November 2010’s Penny Shares to Watch…

This month’s penny shares to watch:

• Two huge deals that could kick off a coal boom…

GCM RESOURCES (GCM), STRATEGIC NATURAL RESOURCES (SNRP), POLO RESOURCES (PRL)

• 'Tanzania, Malta, and Trinidad are about to take off': you heard it here first!

LEED PETROLEUM (LDP), LONRHO (LONR), LONZIM (LZM), LENI GAS & OIL (LGO), SOLO OIL (SOLO), ZEST GROUP (ZEST), VATUKOULA GOLD MINES (VGM)

Two huge deals that could kick off a coal boom…

(This article first appeared in Penny Sleuth in October 2010. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)

Could it be that two of the world’s bigger coal projects are finally going to get the green light? Certainly the way that the share prices of GCM RESOURCES (GCM) and STRATEGIC NATURAL RESOURCES (SNRP) have been climbing of late suggests that good news could be just around the corner.

Let me start with GCM. Its focus is on the Phulbari coal project. Such is its scale and potential importance to the economy of Bangladesh that GCM’s share price soared in 2005, hitting a high of 919p. Then trouble struck in the shape of rioting by some of 40,000 rural dwellers who were threatened with forced relocation. The Government of the day backed off but hopes were revived when a new Government, democratically elected in 2008, vowed to make power generation a top priority.

The need for electricity is evident. With a population of 160 million, Bangladesh is one of the most densely populated countries on the planet. It is also one of the poorest. According to the World Bank over 80% of the population survive on the equivalent of less than US$2 a day and GDP per capita, at around US$1,500 per annum, is a fraction of the world average.

And yet Bangladesh has been achieving economic growth of 6% per year and has been identified by Goldman Sachs as one of the countries with the potential to become an economic powerhouse of the 21st century. But if it is going to realize this potential it will need power. And that leaves it with a very simple choice...

How coal can save Bangladesh from total ruin

At present Bangladesh has the capacity to generate around 4000MW of power. But with demand closer to 5000MW regular blackouts are hampering the efficiency of existing industries and agriculture. In recognition the Government, in pursuit of accelerated GDP growth of 8%-10% per year, has said that a 50% increase in electricity generation is needed over the next five years.

That is a ‘big ask’. Making it harder still is the fact that Bangladesh is running out of the gas that currently fires 90% of its electricity. So the obvious answer is to exploit the country’s huge coal reserves. Phulbari has a coal resource of 572m tons, and is the only project that has been subjected to a full Environmental and Social Impact Assessment. It alone could support a power generating capacity of 4000MW, and could transform the outlook for electricity availability in the country.

So the question now is whether and when the Government will give Phulbari the green light. Some clues suggest that this could be imminent.

The first of these is that POLO RESOURCES (PRL), has said that approval for Phulbari would make a ‘substantially undervalued asset’. PRL has a 29.8% stake, and is known as a shrewd investor in resource projects around the world.

Next, the local media have reported that the Bangladesh Government has decided to form a Committee to establish a ‘coal mine city’ at Dinajpu, convenient for Phulbari. And acknowledging past problems, M. Mizbahuddin, secretary of Bangladesh’s Energy Division has said that ‘rehabilitation of the affected people of the coal mining area and the fixing of compensation packages in consultation with the affected people is the main task of the committee.’

So after years on the brink of disaster, Bangladesh looks to have bitten the bullet – the government now looks to be backing coal in a big way.

And Polo isn’t the only group to make a breakthrough on a major coal project recently. There are some very interesting things happening in South Africa too…

A Masterplan to unlock 150m tons of prime coal

A second coal venture that has faced rather different obstacles is the Elitheni mine of STRATEGIC NATURAL RESOURCES (SNRP). This is another huge resource, but found in South Africa. The license area is the size of Luxembourg and exploration of just 3% of this has already revealed a resource of 150m tons of anthracitic coal. With South Africa under constant threat of power shortages, this should have considerable value.

SNRP’s initial plan was to supply power stations to be built by Peter Earl’s IPSA (IPSA). But in a difficult political and financial climate Earl’s plans have foundered, leaving SNRP to explore different markets.

Now it has plans to supply local industry, and is talking to the owners of other South African power stations. But the big hope is to export coal to the power-hungry markets of China, South Korea and, especially, India.

Rail links between Elitheni and South Africa’s east coast still survive from colonial days, but SNRP needs to prove the quality of its coal and also ensure sufficient shipping capacity. With the port of Richards Bay bursting at the seams, SNRP believes that it could start to export through East London, before increasing volumes significantly through Coega, where new deepwater terminals capable of docking much larger ships are being built.

This is SNRP’s master plan. Today, an independent study found that Elitheni’s coal is suitable for industrial markets, power generation and the export markets. With this confirmation SNRP is now looking forward to signing off-take deals and finally unlocking the potential of its vast coal resource. Well worth keeping an eye on these very promising developments.

'Tanzania, Malta, and Trinidad are about to take off': you heard it here first!…

(This article first appeared in Penny Sleuth in October 2010. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)

There are plenty of larger than life characters in the penny share world, but few can match David Lenigas.

David’s language is colourful, his opinions take no prisoners, and he certainly could not be accused of understatement. ‘Vatukoula Gold,’ he roared as I walked into his elegant office in Jermyn Street ‘is the cheapest gold share in the world!’

‘For 72 years it has been producing an average of 11 grams per tonne’, he explained. ‘That is more than five times the average grade of the world’s known gold resources – and it has got the reserves to produce at 13g/t for another 43 years.’

Originally a mining engineer, David is now Chairman of four AIM listed companies, LONRHO (LONR), LONZIM (LZM), LENI GAS & OIL (LGO), and SOLO OIL (SOLO). He is also chairman of the ASX-listed LONRHO MINING LIMITED (ASX:LOM) and on the board of the music company ZEST GROUP (ZEST) and VATUKOULA GOLD MINES (VGM). He doesn’t mince his words.

Having favoured me with his opinion of the world’s best gold mining investment, David then produced a plastic fish wrapper from the top drawer of his desk. ‘We have had six products listed for the US market – no easy task,’ he said, turning to the fortunes of LONRHO. ‘We are going to be sending containers of hake from African waters over to Costco. This is going to be huge. All the retailers have been under massive pressure from Greenpeace, and there is enormous demand for sustainably caught fish. I love fish fingers,’ he revealed, ‘and now the supermarkets are going to be able to sell fish fingers with proper fish in them and not the usual processed rubbish. The mums will love it!’

Food processing is the foundation of LONRHO, which also flies aeroplanes, runs hotels and manages a host of other services across southern Africa. Results due in early November should confirm that this is a good diversified way of investing in Africa’s renaissance, but I was really with David to hear about his venture into the oil business.

Where black gold could start spurting next

LENI GAS & OIL was formed in 2007 to apply modern techniques to oil and gas assets in ‘the sort of place you would like to take your family on holiday’, meaning in this case Spain, the Gulf of Mexico, Trinidad and Malta.

David’s theory is that oil fields are ‘like diamonds – they don’t like being lonely’. So if you find one parcel of diamonds or oil another is likely to be nearby. LENI GAS is developing Spain’s largest on-shore oil field – not that this says a lot because the little oil that Spain has is mainly off-shore. But David believes that LENI GAS can boost oil production from under 200 barrels per day to 1000boepd.

How? By opening up nearby fields and stimulating the flow rate from the existing reservoirs where ‘there is no fizz in the champagne bottle’. In other words, pressure is low but this will be boosted by the injection of liquid nitrogen supplied by Praxair.

LENI GAS’s second venture in a mature field is in the Gulf of Mexico. Here it has minority interests in blocks operated by LEED PETROLEUM (LDP) and is hoping to boost its share of production to 220 boepd by the year-end. But there is more excitement to the LENI GAS & OIL story than incremental improvements to existing fields.

In Spain, David believes that recoverable reserves of oil and gas could be found at deeper levels. And he is also excited about the prospects in two frontier locations: Trinidad and Malta. The former, according to David, ‘floats on oil.’ In fact, Trinidad lies off the coast of the major oil producer Venezuela and yet has never seen more than the most cursory oil exploration. As for Malta, its off-shore waters are adjacent to those of Libya. Libya is already a major producer from on-shore fields, and has now opened up its off-shore acreage to the likes of BP, ENI, Total and Petrobras.

So LENI GAS & OIL has some interesting possibilities in the next few years.

Of course, I have my own ideas on where the next big oil find might be. In the last year, I’ve pursued oil explorers to Texas, Namibia and the Falklands.

They haven’t all worked out – that’s the nature of backing high-risk oil explorers. If you would like to read about where I think the biggest oil finds of the next decade are going to be, then...

Good investing,

Tom Bulford
Editor, Red Hot Penny Shares

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(This article first appeared in Penny Sleuth in October 2010. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)