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Strategies & Market Trends : Natural Resource Stocks -- Ignore unavailable to you. Want to Upgrade?

To: Christopher Loe who wrote (19703)	1/5/2005 8:21:27 PM
From: SliderOnTheBlack	Read Replies (6) \| Respond to of 108625

Say hello to my little friend................................................. During these transition & shakeout periods I occassionally like taking a position in the most out of favor/contrarian plays within the sector; in essence a "trade the traders" play. Presently "Out of Favor" in the Gold Stocks would best be defined by the ravaged "Yellow Dogs of the Bow... Wow" South African sector. Have they bottomed here ? - who know's. Are they out of favor ? - well, let's just say they look like what's left in the Tub after the Baby and the Bath Water have both been thrown out. The opportunity with the South African Golds has always been with their superior leverage to Gold... unfortunately for them, the Rand hasn't been cooperating lately. But, that's where the opportunity lies... - Where others fear to tread. - Where one man's Junk can become another man's Treasure. While there are many roads to success and profit; I usually find more success and alot more profit - in taking the road less traveled. And the yellow brick road back to the South African plays has definitely been... "less traveled". I know, it's been a while and you're thinking ... - What have I been smokin ? ...bear with me (no pun intended). I don't think you can wait for these stocks to bounce technically off of their bottoms, or to fundamentally react to a change in South African Monetary Policy, or a Rand, or USD reversal and catch them anywhere near their ultimate bottoms. I think you have anticipate a bottom and build into a position - buying into weakness before the technical,or the currency play becomes visible; because once it is... the stocks imho; will already have anticipated the move and ramped hard & fast off their out of favor/over sold bottoms. I know, you're all thinking - Why would I buy one of these South African Golds rather than a North American Explorer, or emerging producer - a play that's worked so well, so far; when the sectors moving up ? I think the best way to answer that question is in looking at the numbers. Let's start cheap and take a look at the numbers for my little friend - Mr. Drooy. Would you rather throw a $1.50 at a No American Explorer that may never be successfull at the drillbit, or buy an emerging producer that may not be well capitalized, may be diluted into oblivion and never bring Big Number ounces to production... or ~ Would you consider spending that same $1.50 on an "option" that may never expire... on the #11 Gold Producer in the World whose 900,000 oz's a year of production are being valued on a Market Cap to Annual Production basis at only $396 per oz - well under a current $425 market price for Gold ? - whose Proved & Probable Reserves in the ground are only being valued at a whopping $25 per 0z ? These valuation numbers exist for an established major producer in an upcycle for Commodities with Gold at $425 oz. Whodathunkit ? Think back to 1999/2000... If I had told you all, that you could buy those kind of Reserve numbers and that level of present Production below the spot market for Gold, 5 years from now - in a $425 per oz Gold Envirnonment... Would you have bought an option for $1.46 ? You know you would of. And that's where we find ourselves today. Say - hello again my friend ~ To Mr. DROOY Still skeptical ? Throw in yet another kicker - ...they've got assets that can be spun off; that are nearly equal to the present market cap of the entire company.... leaving those massive production & reserves left behind in Africa for "free." That's the way Mr. Market is presently valuing our little friend the once revered Rocket of Roodepoort. Here's a quote from the company on that valuation and potential spinoff: ["Murray told miningmx last year that investors seemed to be valuing the company either on an option pricing model or a cash flow multiple. “Our share of Porgera (a joint venture with Placer Dome in Papua New Guinea) is worth between $140m to $180m which, on a two times net present value, should give us a market capitalisation of more than $300m alone,” Murray said last year. DRDGOLD is currently valued at about $350m. The outcome was that the company’s South African gold resources of some 10m oz, traditionally DRDGOLD’s best quality for US investors, had been given virtually no value by the market......In other words, all eyes were on the performance of the South African operations rather than DRDGOLD’s offshore mines which are estimated to produce $15m in operating profit per quarter."] * Put a reasonable PE Multiple on spinning off that $15M per Qtr/$60M per year in operating profit... STILL skeptical ? I know, it's a tough crowd. - how about Management also putting their money where their mouth is with some Insider Buying: miningmx.com [miningmx.com] --[" FOUR DRDGOLD directors bought nearly a quarter of a million dollars worth of their company’s stock in a fortnight last month amid signs that the company’s famed leverage to the gold price was evaporating. The firm’s executive team, chairman Mark Wellesley-Wood and CEO, Ian Murray, as well as non-executive directors, James Turk and Robert Hume, bought a combined 150,000 DRDGOLD shares worth a total $247,000. Shares were bought at a price of between $1.78 and $1.61/share. In hindsight, the directors should have perhaps waited as the stock slipped to $1.46/share in late December before regaining about 5% to $1.54/share today (3 January, 2005)."] I am NOT knocking anyone buying/holding/trading the North American Junior's here...I'm researching a watchlist basket for myself (if we continue pulling back) as I type; just pointing out that given the Gold/Commodity Bull; the time may have arrived to think a bit outside the box, to break away from the rest of the GoldBull pack and take another look at the out of favor South Africans like DROOY. Can they go lower ? - sure, anything can. But, sooner or later; South African Monetary Policy will come under pressure, or the Rand will soften,or the Dollar will Rally; assets will get spun off & companies will get taken out and Trading Profits will once again be found Deep in South Africa. Not a Drooy fan... don't worry - be happy. DROOY isn't the only cheap South African on a MC/PP, or production basis - HMY is selling @ $64 per oz MC/PP. Don't like Harmony & don't think they can close on their bid for GFI...for another $20 per oz you can buy the fundamentally stronger GFI at only $84 per oz MC/PP. re: valuations: trinity.mips1.net - click on the far right column of MC/PP USD$ per OZ for an interesting look at valuation rankings... great site. Want exploration upside - RANGY is an interesting play has been hammered down to an option price of $1.61 - down from $5.78 mere months ago. Has it bottomed ? ..how cheap is cheap ? Cheap is in the eye of the beholder - is NEM cheap ? Sprott Asset Managements entry into Aflease adds credibility and endorses the Out of Favor South African idea. Aflease itself is another "outside the box" idea as it adds an interesting Uranium Component as well...lot's of So African idea's out there. This last leg of this Gold Bull was driven by the Stocks most leveraged to North American Production and the weak USD - it wasn't hard to figure out. The Gold Bulls were heavilly bunched all together on the same side of that trade, as well they should have been...but, we all know what happens when everyone loads up on one side of a sector and plays off of the same trading theme...others become undervalued & oversold. Then the shakeouts occur... one door closes and another one opens. Has the time for the South African's arrived ? In my opinion... it has; at least for initially building a partial re-entry position by buying into further weakness here. I don't know about the rest of you... but, I like the feeling you get from both doing a little thinking and a little trading outside the box... but, then again; maybe it's just from having the little Rocket - back in my pocket~ ciao`