This will see small companies, whether on the main market or AIM, offered the chance to pay £10,000 for a year’s worth of independent research prepared by one of three firms, Argus Research from New York, Chicago’s Pipal Research and our very own International Investment Research Plc.

Naturally I am pleased to see the LSE at least acknowledge that the share prices of small companies often bear no relation to the performance of the business itself, and that this is a real concern not only for investors but also for the many small companies that want to be able to issue new shares at a fair price.

But will this new measure really offer ‘huge value’? After all independent research is not new.

Filling the gap

In the old days a company’s stockbroker was responsible for writing research notes, partly to inform the market and partly to drum up some business for itself. Finding that the illiquidity of small companies defeated this latter purpose, many stockbrokers have simply abrogated this responsibility to the disgust, I might add, of many of their clients.

Into this gap have stepped a number of independent research houses such as Edison and Hardman that will write research notes to order, for a fee of something in the region of the £10,000 that the LSE is charging for its new service.

Nobody, of course, really believes that this research is truly independent. The researcher will be briefed by the company, and the research note will be vetted before it is published. If an ‘independent’ research firm has ever thanked a client for the commission by publishing a sell recommendation, I haven’t seen it.

The new venture sounds slightly different. The research note will be written by one of the three appointed firms ‘on a pre-determined allocation basis’ which I assume means that the company itself does not get to choose which of these three it will be. And ‘the research will consist of comprehensive factual information and analysis’ and ‘will not be investment advice and will not make recommendations.’

This immediately raises one question. Will companies be prepared to pay £10,000 for a research note over which they apparently have no control, and which does not conclude with a recommendation for the shares? A second question concerns the contents of these notes.

Apart from ‘comprehensive factual information’ we are promised that ‘the research providers have agreed to share common methodologies and produce reports that follow a uniform presentation format, in order to facilitate cross-company and cross sector comparisons by investors.’

Some bright spots

I like the sound of a common methodology, although I wait to see how this will enable us to compare the merits of, for example, an oil explorer and a software provider. But how much new information will these notes bring to investors?

The basis of the LSE’s initiative is that there is a lack of information about small companies; that more information will mean that more opinions are formed; that more opinions will lead to more trading in the shares; and that the result will be a more accurate pricing of small company shares.

However, there has been a massive increase in the amount of information that is available to investors in the last few years – but it seems to have done very little for the pricing of small company shares.

Whereas two or three years ago it could be quite hard to get hold of information about small companies, today just about each one has a very comprehensive web-site, featuring a description of its activities, past copies of annual and interim reports, biographies of the directors, and sometimes broker research notes. Indeed, my very own articles from Red Hot Penny Shares have been known to appear on company websites.

So companies have made a big effort to inform the market and if it has had no effect it can only be for one of three reasons. Either very few people are actually reading it – as I am sure is the case. Or the huge increase in the number of small companies trading on the LSE has simply overwhelmed the market’s capacity to absorb all that it should know about them – which I also think is the case.

Or people have been reading this information, but simply don’t believe that it tells the full story.

It is of course inevitable that companies do not publish negative information about themselves, either via a corporate website or via a note written by an ‘independent research house.’

What intelligent investors really want to see is an informed assessment about a company’s product written perhaps by an industry specialist, and a suitably cautious and sober assessment of its position vis-a-vis competitors.

If these newly appointed research houses can provide these perspectives they could make a useful contribution. But the old problem remains – will small companies be prepared to pay £10,000 for a note that draws attention to their weaknesses? And if not, is it worth having these ‘independent’ notes written in the first place?
Regards,

Tom Bulford
for The Penny Sleuth

Source: The London Stock Exchange Listens to the Sleuth

It wouldn’t have been a bad idea. In the last year, the junior Alternative Investment Market (Aim) index has fallen around 14 per cent while the FTSE 100 is down only 6.5 per cent. Admittedly, you’d have been better off in cash – you’d have made 5 per cent there. But, relatively speaking, at least the experts were right.

Now, however, it’s all the other way around. If you are looking for fundamentally cheap investments, you need to be looking at Aim where the average price-earnings (p/e) ratio has fallen to a mere 6.3 times.

There are 1,600 companies listed on this market, so there are obviously huge variations within this – miners and oil companies trading on p/e ratios of 20-plus and the odd outlier, such as fashion super-success ASOS (LON:ASC), trading on 40 times. Even so, talk to a small-cap fund manager of any kind, and he’ll be quick to point to a pile of favourite stocks all throwing off cash yet selling in the market for the bargain prices of 4r or 5 times earnings.

One example is AT Communications (LON:ATCG), a perfectly respectable telecoms company on a historic p/e of 5 times and a prospective p/e for 2008 of a mere 4.75 times.

So just why are there so many apparent bargains about? One answer might be, tax.

Until recently, capital gains on Aim-listed stocks were taxed at only 25% of the normal rate for higher-rate taxpayers, as long as you held the stocks for two years – so an effective rate of 25% of 40%, which is 10%. Now, however, you pay 18%, just like anyone investing anywhere else.

Then there is inheritance tax to consider. Certain Aim stocks are immune from inheritance tax. But now that couples are able to leave their nil-rate bands to each other (automatically combining their tax- free allowances) perhaps fewer people feel the need to bother with the kind of estate planning that Aim provides.

Of course, there is – as there should be – more to this than just tax. There’s also general risk-aversion. Smaller companies tend to be more geared to the domestic economy than larger multinational companies so, when things turn down, their shares inevitably suffer more than most.

And things are turning down in the UK – big time. The housing market gets worse by the day; there are signs unemployment is about to take a turn for the worse as jobs in construction and retail start to go; oil prices have now started to “melt up” – even more quickly than I suggested they would – and rising inflation means no interest rate cuts.

However, an annual survey of the market from Baker Tilly and Faegre & Benson, entitled “Taking Aim”, throws another kind of light on the way things have changed in the market.

Back in 2005, there were 335 initial public offerings (IPOs) on Aim, raising an average of £17m each. In 2007, there were 82, but the average amount raised was a massive £231m. In some ways, this might look like a good thing – more money was raised in total. But for real smaller companies it might not be.

Why? It suggests, says John Glencross of Calculus Capital, that the London Stock Exchange (LSE) and the companies that work as brokers to Aim-listed companies are more interested in marketing Aim as a home “to foreign companies seeking an international listing, where the amounts involved are very large, than to growing UK companies which typically want under £10m”. A number of last year’s listings were also large funds of one sort or another, or property-related companies.

For these overseas companies, and the brokers getting paid for bringing them to the market, Aim also presents an opportunity for a form of regulatory arbitrage. Its relatively light regulation and less-than-arduous listing requirements make it an easier place to get a fundraising away – and earn those commissions.

This makes sense, of course, in that both the LSE and the brokers are looking to make money, and you make more from big listings and secondary fundraisings than small. But it does make it hard for small companies to get their hands on funding.

This might be the key to the low-looking valuations. Right now, a small company, however good, doesn’t really have anywhere to go to get money to expand. The banks are closed or upping their rates; the debt markets have never been small-cap friendly; and if they only want a few million, Aim isn’t suiting them very well either.

At the same time, liquidity has disappeared from the market itself. Spreads are wide and volumes are low. So buying and selling stakes in listed companies has become little easier than buying and selling in private companies.

The combination of these two factors means that, right now, being listed on Aim isn’t really all that different to being a private company.

And what do private buyers pay for private companies? It depends on all sorts of issues but, in general, the answer is around five times profits. Look at it like this and maybe the seemingly cheap stocks rattling around Aim aren’t so cheap after all.

It would be nice if there were something to be done about all this – small companies are incredibly important to the UK economy. But, as it probably won’t be, I think we can expect the sector to continue to be starved of both funding and investor interest. Both are compelling reasons not to leap in just yet.

Source: Why You Should Stay Away From the Alternative Investment Market

Floating out Fresnillo, the world’s largest primary silver producer, Penoles is valuing the subsidiary at a whopping $4bn.

The logic is that analysts prefer simple stories rather than trying to evaluate multiple-asset miners. Fresnillo contains just the group’s major precious metal operations. The Penoles structure, which survived 120 years of revolution and crises, is being dismantled to suit 21st century investors.

This IPO is deemed to be a success for London. Commentators are saying that Fresnillo’s launch in the City is part of a shift in corporate Latin America. Instead of using Madrid or New York for its capital raising, these guys are coming to London.

Of course, the London Stock Exchange (LSE) has worked hard to cultivate links with Central and South America. There’ve been loads of road shows extolling the virtues of a FTSE or Alternative Investment Market (AIM) listing. The LSE has met chief executives in Sao Paolo and Lima. Further road shows are planned in Chile and Argentina.

Hochschild, a Peruvian silver and gold miner, became the first Latin American company to float in London for a century when it listed in November 2006. Fortunately for the LSE’s marketing drive, its shares have since risen 20%. Andrew Wray, at bankers JP Morgan Cazenove, said: “New York used to be in the backyard for Latin American companies but they are increasingly turning to London, particularly resources companies, as so many others are listed here.”

The IPO is a success for its parent

The IPO seems to have been a success for Bailleres, too. Penoles’s shares jumped 8.14% on the Mexico City bourse to 346 pesos a share following news of the spin-off.

Fresnillo sold about 23% of its shares in London. It was hoping to raise around $1 bn in total. In the event, it brought in around
$900 m, but plans are to sell a further 2%.

Anyway, the company is large enough to move straight into the top London share index, the FTSE 100. The remaining shares will be held by Penoles.

Penoles’s precious metals division produced 34.4 m ounces of silver last year and a further 280,000 ounces of gold. It is Mexico’s second largest gold producer, with a turnover of $648 million.

The new company is named after its largest mine, in the Zacatecas region of central Mexico. Fresnillo also has a gold mine in the Sierra Madre mountain range of northern Mexico and another in central Mexico.

The money raised from the share placing will be used to pay off debt, finance the expansion of the Fresnillo mine and develop three other mines.

CEO Jaime Lomelin said at the IPO press conference that Fresnillo will ramp up annual production of gold to 400,000 ounces and silver output to 60 million ounces. “We have a lot of projects in the pipeline,” he told reporters.

Continues below

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Weaker metal markets took off some of the shine

Understandably, Fresnillo is forecasting that silver prices will stay high. Chief financial officer, Mario Arreguin does, however, expect “increasing volatility.”

His words might equally apply to the share price. The stock opened on the London Stock Exchange at 530p, touched an intraday high of 539.5p and hit an intraday low of 502p. The shares then closed at 520p, a decline of 6.3% from the IPO price.

Analysts said the fall reflected the recent retreat in precious metals prices. They also thought there was a lack of appetite for new issues after Czech coal miner New World Resourcesraised £1.1 billion pounds with an IPO in the same week.

But BlackRock fund manager Graham Birch, a big name in precious metal investing, hastened to defend Fresnillo’s virtue. He told journalists that he had bought shares in the IPO and was confident they would perform well over time.

“I think this is a really excellent company. We’re very pleased to have it in our precious metals portfolio,” he said.

Silver is certainly a way below its peak. It is around $17 an oz, having crossed the magical $20 line in March. Kitco, the precious metal commentators, share Fresnillo’s view that the price will remain volatile. They expect it to revisit $15.50 an ounce at some stage.

At the moment, however, chartists reckon the price movements are looking good. The 200 day moving average is on the up… an excellent sign!

The case for silver shouldn’t fade

Analysts GFMS believe that as long as gold prices remain strong, the case for silver investment will not fade.

They expect the rally to continue at least to the end of the year, and quite possibly into 2009. So, they see silver investment demand and price strength persisting.

More importantly perhaps, since investor sentiment can turn on a speck, industrial use of silver is still rising. Electrical and electronics fabrication accounted for the greatest increase.

So, keep mining.

Erin and Isabel

PS Make sure you don’t miss out on getting all the latest industry news in one daily hit with a brand new free eletter from Fleet Street Publications.

Source: The Case For Silver Investment Should Not Fade

Finding these opportunities is just half the mission. The more important, and often more difficult task, is finding safe ways to play them.

Consider China. Unless you’ve been cooped up in Guantanamo for the last few years, you’re already familiar with the miracle of China, Inc.; 11.4% GDP growth, the world’s “go to” manufacturing center, a 1 billion strong local consumer market, and some of the greatest business opportunities in the history of the world.

So far, so good. But when you drill down another level, the level where you hope to find undervalued investment opportunities, things quickly get more complicated. Thanks to that country’s emerging middle class, flush with exponential growth in purchasing power and investable funds, , the Shanghai stock exchange has become one of the hottest capital markets in the world. And one of the most dangerous.

Over the last 7-years, the Shanghai Composite Index has returned approximately 80% to investors with some serious roller coaster rides along the way, including days of such catastrophic meltdown that even the most seasoned investors make a bee-line for the nearest emergency exit.

The Price/Value Disconnect

The most disturbing thing about the Shanghai market is the often complete disconnect between the price of a given stock and the value of the underlying company. In China, soothsayers in the local newspapers predict what numbers will endow great luck… just like a fortune cookie at your favorite Chinese buffet; and as you are undoubtedly aware, stock symbols in Shanghai are numbers, not letters. So when the great sage says 0, 4, 7, and 9 are today’s lucky numbers, that spells good news for Shanghai Zenhua Port Machinery Co., symbol: 900947, and poof, the stock jumps—irrational exuberance at its most irrational. This and similar actions of an inexperienced, first generation investor class, coupled with a general overconfidence among the Chinese on the outlook for their stock market, periodically drive the Shanghai exchange to bubble territory, that is subsequently corrected in stomach churning down moves.

So, the sort of booming economy and big upside we like, but with an unpredictable and wildly irrational stock market.

What’s an investor to do?

Because we’re looking to buy into the growth, and to do it safely, stepping up to the craps table in Shanghai along with all the other speculators and soothsayers isn’t going to cut it.

Instead, we invest in undervalued Chinese companies listed on more established exchanges. Simple, but effective.

Some examples…

We are currently following a Jersey-domiciled, London-traded cement company based in the western China province of Shaanxi (not to be confused with the neighboring Shanxi province…). Shaanxi is one of the fastest growing provinces in China, and this cement company is ideally positioned to capitalize on this growth. Currently trading on London’s Alternative Investment Market (AIM) at only 6.4 times earnings and 4.6 times current assets, this stock is as undervalued as it gets, especially considering the growth prospects.

While it has already provided us with solid profits, we see it as a relatively near-term double from today’s levels. But we digress from the central point here… which is, because it trades on the London AIM, and not Shanghai, your shares have nowhere near the volatility.

Confirming that point, we looked at twelve worst performing days of the Shanghai Composite Index since January 1 2007, with single day losses ranging from 5% to over 10%. On average, during those steep drops, our Chinese cement play outperformed the index by an average of 6.85%. Viewed from another angle, on the 12 worst performing days of the Shanghai Composite Index since January 2007, our AIM-listed Chinese cement company actually posted a daily gain on eight of those twelve days, and posted a far better return than the index on all twelve.

For us as investor this means we are able to capitalize on one of the fastest growing industries in one of the world’s fastest growing economies with one of the industry’s most seasoned management teams, and doing it all safely, with far less volatility than in Shanghai.

We believe in the Asia growth story, and we believe in companies like our China cement story (the name of which we can’t share here because it wouldn’t be fair to our subscribers). But we are only willing to risk our hard earned capital in a way that makes sense to us. So in China, we look for solid, undervalued companies on established exchanges – and there are a number of these gems if you dig for them – and save the gambling for the casinos in Macau.

Fitzroy McLean is the co-editor of Without Borders from Casey Research, a monthly service dedicated to searching the world for undervalued, lower risk investments. A three month, no-risk subscription offer is available that will bring you current with all of the Without Borders recommendations… learn more now.

Source: How to Safely Play China’s Growth

Sad too is probably how early stage explorers are feeling in these uncertain times. Raising capital for new projects has become increasingly difficult. Funding from traditional investment sources has all but dried up.

Take London’s Alternative Investment Market (AIM). It is increasingly reluctant to list companies in the early stages of exploration. Miners coming to AIM today tend to be producing, or at the very least close to producing.

That is the golden rule we tend to apply too! But we also recognise that exploration is important. After all, minerals are in short supply and in spite of US slowdown, the commodities bulls reckon demand from Asian economies will rise and rise!

So while producers, or near-producers, are certainly preferable, we’d be crazy to write off all explorers. They might be risky but there is always a chance that they will deliver. Even if share prices have taken a hammering!

African Eagle… soaring to production

In spite of a disappointing slump in the share price since August (it is not alone here!), London and now Johannesburg-quoted African Eagle Resources might be one of those.

African Eagle is a copper, gold and now uranium explorer with interests in Zambia, Tanzania and Mozambique – all countries with relatively stable political and economic regimes and good infrastructure.

Better still, a successful secondary listing on Johannesburg’s Alternative Exchange (AltX) last year means African Eagle’s exploration projects are fully funded for 2008 and 2009. And the plan is to fast track the two most advanced of those to production sooner rather than later.

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Own this company now before their share price reflects what they’re actually worth…

Forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you
can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. Customer Services: 0207 633 3600.

Other projects in a relatively advanced state are the Ndola and Mokambo Copper projects in Zambia. Also in Zambia is the Sasara Eagle Eye copper-gold project… It holds a large iron-oxide-copper-gold system as well as uranium rich mineralised targets.

But for the moment, Mkushi and Miyabi look most promising. Production is expected within three to five years. And from our precious metals vantage point, there is plenty of shine on Miyabi!

Randgold takes a shine to African Eagle

Here is why. First of all Miyabi is located in Tanzania in East Africa, where mining is considered to be a key foreign exchange earner and growth sector. Over the past ten years there have been substantial economic and structural reforms here. The result is that Tanzania is now the third biggest gold producer in Africa, with more than 50m ounces of gold reserves and resources. Fair play to them!

Miyabi, a gold bearing corridor of 7km by 2km, is African Eagle’s most advanced gold project. Drilling in this area has to date defined a JORC-compliant resource of 520,000oz of gold. (For the record, JORC is a professional code that is now widely accepted for reporting resources and reserves.)

More reassurance comes from the fact that London and Nasdaq-listed Randgold Resources, one of our favourite junior gold companies, has been involved in the drilling process.

Randgold and African Eagle have entered a joint venture whereby Randgold not only funds but also carries out the pre-feasibility study. So Randgold obviously wants to get it right. Because getting it right means that it could earn a 50% interest in the project.

African Eagle then has the option to co-fund a full feasibility study or dilute its interest to 35% if Randgold funds the full study. So there is everything to play for.

Clearly Randgold brings its drilling expertise to the project. It recently completed 4068m diamond drill programme across the Miyabi Structural Corridor. Why? To better understand the geology and mineralisation of the area.

After all, African Eagle has pointed out that the area, covering just over 500 km², has only been part drilled. And it seems pretty confident that it can expand that resource to 1m oz.

…and TWP Finance gets in on the act too

Now African Eagle’s strategy is clearly one of finding partners with skills and experience, financial support or local knowledge.

But more recently it sold a 4.48% stake to TWP Finance, a subsidiary of consultant engineers TWP Holdings.

TWP has made it quite clear that it intends to up that to a “strategic stake” in African Eagle. Now, TWP Finance positions itself as company that trades mining skills and intellectual property for sweat equity or mineral rights. A company that is committed to “becoming increasingly involved in early stage exploration projects around the globe,” says TWP Finance’s chief exec Dean Cunningham.

It is a risky strategy but one TWP reckons is worth taking. Explorers are finding it increasingly difficult to find capital. But the world says Mr Cunningham needs “these new projects to supply the current commodity and resources boom”.

So TWP brings its small team of financial and mining experts to a project in return for shares. Then it brings its skills base to the party and helps to fast-track key projects.

Risky but potentially rewarding? African Eagle may just be a takeover target for bigger players. At last look the share price was trading at around 8p a share.

Management can’t say loudly enough that it is undervalued.

Neither can Mr Cunningham, who reckons “African Eagle shares are an attractive prospect at present, as they are relatively undervalued despite the high metals prices in the extended commodity cycle”.

Spin if ever I heard it, says Erin. But even she has a twinkle in her eye.

Keep mining,

Erin and Isabel

PS Make sure you don’t miss out on getting all the latest industry news in one daily hit with a brand new free eletter from Fleet Street Publications.

Anybody with any sense has steered well clear of Zimbabwe for the last few years. But as the election process got underway it seemed that risk hungry investors were alive and well. Stocks in mining companies operating in Zimbabwe leapt in Johannesburg, London and Sydney as news that Robert Mugabe’s days as president could be numbered. The change in leadership hasn’t materialised, but let’s look at what happened.

Where there is risk, there are bargains…

In Sydney platinum producer Zimplats rose 11%, the biggest rise in a year! Around 68% of Zimplats is owned by South Africa’s Impala Platinum (Implats) and in Joburg, Implats too saw its share price jump 3.9%.

Then in the big smoke, LonZim, the investment fund established by mining group Lonrho, rose an impressive 14.85% to close at 116.50p. LonZim wants to raise around US$140 million on London’s Alternative Investment Market (AIM) to purchase assets in Zimbabwe in the event of an economic upturn. Rumour has it that the fund has already raised $65m.

Aquarius Platinum was another gainer — its share price leapt 8.1%. And take a look at this — London’s African Consolidated Resources soared 36% in just two days! The company felt compelled to put out a statement saying it had no idea why the share had moved so dramatically. That said, speculators that didn’t then take their profits will be kicking themselves now. The share price has fallen nearly a third since!

Still, enthusiasm for Zimbabwe is not exactly new. In October, asset management and investment company Imara used its newly launched Botswana-based Zimbabwe Fund to invest $13.5 million in 17 of the 82 companies listed on the Zimbabwe Stock Exchange. They must be chuffed — the Zimbabwean stock exchange’s mainstream industrial index has gained 600% this year!

And if you’ve been reading our diaries you’ll know that the Chinese too have been actively seeking mining opportunities in Zimbabwe. They are after gold, platinum and even uranium. The Chinese have already proved their interest is real. Last year they put money into Zimasco Consolidated Enterprises, Zimbabwe’s largest ferrochrome producer.

The nightmare isn’t over

So there is some truth in the saying where there is risk there are also bargains to be had. But there are big risks, not to mention ethical considerations; the nightmare is most certainly not over. Mugabe and his ruling Zanu-PF party were never going to relinquish power easily and second round of the presidential election now seems certain. Even Zimbabwe’s opposition leader, Morgan Tsvangirai, who is said to have won the election, has left the country. And some argue that investing in Zimbabwe will only prolong Mugabe’s reign of terror.

If stability does come to Zimbabwe, which is looking increasingly unlikely, the rewards will be long overdue. For sure, companies operating here have been hanging on by a thread. It has not exactly been an easy ride.

Take ACR, for example — Mugabe’s government cancelled its title to mine the rich Marange diamond fields in eastern Zimbabwe. Rio Tinto too saw the production of diamonds from its 78% owned Murowa operation fall 40% – given economic uncertainty the mining giant simply couldn’t justify the necessary US$20m investment to keep the operation going. And Murowa is Zimbabwe’s biggest producer of rough stones.

Indeed, countless mines (more than 100 since 1998) have had to close because of skyrocketing operational costs. Then Mugabe decided to introduce a nationalisation law that forced miners to cede majority ownership to locals. Add to that foreign exchange troubles, power cuts and power struggles, and it is plain to see that the list of woes has been endless.

But if a miner can’t look on the bright side then he is in the wrong job. David Brown, chief executive of Implats, the world’s number two producer, called Zimbabwe a “big blue sky opportunity”.

Certainly many mining companies have remained committed to Zimbabwe. After all they know what is in the ground! Zimbabwe has large gold and diamond deposits. And it is has the second biggest platinum reserves in the world after South Africa.

Last month, for example, Implats said it would aim to increase platinum output from its Zimbabwe mines by 100,000 ounces to 260,000 ounces annually by 2010. That meant a commitment of $360 million to expand its Mimosa and Zimplats operations.

Then Anglo Platinum, the world’s biggest platinum producer, and Rio Tinto both said that despite the troubles, they remained committed.

A glimmer of hope

The business community would like to see Mr Tsvangirai in power, but nothing short of a miracle would be needed for this to materialise now. And even if it did, the economy will still be in tatters. Michell Gavin, an adjunct scholar on Africa at the Council of Foreign Relations, couldn’t have put it better. An “all-hands-on-deck effort” would be necessary to rescue Zimbabwe, she was reported saying in Time magazine.

Okay, so the international community which vehemently boycotted Zimbabwe is ready to step in with financial support. The Brits, it seems, are already expected to dig deep into their pockets to bring the country back from the dead. Allegedly £1bn a year emergency aid and development package is on the cards. That would triple the aid currently being supplied to Zimbabwe.

So there may be a glimmer of golden hope. Worth watching! Though it could very easily be snuffed out.

Keep mining,

Erin and Isabel

It happened by accident. For years geologists were unable to work out how to extract the gas that they knew was contained in the dense, jet black rock that lay below North Texas. This rock is known as Barnett Shale, named after pioneer settler John Barnett, and is beneath 5,000 square miles of the State. Shale is an organic rich rock, deposited by a major worldwide flooding event over three hundred million years ago. Because, like slate, it is a sedimentary rock, it is dense and heavy. So it is not easy to suck gas from it especially as, while some of this gas resides in the minute pores in the rock, the remainder is a solid solution bound onto the grains of the rock.

For years prospectors thought that the only way of extracting this gas was to pump other gas into the rock. Then one day Mitchell had a different idea. ’Why don’t we just pump water into the well and see what happens?’ he asked. And something did happen. The gas started to flow. And he became very rich.

Almost by accident Mitchell had discovered a method of fracturing the shale several hundred feet below the surface, allowing the gas to slowly seep through the minute fissures and up to the surface. Allied to new techniques for horizontal drilling a whole new opportunity was created for the energy industry. With the cost of imported energy rising ever higher, shale gas is now the USA’s fastest growing energy sector. There were only two hundred well bores on the Barnett Shales in 2000. Today there are seven thousand.

A small AIM-listed company with its eye on the potential of shale is Irvine Energy. It has interests in a portfolio of 162,000 acres of land in Kansas and Oklahoma of which its net interest is 111,250 acres. 50,000 acres of this is in Oklahoma, above the Chattanooga shale deposit that forms part of the band of shale rock stretching from the central south of the USA to Michigan and the Appalachian basin in the north east. The Chattanooga shale deposit has already been successfully drilled in Arkansas by Southwest energy and in Oklahoma by Devon Energy and Newfield.

Increasing production

Working alongside partner Metro Energy, Irvine has a 78% net revenue interest in the Oklahoma acreage, which has the potential of ‘stacked pay zones.’ What this means is that there could be hydrocarbons at different levels below ground. At depths of between 1,500 and 4,500 feet it has identified conventional oil and gas formations (where the hydrocarbons have already migrated upwards through porous rock until becoming trapped). It has also identified gas in shale at depths of 2,800-4,000 feet and a coal and coal bed methane deposit at 500-2,200 feet. The exploitation of the coal bed methane resource may be tackled alongside a partner, because this energy source requires careful handling. It can, for instance, be necessary to pump contaminated water from the coal seam before extracting the gas.

Irvine’s main focus now is on increasing production and the proven reserves within its acreage. Already it is producing oil and gas from conventional sources in Oklahoma, at a net daily rate of 600mcf to Irvine, while in Kansas it will shortly be producing gas from twenty wells in the north west of the state, and is targeting a production rate of 500mcft per day net to Irvine. Meanwhile, as production is ramped up here, Irvine will be drilling over one hundred wells in the next eighteen months in Kansas and Oklahoma based on seismic interpretation of its existing acreage.

Depending upon its success rate Irvine could dramatically increase its reserve base by the end of next year. At just 2.5p the share price values the company at about £18m. But recent transactions in the industry have valued resources in the ground at $2-3 per mcf. Based on this broker Evolution has set a 7p share price – but reckons that a successful conversion of contingent resources to proven or probable reserves would make the shares worth 25p.

This is certainly a share that is on the Red Hot radar screen.

Regards,

Tom Bulford
for The Penny Sleuth

Is it true that De Beers pulled off one of the one successful pieces of social engineering ever? If they did manage it, you can’t deny that it was one of the most remunerative schemes ever hatched! For sure it persuaded all of us (with a little help from Marilyn Monroe) that love, courtship and weddings mean diamonds. From being a loss-making over-supplied product, diamonds were transformed into a product that brought in billions of dollars. So could this be done with other gemstones? Miners have at least 130 more to choose from.

There is a lot of money riding on that question. Diamonds, emeralds, rubies and sapphires are “precious” – they are the pricey classics. Few doubt that. They have “lasting appeal and distinguished history”, says the International Colored Gemstone Association in the US.

Prices give the rankings. Diamonds generally come top. Ruby and emerald are also priced higher than a top quality sapphire, due to their rarity. For a one-carat ruby stone the bill is likely to be between $250 and $10,000 per carat. Truly quality gems will cost more.

What hope of using De Beers’ tricks for any of those other 130? Miners are always on the look-out for new money raisers. Plus, given quantities are often too small for the mega miners this can be rewarding territory for the minnows.

Rising stars of gemstone jewellery are, apparently, tanzanite, tourmaline, aquamarine, imperial topaz, and tsavorite garnet. Gems in this category sell at between $50 and $1,000 per carat for an average-to-good quality one-carat stone. Larger stones go for more. For example, large examples of tsavorite – can easily reach $3,000 per carat.

There is another category – connoisseur gems. These have a more specialized market because they are rarer. Here are all sorts of marvellous names – black opal, jadeite, pink topaz, chrysoberyl cat’s-eye, fancy coloured sapphires, and even rarer stones like demantoid garnet and alexandrite. The lists give prices ranging from $250 to $5,000 per carat. Yet top quality alexandrite with a good colour change regularly command at least $10,000, even in a one-carat size.

Collector’s gems include spinel, zircon, moonstone, morganite and other beryls, and many even rarer ones. They are little-hyped as they are not many around to make marketing worthwhile. Red and hot pink spinels can command a few thousand per carat, but most of the gems in this category will sell for hundreds, not thousands.

Lastly, well inside present budgets, there are the affordable old favourites and some new gems. These are amethyst, white opal, citrine, ametrine, peridot, rhodolite garnet, blue topaz, iolite, chrome diopside, kunzite, andalusite, and many ornamental gemstones such as lapis lazuli, turquoise, onyx, chrysoprase, nephrite jade, and amber. Prices for these gemstones range between $5 and $100 per carat for a one-carat stone.

Of course, it’s questionable whether risking money on an obscure mineral as recession looms is a good idea. Better go for diamonds? Not necessarily! The trade fears a collapse after sharp rises in prices of large stones. Fuelling the market are stock-piling insiders. To them it seems the best haven, as the financial news grows ever direr, are diamonds.

A warning has come from right at the centre of the trade – from America’s maverick diamond trader Martin Rapaport. “Higher prices brought about by internal diamond industry speculation are not sustainable and may result in significant financial loss,” he says.

And added: “If a significant component of the price level is based upon internal diamond industry speculation that prices will continue to rise, then even a slight short-term decline could cause a collapse.”

So, there is nothing wrong with checking for winners among the lesser gems. That is certainly the view of one of London’s most successful investors – Dr. Graham Birch who heads BlackRock’s Merrill Lynch natural resources team.

Tucked away in his World Mining Trust portfolio is a little £50m AIM stock – Noventa. It makes up just 0.2% of his £1.2bn portfolio. It might be worth looking further into, though, given it’s been picked by a manager whose fund’s share price has risen by 421% over the last five years, 185% in the last two.

One gem Noventa produces from its Mozambique mines is morganite. This is a rare pink beryl gemstone. It’s from the same family as emerald and aquamarine. There is an exclusive joint venture with NASDAQ-quoted jewellery manufacturer LJI, whose retail jewellery chains span across China. Noventa sells its rough morganite at $1,670 a kilo to LJI, and gets 49% of any jewellery sales profits on top of that.

And as a hedge for its jewellery business Noventa also mines tantalite. Key use of this rare stone is in capacitors for electronics and mobiles. Supply/demand balance is forecast to slip into deficit. Top of the pops rating comes from the fact that the US Defence National Stockpile Centre exhausted its inventories in 2006.

Another little AIM gemstone miner is TanzaniteOne. This one mines the gloriously blue tanzanite in, of course, Tanzania, but also mines tsavorite. Fascinating company this but, by the way, the share price is heading south; it seems investors don’t like the latest news. It cannot be the figures – they show some good rises. One can only deduce that perhaps they don’t like the latest change to local management. A bit of resource nationalism going on here?

TanzaniteOne practically invented tanzanite. Discovered only forty or so years ago, it was not really marketed until the 1990s. The amazing thing about gemstones is that a number of others have equally short histories. Seems we are all suckers for a new pretty face – though the face of this brilliant blue stone has to be heated to 450 degrees to develop its colour.

The disadvantage to these new stones is that they carry no myths or magic. Key to their success is the way De Beers played diamonds – marketing. It can be done! Tanzanite became popular following marketing by legendry New York jeweller Tiffany. In 2002 the stone was added to its lists by Jewellers of America as one of the December birthstones.

Erin Hamilton and Isabel Turner
For The Daily Reckoning