Weekly Update - Week Ending 2 September 2011

To calculate the weekly performance on my portfolio I take the close from last Friday to work out the percentage increase/decrease in each stock. This is compared to the ASX 200 (Code: XJO) and the Small Ords (XSO). The Small Ords is comprised of companies included in the ASX 300 index, but not in the ASX 100 index. I include the Small Ords in my comparison as it helps highlight the markets appetite for risk.

Market:	Close (Friday 26/08/11):	Close (Friday 26/08/11):	Percentage Change:
XJO	4200	4242	1.00%
XSO	2448	2475	1.10%

This week saw the XJO close at 4242, a gain of 1% for the week. The XSO outperformed by the slightest of margins closing up 1.10% to 2475. Next week will certainly be interesting with the Dow and European markets getting hit hard on Friday night after the release of some poor job figures in the US. The Aussie market did close lower on Friday and may have priced in some of these falls already.

In regard to my individual stocks it was certainly an interesting week. I added a new stock to the portfolio, Kentor Gold, and also saw MHM rocket up 10% on Wednesday. It was however unable to hold onto those gains and only closed up 4.32% for the week. OBJ remained flat at 0.018 and KGL closed at 0.98 down 2% from my initial purchase price of 0.10. As KGL was not part of the portfolio for an entire week I have used my purchase price of 0.10 rather than the close from last Friday when calculating my portfolios performance.

Code:	Weighting:	Share Price (Friday 26/08/11):	Share Price (Friday 02/09/11):	Percentage Change:	Weighted Change:
OBJ	25.66%	0.018	0.018	0.00%	0.00%
MHM	12.50%	0.81	0.845	4.32%	0.54%
KGL	11.81%	0.10	0.098	-2.00%	-0.24%
Cash	50.03%			0%	0.00%
TOTAL				0.774%	0.30%

As the above shows the portfolio closed up 0.30% for the week. The loss from KGL was more than offset by MHM and the large cash holding moderated any gains.

If we remove cash from the equation MHM’s 4.32% rise and KGLs 2% drop takes on more significance and results in an overall increase of 0.61%.

Code:	Weighting:	Share Price (Friday 26/08/11):	Share Price (Friday 02/09/11):	Percentage Change:	Weighted Change:
OBJ	51.37%	0.018	0.018	0.00%	0.00%
MHM	25.01%	0.81	0.845	4.32%	1.08%
KGL*	23.63%	0.10	0.098	-2.00%	-0.47%
TOTAL					0.61%

Kentor Gold: Analysis on Burnakura Gold Project

After yesterday’s post on the background of Kentor Gold I have decided to post my analysis on one of Kentor projects, the Burnakura Gold Mine. Over the next couple of days/weeks I will post analysis on each of their projects and then bring it all together to provide my total valuation on the company.

The Burnakura Gold Project located 50km south of Meekatharra in Western Australia, it covers an area of $47.5km² of gold prospective tenements on pre-1994 mining leases. The project has historic open pit production of 216,205 oz (1.8 million tonnes at 3.8 g/t) and open pit mining ceased in 1998 when the price of gold fell below $440 per oz.

In 2005 underground production commenced with a new plant and camp installed in November 2005. The mine continued to operate until October 2009 when the operation was placed in care and maintenance mode pending the development of additional underground deposits. Underground production resulted in 50,637 oz of gold from 264,731 tonnes mined at 5.94 g/t.

As the project was owned by an unlisted mining company, Jinka Minerals, the mine was never bought back into production (even with the huge increase in the price of gold) due to a lack of funds/limited access to funds for further exploration. As a result the project (along with Gabanintha and Jervois) were sold to Kentor Gold in 2011.

Burnakua currently has a 160,000 t/pa CIL Gold Plant which can be easily upgraded to 400 to 500,000 t/pa should a suitable grade be defined. There is also a refurbished ninety person camp, offices and workshop.

Kentor is also considering the use of a heap leach plant to process lower grade ore and on 20 June 2011 announced that they had acquired a heap leach plant, previously owned by Range River Gold (in administration). The plant acquired included:

·         A two stage crushing plant

·         Heap leaching equipment including an agglomerator, conveyors and stacker

·         Carbon adsorption tanks

·         Elution column and gold room.

The elution column and gold room will be used in the processing circuit at the Burnakura project and provides Kentor Gold with an effective means of re-commissioning the plant.

Since the acquisition Kentor Gold have also announced a 500,000 oz resource at the Burnakura Project. See announcement for further details.

To arrive at a value for the Burnakura project I have analysed potential project costs provided by an Intersuisse Report and a variety of other industry sources. I have split my valuation into two sections, the high grade operations and the heap leach operations. I then ran a discounted cash flow exercise (using a spread sheet that I developed) on each operation to arrive at a net present value. This involved hours of work and I am happy to share the spread sheet with those interested. For the purpose of this post I will however summarise the key points. Please be aware that this is not intended as advice and you should do your own research. The points below does not represent all my research but more so a snap shot/summary.

My initial projections for the production are conservative and include the following:

1.    250,000 tpa production after year 1

2.    Mine life of 11 years until 2023

3.    Average grade of 2.9 g/t

4.    Average gold price over the life of the mine $1,550 (starting at $1,700 in 2012 and decreasing over time to $1,400 in 2023).

5.    AUD/USD exchange rate starting at 1.05 and decreasing to 0.90 in 2023.

6.    Cash costs of $850 per ounce including royalties.

7.    Production of approximately 21,000 oz per annum after year 1.

8.    Initial project capital expenditure of $2,500,000 in 2011 and 2012

9.    Sustainable capital expenditure of $2,500,000 from 2013 to 2023.

Now since I ran these figures the price of gold has increased significantly. It is likely that we will be going into production with a gold price of close to, if not higher than $2,000 per ounce which obviously improves the profitability and therefore value of the mine. Initial discussion with other investors in KGL has also indicated that cash costs will be lower than my estimate. Kentor Gold is expected to release the feasibility on this project within 4 weeks. I will then re-evaluate the above figures to be more in line with their forecasts. What the above does however highlight is a base case scenario which is how I like to analysis the future potential of a company. Any improvements in the projects financials is additional reward on top.

The Net Present Value of the High Grade Operations is $45.8 million based on the above. There are currently 1,061,592,950 shares on issue with 59,611,358 options. On a fully diluted basis this equates to a NPV of just over 4 cents per share.

We can then add on the Heap Leach Operations. The assumptions for the gold price, exchange rate remain the same. Those than differ include:

·         Plant capacity of 350,000 tpa

·         Average grade of 0.91 g/t

·         Average gold produced is just under 12,000 oz per annum.

·         Cash costs per ounce of $750 including royalties

·         Initial cap ex of $5 million in 2011

·         Sustainable cap ex of $3 million in 2012 flowed by $1 million each year after.

·         Mine life until 2029

This gives a Net Present Value of $33.9 million of 3 cents per share. Therefore the value can be summarised as:

High Grade Operations: 4 cents per share (fully diluted)

Heap Leach Operations: 3 cents per share (fully diluted)

Total Value: 7 cents per share (fully diluted)

On top of that if we say that cash on hand will drop to only $35 million within the next 3 – 6 months then we have another 3 cents per share value. That equates to the current share price of 10 cents which effectively means future upside from Gabanintha, Jervois and Andash is provided for zero, as long as Burnakura proceeds.

We also need to keep in mind that I am basing my analysis on the High Grade Operations on a 250,000 tpa plant and a gold price that is significantly lower than today’s spot price. It is likely that the plant’s capacity will be increased soon after production commenced and gold still appears to be in a long term uptrend that could provide further upside to for the project.

Finally this is the first time I have posted any figures on my blog so I will state again that you are required to do your own research, do not rely on my own figures as I am not a professional and I could have made mistakes. Investing and trading is risky and you should consult a licenced financial advisor.

I look forward to your comments and feedback and sharing my spread sheet with those who may be interested in comparing notes.

OBJ Announcement: Preliminary Final Report Appendix 4E

On 30 August 2011 OBJ Limited Announced their Preliminary Final Report Appendix 4E. The announcement did not really provide any new information but some key lines I have pulled out include:

“The company continues to progress its technology and its business development initiatives in collaboration with international pharmaceutical, cosmetic, homecare and consumer healthcare partners.”

This really highlights the wide range of applications our technology can be applied to and the number of “irons we have in the fire”. There has been some discussion amongst OBJ holders and I believe the general consensus is that an announcement could come from FMCG #1 at any stage, GSK could also announce an agreement with milestone payments in the near future (although commercialisation of a product is still some time off) and FMCG #2 appears to be the furthest from any formal agreement.

It is however hard to judge the current status of the agreements and one needs to be confident in the technology and its application to hold comfortably through these periods. At this stage I do not mind if the share price stays where it is and my only concern in the short to medium term is the threat of dilution from a capital raising. Although the company has very low cash burn for a bio tech stock there is always that thought in the back of my mind.

Some other positives to come out of the announcement include: “The Company also announced the signing of a Strategic Alliance Agreement with one of the world’s largest consumer healthcare and homecare product companies.”

And “Highlights of the period include encouraging progress in the multi-product Strategic Alliance with one of the world’s leading Fast Moving Consumer Goods companies (FMCG)”

Again it is nothing that we did not already know but underlines the size of the partners we are dealing with and the potential our technology has.

Link to Announcement

August Monthly Update

All I can say is what a month! Late July/early August really saw the market fall off a cliff on the back of the US downgrade and concerns over European debt issues. It is not like the event itself was entirely unexpected, more the timing of when. I will admit that since the Global Financial Crisis low I had remained bearish for a very long time. As a result I missed most of the initial run up. At the time I did not think the run would last as long as it did and I was also talking with close friends who were even more bearish than I. Unfortunately I listened to them a little bit more than I should have.

Anyway that is a story for another day. So where was I ……… With the market falling off a cliff a lot of people were saying here we go again. I am glad to say that I was not one of them (at least in the short term). I don’t quite know what it was but I did not see “panic” in the markets. Sure stocks were down but it did not seem like investors were running for the exits and would get out at any price. This stance was confirmed when on August 9 the market opened sharply down and hit a low of 3765. What we then witnesses was a massive turn around, something like a 7% intraday range which saw the market eventually close up at 4034. From that point forward the market has not done too much of note and has largely traded between 4100 and 4300.

The performance of the ASX 200 (XJO) and the Small Ords (XSO) is summarised below. As you would expect the XSO did get hit harder during August as investors moved out of riskier stocks.

Market:	July 29 Close	August 31 Close	Percentage Change:
XJO	4424	4296	-2.89%
XSO	2595	2514	-3.12%

In regard to my portfolio both OBJ and MHM were hit harder than the broader market. This can be expected during times of increased volatility as investors do not want to be holding stocks with limited revenue and or high debt. OBJ closed down 10% for the month, with MHM down 8.91%. MHM could have been down considerably more if it was not for yesterday’s action which saw the stock climb 10%. If we see MHM green again today then I think we can say that the downtrend has been broken.

Code:	Weighting:	July 29 Close	August 31 Close	Percentage Change:	Weighted Change:
OBJ	25.00%	0.02	0.018	-10.00%	-2.50%
MHM	12.50%	1.01	0.92	-8.91%	-1.11%
Cash	62.50%			0%	0.00%
TOTAL				-6.304%	-3.61%

Given the fact that over 62.5% of my portfolio was in cash the weighted change was not too bad with the overall portfolio losing 3.61% (compared to a loss of 2.89% for the XJO). If we remove cash and just examine the stocks held then the portfolio dropped 9.54% during the month of August.

Code:	Weighting:	July 29 Close	August 31 Close	Percentage Change:	Weighted Change:
OBJ	66.00%	0.02	0.018	-10.00%	-6.60%
MHM	33.00%	1.01	0.92	-8.91%	-2.94%
TOTAL					-9.54%

Finally those of you who follow my blog closely would know that I added a new position yesterday, Kentor Gold (ASX: KGL). I have not included it in the above analysis because it has only been held for 1 day of August. For the record I purchased at 0.10 and the stock closed at 0.099.