"The time has come," the Walrus said, "To talk of many things:...

"The time has come," the Walrus said,
"To talk of many things:
Of shoes--and ships--and sealing-wax--
Of cabbages--and kings--
And why the sea is boiling hot--
And whether pigs have wings."

This is the only stanza i remember from Lewis Carroll's famous fairy tale and somehow a full 55 yrs later it has stuck. Reading some CEO's forecasts re various companies and you wonder if they do indeed believe 'pigs have wings'.

But I've chosen this stanza as after much research i reckon 'the time has indeed come to buy SWK." I'll explain why but first disclose I have been buying fairly heavily between 9.1 -10.0cents over the past few days.

SWK is Australia's largest specialist underground diamond core driller. It manufactures/assembles its own rigs in Perth and then contracts out to largest gold and base metal mines, mainly here in Oz. Yet just 12 months ago SP was 27cents and today its 9.1cents. What happened?

Main reason is that margins in this sector are a fraction of those during the boom. Many drillers have gone to the wall or face bankruptcy esp surface operators. SWK downsized its surface ops to focus on the UG wk and has the best machines capable of drilling 1500metres while parked 500feet below the surface. Firm is very highly regarded is its niche and is able to renew work with customers year after year hence avoiding expensive tender process.

In FY15 SWK incurred a loss. This was primarily due to thin margins, impairments on non-core parts of company and increase in staff. So is it under threat? I don't think so as:

1) SWK continues to drill record amount of metres underground. Their website shows how they ratchet up every minute! Remember SWK get paid per metre not per hour.
2) Extra staff have been brought in.
3) Gold is 40% of the business and in AUD terms POG is firing along with gold mines here in Oz.
4) But the main reason for my confidence is SWK on cusp of releasing their adapted rigs which require one person to operate versus two! That's a 50% saving in labour cost at each working rig.
5) Using the yr end report (a long but worthwhile read) the first rig is entering work now after years of trials. All rigs should have 'reduced man-power by June 2017'.
6) Very few brokers bother with SWK esp as trade vols are small and mkt cap just 20million!
7) But even after writedowns the NTA is 38cents/share. These assets are mainly the rigs themselves. Now compare with BOL our biggest crane operator. Huge amount of capital tied-up in cranes (NTA) but majority of cranes lie idle in the yard. With SWK over 80% of rigs earn income 360 days/yr. A big difference.
8) Competitive advantage means SWK can drill at lower cost than its competitors. Hence, it is very unlikely to lose customers and likely to gain new mines once adapted rigs are available.

9) Leverage. Here is something i believe Mr Mkt has missed. During this prolonged period of low gold/commodity price, in order to survive mines have reduced output and concentrated on the richest orebodies. Now as we get twin boost of lower AUD combined with higher Au price, it has a multiplier effect. Hence, mines are now able to bring lower grade ore back into production and this requires more drilling. For those not currently doing so, the easiest method is to go from 1 - 2 shifts per day.

Lets say each rig drills 50m core/shift.
1 shift per day = 50m/day.
Currently 2 men = 25m/man/rig.
2 shifts = 100m/day
4 men = 25m/man but SAME rig produces double the daily gross income.
New version rig (NVR) 1 shift = 50m/day
NVR 50m/man/rig. (100% increase)
NVR 2 shifts = 100m/day.
NVR 2 shifts = 50m/man/half rig.

i.e. now get 100metres/day from Two men/One rig versus 50m/day from Two men/One rig.

So output per rig doubles and output per man-hour doubles. Starts to add up after a while. And all this without any extra cost to mine owner. BUY.

Risk: The obvious risk is that gold and base metal prices collapse. In that case mines across the country will close and SWK along with half the stks on ASX will disappear as fast as Alice's rabbit 'disappeared' down the hole.

PS. Read the entire company report. Loads of useful info.
PPS. Gold jumped USD22/oz last night.