The Speculator

PORTFOLIO POINT: Mining analysts stamp Potash West with an astounding valuation '¦ and Robust wins a show of confidence from its Indonesian partner.

Our West Australian fertiliser hopeful Potash West (PWN) saw its shares close last week at 21¢, giving the company a market capitalisation of $15.6 million.

That’s way short of an astounding valuation from a boutique New York research company which, in a report dated December 15, assessed the company as having a “fair share value bracket” ranging between $2.07 and $4.82 a share.

Naturally, I called Potash West managing director Patrick McManus to ask how this New York firm had tracked down the relatively grassroots West Australian company.

McManus, who has a degree in minerals processing from Britain’s Leeds University and an MBA from Perth’s Curtin University, has more than 30 years’ experience in operational, technical and corporate roles with Rio Tinto, RGC Ltd and Bemax Resources, had a most plausible answer.

It appears that the New York firm – Arrowhead Business and Investment Decisions – had carried out a study on South Boulder Mines (STB) and its large but still-to-be defined Colluli potash deposit in the Middle Eastern country of Eritrea. A scoping study carried out last year produced a pre-tax net present value (NPV) of $US133 million based on production of one million tonnes/year of potassium chloride and using only 20% of the then estimated resource.

South Boulder, at $1.36, now carries a market capitalisation of $132 million.

Arrowhead then explained it had embarked on a peer group comparison on a dozen other emerging potash mining companies and hence the interest of the American researcher’s two Indian analysts – Vishal Pasari and Rashmi Shah – who prepared the 32-page report, which has been available on Potash West’s website since January 9.

Potash West only listed in May 2011 after raising $6 million in a public float at 20¢ a share.

It has a target of establishing a JORC-compliant resource of 50 million tonnes of the potassium-bearing mineral glauconite (about 6%-plus potassium oxide), to support a notional production target of 200,000 tonnes of potassium sulphate a year.

The company holds exploration tenure over 2905 square kilometres of WA’s Dandaragan Trough north of Perth. Presuming it all comes to fruition, Arrowhead’s conclusions are based on a discounted cash flow (DCF) with first profits emerging from operations in 2018 through to 2028. That’s a very far-sighted stretch.

Nevertheless, on page 26 of its report, Arrowhead judges a “fair market value” for Potash West shares of between $2.07 and $4.82, giving the company a present value of between $157.8 million and $367.7 million.

Potash West also disclosed this week it had agreed after Arrowhead’s approach to contribute $10,000 to the cost of the research plus an option to the researchers over 200,000 shares exercisable at 40¢ to 60¢.

Boost for Robust Resources as shareholder Trafford cashes up

Our Indonesian gold-silver-base metals prospector Robust Resources (ROL) won a vote of confidence from its Indonesian affiliate yesterday with the news that Droxford International Ltd had become Robust’s second largest shareholder with a 9.35% stake.

Droxford, a company controlled by Indonesia’s Salim Group, has spent $7.4 million acquiring a further 5.3 million shares in Robust from the Australian-listed Trafford Resources (TRF) at $1.40 a share. That takes Droxford’s holding in Robust to 8.172 million (9.35%) behind the Talbot Group, a Brisbane-based family company associated with the late Robust director Ken Talbot with 11.58%.

Robust shares have traded as high as $2.27 in the past 12 months, but ahead of the sale announcement they traded last week down from a high of $1.255 to a week’s low at the close of $1.17. That should give other shareholders some comfort.

Robust managing director Gary Lewis said yesterday: “The Salim Group’s continuing investment in Robust, in addition to their 22.5% shareholding in our Indonesian subsidiary PT GBU, is a solid vote of confidence in the company’s flagship Romang Island project and our future prospects, especially following the announcement of our maiden JORC resource of 1.18 million gold equivalent ounces.

The company predicts its 2012 drilling program will be the most active in Robust’s history, with $15 million budgeted for further exploration and development on Romang Island, 500 kilometres north-west of Darwin.

Wilcherry Hill drilling program under way

Both the newly cashed-up Trafford Resources and its 37%-owned affiliate IronClad Mining (IFE) are now comfortably positioned to accelerate their respective programs on the Wilcherry Hill iron ore project, 120 kilometres west of Whyalla, South Australia.

IronClad and Trafford share an 80:20 joint venture to develop Wilcherry Hill’s direct shipping ore (DSO) potential from what’s claimed to be readily upgradeable magnetite, with first shipments of ore to Chinese mills in the second quarter of calendar 2012.

Trafford retains the rights to any gold within the project area, also known as the Weednanna gold project. Trafford last week announced a new drilling program of 11 holes combining reverse circulation and diamond drilling had begun on newly identified gold targets.

Apart from Trafford’s $7.4 million cash windfall from the sale of its Robust shares, its affiliate IronClad on January 12 announced a successful cash raising of $6 million in a placement of 7.5 million shares to Hong Kong-based resources investor New Page Investments Ltd.

The placement at 80¢ a share represented a premium of 20% on the January 10 closing price of IronClad at 66.5¢.

New Page is the major shareholder in China-based steel trader and processor Novo Group Ltd, which is dual-listed on the Hong Kong and Singapore stock exchanges.

Perhaps I let Trafford go from our portfolio prematurely late last year for its now seems to be in recovery mode. We’ll look forward to its December quarterly report next month and keep them on the radar.

Other stocks I suggested we would review this week will wait another week until their December quarterly reports are furnished to the ASX.

David Haselhurst writes a monthly column for Money magazine. Please note that he is not able to provide personal replies to emails.

-The Speculator portfolio, as at January 25, 2012
Company	ASX	No of shares	Bought	Purchase price	Current price	Current value
Image Resources	IMA*	15,000	31/12/2010*	0.362 av	$0.310	$4,650
Viralytics **	VLA	19,995	20/12/2011	$0.308	$0.380	$7,598
Robust Resources	ROL	6,000	31/12/2010*	$1.49 av	$1.180	$7,080
Scotgold Resources	SGZ	25,000	31/12/2010*	$0.053	$0.062	$1,550
Scotgold Resources Options ex30/4/12 @ 8c	SGZO	2,500		$0.000	$0.008	$20
Coalworks	CWK	10,000	31/12/2010*	$0.830	$0.725	$7,250
GoConnect Ltd	GCN	120,000	31/12/2010*	$0.038	$0.040	$4,800
Minemakers	MAK	20,000	25/01/2011*	0.425 av	$0.275	$5,500
Platsearch	PTS	20,000	8/02/2011	$0.130	$0.081	$1,620
Broken Hill Prospecting	BPL	20,000	22/02/2011	$0.160	$0.085	$1,700
Austpac Resources	APG	40,000	2/03/2011	$0.060	$0.044	$1,760
Potash West	PWN	11,050	30/03/2011*	$0.200	$0.235	$2,597
Cortona Resources	CRC	20,000	13/04/2011	0.146 av	$0.140	$2,800
Golden Gate Petroleum	GGP	270,000	20/04/2011	0.013 av	$0.024	$6,480
TNT Mines	TNT	4,440	22/07/2011	$0.000	$0.250	$1,110
Quickstep Holdings	QHL	20,000	23/11/2011	$0.185	$0.165	$3,300
Orpheus Energy	OEG	19,250	17/08/2011	0.164 av	$0.135	$2,599
x
Total value of portfolio						$62,414
Cash at bank						-$9,554
Total						$52,860
x
Portfolio change since January 3, 2012 (started with $50,000)						5.72%
All Ordinaries change since January 3, 2012 (then 4155.22)						3.16%
*Shares held from previous year, carried at their December 30, 2011 closing price. **Subscribed $6000 under share purchase plan for 19,595 VLA at 0.308 each to join our residual holding of 500 shares.