Coal shaping up as black goldFont PURE SPECULATION: Robin Bromby...

Coal shaping up as black goldFont

PURE SPECULATION: Robin Bromby | October 06, 2008
Article from: The Australian
WE were talking to someone who bought Straits Resources (SRL) at $2.08 on Friday and couldn't believe the stock was so cheap. His argument: the company is capitalised at only $500 million yet has a large footprint in thermal coal through its 47.1 per cent stake in Singapore-listed Straits Asia.

This latter company is mining 11 million tonnes a year and its revenues pretty well equal the parent's market capitalisation.

SRL also has its Hillgove antimony-gold mine in production -- both metals are commanding high prices -- although its copper arm may not be one of the more comfortable places to be in the next year or two.

On Tuesday Austock Securities put out a buy on the stock at $2.70, a 12-month target of $4.32, a valuation of $7 a share and a forward price-earnings ratio of between two and three times.

Pure Speculation is leery of talking up anything at the moment, especially after reading the latest from Nouriel Roubini, the New York economics professor scoffed at two years ago for predicting with amazing precision the present financial catastrophe.

Writing in Forbes magazine a few days ago, Roubini said the next step in this panic could be "the mother of all bank runs" as foreign banks start to get the jitters about their US holdings. "A silent cross-border bank run has already begun," he adds.

Gold will certainly be a safe haven in such a scenario, and the next best thing could be thermal coal. The reasoning for this is that one of the last things people do without is electricity. The Japanese kept their air-conditioners humming all summer during the recession of the 1990s, and the Chinese in all those shiny new towers in Beijing, Tianjin and Shanghai will do the same. As well as watching their new television sets.

Almost 40 per cent of the world's power is generated from thermal coal.

China recently imposed an export tax on thermal coal to try to keep as much as possible for itself due to electricity rationing. Now, reports Reuters, Japanese utilities have agreed to pay that tariff to ensure their coal shipments continue.

Seafood for coal swap

DOMENIC Martino knows which side of a dollar is up, and he now has a finger in the thermal coal pie.

Martino is usually where the action is. Since his associations with Deloitte and Sydney Gas (SGL) -- both of which attracted their share of media attention -- he is now tight with Clive Palmer's mineral activities, most publicly as chairman of Australasian Resources (ARH).

He is also the man behind one of the more intriguing corporate repositionings of the week -- the move by Sam's Seafood Holdings (SSS) into thermal coal. The former fish and chip retail chain has emerged from receivership and will acquire an 80 per cent stake in two Indonesian companies looking for coal in the Indonesian province of South Kalimantan.

The deal with Martino's Triumph West requires Sam's Seafood to pay $US300,000 in cash, 100 million ordinary shares and 150 million performance shares.

As reported elsewhere on this page in the Mining Week column, Coalworks (CWK) has upgraded its thermal coal reserves at Oaklands in southern NSW to 640 million tonnes. Since listing on June 25, the company's shares have slid from their $1 issue price to 45c on Friday.

Most of that decline seems due to the general market malaise. The company is pressing on and is already in talks with NSW government departments on all the issues involved in mine development.

Coalworks may also have a logistics problem. The broad gauge railway running from Oaklands into Victoria is about to become unusable because the main line section with which it connects is being converted to standard gauge.

So far, the Victorian Government has not agreed to convert the Oaklands branch, leaving it what is called gauge-isolated. The farmers have been trying to get it converted because trains now collect wheat from the silos at Oaklands. Perhaps that and the prospect of some profitable coal business might change minds in Melbourne. After all, 640 million tonnes of thermal coal is a pretty good thing to be sitting on right now. Finally on the thermal coal front, shares in Atomic Resources (ATQ) had a surprise bump during the week. They had previously traded at 10.5c on September 19, and then on Thursday a parcel went through at 17c. The shares fell back to 10.5c on Friday, but at close of trade the lowest seller was asking 17c.

The best guess is that someone suddenly liked the coal story and wanted some stock even in a bear market. Atomic has $4.8 million in the bank and an established coal resource in Tanzania, where drilling is under way to verify 1950s data. The coal is high in ash but low in moisture and sulphur. Sales are assured: the Tanzanians want more power stations to overcome their energy shortages, and the big market of India is just a ship voyage away.

Gold still gleaming

OUR swooning over thermal coal does not mean any lessening of enthusiasm for gold at Pure Speculation. Yes, yes, we know gold's growth in value has not kept pace with other asset classes, the return on it at times is lousy -- and there are many other arguments against the yellow metal.

But who knows how many of those other asset classes will be worth anything when we enter the financial equivalent of a nuclear winter?

Last week we reported that the US Mint had suspended sales of the buffalo gold coins because demand had cleaned out all the stock. Well, now we read that Jeremy Charles, chairman of the London Bullion Market Association, is saying he has never seen in 33 years the demand for physical gold as great as it is right now. "The gold refineries cannot produce enough bars," he is reported as saying.

The association says it found wealthy investors paying $US25 an ounce over the spot price to get to the head of the queue. The Austrian Mint, meanwhile, is working at weekends to boost gold coin production due to heavy demand.

One commentator made an interesting point. The attraction was not so much the potential future value of the gold but the fact that it was a physical asset.

People are losing their trust in paper. There's so much bad paper around.

Hedging on the way back

HEDGING is emerging as an issue in the gold sector once again. For the past couple of years, de-hedging has been the new black, but that is changing because of the recent sharp movements in both the gold price and the Australian dollar.

Within a day of each other, two juniors signalled different directions. First, Arc Exploration (ARX), formerly Austindo Resources (and before that HML Gold Mining Corp, and even before that East West Minerals) said it had reached agreement with ANZ Bank to close out the hedge book for the company's Cibaliung gold project in Indonesia in order to be exposed to the spot price when production started.

As a result, the commitment to deliver 141,796 ounces at $US651.15/oz and 43,595oz at $US658/oz has been wiped, but the project debt was increasing from $US20 million to $US60 million.

Apex Minerals (AXM) is more exposed to the vagaries of the local currency being in Western Australia and has moved to protect its exposure to the Aussie dollar with forward sales -- 30,160oz in 2009 at $1129/oz -- and put options. These together cover 63 per cent of forecast production in fiscal 2009. It may be that prudence is the new black.

Being involved in gold exploration in Indonesia has always been a tricky business -- so many hopes, so many dreams, so few mines.

Hillgrove Resources (HGO) which is hell-bent on becoming a $1 billion mining house, is one of the latest to try. Its newest acquisition is a gold project on Sumba Island, in Indonesia's Eastern Nusa Tenggara province, which was explored back in the 1990s by the then BHP.

Now, too, comes web marketer TVN Corp (TVN). Chris Mardon came on board earlier this year and his credentials includes time at the former Delta Gold, Croesus Mining (CRS) and Tanami Gold (TAM). TVN plans to move into resources and has started by acquiring an option over a project in West Kalimantan.

This sits on a mineralised system that has been mined over 300 years by the Dutch, Chinese and locals. Toronto-listed Yukon Gold was one of several companies that have held the project over the past 20 years.

Crossed wires on numbers

LAST week we reported that the New Zealand number for Tasman Goldfields (TGX) was disconnected and a message left on the Brisbane number got no response. Wrong on the first count, as was pointed out in a sharp email awaiting us the next day -- it must have been faulty dialling at this end.

The company has, however, taken steps to amend the Australian contact details listed on the ASX to make sure investors can get in touch quickly. Peace has been restored between TGX and Pure Speculation.

Re our reporting a sudden fall in the company's share price, TGX's Geoffrey Checketts, in a second email from Invercargill, points out that one shareholder had put up 300,000 shares for sale in a single line -- the size of which clearly frightened off buyers.

"Putting up such a big order in one block suggests either an impatient shareholder desperate for any amount of cash or one who doesn't understand the state of the market," Checketts says. "Either way, a judicious buyer wouldn't rush to buy."

The Australian implies no recommendations regarding any of the stocks mentioned. The author does not own shares in any of the securities mentioned.

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