Around the Traps ... with THE FERRET 09:29, Friday, 4 March 2005
Sydney - Friday - March 4: (RWE Australian Business News) - **************************
You often get companies complaining about their low share price.
But when a company argues against a sharemarket's higher valuation then that's the classic man-bites-dog story.
It's happened with PORTMAN MINING (PMM), which is recommending a $3.85-a-share takeover bid from Cleveland-Cliffs.
The sharemarket, and particularly CSFB, reckon the shares are worth more given the white hot iron ore sector.
However, the argument provides some interesting lessons for investors about sharemarket valuations and broker research ... and some pointers for the future for mining stocks generally.
Portman's acting chairman, Michael Perrott, says CSFB has overstated the earnings per share outlook for the company.
"Obviously, it is difficult to make predictions about future profitability and Portman has not published any earnings forecasts," he said.
"Future earnings will depend on a range of factors including, of course, iron ore prices and exchange rates.
"In particular, Portman believes that CSFB's valuation appears to have understated our likely operating costs."
Mr Perrott said the company was incurring higher operating costs in the recently opened Northern Tenements, where the majority of its future production would come from, and this made reference to historical averages as a guide to future operating costs unsafe.
"In addition, as we said in our supplementary target's statement last week, the whole mining sector is facing significant cost pressures and we expect these pressures to translate over time into higher operating costs," he said.
(Investors please note .... the man said the "WHOLE MINING SECTOR IS FACING SIGNIFICANT COST PRESSURES").
Anyway, Mr Perrott said that CSFB's estimated EPS for 2005 of 70.2c fell to 51c after applying Portman's cost projections, which is a difference of 37 per cent.
The 2006 figure of 118.2c falls to 92c, a difference of 29 per cent, and 2007 from 104.5c to 76c, a difference of 37 per cent.
Seems that an EPS calculation, and therefore a forward p/e projection, is an art rather than a science.
*****
VIEW RESOURCES (VRE) put another focus on the spectre of rising costs in mining.
It has its detailed feasibility study in respect of the recommencement of mining and processing operations at Bronzewing.
The feasibility study shows that the Cockburn and Central pits generate a positive cash flow from a scheduled 136,000 ounces of gold, but do not currently meet View's internal financial hurdles.
All aspects of the feasibility study were in line with previous project estimates except for mining contractor costs, which were about 30 per cent higher than previous estimates (representing an increase of approximately $50 million over four years).
The increases reflect the across-the-board industry increases in contract earthmoving rates and chronic shortage of skilled mining labour and key mining consumables and equipment.
One of the key factors in assessing the immediate restart of mining activities was the inability to secure operational guarantees from contractors in respect of labour, explosive and machinery supply.
As a result, View has decided that the recommencement of mining at Bronzewing will be deferred until market conditions improve and/or further resources have been defined to support appropriate internal rates of return.
View shares fell 6.5c to as low as 31c before closing at 33c.
*****
AUSTRALIS AQUACULTURE (AAQ) yesterday signed five-year exclusive supply agreements with three of Australia's biggest barramundi hatcheries, giving Australis exclusive rights to buy fingerlings and strengthening the company's position as the biggest exporter of fingerlings to the US.
"The importance of these agreements can't be overstated," Australis managing director Stewart Graham said.
Yeah, sure, just the usual fisherman hype, we thought.
But he wasn't kidding.
Australis shares soared 14c to 69c before closing at 66c.
*****
Australis Aquaculture was listed on August 4 after a float at 25c a share and investors were a bit stunned mullet when the price fell to 24.5c.
However, it immediately took off, hitting 65c five days later and stirring memories of SAM'S SEAFOODS's (SSS) early days on the bourse.
What is it about these fish stocks that gets the punters so excited?
Sam's opened its stock exchange account at $1.12 in December 2001 and rose relentlessly to reach $5.14 in November 2002.
Ferret wrote at the time he was non-plussed as to how the rise could be so sharp.
It's a different story these days.
Sam's shares plumbed $1.09 on February 9 ahead of the February 28, last-day announcement that December half-year net profit had plunged 99.8 per cent to $47,000.
However, not to worry ... the company said in a "Business Update" that day, which curiously failed to mention the half-year profit plunge, the "fundamental dynamics of our business have been purposely and positively changed to focus on future market channels and growth strategies".
It said directors and management had "enthusiastically and positively embraced change" and that as a company it was "committed wholeheartedly to our diversification and vertical integration strategies which will ensure we achieve our documented milestone objectives to become the premier national seafood distributor and undisputed market leader".
It was, it said, "meticulously following a concise and measured strategy".
It's hard not to be impressed.
Even the market has restored the price to $1.36, up 1c yesterday.
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