Above the ground activity burnishes value of Otter Gold's share price

Peter V O'Brien, Finance writer

Friday 9th November 2001

Mining stocks' share prices

Company	29.10.00	2.2.201	4.5.01	3.8.01	2.11.01

Cue	4.6	5	5	10.5	6.5
Heritage	6.1	4.5	4.9	4	3.1
GRD (1)	90	122	117	142	137
NZ Oil & Gas	28	30	36	42	35
Otter	40	36	17	12.8	21
Summit	7	10	10	16.5	14.5
(1) Converted from Australian cents
London gold
($US/oz)	265.45	266.70	266.15	268.85	280.35
2001 high: $US292.20			2001 low: $US256.20

Most of the activity in the stock exchange's little mining sector was happening above the ground in the past three months.

There were few changes to listed mining and exploration companies' share prices over the period, as shown in the table, apart from Otter Gold Mines, which was under offer from Australian company Normandy NFM.

The terms of Normandy's offer determine the Otter share price any given day, because the former is proposing the issue of 1.9 of its shares for every 100 Otter shares.

Normandy's bid was made on October 11, when its price was $A9.30, pricing Otter at 17.6Ac.

The Australian company's price was $A9.40 last Friday, raising the value of its offer to 17.86Ac, or 21.87 NZc, say 22c.

Otter closed at 21c on the New Zealand exchange on Friday, near enough to the theoretical price.

The current offer price is still theoretical, in the sense that it could change after Otter receives the appraisal report it must commission.

It will be interesting to see what happens if the value in the appraisal report is more than the equivalent of Normandy shares for each 100 Otter, because Guinness Peat Group agreed to sell 7.8 million shares to Normandy on the 1.9:100 basis.

Otter has interests in productive gold mines. Valuation of such assets and consequent cash flows requires a different approach from that applicable to, say, a manufacturing business.

The miner lost $41.92 million in the year ended June, including a $24.3 million writeoff of its interest in former in-substance subsidiary Allstate Exploration NL, $6.3 million for the writeoff of its Tanami Mine's deferred waste costs, $5.5 million for rehabilitation of Tanami after flooding and a $3.8 million recognition of unrealised hedging due to reduced Tanami Nine reserves.

A successful Normandy bid for Otter would remove another company from an already slim mining list.

Some of the other listed companies were also involved in "above-the-ground matters in the September quarter, although they were relevant to potential developments "under the ground."

Mining is a politically sensitive business in most parts of the world, including New Zealand.

GRD had that truism confirmed when Conservation Minister Sandra Lee declined the company's application to vary an existing access agreement for the Reefton Gold Project on the West Coast.

The company's quarterly report said the project layout and mining schedule had been revised to conform to the current access agreement.

GRD operates the Macraes gold project at Macraes Flat, Central Otago, but the Australian group has broadened its activities in recent years to encompass waste recycling, technical solutions to problems related to the mining industry and residential, commercial and industrial construction.

Mining is still the dominant activity by far, accounting for 72.2% of total gross revenue for the six months ended June and all the profit, given there was a loss in each of the other activities.

The company's share price has improved over the past year, when account is taken of the Australian company's total acquisition its New Zealand subsidiary, but that has more to do with the performance of the Australian sharemarket than any developments on the New Zealand mining front.

It was also worth noting that heightened international tension since September 11 did nothing for the share prices of New Zealand goldminers and only a little for the international gold price.

The $US292.20 an ounce, shown as the highest price for gold this year, was recorded on September 26, but when The National Business Review's last quarterly review of the sector was published in August, the then 2001 high was $US286.10.

That can be compared with the price of $US279.80 last Friday and the range over the preceding four quarters.

It seems some speculators believed the "flight to gold" myth that arises for a few days when each new crisis breaks and then adjust to the reality which has been dominant for years.

Sudden, even small, jumps in the gold price can catch miners out in their hedging programmes, if only on the basis of lost opportunity costs, but few people will make fortunes playing gold during crises unless they move massive amounts quickly and "on the turn" in dollar terms.

It will be interesting to see how New Zealand Oil & Gas gets on with its "above the ground"activity associated with the company's Pike River coal operation on the West Coast.

The quarterly report said, "the key element at this point is to obtain access to the mine through a small area of conservation land."

That should get the sandals on the march.

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