Weekly Update - Week Ending 9 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 02/09/11):	Close (Friday 11/09/11):	Percentage Change:
XJO	4242	4194	-1.13%
XSO	2475	2484	0.36%

Well it was a very interesting week with the XJO closing down 1.13%, but the XSO put on 0.36%. Although the markets have been very bearish over the last couple of weeks I am yet to see outright panic and I believe this is reflected in the stronger performance by the XSO. However the action in Europe and the US was very concerning over the weekend so that panic may still yet eventuate.

Code:	Weighting:	Share Price (Friday 02/09/11):	Share Price (Friday 11/09/11):	Percentage Change:	Weighted Change:
OBJ	25.66%	0.018	0.018	0.00%	0.00%
MHM	12.50%	0.845	0.8	-5.33%	-0.67%
KGL	11.81%	0.098	0.11	12.24%	1.45%
Cash	50.03%			0%	0.00%
TOTAL				2.306%	0.78%

This week OBJ closed unchanged at 0.018 cents, MHM continued its trend of getting smashed by a comparatively larger amount than the overall market and closed at 0.80, a drop of over 5%. The best performer was KGL which closed up 12.24% on the back of some promising announcements. It could have closed higher, at 11.5c, had it not been for a seller who added 1 additional share to his order just before close to make sure KGL finished the day at 11 cents and not 11.5 cents. The good news was that the overwhelming majority of volume on Friday did in fact trade at 11.5 cents.

The end result was a 0.78% increase in the portfolio’s weighted value. If we remove cash from the equation then the result was slightly more impressive due to the strong gains by Kentor Gold. On this basis the portfolio closed up 1.56%

Code:	Weighting:	Share Price (Friday 02/09/11):	Share Price (Friday 11/09/11):	Percentage Change:	Weighted Change:
OBJ	51.37%	0.018	0.018	0.00%	0.00%
MHM	25.01%	0.845	0.8	-5.33%	-1.33%
KGL	23.63%	0.098	0.11	12.24%	2.89%
TOTAL					1.56%

Kentor Gold: Burnakura Gold Project Update

Another day, another announcement by Kentor Gold. If investing in the small/micro cap sector of the stock market has taught me anything, it is the importance of news flow. As long as a company is updating shareholders and the market and what is going on people remain confident and the share price somewhat supported (unless the news is bad of course). By contrast companies that don’t update holders often fall off the radar or face the growing discontentment amongst holders. So with that all said it is great to see Kentor Gold reporting on such a regular basis.

Today’s announcement marks a significant step towards production at the Burnakura Gold Project. The announcement reaffirms that production is on track for mid-2012 and provides some addition details on the refurbishment and recommissioning program. A contract for this work has been awarded and the dismantling and transportation of equipment from the Indee site has already started.

The CIP processing plant at Burnakua is being recommissioned and expanded and the additional plant acquired from the Indee site will facilitate the re-start of the project. A key component of the upgrade is the addition of a gravity circuit to recover free gold with a stripping plant and gold room relocated from Indee which enables gold production onsite.The announcementalso  reaffirms that a throughout of 250,000 tpa is being targeted for stage one with future expansion to 500,000 tpa being considered for stage two.

Finally the announcement goes on to state that a 60 hole air core drilling program commenced today to test structure targets adjacent to the magnetic anomaly north of the existing open pits and work approval has also been received for an 8,000m RC drilling program that is planned to commence in October.

All in all just another tick in the right box for Kentor Gold.

Link to the announcement.

Is Gold on the Verge?

Yesterday I posted a video on Youtube outlining my thoughts on gold. Based on the price action that we had witnessed over the last couple of sessions I thought that one of two scenarios could play out:

1.    That a new uptrend was being established at a steeper angle

2.    That gold had formed a double top and was likely to pull back and consolidate between $1,750 - $1,850 (bullish target) or within the previous channel, $1,500 - $1,650 (bearish target).

Below is a copy of the chart that was contained in yesterday’s video:

Last night’s action was reflective of my earlier analysis as we did see further weakness in the price of gold. As the new chart below shows the price gold dropped down to the new trend line that I had previously mentioned. The lower wick indicates that it did fall below the trend line during the session, however, what is important is that it closed pretty much smack bang on it. As a result of this we now need to see a green candle for this new uptrend to continue. If we see further weakness in the price of gold tonight then the uptrend will have broken down and gold will head lower in my opinion. This then brings my second scenario into play and could result in consolidation between the two price levels outlined above.

Finally I don’t think either consolidation scenario would be particularly bad for gold in the long term. My initial video that I posted a number of weeks back discussed how a parabolic move is not an ideal scenario for anyone who is invested in gold for the long term. If gold was to move back into its original channel then the long term uptrend could continue for a considerable amount of time.

See my new video based on last nights price action here.

Disclaimer: The above is not advice, just some general thoughts. Please do your own research and consult a licenced financial advisor.

Just a Quick Post on Kentor Gold

This morning we received a Change of Director’s Interest Notice from Kentor Gold. Although it is nothing new or major in the development of the company it is always positive to see a director adding to their position.

A Director of the company, John Taylor, added 500,000 ordinary shares to his position yesterday (7 September 2011). The consideration for each share was 11 cents for a total outlay of $55,000. This brings his total holding in the company to 4,500,006 ordinary shares.

I thought I would update you all on this development as his purchase did occur on the same day as Kentor Gold’s promising drill results on Jervois.

Link to the announcement.

Kentor Gold Announcement: Outstanding Drilling Results Confirm Jervois as a Significant Project

This morning Kentor Gold released the results of additional drilling that has taken place at their Jervois project. The result was certainly well received by the market with the share price hitting a high of 12.5 cents in early trade (currently trading around 11 to 11.5 cents).

The significance of this announcement cannot be underestimated as it goes some way to confirming the “potential for a major mine at Jervois”. Previous drilling results had only confirmed a mineralisation to a depth of 200m, although at the time management was confident that it extended further. This was confirmed today with “mineralisation at Reward Prospect open at depth of 450m below surface and to the north along strike.

The best drilling result was 72m intersection at 3.27% copper, 51.33 g/t silver and 1.16 g/t gold (true with of 16m). And assays of up to 8.8% copper, 276 g/t silver and 19 g/t gold were recorded from individual samples within the hole.

Not only does this highlight the potential for an ore body with a higher grade than the current resource estimate (113,000 tonnes at 1.3%) but also the potential for significant gold and silver credits as well. Management had previously flagged the potential of a gold mineralisation, however historical drilling focused on copper and there was not enough data to include gold within the initial resource estimate. This could allow for some significant upside from any future resource update.

So overall I am very pleased with the announcement and look forward to future drilling results from Jervois and Kentor Gold’s other projects.

Kentor Gold: Analysis on Jervois Base Metals Project

Today I am putting together my final thoughts on Kentor Gold’s Australian Assets. As part of the acquisition of Jinka Minerals Kentor Gold acquired three projects; Burnakura and Gabanintha and Jervois.

The Jervois Base Metals Project is located 280 km north-east of Alice Springs in the Northern Territory on a land holding of 38km². The project has Copper, Lead, Zinc, Silver and potentially Gold mineralisations.

The project is on a granted mining lease (issued prior to the introduction of Native Title Legislation) and has had over $5 million spent on past exploration. The project was also mined by Plenty River Mining Limited who commissioned a treatment plant and associated mine infrastructure in 1981. Between 1982 and 1983 2,000 tonnes of concentrate grading 50.4% Lead, 5.4% Zinc, 0.6% Copper and 680 g/t of Silver was produced. Mining was suspended in December 1983 due to a sharp fall in metal prices.

On 5 July 2011 Kentor Gold announced their initial resource estimate for the Jervois Project. In the announcement they stated:

“The copper resource was limited to a depth of 200m below surface. However, we have strong indications from previous drilling that the ore body continues at depth and along strike.”

And “Only 30% of the previous drilling was analysed for gold, hence it was not possible to include gold in the current resource estimate. However, it is intended to analyse for god with the hope of adding a gold resource as part of the copper resource estimate in the future.”

Both of these statements highlight the future upside that could occur once further drilling has been completed.

To value the Jervois Project I have analysed the in ground value of each commodity that makes up the overall resource. This is the same valuation that I used for the Gabanintha project. In addition to this I have run some back of the envelope numbers and a DCF model, however as this project is a number of years away from production I prefer to use the more conservative approach for the time being.

The approximate value (based on figures from the LME at the time of writing this post) of each commodity that makes up the resource is:

Copper US$9,000 per tonne

Lead US$2,500 per tonne

Zinc US$2189 per tonne

Silver $42 per ounce

For the purposes of my valuation I am discounting these figures to $7,500 p/t (Copper), $2,000 p/t (Lead), $1,750 p/t (Zinc), $30 per ounce (Silver). This is to take into account current market uncertainty, volatility and exchange rate risk. I then take a percentage of these figures to arrive at the following in ground value.

113,000 tonnes of Copper at an in ground value of $150 per tonne = $16,950,000

7,593,157 Oz of Silver at an in ground value of $0.60 per oz = $4,555,984

25,666 tonnes of Lead at an in ground value of $40 = $1,026,640

21,958 tonnes of Zinc at an in ground value of $35 = $768,530

Total in ground value = $23,301,154

I will admit that I do not have much experience with Lead and Zinc. I have therefore utilised 2% of the commodity to arrive at the in ground value (E.g. Lead $2,000 x 0.02 = $40). This is largely in line with the in ground value I assigned to Gold and Copper for the Gabanintha Project.

To summarise my previous research the valuation of Kentor Gold is as follows:

Burnakura High Grade Operations (DCF valuation): $45.8 million

Burnakura Heap Leach Operations (DCF valuation): $33.9 million

Gabanintha Gold-Copper Project (in ground valuation): $10.5 million

Jervois Base Metals Project (in ground valuation): $23.3 million

Conservative Cash Figure: $35 million

Total: $148.5 million

As per my previous notes I do not believe that the total figure is reflective of the true potential of Kentor Gold. My research is designed to highlight a base case scenario and as Kentor moves closer to production in each of its projects it is my belief that the market will switch from an in ground value to a DCF based valuation. As a result the share price should rise over time and be more in line with the Intersuisse report which has a target of 48 cents.

As always please do your own research and be aware that this does not represent all of my research. You should consult a financial advisor before making any investment.

Explorer to Producer and Why Your Timing is Important

The other week I replied to a post about a resource stock and its share price. My response was in regard to the life stages of a company as it moves from explorer to producer and the affect this can have on the capital structure. I received some positive feedback on the post so I thought I would share part of it with you again today. It is very simplified but I think it details the overall process well.

As a resource company moves from explorer to producer the share price normally re-rates in a number of ways.

If the company starts out as an explorer the share price will be largely tied to their exploration potential and any discoveries they make. The share price will normally jump in price if they announce good drilling results and a “potential” discovery.

Following this spike in the share price will typically fall. At this stage the stock is basically controlled by traders and after they have traded the run up they will move out of the stock and look for their next target.

Time then passes and if we assume that the discovery is good further drilling takes place as the company proceeds to put together a JORC estimate. Obviously it is normally two steps forward, one step back but for the sake of this example and simplicity let’s assume they have discovered something worthwhile. The share price is then likely to jump again once the JORC estimate is finally put together and people will start applying an in ground value to the resource.

The share price then drops back as traders leave it again and longer term holders realise that it takes a significant amount of capital to develop a mine. There is also other risks associated with mining approvals and licences, etc.

Assuming all is well the company will then proceed to the preliminary feasibility stage to run some basic numbers on the project. If we assume this comes back positive then the share price is likely to rise again as the first box towards developing a mine has been ticked.

As per usual it will then drop back as it is dumped by traders again and longer term investors wait for the bankable feasibility study which is required before the formal decision to proceed with the mine can be made.

Once this is released it confirms that a mine can be profitably developed and the share price may run again off this news. However, following this the share price may retrace again because the mine development costs will be high and existing shareholders face the threat of dilution (as the company may issue additional shares to raise funds).

The share price may then run and re-trace every now and then based on the issuing of mining licences, securing of finance and successful capital raisings. During this time the shareholder base is also likely to change with more investors coming on board and positioning themselves for when the company starts producing.

Finally once the mine is in production there will be a re-rate in the share price because they will have finally achieved what they wanted (i.e. a mine that is operating). The real re-rating will however come in 3, 6 or 9 months when the company proves that not only can they run a mine but that they can meet their production targets, revenue and profitability forecast.

Now that is obviously a simplistic breakdown of the process and it may take a resource company many, many attempts at exploration before they are in a position to define a resource. However we can see from the above that the reason why it can run and re-trace so much is because in the early days it is largely traders who push the price up and down. Also as an explorer the company will probably have a market capitalisation of between $20 and $50 million. To develop a mine will cost many times their market capitalisation and as a result new shares will be issued diluting existing holders. Obviously some people will sell in anticipation of this which can also have downward pressure on the price.

I would also like to add that in regard to my investment approach I primarily look for companies that have a good chance of moving into production, low/no debt and preferably a cash in the bank to minimise the potential of a capital raising. In summary if you are a long term investor it is about buying at the right stage of the company’s life to minimise the potential of adverse effects and the burning of time while you wait for the company to move to the status of producer.

Kentor Gold: Analysis on Gabanintha Copper-Gold Project

The other week I provided my thoughts on the Burnakura Gold Project that Kentor Gold plans to have up and running by mid 2012. Today I will be summarising my notes and research on the Gabanintha project which is located only a short drive from Burnakura.

The Gabanintha Copper-Gold Project is located 45 km south-east of Meekatharra in Western Australia. The project was acquired as part of Kentor Gold’s acquisition of Jinka Minerals and covers 90km² (including the abandoned workings of Gabanintha Gold Mine).

The mine originally operated between 1987 and 1991. During this time it produced 180,000 oz of gold, including 157,800 oz (1.52 Mt @ 3.23 g/t) which was open pit mined by Dominion Mining Limited. In addition further exploration was carried out by Reward between 2004 and 2008 with further mineralisation located at the Yagahong, Canterbury and Tumblegum prospects. The most recent mining activity by Dominion focused on the gold mineralisation, however copper was identified in the Terrells Pit and Kentor Gold plan on drilling this area in the future.

Given this projects close proximity to the Burnakura mine Kentor Gold plans to undertake a feasibility to study the possibility of adding flotation capacity to the Burnakura treatment plant. This would allow the processing of the copper-gold concentrate from the Gabanintha ore.

Since the acquisition Kentor Gold has defined a resource of 203,000 oz of gold at an average grade of 1.4 g/t (using a 0.5 g/t cut off) and 450,000 tonnes of copper at 0.5%. The gold resource includes a high grade component of 1.3 Mt at 2.9 g/t for 121,000 oz.

To arrive at a value for Gabanintha I completed a Discount Cash Flow analysis and ran some back of the envelope figures to arrive at a value. I also reviewed some research by Intersuisse which supported my analysis. However for the purpose of simplicity and to be conservative in my analysis I have valued Gabanintha based on an in ground value of the resource.

To do this I have applied an average value of $50 per oz of gold in the ground. A report by Edison Investment Research suggests that this value is fair, if not undervalued, based on their research into the market capitalisation of gold stocks listed in Australia, Canada and London.

For the Copper component I have also relied on an in ground value. Copper is currently around US$9,000 per tonne, however to take account of global market uncertainty I have discounted this to $7,500 per tonne. I have then taken 2% of this or $150 per tonne for the in ground value calculation. By way of comparison the $50 in ground value per ounce of gold equates to 2.7% with gold at $1,850/oz.

Therefore my calculations for Gabanintha are as follows:

Gold component: 203,000 ounces with an in ground value of $50 per ounce = $10,150,000

Copper component of 2,250 tonnes (450,000t @ 0.5%) with an in ground value of $150 per tonne = $337,500

Total Value: $10,487,500

This is a significantly more conservative value than if I applied the same discount cash flow analysis outlined in the Intersuisse report. I do believe that the value to be obtained from Gabanintha will be significantly higher than the $10.487m above. I will however utilise this conservative approach for now and update my research once Kentor Gold gets closer to production. My research to date is all about providing a base case valuation for Kentor Gold.

Once I finish my write up you will see that the sum of parts (individual projects) amounts to more than the current market capitalisation (fully diluted) in my opinion only. This provides some downside protection and highlights that even when valued in an extremely conservative way there should be future upside to the current share price. As the projects (Burnakua, Gabanintha and Jervois) move closer to production there will be a move by the market to value each project on its future cash flows. This will allow for a corresponding increase in the share price and therefore meets my main investment criteria of offering “multi-bagger” potential (all in my opinion only, Do your own research).

In summary the value of Burnakura and Gabanintha (the only projects I have written about to date) is as follows:

Burnakura High Grade Operations (DCF valuation): $45.8 million

Burnakura Heap Leach Operations (DCF valuation): $33.9 million

Gabanintha Gold-Copper Project (in ground valuation): $10.5 million

Conservative Cash Figure: $35 million

Total: $125.2 million

Obviously these calculations are based on the company achieving specific operational and production milestones. There is obviously project, financing, commodity price and exchange rate risk involved. With all my research I try and put forward a conservative stance, however please do you own research and consult a financial advisor before making any investment decision.

Some Housing Keeping Notes For The Blog

I thought I would do a summary on some outstanding updates/posts that I will be writing over the coming weeks. I am doing this for two reasons:

1.       So you don’t think I have forgotten about the posts I promised to write.

2.       So there is a record of all the posts I will be making in the near future.

So over the coming weeks I plan on writing the following posts:

1.       My background analysis on OBJ Limited

2.       Provide my analysis on MHM Metals Australian plant and future expansion plans

3.       Provide my summary of value/calculations on MHM Metals

4.       Finish summarising my notes on each of Kentor Gold’s mines to arrive at a final valuation

5.       Write additional posts on my researching style and how I analyse companies.

Also if there are any topics that you are interested in hearing more about please feel free to post a comment or two.

Kentor Gold Announcement: Half Year Accounts

On Friday Kentor Gold released their Half Year Accounts and although it was not marked price sensitive, history has taught me that it is important to read all announcements as additional insight and clues into the company’s operations can be gained.

The first thing that struck me in regard to this announcement was the positive tone towards the Andash project. The wording of the announcement certainly implies that it has a strong chance of going ahead in my opinion. For example the announcement stated:

“While the Andash Gold-Copper Project in the Kyrgyz Republic awaited local approval for site access”

“At Andash, in the Kyrgyz Republic, the pre-construction phase of the gold-copper project was well advanced during the half year and is currently waiting on finalisation of geotechnical investigations for the design of building foundations and the tailings dam”

“Andash is planned to produce at a rate of 70,000 oz gold and 7,400 tonnes copper a year”

“Andash will be one of the world’s lowest cost gold mines”

Each of those statements makes reference to activities that the announcement says are planned/will be. In my opinion if management thought there was more than a 50% chance of the project not going ahead then they would have tempered their enthusiasm towards the project. This view is further supported on page 12 where it states “The directors have considered a detailed risk assessment of the project’s likely development at the half year, considering the developments in the last six months, and are confident that the project is still highly likely to proceed.”

The announcement then goes on to discuss the Australian operations but provides no new information or anything of significance in my opinion.

Another positive was however the fact that the company has $43.7 million cash on hand as at 30 June 2011 and the US$50 million debt facility from Macquarie Bank Limited. As a result the “company retained the capacity to fund the current anticipated development cost of the Andash project from the proceeds of the equity raising and the undrawn debt facility”. I therefore believe the chance of a capital raising in the near future is all but non-existent. The only circumstance in which I can see it occurring is if they may to fast track expansion (stage 2) at Burnakura while also developing Andash in order to take advantage of the high gold price.

All in all the announcement was nothing to get overall excited about, however there were some positives to be taken on board, especially managements thoughts and feelings in regard to the Andash project.

Link to announcement.

MHM Metals Announcement: MHM Progress Report 2

Some MHM shareholders are a hard bunch to please! On Friday MHM released a progress report and although it does appear that the signing of a US agreement has been pushed back slightly there were a number of significant statements within the announcement that could increase the scope and size of the overseas operations and therefore positively contribute towards the company’s revenue and profitability.

Firstly in regard to the Australian operations the announcement stated that “Operations in Geelong continue to progress. MHM Metals Ltd (ASX: MHM) subsidiary Alreco is pleased that aluminium recovery from recycled slat slag is far exceeding expectations. This additional volume of recovered metal has led to refinements to optimise the process”. As this is the first facility utilising this technology it is not uncommon to experience teething problems, however I that the above statement highlights that a significant stage has been passed and the next quarter should finally deliver on the projected outcomes for the plant. In my opinion the application and benefit of the technology has now been proven and de-risked.

The announcement then moves on to the eagerly anticipated US operations update. Recently MHM appointed John Pugh to an executive role. Mr Pugh had previously worked for Smelter Services Corporation for 21 years and his appointment to MHM was supported by his previous employer. It appears that he is already delivering for the company with MHM stating that “The appointment of John Pugh in an executive role has yielded positive results for MHM, and feedback also suggests this was well regarded by the US aluminium industry.”

The company then goes on to talk about a new recycling opportunity, “Black Dross”. Black Dross is a by-product from reverberatory furnace operations and generally has similar composition to salt slag, albeit often has a higher aluminium content (therefore potentially more valuable in my opinion). Currently MHM are in discussion with a number of companies regarding this material, however it could result in the emergence of an additional revenue stream for MHM.

I also believe this may have had an impact on the site selection as MHM would want to ensure that the location and the design of the plant can process material for as many clients as possible and also achieve cost efficiencies associated with the processing black dross and salt slag in the one location. The announcement does allude to this fact by stating that “MHM is assessing a number of sites in the US for construction of the first salt slag and black dross recycling plant”.

Furthermore it now appears that expansion into the US could be quickly followed by Canada with a substantial volume of material being identified in the region, along with companies supportive of MHM’s business.

So although the signing of an agreement may be somewhat delayed the end result could be substantially larger. The only concern I now have in regard to this is the impact on project financing. Obviously a larger plant costs more money and we therefore need to consider the methods of funding, both debt and equity. I have cash in the portfolio and am happy to acquire more shares in MHM, however, at this stage I will wait and see how the company plans to fund the project in case a capital raising also forms part of the picture.

Link to the announcement.