Thursday, September 30, 2010

Australia's 2009 First Home Buyer Bubble


With Gold & Silver hitting fresh highs tonight (in USD) I feel a little annoyed that I'm writing about housing, but if I don't do it now I might never get this completed! 

In February 2010 I started to write an article, after several nights and 1700 words later I felt I'd hardly scratched the surface of the topic, but I lost interest in completing it at the time. I am going to try and condense what I have into a blog here.


Introduction

In 2009 a surge of first home buyers (FHB) flooded the Australian property market. They bought housing in record numbers, using high leverage, with record loan size (both nominal dollar amount & compared with non-FHB buyers) and in an environment of historically low interest rates.

This was driven by a variety of factors, including but not limited to: low interest rates (including honeymoon interest rates under 4%), lenders relaxing their credit requirements after a squeeze in 2008 & the introduction of the First Home Owners Grant Boost.

Keep in mind this article is not so much about property prices and whether Australian housing is over valued; it is about the bubble in first home buyers numbers, you will have to make you own conclusion about what these numbers might mean for the market and prices to come.


The First Home Owners Boost Scheme

The First Home Owners Boost (FHOB) was introduced in October 2008. For those not familiar with the scheme, this was provided on top of the original First Home Owners Grant (FHOG). The two schemes combined provided a total of $14,000 for the purchase of established homes and $21,000 for new homes. Further to this, other smaller grants and stamp duty concessions were (and in some cases still are) available through state and territory governments.

Initially the FHOB was introduced with the view that it would run to the middle of 2009, but in May 2009 it was extended, with partial removal scheduled for  October 1st 2009 and the complete removal of the boost on January 1st 2010 (with the FHOG of $7000 remaining).

Also in early 2009 came Kevin Rudd’s Household Stimulus Package with many young couples receiving $900 each and families receiving even more in some cases where they had multiple children ($950 per child).

These boosts, grants, stimulus packages & concessions acted as a multiplier, increasing the deposit available to first home buyers which pushed up the prices not only of property in the range of first home buyers, but also in higher price brackets. The increase of prices in lower price brackets provided higher deposits for those upgrading and so on, hence the multiplier effect.

It bought thousands of buyers forward in their decision to buy property, where they may not have otherwise considered buying. It was a terrible decision to introduce this boost and I think the consequences of the decision will be not be fully realised for some time to come.


Introductory/Honeymoon Rates

AFG Figures - AFG makes up approximately 10% of the entire mortgage market

Introductory rates (otherwise known as honeymoon rates) are exactly as the name implies, an introductory period where the interest rate on the loan is lower. Usually this is for a 6 or 12 month period, following which the loan reverts back to the standard or discount variable rate.

An unusually large percentage of these loans were taken up during the period of increased FHB activity. While there is no conclusive evidence that I can find linking first home buyers to this abnormal take-up in intro loans, it does seem likely FHBs were partially driving this increase.

It’s interesting to compare February 2008 to February 2009 where there was an increase of over 300% of this loan type taken up. The increase could likely also be attributed to the aggressive deals that were available at the time with some financiers offering rates as low as 3.99% for 12 months to attract borrowers.

Most of these loans, although attractive on first appearance, have clauses that ensure the bank is appropriately compensated if the borrower decides to break the loan within a short period of time (generally if they refinance or payout the loan within 3-5 years there will be additional exit fees on top of any standard costs/fees).

An example of this type of product was FirstMac’s “Fight Back” loan with a 12 month fixed rate of 3.99%, reverting to the standard variable rate following that period. For this product there were exit costs consisting of: Year 1 – 2%, Year 2&3 – 1.5%, Year 4&5 = 1.2%. So in a situation where the buyer wanted to refinance after the first year, but before the end of the third year this would have incurred a $4500 exit fee on a $300k mortgage.

That same FirstMac loan is likely now charging an interest rate around 7%, this is quite a jump from the rate these borrowers would have been paying only 6-12 months ago. An increase of 3.01% is an extra $179 per week on a $300k loan.

While serviceability would have been calculated on the full rate + buffer it still does not instill confidence that the first home buyers that chose introductory rates are now paying a lot more than they were.

At worst these intro rates resetting could cause a large number of defaults and forced sales as the owners realise they cannot afford the increased repayments (especially in a situation where rates continue to rise, which as of September 2010 is looking quite likely). At best these resets will reduce the amount that the borrowers had potentially been spending on consumer goods & discretionary items which could have negative effects on the greater economy.


Leverage

In early 2009 over 55% of FHBs were borrowing at an LVR of 90%-100% (with over 30% at 95% or higher).



What does this mean? An increase in LVRs coupled with the FHOG boost caused these situations:

A) Buyers who didn’t have a large enough deposit to buy were now able to with the increased grant.

B) Those who were already looking to buy with a deposit used the extra boost to further leverage their buying power.

Some might disagree that the above two situations occurred in large numbers, but the increase in LVR by first home buyers shows that they must have. If first home buyers had simply used the boost to pay a larger deposit on a property they had already been considering then we would have seen a drop in LVRs.

Leverage can be a useful tool to the seasoned investor. Many investors use leverage and interest only rates to increase their exposure to property. In the wrong hands however leverage can be a very dangerous tool as while there is increased exposure to rising prices on the upside there is also increased exposure to falling prices. For those that have borrowed at an LVR of 95%, a 5% increase in house prices would see a 100% gain on their amount of equity, a 5% drop would completely wipe out any equity.

The following is an example of just how much difference to purchasing power the low interest rates, increased FHOG & easy credit can make for an average couple.

Jane & Johnny (Income $40k pa (each), $34k net ($5660k net combined pm)
$4k subtracted for stamp duty/costs to borrow/pest & building inspection/misc
Calculator & Rates used - 30 Year Loan Term (no other commitments)

Feb 2009
Rate: 5.65%
Saved Deposit: $20k
FHOG: $14k (-$4k costs)
Total Deposit: $30k
LVR: 95%
Serviceability Allows: $534k
Deposit Allows: $570k
Purchasing Power (Incl. Dep): $564k
  
January 2010
Rate: 6.65%
Saved Deposit: $20k
FHOG: $7k (-$4k costs)
Total Deposit: $23k
LVR: 95%
Serviceability Allows: $485k
Deposit Allows: $460k
Purchasing Power (Incl. Dep): $483k

As you can see in the above example using high leverage, lower rates & an increased grant Jane & Johnny were able to increase their purchasing power by $81k. This is by no means an extreme example. With the extra 16% purchasing power they can then use this to bid up the price of properties against others in the same situation, is it any wonder that property prices rose in 2009?

Something else to consider when looking at LVRs is that some financial institutions have started to reduce what they will provide to borrowers. While 100% LVR loans were commonplace in 2007, over 2008/2009 many lenders reduced their maximum lend to 90-95% and some lenders have tightened even further.

A huge increase in enquires for 100% mortgages during the first 2 months of this year shows that first home buyers were still keen to purchase, but simply didn’t have the ability to do so with the reduced deposit.


Breaking Records

During 2009 there was several records broken by FHBs (ABS data).

The first record was a comparison of average loan size, FHB vs non-FHB. Normally they were within a couple of percent of each other in terms of loan amount, however in February 2009 FHB loans peaked at 14% more than non-FHB loans. Although February was the peak against non-FHB loans, FHB average loan size continued to increase over the year, rising from $245,500 in February 2009 to $278,700 in November 2009, an increase of $33,200 (13.5% increase).

The second record broken was the number of dwellings financed FHB vs non-FHBs. The percentage of  FHBs peaked in May 2009 at 28.5% of all dwellings financed; this was the highest percentage in the history of the figures available from the ABS (1991).

Along with the record loan size and percentage of finance we also had record numbers of FHBs taking up the grant over the grant period (and 2009).

ABS statistics show a record number of first home buyers took up the grant while the boost was available, this is also confirmed by the Minister for Housing office in their statistics:
ABS data shows October 2008 – September 2009 (185,546)
ABS data shows October 2007 – September 2008 (123,513)
An increase of 62,033 buyers (over 50%) of the previous years numbers.

The Minister for Housing at the time said that 190,050 took up the grant over October 2008 to October 2009.


Conclusion

What does this all mean you must be thinking...this information wasn’t gathered with the intention of convincing you of anything, so in conclusion there is no conclusion.




September 2010 Update

Many of the factors that drove housing growth over 2009, including low interest rates, the FHOB and relaxed foreign buyer laws have now once again reversed with the FHOB ending, rates back on the rise and due to public outcry the foreign buyer laws were re-tightened.

Market conditions are looking very similar to 2008, with:
It's just a question of whether this is just another short term blip down on the house price chart before they take off again or the start of something more sinister. Will the government intervene again in the market like they did with the boost? Will it be effective a second time? Time will tell.


BB.

Wednesday, September 29, 2010

Only 3 "pure" Silver plays on the ASX

CCU, SVL, AYN ... I get the feeling these three codes will come up very frequently on stock discussion boards over the next several months. Silver (priced in USD) has recently broken out to fresh 30 year highs as the precious metal bull market kicks things up a notch, Gold has surpassed $1300 to reach new highs, the HUI is approaching the high of 519 set in March 2008, all signs are pointing towards an explosive end of year for the metals & related stocks. 
During periods of high interest in precious metals Silver tends to outperform Gold as do the mining stocks, so you can just imagine the interest we could see in Silver mining companies, especially if Silver climbs in a parabolic fashion as I suggested it might in another recent post: "Where to for the price of Silver?".

The Gold:Silver ratio is still around 60:1. Before the 2008 collapse in precious metals prices this ratio was sitting around 50:1. A 50:1 ratio today based on the current Gold price would give us a Silver price over US$26.

Australia's large Silver producers do not do so as their main focus ... so finding exposure on the ASX to Silver's price upside can be difficult. To my knowledge there are currently only 4 "pure" Silver companies on the ASX (by pure, I mean Silver production or exploration is their main focus). One of those companies (CXC, Coeur D'Alene Mines Corp) is delisting from the ASX in December this year. That will leave us with 3, which brings us back to the codes listed at the start of the blog ... CCU, SVL, AYN, these are the 3 ASX codes for the following companies:


Cobar Consolidated Resources Limited (CCU)
Silver Mines Limited (SVL)
Alcyone Resources Limited (AYN)

Below is a short introduction I have written for each, I will hopefully find time to cover each of them in more depth in the near future.

In my opinion the real speculative money has not really caught onto Silver's rise, as Silver rises further I expect these 3 companies will benefit handsomely through a significant rise in their share prices.


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Silver Mines (SVL)
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Share price: 18.5c
Number of shares: 94m
Number of options: 30m (12c, May 2011)
Market cap (not inclusive of options): $17.4m
Cash: $1.8m + $472k = $2.27m (placement/end of June Qtr)
Silver resource: 4.6m oz @ 200g/t
Market Cap / Resource = $3.78 p/oz

Silver Mines listed on the ASX in January 2007 with the purpose of exploring several tenements in the New England region of north-eastern New South Wales. The tenements are all considered prospective for silver and to a lesser extent gold and base metals. Their tenements consist of over 1,300 km2 of prospective ground in an under explored province. Webb’s Silver has a history of mine production over 1885-1901 and 1962-1965, the mine produced about 40,000t @ 700g/t Ag.

Recent high grade results from a drilling program at their Webb’s Silver project include:

RC076 – 25m @ 1,175 g/t silver from 146m (incl. 1m @ 6,150g/t Ag)
RC082 – 8m @ 183 g/t silver from 167m (incl. 3m @ 337g/t Ag)
RC097 – 4m @ 823 g/t silver from 90m (incl. 1m @ 2095 g/t Ag)
RC098 – 24m @ 316 g/t silver from 84m (incl. 1m @ 1600 g/t Ag)
RC100 – 11m @ 635 g/t silver from 74m (inlc. 1m @ 3008g/t Ag)

13,000m worth of drilling to date has been completed at the Webb’s project with another 4000m planned by years end.

An upgrade to SVL’s resource is expected very soon which will incorporate many of the recent drilling results; the resource was last updated in 2008.


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Cobar Consolidated Resources (CCU)
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Share price: 27c
Number of shares: 131m
Number of options: 5m
Market cap (not inclusive of options): $35.3m
Silver resource: 50.6m oz @ 71.8g/t (Res. 14.3m oz, 97g/t) + 2.7m oz @ 47g/t
Cash: 3.7m (end of June Qtr)
Market Cap / Resource = $0.66c p/oz

Cobar Consolidated listed on the ASX in July 2006. In December 2007 CCU entered into a joint venture agreement with CBH Resources Limited over its Wonawinta tenement EL6155 (initially with potential to earn up to 70% interest), which was located near it’s existing Gundaroo Prospect. A maiden resource was announced in mid 2008 with several upgrades as drilling continued over the next 18 months. CBH Resource’s interest in the Wonawinta Project has now been reduced to a 2% royalty.

An optimised mine schedule has been performed, capital expenditures for plant construction estimated and debt adviser appointed to assist them with financing the project. There is potential for production by the end of 2011 with cash costs expected to be in the vicinity of $6.50p/oz (after lead credits).

In a recent announcement showing target minerlisation it was suggested that there may be another 40m+ oz to be discovered over and above their existing resource.


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Alycoyne Resources (AYN)
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Share price: 3.7c
Number of shares: 770m
Number of options: 140m
Market cap (not inclusive of options): $28.4m
Silver resource: 15.1m oz @ 79g/t
Cash: $3.7m (end of June Qtr)
Market Cap / Resource = $1.88 p/oz

Alycoyne Resources is essentially a recapitalisd Macmin Resources (MMN) which went into administration in 2008 after being unable to raise required capital in the middle of the GFC.

In March this year AYN announced a 15.1m oz resource and indicated resumption of production would resume later this year. $20m was spent on the infrastructure that currently resides at their Twin Hills mine.

In a recent capital raising of $3.7m a non-executive Chairman injected $1m of personal funds.

An update to their resource is expected soon.


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BB.

Disclosure: Position held in SVL & CCU. Not investment advice. Do your own research.

Tuesday, September 28, 2010

White Cliff Nickel (ASX: WCN)

You could be forgiven for wondering why I would be covering a nickel company on a blog about Gold & Silver stocks! However, if you look further than the name it is soon obvious that WCN is much more than just a nickel explorer. Their self described company profile is:
WHO ARE WE :
Gold‐copper and nickel focused exploration company
OUR GOAL:
Identify mineable gold‐copper or nickel deposits
OUR METHOD:
Systematic exploration process
Assess ‐ Acquire ‐ Compile – Soil Sample‐ Drill

Their Gold prospects are the main reason for my purchase, however the other commodities that form part of their focus also add value. Copper was recently covered by The Daily Reckoning as a new "trade of the decade".
A New ‘Trade of the Decade’
He dropped out of the spot light for a while there, but 'Doctor Copper' is making some big moves again. The copper price fell nearly 25% earlier this year after the 2009 rally. But whilst gold hogged the headlines copper has snuck back up the chart again.

It is now only about 3% from hitting a two year high.
Daily Reckoning

Nickel while still far from the 2007 highs is now trading at double it's early 2009 lows and very recently hit a new 4 month high.
Nickel CMNI3 was last bid at $23,200 from $23,250, after earlier hitting a four-month peak at $23,570. 17/09/2010
Reuters

Before writing about some of their projects I thought I would cover off the basic company numbers:

Issued Shares: 53.6m (tight capital structure)
Issued Options: 33m (Strike @ 25c exp June 2011)
Top 20 Shareholders: 56% (directors 12%)
Share Price: 9.5c (27/09 close)
Market Capitalisation: $5m (not taking into account options)
Cash: $2m (+ further $2m available in JV funding)

WCN listed on the ASX in December 2007 with an initial 25.6m shares at 25c. Over the next 2.5 years they have added significant value through the acquisition (and exploration) of further projects, mainly focusing on those with nickel and Gold prospects. 

The initial fall in share price from listing in 2007 can in part be attributed to a fall in the price of nickel which fell from almost US$25/lb in mid 2007 to a low of under US$5/lb in early 2009. 

With much added value today the share price still lingers below the market capitalisation at time of listing. Given the Gold bull market we are in I can only assume that under the radar micro-cap juniors like WCN will eventually be re-rated and priced with the potential that they contain.

In May 2008 a JV with Daewoo International Corporation and Korea Resources Corporation was announced where $5m in funding would be provided in exchange for a 50% interest in the project. Later that same month it was announced that a new nickel/Gold project had been acquired at Lake Johnson. In February 2009 WCN secured 100% ownership of the Mt Remarkable Gold project, following this in late 2009 the Kelly Well Gold Project near Laverton was acquired. In May 2010 an agreement was reached to obtain a 45% interest in a Gold/copper project in the Kyrgyz Republic (Chanach). 

It was an announcement from the most recently obtained project that today sent the share price 22% higher to a new 52 week high.
White Cliff Nickel shares spike on copper discovery at Chanach Project

White Cliff Nickel (ASX: WCN) has reported that channel sampling across the first bulldozer trench completed at Chanach has identified a zone of copper mineralisation with a high grade core of 28 metres at 1.02% copper within a mineralised halo of 45 metres at 0.94% Copper, including a peak channel sample value of 3.24% copper.

In addition to the "outstanding" result in the first trench, extensive copper alteration zones have been identified in bulldozer trenches over a 450m distance rock chip sampling has identified high grade gold and copper results up to 26 g/t gold and 6.1% copper.


Proactive Investors

There has been political unrest in Kyrgyzstan after the country's President, Kurmanbek Bakiev was ousted in April this year, however in June a referendum was held supporting a constitutional change that would make Kyrgyzstan a parliamentary democracy. The election is to be held October 10th and the expectation is that it will add stability to the region.
Obama Administration Gives $5 Million for Kyrgyz Elections

Washington — The Obama administration has allocated $5 million to help Kyrgyzstan organize its October 10 parliamentary elections, which U.S. officials hope will be free and fair and will include wide participation from the Kyrgyz population as the country continues to recover from ethnic violence earlier in the year.

America.gov

This is positive news for companies who have projects in the region and I suspect it's likely that the political unrest has been the reason that the market has not priced this projects potential into the WCN share price.

Further to the Chanach project, where a further 600m RC drilling program is planned over the next two months, WCN is also planning drilling at their Mt Remarkable & White Cliff projects (November - December).

A brief summary of WCNs tenements shows the highly prospective nature of their projects:

Chanach (Gold and Copper) Project (45%)
• 93 sq km in the core of the Tien Shan gold province.
• Historical sample grades:
  - Gold grades up to 40 g/t
  - Copper grades up to 5%
• Within 100km of major gold deposits containing between 3 and 93 million Oz gold and 1‐25Mt copper

Mt Remarkable (Gold and Nickel) Project (100%)
• The project covers 266 square km
• Historic gold results of:
  - 5m @ 1.91 g/t gold
  - 16m @ 1.07 g/t gold

Laverton (Gold and Nickel) Project (100%)
• 1200 sq km of greenstone terrain
• Significant gold results of:
  - 8 m@ 8 g/t Au in basalt
  - 4m @ 5 g/t Au in sediment

White Cliff (Nickel, Gold & Uranium) Project (50%)
• Covers 1400 sq km
• New Greenfield nickel discovery
  - 20m@ 1.0% nickel
  - 1m @ 2.1% nickel

Lake Johnston (Nickel and Gold) Project (100%)
• Extensive historical nickel assays at Lake Johnston
• 352 assay > 0.5% nickel inc;
  - 8m @ 0.98% nickel
  - 4m at 1.32% nickel
• Previous gold results of:
  – 1m @ 8.68 g/t
  – 3m at 1.72 g/t

Oakover River (Iron and manganese) Project
• Approximately 970 square km
• Potential iron and manganese mineralisation in an under explored area


Exploration companies can be difficult to put a value on, but in my opinion the WCN share price should be much higher than it is currently. It's barely priced over the cash and JV funding available. The nature of the payments for the Chanach Project indicate a resource of 2 million ounces of Gold or higher is possible (of course there are no guarantees) and their other projects clearly have potential for mineable deposits.

Given the illiquid nature of WCN the chart doesn't provide too many clues, however if 9.5c holds we could see this turn into a level of support with the October 2009 high touching this level before retracing.

I would say for the time being WCN does not provide enough liquidity for day trading, however value investors and swing traders should consider the potential. With several drilling projects in the months ahead and a rising price of Gold I suspect that the market cap will be multiple of current in the not too distant future.


BB.

Disclosure: Position held in WCN. Not investment advice. Do your own research.

Wednesday, September 22, 2010

Australian Property priced in Gold & Silver

You may have noticed a recent surge in the number of commentators/articles/blogs making note of Australia’s housing bubble. Jeremy Grantham (US Investor and co-founder of global investment management firm GMO) said in an interview earlier this year that prices would need to come down 42% to return to the long term trend, The Economist magazines latest global survey found that Australian property was 61% over valued, even Mike Shedlock (or Mish, registered investment advisor representative for SitkaPacific Capital Management) has mentioned that Australia’s housing bubble exceeds that of the recently collapsed US bubble.

There are several measurements we can look at to gauge whether house prices are over valued or under valued. The Economist has used a measurement of purchase price vs rents, Jeremy Grantham used price vs multiple of income and this blog takes a brief look at house prices measured in Gold & Silver.

The Perth Mint is a fantastic resource for historical prices on Gold and Silver, not just in AUD but several major currencies. For the purpose of this comparison I used the monthly data provided by the Perth Mint (AUD, ASK, Average). I averaged the monthly data over each year* to provide an annual figure which I then divided into the median house price in each of Australia’s capital cities to obtain the number of ounces (of Gold/Silver) required to purchase one. The averaging of Gold/Silver prices over 12 months smooths out any unrealistic ratios caused by large spikes in the Gold/Silver price like the one in early 1980. For example in 1980 Sydney's median house price was $68,850 if we divide that by the average Gold price for the year ($541.88) we get a price of 127 ounces, if we use the average price of Gold for the month of January 1980 ($610.99) we get a price of 112 ounces and if we divide by the daily price on 21st January, 1980 ($752.50) it would only cost 91 ounces of Gold to buy the Sydney median. Realistically you aren't going to be swapping your Gold into property at the height of such a spike, so using a yearly average makes sense.

In 1980 you were able to purchase a median house in any Australian capital city apart from Sydney for under 100 ounces of Gold. How have prices tracked since? The below chart shows the Sydney and Melbourne medians priced in ounces of Gold for the last 35 years:

Figure 1 (Sydney)

Figure 2 (Melbourne)

As can be seen in Figure 1, Sydney soared to an incredible 987 ounces of Gold in 2004 (from 127 in 1980), it corrected to less than half that price between 2004-2009 (987 to 425) and currently sits around 468 ounces. Melbourne rose to a height of 597 ounces in 2004 from a low of 72 in 1980, corrected back to 346 in 2009, but with strong housing growth in early 2010 this has seen the median Melbourne house jump back up to 422 ounces of Gold.

It's also interesting to note the contrast between the Silver/Gold ratio over the last 35 years and how that affected housing priced in Silver. Using the average figures for 1980 we saw a ratio of 1:27 (Gold:Silver),while today's ratio stands at 1:61. This means that housing is even more overpriced in Silver today than it is in Gold. During 1980 in Melbourne, Brisbane & Adelaide one was able to buy a house for under 2000 ounces of Silver. 2000 ounces of Silver today wouldn't even cover a 10% deposit in any of these cities. Even before Silver started it's parabolic run when it was priced around $3.75 to $5.25 an ounce (1975-1978) it still only look 6000-8000 ounces of Silver to buy a property in those cities, whereas today it takes around 22000-27000.
There is plenty of room for Gold/Silver to increase against the price of houses and still maintain a reasonable ratio. Will we once again be able to buy a median house with 100 ounces of Gold or 2000 ounces of Silver? Only time will tell.
BB.
* For 2010 the first 6 months were averaged
# Note that $ figures quoted are AUD based prices

Disclosure: Position held in Gold & Silver. Not investment advice. Do your own research.

Monday, September 20, 2010

Where to for the price of Silver? (USD)

With Silver on the move I have to wonder where the price is headed. Some analysts are looking at the recent wedge breakout and gauging price targets from this technical event, I have seen others try and make an inverse head and shoulder pattern out of the last 3 years. Personally I would take a more simple approach and measure where I think this parabolic spike will go based on the moves of the last two. Each of the last two parabolic spikes have been preceded by a larger than average drop in price. Here are some figures that I've pulled from IncredibleCharts (intraday highs and lows):

Parabolic Spike 1:
$9.23 - December 12th, 2005 -> $7.84 - December 28th,2005 -> 15% Fall
$7.84 - December 28th, 2005 -> $16.68 - April 18th, 2006 -> 113% Rise

Parabolic Spike 2:
$13.49 - July 24th, 2007 -> $11.04 - August 16th, 2007 -> 18% Fall
$11.04 - August 16th, 2007 -> $21.35 - March 17th, 2008 -> 93% Rise

Parabolic Spike 3?
$18.89 - January 11th, 2010 -> $14.62 - February 5th, 2010 -> 22% Fall


That leaves us back with the question in the blog title...where to for the price of Silver? A 93% rise from the January 11th low would take it to $28.20, a 113% rise would take it to $31.15. I would say this is a reasonable target for the price of Silver in this coming parabolic spike. Of course no one can know for sure, there are plenty of factors which haven't been considered in this price discovery method, for example demand for Silver has increased dramatically since each of the last parabolic spikes so this may have some bearing on the peak price, also we've had a longer period of consolidation.

One thing I think we can count on is that the price action will be volatile. Silver has had a stellar run from the $18 mark over the last month, even if we are ultimately heading to $30 over the coming months you can be sure there will be pullbacks on the way up so don't be surprised to see them.

The price of Silver in USD has been dragging up the Australian price (even with a rising AUD) and it's currently trading back above AUD$22. This bodes well for any stocks on the ASX which have Silver exposure. To my knowledge there are only 4 "pure" Silver stocks on the ASX, one of which (Coeur D'Alene Mines Corp, CXC) is delisting in December this year. This will leave 3 "pure" Silver stocks on the ASX. They are:

Cobar Consolidated Resources Limited (CCU)
Silver Mines Limited (SVL)
Alcyone Resources Limited (AYN)

I will cover these companies in a new blog soon.

BB.

Disclosure: Position held in SVL, CCU & Silver. Not investment advice. Do your own research.

Sunday, September 19, 2010

Mantle Mining (ASX: MNM)

I would consider Mantle Mining one of my more speculative holdings, however there is potential for a huge payoff if any one of their exciting projects comes to fruition.

Initially placed on my watch list as a Gold/Silver micro-cap with potential (they have a JORC Gold/Silver resource), recent developments have made it clear that the big value may come from their Coal assets.

Firstly a few numbers:

149.2m Shares x .046 = $6.85m market cap
30.8m Listed Options (MNMOA), 7c by 31/12/10 strike
Cash at end of June quarter: $843k + $300k since received in tax offset = $1.14m (approx cash burn has been $400k per quarter).

If the share price appreciates to 7c+ before the end of the year and all options are exercised this would add another $2.15m to the cash position detailed above.

They have Gold and Silver resources (JORC compliant) across two of their projects:


Great Britain Gold Resource:
125,000 @ 1.8 g/t Au

Granite Castle Gold and Silver Resource:
79,301 @ 2.91 Au & 1,530,803 @ 56.2 Ag

Applying a basic in ground valuation (comparatively valued to Mantle's peers) on this resource provides a value higher than their entire market capitlisation:

Total Gold: 204,301 ounces x $30 = $6.1m
Total Silver: 1,530,803 ounces x $.80 = $1.2m
Total value of resource: $7.3m (compared to market cap of $6.85m)

A definition drilling program for Granite Castle is in the early stages of planning for later this year.

Their third and potentially most exciting Gold tenement is the Haunted Stream Gold & Base Metals project. Located in Victoria, this tenement is in an area with a rich history from the Gold rush era.

Bush fires in 2008 uncovered some 200 old mine workings under which they are currently drilling an anomaly (Anomaly 4), which is a major target for possible deep vein gold or porphyry copper-gold mineralisation. The drilling program has intersected multiple shear zones with visible base metals. Lab results are pending, an announcement surrounding the results is expected shortly.

The Heritage Victoria website details some of the grades from the Gold rush era in this area:

HAUNTED STREAM GOLDFIELD NOTES

March 1884
: Ernestine Co. - 'I am informed on reliable authority' that 1,281 tons from their mine yielded 320 oz (approx 7.75g/t)

December 1884
: Hans Co. - 460 tons yielded 200 oz gold. Rob Roy Co. had trial crushing at Ernestine battery - 40 tons yielded 169 oz (approx 13.5g/t & 131.4g/t)

June 1885
: Hans Co. employing 30 men - 750 tons crushed for 216 oz. Rob Roy Co. tunnel in about 120 ft - about 140 tons yielded 560 oz (approx 8.95g/t & 124.4 g/t)

Heritage Victoria

The g/t figures above were calculated by myself from the details provided, there are more examples if you follow the link.

Further to the above precious & base metal projects MNM also has promising developments occurring with their coal project at Bacchus Marsh. They've executed a significant MOU with Exergen. Here is an article that covers the news:

Mantle, Exergen to develop clean brown coal

Mantle Mining Corporation Ltd has signed a non-binding memorandum of understanding with Exergen Pty Ltd for the development of its 100% owned Bacchus Marsh brown coal project in Victoria.


Mantle, which has recently been granted priority over an application for EL5294 at Bacchus Marsh, believes the tenement could contain an exploration target of between 1 and 2 billion tonnes of brown coal.


Exergen has developed a breakthrough clean coal technology known as continuous hydrothermal dewatering (CHTD).


Exergen's cornerstone investors include Tata Power, Theiss (Leighton), Itochu and Sedgman.
Mantle and Exergen have formalised a 50-50 joint venture for exploration and subsequent mine development.

Exergen will construct a 50 tph demonstration drying facility and an export project on its 50% of the coal deposit.


Mantle will be licensed to use the CHTD on its 50% of the coal deposit.

Business Spectator

Also of interest is this excerpt from Exergen's website:


The LV-NG Project
Having successfully proved the CHTD concept in its 4tph Pilot Plant, Exergen has completed a Detailed Feasibility Study for a proposed 50tph Demonstration Scale Plant and a 4000tph Commercial Scale Facility.

Once a suitable Latrobe Valley brown coal resource has been identified and secured, LV-NG intends to invest up to $100m over the following two years completing the Development and Demonstration Phase. During this phase, LV-NG will secure all necessary project approvals, commercial agreements and also construct a 50tph, Commercial Demonstration Plant in the Latrobe Valley.

In the following Commercial Construction Phase, LV-NG intends, over a three year period, to develop a new 30m tonnes per annum brown coal mine and an adjacent CHTD Processing Plant in the Latrobe Valley.

The CHTD plant will produce 12m tonnes per annum of enhanced Exergen brown coal and 16 gigalitres per annum of industrial / agricultural quality water. The treated Exergen coal will be transported in a slurry form, in a new pipeline constructed by the consortium, to a location adjacent, at The Port of Hastings Authority on the Mornington Peninsula.

A Final De-watering Facility will remove excess water prior to the finished product being loaded via covered conveyors onto ships for export.

Exergen

An intention to spend $100m on the plant/development for 50% of the project that Mantle currently owns outright and Mantle has a market cap of less than $7m? Mantle is incredibly under priced at today's share price if this MOU develops into the arrangement planned.

Interestingly Mantle's MD is formerly from Exergen. One can't help but wonder whether there has been a plan all along for Mantle to be partnered with Exergen.

Recent comments from Australia's new Climate Change Minister (Greg Combet, former coal engineer) should assure investors looking at companies with Coal based projects that there is someone looking out for them at the top:

Australia minister reassures coal industry

Australia's new Climate Change Minister Greg Combet has vowed to bring 'common sense' to the climate change debate, and has warned that he will fight for coal industry jobs as he pursues a price on carbon.

The Australian newspaper says the former union leader has predicted the coal industry 'absolutely' has a future as he pursues his three key policy reform objectives: pursuing renewable energy; energy efficiency; and the development of a carbon price for Australia.

Insisting the Climate Change portfolio is an economic reform challenge, he said: 'You don't take the back of the axe to the fundamentals of the Australian economy.'


UPI

Further to the above Mantle has also begun drilling at their Barkly Phosphate project. Drilling is expected to be complete by early October.

It should be noted that Mantle Mining has commenced proceedings in Queensland’s Supreme Court to enforce an agreement for the assignment of their Trafford Coal tenement (not one of those projects detailed above). I've read through the details and looks pretty open/shut to me (for a Mantle Mining victory & hopefully they recoup their costs in the process), but it's not always that simple.

Mantle Mining has other projects that I have not covered in this post, I would suggest trawling through some of their recent announcements for further information about what they have to offer.

This is not the sort of company that you dump your life savings into, but in my opinion the risk here is far outweighed by the potential for huge rewards.

With a whole swag of announcements likely on the way in the next few months Mantle not only provides an opportunity for the value investor but also for the short term trader. Although Mantle can be relatively illiquid at times it also often spikes higher on positive news as can be seen in the below chart when the MOU was announced (also on a longer term chart you will notice a tendency to spike higher on news).

Chart:




If you found value in the above blog I would encourage you to add my site to your favourites and return frequently to read new entries.

BB.

Disclosure: Position Held. Not investment advice. Do your own research.

Welcome!

Welcome to my blog!

Predominantly this will be somewhere to post my thoughts on Gold & Silver. This may include coverage of news and price action of the metals themselves as well as discussion around related Australian stocks. Sometimes I may cover other topics such as Australian housing.

To give some perspective about who I am and where I am coming from, here's a bit about myself:

I'm a 26 year old male living in Adelaide, Australia. I've had an interest in Gold & Silver for around 2.5 years. It stemmed initially from looking for an investment that was "safe" given the events of the financial crisis that I saw playing out around me.

It started with my first purchase of physical at close to the early 2008 peak (just my luck!), however later in 2008 I was presented with the buying opportunity of a lifetime and I dived in head first securing my core position in physical.

During 2008 I started talking up the metals at work and was labeled appropriately by a colleague as the "Bullion Baron", this is where the name of my blog came from.

Later in 2008 as Gold/Silver stocks were smashed I recognised that there was potential for even larger gains to be had in related mining stocks, some of which had been pushed down to LOWER than their cash backing. So I started buying/trading Gold & Silver stocks in early 2009.

Today I hold a portfolio of Gold/Silver stocks and await the next move higher in the metals.

This is my first ever blog, so if you see something that can be improved, please do let me know.

I hope you enjoy your stay, add me to your favourites and check in every now and then to have a read.

Cheers

BB.