FYI | Jun 20 2007
One of the most frustrating experiences for an investor is making the correct call and still losing money.
And yet, this is not as rare as one might assume. Imagine those shareholders in fledgling uranium producer Paladin Resources (PDN) who saw the shares rise beyond $10 in February only to fall back to below $8 and subsequently rise back to above $10 in April.
Spot uranium stood at US$75/lb and US$95/lb respectively in February and April. Anyone holding on to their shares based on the expectation that uranium prices would go up further has been correct, yet while spot uranium surged to US$135-138/lb Paladin shares dived to near $8 again.
This week saw the shares resume their upward path and surge past $9. According to some market commentators renewed takeover speculation saw some hot money rushing back into the sector.
The first event that got the market excited was a US$2.5bn offer -in cash- by French government controlled Areva for Africa focused uranium explorer UraMin. UraMin has assets in several African countries as well as in Canada. Its main project is the Trekkopje uranium project in Namibia, a country with which investors in Paladin are all too well familiar with.
The main characteristics of this story are that UraMin is still but an explorer who hopes to have a bankable feasibility study ready by year end for its Namibian project plus the fact that Areva is willing to pay in hard, cold cash.
The second event was the news that Russian billionaire Vladimir Potanin, of Norilsk Nickel fame, is joining the race for uranium assets across the globe in cooperation with the Russian Federal Atomic Energy Agency. Both partners have reportedly already discovered some interesting opportunities in Uzbekistan and throughout Africa.
So it is takeover speculation rather than the prospect of uranium prices possibly reaching as high as US$200/lb over the next twelve months that is currently driving share prices for the likes of Paladin and Energy Resources of Australia (ERA). The latter is obviously subject to speculation of Rio Tinto (RIO) mopping up minority shareholders instead of selling its subsidiary to a third party.
Merrill Lynch analysts suggested a similar scenario last week when they reviewed the gold sector stating it wouldn’t be long before major league gold producers would start chasing second and third tier producers with low cost reserves.
This week gold specialists at GSJB Were sort of translated the uranium theme into the gold sector. GSJB Were has long forecast that spot gold would reach US$850/oz and the broker has now taken the view that this will still happen, the process has simply been delayed during the first six months of this year.
But shares of gold producers will not necessarily move up in accordance with the gold price, GSJBW believes. Similar to Merrill Lynch, GSJBW has noted that many gold producers are suffering from rising costs and this will eat into their margins.
The broker therefore advises investors should look out for producers who will enjoy rising volumes while keeping cash costs down. This week’s report suggests the broker’s preference is for Avoca Resources (AVO) and Kingsgate Consolidated (KCN).
Other stocks that should perform well, the broker believes, are Newcrest Mining (NCM), Lihir Gold (LGL), Sino Gold (SGX), AngloGold Ashanti (AGG) and Perseverance (PSV), with a special mentioning for Bendigo Mining (BDG).
The analysts believe that at $0.32 shares of the troubled Victorian gold miner have fallen low enough to start looking attractive again (sort of). With the extra remark that risks are still high, GSJBW believes Bendigo is likely to produce a positive news flow over the coming 6-9 months.
While this may have a positive impact on the Bendigo share price, the broker maintains it is rather unlikely for the company to establish a JORC reserve estimate in the near term. Currently, Bendigo Mining’s base valuation is calculated as $0.40 but this could rise to $1 under a positive scenario.
One of the questions that have yet to be answered is whether the same principles apply for commodities whose prices are expected to trend down from here onwards.
Anyone a bet?
Till next week!
Your happy as ever editor,
Rudi Filapek-Vandyck
(as always supported by the Fab Three: Greg, Terry and Chris)
