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Boom slowing fallout clearer

PENNY dreadful nickel stocks, in case no-one noticed, ran out of puff last week with some notable falls as the rotary lie detector, also known as the drill bit, delivered a few sobering assay results.

Western Areas was the major victim, down 24 per cent to $1.49, which took the decline from the 52-week high of $2.20 to a rather painful 71 cents, or a 32 per cent slump – which, at another time, would have been called a crash.

By the time Briefcase hits the streets all may be have been forgiven and Western Areas could be on the way back up. That’s the nature of speculative share trading hype. Not to mention the risk of a weekly publication.

However, whether a single plaything of the day traders is up or down is irrelevant to the big picture unfolding in the world of metals and to the question of who is really making money from the current over-hyped boom.

First, the big winner. Surprising to its many critics the company pulling in cash from every direction is WMC.

Soundly rubbished for selling a string of small Kambalda nickel mines that created viable business units out of Mincor, Independence and a few other tiddlers it seems that WMC has really been rather smart, and scored a triple winner.

Sales of mothballed mines, at steadily increasing prices, produces cash.

Nickel concentrate is being delivered to supplement declining supplies from the Kambalda smelter.

And, every tonne of concentrate is processed at a fat fee, which no-one questions because WMC has the only nickel smelter within, oh, about 10,000 kilometres.

Rather than being rubbished, WMC management might actually deserve a bit of praise because by selling the mines (and they are too small for WMC to operate) and standing in the market as a buyer of concentrate (and ore in some cases), the current nickel boom has been allowed to happen.

If in doubt, apply a dollar test. Since July 4 the WMC share price has risen from a 12-month low of $3.26 to a high of $5.31 on October 14, and back to around $5.

Put another way, shareholders in WMC have seen the value of their business rise by more than $2 billion to around $5.5 billion today, a level which is comfortably above the market capitalisation of all of the small nickel stocks combined – and may explain why WMC staff at last week’s nickel conference in Perth were so happy as they handed out WMC key rings and stress balls.

Now that we know who’s really winning, what about the big picture?

Last week it was suggested that a bit of caution was required. This week, there are very real, though admittedly faint, alarm bells ringing.

Two reports, one from the Morgan Stanley office in Hong Kong, and one from Citigroup Smith Barney in Sydney, have raised questions about whether metal prices, in the current upward surge, have peaked.

Citigroup says the nickel price “has already been driven to unsustainable highs”. Substitution, such as plastic sinks rather than stainless steel, is an example, of the emerging threat.

Morgan Stanley approaches the nickel bubble (sorry about that word) from a different direction.

It says much of the Chinese buying has been by speculators and hoarders and that regional Chinese banks are getting worried about credit quality, just in case the stockpiles cannot be sold at the price paid.

Which all makes for interesting food for thought as share traders do what they always do and deal as if a market can never fall.

 

THERE must be a reason why managers choose stupid names for companies, though it’s hard to imagine what that might be.

Alan Newman, one-time boss of Futuris has Gheko Capital as his private company (Gheko as in Gordon Gheko from the movie Wall Street).

Independence Gold chief executive, Chris Bonwick, says his wife owns a company called Virtual Genius, which is a big shareholder in Independence and, presumably, named after hubby.

But the name which takes the cake because it is so strange is Monadelphous, a local engineer which appears to be named after “filaments united into one bundle” or related to “plant stamens”, according to my dictionary.

For investors, however, it seems that the strange name is not a turnoff, quite the opposite. Over the past year the stock has risen from $2.65 to $4.91 before easing back last week to around $4.48.

What’s driving Monadelphous is the rising tide of mining and civil engineering work which is also underpinning the big players, such as Leighton Holdings.

The outlook, if you believe half of what is promised, is for more of the same with profit steady this year at around $7.5 million, with much of it being paid out in the form of a 26 cents a share dividend – which makes Monadelphous one for the serious believer in backing second-tier stocks.

 

A FINAL word on those strange creatures called day traders.

Last week they hit the share register of Cullen Resources like a school of starving sharks. On October 20 they swapped 114.7 million shares among themselves, or 35.7 per cent of the company’s issued capital.

The share price opened at 5.1 cents, shot up to 8.2 cents (a 60 per cent gain), and closed at 7 cents, which should have produced good profits for some of the players but begs the question about what’s different between day trading and a day at Burswood.

 

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