they call me evil knievel - no schist!

On another small forum where I have been posting for many years, they nicknamed me Evil Knievel. While I am not enamored of the Christian name, I take comfort in the view that the nickname has to do with my propensity for risk taking and not my character. According to those posters who named me thus, I have a tendency to leap into the unknown. Penrice Soda fits that tendency perfectly. It has been in free fall for ages now.

You can wait for others to lead the way, sitting there waiting for the share price to break through the resistance level but by then you can be paying a third more than the bottom price. When a stock looks cheap on fundamentals, I prefer to catch at falling knives and see if I can pick the bottom. While that approach has had some notable failures for me - Henry Walker and Cockatoo Ridge to name two - it has also had some marvellous successes. One such success was Forge bought at 21c in February 2009 and the last of them were sold for $3 a year later. You only need one Forge for every 14 Henry Walkers to keep in the game.

While I have been in Penrice for quite a while now, quietly bleeding to death, I have put in a lot of work over the last week to see if I should stay or go. Im staying. Better than that, I am buying more. I like what I have seen so I am on my bike and screaming towards the canyon again.

Here is what I like about them:

(1) Penrice Soda shares were issued via the Prospectus at $1.93 in 2005 and they are selling at 29c today. The net tangible assets at 30 December 2009 were 79.8c a share and that is likely to increase as at the end of June 2010. The company raised $28.1 million in cash in October 2009 yet the whole market cap of Penrice is $26.49 million now. It hasnt lost that money raised. It is not in breach of its covenants and the gearing is at its lowest since it listed in 2005.

(2) The fall in soda ash prices and pressure from imports caused by the global financial crisis and massive Chinese exporting appears to be slowing down . One of Americas largest producers General Chemical announced an immediate 10 percent rise in soda ash prices on 18 June 2010 . Chinese exports were down sharply in the first two months of 2010. I could not find any more recent detail but with the turn up in the world economies this trend is likely to continue. The links are shown below.

General Chemical soda ash price rice

Chinese exports of soda ash slow down

(3) The massive fall in the share price does not seem to be warranted when compared to the companys minor downgrade in May. The company is still predicting a profit of $5 to $6m. I know there are question marks about that profit due to the steady increase in inventories but we are not talking about a company-destroying loss here. The free cash flow is said to be -$7m to -$10m but a large part of this amount is due to capital expenditure on plant and equipment. I look at the operating cash flow and that was positive in the six months to December and likely to be around break even for the full year. These are not the figures of a company about to go under.

(4) A large proportion of the collapse in the share price seems to be due to three or four heavy sellers who appear to have been at it for some time. No-one has filed a change of substantial shareholder notice so none of them owned more than 4.6 million shares when they started selling. We know that when institutions decide to leave they often dump the lot and go. A small loss for them in their total portfolio can be devastating for the company they are quitting and that has been the case here. This selling cannot last forever and when the turnaround comes, it could be just as dramatic as the fall has been. When it happens and these selling instos run out of stock, potential shareholders are going to look at the assets, the revenues and the contracts and find that this stock looks very cheap. Sharp falls are often followed by sharp recoveries.

(5) The Companys contract announcements and renewals of recent have been impressive. It is worth listing them all together:

Adelaide Brighton

Owens-Illinois

Amcor Glass

(6) Boral just announced that it sees a major part of its future in increasing its investment in limestone quarrying. It is doing a major capital raising and intends to use $200m of that raising to invest in a limestone quarry in NSW. A good portion of that money is to be used for the rail transport infrastructure. By Comparison, the whole of Penrice is valued in the market at only $26.49 million. Its quarry at Angaston is described by Penrice as the largest marble and limestone quarry in Australia. It already has a dedicated railway line taking its raw materials from quarry to plant and passing its major customers along the way. What does this make the Angaston quarry worth.? Why would Boral put so much money into that area if the future did not look promising? Borals strategic plan makes the recent investment by Penrice in upgrading the Angaston quarry look good.

(7) Two of the directors bought shares in the last two months including our Chairman David Trebeck. He paid 52.6c a share for 100,000 shares in early May. Clearly he thinks they are worth more than 29c.

(8) In February 2009 when Windimurra Vanadium went into receivership, Penrice shares fell from 95c to 54.5c over a time period of just two weeks. Penrice had a contract to supply Windimurra with soda ash. It was going to be Penrices largest soda ash contract with the mining industry. Soda ash is used in the process of extracting vanadium from magnetite ore. Windamurra appears to be back on track. Atlantic Limited and Mineral Resources Limited have reached agreement with the receivers to acquire and commission the project and it is expected to be in production in early 2011. I doubt that the original contract with Penrice would automatically come back into play but regardless, one could expect that Penrice would have to be in the betting to regain it. It is after all the only Australian supplier. If Penrice shares fell by 43 percent because of the loss of this contract surely we can expect a bounce in the share price if it gets the contract back.

Bacci was right with his earlier ten reasons to sell and it was a great call. But the shares have fallen by almost two thirds from what they were when the minor downgrade was announced at the end of April. I've come up with eight reasons to reconsider and I am working on the other two. I do think it is timely to look again and assess whether they have fallen too far.

See you on the other side of the canyon :)

GPASAS