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Base Valuations Down Under

By Neil Charnock      Printer Friendly Version
Feb 13 2008 12:25PM

Today the 13th February 2008 is hopefully a turning point towards a more cohesive Australian society and rising living standards / quality of life for our indigenous population – today we celebrate Sorry Day. An unreserved apology has now been extended by our new Parliament to our indigenous peoples and we now have a chance at a new beginning where humanity rises above politics on this important issue. It takes a big man to say sorry and I personally commend Prime Minister Rudd and I don’t care what side of politics you are on as I take no sides here – however I believe humanity is a senior consideration. It is my hope that we can now move on and implement solutions to serious problems faced by the Aboriginal people and work together to make a more equitable and richer future for all.

Now to the markets…

Back in November I published an article on the World Wide Web which warned that we had to have a resource stock correction at that time – this was based on the technicals I observed on the chart of our leading ASX mining index. On the 22nd January 2008 I also released an article that included a statement to the effect that I could not claim or confirm a bottom was in yet - but thought it was close. 

I had not changed this view about diversified miners or our precious metals miners and saw a chance of one final slap down at this level in the short term. This has now come to pass but only for some stocks and, while others are making interesting bottom formation patterns. Other larger stocks within this sector have already rebounded sharply. We may see a more gradual drop back down to a higher low now to complete this corrective phase in metal stocks and I would expect this over the next 3-4 months. I am not expecting a broad recovery in smaller gold stocks before the 3rd or 4th quarter of 2008 as I believe gold will consolidate for a brief rest at this price level before following its own trend higher. However there are always special situations and useful fluctuations for traders and longer term investors – as I said these stocks are finding their bottom one by one.

When you see mining share prices at deep new 12 month lows, some with yields well over 10% and P:E ratios below 5 you have to consider that a low may be in. It is also true that the junior producers have suffered most in the down turn and that they generally do well only towards the end of a gold up-leg. These are crucial factors and I leave it to the common sense of the reader to read between the lines. Copper has been strong breaking up out of a short term trading range – it now faces solid overhead resistance. Nickel and zinc look to have found support at sustainable price levels and could head higher over the remainder of 2008. I believe the probability is growing higher that we are at base values in many mining stocks at this point.

Your radar should be switched on and you should be right in front of it now because these stocks will hit their individual minimum prices one by one and there is fantastic money to be made. I picked up one company right on the exact bottom of a crazy panic move the other week and I am already up over 40% on that parcel with tremendous short term upside to come due plus longer term holding potential. This is due to organic growth and company progress as previously released to the market.  The market knew this information and yet this baby went out with the bath water so to speak. For now I want to talk about base valuations here and to highlight the solid, no compelling opportunities to layer in both investments and speculation plays over the next few months.

Some of the gold stocks have already hit bedrock, actually more like thrown down a mine shaft during the local reaction to the ‘situation’ in the USA and global markets. Then they bounced and corrected back again which is where we now sit and I used this opportunity to rearrange my investments and trade the volatility. I merely looked at the metal prices (gold at $AUD1000) during all that down draught in the gold stocks here and assumed which one was telling the truth – gold.

The fundamentals of our economy bear little similarity to the USA because we have powerful underlying strength from our mining industry that essentially makes up 40% of our economy – driven by resource hungry emergent economies. Remember that despite the slow down in the second half of 2007 in the USA we still saw growth of 11.4% in China. Global growth came in at 5.2% to $US50.36 Trillion for 2007and India achieved a very strong 8.5%.

In Australia we also now have some anticipation that recent wide spread rains can bring some relief to our agricultural sector, which also maintains a disproportionately high dominance in our economy. I point all this out because I see our economy is very strong and thanks to a gold price north of $AUD1, 030 – our gold stocks are highly undervalued. Thanks to the unfortunate plight of those who panicked and or had to sell due to margin calls – the diversified mining stocks are mostly at base value in this range. 

Australia enjoys a very low sovereign risk and is a leading mining centre frequented by the Chinese on a regular basis. Offshore majors are here, Barrick, Coeur, Newmont and others because they know there is value. Coeur cleverly tied up the silver resource of two diversified miners a few years back when silver was ready to fly. 

This precious metals bull market in Australia is young as evidenced by the lack of educated comment from mainstream advisors, most of the media and the general investing public. One high profile - leading newsletter service here just criticized gold bugs as “bores” and produced some pretty ordinary comment about gold accompanied by a very ordinary overview of our gold industry. I just make the point that they are not up to speed on this issue yet as evidenced by their comments and coverage. 

They basically contended that jewelry demand dries up when investors push the price of gold up so the supply demand equation is a no win situation for gold which is why it ‘always disappoints’ investors. But hey, they also recommended buying property and selling shares when we generally lag the US by 12 – 18 months and we also have a record low affordability level - with steeply rising interest rates forcing around 300 home owners a day to walk away from their houses. It does not seem to be sage advice to sell assets with up to 13% yield and buy an illiquid asset class with a yield of around 2% in this investment climate.

I am not a permanent bull on gold or silver and bought my silver for $US4.50 – I watched with excitement when it broke above $5 which I considered a basement price at the time. I have had a ball with gold stocks since 2001 and met hundreds of smart wonderful investors around the globe via my computer since I went public with my analysis so who cares if I am miss labeled – so what – I just cannot take offence as I feel fortunate to have seen what was coming and what is still to come.  I would rather work with such parties than criticize however – so that more investors, the industry and they too - can win from the awesome fundamentals facing the metals at this time in history.

Perhaps the Australian public at large will not wake up until the end and buy stocks only when they are vastly over priced. So offshore buyers, the companies and individuals and savvy local investors will be the only ones to benefit.

There has been a history of relative undervaluation of our mining sector in Australia as compared to North America and I have been putting forward a theory I postulated a few years back – that the internet and globalization would cause an equalization of this factor. This time the demand is in our own back yard (Asia) and sovereign risk is a bigger issue than ever. Lastly today I wish to commend the local mining industry on a whole and will be talking about some special companies making special progress or of special interest in weeks to come. 

Our miners have their act together, on the whole, with many great management teams, state of the art production facilities and modern exploration technologies employed. I have just been analyzing a Queensland mine with a very substantial underground deposit; in fact it is one of the higher grade large deposits on a global basis that has ever been found. Other quartz load deposits here have had their difficulties because too many assumptions were made; large hedges were entered into in days gone past and some other factors but no such problem here. The geology of this deposit is brilliant because the gold bearing ore separates easily from the bed rock and because there has been virtually no geological folding of the deposit since formation. This enables precise drilling down to 1200 metres with an accuracy variation of about one metre. They have no debt or hedge and I have a link to a substantial article (marked Special Feature - with a live link directly below) above the disclaimer section below for anybody who wishes to find out more – all in clear readable language.

Now briefly to our services – GoldOz is adjusting our successful Newsletter to reflect popular feedback with a greater emphasis on gold companies and less on the global scene. We will still feature the Dow, All Ords, the major mining index, gold, silver and the metals with a more occasional coverage of the (now precious) base metals. The PDF master set upgrade is underway now so subscribers can get the last issue and a free upgrade for only $AUD35 at our store right now – handy “thumb nail” coverage of well over 350 gold companies.

Good trading / investing.


Neil Charnock
Special feature -



Colin Emery is currently a Branch Manger and Senior Client Adviser of a Stock Broking Company in Queensland Australia. Prior to his work in Share broking he spent nearly 20 years in Senior Management and Trading positions in Treasuries for major International Banks such as Bank Of America, Banque Indosuez, Barclays Bank, Bank Of Tokyo and Deutsche Bank AG. He spent a number of years as a Senior trader in New York, London, Singapore, Tokyo and Hong Kong with these institutions. He also was Global Head of emerging energy, emission and commodity products for the leading Energy and Commodities brokerage firm of Prebon Yamane Ltd – Prebon Energy for four years before moving to Cairns in 2003 to focus on the Stock market and Private consulting work. The private consulting and advisory work currently undertaken is with companies involved in Resources, Energy and Renewable Energy and Forestry.

Neil Charnock is not a registered investment advisor. He is a private investor who, in addition to his essay publication offerings, has now assembled a highly experienced panel to assist in the presentation of various research information services.  The opinions and statements made in the above publication are the result of extensive research and are believed to be accurate and from reliable sources. The contents are my current opinion only, further more conditions may cause my opinions to change without notice. The insights herein published are made solely for international and educational purposes. The contents in this publication are not to be construed as solicitation or recommendation to be used for formulation of investment decisions in any type of market whatsoever. WARNING share market investment or speculation is a high risk activity. Investors enter such activity at their own risk and must conduct their own due diligence to research and verify all aspects of any investment decision, if necessary seeking competent professional assistance.