17/12/2009 - 00:00

Get ready to hunt out ‘disconnections’

17/12/2009 - 00:00


Save articles for future reference.

Speeding fines all part of the business for Sandfire Resources.

VALUE disconnection, of the sort Bystander explored last week by comparing two uranium stocks – Manhattan Corporation and Energy and Minerals (EMA) – has spilled over into other commodities, with copper providing the latest example.

Sandfire Resources and Vulcan Resources are both exploring for copper, the metal widely regarded as the next best thing, given growing global demand and limited new production.

But while a comparison of their assets reveals interesting parallels, their stock market values show a 13-fold difference, with Sandfire screaming up to $345 million courtesy of a share price rise from 5 cents to $3.43, while Vulcan has been stuck in the basement at $26 million with a share price crawling up from 5.5 cents to 11.5 cents.

There are good reasons for both companies to perform in the way they have, but a 13-fold gap is curiously wide, similar to the five-fold gap between Manhattan and EMA and prompting the same question: is one over-valued or the other under-valued?

Since this is an investment advice-free zone it’s best to just look at the facts.

Sandfire first, because it has made a fabulous discovery at its Doolgunna project halfway up the Great Northern Highway between Meekatharra and Newman.

Last week, Bystander took a day off for the joy of six hours in a 27-year-old Cessna, dodging Gascoyne thunderstorms to take a closer look at Doolgunna and the remarkable drill cores being pulled out of the Conductor 1 and Degrussa structures.

Despite setting this year’s record for stock market ‘speeding fines’, with four please explain notices from vigilant ASX staff watching the Sandfire rocket, there is no doubt that the company has discovered a copper mine, and perhaps more than one.

The nature of the mineralisation at Doolgunna means there is a high chance of repeat structures, with the company most likely to share in the discovery being Talisman Resources, the latest plaything of nickel mining’s half-billionaire, Kerry Harmanis.

According to a November 17 estimate by the stockbroking firm, Bell Potter, Doolgunna’s first mine is likely to produce 50,000 tonnes of copper a year, plus 60,000 ounces of gold, which boils down to a net present value of around $346 million – remarkably close to the company’s current stock market value.

Vulcan’s best asset is the Kylylahti copper, gold and cobalt mine in Finland. It has struggled to get the mine across the feasibility finishing line, and is in the middle of a complex merger with another copper company, Universal Resources.

On Vulcan’s numbers, Kylylahti has a net present value of $US149 million ($A163 million) which is roughly half what Bell Potter says Doolgunna is worth, a comment on a much lower ore grade in Finland.

If everyone is using the right data for their best guesses then Vulcan’s value should be a lot closer to half that of Sandfire, not 13 times less.

This ‘back of an envelope’ exercise is largely for the amusement of readers, though serious investors will get the point, that the next phase of the stock market will be all about hunting out disconnections, and identifying stocks which are under-valued relative to their peers.

Go figure

THERE is another theme emerging for investment next year, and perhaps the next decade, and that’s ‘sell people, buy power’.

The people-selling observation is based on a number of recent developments, including the astonishing mistakes made by government and private economists about the state of the labour market, rising union militancy, and the looming skills shortage.

Rather than head for an unemployment rate of between 8 per cent and 10 per cent, Australia’s unemployment rate is now said to peak at 5.7 per cent, with labour shortages emerging in certain industries.

Good news as that is for most workers, it is a wake-up call for investors. Companies that employ a lot of people will be easy union targets.

Just as the Australian government got its immigration policies so totally wrong, so too has it botched its employment and labour relations laws, and perhaps its showpiece carbon trading laws, which the rest of the world is ignoring.

The power-buying advice is merely stating the obvious.

While Copenhagen delegates argue about global warming, climate models, and future temperature trends, and hopefully do a better job forecasting than Australia’s labour market economists, the price of coal shares continues to rise strongly.

In an exercise as amusing as the copper and uranium “disconnection” studies, Bystander was able to demonstrate that, since July, a basket of Australia’s top six coal stocks has delivered close to double the price rise (up 27.4 per cent) as a basket of the top six energy renewables stocks (up 16.8 per cent).

The gap speaks loudly about where money is flowing (into coal) as well as the increasingly discredited art-form of modelling, which seems to be a case of garbage-in and garbage-out, generating misleading results, bad government policy, and inaccurate investment advice – and that’s before we get to the big one, climate modelling.

Overzealous ASIC

IF investment and climate modelling are disconnected from reality, consider the absolute disconnection of Australia’s corporate regulators in their latest bruising legal encounter, this time with former AWB boss, Andrew Lindberg.

If a private sector employee had been told by a judge that his actions had brought “justice into disrepute”, or that Mr Lindberg had every right to feel “unjustifiably vexed and oppressed”, then he or she would be demoted, or sacked.

What happened at ASIC, fresh from its $35 million failure to prosecute Jodee Rich? Nothing. Not a peep. No apology. Business as usual, and that can only mean more wasteful prosecutions of tall-poppy targets will be increasingly common as some low-paid public servants conduct a class war against the private sector.

Home on the range

GOING farming? Bystander hears on the old boy’s network that his favourite nickel half-billionaire, Kerry Harmanis, has been dabbling in rural property, snapping up a farm in the Wandering/Bannister area. Perhaps it will be for a change of pace, or perhaps it’s a piece of land close to Australia’s newest and biggest goldmine, the Newmont monster at nearby Boddington.


“The longer the title, the less important the job.”

George McGovern



Subscription Options