Monday, March 14, 2011

Is Chaoda Modern Dropping Because of an Unfounded Rumor that it Changed Auditors?

Chaoda Modern, the 3rd largest agicultural firm in China has dropped from a price of near HK$10 in the past year to somewhere near $HK4 currently. I suspect the current drop is due to an inaccurate rumor that Choada changed auditors -- but the last auditor Grant Thornton was acquired by the current auditor, BDO Seidman, which is the 5th largest auditor in the worldwide.

An article stating that Chaoda changed auditors appeared on Dec 31, 2010 on a blog -- Since that time the stock has dropped from $HK6 to $HK4ish, with the only other news a moderately positive 6 months ended Dec 31, 2010 earnings release (more on this earnings release below).

Chaoda is audited by BDO Seidman,which is the largest US based accounting firm outside the Big 4. The previous auditor Grant Thornton merged with BDO (reference: but no change in auditors. BDO actually is probably a stronger accounting firm than Grant Thornton, but Grant had a good reputation as well.

Grant Thornton gave an unqualified opinion in the last Annual Report:
source: p. 41-42

It should also be noted that Chaoda is ranked by Forbes as the 3rd largest agricultural co in China. It is very difficult to fake being one of the largest agricultural firms in the world's largest country in terms of agricultural production.

The results announcement was moderately strong. Chaoda reported good top line for the six month period ended Dec 31, 2010 (+18%) but flat in net profit, the main item was an increase in general and admin expenses to 6% of revenues from 2% the previous period, plus they issued shares to pay for mainly an acquisition of more land.

Shares increased as they issued equity instead of dipping into cash to fund expansion (don't really know why they won't utilize their very large cash and investment position). Chaoda has RMB3.8Bn of cash and no debt -- all assets are in RMB and look solid, buildings (RMB8Bn), vegetables in inventory (RMB2Bn) and they have very low liabilities RMB218M total. They also have RMB1.3Bn of equity assets - mainly I believe their share of HK listed Asian Critus. One asset is "prepaid premium for land leases" at RMB5.8Bn -- I believe this is tangible (prepaid leases, so expenses won't appear in future periods, as long as the firm is a going concern). With prepaid land leases, net tangible book value is RMB 24.9Bn while market cap is HK15Bn (RMB12.5Bn) so market cap is around 50% of book. PE is below 4 (interim 6 mo net profit is RMB1.54Bn).

Operating cash flow looks strong, equal to EBITDA of RMB1.8Bn for the interim period, but the co raised RMB2.3BN of financing (mainly equity) to fund expansion. Almost RMB1Bn from new shares issued over the past half year (this seems to me, not a huge dilution).

Note, the major reason for the increase in SG&A was an increase in options exercised, from only RMB6M in 2010 to 160M in 2011 - also note salaries were up about RMB100M (this is likely due to wage inflation in China, surprisingly workers are somewhat in short supply for farming). So this hopefully won't be repeated. -- they are approx 192M share options outstanding but the majority have excercise prices between $HK6.75 and HK$8.10 per share. The exception is the ceo who has 66M options with an excercise price of HK1.50 (but at least he'll be motivated to get the stock price up).

They are paying a dividend this year of RMB84M -- didn't pay a dividend last year. So at least will get some income, also shows they care about the stock price a bit.

Overall to me the company looks strong I don't know why it's dropping for sure -- the first drop, issuance of equity at HK$7.50 when the stock was trading at HK$9 -this made sense to drop, but the second drop, if it has anything to do with the rumor that they've changed auditors, is just plain wrong (the news of the previous auditor, Grant Thornton, being acquired by BDO maybe is not well known, and it may be thought that Chaoda really did want to change auditors, but BDO is a well respected accounting firm). So this one really has me scratching my head. It looks very strong, with the exception of the issuance of equity to fund expansion, that has made net profit growth relatively flat.

Thursday, March 10, 2011

Follow Up on Frontier Resources

As posted in a previous note, the main question for Frontier Resources (ASX: FNT.AX) is whether the deposit on New Britain has a reasonable chance of proving to be a large scale, economically producing, high grade mine. This is significant because the initial exploratory data was reported to be very positive (could this be a major deposit of Gold in a new territory, relatively unexplored New Britain of Papua New Guinea? -- similar to Lihir of Newcrest Gold (the 7th largest gold deposit in the world, discovered in the past 5 years?)

We won't answer this out with 100% certainty, but it seems we can be able at least shed some light on this main question, by asking few sub-questions first: 1. Does the management team have the connections and experience to at least get the ball rolling on development, if reserves are economic?

Second, are there high grade deposits nearby (in Papua New Guinea?). Mineral deposits are formed by geological processes, and these processes can be similar in nearby locations.

Third, what are the (known) geological processes for forming gold? This might sound too esoteric, but really this helps a lot, at least in the case of oil, in looking for new reserves (really many analysts won't even speculate on this, but for example, I know a bit about oil formation theory, and so for example, took a look at Petrobras of Brazil, looked at their producing wells, and saw huge territories unexplored plus offshore areas next to rivers -- good signs of future oil discoveries and Petrobras subsequently has announced very large

First question -- actually this is probably the best question -- management experience. The Chairman and CEO Peter McNeil is also CEO of another PNG based gold mining firm in addition to Frontier -- New Guinea Gold Corporation. Frontier Resources has only 2 full time employees in management, it appears, the CEO and a co secretary. (this data is really hard to find, is not in the Annual Report -- have to infer since they don't state how many employees).

New Guinea Gold is also mainly on New Britain, same management structure, just McNeil and a secretary and non-exec directors (so essentially it is a twin of Frontier except drills different prospects) has drilled 12 projects, got good exploration results (grades of over 2 g/ton, but hasn't been able to develop these projects, one problem was that crushing the ore turned out to be a problem, so gold production has been disappointing. The stock has been down a lot -- stock price on the Venture Exchange of Canada of New Guinea Gold has gone from .6 in 2007 to 0.1 currently -- the market has lost confidence that management will bring any projects into production and/or sell deposits.

Frontier Resources is also a vehicle to explore New Britain, is up a lot with the recent report of grades but -- really reading the reports from New Guinea Gold Corporation they sound sort of similar in terms of grade (some reports of very high grade 30-60 g/ton then most of above 2 g/ton) -- but New Guinea Gold hasn't been able to bring these online.

I've seen a small management team be CEO's of more than one mining co before --example New Gold and Silver Bear Resources -- both headed by the same management team -- note New Gold is doing great while Silver Bear isn't. So this isn't a bad sign necessarily -- what you do want to see is proven experience getting mines to production and building value. New Guinea Gold isn't this, Frontier so far isn't proven (wondering actually why two co's in the same region for the same type of deposit -- Silver Bear is at least for silver while New Gold is for gold, makes sense -- wondering if Frontier is another vehicle to make investors forget about lack of success at New Guinea Gold).

Anyway -- on the first question overall summary is "iffy."

Second question, yes there are good, relatively recent discoveries is Papua New Guinea. The most publicized is the LIhir Gold discovery on tiny Lihir Island in PNG: Amazingly, this deposit has 28.8M ou of gold reserves at an average grading of 3.5 g/ton (which is extremely high, most grades are 1 g/ton or lower) and ranks #7 on the world's largest gold deposits. In other words, huge! Lihir was bought out by Australia's Newcrest Gold in 2009, and Newcrest states that it wants to produce about half of its production from Lihir going forward (Newcrest is an amazing stock, Australia's largest Gold producer, has rocketed up to a $A30Bn market cap (3rd largest gold mining co in the world). Note that Newcrest's other major producing mine, Cadia East in Western Australia, produces over 1M ou per year of gold but from an average
grade of about 0.5 g/ton (so Lihir is about 7x more concentrated). Cadia East
has reserves of gold of about 18.7M ou, so Lihir has about 50% more gold. (in
other words, Lihir is a world class deposit)

Two other PNG projects appear in the top 200 largest gold deposits. Allied Gold owns Simbiri which is located also on a tiny PNG island (called Simbiri) about 30 km north of Lihir -- average grade is between 1.0-1.5 g/ton with total reserves of 2M ou (so much lower and smaller than Lihir, but LIhir is unusually large and high grade). Harmony Gold and Newcrest co-own Hidden Valley on the main lsland of PNG, with an average grade of 1.7 g/ton and total proven resource of 1.2M ou.

For gold mines in Indonesia, there are three in the top 200 (Indonesia could have similar geology to PNG, both are island countries and actually the main island of PNG is split evenly between Indonesia and PNG). Interestingly, Indonesia's gold deposits are all relatively low grade, below 0.5 g/ton, including the massive Grassberg mine, owned by Freeport (FCX), which has approx 35M ou of gold at an average grade of 0.4 -- note this mine is ranked #3 in terms of reserves of gold, and has already been in production since 1975 so could be depleted in terms of its higher grade ore.

In summary to question 1, there are high grade deposits in PNG and it doesn't appear that PNG has been a major destination of mineral exploration budgets (only a few firms, Newcrest, Harmony, Allied and some minors including Frontier searching so it is possible. Actually the next question is, what did the exploratory mineral info look for Lihir and the other major deposits? Were these close to info coming about concerning Andewa? Will try to find this.

Third question, (this is getting lengthy) gold appears to be formed by three main geological processes. First process, the Witwatersrand deposit in South Africa (largest in the world, produced approx 40% of the world's gold, but now is largely depleted except for underground mining, was in production since the 1910's) was formed approx 3 bn years ago -- the earth is 4.5 bn years old so South Africa is one of the few areas with surface areas formed during this time. Almost all other areas (with the exception of parts of Australia) have been reformed by more recent geological processes. The best theory is that during this period of the earth's history (3 bn years ago) heavier metals were flowing from the magma to the surface (gold, platinum) and the earth was in a different phase of history -- the gold is left over from this period, but not covered in vast amounts of overbuden unlike almost all other areas. This process is probably unique to S. Africa, won't explain Papua New Guinea gold.

Second process Carlin type deposits, found in Nevada -- gold is completely dissolved in minerals -- unique (I thnk) to mainly North America -- won't go into detail.

The journal Science explains a process of gold formation unique to Pacific Islands
-- water flow accumilates gold over relatively short periods (couple 100,000 years). Will reference for this (getting tired) -- anyway, need a lot of flowing water and a trap, can be a good source for PNG, for New Britain -- was how Lihir gold was formed.

Anyway so the summary would be management -- medium to negative, close-by deposits -- moderately positive, gold formation -- positive. Overall however probably question 1 is the most indicative and so overall I would say "iffy."

Wednesday, March 9, 2011

Further Notes, Thompson Creek

A couple more notes on Thompson Creek:

1. They have to build the infrastructure at Mt Milligan and another site, which will cost $350M in 2011, likely will run cash to a bit less than $0 in 2011-2012, (currently net positive cash balance after the acquisition of Mt Milligan is about $300M). As long as copper and gold prices stay where they are, this is ok -- I would say copper prices are more vulnerable than gold prices out to 2013.

The expected of revenue from Mt Milligan from copper is $243M per annum at $3,50 lb copper (81M lbs) and from gold is $230M at $1200 gold (relatively even split copper gold). So the expected revenue from Mt Milligan will be about the same as current total sales (2010 sales of $594.8M).

2. Along with note 1, TC just bought Mt Milligan in Oct 2010 for $700M. They financed this with a stock issuance and also a gold forward sales agreement with a company called Rand Gold (I looked at this, and it looks ok). But now as mentioned in point 1, they have to build the mine infrastructure.

3. Molybdenum production will decline at their main Moly mine, Thompson Creek in Idaho in 2012, overall Moly production is expected to be down to 26-28 M lbs in 2012 from 31-33M lbs in 2011. They have to also spend $181M to expand their other Moly mine, Endako, in 2011. Further, cash costs are going up to the $9 range per lb for the thompson creek mine from $7 range in 2011. Endako is not as high quality an asset (grade of 0.,04% Moly verses 0.08% at Thompson Creek). It appears Moly production at Thompson will stablize after 2012, but I am not sure -- mine life currently is 11-14 years at Thompson Creek. Mine life at Endako is also 15 years.

4. Moly prices may come under pressure in 2014, when the largest Moly project in the Western Hemisphere, owned by Moly Corp (ticker: GMO) comes online This project will approximately double US production of Moly, producing 50M lbs per annum of Moly current US production is 56M lbs according to the USGS: World production of Moly is 234M lbs so General Moly will add about 12.8% to world supply. General Moly has Chinese financing for its project so it is most likely going through.

5. Lastly, TC has 22M warrants outstanding with an exercise price of $9, which is actually a lot. These expire on Oct 11, 2011, so the stock could be under pressure from these -- my understanding is that TC will have to pay out cash for the exercise of these warrants. At a stock price of $12.50, this is $3.50*22M or $77M, which is actually going to drain the cash balance of TC further.

So in summary, TC is interesting however will likely be under pressure through 2011 until visibility on the Mt Milligan project is more clear, which will be sometime in 2013. Further, currently copper and some other industrial metals are weakening in anticipation of perhaps less stimulus from the major economies and therefore lower economic growth. So TC (I think) won't see a breakout until 2012 (but can watch the co, see if it gets close to $10 where the warrant exercise won't be such an issue).

Tuesday, March 8, 2011

Thompson Creek

I was going through the world's largest gold deposits, then seeing which firms own them, -- interestingly you can search the mines here: I'd like a large deposit, so that the co can set up operations and then have a long mine life, plus the resource firm's main source of value is its mining assets.

Anyway, what is interesting is that Thompson Creek, mainly a Molybdenum producer, owns the 47th largest gold deposit in the world, Mt Milligan in Canada, with 6 million ounces of gold proven, also contains about 1 M tons copper (comparison, Codelco, Chile's gov't owned copper miner world's largest has 77M tons copper)(which is to say, it won't set records in copper, but the copper is a source of value). 22 year mine life, will come online in 2013, so current forecasts don't include earnings from this forecast to 2012 (current forecast is selling at 13x 2012 earnings). Production will be 194,000 ou gold, which is around a small to mid tier producer -- you'd see this at around $1Bn in market cap by itself at least.

This doesn't include Molybdenum, which is the main asset, interestingly Moly prices haven't moved up too much, despite the fact that iron ore, copper, now nickel -- most base metals are up -- see Moly prices were at $30-35, now at $15, but at an uptrend.

Nice net cash position, market cap of only $2Bn, nice chart (stock looks flat, no breakout yet).

Corporate presentation here:

I really like the "hidden" asset of the Mt Milligan gold and copper mine. However note, the grades are on the low side for the mine, -- grades of around 0.4 g/ton for gold -- you want to see at least 1 g/ton, and copper grades of 0.14% copper -- you want to see grades of 1% copper. However, the reserves are very big, I noted one of the most successful gold miners, Newcrest in Australia, has one main mine, Cadia, which has a grade of 0.5 g/ton but 27 M ounces total., Now Newcrest is worth almost $30Bn, due to the fact that they have all the operations set up, even as the mine as a relatively low grade (can just process and process ore).

TC should be able to do the same, perhaps on a bit of a lower scale, but a 6 M ou mine is not small at all (again gold mines of over 1M ounces are very rare).

Anyway, once the market either anticipates the gold mining operation Mt Milligan coming online, or higher moly prices, TC should do better than a relatively low $2Bn market cap.

It's not showing up as a gold producer yet since it is classified as Moly, so that's why I think it hasn't moved too much. (most gold producers are up a ton over the past year and a half). It's sort of like KHGM, which is the world's 6th largest copper producer, but also has the 5th largest reserves of silver (always classified as copper, doesn't get a benefit yet too much from silver) (KGHM has already up a ton so probably isn't too much of a buy here).

Feasibility Study of Mt Milligan:

I found an NPV for a feasibility study of Mt Milligan (located about 500 miles north of Vancouver):

The chart gives different prices of copper and gold, and different discount rates. The maximum prices for copper are $3.50 per lb (now $4.33) and $1000 for gold (now $1400 ou). At $3.50 copper and $1400 gold, the NPV is $C3,134M at a 5% discount rate, $C2,156M at a 8% discount rate.

Of course you'd increase that value is the value of copper is $4 and gold $1400.

So I think the stock will do really well once revenues come in from Mt Milligan. (and as long as commodity prices stay strong).

Checked the message board for TC, and the explanation for the low stock price is possible bankruptcy, from a potential meteor strike (this is a joke). The messages are very frustrated with the stock, blaming it on management, for some reason (need to figure out why). So perhaps it will be a while before it moves. But it appears the value is there.