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Tim Boreham
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+ About Tim Boreham

Welcome to the New Criterion, authored by Tim Boreham.

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

Tim Boreham has now joined Independent Investment Research and is proud to present The New Criterion, which will honour the style and purpose of the old column. These were based on covering largely ignored small- to mid-cap stocks in an accessible and entertaining manner for both retail and professional investors.

The New Criterion will strive to continue the tradition in a weekly online format.

The column will not offer stock recommendations because we think readers can make up their own mind on the facts and opinions presented.

Our coverage will include both the industrial and mining sectors, including listed investment companies and IPOs. The stocks covered will not necessarily be of investment grade with sound financials. But they will have credible management and – at the very least – an interesting story to tell.

We hope readers will find The New Criterion both entertaining and informative.

The New Criterion: Commodities stocks

Thursday, February 22, 2018

There are more ways to gain exposure to commodities than buying the miners themselves. Here are two alternatives.

Zenith Group (ZEN) 77c

Investors convinced of a sustained resources recovery (and that appears to be the case) face an internal dilemma. Should they ride the cycle with an exposure to the actual producers, or invest in the handmaidens that help the miners get the stuff out of the ground?

After all, the real smarties during the 1880s gold rushes were the ones who invested in pots and pans and built a sustainable business.

In the case of remote mines – in other words, most Australian ones – power is a key input cost and there’s an unhealthy reliance on inefficient diesel generators.

Zenith, which listed in May last year, supplies or operates gas, solar or diesel hybrid plants for a clutch of mining’s famous names.

This month Zenith won a contract from Newmont Australia to build own and operate (BOO) a 62 megawatt power station at the gold miner’s Tanami project in the NT. That deal took Zenith’s BOO capacity from 125 megawatts to 185 megawatts and its total installed capacity to 380MW across more than 30 projects.

Other contracts are with Newcrest Mining’s OK Tedi mine, Independence Gold’s Nova nickel project and Incitec Pivot’s Phosphate Hill.

But Zenith’s biggest customer is with Northern Star Resources, covering the gold producer’s Plutonic, Jundee and Kundana mines.

Zenith also uses a manage operate and maintain (MOM) model. But BOO accounts for 65 per cent of revenue and is the preferred arrangement because Zenith is protected by ‘take or pay’ arrangements, not to mention a wider involvement in the process.

A key advantage of remote generation is that once the client has installed the plant it’s unlikely to change supplier.

 “The business has never lost a client and we don’t intend losing them now,” chairman Doug Walker says.

Zenith was founded in 2006 by Walker and director Gavin Great, Zenith initially with a contract to power Chevron’s Barrow Island base.

Walker has form in the remote power game, having founded StateWest Power before selling it to Wesfarmers in 2001. Wesfarmers then renamed the business Engen and sold it to Energy Developments, which in turn was acquired by the utility DUET.

In a key test of strength, Zenith endured the fallout of the global financial crisis on the resources sector and its shares are now well above their listing price of 50c a share.

“The GFC was a test of our resolve and our strength,’’ says managing director Hamish Moffat. “But at least it focused our clients on the real cost of energy.”

On that front, nothing much has changed given the relentless emissions debate and concerns about blackouts and gas shortages. While the recent-ish Finkel report focused on utility scale generation, off-grid users such as miners are not immune from emission target reductions as per the Paris Agreement.

We’re still bound by that accord, which requires us reducing emissions by 26-28 per cent (relative to 2005 levels) by 2030.

Zenith, which reports its half-year results next week, has flagged a full year net profit of $9.5-11m and ebitda of $12-14m, on revenue of $33m.

That’s quite a step up from the 2016-17 full year profit of $3.1m and ebitda of $9.84m, on revenue of $30.9m. But investors hankering for a dividend should look elsewhere.

Zenith accounts for about 12 per cent of the remote generation market, competing with the DUET-owned Energy Developments as well as bigger fellow ASX listee Pacific Energy (PEA).

K2Fly (K2F) 28c

Is that the time?

Partygoers tend to suddenly remember the babysitter or an early morning appointment when the conversation turns to consulting systems integration for infrastructure and asset-heavy industries.

But for K2fly investors sitting on a 300 per cent plus gain over the last two months, these topics are even more riveting than house prices and whether Bernard Tomic is simply a twat or a lost soul deserving of sympathy.

With its dominant client base of miners, K2fly can be seen as an exposure to the recovering resources sector, yet one not dependent on the commodities cycle. A bullish December update- which sent the stock (K2) flying, vindicates the board’s decision to buy the private Infoscope in July last year.

The purchase price --$625,000 and $275,000 of K2fly scrip – represented a stingy ebit multiple of 1.56 times.

Infoscope’s software enables miners to manage land issues such as tenement tracking, cultural heritage and ground disturbance in a seamless manner. Clients include Fortescue Metals, iron-ore mine operator API Management, Metals X,  Westgold Resources and The National Trust (via The Keeping Place, funded by Fortescue, BHP Billiton and Fortescue).

But what’s spiked the punch bowl is Infoscope’s recent tie-up with the German based enterprise software provider SAP, which globally has 770 mining clients (including most of the majors).

This raises the prospect of K2Fly receiving monthly licensing fees from SAP off a much wider customer base, as SAP moves its clients to ‘cloud’ computing..

K2Fly exec chairman Brian Miller says that with a market cap of $10m, K2Fly would not normally be big enough to get a seat at the SAP table.

Proving the adage that it’s not what you know but who you know, Miller leveraged his previous history as an SAP executive.

 “SAP is especially important in relation to moving customers from on-premises software to the cloud,” he says.

“Because we have leveraged our previous relationship with SAP we have been able to be the first cab off the rank.”

The Infoscope platform is currently being “ported to the SAP cloud and its s4 Hana environment”. This is geek speak for saying that when someone plugs in the right cable, Infoscope and SAP will run seamless together.

When this happens by the end of the current quarter, SAP’s salespeople will be able to sell K2Fly products to its own client base, generating recurring monthly licensing revenue for K2fly.

“SAP has very aggressive targets in terms of how they will move their client base. In the mining sector we should play very well in the space,” says Miller, who believes that most clients would be good for annual fees of at least $500,000.

Otherwise, K2Fly has reseller deals with other IT industry leaders including OBI Partners and Kony of the US, Sweden’s ABB and Capita PLC of the UK.

K2F re-sells Capita’s Fieldreach, a mobile based management tool for blue-collar workers on physical assets. In November K2Fly struck a deal to supply Fieldreach to Arc Infrastructure, which operates WA’s 5500 kilometre freight network.

K2fly also consults to the water, electricity, rail and power sectors.

As always, K2Fly doesn’t exactly have the field to itself. In the tenement management sector it competes with the private C2 Land and Land Assist, or miners who build their own system using Indian programmers.

But there’s no doubting the revenue momentum. In the December half just announced, K2Fly chalked up $937,396 of revenue for a loss of $2.68m, compared with $798,066 of turnover and a $1.3m deficit last time around.

The company has also submitted for seven proposals and tenders, “some of which are for the multi-year provision of software and services.”

On Feb 5 K2Fly announced a contract with a “tier one utility company” that would be material to 2017-18 revenue.

The company then went on trading halt, after which the company clarified that it would be a WA-based electricity company and involve revenue of $250,000-300,000.

Spark up the party!

Tim Boreham edits The New Criterion

tim.boreham@independentresearch.com.au

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense. 

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The New Criterion: Jumbo Interactive and OtherLevels

Thursday, February 15, 2018

Lottery ticket reseller Jumbo took the right decision to align itself with traditional partner Tatts Group rather than aggressive challenger Lottoland. Meanwhile, digital promotions house OtherLevels believes that a clamp on wagering advertising will be good for business. Here's a rundown on both.

Jumbo Interactive (JIN) $3.43

Sometimes adversaries can do an unintended favour, which in the case of the online lottery ticket seller has meant a closer relationship with traditional partner Tatts Group.

Tatts – now part of Tabcorp – owns a 15% stake in Jumbo after a placement of 6.6m shares at $2.37 in June last year.

Crucially, Tatts also extended its reselling arrangement with Jumbo out to 2022.

The adversary in question is the Gibraltar-based rival Lottoland – dubbed by some as the Uber of the wagering world because of its disruptive tendencies.

In the unlikely event that no-one has noticed, Lottoland has been aggressively marketing its derivative lottery product in the face of newsagent-led calls for tighter regulation or even an outright ban.

The newsagents are peeved that Lottoland is taking away their business, although Lottoland only promotes overseas lotteries.  State governments are even more annoyed at missing out on lottery taxes.

With a claimed local customer base of 650,000 and 6.5m globally, Lottoland last year offered newsagents a 10% cut of the price when punters nominated a particular outlet.

The derivative nature of Lottoland’s offering means punters don’t participate in the actual lottery, but the outcome of a draw. Last weekend it offered a $1 billion “Super Bowl” themed lottery, reduced by 38% as per “terms and conditions”.

In April last year Lottoland paid $7.6m for a 7% stake in Jumbo, clearly in view of winning over Jumbo to distribute its product over Tatts. But in late June Lottoland conceded defeat and sold its stake at a slight loss.

Despite being distracted by its own merger with Tabcorp, the Lottoland threat girded Tatts into deepening its relationship with Jumbo, which has been selling Tatts tickets on its OzLotteries site since 2000.

Jumbo chief Mike Veverka admits he’s not a fan of Lottoland.

“We weren’t keen on doing anything with them at all,’’ he says. “But they did help push things along (with Tatts).”

The new Tatts-Jumbo tie-up helps allay long-standing investor fears that Tatts would opt to go it alone. (apart from Tatts itself, no-one else can sell Tatts tickets online other than Jumbo).

Veverka argues that as Tatts still gets the ticket and Jumbo has proved an efficient intermediary, it makes no sense to cut  Jumbo adrift.

The Keno business aside, Tabcorp did not have a lottery business but appears willing to learn, having already sounded out Jumbo for advice.

“They are good managers. It won’t take them long for them to get their head around lotteries,” Veverka says. “The last thing they would want is to see the lottery business shrinking.”

In the meantime, Jumbo’s has jumbo-sized its performance, thanks to a string of jackpots (defined as anything over $15m).

In an update on Jan 8, Jumbo pointed to half (December) year earnings of $5m, 43% higher than previously and outstripping December’s guidance of $4.3-4.5m.

Jackpots increased by 20% to 18.

Total transaction value – the face value of the tickets sold – should rise about 20% to $89m.

Jackpots are far more popular with punters, who overlook the reality that the monster payout is more likely to be split among multiple winners.

But that’s not the case with the unclaimed ticket for a $50m Powerball prize purchased at your columnist’s local newsagent – and he remains ready and able to relieve Tatts of the loot if that makes things any easier.

Jumbo shares have spurted 150% over the last 12 months, for a market valuation of $200m.

Also debt free and sitting on a bash balance of $45m. Given the company’s strong franking balance, that raises the prospects of a special dividend.

Jumbo’s fortunes were reflected in the last Thursday’s half-year results for Tabcorp, which reported a 6.2% increase in lotteries revenue for the Tatt’s division, to $1081.2bn. The Tatt’s numbers were certainly better than Tabcorp’s core wagering results.

Digital lottery sales now account for 14.9% of Tatts lottery total sales, up from 14.3% previously.

OtherLevels (OLV) 4c

OtherLevels CEO and founder Brendan O’Kane believes a looming crackdown on gambling promotion will help his heavily wagering exposed digital promotions business, which sounds counterintuitive.

But he reasons if the corporate bookies can’t saturate sports coverage from tennis to tiddlywinks with their special introductory odds, they will need to do more to nurture their existing customer base.

The federal government last year said it would ban betting ads from live sport before 8.30 pm - a measure not yet enacted.

But agitants such as the Nick Xenophon camp are pushing for much more, amid perceptions the industry has way over reached with its blanket-bombing approach to advertising.

The UK-domiciled William Hill has already sniffed the breeze and is odds on to exit the Aussie market, citing regulatory pressures and increased state taxes.

“In Australia there has been a strong focus on brand building and acquisition which has raised questions in the public eye about whether this is what we want to see on TV at 7 pm,” O’Kane says.

The bottom line is that if you’re a punter already on the books, don’t be surprised to be texted live odds pertaining to an event the clever algorithms know you’re interested in.

The in-play aspect is crucial: according to Bet365, 72% of sports betting is carried out after the opening siren (or whistle), with 80 per cent of tennis bets places after the match has started.

OtherLevels gambling-heavy client book includes Ladbrokes, Bwin, the National Lottery, Matchbook, Topbetta and Golden Nugget. “Tattscorp” is also a client.

The company also does work for Flight Centre – another mover in digital reach – and various outposts of Coles.

However, OtherLevels’ key relationships are with the bookies’ British parents – and for good reason. “The UK has been more cautious compared to Australia,” he says. It’s a bigger market with mote maturity and visibility of risks.”

OtherLevels client contracts are typically for 12 months, with an upfront licensing fee and a per-text or per-email fee.

OtherLevels listed in March 2015 after raising $7.5m at 20c apiece. But the company struck early trouble by burning too much cash and making an ill-fated foray into the US.

“We dug ourselves a very deep hole and spent the last 18 months digging ourselves out of that hole,” O'Kane said.

OtherLevels preponderance of wagering clients is not surprising, given the sector was one of the first to embrace digital marketing. But OtherLevels December (second) quarter update showed $2.066m of cash inflows, well up on $1.353m achieved for the September quarter and $1.132m for the previous December quarter.

More importantly, the company turned a $676,000 deficit into a $41,000 surplus for the first time.

OtherLevels market cap of $8.5m implies little upside, which could be construed as an opportunity.

There’s a clump of investors who can be relied on to hang around: O’Kane and the board account for 35% of the register, with Queensland Chief Entrepreneur (yes there is such a thing) and Shark Tank judge Steve Baxter holding a further 20%.

Tim Boreham edits The New Criterion

tim.boreham@independentresearch.com.au

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

 

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The New Criterion: Nickel Stocks

Friday, February 09, 2018

Some argue that nickel is a more important component in electric vehicle batteries than lithium or graphite. It's a controversial debate but here are two stocks worth looking at.

Panoramic Resources (PAN) 42c

Barring a fresh commodities meltdown, the WA nickel stalwart is poised to press the button to restart its dormant mainstay mine after investors flocked to its recent capital raising.

The mine, Savannah in the east Kimberley, was placed on care and maintenance in mid 2016 after becoming victim to the plunging price for the stainless steel ingredient.

At the time nickel traded at $US3.50 ($4.30) a pound, but optimism about nickel’s role in electric vehicles has pushed the metal to a spot price of $US6.05/lb.

While the metal has retracted from its recent high of $US6.30/lb, it’s gained 28% over the last 12 months. Nickel has thus outperformed the in-favour copper as well as zinc, lead and aluminium, but the gains come after eight years of dismal prices.

At the current spot price ($US6.15/lb) at the time of writing), nickel is comfortably above the ‘sustainable’ minimum of $5.50/lb needed to resume production at Savannah, which was mined for 12 years and produced 1.2 million tonnes of concentrate material over that time.

“It feels a lot better than 18 months ago when we shut the mine,” CEO Peter Harold says. “But we have a bit of stuff to do first.”

 The Savannah feasibility study costs the re-start at $36m, assuming an ‘all in’ production cost of $US3.50 ($4.30) a pound. With the potential to be expanded, the mine boasts reserves of 112,600 tonnes, grading a handy 1.65% nickel.

This time around, the economics are boosted by the presence of copper and cobalt, two other EV-related ingredients that have been on the fly.

The feasibility study assumes annual output of 10,800 tonnes of nickel, 6100 tonnes of copper and 800 tonnes of cobalt. The latter two metals will play a key role in the mine economics: copper and cobalt credits are expected to account for 40% of the mine’s revenue, compared with only 20% last time around.

Apart from hawkishly watching the nickel price, Harold is working on an offtake agreement to secure a buyer beyond 2020, when a current deal with Jinchuan Sino Nickel expires.

 While it’s possible the Chinese conglomerate might extend the deal – it’s done so twice already – other nickel hungry parties are beating a path to Panoramic’s Hay Street HQ as well.

 “One of the issues is whether we split the concentrate 50:50 as a risk mitigation strategy, or just go with one supplier,” Harold says.

Then there’s the always-pertinent question of financing the project. But having just raised a net $19.8m in the underwritten rights offer, Panoramic needs to raise only modest debt that should be covered by one bank, rather than the syndicate.

As for the nickel price, it’s a case of ‘anyone’s guess’ but expert forecasts hover around $US6.75/lb. 

“I have been in the nickel game for more than two decades and have seen the price at $1.90 and as high as $20 (as pound),’’Harold says. “There’s no way anyone makes money at $3.50, but at $US6-8/lb things get really interesting.”

The case for the nickel bulls is supported by both the projected demand for the electric vehicle battery market and surprisingly robust output of stainless steel, which is what nickel is still mainly used for. On the supply side, there’s a dearth of big new projects.

There’s cause for wariness too because the metal remains in oversupply: the London Metals Exchange inventory stands at 380,000t, a chunky stockpile in the context of global supply of around two million tonnes.

In January, key nickel supplier Indonesia eased a ban on raw ore exports and the effect of this is yet to be seen.

Some party poopers also contend that electric vehicle demand has been exaggerated, or in any event is factored into the price already.

On Macquarie estimates, lithium ion batteries accounted for only 10-15,000t of nickel production in 2016, although this number probably doubled in 2017.

Others argue that with lithium-ion batteries needing ten times more nickel than lithium, punters have been getting excited about the wrong material.

Still, it’s almost certain the Panoramic board will press the green button on Savannah, which has a net present value of $210m to $380m.

If the unexpected happens – as its wont to do with commodities – Panoramic's $200m valuation will melt like a Paddle Pop on Cottesloe beach in summer.

At least the company has a little known sideline: renting out a 200-person accommodation camp at its Lanfranchi site near Kalgoorlie (also mothballed) to another miner.

“We are a hospitality mining company now,’’ Harold says. “That asset is a real sleeper.”

Mincor Resources (MCR) 34c

Fellow quiescent nickel miner Mincor is feeling the love as well, having also been forced to curtail its two Kambalda mines after 15 years of continuous operation that delivered $133m in dividends.

Mincor has just raised $10m in an oversubscribed share placement and share purchase plan to fund more work at its Kambalda prospects, in view of re-starting production in the short term.

The company also refers to “forecast growth in the nickel market over the next few years” – and punters obviously agree.

Unusually, retail investors flocked to the SPP – so much so that the offer was increased from $3m to $4m. The now cashed-up company is kicking off a drilling campaign at its Cassini project in early February.

Mincor has extensive ground in the nickel-rich territory and is underpinned by resource of 99,000t (28,000t proven).

But it’s gold, not nickel that is likely to provide Mincor’s short term cash flow via its Widgiemooltha gold project.

Last year’s feasibility study supports the project as a short-term (19 month) operation across ten shallow pits, with a modest start up cost of $2.8m.

The Widgiemooltha project has a net present value of $25.7m, based on recovering 65,800 ounces of the lustrous stuff. But it’s nickel that has driven Mincor shares up 35% over the last 12 months, for a market valuation of $84m.

For impatient investors craving here and now exposure to the nickel, Western Areas (WSA, $3.04) is the only pure-play nickel miner of substance. The WA miner produced 5970t in the December quarter, which was within expectations.

Western Areas expects to produce 21,500-22,500t for the full year, at a comfortable cash cost of $2.40-2.65/lb

Independence Group (IGO, $4.53) has also started producing from its Nova mine, with 4500t of output.

Independence owns one of Australia’s biggest gold mine, Tropicana but s dramatically expanded into nickel with the $1.5bn purchase of Nova owner Sirius Resources in 2015.

The market currently values Independence at $2.66bn and Western Areas at $830m, with the ‘bondcano’ taking some of the gloss of their worth. We’ll leave it to the bulls and bears to argue whether these numbers still factor in the upside of the nickel boom-ette.

Tim Boreham edits The New Criterion

Tim.boreham@independentresearch.com.au

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

 

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The New Criterion: From bitcoin to blockchain

Thursday, February 01, 2018

Just as the listed bitcoin sector emerged from the depths of the cyber haze in 2017, 2018 is shaping up as the year of the blockchain – the underlying technology supporting crypto currencies.

As with bitcoins et al, few investors outside of the rarefied tech head world really understand how blockchain – a.k.a distributed ledger technology – works. Not that that will deter them.

Suffice to say, blockchain a method of recording transactions securely not just in the one repository, but across the whole transaction chain.

As such, it has myriad uses unrelated to crypto currencies which currently have little utility other than supporting criminal money movements.

Either that, or we’re all being subject to the same sort of con job the IT brigade inflicted on the world with the Y2K virus.

While down-and-out minnows continue to discover a sudden interest in bitcoins, blockchain fever is starting to engulf bourses here and elsewhere.

In the US, shares in unprofitable soft drink maker Long Island Iced Tea almost tripled after the company re-named itself Long Blockchain. In its new guise, the company said it would seek to partner with companies developing blockchain ledgers.

If that’s not enough Croe Inc was developing innovative sports bras, before acquiring a blockchain company for extra share price ‘support’.

ASX stocks in need of an extra bounce have also been quick to sniff the breeze. Last December, the HR play Reffind (RFN, 3.8c) bought a stake in loyalty scheme manager Loyyal.com, which seeks to use blockchain for business process improvement.

Reffind’s change of tack is supported by the listed investment company Chapmans (CHP, 1.6c), which invested $1m in Reffind’s recent placement (thus making Chapmans Reffind’s biggest holder with a 9% stake).

Insofar as it serves a use rather than being a speculative vehicle, investing in blockchain looks to be a more sustainable strategy than the go-for-broke punt on bitcoin.

Plenty of fortunes have been made on bitcoin’s spectacular appreciation, but the currency (or it commodity) looks to have peaked.

Also bear in mind that there are hundreds of other crypto currencies, so the supposed rarity of bitcoin can’t be equated with the rarity of gold.

In your columnist’s view, the more sensible plays are those that are adopting blockchain as an adjunct to their existing activities rather than as an unrelated sideline.

Take the logistics group Yojee (YOJ, 29c), which has developed cloud software to automate and streamline the movement of goods.

For Yojee, the appeal of blockchain is that it creates an indisputable record of existence of a transaction and where the goods are in transit. This means payments can be made more quickly.

To date’s Yojee’s revenues ($62,000 in the September quarter) aren’t exactly commensurate with the company’s $180m market valuation.

But blockchain or not, Yojee is gained momentum with a number of recent overseas contracts. These include deliveries for Scharff (which services Peru and Bolivia for FedEx) and a preferred software status for the Indonesian Logistics and Freight Forwarders Association.

Elsewhere, the US centric payments house Change Financial (CCA, $1.05, formerly known as ChimpChange) already uses a blockchain ledger for its core consumer banking business.

(As we’ve covered previously, Change provides a mobile-phone based transaction service for under banked millennials).

Now, Change is investing $US100, 000 as seed capital in a venture called the Ivy Project, which seeks to develop a blockchain based cryptocurrency for transactions worth more than $US10, 000.

“Involvement in the Ivy Project is a natural investment for our company as blockchain and cryptocurrencies are rapidly evolving as an innovative solution in storing data, moving money and conducting transactions,” CEO Ash Shilkin says.

“We have grown to service 130,000 banking customers in the US and this investment will extend our reach to business to consumer and business to business banking.”

Meanwhile, the obscure Ookami (OOK, 7.1c) is investing a tad under $1m for an 18 per cent stake in the private blockchain company Brontech, founded by blockchain guru Emma Poposka.

Described as a data marketplace and digital identification platform, Brontech is all about capturing financial data directly from users, thus allowing customers to capture the monetary value of their personal information.

Such data is the core of Experian’s business model, Brontech can be genuinely described as a disruptor. Ookami’s investment also comes ahead of the introduction of open banking, which will force banks to share customer data with third-party providers potentially offering a better deal to these clients.

Once again, the technical aspects of blockchain’s role are hard to master, especially for investors shaking off holiday cobwebs.

But the Brontech deal, unveiled on December 11, was enough to send Ookami’s shares from 3.6c to a peak of 14c.

A comforting aspect of blockchain is that the $10.6bn market cap ASX Ltd (ASX, $54.60) is adopting the technology to replace the ageing Chess settlement system.

The decision came after two and a half years of testing and deliberation and we’ll presume the bourse’s blue chip-board hasn’t been hijacked by the technology boffins.

Even The Perth Mint – which is no friend of cryptocurrencies – is mulling blockchain technology to improve the security and traceability of that traditional speculative commodity, gold.

As for the minnows, it will be months (or years) before it becomes clear who the blockchain winners are – and which ones are simply pulling the chain with investors.

It’s also possible that bitcoin and blockchain investors alike are ignoring the safest ‘crypto’ exposure. A recent global report from Morgan Stanley claims that bitcoin mining – the process of creating the ‘coins’ – is likely to guzzle 125 terawatts of electricity this year. Put in context, this enigmatic activity will use more power than the predicted demand for electricity vehicles in 2025.

Given that, energy utilities such as Origin Energy (ORG, $9.29) and AGL (AGL, $23.74) are shaping up as the real ‘crypto’ winners.

Tim Boreham edits The New Criterion

tim.boreham@independentresearch.com.au

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

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The New Criterion: Titomic (TTT) 1.67c

Monday, January 22, 2018

While last year’s speculative gaze was squarely on the bitcoin plays interspersed with Pilbara ‘watermelon’ nuggets, the proliferating listed 3D sector proved a quieter winner.

Indeed, robotics of any ilk remains a sexy investment theme. As Aurora Labs chief David Budge puts it: “my philosophy is that 3D printing is and will be at the forefront of the new industrial revolution and will transform manufacturing.”

Titomic has led the way, with its shares surging more than 800 per cent since listing in mid September after a $6.5m raising.

Along the way, Titomic has fed the market with a steady diet of announcements, thus avoiding the flat spot that afflicts so many ASX debutantes.

We’re not talking about the gong for Best Marine Innovation at a shipping expo in November, although such trophies are always nice for the corporate pool room.

Developed by the CSIRO, Titomic’s technology play has pioneered a form of cold fusion, but sadly it won’t do anything to abate the energy crisis.

It’s all about kinetic fusion, which involves spraying titanium alloy on to a lattice to produce a load-bearing structure.

The process expands 3D printing technology to bigger items such as aircraft parts and ballistic coatings on military vessels and vehicles.

To date, titanium coating has been limited by the need to melt the metal in a vacuum chamber.

“It’s like glorified welding,” says Titomic chief CEO Jeff Lang. “One problem is that the heat distorts the parts.”

With Titomic’s cold-spray process, the coating at supersonic speed bombards the underlying material.

While focused on titanium, Titomic’s process can meld dissimilar materials together, such as blend of titanium and ceramics.

 “In aerospace the strut in a wing can be made from two materials with attendant weight savings,” Lang says.

In December, Titomic shares surged further after the company announced a tie-up with the Perth-based engineering firm Callidus, to produce parts for the latter’s oil and gas clients.

It’s expected that Callidus will purchase a Titomic manufacturing system after successful completion of the initial work, to be carried out at Titomic’s new Melbourne facility.

Paradoxically, Titomic’s greater fortunes might lie with the age old vehicle of the masses: bicycles.

A $50bn a year sector globally, making bike frames involves intricate work, especially with the cashed up lycra set demanding the best of titanium/carbon/scandium alloy technology.

In late December Titomic appointed Peter Teschner to head the bike division. We don’t normally mention mid-management hires, but apparently Teschner is dubbed the Master Craftsman among the pedal pushers and he even designed a mount for Tour de France winner Cadel Evans.

Titomic has also teamed with a “well known” North American bike maker to develop a high performance titanium bike.

Meanwhile the Melbourne facility is on schedule to start production trials in the June quarter. The factory is capable of producing parts for industries including aerospace, automotive, sporting goods, marine and medical and mobility equipment.

Aurora Labs (A3D) 97c

Aurora investors buckled in for a wild ride after the 3D play listed at 20c in August 2016, after a $2.85m raising.

The shares shot up to $4 in February last year, prompting management to raise another $7m at $2.50 apiece. By October the shares had slumped to 50c, but in November jumped 75 per cent after news of a tie-up with engineer Worley Parsons.

Strictly speaking the news of a binding term sheet with the engineering group was ‘olds”, given a non-binding version was announced last January.

Aurora is developing 3D metal printers, powders and parts, including a medium-format machine capable of replicating some large-scale metal manufacturing at rapid speeds.

In the 2016-17 year Aurora chalked up first sales of a small format printer. But Budge says the real opportunity lies with large and medium format printers, given the higher prices and more lucrative markets.

Aurora’ s large format unit is capable of printing one tonne of material in 24 hours which, the company claims, no rival product is capable of doing.

“We are now in the process of developing a prototype of the medium format printer and will aim to get an operational pre production large-format printer to print complex parts at rapid speeds during 2018,” Budge says.

 Robo 3D (RBO) 5.3c

While Aussie retailers quiver at the mere mention of Amazon, the online behemoth is a friend to the Californian-based producer of desktop 3D printers.

Thanks to Amazon’s distribution reach, Robo 3D recorded better than expected sales of a newly-launched entry-level unit that sells for a sharp $US499 ($620).

The units, called R1+, generated $750,000 of sales in the December quarter. Robo also has a $US799 model that targets the education model and a deluxe $US1499 version for professionals and ‘prosumers’.

Robo was founded by a clutch of San Diego University students in 2012 and the company has been selling printers since 2013. Robo back-door listed on the ASX in December 2016, having raised $4m at 10c apiece.

Last December management tapped the well for a further $3.1m, at 4.5c apiece.

With its shares trading well below par, Robo is the laggard of the sector but at least it’s getting money through the door: the company expects to report $4m of revenue for the first (December) half, exceeding the $3.1m achieved for the entire 2016-17 year.

333D (T3D) 0.6c

Meanwhile, 333D has cornered the market in ‘bobblehead’ cricketer figurines, after inking a deal with the Australian Cricket Board in early December.

The deal came just in time for the Ashes hero keepsakes to be sold at the Boxing Day test, although we doubt the Barmy Army was an enthusiastic client.

In another case of brilliant timing, 333 gained the rights to produce Dustin Martin figurines in early September – just before the grand final that elevated the tattooed hero to patron saint of the yellow and black hordes.

A separate deal with the AFL covers lesser footy mortals.

Sadly the Martin magic is yet to rub off on 333D’s sub 1c share price.  The company generate d$150,000 of sales in the September quarter and we await the December numbers with interest to see how many Dusty figurines sold for $149 a pop.

The market currently values Titomic at $40m, Aurora at $25m, Robo3D at $16m and 333D at $4m.

Tim Boreham edits the New Criterion

Tim.boreham@independentresearch.com.au

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The New Criterion: HearMeOut

Monday, January 15, 2018

Your crusty columnist really must widen his social circle from his ageing acquaintances, as he had never heard of US rap artist Danielle Bregoli or Indian actor and singer Chinmayi Sripaada.

Bregoli – a.k.a. Bhad Bhabie – and Sripaada are listed as key social media influencers on Hear Me Out, a social media channel dubbed the voice version of Twitter.

Bregoli has chalked up 100,000 followers on HMO, while Sripaada is not far off on 79,000. But they face stiff competition from former US talk show host and inveterate social media user Larry King, who has agreed to post original content on HMO in return for 150,000 HMO options at a strike price of 20c.

As its name implies, the Israel-based HMO seeks to replace (or complement) the Facebooks and Twitters with a platform for 42-second video musings: anything from news commentary to jokes and sharing music clips.

The reasoning goes that one’s voice is more authentic than written posts, which have become subverted by trolls, disguised advertising and the fake news syndrome. “We feel the voice is an authentic signature and that’s what we want to bring back,” says CEO Moran Chamsi.

The 42 second rule isn’t a reference to Douglas Adam’s famous answer to the meaning of life, but a scientifically calibrated limit to allow users to post something profound without losing the attention of the audience.

It’s just as well, because as with Twitter (which recently doubled its allowable word length) there are plenty of folk in love with the sound of their own voice.

Speaking of such, HMO plugs into the growing acceptance of voice activated instructions, with 20 per cent of mobile queries now done with the vocal cords (OK, Google?)

HMO’s key prospects lie with the automotive sector and the ‘connected car’. Just as radio survived because folk can listed to their favourite jocks during their clogged morning commute, drivers can use the platform in a way they can’t avail of Facebook or Twitter (not legally, anyway).

One Sydney broker uses HMO to dictate a market report to 1800 clients.

In partnership with the Nasdaq-listed wireless chipset mob DSPG Group, HMO this month launched its in-car prototype called HOOP at the CES in Las Vegas, one of the world’s biggest consumer electronics fairs. HOOP, which does not require a ‘connected car’ to work, enables drivers to use their device while their hands are where they should be – on the wheel. 

In 2016, HMO partnered with Ford to implement its technology for the car maker’s Applink Synch platform. After a pilot in Ireland and the UK, Ford approved HMO for the US market.

Now that sounds promising.

As with so many app-based plays, HMO’s monetisation path is less clear and certainly can’t be explained in 42 seconds.

Suffice to say, it includes  personalised advertising, charging for premium profiles and licensing and white label deals with car makers.

HMO shares have sagged since listing in December 2016 at 20c apiece, after an oversubscribed $5.6m IPO. But at least the technology has been built already and the company doesn’t appear desperate to raise more funds.

“The tech is built so there’s not a big ongoing spending commitment,” Chamsi says.

As of November, the HMO app had been downloaded from the Google Play store 500,000 times. 

Connexion Media (CXZ) 0.09c (trading halt)

Now here’s a cautionary tale about another well supported, automotive-related ‘internet of things’ play that drove down the wrong road.

Backed by heavy hitters including General Motors and former Toyota Australia chief John Conomos, Connexion was to have revolutionised the morning commute with miRoamer, an internet radio capable of picking up stations anywhere in the world.

GM Connexion also developed a fleet management tool called Flex. In mid 2016 partner GM launched the product, known as Commercial Link to its US vehicle customers and last year expanded availability to Canada and Mexico.

What could go wrong?

While the subscription-based Commercial Link earns modest revenue, GM says sales have fallen short of its internal expectations. But at least the car giant is willing to invest more money to improve the take-up rate.

As for Miroamer, it looks like it will be a while until motorists can enjoy the Beeb or the Voice of Russia while negotiating the Harbour Bridge snarl or the Tulla merge.

After 12 months of management turmoil marked by two CEO departures (including founder George Parthimos) and the exit of chairman Conomos, Connexion has changed direction by buying a private I.T mob called Security Shift.

The deal involves Connexion investing in $1.8m of new Security Shift shares and Security Shift’s vendors receiving $1.19m of new Connexion shares.

On Dec 8 Connexion launched a one for six rights issue at 1c apiece, to raise a princely $1.2m. In June last year the company raised $5m in convertible notes (since redeemed).

In the September quarter, Connexion recorded $220,000 of cash receipts but burnt $440,000 for an end of quarter cash balance of $367,000 (the company subsequently pocketed a $1.5m research and development refund).

The company says the quarter marked a “significant turnaround in business trajectory and financial performance”.

As with so many other tech minnows  it’s hard to pinpoint what went wrong at Connexion, but as a rule of thumb investors should  assume that any product will take twice as long to develop than management claims -- and cost three times as much.

The profitable Security Shift deals in cyber security and IT governance risk and compliance. Sadly there’s no mention of Bitcoins and blockchains – the sure-fire way to put a rocket up a share price.

Tim Boreham edits The New Criterion

tim.boreham@independentresearch.com.au

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

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The New Criterion: Two stocks to watch

Thursday, December 21, 2017

THE NEW CRITERION

By Tim Boreham

The global asthma market is huge, but developing asthma prevention and management devices has hardly been a wheeze for the listed Adherium and Respiri. It doesn’t help when some patients adopt a novel approach to usage.

Adherium (ADR) 7.5c

Judging from a yarn told by Adherium CEO Arik Anderson, the respiratory medicine monitoring house has more consumer education to do despite moving 100,000 units of its Smartinhaler asthma devices to date.

The story goes that a doctor was puzzled by erratic readings from one of the company’s Smartinhalers that encase a standard Ventolin puffer canister.

Asked to demonstrate usage, the patient pushed the device against her chest and released the medicine. “She said it made her feel better,” Anderson says.

As Anderson reasons, if it weren’t for the Smartinhaler, the physician would have been none the wiser about the patient’s unconventional application technique. “The doc could get to the root of the problem because he had the data. Otherwise she would have kept doing the same thing.”

As medical devices, the Smartinhalers aren’t exactly rocket science -- which is probably why they’re being commercialised with manufacturing partner AstraZeneca.

But we have say that not everyone’s gasping with elation. In a classic case of founder’s syndrome, founder and former CEO Garth Sutherland recently departed the board and the shares are trading below their cash backing.

Anderson dubs Adherium as “not an inhaler company, but an adherence company with the world’s biggest data set for respiratory medicine usage.”

Approved for sale in the geographies that count, the devices monitor how well asthma (and chronic obstructive pulmonary disease) patients are complying with medication regimens.

The data is sent wirelessly to the patient’s (or carer’s) mobile phone app.

Adherium exists because adherence rates are so poor: typically patients take between one third and one-half of the dose they’re meant to.

Clinical studies showed the Smartinhalers improving compliance by 59% in adults and 180% in children.

Before listing in August 2015, the New Zealand based Adherium had spent two decades perfecting the devices. The company was able to list (and raise $35m) on the strength of the ten-year deal to supply AstraZeneca with product.

AstraZeneca makes the Symbicort aerosol inhaler that’s used by six million asthmatics globally.

In September the Food & Drug Administration approved Adherium’s next gen device called SmartTouch, specifically designed to be used with the Symbicort puffers.

This SmartTouches record the time and date of inhalation and transmits and also stores medication patterns.  

While Adherium has been deemed a technical and clinical success, the board realised that clipping the ticket on AstraZeneca sales isn’t going to provide exponential revenue growth.

Hence the company’s new push into the direct-consumer market supported – hopefully – by reimbursement from insurers.

This strategy was a key reason for hiring Anderson, a Wisconsin whose last role was as president of Terumo Cardiovascular Systems ’s perfusion and surgical devices division.

Anderson is charged with building the company’s sales and marketing function, which currently does not exist. “We have been inadequate in making a noise about ourselves,” he rues.

The company has launched a trial digital-based marketing campaign in NZ, aimed at signing up 1300 customers. The target audiences are 5-18 year olds living at home and the geriatric population (more in relation to chronic obsessive pulmonary disease, or COPD).

The clean and green isles renounced by Barnaby were not chosen for their over-the-odds asthma rates, but because everyone tends to know each other and thus word travels more quickly through clinical and asthma support networks.

The findings will support a planned launch in the US in the second half of 2017-18.

As with so many consumer medical devices, the issue is how many patients will pay – and how much.

Management hopes the trials will support a decision by health insurers to include the device on its reimbursement schedules. The company is also targeting large organisation such as Apple and Google that self-fund their insurance.

“We can save them $1500 per patient on average, just for asthma,” Anderson says. “With COPD the opportunity for savings is dramatically heightened but they tend to be slow moving (in their decision making)”

Adherium recorded $2.3m of revenue in the 2016-17 year, but lost $12.8m. In the September (first) quarter of the current financial year, Adherium lost a further $4m on receipts of $622,000

At Adherium’s recent AGM, management said it was targeting sales of a minimum 25,000 devices in the current year, with revenue of $5.7-7m, maximum cash burn of $12m and an-end-of-year cash balance of $10m.

The company says $2m of revenue in the December quarter is as good as in the bank, with $2.6m expected in the June (second) half.

Meanwhile, Adherium shares remain well adrift of their 50c listing price and the $13m market valuation is worth less than the $18m of cash on hand.

Anderson believes that after the IPO some investors made “certain assumptions” about the devices penetrating Simbicorp’s six million customers and were disappointed.

Respiri (RSH) 3.7c

Listed life hasn’t exactly been a wheeze for Respiri either, with the developer of a mobile-phone based asthma diagnostic facing a revolt against the re-election of star chairman Leon L’Huillier.

At Thursday’s AGM, a posse of investors accounting for more than the requisite 5% had sought to replace the former head of Victoria’s Transport Accident Commission with their own candidate, citing remuneration concerns.

The agitators also would have had the cudgels out for director Timothy Oldham, who did not seek re-election.

But L’Huillier’s bacon was saved thanks to the support of 16% shareholder, pokies baron Bruce Mathieson (L’Huillier also sits on the board of the Mathieson’s  Australian Leisure and Hospitality Group).

With 70% of holders endorsing the re-appointment, Mathieosn had plenty of other friends on the register as well. 

When it was known as Isonea the company developed the first iteration of the AirSonea device, which uses an app to diagnose the patient’s breath.

Current management contends the prototype was rushed to market in 2013, with poor engineering and lack of IT support for users.

Whatever the case, the device bombed.

Pending regulatory approval, Respiri plans to launch an improved version which is easier to grip and to place on the neck. The wheezes are then analysed by a Bluetooth connected algorithm.

AirSonea has been approved for use by US, European and local regulators, but commercialisation still looks like being a few months away.

In the meantime the company is scouring for distribution partnerships and L’Huillier reports expressions of interest from more than 20 parties globally.

Ultimately, success depends on the willingness of parents with asthmatic kids to fork out a couple of hundred bucks for the device – or else trust their own instincts.

Tim Boreham authors The New Criterion.

Tim.boreham@independentresearch.com.au

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

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The New Criterion: P2P vs Cabcharge

Friday, December 15, 2017

By Tim Boreham

An ASX  newcomer is offering an exposure to both the taxi and ride share sectors at a time when listed stalwart Cabcharge is fighting back.  

P2P Transport (P2P) $1.34

Cabcharge’s former monopoly on non-cash fares might have been smashed some time ago, but when it comes to a listed taxi industry exposure local investors have only had the choice of Cabcharge or Cabcharge.

As for the burgeoning ride share sector, Uber is privately owned and there’s no way of hitching a ride on the ASX.

All this changed on Wednesday, with fleet manager P2P (as in point-to-point transport) listing at a modest premium after raising $30m in an oversubscribed IPO.

The “platform agnostic” P2P manages a fleet of 720 vehicles, mainly for taxi drivers but also for full-time ride-share drivers who don’t want to run their private vehicles into the ground.

Pitched as a roll-up play, P2P aims to grow by acquisition in a fragmented sector populated by family businesses owning a handful of taxis each.

P2P co-founder and CEO Tom Varga says P2P has the advantage of being vertically integrated: it not only acquires the vehicles but fits them out as taxis and services and maintains them.

It also sources drivers, but does not aspire to emulate Cabcharge (and many others) in the crowded payments game.

“We do everything required to keep the steel on the road,” says the former BlueScope and Macquarie Group exec. 

“There’s no margin paid to someone else in the channel.”

Given its economies of scale, P2P claims to be able to source a car for 15-20% cheaper than the retail sticker price, with a 20% saving on insurance costs and 25% on insurance.

For ride-share drivers, leasing a popular Toyota Camry hybrid from P2P costs between $249 to $299 a week to rent, with only petrol and tolls to pay over and above that.

The economics preclude part time or weekend drivers, but are more attractive for the 25% or so who drive for 40 hours a week or more.

Interestingly cabbies will pay much more to rent a taxi -- $850 to $1500 – which reflects the still-superior earnings power of cabs because of rank privileges and their ability to accept passengers off the street.

Of course it’s hard to earn a decent living via either channel.

A diplomatic Varga says that with taxis still accounting for 93% of the passenger market, Uber’s 6% share has often been overstated. 

Uber also gave the taxi industry a much needed kick up the bum (our words). “It’s easy to say Uber has been bad for the (taxi) industry but  ...  Uber has resulted in a lot of changes that have benefited everyone,” Varga says.

Well, almost everyone. At the stoke of a legislative pen, the value of a Victorian licence – which at the peak of the market changed hands for more than $500,000 -- to a mere $53 a year licensing fee.

But with the regulatory ground rules for both taxis and ride shares now becoming clearer – and with taxi industry innovation such as set fares in Queensland – Varga expects both sectors to burgeon.

As for the IPO, P2P forecasts $6.4m of earnings on $50.4m of revenue in 2017-18, based on its fleet growing to 1084 by June next year

This compares with earnings of a mere $92,000 and revenue of 2016-17 (based on a 514-strong fleet).

At $1.32 a share, the offer was pitched on a current year earnings multiple of 16 times and a yield of 2.5-3.7%.

Investors should be aware that the three key founders have used the listing as a chance to lighten up their holdings to the tune of $6m.

But the founders will still control 36.5% of the company with 27.8m shares (escrowed for two years).

We guess they’re still more ‘in’ than ‘out’. 

Strictly speaking, P2P’s nearest exemplars are Singapore’s Comfortdelgro (Cabcharge's erstwhile JV partner), Indonesia’s BlueBird (as in the ubiquitous Balinese cabs).

Cabcharge (CAB) $2

While P2P is priced for growth, Cabcharge’s valuation assumes a continuation of the decline that has seen its earnings erode by almost 25% over the last five years.

As Cabcharge shares trade close to record lows, there are signs of stabilisation as revamped management devotes more resources to a ‘back to basics’ approach to customer service and deploying technology such as booking apps.

At Cabcharge’s recent AGM, CEO Andrew Skelton highlighted measures such as new handheld terminals to counter the offerings of payment rivals such as Ingogo and GM Cabs.

Last year, Cabcharge pocketed $184m after disposing of its 49 per stake in a local bus operating J.V – a business that increasingly looked a distraction rather than a sensible diversification.

“We are encouraged by the early signs that our strategy is working and we are excited by the ... opportunity available in the expanding market for personal transport,” he said.

A more fundamental reason for optimism is that Cabcharge had been battling the headwinds of a Reserve Bank dictate that cut the allowable surcharge on credit card transactions from 10% to 5%.

But this has now worked its way through the numbers, which means the drag on 2017-18 earnings should not be so severe.

No-one would argue that Cabcharge is a growth stock, but the moot point is how much the trashed share price factors in further declines.

Cabcharge reported net earnings of $21.3m from continuing operations in 2016-17, with current expectations ranging from a slight decline to as low as $17m. 

Cabcharge reported earnings per share of 17.7c in 2016-17, with current year expectations ranging from 16c to a healthy 24c. This means the company is trading on an earnings multiple of anywhere between 7.5 times and 11 times.

At the AGM, management made positive noises but did not proffer any earnings guidance, so it’s a guessing game as to how strongly the overdue reforms will trickle to the bottom line.

Our sense is that conditions have at least stabilised, but investors may have to wait for longer to enjoy the rewards.

With net cash of $25m, Cabcharge at least has the balance strength to last a journey which – like many of its cabbies – remains directionally challenged.

 

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

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The New Criterion: 2 mine developers to watch

Friday, December 01, 2017

By Tim Boreham

Pioneer Resources (PIO)

The Perth-based stalwart’s main prize remains lithium but its shorter term revenues lie with an industrial metal few outside of the oil and gas industry have heard of: caesium.

Most of the world’s caesium is turned into a derivative called caesium formate, used to lubricate high-pressure oil wells (mainly in the North Sea).

In radioactive form caesium is a by product of nuclear power production, but we’re assured the mineral version wouldn’t hurt a gnat.

About 75% of output is used in drilling and the remaining 25% for caesium chemicals.

The material is so rare that about 85% of caesium formate used is recovered for re-use.

So much so that the near-monopoly supplier, the Canadian miner Cabot, leases the stuff rather than selling it outright.

“Cabot’s business model is so unusual that academics have written whole economic papers on it,” says Pioneer chief David Crook. “In the meantime, 99.9% of people haven’t even heard of caesium.”

Currently, there are only two commercial caesium mines globally: Cabot’s Tanco (in Canada) and Bikita in the Robert Mugabe’s former fiefdom of Zimbabwe.

In a case of caesium-ing the day, Pioneer plans to develop the third at its Pioneer Dome deposit between Kalgoorlie and Geraldton in WA. Envisaged as a short life, low cost open cut operation, the mine would be done and dusted within six months.

The company received a mining permit last month and hopes to start extracting by the first quarter of 2018.

Pioneer has a measured resource of 10,500 tonnes of the pollucite host material, of which perhaps 7500 tonnes can be extracted.

For those into geo-porn, pollucite is a caesium-bearing zeolite that forms in lithium-caesium-tantalum pegmatite structures.

According to the US Geological Survey, global caesium reserves stood at 210,000 tonnes in 2014, with output of 17,300t of pollucite material.

The pricing dynamics of caesium are hazy because it is not openly traded. But Pioneer’s project is predicated on generating free cash flow of $12 million for an investment of around $5 million (possibly stumped up by offtake partners).

While that makes for a handy return that mine is hardly a company maker: the funds will be ploughed into drilling for spodumene-based lithium targets at the project.

A farm in deal with Lepidico (ASX:LPD) covers lithium in lepidolite form, also present in the mineralisation.

Lithium is harder to extract from lepidolite, but Lepidico may have the answer with its patented L-Max process that produces the desired lithium carbonate directly from the material.

Pioneer also has a cobalt project near Kalgoorlie (Blair Dome, which it has just started drilling) and an option to earn an 80% interest in two Canadian projects.

And did we mention the company has acquired some Pilbara gold tenements? No watermelon seed nuggets have been found as yet, but a team of geologists is leaving no rock unturned.

American Pacific Borate & Lithium (ABR)

As with Pioneer, this one is turning the lithium story on its head with a proposal to develop one of the few borate mines outside of Turkey.

According to ABR CEO Anthony Hall, most lithium projects contain borates and most borates contain lithium, but metallurgy issues can make the lithium hard to extract.

The borates are usually a by-product of lithium, but in this case the popular industrial ingredient (in the form of boric acid) is driving the economics of ABR’s fully-owned Fort Cady project in California’s Mojave desert.

Boric acid has not fewer than 300 industrial uses, including heat resistant glass, fibreglass insulation, ceramics and fire retardants.

The current global market of four million tonnes, 55-60% of output is controlled by Turkish state-owned monopoly Eti Mine Works.

Rio Tinto operates the Borax mine near Fort Cady. It’s barely a line item in the global giant’s accounts but is profitable and accounts for a further 20-25% of global output.

The former head of Spanish potash hopeful Highfield Resources, Hall formed ABR to acquire Fort Cady from mining veteran Roy Shipes, now ABR’s chairman. As well as being a former US Air Force captain, Shipes has held senior roles at Ok Tedi Mining, Southern Peru Copper and Phelps Dodge.

ABR raised $15 million in an IPO and listed in July this year.

ABR is testing the age-old theory that it takes the third owner of a mine to make even money: Fort Cady has had two previous owners who sunk $US50 million into developing the mine and ABR will leverage this handiwork.

Fort Cady already has mining and environmental permits, but is waiting the re-granting of environmental approvals bestowed on the second owner (who ran out of money, as you do).

Investors are awaiting a scoping study on Fort Cady and an official maiden resource by the end of the calendar year.

ABR already points to an initial 90,000 tonnes per annum operation with an up-front cost of $US80-90 million and an ongoing EBITDA margin of $US500 a tonne on the current boric acid price of around $US1000 a tonne.

Fort Cady’s historical resource suggests 115 million tonnes of borates translating to around 13mt of boric acid, enough for a mine life of around 100 years.

“We have good visibility around those numbers and we are happy,’’ Hall says.

Eventually ABR plans to triple output to 270,000 tonnes of boric acid, as well as producing the desirable fertiliser potassium sulphate (SOP).

As for the lithium, it’s a case of suck it and see. But as it’s a waste material, any lithium production would be an added extra.

Hall reckons half of the lithium borate material is attached to clay (which makes extracting the lithium problematic). But the remaining half is contained in salt based brines – an easier proposition.

Initial heap leach testing of material showed “excellent” boron recoveries of 98.5% and lithium recoveries of 48.3%.

Historical measurement puts the lithium resource at 80mt of lithium at an average 313 parts per million. A confirmatory drill hole this month reported better than expected lithium grades of up to 545 parts per million (ppm).

In comparison, the ASX listed Reedy Lagoon Corp (RLC) is creating excitement with grades of 90-120ppm at three lithium brines projects in neighbouring Nevada.

ABR shares have more than doubled since listing at 20c apiece, but Hall reckons the market is overlooking the “free option” on the lithium.

Happily, the environmental permitting process in Trumpland is more straightforward than in Spain, where Highfield’s Muga project has been waiting – and waiting – for the government to sign the paperwork.

ABR shares have more than doubled since listing at 20c apiece, but Hall reckons the market is overlooking the “free option” on the lithium.

Tim Boreham edits The New Criterion

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

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The New Criterion: Molopo Energy

Friday, November 24, 2017

By Tim Boreham

Molopo Energy (MPO) 14c (trading suspended)

“And what for? A little bit of money” despaired Fargo’s original heroine cop Margie Gunderson after witnessing some truly gruesome work involving a woodchipper.

In the case of the Molopo saga, there’s been enough blood and gore of a corporate variety to do a Coen Brothers script proud. In this case the prize for the squabbling parties is rather a lot of money: $55 million of cash worth 22c a share.

For months Molopo has been under siege from Aurora Funds Management and Keybridge Capital, which are linked with banned director Nicholas Bolton and Perth corporate raider Farooq Khan.

Having declared unacceptable circumstances, the Takeovers Panel in mid June ordered Aurora and Keybridge to sell most of their Molopo shares because in effect the parties involved were acting in concert without telling the market.

Undeterred, Aurora in July offered 18c a share, at least 88% by way of units in Aurora’s absolute return fund.

In September this offer was reduced to 13c a share, to reflect the “value dilutive” effect of Molopo’s $8.5 million purchase of a half-stake in a Florida oil and gas explorer, Orient FRC.

Then Keybridge forced a second meeting to install its nominee William Johnson and ditch Molopo chairman and CEO Alexandre Gabovich.

At the initial meeting in June, holders rejected Keybridge’s attempt to appoint three new directors, including Johnson and former ASIC chairman Tony Hartnell.

Curiously, at the second meeting held on November 10, holders again rejected a motion to appoint Johnson. But out of frustration at Molopo’s lack of direction they also voted to turf the France-based, board-endorsed Gabovich from the board.

Now prominent fundie Geoff Wilson’s Wilson Asset Management has donned his white knight cape and flagged a 13.5c a share off market cash offer for Molopo, conditional on 50.1% acceptance and a court hearing initiated by Keybridge being resolved.  (Keybridge in part is seeking access to Molopo documents pertaining to the Orient FRC purchase).

Normally, an offer pitched at a 40% discount to the intrinsic worth of a share (that is, WAM’s) would be one for the circular file.

But in this case, at least WAM’s offer is solid cash and gives holders an escape route given Molopo shares have been in suspended animation since late July.

That said, Molopo’s 3900 shareholders have seen it all before and may be happy to hang on for the next comical episode.

Wizened investors will recall that in 2011 a shareholder group backed by Max property developer Max Beck, pokies king Bruce Mathieson and ex Woolworths chief Roger Corbett ousted the original board.

But by late 2014 the reconstituted board (including Beck) were also on their way, citing lack of support for their so-called Three Pillars turnaround plan.

Given Wilson doesn’t resile from a fight and neither does the Bolton/Khan camp, the Molopo saga is far from over.

Tim Boreham edits The New Criterion

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

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