ROADHOUSE COMMENT: There is much speculation at present on the exploration side of the resources sector, especially with the recent passing of the Abbott Government’s Exploration Development Incentive Scheme.

The Exploration Development Incentive has been passed – Hurrah, I hear you all cheer, but is it the answer to all our exploration funding dilemmas?

With its recent passage of its Exploration Development Incentive scheme reforms, the Abbott Government may feel it has placed a full stop on the last sentence of the final chapter of a long drawn-out saga.

The scheme gained traction in the collective psyche of the exploration sector when in 2007, then aspiring Prime Minister, Kevin Rudd, firmly laid out a ‘Flow-Through Share Scheme’ on the Labor Party election platform.

However, after storming down the straight to greet the electoral judges, by what history may deem to have been too many lengths, the Rudd Labor Government’s first budget delivered by its Treasurer, Wayne Swan, gave Flow-Through Shares the liquid paper treatment and it disappeared from view.

Of course many industry-types had not forgotten what had been promised and it was up to then Mining Minister Martin Ferguson to appease the torch-bearing masses, by telling them it would definitely be looked at in the next budget.

Instead we were presented with the Resource Super Profits Tax, which enraged Twiggy so much he unwrapped a new set of hi-vis gear from its packaging and jumped on the back of a flatbed truck with Gina for some good, old fashioned speechifyin’.

However, time moves on.

Announcing the passage of the reforms the Abbott Government said it would, “provide incentives for mineral exploration and remove punitive tax rates on excess superannuation contributions.

“The Exploration Development Incentive supports junior and mid-sized mining companies by encouraging greenfields mineral exploration.

“It is a catalyst for new exploration, new investment and new opportunities in the resources sector.

“The Exploration Development Incentive delivers on our election commitment and helps encourage investment for new minerals exploration in the junior exploration sector.”

But, what does it do? This is a pretty wild ride, so hang on and I’ll try to make it simple. If I can understand it, then you should.

The basic principal of the EDI is to encourage investors to invest in junior exploration companies.

The rationale is that by allowing them to issue ‘exploration credits’ to their investors it will make investing in these junior explorers a much more attractive proposition when they are out rattling the tin to raise capital.

To be eligible to participate in the scheme, companies will need to be conducting greenfield exploration.

By doing so they will be allowed to pass on a proportion of their eligible exploration expenditure through a refundable tax offset or a franking credit to investors (depending on the type of investor).
 
According to accounting firm, HLB Mann Judd, under the new scheme, “exploration credits can be created and distributed in an income year by an entity that was a greenfields minerals explorer in the prior income year.”

The credits are generated from the prior year’s expenditure as follows:

Source: HLB Mann Judd

In the final wash-up the EDI is undoubtedly a good idea if the end result is that it assists genuine explorers.

One affect the Global Financial Crisis (you remember) was supposed to have was the flushing out of the ASX-listed companies that had taken advantage of the boom and to focus on maintaining a lifestyle for their directors rather than the development of projects, and therefore, shareholder wealth.

These companies have possibly contributed more to the reluctance of investors to support small raisings, which are generally just to keep the office doors open and the lights switched on.

“The best thing for the industry would be if the majority of these companies disappeared in order to provide ‘clear air’ for the better companies,” Minelife founding director & senior resource analyst Gavin Wendt told The Roadhouse.

“I’m not sure how this scheme compares with what’s operational in Canada, but the incentives there haven’t really helped their market (not in the tough times anyway).

“Their market is worse off than ours!”

ROADHOUSE COMMENT: The crash of the iron ore price continues to cast a shadow of doom across the Australian Share Market.

The iron ore price enjoyed a bit of a jump this week, but that may not be enough to save those third and fourth tier companies struggling to maintain a toehold in the marketplace.

The latest victim of the iron ore crash appears to be long-time market favourite, Atlas Iron (ASX: AGO), which called a voluntary suspension of its securities this week.

“The voluntary suspension is requested pending the outcome of an extensive review of the company’s operations, financial outlook, asset sale opportunities and capital structure in light of the recent rapid fall in the iron ore price,” the company informed the ASX.

Atlas’ approach to the industry’s collective dilemma received a heavy kicking by industry know-it-alls wearing their twenty-twenty hindsight steel caps.

These are the same know-it-alls who have regularly suggested the iron ore price would not fall any further as they declared US$80 per tonne would be the bottom, as would US$70, US$60, and US$50.

Regular readers of The Roadhouse would remember we called US$40 a tonne well before Christmas and we’re sticking with that prediction.

Nobody, however, has been as rash in their response to the fall as the man who sits in the big chair at Fortescue Metals Group (ASX: FMG), Andrew Forrest, who famously suggested iron ore producers place a cap on production in a bid to bring the price down to enable smaller producers to survive.

Of course, The Roadhouse in no way suggests there may be some collusion by the big boys in the iron ore playground, BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO), but the conspiracy theorists in the front bar continually suggest FMG’s train set would be a great addition to a combined BHP/RIO enterprise in that it would be able to allow – for a healthy fee – smaller companies a transport corridor to port that would not interfere with their current operations.

The remaining question, however, is who will rise from the ashes of the prolonged price war to ride their product on the rails to distribution Nirvana?

We don’t pretend to be smart enough to make that prediction, so we’ll leave that to the smarter pundits who have handled the price fall so well.

With the resources sector copping such a baking it was interesting to read a recent article in The Age, which suggested mining stocks to currently be at bargain prices, highlighting the recent dividend performance of BHP as an example.

The article quoted a number of industry watchers including a couple of friends of The Roadhouse in Alto Capital senior analyst Carey Smith and Breakaway Investment senior resource analyst Mark Gordon.

Both men commented on the current outlook for mining stocks.

“It’s worth dipping your toes into uranium and nickel stocks but iron ore, coal and gas have further to fall,” Smith told The Age.

“The share prices of BHP and Rio have fallen nowhere near as much as the iron ore price. Nor, for BHP, the oil price. It could drop to $25 or lower,” he warns, though by the same token “trying to time the market never works.”

“I think we’ve reached the bottom,” Gordon said.

“We should start seeing a rise in their share prices but it won’t be dramatic.

“It’s hard to say what the catalyst will be.

“BHP and Rio Tinto have become long-term dividend stocks.

“We’re looking at the smaller end, to decent projects making money and good management.

“We also like the base metals.”

After reading the article The Roadhouse followed both gents up to ask them to expand their thoughts in terms of the exploration sector, which is really feeling the pinch at present.

“Unless you are exploring for graphite or nickel in the Fraser Range, the market is shut, with no interest for exploration companies at all,” Smith bluntly declared.

“The speculative money has moved into tech and biotech stocks.”

Gordon was a bit more diplomatic suggesting a company with a good enough project was always worth keeping an eye on.

“A good project will always be a good project,” he said.

“Whether the market is prepared to appreciate it at any given time is another thing all together.”

ONE OFF THE WOOD: Northern Star Resources (ASX: NST) is now the second biggest ASX-listed gold miner by production. It has five operating gold mines, all located in Western Australia with total JORC Resources-Reserves of 6.7 million ounces of gold.

The company’s managing director, Bill Beament dropped by to give us the low down on just what makes Northern Star the current success story it is.

Resources Roadhouse: One year ago Northern Star was a one-mine company producing around 100,000 ounces per annum, then you went on a bit of a shopping frenzy acquiring the Jundee mine from Newmont and Plutonic, Kundana and Kanowna Belle mines from Barrick Gold.

Bill Beament: What we loved about the assets we bought was that between them, they have produced 20 million ounces of gold over the past 20 years.

These are world class systems, and they’re not ten, twenty, or one hundred thousand ounces scattered across multiple deposits across a 100 kilometre haul road. These are all single systems.

Take Plutonic, for example, with what has already been mined there and what’s remaining – it is a seven million ounce ore body. Jundee is a plus-seven million ounce ore body, and growing.

Kanowna Belle is 6.45 million and Kundana plus-five million ounces.

RR: Mines like these only keep growing with continual exploration. What plans to you have in that area?

BB: The core focus of our business at the moment – around 95 per cent – is all around mine life extension.

We plan to spend around $50 million on extensional exploration activities over a 12 month period, which we are now about five to six months into.

One thing we obtained from the acquisitions we made was a significant pipeline on which we can concentrate our exploration spend.

We don’t have to go out and find a new Kundana or Jundee in the next couple of years, that’s already been done for us.

RR: Okay, let’s look at each mine on its merits one at a time, starting with Kundana.

BB: Kundana was a great buy off Barrick. We initially mined three deposits there – Raleigh, Rubicon, and Hornet – that has now moved out to four with Pegasus recently coming into production.

Pegasus is a wonderful discovery – this is what we bought the Kalgoorlie operations off Barrick for – at the time people thought Barrick was selling Kanowna Belle, but in reality we were actually buying Kundana.

We believe we have a good eye for detail and an ability to identify value in assets other people don’t see.

We just announced our second Resource upgrade on Pegasus to 1.12 million ounces at 11.6 grams per tonne gold, and 70 per cent of that Resource is in the Indicated category.

It only cost us $10 million to bring Pegasus into production, so its return on invested capital – just on a small portion of the ore body – is in excess of 500 per cent.

Not bad when you consider it still has an expected mine life of 10 to 15 years.

We released more drill results from there that were not part of that Resource estimation. So we know Pegasus is going to continue to grow.

RR: Still at Kundana – what can you quickly tell us about Millennium?

BB: We discovered Pegasus after our head geologist came up with a new geological theory on the Kundana Trend.

We then applied that theory and geological model on our tenements – Kundana is a Joint Venture, however we still own 100 per cent of the past producing mines there.

We found a new discovery there last year, called Millennium, This will be a mine in the years to come.

We are now applying that theory to another seven targets that are very similar to Pegasus.

RR: Jundee is still rated as one of the country’s best mines?

BB: Jundee had been one of Newmont’s mainstays in Australia for a long time. It has had a two year Reserve life for the past decade.

One thing we liked about Jundee is its track record of replacing its Reserves. We have done two Reserve Resource statements, one very recently.

The mine used 250,000 ounces last calendar year – we have replaced all those Reserves and Resources, and actually added some.

There are some 40 drill results that did not make it back in time to be included, which meant five or six lodes weren’t calculated in time for the cut-off.

We’re now running those models, so we expect around mid-year those Reserves are going to be replenished again.

RR: And Kanowna Belle? First production in 1994 but doesn’t look like slowing down?

BB: This has been a great asset for a long period of time. We are realistic so we only have a mine plan there that takes us out until the end of next year.

It does about 80,000 to 85,000 ounces per annum – but we didn’t actually buy it for the underground mine, we bought it for the associated milling infrastructure.

It does all the milling of the ore from our Kundana operation.

One thing it has been, however is a great cash flow operation.

RR: Completing the full circle we come back to Paulsens – the cornerstone of your operations.

BB: You should never forget where you come from. Paulsens is our cornerstone asset. It is what we built the company on starting four and a half years ago.

It’s where we developed our company culture and our operating model, our systems and procedures.

Paulsens just received a new big kick in January with the discovery of a massive extension to mineralisation of around three metres down-plunge, called Voyager 2.

This Voyager 2 extension is going to underpin this mine for further five years.

It has experienced a couple of rough quarters with grades dropping a bit, to around five grams per tonne, however historical grades are around seven grams per tonne.

We anticipate hitting ore in Voyager 2 in development by the end of March and expect to be producing from there by the end of the June quarter.

So come next financial year, Paulsens will be back producing at the margins we are used to.

THE ROADHOUSE PHARMACY: Actinogen Limited (ASX: ACW) has had the results of a Phase I study for the company’s lead drug candidate, Xanamem™ reviewed by the independent Dose Escalation Committee.

Actinogen is an Australian biotechnology company focused on the development of novel treatments for Alzheimer’s disease and other major age-related neurodegenerative disorders.

The company has completed recruitment and dosing at 10mg of the first cohort of eight participants.

On completion of its review the independent Dose Escalation Committee declared it was satisfied with the safety, tolerability and pharmacokinetic results.

Actinogen said the Committee has allowed for a dose escalation to 25mg for a subsequent cohort of a further eight participants, which the company expects to be carried out in late March.

“Xanamem’s novel mechanism of action sets it apart from existing Alzheimer’s treatments,” Actinogen Limited said in its ASX announcement.

“It works by blocking the production of cortisol – the stress hormone – in the hippocampus and frontal cortex, the areas of the brain most affected by Alzheimer’s disease.

“There is growing evidence that chronic stress and elevated cortisol levels lead to changes in the brain affecting memory and to the development of amyloid plaques and neural death – the hallmarks of Alzheimer’s disease.”

Actinogen outlined the specifics of the upcoming second Phase I study, in which a total of 24 healthy volunteers will be given doses of 10mg, 25mg and 35mg of Xanamem, in a multiple ascending dose (MAD) with eight participants in each cohort.

“The primary endpoint of the study is to confirm safety and tolerability of the drug,” Actinogen said.

“In addition the study will demonstrate how the body absorbs and metabolises
Xanamem and the optimal dose for the drug.”

The double-blinded, placebo controlled study is being conducted at Linear Clinical Research, part of the QEII Medical Centre in Perth, Western Australia.

Website: www.actinogen.com.au

THE ROADHOUSE BOWSER: Austin Exploration (ASX: AKK) announced the formation of a Joint Venture with Pierre Energy Partners to develop Pierre Shale prospects at the company’s 100 per cent-controlled 11,560 acre oil and gas property in Fremont County, Colorado.

Austin and Pierre Energy have agreed to terms for two Pierre wells to be drilled back-to-back in April and May.

Under the terms of the JV Pierre Energy will carry Austin on the drilling costs to earn 50 per cent of the oil production from C18#3 and C18#4 exploration wells.

Austin will pay for the completion costs of the wells in the event of a discovery.

“This agreement effectively advances the development of our Pierre shale opportunity without up-front cost or risk to Austin,” Austin Exploration chief operations officer Guy Goudy said in the company’s announcement to the Australian Securities Exchange.

“We have worked with several companies on our Colorado property and this company drilled the last Pierre well on our Colorado property and performed a safe, efficient, cost effective and overall outstanding job and this provides us with great confidence that they are an efficient and superior partner to other interested parties.”

Austin also announced it is in advanced negotiations with Pierre Energy, are in advanced negotiations for a long-term partnership with the objective of a continuous drilling program for the property.

The company explained the next phase of this program would see Pierre Energy drilling ten wells in exchange for a 50 per cent ownership of the Pierre formation over the 11,560 acre property.

Pierre Energy would earn this 50 per cent upon drilling completion of the tenth well and until then would earn 50 per cent of Austin’s NRI for each well bore.

After the ten wells are completed in phase two, Pierre LLC, will drill a minimum of two wells per year and Austin will complete the wells for production cash flow.

Website: www.austinexploration.com