The Speculator

PORTFOLIO POINT: We exercise our options in ASX-listed Scotgold Resources, as two London brokers say the company is worth more than twice its current price.

Scotgold Resources (SGZ) originally joined our portfolio in February 2010, with an initial purchase at 10.4c, topped up last year with a rights issue at 5c a share.

Its proposed Cononish gold/silver mine, 75 kilometres north of Glasgow, will be the only commercial gold producer in the United Kingdom, with initial production expected in 2013.

After our initial purchase, the shares rallied to a high in 2010 of 14.9c, but then faced headwinds from various environmental interests. They fell to a low of 3.8c later that year, after the Loch Lomond and Trossachs National Park Authority (NPA) narrowly rejected (by 12 votes to 10) on environmental grounds the company’s application to begin mine development.

A principal objection from the dissenters was the size and appearance of the mine’s tailings pond (never mind about the financial benefits and job opportunities offered to the local economy).

The rejection caused something of a storm in local politics. In a vote of confidence in March last year, Scottish Enterprise (an arm of the Scottish government that encourages economic development) formally offered a Regional Selective Assistance grant of $1 million (£600,000), which the company accepted.

Late last year, an amended development application was finally approved by the NPA. In the meantime, Scotgold has identified multiple exploration targets within its wider tenements. These include the discovery, announced earlier this month (March 7), of a magmatic-style Cu-Ni-Au-PGM (copper-nickel-gold-platinum group metals) deposit.

The proposed Cononish gold/silver mine lies within the boundaries of the national park, but is contained within 3200 square kilometres of exploration tenements Scotgold holds, 85 percent of which lie outside the park. They include the above-mentioned Sron Garbh Cu-Ni-Au-PGM deposit, five kilometres north of Cononish and beyond the reaches of the NPA.

Two brokers endorse a doubling of the present share price

This month, when Scotgold traded on London’s AIM-market at 5.37 pence, London-based broker Westhouse Securities Ltd told clients: “We maintain our strong buy recommendation and 11-pence target price, based on the Cononish gold/silver project which we believe will enter production by the end of 2013.”

Today, Scotgold traded on the ASX at 7.7c, which is equivalent to a sterling price of just 5.04 pence, less than half the broker’s target price.

On February 29, another London broker – Singer Capital Markets Ltd – in a 17-page research report (when Scotgold was trading on the AIM-market at 5.13 pence) also endorsed a target price of 11 pence, or a 114% upside.

Singer Capital added: “Our valuation is based on the in-ground value of the UK exploration peer group and a DCF (discounted cash flow) model for Cononish. We used a 10% discount rate, $US1500/oz gold for the production years 1-3 and $US1350/oz for the remaining four years. The average of those two measures produces a NPV (net present value) of 22 million pounds, which equates to an 11 pence target price and 114% upside.”

The overnight gold price today stood at $US1650/oz.

The Cononish deposit has an initial JORC-compliant resource of 163,000 oz of gold at an average grade of 10.2 grams/tonne, plus 596,000 oz of silver with an average grade of 45.7g/t.

Singer Capital believes Cononish has the potential to be a 500,000 oz project. And “at a gold price anywhere north of $US1000/oz Cononish is robust.”

We exercise our Scotgold share options

When we added to our Scotgold holding in last year’s rights issue at 5c a share, we also picked up 2500 Scotgold options exercisable at 8c by April 30, 2012.

Option holders who don’t exercise by that date will see them cancelled. Quotation on the market for the options will cease on April 20.

At today’s price of 7.7c, the options at 8c are only slightly out of the money and given the company’s more optimistic outlook, the Speculator has exercised his holding.

It should be pointed out that the two London brokers quoted above have done work for Scotgold in the past in arranging the company’s AIM-listing in London, and so it is in the interests of the brokers’ clients to recommend the stock.

Milestone for Quickstep Holdings

Investors in Quickstep Holdings (QHL) have seen their shares slip from a 12-month high of 37.5c to a low of 12.5c, as doubts arose about Australia’s commitment to buy as many as 100 Joint Strike Fighters and the possibility of delays in the US Air Force program.

The shares have since recovered to trade today at 18c, following Monday’s announcement that Quickstep had completed its first advanced composite production parts for the F-35 Lightning 11 JSF, under the purchase order secured from Northrop Grumman in July 2011. The company now expects to deliver one set of plane parts per week and will gradually ramp up the quantity.

-The Speculator portfolio, as at March 28
Company	ASX	No of shares	Bought	Purchase price	Current price	Current value
Image Resources	IMA*	15,000	31/12/2010*	0.362 av	$0.370	$5,550
Viralytics	VLA	19,995	20/12/2011	$0.308	$0.350	$6,998
Robust Resources	ROL	6,000	31/12/2010*	$1.49 av	$1.250	$7,500
Scotgold Resources	SGZ	27,500	31/12/2010*	5.5 av	$0.078	$2,145
Coalworks	CWK	10,000	31/12/2010*	$0.830	$0.815	$8,150
GoConnect Ltd	GCN	250,000	31/12/2010*	0.034 av	$0.035	$8,750
Minemakers	MAK	20,000	25/01/2011*	0.425 av	$0.275	$5,500
Platsearch	PTS	20,000	8/02/2011*	$0.130	$0.090	$1,800
Broken Hill Prospecting	BPL	20,000	22/02/2011*	$0.160	$0.096	$1,920
Austpac Resources	APG	40,000	2/03/2011*	$0.060	$0.041	$1,640
Potash West	PWN	11,050	30/03/2011*	$0.200	$0.250	$2,763
Cortona Resources	CRC	20,000	13/04/2011*	0.146 av	$0.135	$2,700
Golden Gate Petroleum	GGP	408,500	20/04/2011*	0.0145 av	$0.022	$8,987
TNT Mines	TNT	4,440	22/07/2011*	$0.000	$0.250	$1,110
Quickstep Holdings	QHL	20,000	23/11/2011*	$0.185	$0.180	$3,600
Orpheus Energy	OEG	19,250	17/08/2011*	0.164 av	$0.125	$2,406
Total value of portfolio						$71,519
Cash at bank						-$13,930
Total						$57,589
Portfolio change since January 3, 2012 (started with $50,000)						15.18%
All Ordinaries change since January 3 2012 (then 4155.22)						5.69%
*Shares held from previous year, carried at their December 30, 2011 closing price.

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