Collected Wisdom

The rising gold price is yet to parlay into a win for Newmont Mining (NEM), which is still reeling from a $1.8 billion loss in third quarter results, generated by closing out its hedge book. On the horizon, more difficulties are expected as the company attempts to maintain its position as a major gold producer. Analysts are predicting more acquisitions in the style of Newmont's recently announced offer for Canadian gold miner Miramar Resources, with potential targets including either Lihir or Newcrest. The Miramar deal will see Newmont take full control over the Hope Bay gold project, which stretches over 1000 square kilometres and is believed to have unqualified reserves of about 10.7 million ounces. Many of the company’s mining assets have notoriously high extraction costs, but a new series of programs to be launched in 2008 seek to address these problems. Investors seeking exposure to the rallying gold price at discount should consider adding Newmont to their portfolio. Buy Newmont Mining to $5.35.

One of our favourite stock tippers remains staunch in his belief that the best way to get uranium exposure is through producers and not fly-by-night explorers. Paladin Resources (PDN) is such a stock. After hitting a high of $US138 uranium prices have settled to about $US80, mainly because of an auction conducted recently by the US Department of Energy, in which more than half a million pounds were sold for $US80 each. Another reason for weakness in the Paladin share price is the disappointing production from its Namibia Langer-Heinrich mine. Initial forecasts were for around one million pounds but the actual count for 2006-07 was closer to 120,000 pounds. Forecasts for next year are closer to 400,000 pounds. Paladin is currently trending upward, but a still long way off its $10.70 high of April 10. Buy Paladin at current levels.

Tabcorp Holdings Limited (TAH) has come under a lot of attention lately, for all the wrong reasons. After hitting a high of $18.75 on May 4, it closed as low as $15.28 on October 19, or a fall of 18%. Smoking bans and equine horse flu have provided investors with more than enough reasons to go sour on the $8 billion gaming giant, but at current prices it is beginning to look undervalued to one particular investment publication. The company’s casino operations in Sydney, Townsville and the Gold Coast still provide reliable cash flows. Equine influenza will eventually subside and racing in NSW and Queensland will resume. If chief executive Funke Kupper can bed down new licensing agreements for NSW and Victoria Tabcorp, Tabcorp could find itself well positioned as consolidation in the sector continues. At current levels Tabcorp is a long-term buy.

Alumina (AWC) has a 40% interest in the world’s largest alumina producer and as such has a price floor of about $6 because of ongoing corporate appeal. After hitting a high of $8.88 on July 16 on the back of a BHP takeover rumour the stock has eased quite significantly, closing not far off its natural floor at $6.63 on October 19. Like all commodity plays, China’s role is crucial to the success of this company. And although China has a plentiful supply of bauxite, it requires more than four times the energy to process than the Australian equivalent, hence the demand. All things considered the market has not responded favourably to Rio Tinto’s acquisition of rival outfit Alcan but one tipsheet expects that in time this will prove to another canny deal from the Australian mining giant. Buy Alumina to $7.75.

When Asciano (AIO) made its debut in June 2007 the market was quick to apply a takeover premium, pushing the infrastructure player north of $11. In reality, Asciano’s high gearing has been enough to put off any potential suitor, which has seen the stock ease to $8.77 at the close of trade on October 22. Apart from its port and stevedoring assets, Asciano also controls the rail freight business Pacific National. Rail is viewed favourably by analysts because of its high barriers to entry, its role in the resources boom and decent environmental credentials. Pacific National is expected to expand operations into Queensland’s coal haulage market, currently controlled by Queensland Rail. Pacific National has extensive contacts in the mining industry and is expected to lean on them heavily to gain access to the market. Much has been made of both Asciano’s and Toll’s interest in Brambles. Exactly how this will play out is not easy to predict, but investors should be aware of the potential of such an event to create a buying opportunity. Asciano is a growth stock and not suitable for income oriented investors. Buy Asciano to $9.80. (To read Tom Elliott's coverage of Asciano's ambitions for Brambles today, click here.)

Investors seeking undervalued infrastructure stocks should consider Challenger Infrastructure Fund (CIF). The group holds a collection of water, energy and communication assets with a focus on Europe. Most of the focus has been the acquisition of 27% of the UK’s Southern Water for $720 million. Fees generated by the parent company are relatively sedate in comparison to those generated by Macquarie’s Thames Water. Utilities are a highly regulated in the UK and water is no different. Southern Water is committed to about $80 billion in capital expenditure over the next eight years. Most of the funding is coming from a larger debt facility with parent company Challenger putting in another $225 million worth of capital. Nevertheless, investors should be warned that dividends are unfranked and so any purchase of the stock should be done with a view to a tax strategy. Buy Challenger Infrastructure Fund to $3.70.

Benefiting both from a weaker US dollar and strong consumer sentiment, stock in JB Hi-Fi (JBH) has soared from $5.50 on October 19, 2006, to $15.72 on October 19, 2007 – a rise of 185%. In the year to June 30 annual sales rose 36% profit was up 56%, blitzing the performance of rival retailer Harvey Norman. Moving forward, the company is confident that it can post improved results, with chief executive Richard Uechtritz advising investors that a strategic move into computers and telecommunications markets should increase sales by 33% for 2007-08. Medium-term challenges for all discretionary retailers include the rising cost of fuel and ever-present worries about interest rates. Over the longer term, new delivery platforms based around high speed internet have the potential to compete for revenues and the currency strength of Asian trading nations remains an issue. But for now, enjoy the blue sky. At current prices JB Hi Fi is a buy.

Watching the directors

Week to October 19

• Geoffrey Wilson, director of Wilson Investment Fund (WIL), has just purchased more than $430,000 worth of stock.
• Two directors of Wesfarmers (WES), Colin Carter and Patricia Cross, have both purchased parcels of shares.
• Buying by Linda Nicholls, chairman of Australia Post and a director of Sigma Pharmaceuticals (SIP). The price of Sigma stock has recently fallen.
• Robert Aitken, director of recruitment company Rubicor Group (RUB) has purchased two parcels of shares of approximately $130,000 each in the last fortnight.
• Christopher Cooper, a director of Redflex Holdings (RDF) has been purchasing parcels of shares over the past couple of weeks.
• Vanda Gould, a director of Cyclopharm (CYC) has purchased more than $419,000 worth of stock. This stock has recently experienced a significant price fall.
• Continued buying by the directors of Apex Minerals (AXM) and the stock price is still rising.

Previous week

• Continued buying by the directors of AP Eagers (APE). Nicholas Politis has purchased another parcel of shares, $238,000 worth.
• A few Collection House (CLH) directors have been buying parcels of shares over the past month.
• Two directors have purchased shares in Healthlinx Limited (HTX).
• Garry Hounsell, director of Mitchell Communication Group (MCU), has continued buying. He has purchased more than $1.7 million worth of stock in several transactions over the past month.
• Rolf Krecklenberg, a director of MFS Limited (MFS), has just purchased almost $500,000 worth of stock. Two other directors, Geoffrey Williams and one time Liberal Party leader Andrew Peacock purchased MFS shares in August.
• Continued buying by Frank Wilson, director of TFS Corporation (TFC).

Source: The Inside Trader