reap a harvest from patience

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Reap a harvest from patience
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PURE SPECULATION: Robin Bromby | October 26, 2009

Article from: The Australian
FIRST, some words that normally send shivers down the spine of your average resources share buyer: think long term. Apologies if, by uttering that ugly concept, we've given anyone a nasty turn over their morning soy or skinny lattes.

The UN now puts the number of people who don't get enough to eat at 1.02 billion. At the same time, prices of the two fertiliser feedstocks -- potash and phosphate -- are in the basement. Last week Potash Corp of Saskatchewan, the world's biggest miner of that mineral, posted an 80 per cent profit fall.

Nearly half the company's mining capacity is lying idle. One of Russia's largest potash producers is working at about 60 per cent capacity.

Meantime, we're seeing increasingly dire warnings about food shortages around the world. This will be worsened by the fact that farmers in the developed world -- the US particularly -- have been cutting back on fertiliser use because of financial problems and the fact that they can't borrow money to buy it. The bottom line is that there is no way that world food production can be lifted without chemical fertilisers.

Paul Deane, rural economist for ANZ Bank, says in his latest fertiliser report that global markets for the product have been in disarray for a year. India is the only country consuming potash at anywhere near the levels of last year and has just negotiated a new import price more than 20 per cent lower than its 2008-09 contracts. He notes that China is likely to be able get a big price drop for its new import contracts.

On the subject of phosphate, the ANZ report quotes a US manufacturer saying he has seen "probably the largest contraction of fertiliser usage in 75 years". But Deane adds that lower fertiliser application is unsustainable for any significant length of time, and there is hope sales will rise for the upcoming plantings in the US of corn and soybean.

What does all this mean for the investor here? Patience, that's what. But if you have been playing the market for any length of time, just think of all the times you have muttered something along the lines of "if only I had got in earlier and at the bottom of the cycle". Well, pal, this is close to the bottom for phosphate and potash. There may be a long wait ahead. However, not only do the world's hungry need to be fed but the growing middle classes in Asia and elsewhere in the developed world are demanding better food. Chinese rural people are now eating 10 times the amount of meat they consumed just a few decades ago.

Certainly, the prospective phosphate and potash producers here are proceeding on the basis that demand and prices will rebound.

We've just seen ActivEx (AIV) exercise its option to buy the Lake Chandler potash project near the West Australian wheat belt town of Merredin.

There is already an inferred resource that would support at least 20 years' mining. ActivEx says its market studies show a ready market in Australia, substituting for foreign potash which is now imported mainly from Canada, Taiwan and Germany.

On the phosphate scene, Phosphate Australia (POZ) has lifted its inferred resource in the Northern Territory to 14 million tonnes at 20 per cent phosphate oxide. The company says its objective is to develop the Highland Plains project as Australia's lowest-cost new phosphate mine.

Also in the NT, Minemakers (MAK) is starting to bulk sample high-grade phosphate rock to send a test product to potential customers. The company's latest quarterly addresses the issue of price falls. Minemakers notes that, while the world's largest producer, Morocco, has experienced prices dropping from $US450 a tonne in mid-2008 to $US110/tonne now, fertiliser manufacturers are almost unanimous that demand will pick up.

The fall in fertiliser use will inevitably lead to a catch-up phase as farmers strive to meet demand for food.

The price cycle will take a while to pick up -- but we're almost brave enough to ring the bell for the bottom. Be warned: we plan to harp on this subject.

A new gold rush

IF some prospectors, using only metal detectors, had taken about $1 million worth of shallow gold from your tenement, would you be gearing up for some exploration?

Of course you would, and that is what Fox Resources (FXR) is planning. A little reluctantly, it must be added, because Fox is a nickel and copper play, and there is a little concern there that adding gold at this stage might leave some investors thinking there's a change of tune.

There's not. Fox picked up the tenement just outside Karratha in the Pilbara because of its nickel sulphide potential. But some time ago word got around the prospector bush telegraph that one or two people using metal detectors had been finding gold, some of it in nugget form. It is estimated that about 1000oz were removed before Fox put up signs warning off the prospectors.

Managers at the cattle station on whose ground the tenement lies were not too thrilled, either. Some of the prospectors set fire to ground vegetation to make their search easier.

The gold rush has also got the owners of the neighbouring tenement excited. Red River Resources (RVR) and Iron Mountain Mining (IRM) are now waiting the assays from sampling done on their Miaree project, sampling that was triggered by the metal detector rush.

Moreover, these are not tired old brownfields stories. Neither tenement has previously been mined for gold.

Miners untroubled

IT seems our chaps are a bit more hardy than much of the global mining fraternity. After recent riots and deaths in the Guinean capital of Conakry, many of the global mining majors are withdrawing expatriate staff from the troubled West African nation.

Two juniors operating in Guinea are not only staying put, but each is planning to start drilling this week -- Lindian Resources (LIN) at its Dinguiraye platinum-nickel target and Burey Gold (BYR) at the Masounia gold project. Both deposits are more than 300km from Conakry and apparently not too troubled by the unrest.

We're assured that Lindian MD Greg Smith is not easily unnerved. He is in Guinea now, apparently driving around and getting through roadblocks with ease.

Good as gold

WITH its Friday close at 8.3c, EnviroGold (EVG) must be one of the lowest-priced emerging gold producers. Yes, but with a caveat. The company's first gold will come out of the Dominican Republic, but EVG has just released a technical report on two projects in Ecuador.

The report concludes that the company's plan to produce 100,000oz a year for 10 years is realistic. News of a million-ounce producer is always welcome, but Pure Speculation is a trifle toey because the Ecuadorian government has some form in giving foreign mining companies the run-around.

The analysts at Sydney-based Stock Resource are, meanwhile, getting excited about Chesser Resources (CHZ), which has the Sisorta gold project in Turkey. What floats Stock Resource's boat is that Chesser has acquired a second gold deposit in the country, Kestanelick, where some early exploration has produced assays up to 10.2 grams/tonne. "This now de-risks the company from essentially a one-project play," says the client note, slapping a "buy up to 14.5c" on CHZ.

The stock closed on Friday at 15.5c but we think that's neither here nor there in this new bull market. CHZ will start drilling at the new project next month and Stock Resource feels confident the company will be reporting some high-grade intersections.

By the way, we've been meaning to tell you that New York fund manager Van Eck Global is launching the Market Vectors Junior Gold Miners exchange-traded fund. Our companies to make the portfolio are Andean Resources (AND), Avoca Resources (AVO), St Barbara (SBM), Dominion Mining (DOM) and Medusa Mining (MML).

And, while on the subject of precious metals, the president of the Indian Bullion Market Association says gold prices could encourage more Indian buyers to switch to silver. And Reuters reports that HDFC Bank, one of India's largest gold sellers, is looking at offering silver bars because of interest from investors. So we'll be watching when Silver Mines (SVL) starts reporting results over coming weeks from its Webbs silver project in northern NSW.

The Australian implies no investment recommendation and this report contains material that is speculative in nature. Investors should seek professional investment advice. The writer does not own shares in any company mentioned.

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