Sunday, November 28, 2010

Has Silver formed a double top?


The above are crops from a 2 year Silver charts which show the formation that Silver has seen at the peak of each of the last two spikes and appears might be forming at the peak of this one.

As pointed out in a previous blog entry, Silver has risen by a similar percentage to both of the last two spikes: 

$7.84 - December 28th, 2005 -> $16.68 - April 18th, 2006 -> 113% Rise
$11.04 - August 16th, 2007 -> $21.35 - March 17th, 2008 -> 93% Rise
$14.62 - February 5th, 2010 -> $29.33 - November 9th, 2010 -> 100% Rise

Not only are the spikes a similar percentage move to the last, but they are reasonably evenly spaced (every 2 years) and each of the peaks is approximately $7 higher than the last (approx $14, $21, $28) if measuring by the highest close (rather than intraday peaks).

In my opinion a break below the $25 mark would signal that the formation is complete and provide a downside target of $16.43 to $22 as I previously discussed. Even though I mention a $16.43 target I can't see the price falling back under the $19.50 to $21.50 level. This price area has provided a lot of resistance over the last 2.5 years and I could see it turning into a significant support area should the Silver price retrace.

Of course there is no guarantee the price of Silver will retrace or follow the same formations as in the previous spikes. There are other fundamental factors which might continue to drive the price higher.

American Silver Eagle 1oz Silver coin sales are going through the roof. In 2006 approximately 10m coins were sold, 20m in 2008, already in 2010 we have 32m sold with another month yet to go. We've seen a record month in November 2010 for ASE 1oz sales, surpassing the previous high set in 1986.

Another factor at play is that Chinese citizens are (legally) allowed to buy and own physical Gold & Silver, this was not possible in either of the 2 previous spikes.

Further to this we have an upcoming decision from the CFTC on metals positions limits which may have some bearing on the maximum positions the US Investment Banks can hold and also we have several lawsuits that have been lodged against JP Morgan & HSBC for manipulating the Silver price...

It will be interesting to see if the fundamentals or technicals win this battle.

Whether you are buying, selling or holding Silver at the moment will likely depend on your strategy. Personally I am holding, but have not bought any significant amounts while spot has been above $20.


BB.

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

Thursday, November 25, 2010

ABS House Price Index negative YOY in 2010?

In March this year (prior to the release of first quarter data) I made a bet on an internet forum I frequent. The outcome of the bet was based on whether the ABS House Price Index (weighted average) would finish positive or negative over the next 12 months (December 2009 to December 2010, with myself betting that we'd see it finish negative). $100 is to be paid by the loser to a charity of their choice, just a friendly bet, nothing too serious.

My opinion at the time I made the bet was that house prices would peak in first quarter 2010 and that this would be the "tipping point" for the correction to come (15-20% in nominal terms, higher in real terms) to play out over several years.

It must have only been a few weeks following the initial bet having been placed that the first quarter ABS data came out showing a 4.8% increase in the index over the first 3 months. It was that point that I realised I should have attempted to start the bet from the end of the first quarter data. I thought I'd already done my dough.

The second quarter data came out and my first observation was the headline 3.1% rise...prices were still going up! However at the same time it was this point that I noticed that ABS produces revised figures. The December 2009 figure had been revised slightly higher than when the initial bet was taken and the March 2010 quarter had dropped, even though prices were rising, the numbers weren't looking quite as bad as I thought.

Third quarter data hit the ABS site only a few weeks ago and it was just barely positive, the weighted index rose by only .1% for the quarter. Brilliant, things were finally turning, but fast enough to win the bet? Probably not, that said I wouldn't completely rule out the possibility.

As it stands the final revisions available are as follows:

December 2009 - 142.2 (up from 141.8)
March 2010 - 147.1 (down from 148.5)

June quarter has dropped from 152.8 to 150.1 after only the second estimate, with the final estimate still to come (which may be lower). The third quarter has a first estimate number of 150.3.

Some watching the ABS index are saying the third quarter was positive, but I think we will find this is definitely revised to a negative number come second and final revisions. If we said that the difference between first and final estimates in third quarter work out similar to the second then that would put the third quarter final revision at around 147.6.

To then drop fromn 147.6 to 142.2 we'd need to see a 3.6% drop in the final quarter...likely? Probably not. Possible? Definitely.

Even if we don't see a year on year fall December 2009 to December 2010, we will likely see it from March 2010 to March 2011.




BB.

Monday, November 22, 2010

Dr. Clive Roffey on Gold One International (GDO)

A Hot Copper poster recently linked to this article dating back to 1980 which indicates not only did Dr. Clive Roffey predict the rise of Gold to $800+, but also accurately called the top and wasn't far off with where Gold eventually settled as well.


It  has come to my attention that Dr. Roffey (some 30 years after the above prediction) is regularly commenting on the market, Gold and Gold shares in a show called "The Roffey Review". A show well worth watching if you appreciate technical analysis, although he predominantly comments on stocks listed on the Johannesburg Stock Exchange.

On November 1st Dr Roffey mentions Gold One as a potential 5 bagger  as it's preparing to break out of a multi-year consolidation pattern (on the JSE, only listed on the ASX in early 2009), he provides an update on November 8th explaining that it has broken out and he has a short term target of 450 (currently at 250). 450 is approximately AUD 66c (current GDO share price on the ASX is 36c), we'd need an 80% increase in the share price of GDO to reach this short term target or to meet the 5 bagger target the share price would have to rise to $1.46.

I will cover Gold One International in a more detailed post at a later stage, but suffice to say I think this Gold stock is being overlooked by many. In my opinion it represents excellent value at the current share price.

For the Gold One references check the videos on the following dates and times:

Nov 1: 4.40 to 5.05
Nov 8: 3.40 to 4.05

LINK

Dr Roffey continues to like Gold at these prices as mentioned in his latest clip on November 15th.

A detailed list of Dr Roffey's predictions can be found on charts.co.za here are those relating to Gold:
June 1979 when gold was trading around $300 he forecast in a major article in the Rand Daily Mail that it would hit $800 around the end of the year. It peaked at $850 on January 16th 1980.

November 1979 again reiterated the $800 target in the Rand Daily Mail, and in the same article. It peaked at $850 on January 16th 1980. 

November 1979 also forecast that after the $850 peak it would fall rapidly to at least $400. By June 1982 gold had fallen to $285.

January 1980 he publicly won a Kruger Rand from another highly respected analyst who insisted that bullion was on its way to $1000. Gold peaked at $850 on January 16th 1980.

July 1999 In Smart Investor, when gold hit $252, called this as the 1980 bear market low for bullion when most other analysts were calling for $200 and less. The gold price bottomed at $252 and has remained above that level ever since.

July 1999 in the same article called for a bullion rise to $325 by the end of the year. A completely opposite view to the prevailing sentiment. Bullion hit $334 in the September.

Of course this is just one man's opinion and I'm sure he has made incorrect calls as well as those he boasts above, but you can't help but sit up and take notice given his accuracy in the last Gold bull market.


BB.

Disclosure: Position held in GDO & GOLD. Not investment advice. Do your own research.

Sunday, November 21, 2010

REIV Auction Statistics & Property Update

Victoria 

I have been tracking the REIV auction statistics for the entire year and it has been interesting noting trends in the figures that are reported.

Of course the most obvious trend has been that of the clearance rate which have fallen from highs over 85% early in the year to 65%, they then stagnated through the middle of the year and have since continued their descent from late September. Where do they settle? I suspect with the large number of auctions over the next few weeks that we could see low 50's reported from the REIV, which would likely mean under 50% from other reporting bodies such as APM & RPData who also release auction statistics using more conservative methodologies.


Another interesting statistic to note has been the increase in auctions being reported as "no result". Essentially this means that at the time of print for the data, real estate agents were yet to report to the REIV the results of these auctions. As a percentage of auctions held on the weekend this number being left unreported is on the increase. Having hovered around the 7-9% throughout early and middle parts of the year it has now blown out to a regular 12-14% or higher. In my opinion this potentially points to Real Estate agents holding back from reporting those not sold to artificially boost the clearance rate.

Given that the past 2 weekends (6th/13th November) have both had their clearance rates revised lower by 2% (both revised down to 59% from 61%) following the official releases, it's not too hard to imagine that we'll see another revision (lower) with this weeks clearance rate of 59% & high % of those with no result.


We've already seen a couple of big weekends for Melbourne and it's set to continue with over 1000 auctions scheduled for the next 3 weekends (this weekend being the first of 4 mentioned in the article below).
Market pendulum starts swinging for buyers
A RECORD 4385 auctions will be held over the next four weeks, giving buyers the best opportunity to snap up a bargain in two years.
The Real Estate Institute of Victoria said this was buyers' best opportunity since the global financial crisis to snap up property for less than it was worth.
For the first time, there will be four consecutive weekends with more than 1000 auctions scheduled, which could force sellers to accept less than they hoped for.
Herald Sun
Melbourne and Sydney have really been the last two cities standing in the way of the RPData index showing drops in property prices across the nation, we've been in limbo as most cities stagnate or drop with Sydney and Melbourne standing firm and holding the numbers up. Will this continue? I doubt it. I think it will be obvious by the end of the year that prices are falling across the nation.

Auction clearance rates have been known to correlate strongly with price growth as indicated by the following chart produced by the RBA.


The chart indicates that when we get a national clearance rate (weighted) of lower than 50% then we see price falls. Given the high number of auctions held in Melbourne it tends to heavily influence the national clearance rate, so if Melbourne clearance rates fall further, then so will the national figure.

Adelaide

The Saturday Advertiser had an article about housing, "Housing glut a buyer's market" the title reads...on page 23. Of course if we were seeing a tight property market and price increases we would have housing as front page news, given the downturn they have to tuck it half way through and hope no one notices.

They provided a few statistics in the article mentioning that their lift out RE section contained 2649 open inspections, which is 200 more than last week and almost 1000 more than the same time last year. That's around a 60% increase in listings from the same time last year!

Nation Wide

The number of properties listed for sale continues to rise across the nation. I noted in an earlier blog on housing that REFind showed an increase from 284,000 homes for sale at the start of August to around 311,000 in early November. Today that number stands at around 323,000, a 14% increase from August and 4% increase over the last few weeks alone. With the seasonally slow property period leading up to Christmas and in the 2 months following it will be interesting to see how high the stock on market reaches, will we see a rush of sellers try to get their properties on the market now in advance of the slow down?


BB.

Note: Table and graph showing REIV data purposefully exclude weekends that don't reflect a normal weekend (long weekends, AFL grand final weekends, election weekend are all excluded from the data series).

Wednesday, November 17, 2010

Rent vs Buy: An Australian "Cost Comparison"

In late August there was a segment on the 7pm Project about property, it posed the question whether it is better to rent or buy (landlord vs mortgage). The show concentrated on the cost aspect and I found this interesting as it was some of these very calculations that influenced my decision to rent rather than buy again after selling a house in Adelaide around 10 months ago.

They honed in on what families with a tight budget/low income could do with the extra dollars saved by renting (e.g. like going on holidays, paying for private education for the kids), when ultimately it's probably these groups of people that would benefit most from the forced savings of a mortgage (assuming they pay the loan principal and interest). This was an irresponsible angle in my opinion.

They gave the example of a $500k property (rent versus buy) where they attributed a 5% cost of purchase price to rent ($25,000pa) or alternatively paying a 7% rate on a mortgage ($35,000pa). No mention was made of other expenses that one would incur when buying such as:

- Council/Water rates
- Building insurance
- Maintenance costs
- Stamp duty
- Buying & selling fees (bank, agent, etc)

Briefly mentioned was that some money managers rented, invested their saved money elsewhere (e.g. in the stock market), but they did not make this option (rent while saving the difference) look attractive.

Overall it was lacking substance, but no doubt it was produced for the mass consumption of the general public and the reality is that more detailed analysis of the subject wouldn't interest many.

Following on from the example provided in the show, here is a more realistic breakdown of what it would cost to rent vs buy:


Rent vs Buy - The Figures

Property: $500k House


Rent:
$25k pa / 52 = $480pw


Buy:
$500k + $24,000 (stamp duty & transfer fee#) x 7.25%* = $37,990
1% of property value for maintenance & insurance = $5000
Council & water rates = $2000
Total = $44,990 / 52 = $865pw (interest only)


# Adelaide based figures, this would differ between states
* Cash rate has increased since 7pm Project aired with 7% example

While more detailed than the 7pm Project example I'm still making some assumptions:

Obviously a first home buyer would have the benefit of the FHOG and possibly other state incentives and stamp duty discount depending on location and type of property.

A 100% loan on the property is used in the example. A more realistic LVR would be 95% with the buyer funding the 5% and purchase costs with a saved deposit, however if we used that in the example then we would need to add the benefit that the funds would have otherwise provided in a term deposit for the renter (which just gets too finicky).

It also does not take into account buying and selling costs, such as:
- Mortgage application fee (not always applicable)
- Real Estate Sale Commission (usually around 2% of the sale price)
- Advertising costs during sale
- Conveyancer (for both purchase and sale)
- LMI (if buyer is using a high LVR to purchase)

Further to this in many metropolitan areas a 5% yield would probably be considered fairly generous (across most metropolitan/capital cities houses are at a gross yield of less than 5%)

So potentially we're looking at housing being 80% more expensive if you buy (with a mortgage) over renting the equivalent. Of course this is only a look at the average situation, each property will slightly differ for better or worse.

This example also doesn't take into account the potential for positive or negative price growth of the property if purchased. The reality is that only 4% capital growth would be required for the owner to break even with the renter in the example provided (that's not high growth if inflation is running at 3%). Suffice to say if you think property prices will continue to see moderate or even high growth then buying still may be the better option financially (from your point of view). 

The question remains though, will vendors always be able to find the greater fool to purchase the house for a higher price? It's a vicious circle and if those that seek housing start to look for refuge from overwhelming mortgages by renting then we could just as easily see price declines which puts the renter in an even better position.

The way I see it the landlord is not only providing me a place to live comfortably (for a great price, much less than it would cost to buy), but they are also absorbing the price risk. Win-win for the renter who believes that property prices will correct, of course not everything plays out as we expect.

This is only the financial aspect. There are other differences which separate renting from buying. Obviously the stability that owning provides might be invaluable to some, such as those with a family.

I would be interested in hearing how the rent vs buy situation stacks up in your neck of the woods...


BB.

Tuesday, November 16, 2010

Silver retracement target and clarification

Just a short post on Silver to clarify a term I have been using and look at some retracement targets for the price.

"Parabolic spike" is a term I have used to describe the strong moves higher we've seen approximately every 2 years during the Silver bull market, so when I suggested the parabolic spike might be over (in a post last week), I was referring only to that particular strong move and not the entire bull market. I suspect we will see a Silver price multiples of the current price before this bull market is over.

Following the parabolic spike in 2006 and 2008 we saw large corrections after each move:

2006
$16.68 - April 18th, 2006 (peak)
$9.40 - June 14th, 2006 (trough)
44% drop

2008
$21.35 - March 17th, 2008 (peak)
$15.96 - May 1st, 2008 (trough)
25% drop

A 25-44% drop from the $29.33 peak a few days ago would take us back to: $16.43 - $22. I would suggest this is a possible target for the correction to bottom. There would be very strong technical support around the $19.50-$21.50 level if it corrected that far.

That said given the current fundamental demand for Silver I would not be surprised to see it find support at higher levels than seen in previous corrections or the spike may not be over at all and we are just in a period of consolidation before another sharp move higher.

It's worth checking out James Turk's commentary on Silver's price action, he believes that the chart is still looking bullish and that Silver will reach $30 within the next 7 days:

November 14, 2010 – Silver’s short-term uptrend remains intact, notwithstanding silver’s big price drop on Friday.  The fundamental factors driving silver higher have not changed.  The outlook for silver remains very bullish.
There has been no damage to silver’s technical condition.  For example, silver is above its 21-day moving average.  Also, silver remains well above $25, its last major resistance level.  More importantly, the price drop at the end of the week occurred with bullish sentiment taking a nosedive.  These conditions bode well for silver’s short-term outlook, as does the following chart.
The above chart will be familiar because it is the one I used on King World News on October 28 to forecast a $30 silver price in less than 18 trading days.  Silver closed that day at $23.871.  On November 9, only 8 trading days later, it reached $29.342 – nearly hitting my target.  The good news is that my reading of the above chart indicates that silver might yet reach $30 within my 18-day target, i.e, November 23.
Note the new pattern silver has formed.  It is a pennant, and these have the same features as the flag pattern upon which I based my $30 forecast.  Both are continuation patterns within uptrends.  They allow for a short-term consolidation, mainly to work-off some bullish sentiment, which accurately describes what happened in silver as this pennant formed over the past few days.  A pennant pattern typically ends with an upside breakout.
My expectation therefore, is that silver will break out of this pennant to the upside, and probably early this week.  The demand for physical silver remains very strong, and it is the demand for physical silver, and not paper-silver, that ultimately determines the silver price. 
Most trading in physical silver takes place in London and Zurich.  The weakness on Friday occurred after both of these centers had closed.  That means that prices were driven down in the paper market.  We have seen these late Friday raids to ‘paint the tape’ many times over the past decade, so this latest one should not be a surprise.  But what is indeed a surprise to me is that the silver shorts would try this gambit now when the physical market is so tight.  Lower prices will only heighten the demand for physical metal.  Thus, I expect the silver price to rebound sharply this week.
Free Gold Money Report

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

Friday, November 12, 2010

Crash JPMORGAN Buy SILVER

An interesting suggestion was made by Max Keiser on Info Wars (Alex Jones) just recently.

Watch from the 5 minute mark:


Max Keiser says: "If 100m people in america bought 1 silver coin, thats 100m ounces and take that off the market, it would crash JP Morgan and we would have a scalp, we would have a major victory."

He then goes onto suggest that users specifically do a Google search for the term "Crash JPMORGAN Buy SILVER" (to raise awareness). 

Asking listeners to search for particular terms has been a recent speciality of Alex Jones:
Radio talk-show host games Google Trends
A radio talk-show host urged his listeners Wednesday to search the Internet for two specific phrases in order to get those terms into Google's closely watched Google Trends list and promote a blog post implying President Obama will invite a terrorist attack on the U.S. to boost his popularity.

Alex Jones, who hosts The Alex Jones Show weekdays on around 60 radio stations, asked his listeners to conduct Internet searches with two specific queries: "save his presidency" and "Obama terror attack." They responded, driving those two terms briefly to the top of Google Trends with the goal of driving traffic to an article headlined "Will Obama Force America To 'Absorb A Terror Attack' To Save His Presidency?"
CNET

How much effect would the purchase of 100m ounces of Silver have on the physical market? It's difficult to say. Annual production was approximately 710m ounces in 2009, so potentially 100m ounces is only around 1/7th of annual Silver production. Of course the demand would likely add pressure to the market, but enough to sink one of the large US Investment Banks?

JP Morgan is said to have shorts in the vicinity of 30,000 Silver contracts, NIA recently estimated that $50 per ounce silver would mean approximately $4 billion in losses to JP Morgan. This only equates to around 1 quarters worth of profit for JP Morgan, hardly something that's likely to send them under.
JP Morgan quarterly profit up 23 percent
JP Morgan Chase on Wednesday reported its profits rose 23 percent in the third quarter on better performance by its retail banking arm.

Profits rose to 4.4 billion US dollars from July to September, an increase of 23 percent from the same period last year, the company said in a statement.

The Age

I suspect the Silver buying that sends the Investment Banks up the wall will not be from US citizens, but from Asian buyers. This was something recently discussed on King World News.
Asian Buyers Have Silver Shorts Checkmated
The contact out of London has updated King World News on the Asian buyers which have been squeezing the shorts in the silver market.  The London source stated, “There is an insatiable appetite for physical silver here and the shorts know that, the shorts know they are checkmated.  The Asian buyers are layering in bids

Asian buyers were able to pick up silver at a discount at the lows of yesterday.  They are continuing to buy today and tomorrow.  People have to remember that spot trades 24 hours a day, so as the shorts raid the market, physical buyers already have orders in to buy tonnage of silver at a time on that weakness.

As I said to you the other day, the locals which were short with the banks were overrun when the price of silver stabilized just above $25.50 for a few hours.  The local traders were margined out and silver moved over $1 higher later that same day.

In other words, the only entities that are left short here are the Fed backed banks.  Nobody in their right mind would be short here.

Spot has been trading in front of futures here in London all day.  We have been in backwardation all day long on the LBMA.”
 
BB.

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

Thursday, November 11, 2010

Is Silver's parabolic spike over?

My third ever post on this blog was entitled "Where to for the price of Silver?", it suggested that we were likely going to see Silver head into a parabolic spike. The price target was $28.20 to $31.15. The blog was posted on the 20th of September when we saw the Silver price close at $20.71. Almost 2 months later on November 9th we saw a Silver price of $29.33 (intraday), this was a 42% increase from September 20th and approximately a 100% increase from the low I suggested Silver was rising from (made on February 5th).

This gives us the following parabolic spikes:

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

$14.62 - February 5th, 2010 -> $29.33 - November 9th, 2010 ->
100% Rise


 
The price of Silver saw a big fall following the intraday high of $29.33. The fall was attributed to a change of margin requirement for Silver traders by the CME:
Commodity Exchanges Increase Margin Requirements as Prices Surge
Nov. 11 (Bloomberg) -- Commodity exchanges in the U.S. and Europe are increasing the cost of trading some raw materials in response to a jump in volatility as prices surge.

CME Group Inc., the largest futures market, increased margin requirements, or the amount of money traders must keep on deposit, for soybean futures by as much as 10 percent as prices jumped to a 26-month high. The CME’s Comex unit raised the requirement for trading silver to $6,500 a contract from $5,000 as the metal reached a 30-year high. ICE Futures U.S. increased margins for cotton as the commodity rose to a record and LCH.Clearnet is raising them for robusta coffee, cocoa and white sugar next week.
Bloomberg
 
The question now remains: With the target price met is the spike over? Should we expect a fall and period of consolidation? I hinted in the September post that we might see a higher rise than previous spikes due to a longer period of consolidation and increased demand, will this be the case?

I encourage your comments on these unanswered questions!

This spike may not be over, but it would be prudent to take care if trading Silver on margin or if you are looking to buy a core position. In my opinion those accumulating Silver over time should continue to do so, but those looking to buy Silver for the first time should probably consider the sharp rise we've seen so far and whether they are happy to hold through a fall in price and consolidation (should the current spike be over).

It is my personal opinion that we will see higher Silver prices over coming months, however it is easy to get caught up in the 'hype' and I wonder how many other Silver investors thought Silver was going higher (short term) at the top of the spikes in 2006 and 2008...


BB.

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

Tuesday, November 9, 2010

Cobar Consolidated Resources Ltd (CCU)

Cobar Consolidated Resources (CCU) is currently my longest held stock. As a shareholder I've watched the share price rise from just 6c (where I purchased my core position) to over 40c in late 2009, collapse back to under 20c and now it's soared back over 40c. It's been quite a ride, but while I've successfully traded a few small parcels I have held my core position all the way through the volatility.

I have mentioned CCU briefly in a couple of earlier posts relating to the Silver juniors on the ASX. CCU is one of only three "pure" Silver stocks on the ASX (three left after CXC delists later this year). Given the few choices of stocks with decent Silver exposure and the recent significant rise in the price of Silver, CCU is poised to do well.

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.
 
This junior seems to tick all the boxes with solid management, reasonable cash burn levels, a large resource, registry dilution minimal so far & a solid plan emerging.

One of the most impressive feats of management this year has been raising capital at well above the share price at the time ($3.25m paid for 13m shares by Magna Resource, an Indonesian based resource company), usually capital is raised by juniors at a hefty discount to the share price. 
 
Ian Lawrence (Managing Director) has more than 30 years experience in senior line management, strategic management and consulting, including a 20 year career with WMC Resources where he held senior roles including General Manager Group Technology, and Resident Manager and Manager Metallurgy at Olympic Dam. Ian Lawrence has been with CCU from the start and I believe he has done a great job so far and will continue to do so as he leads CCU into Silver production.

Share price: 41c (as of close 08/11/2010)
Number of shares: 131m
Number of options: 6m (unlisted)
Market cap: $53.7m (undiluted)
Cash: $2.9m
Silver resource: 50.6m oz @ 71.8g/t (Res. 14.3m oz, 97g/t) + 2.7m oz @ 47g/t
Market Cap / Resource = $1.06 p/oz (Wonawinta Resource only)

The optimisation study suggested 2.6m oz will be produced per year for 5 years from their reserves.

Estimated cost in the study is $6.50 per ounce (net lead credits). I'll use an estimated total cash cost of $9.50.

There's 131m shares on issue currently, with requirement to raise $30m for plant going into production.

For the purpose of the example I will dilute the registry by the amount required to fund the CAPEX, however reality is that they will use financing for at least part of the project (but let's call it the worst case scenario).

$30m / .41 = 73m shares extra added to the original 131m (+ 6m options) gives us a diluted registry of 210m shares.

What Silver price do we use for the 5 year period?? Let's just use the AUD spot price for now of $27.30.

So 2.6moz x $27.30 = $71m revenue per year - total costs ($24.7m) = $46.3m profit per year / 210m shares = 22c EPS x very conservative PE of 5 and you have $1.10 per share.

That's not taking into consideration tax (or the CBH 2% royalty), but this is mainly as I assume there are significant development costs they will be able to claim against net profit (?). Also $1.10 per share provides no value for their resource further than the first 5 years reserve, I suspect CCU will extend the resource and reserves significantly with further drilling.

I don't think CCU will stick around at this share price level when the market realises the potential that CCU has.



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

Sunday, November 7, 2010

Australian Housing: Get Real Christopher Joye

I couldn't help but laugh at a recent post over on Christopher Joye's personal blog "Aussie Macro Moments". It's an article from the Wall Street Journal detailing a bet that Joye has challenged Jeremy Grantham to. I would like to break down the article to discuss a few points. Here is a link to the original article.
Australian Analyst Challenges US Guru To A$100M Property Bet
WELLINGTON (Dow Jones)--Australia's most vocal proponent of the country's property market Friday challenged Wall Street investment guru Jeremy Grantham to wager A$100 million on the outlook for the country's housing prices.
First let us just remember who we are talking about here. This is not an Australian analyst on analyst bet (like Keen vs Robertson). Jeremy Grantham is a co-founder of (and Chairman of the Board for) GMO (Grantham Mayo Van Otterloo) who have assets under management of $107B, Christopher Joye is founder (and Managing Director) of Rismark International, a global funds management and advisory board. Trying to find information about the value of Rismark or the value of the funds they control is difficult, but suffice to say it would pale in comparison to the size of GMO. Joye is not in the same league as Grantham. 

I suspect Grantham won't respond, but that's not really surprising, it would be like myself (a random blogger) challenging Christoper Joye to a $100m bet, I'm sure he wouldn't respond either.
Christopher Joye, managing director of property research group Rismark International, challenged his equally vocal sparring partner GMO Capital founder and chief investment strategist Grantham to put his "money where your mouth is" on the issue of whether Australia really is in a property bubble.

Grantham's downbeat views on Australia's home prices are "sensationalist and spurious," Joye said.
The term "sparring partner" makes it sound as if these two have gone head to head. Sure they have opposing views, but as far as I'm aware Grantham has not responded directly to any of Joye's comments in the past.
Joye challenged Grantham to bet the A$100 million over a three-year term, basing the outcome of the bet on movements in the RP Data-Rismark Australian Capital Cities Dwelling Price Index.

For every 1% rise in the index, Grantham would receive A$1 million, Joye said. But for every 1% decline in the index, Grantham would pay A$1 million away.

The trade would be settled at the end of three years with monthly margining to manage credit risk.
First let's look at the number Joye uses....$100m. The index would have to rise or fall 100% for a payout of that size to take place, is that what Joye expects to happen one way or the other? Let's be serious, the payout, if the bet did go ahead would be nowhere near the size that is suggested by the headline grabbing number used.

Secondly look at the index Joye wants to use, the RP Data-Rismark Index. You may recall I mentioned above that Joye was the Managing director of Rismark International? Talk about a conflict of interest. Joye wants Grantham to take a bet, the outcome of which is directly reliant on an index which doesn't allow public examination of their methodologies and further to this one that Joye's company is directly involved with? Surely he jests!
The high stakes wager comes on fresh warnings from Grantham in his latest quarterly investment letter that house prices in Australia are set to fall as affordability is stretched and consumers are already spending too much on homes. Australian house prices have grown strongly over the last 20 years. In major capital cities such as Sydney and Melbourne, the average median home price has doubled in value in eight years and quadrupled in 21 years.

The bet is the latest installment in a long-running war of words between Joye in Sydney and Grantham--though Grantham is yet to directly go after his rival down under.
They are not words "between" Joye and Grantham. To date they have only been words from Joye at Grantham. Talking at someone does not constitute a "war".
"We would ask Mr. Grantham to cease and desist from his hyperbolic jawboning," Joye told Dow Jones Newswires.

"If you actually have any conviction regarding your predictions about the 'time-bomb' that is Australia's A$3.5 trillion housing market, we would ask that you put your money where you mouth is," Joye said.

Grantham has repeatedly argued house prices in Australia are overvalued warning a speculative bubble was set to burst. At one time, he estimated housing in Australia was overvalued by 42%.

Joye has rejected these assertions saying it has whipped up hysteria among hedge funds which have become needlessly wary about investment in Australia.
They've got good reason to be wary about investment in Australia, especially in areas directly relating to or affected by house prices. Property may not drop by the 42% that Grantham suggests it's overvalued, but there are certainly some risks to consider including our banks heavy reliance on offshore funding.

I will post Grantham's latest comments on Australian housing at the end of this blog and you can judge for yourself whether it is "hyperbolic jawboning".
The Reserve Bank of Australia has also waded into the debate saying the bulk of mortgage-related debt is held by those most able to service it. RBA Deputy Governor Ric Battellino said earlier this year the ratio of house prices to income "is not that different from most other countries."

Joye has been supported by analysts at Goldman Sachs, Westpac, Commonwealth Bank of Australia, Australia and New Zealand Banking Group and HSBC. Strong population growth and claims there is a chronic shortage of housing in Australia are often cited as reasons to expect strong demand will underpin house price into the future.
CBA, Westpac, ANZ and HSBC all have strong interests in seeing the Australian property market increase (given their lending is to borrowers buying these assets), so in my opinion their views aren't independent enough to take seriously. Goldman Sachs recently claimed that Australian housing is not in a bubble, but did estimate that Australian housing prices are currently between 25-35 per cent overvalued...I would be interested to hear what Goldman's definition of a bubble is, because they estimate our property is almost as overvalued as Grantham suggested (35% Goldman vs 42% Grantham).

Australia's mythical "housing shortage" is a topic I will cover in more depth at a later stage, but suffice to say I disagree that we have one.
But some foreign banks, including Morgan Stanley and the International Monetary Fund, have called the property market overvalued.

Warring over the issue of house prices in Australia has resulted in some strange goings on. Academic Steven Keen walked from the nation's capital Canberra to its tallest peak at the start of the year having lost a bet with economist Rory Robertson that house prices would drop by up to 40%.
Once again the Keen vs Robertson bet is misrepresented.

The bet lost was not that prices would fall 40%. The bet lost was based on the direction of the ABS Housing Index over the 12 months following the face off. The longer term bet is still in play and Robertson may still walk (although my personal opinion is that we won't see houses fall by as extreme a percentage as Keen has suggested).

As promised earlier here is Grantham's latest comments on Australian housing:
GMO quarterly 26/10/10 – page 15-16

Postscript: Australian and U.K. Housing

I happily concede that the U.K. and Australian housing events are not your usual bubbles. Australia, though, does pass one bubble test spectacularly: we have always found that pointing out a bubble – particularly a housing bubble – is very upsetting. After all, almost everyone has a house and, not surprisingly, likes the idea that its recent doubling in value accurately reflects its doubling in service provided, e.g., it keeps the rain out better than it used to, etc. Just kidding. So, the house is the same. Perhaps the quality of the land has changed? In any case, Australians violently object to the idea that their houses, which have doubled in value in 8 years and quadrupled in 21, are in a bubble.

The U.K. and Australia are different partly because neither had a big increase in house construction. That is to say that the normal capitalist response of supply to higher prices failed. Such failure usually represents some form of government intervention. In Australia, for example, the national government sets the immigration policy, which has encouraged boatloads of immigration, while the local governments refuse to encourage offsetting home construction. There has also been an unprecedentedly long period of economic boom in Australia, and the terms of trade have moved in its favor. And, let’s not forget the $22,000 subsidy for new buyers. But does anyone think that bubbles occur without a cause? They always need two catalysts: a near-perfect economic situation and accommodating monetary conditions. The problem is that we live in a mean-reverting world where all of these things eventually change. The key question to ask is: Can a new cohort of young buyers afford to buy starter houses in your city at normal mortgage rates and normal down payment conditions? If not, the game is over and we are just waiting for the ref to blow the whistle. In Australia’s case, the timing and speed of the decline is very uncertain, but the outcome is inevitable. For example, the average buyer in Sydney has to pay at least 7.5 times income for the average house, and estimates range as high as 9 times.

With current mortgage rates at 7.5%, this means that the average buyer would have to chew up 56% of total income (7.5 x 7.5), and the new buyer even more. Good luck to them! In the U.K., which also has floating rate mortgages and, in this case, artificially low ones, the crunch for new buyers will come when mortgage rates rise to normal. But even now, with desperately low rates, the percentage of new buyers is down. Several of these factors, which do not apply to equities, make for aberrant bubbles, and clearly the Australian and U.K. housing markets fit the bill. In comparison, the U.S. and Irish housing bubbles behaved themselves. So let’s see what happens and not get too excited. After all, these may be the first of 34 bubbles not to break back to long-term trend. There may be paradigm shifts. Oil looks like one, but oil is a depleting resource. If we could just start depleting Australian land, all might work out well.
Hyperbolic jawboning? Which part Christopher Joye?

Not only do we have our major banks refuting that there is a housing bubble (see my recent blog post here which mentions their reports), but we've also got a "respected" Australian analyst attempting to make a ridiculous bet. A lot of work is going into refuting Australia's "mythical" housing bubble...why go to the effort if there is nothing to worry about?


BB.

Friday, November 5, 2010

Castlemaine Goldfields Ltd (CGT) - An Introduction

LGL increases Ballarat East resource to 1.5 million ounces
Lihir Gold Ltd (LGL) has lifted its Total Mineral Resource estimate at the Ballarat East project by 7% to 1.5 million ounces, following encouraging drilling and trial mining activities over the past year.


Importantly, this includes a 27% increase in Indicated Resource to 305,000 ounces from 241,000 ounces previously. Ore in the Indicated Resource category has increased from 560,000 tonnes to 952,000 tonnes. The average grade of the total resource has increased from 11.3 to 11.8 grams per tonne.
LGL ASX Release - 30/10/2007
You might be wondering why I've started this blog with a announcement for a different Gold company to that listed in the title...

Despite what their name might suggest, Castlemaine Goldfields (CGT) is far from a one trick pony.

The above mentioned Gold resource (1.5m conservatively estimated ounces) that once belonged to Lihir Gold (LGL, now taken over by NCM) was sold to CGT along with a Gold plant, freehold land, drilling equipment, mining licenses, Gold lab, light vehicle fleet and more. The Ballarat Gold plant and tenements is a world class package that was developed at a cost of more than $400m to LGL.

The entire Ballarat project was acquired by CGT for:
- An upfront payment of A$4.5m
- Assumption of the rehabilitation liability
- A 2.5% net smelter royalty capped at A$50m

I challenge you to find a better value Gold acquisition in recent years!

To further show the sort of value achieved from this acquisition, in the last quarterly (September 2010) CGT  announced they had sold surplus equipment from the project for $1.7m. That's a 38% return on the upfront payment just from selling the bits they won't need!

This was a fantastic move by CGT given that they also have a Gold resource of 686,000 oz at nearby Castlemaine. The purchase was a strategic move that in my opinion solidified CGTs position as one of the best upcoming Victorian Gold developers/producers.

Here are a few numbers:

Share price: 3.7c (as of close 05/11/2010)
Number of shares: 1.02b
Number of options: 6m (unlisted, strike @ 20c+)
Market cap: $40.8m
Cash: $18m
Gold resource: 2.2m Oz
Market Cap / Resource = $18.55 p/oz
(or $10.35 p/oz after taking cash off market cap)

Significant grades from drilling (by LGL) in the 18th months leading up to the resource upgrade at Ballarat included:
9m @ 30g/t
8m @ 22.7g/t
4m @ 47.4g/t
10m @ 8.2g/t
8m @ 11.3g/t


LGL had plans for a 20 year mine life at 200koz per annum from Ballarat. CGT will be looking at a different plan, intending on being a 100koz per annum producer with 50koz/pa coming from their Castlemaine resource and 50koz/pa coming from the Ballarat resource.

CGT has suggested a timeline that would see them producing by late 2011. The plant is currently on care and maintenance while they shore up the resource in the areas they intend on mining from initially.

In my opinion at the current market cap CGT presents an excellent buying opportunity. The share price has seen some weakness the last few weeks, however expect this to turnaround soon. I think CGT is one of the best value Gold picks on the ASX. As mentioned in the title, this is only an introduction and I will likely cover CGT in more depth at a later stage.



BB.

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