-- Posted Monday, 24 May 2010 | | Source: GoldSeek.com
By: Tony Locantro
The event causing the most stress in my life is that Mother of all volcanoes in Iceland that is threatening to derail my trip of a lifetime. I promised my partner that if Pearl Jam ever announced a major European tour we would follow them to a number of concerts and at the same time take in some sights and a well earned rest.
In order to secure the fan tickets I was forced into some hideous online battles on a number of fronts. At times the website was utter chaos and I thought I had them in the bag only to be denied once I tried to checkout. The Dublin concert was rumored to have sold out in 4 minutes and despite my success it was an experience I do not want on a regular basis. Joining the ranks of brokers in 1998 I was never personally heavily exposed to online trading, and now from an interesting vantage point it is a comedy of errors when stocks are rallying hard or being belted into next week
Just as budget airlines have taken the romance out of flying, the romance associated with good old fashioned stock speculation has disappeared also. There is very little pride in ownership (not like the days of stock certificates), and more derivatives than you can poke a stick at. I derive (no pun intended) considerable humour from the explosion in derivatives from stock market products to dark chocolate strawberry cherry ripes that you are tempted to pick up from the discount bin whilst suffering a massive hangover. Long-dated company options and some puts/calls (writing) are like your Diet Cokes, your Hot and Spicy KFC, or your Jetstar if you don’t mind flying from Perth to Sydney on the red eye to save money. They are fine as long as they backed by something and cannot blow a country’s balance sheet out of the water.
Many high quality home builders during the first home housing bubble created cheaper alternatives to capture a new market, and again if the quality is there this is a good thing. Bring in the installation debacle and all of a sudden you have children laying pink batts in one of the biggest rorts Australia has ever seen.
“One of the key components of any bubble is the massive increase in corruption and rogue operators attempting to cash in”
Now the installation balls up brought out many catch phrases like, “How can we sleep while our batts are burning” and the great Australian tradition of taking the piss (not in a Hey Hey Its Saturday sense) was alive and well. Poor old Pete lost his environmental post and egg was wiped from the face of the Government but Australia soldiered on through this and our economy was in cruise mode. Our Reserve Bank was lifting rates, housing prices were recovering, and our resource sector was being swamped by the Chinese. We were the envy of the entire world, Australian was open for business and just like the Swedes, Mexicans and Japanese before us we were perhaps heading for our own version of “bubblevision”.
Just imagine your standing in line on a Saturday night after a massive night out waiting for a taxi when all of a sudden you are king hit from behind. This was it what the Resources Super Profits Tax (RSPT) felt like when it was delivered. I am not going to enter a lengthy debate on the tax, but what in the bloody hell were they thinking? I got the impression that they were proud of such a measure and it would be well received, just like Pearl Jam fans would be more stoked than a pro surfer to hear that I would be replacing Mike McCready on this tour.
Now we are seeing the biggest tantrum since primary school being thrown from the mining sector and to an extent rightfully so. He who has the most coin can take out advertisements in the paper, write open letters to Kevin Rudd and that’s all well and good, but if they cannot understand the basic gyrations of the stock market and how mining projects are riskier than a Government bond then how much hope do we have?
During the week there wasn’t that much on TV so I flicked over to CNBC and watched a partial interview with a hedge fund dude from the US. He was boasting how they were shorting the buggery out of the Aussie dollar and others were following suit. Great stuff, here I am about to embark on a 4 week European trip and my spending money is being blown to smithereens by what I consider to be punters. Now this is the slap we are copping post major resource stock bloodbath that saw anyone remotely with a profit i.e. doing what mining companies are supposed to do, being hammered by local investors then perhaps shorted by the foreigners.
To add further insult to injury, Australia had just been voted one of the safest and best countries to do business in only days before it all hit the fan. Sure you mightn’t run into soccer hooligans, or illegal miners in downtown Meekathara, but heaven help you if you stumble onto a mineral discovery that returns more than 6% pa.
I cannot blame the Canadians for jumping all over our RSPT balls up and putting out the welcoming mat. I am sure Nova Scotia is a lovely place and would be like watching “Men In Trees” but it sure is mighty cold and how quickly do you think you can get anything into production anyway. By the time a mineral deposit is discovered it can take many years to complete even the basic permitting, before a project can even move into feasibility. Imagine going to a home builder and your quoted 7 years for a basic two storey house?
After watching the New Zealand budget being delivered, I was even thinking that perhaps we could create another Bondi somewhere on the North Island. Australian’s take great pleasure in bagging our dear friends across the ditch, but many wouldn’t know that the New Zealand accent was voted the sexiest of the English speaking language, and you only have to watch Yes Man to see just how funny Kiwi’s are in the company of the likes of Jim Carrey. I didn’t think South African’s were all that funny either till I watched District 9. If D9 is the only thing you take away from this article it has been worth your while. This movie was the first in a very long time to give me a truly WTF was that moment! I cared more for the Prawns in this movie than I did for the characters in the much hyped “The Pacific”. Mind you they did produce Band Of Brothers and that will live with me for a very long time so Tom and Steven you are forgiven!
“Sure many countries might try and woo potential foreign investors, however the fear is that Australian might have provided a nasty precedent that will see other Governments embark on major tax grabs and provide pain for miners and investors on a global basis”
As I move towards providing some market insights and looking at opportunities for the future I think it’s necessary to declare my agenda. I have elected to deal in the mini caps of the market and focus on junior exploration companies. This could involve floating a $3m company, or buying up to 30% of tiddler on market that meets my stringent criteria amongst a variety of investors (mainly Mums and Dads). This is the area I am passionate about and it is all about risk and reward and providing multi-bagger returns for clients. Whether or not this comes from a major discovery, an acquisition or benefiting from a bubble e.g. lithium or hopefully geothermal in the future the right people tend to find the right projects whether through the drill bit or being so well regarded in the industry that a major is willing to hand over a project that is a company maker for the junior taking it on.
There has been some major VTEM or EM surveys being completed in Australia and there are some very exciting exploration programs ahead. Whilst speculators mightn’t find these announcements interesting there are certainly clues provided as to what project might have a decent chance of success.
“Regardless of world markets, one of the common themes throughout history is that in the event of a significant mineral discovery by a junior explorer there is always the chance of a hefty re-rating no matter what commodity or precious mineral is discovery”
SPECULATIVE MARKET OBSERVATIONS
Ø I refer to some parts of the financial press as “Bricklayers at the wall of worry”. With the RSPT, Europe, the AUD being shorted into oblivion they are dining out on world events. Interviews with bulls, bears, ostriches (not the Hey Hey Its Saturday variety) can only serve to confuse investors and increase the fear factor. CNBC showing protestors in Greece battling Police whilst running a Dow ticker is hardly going to inspire anyone to buy shares in Gillette or McDonalds on that day. When markets are falling we are drowning in negativity, very few are prepared to state the bullish case and every single correction feels like the end of the world. Those that bought a grab bag of Australian icons at the heights of the GFC did very well, and history has shown that if you buy quality at the right price you will outperform the index.
Ø Australian resource stocks have been sold off heavily. Even those barely profitable or yet to become so have not been spared in the malaise. Some of my clients are refusing point blank to buy one of these companies and would much prefer something in Liberia. (They will stop at Soda ash in Somalia though). Sentiment is at or near rock bottom, and I shudder to think how some companies will raise capital despite the proposed 30% rebate on exploration costs.
Ø Iron ore, coal and coal seam gas bubble has burst for now. It was starting to get ridiculous with massive amounts of money being thrown at magnetite projects i.e. low grade iron ore, or MOU’s signed for huge gas sales to China. Australian gold producers would have killed for the valuations being thrown around for anyone with some Fe or gas on their ground. There was a frightening amount of money made through M&A’s in particular but who would have thought it all ended as a result of a proposed tax?
Ø The West African gold bubble for ASX listed companies has been stunning to watch but has got the wobbles in recent times. The thought of gold trenches and drill sample bags with elephants as a backdrop is far more appealing than local ground, so why would anyone want to buy Australian? Foreign investors must be thinking the same thing as the capital raisings and opportunities are being lapped up by overseas funds that have no fear of exotic locations. There have been some major resources proven up and these companies will prosper, however not everyone with a Po Box on the Ivory Coast is set for instant riches. The press have latched onto the West African gold story and it has been getting some decent mileage, however many inexperienced investors could already be setting themselves up for considerable losses. I always thought a decent gold bubble was overdue, just got the wrong address this time.
Ø Geothermal and alternate energy sector at the moment is as dead as a dodo, but could provide the ultimate contrarian investment. It is amazing how when oil is knocking on the door of $140, the press is saying it’s going to $200 and it is going to run out in 30 years. Now with the price struggling at $70, it is on its way to sub $40 and will last forever. What to believe here? Anyway I really like geothermal and believe it has potential so we have taken massive positions in two companies involved in the sector. Interesting to note that many people I discuss the sector with feel the same way, and any traction followed by the press following through could see things get interesting again.
“The speculative sector in Australia is fast becoming one without a bubble. Numerous were running concurrently, and with some of the heat coming out the West African gold story, once the severe volatility passes, other sectors of the market may come in for greater attention and hence there lies the opportunity”
Ø During the GFC every stock was being belted indiscriminately. This correction for now appears to be different in that I am seeing some rotation into the gold stocks, some ethical fund buying in the alternate energy sector and relatively strong market depths that were non-existent during the GFC.My clients are more “pissed off” than scared, and many are totally dumbfounded at what has happened to Australia. Sure many of our companies are explorers and may ultimately benefit in the long run but this has left a really bad aftertaste.
Ø Rallies in companies reported strong drilling reports are short-lived. Pre RSPT the re-ratings were far more powerful, but with so many stale bulls out there and cheap placement stock still floating around the new and inexperienced buyers are easy pickings. I would expect this to slowly change, but the odd stock rally provides some ammunition for other opportunities.
Ø Mining conferences are still dominated by the industry talking to itself. Companies who have rallied 20-50x already in price get the full house treatment. It was embarrassing to see half the audience walk out at the start of a juniors presentation, especially considering management are a class act (found plenty of tax dollars for Australia previously) and are about to drill a very attractive target. I always thought the best upside was achieved by buying prior to a major mineral discovery? Or perhaps I have been mistaken all these years. If mining conferences all of a sudden become a great to “pick up” I would suggest it would be time to be selling everything.
Ø As share prices were being trashed I was standing their speaking to mining executives at their booths going about their business. They were not out drilling dud holes, fumbling over shocking BFS’s, and struggling to pay their office rents. As investors and those addicted to financial websites were working themselves into a tizz, it was business as usual for the industry, and I cannot see some damage on the scoreboard stopping a dedicated explorer from hunting elephants. When markets are acting irrationality and feel surreal even a small dose of reality can be extremely valuable.
Ø There is a lot of money on the sidelines. These funds are chasing takeover targets, new projects, new people, and investments. Australia was on the cusp of a major explosion in M&A activity, however the RSPT has killed this off. Some of this money will be returned to shareholders (as one high-grade but neglected gold producer is planning to do), but where is this money going to go? Market malaises often lead to powerful rallies on the flip side, and the pressure was certainly building.
PROFIT OPPORTUNITIES IN AUSTRALIA
From 12 or so year’s frontline advising to hundreds of people in all types of markets I have learnt what works over the longer-term and what doesn’t. I can see what clients do wrong, and where they go right, and can say that there are no short-term solutions or formulas that will cut out sheer hard work. My second book is on track to rival Axl’s Chinese Democracy in time taken to be released, however unless you have the right personality is going to be near impossible to have the right portfolio or learn anything from what I have written. Cutting through the BS here are some thoughts,
Ø If you buy a basket of blue chips when the index i.e. All ords or ASX 200 is low and set to rise you should make money. If you are lured in at the top you are going to go down on paper and any short-term investments become long-term ones. Those who bought the Nikkei at 90x earnings (yes that’s right) have endured a long bear market, however there were plenty of powerful rallies in between. The moral of the story is buy low and buy value. Just because a company has a great product and is well loved, doesn’t mean you will make money from it.
Ø Australian mid cap mining companies bounced in spectacular fashion in the GFC. Some provided 4-5 baggers and some were even trading at cash value. Apply the same here as you did in the first point. Buy quality, buy low and if you can afford to buy lots. There is going to be some major consolidation and M&A activity in this space. Some companies are still yet to recover from the GFC and if you look carefully you can find millions of JORC resources + exploration ground for shell value.
Ø The AUD gold price is now over $1400oz. Some Australian gold producers are now looking at $800+ margins and with financing just completed some have been able to hedge at very attractive levels. I understand what many think of hedging and there are extreme views out there but there is going to be a massive build up in capital in this sector looking for a home. A select few Australian gold producers could become cash rich and asset poor and there could even be some diversification into base metals as the sector is battered and bruised from the attack on commodities and the AUD.
Ø Down the food chain why not try and pick a sector that could offer potential. Now that we have had lithium go gangbusters why can’t something else? My clients benefited greatly from one lithium stock, but are being let down on the scoreboard in the geothermal space. Shale gas was all the rage at a recent Sydney oil conference and has been bubbling in the US for some time and must be rated a chance. The next big thing is hard to pick with sentiment so low, however those who can spot the early warning signs will probably wait before deploying cash. Those prepared to buy now and who correctly pick the right sector should be rewarded handsomely before the money flow takes over. Without index momentum it is very much a stock pickers market with the potential for further opportunities with tax loss selling set to intensify into June 30 2010 (obviously referring to Australia here)
Ø Where is the next potential geological hotspot post Africa? Could it be South America, Mongolia, Madagascar, Mozambique, Canada, or across the ditch. Burkina Faso has gone nuts on the gold side but what else is the country rich in? We have a large amount of funds riding on a Canadian gold bubble of sorts and surely advanced projects would benefit from generous Government assistance as opposed to taking the nationalistic approach.
Ø It is really exciting to see a company present at a conference that has drilled into a monster. Those with the smallest of market caps become institutional heroes and surprisingly they all seem to fit into their new positions perfectly. Some of my greatest success stories have come through major mineral discoveries and now that we are able to buy RISK on the cheap the upside potential has been enhanced by the world wide pandemonium. It takes considerable time to work out the genuine explorers in the industry and who will provide investors with the best possible odds. It is interesting to note that most of these companies are now trading at under 20c per share and some even have their market caps supported by resources, cash and/or investments.
Ø Another opportunity lies in acquisitions where industry professionals from larger mining companies go into business for themselves. They are the ones able to get the funding support to purchase projects that the lifestyle players could only dream about. There are a number of juniors out there with very supportive major shareholders and JV partners that will rely on their expertise to work on green and brownfields exploration. Now with the so-called exploration rebate, surely the majors must be tempted to make further inroads into the junior space. Just like the top quality exploration companies you can pick some of these up for under 20c per share. Funding shouldn’t be a major issue either as surely big brother isn’t going to let the little one get beaten up too much.
The key formula to investment success is to BUY LOW AND SELL HIGH. No amount of market regulation, gyrations or trading on the short side will change this. The routing of the AUD and our local share market has seen value again reappear post GFC. There is an argument that the Government has produced the worst case scenario with the RSPT and that it could yet be watered down. This would provide an impetus for a number of our resource companies to undergo share price re-ratings. The European situation is not going away in a hurry, however Australian could stand to benefit on a number of fronts. Technology has the potential to interrupt and disturb markets but it doesn’t have the potential to change human behaviour which I have worked out is the main driver of either profit or loss. Fear is temporary, greed is perpetual and human stupidity is infinite.
“I change by not changing at all”
Eddie Vedder Pearl Jam: Elderly Woman Behind The Counter In A Small Town
Tony Locantro
Personal Disclosure: I have personal holdings in speculative shares in gold, silver, base metals and industrial sectors and may at times liquidate or increase these holdings as I see fit. My clients have considerable investments in a number of companies and may sell these without notice
Disclaimer: The opinions contained in this article are purely my own and any prior to any investment decision you should contact a licensed financial adviser. Speculative shares are volatile, should be considered high risk and can result in significant financial losses. I earn fees from trading and raising funds for junior resource companies.
About the Author: I am an advisor to hundreds of small to medium investors in the speculative sector of the market and have been since November 1998. In 2001 I wrote "The Green Room" A Guide to Speculating on the Australian Stock Market and have run a number of presentations. I am currently writing my second book and it should be ready for publication some time before 2015. I have a small number of books left (about 3) and am happy to send these out to prospective clients free of charge.
If you would like further information or are interested in becoming a client I can be contacted at tlocantro@iinet.net.au
-- Posted Monday, 24 May 2010 | Digg This Article
| Source: GoldSeek.com
