Locantro’s Life: Speculative Portfolio Construction

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“At the start of the bull market we have all the paper and they have all the money. At the end of the bull market we have all the money and they have all the paper”.

After a 12yr stint as a client advisor I found the most successful speculators were those who were able to take a “contrarian” view whilst learning to overcome their emotions. Whilst the opening quote may be more suited to the orange juice frenzy in Trading Places it is all about “buying low and selling high”.

Sirius Resources (SIR) has been the star performer for 2012 and early 2013 and has shown us that high risk/high reward exploration can certainly pay off even when you are low on cash and hope. On July 26 2012 they announced a major new nickel-copper discovery that defined a potential new province. In a dire market the initial reaction was subdued with the shares racing to 24c-24.5c before dropping back to 19c and stopping out many who had rushed to get involved. The SIR story continued to build with further strong results (including the Bollinger discovery), and the share price reached an all-time high of $5.00 in March 2013. With SIR came the resurgence of “near-ology” and juniors such as BUX, SFX, MAT, ENT, BFE and others all benefited from being in the same region regardless of their exploration potential. SIR also allowed Boadicea Resources (BOA) to get their IPO away with their 20c shares reaching a high of 70c in November 2012.

In one of the worst junior resource markets SIR has seen its 5.7c shares soar to $5.00 and not only has it benefited those directly involved, it has shown that greed is still very much alive and well and a whiff of another major discovery, will see the FOMO brigade vowing not to miss another Sirius after many were still regretting not charging into Sandfire (SFR) in what also a diabolical market for juniors.

In exploration you need some luck and, hearing numerous slightly altered versions of how Sandfire stumbled on Degrussa it pays to be persistent and take on that dare of “Drilling a deep hole in search of poddy gold”

Unfortunately with all the excitement and upside comes the negatives and sentiment has now turned nasty to the junior explorers after many inexperienced traders seeking their own instant wealth found their way into the “lobster pots” with failed trades on other high-grade hits and near-ology plays that didn’t quite work out.

Regardless of the lack of positive sentiment the Australian junior resource sector is now offering some of the best value I have ever seen since I took an interest in early 1994. Throughout my career in speculation there have been a number of occasions where the entire sector has appeared to be “stupid cheap”. One of the most memorable for me was around the Asian crisis in 1997 that took hold in July. I had finally had access to the market through a Palsonic Teletext TV (with rabbit ears) and watching prices on rotation I was able to ascertain that the junior resource sector was undergoing a nasty correction.

From 1994 I built my knowledge through constantly asking to be tested on share prices from the newspaper and attending the ASX in Sydney to converse with other speculators. These days with over 2,220 listed companies the information is quite difficult to read due to a drastically reduced font size and the bizarre step taken by The West Australian in particular to list all companies in alphabetical rather than separate them into industrial and mining/energy.

After deciding to leave the NSW Police Service I travelled to Perth armed with a pen and notepad and walked the West Perth grid that pretty much houses the entire Australian junior resource industry. I interviewed around 20 Directors, geologists and company secretaries and after having it bound I was able to secure an advising role at William Noall on “The Terrace”.

Leading up to the Dotcom bubble the major trading activity surrounded Optus Warrants (CWO’s) and although I began to build a large position for clients in BeMax Resources (former ASX: BMX), once the NASDAQ started to really move it was sheer mayhem as the bombed out juniors from the Asian crisis all rushed to backdoor in any Dotcom/tech related entity or ideas to avoid being left behind. Suddenly “fear” morphed into “the fear of missing out” and I witnessed some companies increase up to 300 times in value. New IPO’s were also all the rage and 200% to 500% returns on day one were not uncommon. The catch was that you either had to be a highly regarded client of a major broking firm or a small investor lucky enough to be approached for shareholder spread.

During this period of madness my client base increased five-fold and I eventually was writing >$100,000 in commissions which at times was the average yearly wage in around three weeks. Apart from the stupid amounts of money being thrown around, the greatest lesson I took away from the Dotcom bubble was learning about fear, greed and how my clients were handling the emotional ride of a speculative bubble. I look back at my policing and advising career as almost 20 years of pure psychology and I will look to provide subscribers with as much insight as possible as share prices recover from their lows (and they will!).

Since Dotcom there have been a number of mini-bubbles in retractable syringes, childcare centres, boutique breweries, coffee shops, juice bars, potash, phosphate, nickel, molybdenum, real estate, rare earths, coal, iron ore, lithium and regional exploration spikes in Cloncurry (QLD) and Doolgunna (WA) when Sandfire (SFR) eventually saw its share price >$8.00 after struggling below 6c during the GFC.

The only sector that came remotely close to Dotcom was uranium which saw Paladin (PDN) explode from 0.008 (8/10’s of one cent) to over $10.00 as speculators frenzied over any junior that was pegging ground or even considering looking at going nuclear. Whilst there were some major success stories such as Mantra (MRU) and Extract (EXT), investors were hammered in similar fashion to the Dotcom bubble once buyers were exhausted and the sector came crashing down.  Regardless of the lessons apparently learnt in late 1999/early 2000, human nature again dictated terms as many flocked for their slice of the uranium action as they felt completely safe doing so as part of the herd.

The most recent bubble dominating Australian TV is sports betting which continues to roll on as a major incentive war escalates. Now if your team is ahead at half time but loses you have a chance of perhaps getting your money back. I admit to having a soft spot for TAB Sportsbet only due to the fact I like seeing how the fresh faced and attractive Jamie Rogers hair styles are evolving. Flat, curly, in a bun or even wearing a hair piece it is my brief escape from reality. Free bets, promises of the best odds, three strikes, and now refunds based on the size of the crowd it is a sure fire sign the bubble is maturing.  The reported $500m bid for Tom Waterhouse’s operation might be the ringing of the bell, but with human stupidity infinite the sector might grow legs and wings.

Being previously addicted to smoking, poker machines (cardies and the flashing hearts), horse racing, and day trading I am not going anywhere near sports betting regardless of the fact I enjoy analysing both AFL and NRL. My Saturday’s spent at the Glenrose TAB are now well behind me and no doubt my children are now looking forward to the series of lectures heading their way. No smoking, no tatts, no exotic bets or dancers (at least until they are 18) and my children will be half way there with their futures.

One of the most ridiculous bubbles that has swept the world has been GANGNAM STYLE which stormed past 1 billion hits on YOUTUBE. Even sillier is the HARLEM SHAKE which just like the other display of stupidity (planking) has cost people their jobs and hope of a future career. The world needs some respite from the current heat on the Korean front but why not a return of the yo-yo or producing a range of Game & Watch toys where we aren’t forced to pay $100 because they are now vintage.

During the Dotcom madness and other mini-bubbles the major barrier for investors was their addictions. It was all about the adrenalin of a short-term trade, rumours of a major hit, or the romance associated with an anonymous post on Hotcopper. Once you are addicted to the over hyped rubbish on the market it is near impossible to go back. On many occasions it was a more a case of “wrong person” has opposed to the “wrong stock”.

From my experience I have learnt that the following does not work over the long-term when it comes to speculation remembering in a bubble that almost everyone is a genius:

Technical analysis (You either believe it or you don’t and I don’t, even though I am mindful that chartists will influence prices up, down or sideways). Without willing buyers chasing stocks on momentum or having them panic once stop losses are breached it would be difficult for position builders such as myself to get set at the right price.

  • Black box programs or complex formulas claiming to be able to capture human emotions.
  • Overanalysing the economy and trying to forecast prices for a basket of precious, base and industrial metals. Remember one of the greatest investment minds Peter Lynch has been quoted as saying, “It is futile to predict the economy and interest rates”.
  • Developing an unhealthy addiction to Hotcopper now that they have relented and brought back the old and much loved version.
  • Buying stocks because you saw an ASX code on a car number plate followed by a three digit number with a 9 in front of it.
  • Buying at the height of the exploration frenzy because at $4.50 it must certainly be going to $5.00 regardless of the fact that the “smart” money was in sub 50c and are looking to get out. This strategy can work over the long-term but is a perfectly fantastic “waste of your life”.

My most successful clients over the long-term were able to:

  • Read up on companies I had suggested and develop their own view.
  • Build large positions when there was little interest in the stock regardless of negative press and gurus calling for a major market crash.
  • Ignore the fact that the stock wasn’t one of the most popular on Hotcopper or wasn’t yet covered by analysts.
  • Accept that undervalued and illiquid stocks were prone to 30%+ drops when there was a panic on the Dow or a shareholder simply wanted out.
  • Go against the mainstream and not apply stop losses to perfectly sound companies which would only serve to “stop profits”
  • Resist the temptation to constantly monitor the share price and reach for the phone whenever there was a dip on no apparent news.
  • Not become paranoid that every trade either up or down was the result of insider trading or an evil group trying to suppress the price for a takeover or to accumulate stock.
  • Sell stocks that had increased 10-50x in value all the way up without regret. There have been cases where I have seen investors drop $800,000 on paper from an initial $20,000 investment (this is crazy).

To assist in putting together a speculative portfolio, rather than reading hundreds of books, attending courses and subscribing to every newsletter (apart from mine) I am suggesting that the following three books will be all you need providing you are slightly reasonable and possess an inkling of common sense. I would suggest reading them in the following order:

1. The Winning Habits of Warren Buffet and George Soros, Mark Tier

2. One Up On Wall Street, Peter Lynch

3. Devil Take The Hindmost, Edward Chancellor

If you take nothing else away from this article the following site is a great place to pick up these titles and others www.bookdepository.co.uk

Locantros life


Building a Speculative Portfolio

It may of taken some time to get to this point but I felt it was necessary to provide some background information and insights on my methodology and how speculation is all about people and how they behave rather than complex computer programs. I treat the junior resource sector as a “battle” between, shareholders, daytraders, quick buck artists, company directors and ultimately the toughest of all in dealing with your own emotions of fear and greed with the occasional dose of stupidity thrown in. Here are five juniors that I consider worthy to consider when constructing a speculative portfolio. Not only do they offer the potential for share price upside, it is the on-going education that could be most valuable in identifying similar companies and learning how to negotiate risk and reward analysis.

I am going to start off with the “Sensational Six” and then work my way through some more highly speculative opportunities to spice up the portfolio. (For the full stock list and to learn more visit locantro.com) 


Minotaur Exploration (MEP) 14c

  • Strong management team and geological talent. Dr Tony Belperio was involved in the discovery of Prominent Hill (Oz Minerals).
  • Offer an outstanding mixture of both brownfields and greenfields projects. The market has attributed no value to the Mutooroo Iron and Poochera Kaolin Projects despite both having JORC resources.
  • Ability to generate an on-going flow of “elephant targets” that offer multiple upside potential.
  • Catch Dam Prospect in South Australia that represents an exciting “high risk/high reward target. A “Crunchie” for fans of the much loved chocolate treat.
  • Sale of their South Australian tenements to BHP for $10m, along with their interest in the Tunkillia Gold Project for $6m in total indicates that MEP is much more than a “lifestyle” junior resource company. MEP could again re-rate in the event of divestments and/or joint ventures over their development and exploration assets.
  • Market capitalisation/project and exploration mismatch where the market is barely valuing the company above cash/shell value despite considerable success in not only monetising assets but also providing extreme leverage to exploration success. The most conservative BOTE valuations would see MEP trading at the 25c-30c level where it could be once the sector recovers.
  • Link to my in-depth research report (19 March 2013) can be found here

http://locantro.com/asset_uploads/locantros_life/Locantros_Life_Issue_27_MEP.pdf


Chinalco Yunnan Copper Resources (CYU) 7.5c
 

  • Outstanding management team now led by Paul Williams and Richard Hatcher.
  • Have announced a JORC resource at the Elaine Project in north- west Queensland (70% CYU/30% GSE) of 27.7mt grading 0.53% copper and 0.08 g/t gold for contained metal content of 147,000t copper and 75,000oz gold.
  • Hunting “elephants” in Chile in JV with Rio Tinto and a subsidiary of Codelco at the Sulfatos exploration property in northern Chile.
  • Due to commence exciting exploration at Blue Caesar (Queensland), Humitos and Palmani (Chile)
  • Strategic review of CYU’s assets and growth aspirations has indicated a greater focus on M&A activity with the support of the major shareholder (Chinalco)
  • Ideally placed to benefit from falling commodity prices and investor interest in the hunt of suitable acquisitions.


Octagonal Resources (ORS) 12c

  • Despite a healthy AUD gold price of around $1509 ORS appear undervalued on their gold processing plant at Maldon and JORC resources.
  • Toll treating agreement with A1 Consolidated Gold Ltd will see ORS receive 10% of all gold produced plus a processing fee. This will not only provide handy cash flow but will assist them with the ramp up phase of their underground and open pit gold production.
  • Re-processing of the Kangaroo Flat flotation concentrate tailings (50% JV with UML) has performed well and above expectations.
  • Focussed on becoming a profitable gold producer by taking a methodical approach to the best mining methods and understanding the geology.
  • Difficult ground conditions have affected progress on accessing the Alliance South Deposit (473,000 tonnes @ 12 g/t Au for 182,000 ounces), and ORS have elected to drive towards a secondary mining target, whilst continuing to slowly progress towards their main target. ORS have since announced that they are through the worst of the conditions and are undertaking “normal” driving activities.
  • Exciting exploration potential at the Burns Prospect in Western Australia that has delineated a 2km copper anomaly.
  • Market capitalisation of around $12.7m (no debt) with a plant (replacement value of $15m) highlights the value proposition.
  • I have been involved with and witnessed the transformation of a number of gold juniors including, Medusa Mining (MML), Integra Mining (IGR), Dominion Mining (DOM), Ramelius Resources (RMS) and Northern Star (NST) and believe that ORS has similar potential providing they are able to protect their capital structure by achieving their near-term production goals. They also appear to be a viable target for corporate activity.


Red Metal (RDM)  16c

  • Was previously the weakest of the four pillars but this has changed in a big way following high-grade lead-silver hits at the Maronan Project that saw the stock hit highs of 52.5c in late 2012.
  • Stock was poleaxed due to “extreme weathering”, however the news didn’t kill Maronan off and it appeared to be more a case of the “Hot money rushing for the exits” when they failed to announce another “Cannington”.
  • Very well managed junior led by Rob Rutherford who rates as one of the most highly respected leaders in the junior resource sector.
  • RDM’s project portfolio is geared towards the company’s goal of becoming a “small company with a large share price”. Whilst Maronan is clearly the near-term focus, RDM’s other projects in Australia and the potash in Colorado USA should not be discounted.
  • Pernatty Lagoon although being up to 1.6km deep (the target) could again see RDM generate further speculative interest and off a low base another repeat of late 2012 cannot be ruled out. 


WPG Resources (WPG) 8.7c

  • Sold their South Australian iron ore assets to Onesteel for around $320m. A distribution totalling $1.05 per share (fully franked dividend of $0.63 and a capital return of $.42) was paid to shareholders in November 2011.
  • WPG’s management team have the enthusiasm and desire to do it all again for shareholders and possess the projects to see another growth phase emerge. WPG’s projects are enhanced by the retention of their Port Pirie assets and permits.
  • Highly prospective projects including the Giffen Well iron ore project where WPG have announced a resource estimate of 689 million tonnes at an average grade of 30.9% Fe making it one of the highest grade BIF iron ore deposits in Australia.
  • WPG have since announced that the combination of the Giffen Well iron ore project, the Company’s port assets and its Penrhyn coal project forms a unique package that is virtually unrivalled in Australia.
  • The release of the PFS study at Giffen Well indicated “An affordable iron ore project” with capex of around $1.5bn (potential for reductions) along with costs of around $72 per tonne FOB which were similar to Peculiar Knob.
  • Share price has held on well in comparison to other iron hopefuls, however the key now is for WPG to partner up, and work towards either production or divesting the asset for multiples of its current market capitalisation (a paltry $22.4m).


Chesser Resources (CHZ) 20.5c
 

  • Emerging Turkish gold producer with 462,000oz gold (inferred) and looking to expand this resource.
  • Robust scoping study released with total capex of $88m US including a 30% contingency and an IRR of 61%
  • Average production of 63,000oz of gold and 38,000 ozs of silver over 6 years.
  • Pre-feasibility study now underway with high-grade results continuing as CHZ drill the vein systems where only around 15% have been drilled to date.
  • Share price has suffered due to sagging sentiment in the gold sector, but there remain very few opportunities with momentum, a resource base likely to increase, and the potential for consolidation in the sector. (Previously ran to $1.28 on the back of similarities to Andean Resources)


Silver City Minerals (SCI) 11c
 

  • The “Mother” of near-ology plays with SCI’s tenements surrounding the Broken Hill mine.
  • Lead project is Razorback West that could be a northern extension of the Broken Hill Line of Lode.
  • IP anomalies strongly coincident with gravity and lead geochemical anomalies. (In English they have some great targets to drill)
  • Drilling now underway at Mount Brown (silver-lead-zinc-copper gossans). Five holes of RC drilling for 700 metres is planned.
  • Mount Brown is the first of five projects to be drilled over the coming months.
  • Board and technical team with the right mix of skills to see SCI grow through discovery and/or M&A activity.


Some Further Tips

  • Look to buy an odd number of shares rather than go for the usual 10k, 50k, 100k, or 1m shares. If you hold 67,667 shares in a company that is running it is much easier to sell 17,667 shares than to break your holding of 50,000. It is the same mentality as breaking a $50 note to buy a packet of Extra.
  • Do not be afraid to take profits into strength and be mindful of complacency which will see profits erode and regret set in.
  • Remember that the junior resource sector will have its ups and downs (some quite severe in both directions) but there is always interest in major discoveries regardless of the underlying market sentiment.
  • Well managed “small” companies with the robust projects and support to develop them are still going to graduate to the next level despite fears over the fiscal cliff, and China’s growth trajectory. I.e. there will always be something to worry about! 


Risk and Reward Analysis

Once the stocks in the portfolio start to move I would expect that anxiety levels will increase and the major risk will be selling too early has we have had far too long to adapt to these stupidly cheap valuations. During the more mature stages of the Dotcom bubble I learnt to adapt to share prices and market capitalisations that appeared reasonable to those immersed in the sector but appeared ridiculous to me. As share prices move the key is to be able to apply risk/reward analysis to each situation without becoming attached to the stocks more likely to drop considerably or as a best case go sideways which is effectively “dead money”.

As the market improves (and it WILL) my aim is to provide my subscribers with further insights into how I go about applying risk/reward analysis to the companies I follow, that will ultimately dictate where the red arrow lies in the valuation bar in my TFIF updates. Subscribers should remember that “Fear is temporary and greed is perpetual” and more importantly that “Human stupidity is infinite”.

Speculation whilst potentially rewarding is also extremely dangerous  and although Locantro’s Life is all about making money in order to do this some of the risks must be removed or mitigated and buying low has always been an excellent place to start.

Tony J Locantro

Email: tony@locantro.com

Website: http://locantro.com

About the Author: Tony Locantro is the Managing Director of Locantro Capital Pty Ltd, Locantro Asset Management Pty Ltd and Gold Australia Pty Ltd. He entered the stockbroking industry in 1998 and was an Associate Director at Patersons Securities Limited until 2010.  In 2001 he authored The Green Room: A Guide to Speculating on the Australian Stock Market and is the current author of the newsletter, Locantro’s Life. He has been quoted extensively in the financial press and Dow Jones Newswires, has written articles for Kitco and other websites and also appears as a regular panellist  on Your Money Your Call (Sky Business News). He is known as a passionate and respected supporter of the junior resource industry.

Disclosure of Interest: Tony Locantro, his companies, employees and associates may have personal interests in the majority of the companies or sectors covered in this article.

Disclaimer: This article is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular reader have not been taken into consideration. Individuals should therefore discuss, with their financial planner or adviser, the merits of each recommendation for their own specific circumstances and realise that not all investments will be appropriate for readers.

Analystgold australia

Tony J Locantro
Managing Director     

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Disclaimers

Locantro’s Life is designed for speculative investors. Subscribers should ensure they consider their risk profile as speculation is the highest risk investment.

Please note

This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without prior approval.

Disclaimer

Locantro’s Life is a publication issued by Gold Australia Pty Ltd (ACN 131 793 416) who is an authorised representative of AustAsia Financial Planning Pty Ltd AFSL 229 454.

Gold Australia Pty Ltd has made every effort to ensure the reliability of the views and recommendations expressed in Locantro’s Life. Gold Australia Pty Ltd research is based upon information known to us or which was obtained from sources which we believe to be reliable and accurate at time of publication. However, like the markets, we are not perfect.  Locantro’s Life is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular reader have not been taken into consideration. Individuals should therefore discuss, with their financial planner or adviser, the merits of each recommendation for their own specific circumstances and realise that not all investments will be appropriate for all subscribers. To the extent permitted by law, Gold Australia Pty Ltd and its employees, agents and authorised representatives excluded all liability for any loss or damage (including indirect, consequential or special loss or  damage) arising  from  the  use of, or reliance on, any information with Locantro’s Life whether or not caused by any negligent act or omission. If the law prohibits the exclusion of such liability, Gold Australia Pty Ltd and AustAsia Financial Planning Pty Ltd hereby limits their liability, to the extent permitted by law, to the resupply of the said information or the cost of the said resupply.

Disclosure of Interest

Gold Australia Pty Ltd, AustAsia Financial Planning Pty Ltd, its Directors, employees and consultants may have personal interests in the majority of the companies covered in this report (both direct and indirect).

AustAsia Financial Planning Pty Ltd (AFSL 229454) Level 1 AustAsia House, 412-414 Newcastle Street, West Perth WA 6005 Phone: (08) 9227 6300, Fax: (08) 9227 6400

 

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Precious Metals Investment Symposium