Annual Reports: OBJ & MHM

I thought I would just do one post to cover both OBJ and MHM Metals who both released their annual reports this week. As is normally the case annual reports they only provide us with information on what we already know, however, it is important to read them in detail as you can pick up some hints or insight into the company’s operations and managements thinking.

Firstly, with OBJ, it is clear that all their programs are progressing well with their international partners. We also appear to be gaining increasing recognition in both academic and corporate circles which can only be a positive thing for the future.

One interesting thing to come out of the report was the company’s expansion of its own laboratory and the granting of ethics approval to perform their own tests (in their own lab) on skin. This should allow OBJ to speed up a variety of testing procedures and have more control over the process.

Secondly, OBJ stated that they are actively seeking short, medium and long term outcomes and that they have moved further from their research and development base to product-focused development programs and partnering activities. This helps firm my belief in the company’s technology and the potential for a re-rating of the share price within the next six months.

Moving on to MHM Metals and the report was slightly more mundane with no new additional information provided. The key point that I really picked up from the report was that “black dross” does offer an additional revenue stream for the company and that they are going to look at constructing a plant that can recycle this material alongside salt slag and any reclaimed landfill.

Secondly MHM continued to state that they are in discussions to receive government support for their project. What level of support is unknown at this stage but clearly tax concessions, land grants or a financial incentive will be hugely beneficial for the company.

Finally MHM reaffirmed their position to look at non-dilutionary methods of finance and remain committed to 100% ownership of the plant. This has helped allay some concerns that I had previously stated on my blog. Given the potential for a larger plant I was concerned that the company may need to approach the market for additional funding which would obviously dilute my initial holding and could provide additional downward pressure on the share price. It was also my view that a capital raising now would potentially be the worst possible time given the negative sentiment that surrounds the company and wide market.

Paying For Blue Sky

When I first purchased MHM the market capitalisation was circa $120 million (undiluted). Since then the price has crashed from around $1.20 to as low as $0.52. It is clear that this fall is not only due to the global market selloff, but also the failure to deliver any material progress with MHM’s US operations. As a result that “blue sky” has been eroded over a period of time.

Even with some rough calculations which ignore the “blue sky” potential we could arrive at the following value:

MHM Australian Operations: $8.6m profit p.a. x PE of 5 = $43m *

Cash = $10m

Resource Ops/Exploration Potential = Say $25m**

Total Value = $78 million

* Please note the $8.6m projected profit is yet to be achieved from the Australian plant. I also only used a PE of 5 because no long term contracts are in place and additional feed will need to be sought after the 160,000 tonnes of Alcoa landfill is exhausted (5 years’ time).

** MHM has interests in Silica, Gold and Copper I have attributed a value of $25 million to these projects based on what other explorer’s trade for. If this was the sole focus of the business I expect that they would have a MC in excess of $20m but no higher than $30m.

As you can see from the above I can arrive at a rough valuation of $78m. This is $44m below the market cap at the time I purchased and hence represents the “blue sky” potential that I paid.

In hindsight I certainly should have waited for the gap between the company’s current operations value and the market cap to reduce, however, news on the US expansion was expected around the middle of the year and if it had announced a 200 – 250,000 tonne plant then $1.20 would be history in my opinion.

What this really shows is that as an investor I need to balance the risk/reward of paying for this “blue sky” potential or waiting for the price to drop and ultimately miss out on the bigger picture. I continue to maintain almost 50% of the portfolio in cash and it is my aim to increase my holdings in MHM after US expansion is approved. I anticipate that I will be able to do this under my initial purchase price of $1.20.

Weekly Update - Week Ending 23 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 16/09/11):	Close (Friday 16/09/11):	Percentage Change:
XJO	4149	3903	-5.93%
XSO	2435	2233	-8.30%

Firstly sorry that this is a little late in coming out but I have been flat out with work this week. Last week was horrible for the local market with the XJO closing down 5.93%. We also saw a massive move away from riskier stocks as indicated by the larger sell off in the XSO (down 8.30%). This mood was reflected throughout the world’s financial markets with gold, silver, commodities and currencies all being sold off hard.

Code:	Weighting:	Share Price (Friday 16/09/11):	Share Price (Friday 23/09/11):	Percentage Change:	Weighted Change:
OBJ	25.66%	0.019	0.017	-10.53%	-2.70%
MHM	12.50%	0.735	0.61	-17.01%	-2.13%
KGL	11.81%	0.11	0.096	-12.73%	-1.50%
Cash	50.03%			0%	0.00%
TOTAL				-13.420%	-6.33%

As a result my portfolio was smashed and down 6.33% on a weighted basis. The worst performer was MHM metals down over 17% with KGL not too far behind. Removing cash from the equation paints an even darker position and shows that the weighted value of the shares in the portfolio decreased 12.67%.

Code:	Weighting:	Share Price (Friday 16/09/11):	Share Price (Friday 23/09/11):	Percentage Change:	Weighted Change:
OBJ	51.37%	0.019	0.017	-10.53%	-5.41%
MHM	25.01%	0.735	0.61	-17.01%	-4.25%
KGL	23.63%	0.110	0.096	-12.73%	-3.01%
TOTAL					-12.67%

The reasons for the selloff are clear. Investors are taking risk off the table and any company not producing an income is being sold off. Obviously I am disappointed with the portfolios performance over the last couple of weeks, in particular MHM. On reflection it is now clear that I paid too much for the “blue sky” potential of the stock. I believe the fall from my purchase price of $1.195 to its current price can be attributed to (in this order):

1.    Management’s failure to deliver on the US expansion.

2.    The general markets move

3.    The fact that the Australian operations are yet to deliver a full quarter of normal production.

I continue to hold all stocks until a change in the fundamentals of the company suggests otherwise.

Gold Mines in Kyrgystan

I have just been passed an interesting article that shares some interesting news from Kyrgyzstan and which may also have implications for Kentor Gold’s Andash Project. On Wednesday Kyrgyzstan launched its second foreign-run gold mine at the Ishtamberdy deposit in the southern Kyrgyz region of Jalalabad. The mine is owned by a Chinese company call Full Gold Mining and will commence production by the end of the year before ramping up to 300,00 tpa by 2012.

Now why is this significant to Kentor Gold? Well the project was only able to proceed after the company met with protestors and overcame local opposition, a scenario which is very similar to what Kentor is facing with Andash. The article goes on to state that Full Gold was able to overcome the conflict with residents of the nearby village of Terek-Sai by paving the road linking local settlements (in conjunction with several other local businesses). It is only natural for everyone to want their piece of the pie so to speak and it appears as through the locals wanted to get something other than jobs out of the project befor allowing it to proceed.

I won’t speculate on what may or may not happen at Andash, but perhaps we will see similar local development plan enacted by Kentor Gold.

The other important issues the article picks up on is how vitally important gold mining is to the country. For example the Kumtor Gold Mine, owned by Toronto listed Centerra Gold contribute 9.4% of the GDP and nearly half of Kyrgyzstan’s industrial output last year. Clearly this underscores the importance to the local economy and any progressive government will want to support foreign investment into the industry.

Finally I keep an eye on the Kyrgyzstan political situation and next month will be very important for Kentor Gold and the future of mining in the country as local elections are scheduled to take place on October 31. The current Prime Minister Almazbek Atambaev is considered to be one of the favourites to be elected to the position of President and from what I understand this would be a positive outcome for the country and possibly the local mining industry.

KGL: Company Insight - Significance of Outstanding Drilling Results

Yesterday Kentor Gold released an announcement on the significance of the Jervois drilling program through the use of a Company Insight interview. As an investor I really appreciate it when companies use this type of channel to provide additional information to the market. They typically provide a more general overview of the company’s operations and help clarify management’s thoughts and opinions on events that are likely to shape the company’s progress.

The first key bit of information focused on Jervois and the potential for an increase in the JORC resource estimate. We already knew this was on the cards but it today’s announcement stated that “recent drilling has confirmed that the mineralised structure is still continuing strongly at 450 metres below the surface”. The future potential of Jervois cannot be underestimated in my opinion with the Managing Director, Simon Milroy, stating “I believe that we are at the early stages of understanding a large mineralised system with the clear potential to be a major base and precious metals mine.”

Additional drilling results from Reward, Green Parrot, Bellbird and Bellbird north can also be expected in the near term. This should help maintain the current rate of news flow, something that I view as very positive and a significant contributor towards underpinning the share price in the short term.

The most exciting news for Kentor (at least in the short term) is skill the development at Burnakura. Today’s announcement has clarified the company’s previous guidance of completing the refurbishment of the existing plant and small expansion by  mid-2012 to June 2012. The announcement then goes on to outline an additional three phases of expansion. From this we can see that the heap leach operations are going to proceed (underlining my base case valuation of KGL), that there “will be an expansion to 500,00 tpa” by installing a second ball mill and that they are considering treating gold and copper-gold ore from Gabanintha at Burnakura.

As soon as we receive further guidance on the 500,000 tpa upgrade (in regard to timeframe and cost) I will update my discounted cash flow analysis to incorporate this. It stands without reason that a doubling of plant capacity from 250,000 tpa to 500,000 tpa has the potential to increase the value of the Burnakura operations and Kentor Gold by a significant margin.

Finally the most important line in my opinion is “we are planning to have three mines in operation with gold and copper production from Burnakura and Jervois in Australia and at Andash in the Kyrgyz Republic. Not only does this underline the future potential of the company (from zero to three mines in three years), but it talks positively about the Andash project. As I have mentioned in my previous posts if management had any major concern about Andash I do not believe they would refer to it in such a positive manner. It is my opinion that Andash is a greater than 50% chance of going ahead, however for the purpose of my valuation I will still attribute this project with a zero value.

Link to the announcement.

KGL: Court Decision on the Minority Ownership in Andash Mining Company

Yesterday Kentor Gold advised that the Chui Regional Court had handed down their decision in relation to the minority ownership in Andash Mining Company.

This minority ownership refers to the 20% of the project not owned by Kentor Gold and the previous transfer of this stake between the minority owners.

The court found in favour of the General Prosecutor “who asserted that the transfer of a 20% holding in AMC between the minority owners was invalid.” Furthermore the court now requires KGL to re-register Andash as a company owned 100% by Kaldora (100% Kentor) and then make an offer to the Kyrgyz Government to purchase this 20% stake.

This does not affect the project dynamics in any way as Kentor Gold, previously had 80% and will still have 80% if the government takes up their 20%. Furthermore Kentor has previously advised the market that if they were awarded 100% of the project that they would sell the 20% stake to the government for nil consideration.

In my opinion this is an important step forward in proceeding with the Andash project. Firstly it removes the legal clouds surrounding the project and provides Kentor with a valuable bargaining chip (the 20%) to get the government onside.

Should the government take up their 20% stake Kentor will pay for the entire development of the mine and oversee its operations, while the government gets the opportunity to rake in a considerable amount of profit. Given the importance of mining to the local economy and the nations GDP this has the potential to create a “win-win” scenario for all involved.

Finally it is important to note that the case can be appealed further, however “Kentor believes that the General Prosecutor’s legal case is now very well tested”. Hopefully more positive news on the Andash project follows in the near future.

Link to the announcement.

One Shot, One Opportunity!

All I have is one opportunity. This is a thought that I constantly crosses my mind because it is unlikely that I will be able to add significant capital to my portfolio over the next few months or years. There is one last cash injection to come (which I will discuss in a later post) but after that I have to make this work with what I have already got.

Throughout my life I have learnt that I like working for myself. This even stretches back to when I was sixteen I owned a retail business for a couple of years. After this I moved into the property industry, and if I am honest I didn’t enjoy my life. I hated waking up to go work for other people and found my work life to be somewhat stagnant. This probably wasn’t helped by the fact that the private company I worked for was undergoing a transformation with the father passing the business onto his son who had absolutely no idea how to manage people or projects, let alone run the numbers over potential developments (but that’s a story for another day).

Anyway it had always been a passion of mine to work in the stock market and to be honest I don’t know why I didn’t follow that path sooner. Towards the end of my property career I tried applying for a number of graduate roles, however I had in part studied the wrong degree. It was basically an economics degree which applied the theories and modules to property, however when recruiters saw that I studied a Bachelor of Property, they didn’t seen the economic side of things that dream was eventually shattered.

In the end it probably was a positive thing because I don’t know if I could have gone on to work 80 hours plus a week in the city, which would leave little time for my family and other activities I enjoy (soccer and going to the gym). Anyway I continued to muddle along and switched to working in residential sales, it didn’t last long and I reached another cross road in my life. Basically I was forced to go work for someone else or grow some balls and risk it all again to work for myself.

That is when I expanded an online business that I had previously only run for some additional income on the side. I increased the businesses advertising tenfold and with it came a corresponding increase in revenue and profitability. I was not rich, but I had the enough money to pay an average wage, keep the wife happy and press on with my dream of working for myself and eventing into the stock market once more. If you read my original welcome post you would know that I feel at home in the market and this was kind of like returning to my roots, even though I am only 22.

As a result I am writing this piece today. I have this one opportunity and need to make it work. I am not under any illusions of how hard this is going to be and realise that to do this full time I need to get a number of “10 baggers” within the next 3 to 5 years. To ensure I can make enough to realise this dream I have to throw everything I have against it. I have to be willing to take on more risk than ever before and back my own research. This is not about being reckless or throwing good money after bad, it is about taking the steps that could result in a life changing outcome. As I mentioned at the start I have a limited amount of capital with which to work with and being married does limit my access to future funds (as we are also saving for our own home one day, as a result I have one shot at making this work and to change the course of my life.

Weekly Update - Week Ending 16 September 201

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 11/09/11):	Close (Friday 16/09/11):	Percentage Change:
XJO	4194	4149	-1.07%
XSO	2484	2435	-1.97%

This week the market started with a 3.72% fall on Monday and although Europe and America started to show strength early in the week it wasn’t until Thursday and Friday when we actually saw some decent gains on our market. As a result the XJO closed down 1.07% with the XSO falling 1.97%. I expect the coming week to start off slowly given the FOMC that takes place on the 20^th and the 21^st of September (Tuesday & Wednesday), with the outcome of the meeting likely to set the direction for the market in the short term.

In regard to the individual stocks held within the portfolio we have seen the market start to “give up” on MHM so to speak. What I mean by this is that over the last couple of weeks MHM has rallied and fallen in line with the market. This week, however it was happy to fall hard but did not join in on the move up with the same amount of strength. I believe this is primarily due to the delays with US expansion, however the fundamentals remain strong (if not better than the past) and I continue to hold.

OBJ finally starting showing some short term strength and ended the week up at 0.019. Although not a large percentage increase there was significantly more volume which helps give me confidence in the share price over the next week or so (barring any major disaster in the US or Europe). As I mentioned on my blog earlier in the week it appears that our Patent has been approved in America and I expect that the announcement should come out sometime this week. The announcement won’t be a game changer in itself, however I do expect a slight boost in the share price or at least an improvement in the buyers’ depth. I am also of the opinion that the longer the announcement is delayed the more positive it could potentially be, as I can see no reason for a delay unless they wish to release additional information alongside it.

Kentor Gold had a bit of a nothing week and remained unchanged at 11 cents. As a result the portfolio increased by 0.41% on a weighted basis, with gains in OBJ being offset by the fall in MHM and cash component of the portfolio.

Code:	Weighting:	Share Price (Friday 11/09/11):	Share Price (Friday 16/09/11):	Percentage Change:	Weighted Change:
OBJ	25.66%	0.018	0.019	5.56%	1.43%
MHM	12.50%	0.8	0.735	-8.13%	-1.02%
KGL	11.81%	0.11	0.11	0.00%	0.00%
Cash	50.03%			0%	0.00%
TOTAL				-0.856%	0.41%

Removing cash from the portfolio shows an improvement of 0.82% for the week.

Code:	Weighting:	Share Price (Friday 11/09/11):	Share Price (Friday 16/09/11):	Percentage Change:	Weighted Change:
OBJ	51.37%	0.018	0.019	5.56%	2.85%
MHM	25.01%	0.800	0.735	-8.13%	-2.03%
KGL	23.63%	0.110	0.11	0.00%	0.00%
TOTAL					0.82%

As always please do your own research and consult a financial advisor. Nothing I say is advice or a recommendation to make any form of investment or trade.