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Aug 2003 - Invest Outside Aust

Investing Outside of Australia Becomes Fashionable Again

The old adage for gold share investment of firstly Western Australia, then other (mainland) Australia, and then outside of Australia has changed dramatically in the past year, especially in the past 6 months. The rationale for why WA gold companies usually had twice the market cap of those in say NSW (aside from Newcrest’s revival) is that the gold orebodies in WA are perceived as being more predictable than in NSW.

This change has occurred due to a shortage of Australian gold stocks to invest in since most have been taken over by the world’s major gold producers, and a string of recent successful returns to shareholders who have invested in the Asian countries of China, Laos and Thailand. Listed Australian platinum stocks with holdings in Southern Africa have also benefited due to no immediate Australian producer alternatives.

In just over the past 6 months Sino Gold (SGX, gold in China) has listed and doubled in price, Kingsgate (KCN) has materially increased (gold and copper in Laos, our first report on it was at 80c in September 2001), and Oxiana (OXR) continues to power ahead.

The increases have not only been confined to producers, explorers have “scored” too, with Pan Australian’s (PNA) share price doubling in the past year from our first report on them (initially gold in Laos, its market cap has tripled), County Diamonds (CYD) has more than doubled on acquiring a reputedly ex-WMC gold prospect in China and Michelago’s (MIC) share price has so far quadrupled from about 1c to more than 4c per share in just over 1 month on its gold joint ventures in China’s Guangxi Province. Similar appreciations have also been occurring from a London viewpoint with the newly listed Caledon Resources also appreciating significantly on gold in the same Guangxi Province as Michelago.

Abelle (ABX) fits somewhere between a gold producer and an explorer, with its recent appreciation a function of its exploration-towards-mining progress in Papua New Guinea at Morobe and Wafi, as Gidgee in WA trundles on producing gold. While Harmony made a “fair and reasonable offer” of A$0.75 per ABX share and A$0.45 per ABX option about the end of April 2003, ABX are now (August 1) trading at about A$1.30/share and the options at about A$0.99 each.

The platinum companies have also scored with Zimplats’ (ZIM, despite being located in Zimbabwe) share price tripling in price in the past year, it was A$1.40/share at the time of our first report in October 2002, and A$2.80/share at the time of our second report in April 2003, and is now trading about A$4.07/share ahead of an unconditional offer from Impala Platinum for A$4.08/share that is currently scheduled to close on 29 August 2003. Aquarius (AQP) has had more of a rocky trading price mainly due to investor perceptions of BEE and the proposed Money Bill royalty that is supposed to become simpler and reduced. However, even Aquarius has risen almost 30% to about A$7.00 since our last report in early May 2003.

Similarly like the gold shares, platinum explorers who have interests in the South African Bushveld Igneous (PGE) complex) have also benefited with Pan Palladium more than doubling from a low of about A$0.23 in mid-May to its current level approaching A$0.50/share. These results have improved perceptions towards investment outside of Australia again.

Perceptions towards investment outside of Australia have not always been so negative, when Bre-X rose in leaps and bounds at the rate of about 1moz per drillhole it was all “boom and zoom”. We can recall visiting an exploration prospect in Malaysia by flying to KL (Kuala Lumpur), staying in a “top” hotel, and then in the morning catching a lift to the roof of the hotel, to board a director’s helicopter to fly to the prospect.

However, the perceptions were halted “in their tracks” by the Bre-X fiasco, once Bre-X was shown to be a case of “salting”, all other exploration came under the spotlight, and the currency weakness and regional unrest compounded the issue, pushing offshore investment perceptions into the wilderness for about 5 years or so. However, Australia has been making moves to stabilise its neighbours in PNG and more recently in the Solomon Is, possibly even Gold Ridge or Bougainville may be re-opened.

The recent appreciations by exploration companies in China does have potential substance. When looking at the historic gold discoveries in the Guangxi Province as shown by the yellow dots (see Figure 1), it is easy to see why. The big dots are apparently 1moz, medium dots 0.5moz and small dots 0.1moz (or 100,000oz) gold deposits that have been mined. About 120,000oz were produced from the 100 mines in the Guangxi Province in 2001 of which the largest was producing at 35,000ozpa, so there should be opportunities.

China in fact appears to be advancing at a faster deregulated rate than Thailand. In January 2003, it was stated that China expected to continue with its programme of selling mining rights over gold mines, which started in Zhejiang Province in 1998, and then Jiangxi in 2002, with about 2/3 of China’s provinces now having made the breakthrough. On 30 July 2003, Zhongjin Gold Corp, the flagship of the China National Gold Group Corporation (who account for about 20% of China’s gold production) expected to become the first domestic gold company to list on China’s domestic market in Shanghai with an IPO raising of almost US$47m. The Shandong Gold Mining Company is reputedly the next in line to list (and raise US$32m), as China continues its pace of liberalising its gold industry.

Investment perceptions have changed, and fortunately this time are far more wide ranging and not based essentially on one major exploration discovery (Bre-X) that proved to be fruitless.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who has a Proper Authority with State One Equities, and with his associates, holds interests in some of the stocks in this article.. The opinions expressed in this article should not be taken as investment advice, but are based on observations by the author. The author does not warrant the accuracy or completeness of any information and is not liable for any loss or damage suffered through any reliance on its contents.

  • Written by: Keith Goode
  • Friday, 01 August 2003

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