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Jan 2007 - Year End & China

  • The construction pace of growth in China appears to be accelerating and is involving bridge building engineering feats and extensive spending on railways & rail networks with US$190bn allocated up to 2010 and more to 2020.
  • It didn’t matter where you went in China, literally everywhere was in major construction in villages, towns, cities, plus new railways & new freeways etc.
  • The main base metal of interest still appears to be nickel (based on INCO and Falconbridge both taken over, & Jinchuan’s offtakes with a number of ASX listeds).
  • I re-iterate a comment I made in our last annual review dated 3 January 2006, namely to anyone that still insists that “commodity prices have to fall”, or “China’s growth has to come to an end”...you should ask them “when was the last time you visited China?”.
  • This comment is based on ERA’s (my) last visit to the China Mining (November) 2006 Conference in Beijing, in which I visiting Golden Tiger’s operations in Western Guangxi and SGX’s Jinfeng operations in Southern Guizhou during the week before the conference, attended the conference and saw a number of blue skies over Beijing including an almost clear sky flight from Guiyang to Beijing, and then visited Shanghai and some friends studying Mandarin at a university in Hangzhou.
  • The disparity that we wrote about in the performance of Australian nickel companies during 2005 and our comment that “we believe both (Mincor and Sally Malay) are capable of exceeding A$1 per share, with Independence capable of being well over $2 per share”, was an understatement as during 2006, both MCR and SMY exceeded and are still more than $2/share, with Independence rising to over $5/share, before dropping back.
  • Both Inco and Falconbridge have been taken over, so comparisons with them cannot be made any more – surprisingly no one has focused on why they were taken over as in why not aluminium, copper or zinc companies. However, Table 1 below reflects a “what if” nickel stayed at US$15/lb (US$33,000/t) since current share prices appear to be indicative of nickel prices of ~US$

Aug 2007 - DnD - SMY, AVO, CSM

Buy SMY & AVO; CSM worth >$5

  • If we had to pick two stocks, they would be our last two reports : SMY & Avoca
  • Preferred buying order for the nickels: 1. Sally Malay, 2. Indep Group, 3. Mincor
  • IGO could produce 1,000tNi above expected or ~10,000tNi in 07/08. Tropicana expect > 20moz (range is 20moz to 50moz over the 350km strike length).
  • MCR’s 50% increase to 900,000tpa treated by 08/09 appears to be >1.0mtpa.
  • CSM’s Gillet worth well above the ~$4m in the IGR (A$70m to A$95m?), Beta Hunt now improving with Vent #, New Ni concentrator at Widgie appears likely.
  • This Comment started out based on the visits we (ERA) took during this years’ Diggers and Dealers August 2007 Conference. However, it has been extended following the recent decimation in share prices due to trading on money that did not exist, and requests for our nickel and gold favourites.
  • Our (ERA) current favourites are :
  • Sally Malay : Recent August 1 report, rose ~10% on report release, plenty of upside potential, Deacon : HUGE, maiden dividend, debt-free, hedging basically gone (actually lost $112m in hedging in 06/07 & still made ~$90m NPAT (cashflow would be even higher)).
  • Avoca : Recent August 2 report, rose ~5% on report release, market unfazed by negligible production this year, new Wills supergene discovery, potential new Chalice discovery.
  • Independence Group : Steady production from Long/Victor at probably closer to 10,000tpa Ni (quoted as 9,000tNi for conservatism). Tropicana 20moz to 50moz, other new gold areas.
  • Mincor : Significant increase in production coming and plenty of exploration upside. Thinks it should recoup its Otter Juan acquisition within one year with ~$6m cashflow just for July 07.
  • As for CSM : Wait until the last possible day before accepting, the ideal scenario is that neither offers win as in ERA’s opinion, it should not have embarked on this course of action and could have traded closer to $5/share (due to the manganese market upside). If Pallinghurst looks likely to win, then SELL : if TTY looks likely to win, then BUY.
  • There were numerous visits to choose from at Diggers, from which we visited IGO’s Long/Victor Mine; MCR’s Otter Juan, Carnilya & Miitel; and CSM’s new Gillet discovery and new open-cut mining at Armstrong & 132N. Our comment on IGO includes the presentations made by IGO and AGG mainly on Tropicana at the conference, where estimates ranged up to 20moz and beyond.