Risky Business Of Following Leaders

Sydney Morning Herald

Monday February 25, 2008

Jamie Freed jfreed@smh.com.au

THERE is a resources investment strategy which could be deemed "follow the man".

That means buying shares in companies led by certain industry veterans with a track record of strong returns rather than being picky about the particular project.

This strategy isn't without its risks. Some of the men involved (unfortunately there are still very few well-known women in the resources sector) have quite colourful reputations.

Classic examples include Fortescue Metals chief executive Andrew "Twiggy" Forrest, former Macarthur Coal managing director Ken Talbot and former Consolidated Minerals managing director Michael Kiernan.

All three of these men have spent millions investing in several companies and have often brought a lot of followers along for the ride.

None of the men have sterling reputations. Forrest left many bondholders out to dry in his Anaconda Nickel. Talbot stepped down as the head Macarthur after being investigated by Queensland's Crime and Misconduct Commission for lending money to the state's former health minister, Gordon Nutall. And a few years back, irate institutional shareholders rejected a large pay package for then-ConsMin boss Kiernan, who eventually stepped down.

Still, some investors have managed to make a lot of money backing these men.

Load up with options

Forrest appears to have an investment strategy of getting in early with lots of options. He's did that at Fortescue, where he invested at the equivalent of 0.08c a share now worth $7.50 each.

He's taken a similar strategy at Poseidon Nickel and Moly Mines. Forrest, Moly's first chairman, is no longer on the board but holds 12 million options exercisable at 20c. And a major Fortescue investor, Harbinger Capital Partners, has a 19.9 per cent stake in Moly, which closed at $3.39 on Friday.

Moly is developing the $1.1 billion Spinifex Ridge molybdenum project in Western Australia, which could provide 5 per cent of the world supply of the specialist steelmaking material. The mine should be under construction by the middle of the year, depending on the timing of a huge debt raising.

After copper and cobalt credits, Spinifex Ridge will have a cash operating cost of $US6.92 a pound, compared with a moly price about $US35 a pound. In the decade to 2004, the moly price averaged only $US4.50 a pound but the outlook is strong. Earlier this month, major moly producer Rio Tinto said supply looked likely to lag demand this year.

Friends at court

Former Macarthur boss Talbot has good friends at CITIC Resources, a Chinese group. Talbot last year sold $113 million of Macarthur shares to CITIC, giving the Chinese 19.9 per cent of the Queensland coalminer.

Since 2006, Talbot and CITIC have been major shareholders in South Australian uranium hopeful Marathon Resources. Combined, the pair now hold 21.3 per cent of the company.

Marathon has been drilling out the Mount Gee project in South Australia but hasn't had an easy time of late.

Analysts were disappointed by a resource downgrade in September, to 26,900 tonnes from 31,200 tonnes.

More recently, the company admitted it made an "error of judgement" and improperly disposed of some of its exploration materials. Following a state investigation, Marathon has agreed to commission an independent report into its environmental practices.

It has concluded its allowed drilling program and is now focusing on completing pre-feasibility studies. Far East Capital analyst Warwick Grigor last month estimated a low-grade underground mine would have a cash operating cost of $US40 a pound, which is quite high.

Marathon shares closed 7c lower at $1.35 on Friday, down from a peak of $6.75 last July.

Keep juggling

Since exiting ConsMin, Kiernan has had his hands full with a raft of companies, including Territory Resources, Windimurra Vanadium, Monarch Gold, Matilda Minerals, India Resources, Mineral Resources and Peel Exploration. But his main focuses appear to be Territory and Monarch.

Of those two, Territory certainly looks to be the stronger company at the moment. Monarch received a $7 million loan from India last quarter to help stay afloat without a dilutive equity raising.

But Territory, which was last year involved in a failed bid for ConsMin, had a strong enough balance sheet to sub-underwrite a recent offering for Windimurra which ended up oversubscribed.

Territory shipped 271,000 tonnes of iron ore in the December quarter and ended the period cash flow positive with $19.8 million in the bank.

Fat Prophets analyst Gavin Wendt is a Territory fan and last week called it a "buy" at about $1.19, which coincidentally was the closing price on Friday.

"Territory has current production that allows it to take full advantage of the window of opportunity in iron ore that presents itself right now and it is looking to build other income streams to reduce its exposure to iron ore alone," he said.

© 2008 Sydney Morning Herald

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