6th Birthday savings Small Caps only $375: our lowest price

        Subscribe Now       
x
14-Apr-2011
RED 5, JUPITER ENERGY & M2 COMMUNICATIONS
Philippine rainbow eludes gold investors
ASX Code RED, JPR, MTU
You just have to look at the bumpy price of the wannabe gold producer Red 5 to get a feeling of one major shareholder's frustration when he repeatedly says management has been "faffing about".

At 18¢ a share, its market cap is $237 million, but in the past year its shares have gyrated between 11.5¢ and 22.5¢.

The company is sitting on a gold resource of 1.1 million ounces and has proved reserves of 740,000 ounces (that is, gold it knows it can get its hands on) in the Philippines. The investor believes if it had not been for management the company would be well into production by now.


In December 2009 Red 5 announced that part of the funding for its Siana gold mine would come from $US40 million in debt from Deutsche Bank and the emerging markets fund manager Ashmore Investment Management.

It never happened. In the meantime the company raised $US50 million in equity last year at 17.5¢ a share and in March it announced a $US8 million credit facility with the Sprott Group, a leading player in the sector and a substantial shareholder.

The managing director, Greg Edwards, says the credit facility is an emergency measure and the delays are because of rain in the Philippines.

"If you think the rains in Queensland were bad, it was four times worse here. So far this year there has been over four metres of rain … and despite that we've poured two major concrete foundations."

Edwards says production of its 850,000-ounce mine is due to start in July. It is to produce about 90,000 tonnes a year, and the grades look impressive. In the first three years, when it is open cut, the mine is set to produce 3.4 grams of gold a tonne. For the next seven, when it goes underground, it climbs to six grams a tonne.

Wilson HTM's price target for the stock of 33¢ includes only 2¢ for its Mapawa prospect, where preliminary drilling has been done.

Significantly, the frustration of some fundies with management is not so great that they have sold out: "The Mapawa prospect itself could be worth several hundred million dollars or more."

When you are a shareholder you have to be a believer.

GOOD ODDS

One stock that epitomises the word speculative is Jupiter Energy, a small oil company with operations in Kazakhstan. Its shares have risen 40 per cent in the past two weeks.

It has more than 1.5 billion shares on issue at 7¢ each, giving it a market cap of $103 million. This is pretty big for a company that had $6 million in cash in the middle of March and is forecast by the house broker and shareholder, Southern Cross Equities, to spend about $60 million over the next four years. It is not due to be in full production until fiscal 2014.

One of the catalysts for the recent run was the company's announcement this month that reserves in one of its two wells in Kazakhstan had increased to "over 24 million barrels". This gave investors more comfort in Southern Cross's assumption of 25 million barrels in its 14¢ valuation.

The broker's valuation also relies on an oil price of $US90 a barrel, which seems reasonable when you consider the oil price is more than $US100 a barrel.

Kazakhstan is an exciting country for oil producers, and Southern Cross has capitalised on this, factoring in 6¢ of exploration success into its valuation.

What the company will have to do is raise money. The presence of the Russian-backed Waterford Group on the share register gives a degree of reassurance on this front. Waterford holds 37 per cent and has experience in the region.

Jupiter will probably do a capital-raising later this year if it lists on the AIM market in London, says its chief executive, Geoff Gander.

''I wouldn't be surprised if we raised $20 to $30 million."

Jupiter is nowhere near being a Black Caviar. The best that can be said about it is that it could be a distant cousin - but then again, so is the humble donkey.

BOSS CASHES IN

M2 Communications has been making the transition from small cap to mid cap quite successfully.

It resells and repackages the telecommunications services of Telstra and Optus for small- and medium-sized businesses to other, mainly smaller, resellers.

In early-2007 M2's shares were about 30¢, and its market cap was in the $30 million range. Today M2's stock trades at $3.47, giving it a market cap of $430 million.

The company has been winning market share but it has also had an aggressive acquisition program, buying small unlisted companies on low multiples. Their values climb by being part of a listed entity that trades on a high multiple. M2's PE for fiscal 2011 is about 16 times.

Since 2007 it has acquired brands including Commander, People Telecom, Southern Cross Telco and Clear Telecoms. The brokers that rate the stock a buy, Patersons and Lodge Partners, believe it will buy more.

In this humble columnists view, the so-called roll-up strategy only works in the good times, and they cannot last forever.

So the announcement released to the stock exchange last Friday that its chief executive and founder, Vaughan Bowen, had been selling was interesting. He has sold a little more than 1.9 million shares for $6.6 million, reducing his stake in the company from 8.4 per cent to 6.8 per cent.

This is a clear sign that an insider is taking some risk off the table.

SUORCE: 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