AGO shares have been hammered falling 25% on the back of the...

AGO shares have been hammered falling 25% on the back of the capital raising, tax review and China slowing its economy.

The Chinese issue is well known and in the medium-long term what the Chinese are doing will help support demand for commodities. The worst case scenario is that the Chinese economy goes bust owing to a speculative property boom and all action must be taken to avoid this. Following the GFC we know how quickly the Chinese could stimulate their economy if needed so I am not concerned about Chinese tightening moves.

The capital raising is frustrating as it brought the price down from A$3.00 to A$2.50. What is encouraging was that it was over-subscribed at a time just before release of the tax review. The confidence to be taken from this is that where needed AGO has access to the necessary cash.

With the tax review, have the markets overreacted? I do not live in Australia so maybe I do not understand the tax system, but from the 2009 accounts see that the group tax rate was 30%, so does this mean the review will be increasing this from 30%-40%? That is a nasty rate of tax to pay but does not destroy the growth story and value to be unlocked. Also I see from 2009 accounts that AGO has A$ 46 million of tax losses and this should rise further for 2010 as a result of exploration expenditures, so maybe we will have A$60 - A$ 65 million of losses to set against future profits, although I am not sure for how many years they can be carried forward (this ignores any losses that WRK and AXO may have and AGO can utilise). Also I assume that the tax system allows for write off of mine development costs and then there are also the credits for exploration expenditures etc and the detailed negotiations before this is implemented that should ensure that there is no double taxation.

The pickup in price in the last 1 hour of trade today could suggest that the market has recognised this overreaction and we should see a recovery in price over the next weeks.

BR
Max