A game-changer for Beach?

PORTFOLIO POINT: Beach Energy is about to test its Encounter No 1, near the scene of its successful Holdfast No 1 shale gas well in the Cooper Basin.

Minefield is not about share tipping; rather it is about those stocks with a good story to tell but which are struggling for oxygen in a very crowded market. There will be no outright recommendations, but a simple measuring tool in traffic light colours: Green for “good”; amber for “proceed with cautious confidence”; red for '¦ well '¦ caveat emptor (let the buyer beware).

Here are three stocks that have slipped through the cracks.

Beach Energy (BPT)

The hunt for oil and gas in unconventional rock types, such as shale, made financial and exploration news last week, but the important test for investors comes over the next few weeks as Beach Energy returns to the scene of last year’s big breakthrough.

At the Encounter No 1 well in the Cooper Basin, Beach is getting ready to conduct fracture stimulation tests to follow-up the initial success in the nearby Holdfast No 1 well, which was largely ignored despite being one of Australia’s most significant onshore discoveries.

Back on August 10, Beach said it had added to its resource inventory (booked) “an initial two trillion cubic feet of contingent resource” in exploration permit PEL 218 as part of its shale gas exploration program. (See graphic, below.)

On the market that day, Beach shares fell half-a-cent to 97.5¢. They climbed above $1 over the next few days but ended the week of the announcement at 96.5¢ in what was a remarkably negative reaction to the booking of Australia’s first shale gas resource, however conditional, especially as two trillion cubic feet of gas is the equivalent of 330 million barrels of oil.

Since that flat reaction, perhaps because of negative publicity surrounding fracture stimulation of coal-seam gas, which differs significantly from what Beach is doing in the Cooper Basin, the company’s share price has risen to about $1.35, which is still a modest price compared with how the rest of the world sees the potential of shale gas.

Two events outside Australia underline the significance of shale as a new source of energy. Byron Wien, one of the world’s top investment-fund managers and a senior managing director at Blackstone Group said in a report, covered on Business Spectator, that the “extraction of oil and gas from shale” begins to be a game-changer.

About the same time Wien was getting excited about shale, the mid-tier US oil producer Hess Corporation announced it was allocating a remarkable 37% of this year’s $US6.8 billion exploration budget to shale targets, possibly the biggest single commitment, in percentage terms, by a substantial oil company to shale exploration.

Beach’s return to test its second discovery well, Encounter, will add to the company’s knowledge of the potential for gas production from shale in its Cooper Basin tenements, which are the best-located of any shale exploration programs thanks to the extensive gas gathering and distribution infrastructure in place, including pipelines to major cities.

Interest in Beach’s shale exploration has grown since the initial flat market reaction with presentations at the company’s annual meeting last November adding to investor knowledge.

Of particular interest are slides and notes from petrophysicist Carrie Trembath, starting on page 34 of the information pack, providing a useful insight into what’s happening and why the shale exploration program could be a game-changer for Beach and the entire Australian energy sector. Two of the slides are offered below.

Trembath’s report is technical, but for investors keen to improve their understanding of what shale gas (and oil) exploration is all about it is the most concise available.

It will also help in assessing whether Beach’s breakthrough in Australia’s shale hunt is receiving the recognition it deserves, because at its current share price that does not seem to be the case. A second successful flow test could indeed be a game-changer for Beach.

Perseus Mining (PRU)

Six months ago investors could hardly get enough of Perseus Mining, driving its share price up by more than 75% between June and September. Then they watched it run out of steam as the gold price contracted and the company started the commissioning phase of its flagship Edikan gold mine in the African country of Ghana.

Over the past few days Perseus has been on the rise again as the flow of positive news from Edikan grows, and a second gold mine in the adjoining country of Ivory Coast takes shape.

On January 10 commercial production was declared at Edikan, a formal announcement of little practical consequence as first gold was poured late last year, a significant step for investors because it means the “bugs” have been largely eliminated from the new mine. The market liked the announcement, and lifted Perseus shares from $2.55 to $2.77.

Three days later, the company announced a fresh set of drilling results that boosted confidence Edikan will be able to easily hit its long-term target of 290,000 ounces of gold a year (at a cash cost of around $US581 an ounce), and be in production longer than currently planned. That news took Perseus’s share price up to $2.96.

Mining in Africa always carries greater risk for investors than mining in more stable regions such as Australia or Canada, but the potential rewards from relatively low-cost production, and ongoing exploration success, can be substantial.

For followers of Perseus, the first step in the recovery process after last year’s sell-off is September’s peak price of $4.05, a result that should be driven by continued news flow from Edikan and the Ivory Coast project, Sissingue, where a mine is steadily taking shape with major items of equipment ordered and first production scheduled for next year.

Resource upgrade news will be one event to watch out for from Perseus, with drilling at all of its sites running well ahead of assay laboratories. Last week’s drill results from Edikan, including an eye-catching 24 metres at 9 grams of gold a tonne, was an impressive start to the year, but of equal interest was the fact that assays from another 632 other drill holes were on their way.

Perseus managing director Mark Calderwood said 2012 should be a busy year for resource and reserve estimates, starting with a planned upgrade in March for Edikan and Sissingue in June.

Mincor (MCR)

Investors could be forgiven for losing faith in nickel miner Mincor, which suffered a truly horrible year in 2011 with its share price dropping 67% after setbacks in its mines that coincided with a sharp fall in the price of nickel.

Look again. The Mincor worm appears to be turning. Production at its mines near Kambalda in WA is rising, cash costs are down, and the nickel price is also showing signs of recovering from its recent low of less than $US7 a pound to almost $US9.

On the market, Mincor’s share price has been creeping up from last year’s low of 65¢ to around 75¢, aided by a share buy-back program, perhaps the first clue that the company is not in bad shape.

In fact, since the buy-back program was announced as a means of stimulating the share price, Mincor has spent close to $3.9 million soaking up 4.8 million stray shares.

Cash in Mincor, carefully squirrelled away in better times, stood at $79.3 million last September, meaning that at least 54% of the current 75¢ share price is cash-backed, and almost certainly more given the rising nickel price.

There are three issues for investors to consider with Mincor.

• To be satisfied that a run of bad luck has come to an end, be convinced that a major internal restructuring program at Mincor’s mines is sustainable and the access to high-grade ore will deliver a steady decline in costs.
• To believe that the recovery in the nickel price is sustainable, which is a harder fact to accept given the glut of metal on the market and a possible slowdown in demand for stainless steel, the major use of nickel.
• There is the need for Mincor to deliver results from its diversification program, which includes a high-risk step into gold exploration in Papua New Guinea.

On balance, it is the cash in the company, and the revival at its Kambalda mines that puts Mincor back on the investment radar screen, but concern about the nickel price and the risks associated with the PNG step-out that keeps it as a stock to watch at this stage.