drilling at myall creek, page-12

Yes agree Bullbar "A No Brainer"
Hi All..some of you might find my quote below a bit long and tedious so if so just skip it. The point is there are many "penny dreadfuls" out there and how do we know when we are on a winner.In reading thru this article it starts to clarify in my mind why so many of us here think we are on one of those few winners that come along so infrequently. We seem to fit most of the winner criteria.
I just thought I would post it as we are in a bit of a holding pattern these last few days but I personally am expecting fireworks at any time.
Anyway - Best of luck holders
fc


Pennies from heaven: Australian December 08, 2010 There is a prudent school of investment thought on "penny-dreadful" stocks -- micro caps in more polite circles.
The thought is they're struck at cellar-dweller valuations for a reason: they're serial loss makers, crippled by debt or, conversely, unable to access bank funding.

Some have had their day in the sun but have failed to execute their business strategy. Others are simply vehicles for incompetent or venal management and directors to maintain a lavish lifestyle, at least until the well runs dry.

Whatever the case, chances are the stock receives little or no reliable third-party scrutiny. Management's word is gospel and don't expect the regulator to take too much notice of any shenanigans.

Health warnings aside, with the market's risk appetite recovering, the sector shouldn't be ignored altogether. And thanks to the rise of online trading, it's never been easier for retail investors to dabble in the sector.

True, most penny dreadfuls go nowhere -- except into the hands of administrators -- but there's always exceptions to the rule for risk-takers to brag about.

Take RHG (Australian Securities Exchange code: RHG), which consists of the housing book of the old Rams Home Loans not acquired by Westpac after Ram's exquisitely ill-timed listing in mid-2007.

Having touched 4.6c in mid-2008, RHG has done a Lazarus with a quadruple bypass: it's trading at about $1. Management has promised to buy back all shares for not less than 88c, plus a 30c franking credit.

Blue chips including JB Hi-Fi and Cochlear started out penny dreadfuls, as did Andrew Forrest's Fortescue Metals. "If you buy $10,000 of shares at 1c and they get to a $1 you'll be a millionaire," says Lincoln Indicators chief executive Elio D'Amato. The catch? For every Cinderella story there are many more stocks that simply mark time, go broke or are commandeered as a shell company at little gain for existing shareholders. "Not all fairytales have happy endings," rues D'Amato.

Select Asset Management chief investment officer Dominic McCormick says penny dreadfuls should be treated only as an adjunct to a portfolio.

"It is more about speculation than investing," he says. "Because there are sensational success stories, people get the impression it's easy and they have to be in it. People always focus on the successes and forget about the number of losers across the whole spectrum.

"We certainly believe any exposure to small and micro cap stocks make sense but you must do that in a diversified way."

Defining the sector is not a precise art: the penny dreadfuls are often defined as sub-10c shares, but these stocks often boast a weighty market capitalisation because of the number of shares on issue. For instance NewSat (ASX: NWT), which plans to launch Australia's first independently owned commercial satellite, boasts a $40 million valuation even though its shares are trading at a fraction of a cent.

According to D'Amato, 566 companies -- one-third of listed companies -- are trading below 10c. Just under half, 258, are resources stocks. Of the 566, 93 generate a small profit. One example is the maligned car hi-fi group Strathfield (ASX: SRA), which trades at a fraction of a cent but generated a $2.73m profit last year after emerging from administration. "The good news is the board is of the opinion the return to profits is sustainable and should continue for the foreseeable future," the company says in its annual report.

Encouragingly, roughly 110 stocks have graduated from penny-dreadful territory in the past 12 months. Some gains have been spectacular, especially among the resource rough diamonds.

Few folk would have heard of Ukrainian hydrocarbon hopeful Hawkley Oil and Gas (ASX: HOG), but that won't faze happy holders living high on the hog of a 3000-plus per cent share price leap (from half a cent to 18c at the time of filing).

Other notables are Northern Star Resources (NST) (1100 per cent), Nucoal Resources (NCR) (900 per cent), Burey Gold (BYR, 833 per cent), Mako Energy (MKE) (670 per cent) and the aptly titled Aspire Mining (AKM, 930 per cent).

Tattslotto-style jackpots are harder to find in the industrial sector. But not for devotees of Farmworks Australia (FWA), the rural-services provider that delivered a 1560 per cent windfall.

Or how about chemical and biological defence mob Alexium International (AJX), up 1400 per cent after flat lining at 10c in June?

Another dazzler is auction house Webfirm (WFM) backed by Computershare founder Chris Morris and up 460 per cent to 18c over the last year.

Roughly speaking, penny dreadfuls fall into three camps: fallen stars that have had their chance, newcomers with a reasonable story and those that have headed nowhere for years.

The first camp is populated by stocks such as the internet encryption play Senetas (SEN), a day traders' favourite that was once valued at $400m.

Once backed by former National Australia Bank chief Frank Cicutto, rent-roll consolidator Run Corp (RNC) trades at about 8c, having listed at $1 in late 2005.

Another notable ghost of happier times is dotcom era remnant Adultshop (ASC), which briefly reclaimed the headline with last year's unsuccessful bid for private erotica chain Sexyland.

The inherently risky biotech sector hosts an over-the-quota share of low-valued plays that are coming or going, or simply marking time in the bourse's equivalent of god's waiting room.

Avexa (AVX) exemplifies the biotech roller-coaster ride: the shares hit 65c in 2007 but are now trading below 5c because the company failed to commercialise its HIV drug, ATC.

Those with a credible story but yet to award investors include mail-house DVD rental mob Quickflix (QFX), IP sheriffs Ipernica (IPR), NewSat, green-friendly nappy maker Ecoquest (ECQ) and digital advertising and direct marketing minnow Facilitate Digital (FAC).

Microequities' managing director Carlos Gil says that at the onset of the GFC, a lot of solid companies became "very, very cheap". Mining services stocks in particular were marked down as production -- notably BHP Billiton's Ravensthorpe copper facility -- closed down.

Gil believes 2008 was a "once in a lifetime event": in other words, punters have missed the opportunity to swoop on the truly undervalued bargains. "I don't think you are likely to see that value appear again in a hurry," he says.

Most small-cap funds prefer a minimum and maximum market-cap criteria for choosing their stocks. "It's a dreadful connotation," Gil says of the penny-dreadful descriptor. "We only invest in profitable, growing micro-cap companies, not an explorer yet to prove a resource. As a general rule we don't go below 10c [a share]."

Greg Canavan, founder of investment newsletter Smart Money, Smart Investments, says the stocks are dreadfuls for a reason: they may be trialling a technology for which the commercialisation prospects are unclear or, in the case of resource minnows, they're "scratching around for a resource". He won't risk his reputation by recommending them as "buy" calls. "You really have no idea whether they will work out," he says. "It's just a numbers game. You need to invest in 15 or 20 to improve your odds."

Microequities is willing to consider plays anywhere between $10m and $250m, while Fairview Equity Partners' emerging markets fund plumps for stocks with a minimum $70m value.

While luck is the most useful asset for a penny-dreadful trader, there's a few rules of thumb to improve the odds.

The cardinal one perhaps is to take profits when a windfall gain materialises. "Another rule of thumb is that if a company has been listed for five years without showing a profit -- or at least a route to profitability -- they probably never will," Gil says. "There's a lot of companies in the micro caps space whose life depends on a continuation of capital raising. We don't invest in companies without a proven business model and two years of demonstrated profitability. The first rule of making money is not to lose money."

For Microequities, it's more about dismissing opportunities than passing them up: Gil estimates there are 1600 micro-cap companies.

With 16 stocks in the fund, that means Microequities assesses -- but then passes up -- 99 out of 100 prospects.

Fairview Asset Management seeks stocks with a "good solid story" on earnings and cashflow.

"You want to get most of them right, because if you don't you might get liquidity issues," executive director Chris Adams says. "They are not speculative but have a good track record and good fundamentals."

Fairview's wins include Botswana copper explorer Discovery Metals (DML), which has a $300m market cap -- a long way from its penny-dreadful status early last year.

Canavan cautions the banks won't go near companies without an established cashflow.

"The problem is they may be in a really good industry or have a great potential product, but it takes a lot of money to get to commercialisation," he says. "They might be a good story but unless they are bought out they have to rely on capital raisings. It's a good idea to be realistic."

Select's McCormick says the odds are improved if the investor has an insight into the sector or technology involved, or if they know management team: "You have to take a view on the sector they are involved in."

He cautions that few become market leaders down the track, despite the often grandiose aspirations of management.

"You can look at exception games such as Fortescue, but people have to know that's the exception rather than the rule," McCormick says.

Still, investing at any level is about hoping for the best and filtering out the messages from the nay-sayers.

For every buyer there's a seller unconvinced about the management's spruiking of breakthrough technologies or the next mother lode.

With a modicum of luck, one or two stunners across a portfolio of, say 10 stocks will outweigh the inevitable losses.

The usual caveats apply: don't risk your superannuation and don't hang around for a dividend.