NBN rollout may make BigAir's day

The media focus on the Telstra's sales of its network to NBN for $11 billion that was announced this week has seemingly been relentless, and understandably so.

But investors looking to take advantage of the changing telecommunications landscape would do well to consider BigAir, one of the smaller players in the telco world.

At 31 cents, its shares have climbed about 50 per cent in the past couple of months. BigAir (ASX code BGL) has a market cap of about $45 million and is a provider of high-speed broadband via a wireless network throughout Australia.

The share price rise is partially due to the 20 per cent profit upgrade announced in early May, and it could also be sparked by speculation of a takeover by one of its competitors. But it could also be that investors are cottoning on to the opportunities that could lie ahead.

Being a wireless provider, BigAir is in the luxurious position of being one of the few companies that can actually compete with the NBN, because of the cherry-picking legislation that stipulates companies that own fibre networks can't compete with the NBN in regional Australia.

BigAir has spent about $10 million building its network in the past seven or so years. In the main it services small- to medium-sized businesses in the main cities. Its network often acts as a back-up for many businesses, whose operations cannot afford to be offline.

But in the telco world, perspective is needed. Compare BigAir's capital expenditure with the $3.6 billion Telstra spent in fiscal 2010 alone (FY09 it was $4.8 billion) – and this isn't including its investments.

Why wouldn't a gorilla like Telstra just spend $10 million building a wireless network on its own?

Linwar Securities' analyst Owen Humphries says it would be better value for a gorilla to just buy BigAir because of the technical difficulties. He then waxes lyrical about the virtues and ubiquitous nature of the internet “cloud”.

According to Humphries' forecasts, Big Air is trading at a discount of between 10 and 20 per cent to competitors such as Vocus (VOC), iiNet (IIN), TPG (TPN) and Macquarie Telecom (MAQ).

BigAir's talismanic chief Jason Ashton says that what is important right now for investors is the cash flow the company is generating, which at the operating level and after capital expenditure is about $5 million a year.

“There is a big disconnect there,” he says, without irony.

BigAir's rising share price means that more people are dialling in to this disconnect.

Doray has gold in its sights

Doray Minerals is one of those stories that is encouraging normal people to drop everything and head to the gold fields.

After raising $4.7 million based on an issue price of 20 cents in February last year, the West Australian miner struck gold soon after and its shares shot as high as $1.72.

Doray (ASX code DRM) then raised $21 million at $1.30 at Christmas and its shares now sit at 85 cents, delivering it a market cap of $63 million.

What has got people excited is the high-grade deposit Doray is sitting on. In the past year the company worked out that it has a “resource” of 174,000 ounces – meaning it has about this much gold sitting in the ground, with grades of about 25 grams a tonne. So, at a gold price of about $1500 an ounce, each tonne of rock to be mined will be worth in the order of $1200.

Managing director Allan Kelly believes his company's resource could be close to 700,000 ounces – which before costs is worth more than $970 million.

“If the grades we are hitting keep up and if the load continues to be as consistent, the resource could be three to four times bigger,” he says.

He estimates that if they do come up with more positive drilling results, production will not start until mid-2013. After its latest raising, the company has about $20 million in cash which should be enough until then.

Management optimism aside, the key for short term investors is to see the results of Doray's drilling and feasibility study due out at the end of the year.

One fundie who specialises in gold says that although promising, Doray's discovery is still on the small side, profitable as it looks.

He believes that a resource of 400,000 ounces by the end of the year is possible. After costs, this will generate about four years of free cash flow in the region of $30 million a year.

So a market capitalisation just north of $100 million is a more realistic target.

What the company does with the cash this mine spins off is the bigger question. If it reinvests well, it could turn into another Ramelius Resources (ASX code RMS) which had similar humble beginnings, but now has a market cap of more than $350 million.

Instead of buying a pan, pick or shovel, a punt on Doray could be a better bet for the dentist turned prospector.

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