04/07/2006 - 22:00

All eyes on cash, rates and distribution

04/07/2006 - 22:00

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Watching cash sounds about as exciting as watching paint dry, but for the rest of 2006 cash will be the big topic in every market for three reasons: its price; in the form of interest rates; and the tricky questions of who’s got it, and who hasn’t.

The bad news first. Some people who risk being exposed as cashless are mineral exploration companies floated over the past three years, and possibly thinking about a capital raising to keep themselves afloat.

Heavy share price falls among the explorers in May killed off those plans, just as it became a lot harder to float a new explorer.

The problem for the late movers is that they now face the embarrassment of having their cash balance revealed to the world every three months. And if that balance is less than $1 million it becomes hard to imagine how they can survive for long, given the high costs of running a company, and the perils for directors of trading while insolvent.

The first round of serious cash watching starts in about three weeks, when mining and oil companies lodge their June quarter reports. Until now, most interest in these routine documents has been in the exploration news, a sort of who’s-drilling-for-what-and-where exercise.

But the sharp decline in stock market sentiment, coupled with a severe bout of flopped floats since mid-May, means that most analysts will flick quickly through the management blurb at the front of the June filing to check the cash report at the back.

It’s a fair bet that some of the 200 or so small resource companies floated into the boom that has been rumbling through the market for the past three years will have very little left in their bank accounts.

This would not be a problem if the market had not deteriorated so quickly. Until May it was easy to raise a small pot of cash from investors eager to buy some chips in the casino that all boom markets are.

Today, it’s a different matter, as shown by the float flops. Good companies will get some money, but at a price. Bad companies are doomed to a life of frugality as they try to survive off what’s in the bank, unable to explore and unable to deal.

Understanding the more cautious approach of investors to the small end of the resources sector is easiest to explain after looking at the performance of some recent floats. Rey Resources, for example, listed on June 5 at 20 cents and is now trading around 13 cents, a 35 per cent fall in a month. Panaegis Gold listed its 20-cent shares on June 20, and is also now down around 13 cents.

Ouch.

•••

Now the good news. As Briefcase was saying last week, the overall outlook for the stock market is not as bad as some analysts would have had us believe at the height of the May/June correction.

Last week’s 0.25 per cent rate rise in the US is widely seen as the last for some time, so now it’s possible to work more detail into how the economy will behave, and how that will affect corporate profits.

But hidden beneath this big picture stuff is where an astute investor might find the occasional upside surprise in the form of a company with more cash than currently meets the eye.

The category Briefcase is watching most closely is the small resource producer; not the explorers, and the hopeful miners of the future, but those actually in production and enjoying high prices for base metals, oil and even gold.

Stock such as Kagara Zinc and Perilya are riding high on the zinc price. Small oil producers, such as Amadeus and Beach, should report stronger-than-expected profits, as might some of the small nickel miners. Mincor, Jubilee and Minara should have been socking it away with the nickel price averaging close to $US8.50 a pound over the past six months.

Briefcase, as ever, gives no investment advice, it merely suggests that small miners in production over the past year might have the capacity to surprise when reporting season kicks off in August.

•••

Testing the theory that some resource companies are quietly amassing substantial cash hordes is not hard, even if it means dispelling conventional wisdom, which says the resources sector stumbled badly in May.

True, it stumbled on the stock market. But, it certainly didn’t stumble in the real world of commodity prices.

A call of the card at the London Metals Exchange shows that while a correction was experienced about two months ago it was little more than the froth being blown off an overheated market.

Copper, for example, was trading around $US1.70 a pound at this time last year. It peaked at $US3.75/pound in late April, but is still trading around $US3.25, close to double its price of 12 months ago. Some correction.

Nickel was selling at $US6.50/pound a year ago, peaked at $US10.60/pound and is now $US9.70. Zinc was US50c/pound, peaked at $US1.70/pound and is now around $US1.40.

In most cases, metal prices today are roughly double what they were 12 months ago, and showing every sign of staying high for some time as supply struggles to meet demand.

In other words, the stronger for longer metals market theory remains intact and companies in production are doing very nicely.

•••

Now for something completely different; outcomes based education. Like most observers of this debate, Briefcase has struggled to understand what OBE means – and doesn’t that say something about the so-called educators in the community.

But the scales fell from the eyes of Briefcase when the NSW Education Minister, Carmel Tebbutt, used one word to explain what it’s all about. That word is ‘content’ or, at least, that’s what’s missing from OBE.

Rather than learning a subject in depth, OBE students will learn enough to pass. Briefcase understands this perfectly because its similar to a form of journalism with which it is familiar, called ‘once over, lightly’ – a particular poor form of the scribblers’ art, even if it does help fill holes in pages on thin news days.

•••

“The chief cause of problems is solutions.” Eric Sevareid

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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