Under the Radar

Like many gold exploration plays, Chesser’s share price has been heading south, to the tune of almost 30 per cent in the past 6 weeks as investors desert higher risk stocks in the face of global uncertainty. But Radar Watchers should look out for a big announcement any day now that could boost Chesser’s fortunes.

At 54 cents a share, Chesser Resources (CHZ) has a market cap of $67 million. This is a miner that could end up being many multiples of this. Chesser is coming out with its much anticipated “resource” in the next few days. A resource is a big deal, and is basically a calculation of the ore body (measured in tonnes) multiplied by the average grade of drilling samples. It’s an even bigger deal in the type of epithermal gold system found at Chesser’s Kestanelik project in Turkey.

It has similar geology to Andean Resources’ principle asset, Cerro Negro located in Argentina. Andean never produced an ounce of gold. It drilled for six years and produced a resource of 3.1 million ounces, and was taken over by Canada’s Goldcorp in 2010 for $3.6 billion.

The indications are that Chesser’s initial resource could be in the region of 500,000 ounces, which is based on only 7 of the 80 veins of gold that it has identified. The company continues to drill and is aiming to put together a resource of 1.2 million ounces by the end of the year which could support a 100,000 ounce a year mine for 10 years.

African miners are also ones to watch

As I mentioned in last week's missive, watchers of West African miners are in for a feast of drilling data that is long overdue.

One is Castle Minerals (CDT), which is known as a gold explorer in Ghana. Last week it announced some good results on the gold front, showing strong intercepts, but on Wednesday it also announced some very good graphite drilling results.

Every digger and his dog is on the lookout for a graphite deposit, in the wake of a price that has more than doubled in the past four years.

Its usefulness is being appreciated by the Chinese, among others, for industrial applications. Graphite explorers Talga Gold (ASX: TLG), Syrah (ASX: SYR) and Archer (ASX: AXE) are all five to 10 baggers so far this year.

After the graphite music stops and graphite's price stops climbing, those that remain will be the deposits with high grade and are of sufficient size to justify production.

Castle Minerals is reviewing work done by the Russians in the 1960s and it could well be that this one ticks the economic box.

Bassari Gold (ASX: BSR) also announced some interesting drilling results at its Konkouto prospect in Senegal. It is very early stage for these guys, though, with a market cap of just over $30 million. Still, you have to be in it to win it.

Please look out for our next issue out on Thursday (17 May). We have our usual company updates and we tip a biotech and a miner. We also interview one of Australia's few dedicated biotech investors. 

So far in April the ASX All Ordinaries has fallen about 2 per cent, which is hardly surprising. After all, the market is up 6.6 per cent since late December when the European Central Bank opened its purse strings and decided that everything including a bus ticket was collateral.

Just arrived back from meeting a lot of interesting companies, and some more than interesting people.

Much of the action in Africa is centred in a little country called Liberia. This is because it's relatively safe (with the first female president in Africa) and is coastal.

The only hook is that these companies are early stage. The ones I spoke to were Middle Island Resources, which is favoured by one of the top fund managers in the sector - it's only small, but Rick Yeates and his team have about 100 years of experience between them.

Another little one that seems like a hot prospect is Tawana. The boss there, Len Kolff worked for Rio Tinto and was instrumental in finding the giant Simandou iron ore prospect in Guinea. This is the biggest iron ore deposit in the world. It seems his little gold exploration company has stumbled on a big iron ore find of its own - in Liberia. He told me how he was dancing around the taxi as he realised what he was on to. Pretty surreal stuff.

I also heard tales of blood gold being the new blood diamonds. More of that tomorrow.

We had a big win this week with Chilean gold miner Lachlan Star announcing that it has more than doubled its resource over the past year to over 3 million ounces, which more than doubles its mine life.

Well, the so good, is a big qualified so good.

When the World Bank basically said that we could be heading for financial crisis II, it got a lot of people thinking about doom and gloom scenarios. After all, the World Bank predicted a slump in commodities prices and lowered its forecasts for global growth. But you have to put the World Bank into perspective.

As your columnist writes a sea of red is hitting his screen. A clue is that it isn’t a Santa virus.

Many market pundits have been singing that there will be a Santa rally because of various reasons, such as hopes of a successful resolution of the European sovereign debt woes, or that the Tea Party has shouted itself into obscurity (remember that it was more than partly responsible for the debt ceiling stand-off in the US last July).
What we’re seeing today is the market in free fall. The benchmark ASX 200 Index is down 2.3 per cent, the ASX All Ordinaries is 2.4 per cent lower; while the ASX Small Ordinaries is falling the hardest - down 3.5 per cent.
What’s happening can be at least partly explained due to end of year shenanigans.
At the year-end, fund managers have to account on quarterly basis for their holdings. In many cases they won’t want to explain to their various trustees why they have a holding, so they may sell more aggressively than they would otherwise.
This doesn’t necessarily have a poor impact on a normal market. When things are humming along, a bit of switching goes unnoticed.
But sentiment is at its worst levels since the depths of the financial crisis in 2008. In times like this, fund managers bail out of stocks they consider to be the most risky. In many cases these are the little ones. Going into Christmas, a fund manager wants to drink his sherry in the knowledge that he will come back to a company that won’t be 20 per cent below its current price when he gets back to the office.
The impact on small companies is highest. These companies are not traded much and are vulnerable when volume from the offer side hits the bid.
But right now is also an opportunity to profit. You have to play it very carefully, however. Many use the over-used falling knife metaphor. This basically means you can buy something that looks cheap today, but will kill your portfolio returns tomorrow.
But this is not always the case. It’s certainly not the case when the market as a whole gets very very cheap.  At current levels, Under the Radar Report’s Portfolio Manager says that we are close to “entering the kill zone”, referring to a situation where stocks get so cheap that they have to be bought.
In our model portfolio, he has been very careful not to step up and buy too quickly, just because we see value.
A situation where the market reaches this situation and is so over-sold to this extent occurs very rarely. At the other end of the spectrum, stocks as a whole can get so expensive that you wouldn’t touch any of them.
Most of the time stocks trade at a discount or premium to a fair value that an investor might attribute to the company. But this value might never be realised.
In the two extreme cases, however, they should move towards fair value sooner, rather than later. In the case of the oversold market, this must be premised with the fact that not all of them may survive (which is what is being factored in by the market in the doomsday scenario).
In the case of the vast majority of companies, they will survive. And if you show more courage than some fund managers are showing, you should reap the rewards.

Photon one for the brave punters
Richard Hemming
December 16, 2011 - 8:49AM
Investors in the stock market can often be “over-exuberant”, and this is definitely the case with the advertising and marketing group Photon, whose shares have doubled since early October after it announced that it had eliminated its debt, largely through the $146.5 million sale of one of its businesses.


The company might have survived, but your intrepid columnist seems to be one of the few asking, what's left?


Photon (ASX code PGA) at just under 6 cents prior to today is trading on a forecast price/earnings ratio for 2013 of 14 times. If you take out the non-cash expenses (mainly amortisation from its many acquisitions) this reduces to about 11 times. This ratio is in line with its bigger competitor STW Communications (ASX code SGN).


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Photon has been cleaned up, for sure, but in investment terms, this achievement is the equivalent of reaching South Base Camp at Mount Everest.


In 2011 Photon's revenues were $344 million producing operating earnings (EBITDA) of just over $53 million. After the fire sale that has occurred to keep the doors open, in 2013 the company should produce about $200 million at the top line and EBITDA of just over $20 million.


Takeover prospects remote


Upon analysis of the remaining businesses, any hopes of a takeover by London based giant WPP are pre-mature when you look at the task confronting the chief executive, whoever that will turn out to be.


You see, the man who won't be embarking upon the restructure is current chief, Jeremy Philips. A couple of weeks ago he announced the big deal to sell a division and save advertising executives their jobs. Then this week he said he was leaving his.


Philips, by all accounts, is one of the more cheery people in corporate Australia. He owns about 5 per cent and along with other shareholders probably believes that Photon's growth makes it a better investment than STW.


But, in the words of one industry insider, both will struggle in a country with a very small population:


“The problem with all (advertising and marketing) businesses in Australia is that they are inherently sub-scale because of the costs of a holding company type operation, which only really works off a much bigger revenue base.”


Philips came into Photon 18 months ago when it was saddled with 45 businesses and payment liabilities of $450 million. Fast forward today and the company has zero debt and 14 businesses.


A feudal overlord


He has clearly removed its financial duress, but Photon still suffers from its feudal holding structure.


What got it into trouble was that it operated as a kind of fiefdom, grabbing businesses left, right and centre. It encouraged them to come into its fold by saying the equivalent of: “keep your management, keep your systems, we won't integrate them, we just want you to be part of our group, plus we'll pay you more if you continue to perform.”


Many of these companies did perform, and Photon was on the hook to pay over $100 million in what they call earn-outs, which the company severely underestimated. This gap resulted in its shares plummeting from $1 to 10 cents in mid-June 2010 and Photon raising $100 million at 10 cents a share. It now has 1.54 billion of the suckers on issue.


What remains in Photon now is the question. We would suspect that with its nose pressed firmly against the glass, the businesses it has sold were its strongest.


In terms of integration, all the 14 businesses currently do together is pitch for the occasional job. Integration does represent a big opportunity, but it will involve massive costs. And this is at a time when the industry outlook is poor, because of the obvious constraints on its customers.


Philips is happy knowing he won't be part of this, and good luck to him. The challenge for Photon is to find someone who is genuinely happy, and able, to finish a job only half completed.


What about its competitor, STW?


STW has about 70 advertising, marketing and communications agencies that work under its structure. It also has the overlord look about it, which one insider said was an essential part of the industry:


“Feudal lords are not looking for love (from their feudal overlord) they are looking not to be annoyed.”


But the key difference between STW and Photon is that the former's back office and administration capacity is largely centralised.


STW was originally spawned from John Singleton Advertising in 1985 and is Australia's largest operator in the space. It is now operating without its old guard. Russell Tate retired at its AGM last May, while founders John Singleton and Mark Carnegie and the majority of the original board have left the company.


Some have confidence that the old guard are not necessary because STW centralised its operations further and engages in the training and cross-selling necessary to be successful in an extremely competitive and small market.


One of those is Frank Villante of Celeste Funds Management says his fund owns shares in STW, but does not consider Photon to be investment grade.


“Photon is a red-blooded punt, and if I wanted to do that I'd go to the races. If you are comfortable with the industry, STW is successful in the key metrics of customer retention and sales performance.”






Read more: http://www.smh.com.au/business/photon-one-for-the-brave-punters-20111216-1oxfp.html#ixzz1gfFnAVAa