Background Information on Kentor Gold

Kentor Gold listed on the Australian Stock Exchange in February 2005 with an issue price of $0.50 per share which raised $6 million. The proceeds of the offer were to be applied towards the exploration of the company’s tenements in the Kyrgyz Republic.

In March 2005 there was a change of Government with the “White House” stormed and the President and Administration in Bishkek removed from power. This was the third revolution in the history of the Kyrgyz Republic and the interim Government promised elections within 3 months. Kentor continued to operate during this period and its people, offices and assets were safe and unaffected.

The next couple of years were largely uneventful with the company exploring in various regions, branching out into Geothermal exploration and even Uranium exploration in the Northern Territory (Australia). During this period the most important event in my opinion was the appointment of Simon Milroy as the Managing Director and Chief Executive Officer. Since his appointment there has been significant improvement in the company’s strategy and ability to move forward with projects (in my opinion).

Throughout 2009 there were plans to establish a small mining operation of 10,000 oz per annum in the Kyrgyz Republic (Savoyardy Gold Project), however, the option to acquire the Andash Gold-Copper Project which surfaced in July 2009 shifted the company’s focus due to the size and potential of this mining operation.

An option to purchase the Andash project was announced on 1 July and would give Kentor the opportunity to purchase an 80% interest in the project. The project came with a JORC compliant resource estimate of 680,000 oz of gold and 77,000 tonnes of copper with the feasibility study, environmental and social impact assessment and mining licence all completed (i.e. the project was development ready).

Under the option agreement Kentor would pay the current owner (Aurum) US$100,000 for an initial exclusive 3 month option to purchase 100% the company which held the Andash stake and the mining fleet/construction equipment. A three month extension could also be granted for an additional payment.

The purchase price for the 80% Andash stake was US$10,000,000 with a further US$5,000,000 payable to securing the mining fleet and construction equipment. The option was exercised on 20 October 2009 with the start of production targeted for 2011.

Kentor considered both debt and equity financing for the deal , with Macquarie Bank offered a US$15,000,000 loan facility, however the company decided to raise $28,000,000 via a share placement (which was oversubscribed) before completing the deal on 23 December 2009.

On 31 March 2010 Kentor Gold announced the outcome of the feasibility study which highlighted the following project attributes:

·         Technically and economically robust project.

·         Average annual production of 60,000 oz gold and 6,800 tonnes of copper over an initial six and a half year life.

·         Initial capital cost USD$102.36 million.

·         Very low cash costs (gold US$38/oz including royalties after copper credits)

·         Project NPV USD$107m at gold $1,000/oz and copper US$2.75/Ib.

·         Strong market demand for Andash gold-copper concentrate

·         Study expects further exploration will extend mine life.

The announcement also stated that site development works would commence in April 2010 with production scheduled for late 2011.

Also on 31 March 2010 Kentor Gold announced that they had negotiated a deal to secure a further 10% of the Andash project from Aurum for an additional fee of US$2.2million, which was to be paid in three instalments by 30 July 2010. However, this changed when in April 2010 there was a further uprising in the country and an ousting of the Government . Roza Otunbayeva took over as interim leader. None of Kentor’s projects, people or assets were adversely affected by the uprising. As a result Kentor decided not to proceed with the acquisition for the additional 10% stake in the Andash project at this time. (Additional Information: Since this time a legal dispute has also surfaced about the 20% of the Andash project not held by Kentor which further clouds the picture.)

Other notable events during that occurred between 2010 and early 2011 in relation to the Andash project include the securing of a $50 million facility from Macquarie Bank and a $65.2 million capital raising both of which would help fund the development of the mine and future projects.

On 1 April 2011 Kentor Gold announced that they had made an agreed takeover for Jinka Minerals (an unlisted company with 1,400 shareholders). The acquisition would provide Kentor Gold with 100% ownership of the following projects:

·         Burnakura Gold Project

·         Gabanintha Gold Project

·         Jevois Base Metals Project

Under the terms of the take over Kentor would pay out $7.8 million in cash and assume $4.9 million in debt (which would also be due and payable at the time of the takeover). The total $12.8 million would be funded from existing cash reserves.

The first priority for Kentor was to establish JORC Resource estimate for each project and to prepare a feasibility study on Burnakura which was in care and maintenance mode. This would provide Kentor will the ability to recommence gold mining operations within a relatively short period of time. All the projects are on granted mining leases and Burnakura came with existing plant and equipment and a 90 person camp. I will be detailing the potential of each project in my future posts as this is just to provide a brief summary of events in Kentor Gold’s history. Kentor Gold took control of Jinka Minerals on 12 May 2011.

On 20 May 2011 the markets attention swung back to the Andash project with an announcement by Kentor highlighting that the project would be delayed for a number of reasons, primarily local opposition to the project. This announcement was followed by a further update on 28 June 2011 announcing that a Member of Parliament, Akylbek Japarov had opposed the mine and put forward a resolution that was adopted by parliament. The resolution revoked the land use permit and mineral licences for the Andash project.

This is however where things get complicated because under the separation of power the Parliament does not have the power to revoke mineral licences or land use permits. This is the responsibility of the Executive arm of the Government. Kentor Gold proceeded to say that they had received a letter from the Ministry of Natural Resources confirming that “Andash Mining Company complies with all legal requirements to and standards of licence activity in the Kyrgyz Republic”.

The Minister also went on to say that by the end of 2011 consideration will be given to the work plan and issues related to the fulfilment of the conditions under the license agreement. We also need to keep in mind that there are elections due in October 2011.

As part of my research and analysis into Kentor Gold I have assumed a zero percent chance of the Andash project going ahead when calculating a future value (share price) for KGL. However, if we consider the fact that mining (and in particular the Canadian owned Kumtor Gold Mine) represent a huge percentage of the country’s GDP and contributes towards providing high paying jobs to local citizens then the Andash project cannot be ignored by the Kyrgyz Government. This is especially true when previous governments have been ousted due to corruption and a failure to improve living standards throughout the country. The Andash project is expected to create 450 jobs and contribute $200 million to the national budget over its initial six years. Based on this and Kentor Gold’s long standing operations in the country I do believe that there is a greater than 50% chance of the project proceeding at some point in the future. The focus at the moment is however on the Australian assets, which may prove more valuable than Andash anyway.

Since the acquisition of Jinka Minerals, Kentor has released the following JORC compliant resources:

New Position: Kentor Gold

As I mentioned in last week’s post on the price of Gold I have been researching a number of gold stocks over the last couple of months. This morning I picked up a parcel in Kentor Gold (ASX: KGL) at an average price of 0.10c. I originally had my order in at 0.105 however KGL opened sharply lower. This is a result of yesterday’s price action which saw the share price hit 0.115 in anticipation of the drilling results that were released this morning on one of the company’s projects (Jervois). It was classic price action of buying into the lead up of the announcement and selling into it upon its release.

I will provide a more detailed analysis of the company and my reasons for investing in KGL in the near future, however in summary:

The company was progressing with a gold mining project (Andash) in Kyrgyzstan, however with the political turmoil occurring in the country and the potential for delays with the project the company sought to diversify its holdings. On 1 April 2011 Kentor Gold announced an agreed takeover of Jinka Minerals. As a result of the takeover Kentor Gold acquired three projects: Burnakura (Gold), Gabanintha (Gold & Copper), Jevois (Base Metals).

All the projects have supported previous mining operations with Burnakura operating up until October 2009 when the operation was placed on care and maintenance pending the development of additional underground deposits. There is a ninety person camp, offices and workshop with the plant easily able to be bought back on line for minimal investment. As a result production is expected to recommence in June 2012 and the free cash flow generated from this mine will fund the company’s Gabanintha and Jervois projects.

Andash is also likely to get the go ahead once some local opposition to the project is overcome and provides further upside potential to the company’s share price.

As a result of the acquisition the balance of my portfolio (based on the original purchase price of each stock) has been adjusted to the following:

OBJ Limited: 25.66%

MHM Metals: 12.50%

Kentor Gold: 11.81%

Cash: 50.03%

An Insight into My Research – Background Analysis

I thought it would be an ideal time to discuss some of my researching methodology and analysis techniques so that you all can get a better idea of how I chose my investments. I will break my investment approach down into a number of separate posts which will be published over the next few weeks. For today I am focusing on the very first step which is the background research I conduct into the company.

Once I have found a company that I am interested in or has what I believe to be good future potential I undertake a significant amount of research into the background of the company. This normally involves reading past ASX announcements, broker reports, news articles and investor presentations. Luckily for me most of the stocks I research have been listed for around 4 to 8 years so it only takes a couple of days to wade through all this information. For both of my current investments (OBJ and MHM) I have read and taken notes on every announcement released since their listing.

I know this may seem extreme, however, it helps me understand where the company has been, where it is now and where it plans on going in the future. For companies that have been listed on the market for a long time or have undergone a significant restructure I normally only read from this point forward. An example is Northern Star Resources (ASX: NST) who acquired Paulsens Gold Mine in 2010. Prior to this the company did nothing of note (in my opinion) so I only spent a small amount of time reading over these earlier announcements. That said if I believe information and a further understanding of the company’s past is required then I commit the time to read it all.

After reading about the company I have normally developed a list of questions and concerns that can affect my investment decision. In particular, my research can help highlight poor management, a failure to meet deadlines or targets or a general chopping and changing of the company’s activities on a regular basis. I will also be better able to understand the company’s future potential from these announcements and what their “vision” is. For example it may highlight that the share price has been depressed for many years due to poor management. However a new senior management team could have been installed six months ago and acquired a project that is moving towards production. This can provide an opportunity as the market may be pricing them at a discount due to the previous management and their old projects.

After I understand the company it is important to do further research into the industry and associated partners. This is particularly evident in the bio-tech space where there is a steep learning curve in regards to understanding the link between large pharmaceutical companies, their smaller partners, the approval processes and timeframe to development. For example with my stock OBJ Limited case we are dealing with three partners, two of which are unknown (due to confidentiality agreements) and as a result links need to be drawn between potential partners to get a clearer picture.

For stocks in the resource sector this analysis can involve looking at nearby mining operations, other similar companies listed on the ASX and other exchanges and considering the future demand of the commodity. This allows for additional analysis and comparisons to be made between companies when I finally proceed to the calculations and forward projections part of my research.

Finally the last part of background research I undertake is into the senior management team and Board of Directors. With Google and Linkedin it is very easy to gain an understanding of what each person has done in the past, the success they have had and any failures along the way. It is important to look for different sources other than what the company tells you because naturally they will only highlight the positives. Now just because a manager may have failed with a project elsewhere does not mean the company is immediately removed from my list of potential stocks. I am more concerned about repeated failures, illegal dealings and anything that indicates that the manager just jumps from one thing to the next with little considerable for shareholders.

As you can see the above does involve a significant amount of time and after starting with some advice from Warren Buffet I am going to conclude with some of my own. Don’t worry about the thought of wasting hours and hours of research only to find out that the company is a dud. It is better to waste 20, 30 or 40 hours of your time than lose all of your money in a poor investment. Sometimes it feels like you have wasted all that time researching a stock only to conclude it is not a good idea to buy, but you should take this as proof that the research is worth doing. In the long run you will be better for it!

New Stock Market Forum

I just thought I would let you all know about a new stock market forum that I have started using, ShareScene.com.

As usual my user name is investorpaul so feel free to send me an instant message or join the conversation on any of the stocks I discuss on the site.

For those of you who are familiar with Hotcopper or Aussie Stock Forums I would describe ShareScene as a mix of the two. It does not have anywhere near the amount of posts as Hotcopper, however there is discussion on a wide variety of stocks and like ASF the conversation does not appear to be as fast paced or speculative in nature.

I hope to see you on there in the future.

Weekly Update - Week Ending 26 August 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 19/08/11):	Close (Friday 26/08/11):	Percentage Change:
XJO	4101	4200	2.41%
XSO	2356	2448	3.90%

This week we saw the Small Ords outperform the ASX 200 again (3.90% increase compared to 2.41%). This continues the theme from last week and highlights that investors are happy to take on more risk and seem to have put the US and Euro troubles behind them for the time being.

It was also an interesting week with both my stocks, OBJ and MHM making announcements. First up OBJ announced the outcome of their Dermaportation Patent which is an important step towards securing a commercial deal. As I outlined in my post on this announcement I anticipated that it would be sold into/used as an opportunity to holders to exit the stock. That was certainly the case with OBJ bouncing off a low of 1.6c (that it reached prior to the announcement), hitting an intraday high of 2.0c before closing even at 1.7c.

MHM also made an announcement in regard to drilling results from their Hill 99 project. The announcement was nothing to get excited about and the share price remained within the low 80c’s for the entire week. You can read more on this announcement and my thoughts here.

Code:	Weighting:	Share Price (Friday 19/08/11):	Share Price (Friday 26/08/11):	Percentage Change:	Weighted Change:
OBJ	25.00%	0.017	0.018	5.88%	1.47%
MHM	12.50%	0.82	0.81	-1.22%	-0.15%
Cash	62.50%			0%	0.00%
TOTAL				1.554%	1.32%

So reviewing the portfolios performance on a weighted basis we saw an increase of 1.32%. This was a little disappointing because MHM did not re-bound as strongly as other small to micro cap stocks. I do however feel the market is getting a little impatient in regard to the lack of news on their US expansion plans which could be keeping a cap on the share price in the short term.

Code:	Weighting:	Share Price (Friday 19/08/11):	Share Price (Friday 26/08/11):	Percentage Change:	Weighted Change:
OBJ	66.00%	0.017	0.018	5.88%	3.88%
MHM	33.00%	0.82	0.81	-1.22%	-0.40%
TOTAL					3.48%

Removing cash from the equation shows a weighted increase of 3.48%, largely due to the fact that any 0.001c move in OBJ represents a 5% increase/decrease which easily offsets any smaller move in MHM.

This was also the last full week of trading before the end of August so stay tuned for my monthly update which will be out shortly.

MHM Announcement: Drilling Results From Hill 99 Copper Gold Project

MHM have just announced the results from the Hill 99 Project in Western Australia. To provide a bit of background information to this announcement MHM Metals originally listed on the ASX as an explorer of Gold, Copper and Silica in Tasmania. The Global Financial Crisis however forced them to look to near term revenue opportunities which led them to the salt slag recycling business.

This salt slag recycling business is now the primary focus of the company and has the greatest potential to deliver significant increases in revenue and profitability in my opinion. However, the company has continued to prospect in Western Tasmania and today’s announcement is a result of that.

The announcement covers two diamond drill holes completed at Hill 99 (100% owned by MHM). The results of the drilling program include:

Hole H99-4: 0.3m @ 10.55% copper, 15 g/t Ag, 0.244% zinc from 177.6m

Hole H99-5:1m @0.165% copper from 169.5m

The announcement then goes on to draw comparisons between the geology of Hill 99 and surrounding gold/copper mines.

As far as the results go there is not much that can be gained from the announcement with only two holes drilled. The most encouraging find is Hole H99-4 with 0.3m @10.55% copper which can hopefully be further defined with future drilling programs. A reference was made to a future drilling campaign:

“The results are sufficiently encouraging that a second stage drilling program of three diamond drill holes totalling 1,200m has been recommended, to test along strike and deeper than the existing drilling. The timeframe for the second stage program has not yet been determined.”

The most significant part of this paragraph is that the drilling program has been recommended but the timeframe not yet determined. Given the capital costs associated with expanding the salt slag operations into the US it appears as though the company will be conserving capital in the near term. Once the cost of expansion has been covered any additional free cash flow can then be funnelled into the minerals projects to fund additional drilling.

In summary the announcement was nothing to get excited about in its own right however the hint towards conserving capital could indicate that a decision on the US expansion is just around the corner.

Link to announcement

Gold Pulls Back... Is It Following Silvers Move Earlier In The Year

Okay, so my earlier prediction about gold having a short term pull back is proving correct, albeit a few days early. I originally thought that gold would only start its pull back based on the outcome of the Fed Reserve speech on Friday (see my earlier post on why here). However it appears that traders have started to take some money off the table in advance which has led to falls in the gold price over night.

Only adding fuel to the fire is an increase in gold margin requirements by the Comex. The margin required to trade gold futures was increased by 27% to $9,450 per 100 ounce contract in the speculative Tier 1 category. This follows an earlier increase of 22% on 11 August 2011. The net effect of this move is that it makes it more expensive for speculators to trade and hold gold, thus resulting in the traders reducing or liquidating open positions.

Now anyone has had had even a passing interest in the precious metals market will recall what happened to silver earlier in the year. For those who don’t know margin requirements were raised by Comex. As I have stated earlier in my blog I base my investment decisions on fundamental advice, however I could not resist posting another chart based on the latest moves in the gold price.

As I mentioned in my earlier post gold went parabolic and had broken out of its upward channel. At the time I commented that it would be better for gold in the long term to pull back and consolidate at a new level before continuing its upward trend. Based on last night’s trading and the action of the CME (Comex owner) I now think gold is replicating what silver did earlier in the year.

As you can see from the above chart silver (in USD) went parabolic after breaking out of its channel. Shortly after the CME raised margin requirements and the price came crashing back down. This followed by a period of consolidation between $33 and $38 an ounce. It then hovered around the $40 mark before taking off over the last few weeks alongside gold (it has also followed gold’s pull back).

If we now look at the gold chart we can see the same parabolic move, followed by a pull back and CME margin hikes. If gold is to continue the same pattern set by silver I would expect gold to pull back into its original channel and consolidate between $1500 and $1700. Much like silver I anticipate it will then recommence its upward march sometime in late 2011 or early 2012.

As a result of this action I have decided to hold off taking a position in a current gold producer. I feel that if we are going to see a larger pull back in the price of gold that some stocks (and in particular the one I am looking at) will also be sold off. I will still accumulate my longer term holding once I have concluded my research and feel satisfied with its future potential. I look forward to providing more information on this stock once I have finalised my research.