quality specs - the eight elephants

In 12 years of client advising in the speculative arena, I must say that my stock selection model took time to evolve, however it was apparent that the key was "experience". This was through watching other companies evolve, the people and projects behind them and importantly how they behaved on the screen.

The leader of our 2010 stocktracker, Chesser Resources (CHZ) had an Andean (AND) feel about it sub 10c, and even though the stock at the time was as popular as a pimple on prom night, the Kestanelik project in Turkey has already delivered multiple share price upside. The only other stock that could upset CHZ at the finishing line is Northern Star Resources (NST) which allowed numerous buying opportunities through bad news events that included doubts over the Paulsens project acquisition and a fire. We were hoping a toilet overflowing would enable another 20c buying window, but no such luck.

In June 2004 I came up with a list of 11 juniors, where some have performed quite well, and others have had their moments. There was a very strong run into 2007 from the likes of TRO and ARU in particular, however the GFC put paid to a fair chunk of the upside as it did with pretty much any company that was listed on the planet.

You cannot simply purchase a speculative portfolio and stick your head in the sand. The process involves capital management, considered portfolio construction and more importantly having the ability to conduct regular risk/reward analysis as weightings change. I found that the real struggle for many was simply being able to let go of a multi-bagger, and in one case a $20,000 investment in an IPO turned into $1m+ with dividends, yet selling became a major issue.

The link to that list from June 2004

http://www.gold-eagle.com/gold_digest_04/locantro071104.html

I am not going to go into any depth on my stock selection model, however in 2002 I had this published on Gold-Eagle,

http://www.gold-eagle.com/editorials_02/locantro061102.html

I have learnt that "value contrarian" investing in quality resource juniors was the most successful strategy that ensured longer-term success for clients. The stocks covered are going to get the crap beaten out of them in any crisis, will be forced to raise capital at unattractive levels, be recommended by a newsletter and then the "stop" level will be reached and at times have calls for management to be removed because of a poor performance on the scoreboard. I remember the journey for Herald Resources (HER) in particular was a tough one after September 11, the Bali bombings and any negative issues regarding Indonesia. It didn't stop the company from being eventually taken out at $2.85 per share (September 11 lows of 30.5c), however it would have tested the patience of any loyal shareholder.

Speculators should also be mindful that some of the most successful companies at some stage in their lives will be cut in half and this can often occur from an IPO that involves little fanfare.

During my on-line battle for Eddie Vedder Australian solo tour tickets, I noted much dismay from those calling for him to tour Peru, Portugal and New Zealand. Same applies here, there are numerous other stocks that could have made the list, however I had to cull it to eight, and these are the ones I feel have a decent chance of success over the medium-term.

The "eight elephants" refers mainly to exploration companies with the expertise to embark on the hunt for discoveries and/or acquisitions of the company maker variety. In most cases their management teams will steer clear of "bandwagon" jumping and stick to their guns. I have also taken risk/reward ratios into consideration and believe that the entry prices here are attractive. I cannot control what might happen in the immediate-term price wise, however for those with the right character traits you will not die wondering with these companies.

The Eight Elephants

(1) Thomson Resources (TMZ) New IPO at 20c

* New IPO formed from assets of PlatSearch (PTS), Minotaur Exploration (MEP) and ground acquired from the old Compass Resources land package.
* Target listing date around December 15 TBA
* Top shelf board that includes Dr Tony Belperio (part of the team that discovered Prominant Hill), Lindsay Gilligan (Ex Director of the Geological Survey of NSW), Eoin Rothery who was previously in charge of exploration at Woodie Woodie for Cons Mins and Greg Jones who has been credited with a number of discoveries including the Blair Nickel and Orion gold deposits in WA.
* Land position in the Thomson Fold Belt (TFB) with the belief that the TFB is a continuation of the Lachlan Fold Belt under cover.
* The Lachlan is one of the world?s great metallogenic provinces. In NSW it has produced in excess of $200 billion of metals, mainly as gold (>2,100 tonnes Au), copper (11.9 million tonnes Cu) and lead and zinc (>10 million tonnes Pb+Zn).
The province hosts in excess of 3,000 mineral deposits including 24 recognised porphyry copper/gold systems such as the world-class Cadia/Ridgeway and Northparkes deposits. It also hosts the large, high grade base and precious metal deposits of the Cobar Basin located close to the southern margin of the TFB.

*TMZ due to considerable previous work, have eight walk up drill targets and will be looking to target the high-grade gold potential at Ares, prior to some of the larger "elephant targets".

www.thomsonresources.com.au

(2) Minotaur Exploration (MEP) 22.5c

* In my opinion one of the most "complete" speculative stocks on our market.
* First class geological team, headed by Dr Tony Belperio and Richard Flint.
* Magnetite iron discovery at Mutooroo with considerable potential.
* World class Kaolin Project at Poochera that could provide considerable cash flow. (subject to pre-feasibility study in 2011)
* Nova Scotia iron ore potential that has similar characteristics to Mutooroo.
* Investment portfolio including holdings in PTR, PTS, MTH and the soon to be listed Thomson Resources (TMZ).
* Major exploration strategy in Cloncurry (hampered by recent rain but to resume with gusto in 2011).
* New gold focus in Victoria, plus the Tunkillia Gold Project in South Australia in JV with Helix.
* Continual development of "powerball" targets, that saw Aphrodite drilled, however the project was downgraded due to a lack of alteration in the drill core. The risk/reward stacked up for this project considering the upside potential was of the multi-bagger variety whilst the initial drop on the news was around 7c.

www.minotaurexploration.com.au

(3) China Yunnan Copper (CYU) 16.5c

*** Please note that there is a 15c underwritten share purchase plan SPP underway)***

* Yunnan Copper Industry Group (YCI) are CYU's major shareholder, with Chinalco holding 49% of YCI. Chinalco are no tin pot junior. (They had a crack at RIO).
* In JV with GSE CYU had the Mt Dorothy copper-cobalt discovery with 35m @ 1.52% Cu, 397ppm Co.
* CYU just announced "visual' intercepts at Mt Dorothy with assays pending.
* Have commenced drilling at the Humitos Copper Project in Chile.

www.cycal.com.au

(4) Elementos Limited (ELT) 21.5c

* Was spun-out of one of my previous exploration favourites Orocobre (ORE) which was able to catch the lithium wave and was effectively a 20-bagger from its GFC inspired lows.
* Post AND and CHZ could ELT be next? Risk/reward at 21.5c certainly attractive, however stock prone to periods of poor liquidity and large percentage swings on low-moderate volume.
* Focus on Argentina, with the hunt for large Porphyry systems and high-grade gold-silver systems.
* Two new recent discoveries including Yvette high-grade silver veins and Divisoria gold-copper.

www.elementos.com.au

(5) Red Metal (RDM) 18c

* Drilling at the exciting Corkwood Copper Project in the Cloncurry region of QLD.
* New interpretation of potential at Maronan seeking Cannington style silver-lead mineralisation.
* Uranium JV with Cameco in the Curnamona Craton South Australia to gain momentum in 2011 with 16,000m drilling planned.
* Exciting potential at the Swift Hills phosphate project which is only 10km from Incitec Pivot's mine in QLD.
* RDM have applied for permits in the Paradox Basin, Colorado USA after a study was commissioned for potash potential by Agapito Associates.
* The Agapito study predicts the likely presence of potash strata that could be amenable to extraction using standard solution mining methods. Based on this the Company is targeting economic resources capable of producing between 200,000 and two million tonnes of potash per year.

* Well run junior with management focussed on becoming "A small company with a large share price".

www.redmetal.com.au


The first five companies all have similar structures and in the words of Dennis Denuto, "vibe". The next three are slightly different, but each offers significant upside potential from a low base.

(6) PIONEER RESOURCES (PIO) 3c

* Well run junior gold explorer focussed on extending the Mt Jewell gold discovery.
* The Managing Director David has the unfortunate surname, "Crook". From my dealings with him he is anything but and is very highly regarded amongst his peers.
* Raised $2.5m in late September 2010 at 3c per share.
* 30,000 RAB drilling program announced with the aim to identify suitable targets for follow up RC and diamond drilling.
* Wild Dog Prospect has become a major new priority and one to watch in 2011.
* Significant land package, potential to drill towards an initial resource and strategically located in relation to NGF's Paddington Gold Mine.
* Higher liquidity than the other stocks and covered, and the share price has again closed on its rolling year low of 3c.

pioresources.com.au

(7) Global Geoscience (GSC) 8.5c

* One of the those companies with a name you would expect to fund on a stress ball or notepad from a mining conference party pack.
* Not that well known, but is very well supported from loyal shareholders and is sporadically the subject of write ups in the press.
* GSC have just recommenced drilling at the Sara Sara copper-moly project in Peru.
* Commenting on the recommencement of drilling program, Global?s Managing Director, Bernard
Rowe, said:
?These are very exciting times as we recommence drilling at Sara Sara. The broad zones of copper from the last drill program were very positive, however, the real prize at Sara Sara will be the large copper porphyry systems that we believe underlies what we have seen so far. We
know the system contains significant copper and the deep diamond drill holes will test for a large porphyry copper system beneath and peripheral to the earlier copper intersections.?
The shallow, high-grade silver mineralisation will be investigated with percussion (RC) drilling.

www.globalgeo.com.au

(8) Adelaide Energy (ADE) 6.5c

* The only energy stock in the eight elephants has been a poor performer of late after experiencing some flow issues from it's producing operations and going into caretaker mode due to a weak cash position.
* Near-term cash issue now addressed through a capital raising of $6.8m (1 for 2 rights issue at 6c with a placement).
* Produces from the Katnook operations in South Australia, where revenues continue to grow and a Gas Retention Licence was awarded.
* High risk/high reward exploration from Beach Energy's (BPT) shale gas hunt with Encounter-1 currently underway. ADE have a 10% interest in the shale gas program with BPT and are carried for the first $25m in expenditure.
* Heavy rains have hit the Cooper Basin region and the second well Holdfast-1, may be affected.
* Shale gas sector has performed strongly in the US, but is yet to arouse any speculative fervour in Australia. Both BPT and ADE are the forefront of the sector in Australia as exploration gathers momentum.

www.adelaideenergy.com.au

Cheers

Budfox