June Research Report, page-4

@nordesmic

Nord,

I think sometimes it’s good to go down the stream of consciousness route and let go of the rulers for a while.

Question : "I guess the question I'm asking myself is why is the business valued the way it is? I read some of the good discussion from yourself and @worzel1 and you're saying that a takeover isn't likely from NST because TBR/RND would want cash not script. So what would it take for them to sell their portion of the EKJV and realise full value for shareholders?"

Answer: I don't think this is the right question as it assumes the only way for the companies to realise full value is to sell the EKJV interest. It also assumes that peer comparison valuations are a good measure by which to value the long run value of a gold mining company.

I have calculated the longer run return per share in a real hand waving way in the post below. It is not by any means a thorough analysis (real back of the envelope stuff) as it doesn't take into account tax, royalties and probably a number of other variables, but it does highlight how shareholder value will likely increase despite of the “apparent” market mispricing. Anyone else is welcome to have a better go and maybe point out the flaws in my calculation or come up with a more realistic number.

http://hotcopper.com.au/threads/peg....2531229/page-6?post_id=15437118#.VZNX_iwVjIU

On to the issue of market mispricing, I have followed gold stocks for a long time (mostly quite lazily as an armchairist if that is a word), but one thing I know about the gold mining business is that it is difficult. I have seen market quite a few WA gold market darlings come unstuck and go into administration (wiped from the boards) while still trading with reasonably healthy looking share prices. Sons of Gwalia, Croesus Mining, Centaur Mining and Exploration, Norseman Gold are just a few of the larger examples.

Modern markets are like the fairy tale story of Cinderella in my opinion. You have the neglected, forgotten stocks. These stocks generally have very low liquidity and a more or less priced by the few traders that take some interest in them. These I call the honest stocks, not all good stocks by any means, but honestly priced. Then you have the large majority of stocks whose trading is "facilitated" by “holders” of “liquidity”, these I call the dishonest stocks. Why dishonest? The ability to quickly sell a stock, not in a week or a day or an hour, but in the next fraction of a second is a great advantage but it comes at a big price. The price is that risks aren’t properly factored in. The market forgets that gold mines fail, that systemic risks exist in the markets themselves, that commodity price and currency price risks exist along with a whole other raft of risks.

Well in my opinion the honest stocks are often mispriced downwards and the dishonest stocks are often mispriced upwards so peer comparisons are not very useful tools to determine the long run potential success of a gold mining company.

What I know from the Cinderella story though is that the prince eventually saw the beauty of the neglected sister and did everything he could to find her ,which included letting every fair and available maiden in town try on the discarded slipper.

I think with Rand and Tribune the market is in a very long process of finding out who fits that discarded slipper.

Question: “ Are they really a mining company or just a holding company for the EKJV and the gold waiting for the prices of each to meet their targets?”

Answer: The companies generate positive returns on capital for shareholders from mining so they are a mining companies. In fact, in terms of business models for mining they operate super-efficiently. In the past under Placer/Barrick (from memory) the companies provided all the development and mining capital for their share of the mining which Placer/Barrick managed, but once the ore got put on the ROM pad it was randomised and divided according to the JV proportions. RND/TBR took their ore to the Greenfields Mill down the road for treating and Placer/Barrick to their ore to Paddington and then later to Kanowna Bell.

Under this model you can think of the major JV partner as no more than a contract miner for the companies and the toll-treater as a contract miller of the ore. This model only breaks down, as it did one time in the past, when the mine operator (not mentioning names) tried to transfer expenses for staffing from its loss making operations elsewhere in WA to the profitable Kundana mine site.

Now a days under the EKJV all the ore goes to KB but fundamentally RND/TBR’s business/mining model remains unchanged. NST can basically be considered a “contract” miner, miller and explorationist, delivering benefits to both Rand and Tribune for which they pay all fair costs. Don’t forget RND/TBR have seen something like 7 or 8 partners come and go at Kundana.

Well sorry for the long explanation, but it should help you get a better feel for the companies.
They aren’t going to sell their share in the JV IMO. They are just going to keep reaping the rewards of one of the highest grade gold mines in Australia.

Eshmun