04/04/2006 - 22:00

Explorers digging deep into investors

04/04/2006 - 22:00

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Curious things have happened in Perth in recent weeks. The most interesting is the boom in uranium shares. But not far behind is the legal struggle between Fortescue Metals and the forces of darkness (sorry, the government), while bringing up the rear are our rising property prices when the rest of the world is in decline.

On the uranium market, well, let’s start by being honest -- among the companies which say they’re exploring for uranium, fortunes are being made; not from digging a thing out of the ground, but by mining the pockets of investors.

The dollar figure of what’s been happening is impossible to pin down but it seems to Briefcase that at least $1 billion in additional “wealth” has been created almost overnight – and from nothing, a trick to make best medieval alchemists blush.

The reason the chaps from 1000 years ago would have red faces, if they were alive, is that they devoted their lives to changing materials. The most popular attempt was to convert lead into gold.

Where the alchemists failed, good old Aussie speculators have succeeded. They have converted companies owning paddocks full of kangaroos and spinifex into overnight stars, creating in the process mega-millions of dollars.

Even Paladin Resources, one of the very rare uranium hopefuls on the way to becoming a uranium miner, is an example of the alchemists at work. While most investors simply look at the share price rise, from one cent a couple of years ago to a recent peak of $5.40, the real result is to convert a company worth about $10 million into one today valued at $2.1 billion.

In Paladin’s case, there might be a genuine reason for that astonishing rise. But, the new market value means that pressure is now on management to deliver the earnings to justify the share price. For Paladin, that means producing enough uranium to post an annual profit of around $200 million – possible, but a hard ask.

Moving away from the one dinkum future miner, Briefcase travels to a world where values become all but impossible to justify, a place inhabited by companies such as Toro Energy, Globe Energy, Hindmarsh Resources and Summit Resources – and perhaps another 40 in the same category of “roo pasture” explorers.

True believers in the great uranium boom of 2006 will accuse Briefcase of being unkind, if not rude. They will say that companies like Toro can justify their market value because of impeccable credentials, such as the backing of Oxiana Resources, Minotaur Exploration, Newmont and BHP – not to mention an all-star cast of directors.

But, where Briefcase has to pause for breath is the rocket-like ride in Toro shares from an issue price of 25c to an 86c first sale on March 24, to a trade at $1.49 on March 28 (the third trading day after allowing for a weekend). For an initial investor, the top to bottom ride was 500 per cent over a time measurable in hours, not just days.

Toro, which has some genuinely interesting exploration prospects, no doubt complete with the odd family of roos and emus in South Australia and a very pro-uranium state, could one day be a world-class uranium producer. But, that day is an awful long way off and the truth today is that it is nothing more than an explorer – something the speculators seem to be overlooking.

Seasoned old hands, like stockbroker Bruce Benney, shake their heads, not in amazement, but simply because they have seen it all before. Benney came in during the original nickel boom (as did Briefcase) and watched stocks like Poseidon and Tasminex rise and fall. He also saw the dot.com boom, which was based on even shakier credentials than Poseidon, and reckons that this uranium boom has dot.com written all over it.

“I just copped the Poseidon boom, but that was small compared to what we’re seeing today,” Benney says.

“A closer parallel is the dot.com boom, and that’s probably the same people coming back for another bite, now that they’re had time to catch their breath.”

Touché, Bruce.

•••

Strange happening No.2 was to be found in Federal Court No.2 when Fortescue Metals Group, its chief executive, Andrew Forrest, and lawyers representing the Australian Securities and Investments Commission, made their first appearance before Justice Nicholson.

Daily media reports on that encounter hung on the outraged words of lawyer to the stars, Martin Bennett. His courtroom remarks about ASIC’s deceptive conduct charges again Forrest being “hideously defective” gained the desired headlines.

But, as Briefcase sat in the court, and watched the smiles on the faces of ASIC’s lawyers as Bennett did his duty for his client, a few thoughts occurred.

The first was why Forrest and Fortescue have separate legal teams? The answer is probably because of subtle variations in how a company and an individual are charged, and treated by the law. Not that this explains why the two teams were not seeking the same terms for future dealings. Fortescue’s lawyers are seeking to “resolve” the matter with ASIC. Forrest’s lawyers see no reason to confer, just a demand for the charges to be struck out.

And all this leads to the second thought. Why was there so much thunder and lightning at a directions hearing where dear old Justice Nicholson just wanted to set a date for the next day in court, a tortuous process that took 45 minutes. Imagine what will happen when the real arguments start.

•••

Strange event No.3 – property prices. Sadly, we’ve run out of space this week. Just consider this thought: US interest rates rose again last week. The gap between US rates and ours is now miniscule, whereas it was once large – hence the falling value of the Australian dollar.

When, not if, the US raises rates again (probably in May), something must give in Australia. Either our dollar falls further, which is good news for the miners, or inflation becomes a serious worry, or both.

If the Reserve Bank joins the global game of raising interest rates, more than few pips will squeak in the property lemon – except Perth, which is immune from global currency forces (said quickly by Briefcase while sticking tongue firmly in cheek).

•••

“Some men are born mediocre, some men achieve mediocrity, and some men have mediocrity thrust upon them.” Joseph Heller, in Catch 22.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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