–We had a closer look at both the bauxite and iron ore projects. The company’s “Railway Project” is its main iron ore asset. The good news is that it’s in the Pilbara, where the iron ore quality is high. The company describes the Railway Project as, “a highly prospective Marra Mamba Formation” which is, “host to a number of major iron ore deposits within a 50km radius of the UMC tenements.”

–It is good to be near places where there is already proven ore. But “proven” is such a tricky word in the mining business. We asked Diggers and Drillers editor Al Robinson for a sixty second primer on how to tell if a mining company is blowing smoke.

–”Make yourself two categories: Reserves and Resources. Under resources create three more categories: inferred, indicated, and measured. When a company announces resources, it’s saying that its early geology leads it to believe it might have an ore body there. But there’s a lot of uncertainty. Nothing’s definite. A lot can change. It doesn’t mean they can produce any mineral or metal at a profit.”

–”You have thirty seconds left.”

–”Reserves are a step up and fall in to two categories: probable and proved. You can only call something a ‘proved reserve’ if your geology is sound and you know, with as much certainty as you can know these things in mining, that you can produce the ore body at a profit.”

–The important thing about having a defined reserve is that it allows investors to begin constructing a realistic valuation for the company’s assets. It is still not an exact science. Valuation never is, what with the market prices for underlying commodities in constant cyclical (or super-cyclical) flux. But the more defined a resource base is, the easier it is to decide how much you should pay for a stock today.

–There are many more variables involved, of course. But with respect to UMC, the company is doing what it has to do to “prove up” its resource base. That will take time. –Its bauxite operations are worth a look too. The company entered a five phase agreement with Norwegian giant Hydro Aluminium. Hydro owns 75% of the project and is probably looking to source bauxite ore for its aluminium operations. However, we read in UMC’s ASX announcement yesterday that phase four of the plan includes construction of a bauxite mine and aluminum refinery in the Kimberley region of WA, as part of the company’s Mitchell Plateau South program.

–You must crawl before you can walk or run. Before phase five, where Hydro buys UMC’s bauxite for a new alumina refinery in WA, UMC has to prove it has mineable bauxite reserves. Its current drilling plan will try and demonstrate that when it begins next month.

United Minerals Corporation (ASX:UMC)

–All of the above information came out in UMC’s announcement to the ASX yesterday. Note, however, the increase in volume in the stock in late March and early April. The market moved before the market knew what the company knows. So why did the market move? Hmm.

–In the States, company directors with large positions in their own stock are required to file “Form 4″ with the Securities and Exchange Commission when the size of their position changes. That form must be submitted two days after a transaction is made.

–Naturally, investors can use Form 4 filings to see what the insiders are doing. Tracking insider buying is a popular trading strategy for punters. In Australia, ASX listing rules 3.19a and 3.19b require a company to notify the ASX of dealings in a company’s securities by directors within five days of those dealings. Most of the major papers and some websites will publish, from time to time, “Director’s Dealings.” This tells you what insiders are doing, after they have done it.

–Section 1042 of the Corporations Act of 2001 defines Insider Trading in Australia. It’s actually a pretty entertaining read, if you have the time. The important language in that section says that company directors cannot trade on information that is not “generally available” to the public which might have a “material” impact on the share price.

–Hmmn. That is the letter of the law. As a company director, it is not legal to buy and sell shares because you are in possession of price-sensitive information the public doesn’t know. But the spirit of the law is one thing. Enforcing it is another. The ABC’s 7:30 report did a fascinating story on insider trading last week. You can find the transcript here.

–We reckon you’ll never root good old fashioned insider trading. Meanwhile, if you’re not on the inside, keep an eye on unusual volume activity in shares. That’s what we’re going to do from now on, in addition to looking at the price sensitive announcements published daily by the ASX. We may even begin to publish director’s dealings either here or in Money Morning. We’ll keep you posted.

–But our beat remains fundamental here at the Daily Reckoning. We’re looking at the big picture. More on that tomorrow.

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