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By Greg Peel

Copper mining first began near Ravensthorpe, half way between Albany and Esperance in Western Australia, in the early 1900s. Since that time, some 20,000 tonnes of copper has been extracted and in its heyday the area boasted no less than five copper smelters. But early mining technology had its limitations, and it wasn't long before Ravensthorpe lost its premier copper mining status in WA to the Nifty resource in the Pilbara, now owned by Aditya Birla ((ABY)).

Where there is copper there is almost always gold, and similarly gold prospecting also began in the Phillips River area near Ravensthorpe in the early 1900s. Again, primitive workings were soon abandoned once new discoveries were made elsewhere.

Indeed, across the globe the history of both the mining and energy sectors has been one of exploiting a particular area to extract what is readily available and then moving on rapidly to the next exciting prospect. It has now been several decades since the last globally significant gold resource was discovered, and a similar period since the last major, easily accessible oil reserves were found. In oil's case, the answer has been to exploit newer, more sophisticated technologies to drill ever deeper as one alternative, which -as we have seen- can have disastrous consequences. At the same time, new technologies (and a strong oil price) have sent prospectors back to revisit old well sites which were abandoned long before all the oil was extracted.

The same is true for minerals. Whereas the miners of yesteryear may have extracted all that was readily available, it does not mean they extracted all of what was there. Indeed, their antiquated technology meant that in many cases all they managed to do was to literally scrape the surface. Moreover, mining is not just about digging ore out of the ground, but about metallurgical processes of separating that ore into its valuable elements. Again, metallurgical technology has made great strides since the early 1900s.

It is surprising to thus note, particularly given the well-known nickel reserve at Ravensthorpe, that the area in general has remained largely unexplored – not in terms of holes in the ground, for they are many, but in terms of twenty-first century technological capacity for mineral resource discovery and exploitation in an area that clearly boasts potential for sizable reserves lying beneath. However, in recent years, spurred on by significant moves in the prices of copper and gold, that has been changing.

Tectonic Resources ((TTR)) listed on the ASX in 1993 and has since boasted success in two gold mining and one nickel mining venture. Today Tectonic has a singular focus, and that is on its Phillips River gold and copper reserves near Ravensthorpe, which lie sufficiently adjacent to the existing bitumen road to the port of Esperance (157km).

Within Tectonic's Phillips River tenements are several prospective sites, but to date the major focus has been on the gold-copper resource beneath the old abandoned sites and Kundip, and the extensive gold-copper-silver-lead-zinc resource at nearby Trilogy, discovered in 1997. It is the Trilogy project which has specifically proven the beneficiary of twenty-first century technology.

While the gold and silver at Trilogy pose little extraction problem, the "jewel in the crown" of this particular resource is its main copper orebody. Some copper can be readily extracted, but the bulk exists as a conglomeration of copper, zinc and lead ores. The copper and zinc exist as sulphides, meaning they can be separated at low cost using floatation processing, but the lead does not exist as a sulphide and permeates the entire core. For this reason, Trilogy laid dormant from 1997 to 2007.

In 2007 new reagent technology developed elsewhere allowed Tectonic to revisit Trilogy and by 2009 the company was able to declare that value could now be "liberated" from the entire orebody. In other words, the new reagents allowed for all of the copper, zinc and lead to be fully separated at a viable cost.

The significance of this milestone "cannot be underestimated," suggested Tectonic MD Steve Norregaard at a lunch presentation attended by FNArena earlier this month. Alongside the proving up of the gold reserves at Trilogy and particularly Kundip, the technological breakthrough provided the company with the confidence to move forward into a definitive feasibility study of Phillips River. That study is now well progressed, and at the time of the presentation Tectonic announced an increase in its gold resource base to 880,000 ounces.

Tectonic believes this is only the beginning given highly prospective results from other drill sites within its 408sqkm of tenements (and another 186sqkm of joint venture tenements). In particular, the May series of drill sites at Kundip has hit 12.9g/t of gold at 6 metres. The use of modern induced polarisation (IP) survey technology has proven effective in targeting such strikes and defining wider orebodies.

Tectonic expects its feasibility study to complete by August, and funding to be secured by December (interested parties have already been identified). Construction is then slated to begin in 2011 leading to first production in 2012.

Applying current metal spot prices to each of Tectonic's gold, copper, silver, zinc and lead reserves renders an in situ resource value of $195/t or 4.3g/t of gold equivalent according to the company's calculations. Today's TTR share price of six cents implies a market capitalisation of $22m, or 0.9% of that in situ resource value.

As an adjunct to the "new technology" focus of this story, it should be noted that the Ravensthorpe area is noted for its high winds. To that end, Tectonic intends initially to power its operations with diesel but assessment of the construction of a combined wind/diesel power base has shown definite potential. Not only would such a power source lower the cost of Tectonic's operations, it would mean the possibility of carbon certificates and, perhaps one day, a positive emissions trading offset.

By Chris Shaw

Even in an environment of improving economic news over the first few months of this year, zinc and lead prices have been falling to the extent both metals are trading at levels where most producers are scarcely breaking even.

Zinc and lead prices have a strong connection given the two metals tend to appear together in nature and so are often both produced from the same mine.

Research group and portfolio manager Hallgarten & Co suggests the price weakness in these metals has some implications, a major one being the weakness in price of both metals is responsible for little in the way of new projects. Rather than being developed, these new projects are being left on drawing boards, at least until prices recover to more profitable levels.

In the view of Hallgarten analyst Christopher Ecclestone, this stalling in new project development is a negative for long-term supply, given the long lead time required to take a project from the proposal stage to being in production. The positive of this is additional support for longer-term prices, as any supply side response will be weaker than previously expected.

For zinc specifically, Ecclestone notes at a price below US70c per pound most producers are losing money. This means price action in recent months has been something of a surprise, as while steel production has rebounded in 2010 there has not been anything like an equivalent bounce in the zinc market. This reflects relatively weak Western demand.

On Ecclestone's numbers, zinc demand in 2009 fell by 25% in Europe, 10.5% in the US, 23% in Japan and 22% in Korea, which offset an increase in Chinese usage of 17.8%. On balance he estimates global demand fell by 5.3% last year.

This meant for 2009 production of refined zinc exceeded usage by 445,000 tonnes, which was the largest surplus since 1993. Ordinarily such a surplus would have sent prices even lower, but Eccelstone notes China took advantage of price weakness to increase its stocks of the metal.

Global zinc production is expected to increase in 2010, but the key for Ecclestone is this is likely to prove a short-term issue as global mine production should then fall in both 2011 and 2012. This is the fallout from a lack of new mines coming on stream to replace expiring mines.

Why Ecclestone is bullish on zinc has much to do with China, as having been a large next exporter early this decade the Chinese in the last couple of years have swung to being large scale importers. Such a trend is expected to continue, as China's ongoing energy supply problems are likely to see even more finished metal being imported.

The other issue in China is not only is the country's output not enough for its own needs, but what is produced in China tends to be higher cost thanks to low grades and mining inefficiencies. Ecclestone estimates while break-even for Western producers is somewhere around US80c per pound, in China it is closer to US$1.20 per pound. Chinese producers are therefore making large losses on zinc production at current price levels.

Foreign exchange movements are continuing to impact on producers outside of China. As an example, Ecclestone points out late in 2009 the Australian dollar was close to parity against the US dollar but is now trading at around US82c.

This decline against the greenback has allowed Australian producers to retain some margins, though overall they are worse off from the falls in the zinc price in recent months. In contrast, the European producers have enjoyed a net gain from the slump in the euro, the dream scenario for them being a recovery in the metal price while the euro stays below US$1.30.

In terms of who was selling as prices slumped this year, Ecclestone suggests the decline from US$1.20 to US$1.00 per pound for zinc may have seen some releasing of stock by the Chinese given their heavy buying at lower prices.

As prices slid below US$1.00 per pound however, Ecclestone suggests the Chinese would have been unhappy, as prices at this level would impact on future mining plans in that country. The slide in the zinc price to US71c per pound was simply distressed selling in his view.

With respect to the price outlook, Ecclestone suggests this distressed selling has now run its course, as evidenced by prices climbing back to the US80c level rather quickly. At these levels Ecclestone expects the Chinese will again look to enter the market to acquire some cheap stock, which would offer them some protection in case the market was to again overheat at some point.

In Ecclestone's view both zinc and lead prices could trade back at the US90c per pound level in the next few weeks and should finish the year at better than US$1.00 per pound in both cases. On a 12-month view zinc is expected to reach US$1.10 per pound or a little higher.

ASX-listed companies with direct leverage to the zinc price include Intec Ltd ((INL)), Prairie Downs Metals ((PDZ)), Abra Mining ((AII)), Kagara ((KZL)), Perilya ((PEM)), CBH Resources ((CBH)), Terramin Australia ((TZN)), Meridian Minerals ((MII)), Zinc Co Australia ((ZNC)), TNG Ltd ((TNG)), Overland Resources ((OVR)), Union Resources ((UCL)), Tri Origin Minerals ((TRO)), Metals Australia ((MLS)), Blackthorn Resources ((BTR)), Jabiru Metals ((JML)), Rox Resources ((RXL)), Anglo Australian Resources ((AAR)) and Bass Metals ((BSM)).

By Rudi Filapek-Vandyck, Editor FNArena

It is easy to take this week's Chinese data for exactly the opposite of what they are and that is proof the central government's effort to slow down economic activity is actually working. Seems strange to draw such a conclusion when global risk assets are rallying three days in a row following the leak of some Chinese data prior to their official release, isn't it?

And yet, it is true.

Take Thursday's import and export figures, for example. The reason why global risk aversion took a step back this week is because Chinese export data blew everyone away with a growth figure of no less than 48.5% in May – market consensus was positioned for a mere 32% growth figure.

It is easy to see why this news was as well received as it was: at a time when European governments are tightening belts and the US is unable to create a sufficient number of new jobs, it's a relief to see the Chinese have no problems whatsoever to continue flooding world markets with cheap toys, shoes and other stuff.

In addition, the reported 48% improvement in Chinese imports was equally above market expectations, albeit only mildly so. This number too was important because talk of a downturn in Chinese property markets is keeping global investors edgy and various Chinese indicators had been on the soft side recently.

Insofar that some corners of the global investment community were again contemplating a much stronger slowdown this year. There was talk about a GDP number of 8% or even less for the current quarter. Compared with double digit growth in Q1, this would certainly spook financial markets, not to mention industrial metals and oil.

As it happens, Chinese trade data for May showed imports for copper, crude oil, coal and iron ore have all slowed down, without falling off a cliff. The 48% jump in imports has dispelled any fears about an immediate, sharp slow down in Chinese economic activity.

All this is side one of the story, and the reason why equities and commodities have rallied strongly from depressed levels this week.

On the flipside we find proof after proof after proof that the Chinese economy is slowing down. The good news, on the evidence presented thus far, is that this slowdown seems to be of a gradual nature, contrary to what occurred in late 2008.

Note, for example, the sharply widening gap between exports and imports in May.

Chinese data released on Friday mostly fit into this mould. Industrial production expanded by 16.5% in May. In April IP grew at 17.8%. Fixed asset investment in urban areas rose 25.9% in the January-May period – again, this is slower than the reported 26.1% growth for the January-April period.

Retail sales rose by 18.7%, picking up from April's 18.5% increase, but Chinese retail data also include purchases by various governmental departments.

Also, financial institutions in China extended 639.4 billion yuan worth of new local-currency loans in May, down from 774.0 billion yuan in April. Economists had expected 600 billion yuan in new loans.

What would have spooked international markets, if overall circumstances would have been different, is that Chinese consumer inflation punctured through the 3% in May, printing 3.1% growth on an annual basis.

Within a more positive environment this would have sparked expectations of further tightening, but given the slowdown ahead most economists (including the Chinese) seem to anticipate a return to sub-3% inflation growth in the months ahead.

In other words: it's all good, there's no need for panic as far as the Chinese are concerned.

Somewhat disconcerting was the reading of a 7.1% increase in the May producer price index. Not only was this higher than April's 6.8% PPI rise, it also beat economists' median forecast of a 6.9% rise. Again, slowing momentum is likely to take care of this before it becomes a problem that requires government action.

Finally, the People's Bank of China said in a statement that the broadest measure of money supply, M2, rose 21% at the end of May from a year earlier, in line with market expectations, and slowing slightly from the 21.48% rise at the end of April.

Despite some economists expressing their concerns about Chinese inflation and overheating, it is far more probable that no further actions will follow, including no further tightening and no revaluation of the yuan/renminbi – at least not for the time being.

In the meantime, growth projections for the Chinese economy are falling across the globe, but in a moderate manner. According to the new trend it is anticipated this year's GDP will fall below 10% into the 9%-something, which would imply a GDP number of 8%-something by the final quarter of this year.

By Chris Shaw

A major lesson of the last few years according to Deutsche Bank is to  not be complacent about risk, so the current European debt crisis must be considered given the potential it develops into a problem for the global economy.

As Deutsche notes, inter-linkages in the global economy mean troubles in one part of the global financial system now tend to have more far reaching impacts, as the sub-prime debt crisis showed.

As well, Deutsche points out if the current issues in Europe do spread there is less scope for an appropriate policy response given governments have generally been on the stimulatory side with respect to policy settings over the past year or so.

Applying the current risks to the global economy to what is being priced into markets leads Deutsche to suggest the Australian market may now be factoring in too much risk. Australian equities have fallen 15% over the past month, which follows earlier sluggish performance.

On Deutsche's estimates, this means the market's price to earnings ratio on year ahead earnings forecasts has fallen from a normal level of around 15 times to 11.5 times currently. This compares to a low of around eight times when the Global Financial Crisis was at its peak in October of 2008 and amounts to a downgrading of growth in FY11 from 26% to more or less flat.

At that time markets were pricing in a severe global recession, so according to Deutsche the recent de-rating seems to be factoring in either a major slowdown or a stalling in global growth. Even allowing for the these risks the broker suggests current prices imply potential for a recovery, especially in those sectors hit the hardest of late.

These include the banks and mining stocks, construction contractors, wealth managers and some selected industrial stocks, the falls again creating value in Deutsche's view. To reflect this it suggests lifting or sustaining positions in these sectors to take advantage of any market rebound, rather than adopting a more defensive approach.

On the back of the value on offer, Deutsche has lifted its rating on the banks from underweight to index weight, this change being implemented by adding ANZ Banking Group ((ANZ)) to its recommended portfolio at the expense of Boral ((BLD)).

Deutsche retains its overweight positions in the mining, contractors, wealth managers and diversified financials sectors, while it continues to be underweight in defensive sectors. Deutsche is market weight Energy stocks in its recommended portfolio, pointing out the sector continues to trade at around an average price to earnings multiple despite the recent sell-off in the market.

According to Deutsche, the fact the Australian equity market and the Aussie dollar have both fallen significantly suggests foreign investors have been active in withdrawing from the market. This leads it to suggest at current levels the Australian market should again be looking reasonable value to foreigners, which has the potential to bring inflows again.

This is especially possible as US growth prospects continue to be upgraded, as this implies greater resilience in global growth than markets are currently estimating. The other point Deutsche makes is the de-rating of the Australian market reflects concerns over Chinese growth and the potential for policy tightening to prevent an overheating.

But if the sovereign debt crisis acts to dampen activity levels in China it would lower the pressure to tighten policy, which could also ease the market's sense of nervousness on the outlook for Chinese growth.

What supports Deutsche's positive view on mining stocks in particular is that commodity prices are still on average above the level it has built into its forecasts, with spot prices in particular still at elevated levels.

If spot prices were assumed to continue at current levels and this was factored into earnings, Deutsche notes price to earnings multiples for the likes of BHP Billiton ((BHP)) and Rio Tinto ((RIO)) would be down around the low multiples seen at the height of the global financial crisis. Such a multiple allows for significant falls in commodity prices in coming months.

Citi suggests such significant price falls are unlikely, as while a slowdown in China remains a risk underlying demand indicators ex-China have been recovering. This makes it unlikely in the broker's view average commodity prices in 2010/11 fall below the levels experienced in 2009.

Given this assumption, Citi suggests value on a 12-month basis is emerging in the Australian metals and mining sector. This view is reinforced as Citi notes its long-run commodity assumptions are very conservative, so when share prices breach its net present value estimates for companies good value is on offer.

Citi has taken a floor level net present value approach, which assumes 2009 average commodity prices until 2015 when long-term price forecasts kick in. This approach implies around 10-30% downside to base net present values, so the fact the likes of BHP, Rio Tinto, Whitehaven Coal ((WHC)), Fortescue ((FMG)), Energy Resources of Australia ((ERA)) and Paladin ((PDN)) are trading below these floor net present values suggests value is evident excluding any catastrophic market shock.

The proposed resources super tax has also been factored into Citi's analysis and it notes adding this to its model shows ERA, Paladin and Rio Tinto are still trading below the broker's "floor" scenario for net present value. Fortescue and BHP are trading broadly in line with net present value under such a scenario.

In terms of core picks, Citi continues to recommend Rio Tinto in preference to BHP Billiton given greater value and more leverage to a price recovery thanks to its aluminium and iron ore divisions. PanAust ((PNA)) remains Citi's core metal pick as the company should double production growth over the next five years and offers strong leverage to copper.

In coal Whitehaven is Citi's top pick as aside from value at current levels it offers good volume growth and exposure to tight coal markets, while Paladin is also viewed as attractive given an expected significant increase in production and merger and acquisition potential.　

By Chris Shaw

A major lesson of the last few years according to Deutsche Bank is to  not be complacent about risk, so the current European debt crisis must be considered given the potential it develops into a problem for the global economy.

As Deutsche notes, inter-linkages in the global economy mean troubles in one part of the global financial system now tend to have more far reaching impacts, as the sub-prime debt crisis showed.

As well, Deutsche points out if the current issues in Europe do spread there is less scope for an appropriate policy response given governments have generally been on the stimulatory side with respect to policy settings over the past year or so.

Applying the current risks to the global economy to what is being priced into markets leads Deutsche to suggest the Australian market may now be factoring in too much risk. Australian equities have fallen 15% over the past month, which follows earlier sluggish performance.

On Deutsche's estimates, this means the market's price to earnings ratio on year ahead earnings forecasts has fallen from a normal level of around 15 times to 11.5 times currently. This compares to a low of around eight times when the Global Financial Crisis was at its peak in October of 2008 and amounts to a downgrading of growth in FY11 from 26% to more or less flat.

At that time markets were pricing in a severe global recession, so according to Deutsche the recent de-rating seems to be factoring in either a major slowdown or a stalling in global growth. Even allowing for the these risks the broker suggests current prices imply potential for a recovery, especially in those sectors hit the hardest of late.

These include the banks and mining stocks, construction contractors, wealth managers and some selected industrial stocks, the falls again creating value in Deutsche's view. To reflect this it suggests lifting or sustaining positions in these sectors to take advantage of any market rebound, rather than adopting a more defensive approach.

On the back of the value on offer, Deutsche has lifted its rating on the banks from underweight to index weight, this change being implemented by adding ANZ Banking Group ((ANZ)) to its recommended portfolio at the expense of Boral ((BLD)).

Deutsche retains its overweight positions in the mining, contractors, wealth managers and diversified financials sectors, while it continues to be underweight in defensive sectors. Deutsche is market weight Energy stocks in its recommended portfolio, pointing out the sector continues to trade at around an average price to earnings multiple despite the recent sell-off in the market.

According to Deutsche, the fact the Australian equity market and the Aussie dollar have both fallen significantly suggests foreign investors have been active in withdrawing from the market. This leads it to suggest at current levels the Australian market should again be looking reasonable value to foreigners, which has the potential to bring inflows again.

This is especially possible as US growth prospects continue to be upgraded, as this implies greater resilience in global growth than markets are currently estimating. The other point Deutsche makes is the de-rating of the Australian market reflects concerns over Chinese growth and the potential for policy tightening to prevent an overheating.

But if the sovereign debt crisis acts to dampen activity levels in China it would lower the pressure to tighten policy, which could also ease the market's sense of nervousness on the outlook for Chinese growth.

What supports Deutsche's positive view on mining stocks in particular is that commodity prices are still on average above the level it has built into its forecasts, with spot prices in particular still at elevated levels.

If spot prices were assumed to continue at current levels and this was factored into earnings, Deutsche notes price to earnings multiples for the likes of BHP Billiton ((BHP)) and Rio Tinto ((RIO)) would be down around the low multiples seen at the height of the global financial crisis. Such a multiple allows for significant falls in commodity prices in coming months.

Citi suggests such significant price falls are unlikely, as while a slowdown in China remains a risk underlying demand indicators ex-China have been recovering. This makes it unlikely in the broker's view average commodity prices in 2010/11 fall below the levels experienced in 2009.

Given this assumption, Citi suggests value on a 12-month basis is emerging in the Australian metals and mining sector. This view is reinforced as Citi notes its long-run commodity assumptions are very conservative, so when share prices breach its net present value estimates for companies good value is on offer.

Citi has taken a floor level net present value approach, which assumes 2009 average commodity prices until 2015 when long-term price forecasts kick in. This approach implies around 10-30% downside to base net present values, so the fact the likes of BHP, Rio Tinto, Whitehaven Coal ((WHC)), Fortescue ((FMG)), Energy Resources of Australia ((ERA)) and Paladin ((PDN)) are trading below these floor net present values suggests value is evident excluding any catastrophic market shock.

The proposed resources super tax has also been factored into Citi's analysis and it notes adding this to its model shows ERA, Paladin and Rio Tinto are still trading below the broker's "floor" scenario for net present value. Fortescue and BHP are trading broadly in line with net present value under such a scenario.

In terms of core picks, Citi continues to recommend Rio Tinto in preference to BHP Billiton given greater value and more leverage to a price recovery thanks to its aluminium and iron ore divisions. PanAust ((PNA)) remains Citi's core metal pick as the company should double production growth over the next five years and offers strong leverage to copper.

In coal Whitehaven is Citi's top pick as aside from value at current levels it offers good volume growth and exposure to tight coal markets, while Paladin is also viewed as attractive given an expected significant increase in production and merger and acquisition potential.　

By Greg Peel

Commonwealth Bank's (CBA) quarterly profit update showed a result largely in line with analyst expectations and confirmed the sector-wide trends evident in all three recent interim reports from CBA's three major peers. Once again a big bank result was balanced out only by a better than expected fall in bad and doubtful debts (BDD) being offset by weaker than anticipated financial market trading profits.

I discussed this trend at length in Riding The Bank Rollercoaster published earlier in the week, but suffice to say faster than expected economic recovery in Australia has meant a faster drop in BDD levels than previously assumed, and the drop off in previously heightened financial market volatility toward the end of 2009 and into 2010 (last week notwithstanding) has meant the earlier opportunity to profit from broking fees and proprietary trading has also dropped rather quickly.

The rate of decline in BDDs is nevertheless expected to slow up from here, leaving a long tail into FY12 as the GFC effect slowly works its way out. Trading profit opportunities are also expected to normalise further. (In both cases, of course, one assumes no GFC2 ahead). A further factor is the reduction in "exception fees" being all those sneaky penalties for bounced cheques etc, which banks have been forced to reduce through political and RBA pressure.

Which brings us to yesterday's out-of-left-field announcement of a class action being instigated against all the banks with respect to those fees.

While it would be a shock if the list of enthusiastic litigants didn't grow exponentially (what have they got to lose?), Citi's opinion is even if the case were successful the actual payout would be immaterial to overall sector profits – something like $200-800m across the sector – and then a win is not all that likely anyway. The banks have already, as noted, reduced such fees so the government is unlikely to push the issue further, and a similar case brought in the UK recently failed.

Nevertheless, those reduced exception fees conspire with reduced trading profits and lower but nonetheless lingering BDD problems to suggest bank sector revenues going forward will not look as terrific as they have done since the bounce out of the depths. Then there is the issue of margin pressure which, again, was discussed at length in the aforementioned article.

The overall outlook was summed up by a cautious CBA management, which yesterday noted:

"Whilst the economic outlook has progressively improved over the past twelve months, operating conditions remain challenging. Credit growth remains muted and margins continue to come under pressure from higher average funding costs and strong price competition".

On a comparative basis, customer margins held up better for CBA than for peers in the past period and the bank noted a strong pipeline in small and medium enterprise (SME) and business lending. Non-retail lending provides incrementally greater return on capital. CBA's institutional lending book has also stabilised after its period of decline.

The quarterly update implied a first half revenue growth of 13% which, despite the expected decline in growth rate, puts CBA comfortably ahead of major rival Westpac ((WBC)) on 7%, notes Merrill Lynch. Thus as sector-wide momentum diminishes, CBA is at the better end of the trend compared to peers. While the big bank potentially suffers from a higher growth rate in operational costs, the current systems upgrade underway is a bit of a wild card in terms of potential cost reductions.

CBA's tier one capital has risen slightly to 9.2% and its level of liquid assets held remains elevated, notes Citi. While this suggests less opportunity for leveraged profits, it does mean CBA will have no need to raise capital under any particular circumstance, which includes whatever regulatory nasties lay ahead. Stricter regulations nevertheless remain a possible downside impetus for all the big banks.

On that point, Citi notes an APRA proposal to eliminate "double gearing" on bank balance sheets which actually reduces CBA's return on equity premium over peers (down to 22% compared to to 17-20% in FY12) and thus brings CBA back to the pack a bit.

Analysts generally believe CBA now deserves a diminished premium over peers, but a premium nevertheless given better core revenue expectations and better quality earnings. That's the relative view, although all brokers agree the bank sector is facing headwinds of lower revenues and lower margins into the rest of calendar 2010 and beyond. Overall, analysts reduced their earnings forecasts for CBA by around 1-3% in FY10 and up to 5% in FY11.

Target prices were also adjusted accordingly, but the impact was only a 27c reduction in the average FNArena database target to $59.01.

The result did not affect any changes in analyst ratings, and Credit Suisse stood by its decision to upgrade CBA to Outperform earlier in the week based on the 10% thumping the stock incurred during the euro debacle. As to the matter of whether or not CBA is trading at a realistic premium to peers or not, the answer lies in the spread of Buy and Hold ratings (four to six). Those on Hold believe CBA is now correctly priced while Macquarie, Credit Suisse, Merrill Lynch and UBS see further relative upside.

The Buy-raters are still influencing a perceived 8.7% of absolute price upside (based on yesterday's closing prices) which is clearly a reflection of the big hit the banks have taken this past week or so as much as anything else. But this upside is now the lowest among peers. Given CBA still ranks second on average, the difference lies in the volatility (spread) of price targets.

There are no Sell-raters but Morgan Stanley (not a database member) has maintained an Underperform rating suggesting sector earnings growth is running out of steam and CBA is fully valued.

For the last word on the sector in general, the Credit Suisse equity strategists are currently Market-weight banks on the basis of little scope for positive earnings momentum in the near-term. While the mortgage rush has tapered off, the improvement in business lending demand represents only stabilisation, notes CS, rather than any great recovery. The market is awaiting the day the banks can release all those extra BDD provisions set aside in 2008-09 into earnings, but while BDDs tail off only gradually, and stricter capital requirements from likely regulatory changes hang over the banks' heads, that day is yet a-ways off.

By Greg Peel

Here we are four days on from the government's announcement that it would look to implement the resources super-profits tax (RSPT) recommended in the Henry Tax Review, and still the market is battling to understand the detail. Of most concern is just exactly what impact on discounted valuation the tax will have on Australia's listed resource companies, and in particular on the two biggest players, BHP Billiton (BHP) and Rio Tinto ((RIO)). Said Citi in a report this morning:

“The extent of the impact seems to vary quite markedly across the market, reflecting commodity price assumptions and ambiguity over exactly how the RSPT works”.

The first variance factor is not related to the tax – differing assumptions on longer term commodity prices among analysts have always extrapolated into wildly varying discount valuations and hence target prices and recommendations. However, given profits are based on prices, and the RSPT taxes profits (unlike the existing royalty system which is imposed on production), in fact the new tax adds a new dimension of variance into analysts' valuation models depending on their initial price forecasts.

Throw in the second point of variance – ongoing ambiguity over the RSPT itself – and we have a recipe for simple uncertainty. It is uncertainty more than anything which drives investors to exit stock positions. If the tax is bad but if we know just how bad then prices can adjust accordingly and be done with it. But we just don't quite know yet how bad, or not so bad, the implications of the tax really are.

And, of course, we don't know whether or not the RSPT will be watered down (my assumption is Rudd started from the worst point to leave the door open for concessions) before it becomes legislation, or whether it will ever become legislation, or whether the Rudd government will be around in 2011 anyway. More uncertainty.

Macquarie has been a particularly heavy critic, not so much of the tax's intent but of its detail.

The analysts interpret that miners' future deductions associated with upfront capital investment will be diluted in early years, thereby reducing their value in net present value (NPV) terms. And then any “capital account” balance will be inflated at what the analysts call the “paltry” rate of 6%. In the context of a miner's weighted average cost of capital, and the inflation factor associated with the similar and pre-existing Petroleum Resources Rent Tax, Macquarie finds 6% “quite hard to stomach”.

Macquarie is coincidentally holding its Australian Equities Conference this week, and no prizes for guessing the hot topic around the coffee urn. Senior mining executives are most upset they weren't consulted before the tax announcement (blow me down) and are frustrated over the “cloud” that has descended on the industry. The factors the Macquarie analysts would like to see addressed in the upcoming consultation process are the apparent total net tax exceeding 50% (including royalties and corporate tax and allowable offsets) and the rate any “remnant capital shield” is carried forward (currently being that 6%) and the rate at which that shield can be amortised over time.

Got it? Well one can begin to understand just how complex the RSPT is and why it is not simply a 40% tax.

Citi notes that as of yesterday's closing prices, BHP and Rio have fallen 15-20% from their recent peaks (and they're both down another 2% today as I write). Those falls have been kicked along by this tax uncertainty, but in the context of base metals prices being around 15% lower and oil about 10% in the same time frame, given Chinese tightening and European fears, the actual uncertainty impact is difficult to gauge. However, Citi suggests the valuations of both are beginning to look attractive.

Inherent in Citi's conclusion is the analysts' own interpretation of NPV impact on the two miners of the Henry tax alone. They say 11% for BHP and 12% for Rio, but other broking houses have differing views which again comes back to commodity price assumptions. The actual impact on earnings, says Citi, is 5-9% given the impact is lower in the short term and higher in the longer term (2015 and beyond) based on accelerated capex depreciation.

Citi did have a $55 target price for BHP and $100 for Rio pre-Henry but applying Henry means Net Present Values (NPV) fall to $38 and $80. That puts BHP at fair value right now and Rio at a 15% discount. “Historically,” says Citi, “these [valuation levels] have been good buy signals for both on a 6-12 month view”. But the analysts nevertheless recognise the aforementioned “uncertainty” that will weigh on momentum in the short term.

BHP and Rio both have approved expansion plans both in Australia and across the globe. Obviously Pilbara iron ore was in each case a priority for expansion prior to Henry, and although Citi suggests existing Pilbara projects will not be overly impacted, expanded operations will be. This will likely mean both companies will shift priority to offshore projects.

Macquarie concurs, noting “our analysis indicates that the net present value of the 'next generation' of iron ore developments in the Pilbara will be reduced by more than 30% should such an RSPT be attached”.

The implication here is one for the Rudd government to consider. If it chases BHP and Rio priority investment offshore then RSPTs will not be there to collect, nor jobs created locally etc etc.

But coming back to Citi's “attractive” valuation claim, the analysts readdress the issue of variance of long term commodity price assumptions. Citi is using notably conservative long term prices in its NPV models, the analysts admit, particularly for copper and coal. Were these adjusted back to current prices or consensus estimates, then most of the RSPT impact would actually be offset.

Thus the two miners are in theory even more attractive.

Who among you might be so bold? I think one can very safely say the market has assumed the worst from Henry, and that's how Rudd saw things playing out anyway. I am reminded once again of an experience many moons ago.

When I was once a proprietary trader looking for approval to trade new markets, the very wise deputy CEO (no names, we'll just call him Alan Moss) advised me to always insert a clanger in my proposal to the CEO that clearly was not acceptable. The CEO would then spot the clanger and be pleased that he had done so, and I would humbly withdraw with approval on the basis the clanger was removed – leaving my actual proposal intact.

Had Rudd consulted the mining industry before announcing an RSPT, as Howard would have done, he would have ended up with something very favourable to the industry. Now that consultation is open after the announcement, the industry will likely be happy with any concessions it can get. Feigning defeat, Rudd would concede to a watered-down tax which might just be what he had had in mind in the first place.

Or am I just giving him too much credit? It is a point which supports Citi's valuation case, all things being equal on the China/Europe front of course. 

By Chris Shaw

Commerzbank has previously pointed out commodity markets are vulnerable to a downside correction because, despite oversupply in various markets, prices have continued to climb.

With Standard & Poors downgrading credit ratings for both Portugal and Greece this proved the last straw for commodity prices in Commerzbank's view, as commodity prices have subsequently come under pressures as investors become more risk averse.

This has pushed down the oil price by almost US$4.00 per barrel in just two trading days, a decline Commerzbank points out has been exacerbated by weak oil data fundamentals. The group notes the American Petroleum Institute's latest inventory statistics for the US showed crude oil stocks rose last week by more than 5.3 million barrels.

Standard Bank has also commented on the US surplus in crude and product stocks, noting at present the surplus is particularly acute in the distillate market. While distillate stocks have declined from 50.5 days last October to 41.6 days now, this remains an elevated level in the bank's view.

At the same time Standard Bank notes capacity utilisation in the US market has risen, with a higher utilisation rate meaning more product is being produced. This implies it will be tough for the US market to record any decline in inventory levels in coming months.

But as Barclays Capital points out, the current data are an indication of what at present is a highly dislocated US market. The inventory overhang is centred solely in the US Midwest, where crude inventories are now 18 million barrels above their five year average. Elsewhere in the US market crude inventories are below their five-year average levels.

Over the past five weeks, Barclays notes, US crude inventories have increased by 6.5 million barrels in absolute terms, which is in line with normal seasonal trends for this time of year. But the five-year average change in inventories for the same period is an increase of 10.9 million barrels, so relative to the seasonal trend inventory levels have in fact come down.

On its numbers, Barclays estimates the overall surplus of inventory above the five-year average in the US has fallen from 21.9 million barrels to 17.5 million barrels. The distortion being created by the higher supplies in the Midwest is affecting prices on the shorter-end of the oil price curve in particular in the group's view, with the curve being both flatter at the back and steeper at the front at present.

While Commerzbank suggests the oil price may fall further short-term as the current macro environment is suggestive of relatively modest demand growth, Barclays sees the demand picture in the US at least as not quite as clear.

Barclays points out US gasoline demand is at present running at its highest level for any April, with year-on-year demand growth running at around 3.4%. On the flip side, distillate demand for April is around 15.7% below its April 2007 level.

In terms of oil price expectations, Standard Bank expects the market will remain relatively range bound. The bank sees front month prices averaging US$84 per barrel in the June quarter as prices above this level would need to be accompanied by substantial US dollar weakness.

Standard Bank doesn't expect this will be the case this quarter given the economic issues in Europe at present and the potential for this to put pressure on the euro relative to the greenback.

By Greg Peel

Nickel is all the rage at the moment as the global economy attempts to recover from the GFC and China's stainless steel factories once again fire up into full production. The most expensive of the five major base metals, nickel likes to act as the standard bearer for an advancing army. It usually leads the way with gusto into the fray but then, unarmed, turns and flees at the first sign of trouble. To that end, it is also usually the most volatile of the metals.

As the following chart shows, investors looking to play nickel have to be prepared to strap themselves in:

Nickel's great expense (US$12/lb compared to US$3.50/lb for copper, US$1/lb for aluminium and zinc) obviously reflects a lack of general supply versus global demand for stainless steel but it also reflects the high cost of nickel production, from ore to concentrate to end-use metal. This is a factor in nickel's price volatility as mines and smelters are shut down when prices spiral downwards and then take a long time to ramp up again. Right at the moment both supply of ore, old and new, and active smelter capacity is struggling to keep up with the renewed demand for stainless steel, particularly for the Chinese manufacturing industry and domestic economic expansion.

That's why a rise in the nickel price tends to signal to the market that an overall rise in metal prices is afoot, and thus why nickel is now up 50% since the "Greek Dip" in February and up 200% from the GFC bottom.

Unfortunately it works the other way as well. Clearly metal prices can't just going up forever because high prices must eventually cause demand destruction. This is problematic for copper and aluminium, as the market has little alternative than copper for wiring and aluminium for light-weight construction (although plastic composites are moving in on aluminium now). But nickel is substitutable (as is zinc).

Quality stainless steel is made using a high proportion of nickel. Lower quality stainless steel is made using a lower proportion of nickel or by using chromium, for example, instead of nickel. And this is what happens when the nickel price is just too high – rather than shut up shop producers offer lower quality stainless steel onto the market instead. And then suddenly the nickel price collapses.

This occurred in early 2007, as the above graph notes. The great nickel price blow-off occurred despite the GFC-related metal collapse not occurring until 2008, and despite the prices of iron ore and coal used for steel-making jumping significantly in the 2007 contract price negotiations. Zinc responded similarly (zinc is used to make galvanised steel), but copper only stumbled for a while and aluminium barely blinked.

Further twenty-first century volatility was added from the great influx of speculative commodity funds into the financial market arena.

Nickel then dropped again in the GFC. So over the five year period displayed in the chart, nickel went from (all USD/lb) $8 to $24 to $12 to $4 and back to $12 again. Over that period, marginal nickel producers simply came and went. Hero one day and gone the next. It is not hard to see why investing in pure-play nickel miners is not a game for the risk averse.

One way for a nickel producer to ward off destructive nickel price volatility is to hedge, whether by forward-selling nickel for future delivery at price received today (often used as a source of funding as well as hedging) or by simply trading in offsetting futures contracts. But to hedge means to miss out on upside profitability potential in the good times and as such investors tend to punish miners who hedge even if it provides insurance.

If you are a privately-owned miner, unconcerned about the opinions of flighty investors, another way to hedge against the inevitable rollercoaster of nickel price cycles is to take things steadily, conserve cash and manage resources pragmatically to provide a natural smoothing mechanism. Funnily enough, this is exactly what Mincor ((MCR)) has been doing since 2001 when it became nickel miner. The problem is, that's not what listed miners are supposed to do.

Stock analysts will never look favourably upon listed companies who hoard cash and reserves for a rainy day. Money lying idle is simply money not working, undermining the potential for earnings growth and ultimate shareholder returns. It must be used for acquisitions, or to pay down debt, or to return capital to shareholders and thus affect earnings per share accretion. The paying down of debt is not all that favourably looked upon as well if times are good. Listed companies should borrow to their absolute capacity to fund new projects and to avoid shareholder dilution arising from raising fresh equity for such a purpose.

All this changes, of course, when the cycle turns and high gearing and low cash reserves are seen by analysts as an obvious folly. Witness the fortunes over the last three years of a cashed up BHP versus a debt-laden Rio Tinto.

"Before 2007," noted Mincor CEO David Moore last week, "the analysts all told us we were carrying too much cash. Then in 2007-08 they told us well done for having cash, but by 2009 we were carrying too much again". I met with David at a presentation lunch hosted by Cameron Stockbroking.

There is a lot of pressure on listed companies to make hay while the sun shines. Mincor's stated "purpose" is to maximise total shareholder returns (TSR). Going bust at the bottom of an inevitable cycle is not one obvious way to achieve that. Staying alive throughout cycles is, even if it means sacrificing some TSR upside in the up-cycle for the sake of the longer term investor and not the short-term trader.

On the release of its FY10 interim result in February, Mincor was capitalised at $430m, had made a profit of $14.2m for the half on earnings of $40m and was carrying $107m in cash with no debt. To a stock analyst, that is not a balance sheet that maximises potential. But such a balance sheet has seen Mincor through the bubble-and-bust of the nickel market over 2007 and the GFC of 2008 while still paying out consistent discreet dividends to its shareholders.

Yes – Mincor is a pure-play miner-explorer that likes to pay its shareholders dividends, and pretty resasonable dividends at that. Many pure-plays don't play dividends and any miner that does usually keeps payouts to a minimum and withdraws payouts immediately when prices fall. But Mincor paid a 6cps dividend in FY09 and has paid 3cps for the first half FY10 with the intention of doing the same for the second.

In the middle of FY09, at the bottom of the nickel market, Mincor shares fell below $1.00. At that point they were yielding 6%. A miner yielding 6%! Mincor's share price is now back over $2.00 so that yield is under 3% which is more consistent with your larger-cap miners. But the point is that throughout the cycle, the dividends kept coming.

Obviously the share price went for a rollercoaster ride but you can't do too much about that when your fortunes are strongly leveraged to the nickel price. Particularly when stock analysts don't like you. Mincor is an ASX 200 company, but it only attracts coverage from three out of ten FNArena database brokers and researchers, and one of those is Aspect Huntley (Hold). The other two are Macquarie (Outperform) and Deutsche Bank (Sell).

Macquarie appears on Mincor's register with a 5.2% holding, but that is not a reflection of the analysts' rating. It is probably a reflection of why Macquarie covers Mincor, nevertheless. Deutsche, on the other hand, is simply down on all nickel producers at present, factoring in a long term nickel price of US$6.50/lb currently compared to an average US$9.70/lb derived from nickel miner stock prices, and compared to a spot price of US$12.31/lb.

Mincor's other "hedging" policy – or if you like, longer term smooth sailing policy – is to keep a running balance of proved-up reserves against actual production, thus ensuring longevity but also providing a "hedge" to the upside. If the global nickel market does go into hefty supply deficit for a period, Mincor has reserves to draw upon. The company is always exploring for and proving up reserves several years ahead of production expansion plans.

Mincor's operations are centred in Kambalda which is 60km south of Kalgoorlie in WA. Kambalda has been a nickel producing area for decades and Independence Group ((IGO)) and Panoramic Resources ((PAN)) are neighbours. Mincor turns all its nickel sulphides into concentrates at the nearby smelter owned by BHP Billiton ((BHP)) and on a longstanding agreement all concentrates are purchased by BHP. Were this relationship to be terminated either way, there are plenty of other options.

Mincor's tenement lies in the Kambalda dome, which hosts four of the six biggest nickel sulphide ore bodies in Australia. Two-thirds of Mincor's Kambalda Dome holdings have not been effectively drilled to date. Mincor's North Kambalda site has shown in testing what appears to be an "ultra-size nickel ore body" formation, known delightfully in mining parlance as a "US nob".

Mincor is pioneering the use of "advanced in mine geophysics" which has also shown potential for the existence of further US nobs at its Otter Juan site. Mincor's exploration, suggests David Moore, is throwing up "game-changing potential". Emerging discoveries are also being made at the once discarded (before Mincor's time) Miitel sites. Miitel is the "sleeping giant" of ore bodies with existing reserves or 468kt of nickel including 100kt of developed ore, and a re-opening study is now underway.

That Mincor should be a nickel sulphide miner is important. I noted earlier that nickel is the most expensive of the base metals reflecting lack of supply. Specifically, new nickel sulphide discoveries are now almost non-existent across the globe. New discoveries and projects are mostly those of nickel laterite reserves, and nickel laterite is a lot more expensive to process.

In short, Mincor is a nickel miner with a consistent track record of total share holder returns. Since foundation in 1999 (previously listed in 1997 as a different company), Mincor has provided a TSR of 5900%. But the company is also now looking to diversify. Mincor has a pipeline of regional exploration sites across Australia focusing on copper and other base metals.

Mincor sells itself as providing cashflows, profits, dividends, nickel price leverage, financial strength and "unlimited exploration upside". Analysts don't like Mincor because it plays the game too conservatively, protecting its production capacity by constant rolling forward reserves and exploring for new ones, and protecting the company and its shareholders by not borrowing money but self-financing out of a constantly healthy cash balance.

Mincor is a company suited to longer term investors who want nickel exposure. An investment in Mincor is obviously not without risk but the company's policy is one of longevity rather than simple death or glory.

By Greg Peel

Nickel is all the rage at the moment as the global economy attempts to recover from the GFC and China's stainless steel factories once again fire up into full production. The most expensive of the five major base metals, nickel likes to act as the standard bearer for an advancing army. It usually leads the way with gusto into the fray but then, unarmed, turns and flees at the first sign of trouble. To that end, it is also usually the most volatile of the metals.

As the following chart shows, investors looking to play nickel have to be prepared to strap themselves in:

Nickel's great expense (US$12/lb compared to US$3.50/lb for copper, US$1/lb for aluminium and zinc) obviously reflects a lack of general supply versus global demand for stainless steel but it also reflects the high cost of nickel production, from ore to concentrate to end-use metal. This is a factor in nickel's price volatility as mines and smelters are shut down when prices spiral downwards and then take a long time to ramp up again. Right at the moment both supply of ore, old and new, and active smelter capacity is struggling to keep up with the renewed demand for stainless steel, particularly for the Chinese manufacturing industry and domestic economic expansion.

That's why a rise in the nickel price tends to signal to the market that an overall rise in metal prices is afoot, and thus why nickel is now up 50% since the "Greek Dip" in February and up 200% from the GFC bottom.

Unfortunately it works the other way as well. Clearly metal prices can't just going up forever because high prices must eventually cause demand destruction. This is problematic for copper and aluminium, as the market has little alternative than copper for wiring and aluminium for light-weight construction (although plastic composites are moving in on aluminium now). But nickel is substitutable (as is zinc).

Quality stainless steel is made using a high proportion of nickel. Lower quality stainless steel is made using a lower proportion of nickel or by using chromium, for example, instead of nickel. And this is what happens when the nickel price is just too high – rather than shut up shop producers offer lower quality stainless steel onto the market instead. And then suddenly the nickel price collapses.

This occurred in early 2007, as the above graph notes. The great nickel price blow-off occurred despite the GFC-related metal collapse not occurring until 2008, and despite the prices of iron ore and coal used for steel-making jumping significantly in the 2007 contract price negotiations. Zinc responded similarly (zinc is used to make galvanised steel), but copper only stumbled for a while and aluminium barely blinked.

Further twenty-first century volatility was added from the great influx of speculative commodity funds into the financial market arena.

Nickel then dropped again in the GFC. So over the five year period displayed in the chart, nickel went from (all USD/lb) $8 to $24 to $12 to $4 and back to $12 again. Over that period, marginal nickel producers simply came and went. Hero one day and gone the next. It is not hard to see why investing in pure-play nickel miners is not a game for the risk averse.

One way for a nickel producer to ward off destructive nickel price volatility is to hedge, whether by forward-selling nickel for future delivery at price received today (often used as a source of funding as well as hedging) or by simply trading in offsetting futures contracts. But to hedge means to miss out on upside profitability potential in the good times and as such investors tend to punish miners who hedge even if it provides insurance.

If you are a privately-owned miner, unconcerned about the opinions of flighty investors, another way to hedge against the inevitable rollercoaster of nickel price cycles is to take things steadily, conserve cash and manage resources pragmatically to provide a natural smoothing mechanism. Funnily enough, this is exactly what Mincor ((MCR)) has been doing since 2001 when it became nickel miner. The problem is, that's not what listed miners are supposed to do.

Stock analysts will never look favourably upon listed companies who hoard cash and reserves for a rainy day. Money lying idle is simply money not working, undermining the potential for earnings growth and ultimate shareholder returns. It must be used for acquisitions, or to pay down debt, or to return capital to shareholders and thus affect earnings per share accretion. The paying down of debt is not all that favourably looked upon as well if times are good. Listed companies should borrow to their absolute capacity to fund new projects and to avoid shareholder dilution arising from raising fresh equity for such a purpose.

All this changes, of course, when the cycle turns and high gearing and low cash reserves are seen by analysts as an obvious folly. Witness the fortunes over the last three years of a cashed up BHP versus a debt-laden Rio Tinto.

"Before 2007," noted Mincor CEO David Moore last week, "the analysts all told us we were carrying too much cash. Then in 2007-08 they told us well done for having cash, but by 2009 we were carrying too much again". I met with David at a presentation lunch hosted by Cameron Stockbroking.

There is a lot of pressure on listed companies to make hay while the sun shines. Mincor's stated "purpose" is to maximise total shareholder returns (TSR). Going bust at the bottom of an inevitable cycle is not one obvious way to achieve that. Staying alive throughout cycles is, even if it means sacrificing some TSR upside in the up-cycle for the sake of the longer term investor and not the short-term trader.

On the release of its FY10 interim result in February, Mincor was capitalised at $430m, had made a profit of $14.2m for the half on earnings of $40m and was carrying $107m in cash with no debt. To a stock analyst, that is not a balance sheet that maximises potential. But such a balance sheet has seen Mincor through the bubble-and-bust of the nickel market over 2007 and the GFC of 2008 while still paying out consistent discreet dividends to its shareholders.

Yes – Mincor is a pure-play miner-explorer that likes to pay its shareholders dividends, and pretty resasonable dividends at that. Many pure-plays don't play dividends and any miner that does usually keeps payouts to a minimum and withdraws payouts immediately when prices fall. But Mincor paid a 6cps dividend in FY09 and has paid 3cps for the first half FY10 with the intention of doing the same for the second.

In the middle of FY09, at the bottom of the nickel market, Mincor shares fell below $1.00. At that point they were yielding 6%. A miner yielding 6%! Mincor's share price is now back over $2.00 so that yield is under 3% which is more consistent with your larger-cap miners. But the point is that throughout the cycle, the dividends kept coming.

Obviously the share price went for a rollercoaster ride but you can't do too much about that when your fortunes are strongly leveraged to the nickel price. Particularly when stock analysts don't like you. Mincor is an ASX 200 company, but it only attracts coverage from three out of ten FNArena database brokers and researchers, and one of those is Aspect Huntley (Hold). The other two are Macquarie (Outperform) and Deutsche Bank (Sell).

Macquarie appears on Mincor's register with a 5.2% holding, but that is not a reflection of the analysts' rating. It is probably a reflection of why Macquarie covers Mincor, nevertheless. Deutsche, on the other hand, is simply down on all nickel producers at present, factoring in a long term nickel price of US$6.50/lb currently compared to an average US$9.70/lb derived from nickel miner stock prices, and compared to a spot price of US$12.31/lb.

Mincor's other "hedging" policy – or if you like, longer term smooth sailing policy – is to keep a running balance of proved-up reserves against actual production, thus ensuring longevity but also providing a "hedge" to the upside. If the global nickel market does go into hefty supply deficit for a period, Mincor has reserves to draw upon. The company is always exploring for and proving up reserves several years ahead of production expansion plans.

Mincor's operations are centred in Kambalda which is 60km south of Kalgoorlie in WA. Kambalda has been a nickel producing area for decades and Independence Group ((IGO)) and Panoramic Resources ((PAN)) are neighbours. Mincor turns all its nickel sulphides into concentrates at the nearby smelter owned by BHP Billiton ((BHP)) and on a longstanding agreement all concentrates are purchased by BHP. Were this relationship to be terminated either way, there are plenty of other options.

Mincor's tenement lies in the Kambalda dome, which hosts four of the six biggest nickel sulphide ore bodies in Australia. Two-thirds of Mincor's Kambalda Dome holdings have not been effectively drilled to date. Mincor's North Kambalda site has shown in testing what appears to be an "ultra-size nickel ore body" formation, known delightfully in mining parlance as a "US nob".

Mincor is pioneering the use of "advanced in mine geophysics" which has also shown potential for the existence of further US nobs at its Otter Juan site. Mincor's exploration, suggests David Moore, is throwing up "game-changing potential". Emerging discoveries are also being made at the once discarded (before Mincor's time) Miitel sites. Miitel is the "sleeping giant" of ore bodies with existing reserves or 468kt of nickel including 100kt of developed ore, and a re-opening study is now underway.

That Mincor should be a nickel sulphide miner is important. I noted earlier that nickel is the most expensive of the base metals reflecting lack of supply. Specifically, new nickel sulphide discoveries are now almost non-existent across the globe. New discoveries and projects are mostly those of nickel laterite reserves, and nickel laterite is a lot more expensive to process.

In short, Mincor is a nickel miner with a consistent track record of total share holder returns. Since foundation in 1999 (previously listed in 1997 as a different company), Mincor has provided a TSR of 5900%. But the company is also now looking to diversify. Mincor has a pipeline of regional exploration sites across Australia focusing on copper and other base metals.

Mincor sells itself as providing cashflows, profits, dividends, nickel price leverage, financial strength and "unlimited exploration upside". Analysts don't like Mincor because it plays the game too conservatively, protecting its production capacity by constant rolling forward reserves and exploring for new ones, and protecting the company and its shareholders by not borrowing money but self-financing out of a constantly healthy cash balance.

Mincor is a company suited to longer term investors who want nickel exposure. An investment in Mincor is obviously not without risk but the company's policy is one of longevity rather than simple death or glory.