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08-Apr-2011
CHALICE, SOMNOMED, & KING ISLAND SCHEELITE
Sitting precariously on a goldmine
ASX Code CHN, SOM, KIS
Chalice Gold Mine's chief executive, Tim Goyder, is either a good poker player or he is very confident.

His company's operations are in one of the more dangerous countries, Eritrea, and he is literally sitting on a goldmine.

In the next month he believes that Chalice will get between $40 million and $60 million from the Eritrean government in return for 30 per cent of its Zara gold project (on top of its existing 10 per cent). It will also get the "complimentary" mining licence thrown in.


Chalice is sitting on something special. It has a reserve of 840,000 ounces. Based on a gold price of $1400 an ounce, the project will generate a minimum of $400 million over its seven-year life.

Chalice has about $5 million in cash, but with the money that is supposed to come in from Eritrea's government, Goyder expects to double the size of the reserves, and to start development in October and production in 2013.

Eritrea is a tiny country abutting the Red Sea in northern Africa. It has been subjected to UN sanctions since 2009 after accusations that it supplied arms to Islamist militants in Somalia. It is also in the path of the Jasmine Revolution that has been sweeping the region since Tunisia's ousted its president in January.

But Goyder is unfazed: "This is like walking into Kalgoorlie before it was discovered … it's a relatively stable country with an authoritarian government … No, we don't expect an uprising."

At 46¢, Chalice's shares have fallen almost 40 per cent in three months, suggesting many others do have concerns. Its market capitalisation is now $100 million.

A big factor in Chalice's favour is that about two months ago the Canadian listed Nevsun Resources (market capitalisation $1.2 billion) started production from its Bisha mine in Eritrea, which is now producing 1000 ounces a day.

Could Chalice be the next Nevsun? So much depends on the money from the Eritrean government. Goyder says he is confident the government has the readies, because it borrowed $60 million in late 2007 from the China Import-Export Bank to pay for 40 per cent of the Bisha project.

Back then, though, there wasn't the pressure that the region is experiencing now.

A GOOD SLEEP

The corporate warhorse Peter Neustadt says institutions are jumping into SomnoMed because of earnings prospects in the growing market for sleep apnea treatments.

"Our company is operating in a high growth market and we are the global leaders,'' he says.

Sleep apnea causes patients to constantly wake up because their airway is blocked. The company has designed a mouthguard that is fitted by a dentist and moves the jaw slightly forward, keeping the throat open and preventing sleep apnea, which in Neustadt's words "turns people into zombies".

Neustadt, who is the chairman, has turned this company around, having underwritten a new issue of shares to prevent insolvency and changed the board and management since joining just more than five years ago.

Many institutions are betting that its prospects overseas are good. Its product is assisted by Medicare reimbursement in the US and Europe. It now generates 90 per cent of its revenue overseas, from 10 per cent four years ago. Wilson HTM has a 12-month target price of $1.60, compared to SomnoMed's share price of 45¢.

SomnoMed's big competitor is ResMed, which has a market capitalisation of $4.4 billion, and revenue of $1.3 billion. SomnoMed is a tiddler by comparison.

But it is the shortcomings of ResMed's "CPAP" product that is partially responsible for the potential of SomnoMed's. CPAP is a machine that blows air into the throat. The problem is that it is very uncomfortable and patients frequently take it off at night.

Although there is a lot of potential with SomnoMed's product, it requires the approval of numerous medical experts before it gets to the patient. This is not good for investors' patience.

One investor told me that he saw the stock as a play, being bought out by ResMed. It would not be a stretch to think that Neustadt has the founder of ResMed, Peter Farrell, on his speed dial.

KING TUNGSTEN

King Island Scheelite, the wannabe tungsten producer, is doing its best to make the tiny island better known for the metal than its cheese.

Its capital raising closed yesterday and the chief executive, Simon Bird, is brimming with enthusiasm, saying the $4 million capital raising is in the bag.

"Based on that, we've started feasibility work on the tailings of the dam, with the results expected in two weeks … we look forward to (exploratory) drilling.''

No doubt the chairman, Excel Coal's founding director, Tony Haggarty, shares these sentiments. He probably took a few shares in the placement - he can afford to, being worth about $450 million.

At 32¢, it has a market capitalisation of only $20 million, but it is the tungsten price shareholders should watch. It has climbed about 70 per cent in the past year.

On the basis of the value of its existing reserves, King Island is worth $1.26 a share.

To get to this valuation there is much work to do. But for those with an appetite like Haggarty, it still looks more appealing than cheese.

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