$95 only: Big Cap Report on Sale! Limited Offer: Subscribe for 12 months and save $210
Subscribe Now
x
13-Apr-2011
ALARA RESOURCES, DELTA SBD & CBD ENERGY
Sentiment a factor in the climb ahead
ASX Code AUQ, DSB, CBD
For veteran geologists such as Shanker Madan, the managing director of Alara Resources, the privatisation by Saudi Arabia of prospects for mineralisation in 2005 represented an opportunity too big to pass up.

Madan was the former chief geologist of Lang Hancock's Hancock Prospecting and a senior geologist for many years with BHP, Rio Tinto and Texas Gulf. He brought all his experience to bear when he picked up half the Khanaigui zinc and copper project for $US7.5 million last year.

"Saudi is more focused on oil but it has a huge area of rocks that are very prospective for base metals and gold and people aren't aware of that," he says.


Well Madan is. And so are the growing numbers of institutions climbing on board. The stock is in a trading halt and the word is that the $30 million it is raising at 36¢ from institutions will be oversubscribed.

At 40¢, its price before the trading halt, its stock has more than trebled in 12 months. But its market cap of $50 million reflects the fact that the company has mountains to climb before reaching production.

Alara is looking at producing 55,000 tonnes of zinc a year in concentrate and about 5000 tonnes of copper after it goes into production, which Madan says is set for 2013.

Petra Capital's valuation of $1.01 is based on a long-term zinc price of US75¢ a pound (which compares to its spot price of $US1.15) and a copper price of $US2.50 (spot price of $US4.47). The broker used an exchange rate of US80¢ for $1, well below the $US1.05 it trades at now.

As with all these things, if you plug in spot prices and the like you could get a valuation well over $2. But what matters more for a company at such a speculative stage of its life cycle is sentiment.

And Saudi Arabia is popular for investors in base metals. One of the big attractions for the Chinese state-controlled Minmetals Resources in its $6 billion bid for the copper producer Equinox Minerals is its Jabal Sayid copper deposit in Saudi Arabia, which used to be the chief asset of the Australian-listed company Citadel Resources.

Sentiment is everything for these mining minnows, as Shanker Madan would know better than anyone.

IN A SWEET SPOT

When you invest in small caps, in many cases you are paying for the asset - tangible or not - and hoping the company's management can learn quickly about what being a publicly listed company entails.

This could be the case for Delta SBD (DSB on the Australian market), which provides manpower and equipment for coalminers such as BHP Billiton and Xstrata to build underground mines. It was formed after the merger of two companies and employs about 400 people.

The company is definitely in the sweet spot with Australian coal exports being forecast by the Australian Bureau of Agricultural and Resource Economics and Sciences to increase at about 5 per cent a year until 2015. But the type of work it does is very dangerous.

One of Delta SBD's jobs is to provide "additional support for the (coalmine's) roof to stop it falling", says the managing director Steve Bizzaca. He needs to keep his workers alive, holding a 36 per cent stake in the company that listed in December after raising about $3 million and issuing 43.3 million shares at 80¢.

Its shares now trade at 86¢, which is impressive since the company provided an unspectacular first-half net profit of $2.2 million. This was on turnover of $39.7 million, a 1.9 per cent increase in revenue on the same half a year ago.

But the company is getting its act together, says Bizzaca - who cites new contract wins - and is on track to record a net profit of $5.1 million. This gives it a price-earnings multiple of just over eight times and a dividend yield of 3.4 per cent.

For shareholders, the education of Bizzaca and his management team could be worth holding on for.

A STORM IN A JV

Shares in Gerry McGowan's CBD Energy spiked as much as 33 per cent yesterday to 20¢ after the company announced a joint venture with two Chinese energy utilities listed in Fortune Global 500.

Not bad for a company whose market cap is just under $75 million.

McGowan told the Herald his company's share would be 23 per cent of the $6 billion investment in wind farms in Australia, which will start with a $200 million project in south-western NSW in Taralga.

"This will be the biggest investment the country's going to see for some time," says the former chief of Impulse Airlines.

CBD will also generate management and operator fees that will kick in from August or September next year.

But the big thing affecting the shares of CBD, which trade on a mid-single digit price-earnings multiple, is the uncertainty about the policy for renewable energy.

Renewable energy certificates provide proof of renewable energy use and provide subsidised income for providers such as CBD Energy. The certificates have deviated wildly during the past 12 months, trading between $26 and $36 in Australia. According to McGowan, this is a result of the government changing its policies and pulling schemes such as its subsidy for rooftop solar systems.

But he adds that this problem is mitigated by the joint venture, which is essentially designed to lower ''the industry's cost base".

With inflation pressures in China, this might not be always the case.

SOURCE: FAIRFAX

Start Your 30 day free trial today

Do you want to get access to our weekly reports?
Leave your details and get an instant access.

As Seen In