May 2011’s Penny Shares to Watch…

This month’s penny shares to watch:

• Property investors are delusional: house prices will fall…

ESSENDEN (ESS)

• This rare metal is going stratospheric...

TRI-STAR RESOURCES (TSTR)

Property investors are delusional: house prices will fall…

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

Three subjects never fail to upset my readers and guarantee a sack load of abusive letters. The three are: implying that anybody with a house full of pets is mildly peculiar; claiming that inheritance tax is a good thing; and arguing that property is a bad investment.

So let me tell you about the nutter who owned a dogs’ home and wanted to pass it on to his children…

I am joking. But I was not joking three weeks ago when I said that I believed land prices were certain to fall. Back came my readers with predictable ferocity. “Look at all the money I have made on my property portfolio”, said one. “Tom has a poor grasp of economics”, said another. So much for my University degree!

But with the annual ISA investment decision now upon us, I for one will not be putting any of my investment funds anywhere near property. People always delude themselves about this. They boast that the house they bought for £100,000 is now worth £200,000. But they forget to mention the costs of buying it, of furnishing it, of repairing the roof, paying the council tax and insurance and the £20,000 that they spent on the new conservatory.

Property investors see what they want to see

And they delude themselves in other ways too. A 2008 study by a group of academics in the USA compared people’s estimates of the value of their homes with the amount they actually got when they sold. The study concluded that homeowners, on average, overestimate the value of their properties by between 5% and 10%.

“While most individuals overestimate the value of their properties”, the study revealed “those who bought during more difficult economic times tend to be more accurate”.

On the other hand, those who buy their homes when prices are high and rising – which applies to most UK home owners – expect that this happy state of affairs to persist and are prone to being over-optimistic. This is an instance of ‘investing by the rear view mirror’, by which our view of future trends in asset prices is biased heavily by recent experience.

We see what we want to see. If our financial hopes for our old age rely upon the value of the family home, we convince ourselves that property is a great investment. We convince ourselves that it is safe, even if it might not be.

Despite the collapse of house prices, another survey found that two-thirds of Americans rate property as a safe investment and this even applies to those who, having seen the value of their home fall below the liability of their mortgage, have certain evidence that it is not.

House prices simply must come down

I don’t buy any of the arguments for investing in property. In this country the housing market is artificially supported by low interest rates. I am sick of hearing house building executives and estate agents moan that if only the banks would lend more money the housing market would be fine. The housing market is under pressure not only because the banks have finally come to their senses, but because incomes are static, taxes are rising, and rises in the daily cost of living are reducing the surplus available to service the mortgage.

The point I was trying to make in my earlier article is that this will hit the value of land. The cost of building materials and builders’ wages is fairly constant. But there is no reason why house prices should not be lower if builders pay less for building plots.

And a weak housing market is not the only thing pushing down the cost of land. Last week the tenpin bowling operator Essenden (AIM:ESS) said that many of its sites were ‘over-rented’ – meaning that the only thing preventing the bowling alleys for making money is the rent they are paying for the building. Essenden now wants the rents reduced and with the landlords having few – if any – alternative tenants Essenden should have them over the barrel.

This type of thing is going on all over the country. House builders hate reducing asking prices – they would far rather throw in free carpets instead – and landlords hate reducing rent because this is an admission that their land values are too high. But the economic predicament of this country dictates that land values and house prices must come down.

I am sticking to shares in wealth creating companies. I suggest you do the same.

This rare metal is going stratospheric…

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

Antimony is not a glamourous metal. Silver-grey in colour,it’s main use is as a fire retardant in things like toys and plane seat covers. Until a few months ago, it was largely unheard of.

But last week a comment in the annual results from Tri-Star Resources (TSTR) revealed a stunning fact about antimony. Since autumn last year, this rare metal has soared from $9,000/t to $16,600/t today.

According to director Vehbi Eyi: “there has been considerable speculation that China has, apart from applying export quotas on antimony and antimony products, actually commenced a programme of strategic stockpile accumulation”.

The matter is simply put by the United States Antimony Corporation. “The Chinese control 92% of the world market”, it says, “Their production is down and their consumption is up”.

And so the Chinese have brought about a sudden and shocking supply crunch in the metal. The price of antimony has gone into the stratosphere. And it’s likely to stay there for some time – great news for the few penny shares in this tiny market.

Why the EU has issued a stark warning on antimony

In truth though, antimony has been doing pretty well for the last decade. From around $1400/t in 2000 the price moved steadily upwards to $6300/t in 2008. Even the financial crisis succeeded in knocking it to no lower than $5500/t.

Antimony is scarcer than most rare earth elements. Demand for the metal has been growing at 5%-7% per year with some 35% going into fire retardants, with other important end markets being batteries, ceramics and glass. Antimony was one of the critical raw materials singled out by the EU as being of “high economic importance” due to the lack of substitutes and low recycling rates; and of “high relative supply risk”, owing to the fact that the bulk of the world’s known reserves are located in China.

The latest surge was the result of a ban placed by the Chinese Government on exploration for rare earths, tungsten and antimony and on the opening of new mines. Whether China is motivated by a wish to protect the environment, as it claims, or the desire to hoard precious supplies these latest developments have justified the warnings made by the EU last year.

The US Geological Survey says that, there are only sufficient known reserves to cover ten years of demand (vs. 34 years for copper, for example) and with most of these limited reserves in China the supply outlook for the rest of the world is precarious.

How Tri-Star could strike it rich in the Turkish mountains

Striving to fill the supply gap and take advantage of sky-high prices is Tri-Star Resources (TSTR). This penny share company emerged last August when the privately held Turkish exploration company Tri-Star was reversed into a defunct AIM listed company called Canisp, but it has received little attention so far.

Tri-Star’s exploration and mining licenses cover c.800 hectares of forested and rugged mountain terrain in western Turkey, a country that is keen to promote its mining industry. The focus is on the Goynuk mine which has been intermittently worked by artisanal producers for the last 100 years. The mine appears to be rich in antimony and a related metal, arsenic, but despite the scratchings of the artisanal workers it has never been properly explored. Tri-Star believes that it could be economically viable as an open pit mine, and has the possibility of good mineralisation at depth.

Last year Tri-Star started to define Goynuk’s true potential. In conjunction with surface mapping it took samples from the surface and from twenty drill holes and sent these for analysis in Canada. The results were reported in February and were good enough to convince Tri-Star that the mine could become commercially viable.

It also now has sufficient evidence, gathered from three locations, to make a preliminary resource estimate. The first location, an extension of the ore body previously mined underground, contains estimated mineralisation of 210,000 tonnes at a grade of 5% antimony. Next is a location in the upper portion of mined area, thought most suitable for an open pit operation. Here the estimate is of 160,000 tonnes at an average grade of 4%. The third target is the tailings dumps from previous mining. Although inconsistent and hard to sample, they are estimated to contain 80,000 tonnes grading 2% antimony.

Adding all this together gives 450,000 tonnes at an average grade of little over 4%. That would produce 18,500 tonnes of antimony, worth about $288m (£175m) at today’s prices.

First though, Tri-Star must further define the resource. It must then design, build and pay for the mine and what the price of antimony might be if and when it finally comes into production is anybody’s guess. For the time being the £50m stock market valuation of this penny share stock looks high enough.

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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 April 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)