02/07/2008 - 22:00

Travel plans need changing

02/07/2008 - 22:00


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ARC Energy's erstwhile substantial shareholder and its corporate thorn in the side, Mineralogy, finally announced a notice of ceasing to be a substantial shareholder in Arc on June 11, fully six months after it began to sell its holding last December.

ARC Energy's erstwhile substantial shareholder and its corporate thorn in the side, Mineralogy, finally announced a notice of ceasing to be a substantial shareholder in Arc on June 11, fully six months after it began to sell its holding last December.

Most participants in the great ASX share game must play by rules, which state that once an entity has a relevant interest in more than 5 per cent of a company's shares, any significant changes in that position must be disclosed within three days of the change. Mineralogy was a heavy seller in May, but not a word to the ASX. While Briefcase was speculating about the source of Arc's share price weakness in the face of AWE's merger proposal, we heard nothing from Mineralogy.


Two weeks ago, Briefcase said the US government was acting like Santa Claus, giving out tax rebates in the hope of propping up its fatally flawed economy. Well, guess what? In the latest US economic news, retail sales were reported to rise by 1 per cent in May, twice as high as expected, as tax rebate cheques were used for purchases rather than the more prudent path of debt reduction. April retail sales were also adjusted to a gain of 0.4 per cent versus a 0.2 per cent fall reported earlier, and March sales were revised to an increase of 0.5 per cent, versus up 0.25 per cent announced earlier.

This is short-term stuff and really just masks the US's underlying problem, which requires fundamental, root and branch changes and not the band-aid stuff we are seeing.

On the topic of the land of the free, Briefcase's recent travels in California tend to support statistics showing a fall in auto traffic. In that quintessentially car dominated city of Los Angeles, my limo driver last week was very pleased that so called "non-essentials" were off the road, leaving the freeways remarkably clear for the all important limo service.

While Americans are wedded to their cars, $4.60-a-gallon gasoline has begun to bite; the number of vehicle miles travelled in the US fell in March on a year-over-year basis for the first time since 1979. We may well be witnessing peak travel, not only in auto miles but soon, air miles. By early 2009, the trends will become clear.

Briefcase is fascinated by the apparent level of ignorance among the American population. The US airwaves are full of criticism of Middle Eastern producers for failing to supply oil, completely ignorant of the fact that the US, with 4.5 per cent of the world's population, consumes 25 per cent of its annual oil production.


These days it is very difficult to find and motivate skilled exploration people to come and work for a company. Havilah has found a very clever way of maximising its exploration activity, while continuing to spend shareholders' funds on project development. This deal significantly lowers Havilah's risk profile and represents a solid business model for others to consider.

Havilah Resources is farming out all exploration activity, outside of its existing project areas, to a high-power team in a new ASX float. This action will leave Havilah free to fund the development of the Mutooroo copper, cobalt, sulphur, iron project, the Kalkaroo copper, gold, molybdenum project, the North Portia copper, gold project, a tin project and the Portia gold project.

Havilah's project activity will provide more than enough upside for shareholders over the coming three years, while it's new and highly motivated exploration arm will spend risk dollars and have the motivation for success, by earning equity in any success.

The deal negotiated with a new float revolves around external funding for high-risk exploration, anywhere outside of known deposits on the Havilah turf, which would result in the new company earning a 60 per cent interest in any new project by completing a bankable feasibility study (BFS) on any new deposit. Briefcase sees this as a great deal for Havilah. The cost of exploration, discovery and then undertaking a BFS can be well north of $10 million for each deposit.

Havilah will be comfortable in the knowledge that its effective exploration arm has skilled and motivated staff. Once a BFS is presented, Havilah can participate at a 40 per cent interest or revert to 1.5 per cent royalty from production.


Having failed with Arc and Nexus, Anzon has found a third dancing partner in Roc Oil.

Roc has a sorry history of weak performance, punctuated more recently by unconscionable selling of shares by several board members just days before the company announced a 25 per cent downgrade to oil reserves at its Zhao Dong project. Following this episode, Roc has entered a sort of twilight zone. It is an indictment on the company's board and management that after eight years as a listed company, it still trades at a 10 per cent discount to its original issue price of $2 per share. In the meantime, the oil price has risen six fold and peer companies, such as Woodside, AWE, Arc and Nexus have moved ahead between five and 20 fold.

While Roc's projects in Australia and the North Sea are producing reasonable returns, Roc's assets in China and Africa hold high potential, but have very poor political and fiscal positions and are now sucking in large chunks of capital for exploration and project development.

Exploration onshore Angola is proving to be a very expensive pastime, with tantalising results holding some promise. A merger with Anzon would balance the company's portfolio, putting more value into a favourable location, while offering shareholders some development upside and project life. Briefcase sees little joy for shareholders in the short term, despite valuing the company at over $2.80 per share, with risked exploration lifting value to $3.25 per share.

Roc shows little inclination to refresh its management or board so as to attract more shareholder support and, despite buy recommendations from many large brokerage houses, shareholders must wait on success with the drill bit, which may be met with a bid, to put them out of their misery. The unfortunate passing of well-liked former MD, John Doran, may open the door to change. It will be interesting to see how the merger progresses. Nexus may choose to use the opportunity to exit, leaving Roc as its substantial shareholder, or it may see the gaining of a foothold in a merged AZA/Roc entity as a nice little position, on which to sit.


- Peter Strachan is the author of subscription-based analyst brief StockAnalysis, further information can be found at Stockanalysis.com.au


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