Small is beautiful as gold hits a crunch Font Size: Decrease...

Small is beautiful as gold hits a crunch Font Size: Decrease Increase Print Page: Print Robin Bromby | February 11, 2008
WHILE disappointing, the news that View Resources had called in the administrators was not the big gold story of the week - although it would have been for Lion Selection Group, which had invested $7.9 million and, at the most recent substantial holder notice, held 31 million shares, or 7.1 per cent, of View.

The $10.6 million raising in November and the sale of View's stake in the Carnilya Hill nickel project for $25 million might have given ground for thinking the company could have kept its head above water at the Bronzewing gold mine. Traders clearly thought so as they heaved View's share price off the floor in mid-January.

No, the big gold story of the week came from Newmont Mining. The global miner said it was boosting its exploration budget. And they will target smaller deposits as part of the campaign.

Not to get too carried away, but this switch is an epochal event. For years, the majors have been walking away from discoveries because they did not meet size requirements; a resource of 500,000oz of gold was just not befitting a world player. And they sold off the scraps, as Barrick Gold did by flogging its Paddington mine to Norton Gold Fields.

Newmont has historically mined deposits greater than 10 million ounces - but these are getting scarce on the ground at the moment. Now they have to consider more humble targets, a sign of how gold supply is going to face further crunches.

Caution needed

GOLD may have closed at $US922 an ounce on Friday but that doesn't bullet-proof smaller producers, as the View calamity shows.

Two things must always be kept in mind when buying into gold stocks. One is hedging, which is not always avoidable if a company needs to raise money. But the best thing in the present climate is to be fully exposed to the spot, our most recent example being North Queensland Metals at its Pajingo mine. Subsequent to our report on this last week, NQM has raised $7.5 million through a share placement.

Its 40 per cent partner, Heemskirk Consolidated, has chosen caution and has entered into a put option deal that sets a floor of $900/oz under 14,000oz of its share from Pajingo, about $100 below the present Australian dollar price.

But hedging is very much out of favour. Peru's Cia de Minas Buenaventura has decided to spend $US434 million to unwind 2010 and 2012 forward sales covering 782,000oz at an average hedge price of just $US380/oz.

The other thing to watch is cost. Reed Resources, which is in joint venture with Kingrose Mining at the Sand Queen mine north of Kalgoorlie, reported on Friday that its cash costs were a modest $311/oz. It sold 608oz in its latest deal for $1011/oz.

Copper and lead

WHO said there was a world slowdown under way? So asks BNP Paribas commodity man David Thurtell in his Friday note after copper leapt $US160/tonne to $US7700.

And look at lead - up 6.8 per cent in one day and closing for three-month delivery at a very heady $US2970/tonne, not by any means its 52-week record but an impressive rebound on recent trading. And, it appears, it's no longer a case of zinc stinks, with that metal gaining 4 per cent to $US2445/tonne, which was made even more extraordinary by the fact that inventories of zinc at the London Metal Exchange actually rose by 2875 tonnes on Friday.

Thurtell believes the metal's rebound had a lot to do with shorts covering their positions against a background of Chinese New Year. "The absence of Chinese sellers with the New Year holidays did the shorts no favours," he commented.

Coal prices

AND nothing seems likely to stand in the way of coal prices. Floods in Australia, bottlenecks in Indonesia and China's dwindling export trade are combining to put the squeeze on supply. Indian demand for thermal coal imports is predicted to soar. Goldman Sachs JB Were notes that India is planning several "ultra-mega" coal-fired power plants to use foreign coal and these will add 100,000 megawatts to the grid by 2012.

South Africa and China have been experiencing brownouts, load shedding and other euphemisms for power cuts due to coal supply disruptions and inadequate capacity.

All this means there is only one way for prices to go and Goldman Sachs' three-year forward price assumption has been lifted from $US87/tonne to $US100. No surprise then that Comdek caught our eye this week. Comdek is still listed on the industrial board due to roots in the satellite communications business and was retrieved from the administrators by a Perth group wanting a vehicle for its energy strategies. The company is associated with Perth law firm Price Sierakowski (which has been involved in a number of mining IPOs) and Ventnor Capital (one partner there being Richard Monti, who worked at Anaconda Nickel and then helped Andrew Forrest put together the tenement package for Fortescue Metals Group).

Comdek last November acquired 70 per cent of coal projects in the Waterburg region of South Africa. Sixty-five per cent of the 415 million inferred resource is thermal coal - and the power utility Eskom is building a 4300MW coal-fired station in the area.

Now Comdek has bought two coal projects in Tasmania. The resource is pre-JORC but is estimated at up to 22 million tonnes of thermal coal with potential for exploration upside. And it's right beside a railway line.

The then BHP explored there in 1981-83 when there were plans for a coal-fired power station at the Conara rail junction, but in 1983 the Tasmanian government decided it was a better idea to go with oil as the feedstock.

Comdek is looking at raising capital through a placement within three months, along with a name change and a move to the mining board.

Margin notes

ONE reader took issue with Pure Speculation for suggesting last week that the number of exploration stocks taking big hits was due probably to margin calls. His argument - too complex for the space we have here - was plausible, until we opened the next email. It came from the MD of an iron ore play who reported several shareholders had telephoned to apologise for selling but they had to come up with the cash for their margin positions.

And how else to explain Lindian Resources losing 52.2 per cent of its value on 40,000 shares going through for a total of just $4200? Chairman Reg Gillard believes it could only have been someone forced to take whatever price was on offer.

Lindian had a shareholder meeting on Thursday to approve buying 80 per cent of the Bafwasende gold and diamond project in the Democratic Republic of Congo and there was not a single vote cast against the plan.

There were other drops that were otherwise hard to explain: Superior Resources falling 30 per cent on just $3600 worth of shares, Alchemy Resources down 27 per cent on $7600 in trades. And then there was Newland Resources; it traded on only one day last week, losing 38.5 per cent on 5004 shares worth $400.32.

Another piece of evidence came with the announcement by Regal Resources that its $2 million sale of the Eucalyptus gold project had fallen through. Apparently the intending buyers had been planning to raise the necessary by selling other shares. But the price falls meant they could no longer liquidate enough stock to meet the price tag.

This is all the more extraordinary because the pre-stripping work at Eucalyptus has been finished, there is a resource of 174,158 ounces of gold and you could be in production within a few months.

Regal was selling because it is focused on its Menzies gold project and a joint venture with Newcrest Mining.

Uranium sampling

THE vast field of uranium players continues to sort itself out. Scimitar Resources looks set to emerge from the grassroots category at the rear and move to the level of advanced explorer.

The company has commissioned independent consultants to come up with an initial resource estimate of its Bennet Well project south of Onslow. The deposit is 15km from the Manyingee deposit (10,900 tonnes of U3O8) owned by Paladin Energy.

We report sampling always with the caveat that it ain't drilling but, nevertheless, we had to sit and take notice when Contact Uranium said such work at its Kihitian project in Peru had returned assays of up to 34.75 per cent uranium. Yes, that's 34.75 and not a typo. This is just 15km from the company's Corachapi project where there is already an established resource.

But, alas poor White Canyon Uranuim. Another extension of its IPO, this time to February 18. Has it missed the uranium bus?

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