December 2011's Penny Shares To Watch

• Tantalus Rare Earths could soon be producing billions of dollars’ worth of rare earths…

• North Sea oil deal catapults Parkmead shares 25% higher…

• Penny share lessons from my first 100 letters

Tantalus could be sitting on an $80bn rare earths resource

(This article first appeared in Penny Sleuth in November 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)

I wouldn’t much like the task of scouring the radioactive waste of uranium mines. But as I discovered last week, this is what some people are prepared to do in search of rare earth metals.

And just check out the move from Parkmead further down the page. That’s why I love penny shares – that’s what they can do with a bit of good news.

We can’t live without rare earths

Rare earths are crucial to many modern-day electronic gizmos. Take your mobile phone, for instance. Without europium, terbium, dysprosium, gadolinium and yttrium it would be the size of a brick.

Catalytic converters, lasers, fibre optics, microphones, speakers and many other things need rare earths. And if the environmentalists’ dreams are to come true, we’ll need a lot more.

President Obama wants one million electric cars on the roads of the USA by 2015. That won’t happen without large batteries made with rare earths. Wind power is another popular environmental cause. But an increasing number of wind turbines use a magnetic drive to improve their reliability and mechanical efficiency. It’s made with rare earths.

In the 1980s the opening up of global trade saw raw materials sourced from the lowest cost producer. In the case of rare earths that was China. So while the rest of the world came to rely upon Chinese supply it did little to develop its own sources. Now, as China industrialises, it wants to keep back more and more of its rare earths for its own booming high tech industries. China has supplied 95% of the rare earths needed around the world, but as it cuts its exports a massive squeeze is emerging.

And there’s something that’s compounding the problem. This is a delay to the expansion plans of one of the largest non-Chinese producers. By re-opening the Mount Weld mine in Western Australia, Lynas Corporation believes that it can contribute 20,000 tonnes to global supply. A processing plant has been built at Gebeng on Malaysia’s west coast but now the locals are having second thoughts.

Why Malaysia has grave concerns about rare earths

The culprit is iron phosphogypsum, a crumbly, off-white waste product. When Gebeng hits full capacity it will generate 64,000 tonnes of phosphogypsum every year – enough to cover a one-hectare site to a depth of five stories.

Distributed throughout this waste would be about 106 tonnes of the radioactive element, thorium. Lynas has offered tentative plans to recycle this waste, while the International Atomic Energy Agency has found that this thorium would be at ‘relatively low concentrations’, with radioactivity ‘at a low enough level that the agency wouldn't consider it a radioactive material when being transported’.

But this has not been enough to appease the Malaysians. Unsurprisingly, they don’t like the idea of being treated as a dumping ground for radioactive waste and are arguing that it should be kept in a nuclear-style storage facility.

The second great hope for non-Chinese supply is Molycorp, the US producer which is planning to double the output of its Mountain Pass mine near Las Vegas by 2013. The issue here, though, is that Mountain Pass produces a preponderance of ‘light’ rare earths.

This brings me back to Tantalus Rare Earths (TAE).

Tantalus has a rare earths project in northern Madagascar with three apparent merits. The rare earths are near the surface, allowing for low-cost extraction; they contain a low ratio of the radioactive elements uranium and thorium, a potential problem that other rare earth miners tend to gloss over; and the deposit has a high proportion of the more valuable ‘heavy’ rare earths.

Tantalus is now negotiating a deal with China Non Ferrous Metals, which can supply not only finance but also the ore processing know-how. Once this is in place, Tantalus can progress towards first production.

The figures certainly sound interesting. So far, Tantalus has made a preliminary in-house resource estimate of 55 million tonnes of ore grading 0.084% rare earths. With a sale price of $180/kg this has a market value of around $8bn. According to Ivan Murphy at Tantalus, the production costs would be no more than $7/kg.

What’s more, the final size of the resource could be ten times the amount announced already. The one drawback for UK investors is that shares in Tantalus Rare Earths are traded on the open market of the Frankfurt Stock Exchange. A secondary listing, though, in Toronto or London is a possibility.

This doesn’t yet fit with what I’m looking for at Red Hot Penny Shares. But it’s a fascinating story – and one that’s well worth keeping an eye on. It’s on my watch list from today.

North Sea oil deal catapults Parkmead shares 25% higher

(This article first appeared in Penny Sleuth in November 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)

• Shares in PARKMEAD GROUP (PMG) add 3.25p. That might not sound much, but on a share that closed yesterday at 12.75p, it represents a 25% jump.

• The excitement comes as Parkmead agrees to acquire a 15% interest in two North Sea blocks. These contain the Platypus gas field and the Possum gas prospect.

• Investors have high hopes for Parkmead, due to the track record of Tom Cross, its Executive Chairman, Cross was previously at another great penny share success story, Dana Petroleum, which is the operator of these two blocks.

• Cross says: “We know the geotechnical aspects of these blocks intimately and believe they contain the potential for significant upside”.

Penny share lessons from my first 100 letters

(This article first appeared in Penny Sleuth in November 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)

Ten years ago I found myself at Centre Point, that landmark London office block at the junction of Oxford Street and Tottenham Court Road. The building seemed dilapidated, and things did not improve much when I eventually got to the twelfth floor for my meeting with Fleet Street Publications.

The office was untidy, even a little chaotic, with casually-dressed individuals half hidden behind mounds of paper. Frankly, after being used to the marble halls and neat pin stripes of the City I felt that I was coming down in the world!

But of course, one shouldn’t judge a book by its cover. And in fact that day turned out to be one of the best of my working life. It led to my becoming editor of Red Hot Penny Shares, which I am very privileged to be writing to you each month.

Ten years on and this coming Friday represents an important milestone for me. It’s the day I’ll be sending out the 100th edition of my monthly newsletter. And I’ve got a brilliant issue lined up!

But back to Centre Point, and I was asked to go away and write an article describing why people should invest in penny shares. I was given one piece of advice: “Write as if you were talking to somebody in the pub. Not like a boring City broker’s note”.

So I went home, adopted my best barstool manner, and in one swift splurge explained that I had always been an investor in small company shares. I gushed about why I passionately believed that others should do the same…

My alternative to the rapacious banking industry

It was quite a cathartic exercise. Through my years in stock-broking and then fund management I had become increasingly frustrated. I could see that the whole financial services industry had become far more interested in simply forcing products down the throats of unwitting savers than actually providing them a service.

I could see that most of the City’s analysts and bankers – for all their pomposity and self-importance – were not especially smart. Depressingly, many of them did not even seem particularly interested in the stock market. They were too busy counting their bonuses and climbing the greasy pole of career advancement.

Not much has changed! Savers still get a shockingly bad deal from the financial services industry, and the City is still full of people who could not earn a quarter of their pay in any other walk of life. Fortunately it has become easier for us to take matters into our own hands, as increasing numbers of Red Hot Penny Shares readers have decided to do.

My first issue was in September 2003 and my main concern at the time was simply to fill the pages. I must have been pretty desperate because the first share I tipped was BPP Holdings – a great investment but hardly a penny share. Gradually, though, I began to gather information and tune in to the penny share world.

The performance was mixed. We had some horrors – remember RingProp or Azure Dynamics? But we also had some great winners, although it is sobering to recall that three of our biggest successes, Tanfield, MyHome and Worthington Nicholls have since collapsed just as fast as they had risen.

Three important penny share “tells”

Practice has not made me perfect. But it has, I think, made me a lot better. I’m a stronger writer and I’ve honed my skills at finding small companies that really have the potential to make good money. Today, I look for three things:

1. A sudden breakthrough. Nothing propels a penny share price upwards quicker than an oil strike or a new wonder drug. Two of our biggest successes have been Gulf Keystone, which struck oil in Kurdistan, and drug developer Verona Pharma.

2. A great product. I like nothing more than an innovative product, with good profit margins, limited competition and a big potential market. Software Radio was a perfect example, as was Clearstream Technologies.

3. A powerful theme. Every now and again investors get swept up by a powerful theme. The whole dotcom boom was one and the recent natural resources boom was another, helping us to a quick gain on emeralds producer Gemfields. If you can spot these themes you can make money fast.

The cast of penny share candidates is ever changing. Looking back, I have tipped many shares such as Gourmet Holdings, Phosphagenics and Fayrewood, which are no longer on the stock market. But as companies disappear, they are replaced by a fresh crop, and the opportunity to discover potential new winners never ends. This is why I live for the small company market.

As I head in to my next 100 editions of Red Hot Penny Shares I feel the thrill of the chase as much as ever. The penny share world is a kaleidoscope of opportunity and I’m very excited about hunting down a new set of stocks for you in 2012. Get the latest issue today. It’s a cracker!

More adrenaline if you need it…

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Good investing,
 

Tom Bulford Editor, Red Hot Penny Shares

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(This article first appeared in Penny Sleuth in November 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)