Juniors learn about life the hard way : Print Robin Bromby | March 31, 2008 LIFE can be heart-breaking at times in the junior resources sector. There are the disappointing assays, the scramble to get workers and equipment, the grovelling to brokers and bankers for support and, when times get tough, your investors start dumping stock which causes your share price to fall and that makes it even harder to raise money.And then there are the deals that seem poised to deliver a company-maker but slip through the fingers at the last moment.
Please welcome Republic Gold (RAU). Last year, the company had its Bolivian gold hopes dashed and is now pursuing its former Canadian partner in that project through the courts.
In the meantime, it has turned to its Australian projects with particular focus on tungsten and gold in Queensland. Tungsten is a must-have metal these days, and is one of the fashionable things to be in. Republic Gold was certainly very anxious to expand those interests and started negotiations with the owner of the old Mount Carbine mine northwest of Cairns -- owned by Mt Carbine Quarries and its boss Geoff Nicholson.
The Mount Carbine mine was Australia's largest producer of tungsten until the market collapsed in the 1980s (thanks to those world citizens in China flooding the planet with the metal when they needed some foreign exchange quick smart).
Republic Gold spent eight months investigating the project, including parting with cash for diamond drilling. On the basis of this, Republic offered Nicholson a $14 million deal -- of that, about $12 million was a mix of cash and shares (Republic has $9 million in the bank) and the remainder as a 1 per cent royalty over the 10 years the mine is expected to be in existence (which was estimated by Republic at $1.7 million).
Throughout the prolonged negotiations, the deal under discussion was Republic offering to buy the entire operation -- quarrying included.
After this had gone on for eight months, Nicholson suddenly told the Republic people in late January that there was no deal.
But on Friday, eight weeks after Republic had been given the flick, the quarry boss accepted an offer from junior Icon Resources (III) which involves 3.5 million Icon shares (worth $665,000 at Friday's close) and a 2.5 per cent gross royalty. Nicholson is to keep his quarrying business with Icon buying only the rights to the tungsten. No cash is involved at this stage.
That would have been difficult because Icon, unlike Republic, does not have $9 million in the bank. At December 31, it had cash of $1.38 million after spending $901,000 in the December quarter. No money has been raised since, and chairman John Bishop is aware of the fact that more money will have to be acquired in the coming months. However, he is trying to avoid being forced into a discounted placement price, something that would cheese off existing shareholders.
Icon at least has some good grasp of what this project entails, an important factor given the nuggety nature of the mineralisation. One of its directors, Andy White, was part of the management team when the mine was in operation.
We were anxious to find the reasons for Nicholson's sudden change of mind, and turning down a good dollop of cash in hand, but he didn't return our calls.
Plugging away
INVESTORS, not surprisingly, are starting to get very hard-headed about the more speculative end of the resources sector. Moby Oil & Gas (MOG) on Tuesday announced that the Coelcanth-1 well in the offshore Gippsland Basin, in which Moby has a 16.66 per cent interest, came up dry. Down its shares went by 45 per cent to 6.6c.
But even when there's no news, the bottom can fall out of a share price these days, as Eureka Energy (EKA) found out on Wednesday when $525.00 worth of its stock went through at 10.5c, representing a 25 per cent decline on the day. Eureka has a large gas play in Texas where a related company, Aurora Oil & Gas (AUT), also has a stake. Eureka does not have gas to surface yet but a neighbour, ConocoPhillips, does. When and if the two Australian companies come up lucky, there are pipelines and other infrastructure already in place.
What is becoming apparent about the large number of Australian oil and gas juniors now plugging away (literally in some cases) in the US is that investors are starting to get anxious about whether these plays are actually going to make money. With all the old fields in the US, it seemed like money for old rope to go in with modern technology and pump out a bit more oil or gas. The cost was low, given the vast pipeline networks and ready buyers.
It didn't quite work out that way. Louisiana Petroleum, now Erongo Energy (ERN), found that out. Buying into production is one thing; making it pay is another -- and this is now what increasing numbers of investors want to see.
Eureka options exercisable at 20c expire today. With the company share price closing at 12.5c on Friday, Eureka is resigned to kissing goodbye to the $8 million that would have been tipped into its bank account had the options been exercised. But it has enough money for at least two more wells, and some good news from those could give an altogether different outlook.
Elk on the run
ONE player in the US does seem to have suddenly come back into favour. Elk Petroleum (ELK), after a good initial run following its listing, had sagged to 17c last November. Last week, however, the company received a speeding ticket from the ASX after the share price rose over five trading days from 35c to an intraday high of 61.5c on Thursday.
We know nothing, Elk replied. Well, someone seems to think there's good news in the wind: in the March trading days up to the 18th, the number of shares going through on a daily basis varied from 39,421 to 231,784. But by last Wednesday that number leapt to 427,500. Thursday saw 802,503 go through, then another 456,755 were traded on Friday.
Elk, which pumped 21,622 barrels of oil at its Wyoming field during the December quarter, is awaiting a report on the feasibility of using carbon dioxide to enhance oil recovery at its Grieve field. That report is expected in the next few weeks. Then we will know if the punters have guessed right.
California dreaming
MEANWHILE, the North American players are keeping busy.
Solimar Energy (SGY) and Sunset Energy (SEY) say they have a potential oil discovery at the Maricopa project in California. Electric logs indicate a potential oil pay zone of about 40m. The companies will run production tests during April to assess the commercial significance of the well.
Salinas Energy (SAE) is drilling production wells at its North San Ardo project in California. Each well will cost $US750,000. The Australian company's project is next door to the giant San Ardo heavy oil field which is operated by Chevron, ExxonMobil and Shell and has so far produced 500 million barrels.
The US Government has been collecting bids for leases in the Gulf of Mexico. Buccaneer Energy (BCC) says it has submitted the highest bid on a 2023ha block located 48km off the coast of Louisiana, while Petsec Energy (PSA) is the apparent high bidder for three leases in the central Gulf of Mexico.
Locally listed partners Marion Energy (MAE) and Odyssey Resources (ODY) have reported what they call a significant new gas discovery at their North Helper gas project in Utah. The discovery well flowed at 1.5 million cubic feet of gas a day.
Tailenders
* DAVID Williams took the helm permanently at Great Artesian Oil & Gas (GOG) last week. Apart from the obvious tasks of pushing exploration and commercialising its gas discoveries, Williams has set himself the goal of making Great Artesian bigger and its clout sufficient to call its own exploration tune. Its stock is not all that liquid and cash reserves are not high, so Williams has his work cut out.
* TRADERS have been punishing the stock price of Metals Australia (MLS) and kept on doing so even after it announced a 30 per cent resource upgrade at its Manindi project in Western Australia where there is now 81,000 tonnes of contained zinc along with copper, silver and gold. MLS also has a promising uranium project in Namibia, albeit well behind other Australian explorers there in terms of progress. The problem for the junior is that there are no scraps to be thrown at impatient shareholders in order to give the share price a little zing -- even the zinc project is a few years away from production. And shareholders are now becoming much more interested in something that produces revenue now that the easy times of making a quid from flipping stock for capital gains have gone.
* EASY part over. Industrial Minerals (IDM) has seen off a court action to close down its chromite mining plans in Oregon. It has $10 million in the bank but needs to raise another $25 million or so to get mining by tapping US or European investors. Difficulty expected.
The Australian implies no recommendations regarding any of the stocks mentioned. The author does not own shares in any of the companies mentioned.
