InvestSMART

Extracting wise words from a sea of red

F riday's sharemarket rout came two days after billionaire mining entrepreneur Robert Friedland picked up the coveted Dealmaker of the Year award at the annual Diggers and Dealers bash in Kalgoorlie.

F riday's sharemarket rout came two days after billionaire mining entrepreneur Robert Friedland picked up the coveted Dealmaker of the Year award at the annual Diggers and Dealers bash in Kalgoorlie.

Even so, Friedland was his usual prescient self in what was a throwaway couple of lines about the role of markets.

"Nobody knows what anything is worth. The markets are designed for a willing seller to meet a willing buyer," the chief executive of Canada's Ivanhoe Mines ruminated.

Put another way, for every share sold on Friday by a panicked seller, there was a buyer on the other side of the deal - one happy to bet that the global economy is not in meltdown. Not yet anyway.

Having said that, the miners and exploration companies did take the biggest hits on Friday. It's not every day that you see BHP Billiton take a 4.8 per cent share price hit and Rio Tinto a 4.5 per cent price whack.

Commodity prices were a sea of red, with price falls of as much as 5 per cent on renewed concerns that cohesive global economic growth will not come until US and European debt woes are worked through.

But commodity prices nevertheless remain at historically high levels in response to the tsunami of demand coming from the emerging economies where people want to live like the rest of us. And as Friedland again noted, if you can't grow it, you have to mine it.

DODGING DAMAGE

Take a look through Friday's share price casualty list and you will find that the extent of the damage varied widely. Two stocks that did much better than their peers were Highlands Pacific and Troy Resources.

Highlands actually went against the trend, rising 1? or 3.6 per cent to 28.5?, while Troy's 6? or 1.4 per cent fall to $3.96 a share hardly hurt on a day when share price destruction was widespread.

The out-performance by the pair is simple enough to explain - both offer the promise of negative cash costs of production for their principal metals. In the case of Highlands that is copper, while for Troy it is the haven metal of gold.

Highlands has had some bad PR of late thanks to its minority position in the completed but not producing $US1.5 billion ($1.43 billion) Ramu nickel project in Papua New Guinea. Planned deep-sea disposal of the operation's tailings is the subject of continuing legal action, even if the practice has been ticked off as being OK by everyone who matters.

Highlands has 8.56 per cent of Ramu and the truth is that the local market gives that stake no value. It is the group's 18.18 per cent free carried interest (to final feasibility study stage) in the Frieda copper/gold joint venture with the mighty Xstrata in Papua New Guinea that has got the market excited.

First production is some years off and it will require more than $US5 billion to develop. But if it were in production today, Frieda would be churning out its 246,000 tonnes of annual copper at a negative cash cost after crediting the bumper prices it would be receiving for its 379,000 annual ounces of gold.

So Highlands would be entitled to 45,000 tonnes of annual copper for less than free on a cash cost basis, if such a situation is possible.

It is a similar story for Troy - said by many of the dealers at Diggers and Dealers to have been the standout gold story at the bash.

The Perth producer now gets all of its gold from South American operations (Brazil and Argentina), with its mothballed Sandstone operation in Western Australia for sale for somewhere between $0 and $20 million as the company puts it.

Group gold production for the 2011 financial year was 71,614 ounces at a cash cost of $US561 an ounce, net of silver credits.

But bigger things are expected in the year ahead as the group's new Casposo gold/silver mine in Argentina's San Juan province hits its straps. Casposo had its first gold pour in November last year and its charge to full production was stymied somewhat when temperatures in June this year got as low as minus 18 degrees.

Thanks to the credits coming from the charge in silver prices to more than $US38 an ounce, Casposo's gold is coming out of the now unfrozen treatment plant at a negative cash cost. What's more, most analysts have group production surging to 120,000 ounces in 2012 and reckon the exploration upside of the region's high-grade gold/silver vein sets has to be seen to be believed.

LACONIA'S LUCK

Being in a trading halt was not a bad place to be on Friday. That was a position Perth-based explorer Laconia Resources found itself in after going into a halt on Thursday, pending the announcement of a "material joint-venture agreement".

That got Garimpeiro's interest up as at its last sale price of 5? a share, Laconia was being valued at $4.1 million or $1.9 million if you deduct its cash at the end of June of $2.2 million.

One thing that can be said for certain in the current equity market turmoil is that a material joint-venture agreement is going to have more of an impact on a $4.1 million company than the next move in the Dow Jones industrial average will.

It is known that Laconia's main focus of late has been its Lennon's Find polymetallic project near the hotter-than-hot Marble Bar in WA. So the expectation is that it is about to strike a deal in which Chinese steel mill interests can earn an interest in its Mooletar iron ore project near Mount Magnet in WA's mid-west.

A deal under which the Chinese can earn a 75 to 80 per cent interest in return for the staged expenditure of $5 million to $8 million over a couple of years would not surprise. Management of the project is likely to be retained by Laconia.

Mooletar is reasonably located in that it is 125 kilometres from the proposed midwest rail system and associated Oakajee port.


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