Market Update

General - Sheffield - sorry, again Gascoyne

Good morning

The IMF issued a new estimate for world GDP growth - 3.7% for 2018 as well as 2019, down from 3.9%. Bad enough…but if they are right, great numbers for us resources people!

Europe deciding today about new CO2-emission targets for cars & trucks in 2030 - their will most probably be a compromise of between 30-and 40% reduction. Not doable without many EV´s on our streets!

Visitors of the LME-week are obviously talking each other very bullish! Base metals sexy today - zinc up 3%, nickel 2%, copper up by 1%….all ignoring the stronger US$!

Sheffield - had some major exploration success, following up from a few drill holes drilled 20km from their existing Thunderbird project. The drilling confirmed another , potentially major deposit of Heavy Mineral sands, probably in the vicinity of 120 millt grading 5% HMS. The company points out, that they could see as much as 15% of the HMS made up of Zircon, which is by far the most valuable mineral sand - for example, the existing project contains half of that amount of zircon. This clearly shows, that Sheffield might not be just one large project, but that it sits potentially - it´s early days - on a new, mineral province, with production for 2 generations and more ahead, at production rates much above the currently planned rates! How much more sex appeal do the majors need? This project is being delivered to them on a silver plate, with a NPV of double or triple the current share price, depending on your assumptions, and with substantial exploration upside!

Gascoyne - sorry this one again…down again today….despite the two, new excellent board additions! The company has clearly stated in a very recent presentation, that all is on track to reach commercial production this Quarter - mainly because of improving grades. This is still valid - all going according to plan, to my knowledge. The recent addition of those two new , senior board members, and the resignation of the Chairman, have raised some eyebrows - a company, which has had it´s fair share of problems, had to raise money twice more than expected, and saw the share price hammered this year, might have one problem left to announce, and raise money again? I do not believe so…great punt! If you are not a shareholder, buy half now, and buy another half, once progress has been announced….Obviously, the market is sceptical - so do not bet your house on it! Mother Earth can make us throw up sometimes! But I have absolutely no indication, that fundamentally, some thing would be completely wrong here. I do not believe, that the company will be able to produce at 1000 A$/oz AISC - diesel prices have increased by 25% or so from the feasibility study - but even if costs should stay as high as say 1150 A$/oz, and I add another 100$ for all sort of costs like headoffice, exploration etc, that still leaves free cash of 450 A$/oz or 45-50 mill A$ in free cash after all costs and before debt service ( debt is 60 Mill A$ ).

The last story I have today perhaps is the most interesting one, and it can tell you a lot about how markets are working or better, how they are not working!

We all believe, that institutional investors are doing their homework, do their own analysis, and run their own spreadsheets…..! Clearly, this got to be the case?? - but I have now learned, that the above is the exemption rather than the norm! I have an Australian friend here in the office for a year or so as a guest, and he had to cover 60 stocks ( yes, 60!! ) in his previous job as analyst of a relatively large fund. Given that you work say 200 days per year, and that you also always look for new ideas and new stocks, this tells you something! Also, I had a conference call with a TOP 250 company by market cap today, and I pointed out, that a recent initiating report ( they tend to be very detailed ) by a major broker estimated a dramatic increase of operating costs two years down the track, leading to a fall in operating cash flow from 170 mill A$ in one year, to 65 mill A$ the next year. The company had not seen this - shame on the IR-guy - but obviously, nobody had pointed that out or enquired about it to the company! Absolutely amazing stuff. But this gives us the opportunity to - at least sometimes - pick something, which is flying below the radar of institutional investors!

I am certainly learning from the above, that a very important part of a well managed company is the Investor Relationship guy…in the end, it´s him, who can point investors into the right direction, and sell the value of the company to them! And in smaller companies, where no IR-person might exist, it comes down to the MD being so well liked, or well regarded, that institutional investors at least give him a proper hearing!

Witnessing the above, I am not wondering anymore about why some of my stocks are so cheap ( ok, I admit - I am allowed as well as pepared to take bigger risks - and sometimes the risks have been bigger than I anticipated! ) . So all of us should do at least enough homework on our larger investments, to find these mis-pricings…and again and again, also look at any potential risk, which we might have overlooked, and which sometimes make a mis-pricing an appropriate pricing!

Have a nice evening!


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