown from 2010-2013. Currently its a good time to buy, and you can do that through CFDs like www.cmcmarkets.com, and sell when they reach the top of the channel. The stock pays a 4% dividend, so you could also opt for a put option at that point. 

2. You can set an alert at the top of that 'consolidation channel', and when you get that signal, look for a break-out, as that will in all likelihood signal the start of a new minerals boom. It might not start for another 2-3 years, but you have a nice 'signal'. You can set an alert and forget about it. maybe you might want to set a hyperlink to this article.

The cost of that leveraged equity was about $25,000. The profit to be gained was truly phenomenon. My entry price was around $3.70 if I remember correctly. The reason I bought this was because of two coincidental events:

1. A representative from Leveraged Equities came to our company. I was working for a boutique mining finance company at the time. So they gave us a presentation to promote their product.

2. Then later in the day, a representative of Orica came to our sister company, a retail stock broker, and gave us a presentation on the company. It was readily apparent at the time that Orica was a turnaround story. I jumped on. 

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Mining service companies offer good profit outlook - choose wisely

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One of our roles as investors is to critique others research; but an additional role is to add-value to others research without plagiarising it, since we respect their intellectual property, as we would expect them to respect ours. Now, I came across this article by TheBull.com.au describing the financial fundamentals of a number of mining service companies. I have not examined their calculations because its not a sector that I follow; however it is actually good exposure to this next phase of the mining boom. If you recall me saying, this next phase will be about 'volume' or 'capacity' increases; as opposed to strong real price rises. 

China and India will need more ore, but the supply-cost curve will be flatter, as they pay less for those more tonnes, but demand higher volumes. The reason why the supply curve will be flatter is because:

1. There will be many more mines

2. New capacity will be incremental to existing capacity, whether expansion of existing mine capacity or satellite capacity using existing railways, ports, etc. 

3. The spectre of pass-through of cost advantages to buyers resulting from these economies of scale at the tail-end of the supply cost curve, as they attempt to be competitive

4. There will be fewer factors to differentiate between projects

5. Cost savings through consolidation of miners. i.e. In the price spike in the 2000s, there was a rapid rise in the number of miners, particularly in the iron ore sector, which was already highly consolidated. This prompted miners to sponsor new market entrants, to give them more bargaining power looking forward. Now the majors are going to embark on another phase of consolidation. It will anger China of course, and that will probably demand some kickback for a party official. Yes, I know, its against Communist Party policy. Rest assured; it will be all worked out. 

Now, why is this good for mine services companies? Well, the reason why its good is because:

1. Mine service contractors struggled to provide cost-competitive services in the price boom because the spike to exploration caused a shortage of parts & equipment, rigs, as well as labour.

2. Mine services are actually more profitable than exploration services, since mining is continuous, so more easily supported. 

3. A flat supply-cost curve means its easier for mine service companies costs to be absorbed by miners as simply a 'pass through' to the consumer. 

4. The prospect of 'tough times' now means that consolidation in the sector will result in better profit margins moving forward.

5. The cost of capital for debt-financing has never been cheaper

6. We have already mentioned the very favourable growth in 'volumes'. Mine service companies are paid to mine 'volumes' as opposed to the contained metal content.

That is a lot of benefits. Of course some projects are better than others. i.e. You would expect a mine services company to prefer large mining operations, say coal, iron ore, because they have a 20+ year mine life, so easier to leverage their services and debt finance. Remember interest rates are going to be low for a long time yet. Of course these companies still have to be good managers, and you will want to watch their profit margins to ensure they are good analysts of their costs. Leverage is a two-edged sword. 

So this brings us to the research performed by The Bull - see this article. I never liked the accounting; I prefer the strategy and conceptual side rather than the number-crushing. Thanks to The Bull! 

Now, you might wonder which of these companies offers the best exposure; and whether you should invest now. The market is going through a 'correction' at the moment, so you might want to wait for a technical entry into these stocks - or others. These are mostly drilling contractors, however you might want to look at providers of other services to mines like:

1. Recruiting companies that specialise in mining - since recruiters are paid really well - though they have suffered a shake-out of profit margins as well. 

2. Security companies 

3. Catering companies

4. Transport companies, i.e. regional airlines servicing the mines, or bulk ore handling groups (you will need to look internationally). 

5. Regional media groups. i.e. A Western Australian newspaper group.
6. Explosives providers - A company like Orica does not just manufacture explosives, it provides a down the hole delivery service. i.e. This is a value-add service. I have made a special topic of this company

It is hard in most of these areas to get 'specific' exposure to mining. This tends to leave you looking at mining contractors, or regional service providers benefiting from the 'trickle down, like newspapers. Just ask yourself where the greatest upside and growth lies. I would think its with the mining contractors. Recruiting has low barriers to entry, so margins can be undermined. Once you get a good contractor, you won't change for a price reason; you will change by default, unless its a substantial point of disadvantage, and no contract is the same, so its hard to undermine the competitive position of a contractor. Its harder than signing up for a new cell phone contract, but you can see how they bog you down in details. Where do you think they learned how to 'complicate' the process....from dealing with companies. 

So back to what makes a good entry? Well, you will want a company who displays high margins, but you will not want a company who has high debts because they are fully leveraged, so there is no upside in terms of expanding earnings as the market volumes recover. You will want a low PE; but you would not want to compromise on the leverage upside. Cash on hand is not necessarily a good thing because it could be construed as under-utilised resources, or funds for acquisition. They may use these funds for acquisition, and that would be good news at this time. A takeover in uncertain times is always good if its a contrarian investment. 

Lastly, one will want to know what 'work in progress' might change the nature of these financial ratios. Such ratios can be dangerous because they can conceal an important context, which might not be alluded to with ratios, or it might be a conceptual consideration not readily quantified. This is the problem with ratios. Financially, use your technicals to pick entries. 

So when would you expect to sell such investments? Well, that would be:

1. When they are a technical sell

2. When interest rates start rising substantially - a long way off

3. When and if your stock is a takeover target - wait for alternative bids, and seek out the smaller companies which might in fact be the target rather than the predator

4. When global economic activity or equity markets again look peakish

The implication is that these mine service companies will be good long term investments when they bottom. You can happily put them in your super fund. I would not leverage a leveraged enterprise though using contracts for difference unless you have the diversification to do so. The last thing you want is a contractor dispute. It is preferable for this reason to have a stock with a diversity of projects, with no single over-investment in one project. Its actually good to have a regional focus since that is an economy of scale; and miners are price-takers anyway. This would not be the case however if your region of interest is all high-cost mining capacity (i.e, at the tail-end of the mine cost curve), as they will all be priced out of the market at the same time. i.e. Let's say that most iron ore miners are close to the cost, and you buy a mining contractor exposed to a suite of miners 2000kms inland. This is a 'transport cost penalty', so unless they have an offsetting advantage like premium ore grade and economies of scale from thick ore horizons and bulk mining and train freighting advantages, and say a backhaul, then you will find that this is a critically vulnerable stock to failure at times of metal price vulnerability. A likely ghost town scenario. 

When you see a bottom in this vulnerable market, you might consider mine service contractors. Just be weary about the timing as this financial uncertainty is undermining confidence, and therefore spending. But don't wait too late, use technical indicators. Its a long term strategy, so use a 1month 20-day period for an entry, then a relatively long term moving average as an exit signal. Mining contractors only go broke if mining ceases; otherwise their earnings are more sheltered than actual miners.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide

Profit from mining with Global Mining Investing eBook   Global Mining Investing Community.

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

Calculation of mine profitability using disclosed C1, C2, C3 mine cost data

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In our book 'Global Mining Investing' we offer some explanation of how to create mine cost calculations so that you can calculate the earnings of a company. Well, in this blog I want to provide some additional resources so that you can in fact practice with your appraisal of mining company earnings.

Consider Millenium Minerals (MOY.ASX). The company has just released its earnings for the March 2013 quarter. They were $10million, or $40 million annualised. This compares favourably with a market capitalisation of $60mil (according to Google Finance); however you might want to confirm that. It addition they have $11mil of cash and bullion on hand, so effectively worth $50 million. Now, you have to consider the impact of:
1. Mine expansion - generally justified by successful resource drilling - or extended mine life
2. Future capital raisings - to cover large capital expenditure like a mine expansion
3. Gold price outlook - price recently fell, but appears to be consolidating
4. Hedge book - a new mine will have some hedging to consider
5. Mining costs - High costs make the company sensitive to gold price fall, but greater upside to a recovery in gold prices.

But I identify this company to provide a case study in how to appraise mine costs and revenues, because it offers you all the information. When you buy most equities, you will have no idea what their commercial viability is because you don't see their 'unconsolidated' operational accounts. This is not the case if you buy miners because:
1. Prices are evident
2. Mine operating costs are disclosed - This is because they are 'price takers' (there are many producers in the market) - so you are more readily able to appraise them
3. Price outlooks can be forecast up to 1-3 years out - whether hedged or open to forecast

These are of course compelling reasons to invest in mining stocks. So what are our sources of information:
1. Quarterly report - see here offers the quarterly cost, production levels, etc.
2. Mine cost model - see here for base metals, here for copper, and here for gold (Oz Mineral's Prominent Hill project)
3. Google Finance - for the latest number of shares and market capitalisation - you should confirm this number with the Quarterly Cashflow reporting because unlisted shares are often not included, and this will also tell you their cash holdings.

Here is another gold project which you could model to test your skills establishing the value of companies. This is an emerging gold miner in New Zealand, listed on the NZX and ASX, called New Talisman Mining. I did not look at their broader corporate interests.

Of course if is desirable if you can model these spreadsheets on Google Documents or Excel. I will eventually do this for a stock so that people can access it, or share it. 

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook   Global Mining Investing Community.

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

Linking projects to opportunities

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This YouTube video on the prospect of a Japanese 'pyramidal city' based on modern engineering methods highlights where innovation is going to take us in terms of design, planning and materials. These structures will need new, stronger, light-weight materials, and that means:
1. Japan - a country which pushes modern technology
2. Australia - a country with large resources of materials and a safe geopolitical regime close to Japan, and more broadly Asia.

The intersection of these ideas is:
1. Raw material providers like Archer Exploration (AXE.ASX) - which holds a large tract of graphite flake which can be converted into carbon nanotubes - the envisages building blocks for these structures.
2. Technological developers in academia and research fields
3. Financial sponsors like Mitsubishi Materials who possess advanced skills in material processing.
4. Project developers such as architects, engineering corporations and ultimately property developers looking for new low-cost solutions.

The contemporary problem is the high cost of land in central Tokyo, the restrictions on development, and the need for new low-cost building materials to keep costs down, and to allow massive new structures. Its about capturing or optimising the benefits that are to be derived from material science. Every advance in the past ultimately made use of new materials. Ultimately it is a large project such as this which is destined to underwrite the large-scale development of carbon nano-tubes.

These developers take time. Projects need to be proven up, technologies need a commercial process to separate and refine materials, and they ultimately need to be fabricated cheaply into useful components. It starts with relationships which will take years to develop. You might ask - does Japan need more office/residential space? Or is this just a pipe dream? Japan is experiencing zero population growth, however there is a fair rate of population increase resulting from people moving to the largest cities. They do however tend to move to the outer city because they can't afford to live in the inner city. Are we thus going to see wealthy people leaving existing housing to live and work in a 'modern city'? Well, this might well be the case, and as technologies do, it might even drive down the cost of housing in central Tokyo.

Anyway, the City in a Pyramid is an engineering concept which I dare say will have its day in time. The developers Shimizu are in the right place at the right time. Might the Abe-led government going to sponsor such development? We will see; however this is not a problem or solution that tends to impact other nations; at least not at this point. What is more, one has to question whether its a false economy for a lot of cities. Consider that the high cost of most city property arises from restrictions on development, i.e. Auckland has very high property costs because of restrictions on fringe development. This is common for most cities. Japanese cities, like Paris (France) are restricted in terms of building heights, with the added issue of small land lots, making assemblage of a 'building plot' hard in a culture which does not like to sell land. Perhaps these technologies are destined to be motivated by other concerns. The steel age might not be over just yet. 

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook   Global Mining Investing Community.

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

Types of investor

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For those interested in my stock research - by all means check out my posts on my new Global Mining Investing forum. The purpose of this forum is to assist people become professional or 'active' investors. There are basically two choices in life:
1. Passive 'outsourcing' strategy - whereby you pay someone to invest, or even just take their advise without processing the information through your own mind. This strategy entails trusting that the government regulatory system works (which was invalidated by a litany of finance company collapses and the global financial crisis), or you could consider..... Funds are making 12-16%, sometimes as much as 18-20%.
2. Active 'personal responsibility' strategy - whereby you decide that you are surrounded by sharks and that you are going to have to fend for yourself. The benefit is that you might learn something, you might make more or less money, but you will be in control, and ultimately responsible, as opposed to thinking or hoping that someone else is responsible. There is huge volatility in this end of the market. Ultimately it depends how well-researched, how disciplined, how analytical, how aspirational you are, and also how 'psychologically' validated you are. You might struggle to make money if you need validation from the market. It won't stop you; its simply an obstacle to overcome. Its a different game to passive investing where you have a relationship with a brand name fund manager who has millions to spend on advertising. For active investors, you can research stocks that others talk about, and/or you can seek your own buys, and your own community. I hope I'm part of it. This is a way of living and more importantly, 'a way of thinking'.

Clearly I'm invested in encouraging people to participate in my community who:
1. Are invested in being active investors - who have a specific interesting in making mining their primary 'specialised' channel for investing.
2. Are interested in helping or guiding their children to become efficacious investors. I started at age 11yo, when my father brought me shares in Abrolhos Oil in the late 1970s.

You might wonder - why mining? There are several reasons why - however I will answer this question on a different post.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook   Global Mining Investing Community.

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

Why invest in mining stocks?

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I raise this question because people might be reluctant to invest in mining because:
1. They might harbour the perception that it is a very risky sector
2. They might consider it to be a very technical sector
3. They might consider it a too specialised and thus vulnerable approach to investment

My response to these questions is that:
1. Risk is managed - not avoided. By 'risk management' I mean identifying all the factors pertinent to mining which could conceivably impact on your investment. I have written a 450-page book on the topic based on my 30-odd years experience, and I've probably not missed much. The perceived risk is what makes the returns so great. The barriers to market entry are what results in stocks becoming so under-appreciated, so cheap, and ultimately so lucrative, to attract attention. Timing is very important; and awareness is critical.
2. Mining is technical - but its not incomprehensible. You will readily understand mining concepts, whether you look at online dictionaries, our book glossaries, or watch some online YouTube videos about mining.
3. Mining is specialised - The huge benefit about mining is that it entails knowledge that applies to all metal, energy or industrial commodities across the globe, and many of the concepts can be applied to other commodities (like dry bulk agricultural commodities or fertiliser). Our book explores a comprehensive range of topics relative to mining - and that's because I covered the breadth of the industry in my career history. There is generally always a 'sexy' sector to apply your knowledge to, even in a recession. Even if you are not interested in those 'hard calls' in recession, the returns are so lucrative in the bull markets that you will not regret the time & research investment.

Aside from these normal apprehensions about mining, there are a number of positive aspects:
1. The cycle - This helps to make different commodities appealing at different times, whether its copper, lead  or zinc, counter-cyclical gold or precious metals, or exotic metals such as rare earths, tantalum or zircon.
2. The returns - Some projects are non-performers, but some well-managed companies simply offer enormous returns. We will show you that the best returns are not with the large companies but with companies with world-class projects offering stand-out benefits that differentiate them from the rest of the market. My best investment return was 3200% over 3 years - it was an option on a company called Aquarius Platinum. Other stand-out performers I bought were Queensland Gas Co, Minotaur Resources and  Anvil Mining. All of these companies were exceptionally cheap until they became 'well-loved'.
3. The inherent value - Commodities are very valuable, so a miner basically has a license to make money over the life of the mine. If you understand the risks of mining you might realise that its best not to wait until you have achieved full value because the premium you pay for any extra return is not worth it. Some commodities like coal, iron ore, oil & gas are being taxed more, and this is certainly a dampener on some metals, or the countries in which they are mined (i.e. the Mineral Resource Rent Tax), however for other project vendors, the projects are still very lucrative in the right market conditions. i.e. gold in Africa. The royalties are very reasonable, and there is good potential for lucrative returns from positive project dynamics, without using debt leverage.

The returns are potentially so high because commodity prices are so volatile; yet predictably so, since they broadly follow cycles. High prices mean new supply is needed. So one looks for a good project. If you find a company with the right corporate and project qualities, you invest subject to pertinent factors.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook   Global Mining Investing Community.

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

Join our Global Mining Investing Community

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For those interested in my stock research - by all means check out my posts on my new Global Mining Investing forum. The purpose of this forum is to assist people become professional or 'active' investors. There are basically two choices in life:
1. Passive 'outsourcing' strategy - whereby you pay someone to invest, or even just take their advise without processing the information through your own mind. This strategy entails trusting that the government regulatory system works (which was invalidated by a litany of finance company collapses and the global financial crisis), or you could consider..... Funds are making 12-16%, sometimes as much as 18-20%.
2. Active 'personal responsibility' strategy - whereby you decide that you are surrounded by sharks and that you are going to have to fend for yourself. The benefit is that you might learn something, you might make more or less money, but you will be in control, and ultimately responsible, as opposed to thinking or hoping that someone else is responsible. There is huge volatility in this end of the market. Ultimately it depends how well-researched, how disciplined, how analytical, how aspirational you are, and also how 'psychologically' validated you are. You might struggle to make money if you need validation from the market. It won't stop you; its simply an obstacle to overcome. Its a different game to passive investing where you have a relationship with a brand name fund manager who has millions to spend on advertising. For active investors, you can research stocks that others talk about, and/or you can seek your own buys, and your own community. I hope I'm part of it. This is a way of living and more importantly, 'a way of thinking'.

For me personally, making money from mining stocks is not about risk-reward; its about exploring another opportunity for developing a passion and taking pride in the results. You get what you want. I have written an ebook to help people get on the path to 'global mining investing'. I actually wrote this book several years ago; in order to systematise my own thinking; but in this current market 'lull' (recession), I decided to prepare a 'massive' addition to it, to make it a complete reference for 'active mining investment'. There is a review on the book at this site. Cameron was my first customer. hehe. He is a geologist like me. I have yet to start marketing this book, so bare with me as I give it more credibility and draw more customers with more reviews. Don't trust me - watch for results. Watch the sharks! If I'm wrong - tell me so! Participation wanted! Question also welcome.

Its not the style of investment most people embrace, I guess because they think its risky. Which is true for those who don't try, who don't learn to develop their skill. Most people think they are good parents. Most people think their parents were good parents. Most people don't know because they don't know what a good parent looks or feels like. You need standards of comparison. This is not the easiest time to make money from mining stocks. Not all boats are riding a high - there is no king tide here. You need to be seriously selective about your stocks; know what is good value because its not the same in all markets.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook   Global Mining Investing Community.

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

Stocks to watch - 22nd March 2013

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Updating developments in a number of shares I own.
1. Gryphon Minerals (GRY.ASX) has found support, and I expect a breakdown in this one in coming week or two.
2. Gippsland Ltd (GIP.ASX) - made a decision to quit this one in the short term because the tide was telling me there was going to be an issue. I will sit on the sidelines waiting for a re-entry into this one.
3. Global Minerals & Energy (GBE.ASX) - I sold out of this one because it was not making any progress. I remain interested in the stock on weakness, however the share buy-back, whilst a source of support, its only the case up until 7.3c, at which point sellers triumph. The buy-back expires in June I think, so I will see what happens then.
4. Millenium Minerals (MOY.ASX) - Remain interested in this one, but only on weakness, since I see Gryphon Minerals as better exposure to the gold sector.
5. Archer Exploration (AXE.ASX) - This stock has had some favourable news about its metallurgical grade for its graphite. Aside from the prospects for a resource upgrade, the possibility of a JV farm-in partner, I am inclined to view this as a nice investment because the product quality value might ultimate offer a exponentially high purity. Its a global resource and they are testing other targets in coming months.
6. Silver City Investments (SCI.ASX) - This is an explorer at Broken Hill. I know these executives from former CBH Resources (aka Consolidated Broken Hill). The prospect of current drilling finding a 'lost limb' to the Broken Hill field looms high as a potential speculative play for a small company. I like this company for its cheap entry into an often overlooked mineral province.
7. Union Resources (UCL.ASX) - There is according to a recent interview the prospect of a fast-tracking of this project. UCL has a 45% interest worth (backed on the exit price of Minemakers of 45c per UCL share), so at 13c they are excellent entry. I presume the buyers wanted to make money from their stake, so I'm also seeing the value-add of in-house (Marmain Mining Plc) engineering expertise.
8. North West Resources (NWR.ASX) - This is a company which I like because I think antimony-gold make for a glorious resource base. The metal association gives good continuity for gold when in presence of stibnite (antimony sulphide), though its probably going to be a deep resource, and the vendors are very slow to progress the project. Recent drilling gives confidence to this resource.

I am expecting the focus to be on SCI and AXE because they are currently drilling. I'm also expecting a technical break-out in GRY in the coming week.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

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

Gryphon Minerals (GRY.ASX) - good buy!

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Gryphon Minerals (GRY.ASX) is a stock that I recommended a number of times back in 2007, 2010, and finally Jan 2009 (draft only - I never published this blog post - probably because I was waiting until I buy myself). Anyway, based on the chart, the entry price was 12c. Exploration has since taken the stock to $2.00. Today the stock has issued 52mil shares at 60c, and is now 34c. This stock conveys the cycles inherent in mining stocks. So here we are today, Gryphon Minerals has:
1. Some $52mil in cash, $30mil in investments
2. A resource of 4mil oz
3. A mine construction plan expected to deliver a capital cost payback of 2.5 years near current ($1500/oz) gold price, or 1.5 years at $2000/oz gold price
4. The added potential to offer expanded resources
5. The added potential to expand mine plant capacity from 2Mtpa to 4Mtpa
6. A large tract of exploration acreage
7. A mid-tier mining stock which has appeal for a takeover/merger, either of which proposition which result in a re-positioning of the stocks.

It is apparent that we can see short term upside to 60c in this stock, but there is an opportunity of course to wait for longer-term sustainable earnings. There are however reasons not to wait, and that is the prospect of a takeover or exceptional drilling results from new areas, resulting in resource upgrades. This company has strategic gold acreage in Africa - it will be a target for other Australian and Canadian miners who will look to diversify away from their specific country risks. Mind you, after a Australian Labor Party (Rudd/Swan/ Gillard) -inspired mineral resource rent tax (MRRT), I have come to regard Western governments as the worst offenders in the sovereign risk stakes. Not to say that there is not a justification for some type of resource 'rent' in mining; but you don't extort wealth from title holders, or equity investors with a stake in those companies. So Africa looks good to me. Ghana is one African country that adopted a modest tax.
The other short term reason favouring gold stocks is the gold price - which is currently sitting at its support level. This stock has just been removed from the ASX-200 Index, so it has been punished for that reason. We are however confident that it will return to the index in due course, and that it will out-perform the broader market.
I will however caution investors that there is no strong chart 'technical support' for this stock, so whilst a consolidation is evident, you might want to use technical indicators to pick an entry. It has not yet become a technical 'buy'. It is however clearly good long term value. One should of course also keep an eye on the gold price to ensure it has support at $1550/oz. The market is currently divided on the outlook for gold. We provide our reasons why we like gold (and Japanese foreclosed & Philippines property) here.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

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

Gryphon Minerals (GRY.ASX) - buy

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Gold has now convincingly broken up above $900/oz, signalling a move higher move. It would therefore seem appropriate to look more closely at gold stocks. A reader directed me to Gryphon Minerals, which is a stock which I remember as having good gold projects in Africa. Upon further investigation I can confirm that this is a good stock; so let's review it:

1. They have over $5mil in cash - so they won't see to return to the market for more money soon

2. Their market capitalisation is just $9mil (with 114mil shares at 8c), placing a value of $4mil on their gold projects, when they have $500mil of in-situ gold.

3. They are surrounded by large gold deposits

4. They have excellent exploration upside - with a large mineralised shear zone to test, which extends to a major gold mine further south.

5. The chart is indicative of a technical buy



The problems for them are that:

1. They are not very advanced - they only have 400,000 oz of gold resources. That will not excite the market, but some success drilling the strike extents of this deposit I am confident will excite the market, and in a gold boom, we can expect this stock to retrace to its previous highs. Short term targets are 15c, 25c, 35c, 55c, but I believe this stock will go to its previous high of 80c. In a gold boom, a rising tide raises all ships. We have the signal for the gold boom.

-----------------------------------------------

Andrew Sheldon www.sheldonthinks.com

Global Metals & Mining (GBE.ASX) 'underwritten'

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If you were looking for an investment in the mining sector, you could do a lot worse than Global Metals & Mining (GBE.ASX). Aside from the fact that the company has $19mil in cash, and a total market capitalisation of $15.5 million (at its current share price of 7c), we should highlight that:
1. This values the company at 'negative' $3.5mil, when in this type of market, I would expect a company to be trading at positive $3.5 million before any consideration of its assets.
So what are the assets?
2. Well it is
But there is more...
3. The company is half way through a share-buyback plan, and historical evidence suggests that its entry price is 6.5-7.5c, averaging 7.1c. Not a bad entry you might say, that makes maximum use of its equity, as well as 'underwrites' any investment you make in the company. The buyback expires in May 2013 (3-4 months), so that's nice insurance given their historic propensity. You might argue that such buy-back prevents you from getting a lower price. That is true enough; but it does protect the price you do get, and for many investors, that is better.
4. The Dow Jones is testing its 5-year (2008) highs of 14,000 points. I expect the market to tentatively break that, then to rally. The US property market has turned, Japan is engaging in stimulus, Asia can be expected to get stronger, and well, the US has no qualms really about monetary stimulus either, since they are only repaying in debased USDs. The fundamentals of 1 billion people engaging in this larger globalised market are compelling. Commodity prices have also recovered, so we expect more of the same. This is a mere correction in a 'super-cycle' that will go on for another 20 years. A 'correct is good' as my father would say. Well, not after a decade-long boom, but you have already paid that price. The recent 4 year recession is typical, and not unprecedented, but it need not be sustained given the positives.

So I have yet to speak of the projects. The flagship project for GBE is a niobium-tantalum resource. Both useful commodities, but the niobium resource is particularly important because the principal source is a single mine in Argentina. Understandably, the Chinese are keen to develop this project as a 'secure source of supply', and you can expect to benefit from them bankrolling the project. With $19mil in the bank, there is no concern about a cash drain, and Chinese equity participation should avoid dilution.

These also have a rare earths project which is less advanced.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

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

Cash backing and cash raising for mining stocks

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The cash backing of a speculative mining stock is critical. In fact the lack of sustained cash earnings is the defining attribute of a speculative mining stock or explorer. The reason they are raising money is:
1. They need to finance ongoing exploration
2. They need to finance a capital development; which will ultimately give them a cash flow stream
3. They want to recapitalise the company so that it is able to deleverage or fully develop its opportunities, i.e. A company might not be satisfied with simply wanting for earnings to finance exploration. They may want to raise cash in the short term with the expectation that this raising will result in an expanded mine-life, aid their capacity to raise future debt. We need to recognise that most companies maximise leverage in the project financing stage to maximise returns. High returns is what ensures financing. But banks will expect companies to reduce risk as soon as possible to satisfactory levels. Such provisions are not likely to be made public.

Now, a company with large cash reserves can be viewed in different ways. Consider that:
1. It avoids any risk of future cash raising
2. It presents a problem of locked-in dilution
3. It presents a problem of non-performing capital. i.e. They have your money, and they are not using it.

Now, this need not be a bad thing if you buy a stock which is cashed up, but the value of the company is a fraction of its cash or liquid assets per share. In this case, the company has $25 million of cash in the bank, and yet it has a market valuation of just $15 mil. This is despite the fact that it also has a very promising, advanced mineral project in Africa. Why the low value? Well, markets are often 'fad driven. Speculative mining stocks are a fad. They go from positions of 'over-sold' to fair or over-valuation. This will depend on the nature or the extent of the recovery and the sustainability of the confidence underpinning it.

Of course the value of the mineral and cash is contingent upon the way these assets can be used. Consider that:
1. The mineral project has a strongly discounted value in the ground. In a recession, or in a period of low commodity prices, this project will be intangible, and thus it can be expected to remain a low value on the balance sheet
2. Cash is great, but if your holdings of 'tangible' cash are being spent or rapidly depleted on 'intangible' exploration for a project which is unlikely to find application in a recession, then this is not appealing.

So what are we to make of a company with $25mil cash worth less than $15mil (say $5million) if we think the project has a valuation of $10mil. We cannot expect this stock to have upside to $25-35mil unless there is a change in market sentiment. We can be assured that we are close to the bottom at such a price. After all, it would benefit shareholders if the company paid a special dividend of say 10c/share knowing that the company will raise money at stronger prices later, when it actually needs the money.

You might wonder why the company has the excess capital in the first place. It is often the case of:
1. A company which sells out of a minority project interest in order to pursue opportunities it has greater control of, and more upside.
2. A cash raising at much higher share prices; followed by a confidence collapse which resulted in the reassessment of their activities, or at least their short term value.

For more understanding of speculative mineral exploration and mining stocks see our mining page or my personal profile.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

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

Question of company options expiring

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A question from a reader....

You say "in your ebook [about a company which] is 7c right now and I notice that they have 400 000 exercisable options at 25 cents expiring in March... I have seen it mentioned in your book that companies may try to raise the share price in order for them to be exercised or is that wrong in this case? If so, how can you you tell if this will or wont occur?"

The answer to this question is evident in the context. Consider the following factors:

1. A company is only going to bother underwriting options if there are a lot of them due to expire. In this case, 400,000 is very few, i.e. Only 0.5% of their issued capital. There is no question of dilution or raising a great deal of money, or even option holders selling shares to exercise their options, if they are so inclined to maintain their exposure. 

2. The funding would be needed for something - justification required perhaps for an underwriter. In this case, the company has $25mil in cash and a Chinese partner with access to cheap capital. 

You can of course learn more about our Global Mining Investing at website. I describe the case of Western Reefs in the 1990s, which had a very large number of options overhanging the stock. Options in these days were an inducement to take up an issue. Now, these options were underwritten in order to raise funds for an alluvial gold processing plant. I new the share price would be supported in order to ensure those options remained 'in the money' at the point of expiry. This would induce many shareholders to exercise, and would allow the underwriter to avoid fully carrying the cost of the option funding. The underwriter would need to provide some support or confidence in order to exit their own exposure. That might be some time in the future if they believe in the long term outlook for the stock.

Japan Foreclosed Guide Profiting from the Gold Boom Global Mining Investing eBook

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