The Speculator

PORTFOLIO POINT: The Speculator buys into undervalued Gullewa Ltd, the biggest shareholder in soon-to-be-listed Allegiance Coal.

In this nervous market, where a number of proposed floats and public listings have been postponed until better times, fingers will be crossed that the forthcoming listing of Allegiance Coal will more than hold its 20c issue price.

There’s a first-class team behind the Queensland-focused coal developer, with its biggest shareholder being the low-key but listed Gullewa Ltd (GUL), which will retain a 56.6% shareholding (100 million shares) in Allegiance after the float.

Gullewa is chaired by veteran exploration geophysicist and geologist Tony Howland-Rose who, in 2007, was co-recipient of the Association of Mining and Exploration Companies Prospector of the Year Award. Together with David Deitz (now chief executive of Gullewa), they presided over the discovery, drillout, financing and building of Tasmania’s $180 million Avebury Nickel Mine and processing plant as executive directors of Allegiance Mining NL.

Allegiance Mining, to the profit of all shareholders, fell to a hostile takeover from Zinifex Ltd in 2008 for close to $860 million.

Allegiance Coal’s managing director is mining engineer Colin Randall, with more than 40 years’ experience in the development and management of major coal mines in both NSW and Queensland. Colin Randall and Associates retain 14.2% of Allegiance Coal (25 million shares) and other seed capital investors 9.4% (16,666,674 shares) following a $2.5 million capital raising at 15c a share in November 2011.

Allegiance Coal’s initial public issue raised $7 million through an offering of 35 million shares at 20c, plus a free one-for-four option exercisable at 25c by March 30, 2014.

The float was successfully underwritten by Patersons Securities Ltd. Nevertheless, it appears to have taken rather longer to fill in this risk-averse climate than its target date for listing of May 15.

Room for a takeover premium

Gullewa’s 56.6% holding of 100 million Allegiance Coal shares and Colin Randall and Associates’ holding of 25 million shares will be subject to a voluntary escrow period of two years before any shares may be sold, or at least 12 months after the listing date if the three-month average weighted price of the shares exceeds 60c. That’s a prudent inclusion in case a takeover bid emerges as times and market sentiment improve.

As a previously unlisted entity, Allegiance Coal over the past four years has put together a portfolio of 14 granted tenements, totalling 2,361 square kilometres over seven of Queensland’s coal basins, including the Bowen and Surat Basins.

In the prospectus, Howland-Rose reports that significant exploration has been undertaken on two of the company’s lead projects:
1) Back Creek thermal coal on the Surat Basin, with an exploration target of 60-80 million tonnes; and
2) Kilmain coking and thermal coal project on the Bowen Basin, with an initial exploration target of 100-200 million tonnes.

Allegiance is aiming to become a 10 million tonnes/year coal producer, with first production in 2017. The funds raised will cover a budgeted exploration and drilling program over the next two years, with a JORC-compliant inferred resource estimate targeted within the next 12 months.

-The Speculator portfolio, as at May 23
Company	Code	No of shares	Bought	Purchase price	Current price	Current value
Image Resources	IMA*	15,000	31/12/2010*	0.362 av	$0.290	$4,350
Viralytics	VLA	19,995	20/12/2011	$0.308	$0.285	$5,699
Robust Resources	ROL	6,000	31/12/2010*	$1.49 av	$0.965	$5,790
Scotgold Resources	SGZ	27,500	31/12/2010*	5.5 av	$0.065	$1,788
GoConnect Ltd	GCN	250,000	31/12/2010*	0.034 av	$0.030	$7,500
Minemakers	MAK	20,000	25/01/2011*	0.425 av	$0.190	$3,800
Platsearch	PTS	20,000	8/02/2011*	$0.130	$0.075	$1,500
Broken Hill Prospecting	BPL	20,000	22/02/2011*	$0.160	$0.105	$2,100
Austpac Resources	APG	40,000	2/03/2011*	$0.060	$0.034	$1,360
Potash West	PWN	11,050	30/03/2011*	$0.200	$0.220	$2,431
Cortona Resources	CRC	25,000	13/04/2011*	0.146 av	$0.095	$2,375
Golden Gate Petroleum	GGP	408,500	20/04/2011*	0.0145 av	$0.015	$6,128
TNT Mines	TNT	4,440	22/07/2011*	$0.000	$0.250	$1,110
Quickstep Holdings	QHL	20,000	23/11/2011*	$0.185	$0.145	$2,900
Orpheus Energy	OEG	19,250	17/08/2011*	0.164 av	$0.130	$2,503
Black Mountain Resources	BMZ	10,000	17/04/2012	$0.300	$0.240	$2,400
Gullewa	GUL	100,000	22/05/2012	$0.063	0.063	$6,300
Total value of portfolio						$60,032
Cash at bank						-$12,890
Total						$47,142
Portfolio change since January 3, 2012 (started with $50,000)						-5.72%
All Ordinaries change since January 3 2012 (then 4155.22)						0.44%
*Shares held from previous year, carried at their December 30, 2011 closing price.

Why Gullewa is grossly undervalued

Gullewa shares have slipped from a 12-month high of 18c to a recent low of 5c and this week traded at 6.3c, giving the company’s 149.72 million shares a market capitalisation of just $9.43 million. That’s less than half the worth of its 56.6% holding in Allegiance Coal, assuming the new float at least holds its issue price, as I expect.

On top of that, Gullewa’s March quarterly report lodged with the ASX at the end of April showed a healthy remaining cash balance of $4.23 million, with expectations of a net cash outflow in the current June quarter of just $1.6 million ($700,000 on exploration and $900,000 on administration).

Gullewa has several other projects in its portfolio, with prospects for either future spin-offs as new floats or sale of control to other entrepreneurs, with possible benefits to shareholders through entitlement offers.

Apart from its majority holding in Allegiance Coal, Gullewa’s projects include:
1) Central Iron Ore (Gullewa 36.1%) with 15 granted tenements covering 1,588 sq km on WA’s Yilgarn iron ore province, with an exploration target of 510-850 million tonnes. One tenement (EL57/819) covering 120 sq km, has been farmed out to the listed Pacific Ore Ltd (PSF), which may earn 51% by spending $1.5 million within two years, another 19% by spending a further $3.5 million within 3.5 years and an additional 20% with expenditure of a further $10 million within five years.
2) Central Iron Ore’s 100% holding in the South Darlot Gold Project, 320 kilometres north-east of Kalgoorlie, with a tenement package of 336 sq km including the old British King Mine (on care and maintenance) 5km west of Barrick Gold’s Darlot Mine.

That should all add up to a promising topping of cream on the cake for Gullewa shareholders.

Furthermore, Gullewa and Randall Associates are to be repaid $500,000 from Allegiance for its float costs, plus as much as $2.4 million in earlier funding if and when funds are available.

(Bought 100,000 Gullewa (GAL) on 22/05/2012 at $0.063 – total $6320).

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