Thursday, April 27, 2006

Comparing performance of listed v/s unlisted commodities

Primer on my investment outlook

United States
The run-up in commodity prices may have negative implications for stocks in the materials sector. We have previously noted that speculators have record net-long positions in a broad range of commodities, and we have suggested that commodity prices recently have been driven as much by speculation as by fundamentals. Our new research shows that commodity speculation is close to an historical high. When speculation rose to similar levels in the past, commodity prices always declined on a year-to-year basis in the subsequent 12 months.

If history repeats itself, it appears as though metals and mining stocks might be the most susceptible to a decrease in commodity prices; chemical stocks also appear to be vulnerable, but to a lesser extent. Investors who want exposure to the materials sector along with some shielding from commodity price declines should probably shift toward the containers-and-packaging and paper-and forest- products groups. To separate the effects of possible speculative activity from fundamental activity, we compared the spot-price movements of commodities that have listed futures with those of commodities that do not.

Our assumption is that speculators are more willing to act through the liquid futures markets than they are by purchasing a physical commodity or by purchasing an illiquid OTC forward contract. If the spot prices of listed commodities appreciate or depreciate abnormally in relation to those that do not have listed futures, it might be reasonable to assume that speculative activity, rather than economic fundamentals, has caused the difference in performance between the two commodity groups. We have divided the component commodities of the Journal of Commerce–ECRI Industrial Commodities Price Index (JOCIINDX on Bloomberg) into commodities with listed futures and those without. The chart above shows the average 12-month performance during the past 14 years of the spot prices of our group of exchange-listed commodities vs. that of our unlisted commodities. Speculative periods are clearly evident; the highest level of speculation was in January 2006. (Interestingly, there are also similarly clear periods of risk aversion.)

Peaks in commodity prices appear to coincide with peaks in our gauge of speculative activity. Indeed, commodity prices have always fallen in the 12 months after the spot prices of our exchange-listed commodities have outperformed those of the unlisted commodities by 15 percentage points or more: there were 19 instances in the history we studied in which the performance spread was 15 per cent or more, and the JOC-ECRI index provided negative returns subsequent to each instance. That suggests that the outlook for commodities for the next 12 months is not very encouraging because the current spread (31 per cent) is well-above the 15-percentage-point level. Implications for Materials Stocks Perhaps because the current environment for commodities is quite speculative, the materials sector has been the bestperforming sector in the S&P 500 during the past six months. It has risen by 25 per cent or so, about 50 per cent more than telecom, the runner-up.

Investors are assuming that commodities will continue to appreciate. The Merrill Lynch Fund Managers Survey shows that only 25 per cent of fund managers believe that commodity prices will be lower 12 months from now, and 42 per cent believe that commodities will appreciate by at least 5 per cent. However, if our analysis is correct, investors should probably consider reducing positions in materials stocks and/or shifting to those industries within the sector that have not been so significantly influenced by commodity speculation. A quick look at the materials sector shows that the metals and mining group appears to be the most sensitive to the JOCECRI index with a beta of 0.92. Underfollowed industries in the materials sector such as containers and packaging and paper and forest products seem to have lower correlations.

Richard Bernstein
U.S. Strategist, MLPF&S

Friday, April 14, 2006

Brandrill overview on miningnews.net

Primer on my investment outlook

Here are some snippets of the Brandrill story :-

These days Brandrill is in fine fiscal fettle – it booked a $23.2 million profit for 2004-05 – and last year posted a world record for drilling depth, managing 1600m of 270mm holes in one shift at Ensham Coal in Queensland's Bowen Basin.

It also claimed, in a presentation to shareholders last year, to be Australia's largest specialist drill and blast contractor.

This drill and blast status was not always so for Brandrill. When it started out in the 1980s it was working in an underground mine in the Northern Territory.

By 1998 the company had, through organic growth and acquisition, built an underground business with revenues of $60-70 million a year, and drill and blast work bringing in $40-50 million a year.

Perry explained that while looking pretty spectacular on a balance sheet, this split of work was not the healthiest thing to have. "On the surface you would have 10-12 contracts while underground you had three to four contracts," he said.

The implication is clear. Lose one drill and blast contract and it hurts a little. Complete an underground contract and that is a major chunk of the balance sheet that needs to be replaced.

In 1998, Brandrill also stumbled across a piece of technology that would change its life. Called Sunburst, the US-developed technology used compressed air rather than explosives to break rocks.

The one drawback was that the mechanical device the US company used to deliver the compressed air was getting broken along with the rocks – a flaw that forced the US player into Chapter 11 bankruptcy.

Brandrill bought the technology and set about making it work, replacing the compressed air delivery system with a chemical propellant.

Instead of blasting the rock apart, as an explosive would, the propellant created a compressed gas that broke the rock along pre-existing cracks. As those cracks grew the gas expanded and its force dissipated, meaning the rock just broke rather than exploded.

The technology gave Brandrill a business opportunity in South Africa's deep underground mines. When blasting is being conducted, those mines lose eight hours of work time to allow the fumes to disperse.

In theory, Brandrill's technology – these days known as RockTek – would allow the mines to regain those hours because it did not generate the fumes and debris normally created by standard explosives. While RockTek was more expensive than conventional explosives, if it could increase the productivity hours at those mines it would be worth it.

With this idea in mind Brandrill headed to the dark continent and formed a joint venture with Torrex Contracting in South Africa. Besides its rock breaking technology, Brandrill also took some jumbos with it and, in something of a first, managed to make them work in South African conditions.

However, RockTek proved problematic. It was producing higher levels of carbon monoxide than mine regulations allowed. This meant the productivity benefits could not be achieved and the South African experiment was over. Brandrill still had its development business though.

Brandrill's bank, however, had started to get nervous and wanted the company to restructure its balance sheet. Costs, including the $1 million a month the company was spending on R&D for RockTek, were starting to bite.

Brandrill rig.

Perry was brought on board just in time to see things start to spiral out of control.

The company discovered one of its Queensland underground contracts was bleeding cash. It haemorrhaged about $5 million over 12-15 months. Then the South African mining industry hit a wall and Brandrill's business there went south. The company's underground contracts finished up and there was nothing to replace it. Remember, in 1998 these contracts accounted for 60% of Brandrill's revenue.

Perry brought in some new management staff, including a chief financial officer, and set about trying to staunch the company's cash bleeds but by early 2004 it was starting to become a losing battle.

With that in mind Brandrill's board called in Bentleys MRI Perth as administrators in June and the Commonwealth Bank appointed Ferrier Hodgson as receivers. Five months to the day later and the company was out of administration.

Part of that relatively rapid recovery was due to Mizuho buying the Commonwealth's $4.8 million debt and then putting at least $4.5 million into a new equity raising to get the drilling contractor relisted on the ASX on December 30, 2004.

With the company relisted, Perry said it had taken the decision to not re-enter the underground contract mining market and instead focus solely on drill and blast work. He said the company was aiming RockTek at the civil contracting market.

Another focus for the company is maintenance and training. After all, it is paid on the number of metres it drills so if the drillers are not achieving the right sort of penetration rates or rigs are out of action for longer than they should be, it costs.

Friday, April 07, 2006

Sherlock bay gets some press attention

Primer on my investment outlook

This company has already given a 300% return to me. Looks like its just the beginning.

Wednesday, April 05, 2006

Divergence between CBH and CBHG

Primer on my investment outlook

CBHG are 9.5% conv notes, and can be converted to CBH shares on a 1-to-1 basis. Ideally prices should track each other, and CBHG should be at a premium due to its yield. Recently, there has been a divergence and CBHG is quoting 30% cheaper than CBH. Strange!!

Tuesday, April 04, 2006

Sherlock Bay Developments

Primer on my investment outlook

Mineralogy boost for Sherlock Bay

Michael Vaughan
Tuesday, April 04, 2006

SHARES in Sherlock Bay Nickel jumped by as much as 70% today after the company reminded the market about its deal with Clive Palmer's company Mineralogy, which recently signed a $US3.685 billion ($A5.17 billion) deal with Chinese interests to develop iron ore deposits in the Pilbara.

Last December, Sherlock Bay paid $A1 million for the right to conduct due diligence on Mineralogy's Cane River iron ore project with a view to submitting a proposal to acquire Cane River Mining ?a Mineralogy subsidiary that owns the project ?by May 30.

Importantly, Sherlock Bay's deal with Mineralogy includes a guaranteed 400 million tonne (71% iron) of magnetite ore from the Balmoral deposit, which comes under the CITIC Pacific deal.

Publicly available reports state Cane River has a non-JORC resource of 102MT grading 53.6% iron.

Sherlock Bay managing director Darren Hedley told MiningNews.net it was business as usual as far as his company was concerned because the CITIC Pacific deal did not directly affect Sherlock Bay's agreement with Mineralogy.

"The key issue for Sherlock Bay is infrastructure," Hedley said.

"[CITIC Pacific] have said they're going to produce product by 2009 ?and that includes [construction of] a port of which the company we're looking to purchase ?Cane River Mining ?has formal access."

Hedley said Sherlock Bay would have to contribute on a tonnage pro-rata basis towards the establishment and operation of a port that will likely be located near Cape Preston on the Pilbara coast.

Sherlock Bay is aiming to get a 20-year, 15.5Mtpa operation off the ground at Cane River.

Hedley paid homage to Palmer for securing the landmark deal and pointed out the deal with CITIC Pacific only covered "a drop in the ocean" (1%) of Mineralogy's prospective iron ore ground in the Pilbara.

"Clearly (Palmer) is a man of vision," Hedley said.

"He picked these leases up in 1985 with a view that a deposit of this size, location and quality has to be desired by many one day and it's testament to his foresight."

Mineralogy's deal with CITIC Pacific remains subject to Foreign Investment Review Board approval.

After reaching a high of 13.5c during the day's trade, shares in Sherlock Bay closed up 3.2c (41%) at 11c, a 52-week high for the company.

Monday, April 03, 2006

Uranium blowoff

Primer on my investment outlook

SHN - Sherlock Bay nickel prices have gone crazy the past few days, and might rise more, as the stock is pending an announcement. Australia announced an agreement with China allowing China to buy uranium. A lot of speculative money flew into uranium stocks, and SHN was the beneficiary. Since my basis cost is less than 4c a share, i'm sitting tight and enjoying the run.
For perspective, here is an excerpt from an interview at www.miningnews.net


Share price (at March 17): 5.9c
Market cap (at March 17): $40.17 million

1. Where is your mainstay project located?
Mt Salt is located 80km west of Karratha. Copper Bore Well is located 100km south of Onslow.

2. When was it discovered?
Mt Salt's radioactivity potential was first referenced in geological literature by AG Spence in 1962. Copper Bore Well was a target of ESSO in the 1970's.

3. What is the company's stake in the project?
Both are owned 100% by Sherlock Bay Nickel Corporation and are currently exploration licence applications (ELA's).

4. What work programs have been completed at the project? How much drilling has been carried out?
Mt Salt - Airborne magnetic and radiometric survey, rock chip sampling, scintillometer traverse, geometrics gamma ray spectrometer traverse, geochemical sampling, spectrometer surveys and broad spaced drilling.

5. What style/type of uranium mineralisation is at the project?
The potential exists for one of three deposits – a cretaceous uranium roll front deposit, a cretaceous unconformity style uranium deposit or a proterozoic basement Jabiluka-Ranger style uranium deposit.

6. What are the dimensions of the mineralisation? What are the levels/tenor/grade of mineralisation?
AGSO airborne uranium channel anomaly system has dimensions some 20km in strike and 4-5 km in width.

7. Is the project essentially a 'greenfields' proposition, or does it have a JORC-compliant resource? If it is not 'greenfields' and if it doesn't have a JORC resource, how much work needs to be done in order to establish one?
Greenfields proposition.

8. What is the potential size of the deposit?
Too early to estimate.

9. How much cash has the company budgeted to spend on the ground at the project during 2006?
Still an application so no funding allocated in 2006.

10. What is the company's current cash position?
As at December quarter the cash position was $3.8 million.

11. Which contractors/consultants has the company been/intend using?
Not yet determined.

12. How is the project located in terms of infrastructure?

13. How far away is a potential development? What is the potential size and timeline?

14. What are the potential capital/operating costs of the development? When will you likely know?

15. What are the main hurdles to reaching a development decision?