Investing in a resource plays, is really investing in a...

Investing in a resource plays, is really investing in a pipedream. Isn't the saying "a mine is hole in a ground owned by a fool pouring cash into it...."

However, factors that could tilt the odds in your favour is the assets being close to historically rich areas and superior management.

Let's look at SRL's assets with potential upside:

1) Tritton - the mine has already been in production for at least the last 5 years. Although cash cost is low, the mine made a slight loss in FY2010 due to high concentrate treatment and refining charges (TC/RC). Global trends are falling TC/RC charges due to sharp increases in smelter facility, especially in China. Turning its financials around and increasing its reserves will boost Tritton's value.

2) Mt. Muro - this mine has been in production since the 1990s and management believes that it holds significant exploration potential. Cash costs are very high at the moment and management intends to spend $22 mil to recapitalise the mine in order to reduce its cash costs. Operational issues need to be sorted out before they can turn this one around.

3) Torrens JV - This JV with Argonaut Resources is within the Stuart Shelf region of South Australia. It is 75 km from the Olympic Dam, the 4th largest copper deposit and largest single source of uramium in the world.

4) 71% stake in Goldminco - Goldminco holds numerous tenement in NSW, including Lachlan Ford Belt which host world class copper and gold deposits such as Cadia (Newcrest), Ridgeway (Rio Tinto), Lake Cowal (Barrick).


Can SRL's management realise the potential of these assets? One way to gauge management's effectiveness is to look at past results but just remember past results do not guarantee future returns.

An analysis of the past 10 year shows that SRL has been spitting out massive amount of cash in the form of dividends. Dividend returns of a 1,000 share investment in SRL over the past 10 years assuming the proposed $1.72 goes through will yield 513% ignoring inflation and 258% after adjusting for a 3% inflation rate. Calculations details are:

Cost of SRL shares- $380 (1,000 share on 3 Jan 01)
Dividends in 2004 - $30
Dividends in 2005 - $60
Dividends in 2006 - $90
Dividends in 2007 - $80
Dividends in 2009 - $300
Dividends in 2010 - $50
Dividends in 2011 - $1,720

If you have invested in the capital raising in 2006 and 2007 your returns would have been lower, but this just reinforces the view that buying shares in a bull price will lower returns.