Reformed offenders on the rise

Reformed offenders on the rise

Over-promising and under-delivering is the cardinal sin for companies listed on the stock market, as investors in three stocks under the Briefcase microscope know all too well. Computronics, Elkedra Diamonds and Dragon Mining have, at different times, been told to sit in the corner – or wherever it is that naughty companies are sent these days.

Computronics, which has a grab-bag of smart technologies in its portfolio, failed to perform on listing with its 35c shares sinking almost from day one to a 12-month low of 15 cents.

Elkedra launched itself into an extremely ambitious diamond exploration project in the Northern Territory, and watched its share price sag from 17 cents to a low of 7.4 cents.

Dragon disappointed its original supporters with a bizarre scheme to produce iron balls for the mining industry direct from a nickel-rich resource called Range Well and all but disappeared a few years ago.

Apart from their time in the sin bin a casual observer can see nothing in common between the trio. A deeper look reveals the twin-threads that bind them. First, they remain unforgiven in the eyes of many investors who have a traditional view of the market and believe that once a miscreant, always a miscreant. Second, that view is wrong – in all three cases.

A fresh look at Computronics, Elkedra and Dragon shows that time has taught them its lessons, healed the wounds (and wounded the heels) and put them on a much better business path.

In reverse order, Dragon (ASX code: DRA) has embarked on a remarkable odyssey that will soon see it emerge as a small gold producer but with firm plans to become a much bigger producer from next year. Its biggest problem is that the first mine is in the far north of Sweden, and the next two (or three) are in Finland.

The Svartliden mine will be pouring its first gold around August or September and become a regular annual contributor of 50,000 to 70,000 ounces of gold at a modest $US160 an ounce. The Jokisivu mine in Finland will follow, then the re-opening of either the Orivesi or Pampalo mines, which were originally developed by the big Finnish mining group, Outokumpu, but sold to Dragon last year in what will (one day) be seen as the company-making deal for the one-time steel ball dreamer.

On the market, Dragon has been a solid performer over the past 12-months but has eased back recently to around 28 cents, in modest trading as a few newcomers discover the Dragon story and jockey for a seat at the table ahead of the critically important first gold pour – proof that Dragon is a reformed offender.

Elkedra (EDN) has nothing as silly as steel mills in its kit bag but it did undertake what might be called the world’s most ambitious exploration program. The grand plan is to rummage around (with the latest electronic tools, naturally) an area known as the Altjawarra Craton in the Northern Territory, an area that would comfortably absorb most of Tasmania – looking for diamonds, or chips of diamonds.

The proverbial needle-in-a-haystack had nothing on this plan, though to be fair, sniffs of indicator mineral and the odd chip of diamond has been found – while the Elkedra share price sank slowly in the west.

The Altjawarra dream remains, but Elkedra has its company-making deal underway via a merger (call it a reverse takeover) with Chapada Diamonds, a company with its foot on a Brazilian diamond project and a plan to raise more cash, list on London’s alternative investment market (AIM) and become a modest gem producer from next year.

Like Dragon, the Chapada deal is in the over-the-horizon category, enough to frighten the xenophobic locals but a big turn-on for British and European investors who have a greater comfort level with Brazil.

Elkedra’s spreadsheet shows a fast route to profit (it would say that, wouldn’t it) with forecast annual revenue of $20 million from the production of more than 30,000 carats a year, and a net profit of $7 million. The margin on Chapada Diamonds, which are in a well-proven resource that has been raided by itinerant diggers for decades, is a handsome 50 per cent thanks to the very high gem content and a value of more than $US400 a carat.

On the market, Elkedra suspended itself (and no, that does not mean hung from the roof) on June 8 when it was trading at 12 cents, on steadily increasing volume and with the price trending up.

Computronics (CPS), the third stock for the black book (with a Briefcase warning that it will deny ever mentioning any names), has been thoroughly trashed since listing last year, partly a function of zero after-market support and also because sales and profit in its first year fell a country mile behind the prospectus forecast – arguably the greatest of all investment sins.

Sales for the year to June 30 2003, were supposed to be $16.8 million. They came in at $11.8 million. Net profit was supposed to be $1.8 million. It was $398,326 – with the kindest thing to be said that at least it wasn’t a loss.

Time marches on and Computronics is trading better. Demand for its range of farm electronics equipment and electronic signs has picked up and the next profit result could surprise the market. Larger-than-life chief executive and founder, Ole Hansen, acknowledges the past problems, which he says were caused largely by the drought that has gripped much of Australia over recent years.

Hansen’s message appears to be getting through with the stock up to 23 cents in thin trade despite no stockbrokers following his story of revival – perhaps because he has an alarming habit of donning a horned Viking helmet at the oddest times to demonstrate his Danish roots. Brokers, poor darlings, are delicate souls and Ole in full cry could be quite a frightening site.

As a final word on all three companies, Briefcase repeats its warning that making investment decisions based on comments from a journalist is just a little less stupid than acting on advice from a stockbroker who cannot pass the test of know your product/know your client.

"For those who do not think, it is best to rearrange their prejudices once in a while." Luther Burbank (who may have been thinking about stockbrokers and journalists at the same time).