Wednesday, June 29, 2011

Mining Shares and Sovereign Risk: Kyrgyz Republic

Those of you who read the blog regularly would be aware that I am largely out of precious metal equities (with only modest positions in two companies after having held up to 15 early in the year). I have kept a close eye on my watch list though and noted with interest that three ASX listed companies with Gold related assets in the Kyrgyz Republic were all sharply red today when most others (precious metal related with projects elsewhere) were stable or green.

Kentor Gold (KGL) closed down 11%
White Cliff Nickel (WCN) closed down 16%
Manas Resources (MSR) closed down 16%

I have written about WCN and MSR previously on this blog (see these links: WCN, MSR).

Only a week ago I briefly posted about Sovereign risk, saying:
An investor needs to weigh up the many risks associated with mining companies; one of those is the risk that future government policy will reduce the value of an investment (sovereign risk). While mining costs can be significantly cheaper in less developed countries there is also risk of nationalisation of mines and mineral resources (something discussed recently in Bolivia and South Africa) as well as other changes that could be a detriment to the investor. That is why I prefer to direct most of my capital into Australian based miners. BB.
In the post I wrote on WCN (linked above) I said this regarding the situation in Kyrgyzstan (written September 2010):
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.
While the elections went ahead (with greater than 50 percent turnout) the environment is far from perfect for foreign mining interests with the following being reported on mineweb yesterday:
Mining companies, who had hoped democracy would lead to a better investment climate in the resource-rich country, are finding the going tougher than expected.

The bus loaded with supporters of a planned $100 million mine had just left its remote Kyrgyz village when a mob on horseback blocked the road. What happened next was a warning to foreign mining companies who had hoped democracy in Kyrgyzstan would improve the investment climate in the Central Asian republic.

"The supporters were dragged out of the bus and warned in no uncertain terms they should not show any support for the project," said Hugh McKinnon, country manager for Kentor Gold, the Australian miner that holds the licence for the deposit.

"This group of horsemen went round every household which has shown support for the project and threatened physical violence unless people agreed to back off."

Four months on, Kentor Gold still hasn't started work on the copper and gold mine it says could transform a corner of Talas province, cradle of the April 2010 revolution that ended nearly two decades of authoritarian rule in Kyrgyzstan.

The country has promised much since electing a new parliament last October, the first in ex-Soviet Central Asia not beholden to a presidential strongman. But early hopes that Kyrgyzstan could become a model for a different way to do business in the region are fading. Mineweb
Further to this Kentor Gold provided an update on their Andash Project this morning:
Kentor Gold Limited (Kentor) advises that a resolution appears to have been adopted in the Kyrgyz Parliament relating to the Andash Project. Although it is believed that the Kyrgyz Government will reject the Parliament’s resolution, it does call for the suspension of all activities related to the development of the Andash gold‐copper project, revocation of all permits and cancellation of the land use permit.

The Department of Natural Resources has written to Kentor today stating that at present it “...has no information on and sees no causes for early cancellation of the license.” Mining licences and land use permits are the responsibility of the Executive Government through the Department of Natural Resources.
While it seems likely the parliament resolution won't stick it will probably delay KGL's development of the project.

Here is a very brief overview I've written for the three companies listed at the top of this post:

*********************************************************

Kentor Gold (KGL): With the share price at 8.1c (close price on 29/06) KGL's current market cap is approximately $86m. As of the March quarterly report they had $68m in cash. They are fully funded for $96m CAPEX at Andash with the remainder to be funded by a $50m debt facility provided by Macquarie Group.

Apart from the Andash Gold-Copper Project KGL also recently took control of Jinka Minerals (purchased for $12.75m equivalent) which holds several advanced resource projects in Australia.

When taking into consideration their cash position, little value (around $18m) is being provided for their 80% stake in the Andash project which is expected to produce 70,000 ounces of Gold for 6 years (with potential to extend) at a cash cost of US$29 (net Copper credits).


*********************************************************

White Cliff Nickel (WCN): The share price closed at 9.2c, providing a market cap of around $6.2m. They had $2.44m cash at the end of the March quarterly and have raised another $730,000 in April meaning they have around $3.17m cash minus the last 3 months spend. This company runs a very tight ship and this capital has the potential to last them 12 months or more depending on the level of exploration carried out (net operating cash flow in 9 months leading up to last quarterly was around $1.5m).

They own or hold interest in several projects, the most exciting of which is the Chanach Gold Copper Project (located in the Kyrgyz Republic) in which they have a 45% interest.

WCN is the least developed of the three companies with no resource yet defined at any of their tenements.


*********************************************************

Manas Resources (MSR): With a share price of 18c MSR has a market cap of $32m. They have a significant number of options which expire September this year and have a strike price of 20c. With the recent share price movement they are now out of the money. The cash position at the end of the last quarterly was $11m.

They have a Gold resource of 1.13m ounces. They have the largest land holding in the Kyrgyz Republic with 4400km2. The Shambesai site has 645k ounces of Gold and a CAPEX of only $16.3m is expected with a life of mine cash cost of US$250 projected.

*********************************************************

Although many precious metal stocks have taken a beating recently, it's pretty obvious that this bunch has copped some of the worst falls. All three are heavily discounted based on the turmoil in the Kyrgyz Republic.

While I'm not currently looking to buy equities right now (for reasons explained in previous posts) I will certainly be keeping an eye on how the political situation develops. I've held positions in WCN and MSR in the past and all three companies look promising, I will be potentially be on the lookout to add these companies to my portfolio in the not too distant future (a smaller percentage than the companies I own and will buy with Australian based projects).

BB.

Monday, June 20, 2011

Precious Metal Stocks - Nano Caps (<$5m M/Cap)

Disclaimer: Unlike many of my posts on precious metals stocks which look at buying based on value, the below post and examples are largely speculative. A reminder that no posts of mine should be considered advice and all investment decisions you make should be your own.

In February 2010 I started a thread on an Australian investment forum about speculatively purchasing 'Nano Cap' precious metal stocks.

If you are a member of the Hot Copper Forums you can view the thread HERE.

Investopedia suggests that Nano Caps are those with a market capitalisation of less than $50m, however given Australia's stock market in general has much smaller sized companies I was looking at those that have a market cap under $5m.

Further to the market cap I narrowed down the selection of precious metal stocks to mainly those that had a JORC defined resource already.

Here is a list of those I came up with:

CLICK IMAGE TO VIEW LARGER VERSION

From the list you can see that some were identified in February, some in April and then a few more in May (all early 2010).

Over time I measured how each of the companies traded and based profit calculations on having put $1000 into each of the stocks on the starting dates listed (a virtual portfolio so to speak). 

I actually also bought and sold some of the stocks as part of my real personal portfolio (those I've held at times from the above list are SVL, MNM, CMY, CVG & WCN, with mixed results but overall profited well).

If someone had purchased $1000 worth of each stocks as they were listed then $18,000 would have been spent all up (18 x $1000). The portfolio today would be worth $53,099 (almost 200% profit).
Some of the stocks have traded much higher than their current prices (given we are in the midst of a reasonably severe market correction this is not surprising). If you had sold out at the peak of each stocks trade (between purchase date and today) the portfolio would have netted $101,708 (of course selling at the absolute peak for each of the 18 companies is extremely unlikely).

The above figures include payment for, but no return from RBX which is currently suspended from trade (obviously some value may end up being drawn from that company as well).

Shares in this sort of market cap range are extremely risky. Many of these companies have small cash reserves and if they were not able to raise cash when required then they could quickly end up in administration. However with great risk comes the potential of great reward.


As many of you would know I am currently (mostly) out of the stock market, but I keep an eye out for opportunities and I think there is still plenty to be made from precious metal stocks in the medium term.

I will be starting a new virtual portfolio of Nano Cap precious metal stocks at some point in the near future (assuming we get the market correction that I am expecting), so keep an eye out for that. It's likely I will change the selection criteria slightly and will be more picky about the stocks I select (as opposed to the above list which was all those I could find on the ASX that met the criteria).



BB.

Mining resumes at Ballarat - Castlemaine Goldfields

Those regularly reading the blog may be aware that I currently only hold two precious metal related stocks (have taken a defensive position as described in earlier posts), one of those is Castlemaine Goldfields (ASX: CGT). This morning they released an announcement (with results from recent drilling) which seemed to wake the stock out of a slumber.

Here is an excerpt from the announcement:
Ballarat Exploration Update - Spectacular Gold Intersection
Sulieman Line of Mineralisation Highlights:-
Spectacular gold intersection from CBU095 on the lower BFZ Fault:

29.1 m @ 32.1 g/t Au from 230.7m,
incl 6.95m @ 6.3 g/t Au from 241.05m massive spur vein zone
& 9.3m @ 91.5 g/t Au from 250.5m fault related massive quartz

The horizontal width for the CBU095 quartz intersection is estimated to be approximately 21m with height unknown. Follow up diamond drilling from the Lower Llanberris decline is now planned to test this new and exciting gold target across approximately 40m of strike.

Managing Director Mr. Matthew Gill commented “This is one of the best underground gold intersections recorded to date in the Ballarat goldfield, and reinforces our conviction that the best area to explore and mine for gold at Ballarat is at the northern part of the goldfield.

As detailed in our ASX release on 26th May 2011, the Sulieman Line of mineralisation in Britannia holds potential for a 3rd ore source, and it was predicted that extensions to that gold mineralisation could be found in the adjacent Llanberris compartment. Now that we have returned to drill the Basking Fault in the Llanberris, it is very pleasing that the results are supporting our geological theories.

We are currently extending the existing underground decline and this will pass close by this intersection. We now plan to conduct in-fill drilling with the objective of being able to add thismineralisation into our near-term gold production plan. This represents a great upside for us, as we progress on schedule towards first gold production in September this year." Link to full ASX announcement.
CGT opened trading at .043 (well above the close of .039 the trading day prior), closed at .044 and traded up to .51 during intraday trade.

A cross trade of 17m shares went through at midday (around 1.1% of the entire company) meaning we've possibly seen a top 10 shareholder exit their position or sell down some of their holding. It's also possible we have a new significant holder. It will be interesting to see who this was when the market is informed. The latest top 20 holders can be viewed on the CGT website, HERE.

In total almost 64m shares exchanged hands today, over 4% of the companies share base, which is no small feat given that the top 20 hold almost 70% of all issued shares.

From a technical analysis perspective CGT's rise looks promising having broken out of a falling wedge with the strong move higher. However short term direction of trade has the potential to be influenced by larger market shifting factors with Eurogroup Finance Ministers meeting this week to discuss what to do about the Greece situation (another bailout or will they allow the eventually inevitable default?)...

I wrote an editorial/company profile piece in May which will be going to print in an investment journal this July. For those interested here it is below:


Mining resumes at Ballarat - Castlemaine Goldfields

In a world where central banks have thrown responsible monetary policy out the window and world governments have been spending like there is no tomorrow, papering over the damage caused by the GFC, there are but a few safe havens for those looking to protect their wealth. Of course the most prominent of those is Gold, a metal whose rare properties have seen it flourish as a wealth protection tool for many thousands of years.

For absolute protection physical Gold is a must, but for those looking to capitalise on Golds rise there is also the option to invest in companies that are exploring for and mining the precious metal. Some Gold mining companies look set to profit handsomely with costs much lower than the spot price of the metal itself.

An investor needs to weigh up the many risks associated with mining companies; one of those is the risk that future government policy will reduce the value of an investment (sovereign risk). While mining costs can be significantly cheaper in less developed countries there is also risk of nationalisation of mines and mineral resources (something discussed recently in Bolivia and South Africa) as well as other changes that could be a detriment to the investor. That is why I prefer to direct most of my capital into Australian based miners.

One of the up and coming Gold mining companies in Australia is Castlemaine Goldfields (ASX: CGT). You wouldn't know it by looking at their name but CGT's flagship project is the Ballarat Gold Project. The project was purchased from Lihir Gold (ASX: LGL) in 2010 for a paltry $4.5m and a 2.5% royalty on production (capped at $50m). $400m had been spent developing the project; the purchase included a 600ktpa plant (designed and installed by Gekko) which has been fully commissioned (removing some of the major risk associated with a start-up producer) as well as a state of the art laboratory, supporting infrastructure, drilling equipment, freehold land and all associated license areas.

Over the months following the transaction CGT sold surplus equipment (given their plans for a smaller operation) totalling $1.95m, covering over 40% of the initial purchase cost.

Capital ($25m) was raised recently in a placement to sophisticated investors at 5c; other shareholders were also offered the opportunity in a Share Purchase Plan. These funds will be used to advance exploration at Castlemaine, Berringa and Tarnagulla. It also provided working capital for the company to resume production at Ballarat during the third quarter of this year.

CGT is targeting 50koz pa from Ballarat with potential to ramp this up to 100koz pa with ore from surrounding regional deposits. Cash costs at Ballarat are anticipated to come in at around $750. Assuming a $950 total cash cost we could see gross cash flow of around $22.5m (using AUD$1400 Gold price), around $15m after royalty and tax (1c EPS). With a market cap around $64m (early May 2010, 4.2c share price) it's easy to see why one could see plenty of value here for the astute investor. With significant investors (top 20) holding close to 70% of the company it does mean liquidity for daily trading can sometimes be lacking, this results in an erratic share price at times.

While CGT have not used LGL's 2007 resource statement for Ballarat (which was 1.5m ounces of Gold at 11.8g/t), they do have a JORC resource at Castlemaine of 686koz. LGL had plans to mine 200koz pa for 20 years from Ballarat, it's likely that the deposits at Ballarat have the potential to supply CGT with Gold rich ore for many year (if not decades) to come.

Significant grades from drilling (by LGL) in the 18th months leading up to the resource upgrade at Ballarat included: 9m at 30g/t, 8m @ 22.7g/t and 4m @ 47.4g/t. Results from CGT in early 2011 have also shown promise with recent results (from Ballarat East) including: 7.8m at 13.8g/t, 5.5m at 61.4g/t, 8.8m @ 9.2 g/t and 12.7m @ 7.1 g/t.

Mining has just commenced with the company expecting first ore to be intersected in the next few months (which will lead to first Gold production). Investors are clearly cautious about the potential at Ballarat with the share price languishing. This is not unexpected given LGL's failed attempt with the project, but Matthew Gill (MD & CEO) was recently quoted saying, "We're not targeting the same mining rate (as the previous owners). We're more measured and going to let the geology direct where we take it". With the right plan and people in place I think there is a good chance that Castlemaine Goldfields will succeed where others have failed.

Bullion Baron

Disclosure: Stock in Castlemaine Goldfields held at the time of writing article.


BB.

Tuesday, June 14, 2011

QLD Gov attempts to re-leverage property buyers

In a budget announcement earlier today the Queensland Government announced a housing stimulus package to help prop up their ailing property market:
Bligh’s $140 million Building Boost to stimulate housing sector
Premier Anna Bligh and Treasurer Andrew Fraser have announced major reforms to the state’s housing sector to boost construction jobs and make new housing more affordable.
The Queensland Building Boost is a six month, $140 million initiative that will provide a $10,000 grant for all Queenslanders constructing or purchasing a new home up to the value of $600,000, with first home buyers also eligible for the $7,000 first home buyer’s grant. Queensland Government
To offset the cost of the new 'boost' they are reducing the long standing transfer duty concession for home buyers.

Further to this at the bottom of the announcement was a link to the following chart:


What does this chart say to you? To me it reads "Look at us, we are going to have the most over leveraged First Home Buyers in Australia, YIPPEE!".
 
From what I can gather First Home Buyers will still pay no stamp duty for purchases under $500,000. So consider a situation where a young couple are looking to buy their first home, they both have average incomes but little ability to save (so only have a small deposit). The $10,000 boost has the potential to lift their purchasing power by up to $200,000 at a 95% lend... don't believe me?

Use an example where the couple are each earning $45k pa net ($90k pa net combined). They have no other financial commitments (e.g. credit card/personal loan). I set the interest rate to 7% and the loan term to 25 years. The calculator suggests they could borrow up to $642,000. Of course they will be limited by their deposit, so if they have $8,000 saved on their own, with the original $7,000 First Home Owners Grant they would have a $15,000 deposit, with a 95% lend (capitalised LMI) they currently have purchasing power of up to $300,000 (deposit x 20).

With the additional $10,000 from the Queensland Government they now have a $25,000 deposit ($8,000 savings, $7,000 FHOG, $10,000 Building Boost) or with a 95% lend (capitalised LMI) they have purchasing power up to $500,000 (deposit x 20). 

$200,000 more than before the extra boost, got to love leverage!

Basically as long as they don't hit their serviceability limit any increase in their deposit (including free handouts from the government) has the potential to be boosted by 20x using the amazing power of leverage!

What's more is that even the non First Home Buyers will be assisted by the power of leverage. For example in a situation where a buyer had to pay $5000 more in stamp duty (due to the removal of concession) but gets the $10,000 Boost they are still able to increase their purchasing power by $195,000 ($200,000 - extra $5,000 stamp duty), still assuming they are not running into a serviceability limit based on their income.

Now the above examples are just that, examples. They don't necessarily reflect real life scenarios and in a real life scenario it's possible that a buyer hits their serviceability limit before they hit the maximum purchasing power (based on deposit), but the ability to leverage this free money can't be ignored.

The Queensland government is obviously getting desperate. Their housing and economic situation is already dire (being well covered by Delusional Economics over at MacroBusiness.com.au) and they are hoping this will kick start their housing market like the Federal Government did with the First Home Buyers Boost in 2008/2009... will they be successful? It will be interesting to see.


BB.

Bullion Baron being impersonated by APF

It was bought to my attention by an anonymous commenter on my blog (thanks again for the heads up!) that I had recently been impersonated by the devious owner/s of the AustralianPropertyForum.com (APF) in an attempt to draw traffic to their website.

I have long been wary of this site and it's morally questionable way of drawing hits by impersonating online identities of other people and sites, but I was completely unaware that I had also been targeted by the imposter.

The anonymous source pointed out the impersonation here:

Aussie housing stock is not too expensive on Property Observer

However with the help of Google I identified many more occasions that I have been impersonated over the last several months, including in the comments of each of these articles:

Rates, prices cap home building: HIA on WA Today
What you need to know about the property markets in 2011 on Property Update
Stamp duty here to stay on Business Day

There are countless other examples. In some cases my other identity used online (hobo-jo) has been impersonated. I rarely post comments (or even read) main stream media news sites, so you can be pretty sure that any commentary using my handles on these sites is unlikely to be authentic.

I have also been impersonated on several forums with user account created using my title (and sometimes site graphics) on the following sites:

Home One Forum
Web World Property Forum
Melbourne Chat Forum
Poms in Oz Forum

As you can see from the above articles and forums, they all have links pointing back to the APF website.


I have put up this blog post for two reasons:

A) To advise readers that comments made with my handle (Bullion Baron or hobo-jo) on forums and news websites aren't always going to be my own.

B) To warn anyone prepared to listen from signing up on the Australian Property Forums. I'm not the only identity/website that they have impersonated in an attempt to draw traffic to the site. This sort of activity should raise a red flag as to the genuine nature of the forum.


There was a dubious beginning to the site and I may go into detail about this at a later stage, but suffice to say you should think about whether signing up on a forum like that (which has used morally (legally?) questionable tactics to bring in traffic) is a wise move... if you do sign up (or already a member) I would recommend you keep your password for that site different to any others (especially different to the email address used to signup).


BB.

Monday, June 13, 2011

Perth Mint 2012 Year of the Dragon Silver Coin

You can now buy Perth Mint 2012 Lunar Year of the Dragon Silver & Gold Coins at Bullion Money:


Newer coverage of the Dragon coin:


And official pictures are now available (rather than the below mockup):

Perth Mint Lunar Dragon Coin Designs


Note: Mock-up design. Official pictures yet to be released.

If you are a stacker or collector of Silver coins you are probably already familiar with the Perth Mint Lunar Series. After the success of their first Lunar releases that began in 1999 the Perth Mint kicked off Series II with release of the 2008 Year of the Mouse coin.

The most recent coin, 2011 Year of the Rabbit sold out within a week after the Chinese New Year (5 months after initial release) with the Perth Mint Blog noting they were sold out on February 9th. At that time the Tiger (2010) and Ox (2009) were also sold out, but the 2008 Year of the Mouse was not, so the Perth Mint started minting and selling these again to reach the 300,000 coin limit (the mouse is also now sold out).

All the Series II 1 ounce Silver bullion coins have a 300,000 mintage limit. On a global scale this is quite a small number and allows the Lunar coins to achieve quite a nice premium compared to other Global coins as well as other Perth Mint series like the Koala (which have larger or no limits)

In comparison to the 300,000 limit on the Silver Lunar series, the Timberwolf and Grizzly Bear, both part of the Canadian Wildlife Series from the Royal Canadian Mint, both have a mintage of 1,000,000 (over 3 times that of the Lunar Series). The 1 ounce Silver Panda (BU) from China had a mintage of 800,000 in 2010. It's worth noting however that other variations of the Lunar coins are not limited to a specific mintage so the gilded & coloured versions as well as sizes other than 1 ounce (e.g. 1/2, 2, 5 or 10 ounce) could end up filling the void where the mintage limited 1 ounce bullion coin cannot.

The Lunar coins are especially popular in European countries and examples of the premiums fetched can be found on sites like Silber-Corner or eBay Germany. In fact there is a rumour doing the rounds that a European dealer approached the Perth Mint about buying the entire 2012 Year of the Dragon mintage!

Pre-orders are already being taken for the 2012 Dragon coin with Gold Stackers (sister site to the Silver Stackers forum) recently having sold out of their allocation and Bullion Bourse now taking orders well in advance of the expected September release. Even without having seen the design it would seem that enthusiasts are keen to get their orders in.

I suspect that demand for these coins is going to be astronomical. The Year 2000 Dragon coin is easily still the most popular of the first series and demands the highest premium even though it had the highest mintage of the 1 ounce bullion coins (as per this reference table). There is talk of these having instant premiums/being sold out on release, I suspect that this won't be the case, but it can't hurt to take precautions. I have placed a pre-order myself to both hedge against the possibility of a higher Silver price at the time of release as well as locking some in to avoid missing out. That said I am holding back and will be looking to order more with any large dips in the price of Silver (which I am expecting through the middle months of the year as QE2 ends and uncertainty takes over).

While it is predominantly a bullion coin, the 1 ounce Silver Lunar coins:

- Have a low mintage
- Sport an aesthetically pleasing design
- Are housed in individual capsules
- Have a quality finish
- Are produced by world renowned Perth Mint
- Come with legal tender status
And are priced as bullion coins on release.

They allow a simple entry into the Silver market. If you expect Silver to continue to appreciate over the medium term then they are a great option as a bullion purchase, but come with the potential for a numismatic premium once sold out at the Perth Mint.


BB.

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

Thursday, June 9, 2011

RPData Statistics -> Over 8 months stock on market

I haven't talked property statistics for awhile now. There hasn't been a great deal that's changed since earlier in the year. Data continues to look negative for Australian property prospects over the short to medium term. Lending is down (although some recent stats show a small uptick recently), stock on market continues to increase, auction clearance rates continue to look dismal, all signs point to even lower prices by the end of the year.

Some data recently released by RPData caught my eye and thought it was worth sharing.

The first is 'stock on market', that is the number of homes advertised for sale. RPData's statistics vary wildly from some other data providers such as SQM Research (whose last national stock on market count was reported at around 360,000), but last month saw a large move higher. This does not bode well given the already high number available and decreasing sales volume. It was reported that 283,690 are currently advertised for sale. This is around 34% higher than the same time last year (211,761).

CLICK IMAGE TO ENLARGE
The number of properties advertised for rent is also on the increase (which somewhat conflicts with other reports I'm hearing that the rental market is tight), 99,561 are currently advertised, an increase of 15,429 (18%) over the same time last year. The Northern Territory has seen the number of advertised rentals more than double over the last 12 months.

CLICK IMAGE TO ENLARGE
In a recent article on the RPData blog, the following chart was published which shows current annual volume of sales is around 390,000 per year:

CLICK IMAGE TO ENLARGE
Based on an inventory of 283,690 properties advertised selling at a rate of 390,000 per year that leaves us with over 8 months supply on the market.

If SQM Research's data is more accurate with 360,000 stock on market then we have 11 months supply on the market.

This is sometimes referred to as the "absorption rate" (number of months it would take to sell all stock on market). Generally speaking 6-7+ months worth of available stock is considered negative for prices.

Thanks goes to @aushousingcrash for pointing out some of the data used in this post.

BB.